Modine Manufacturing Co (MOD) 2015 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Modine Manufacturing Company's third-quarter fiscal 2015 conference call. (Operator Instructions) As a reminder, this conference call is being recorded.

And I would now like to turn the conference over to your host, Ms. Kathy Powers, Vice President, Treasurer and Investor Relations.

Thank you for joining us today for Modine's third-quarter fiscal 2015 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 with today's presentation. Those links are available through both the webcast link as well as a 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 2 hours after the call concludes.

On slide 2 is an outline for today's call. Tom and Mick will provide comments on our third-quarter results and update our revenue and earnings guidance for fiscal 2015. 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 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, Kathy, and good morning, everyone. I am pleased to report that our third-quarter sales of $364 million were up 9% from the prior year, excluding currency impacts, with sales growth in each of our segments, except South America, where markets remain weak.

Adjusted operating income of $14.2 million was up 15% from the prior year, largely driven by continued strength in our building HVAC segment, where a strong North American heating market contributed to both sales and earnings growth.

We reported adjusted earnings per share of $0.15 compared to $0.16 for the prior year. This decrease was largely driven by higher income tax expense in the current year.

Mick will go through the consolidated results in greater detail, but first I will review the segment performance and provide an initial view of the end-market expectations for calendar 2015.

Turning to page 6, sales increased 2% in North America segment, with higher sales to commercial vehicle and automotive customers more than offsetting a decrease in sales to off-highway customers, as both the agricultural and mining equipment markets remained weak.

Gross profit was up 2%, in line with sales, and gross margin remained relatively flat, as a contribution from higher sales volume was offset by unfavorable sales mix and material costs. Similar to last quarter, the increase in sales to commercial vehicle customers and a decrease in sales to off-highway customers created this unfavorable sales mix.

Material cost increase was driven in part by an increase in the Midwest transaction premium for aluminum, which is a significant component of the price we pay for this commodity. As some of you may have read in various news reports, this premium has nearly doubled over the past year.

Unfortunately, we cannot pass along this increase to our customers through our current pass-through agreements. We are, however, working with others in our industry through national organizations to attempt to address this escalation of this cost.

Overall, aluminum prices were up about 20% from the prior year. We expect to see a similar year-over-year increase in our fourth quarter, despite the recent weakening of the price of aluminum.

SG&A expense was up from the prior year, primarily due to higher engineering and development costs. These costs can vary by quarter due to the timing of recoveries from our customers. Adjusted operating income for North America was down $1.2 million from the prior year to $7.5 million due primarily to this increase in SG&A.

We are making progress transferring production from our McHenry, Illinois, facility to other North American plants. As we have previously discussed, this action is necessary to remain cost competitive with our customers. We will continue to evaluate our manufacturing footprint and make changes as necessary to ensure we have the right cost structure in this highly competitive environment.

Our 2015 outlook for North American heavy duty truck market is for continued growth, with a 10% to 15% increase in calendar -- over calendar 2014, while we expect mediums to be flat as compared with the prior year. Our outlook for the automotive market is for sales to remain strong, possibly increasing 5%.

For our off-highway markets, we expect continued weakness in the agricultural equipment market, with sales projected to be down an additional 20% to 25% versus 2014. We expect the construction market to be flat, but with gains in light construction more likely offsetting continued weakness in heavy construction and mining.

Please turn to page 7. Sales for our Europe segment decreased 2% in the third quarter, driven by the impact of a weaker euro versus the US dollar. Excluding this currency impact, sales in Europe were up 6% versus the prior year.

Sales to commercial vehicle customers were up, driven by higher launch volumes of components for Euro VI vehicles. Sales to automotive customers in Europe were also higher than prior year, with higher sales of automotive components more than offsetting the decrease in BMW modules, as those programs continue to wind down as planned.

These increases were partially offset by lower off-highway and tooling sales, which were down from the prior year. Gross margins decreased 190 basis points from the prior year due to a number of negative factors during the quarter.

First, we continue to experience unfavorable sales mix in this segment. The higher mix of relatively lower margin commercial vehicle components and lower tooling sales both contributed to lower margins during the quarter.

As expected, we also continue to experience temporary operational inefficiencies related to our ongoing project to consolidate manufacturing operations in Germany and with new automotive program launches, which we expect to improve in the fourth quarter. Finally, margins were lower due to unfavorable material costs related to the underlying metal prices increases and from the weaker euro.

The German plant consolidation project remains on track. We made significant progress during the quarter and we expect to finish the physical transition during the first half of calendar 2015. Although we expect there to be some inefficiencies in the next quarter, I fully expect we will reach the cost improvement targets we set for this project early in our next fiscal year.

I'm pleased to report that we sold the wind tunnel at our European headquarters during the quarter and received cash proceeds of approximately $6 million. This was the final step in rightsizing our regional headquarters and testing facilities in Germany.

Our 2015 market outlook for Europe is stable, with continued strong demand for premium automotive components. We expect the commercial vehicle markets to be flat to up 5% and the off-highway markets to be flat to down 5%.

Moving to South America on page 8. Sales were down 22%, or 12% excluding currency impacts, and generally in line with the decline in our end markets. Unfortunately, our customers continue to cut production due to weak economic conditions in Brazil. Adjusted operating income was down $1.7 million, as lower gross profit was partially offset by a reduction in SG&A expense.

We have worked diligently to cut costs in South America segment in response to the drop in sales. With 160 headcount reduction so far this year, which exceeds 15% of our total workforce, we still have more work to do in this segment and expect to see more benefits from the restructuring actions in the fourth quarter and into the next fiscal year.

We believe that the weak Brazilian market conditions will continue for the rest of calendar 2015. Specifically, we expect the commercial vehicle market to be flat to down 5% and the agricultural equipment market to be down an additional 5% to 10%. Our aftermarket business remains steady and we expect this market to be flat to up 5%.

Please turn to page 9. I am very pleased to report that our Asia segment reported an 18% increase in sales this quarter. In China, we saw a significant increase in sales to automotive customers as our oil cooler programs begin to launch.

Not only does this contribute to the year-over-year increase, but sequentially, the volumes are up over 50% from the second quarter. This was partially offset by a decline in sales to off-highway customers, as the excavator market in China remains weak.

We also saw year-over-year revenue increases in India, with sales increases to automotive, commercial vehicle, and off-highway customers. Gross margin improved 190 basis points from the prior year on the higher sales volume this quarter.

We continue to see year-over-year margin improvements in Asia as volumes increase. We had an operating loss for the quarter of $300,000, which is a $300,000 improvement versus the prior year.

Our outlook for the Asia excavator market for 2015 is for continued weakness, specifically flat to down 5%. The outlook is brighter in India across all served markets and for the China automotive market, where we expect the market to be up 5% to 10%.

I have previously discussed the importance of diversification in the Asia segment. The work we have done to diversify beyond the off-highway markets in China has resulted in the significant sales gain we have seen this year. We now have more automotive sales in China than off-highway sales, which may have seemed impossible just a few short years ago when the China excavator market was at its peak.

As we expect, our new program launches in the China automotive market and in India to provide -- we expect them to provide significant growth for this segment in the near future.

Turning to page 10. Our building HVAC segment increased $19.3 million or 52% in the quarter. Of this amount, $6.5 million related to the North American business, driven by a 24% increase in heating product sales.

Our Airedale business in the UK accounted for the balance of the sales increase, including $5 million of sales contributed by our recently acquired Barkell business. The year-over-year comparison also benefited from the lower sales in the third quarter of last year resulting from the fire in the UK in 2013.

Gross profit for this segment increased 50% on the higher sales volume during the quarter. SG&A was up $2 million, including about $1 million of expenses at Barkell. We also had higher freight costs and sales commissions in North America resulting from the higher sales volume.

Operating income increased $4.5 million to $9.8 million in the third quarter as compared to the prior year on increased sales volume.

Our outlook for the building HVAC market is for continued strength in each of our served markets. We expect the North American heating market to be up 3% to 6% and the UK data center and ventilation markets to be up 5%. We are clearly benefiting from the strong North American heating market and I am pleased that our building HVAC segment has been able to meet the increased market demand.

In the UK, our Airedale team continues to produce at pre-fire volume levels in their temporary facilities, while making progress on the construction of their new building. The construction project remains on track and we're looking forward moving into our rebuilt facility by the end of this calendar year.

With that, I'd like to turn it over to Mick for an overview of our consolidated financial results and guidance.

Thanks, Tom. Good morning, everyone. Please turn to slide 12. Our second quarter yielded a 5% sales increase, despite the negative exchange rate impacts in the quarter. As Tom mentioned, on a constant currency basis, sales increased 9%.

Our building HVAC and Asia segments showed the largest sales increases, which more than offset further weakness in South America. Europe's sales were lower, as this segment experienced unfavorable exchange rate impact of $12 million. On a constant currency basis, sales were actually up 6%.

In the quarter, our gross profit increased 5%, which is in line with sales growth. The gross profit conversion was negatively impacted by higher aluminum prices. In total, aluminum increased 20% year over year. This includes a 10% increase in the spot price. In addition, the Midwest transaction premium has nearly doubled.

Moving on to SG&A, we are closely managing and reducing costs wherever possible. SG&A costs increased $700,000 or 2% from the prior year and decreased as a percentage of sales to 12.5%.

While the increase was small, there are two items I'd like to highlight. First, we had higher engineering and development costs as a result of lower recoveries from customers.

Second, we experienced higher costs in building HVAC due to the following factors in the UK. Last year, there were reduced costs as a result of the fire. In addition, last year's results did not include the Barkell acquisition. Offsetting some of these cost increases was the recovery of $2 million from business interruption insurance related to the fire.

Also note that we recorded $1.9 million of restructuring expenses in the quarter. $600,000 relates to equipment transfer and plant consolidation charges in Europe; $700,000 is for severance costs in South America; the remaining $600,000 relates to the closure of our McHenry plant in North America.

I am also pleased to report that we completed the sale of our wind tunnel in Europe. This resulted in additional cash flow of $5.8 million and a gain of $3.2 million. This gain is not included in our adjusted operating income.Q3's adjusted operating income of $14.2 million represents a nice improvement from the prior quarter and a 15% increase over the prior year.

Moving down to the provision for income taxes line, as expected, we had a $2.2 million increase in our income tax expense for the quarter. Earnings per share of $0.15 was down slightly versus the prior year, but this is mainly due to the higher income tax expense.

Turning to slide 13, our free cash flow was positive in the quarter, but as anticipated, below the prior year due to a number of small items. One aspect is slightly higher working capital requirements, driven primarily by Airedale returning to more normalized operating conditions. Also there are timing aspects related to insurance proceeds, VAT collections in Europe, and changes in other liabilities.

Year to date, our free cash flow is $8.2 million. As you know, we had a strong free cash flow last year and are projecting positive free cash flow again this year. Also note that our free cash flow calculation does not include the $5.8 million of cash we received for the sale of our wind tunnel in Europe. We continue to maintain a strong balance sheet and ended the quarter with a net debt to capital ratio of 15%.

Now let's turn to our fiscal 2015 full-year guidance on slide 14. Given the current economic environment, including foreign exchange rates and with one quarter remaining, we have updated our financial guidance.

Our full-year outlook is as follows: sales up 1% to 3% from the prior year. Previously, we had expected sales growth in the range of 3% to 6%. Approximately 150 basis points of the decline is due to exchange rates.

Adjusted operating income in the range of $65 million to $70 million. Our previous guidance was $65 million to $73 million. Adjusted earnings per share is now $0.63 to $0.70 as compared to our previous guidance of $0.63 to $0.73.

In summary, we're lowering our sales growth projection while narrowing the earnings range. The change in sales guidance is driven primarily by the strengthening of the US dollar in recent months. In addition, the weak markets in Brazil continue to negatively impact our sales growth and earnings.

We also adjusted two key assumptions behind the earnings outlook. Our SG&A forecast is now $180 million to $185 million, which is lower from our -- lowered from our previous guidance of $185 million to $195 million. We also anticipate slightly lower taxes, with a range of $20 million to $22 million.

I'm pleased that we're able to maintain our adjusted operating income and EPS guidance ranges, even with the significant changes in our currency environment and the continuation of difficult market dynamics in Brazil. We are currently in the process of finalizing our annual plan and we will present our revenue and earnings guidance for fiscal 2016 when we report our fourth-quarter results.

Given the current exchange rate environment, we expect significant headwinds in regards to our sales comparisons. As Tom walked you through, in fiscal 2016, we are not expecting significant improvements in most of our end markets and expect continued weakness, both in Brazil and in the global agricultural and mining markets.

On the positive side, our diversification strategy in Asia is working and we expect to see continued sales improvement as we launch automotive programs in China. Also, our building HVAC segment continues to deliver strong results and we expect these markets to continue to grow.

Finally, we are completing the remaining steps of our restructuring activities in North America, Europe, and Brazil. We expect to see some of those benefits next year.

So with that, Tom, I'll pass the call back to you to wrap up.

Thanks, Mick. This was a solid quarter for Modine, with growth in sales and earnings. As we look ahead, we are focused on significant new business activity in China, converting our strong building HVAC markets, completing our restructuring programs in Europe and North America, and further lowering our cost structure Brazil to match the weak market conditions there.

There are still challenges ahead of us, but I'm highly confident we will continue to benefit from all the work that has been and will be accomplished to diversify and grow our business.

And we'd like to take your questions.

(Operator Instructions) Mike Shlisky, Global Hunter.

I had a few quick ones here. So you seem to have somewhat of a, I would say, a slightly more positive view, I'd say, on North America than anywhere else, I suppose, in what's in the slides as far as your market outlook.

As you transition production out of McHenry and as you see sort of elevated demand, are you seeing any [unclear] costs or any kind of challenges to keep up with some of what looks like to be some pretty strong volume trends in trucks and elsewhere? Or do you have kind of a plan where kind of things are being transitioned in a very gradual and deliberate way?

It's a good question. And clearly, we feel we're really in control of the transfer of products. But at this point, there's no peaking issues. We do know we are under heavy demand on the commercial truck market in North America. And last quarter, we talked about some of the challenge of getting the volume through our main facility that produces modules for heavy-duty customers.

And we've made a lot of progress on that, with improvements on conversions getting through some of the summer service spikes and that type of stuff that I mentioned. But besides that, we feel very good control with the transfer and with our, let's say, ability to be capable to maintain the volume demand that's out there with our -- of those strong markets in the commercial truck and automotive side.

Got you. And then moving on, you had discussed some of the aluminum price issues out there. I guess first, broadly, is there not some kind of lag or some kind of contract that you have to obtain the aluminum? Just kind of maybe walk us through how that works.

And secondly and perhaps, like, more importantly, are you having any issues with actually obtaining the raw material there?

I think you're referring to the Midwest transaction premium that I mentioned and Mick followed up on. Clearly, that phenomenon -- that cost has always been there. It's been much less in magnitude in the past years and the recent few years.

This has really spiked in the last 12 months and specifically in the last 6 or 9 months and really made an impact of essentially doubling from approximately single digits up into the $0.20 per pound that we are paying now, which, obviously, is a big problem for us that cannot be passed through. We don't have that in our current contract agreements with our customers to pass that charge through, as we did with the LME change, which is the normal structure of our material agreement.

So this is something that -- it's concerning. We are working with others in similar industries and with national organizations to try to get a handle on the reason of this spiking of this transactional cost to get it back to normal operating levels.

Mick, do you want to add anything more to that?

Just that there's the three components, really, to the costs for Modine. The spot price based on the LME. Tom mentioned the transaction premium, which is the standard adder, and then the fabrication costs. The customers rely on us to negotiate the fabrication costs and what has traditionally been passed through, as Tom mentioned, is the true base LME cost.

What's going to happen across the market now is this is -- and anybody who is dealing with aluminum, including can companies, this is on everybody's radar. And we'll have to look at all of our commercial agreements now that there's been a change.

Okay, great. And then finally, given your somewhat less positive outlook for other parts of the world and other markets, do you have any plans to kind of further rationalize costs, rationalize footprints, headcount, or what not going into 2015, beyond the restructuring plans you've already announced?

No, our focus right now and we feel the steps we've taken have been appropriate to address the market changes in both North America and in Europe as far as some of the challenges. Clearly, the biggest focus right now is on Brazil, where we see the most weakest demand and really concerning outlook.

And as I mentioned and as Mick mentioned in our comments, we are going to continue to look at Brazil to get that cost structure right to what we think matches up with the long-term slowdown in demand of our major markets down there.

Okay, great. I'll leave it there, guys. Thanks so much.

David Leiker, Baird.

This is Joe Vruwink for David. I wanted to stay on the subject of aluminum. So I think something happened a few years ago with the steel indices as well, where depending on what steel index you had in your pricing contract. Normally, the two were pretty close together. There was a divergence all of a sudden and everyone had to scramble to reset their pass-through agreements.

Is this sort of thing what's going on with the aluminum premium right now, where that can be embedded in contracts? And then if that's the case, does this begin to normalize maybe two quarters from now, where you get recovery for both? And is there any potential to ultimately realize the benefits, given the underlying commodity is coming down?

Well, as far as I understand, Joe, this is a little bit different phenomenon because of the way the structure has been and the changes and what banks can do and how they can invest in some of the commodities themselves, which drove this whole Midwest transaction premium up.

I think from our standpoint, working with national associations, this is something that -- it is getting a lot of attention. It is kind of looking back toward regulation changes. There was actually an exception made for that to occur, that the banks could involve in actually owning commodities themselves and then using this buildup of inventory to actually essentially increase this premium transaction cost, which is getting it to -- from smelters to end users of aluminum.

So I think it varies a bit from the steel buildup of what happened a couple years ago, but we are hoping that this thing gets normalized with some changes, both at the federal level and also changes maybe at the financial level that we can get this thing back under control.

Mick, do you have any other thoughts on that?

No. I guess I'd just add I think commercially, it's definitely impacting everybody. How the supply base and the OEs decide to manage it and share in it. What Tom was referring to is definitely the underlying problem we hope goes away.

But then if it were to continue, you really can't hedge it. And how the supply base and the OEs decide to share in that I think will be a commercial discussion going forward.

And then any way to quantify or qualify aluminum as a percent of your material by or a percent of COGS? Because looking at gross margin staying flat year over year and you have this 20% increase in a pretty important inputs, material. It would seem like margins would've been up pretty nicely year over year.

Yes, the metals in the quarter -- most of that would be the impact of aluminum, Joe. But the metal impact in the quarter for Modine was about $2 million.

Okay, great. That's helpful. Switching gears and talking about Europe, do you think it might be fair to say this December quarter is seeing the maximum headwinds from inefficiencies? And then any way to think about next year, given at some point the duplicative costs and inefficiencies go away and you are realizing more of a normal contribution?

That's a fair question. And we are going to see the reduction of these inefficiencies driven by the logistical issues and things that have challenged the team in Germany for the last several quarters. Those will start winding down towards the end of this fiscal quarter.

As we get into the next fiscal quarter or beginning of our next fiscal year, we really believe that these will start hitting those improvement targets early. So I think you're going to start seeing the momentum shifting.

We'll still have some of those in place, but the temporary costs, temporary labor contractual costs that we have on making the physical moves will be mostly behind us and be much more stable in our new footprint.

And that really goes for North America as well, with the restructuring, as we mentioned, in our McHenry, Illinois, facility. So we really expect to see these contribute to our new fiscal year going forward.

I would add Brazil as well.

Oh yes, good point.

This is the first quarter we started to see some impact of the cost reductions. We should see a little bit more in Q4. But next fiscal year, I would just add to Tom's comment on the McHenry and Europe that South America, we expect to see some of the year-over-year improvements from the cost-cutting efforts this year.

Okay, great. And then my last one -- the Asia business at one point in time was mostly excavators, given the growth this quarter and the fact that the excavator market still isn't participating. I'm sure that statement is no longer true.

Any way to break up the business maybe just by country? Because India certainly seems like it's going to be a positive contributor next year. And then maybe by end markets, thinking about what piece is automotive-related at this point.

Yes, no, it's -- I'm glad you brought this up. I'm very pleased with what we saw this quarter occurring in Asia. We saw the significant growth that was directly to the diversification strategy we put in place a couple years ago.

The automotive oil cooler launches are on track. We'll probably hit three-quarters of a million coolers this year and shooting for 1.5 million next year, to kind of give you a magnitude of what's going into the automotive market in China.

In India, you bring up a great point. We are very pleased with our India operation. We've got the market positions in each of our diversified segments: automotive, off-highway, and commercial truck that we've targeted.

The economy is picking up. We're seeing lots of opportunities with export, opportunities with our customers. And so we feel that India is going to be a strong contributor as we go forward as well in our Asia segment.

So the team's done a great job over there of holding on through the downturn of the off-highway market. As you mentioned, excavators, after they peaked in 2012 and bringing in in a very measured way this new diversification strategy that's going to start converting for us very well.

Joe, I don't have the estimated Asia mix as it currently sits. Unless Kathy has something, we'll call you. We'll get back to you with the answer. I don't have the actual mix with us right now. But we'll get back to with that.

Yes, no problem. We can follow up. That's it for me. Thanks, guys.

(Operator Instructions) Robert Kosowsky, Sidoti.

Question on Europe. I was wondering how do we think about the gross margin profile post the restructuring initiatives in Europe? Maybe, I guess, two, three quarters down the road, just given the changes that we are seeing in end markets and the changes you are having in mix. Is it going to be at the lower end of that 15% to 17% range? Is that kind of a fair way of looking at it?

Yes, this is Mick. Yes, definitely, the journey in Europe is taking a little bit longer than we expected.

If you look at Europe and North America side-by-side, very similar businesses. The run rate this year for Europe is going to be, call it, 12% range for gross margin. North America is running closer to 16% range. Our goal would be to move that towards the 15% range.

And definitely one of the impacts we have going on temporarily, as you know, is the inefficiencies related to plant consolidation. We've talked quite a bit about some of the profit margin challenges on the Origami truck radiator that we are trying to work on improving. And then there's volume.

So it's definitely going to be more than a few quarters, but really how that works is if we get operational improvements and get rid of some of the inefficiencies, we improve some of our productivity, including on Origami, that's going to get us a portion of the way there.

And then that business is really built to be closer to the EUR500 million range. We were there before the recession and so we're going to need a little bit of volume to come back in order to get us then to close the remaining gap.

Okay. So I guess within your control, can you get to, like, a 14% gross margin? Something like that? Then you need just some end market cooperation to get to the 15% to 17% range. Is that kind of a fair way of thinking about it?

Yes, I think there's 100 basis points from -- if we get $5 million of improvement through improvement in operations and just pure non-volume productivity improvement, that's about going to get us to like 100 points. The other 200 basis points would come by, frankly, we need a $50 million-type of incremental volume to come back.

All right, that's definitely good. And then on the Asia Pac business, I was wondering -- it was obviously a fantastic quarter, both from a revenue and margin standpoint. And I'm wondering the sustainability of the revenue in the margin profile that we are seeing, because they're both outstanding.

Is this more symptomatic of a cycle peak environment? Should we be thinking about these types of numbers going forward? Any way to calibrate our view of what this segment should be doing.

Let me talk about the top line first and I'll let Mick talk about the earnings focus. But on top line this year, we are breaking through last year's record North American volume levels in the heating product sales, which we thought was going to be a spike due to the polar vortex. But we're seeing strong sales continue.

The stocking program in the off-season went very well ahead of time. So there are some fundamentals that we think are driven by basically reconstruction of replacement of existing units in the field.

Also with good product offerings by our group and a very -- we've strengthened our focus on distribution channels very well. So we've done all the factors -- making sure that we understand the market, our product meets sit in our distribution channel, and reps out in the field are really hitting it. So that's been very strong.

I think that we're also going to see the fact the investments we put in place with Barkell that we mentioned in the UK on the ventilation side and with our Geofinity acquisition, which now is in our geothermal residential heating and cooling business, is starting to get grounded as well. So we think top-line sustainable improvement in this segment is going to continue, with those investments on top of what we think is a good product lineup for what we had, both in North America and with Airedale in the UK.

On the earnings side, Mick, do you want to add some color to that?

There is probably just in some ways a little bit of a perfect storm, in a good way, and a tailwind. So if we go back several years, this business has a long history of 30%+ gross margins and I would say more normalized or normalized, like a 15% operating margin, which is really good.

But when I mentioned some of the tailwinds, as Tom walked you through, really two years in a row of exceptional heating markets were at all-time highs there. And then -- which helps with a mix issue.

We are returning to post fire, getting things rolling in the UK there. We've got the acquisition plus we had some good news. We are able to capture some of the business interruption insurance.

The short answer to your question -- yes, absolute great quarter. Probably normalized operating margins are a little bit closer, I would say, long term to around 15% than 17%.

Okay. That's definitely very good. And then one final question -- as we think about the Asia oil cooler ramp, is there any way to think about the incremental margins of this unit?

On the -- can you repeat the question?

Yes, just on Asia segment. You have nice growth from the oil cooler business and I'm wondering how should we think about incremental margins on that extra business?

Yes, the -- I think Asia is similar to what we would say in our other OE segments. 25% to 30% is a good normal conversion.

All right, thank you very much.

That would be obviously gross profit on incremental sales.

All right, thank you very much. And good luck, guys.

Thanks.

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

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

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect.