Good morning ladies and gentlemen, and welcome to Modine Manufacturing Company’s Third Quarter Fiscal 2015 conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Ms. Kathy Powers, Vice President, Treasurer and Investor Relations.

Thank you 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 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 update our revenue and earnings guidance for fiscal ’15. 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’m 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 remained 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. Reported adjusted earnings per share were $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 the 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 the 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. The 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…

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 segment showed the largest sales increases, which more than offset further weakness in South America. Europe sales were lower as this segment experienced unfavorable exchange rate impacts 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 that 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 U.K. 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. Six hundred thousand relates to equipment transfer and plant consolidation charges in Europe, $700,000 is for severance costs in South America, and the remaining $600,000 relates to the closure of our McHenry plant…

Thanks, Mick. This was a solid quarter for Modine with growth in sales and in 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 in North America, and further lowering our cost structure in 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. Now we’d like to take your questions.

[Operator instructions] Our first question comes from Mike Shlisky with Global Hunter. Your line is open.

Hi, can you hear me, guys?

Yes, Mike.

All right, good morning. I had a few quick ones here. So you seemed to have somewhat of a, I would say, slightly more positive year, I’d say, on North America than anywhere else, I suppose, looking at what’s in the slide 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 input costs or any kind of challenges to keep up with what looks to be some pretty strong volume trends in trucks and elsewhere, or do you have kind of plan where things are being transitioned in a very gradual and deliberate way?

Well, it’s a good question, and clearly we feel we’re really in control of the transfer of products at this point. There is no peaking issues. We do know we’re under heavy demand of the commercial truck market in North America. The last quarter, we talked about some of the challenges getting the volume to 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 in those strong markets in the commercial truck and automotive side.

Got you. 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? Maybe walk us through how that works. Secondly, and perhaps more importantly, are you having any issues with actually obtaining the raw material there?

Well, 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 but it’s much less in magnitude in past years and in the recent few years. This has really spiked in the last 12 months and specifically in the last six or nine months, and made an impact of essentially doubling from approximately single digits up into the $0.20 per pound level we’re 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 do with the LME change, which is the normal structure of our material agreements. So this is something that is concerning. We’re working with others in similar industries and with national organizations to try to get a handle on the reason of the spiking of this transactional cost to get it back to normal operating levels. Mick, you want to add anything more to that?

Just that there is the three components really to the cost for Modine: the spot price based on the LME, and Tom mentioned the transaction premium which is the standard adder, and then the fabrication cost. Customers rely on us to negotiate the fabrication cost, 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, and this is in anybody who is dealing with aluminum, including canning 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. Finally, given your somewhat less positive outlook for other parts of the world and other markets, do you have any plans to further rationalize costs, rationalize current headcount or whatnot going into ’15, 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. Probably the biggest focus right now is on Brazil where we see the weakest demand and really concerning outlook, and as I mentioned and as Mick mentioned in our comments, we’re 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.

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

Hi, good morning. This is Joe Vruwink for David.

Hey Joe.

Wanted to say 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 from both, and is there any potential to ultimately realize some benefit 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 in 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 is getting a lot of attention. It is kind of looking back to regulation changes - there was actually an exemption made for that to occur, that the banks could get involved in actually owning commodities themselves and then using this build-up of inventory to actually essentially increase this premium transaction cost, which is getting it from smelters to end users of aluminum. So I think it varies a bit from the steel build-up of what happened a couple years ago, but we’re hoping that this thing gets normalized with some changes both at the federal level and also changes maybe at the financial level, so we can get this thing back under control. Mick, you have any thoughts on that?

I guess I’d just add, I think commercially it’s definitely impacting everybody, so 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 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 buy or a percent of COGS, because looking at gross margin staying flat year-over-year and you have this 20% increase in pretty important inputs material, it would seem like margins would have been up pretty nicely year-over-year.

Yes, 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 the 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’re realizing more of a normal contribution?

That’s a fair question, and we’re going to see the reduction of these inefficiencies driven by the logistical issues and things that 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 and the beginning of our next fiscal year, we really believe that these will start hitting those improvement targets early, okay, 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 fiscal moves will be mostly behind us. They’ll be much more stable in our new footprint, and that really goes for North America as well with the restructuring, as we mentioned, 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.

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 would expect to see some of the year-over-year improvements from the cost cutting efforts this year.

Okay, great. 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 pieces, automotive related, at this point?

Yeah, 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. It was directly to the diversification strategy 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’re 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 on our Asia segment. So the team has 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 you with that.

No problem, we can follow up. That’s it for me. Thanks guys.

Thank you, and again ladies and gentlemen, if you have a question at this time, please press star then one on your touchtone telephone. Our next question comes from Robert Kosowsky from Sidoti. Your line is open.

Good morning everyone. How are you doing?

Morning.

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

Yes, this is Mick. 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 the 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 the plant consolidation. We’ve talked quite a bit about some of the profit margin challenges on the Origami truck radiator that we’re 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 €500 million range. We were there before the recession, 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 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?

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

Alright. Then on the HVAC business, I was wondering--I mean, it was obviously a fantastic quarter both from a revenue and margin standpoint, and I’m wondering the sustainability of the revenue and margin profile that we’re 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 kind of calibrate our view 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’re 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 and replacement of existing units in the field, also with good product offerings by our group, and a very strengthened--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 it, and our distribution channel and reps out in the field are really hitting it, so that’s been very strong. I think we’re also going to see the fact the investments we put in place with Barkell that we mentioned in the U.K. 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 line-up for what we had both in North America and with Airedale in the U.K. On the earnings side, Mick, you want to add some color to that?

There’s probably just in some ways, a little bit of a perfect storm in a good way and tailwind. So we go back several years, this business has a long history of 30%-plus 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, which helps with the mix issue. We’re returning to post-fire, getting things rolling in the U.K. there. We’ve got the acquisition, plus we had some good news - we were able to capture some of the business interruption insurance. So short answer to your question, 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. 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?

Can you repeat the question?

Yeah, just in the Asia segment, you have nice growth coming from the oil cooler business, and I’m wondering how should we think about incremental margins on that extra business.

Yeah, I think Asia is similar to what we would say in our other OE segments - 25% to 30% is a good normal conversion. That would be obviously gross profit on incremental sales.

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

Thank you, and I am 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.