Modine Manufacturing Co (MOD) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2011 Modine Manufacturing Company earnings conference call. My name is Jeff and I will be your operator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session.

(Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Bob Kampstra, Vice President, Investors Relations and Corporate Controller. Please proceed, Mr. Kampstra.

Thank you for joining us today for Modine's fourth quarter fiscal 2011 earnings call. With me today are Modine's President and CEO, Tom Burke, as well as Mick Lucareli, our Vice President, Finance, Chief Financial Officer and Treasurer. 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 Company Web site, modine.com.

Also should you need to exit the call prior to its conclusion, a replay will be available through our Web site beginning approximately two hours after the call concludes. On page two is an outline for today's call. Tom and Mick will provide comments on our fourth quarter results and go through our fiscal 2012 guidance. At the end of the call, there will be a question-and-answer session. On page 3 is our notice regarding forward-looking statements.

I want to remind that you 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. With that, it is my pleasure to turn the call over to Tom Burke. Tom?

Thanks, Bob. Good morning, everyone. We have a lot to cover today as we present our fourth quarter performance. Looking at slide four, in our fourth quarter, our underlying performance was solidly on track with our expectations. Sales were up $72 million, or 22%, over the prior year.

Gross margin performance improved to 15.1%, and we delivered net earnings of $12.3 million, and a diluted earnings per share of $0.26 versus a loss of $0.24 a year ago. A very solid quarter. In the quarter, however, we did find, and are correcting, a few issues that impacted our financial results. Mick will walk through these in more details in just a few minutes. I recognize that our quarter results are a bit messy because of these items, however, our underlying performance was strong and consistent with our expectations.

We had a good quarter and I am pleased with the core results. Modine is continuing to deliver on our commitments and business plans. We've also provided guidance on fiscal year 2012 that shows continued improvement and demonstrates that we are on track, and in fact ahead of pace, to achieve our long standing objective of 11% to 12% return on capital employed by the end of fiscal 2013. We also expect that our -- Modine's fiscal 2012 EPS will be significantly higher over fiscal 2011.

I will now provide some perspective on our markets and business segments so you can better appreciate my optimism. We remain very positive on the outlook of our targeted vehicular markets, as the global commercial truck industry continues to strengthen. The Agricultural and Heavy Construction Equipment segments continue to show strong sales as well. And the Building HVAC and Data Center Cooling markets are also increasing coming off low points in 2009 and 2010.

Starting on slide 5, I would like to provide you with a brief update on each of our business segments. First, in Asia, our growth plans are ahead of schedule. New business wins and quoting opportunities continue to accelerate for both our China and India businesses. We are in the process of converting our Shanghai plant from an assembly-only facility to a full manufacturing facility to provide the required capacity for strong growth in both off- and on-highway application for oil coolers and other power train cooling products and EGR products.

In Korea, we recently finalized a joint venture agreement with OneGene to serve the very important Heavy Construction market in South Korea. We are very pleased with the agreement with OneGene with whom we've had a strong relationship for several years. In Europe, we're in the middle of a final production validation of our Origami radiator which will serve the commercial truck market for Euro 6 emission standards. Our targeted market share of the commercial vehicle powertrain cooling market is well within reach.

In addition, we are expanding one of our Hungarian facilities to make room for an increase in stainless steel brazing capacity required for the EGR product to serve the higher emission requirements for both on- and off-highway applications. Also in Europe, our Austrian facility is ramping up volume on the Origami condenser with many new model launches which we won as a result of our innovative design and manufacturing process.

In North America, our planned manufacturing footprint changes are nearly complete. The last identified facility in Camdenton, Missouri will close later this fiscal year. We are achieving much higher asset turnover performance and an improved gross profit level that has this segment -- return on capital Employed levels that are the highest in several years.

I am pleased to report that we have landed several new business programs within the Heavy Construction and Agricultural segments in this quarter. In addition, we are in the process of pursuing additional business opportunities in the Commercial Vehicle segment, one of which is the result of the Origami technology developed by our European team. We are very encouraged by these early points of interest from our customers.

Our Joplin, Missouri facility has successfully launched a majority of the $100 million of new EGR business resulting from our 2010 US EPA emissions strategy. And as has been widely reported, Joplin, Missouri was devastated by a massive tornado. Though our factory was not directly impacted, sadly, one employee and multiple employees' family members were killed and many others were injured or impacted by the storm. It has been very inspiring the to see the outpouring of support from our employees, customers and suppliers worldwide. The Company has made a significant commitment to the relief agencies in the Joplin community. I also want to pay tribute to our Joplin team, who despite the tragedy and hardship ensured that there was not any supply impact to our customers, and they continue to ensure that our employees have what they need to recover from the devastation.

Our South America team continues to perform very well, with sales remaining strong in our market leading positions in the truck and off-highway segments. We're working aggressively to free up additional floor space in our Sao Paulo, Brazil operations to add capacity for the very important and growing markets in South America.

Turning to slide 6, the Commercial Products Group, which serves the commercial HVAC markets in North America and Europe continues to be a priority growth segment for the Company. In North America, we introduced in January, our new packaged rooftop unit in Las Vegas at the ASHRAE Show. The product was very well received, as it provides our customers the latest technology rooftop unit that combines heating, cooling and air makeup capability with high energy efficiency performance. I am confident our offering will be a top performer in the industry. In its second year of sales, our Effinity93 unit heater continues to win market share at higher margin levels as a result of the heater's market leading energy efficiency. This product has been a big hit in the market, and will ensure we improve our already strong position.

And finally, at Airedale, our European Data Center Cooling and Specialty Chiller business is running at all-time high sales levels as a result of the many market-leading technologies we've launched over the past year. The team and leads in the UK are doing a great job of introducing new technology to stay in front of our competition. We are very excited about the growth opportunities both organic and inorganic that are being implemented and evaluated by the Commercial Products Group team. This remains a key growth area of our business.

Before commenting on our future outlook, I want to address some organizational changes we announced during the past couple of weeks. Our collective focus as an organization is to ensure that we have the right leadership model and behaviors in place to deliver the results that we and our shareholders expect. Modine Europe is a critical part of our Company. We have been fortunate to have worked with Klaus Feldmann for many years and are very grateful for his service to Modine. Klaus's decision to resign from his position as Vice President responsible for Modine Europe was mutual.

Tom Marry, now Modine's Executive Vice President with whom some of you have met, has already stepped in and is more than capable of leading our European organization as we finalize the selection on Klaus's replacement. You have my assurance that Modine Europe's leadership team is onboard and very enthusiastic about working with Tom Marry to ensure Modine Europe's success. Also, in order to ensure that Tom Marry can provide the leadership focus necessary for the European and Asian businesses we also announced the promotion of Matt McBurney to Vice President for our global Commercial Products Group organization. This means that Matt, another tested and highly respected Modine leader who has been with the Company for 19 years and has been a key leader as Director of North America Heating and Cooling will be directly responsible for the entire CPG organization. With strong and accountable leaders in place in each segment, Tom Marry will remain in charge of these businesses going forward. In summary, I expect our progress to accelerate with these leadership shifts and look forward to reporting favorable progress in the future.

Before I turn it over to Mick, I would like to make some statements on our outlook. We expect fiscal 2012 will be a strong year for Modine. As I mentioned earlier, we are well on track to meet our stated goal of 11% to 12% return on capital employed by the end of fiscal 2013. But more importantly, the strategic decisions we put in place over the past three years have put us in a position not just to attain our immediate goal of 11% to 12% but have positioned us well for sustained growth and improved returns for years to come. Mick?

Thanks, Tom. And good morning to everybody on the call. I have several additional slides to get through this quarter. So I will go through them as rapidly as I can. Let's turn to slide 7, I will walk through the income statement.

As Tom mentioned, we have a number of unusual items in the quarter which I will walk through in detail in just a minute. The following numbers presented on slide 7 are reported for US GAAP and include all items. Sales were up 22% over the prior year driven by strong growth, as Tom mentioned, in North America, Europe and Asia. We're also pleased to see improvement in gross margin and a 31% increase in gross profit for the quarter. This includes the unusual items, excluding those items, the increase would have been more significant.

On a year-over-year basis, commodity prices and business mix had a slight negative impact on gross margin. And SG&A was flat as a percentage of sales, but this is coming off an abnormally low base last year. In the fourth quarter last year, our European segment received some large development payments, and our employees were still taking furloughs. And then current SG&A is also slightly higher due to normal -- the number of normal items in the quarter, plus, as we go forward, we expect to see this going back to about 12% of sales in the future. I want to point out that we are very pleased to be able to recognize the large $7.8 million cash tax credit in Hungary. This is the result of our rapidly growing business and investment in Hungary.

Moving on to slide 8, I will walk you through the unusual items. As Tom mentioned, there are several unusual and unanticipated items that impacted the fourth quarter. Combined, these items had a negative impact of $7.7 million. The first item relates to physical inventory adjustments. As part of our normal year end control process, we took physical inventories at all of our locations and determined that we needed to adjust our fourth quarter inventory down. This write-down was due to several factors including interim inventory processes, and the implementation of our SAP ERP system. I want to point out, though, that this was isolated to the North American Commercial Products segments and we are putting in corrective actions and controls to avoid future adjustments.

Next, during the quarter, management made the decision to freeze one of Modine's hourly pension plans. As you may recall, management took this same action in the salaried pension plan in 2008. This decision resulted in a $1.6 million non-cash charge in the quarter for pension curtailment. However, the Company will benefit from reduced pension expenses and volatility as we go forward.

Also, as part of our year-end close, we identified a $1 million asset impairment in Europe relating to developmental equipment for our Origami products. And then as discussed in our press release, there were some trade compliance issues that we have identified as part of our corporate compliance activities. Specifically, we realized that our Maquiladora operations in Mexico and the associated warehouse in Laredo, Texas were not following certain trade-related requirements, including the preparation and filing of necessary import/export paperwork with the proper authorities. I want to point out that we have proactively disclosed the situation. We are also limiting a number of corrective actions to be sure we are in full compliance with all trade regulations and requirements as we go forward. As part of the thorough analysis, we also evaluated potential amounts that may be charged to the Company related to the non-compliant events and we've recorded a $4.5 million liability as a result. We believe this is a very reasonable estimate based on our knowledge at this time. Of this amount, $0.5 million was recorded in the fourth quarter.

And then finally, the last item relates to three large warranty issues with customers in North America and Europe, resulting in a $1.9 million accrual. So turning to the next slide, I will quickly walk you through the impact of these. On slide 9, we have a pro forma view of Modine's operating income, excluding the unusual items I just described. And starting on the left hand side of the slide you will notice operating income as reported is $7.8 million. Then we have the previously discussed inventory adjustments accounted for $2.7 million. The pension curtailment due to freezing the hourly pension plan resulted in a $1.6 million expense. Plus Modine Europe recorded a $1 million impairment. Then we have the previously discussed Nuevo Laredo trade issues. And finally, North America and Asia recorded the sizable warranty reserves that were determined during the fourth quarter.

As Tom mentioned earlier, Modine's underlying business segments and plants performed well during the quarter. Not only is our business trending in the right direction, but our products and programs are launching as expected. Adjusting for the unusual items in the quarter, operating income would have been $7.7 million higher, or $15.5 million. Of the $7.7 million, approximately $5 million impacted cost of goods sold and $1.7 million impacted SG&A. So on a normalized basis, our gross margin would have been much closer to about 16.4%.

Now, let's take a quick look at the balance sheet. And turning to slide 10, we have a few summary statistics. Our fourth quarter operating cash flow was up significantly over the prior year. During the quarter, our operations generated slightly negative cash flow of $3.9 million. This was due largely to the timing of planned capital spending. We had a very large capital spend in the fourth quarter this year. The balance sheet remains strong, with a net debt to capital ratio at 24% and we have $33 million of cash on hand.

Moving on, we've got a few slides on our segment results. And on slide 11, we take a look at the North America segment, with sales up 23%, with the continued recovery in commercial vehicle end markets and a somewhat slower recovery in construction. Gross margin improved 240 basis points to 13.7%, and this improvement includes the negative results of the inventory adjustment, which was $2.2 million in this segment. Operating income was also negatively impacted by the pension curtailment and the warranty reserve that I just explained. So excluding these unusual items, the North America operating income would have been closer to $12.1 million. In the bottom right, we've got a graph that shows North America's estimated revenue mix by market. As a reminder, about 48% to 50% of this segment's revenue comes from commercial vehicles. At this time, the segment has a heavier mix of medium duty business. In the upper right-hand corner, you can see that we expect the truck markets to rebound very nicely next year. I would also like to remind everyone that revenue will be impacted negatively in fiscal 2012 by approximately $45 million, as a few remaining programs wind down in this segment.

Turning to slide 12, we have a look at our South American business. Sales were up 28% by strength across all the markets in Brazil. Gross profit improved but the margin declined slightly. Some of this decline was attributed to the higher commodity metals prices, and that's specifically copper in Brazil, and the delayed timing of the pass-through with those contracts to our customers. Operating income improved to $3 million, or 6.8% of sales, which is our best return among all of Modine's business segments. And then in the bottom right, you can see South America is a fairly well-diversified segment by end market. And in the upper right-hand corner, you can see our market expectations for continued growth in the next fiscal year.

Turning to slide 13, we have a look at our European segment. Fiscal 2011 sales were up 20% driven by strength in commercial vehicles and to a lesser extent in the premium automotive market. We saw a nice gross profit improvement to $19.8 million, or 230-basis-point improvement. Operating income remained relatively consistent year-over-year, as the prior year included large development recovery in the fourth quarter. And additionally, the current year personnel costs returned to a normal level, which made the quarter-over-quarter comparables difficult.

We are anticipating a Heavy Duty market recovery in Europe next year but the segment is still heavily dependent on automotive sales. As a reminder, fiscal 2012 revenue will be negatively impacted by approximately $50 million as our automotive module business winds down in Europe. Then we anticipate that the most of the remaining $80 million of that business will go away in fiscal 2013. In the future, this segment's products mix will shift more heavily toward truck and bus markets as we continue our strategy at securing a larger portion of this market.

Slide 14, we have our Asia segment, sales were up 127% in this segment as new programs continue in both China and India. Gross profit improved $1.9 million to 9.4%. The continued maturity of our volumes in this region will improve margins as we go forward. And excluding the unexpected $900,000 warranty reserve, which I discussed, operating income would have been slightly positive, and this is a great milestone for this new business segment for Modine.

You can see in the market outlook that the Asian markets are continuing to grow. And while the markets are growing, our largest growth driver will be the launch of new programs. Modine currently has a heavy weight in the off-highway space in Asia. However, this mix will evolve as we continue to launch products into China and India.

And moving on to our last segment, on slide 15, we have a look at Commercial Products. Sales showed a slight increase, but this was also impacted by Modine's decision to reclassify some of our product sales to the North American segment. This change negatively impacted sales by approximately $3 million in the quarter. So without the segment reporting change, we would have shown a sales increase versus the prior year. Operating income was partially impacted by this product reclassification. Also, there was some impact from commodity costs, primarily copper, and higher SG&A as we continue to invest for future growth in this segment.

It is difficult to find specific market indices that correlate to sales in our multiple end markets for heating and cooling products. However, there is clearly a dependence on the overall economy and construction spending. There is also a reliance on state and local budgets with regard to our school products.

In addition, there are growth drivers which will continue around energy efficiency. Commercial Products is diversified in itself. But it also serves as a nice diversification from Modine's remaining vehicular businesses.

Now, turning to our full-year outlook on slide 16, based on our current expectations for ongoing market recovery, we are projecting revenues to improve 12% to 16% over fiscal 2011. And I would like to point out that this projection is net of approximately $100 million of programs that are winding down, largely in the automotive market. The majority of these were planned when we started our repositioning of the Company in 2008. Excluding this, our underlying growth rate would be closer to 19% to 23%.

Next, we are projecting operating margins will improve to a range of 4.1% to 4.7% next year. And this leads us to a projection of $0.95 to $1.05 for our full-year earnings per share, which is a significant improvement over this year's EPS. We are also anticipating capital spending will run between $70 million and $75 million. Obviously, our projections are based on the market assumptions as we see them today. We've also included key exchange rate and commodity metals assumptions on this slide. Our earnings can be sensitive to both of these economic factors. And we will provide full-year guidance as we progress through each quarter.

So in summary, while there are a lot of moving parts in the quarter, our businesses continue to perform quite well and consistent with expectations. And we remain well on plan to achieve our return on capital objectives. Now, with that, I will turn the call back to you, Tom.

Thanks, Mick. In conclusion, as Mick said, the Company performed well in fiscal 2011. We're off to a good start in 2012. We're very excited about the future as our served markets continue to strengthen globally.

We have a lot of work to do in the next 12 to 18 months, supporting the many new product launches and remaining product transfers. We have built our three-year plan from the bottom up to meet our objective of 11% to 12% return on capital employed by the end of 2013 and we are committed to deliver on it. Fiscal year 2011 has established our trajectory. As Mick fully articulated, our fiscal year 2012 outlook is strong and on course. And we are confident that with the hard work and strategic decisions we've made over the last three years, along with our deepening focus on continuous improvement through our Modine operating system, we will meet our business commitments and continue to improve further and take advantage of the many growth opportunities in the markets that we serve. Thank you very much. We look forward to your questions.

Thank you. (Operator Instructions) Our first question comes from the line of David Leiker with Baird. Please proceed.

Good morning, everybody.

Hi, David.

First, I just want to close the loop on some of these revenue run-offs. Mick, you had talked about Europe. There is $80 million left after this $50 million in 2012. In North America, you talked about $50 million in 2012. What is left after that?

After that, I would say, zero, Dave. I think it is a big change of our automotive strategy, a big majority of that is the automotive strategy peeling off from modules and the like, and some other run-offs of current programs, but I think that about does it.

Yes, David, it is Mick. This year, we have the big impact from the automotive module business in Europe, plus the remaining, primarily the remaining automotive module business in North America. Then the second piece of the second half of Europe winds down next fiscal year. And then from there, we really start to see the new -- the transition to the new Modine, especially in Europe, where we will be launching then the heavy duty programs to replace that automotive business.

It is nice to see the light at the end of the tunnel. I know it has been a long one.

I hear you.

And then in terms of the new business ramp. Does any of that, none of that really hits your fiscal 2012, does it? It is really fiscal 2013? For the Origami? That commercial vehicle Origami.

Origami, we start launching in 2012 lightly, okay, with certain customers in Europe. Condenser definitely will launch in 2012, but the big volume will start next year in 2013 as well.

Truck.

On the truck. The truck market share will take hold next fiscal year. But we'll start ramping up this year with 1 customer.

Okay. Great. And then the last item, and I will circle back if needed. As we look at the guidance going forward, and we look at 2012 versus 2011, given the revenue gain and the EBIT improvement, the contribution margin, that would seem lower than what we would normally look at. I think if I did my math correctly, it is about 9%. What are some of the headwinds and tailwinds that you are facing as you look at that contribution margin in 2012 versus 2011?

Dave, when we look at fiscal 2012, I mean, first, on the gross margin side, we're primarily expecting a decent conversion there. Gross margin should be up a little bit. We do have some impact from a general mix of our business. We have more vehicular business ramping up, and Asia will become a bigger piece. So those have relatively lower margins than our Commercial Products Group.

And then we are passing through this year, there's good news, a much larger piece of commodity prices. But when you pass those through, they really dilute your margins. You're passing through a cost and a revenue. So both of those together are probably a 25- to 50-basis-point impact on margins.

Okay. Great. Thank you. I will come back if there is anything else. Thanks.

Thank you, David.

Our next question comes from the line of Adam Brooks with Sidoti & Company. Please proceed.

Yes, good morning.

Good morning, Adam.

Real quickly, I guess on the Asia ramp-up, continues to exceed expectations. Is $80 million to $100 million still the goal for fiscal 2012, or has that been moved upwards?

Yes, we've been really happy with the performance there, Adam. And you're right, in looking at the run rate in the quarter, as I would say, we're slowly bumping that up, and for now at least $90 million to $100 million is what we would see right now going forward. But certainly, you're right, it has continued to exceed our expectations.

And is there any pocket of particular strength there? Or is it kind of widespread across all of your markets and all of your customers?

Well, it is following our product strategy, which is commercial truck and off-highway. Obviously, off-highway has been the biggest growth opportunity with our global customers at first, but we're really building a lot of business with domestic customers in both China and India. And also the truck market, as you know, with emissions, is converting later, and with that we see opportunity for commercial truck growth. We will also use specific light vehicle advantage components, so we will supply things like EGR and oil coolers to supply targeted light-vehicle segments. But it is going to look very much like the rest of Modine, but the strongest growth up front has been off-highway, but you're seeing commercial truck coming on strong.

Okay. And quickly, on the North America segment, it looks, if you strip out all the 1-time items, you did about 8.2%. I guess, how sustainable is that heading into next year? Obviously, accounting for seasonality quarter to quarter, but is that kind of a sustainable run rate we can assume for fiscal 2012 in that segment?

Yes, I would say for all of our segments, we're expecting improvement next year, and North America is no different, Adam. They've actually shown the most rapid rate of improvement coming out of our restructuring and repositioning. But we see and we continue to pressure those guys to -- we expect them to continue to grow earnings and continue to show margin improvement.

Great. Thank you.

Thank you.

(Operator Instructions) Our next question is a follow-up, and it comes from the line of David Leiker with Baird. Please proceed.

Hello, again.

Hi.

And first of all, before I do that, I'm very sparingly -- you could pass on these comments, but the slide deck is fantastic. Thank you.

Thank you.

Thank you. (Inaudible - multiple speakers) pays off.

As we look at what you've been doing with Origami, where you've been in the market now, what, 18 months, 24 months or so, marketing it, what kind of competitive response has there been in that particular product offering that you have?

Yes. That's a great question. And clearly, we know that what we're hearing is that our competition is going back to the drawing board, if you will, with thoughts and ideas. What we're confident about is that not only was a design to get the material out, but it's the processes develop to make the part that will really give us the head start. So we have the machinery, production machinery, very well, besides the IP of the design, okay, but on the, let's say the process development side, we've been very, very careful to protect knowledge on that, and have exclusive agreements with very certain specific people to protect that, and it gives us a head start.

They're going to be looking to take material out, that's what's going to happen to our competition. We have not seen a direct response yet, but we anticipate something to come. But, again, we think that process development work is really going to pay off.

We also are now starting to see, as we anticipated, customers, especially the global customers, wanting this to spread globally. So, quite like PF did back in the 1990s on the automotive side of the business, we're starting to see that same desire to spread this opportunity to North America and elsewhere. So we're pretty excited about that. So all the work, the marketing, and the strategic planning is really coming to bear the fruit that we had planned.

And did I hear you make a comment that you have an order or you're pursuing an order in North America for it?

We have a very deep interest right now, okay? So there is a study going on. I don't even want to call it a quote yet or anything, but it is a -- as anything, this kind of changes the whole platform architecture on a vehicle, so there has to be some real engagement and collaboration with the vehicle supplier to understand exactly how you -- all of the advantages you can get with Origami, downsizing things, taking frame rails out, that type of stuff can happen. So we're looking at a development opportunity right now that we're excited about.

And that's the first step that we have to have. That's what we've gone on for the last 4 years, 3 years now, with our European customers.

Okay. And then, not that I necessarily want to pursue this, now that you're exiting auto, but Ford made a comment the other day on their 1-liter, 3-cylinder engine that they have separate cooling systems for the cylinder head versus the block. Does something like that offer an opportunity for you at all? Or is that just going to be more of the same as you go -- as --?

That's a great question. And I don't know the answer to that, but it is a good question. And I will follow back around and get -- make it something we can understand. We know that they're on the commercial vehicle side and in light vehicle, there is a high temp/low temp circuit, which we're looking at opportunities for what we call low-temperature radiators, which is more like a PF product than a traditional radiator.

There is quoting activity going on for that, which is kind of drawing off some of the same core technology we talked about. So that may be related to that, David. But I will look into that.

Yes, I mean, there are areas that warm up, I'm guessing warm up the block more quickly relative to the head, and therefore, it gets to optimal fuel efficiency more quickly.

Exactly right, yes.

And then a couple of other items here. The product that you offered in the rooftop market, is that targeted at schools or is that targeted at different end markets?

No, that is targeted at the, let's say, commercial building space and office space, and the like. It is a fully contained packaged rooftop that sits on a medium-sized building that can do the air turnover. It can condition, heat, cool, humidity control, with all of the latest opportunities of energy efficiency built into it. Things like a heat recovery wheel that can take the extracted air that is being turned over and use that same energy, whether it is hot or cold, to bring it back into the building with a lot of state-of-the-art controls, and of course, heat exchangers that go into it.

So this is a pretty open market for us. It is, again, below the big box names. So we go up against competitors that are out there, like [Aon], and that group that have -- enjoy a pretty good open market right now. So we're pretty excited about this.

We had just very, very positive response at the ASHRAE Show, a lot of attention at the booth and a lot of follow-up. We're going through the training now with all of our reps and distributors, and orders will be coming in soon.

Okay. And then, 2 last items here. On the warranty, anything there that we need to talk about? Is it a production issue, a design issue?

No, this is --.

Will it be a lingering issue?

It is a good question. I will just use 1 example. The one in Asia is involving a commercial truck, [go ye], on a passenger thermal management cooling module. The blower motor that goes into that was found to be defective. It has issues in the field.

So we're being caught in the middle being a systems supplier in this case, servicing and providing support to our customer, and also then working backwards into our supply base. At this point in time, this is what our liability is. Of course, we're going to keep working on that with the supplier as well. So it is kind of a typical issue that you manage, between a customer and supply base in this case.

So there is no unique arrangement with what happened. Just happened to have 2 or 3 of these things line up this quarter.

Okay. And then lastly, and I don't mean this question to talk about specific folks at all, but as you look at the leadership team you have now, where do you think it is versus where you would like to see it a few years out?

Well, I will tell you, as far as our leadership team, I couldn't be happier with what we have in place. Yes, we've had to make some changes here, and we're very focused. I want to make sure, and you heard me stressing the point, that Tom Marry will -- is being positioned to maintain these business segments, responsibilities going forward. There's a lot of reasons for synergy between Asia and Europe right now, on running the business, and of course, the Commercial Products Group that we're going back now to a single head of, Matt McBurney taking that business group. So you have Tom with a very accountable business model, once we find a replacement in Europe. But we have the right leadership model, the right set of behaviors driving forward. And I would say a very invigorated leadership team. So it is one change to make here, but all going in the right direction.

So you're looking for someone to step in and run Europe exclusively?

Oh, yes. Exactly. We will have a segment leader running Europe. That segment leader will report to Tom ongoing.

Okay. Perfect. Thank you very much.

Thank you.

Our next question is a follow-up. It comes from the line of Adam Brooks with Sidoti & Company. Please proceed.

Yes, real quickly. I know automotive has become the waning focus. I mean, is there maybe an opportunity on EV, I know with electric vehicles, obviously thermal management content is going to be high, or is that an area where similar to other automotive markets you're kind of staying away from?

No, and I want to make sure that -- we aren't doing a wholesale departure from automotive. We will be in automotive where we have advantaged components that we can supply on things like layered coil oil coolers, liquid charge air coolers, in some cases EGRs that have a little bit higher demand because of application, a heavier diesel application, that type of thing.

As far as EV, we have some business with North American EV producers. And we have some research going on in Europe with a major battery provider in Europe, tying into a program. So we are looking to see if we can find unique, highly engineered solutions that could become a platform for growth versus a 1-off, I would say, solution for providing something in the near term. So we still have our focus on providing applications where we can use either our existing technology to solve difficult problems and/or bring in a new platform for EV solutions.

Yes, just to add to Tom's comment, it may be very noticeable to the Modine people, but not so much to the external world. We're very clear to talk about automotive modules. And that's the case where Tom talked about this warranty issue, where we supply an entire module and we're passing through shrouds, fans, motors, blowers. The customer wants to drive you down to a low margin, you have the working capital, the complexity of delivering just in time, just in sequence.

That model has not worked for us. But where we will continue to play, as Tom said, of where we have a product platform, a product family that we can often apply to both heavy duty and automotive applications, and we have the capital in place.

The other thing we're not going to do is build a dedicated automotive plant because we know that that can get you into trouble. But just to follow up what Tom said, we will participate where we have the existing product, the capacity in place, and we think we have an advantage. We will play there, and we can make very good money doing that.

Great. Thank you.

Ladies and gentlemen, this will conclude the Q&A portion of the call. I would now like to turn the presentation back over to Mr. Bob Kampstra for closing remarks.

This concludes today's call. Thank you for joining us. Goodbye.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.