Good morning, ladies and gentlemen, and welcome to the Modine Manufacturing Company's Second 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 information 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.

Thank you. Thank you for joining us today for Modine's Second 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 both the webcast link as well as a PDF file posted on the Investor Relations section of our company Web site, modine.com. Also should you need to exit the call prior to its conclusion, a replay will be available through our Web site 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 second 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 second quarter results including an update on our business segments and strategic initiatives. After that, Mick will provide a more detailed review of our consolidated financial results and will update our revenue and earnings guidance for fiscal '18. I will then provide a few closing remarks prior to opening up the call for questions. I’m pleased to report another strong quarter with significant sales and earnings improvements driven by growth across all of our business segments, including a significant contribution from the CIS segment that we acquired last year. In addition to significant sales growth, each business segment observed gross margin expansion in the second quarter led by higher volumes and operating performance. Overall, sales increased 60% including $149 million of sales from our CIS business in the quarter. Our non-CIS business grew 11% on a constant currency basis with increases reported in each of our segments. This growth was fueled by improvements in many of our key end markets along with continued launch activity for automotive programs in the Americas and Asia segments. Our adjusted operating income was $26.8 million, up $22.4 million from the prior year. Each segment reported year-over-year improvements in earnings and the CIS business contributed $8.1 million of operating income during the quarter. Our adjusted earnings per share were $0.36 for the quarter, a $0.37 improvement 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. Now I would like to briefly review the segment results for the second quarter. Turn to Page 6. Sales for the Americas segment increased 12% on a constant currency basis to $141.9 million, driven by in-market improvements in both…

Thanks, Tom. Good morning, everyone. Please turn to Slide 13. We are extremely pleased with the results this quarter with year-over-year sales and earnings improvement in each segment. In particular, we benefitted from favorable volumes on the vehicular side and strong margin improvement in building HVAC. Beginning with the top line, sales increased 183 million or 58% on a constant currency basis. Sales in our new CIS segment totaled 149 million. Excluding CIS, constant currency sales were up 34 million or 11% year-over-year. Gross profit of 86.1 million was up 38 million or nearly 80%. This includes 22.5 million from CIS. Excluding CIS, gross profit was up 15.6 million or 32%. As Tom mentioned, this improvement was driven by all of our segments from higher sales volume and operational improvements. SG&A of 62.2 million was up 14 million. The year-over-year increase is primarily due to the addition of CIS. Please note that at the bottom of the page, we’ve included a table with adjustments to operating income. In total, adjustments were 3.3 million for the quarter. We added back 2.2 million of acquisition-related items. The remaining 1.1 million is for restructuring and environmental expenses relating to plant closures. Second quarter adjusted operating income of 26.8 million was up 22.4 million and our adjusted earnings per share was $0.36, an improvement of $0.37 compared to last year. As discussed last quarter, EPS was positively impacted by the tax benefit from the development credit in Hungary. As a reminder, our U.S. GAAP income statement is included in the appendix of this presentation and in our earnings release. In addition, we provide a full reconciliation between our reported results and our adjusted operating results. So let’s turn to Slide 14. Year-to-date, operating cash flow was 71.1 million, which is 57.5 million higher than…

Thanks, Mick. As Mick outlined, our performance this year is clearly exceeding our initial expectations. This is in large part due to improving markets but is equally the result of the actions taken in the past to ensure our future success. As we near the one-year anniversary of the Luvata acquisition, I would like to look back on some of the actions we have taken that positively impacted our quarter and fiscal year so far. Clearly, the addition of the CIS business has been an incredible success with significant accretion to our bottom line. In our vehicular business, the investments made in China have led to tremendous growth, so much so that we’re running out of capacity and eyeing opportunities for expansion. In our building HVAC segment, I am pleased that we have returned to growth and are seeing margins that are closer to historical levels. This is a direct result of the actions taken to improve this business, particularly in UK. Over the past few years, Mick and I have often discussed the earnings potential of this business if only we’d see some improvements across our markets. We’re now seeing the strength of that potential in our results, while positioning ourselves as a more diversified industry company. This is truly an exciting time to be a shareholder at Modine and I’m thankful for your ongoing support and excited for our future. With that, we’ll take your questions.

[Operator Instructions]. Our first question comes from Mike Shlisky from Seaport Global. Mike, your line is now open.

Good morning, everybody. Can you hear me okay?

We hear you fine, Mike. Good morning.

Okay, great. Want to start off with a question about Asia; interesting quarter here. It looks like that’s really gone from kind of last place to first place over the last 12 to 18 months. I guess I’m kind of curious about the potential for expansion of capacity in Asia. And the new business that could be on the way for you guys, I guess I’m curious as to kind of what’s your benchmark operating margin rate for that business or gross margin rate. Are you looking at trying to keep the EBITDA at double digits here going forward? And what’s the timeframe for any of kind of CapEx or spending that you might have taken in Asia over the next couple of years here?

Mike, it’s Mick. I’ll go first and then Tom can add his comments. But yes, we’re very, very pleased with both the gross profit margin and operating margin in Asia. I think as we go forward, what we’re modeling and we would hold ourselves to is holding at similar margins somewhere between the 18% and 20% gross margin range and we’d be quite happy with a 10% operating margin. And with regards to capital spending and CapEx, the majority of that will just continue to be on equipment and tooling to support the new business. The expansion that Tom referenced is really within – we’re looking to be within an existing campus and looking at more to leasing the square footage than major greenfield plant expansion.

Mike, I just came back from China. I was there last week. I visited each of our VTS businesses and one of our new CIS businesses and I can tell you I’m very excited with what’s happening there. The team has matured extremely well. This has been well groomed over the years to get to this position of getting the rate not only products there but talent in place, leadership in place and it’s clicking on all cylinders right now with the expansion for growth both with multinationals and domestic OEs looking very strong. And on the CIS business, which is kind of new to us as far as China, I’m very pleased with what we have done there as far as really supporting infrastructure gains that are focused on China specifically and elsewhere. So I expect the Asia segment in both the VTS and the CIS business to be very big contributors going forward.

Okay, got it. Wanted to turn quickly to building HVAC as well, again, also very strong margin growth there obviously year-over-year and I’m kind of curious can you achieve the double-digit range going into the next couple of quarters here, or can you give us some sense with all the cost reductions and changes in strategy and changes in facility kind of what – is there a different seasonality now than you’ve had in the past to kind of near to mid-term outlook there as well? Thanks.

Okay, great question. First up, it starts with the leadership changes we made in the UK specifically really getting to understand the market connection as far as channels to market and getting the order book set up the right way, which is strong insight to business. They made all the right decisions on streamlining, as necessary, to get the cost in line and that’s starting to pay off as well. Looking forward to growth, they’re all great segments that we’re participating in, whether it’s precision, ventilation, heating, air conditioning and we added ventilation product line that we’re adding to North America with the [indiscernible] product line. We’re launching the new D cabinet as we speak this month which we really think will broaden that out. So I see, again, the opportunity for growth in this segment and making sure that this segment gets its fair share of capital to take advantage of that in a market that’s something I’m really excited about as well.

Great. And finally I want to turn to the Americas segment and the changes you’ve made in your portfolio business because of the truck market. It looks like you walked away from some business and that’s in line with what you’ve been talking about for a couple of years now which just doesn’t meet your goals, you’re just going to kind of walk away here. I’m curious about two things. One, did somebody else win this business and that might have been smaller than you. They just wanted to kind of get the bookings. And do you stand ready to kind of step in if they can’t deliver? And then kind of secondly, is this one of the first of what could be several different program wind downs but there are other market share gains as other new platforms kind of ramp up in 2018, 2019?

Well, first, let me say we are not walking away from the commercial vehicle business, okay? One element of that business being a powertrain cooling segment is in the heavy-duty section or market sub-segment is kind of the challenging moment and I just want to say the VTS growth opportunities across all of our products end markets I’m very pleased with, this happens to be the one challenging element in the heavy-duty PTC area. I’ll remind you that that’s about 7% of our total sales and if I take the engine product out of that, that’s about half that. And again, we’re about a 30% global market share on the engine product inside of the commercial vehicle program. So again, commercial vehicle very important to Modine. Specifically on PTC, with diversification and growth plans that we laid with the acquisition of CIS and with the focus we’ve had on BTS in building HVAC, we have lots of options as far as making sure we invest our capital in a disciplined manner to return rates that meet our expectations. And that’s kind of the key point. We aren’t going to chase market share for the sake of market share. Let me just be clear about that. We’re going to make sure that investment is growing to accrete our business accordingly to our expectations. So again, we’re not walking away from commercial vehicle. We are reprioritizing our portfolio inside of that specifically heavy-duty PTC. As far as new entrants or whatever, I don’t really have a comment on that. I think that clearly there’s competitors we know well that are focused on that area and quite frankly we made decisions on where we’re going to stop at our quoting thresholds and we’re going to hold that discipline for the benefit of our shareholders.

That’s great color, Tom. Thank you so much. I’ll pass it on.

Your next question comes from the line of Matthew Paige from Gabelli. Matthew, your line is now open.

Good morning and congratulations on another solid quarter.

Thank you, Matthew.

We had spoken in the past about your view on leverage and you mentioned it today. I guess just given the strong stock performance of late, I just wanted to ask for your thoughts on alternative sources to finance what you had perceived to be a lack of margin of safety in your finances?

Yes, can you repeat the first part of your question? You said “the one.”

No. I just thought given where we had been in the stock price and the strong movement lately, I was just curious what your thoughts were on financing options?

Yes, great. It’s Mick. So we are quite pleased to see the stock moving up and reflecting, as Tom said, all the hard work we did. We’ve been so focused on since the Luvata acquisition about driving cash flow and ensuring we get our leverage ratio back to that 2.5x range. So the strong cash flow this quarter, the strong results and the raise in the guidance and the current ratio sitting about 2.6, we feel really good about our capital structure. I think especially on the debt side, we got favorable borrowing rates and we feel really good about the leverage ratio and cash flow. With regards to any type of equity raise, Tom and I talked a lot about that. I think that would have to be tied to something very specific and a very large project before we would think about any type of equity raise.

All right, great. That’s all the questions I have for this morning. Thank you.

[Operator Instructions]. Our next question comes from the line of David Leiker from Baird. David, your line is now open.

Hi. Good morning. This is Joe Vruwink for David.

Hi, Joe.

Hi, Joe.

I wanted to start, can you maybe size the magnitude of the program exits in North America in the second half, and then if you could maybe the profit implication?

Joe, It’s Mick. I’ll kind of ballpark the volume size, but will prefer not to comment on the – I’ll give you some color potentially on margins. So we said through the year on European, just to be clear on that, we have been talking about somewhere between €25 million and €30 million of the commercial vehicle related there to the Origami radiator business. In the North American side we’re looking at approximately $10 million this year. That’s a combination of heavy-duty OE business and service and there’s oaks [ph] in there. As Tom mentioned on the OE production business, clearly more challenged from a returns standpoint. Service business historically has always been across the market, across the distribution channel a relatively higher margin, less capital intensive profile.

Okay. And it sounds like 10 million beginning in the second half, so presumably – focusing in on North America for now, so presumably is first half of next fiscal year you probably grandfather that?

Yes, there’s – still a little early but looking into next year, it’s probably a similar level for fiscal '19.

Okay. On the materials side, what is the headwind now contemplated in guidance? And can you maybe just update us on where that number stood in June when you first issued guidance for the fiscal year?

Yes, we were – when we talked earlier in the year and last quarter, we were estimating 15 million to 20 million of material cost increases. I think that range still holds but we’ve moved from that low end to the high end. Incrementally, Joe, I think from last quarter to this quarter we’re looking at, at least 3 million to 4 million I would say of increased metals and that’s really due to the timing with the spike in the last quarter, again will catch it up, but we’ll start to catch that next fiscal year or late in our Q4.

So where I’m going was I think at the midpoint, revenue guidance moved up round numbers, about $100 million at the midpoint, EBIT moved up I think about $7 million. Maybe I can add back material headwinds that sounds like, maybe that’s 5 million. There’s obviously some volume implication to consider. But when Modine thinks about “normal” contribution margins for the organic piece of the business, is that more like a 15% to 20% number at the EBIT line? And as you think into next year given you have some plan actions in place, [indiscernible] continues to contribute savings. Is 15 to 20 kind of the new status quo going forward or could you actually operate above that when thinking about Luvata synergies and things like that?

Yes, great question, Joe, and a lot of questions in there.

Sorry.

No, this is important that we are clear in the communication. When we target volume conversions, we still stand behind 25% gross margin conversions while we expect to see all else equal. One of the challenges we see – and again, if you just do the midpoint, clearly our business – we try to give you guys ranges [indiscernible] point. We don’t at all – line numbers don’t line up right now the midpoint but I get your question. If you take the increase in revenue and the operating income of 7 million at the midpoint, at least 40% or so of that revenue increase is, as you mentioned, FX and metals that isn’t volume. So we’re not going to convert on that. But even taking a 25% conversion then on a smaller number, we would expect and we did see the gross profit come through. The offsets to that are the metals and the service business on the commercial vehicle side which was – both of those were second half impacts to us. So that took a significant – a negative impact on the volume. Then your question or your bigger question is, is there a different conversion rate running from Modine going forward? And I would say no. On volume, we still see 25% plus conversions and you’ve seen a lot of quarters like that. This quarter, this half, we have some of those headwinds and we’ve had quarters where our conversions 60%. The positive as we look to next year is we will start to recoup the metals increases. And you also mentioned synergies, so not to get too far out in front of us but we’re not setting a new low conversion rate for Modine. There’s some unique factors here on the second half. But more importantly, as we stated, those become recoveries or tailwinds and synergies, you can see a conversion rate that looks by the time you get to EBIT more favorable. Hopefully, I’m making sense to you, Joe. I’ll just pause.

Yes, that’s exactly what I was looking for. That’s great detail. I wanted to finish up on just recalibrating around Luvata; one more quarter in, so just maybe an update on how the business continues to operate relative to your expectations? And I want to be sure I’m thinking about the business correctly into the December quarter. Obviously we got a one-month look at a year ago of what Luvata can do in the month of December and it’s seasonally weak. And so with the expectation into the December quarter this year, probably a sequential step down in EBIT margin just given seasonality. And then Q4 kind of jumps back up and potentially the strongest margin quarter of the year?

You answered your question very well, Joe. That’s exactly right. First off, I’m very pleased with the performance of CIS obviously on how they’re contributing and more importantly really excited about the synergy opportunities that are developing U.S. last quarter about how we’re seeing the synergies between CIS and building HVAC and those are coming together well through procurement, through some other make versus buy things that we’re looking at. So again, very positive with that outlook. So a great performing business, brings the diversification we wanted and obviously cash flow. But the Q3 is – fiscal Q3 is its weak quarter going into December. Obviously their short order lead time falls into the holiday period, so things kind of shutdown, if you will, for a couple of weeks in there. So we’ll see that. But it comes back strong in the fourth quarter next year which we anticipate. I did mention that we see the precision air conditioning business that they’d have a very significant position in, specifically with one customer that we see that outlook brightening. We think that can have some additional impact potentially in Q4 this fiscal year and going forward. So again, they really bring exactly what we wanted to the company and very pleased with what their contributing. And again, some major steps we’re considering forward on synergy when we add to that. So that’s my quick summary on that.

Okay, that’s great. That’s all I have. Congrats on the quarter, it’s great to see.

Thanks, Joe.

I am showing no further questions at this time. I would now like to turn the conference back to Kathy Powers.

Thank you. And that concludes today's call. Thank you for joining us this morning. And thank you for your continued interest in Modine.