Third Quarter Fiscal 2010 Earnings Call

Transcription

1 Presented By: Thomas A. Burke President and CEO Robert R. Kampstra Vice President, Corporate Controller and Chief Accounting Officer Third Quarter Fiscal 2010 Earnings Call February 2, :30 am CT

2 Modine Third Quarter Fiscal 2010 Earnings Call Overview Tom Burke Financial and Liquidity Review Bob Kampstra Outlook Tom Burke Bob Kampstra Q&A

3 Forwarding-Looking Statements This press release contains statements, including information about future financial performance and market conditions, including the information provided under Outlook, accompanied by phrases such as believes, estimates, expects, plans, anticipates, intends, and other similar forward-looking statements, as defined in the Private Securities Litigation Reform Act of Modine s actual results, performance or achievements may differ materially from those expressed or implied in these statements, because of certain risks and uncertainties, including, but not limited to, those described under "Risk Factors" in Item 1A of Part II of the company's Annual Report on Form 10-K for the year ended March 31, 2009 and under Forward-Looking Statements in Item 2 of Part I of that same report, as revised by Exhibit 99.1 to the Company s Current Report on Form 8-K dated September 15, 2009, and the company's Quarterly Report on Form 10-Q for the quarters ended June 30, 2009 and September 30, Other risks and uncertainties include, but are not limited to, the following: the impact on Modine of increases in commodity prices, particularly aluminum and copper and its ability to pass these prices on to customers; changes in sales mix to products with lower margins; the company s ability to remain in compliance with its debt agreements and financial covenants going forward; Modine s ability to fund its liquidity requirements and meet its long-term commitments; the impact the current global economic uncertainty is having on Modine, its customers and its suppliers and any worsening of such economic conditions; the secondary effects on Modine s future cash flows and liquidity that may result from Modine s customers and lenders dealing with the economic crisis and its consequences; Modine s ability to limit capital spending; Modine s ability to successfully execute its four-point recovery plan; the nature of the vehicular industry, including continued depressed customer build rates; and other risks and uncertainties identified by the company in public filings with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements. 3

4 Overview Q3 fiscal 2010 most profitable quarter in 18 months 15.8% gross margin, up 420 basis points year over year $25.2 million in adjusted EBITDA First pre-tax profit in six quarters Aggressive execution of our Four-Point Plan continues Sale of Modine Korea vehicular HVAC business Additional plant closure announcement North America Positioned to weather the economic recession and emerge as a stronger company Dramatic reduction in debt Strong operating leverage in place Strengthening customer relationships Strong Third Quarter Performance 4

5 Four-Point Plan: Progress Report Portfolio Rationalization Manufacturing Realignment Enables: Capital Allocation Discipline Completed sale of Korean vehicular HVAC business in Q3 FY10 Finalizing transition of North American vehicular HVAC business Making excellent progress on commercialization of Origami technology Launched 10 new product offerings within Commercial Products industrial HVAC business Announced closure of Harrodsburg, KY plant in Q3 FY10 By Q1 FY11, a total of five plant closures will have been completed in a period of 18 months Fixed overhead reduced from approx. $260 million to approx. $200 million India/China/Hungary/Mexico plants ramping up production Driving operational excellence through Modine Operating System (MOS) Reduced annual run rate from $100 million to $60-70 million Created investment discipline based on alignment with product strategies and financial metrics Long-Term Financial Objective ROACE % SG&A Cost Reduction Significant operating leverage continues as a result of: Initial reduction of annual run rate from $240 million to $160 million Elimination of more than 25% of salaried positions (35% of management positions) Focused Actions to Prioritize Critical Resources and Leverage Thermal Management Expertise 1 Represents Return on Average Capital Employed. Calculated as (After-tax Net Income + After-tax Interest) / (Average Debt + Average Equity). 5

6 Third Quarter Fiscal Sequential Performance Trends $500 $450 $400 Sales SG&A $40 $35 Adjusted EBITDA $ $30 (in millions) $300 $250 $200 $150 $100 $ (in millions) $25 $20 $15 $10 $5 $- Q1/FY08 Q2/FY08 Q3/FY08 Q4/FY08 Q1/FY09 Q2/FY09 Q3/FY09 Q4/FY09 Q1/FY10 Q2/FY10 Q3/FY10 - $- Q1/FY08 Q2/FY08 Q3/FY08 Q4/FY08 Q1/FY09 Q2/FY09 Q3/FY09 Q4/FY09 Q1/FY10 Q2/FY10 Q3/FY10 18% 16% 14% 12% 10% 8% Gross Margin Sales down 7% year over year, but have shown modest sequential growth over the last two quarters SG&A run rate down to around $40 million per quarter Gross margin up 420 basis points year over year and up 80 basis points sequentially $25.2 million of adjusted EBITDA in Q3 fiscal, best since Q1 fiscal % Q1/FY08 Q2/FY08 Q3/FY08 Q4/FY08 Q1/FY09 Q2/FY09 Q3/FY09 Q4/FY09 Q1/FY10 Q2/FY10 Q3/FY10 6

7 Third Quarter Fiscal 2010 Financial and Liquidity Review Robert R. Kampstra Vice President, Corporate Controller and Chief Accounting Officer

8 Third Quarter Fiscal Highlights ($ in millions) Fiscal Fiscal $ Change Net sales (23.2) Cost of sales Gross profit % of net sales 15.8% 11.6% SG&A expense % of net sales 13.5% 13.3% Restructuring charges Impairments Earnings / (loss) from ops 5.7 (58.0) 63.7 % of net sales 1.9% (17.8%) Interest expense Other (income) / expense (0.5) Pre-tax earnings / (loss) 2.4 (63.8) 66.2 % of net sales 0.8% (19.6%) Adjusted EBITDA % of net sales 8.3% 3.9% Volume Decline: $ % w/o FX North America (36) (26%) (26%) South America 4 13% (14%) Asia 5 114% 114% Europe 14 12% - CPG - - (2%) Totals (23) (7%) (14%) Key Themes Gross margin by segment: 3Q/'10 3Q/'09 Change N.A. 9.0% 11.2% (220) bp S.A. 19.0% 17.2% 180 bp Asia 2.7% (4.7%) 740 bp Europe 13.9% 7.9% 600 bp CPG 31.5% 25.2% 630 bp Modine 15.8% 11.6% 420 bp Gross margin in N.A. benefited in 3Q/ 09 due to onetime Bloom Energy revenue of $8.7M; 3Q/ 10 improved by 440bp excluding Bloom Free cash flow

9 Third Quarter Fiscal Adjusted Results Third Quarter Fiscal 2010 ($ in millions) Gross Profit % of Sales Pre-tax EBITDA Reported Results from Continuing Operations $ % $ 2.4 $ 22.2 Reported results included the following items: Restructuring charges Repositioning charges Impairments Other add-backs - (0.4) (0.4) sub-total Adjusted Results from Continuing Operations $ % $ 5.4 $ 25.2 Third Quarter Fiscal 2009 ($ in millions) Gross Profit % of Sales Pre-tax EBITDA Reported Results from Continuing Operations $ % $ (63.8) $ (43.9) Reported results included the following items: Restructuring charges Repositioning charges Impairments Other add-backs sub-total Adjusted Results from Continuing Operations $ % $ (7.2) $

10 Third Quarter Fiscal Sequential Snapshot Sequential Trends Q2 to Q3 ($ in millions) Q1/'09 Q2/'09 Q3/'09 Q4/'09 Q1/'10 Q2/'10 Q3/'10 Change Sales $ $ $ $ $ $ $ $ 20.1 Gross Margin 16.6% 13.5% 11.6% 9.3% 14.1% 15.0% 15.8% 80 bp SG&A $ 58.5 $ 57.5 $ 43.3 $ 40.3 $ 38.5 $ 37.0 $ 40.7 $ 3.7 Pre-tax $ 13.4 $ (15.2) $ (63.8) $ (37.4) $ (4.6) $ (4.0) $ 2.4 $ 6.4 Adjusted EBITDA $ 36.7 $ 19.7 $ 12.7 $ 1.7 $ 16.8 $ 22.7 $ 25.2 $ 2.5 Free Cash Flow $ 12.3 $ (7.0) $ 7.8 $ (24.7) $ (19.6) $ 11.9 $ 38.5 $ 26.6 Key Messages: Continued sequential improvement in sales (up $20M) and gross margin (from 15.0% to 15.8%) SG&A $41M; Q2 included some one-time adjustments Earnings and adjusted EBITDA had best performance since Q1 fiscal 2009, despite 31% sales decline over same period Improved gross margin and the sale of Korea in the third quarter led to excellent free cash flow generation 10

11 Third Quarter Fiscal Sequential Segments Sequential Trends by Segment - SALES Q2 to Q3 ($ in millions) Q1/'09 Q2/'09 Q3/'09 Q4/'09 Q1/'10 Q2/'10 Q3/'10 Change Asia $ 5.6 $ 3.5 $ 4.2 $ 4.2 $ 6.3 $ 7.2 $ 8.9 $ 1.7 Europe $4.2 due to FX North America South America $2.2 due to FX CPG Corporate & Elims (9.3) (8.5) (6.7) (5.2) (6.5) (11.1) (15.5) (4.4) Total $ $ $ $ $ $ $ $ 20.1 Sequential Trends by Segment - ADJUSTED OPERATING INCOME Q2 to Q3 ($ in millions) Q1/'09 Q2/'09 Q3/'09 Q4/'09 Q1/'10 Q2/'10 Q3/'10 Change Asia $ (1.9) $ (2.3) $ (2.2) $ (2.7) $ (1.6) $ (1.4) $ (0.5) $ 0.9 Europe (1.9) (4.8) North America (8.4) (6.5) (4.0) South America CPG Corporate & Elims (8.6) (14.1) (9.9) (11.8) (12.3) (10.8) (10.1) 0.7 Total $ 17.0 $ (1.2) $ (3.4) $ (14.1) $ (1.3) $ 6.8 $ 9.2 $ 2.4 Observations: Sales increased across all segments Adjusted operating income at highest level since Q1/ 09 11

12 Third Quarter Fiscal 2010 Free Cash Flow Summary Net Debt (total debt less cash) $ ($ in millions) YTD Full year Q1/'10 Q2/'10 Q3/'10 Q3/' Cash flow: Net cash earnings $ Working capital (1) (4) $160 Operating cash flow Capital spending (27) (7) (7) (41) (103) Disposition of assets Restricted cash (11) Other (5) 2 - (3) (8) Sub-total (28) (2) 8 (22) (105) Free cash flow (20) (11) Dividends (10) Net cash flow (20) (21) Funding: Cash (incr.) / decr. 20 (31) 10 (1) (5) Debt (decr.) / incr. - (71) (49) (120) 26 Stock offering (net) $120 $80 Cash flow from operations improved sequentially Generated positive free cash flow Net debt declined further in Q3 due to proceeds from the sale of Korea and strong operating performance $120 million in debt has been reduced since March 31, 2009 Cash on hand of $44 million 125 Q1/'09 Q2/'09 Q3/'09 Q4/'09 Q1/'10 Q2/'10 Q3/'10 Q4/'

13 Outlook

14 Key Assumptions CY2010 vs. CY2009 North America Europe Class 8 commercial vehicle volumes increasing 15% (138,000 units) Medium duty (classes 5 7) commercial vehicle volumes up approx. 40% (115,000 units) Off-highway production flat to slightly down Commercial vehicle volumes up 5% Off-highway production relatively flat Light vehicle sales flat to slightly down South America Asia OEM truck and bus production up 10% Continued growth as China and India plants mature (80+ new program launches in support of global and local customers) Commercial HVAC Continued strong, above-market growth through new product offerings and penetration of newer markets (Effinity 93 unit heaters, data room cooling, PF coil conversion) Anticipate Continued, Modest Overall Sales Improvement over Next 12 Months 14

15 Fourth Quarter Gross Margin Outlook Expect near-term pressure on gross margin in Q4 versus Q3 FY10 due to: Program launch activities/inefficiencies We anticipate that these costs will be temporary as programs mature Restructuring costs relating to announced plant closures Non-recurring costs support additional fixed cost leverage Seasonal impact on Commercial Products Usual decline in 4Q gross margin as the heating season winds down Extraordinarily high 3Q gross margin due to superior operating results Rising commodity (metals) prices Recently implemented a large number of price adjustments Customer price adjustments were based on lower metals (Aug Oct) The pricing differential will decline once metals prices stabilize

16 Commodity Metal Trends 24-Month History LME Aluminum Cash Seller Settlement Price $ $ $ $ $ $ Aluminum up approx. 55% in calendar 2009 $'s customer pricing Q1-Q3 material costs Q mat. costs Q material costs Q1-Q2 cust. pricing Q4 0 Q1 Q2 Q3 Q4 Copper up approx. 160% in calendar /2/2010 1/2/2010 1/2/2008 2/2/2008 3/2/2008 4/2/2008 5/2/2008 6/2/2008 7/2/2008 8/2/2008 9/2/ /2/ /2/ /2/2008 1/2/2009 2/2/2009 3/2/2009 4/2/2009 5/2/2009 6/2/2009 7/2/2009 8/2/2009 9/2/ /2/ /2/ /2/ Month History LME Copper Cash Seller Settlement Price $ $ $ $ $ $ $ /2/2008 2/2/2008 3/2/2008 4/2/2008 5/2/2008 6/2/2008 7/2/2008 8/2/2008 9/2/ /2/ /2/ /2/2008 1/2/2009 2/2/2009 3/2/2009 4/2/2009 5/2/2009 6/2/2009 7/2/2009 8/2/2009 9/2/ /2/ /2/ /2/2009 USD / Pound USD / Pound

17 Focused on Our Near- and Long-Term Objectives Although the worst is behind us, there is more work to do Use Four-Point Plan framework to manage near-term challenges: Product Portfolio Rationalization Advantaged products; targeted research Manufacturing Realignment Lowest manufacturing cost Capital Allocation Discipline Lean asset base SG&A Optimization Effective deployment to manage growth Emerge as a stronger company - well positioned to achieve future growth Strong balance sheet and liquidity Significant operating leverage as market volumes recover Regulatory/technological growth drivers in our end markets Technical focus to deliver superior value to our customers Operating Leverage Growth Shareholder Returns Strong leadership team and a committed workforce prepared to drive the company forward Confident in Long-Term Outlook 17

18 Questions & Answers