Good day, ladies and gentlemen and welcome to the third quarter 2012 Modine Manufacturing Company Earnings Conference Call. My name is Clarissa and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I will now turn the presentation over to your host for today's conference, Ms. Kathleen Powers, Vice President, Treasurer and Investor Relations. Please proceed.

Thank you for joining us today for Modine's third 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 for today's presentation. Those slides are available through both the webcast link, as well as a PDF file posted on the Investor Relations section of our company 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 third 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 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. We had some challenges during the quarter that I'll highlight in a moment. But overall, we had another solid quarter with both revenue and earnings improvements. We delivered a year-over-year increase in net sales, reflecting growth in all of our operating segments with the exception of Europe, which was flat. Our businesses are successfully managing program launches and are driving earnings growth. As a result, our income from operations increased 77% from the prior year, despite some unfavorable currency impacts and an asset write-off in Europe. During the quarter, we saw some softening in our markets, most notably in European truck and Asia off-highway markets. This weakness, along with some other factors, including the impact of changes in foreign exchange, resulted in our revenues and earnings being somewhat lower than we anticipated. As noted on Slide 4, we are adjusting our revenue and earnings projections for the year. We expect year-over-year sales growth between 8% and 10%, down from our previous guidance of 12% to 16%. This decrease is due to the unexpected drop in volumes during the third quarter, particularly in Europe and Asia, along with the impact of the strengthening U.S dollar. We're also lowering our guidance on earnings per share to $0.70 to $0.75 from the previously reported $0.95 to $1.05 range. Last quarter, we affirmed our previous guidance, despite the impacts of currency losses. At that time, we still felt that we were within the range we provided. However, we did not anticipate the drop in volumes that resulted in us lowering our revenue projections for the year by about $25 million, or the incremental foreign exchange losses incurred during the third quarter. Mick will take you through these details later, but these factors have impacted our full-year forecast.…

Thanks Tom, and good morning to everybody. Turning to Slide 8, I'll walk through the income statement. Q3 sales increased $13 million or 3.7%, driven by the growth in Asia, South America and commercial products. Revenue growth was somewhat lower than anticipated due to the lower volumes in Europe and Asia. Year-over-year revenue growth was also negatively impacted by foreign exchange rates. Excluding the impact of foreign exchange, revenue growth would have been approximately 4.7%, so about 1% higher. Gross margin improved 16% to 16% as the businesses showed good conversion on the higher sales and SG&A declined year-over-year and continues to improve as a percentage of sales. We continue to manage SG&A very aggressively but there are also several unique items in this quarter. As Tom mentioned, we wrote-off $2.2 million of assets in Europe. Offsetting that was a positive $2.3 million reversal of an accrual relating to our previously disclosed customs issue. In addition, we have adjusted our expectations regarding management incentive compensation in light of our revised forecast for the year. The combined improvement in gross margin and lower SG&A resulted in much stronger operating income, which improved $7.1 million or 77%. I want to highlight that unfortunately during the quarter, we had $2.1 million of foreign currency losses reported in other income. As I described last quarter, these are largely non-cash in nature and relate primarily to the reevaluation of intercompany loans denominated in foreign currency on our balance sheet. While these are primarily non-cash they have been very costly on a year-to-date basis at nearly $0.15 per share of EPS. The teams worked very hard at reducing our exposure to this type of risk and we anticipate much lower volatility going forward. The reported EPS was $0.18 per share, but the currency losses and asset…

Thanks, Mick. In summary, we had some challenges in the quarter and given the state of the global economy, likely have more ahead of us. However, I remain pleased with our progress. We saw unexpectedly sharp volume declines in both Europe and Asia, and had additional foreign exchange losses and an asset write-down during the quarter. Despite these items, we continue to move Modine in the right direction. We are adjusting our outlook for fiscal 2012 and anticipate the unstable market conditions to continue into the first half of 2013 fiscal year. As a result and as mentioned earlier, we are evaluating our options for our planned European restructuring actions in order to properly position the cost structure for the excellent growth opportunities in Europe. We remain confident in our growth strategies and our strategic direction. Our teams are effectively managing a significant number of launches and are actively pursuing many new business opportunities. We have the global reach to provide our customers with superior products and solutions. Our year-over-year operating earnings grew by 77%, which is evidence that the past few years of hard work is paying off, and that we have the talent, technology and global capability necessary to successfully grow in the future. We will continue to drive improvement throughout the business to build an advantage product portfolio and create value for our customers and our shareholders. With that, we'd like to take your questions.

[Operator Instructions] And your first question comes from the line of David Leiker of Robert W. Baird.

This is Joe online for David. Tom, Mick, obviously Origami is an important product for you guys. I just want to understand the asset write-down a little more, what exactly happened there?

Just -- well, just like I said, with this major of a technology development, it's a step function we had options to consider early on about the best way to go to production, okay. And we made sure we had those bases covered to supply either of those options; one of those that turned into a decision that was part of the plan but caused us to have to write down an investment that we made and prepare for the industrialization of that product. So it was, what I would say, a planned option that we invested in to make sure that we were covered, to protect the customer, protect the product launch and protect the business to go forward. So a little more money than we'd like to write off but, again, a very responsible approach to market.

Okay. And then if I kind of just look at this quarter and then your full year guidance, I mean it seems like most of, if I flow the numbers through previous expectations, you're pretty much going to be close to the revised guidance. So would you say Q3 is the meaningful headwind and caused you to lower numbers where Q4 is? I know trends are kind of more negative but Q4 is a bit better?

Yes, Joe, good question. We are anticipating a better fourth quarter. As we said, there was a bigger volume impact in this quarter and we do expect a little bit of that to continue into Q4. The other big difference, as you look sequentially from Q3 to Q4, is in this quarter, as I mentioned, we had approximately $0.08 per share just in the asset write-off and the foreign currency losses.

Okay, that's helpful. You mentioned the BMW wind down number, I think, of $30 million, is that for the full year or for Q4?

No, estimated this year's impact from the BMW wind down, so the full fiscal year this year will be approximately $30 million and then an additional $50 million next fiscal year, Joe.

Got it. Just with your excavator outlook for China, Volvo is out today talking about China being roughly flat year-over-year in the calendar 2012, I'd imagine that Volvo and CAT are probably your two largest customers there. Caterpillar obviously is still reporting I think double digit increases in their construction business in China, so I'm just wondering, is that the overall market outlook and given your customer exposure, you're going to be in position to do much better than that minus 26%?

Yes, well I think we clearly got surprised with the rapid fall-off this year. Clearly, we have a broad excavator customer market base, those customers are -- we know well, and I think we're going to be cautious going forward, we're prepared to supply whatever comes our way. But I think for planning purpose and with the outlook of the global economic uncertainty, we're just being cautious going forward as far as our planning. But we're prepared to adjust, if that should rise above that expectation, to supply effectively, but we just -- knowing that there's still a lot of clouds around on the first half of the year, we're being cautious as we look forward.

And just to add to that, Joe, we always talk about for Modine Asia being heavily dependent on off-highway and a big portion of that is we're very heavily dependent on excavators. And the challenge next year is that I think most people feel that the next couple quarters, the first half of the year is going to be very tough year-over-year comparable and then a stronger second half.

Okay. And then just talking about the Origami product a little bit, I've probably read press releases from some of your thermal competitors, and they all seem to be coming out with the folded-tube design that, really had seemed to be the IP of Origami, and I know, obviously, you have that patented, so their design is going to be a little different. But I'm just wondering, when you read or study Delphi or Denso's heat exchanger product, do you still feel pretty comfortable that Origami is, hands down, the better product?

Well, we certainly feel so and -- I can tell you that. But obviously, folded tubes have been around for a while, okay. I think that if you look into the -- you can't really look into it because we have are very well protected as far as our process development capability but there's -- to get to the gauge that we're talking about, we've taken another level step to go past the traditional folded-tube levels to a really integrated tube design made by thinner material. It hits all the right things as far as taking off material, performance and still remaining -- keeping strength. So we still feel we still have a very strong advantage, we feel very good about our intellectual property and so we feel we have a very solid position going forward.

Great. And then I just have one last one and I'll hop in the queue. The promotion of Tom, obviously, makes a lot of sense and I think the writing has been on the wall for a while that if you did have a COO, he would make sense for the position. What does this free you up to do with now, Tom? And I guess, do you plan on reassigning different people to the various regions that Tom used to cover so he can focus on his more broad role?

A couple of great questions in there and I'll break that down. First off, we're very pleased with the move. It's absolutely the right timing to do this for two reasons. Now, that we're growing and are kind of balanced, we're just going to start -- business across the globe is going to even out-- having good oversight of process discipline, consistency, standardization of the process is a key part. And Tom's, again, with his experience and background, what he covers today is just an ideal fit for that. Secondly, yes, we've got a -- as the coming months provide more detail. But we are in very, very favorable position on filling our VP of Europe position with a very significant proven leader and that will be coming more out in the next couple of months, which will help Tom, obviously, and bring a particular focus to that region, which is so critical for the business and for our long-term growth. And from my perspective, Joe, I've got -- we've got a lot of things to consider in the future and this is what I'm really excited about besides driving the overall continuous improved methodology that we're focused on from our Modine operating system is to really get into strategic decisions that we have the right to consider now, and that's pretty exciting for the company right now. And I look forward to spending a lot more time with the senior team and our board at evaluating those options and what that means.

Your next question comes from the line of Walt Liptak of Barrington Research.

I want to ask about Europe and you'd mentioned a couple of times that the slowdown caught you by surprise. I wonder if you could talk about which sectors, is it primarily auto that slowed because the commercial vehicle and off-highway look okay?

I'll start off and let Mick kind of come through, quantitatively, what it means. I think we have a very heavily focused automotive current state in Europe and that's really balanced towards premium vehicles and the strong exports that impacted the German customers we support, which are our largest customers in the region, kind of weathered through the, let's say, the initial phases of uncertainty that hit Europe and it maybe came later on in the third quarter that we started to see that impact. So -- and we were a less impacted by the commercial truck because our market share was lower, now growing, as you can see by the pie chart, up to above 20% So if you look into that and then, of course, a quick move around the holiday period, which is always something that happens as they shift production and we kind of get more definition around the last half of our third quarter, kind of brought that to bear. But I think -- so the delay of the impact because of premium auto in our -- influence it has on our business segment, and some of the things that happened towards later, I think, is what may be caught us by surprise. Mick, you want to add to that?

No, just --- I guess other than when we were on the call right around the last quarter, there was some dialogue on the call on questions because several truck OEs in Europe had announced recently in the paper, shutdowns, and we got questioned quite a bit on that. At that time, we really didn't see that in our order rate. So Tom is correct, in that we saw a reduction, some of the orders for truck in the third quarter, and then also on the automotive side, both with BMW and then the other premium auto makers in Europe.

Okay. But it sounds like the surprise was less on the truck and much more on -- with BMW, is that right?

Yes. And again, I'd say our truck exposure, coming in the third quarter, was smaller -- The customers we're tied to were not reducing volumes. We did not see reductions at some of those signaled in particular, that, so we were kind of holding on. And then as the impact -- and I'd say the launch up ramp rate with certain new technology customer is now a little bit slower. So it kind of didn't impact us at the beginning and it's kind of rolled through at a slower pace and, again, the premium autos happened towards the end of third quarter as far as their reductions.

Okay. And I want to ask you a question on the Origami as well. Where are you with your customer? Are you -- my understanding was you're going through test phases. Does this asset write-down imply something about what kind of yields you were getting on your test production rates?

I'll make it clear, so I'm glad you're asking the question if you're not certain. The asset write-down has nothing to do with the current state of production. It was an early decision to say look, this is a significant technology development, we better make sure we have options on considering how we are finalizing the industrialization plan of that product, okay. And because of that, we decided to take a multi-pronged approach okay. We invested in two prongs to protect, number one, the technology which then protects the customer, which then protects Modine, okay. That decision was early enough in the production development for early production phases, they had no impact at all on the production and so we are going with the safe launch plan. So call it a little bit of insurance on a new technology jump that we invested in to make sure that, that technology came together, okay. As far as our current state of where we are with our Origami launch preparation, we're going through some normal launch inefficiencies that you go through with something this significant. We are right on course and right on plan with where we want to be.

Just to add one thing and because Walt's question is a good one and to what Tom replied, the -- to be clear on the asset write-down, there's couple ways to look at that, I think that's where Walt's question is. One, you can have an impairment because you look at your indicators and your projections and you impair assets because you can't justify the value of those. As Tom said, this is a specific piece of equipment that really never left our research facility. It's one piece of equipment that we're not going to use based on the change in the manufacturing process Tom described, it's not tied to a change in our volumes or a lack of confidence in our business model, it's just one very specific piece of equipment that we're not going to use in the production process.

Okay. And I guess if I could ask about yields and revenue, is there any fourth quarter revenue that's going to be material or whatever for the fourth quarter?

That's related to Origami? You're talking about --

That's related to Origami.

Yes, I know. So revenues are going to be right in line with the launch plans that we had, so there's no issue there. And as far as grinding through the launches on getting everything running and optimized, we're going through the normal launch inefficiencies on first batch yield and a little bit higher scrap than we'd like to see at this time, but customer continuity is in place and the orders remain as planned.

Okay. And what about for 2013, could you refresh us on how much revenue Origami will contribute?

Mick, you know that?

Walt, we haven't -- A, we haven't said that before, and B, right now, I wouldn't even have that in front of me. But maybe it's something we could take away and follow up, especially as we head to next quarter on our full year guidance.

Okay. Okay, thanks, guys.

I guess we have been very public about our targeted goal of getting to 40% to 50% of the truck market in Europe --

Which remains right on track.

And a big piece of that will be Origami design in the truck modules.

The complexity to answering your questions is revolved on both the truck side and the automotive condenser side. Clearly it's very focused on our truck side and I guess we can take that back and get that answer and, of course, next quarter, bring more detail on that to everyone.

Your next question comes from the line of Adam Brooks of Sidoti.

Just a few quick questions, looking at the full year operating margin guidance, it leaves a very wide range for 4Q, probably somewhere around 4% to 5.9%. Can you give us a sense of what the variables are there aside from the top line? Is there anything that would give you more confidence to be at the high end and what would make you come in at the low end?

Yes, great question. We debated that quite a bit, because even as we get down to one quarter left, you get a lot more confidence even though there's some variability. So I would say, as I mentioned, we're looking at a stronger quarter, we expect revenue will be up in fourth quarter. And a big piece of that is driven by, frankly, in North America, we have a lot more production days in our fourth quarter than you do in the December quarter with all the shutdowns. But the volume will help us a little bit on the margins. And we're not assuming any more asset impairments or FX losses. So I would say we're looking at a slight margin improvement in fourth quarter over third quarter. What could cause us to be at a lower end or upper end would really be volume driven.

Okay. And if we take a look at Asia in particular, maybe could you give us a sense of -- or an early sense of what profitability could look like for next year? Could you possibly breakeven or, given kind of the ramp-up at several plants and the changeover won, will be another year where you'll probably post a loss?

Yes. If you look at the trend we've been running at in Asia, it's been in the last few quarters an average of, say, $20 million a quarter. And we've been talking about Asia breaking even when we get to the $80 million to $100 million level, and you can see where it bounced around. We have one quarter where we were operating profit positive and then we've been right in that breakeven low range. So, again, we're not ready to provide specific guidance for next year. But you look at the quarter run rates have been around $20 million and with -- we think the next few quarters have a little bit of a headwind on the excavator side. And then we would probably expect with those market -- the market expectations, we'll continue to launch and improve our revenue as all those new programs ramp sequentially.

And I think I might add, Mick's exactly right. I think the excavator is for most sense of that. So if that comes back above what we're planning on, that's going to be pre-conversion. The other thing I'd add is we made a decision in the quarter to expand our manufacturing capacity in Shanghai, that's put a little more headwind on us in the near term because of the need of a lot of conversion costs to go from assembly to a manufacturing facility investment, it goes in. But that is a long-term investment, this is the right time to do that because our product is right, the market conversion is right, so I'm very pleased with our decision despite maybe in a quarter, where we do not ideally like to do it because we made our decision and move forward for the best thing for the company for the long-term for the region.

Your next question comes from the line of Ann Duignan of JPMorgan.

It's Mike Shlisky coming in for Ann this morning. Just wanted to switch over quickly to North America, we've been hearing from one or maybe even two OEMs here that there have been some disruptions in the supply chain. Some of the truck manufacturers just could not ship some units in the past few weeks due to some brake issues, I was wondering if they have given you any sort of changes to their delivery schedules from you since they're having some issues with shipping some products?

We have not seen anything that I have been made aware of and the team follows that pretty closely, obviously, so I cannot convey anything to you from that potential issue.

Great, thanks. Then switching over to Europe, given that some of the OEMs have reduced their truck production plans over the near term, have any come back to you with sort of any kind of changes to their design plans in their trucks that may require you to change your design a little bit on certain parts?

No, not at all. As a matter of fact, I mean we are so busy integrating a revolutionary new design into the truck market with Origami, that's where the focus is. So I mean I guess that question leading from their drive towards CO2 emissions and the future needs for taking out weight and improving fuel efficiency and aerodynamics in their truck, I mean Origami is right at the heart of all that. So I guess we've been in the middle of that for a couple of years now, preparing and designing and now industrializing and launching that. But we see no changes coming from the customer, as a matter of fact, we're very pleased with relationships we've built up with many truck manufacturers in Europe over the last couple of years.

Great, great, thanks. And just on your guidance, just following up on an earlier question, I did notice that you had a somewhat wide tax rate range guidance for the year and there's only a couple months left, are there any sort of one-time items that could come up or issues that may change your tax rate from the low end to the high-end there?

No, I really don't think -- it's hard in every given quarter, literally, where the company is at right now with the various tax rates at where we're profitable around each area of the globe. I wish I could tell you there's a narrow range, there's -- it's just strictly going to be in the mix of our profits as we end the year. And over time, as all of our business units get to more of a consistent level of operating margins, then the predictability would be a lot easier for us.

Got it. And just finally on the guidance, I have to make sure I can understand all the moving parts here, it includes the $2.2 million asset write-down but also includes the $2.3 million positive customs compliance settlement, right?

Yes, it does, so you could -- they kind of offset each other in the quarter. And our guidance is going to be at -- the EPS is as reported from continuing operations, there's no -- we're not adding anything back, that's -- the reported EPS is how we see that shaking out for the full year not adjusting for anything.

And with respect to the FX losses in your guidance now, I think you had mentioned 15% -- $0.15 for the first three quarters, but what changed since last quarter, incrementally, that caused you to make your guidance lower? What portion of that $0.15 is new -- Compared to previous expectations.

So a little bit more than $2 million in this quarter from a continued devaluation of the foreign currencies versus the U.S. dollar. And at the beginning of the fiscal year, for example, the company had a sizable amount of foreign currency exposure on its balance sheet. Through the course of this year and obviously none of us really anticipated the European crisis, the EU, we've continued to reduce those balance sheet exposures. So as we head into the fourth quarter, the amount of exposure we have, not only if the currency has already -- knock on wood -- stabilized a little bit, and we've taken the hits, but our balance sheet exposure is a fraction of what it was at the beginning of this fiscal year.

Your next question comes from the line of David Leiker of Robert W. Baird.

I actually just had a follow-up also related to currency. The $2.1 million you report this quarter, is that just losses on your intercompany loans reported in the other expense line item?

Yes, that's nearly all of it, Joe.

So are you repatriating cash to the U.S. in order to basically hedge against this in the future, is that what is just going on?

Yes, exactly. And a lot -- when I mentioned at the beginning of the year, we had a lot and -- we have a detailed table if I can walk through anybody, happy to do it one-on-one but it's also in our SEC filings, the Qs and the Ks -- but as we came out of the recession and we had all the covenant restraints, the best way we could move money around the globe was from one legal entity to loan it to another. So we have loans -- intercompany loans and one side always has the foreign currency exposure. And then every quarter, you have to revalue it and someone takes a loss on that. So what we've done in the last year is, for example, we've paid off all of the intercompany loans that Modine Europe owed corporate here, so we've gotten rid of those. And then with some of the other areas, we've done the same thing. We've either paid them off to get rid of those or, in some cases, we've also hedged pieces of them.

Okay. Do you get -- are your tax rates going to theoretically go up as you repatriate more cash? I know the tax rate in the current quarter was a little higher than we were looking for?

No, in fact that's one of the -- it's one of the advantages, if anyone wonders, why you do a loan when you can lend the money there in a tax efficient way, and then when you repatriate it, it's a repayment of a loan. So you avoid a lot of complicated tax issues when you do it that way. However, it created the foreign currency exposure which we needed to correct.

Okay. I love the U.S. tax system.

Your next question comes from the line of Dennis Scannell of Rutabaga Capital.

Just had a couple of quick things. When you talk about your expectations now that Europe will be weak or weaker for some time, do you think it bottoms here in kind of, sequentially, Europe flatlines here or do you expect it to take another step down from here?

It's a good question. We think -- I guess the way we're seeing it, it's going to be a prolonged period of uncertainty, thus lines will stay down for a while, I don't -- why it would take another drop down unless something created that. But -- and I guess, Dennis, your question is as to why we bring it up and emphasizing it -- or we're emphasizing so much is that we've been very open to say that in our restructuring, going forward, that we have more work to do in Europe. We've done -- the team in North America has done a great job of getting the footprint right, getting the scale right, getting the cost model corrected, we're really set to go now that we're kind of through that. We've always said we're about 25%, 30% of the way through where we need to go in Europe and we think this is the time to evaluate the opportunities to move that forward, okay. So you're really kind of putting -- we're taking -- just be opportunistic, volumes are going to be down probably for some prolonged period. How long -- how far down they go? You know, we're not -- we have it in our plans that they're going to keep relatively flat, but we're going to start evaluating this period to be some to say should we accelerate those changes that have been on the plans for some time now.

Okay. And in terms of your placements on the European trucks, are you -- for the future engines, are you about where you want to be or is there still some market share that you think you can get?

There still is decisions pending and I can say we're very satisfied with what we've conquested over the last couple of years with the Euro 6. So as a direct result, the Origami technology and what that's brought to my earlier point, but there still is a decision or two on certain components and certain vehicle manufacturers that are there that could even add to that. So as -- we've had this 40% to 50% range, I'd say that we're confident on where that range is coming in and our ability to hold that market share if not increase it a little bit more.

Excellent. And a quick question on Brazil. I think, Mick, you said that -- I wasn't sure if on the export business, are you just feeling a hit to margin because of foreign currency or are you losing export sales because of the stronger real?

It's primarily a temporary hit to the margin. And it's -- for many of those, our contracts are -- we get paid in dollars and then we convert to real. And the good news with Brazil has been the economic strength, the problem they're having with that is, obviously, inflation. So our costs are higher in local currency but when we translate to dollar sales, it is impacting our margins this year.

Yep, got it. And then just one last on the other income foreign exchange losses. So $0.15 year-to-date, it sounds like we've reversed a lot of those intercompany loans. So does that go to effectively zero for the fourth quarter, and then expectations for the fiscal 2013, does that go to close to zero?

No, and that's a good question. In our fourth quarter and what's implied in our full year are no foreign currency gains or losses. Unfortunately, what happened in the past are permanently gone because they've been hedged or paid off. If we would have let them float, you could argue if the dollar -- if the euro took off, we certainly could have seen a reversal. But as we've reduced them or eliminated them, those losses are gone.

Okay. So again, you would expect $0.15 for the full year in 2013 -- in 2012, fiscal 2012 and then probably not much significant move on the FX in fiscal 2013?

Yes, about -- year-to-date in other income, we have approximately $8 million we have incurred year-to-date in losses. And we're projecting that, that's going to hold for the full year but we can't get any of that back.

And there are no further questions at this time. I'd like to turn it back over to Ms. Powers for closing remarks.

I'd like to thank everyone for joining us this morning. Have a good weekend.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.