Modine Manufacturing Company (MOD) Q3 2018 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Modine Manufacturing Company's Third Quarter Fiscal 2018 Conference Call. [Operator Instructions] 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, Investor Relations and Tax.

Thank you. Thank you for joining us today for Modine's Third 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 for 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 third quarter results and provide an update for 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 third 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 review our revenue and earnings guidance for fiscal 2018. I will 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 improvement, overall sales increased 47% including an incremental $110 million of sales from our CIS segment in the quarter. As a reminder, we only own this business for one month in the third quarter in the prior year. Next quarter we'll have a more meaningful year-over-year comparison. Our adjusted operating income was $27 million up $8.6 million or 47% from the prior year and our adjusted earnings per share were $0.35 for the quarter a $0.14 improvement from the prior year. These improvements were primarily due to strong sales volumes and the addition of the CIS business. We had $35.7 million in charges due income tax expense during the quarter due to the recently enacted U.S. tax reform legislation. Mick will provide more insight on these adjustments during his portion of the presentation. Now I'd like to briefly review the segment results for the third quarter. Turning to Page 6, sales for the Americas segment increased 14% on a constant currency basis to $140.5 million driven primarily by continued strength in our end markets. We saw sales increases across all of our major markets with substantial increases in off-highway automotive and specialty vehicle sales. I am pleased to report that gross margins improved 50 basis points to 15.4%. This was driven by the higher sales volume and improved performance, partially offset by the impact of higher material costs. Adjusted operating income for the Americas segment was $9.2 million, an increase of 30% from the prior year, driven by the higher sales volume. The Americas segment continues to benefit from the rebound in the off-highway market with significant sales increases in North America. In addition, many of our plants are launching multiple off-highway programs. We have indications from our customers who expect this growth to continue which will certainly benefit the segment. Please turn to Page 7. Sales for our Europe segment increased 3% on a constant currency basis to $134.6 million, primarily driven by higher sales to automotive and off-highway customers. Consistent with our expectations, this growth was partially offset by lower sales to commercial vehicle customers as certain programs continue to wind down. Gross margin decreased 220 basis points to 13.3%. The decrease in margin was primarily due to a $2.3 million of favorable pricing settlements in the prior-year on end of program production. We did not had a similar benefit this year. Excluding these settlements, we would have seen an increase in gross profit. Lower gross profit coupled with higher SG&A due to currency led to a $1.3 million decrease in adjusted operating income which was $7.4 million in the quarter. The construction of production facility in Hungary is complete and we've initiated production. Two years ago we decided to expand our production capacity by building a third manufacturing plant adjacent to the larger of our two existing manufacturing facilities. The combined plan has both aluminum and stainless steel production capacities allowing us to both competitively and providing additional capacity for our most rapidly growing engine product lines. We continue to see a high level of global activity relating to electric vehicle in the automotive specialty truck and bus markets. We are working with our current customers and developing strategies and we see significant core volume. We recently won a program for an automotive battery chiller program with an existing customer in Europe and are confident that we're well positioned in this important area. Please turn to Page 8. Our Asia segment continues to report significant sales and earnings growth. Overall Asia segment sales grew 44% compared to the prior year on a constant currency basis. We saw growth in all end markets in China, India and Korea with the most significant increases in automotive and off-highway sales in China. Higher sales volume let to a 140 basis point improvement in gross margin which is 19% this quarter. This resulted in a $3.2 million increase in our gross profit from $5 million last year to $8.2 million this year. Operating income for the Asia segment nearly doubled to $5.1 million due to the higher sales volume. As I mentioned last quarter, our rapid growth in Asia over the past year has nearly filled one of our manufacturing facilities in the region. In order to provide additional capacity for growth we will be expanding our manufacturing capacity at our site in Changzhou. Our fourth plant in China we built adjacent to our existing facility allowing us to leverage our seasoned management team at that location. We expect to begin completion in the spring and complete the project in 2019. This expansion is critically important to meet our ever-increasing customer forecasted demand for engine oil, transmission cooling products, as well as additional powertrain cooling products. Turning to Page 9, the CIS segment reported $144.9 million of sales compared to $34.7 million in the month of December last year. Gross profit was $18.6 million which resulted in a gross margin of 12.9%. The segment reported adjusted operating income of $4.9 million, a $5.2 million improvement over the operating loss reported last year. The third quarter is the seasonally weakest quarter for the CIS business, and we expect both revenues and margins to be higher in the fourth quarter. We continue to focus on addressing our performance challenges at certain CIS location and on driving operational improvements. There are many opportunities to drive efficiencies in the business and we have the right leadership team in place to leverage the operating discipline build by Modine with the product and market knowledge of the CIS business. Operating margins are clearly lower than we'd like them to be, especially when you include the significant impact from purchase accounting. However, we are focused on achieving our synergy targets for this business while bringing technical and manufacturing resources to grow both revenues and, of course, profitability. In November, we took our first major step towards this goal by announcing the closure of our manufacturing facility in Gailtal, Austria. This closure reduces excess capacity and lowers our manufacturing cost in Europe. Please turn to Page 10. Sales for our building HVAC segment increased 16% on a constant currency basis compared with the prior year, continuing upward momentum we have seen each quarter this fiscal year. The increase in sales were driven by improvements in ventilation, North American heating, and U.K. air conditioning. Gross profit increased 24%, and gross margin improved by 140 basis points to 33.8%, benefiting from operational improvements in this segment. This resulted in adjusted operating income of $9.2 million, up 36% from the prior year driven by the good conversion on higher sales volume. We are benefiting from a better heating season this year after experiencing two years of market declines. In addition to market growth, we're also gaining market share in our historically strong Midwest and Northeast region, while making gains in the Canadian market. We also expanded our product offering and our ventilation line in North America launching the D-cabinet which is the largest capacity rooftop ventilation product to-date. We showcased this product at the recent AHR Expo in Chicago and quoting activity is now underway. With that, I'd like to turn it over to Mick for an overview of our consolidated financial results, and Mick will also review our revenue and earnings guidance for fiscal 2018.

Good morning, everybody. Please turn to Slide 12. As Tom mentioned, sales increased $147 million or 42% on a constant currency basis. Sales in our CIS segment totaled $145 million which was $110 million more than last year. As a reminder, the prior year only included one month of results. Besides the favorable markets, revenue also benefited from favorable foreign exchange rates and metals pass-through. Excluding CIS, constant currency sales were up $39 million or 12%. Gross profit of $85.4 million was up $26.4 million or 45%. $14.2 million of the increase can be attributed to the year-over-year impact of CIS. Excluding CIS, gross profit was up $12.2 million or 22%. There was good growth in gross profit in the Americas, Asia and building HVAC including margin improvements. Our gross margin was down slightly for a few reasons. First, we had a sizable sales mix impact on a year-over-year basis due to the inclusion of CIS which had a lower gross margin than the company average. Second, net metals impact was negative compared to the prior year. In addition, Europe recorded some special pricing settlements last year in the third quarter that did not repeat this year. Despite these impacts, our business excluding CIS showed year-over-year margin improvement. SG&A of $60.8 million was up $10 million which is primarily due to the incremental increase from CIS and the change in foreign exchange rates. CIS accounted for $9 million of the increase along with another $1.4 million from unfavorable exchange rate. Please note that at the bottom of the page we've included a table with adjustments to operating income which totaled $13.1 million for the quarter. The single largest item was the announced closure of a manufacturing facility in Austria within the CIS segment. This resulted in restructuring expenses and massive impairment charge totaling $9.5 million during the quarter. We also adjusted for 1 million of acquisition integration costs along with $1.2 million strategy consulting fees. The remaining balance relates to restructuring expenses in Europe and Americas and environmental expenses for a plant that was previously owned. Third quarter adjusted operating income of $27 million was up $8.6 million or 47%. Our adjusted earnings per share was $0.35 an improvement of $0.14 or 67%. Note that Modine’s GAAP EPS a loss of $0.57 was significantly impacted by tax reform legislation enacted in December. We recorded $35.7 million of provisional charges to income tax expense in the quarter related to tax reform. This included an adjustment to our deferred tax asset of 20.7 million due to the reduction of the U.S. federal corporate tax rate and $15 million for the transition tax on foreign earnings. After adjusting for the tax reform charges we had a low effective tax rate which was positively impacted by credit in Hungary. Turning to Slide 13, year-to-date operating cash flow was $105.6 million which is $70.6 million higher than the prior year. The year-over-year increase was due to the combination of several items including the inclusion of CIS this year and higher earning along with improved working capital. Capital expenditures were higher than the prior year by $9 million and we expect capital spending for the full year to be around $70 million. This is higher than last year primarily due to the unfavorable foreign exchange rate and capital spending in our new CIS segment. In addition we made equipment purchases to expand manufacturing capacity in China. We reported year-to-date free cash flow of $50.6 million which was better than the prior year by $61.6 million. Please note this includes $20 million of cash payments for restructuring activities, acquisition and integration costs along with legal and environmental expenses. Finally our debt leverage ratio is currently 2.5 down from 2.9 at the end of fiscal 2017 this is well below our current covenant ratio requirement of 3.25 times. We set a goal of getting our leverage ratio back to 2.5 times by the end of this fiscal year with strong cash flow performance through the first nine months. I am pleased to report that we are ahead of schedule. Now let’s turn to our fiscal 2018 guidance on Slide 14. Based on the tailwinds and some end markets along with additional FX benefit and favorable taxes we are raising our fiscal 2018 sales and adjusted earnings per share guidance. We're also tightening by raising the lower end of our adjusted operating income and adjusted EBIT guidance. To summarize our revised guidance, we project sales to be up 36% to 40% from the prior year. We expect adjusted operating income to be in the range of 112 million to 117 million. We raised the lower end of this range and currently expect an increase of 55% to 62% compared with the prior year. We anticipate adjusted EBITDA to be in the range of 187 million to 192 million our current expectation equates to an increase of more than 50% over the prior year. As usual I want to review our other key assumptions. Metals prices have continued to increase and we are seeing increase in sales due to the metals pass-through process this is contributing to our change in the sales outlook. In line with last quarter we assume annual interest expense of approximately $26 million. Moving on we expect our adjusted EPS to be between $1.44 and $1.52 which is up significantly from $0.78 in fiscal 2017. This includes the change in our expected mix of earnings and the impact of the lower U.S. tax rate resulting in adjusted tax rate of approximately 10% to 12% in fiscal 2018. So to wrap up we progressed nicely as the company following the Luvata acquisition. Our earnings through the first three quarters of 2018 fiscal 2018 - I should say are more consistent than the past few years. And we have an opportunity to close are truly great year in terms of financial results and shareholder value. With that Tom I’ll turn it back to you.

Thanks Mick. Please turn to Slide 15 following on the success of our strength and diversify and grow strategic initiative Modine is now a more profitable, diversified industrial company. At the same time we have reorganized our regional vehicular business segments into one global business unit enabling a more structured approach to optimize our portfolio across our served markets. We are performing a strategic review of all of our business units that will help us prioritize our capital and resources where we see the best opportunities for profitable growth. This will help to create our capital allocation plan and prioritize future investments. These investments maybe in the form of R&D spending capacity expansion and/or acquisitions. It has been a year since we completed the acquisition of the CIS business and overall I am very pleased with the result. As promised the acquisition has been immediately accretive to earnings and has generated significant cash flow to repay our debt. This will allow us to evaluate our next major strategy moves to grow the company and drive value for shareholders. We continue to see both top and bottom line growth resulting from strength in our end markets along with market share gains and new program launches. We are clearly benefiting from a strong automotive and off-highway market situation and are capitalizing our leading position the engine cooling to win business in electric vehicle space. I mentioned earlier that we secured a significant order for battery-plate cooling with an existing customer in Europe. Our teams are engaged in multiple opportunities globally and we are very well positioned with our product and footprint and have a strong rate to win as acceleration to electric vehicles continues in the automotive as well as specialty truck and bus markets. I’m very pleased with our results so far this year which has results from all the hard work done over the past several years to strengthen and diversify our business. In addition I’m excited for the new fiscal year especially given our strategic initiatives which provides with the opportunities to continue investing in profitable growth for the years to come. And with that, we’d like to take your questions.

[Operator Instructions] Our first question is from the line of David Leiker of Baird. Your line is open.

I don't usually say this awesome quarter way to go.

Thank you.

On the off-highway business and the strength you are seeing there, is there a way you can break that out a little bit of how much of it is the market, how much of it is new launches, how much of it is share gains? And I know it's going to be tough to do, but any thoughts you have there?

Yes, we can't quantify it, but I’ll try to give you some qualified response to that. Clearly, we’re seeing the tailwinds of strong construction and infrastructure changes in China which is really boosted up there. North America as well as with construction that we're seeing that, you know the names that we’re dealing with there. But with most exciting is that besides taking those tailwinds is that we're winning a lot of business and new programs that we're launching right now and work that's been done with our product portfolio focusing on more - competitive situation at least a more profitable opportunities in the linked business - both in the construction side and in the Ag side. So we won some significant business - with the major global players there. So we’ve probably had not been in the stronger off-highway position in a long time not be able to capitalize on a tailwinds but bring in the right products at that right time to spring in new business which means share gain as well. So that's kind of the high level summary I can’t let it break that down in deeper by numbers. Mick, do you any thoughts on it.

Just so we went through the data and the performance in the quarter I was going to make same comments David generally across the markets we were in line with market growth slightly ahead. And then the biggest impact as Tom mentioned is the win rate quote activity in order book is clearly outpacing the last few years and the market growth rate. So we're really optimistic about the order book that's building.

How broad-based is across the product, is there handful of products and some sense that you have there in terms of the product?

I think this is a really good example of the global product strategy we put in place years ago, getting that matured up and really determining what we need to be in a strong right position. So when we think about the PPC module aspect, we brought in some new products that go along with that on the oil cooler line that compete against some of the stronger players out there that we are going head to head with over the years that really is conquesting sales. So it's been both on what I would say the PC side and PTC side, powertrain cooling, as well as the engine products that are going into those businesses as well, oil cooling and so on. So I can say this is a broad strategic focus on really building up the off-highway product portfolio that's really paying off for us now. And with the singular focus on the BTS side, we are able to really deploy those resources critically. So this is North America and Asia I mentioned, but Europe and South America are also benefiting well okay. We know Brazil is still challenged down there, but we feel very strong with the position we've established down there and we'll definitely capitalize on the upside as that market comes back because we've gained a lot of share in that region as well.

That's great to see the actions you've taken in our discussions in terms of the global structure that build us and it seems like this is really the general position that we're in. And then just one other item here, it's been a year since you've de-bottled that, so some thoughts on where you are on the integration and the synergies cost and revenue synergies and some context of how that's tracking versus what you've expected?

Yes, I'll take this off and let Mick take the back end of those questions you mentioned when it comes to synergy achievement in his thoughts, but could not be happier with the acquisition. Yes, we have some margin improvement opportunities, but we view that going in and that very tied up in the due diligence that we did and the engagement up front and negotiations, the action we took with the closing the plant in Austria was something that was tied up inside of due diligence. We had to take action there. We got some other product portfolios, specifically maybe in the industrial side of the business that one of the locations, it's going to be some support. So we knew those going in taking those off the side, the core business being the largest oil supplier in the world adding our portion of that North America. Could not be happier with the synergy of the teams. The cultural integration which again is very important in any successful acquisition of that size. Very pleased with our leadership teams who have come together. You can see it all the way down through each function that's been engaged. So from a strategic standpoint it's delivering exactly what we wanted to leveraging our thermal management expertise across the broader set of products and markets that we can use the synergy there. Again a leading position in coils that is generating the accretive aspect of earnings. Cash flow of the business excellent. As you know what I call the quality of earnings, the capital intensity is less, but yet the business is very different. At the same time it is management what they have thousands of customers versus a handful that we deal with on the vehicular side and that diversification of small order size responding quickly to orders gives us a whole different dynamic that we've really are benefiting from and look forward to supporting even more and making sure we capitalize on every opportunity. We just came off of the HRI Show down in Chicago, where we had two set up one being our building HVAC booth and a separate booth for the CIS segment because they are separate channels to market. CIS is more of a whole supplier. A lot of good engagement with a lot of the big names you know on building HVAC on the commercial heating and cooling and refrigeration side and very pleased with the feedback we're getting there. And so all in all, strategically I am very pleased again with work to do on driving share but as far as driving margins, but Mick, you want to add any of our thoughts on synergies?

Yes just quickly on that David, we've talked about onset of the acquisition $15 million in three to four years and in the last couple quarters, Tom has pulled that in, so we're well on track to exceed the $15 million in synergies. The step up if I recall correctly of all the purchase accounting was right in that $13 million to $15 million range and our goal in a minimum was to offset all of that and our plan is to get the $15 million plus within the first two years. And we're really happy as Tom said on the cash flow side we've talked about it being a very stable business has it slightly different seasonal pattern but from a GDP grower, I think the things we need to continue to focus on this first year is big top. We hit the first year-over-year benefit of the acquisition as Tom said it's a - we know it needs to refresh with the product portfolio and keep up with the conversion and the industry to aluminum. We have to ensure they've got a lowest-cost footprint and manufacturing cost. We saw our first move here with the closure in Austria and then making sure they've got the right infrastructure and that's really around we’re going to have some aggressive plans to implement an ERP system globally here in the next couple of years.

Our next question is from the line of Mike Shlisky of Seaport Global. Your line is open.

So starting off in the heating world or at CIS or building HVAC, what you talk about today has been the results through 12/31. It got a lot colder in January over much of the country snowing in Florida and Texas and things like that. Can you comment I guess on the order pattern to kind of start the quarter? And is there a long tail that goes to the entire calendar year as people institutions want to kind of make sure that they’re prepared for next winter or is there a very short-term short stuff kind of product for you?

Well it’s a little early to give you the full answer there. Clearly we saw our market rebound as I mentioned over the last two years of our market that it was a little bit down compared to some of the polar vortex winters of three or four years ago. So we’re pleased with that. In the top as I mentioned market share gain has been very improved we got a lot of focus on sales channels and rep engagement on the field. As far as the extended performance of the heating season typically you start seeing as we get in the January tail-off of sales okay as the major work is done as the replacement business which is about half of the business in the heating sales is kind of determined because of the cold step it usually happens before in the early part of the winter season. The longer tail is definitely seeing some benefit this year can't quantify yet but we’re pleased with what that's driving and we think that has some positive effect on Q4 opportunity and building HVAC business. What that does coming out of the winter season replenishment of inventory is really - is a great question number one, and wonder we keep a real close eye and typically we have some restocking programs that we offer in the spring. We try to help with that and hopefully what we’ll find is that we took a lot of product off the shelf okay over the winter and we don't have to be as aggressive restocking programs getting into the late winter or early spring while setting up the next season. So we’ll have more clarity of that in our Q4 call and year end call in May but right now we’re pleased with what we see and it’s really big question Mike.

Secondly can you update us on the raw material situation going into the calendar 2018 here? I know some of this price have been up for last couple of months. Is there a point where you see us lapping in calendar 2018 or is that going to still be a headwind through much of the year?

Yes, did you say a lapping Mike or a catch-up kind of question.

Yes, it’s been higher for a year and so you've had a chance to price it in over a period of time.

Yes, so I think as we - part of the biggest change we've seen since October was I really thought our Q4 would probably be the end of the negative impact year-to-date the first three quarters. The net metal's impact to us is probably been in the 10 million range. With the rise in the last few months again of metals it just kind of pushes out the curve. So if we hold metal start to stabilize, we will get them catch-up in the new fiscal year. It's these environments where if it's long and steady increase, it's not a huge quarterly impact and you've seen that in the last three quarters for us and eventually you catch up and it just seems to been pushed a little bit out with additional run here in the last few months in metals.

Can you update us on the electrified commercial vehicle program that might be out there? Are you hearing about some companies out there looking to launch electric platforms as early as calendar 2019? I guess I am curious, are you involved that you are in electric automobiles because you confirmed with us in general it's a bit higher dollar content in an EV truck as opposed to a diesel truck from your contract perspective.

That's a great question. Looking at my list of when I say EV customers right now and there is at least 2.5 dozen customers who we're dealing with across auto, bus, commercial vehicle and specialty vehicle I really like to make that in the specialty vehicle and bus, our engagement right now in this segment is extremely high. Obviously there's been the names of people that you know well and on the vehicle side and what I call light duty that we're engaged with I mentioned the recent purchase that we had with a European automotive supplier of note that when the battery plate cooling. We're seeing that same date across both existing players as well as new entrants startups in and by the way in every region of the world, okay, so U.S. Europe and specifically in China. On the commercial vehicle side, yes we're engaged with names that are out there and content can be significant. Development work is high and as far as to announce any sort of sourcing, to be premature at this point, but I can tell you that our teams are heavily engaged. I really want to talk about is that you mentioned the commercial vehicle and really getting off the light duty vehicle that gets all the attention, is that specialty truck and bus segments that we serve and by the ways as you know we have a strong participation rate there both in North America and Europe. The EV I would say transition into those segments is really moving fast okay and we're talking about significant content, but these municipalities that have both infrastructure and benefits for EV because of recharging capabilities and things that are already in place plus the fact that you have a lot of municipalities that are starting demand more would say type policies on how urban centers need to be managed as far as the environment is so. So we really see a lot of activity there and it's very, very encouraging. So across all markets on the vehicular side and also when I say there is EV and this hybrid -- plug-in hybrid aspect as well, we're very engaged with that. So the portfolio that we've established through the engine product work over the last several years and making sure that that can be integrated and used on EV content is really paying off is we're going to see a benefit in both battery EV and BEV and plug-in hybrid EV. And the content and we've done some work on this Mike on we've said in general thermal content, ICE thermal content electric vehicle significantly higher. EV when you take everything into account, we've kind of opened it down on a product portfolio basis for us when we see a significant proven opportunity there that's not including things like cabin cooling where you're going to have specific HVAC systems where we're not participating, but when it comes down to the traditional engine-related products such as chillers, liquid condensers and then getting into the powertrain cooling aspect of the inverted cooling. Those products that are very well established as well as the powertrain side on light-duty radiators and the like. So our portfolio is right. The research and development we're putting into is the right time and we're really excited with the pull that start to come from the market that we've seen over the last year.

And looking at the current yield stock market, it's kind of in the news recently, one of the U.S. trust makers has teamed up with one of the biggest global European truck makers on the JV with the intent of I am not wishing any clinical but perhaps this squeeze the suppliers and perhaps you can try each other for a few global contract. I am kind of curious is it something risk to your business right now or perhaps do you think that when your structure is actually optimal for this type of global procurement JV versus your competitors?

I think the work we've don't over the last several years is really culminating with this singular focus particular business unit as this is well prepared to engage with the market dynamics wherever they may fall. The confidence we have in the portfolio, the confidence we have in how we build a strong engine business, how we build kind of PTC products that can be used across off-highway and in commercial vehicle space so that we can really use that asset the right way. This has given us position where we don't need to. I want to use this word, run scared, okay? I mean, I think I made this comment last quarter that we don't feel the need to go chasing market share, we feel confident that we have the options now, that we have this stronger rate to win that we can participate accordingly and feel confident with that will yield for us and mainly for our shareholders. So in a portfolio, the diversification, the focus we have on vehicular now, so we can make good global decisions as this is very well positioned to, let's say, engage appropriately with those new market dynamics you described.

Let me just kind of squeeze one last one here, and I promise I would not ask about the fiscal 2019 outlook, and I'm not going to. Just more of a housekeeping question. As far as the tax rate goes, now that you've gotten past the tax reform, can you give us a go-forward cash rate with we could start to model for fiscal 2019 at the very least?

Yes, Mike. I think for now, I would say we think we'll most likely be in the low 20s. Total company blended basis…

Is there still a Hungarian tax benefit next fiscal year, or that's all about the fourth quarter?

No, that's over. After this year, we'll be done with that. We would expect to be after that next year low 20s.

Our next question comes from the line of Matt Paige of Gabelli & Company. Your line is open.

I wanted to touch on your balance sheet. You demonstrated your ability to de-lever obviously through free cash flow, but you also mentioned some capital projects especially in Asia. So what are your thoughts on current leverage? Are you comfortable here?

Yes. Our goal since the acquisition was to get the leverage back to 2.5 times than we'd like to keep it, below 2.5 times and continue to push it down. Next year, we should be able to drive it further down with our optimism next year from earnings. And it's still continuing to hold CapEx tight. And that's just really allows us to keep the dry powder as a balance sheet for the next strategic move or acquisition we want to make. So we do feel comfortable with the path we’re on and where we are going.

Let me just add on that. As far as the investment in China specifically, we went to China with our Greenfield site strategy, we were aiming ahead towards a day when a mission requirements in China were going to start matching Western world standards, mainly Euro Six and the alike. So the products that we invested in were the aluminum products, higher efficiency, kind of Euro focus because of the strong association with the DOEs, Europe supporting in the China. That strategy laid down by the leadership team years ago is now really starting to pay this investment that we're making is a reflection of the success of that strategy. Having to add a fourth vehicular plant inside of China is a great story, it's going to have great returns. So I just want to say that this is a go-forward strategy build on investment because of the growth of that focus years ago they put in place.

And maybe along those lines, could you speak to what is in your current M&A pipeline and what areas either geographically or product line-wise do you want to expand or get into?

Let me – I will say this is early days. I noted - you might have noted in my comments, that we're doing the strategic evaluation over each of our business units. Now we've brought in some help that really kind of what we call the next phase of our strength and diversify and grow initiative. That is where we are going to put our investment for the best possible growth in returns and with that, the opportunities for looking at adding via acquisition as well. So it's early days in that yet, but we've established a formal structure inside the company, and have a new Vice President of Global Strategy and Business Development that’s been assigned that we’re fitting in the right resources so we can - it becomes a focus everyday of what we’re updating. So I look forward to bringing new findings and developments of how that’s going to go in the future right now I feel very positive that we've got multiple options in front of us so we’re making the best decisions for our shareholders.

Our next question is from the line of Douglas Dethy with DC Capital. Your line is open.

Good morning, Modine team. Good quarter, terrific, thank you. A question, you had recently announced a couple major hires I think in the IT general counsel area. Can you just come in on those? You had some consulting fees during the quarter. Just a little bit of like is the focus here you're trying to keep up with what you've already got on the plate or is it really about looking forward to both probably? If you would elaborate…

Yes clearly looking forward I’ll say first since she is sitting in the room, Sylvia Stein has joined the team just recently and we’re very, very thrilled about that. It was an opening because of our previous GC having a personal opportunity to move into the new role for her and we had a great search and - what I can tell you a great result that I'm very pleased with the experience Sylvia brings where she was at Pines before and a lot of global experience it's going to help us out significantly. And Mick mentioned the need for IT work and strategy going forward and so we did a deep search there and likewise Steve Langer will be joining us again with a lot of experience coming from consumer business background globally very focused so that’s going to be a key on the force as well. I mentioned a strategy work that we did before that was really the expense we put into some outside consulting. I can say that our focus is to build that capability in-house, okay so you tested some to make sure we had a good current state assessment of our businesses as I mentioned. So that we can now make the right decisions going forward and how to best do that. So that SG&A hit on consultancy will be minimized this fiscal year and built up with the teams I mentioned before on a strategy side. Mick, I missed anything?

Just emphasize that what Tom said, we put an existing leader in charge of strategy and we're going to put a team under that individual linked to our business units to drive strategic thought and discussion daily within the building and IT side. I was glad Tom used the word where lots of opportunities we have to put a few of the foundation pieces in place with IT but thinking strategically about maximizing in IT and how to use it and in some cases it being a competitive advantage for us on the front lines and in the marketplace. So excited about the investments we’re making.

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