Modine Manufacturing Co (MOD) 2014 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Modine Manufacturing Company's fourth-quarter FY14 conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Ms. Kathy Powers, Vice President, Treasurer and Investor Relations.

Thank you. Thank you for joining us today for Modine's fourth-quarter FY14 earnings call. With me today are Modine's President and CEO, Tom Burke; and Mick Lucareli, our Vice President, Finance and Chief Financial Officer.

We will be using slides for today's presentation. Those links are available through both the webcast link, as well as the PDF file posted on the Investor 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 2 is an outline for today's call. Tom and Mick will provide comments on our fourth-quarter results, and provide our revenue and earnings guidance for FY15. At the end of the call, there will be a question-and-answer session.

On slide 3 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 with 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, Kathy, and good morning, everyone. Our revenues for the fourth quarter were up 9%, with sales growth in each of our segments, other than South America, where economic conditions remain somewhat challenged. Of particular note were our European region, which delivered 15% year-over-year sales growth, and our building HVAC segment, which had a record heating season in North America. In addition, our Airedale subsidiary in the UK had a strong quarter despite the challenges of the fire that destroyed our manufacturing facility last year. We also completed the acquisition of Barkell, a manufacturer of air handling units in the UK.

We delivered adjusted earnings per share of $0.15 for the quarter, which was down $0.03 from a strong fourth quarter last year. For the full year, we delivered 7% sales growth and adjusted earnings per share of $0.73, ahead of our previous guidance, and up 83% from FY13.

Overall, I am pleased with our financial performance this year, and in particular with our $51 million of free cash flow generation. Our balance sheet is strong, and we have created the financial flexibility to execute our growth strategy. Mick will provide some more details on our financial results in a few minutes, but first I would like to comment briefly on our segment results and market outlook for FY15.

Turning to page 6, revenue was up 4% in the North America segment, with higher sales to commercial vehicle and automotive customers offsetting a decrease in sales to off-highway customers. Although gross margin was up in North America year over year, operating profit was negatively impacted by a $2-million warranty charge related to a unique matter associated with a specific product manufactured in North America for our building HVAC segment. We have identified the root cause, and have fully addressed this problem.

Last month, we announced plans to close our McHenry, Illinois, manufacturing facility, and to consolidate all North American parallel flow heat exchanger manufacturing into other North American facilities. Although making the decision to close a plant is never easy, we believe this move is necessary to maintain the scale that we need in our manufacturing operations to deliver cost-competitive products to our customers. We recorded $2.4 million in restructuring and impairment charges in the quarter, and expect to incur total closure costs of approximately $5 million, in addition to some manufacturing cost inefficiencies that are inherent with winding down an operation. Once the plant is closed in FY16, we expect approximately $5 million in annual savings.

Looking forward, we expect mixed market conditions in North America to continue during FY15. We expect heavy truck production to be up 10% to 15%, and medium truck production to be up 3% to 8% versus the prior year. Our outlook for the off-highway is flat to down 10%, with the agriculture equipment segment of the off-highway market remaining challenged in FY15. Given our current mix of business, which -- the good news in the truck market will be somewhat offset by weakness in the off-highway, particularly in the agriculture and mining equipment sectors where we have a heavier concentration.

Several of our off-highway customers continue to emphasize cost competitiveness, and are aggressively seeking productivity improvements from their entire supply base. Despite these challenges, we see opportunities with these customers as we have demonstrated our ability to successfully compete in this region. In the North American automotive market, we are starting to see new opportunities develop with Detroit-based customers resulting from our latest design innovations for engine products, in support of the OE's need to improve fuel efficiency.

Please turn to page 7. Our Europe segment sales increased 15% in the fourth quarter, driven by higher sales to commercial vehicle customers, higher tooling sales, and the impact of the stronger euro. Excluding the impact of currency, sales grew 11%.

Sales to commercial vehicle customers were up 25%, driven by higher launch volumes of components for Euro 6 vehicles, partially offset by a decrease in sales of Euro 5 components. We anticipate that overall production volume of commercial vehicles will be flat to down 5% in Europe, driven primarily by the pre-buy of Euro 5 vehicles prior to the January 1, 2014, changeover. That being said, we expect our increased market share of Euro 6 components will result in higher year-over-year production increases for Modine.

Sales to automotive customers in Europe were down slightly in the quarter, as higher sales of components were offset by a decrease in automotive modules as the BMW program continues to wind down. We expect the broad European auto sector to be flat to up 5% in FY15, and we expect to see smaller declines in sales of BMW modules as the remaining programs near completion. Europe's gross margin was negatively impacted by a $2.4-million warranty charge in the quarter, which was spread across a number of different products.

As you know, our strategic focus over the past two years has been on restructuring this business. We are entering the final stage of this process, and I am pleased with the work that has been completed so far. We have reduced our assets in the region by $30 million, and have lowered our annual cost by $16 million. During this period, we have also ramped up production in our Euro 6 commercial vehicle programs, and managed the wind down of the BMW module business.

We have a few remaining challenges to overcome before we reach our ultimate financial goals in Europe. First, we need to complete the last remaining consolidation of our manufacturing operations in Germany. As I had mentioned last quarter, we are combining operations from two German manufacturing plants into one. I am pleased to report that the initial phases of the consolidation have gone very well, and we estimate that the transfer will take approximately 18 months to complete. This is a very complex move, and we have a dedicated team working to make sure it is completed successfully. As with any consolidation, there will be some added costs and inefficiencies that will impact our results during the consolidation period.

Second, we need to improve the production efficiency of the Origami radiator. As I mentioned during the past several quarters, we have made changes to the manufacturing processes related to our Euro 6-compliant radiators. Our original Origami radiator plans call for a highly complex and automated manufacturing process.

We were not satisfied with the consistency of this process during initial launch phase. As a result, we have made the necessary changes to the manufacturing process, while maintaining the high quality of the product. However, as a result of these changes, we are not at the margin levels that we initially assumed in our plans.

Most importantly though, we are fully meeting customer demand and quality performance requirements. I am confident we will continue to improve our margins as we move forward with the plant consolidation.

Another obstacle facing Modine Europe is the current level of production volume. Our volume in Europe is still significantly lower than it was three years ago, and is lower than we anticipated when we set our objectives for the European restructuring program. We expect the pre-buy of Euro 5 vehicles to continue to impact our FY15 volumes, and are projecting European commercial vehicle market to be flat to down 5%. Despite these challenges, the team in Europe is driving the necessary improvements, and I am confident we will meet our goals in this segment.

Moving to South America on page 8: Excluding currency impacts, sales were down 6%, with decreases to OE customers partially offset by a slight increase in aftermarket sales -- result experiencing declines in our main markets, namely commercial vehicles, bus and off-highway equipment. In particular, the drop in agriculture equipment market during the past quarter was primarily due to the delays in government subsidized PSI program, which provides low-cost financing for machinery purchases in Brazil.

Our outlook for FY15 for this segment is for market conditions in Brazil to continue to deteriorate. We are projecting that the commercial vehicle and agricultural equipment markets will be down 10% to 15%, and for the aftermarket to be flat to down 5%. We believe that there is a risk of further slowdowns associated with the World Cup this Summer, but that the resumption of the government sponsored financing programs for commercial vehicles and off-highway equipment may help the markets get back on track later in the year.

The recent slowdown in the Brazil economy has challenged our near-term growth expectations. We will, therefore, focus on reducing our cost base and making it more flexible, in order to maintain the profitability objectives at these lower production levels. These actions include headcount reductions that will result in some severance costs during FY15.

Please turn to page 9. Sales for our Asia segment were up 19%, once again driven by export sales from India. We saw increases in sales to automotive and off-highway customers, along with higher tooling sales in both India and China. Our team in Asia has worked hard to manage our costs over the last several years, as the heavy duty market stagnated with the slowdown of construction activity in China.

We have focused on diversifying our business model to become less reliant on the construction markets, and are now launching several new products for the automotive and commercial vehicle markets in China, India and Korea. However, in order to be competitive in these markets, we must continue to maintain our intense focus on cost competitiveness. We plan to use our increasing knowledge of the local markets to guide our decisions regarding growth opportunities in this region.

The outlook for markets in Asia has improved slightly. We are beginning to see signs of improvement in India, specifically for off-highway equipment and commercial vehicles. In China, however, expectations of growth in heavy construction equipment have been somewhat stifled by recent comments from the government indicating that a short-term economic stimulus may not be forthcoming. In Korea, the strength of the Korean won has led to the softening of the Korean off-highway market, particularly for exports. Our team in Asia will be watching the market developments carefully and will act accordingly.

Please turn to page 10. Sales in our building HVAC business were up 24% in the quarter. This was driven by a $4.6-million increase in sales from our Airedale business in the UK. Airedale is currently producing at nearly pre-fire capacity levels in their temporary manufacturing facilities. They have worked diligently to reduce their lead times to meet their customer expectations, and order levels have remained strong. We will break ground on our new manufacturing facility and tech center in early July, and plan to begin production in the latter half of 2015.

The quarter includes approximately $2 million of sales of Barkell Limited after our February 28 acquisition. Barkell is a manufacturer of custom built air handling units located in the north of England. This acquisition will allow us to expand our product offering into the air handling segment, further extending our overall business offering to the HVAC markets. Barkell has been a commercial partner with Airedale for some time, and we are very pleased to welcome them to Modine.

In North America, our heating product sales were up $3.9 million in the quarter, continuing a record-setting trend. The long, cold Winter extended our selling season, and our ability to keep up with demand led to an increase in market share. Our building HVAC group has proven that they are truly a growth driver for Modine. The work that this group has accomplished this year with the recovery of the Airedale fire, the acquisition of Barkell, and the management of unprecedented volumes in the North American heating market has truly been remarkable.

Looking forward, given the elevated levels of heating product sales in North America in FY14, we do expect this market to be down somewhat in FY15. However, we continue to see positive trends in the UK data center and air handling markets, and expect these markets to be up 3% to 8%. And with that, I would like to turn it over to Mick for an overview of our financial performance and guidance.

Good morning. Please turn to slide 12. As Tom mentioned, we had a strong quarter, with a 9% increase in sales. This includes favorable FX and tooling impact of $5 million. As a result, our core sales were up approximately 7%.

In the quarter, gross margin increased 30 basis points to 15.9%. The margin improved despite large adjustments to warranty reserves in North America and Europe. In total, we incurred approximately $4 million of additional warranty costs. I am pleased that we were able to drive year-over-year gross margin improvements in each of the four quarters.

SG&A was up $9 million, with several items accounting for nearly $6 million of the year-over-year change. The major items are as follows. In the fourth quarter of last year, we received an insurance rebate of $1.1 million, and payments received for testing services was $1 million higher. This quarter includes $2.4 million of higher incentive compensation. Our SG&A in the UK was higher by $900,000, due to the Barkell acquisition and Airedale fire-related costs. Last, the current quarter includes business development activities that resulted in transaction costs and professional fees of $0.5 million.

Please note that we recorded $6.8 million of restructuring expenses and impairment charges. $4.4 million was tied to the consolidation of manufacturing operations in Germany, and was mainly severance-related. The remaining $2.4 million relates to the decision to close our McHenry, Illinois, manufacturing facility.

You can see that we had a significant benefit in our income tax line. As a reminder, in 2008 we established a valuation allowance against our US deferred tax assets. In this quarter, we reversed valuation allowances based on a variety of factors, including our earnings improvements and expectation that these trends will continue. The reversal of the valuation allowance resulted in a one-time positive benefit of $119 million or $2.49 per share.

While accounting can be somewhat confusing, this is truly good news for Modine. First, the reversal valuation allowance is recognition of the hard work in previous years to return the region to profitability. In addition, this means we will not pay cash taxes in the US for the next several years, as we realize these significant tax assets.

The only downside is that we will now record tax expense in our income tax statement -- or I am sorry, in our income statement relating to the United States. Therefore, our tax expense, as shown on the income statement, will be significantly higher next year. However, as a reminder, this is only a book accounting entry, and we will not be paying cash taxes.

We reported GAAP earnings per share of $2.49 in the quarter, and adjusted earnings per share of $0.15 after adjusting for restructuring-related costs and the tax impact.

Turning to slide 13, we generated $51 million of free cash flow during FY14. This is a $52-million improvement from the prior year. The cash flow -- free cash flow was negatively impacted by approximately $9 million of cash costs for restructuring activity. So, excluding this amount, free cash flow would have been $60 million.

Positive cash flow is continuing to strengthen our balance sheet. Net debt of $77 million is $63 million, or 45%, lower than the prior year, and our cash balance has increased to just over $87 million. Please note that about $17 million relates to temporary insurance proceeds from the UK fire.

Slide 14 highlights the results for North America and Europe. And in North America, fourth-quarter sales increased $6 million or 4%. The segment's gross margin improved 10 basis points, but was negatively impacted by the previously mentioned $1.7 million of higher warranty expenses. As I previously stated, we recorded $2.4 million of expenses related to the McHenry plant closure. Adjusting for the plant closure costs, operating income was $9.8 million.

Now looking at our European business segment on the right side: Europe had a strong quarter with sales up 11% on a constant-currency basis, and 8% excluding tooling sales. Despite a $2.4-million increase in warranty costs, our gross margin improved 50 basis points to 12.3%. SG&A increased $2.2 million versus the prior year. This was partially due to a lower rate of VAT recovery, which actually works as a credit or a reduction to SG&A. Excluding the $4.4 million of restructuring costs, operating income increased $1.1 million, from $6.9 million to $8 million.

Moving on to slide 15, we have a summary of the South America and Asia business segments. On a constant-currency basis, sales in South America were down 6% or $2 million. The gross margin declined 240 basis points to 15.2% on lower sales volume. Overall, the lower sales volume and higher SG&A in the quarter resulted in a $2.3-million decline in operating income.

As Tom mentioned, we are not expecting economic conditions to improve in Brazil in the near future. For that reason, the focus of the region is on lowering costs to match the lower sales volume. We are anticipating some severance costs in the new year, as we plan to reduce personnel costs, and obviously this will result in lower salary and wage expenses.

Now turning to the right side, at our Asia segment: Fourth-quarter sales increased $3 million or 19%, continuing the trend of the past several quarters. Gross margin improved significantly -- 700 basis points to 14.3%. We are continuing to experience good conversion on the higher sales volume. And SG&A expenses increased $1.3 million, which includes $300,000 of professional service fees in support of our business development activities over there. The results still show an operating loss, but we continue to move towards breakeven, and this represents a $400,000 improvement from the prior year.

On slide 16 is the building HVAC segment. Sales were up $8 million or 24%, as the Airedale business has returned to near pre-fire production levels. As Tom mentioned, the Barkell acquisition added $2 million of sales in the quarter. Gross margin decreased slightly 20 basis points to 28.4%, primarily due to sales mix.

While earnings are up, there are several items to highlight which impacted year-over-year comparisons by approximately $1.6 million. First, we have Barkell expenses, which include $400,000 of normal SG&A costs, along with $200,000 of acquisition-related services. Also impacting the quarter was $0.5 million of Airedale fire-related costs not covered by insurance. And last, we are preparing for an SAP launch, and incurred $0.5 million of related expenses.

On another note, we have not recorded any income for insurance proceeds related to the recovery of lost profit from the fire. We are reviewing our business interruption claim for lost profits with the insurance company, and we are expecting a settlement during the first half of FY15.

Now let's turn to FY15 full-year guidance on slide 17. As Tom outlined, we expect mixed market conditions in FY15. We see improvements in the North America truck market and stable growth in European autos. We remain concerned about the economic climate though in China and Brazil. We also anticipate weakness in global ag and mining markets. Therefore, we expect our revenues to be up 3% to 8% from the prior year. This will result in an increase to adjusted operating income, with a range of $65 million to $73 million, as compared to $61.3 million this year.

There are several important factors to consider in our anticipated results. First, we are planning to incur roughly $3 million in costs relating to plant consolidations in Germany and North America. These costs relate to salaries of dedicated teams, along with expenses related to labor inefficiency, scrap material, and inventory build. Historically, we have not considered these as restructuring costs for adjustments to operating income, and therefore, our guidance assumes the absorption of these costs.

Second, as previously mentioned, we are planning to incur some costs associated with aligning the Brazilian business to match lower sales expectations. And third, we are assuming the business interruption claim related to the UK fire will be received in the first half of the fiscal year.

We anticipate that SG&A will run in the $190 million to $200 million range, driven by a few key items. First, SG&A will increase in the UK by approximately $5 million due to the acquisition of Barkell, and the resumption of Airedale to the normal level of operation post-fire. In addition, we estimate that Europe VAT recovery -- the tax recovery -- may be nearly $3 million lower than in this fiscal year, in FY14. Last but not least, we will not recover as much from third parties who are using our testing facilities in the US and Germany. As a partial offset, we are expecting to sell the German wind tunnel, which will result in a gain in positive cash flow.

Earlier, I walked you through the reversal of our tax valuation allowance, which will have a significant impact on our EPS calculation. While this is good news, because there is a significant tax benefit to Modine, we will now have to book US tax expense on the income statement. We see our full-year tax expense in the $22 million to $25 million range. This is roughly double the tax expense recorded in FY14, before the reversal of the valuation allowance. Once again, we will not pay cash taxes in the US until we fully utilize our net operating loss carryforwards, which will cover approximately $130 million of future taxable income.

So, just to summarize, we are anticipating a nice increase in operating income, but given the higher tax rate, adjusted EPS will be in the range of $0.63 to $0.73. When trying to compare next year's EPS, we estimate that the tax changes in North America have an $0.18 negative impact on FY15 earnings per share. So, on an apples-to-apples basis, factoring in the tax impacts, the fiscal EPS -- the FY15 EPS range would be roughly $0.81 to $0.91. Obviously, there are numerous moving parts and complexities in the tax line, but we are pleased that the underlying income from operations is projected to improve again in FY15. And as we look farther out, we are quite pleased that our order book remains strong and consistent with the prior year.

With that, Tom, I will turn it back to you to wrap up.

Thanks, Mick. If you will turn to page 18, please. I am pleased with the results for the fourth quarter and for the fiscal year as a whole, and I am extremely pleased that we were able to generate over $50 million of free cash flow. As Mick mentioned, this number is even higher when adjusted for cash spent on restructuring.

Operationally, we continue to focus on improving the production efficiency of the Origami radiator, and executing the final restructuring steps in Germany. As I mentioned earlier, there will be some additional costs to complete these actions, but we are confident, in the end, we will reach our profitability goals.

We are seeing improvements in some of our markets, namely commercial vehicles in North America and, in fact, in Europe for us, and also in global automotive. Indian markets continue to improve and we expect this trend to continue. This is partially offset by challenges in others, particularly Brazil, in the global ag and mining equipment market. China volumes have held steady, but we clearly see that our diversification efforts, particularly our new book business in the automotive market, will be imperative to fuel future growth. And, as Mick mentioned, we expect total Company revenues to improve 3% to 8% next year.

Strategically speaking, we continue to be guided by our enduring goals, leading us to focus on higher revenue growth, return on capital enhancement, diversification, and continuous improvement. This year we have taken several significant steps towards reaching these goals, recognizing that we are on a journey. Be assured: We will address any and all challenges we face, while never letting up on our maintaining our position as an innovative leader. Our innovative capabilities will ensure that we continue to provide our customers with the products and value they expect, and generate returns for our shareholders in this increasingly competitive marketplace. And with that, we would like to take your questions.

Thank you.

(Operator Instructions)

Our first question comes from Robert Kosowsky of Sidoti. Your line is now opened.

Just had a question, I guess, first on Europe. Just curious about the cadence of the commercial vehicle sales because it seemed like there was a lot stronger in the March quarter than I had thought it was. And wondering if you have seen a slowdown in the June quarter, as the pre-buy starts to impact results?

Yes. Well, it's -- we have -- it is a real mix switch that is going on. We have much more content on Euro 6 than we had on Euro 5. So the pre-buy effect on Euro 5 gave us a boost coming through last year, but now we have a richer mix. So we are seeing overall increase in commercial vehicle sales year-over-year. But the Euro 5 components are definitely lowering, but it is the mix of trucks that has given us the boost on an overall improvement that we see in Europe commercial trucks.

Okay. That's helpful. Now also, switching to North America, that warranty expense, you included that in your -- (inaudible) adjusted -- ?

Yes, the $2 million in Europe and the $1.7 million in US are in the numbers. There was no adjustment to back those out. We just wanted to point out that the conversion and margin would have been higher in the quarter, if we hadn't had those higher warranty costs.

Okay. And then, one last question. It looks like SG&A in your forecast is going to be up at a higher rate of sales, and it seems to be going higher from higher growth spending, some higher SAP. And I am wondering, how long this is going to last, and when do you think you can get to return of leveraging SG&A?

It's Mick. I will take that question, and then look to my boss here. (Laughter). No, we have had for probably a couple years discussions with investors and analysts. We are still well below, at the pre-recession level the Company was running at a $240 million kind of annualized run rate. But at some point, we have tightened down as tight as we can go, and we have said now for a couple quarters we see a little bit of the SG&A growth coming back from normal investments we need to do in people and for growth. Really what, as a percentage of sales, we really need to have happen here is we need the top line to continue to move in the right direction. We have had a few years of a little bit lower sales growth. So in dollars, SG&A will increase, but to drive it as a percentage of sales back down, we nearly need to move above this $1.5 [billion] range.

I think Mick answered that perfectly. Clearly, our order book is strong, remains strong, and you have got to support that with added SG&A to deliver on that, and the growth of the resources that we put into place. But we watch this very carefully, and we expect that as a percent of sales to stay under control.

Okay, that's helpful. And then finally, how much of a headwind do you see from the inefficiencies this year between McHenry and Europe?

Yes, and, just again, these will be in -- these will be numbers we will absorb and we will discuss in our public filings, but we estimate about $3 million in the earnings guidance we have provided. And that again relates to, we have dedicated -- the complexities of these two are pretty big. So you have dedicated teams of people managing them. And then when you have obviously, the wind down of a plant and the wind up of a catching plant, the receiving plant, we have labor inefficiencies, scrap inefficiencies. Things like that that are very hard to quantify, but they are planned for in our budgets and our forecast. So if that helps you out.

Okay. So for whatever easy comparison we had in the warranty is not recurring, you are giving it away this year I guess, in the inefficiencies from the plants, right?

Yes, and our hope is obviously, when we work with the teams, we hope to push those -- that $3 million as low as we can. But we think it's better to head in, knowing that we have done enough of this, that we know there will be some level of it. And then, we will follow-up with you to let you know how that is, that shaking out.

And when you look at the scope or the size of these projects, would you expect that 2015 to be the bulk of those inefficiencies that you are going to absorb? And then, 2015 you will see that -- or 2016, you will see that comparison turn more favorable? (Multiple Speakers).

Exactly.

The timing.

It is all timing, and it will calendarize, so that most of that cost will be absorbed in fiscal 2015. I mean, some will trail out, but we expect again, we have good experience doing this, the team is dedicated, and we should hit fiscal 2016 with the majority of that behind us.

All right. Thank you very much, and good luck.

Thanks.

Thank you. Our next question comes from David Leiker of Baird. Your line is now open.

Hello, good morning. This is Joe on the line for David.

Hello, Joe.

I wanted to revisit Europe. I am just thinking about your revenues, CV revenues up 25% in the market. That looks like production was down a few points. Is that the type of outgrowth we should be expecting all of fiscal 2015, or was there any sort of inventory stocking on Euro 6 engines that kind of abates going forward?

I will let -- this is Mick, Joe. I will give you the kind of the numerical look at it, and let Tom will add more color to what he is hearing. But no, short answer is no, we are not anticipating that level of growth. Big picture, as we look at the new fiscal year, we do have a sizeable amount of truck business that is growing, and that is just from the gain, our market share gain of Euro 6 vehicles. On the opposite side, we have got, call it $10 million to $15 million of the automotive BMW going down, and another $15 million of [tooling]. So you have got a -- we have got a $25 million to $30 million headwind on BMW and tooling revenue. On the positive, you have got some pick up on the truck business. And then that excludes anything of what is going on with the general, obviously with the markets. But we are not going to see that level of growth from -- in Modine Europe next year from the top line.

Okay. Just from kind of a market health standpoint, so we have heard that obviously a lot of Euro 5 deliveries still taking place, less so it seems like in Q2. And then by the second half, the entire market should be Euro 6. And so, if you had to pick a point on that guidance range for the market today, would you be skewing more towards the high end or the low end?

I think I would say, we are right in the middle.

Okay. Safe answer. (Laughter)

Yes.

Good question, Joe. (Laughter).

Switching gears to North America, so on the flip side, 4% revenue growth this quarter versus commercial vehicle volumes that were up quite handily, Class 8 production, the 20% increase. And it seems like just based on what some of the off-highway customers have been saying, there might have been some dealer restocking during the quarter. So any color on just the pace of revenue growth in that business?

Yes, again, it's Mick. I will jump in on the top side, and Tom can add color. We really think -- I mean you know us well, but we have got about 18% to 20% of that business segment is Class 8, and we are seeing some benefit. Clearly, the benefit from the market data everybody is watching, and then we have our medium segment. But the rest of the business, pretty high reliance on service, ag and construction, and we really from our side we are not seeing pick up in order rates in the off-highway space, specifically in the ag markets. And then, we do have a pretty heavy emphasis at Modine on the really big construction equipment including mining, and we haven't been seeing a pick up on the heavy equipment. Tom, anything?

No, you said that well. I think we do. On the off highway side, we expect maybe construction or lighter construction equipment to pick up some this year which is in there. But right now, that gain in commercial truck has been offset by a pretty steep decline in our segments of the off-highways (inaudible).

Okay. Bigger picture normally around the fiscal year end, you have provided two or three year backlog updates. On just talking to OEMs visiting you guys, at things like CONEXPO and Mid-America, there definitely seems to be a greater emphasis on thermal technology now that we are done with the emissions side of the equation, so emphasizing the performance of these engines that can bring in the thermal suppliers is a big piece of that. With that, in the background, what does the backlog look like as we get out of fiscal 2015, and you start to look towards 2016 and 2017 in the horizon?

We are very bullish on our outlook on the backlog. We gave guidance a year or two ago, and that guidance still holds forward and consistent. So the activity on development opportunities and supporting new projects is very high, as one of those things challenging our SG&A as we mentioned earlier on the previous caller or previous question. So we remain very bullish on the outlook with just what you said. As the emissions changes got contained, there will now be focus on fuel efficiency, and that brings in more precise engine management things, challenges that require new innovations that we are really well-positioned to deliver on. So we look very positive at the outlook.

In the past, Joe, as you know and others know, we have tried to calculate backlogs and net order books. To add to what Tom is saying, there is some complexity we know is in there, is when you have a market downturn, or a shift out a delay of let's say Euro 6 production. Then all of a sudden those numbers move, and we have to try to reconcile for all of you that we win or lose a program, and the answers are normally, no, it's a timing. But to also add color to your question, we still have -- the nice thing about Modine is we have a nice view out the next few years because of the launch cycle, and that order book still stays north of $200 million. Which is to Tom's point, consistent with what we have seen in prior years.

Okay, great. And then my last question, just on the SG&A item. It looks like basically the guide is taking the Q4 spending levels and annualizing that. And obviously within that, it would seem to imply that incentive comp levels stay flat with the Q4 levels. I am just wondering, how much was the move in the stock price during the quarter impacting that overall $2.4 million amount you touched on?

Yes, so, good, I mean, good questions. One on incentive comp, year-over-year, this year is up. It is going to be up in fiscal 2014 significantly as you pointed out. Fiscal 2013 there was zero incentive comp payments. The targets in fiscal 2014 were set on return on capital employed and free cash flow. As Tom walked through the numbers at the closing, it has been a very good year. So based on the target set by our Committee of the Board of Directors, fiscal 2014 will have a higher incentive payment. And then next fiscal year, we always head into the year planning for a payment, but obviously we don't know until the year shakes out. Beyond that, really the big drivers if you kind of take the mid points of the range, there is just a lot of moving pieces in there. You are looking at maybe at the mid point like a $13 million increase in SG&A.

This year we have had abnormally low SG&A due to the fire in the UK, those costs just for the non-accounting types. We obviously incur those costs, but the way the insurance works is, they are offset portions of those by a receivable, insurance receivable, and which you really what you see is a lower cost on the Barkell -- I mean, the Airedale side. Then we have Barkell -- we have had this situation for the last couple years. If you will recall, we had a problem a few years ago with VAT in Europe, and we had a large accrual set up to -- as a potential liability to settle those. The good news is the last few years, we have been going and cleaning up all of those and settling them, and they have actually been working in our favor. So we have been able to reduce that accrual, and that is up to a $3 million impact.

And then the last big one is the test center -- the wind tunnel in Europe. The good news this year, it has been pretty heavy demand, it has been fairly low utilized while we have been marketing it for sale. Our plan is to sell in the new fiscal year, so we won't have those test -- that testing income. But again, we know the trend in the region there, and it is the right time to diversify an -- a non-strategic asset, and generate the cash and reduce our costs going forward. So long answer to your question, but I want to touch on a few of those items that are really just things we need to kind of get level-set here, as we are completing our restructuring.

Okay, now that is all good color. I will leave it there. Thanks very much.

Thanks, Joe.

(Operator Instructions)

Our next question comes from [Shavonge Tipens] of Global Hunter Securities. Your line is now opened.

Thank you for taking my questions. I wanted to ask about the China excavation market and your concerns there, and what kind of trends are you actually seeing specific to China?

As you know, we have a heavy concentration in the China excavator market, and we obviously are looking to diversify that. But specifically on excavators, we anticipated sales growth this year and had came out of the chute strong in the calendar year on a year-over-year basis. But in April there was comments by the government on not putting forth the stimulus package for increased infrastructure. And that seemed to stymie the growth, so it's kind of flattish right now. And the outlook for the rest of the year is kind of, the market will remain kind of on a flat sales level. So that boost we thought that we might get with added infra structure investment from the stimulus is not going to happen. That's how we are planning that going forward.

Okay. Thank you for [your comments].My other question is actually on the insurance claim. Can you talk about exactly how much you [actually] expect in the insurance proceeds in 2015, and is it like a part of your 2015 forecast as well?

Yes. So in our outlook and in our guidance, we are assuming that we will receive an insurance settlement, or payment for lost profit. Flowing through the balance sheet all, in most of fiscal 2014 is a sizeable amounts of receivables and payables. We estimate that the total cost of this, when we finally have our new facility up and running will be in the $50 million range. But the big piece that we wanted to make sure that all of you understand is we also get reimbursed -- so those would be traditional costs of operations. We are in a leased facility, a new facility, we have to build a new one. In addition, we get reimbursed for the lost profit while we were shutdown. And right now, we estimate that that's going to be in a $3 million range. So we will follow up with you, once we finalize that discussion with the insurance company and we receive the payment, then that would be booked through SG&A and show up in income.

Okay. And so, the 500 -- $[0.5] million of insurance that was not actually covered by insurance, that one is not included, right?

No. And that was just -- we had an asset on the balance sheet for construction in progress that was linked to the facility before it burned down. So we needed to, we needed to write that asset down. We were actually looking at expanding before the fire happened. That is what the $500,000 relates to.

Okay, thank you for the color.

All right. Thank you.

Thank you. I am showing no further questions at this time. I would like to turn the conference back to Kathy Powers.

Thank you. This concludes today's call. Thank you for joining us this morning, and thank you for your interest in Modine. Goodbye.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a wonderful day.