Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2012 Modine Manufacturing Company Earnings Conference Call. My name is Jenade and I will be your operator for today. [Operator instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Kathy Powers, Vice President, Treasurer, Investor Relations. Please proceed.

Thank you, and thank you for joining us today for Modine’s Fourth Quarter Fiscal 2012 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’ll be using slides with today’s presentation. The 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 2 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 go through our fiscal 2013 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. Overall we had another solid quarter, ending our fiscal year on a positive note with significantly higher operating income despite some weakening in our served markets. The lower demand resulted in our sales being roughly flat on a year-over-year basis after adjusting for the impact of a stronger U.S. dollar. The improved operating performance occurred during a period in which we were supporting many new business program launches, which is very encouraging and demonstrates that our programs are solidly on track. With higher gross margins and lower SG&A expenses, we delivered a significant increase in income from operations, which was up 136% over the prior year. For the full year, our revenues were up 9% compared to prior year, in line with our expectations. We reported earnings per share of $0.83, ahead of our $0.70 to $0.75 estimate, and our operating income margin was 4.3%. Mick will provide a full financial overview in a few minutes, but first I would like to provide you with a short update on each of our business segments. Turning to Page 5, the North America segment had another good quarter and is continuing to prove that the restructuring we completed in this region has positioned it for continued success in the future. Over the past 4 years, we have consolidated our manufacturing footprint from 13 to 7 factories without reducing capacity, which has significantly improved our operating leverage. From a market standpoint, we are starting to see some slowing in the commercial vehicle market. The medium duty growth projections have been coming down and we believe heavy truck volume may come down as well. It appears that OE [ph] customers are beginning to reduce production orders in order to match a reduced demand. On the positive side,…

Thanks, Tom, and good morning to everybody. I’m going to apologize in advance if I have to cough during my presentation. I’m coming off of a cold and I have all my water and everything lined up, but I seem to periodically have a coughing attack, so I apologize in advance. Turning to Slide 9, I will walk through the year-over-year income statement comparison. As Tom mentioned, fourth quarter sales decreased 8 million or 2%. Excluding the impact of foreign currency, sales increased 900,000 or 0.2%. All 4 of our vehicular segments experienced flat to down revenues due to several macro themes. First, we are seeing weakness in most markets outside of North America and lower foreign exchange rates are converting our non-U.S. sales to fewer dollars. In fact, nearly 60% of our sales are outside of the U.S. In addition, the wind-down of certain automotive programs is impacting our year-over-year comparables. On a brighter note, revenue in our commercial product segment was up 9%. Gross margin improved 160 basis points to 16.8%. This was driven primarily by our operations in North America and Europe. The combined improvement in gross margin and lower SG&A resulted in stronger operating income, which improved by $10.6 million or 136%. Please note that during both periods, Modine received a tax credit. During the most recent quarter, we received a $4.4 million tax credit in Hungary. A year ago, a similar tax credit was $3.4 million higher for $7.8 million in total. Excluding these incentives, our effective tax rate would have been in the range of 24% to 28% for the comparative fourth quarter. Overall, we are very pleased with the operating performance despite the market challenges, and I need to point out that during the quarter we discovered that we had not been properly…

Thanks, Mick. In summary, we had a very good quarter and have wrapped up a good year. We continue to move Modine in the right direction. Fiscal ’13 will be a transitional year for us as we accelerate the process of restructuring our operations in Europe to better align with our global strategy. We expect to experience a negative impact on our fiscal 2013 sales due to the planned wind-down of the automotive module business, but we will also begin to see the benefits of the ramp-up of several important commercial vehicle and off-highway programs. Also, the current economic conditions and exchange rate environment have caused us to be more cautious in our expectations for revenues for the year, but we are confident that our strong order book of business and strategic direction will create significant revenue and earnings growth in the near future. Before moving to Q&A, I would like to say a few words about our enduring goals that we have recently established as part of our strategic planning initiatives. We have previously communicated that we established our near term corporate and business unit objectives based on a target level of return on capital employed. We have decided to take this a step further and have developed 4 enduring goals that are designed to guide our long-term growth strategies. They are: one, to be the fastest improving company in our industry; secondly, to achieve a 10% annual growth rate in revenue; third, to attain a 15% return on capital employed; and fourth, to build a more diversified business model. These goals are aspirational and they will push us to make the right decisions now and in the future to continuously strengthen our company. We are confident by using the principles of our Modine operating system along with the commitment of the entire global Modine team, we can and will achieve them. And with that, we’d like to take your questions.

[Operator instructions] Your first question comes from the line of Ann Duignan with JPMorgan.

It’s Ann Duignan. Can we dig a little bit deeper into your outlook for North America, both the comments you made on heavy truck customers maybe lowering their outlook for builds for the remainder of the year, and also you made some comments about improvement in heavy construction. Maybe you can give us some color around both of those end markets and what you’re hearing. That would be great.

Ann, good question. What we’re starting to see is the order rate coming in from ACT is beginning to drop some, and we’re starting to see some potential, we feel, decline in production orders that could be coming. We’re anticipating that, so we think there will be some downward pressure based on demand coming in on the order rate through the industry. That’s kind of what we’re basing that comment on. As far as the off-highway side and the heavy construction, we continue to see strong orders with the customers and mix that we have being positive in that regard, so that is looking up for us on what we’re seeing as far as releases to our plants with our current slate of customers.

So just to be clear, your comment on heavy duty trucks are more based on what you’re seeing from ACT as opposed to releases you’re getting from customers?

I would say that’s the point. Right now we’re starting to anticipate that what the ACT data is saying, kind of our gut feel of data that’s going on in our plants, we’re going to see some production drops. That’s our instinct at this point.

Okay. And on heavy construction, is that, have you seen an acceleration in the last couple of months in orders for heavy construction? I mean, we’ve seen compact construction equipment to the rental companies has been strong for a couple of quarters now, but it sounded like what you were saying is that on the heavy construction side, this is a newish trend. Is that…?

Yes, and again, I think we’d say continued strong and maybe slight upward movement on orders coming in from our heavy construction customers right now. It’s nothing -- I wouldn’t say it’s a step function increase, but again, continued strong sales with continuing the momentum that we’ve seen over the last couple quarters.

Okay, and then just to continue on the end markets, could you give us a little bit more color, same phenomenon in Brazil. I mean, I think we all understand the heavy truck comments in Brazil and the emissions-driven issues that are there, but you made some comments -- I think you said ag was still a bit weak but you’re expecting it to improve. Could you just talk a little bit about that?

Yes, ag is up, it’s just not up as much. It’s been up 8%, I think. As far as our sales outlook, that’s dropped down to a lower single digit number in our forecast, so it just is not increasing as fast.

Okay. And while we’re going around the world, maybe your comments on China, I mean, again, no surprise that the excavator market has not recovered. But are you hearing anything feet on the street? What is the scuttle from your team in China around construction and trucks, if you have exposure there?

Well, our truck exposure is very low, okay, from that standpoint. But from a construction equipment, again, most excavator is down. It’s way down, and I saw specifically your write-up on Caterpillar, which you anticipated, of the inventory catch that they caught and stuff, building up for their peak season sales, and I think that the anticipation is that’s going to continue on for a while.

Ann, it’s Mick. We’ve continued to see a reduction in order rates in the Asia region in construction. We’re trying to keep our forecasts actually below what our order rates are showing us, because we see the same things you do. But we have not -- that has continued and it’s continuing into the summer.

Yes, my guess is it will continue for a while, not a near-term resolution. And then finally in Europe, you noted that off-highway demand was strong.

I think for Europe, it’s a low base but it remains on a positive slope, yes. So again, it’s a smaller portion of our business segment, switching from automotive and going into commercial. We have a smaller segment in off-highway and it continues, both ag and a little bit of what we have on the construction side is showing positive trends, although on a small base.

Okay, good. And then, I’ll take a step back and see if there’s anybody else on the call who wants to ask a question. I may be the only one. If I am, I’ll come back and hit you with some more. But in fairness to anybody else who’s on, I’ll get offline for a second.

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

Tom or Mick, if we look at -- if you were to put this outlook out, say, 4 or 6 weeks ago, how much different would it be now? Currencies have fallen off a lot here recently. I’m just trying to get a gauge of where you’re putting this number here timing-wise, whether that’s something fairly recent that’s ended up where you are today, or whether this is where you thought you might have been a month or 2 ago.

No, I think to be fair what we’re -- we have the advantage of unfortunately being a March year-end company, we’re providing you with the outlook that we see even as recently as last week, David. And yes, I think we saw some news yesterday from other companies. We are seeing continued decline, we just mentioned to Ann, in Asia, continued softness in commercial vehicles in Europe, and we’re actually seeing that in our order rates on the engine side, which we often think is a predictor, a leading indicator on the truck side. And then things are -- they still have ongoing challenges, as the news was this week, in Brazil; and then you mentioned foreign currency. So short answer, this is what we’ve seen most recently, and yes, it is probably softer than if you would has asked me 2 months ago.

Okay. And if we look at the new business number -- this $250 million number. First, appreciate the disclosure on that. That’s great that they have a number there to look at going out. That’s net of what’s rolling off at the military and the BMW volumes, am I correct in that?

That’s right.

Yes, that’s net of BMW and any other remaining strategic changes we -- any lost program, that’s the net increase we have, and we’ve done our best to remove any kind of market increases into that number, Dave, so that would be neutral of market also.

So if I’m doing my math right with what you’re talking about here in ’13 and what’s left, there’s about $150 million of revenue that’s going to roll off yet over the next several years.

Yes.

Within range, yes.

Okay. And then your comment about the $250 million is back-end weighted. On a net basis, I know you probably don’t want to break it out year-by-year, but just as a ballpark, kind of neutral impact here in ’13 and then $100 million in ’14 to $150 million in ’15. Is that the way you see it flowing on, or is that timing there different than that?

Right now, we see that as more evenly split. You nailed it, this year is more of a push. Our new business is less -- actually, the good news is we’re offsetting the loss as we had sought for the last 2 years. The markets are surprising us a little bit this year, and then the $250 million, David, is pretty much evenly split over the following 2 years.

And how much of that $250 million is the European truck volumes -- the business with the European truck manufacturer?

I would say roughly out of the -- I want to be careful we don’t get into too much segment, but 1/3 to almost 1/2 of our net new business is all from Modine Europe.

And that’s predominantly truck?

Most of that will be truck, correct.

Okay. And then as we look at the outlook here and the commentary you said about the first half of the year, with some of the comps and some of the issues you’re facing, it’s probably likely the first 2 quarters of the year that you’re in a loss position -- is that fair?

Right now, again, I didn’t highlight but I want to make sure, too, in our guidance, the numbers exclude any restructuring charges, so I want to make sure everybody knows on the call, and it is on the slide, that we’ll highlight any quarter if we have a large accrual for loss on the sale of an asset or a severance. So that could impact it, but absent any restructuring, we really don’t see losses in any of the quarters.

Okay, and then one last item. As you go through the restructuring here with Europe and a boost in the return on capital there, which great actions in getting your arms around that, does that change your longer-term corporate targets at all, that 18% to 20% gross margin and 6.5 to 8.5; or are these actions that are needed to get to those numbers?

Yes, this focus is each of our segments, we hold them to get to a 15% target ROACE, which as I explained is kind of our near-term objective. That kind of rolls up to that 11% to 12% corporate number that we’re looking for as our near-term objective. As we move forward, and that’s why I made a comment about enduring goals, that’s just kind of step 1 we want to get to, and moving forward from that is that focus on getting to a higher level ROACE with a target of 15% in mind. But 15% gets us to what I’d say is that required level we have to have for each region to be earning its way forward.

Okay.

Yes, David, I would say the same thing. Can Modine Europe do a higher margin, absolutely, than 15% to 17%. But that, as Tom said, that’s our goal one. Right now, 12% is not acceptable. We need to get to 15% to 17% to earn an adequate return. Beyond that when we’re at full volume in our new strategy, we can have higher margins.

Okay. And one last item to close up here -- as we look at, again, the guidance for ’13 versus ’12, obviously disappointing relative to where the expectations were. How much of that shortfall do you think is a function of these end market issues and currency issues, as opposed to -- I don’t want to use the word too strongly, but execution issues internal within Modine? It seems like most all of it is external.

Yes, easy for us to say, but thank you for the question. I’ll answer from my side and then give it to Tom. Nothing has changed, even from when we built our plans 2 years ago. We look at the net new business. This is $80 million of foreign currency. That’s $80 million of the wind-down, and we still have enough new business to offset the wind-down, but 4 of our 5 business segments’ end markets are clearly down.

Yes, in my comments, if you take into account where Brazil has dropped to the massive drop in Asia, the delay in what has been because of the economic uncertainty in Europe on the truck programs. Those factored together a year ago were to carry this wind-off of business that was there, and those are the factors that are getting us along with Mick’s comments on currency. So we feel the fundamentals are right. We’re getting the Company in a position to grow with the strong product portfolio that we have and with the strategy that’s in place, so we feel very, very positive.

[Operator instructions] Your next question comes from the line of Adam Brooks with Sidoti & Company.

Can you maybe talk a little bit about pricing and if anything has changed within the last 6 months, and maybe more specifically within South America or Asia?

Pricing-wise, nothing has changed. Actually with the conversion in Brazil of aluminum -- from copper-brass to aluminum, our margins improved with that conversion from that standpoint. Pricing may be down, but the margins are up on that business because aluminum offers a better value to those customers. And pricing in Asia, nothing has changed as well.

Okay, and if we look at Asia specifically, you talked about new business rolling on, and obviously the market there is tough. Does that mean that we’re going to have a down year there overall, or will the new program launches be enough to offset the weak market?

Was that Asia you were asking, Adam?

Asia, yes.

Okay. Yes, I think that we have a lot of launching going on in a down market, so there’s a tremendous amount of activity, program launches. It’s just at this point in the game that the volumes are such that it’s not overcoming that drop or loss of the absorbing of a cost base that we have in Asia in place. So that’s really kind of the frustrating part. We continue to see a lot of activity, a lot of launching. We feel good about the business pursuits and the win rate, as I mentioned before, but with the down market situation we’re just not able to overcome the headwinds of the lower demand for the market.

Yes, Adam, with 60% to 70% of Asia currently being excavators and that market being down 40 in probably full year, if it recovers down 20, I really doubt that we’ll be able to overcome that market drop even though we’re launching a lot of new programs. And as a reminder, those are why we expanded our second plant in China into an engine product facility for oil coolers and EGR Coolers, so that we can diversify that revenue mix and not be so heavily dependent on excavators.

Okay. And then real quickly if we look long term, maybe a sense of what the Europe margin can look like, obviously completely changing the product focus over there. You’ve gotten good leverage within North America after restructuring. Is that kind of what you’re looking for within Europe as well undergoing restructuring there, or can that be even higher based on what we’ve seen historically?

That’s a great point, Adam. The North American team and the example it’s set on what we can do with getting the legacy footprint into a new position is just proof of what’s in front of us as far as Europe. It takes a little more time in Europe to get through the changes and the restructuring. As you know, we have to engage and are engaged with all the right parties to make these moves move forward, but we anticipate very much, as we put on the table here, that by the end of ’14 we’ll have this business on an accretive basis as far as return on capital, and from there a lot of upside opportunities. So Mick mentioned that a good bulk of our new business wins are actually in the European region, not just commercial truck but others, so we’re very positive about that.

Yes, Adam, North America runs a couple points higher in gross margin, so the comments we gave today says 2 to 3 years, we need Europe at a minimum to be at the same level of gross profit. They’re nearly identical in revenue, same customer base, and then North America runs 10 million or 12 million lower in SG&A and we talked about that. And what Tom said, North America, we’ve converted to a 22% ROI-type business that makes a very good earnings -- cash and earnings. Europe can absolutely get there within the next 3 years. From there, yes, we can do better; but I just want to keep emphasizing, if we do what we say, things will be dramatically improved just in a 3-year window.

Okay. And lastly, can you give us a sense of initial CAPEX expectations for fiscal ’13?

Yes, we’ll probably be in the 55 million range again.

Your next question is a follow-up from the line of David Leiker with Baird.

Just on this VAT item in Europe, the $10 million number. I’m presuming that’s a cash number, cash outflow that you need to pay at some point?

Yes. The pause, and what you need to know, is that’s an accrual we’ve made, so when we go back and we correct all of these, there’s always the chance that we will be able to negotiate or pay a lower amount. It is an accrual, and David, it could be spread over a longer period of time so it’s not an all-at-once type cash outflow, and it could vary somewhat.

So have you paid any -- has any of the cash been paid on any of that accrual?

None of it.

And where did the accrual hit accounting-wise? Is it just a restatement of past periods, or does it have to flow through this quarter, next quarter or something?

It will be flowing through the last -- we’re going to revise the last 3 years, but in each individual year it’s really not going to be a material number. We’re talking about 700,000 in, for example, fiscal ’11 and 400,000 in fiscal ’12.

Okay. And then let’s stretch the envelope just a little bit, but if we take your current year where revenue came in and you fast forward 2 or 3 years -- you’ve got $250 million of new business, assume current currencies and markets. You hit the midpoint of your margin targets, you’re pushing $2 a share in earnings. Is that a number that’s realistic in that 2 or 3 time year period? Am I looking at that correctly?

Without David, walking you or guiding you the EPS that far out, I would say I think that’s the way we want you to look at the business. We’ve given you the pieces you need, you’ve got the right revenue. We’re confident on our margin assumptions, but I just don’t want to comment or confirm an EPS target.

I just wanted to know if there’s something I’m missing in that math calculation to derive that number. And then if we take that one step further, you’ve got $0.80 in earnings for the year just finished, $0.80 plus or minus something here in the year that’s coming up. The trajectory to start to move from that level of earnings towards this $2 kind of number somewhere down the road, is that -- it seems like that starts 5 or 6 quarters from now, not 3 or 4 quarters from now. Is that the right way to look at that?

Yes, I think if you look at the next 4, I would definitely say in Q1 it’s really hard, Q2, and with -- I know we’ve talked with most of our investors the complexity of Europe, I think most of the blocking and tackling is going to have to be done in Europe this year. So yes, I think this is not a flip the switch and a one quarter restructuring in Europe. I think this year will be a lot of hard work, and our plan is to show you some improvement the following fiscal year with a much bigger kick in the following.

Okay. And then in terms of the European restructuring, where are you in terms of actually addressing those issues from a timeline perspective, talking to the work councils and action plans and things like that?

David, just let me say we are fully engaged with all the required parties right now, addressing these options that we need to consider in finding the best way forward. As you know, it’s very difficult. You know that we’ve got to respect the fact that there are parties that we need to engage with, so the timeline, we are very confident with what we’ve said that by the end of ’14 we’ll have this region in position, but it’s going to take some time to get there so you should be seeing updates every quarter with how that’s proceeding. But right now, we feel confident the right people are engaged and the right sense of urgency is where it needs to be.

Are you at the point that we’re going to start to see some of this activity and some of this benefit show up in the next quarter or 2, or are you in the planning stage and the execution of it is further down the road?

Yes, we’re definitely far enough along where in the next quarter or 2, you’re going to start seeing some of the impact of this. Definitely some of the cost, and we’ll be able to be more open as we execute on those, but you’ll start to see them quickly. Frankly, with anything in Europe, the payback is always a little bit longer, so I hate to say we’d see benefits that quickly.

And then the non-cash costs, do you think those might be comparable to the cash costs that you outlined?

Very difficult question. I’d be surprised if they’re that large, David, but for each item we’re looking at, we’ve got kind of scenario 1, 2, 3. So it’s very hard for me to answer at this point.

And at this time, we have no further questions. I would now like to turn the call back over to Ms. Kathy Powers for any closing remarks.

Thank you. This concludes today’s call. Thank you for joining us this morning. Goodbye.

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