Modine Manufacturing Co (MOD) 2012 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the second quarter 2012, Modine Manufacturing Company earnings conference call. My name is Tahisha, and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will be facilitating a question-and-answer session. (Operator Instructions)

I would now like to turn the conference over to your host for today, Mr. Robert Kampstra, Vice President, Corporate Controller. Please proceed.

Thank you for joining us today for Modine's second quarter fiscal 2012 earnings call. With me today are Modine's President and CEO, Tom Burke, as well as Mick Lucareli, our Vice President Finance and Chief Financial Officer.

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 Investors Relations section of our Company website, Modine.com. 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.

On slide two is an outline for today's call. Tom and Mick will provide comments on our second quarter results and go through our fiscal 2012 guidance. At the end of the call there will be a question-and-answer session.

On slide three is our notice regarding forward-looking statements. I want to 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. With that, it is my pleasure to turn the call over to Tom Burke.

Thank you Bob and good morning everyone. Overall I'm pleased with our operating performance and our sales outlook remains positive. And with this I want to reaffirm our previously issues EPS guidance between $0.95 and $1.05 for the full year. As you know, we experienced some dramatic currency changes in September as the dollar strengthened against other world currencies and despite losses due to foreign currency changes, I am pleased to report that we remain confident in our full year projections. Mick will walk you through the financial details in the a moment, but I'll hit some of the key highlights now.

Operationally, business segments results were basically in line with our expectations for the quarter as both sales and operating income significantly exceeded last year's performance. Sales are now near pre-recession levels, order backlog remains very strong and our operating efficiencies continue to improve. Again, all this supports our year-end guidance in which we have high confidence.

We did experience the typical seasonality in the second quarter we covered with you last quarter and we could not predict the large negative impact created by the stronger dollar. But after backing out impact of foreign currency losses and an unplanned charge in South America, EPS was consistent with our expectations for the period.

Turning to page 5, I would like to provide you with a short update on each of our business segments. Overall our business strategies and priorities remain unchanged. We continue to focus on leveraging the strength of our Advantage product portfolio across our well established global footprint.

In Europe, our volume projection and order books are quite strong and our full year revenues earnings remains solid. We continue to expect top line improvements across all of our served markets for fiscal '12. Modine Europe is prepared for the anticipated challenges associated with the major conversion of their business from a primary automotive focus to a commercial truck focus, which is still in its early stages.

At the heart of this transition is the deployment of our Origami technology strategy. The heavy-duty Origami Truck Radiator launch is in the initial phases of production with a major European truck producer. This German production facility will ramp-up on a steady basis over the next 12 months to support additional European truck customers.

In Austria, our team is also operating at early production levels for Origami Condenser technology to support several new premium automotive programs that will launch this fall. With the Euro 6 emissions conversion under way, we are now positioned to achieve our stated objective to secure a leading European truck market share in the Powertrain Cooling segment. Currently we are excited and focused on the ramp of production for both Origami facilities but in addition I'm also pleased with the performance of the remaining operations within the European business segment.

In North America, the team is focused on taking advantage of our targeted markets in Commercial Truck, Agriculture and Heavy Duty Construction. We continue to secure new business wins in the off-highway segments, both with Agriculture and Construction customers. Our customer relationships are very strong and this is leading to additional business opportunities and sales growth in our targeted North American markets. We are evaluating adjacent market opportunities by leveraging our existing product portfolio and manufacturing capacity to expand our sales potential in this region. Our North American team has stabilized very well after all of the 2010 launches and footprint changes of the last three years. We realized very strong plant performance this quarter which Mick will review later in our detailed segment slides.

Our Modine Production System discipline is working and is driving improvement in all of our facilities. Focusing our improvement on principles on every process, every day is the way we operate and using this discipline will continue to help us meet both our near and long-term goals.

Our manufacturing footprint changes in North America are nearly completed and we expect the last of the previously announced plant consolidation efforts to be finished later this fiscal year. This segment is performing well and will provide solid returns by leveraging our strong market presence and scale.

Turning to page 6, in Brazil we have a highly experienced and self-sufficient business unit that is focused on the very dynamic, fast paced Brazilian commercial environment. They're fully capable to support existing customer expansion in the region and any new entrants that begin to operate in Brazil.

From a market perspective, we continue to see improvement in the Medium Truck and Construction markets in Brazil. We are projecting the Ag market to soften after a very strong fiscal '11 and with the elimination of incentives in calendar 2010. We also expect to see some slowdown in the Truck market in our fiscal fourth quarter as the pre-buy activity winds down with the January '12 emissions law change. We continue to have a very well established and advantaged position in Brazil's primary local markets of Agriculture and Commercial Trucks.

South America continues to manage some short-term performance challenges however, following a major rearrangement to increase overall manufacturing capacity. The adjustments to the facility are necessary to support further growth for aluminum brazing capacity to support the business created by increasing localization by global Truck OEMs. This rearrangement also helps prepare us for increased launch activity and product turnover as we convert copper brass products to aluminum to support the Euro 5 emission standards.

Brazil has been experiencing strong currency rates and high inflation which puts pressure on their export margins. Local currency did weaken compared to the US dollar at the end of the second quarter, which could provide some relief.

Moving on to Commercial Products, this team continues to demonstrate their strong market knowledge and operational drive which resulted in double digit sales growth through the quarter in a relatively flat market. Data Center Cooling and School HVAC demand is improved from the lows back in 2009 and 2010. We also anticipate a favorable heating season for North America, driven by customers seeking energy efficient heating solutions such as those provided by our Effinity93 unit heater product line.

We have invested and will continue investing to bring new products to our targeted Commercial HVAC markets. I am very excited about these new products, including our Atherion Package Rooftop unit and our new Data Center Cooling products. These new products will provide a significant source of revenue growth as we focus on providing technically advanced product offerings to our served markets.

We are well positioned to leverage additional growth opportunities in this business segment and are carefully evaluating our global growth potential and long-term strategy. We will continue to be aggressive in this highly profitable segment.

Please turn to slide 7. In Asia, we are starting to see a bit of cooling off of the rapid growth of the China economy. Construction sales are projected to slow from their frantic pace in the back end of our fiscal '12, however, we continue to see many sourcing opportunities as emission standards and quality expectations drive customer needs for higher performing heat exchangers. We are taking full advantage of the aggressive expansion in the China construction equipment market.

In India, we have experienced some reduction in our Commercial vehicle order book as the broad India Truck market has slowed from the projections published earlier this year. We are very well positioned with local and global customers to support this segment when growth rates increase as they are expected.

In South Korea, our manufacturing JV is off to a solid start to support the very important Korean customer base in the heavy construction equipment market. We are continuing to see the acceleration of new business wins in our quickly maturing Asia segment and are continuing to fill in the manufacturing capacity ahead of schedule. We have a very good customer base made up of both local and global customers in this growing region of the world. Most importantly, we have great teams in place at each of our operations in Asia. This presence positions us to take advantage of the fast growing Truck and Off-Highway opportunities and we remain prepared and poised to continue to leverage these markets as they reach their full potential.

With that, I'd like to turn it over to Mick for a full overview of our financial performance and guidance.

Thanks Tom and good morning to everybody. Before I get started, I would like to highlight one organizational change. Last week we issued a press release announcing that Kathy Powers joined Modine as Vice President, Treasurer and Investor Relations. Bob Kampstra will continue as our Corporate Controller and these changes allow him to focus on our many financial accounting and tax priorities. Many of you know Bob and he has done a wonderful job in Investor Relations, which I thank him for. You'll hear more from me, Kathy and Bob in the next few weeks as we start that transition.

Now let's turn to slide 8 and I'll walk through the income statement. As we discussed last quarter, we have some typical seasonality in our second quarter, primarily due to customer shutdowns. From my perspective, revenues and underlying operating income were in line with our expectations and we continue to execute well on our full year plan. Sales were up 15% over the prior year, driven by increases in all of our business segments. The revenue growth excluding foreign exchange was approximately 10%.

Our gross profit improved by 11%, however, gross margin declined slightly on a year-over-year basis. All of our business segments with the exception of South America and Commercial HVAC showed year-over-year gross margin improvement. South America experienced a margin decline due to plant rearrangement inefficiencies and higher year-over-year copper price. Our Commercial HVAC segment also showed a gross margin decline relating primarily to certain commodity price increases. That said, we expect both segments' gross margins to improve in the second half of the year.

SG&A continues to improve as a percentage of sales and we are on track to meet our objective of 11% and 12% of sales for the fiscal year. And in total spending, this quarter's SG&A was impacted by some unanticipated items in South America. The segment incurred approximately $1.6 million of unusual costs due to environmental remediation, workers compensation and expedited air freight associated with the plant rearrangement.

Overall, Modine's operating income improved $2.8 million or 31% from the prior year. Also you will see we have some large changes in interest and other expense categories compared with the prior year. The other expense recorded this quarter is due to the foreign currency losses versus gains in the prior year. And these quarter gains or losses are largely non-cash in nature and relate primarily to the revaluation of our inner company loans on the balance sheet. Excluding the foreign currency losses and environmental remediation in Brazil, our EPS would have been higher by approximately $0.12.

In addition, I'd like to note that our effective tax rate for the quarter was unusually high at 67%. We continue to see the full year tax rate between 25% and 30% and a more normal range the next two quarters. However, the higher tax rate in the second quarter also had a negative EPS impact of approximately $0.03. So adjusting for the impact of exchange losses in other income and the tax rate, EPS was in line with our expectations.

Moving on to slide 9, let's take a quick look at some balance sheet data. The balance sheet remains strong with net debt to capital of 28.5% and $30 million of cash on hand. Second quarter operating cash flow improved versus last quarter. In the first quarter we had a large build of working capital to support the rebound in our revenue and working capital has stabilized in the second quarter. As a result, second quarter was much better in terms of free cash flow and looking forward we anticipate positive free cash flow for the remainder of the year.

Moving on to slide 10, we will review our segment results for the quarter. And let's start by taking a closer look at the European business segment. As Tom mentioned, underlying fiscal '12 sales were up 12% driven by strength across all markets, resulting in a very solid quarter. The additional 10% revenue growth was due to the Euro strengthening compared to the US dollar on a year-over-year basis. And gross profit improved $4.1 million or 26%. Gross margin increased due to fixed cost absorption on the higher volumes and improved plant performance. Overall, operating income was up by $5 million or more than double the results from the prior year.

We anticipate the commercial vehicle market recovery will continue this year in Europe, while our current business remains heavily dependent on premium Automotive sales.

Moving ahead to slide 11, let's look at North America. Sales were up 7%, with the continued recovery in Commercial vehicle and Off-Highway markets. Operating income improved $3.2 million or 41% as gross profit and SG&A control helped drive the significant increase. Overall, this was a very good quarter for the North America segment. And as a reminder, North America revenue will be negatively impacted this year by approximately $45 million as a few programs wind down. Therefore we are expecting slightly lower revenue from this segment in the second half of the year due to these anticipated wind downs.

Now turning to slid 12, we have a look at South America. Underlying sales up 96%, driven by the pre-buy, as Tom mentioned in Commercial vehicles in advance of the emissions changes and increased aftermarket sales. However, gross profit remained relatively flat due to the stronger Brazilian currency and higher material costs this year. The stronger currency impacts our export margins because we sell the product in US dollars but our costs remain in Brazilian real.

As I mentioned previously, operating income was impacted by a few unusual items in the quarter which amounted to approximately $1.6 million. First we increased our environmental remediation accrual, next we continued to have higher freight costs as we are rearranging our facility to create additional production capacity. And last, we had a couple of employee related expenses or accruals. We don't anticipate that these will continue and we expect SG&A spending will be lower in the second half of the year.

Flipping to slide 13, we have our Commercial Products business segment. This segment continues to perform very well with sales improving 10% on strength of North American heating and cooling sales. Gross margin of 29.3% was very good, but down slightly from the prior year, primarily due to increases in certain material costs. Our operating income was down slightly due to higher SG&A spending and this was the result of new product development costs and higher sales commissions. On a full year basis, we anticipate this segment will show very solid growth in operating income.

Last but not least, let's turn to slide 14 and have a look at our Asia business segment. Sales were up very strong 57%, driven by program launches and maturing volumes in China, India and Korea. As anticipated, the second quarter results were down sequentially due to product launch costs, however, gross margin, gross profit and margin improved on a year-over-year basis as volumes have continued to grow. We expect Asia margins to fluctuate a bit over the next few quarters as new products continue to be launched in this segment but most importantly, we're expecting positive operating income this year as revenues continue to increase and launches are completed.

So now let's turn to the outlook on slide 15 for the remainder of the year and for the full fiscal year. Despite this quarter's foreign currency loss as we discussed earlier, our business segments and end markets are performing well. We anticipate an improvement in gross margin and earnings accelerating in the second half of the year. We are projecting a robust heating season and have seen strong orders in the UK for our Commercial products group. Asia continues to improve as their revenues grow and new products are launched. And we anticipate stronger operating margins in the second half for Europe.

As a result, we are holding our previous full year guidance for earnings. Foreign exchange rates remain a key assumption going forward and at current rates, we expect to be at the lower end of our range. Obviously any weakening in the US dollar provides upside opportunity. In short, the ability to absorb about $5.5 million of exchange losses and stay within our earnings target, demonstrates the overall strength and improvement in our business.

With that Tom, I'll turn it back to you.

Thanks Mick. In summary, the stronger US dollar in September put some unexpected pressure on our second quarter results, but our underlying operating income and operational performance continues to strengthen as Mick points out. Even including the foreign currency losses realized in the quarter, we are confident we will achieve our previously issued full year guidance.

Despite the continued economic uncertainty that is reported almost on a daily basis, the major market outlook for our products continues to be positive. We are confident in our growth strategies that will enable success in our targeted markets. We see the benefits of our diversified market focus and will continue to pursue additional opportunities to diversify within our thermal management core competency. I remain very excited about our long range outlook. We have the right teams, the right products and discipline in place to deliver on our shareholder commitments and take Modine to the next level.

With that, we would like to take your questions.

(Operator Instructions) David Leiker, Robert W. Baird.

This is Joe Vruwink on the line for David. Just a quick question on North America with top-line growth of 7%. Can you maybe talk about what Automotive wind downs had on a year-over-year basis and then maybe compare your growth with weighted average or growth you saw across your various end markets because I know Truck was pretty strong and I'm just interested on how that 7% maybe stacks up when comparing your market growth?

We don't have a breakdown of revenue growth in core markets versus the wind-down of some of the Automotive programs, but a 7% growth rate was pretty close to what we were expecting on a year-over-year basis. There was some impact this year as part of the 45 million, probably a little bit less than half of that in the first half of the year has winded down. But again, on a blended basis and if you look at the pie chart on North America and you look at the blend between heavy-duty, medium-duty, off-highway and light vehicles, that was pretty much about where we saw things coming in for the quarter.

I guess my question is 45 to 50% of your business is in a market that's growing almost 60% year-over-year and so I'm trying to get a sense of maybe what's going on in that business and in particular because I think the growth rates were still pretty good when you talk about light vehicle and Ag and Construction.

I think again if you take a look at about 15% or so in the Class 8 which is the highest growth and mediums are up, but a declining light vehicle segment and a little bit more muted growth in the heavy-duty applications, I think that's where we're getting to that blended rate and the difference versus what you're seeing on a pure maybe Truck growth rate.

In terms of material pricing, I know you have some pass through mechanisms that given the moderation we've seen recently might benefit you and three or so quarters. I'm wondering if you have some mechanism in the Commercial product group, if you have the pricing power to see material cost pass-throughs there and when we might expect them?

For the standard products in that group, so products that are made and sold as standard kind of catalog items, we have the pricing power at our discretion. Clearly, we have to look left and right at what competition is doing, Joe. I would say there we're looking at opportunities to pass some of that through to the customer. And then we also have a piece of the business that is more made to order in the precision air conditioning Data Room market in some of our rooftop units where we have more pricing power. So we will recover some of that, it's just not the same mechanism as we have with our OE vehicular business.

And is the fact that the precision products were down year-over-year have a magnified impact when you're looking at profitability in that business?

No, as we take a look at that business, the actual product mix didn't have much of an impact on the year-over-year gross margin. It was primarily due in some respect to certain areas with products in there with steel and some areas with regards to things like compressors that we saw some significant increases that will take some time for us to work that through the system and adjust our pricing.

My last question is through two quarters you're standing at about $0.30 in earnings year-to-date and by maintaining your guidance range it implies that you're going to have a pretty solid back half of the year. I'm just wondering, ex $0.12 of items - well really $0.15 that maybe weren't forecasted, you'd be in position to possibly raise full year guidance and I'm wondering what aspects of your business are maybe a little bit stronger than they were when you gave this forecast in June?

That's a great question. I would say to your first question, coming out was we're seeing a lot of strength in the vehicular markets, definitely seeing good strength in North America on and off-highway. Seeing good volume in Europe is holding and same thing in Asia. When Tom talked about some of the slowing, it's relative to the historic growth rates.

But I would say absent, as you said, the nonrecurring items, we're very happy with our top line and in Q2 we knew there would be some seasonality there with the volume and that impacts from the volume our gross margin. But as long as the volumes hold we feel very comfortable about a nice increase in our margins in the second half of the year.

So just because volumes are shaping up a little bit better, that's going to have implications for margin, you're saying and as a result the margins have turned out a little bit better?

Yes, in fact, to your point, we're holding guidance, both revenue and earnings, even after lower exchange rates. The underlying unit volumes have been right where or even stronger than as we headed into the year which is great for us. All the businesses are really performing well. As we mentioned, the first half of the year we've had a lot of struggles trying to create the additional manufacturing space in Brazil. We'll get that behind us. But other than that we're very happy with all five segments are performing quite well and I think that's what's leading us to the confidence and as you said, excluding the nonrecurring items the pretty strong results in the second half we see coming.

Adam Brooks, Sidoti & Company.

Just wanted to hear kind of your views in the Europe Truck market; we've definitely heard kind of mixed things with Paccar or Volvo; Volvo's saying down 10%. Maybe your initial impression for what we're going to see for 2012?

We saw the information I think pulled out 5% or 10% in December, I think anticipating some slowdown also some [Sconia] thought that maybe the beginning of the year they might be down. I can tell you our suppliers that we're directly supplying, the orders are strong, they're not announcing any change. They've got some major launches that these programs are tied to as well as far as some excitement. So we've paid very close attention to this with all of the sort of customers that we have right now and we anticipate as Mick said, a good Truck market going forward in Europe.

Do you have any updates for plans for European facilities whether it's closing down or kind of switching over whose really running the plant, any updates as far as over the next few years?

First off, we have lots of plans underway looking at what we need to do in Europe and clearly we've been upfront talking about that. But we have a lot of work to be down and that involved all the stakeholders that need to be involved with that. But we've brought on new leadership to help us with that because of the focus on making sure we have the right amount of attention on things and also can work with all the right parties. But this will be coming clear as we move forward, but right now we've got work to do and preparing to do it. What was the last part of your question, Adam?

That was it. I guess I also had a question on the Commercial products group. The second half of the year looking on a year-over-year basis obviously we know 3Q is seasonally strong; are you expecting to be up on a year-over-year basis in the second half of the year I'm guessing?

Yes definitely and we anticipate, as I said, a very good heating season, which is underway right now. We also anticipate some very good reception of new products that we're launching, both the rooftop which is out now. We've had our first unit shipped out of our plant and we think we have an opportunity to really drive higher than planned sales there and also in the UK where clearly there is a flatter economic situation; we feel very positive about the order book we're building in our Data Center orders that are coming in. So we feel good about the back half of the year and going forward in that segment.

Do you possibly have the numbers for 3Q-4Q last year for Commercial products group, given the realignment?

Just to say what Tom said, I think we're really - we would expect the operating margins to be up in the second half of the year. That's the key driver for them. So last year in Q3 they had a gross margin of approximately 34.7%; in Q4 28.6%. And then operating income in Q3 was 15.3% and in Q4 5.1%.

And what were the revenue numbers for those two quarters after the alignment?

49.9 in Q3 and 33.5 in Q4.

Ann Duignan, JPMorgan.

Mike Shlisky filling in for Ann this morning. Question for you on Asia, I was a little bit surprised to see a sequential decline in Asia, given all the new product launches. I just wanted to get some more granularity about some of the programs that are happening and how they're progressing so far this year?

I'll give you my view just from the pure numbers side then I'll let Tom add some more color, but big picture, at a run rate of call it 20 million a quarter, 1 or 2 million in volume has a pretty big incremental impact. So that's one thing. And then as we look at the cost of goods sold at these plants, we're not only filling up very rapidly our plants in Changzhou but at the same time we're preparing and transferring engine related products to our plant in Shanghai. So a lot of this, it isn't launch problems, it's the timing of when we're launching and in some cases it's just the timing of transfer and product move costs with those launches. Tom do you want to add anything?

No, I think it's a great point. So what we're doing is going from one manufacturing facility in our largest plant in China in Changzhou in one assembly plant, which was our Shanghai facility which was really there to support the passenger thermal management team before. With deemphasizing that we are now making Shanghai into a full manufacturing facility to take over the engine products mostly oil coolers, which is growing rapidly. So we have some impact of that going on.

And a big impact from India from the standpoint of the Truck market down from where we started the year off, both in projections and starting at just a slow market to come back in Truck. We know it's going to come back, we're ready, we've got the orders, but the overall broad India Truck market is just depressed from where it was in our planning cycle.

Then changing over to your SG&A, barring the major onetime items that happened in 2Q, what's a good go forward run-rate and are you complete with your efficiencies in Brazil?

We definitely had in the first half of the year and in this quarter we did have slightly higher SG&A as a run-rate. We've been talking about a couple of ways to think about it. We're really managing it from a 11% to 12% of revenue so that I'll share with you. Also, the second half of the year, SG&A will be down from first half of the year. Q1 we had a large severance accrual, Q2 we had the environmental and the Brazil costs and then we also had some development recovery money that is actually a reduction to SG&A that was pushed to the second half of the year. So SG&A is going to be running lower at least at a $5 million run-rate lower in the second half of the year.

I appreciate your commentary just now on the European Truck market. I was wondering if you could me a similar outlook, maybe just your thoughts on calendar 2012 for Brazil, China, North America in the Class 8 Truck market?

Well, North America, obviously everything looks positive from a Class 8 standpoint. Mediums are slightly behind that. We have a mix between the two. We have a balance of both Class 8 and mediums, so we anticipate the projected we're in line with ACT of what they're thinking for 2012.

In China, the Truck market is expected to increase and again, we don't have solid numbers on that but we're seeing from our discussions with local customers and the likelihood that they will continue to increase and build on it is very high. But again, for us it's a lot of - we're mostly off-highway in China as we speak with now coming in the opportunity to grow into the Commercial Truck business with global customers as well as looking at local. But we anticipate continued growth there. Although our mix is less in China with our current sales that we have now.

In South America, the Commercial Truck business is scheduled to also increase and I believe we're thinking in the neighborhood of 10% or something is the projection that we agree with that's going on in South America.

Your commentary is always appreciated. Thanks very much. Great quarter.

Walt Liptak, Barrington Research.

I wanted to ask about the conversion ratio during the quarter. It's looking like it came out more like 10% versus you've talked about a 20 to 25% conversion ratio and I know there's some material issues, but as we look at the full year, I'm coming out with a lower conversion ratio based on some of the commentary. I wonder if you could provide some color on the gross margin through there?

Walt, Q2 is awfully hard to look at from a conversion and I agree with you, it's in that 11 to 13% range. One thing in Q2 is we had some tooling sales and even though we passed that on to the customer, you're passing that through at limited or no cost and that can influence it. But even without that, conversion was lower and it's just it was an odd quarter. We were down seasonality, both North America and Europe were down sequentially in volume and they converted kind of at the normal range, but the real two big drivers were the ones that I highlighted.

Both Brazil and our Commercial Products group actually were up year-over-year in revenue and their gross profit dollars were down and that really pulled the whole company's weighted average conversion down. In Brazil it's related to all those plant rearrangement costs we walked you through.

Commercial Products is just temporary. Last year they had a phenomenal 33% type gross margin and they're going to work through these material increases. So those two business units having higher sales with gross dollars down pulled it down. On a full year basis, absolutely with the stronger second half we'll be more normal. We are shooting for the 20% type conversion rate. So on a full year basis, we'll get that up and be closer to the 20% range.

In Asia as these new programs ramp, you talked about operating profit turning positive. Is it something where we run into similar loss in the third quarter and then become profitable or is it more of a smoother transition where you get towards breakeven and then it turns slightly positive?

As far as a run-rate for the second half of the year, it's going to be - I don't want to say linear, it's going to be we see sequential, so Q3 we see it being better than Q2, but volume is continuing to ramp. And Q4 is where we'll really start to see probably the most benefit from the volumes in Asia.

I might have missed this but the tax rate during the quarter, why was it so high?

Actually, since Bob's here. He never gets to say anything. It'd be a good chance for Bob to take this one.

We still have certain of our jurisdictions around the world where we generate loss as well and so those jurisdictions don't get the benefits of those losses in our tax rate, so you pay taxes in certain jurisdictions which causes a higher tax rate on a total company basis. So it's really a mix of our earnings and our losses in our jurisdictions that drives that tax rate right now.

(Operator Instructions) Joe Vruwink, Robert W. Baird.

Just one more from me. I'm wondering, Tom with traction you have in the condenser business and you're picking up some Automotive awards, I'm wondering, as I think of that business maybe a year or two from now, understanding you have pieces of business that are running off, are we going to be at a point maybe a year or two in the future where you have higher margin business that you're winning today that maybe fully offsets what you are essentially losing as you exit the business from an overall revenue perspective? Is that doable in a one to two-year timeline or is it going to need a little more?

I think it's a great question. To keep it at a general level, we watch our order book and the new business wins very closely and the answer to that is yes, we feel very positive about the new business wins that we've won that are coming on over the next year, two and three. So I think your logic is right. So that's one of the things that we really put a lot of attention to the last three years with our focus is making sure that our targeted products and targeted markets are aligned with the framework of what we need to have for the future. So we feel very positive about what's in the pipeline coming in to replace our existing business.

At this time we have no more questions. I would now like to turn the conference back over to Mr. Robert Kampstra.

Thank you. This concludes today's call. I'd like to thank everyone for joining us. Goodbye.

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