Good day, ladies and gentlemen, and welcome to the Modine Manufacturing Company's First Quarter Fiscal 2018 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. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Kathy Powers, Vice President, Treasurer, Investor Relations and Tax. You may begin.

Thank you. Thank you for joining us today for Modine's First Quarter Fiscal 2018 Earnings Call. With me today are Modine's President and CEO, Tom Burke; and Mick Lucareli, our Vice President of 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 the 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 first quarter results and review our revenue and earnings guidance for fiscal '18. 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 our earnings release, as well as in our Company's filings with the Securities and Exchange Commission. With that, it's my pleasure to turn the call over to Tom Burke.

Thank you, Kathy, and good morning, everyone. On today's call, I will discuss our first quarter results and provide an update on the status of our end markets and on the integration of our CIS business. After that, Mick will provide a more detailed review of our consolidated financial results, and we'll also discuss our revenue and earnings guidance for fiscal 2018. I'll then provide a few closing remarks prior to opening up the call for questions. I am pleased to report another strong quarter, with significant sales and earnings improvements, largely driven by the addition of our recently acquired CIS segment and solid organic growth as well. Sales increased 50% on a constant currency basis, including a $158 million of sales from our CIS business in the quarter. Our non-CIS, or base business, increased 4% on a constant currency basis, primarily due to higher sales in the Americas, Asia and Building HVAC segments, partially offset by lower sales in the Europe segment. Our adjusted operating income was $31.6 million, a 62% increase from the prior year, primarily due to the addition of the CIS business, which contributed $10.8 million of operating income in the quarter. Our adjusted earnings per share were $0.39 for the quarter, a $0.16 increase from the prior year, primarily due to higher operating earnings, partially offset by higher interest expense from the debt taken on to finance the Luvata acquisition. The integration of the CIS business is proceeding as planned and our cultures and business processes are meshing together well. In fact, based on our short-term momentum, we believe we are positioned to exceed our goal of $15 million of annual cost synergies and we'll meet it ahead of our three to four-year timeline. Now I'd like to briefly review the segment results for the…

Thanks Tom. Good morning. Please turn to Slide 12. We are pleased with the results this quarter and off to a very good start for fiscal 2018. Beginning with the top line, our first quarter sales increased $173 million on a constant currency basis. Sales in our recently acquired CIS segment totaled $158 million. Excluding CIS, constant currency sales were up $15 million or 4%. Gross profit of $88.5 million, was up $26 million or 42%. This includes $25.3 million from CIS. Excluding CIS, and a $700,000 negative FX impact, gross profit was up $1.6 million or 50 basis points. This improvement was driven by higher sales volume in the Americas, Asia and Building HVAC, but was mostly offset by higher metals cost. As discussed last quarter, we anticipated a negative metals impact for most of fiscal '18. However the negative impact should improve as we pass-through - as our pass-through agreements begin to take effect later this year. SG&A of $59.2 million, was up $15 million. The CIS segment added the majority of this increase. Excluding CIS, SG&A was up only $500,000 or 1% from the prior year. Our SDG actions are truly helping to offset wage and benefit inflation. Please note that during the quarter, we added back $2.1 million of acquisition-related items, which includes integration costs. We also recorded $1.7 million of restructuring expenses. These expenses primarily relate to equipment transfer and severance costs in the Americas segment. First quarter adjusted operating income of $31.6 million was up $12.1 million or 62%. And our adjusted earnings per share was $0.39, up $0.16 compared to last year. Our EPS was positively impacted by the tax benefit associated with our plant expansion in Hungary. As a reminder, our U.S. GAAP income statement is included in the appendix of this…

Thanks Mick. We have started the year on a very strong note, with positive signs of improvement in many of our core markets. I'm confident that we will deliver strong results on revenue and earnings growth outlined in our guidance. That being said, our priorities are clear. We will continue with a rapid integration of the CIS business so that we can exceed the synergy objectives to which we committed. We will focus on cash flow generation, so that we can repay our debt and reach the top end of our target leverage range by the end of this fiscal year. At the same time, we'll be very disciplined with our capital allocation strategy, making sure that we are investing where we need to grow including our plant and capacity expansions at Hungary and China. I'm very pleased with the quarter we just reported and optimistic about our outlook for the balance of the year. And with that, we will take your questions. Thank you.

Can we file for questions, please?

[Operator Instructions]. And our first question comes from Matthew Paige of Gabelli & Company. Your line is open.

Congratulations on a nice quarter.

Thank you, Matthew.

The first question was Asia was strong again obviously in the quarter. Is this growth rate sustainable in the near-term? And along those lines, could you update us on content per vehicle in Asia, and if that's continuing to grow?

Well, obviously the tailwind of the excavator market is very encouraging to see, which is the base business that we've established in Asia for some time now, and our growing content on the automotive business that we have with our expansion of diversifying the business with our oil cooler product, which is - we're investing in significantly right now. So we see in the near-term that that growth rate will continue. That will slow down in out-years a little bit as that matures. Content per vehicle, we really haven't provided that. I know that it's significant from an excavator standpoint. On a vehicular basis on the automotive side, it's equal with what our content is on the oil cooler products in our mature markets in Europe and North America.

Great. And then moving to the HVAC side. Could you just speak to the weather impact that the business faces and what conditions typically drive growth and how has that played out so far this summer?

Yes. Well, it's a great question. It is a very seasonal business. Obviously traditionally we've had a very strong heating season, which really kicks-off in late summer going into fall. So that's the upcoming question of how that heating season will - stocking orders will come in and so on. So that's anticipated to be stronger as we approach that season. And of course I mentioned our school products, which helps balance that seasonality out with stronger summer sales with air-conditioning for school systems going in over the summer. So again, I mentioned we had strong school product sales this season with a strong June and July, okay, that we just are wrapping up. So we're pleased with that. So with that behind us, which really contributed to a strong first quarter in Building HVAC market, we anticipate and are planning for an improved heating season sales pattern to start later this summer, going into the fall.

Great. And the last question from me and I'll pass it on. Could you just remind us how your pass-through agreements work and typical time delays and any retroactive charges that you can get?

Yes. It's Mick here. The - we averaged - we shoot for quarterly and we go anywhere from quarterly pass-throughs to semi-annual and we have a few larger customers that go up to a year or an annual price adjustment. So I would say it floats on an average between that a three to six-month lag. And then it does vary a little bit by region. As Tom mentioned in his opening comments, the business in Europe tends to have more of the longer term agreements. North America averages a little bit shorter. But I would say the three to six-month lag is typical average across the Company.

Great. Well, I appreciate taking my questions. Thank you.

Thank you.

And our next question comes from Mike Shlisky of Seaport Global. Your line is open.

Good morning. This is Jordan Bender on for Mike this morning. You guys recently upgraded - I guess, you upgraded your heavy-duty outlook to about 15%. It seems net-net there overall. Market outlook has improved. Are you guys leaning on the side of conservatism by reaffirming your EPS guidance?

Yes, I'll let Tom comment. We've got a lot of moving - I'll let Tom comment specifically to your truck question. There is a lot of moving pieces between our truck outlook and then specifics going on with each of our programs behind that. From just the total company, how we looked at the outlook and guidance for remainder of the year, clearly we came out with a really strong start and we're really pleased with it. When we look at the discussion we just had with the remainder of the year left and a big portion of the heating season to come, we'd like to get another quarter through and see how the pre-season heating orders are looking heading into the fall. We're still getting a really great quarter for commercial industrial solutions. There is Luvata. We're still getting a handle on them. We do know that that is a very short lead time business, very much more like our Building HVAC. So we'd like to have another solid quarter there before raising guidance. So really, it's just - really we'd like to have another quarter run rate before we look at that. As Tom mentioned, we're definitely trending towards the higher end, which is great news. Tom, anything you want to add just on the truck side?

Yes, on trucks specifically, on your question, we are raising guidance as far as heavy-duty trucks in North America to 15% as you mentioned. There are some dynamics changing there. I mentioned a drop in service orders that we did receive this year that's impacting our projection a little bit on that. And there are some shifting elements globally. As I mentioned in Europe, we've had some wind downs because the Origami production/ And again, as I mentioned, I think it's important to note, with our diversification strategy really developing well, okay, I mentioned a couple of times our capital allocation discipline as far as putting investment towards returns that guide us towards our overall objectives. So we're going to look carefully at those competitive assessments and making sure that we're putting that money wisely to use. Saying that, on the commercial vehicle market, you know we invested significantly to move footprint to low cost country in North America, as well as in the process in Europe, so that we are prepared for our product strategy and a competitive assessment going forward.

Okay. And then to dig into the outlook a little bit more, most of the HVAC folks out there are saying mid-single-digit growth in calendar 2017 and even off-highway the construction companies are mostly looking for double-digit growth. Are there any major concerns maybe surrounding your market share with that?

I'm sorry, I missed it. Was that the off-highway you're talking about as far as...

Yes, the HVAC outlook and the off-highway.

HVAC and the off-highway. Well, let me see. Right now, we feel very strong about our - let's start with HVAC position. The product offerings that we brought along, and strengthening our core positions in the heating and air-conditioning markets with improved ventilation products in North America. We feel very strong about the holding or increasing our opportunity to gain share as we've proven that in heating over the last several seasons of gaining share. And in the off-highway segment, again a very strong segment for us, something that's globally driven with strong product platforms. We feel very good about the win rates we see in every region that we participate in. So recent business wins confirm that. So I really see ourselves holding or gaining opportunity to gain share in the market sub-segments that we play in, in the off-highway side.

Okay. And I just want to follow up on from the first question. It looks like that Luvata had a pretty strong quarter, at least compared to what we were expecting. Are you guys running at the $150 million per quarter run rate at this point, or is there something with seasonality for their shipments remain the scope first quarter are higher than average quarter?

Yes, great question. Clearly if we annualize Q1, that would be well above what we've talked about in the past for a pro forma outlook as we go through this year. So I think, a couple of things going on there. It's definitely a seasonal pattern. We're still learning it, but I would point to when we first reported on them, and our December quarter. So they will - our projections show and their seasonal pattern would show their weakest quarter would be the December quarter. So there is definitely a seasonal pattern there that you should expect to see. And then secondly, we are doing well on the synergy side, so if we continue to build those in and get confidence. That's a potential upside to a lot of the pro forma numbers that we've used in the past. So second half of the year opportunity would be synergy, but definitely plan on not a steady four-quarter run rate. There will be a significant dip if things go as normal in the December or our Q3.

Awesome. I'm going to pass it off. Great quarter guys.

Thanks.

[Operator Instructions]. And our next question comes from David Leiker of Baird. Your line is open.

Hi guys. This is Joe Vruwink for David. A - Tom Burke Hi Joe.

Hi Joe.

Can you maybe recalibrate the synergy targets and timelines for Luvata? So 3% to 4% is going to be - or three to four years is going to be shorter. $15 million is going to be higher. Just any more specifics around those two?

Yes, I can give you the short-term view and then Tom can add some more color. As Tom said, we originally came out before we closed and we were able to go through all the details with the new team on board. We wanted to set a target we know we could hit with very, very high confidence. So as we've gone forward, we have a very high confidence of hitting and exceeding the $15 million. Tom and I are pushing that to get that down to more of the two-year window, not the three to four-year window. As we headed into this year, I mentioned we had some synergies built in. We had a target and we're pushing to get north of $5 million in this fiscal year and a portion of that was in our earnings guidance and our planning when we set up the fiscal year. So as we get more confidence in runway, I would think that's an opportunity for us to continue to roll more of these in in the second half of the year. Tom, anything?

Yes. Joe, it's a great question. I'll remind everybody that we invested in a strong integration management office way back even before the close of the deal. We have an executive experienced leader leading now with a dedicated team focused on every element. So again, that started off with our expectation assumptions based on the due diligence, that's then gone into - once the deal was closed, to confirm that. So those assumptions have matured. The timing, ability to move things forward, we feel confident about it as Mick said. And so we can strongly say that we will exceed the $15 million and that two-year time frame is what we're looking at, okay. So again, it's a result of a lot of good effort and organization and discipline that the team is making. And really supporting the fact of the due diligence assumptions that we made going into the close.

Any revenue synergies yet between CIS and your traditional Building HVAC business?

Yes, it's a great question, one that I'm not prepared to give an answer today, other than saying that we're investigating several interesting revenue synergies that are available to us. So they are in the works and you can look for some updates probably getting into the next call.

Okay. And then switching back to the vehicle business, so if I look at Europe and commercial vehicle, I think you said was down 20% and that's just third of the business. So it would actually imply the remainder is growing pretty nicely and off-highway markets are good, automotive volumes were actually, as an industry, down in this quarter. So it would seem like Europe automotive is launching a fair amount of content. I'm just wondering if that's true, if I did my reconciliation correctly. And then what sort of products or programs are you seeing demand for in that region?

Your assessment is correct. Good work as usual, Joe. Yes, we're pleased with the launching of a lot of engine product related to the automotive industry in Europe. Oil cooler platform, the LC product line is the baseline for that, but that's expanding into including liquid charger coolers and other LC products going into subsystems and also a lot of interest going in with the EV opportunities looking forward. Again nothing to report there yet but a lot of activity. So pleased with that side. Again the commercial vehicle market, we are repositioning ourselves coming out of the Origami wind down and investing towards Hungary, as we've said. Hungarian expansion is on track, I might add, okay, with equipment being sold as we speak, with launches scheduled to take - to support the growth in the automotive side that I just mentioned and support the future commercial vehicle business needs that we have in the region. So again good points on your side.

And then the last question for me. Your fiscal Q2 has been a tough one to predict in recent years and we've ended up with fairly large Q1 to Q2 decremental margins. It seems like you've added more revenue diversity, so that should help. Any additional guidance so we're trying to model, don't miss it like we have been, Q1, Q2, what's your contribution margin at the EBIT line should end up being?

Yes, another great question, Joe. And I'd say, last year for sure, if you recall, that was not only the normal seasonality but we ran into a number of operational issues that we then since had to correct in the second half. So by no means are we looking at that magnitude of a drop from what happened a year-ago. I guess, maybe to just help out and so you're right, we kind of - we get it level set with you guys. We are looking. There will be little bit of a revenue drop that's due to the seasonality and mainly in our vehicular business, North America and Europe with the summer shutdowns. And then with that volume, it's really volume related. There will be a little bit of a margin decline too with an operating margin this quarter being in the 6% range, we'd probably be more in a 4.5% to 5% kind of range in Q2 with - on a little bit lower volume. But again, significantly up from the prior year. And then as we get into Q3 and Q4, not only will Q3 and Q4 should be at or above prior years, but Q3 will be above Q2 and Q4 will be above Q3. Lots to go there but that's as closes we want to go without getting into quarterly guidance. Hope that helps.

No, that's great color. Thanks very much. I'll turn it over.

And I'm showing no further questions at this time. I would like to turn conference back to Kathy Powers.

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