Modine Manufacturing Co (MOD) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Modine third quarter fiscal 2009 earnings conference call. My name is Damali, and I will be your operator for today. (Operator Instructions) As a reminder this conference is being recorded for replay purposes.

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.

Thank you, Damili. And good morning everyone. Thanks for joining us today for Modine's third quarter fiscal 2009 earnings call. With me are Modine's President and Chief Executive Officer Tom Burke, and our Executive Vice President - Corporate Strategy and Chief Financial Officer, Brad Richardson.

Tom will lead us off today with opening remarks and his perspective on the business amid challenging economic and market conditions. Brad will follow with a review of our financial performance and an update on our liquidity, including recently amended credit agreements. Finally, Tom will wrap up with comments on our business strategy and specific actions we are taking to strengthen our business. We will then be happy to take your questions.

We will be using slides with today's presentation. Those slides are available through both the webcast link as well as a PDF file posted on the Investor Relations section of our website. Also, should you need to exit the call prior to its conclusion, a replay will be available through our website beginning approximately two hours after the call concludes.

Before we begin, I would remind you that this call 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, I will turn over this call to Tom Burke. Tom?

Thank you, Susan. Clearly the world has changed substantially 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 and severity of the credit market crisis and the resulting global economic recession, which have fueled both macroeconomic and end market uncertainty.

Within this environment, our third quarter results were clearly a disappointment, which triggered a default in our past credit agreement resulting in a precipitous drop in our stock price. Brad will review those results in detail with you in just a few minutes.

I do think it's very important to note that, in spite of these adverse operating conditions, Modine's year to date operating cash flows were strong, up nearly $20 million versus the same period a year ago. Further, our debt has decreased by more than $5 million over this period reflecting strong cash flows and our commitment to reduce our overall debt in the current market environment. I assure you that Modine is not standing idly by, but rather we have been taking and will continue to take aggressive actions to respond to the changing market demands.

As we do, so we are supported by newly amended credit agreements. These amendments have been based on our assumptions about operating in a recessionary environment. We believe the agreements, as amended, will provide Modine sufficient liquidity to execute our restructuring plans and maintain our day-to-day business.

Let me make this clear. Contrary to published reports, bankruptcy has not been contemplated and the amendment process as approved gives the Company the ability to operate during this deep recessionary environment. As we take a number of difficult actions, we are also actively refocusing our product and technology portfolio to protect and leverage our core thermal management expertise. We are encouraged with the many new program wins across all regions and market segments. We believe the combination of our near term focus on preserving cash and liquidity while focusing on the right product processes and technologies for the future solidly positions Modine to weather this recession and emerge on the other side of it as a stronger, leaner, and leading thermal management innovator.

With that I would like to turn it over to Brad for a full assessment of our financials.

Good morning, everyone and thank you, Tom. On slide five shows the outline that I would like to follow for the financial section of the presentation, starting with the third quarter highlights, focusing in on our segment performance, our cash flow as Tom referenced, our liquidity update, and then follow that up with a market outlook.

Turning to slide six, as Tom pointed out, it is very clear that the global economic slowdown, but in particular the precipitous fall in Europe, has had a profound impact on Modine. The economic slowdown hit Modine right at a point when the Company was undergoing significant restructuring and cash burn associated with that restructuring, which was necessary to permit us to achieve scale in our manufacturing operations and refocus the product portfolio that Tom will speak to.

As you can note, walking down the P&L, Modine's net sales declined by $115 million or 25%. Excluding the impact of foreign currency translation, the sales were down $73 million, or about 15%. The gross profit declined by nearly $28 million and the gross profit as a percent of sales was 11.5%, driven by the impact of fixed cost absorption and the negative product mix in Europe.

The Company recorded $27 million in repositioning and restructuring charges and $27 million in impairment charges. The SG&A expenses largely within our control declined by $14 million and will decline further as the impact of staff reductions globally that are being taken right now will begin to flow through in terms of lower SG&A expenses. The overall impact of these factors resulted in a pretax loss of $63.6 million and a negative EBITDA of $42.3 million. Despite these negative results, the Company has generated relatively strong cash flow from operations of $80 million and has actually reduced net debt over the period.

The objective of slide seven is to show you the underlying results of the Company excluding the unusual items. In the quarter, Modine recorded $27 million in restructuring related costs associated with staff reductions here in the Racine headquarters and costs associated with significant reductions that are planned in the European headquarters and manufacturing operations. Further, we recorded impairments in Europe and including the complete write-off of the goodwill and certain fixed asset write-downs in manufacturing plant assets.

We also took impairment charges here in North America associated with one of our facilities that is focused on the North American automotive market. In aggregate, the impairment charges were $27 million. Adjusting for these factors, plus excluding the one-time gain on the sale of the last corporate aircraft, and foreign exchange losses, the Company's core underlying results were a pretax loss of $10 million and positive EBITDA of about $11 million. A similar adjustment schedule is shown for the prior year's third quarter. Comparing the adjusted results for the two quarters presented, Modine's adjusted pretax profits and EBITDA are down about $20 million. Again, on a $115 million drop in sales, or about an 18% downside conversion as the variable profit decline was offset by manufacturing and SG&A reduction.

Turning to slide eight, the left side of the table shows the change in sales by segment on an absolute basis and without the adverse impact of foreign exchange driven by the strengthening of the US dollar vis-a-vis the currencies in Europe, South America, and South Korea. Most notable is the decline in sales out of Europe, resulting from significantly lower automotive volumes and lower commercial truck build rates.

In the European automotive market, we are heavily dependent upon BMW. Shipments of modules to BMWs were down 36% in the third quarter versus the comparable prior year quarter. I would also draw your attention to the fuel cell revenue line which reflected the agreement to license certain fuel cell technology to Bloom Energy.

From a segment operating income standpoint, the far right column shows the change in profitability, again by segment excluding the impact of foreign exchange and other unusual items. The driver of the decline in operating income was Modine Europe. If you look at the change in profitability for Europe of $28.6 million, relative to the decline in revenue of $65 million, the downside conversion is nearly 45%, which is clearly unacceptable. Tom will speak to our plans to aggressively take costs out of the Europe organization both at the SG&A level and the manufacturing operations.

On a positive side, we continue to have very solid performance out of South America and Commercial Products. And I would also note we have seen a stabilization of the North American original equipment business, albeit there is still a long way to go to return this business to historical profit levels.

On slide nine, you can see the cash generation from the business during the first nine months of this fiscal year. As Tom mentioned, there has been a lot of speculation and misinformation communicated about the Company's liquidity situation, which is unfortunate given that the 12b-25 SEC form filed last week incorporated the critical elements regarding the Company's cash position and the status of our amendment process. As shown on the table, despite the losses the Company has generated approximately $80 million in cash flow from operations largely due to significant effort to free cash up from working capital. $61 million of this cash throw was reinvested in the business leaving free cash flow of $19 million. We ended the quarter with $73 million in cash, the highest level in several years.

There's no doubt that the cash flow from operations is going to come under pressure as the economy remains depressed and the progress on working capital becomes more challenging. Therefore, it is critical that the Company has access to liquidity to ensure that we can carry out the funding of our restructuring activities and run the Company on a day-to-day basis. On the next two slides, I will give you an update on the amendments that have been undertaken to ensure the Company has access to liquidity.

Slide 10 shows the pre-amendment covenant and debt structure for the corporation. Under the three primary debt instruments of the Company, the $175 million revolving credit facility and private placement notes, Modine was required to maintain -- was required to maintain a debt to EBITDA of less than 3 and an EBIT to interest coverage ratio of greater than 1.75.

Given the adverse performance of the economy, and its impact on the Company, we tripped both of these covenants at December 31, 2008. The defaults under these covenants were waived and new covenants were put in place with the amendments to the primary debt instruments of the Company. To be clear, at no time did Modine miss a principal or interest payment.

As identified on slide 11, we are very pleased that the Company has secured amendments that give us the borrowing capability to maneuver through a deep recessionary period. As of December 31, with waivers, the total available to borrow on existing lines was approximately $104 million.

Through this amendment process, we obtained the specific ability to borrow additional monies in Europe of EUR35 million and the ability to put $10 million in incremental borrowing capacity in place to fund the global operations of the Company. With the amendment in place, we have approximately $150 million in borrowing capacity, which we expect is more than sufficient. The borrowing requires that the Company maintain certain levels of minimum EBITDA on a cumulative basis as shown on the schedule. Based on our internal forecast of how the Company is going to perform even with the significant contraction in the marketplace, at each quarter end, we estimate that we have between $10 and $20 million of cumulative cushion in comparison to the minimum levels of EBITDA as shown on the slide.

Obviously the access to this credit comes at a price with the interest rate stepping up in accordance with the schedule shown on the table. We have also agreed to certain additional terms including a suspension of our dividend, and moving from an unsecured to a secured facility with security being pledged on certain worldwide assets. Further, we have agreed to minimize the cash balances of the Company and reduce our capital spending to $65 million in fiscal 2010. We incurred approximately $3.1 million in upfront fees to consummate the amendment.

In summary, we believe that the Company has sufficient cushion in its forecast to stay in compliance with the minimum level of EBITDA in order to ensure access to sufficient credit during the recessionary period.

Turning to slide 12, with the current volatility in the global economy, and the impact on the markets that Modine serves, we are withdrawing our fiscal 2009 guidance and do not plan at this point to provide guidance on our fiscal 2010 which starts April 1. However, I do want to provide some outlook on the marketplace, which is the basis for calculating our EBITDA levels for purposes of covenant compliance.

Modine's EBITDA is highly dependent on the North American truck market and Western European automotive volumes. We are not dependent upon the North American automotive which is why we do not have a market update for that segment on the slide.

As you can see, for calendar year 2009, we are estimating Class 8 truck build rates of 135,000 units. Demand is down, credit availability has been restricted, resulting in reduced Class 8 build rate assumptions. Although not shown, we do expect that Class 5 to 7 build rates for trucks will be down to approximately 95,000 units for calendar year 2009. In Western Europe, we are now projecting total unit sales of 11.1 million units, off about 25% from the 2006 to 2007 levels.

Let me now turn it back to Tom.

Thanks, Brad. I would like to spend a few minutes with you reviewing our strategic business segments including important work we are doing assisted by an outside advisor to actively refocus Modine's product and technology portfolio to ensure we have the right product, processes, and technologies moving forward. Additionally, I would also like to review the continued aggressive actions we are taking as part of our four-point plan which again focuses on our manufacturing realignment, our portfolio rationalization, SG&A expense reduction, and capital allocation discipline.

Turning to slide 14, despite the global recession that has occurred in the past year, we have continued to achieve good growth results in our various regional business development activities. In North America we have continued to grow share in our bus and specialty vehicle markets despite already having a dominant position. Our commercial vehicle position going into 2010 emission's change will grow in content as significant exhaust gas recirculation cooler business comes on-line offsetting some truck module losses. We believe Modine will continue to be the single largest supplier of cooling systems and components to the North America truck and specialty vehicle market.

We're also seeing good growth in our agriculture and construction equipment markets as major OEMs gear up for the Tier 4 emission levels. This is where our technology, global footprint, and long standing customer relationships have helped us be the right partner for many of these companies as they seek to find a common solution across platforms and regions.

In Europe, we continue to execute our growth strategy for the commercial vehicle market in advance of the Euro-6 emission law changes which are scheduled for 2012 and we continue our push towards obtaining a 50% market share. We have several active development programs with new customers and received great interest in our Origami product offering as a solution to the more stringent emission laws. As with North America, our support of regional and global manufacturers in the off-highway segment has given us good business prospects helping to fill our new Hungarian facility.

Asia is still a development project for Modine. However, we have already seen good success in the commercial vehicle market in India. We have already obtained two serial orders with leading OEMs and have been named a development partner on two other programs. Our plant in Chennai is perfectly located to serve the growing vehicle production in a fast growing India economy. In addition, we have launched a full technical center in our Chennai facility which is now providing low-cost engineering support to all of our global product groups.

In China, while we are disappointed that the initial rate of growth with local national customers, we have been successful in developing a growing off-highway business that is well integrated with our global OEM customer strategies. We continue to explore opportunities with local national commercial vehicle customers and see good prospects for our strong line of engine components with the local engine customers.

South America continues to build on a solid base where we are the dominant supplier to the growing commercial and off-highway markets. Our Brazil team has become a key part of our multiregional product development process able to fully support the local market. Net new business launches in fiscal 2010 almost offset the 20% overall drop in the market that we are seeing there.

On slide 15, will you note that our commercial products group continues its good growth trajectory both here in North America and in Europe. In North America we launched our new R410A ground source heat pump unit for schools in December 2008. Reception has been so good that we have already exceeded our original sales plan for next fiscal year. We showed this product at the ASHRAE show in Chicago in January to great enthusiasm from engineers and contractors. In addition we have secured a contract with a large school district for the supply of vertical heat pumps for fiscal year 2010.

Lastly, in December 2008, we launched production capability in Mexico for a new micro channel or parallel flow heat exchanger or coil product for the commercial HVAC market. This product line has significant growth opportunity in the very large commercial HVAC market it is a converts from a traditional round tube plate thin design to the highly efficient PF design that Modine invented over 20 years ago.

In Europe our new Turbochill commercial chillers have far exceeded expectations as sales have beat forecasts by over 50% in a down market. The Turbochill product line is the most efficient specialty chiller in the market and this acceptance is offsetting the cyclical market declines of our other products.

Slide 16 shows our six natural vehicle business segments today. Automotive powertrain cooling, components and systems, powertrain cooling systems for commercial vehicle and off-highway, engine cooling products for all three market segments, EGR components for automotive, and also for commercial vehicle and off-highway, and finally, passenger thermal management systems for HVAC units that mostly span the commercial vehicle and off-highway markets.

The natural business segment is one wherein we have an advantage in the market from a combination of either market share, technology, manufacturing footprint or other barriers of entry that allow us to see a viable business development strategy. The products in these business segments are generally available across all of our regions and we enjoy varying levels of market share among these businesses, from a stronger dominant position in the automotive oil coolers worldwide to truck cooling modules in North America, along with developing positions in commercial vehicle and off highway positions in various regions.

As we have executed on our four-point plan, we have taken a close look at all these segments through our product rationalization process with the support of an outside advisor. We did so in order to understand which ones offer us the maximum value for investment focus. In doing so, we have determined that several of these traditional segments, for different reasons, no longer offer us the returns on invested capital that our shareholders and we expect. The resulting changes in our product portfolio strategy now serve as a base for all of our restructuring investment and resourcing decisions.

So going forward, our focus, if you would now look at slide 17 will be on three natural vehicular business segments involving product platforms that will primarily serve the commercial vehicle and off-highway markets worldwide. Additionally, we will continue a select product components that have proven to cross market segments successfully in the automotive market such as our oil cooler, PF condenser, and charge air cooler lines.

Our product platforms will consolidate within the powertrain cooling and engine products groups. As previously announced, with the intended sale of our South Korean operations, we will be exiting the passenger thermal management platform. Our lack of scale and supply chain complexity provides a barrier for entry requiring significant investment and resources to attain a natural business position in this market. Rather than waste time, resources, and capital we have elected to exist this product segment.

We will continue to seek to be a preeminent player in each of the segments and platforms that we see as our core focus. Modine has historically been well-known for our technology in these areas and our future efforts will be even more targeted towards utilizing the demonstrated strengths we already have in our portfolio.

As you will see on slide 18, we are also aligning our core process to promote a leaner yet more nimble approach to product and process development as well as engineering and research. Over the last years we have been working on our value stream for the product development through manufacturing process. We call this process "Concept to Customer." We are seeking to ensure that our investments in new technologies results in products that the markets need and want. To that end we have now also reorganized our technical organization structure to streamline this process and to make sure we have good forward-looking capabilities tied to quick feedback loops. We are moving our R&D closer to the markets into our key customers recognizing the best technology cannot be developed in a vacuum. It takes input from many sources combined with our unique talents.

Going forward, our focus will be tighter, but also more aligned with the strategic business interest as we focus on the key product and market segments. We will be looking for more rapid incremental improvements rather than long step changes reflecting the fact that the pace of technology change is becoming quicker and also more variable. We believe that by doing this we can remain flexible and responsive to our markets while maximizing return on this investment for our shareholders.

I am very excited with the new products that are being developed with our technology roadmaps. For example, the Origami heat exchanger design and process technology is bringing significant interest from all targeted customers as a means to improve fuel efficiency and improve emissions. We are accelerating knowledge developments to support waste heat and recovery systems that will lead to new product offerings that will improve fuel efficiency in commercial and off highway vehicles.

What's important to note is that, despite the challenges we face and the difficult actions we have undertaken to weather this economic storm, Modine will remain a leader in thermal innovation. This is what has defined us in our past and will continue to define and drive Modine going forward.

Turning to slide 19, even prior to the global recession, Modine was executing on our four-point plan to obtain a more competitive cost base, improve our long-term competitiveness, and more effectively capitalize on growth. Since the more severe economic decline we have been actively building on accelerating those efforts. You can see in the highlighted column on the right that we are committed to make the tough decisions to ensure our future viability. We will be aggressive in managing our product portfolio as I described earlier leading to decisions on where we invest in and divest from our product segments. We'll be significantly de-emphasizing the automotive PTC business globally and will participate only where we have components that can cross from other market segments. We have hibernated our fuel technology and resources so that we can redeploy them later when these highly promising markets mature.

We have been extremely aggressive in SG&A reduction. With the last changes we will have reduced our global senior leadership structure by 30%. In Racine we have reduced our headcount by 25%. We are nearing a similar reduction in our European headquarters in Germany and all of our manufacturing plants in North America and Europe are reducing their overhead by 20%. We are driving the Modine operating system which is based on the same principles used in driving efficiency in our plants throughout our key business processes. We are using our product rationalization and new product development processes to drastically reduce capital expenditures.

Finally, as Brad mentioned, we will suspend our dividend for the foreseeable future. These are difficult decisions, especially the personnel reductions. They test the strength of the organization and resolve the leadership team. With our approach that we have utilized I am highly confident our teams are focused and our leadership team is aligned to make it through this challenging period.

Finally, in summary, we are a 93-year-old Company with world renowned expertise in thermal management technology solutions. Facing a worldwide economic financial and credit market turmoil has challenged the Company during a period of heavy restructuring. We have reached a critically important agreement with creditors and have the liquidity to support the Company through this recessionary environment. We are refocusing our product and technology portfolio to leverage core thermal management strengths and meet continuing worldwide demand for emissions compliance, fuel economy and efficiency.

We are proactively addressing the Company performance through strategic reorganization initiated in 2006 and accelerated in 2008 through new leadership and adoption of the four-point plan. We have in place the right leadership, the process, the governance structure to respond and ensure effective execution of our plan. As we proactively address our considerable near-term challenges, we're continuing to improve significantly our operating efficiencies while also positioning the Company for growth. With our credit agreement, with our focused product portfolio, with our downsized cost structure, with our continued commitment to technology development, and with the invaluable capability of the men and women of Modine, we will make it through this period and ensure that Modine is well positioned for the future.

With that, Brad and I are happy to take your questions.

Damili, we're ready for the question and answer period, please.

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

Good morning, guys.

Good morning Andrew.

First of all, I want to touch on your restructuring activities prior to the latest actions you have taken to deal with the effects of the credit crisis. Could you maybe walk us through the state of the plant closures, et cetera, going on in North America at this point?

As we've announced, we've got the plant closures still in process. We've got a separate discontinued operations team that's providing oversight of that. We're on schedule to that plan. We obviously are evaluating each change for improving or optimizing how we can move that forward faster but our targets still remain on track, and there's no change in the outlook of projected cost or savings at this time.

Other than, if you want to drive down in more detail we can we're on track, on schedule to what we're doing in North America and clearly as we've mentioned before we've got some work to do in Europe in the same fashion.

Great. And then in terms of your anticipated divestiture of the Korean business, could you maybe take us through where you stand relative to that process, given the dynamics in the markets?

Andrew, let me just respond to that question.

Certainly the economic environment globally, but also in particular the significant drop in the Korean economy, is making that process challenging. But we do have a third party advisor engaged who is actively working with the Company and working with prospective,- primarily Korean-based buyers to evaluate this business. And we do, at this point, still remain confident that we will be able to find the right buyer and move forward with that transaction. We're certainly not exactly on the time line that we had previously laid out, but we will provide updates as they become available.

Great. Could you maybe highlight -- I know you guys talked about expanding your share relative to the Euro6 mandate. That's kind of been out there for some time. Have you guys received any specific orders relative to the Euro6 standard yet?

Well, there's a lot of development work going on, of which we are development partners, with one of the majors right now. We also have significant work going on with this another big commercial vehicle manufacturers in Europe. So we feel very confident about that opportunity. We are not coming off that. That's a hard objective we have internally, and we see a map to attain it. Clearly our Origami product offering is providing us a very much an advantage in that position because of the cost benefits and performance benefits that add value to the OEM customer.

I also will say that we're looking at expanding an opportunity with a major Russian OEM customer as well that's recently come on the scene as being maybe a player in the European market. So we are extremely confident with that objective, and clearly it's a critical one for the European team.

And so you guys are still comfortable with that share goal that you have out there?

Absolutely.

Great. And then I guess, Brad, moving over to the financial side of the house, could you maybe talk about, coincident with this latest amendment, did you extend the time period of the facility at all, or is that still in place, and can you remind us what that time period is for the facility?

Yes. The answer to your first question, the revolving credit facility, we have not changed the maturity of that. That will expire in July of 2011. So that is in place.

We have agreed on the notes that we have outstanding. Those were bullet maturities, maturing in 2015, 2017 and 2018. We have agreed to amortization schedules commencing December of 2011, which, quite frankly, from my perspective, is a better course to go versus having big bullet maturities staring at us from a financial perspective.

I would also note, Andrew, that the 10-Q was filed this morning, which will have significant details on the amendment and also the documents themselves will be filed via Form 8-K, and those are being filed this week. So there will be more significant disclosure on the exact terms and conditions.

Maybe quickly, along those lines, are there any prepayment penalties associated with the notes?

With the notes, to the extent that they are under the amortization schedule, those are prepaid at par. But to the extent that the Company voluntarily prepaid the notes, or and you'll see in some of the detail, there was significant divestment activity requiring a prepayment, there are make-whole provisions under the notes.

I guess just lastly, from me, obviously the cash flow has been very good here in the near term, as you guys have focused on running the business for cash. Just wondering if the market stabilizes at these low levels, do you guys foresee any ability to extract any additional working capital beyond what you already have outstanding?

Clearly that's a major objective, and yes, to answer your question. We're working all elements of the working capital equation, and not to go any further than that, some are easier than others, but nothing is off the table, and we see a clear focus to be free cash flow neutral in this next fiscal year, and we're very confident we will attain that.

Tom, let me just add to Andrew's point.

Clearly we're very pleased with the amendment. But we are going to be working with our customers clearly to get their support, specifically in the accounts receivable area to support the Company. I mean, the creditors have clearly come to the table, and we're going to work and are working, quite frankly, and have already had some near-term success in the customers supporting us in terms of adjusting a payment term for purposes of working capital management.

Great. Very helpful, guys, thank you so much.

Thank you, Andrew.

Our next question comes from the line of David Leiker with Robert W. Baird. Please proceed.

Hi, it's Keith Schicker. Good morning.

Hi, Keith.

Just wanted to start off, the impairments in Europe, there was some goodwill and some asset impairments. Can you just offer a little more color on what exactly was impaired over there?

Yes. We basically took total of $20 million in impairment charges in the European business. $9 million of that $20 million was goodwill, and this basically comes from the acquisition of Langerer & Reich which occurred back in the 1990s.

And we also impaired a couple of the manufacturing facilities. One of those facilities, we've talked about this product mix issue, and the wind-down of the Volkswagen exhaust gas recirculation program, so therefore the outlook for one of the facilities has been reduced, and therefore we've reflected that as an impairment charge.

I think what's behind this is clearly -- I mean, you've seen and have your own thoughts around the build rates for both the automotive side but the commercial vehicle side of the business, and the projections that we're seeing at this point are saying that it's going to take a long time for the build rates to come back up to the levels that the Company was running at, and the industry was running at, in 2007-2008 period. So therefore, again, our market assumptions are reduced from what we had seen previously, and therefore needed to reflect that in terms of a write-off of the goodwill in the business.

That's great. Thanks. If we look at the sort of minimum adjusted EBITDA requirement under the new credit agreements, and we look at that in relation to what your macro assumptions are -- your macro assumptions are somewhat mixed versus what we're expecting, higher in one instance, lower in another. Your EBITDA target for fiscal 2010 of $35 million is well above our estimate of $21 million. Could you talk qualitatively or quantitatively about what you are assuming in some of the other areas of the business as well as what's happening internally to drive -- to drive $35 million of EBITDA at a bare minimum in fiscal 2010?

Yes, just to be clear, these minimum EBITDAs, they start on an absolute basis in the fourth quarter with a minus 25, and then the cumulative effect begins to build meaning the 22 negative in Q1 is a reflection of both the fourth quarter and the first quarter. It builds throughout that period.

What I can say, and Tom will certainly comment, as you look at, again, our build rate assumptions, we've done quite a bit of work on assessing. Obviously you can have a different view, but I think I would point to a couple of things that again have not even begun to come through the P&Ls that you are looking at in our third quarter. That has to do with the significant reductions that were taken in the manufacturing plant on the fixed cost side, and we basically are affecting here in North America, or have already affected a 20% reduction in our fixed overhead costs associated with our employment. For both here in North America and we've got a similar reduction in Europe.

Also, if you look at the SG&A run rates of the Company and you look at the progress that we have made, you saw the SG&A come down from $61 million in the previous year to $47 million, and yet that does not yet reflect the actions that we've taken in this current quarter -- that is our fourth quarter with the 25% reductions in Racine headquarters and similar reductions that are being affected in Europe. So this run rate on SG&A is going to continue to come down significantly.

In addition to that, and I will let Tom speak to this, we've got a real focus on manufacturing cost reductions that you've yet to see come through the cost structure, a real focus on SG&A that you have yet to see come through the cost structure, and then clearly there's a large commercial element of this, and I'll let Tom speak to what we're looking at commercially with the customers from a pricing standpoint.

We've been work on price rationalization process for a while, and that's been maturing, Keith, and we're very happy looking at every product, every SKU we have in the order book, going through to make sure we have what I would say is an appropriately priced position with our customers, whether that be on current model parts, so we're being responsible in our pricing arrangement with our customers. That's clearly a very engaging process and one that I'm directly involved in, but we see significant upside gaining on that ground.

And I would say the other part that goes with this is that we don't have an inflated top line that goes along with that number. Our top line assumptions are very conservative. So if you take the elements that Brad talked about on SG&A, the fixed cost reduction in our plants, the pricing rationalization that we're gaining ground with in our targets, and you couple that with what we say is conservative below -- very much below consensus on the normal volume predictors that are out there, we feel very confident with our model.

And we also need to know that we have significant new business launching in the fiscal 2010 period. We're seeing somewhere approaching $40 million worth of new business coming in, in that period of time. Just throwing an estimate out there right now and that's in various areas in each region and that's giving us a lot of up side support.

Thank you. Brad, if I understand you correctly, there's several actions on the SG&A line that have yet to flow through. We can expect that run rate to go lower going forward. We're at about $50 million or so in to fourth quarter, if I exclude the gain on the airplane. Is that something that can fall another 10% on a run rate basis?

Yes, if you call ita $205 million annual run rate, because $51, if you exclude on the aircraft, call it $205 million, and what Tom showed in his schedule on the four-point action plan is all of the steps that we're taking are designed to take another $32 million to $40 million of SG&A out. And so that's going to get you down to an SG&A level or a fiscal 2010 in the $170 to $180 million level, just using very rough, rough math.

Okay. And that can be fully realized in fiscal 2010?

Yes, again, the reductions have occurred here in Racine. They've occurred in the manufacturing plants in North America for the most part, and the target for affecting the reductions in Europe is to be done by April 1.

Okay. That's great. Then if we look at, from the manufacturing side, it sounds like you're reducing fixed costs. Have you identified a decremental margin that you are targeting on a lost dollar of sales or declining dollar of sales.

We have -- our downside, normally you would expect just on variable contribution is that for a dollar drop in sales that we would lose roughly about 30%. But you can see, again, in the third quarter that we only, bottom line, reduced by about 18%. And that's obviously a combination of multiple cost control actions taken.

I really don't have, therefore, a good estimate as to how this is all going to fall to the bottom line. But the variable contribution without any self help around our manufacturing costs, the SG&A and commercial actions, as well as commodity pricing, normally you'd see about a 30% downside.

Is that unreasonable to expect that to improve as we go through fiscal 2010?

Certainly, again, on the variable side, I think that's a good rule of thumb. I think what you've got to factor in, though, is all of the self-help initiatives around our cost, the pricing issues that Tom spoke to, and the benefit that we're seeing on commodity pricing.

Okay. And then just a couple of quick housekeeping items. D&A, just comments on where you think that's going to fall in fiscal 2009, then as we've had some recent impairments here directionally, how do you see that trending in fiscal 2010?

The second part, if we look at the capital expenditures, your credit agreement limits you to a certain level. Are you trying or able to come in below that level, and you've built in some cushion there as well from a cash side?

Well, specifically to the capital investment, we've limited that agreement with our creditors to $65 million. Our annual operating plan that we have set for the business is $60 million. And those are hard, fast targets that each of the businesses will live within. I think as it relates to your question on depreciation and amortization, for fiscal 2009 it is going to be roughly in that $75 million level and that's all I can say at this point.

Okay. That's very helpful. Thank you very much.

Okay.

(Operator Instructions) And your next question comes from the line of [Robert Verhahee] with Modine Manufacturing Company. Please proceed.

What's the viability of the pension fund?

Are you talking about the liability or the current funded status of the pension plan?

I think I'm talking about the current funded viability. So I expect to be drawing pension for some time. I just wonder how assured you are that that will continue.

Yes, the pension plan itself is -- we haven't updated our disclosures at this juncture on the pension plan, but the pension plan is at what I would say adequately funded at this point. And if you look at our disclosures that we've had in our prior 10-Q and in our annual filing, again, the US plan is adequately funded. And we don't expect at this point to have to inject significant cash on a go forward basis to keep that plan funded and allow you obviously to get your retirement benefits.

Thank you.

Thank you.

You have no further questions.

Okay. Thank you very much for joining us for our Q3 call. We very much look forward to updating you on our next call in May.

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 good day.