Good morning, ladies and gentlemen, and welcome to Modine Manufacturing Company's First Quarter Fiscal 2019 Conference Call. At this time all participants are in a listen-only mode. Later we'll conduct a question-and-answer session and instructions will follow at that time. [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. You may begin.

Thank you and good morning. Thank you for joining us in our conference call to discuss Modine's first quarter fiscal 2019 results. I am here with 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, which can be accessed either through the webcast link or by accessing the PDF file posted on the Investor Relations section of our website, modine.com. This morning, Tom and Mick will present our first quarter and confirm our revenue and earnings guidance for fiscal '19. At the end of the call, there will be a question-and-answer session. On Slide 2 is our notice regarding forward-looking statements. 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. I am please report we have started our fiscal 2019 with another strong quarter. Overall sales increased 10% or 6% on a constant currency basis. Each of our segments reported sales growth with improvements across most of our major end markets. Our first quarter adjusted operating income was $36 million up $4 million or 14% from the prior year, with particularly strong contributions from our vehicular and commercial industrial segments. Now I'd like to briefly review the segment results for the first quarter. Turn to page five, as a reminder this is the first quarter we'll be reporting on our new organizational structure with three operating segments. Our Vehicular Thermo Solutions or VTS segment is a combination of our previous Americas Europe and Asia segments. In addition we are now reporting our legacy North America coil sales in the CIS segment. All prior year results have been restated for this change. Sales for the VTS segment increased 12% or 8% on a constant currency basis to $353 million. This increase was driven primarily by 25% increase in sales to off-highway customers primarily in North America and in Asia. We also benefited from an 18% increase in sales to automotive customers globally. Commercial vehicle sales were up 5% with increases in Asia and Europe. Commercial vehicle sales in the Americas were flat as the program wind downs on heavy duty programs offset volume increases in mediums. We are pleased with the ongoing trends in auto and the need for specialized engine cooling products resulting in a 21% increase in engine products sales. We continue to have significant growth in Asia where sales were up 51% from the prior year. In addition, sales in the Americas were up 3% and sales in Europe were up…

Thanks, Tom. Good morning everyone. Please turn to Slide 10, As Tom said, we are happy with Modine's results this quarter and off to a good start in fiscal 2019. Sales increased 51 million 10%, which includes a positive FX impact. On a constant currency basis sales increased 32 million or 6%. Revenue improved in all segments and benefits this quarter from a number of items including favorable market trends, market share gain and maturing program volumes. Gross profit of 94 million was up 7% with the margin down 50 basis points. We had positive impacts from higher sales volume, FX rates and ongoing purchasing initiatives. We also had a few negative impacts mainly in our VTS segment. As Tom discussed these relate to higher material cost and temporary production inefficiencies. SG&A of 59 million improved 100 basis points as a percentage of sales as we continue to leverage our top line growth and overall scale. We were able to hold SG&A essentially flat as several favorable items more than offset normal wage and benefit inflation. Adjusted operating income was 36 million up 4 million or 14% including a 30 basis point improvement in our operating margin. Please note that in the appendix, we include an itemized list of adjustments to operating income and a full reconciliation to our US GAAP results. The adjustments fold 1.2 million for the quarter and relate to environmental charges, restructuring expenses and the remaining acquisition integration costs. Income tax expense was 5 million up 2.3 million over the prior year, resulting in an adjusted tax rate of 25% compared to 16% in the prior year. This increase was primarily due to a 3.5 million development credit in the prior year. We also reversed the portion of a valuation allowance on our deferred tax assets…

Thanks, Mick. Please turn to page for Slide 13. As I mentioned last quarter we continue to focus our strategy around strengthen, diversify, and grow and have been working on developing our next round of short and long-term targets and the actions that allow us to achieve them. This strategy has served us quite well over the last few years resulting in a much more diversified portfolio, improved financial metrics, and increased shareholder value. In order to continue to strengthen our business we've completed the strategic portfolio assessment that we started working on last year. This assessment and framework allows us to prioritize those end markets where we have the right products and channel access along with positive market drivers to faster growth. At the same time we are addressing underperforming businesses by actively shifting them back towards its growth and profitability or by deciding to deprioritize or exit as we've demonstrated with two recent decisions in our building HVAC segment. We're prioritizing and will allocate our capital based on these drivers. We are now setting multiyear targets ensuring that future capital is allocated based on our strategic priorities. Finally, under strengthen, we will focus our practice and continue our practice in relentlessly driving SG&A reduction through process improvement and cost containment. Secondly, we will continue to diversify our business following on the success of our acquisition of the CIS business. Our priority will be higher margin in cash generating businesses that will build upon our commercial and industrial and building HVAC segment. Specifically we will look for M&A opportunities that will improve our right to win and increase our value-add to our customers and to Modine shareholders. Our overall goal is to increase the percentage of our revenue contributed by our industrial businesses. This will allow us to further…

[Operator Instructions] Your first question comes from the line of Mike Shlisky with Seaport Global. Your line is open.

Good morning everybody.

Hey, Mike.

Hey, Mike.

So, Tom, your last comment there, suddenly you got a nice STG-2 teed up here. But are there any new targets to watch for on the financial side? Is there a higher margin target or higher volume target, which we're talking about? And if so, what might the time frame be?

Yeah. Well, you can expect an update next quarter, okay, with more definition around the targets. We're clearly working very hard right now and clearly the things we can control and opportunities we are evaluating are making sure that we come out and we have a high degree of confidence in those targets. So expect good updates each quarter. Mick, you want to head into that?

Yeah, just Mike that I would say, as Tom said, we are regrinding through all of those with the next set of specific action. Actions we've - when we did STG-1, our target was the 7% to 8% operating margin. We improved probably 200 basis points since that time. It's 6.4. We haven't crossed the 7%. So for sure we're pushing Modine to continue to move towards that 7% to 8% operating margin. The other area we're really focused on we talked about a lot publicly is free cash flow generation and the amount of free cash flow Modine generates. Again last three years have been really strong and much improved, but we think we can improve as well in our cash flow conversion, our free cash flow margin.

Okay, but just to be clear, Mick, if you add back some of the internal conversations from Luvata that you didn't obviously anticipate when you first announced SCG you would be very close to 7%. Is that correct?

Yeah. Great point, Mike. Yes, thank you for that.

Just want to make sure. Okay, I also wanted to ask secondly in your comments in slides, I saw that you've got in CIS, you've got a very strong datacenter business [indiscernible] but that wasn't quite high of a growth rate and - so can you kind of contrast what's going on between the two segments?

Yeah, it's a great question. Yeah, if you look at the breakdown, about 20% of sales went to data center market inside the CIS and just about 28% in the building HVAC segment. So that is becoming a pretty sizable piece of our business. Obviously the drivers that are in that business, the mega trends are in our favor. You can really say that about - that we have one large customer CIS that increased significantly this quarter as I mentioned, but still we have significant growth across the whole spectrum in building HVAC that we supply end items as a reminder to you, right. So we actually are serving specific datacenters with solutions that are turnkey for them. So we're the end item provider. In CIS we are component supplier or cooler supplier that is a subsystem of the end item. We supply that through multiple providers of building HVAC systems. So we kind of have the end item approach of precision cooling and chillers in the UK, serving that market, and we have globally with CIS coil supply and cooler supply that goes across various end item providers and so really exciting part of our portfolio is we combine those and really with the megatrends towards digitalization we see this as a key factor that we are going to be concentrating.

Okay. And then thirdly I wanted to ask about the price of aluminum and the price of copper. It looks like as of today for this quarter so far both of those are actually down from the prior year. I mean it's only August, but so far we're actually down. Could you maybe comment on some of the non-contractual products like in CIS or associate make and deliver it? Is there a potential margin benefit happening over the prior year for that business and then secondly in the part that is contractual in your VTS contracts, are those - is there a chance we'll talk to see the catchup in the price of commodities in your contracts in the back half of fiscal 2019 here?

Yeah, so, Mike, I'll take that first and see if Tom wants to add in. So a lot of questions you had in there. One is, yeah, we've been happy to see the raw material stabilize here. The big - probably the biggest driver, though, as Tom referenced, the Midwest transaction premium. So on top of the LME price, there is an adder a year ago that was about $0.08 or $0.09 a pound that is now almost double. We've been running in the $0.18 and $0.20 a pound. So that's one impact for us. With regards to the pass-throughs, yeah, I think the opportunity for us from a financial standpoint is if they hold where they're at, we will continue to have pass-through prices and catch up to last year. We had significant price adjustments in our first quarter. Unfortunately we had an equal rise in - equal or greater rise in commodity cost to us. The last I think you were also asking about margin improvement. The way that it works from just the financial side, on VTS it's actually - it can be dilutive. You're passing through your cost. So it's definitely not a margin enhancer. It's a complete pass-through. On the other half of our business, the CIS and building HVAC, as Tom mentioned there too, it's a lot more fluid, every program, every opportunity, it's a fresh quote and the fresh pricing opportunity. So we kind of like that aspect. So that side of the business mix is more flexible.

Okay. Enough, I'll pass along. Thank you.

Thank you.

Thanks, Mike.

Your next question comes from the line of David Leiker with Baird. Your line is open.

Good morning. It's Joe Vruwink for David.

Hey, Joe.

Maybe I'll take it back up with the commodity question. Can you actually quantify the raw material headwind you absorbed this quarter?

Yeah, Joe, it was about $2.5 million total company and most of that 90 plus percent of that, almost 99% of that was in VTS.

So I know I can just add it back. But let's say I add back that $2.5 million, it looks like your incremental margin at the gross profit line was, call it, 16%. You've talked in the past about a 25% target or the ramp-up inefficiency you alluded to really the biggest delta there between 16 and the target of 25?

Yeah, it's a great, great question and we look at it very similar when we look at our - and analyze our businesses internally. The other factor I would say is there's $18 million of FX impact in revenue that, as you know, you can look at an incremental margin on it. It's not a volume or a variable. So when we look at, we adjust for metals and FX, our conversion, Joe, is about 19% or 20%, then the gap to really where we want to be, we had the inefficiencies in the quarter were about $3 million that would have put us at a 30 plus percent type conversion.

And so on to the back half of this year when we maybe get some stabilization and commodities, the inefficiencies go away to be doing an incremental margin of around 30% that would be your expectation?

Yeah. And I think what we're going to see is as we adjust to the volume ramps in those very select locations, Tom was alluding to, we are going to see a ramp in our conversion rate. So Q2 will improve over Q1 and we're expecting Q3 to improve over Q2 and so forth. So it won't be step functions, but it will be a ramp as we continue to go through the year. Tom?

Yeah, Joe, specifically let me just talk here two plans are both tied to our heaviest launch activity plans. So you saw the 51% growth in Asia this quarter and that specifically is coming down to the high degree of launches going on in China, specifically at our Shanghai facility where we're just bulging it to scenes right now adding capacity to us that obviously some expertise to come and help with some of the specific launches, but we have literally dozens of launches that occurred in this past quarter between that and we' have Mexico, we've been doing some product transfers over the last couple of years. As you are aware of, those transfers have stabilized and they are pure launch activity and so the plan is undergoing a lot of stress and strain preparing for that and launching dozens of new programs this year. So it's all been set up to provide this opportunity for growth. We are doing it. We'll start to bring better as Mick said and we are very confident that you'll see that sequentially as we move forward.

Okay. Great. If we can focus on CIS for a minute, I think when you bought the business and you got to look back financials, there was more typically 2% to 3% organic grower, a bit stronger than that this quarter. So two questions, one is have you started to realize maybe some revenue synergies between your existing HVAC infrastructure or vice versa really and is that contributing to better organic growth? That would be one question. And then the second question, with data center customers and how they choose to invest and build out their supply chain, it can be incredibly lumpy. So should we be considering some giveback in a future quarter as maybe they work through what they bought from you this quarter or just give them how robust construction as for data centers overall? Can you sustain growth?

That's a great point. Let me start with that. It is project-based on data center, right. So the project based on capacity increases the data centers and so right now there's a - the trend is very positive. Our order book is built very well, very strong, for, let's say, the balance of this fiscal year for sure and we see going into next fiscal year, but it is lumpy I should say. It is basically a result of projects being approved by cloud providers and other data center type companies. So it's a good point. Good trend. We're very positive. It's going to possibly move physically in the next year, but that is subject to change. Good point. As far as sale synergies, we are at the beginning of that. We have some good things going on with technology conversions from copper to aluminum microchannel, things like that. We're looking at the best way to do that. But that really hasn't impacted them much yet. We see opportunities, significant opportunities looking forward using some of the product-based platforms that maybe is more vehicular-based that can be applied towards things to supply let's call industrial and/or refrigeration type of end items or end markets that we can provide like, let's say, play coolers and things like that, so we've been studying some early indications of possibility that really hasn't paid yet.

Okay. On the vehicle business, so really incredible automotive growth this quarter. I think global volumes are only up 3% or 4%. The 18% growth is pretty remarkable. As I think about that business in the remaining quarters this year and specifically maybe into next quarter, so we're battling a few things that seems - in Europe, various European automakers have communicated different expectations for what production might ultimately end up being as we implement this new WLTP emissions requirement. Some are impacted. Others say no change in our schedules. And then in China, there has been maybe some concern that inventory has got a bit elevated last quarter and so we're due for a bit of a giveback this quarter. Anything you're seeing from, it wouldn't be your backlog obviously because that's really strong. But from an industry standpoint that maybe moderates growth rates next quarter.

Yeah. If you bring up the points specifically on the WLTP, we've looked for softening, for instance, in our EGR business on the automotive side, but plants in Germany. We have not seen any signs of that yet. That was something we anticipated. Overall releases remain strong and again we are feeling it in our capacity constraints and launch activity. So, yeah, we watch that very carefully when we read and hear about some of the fears that may occur, but as of right now we're not feeling that in this quarter.

That's great. And then my last question, can you quantify there is clearly some tailwinds from the backlog, I think you alluded to some truck program roll-offs, which are a bit of a moderating factor, can you maybe quantify the things to consider that detract a little that from growth just so we don't get too ahead of ourselves and modeling out?

Yeah. Joe we've - we went into this year, I think we talked about either this call or the prior call them before. We went into the year planning on about $20 million plus or minus of truck program lying down fairly evenly split between Europe and North America. Yes, a little bit of a challenge to kind of manage those, I think the positive news is in Q1 they seem to be winding down or ramping down at a lower rate whether that's just the transition or the strength of the market, so that's been good news. The short answer to your question is if things hold, we would have about $20-ish million revenue headwind from the program wind-downs.

Okay. Thank you. Congrats on a nice quarter.

Thanks, Joe.

[Operator Instructions] Our next question comes from the line of Matthew Paige with Gabelli. Your line is open.

Good morning. Congrats on a nice quarter.

Thank you.

I just have a couple of questions. You mentioned inorganic growth opportunities. Do you have capacity now either balance sheet wise or intellectually to do another acquisition?

Intellectually.

Yeah, yeah, I hope you mean bandwidth.

Yes, yes, absolutely. That's exactly what I need.

Great question. No, we - within our current bank agreements, we have plenty of flexibility based on the types of acquisitions that we're looking at and the sizes. If you include the plan here to have equal or greater free cash flow to what we did last year, if we do $50 million to $70 million of free cash flow as we go through the year that even expands our balance sheet that way.And then I'll turn it over to Tom. I think we learned a lot - a good experience from the Luvata integration, but to do it well take significant commitment and dedicated resources. So I think we have constant discussions about the bandwidth question.

It is a great point and we have set up, what we call, strategy and business development section in the company that we have three to four key resources constantly focused on our strategic actions both in each element of strength, diversify and grow, but specifically a lot of attention being put into targeting opportunities that can be on inorganic side to build upon the strength that we can develop with the CIS acquisition. So it remains a key part of our strategy and I feel very positive and confident with our approach. We're not running real wild looking for something. We are looking for something that fits well and adds to the value of the company, a value that our shareholders can expect.

And I know you've mentioned that the focus would be on building a track for CIS, but is there any technology that your portfolio needs in your opinion on the electric vehicle side?

It's a good point, so as systems develop into subsystems there are things like electronic valves and things that could compliment as far as flow, control and balancing the system and optimizing the system for the complete vehicle thermo management need. So that is something that we can call an adjacency that we would look for as an opportunity to develop and it could also be done through partners as well, okay. So which we're exploring. So that's a very good question.

Got it and then last question for me, obviously it's a small business that's growing rapidly is there any structural or competitive reason why that business can eventually get to within similar size of the Americas and Europe?

Well, I think - let me quantify that for you right now we have more activity than I ever imagined at this point, its years of kind of going over there and installing the base assets and technologies for the future. They're all hitting on all cylinders right now and obviously China is a key area of focus for us. We talked about India, our India plant is doing phenomenally well, okay, growing with all the key end markets the vehicular focused strategy is. We have a Korea JV it's also doing well. So Asia for us - the growth rate of 51% is going to slow down a bit but it just - but it's going to be a continued strengthening part of our of our portfolio and I also want to add that the - bringing the VTS business under one segment lead, okay, developing those strategies to prioritize is very important. In the regional focus we could get out of balance and times and have one product or one element of vehicle business prioritized over another one of a different region. So this whole product business assessment that I talked about that we completed inside of the STG assessment is very, very important, so we can make sure that we optimize our investments both on financial capital and of course our key resources or teams that are focused on that to make sure we optimize to grow that well.

Right well I appreciate the time and I'll talk to her.

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

Hey guys, thanks for taking the follow up questions. I guess I just got two, I guess first I mean just looking at your guidance range for the year, it was a pretty even quarter I was curious if you have any way you can maybe tilt us in one direction, do you think given a good quarter and a good top line of the improving commodity cost that you might be towards high end I just point or are you still little nervous, maybe the low end is still a possibility.

Yeah, good question Mike and a hard one to answer. I tell you it's kind of the way we think about it and one of our forecast and maybe and the risks and the opportunities. So definitely a good Q1 from a Building HVAC as you know our Building HVAC business really ramps up in the second half of the year. So our visibility there is short and partly tied to weather although we have - we feel really good about the order booking early preseason order bookings and also the order booking in the UK and around data center. So that we kind of look at it as we're feeling good but it's way early. Then we go to CIS, again same very short visibility in that type of business with so much of it being replacement. What we feel good about there - Tom mentioned on the data center there our order book is - we're feeling really good about that and that it's continuing to give us confidence through Q3 and into Q4 as Tom said. When you get to VTF a couple things there, I think there's an opportunity of metals hold where they're at and then I think what we're trying to balance in here as well which was new since we initially launched our fiscal year with the tariffs and we're managing those with our customer base. Tom said where we can we're at we're trying to get exclusions, that's one, I'd like to see another order behind us before we kind of adjust our guidance or guide you to a high end or low end. I would say we're feeling really good about our range coming out of Q1 and before I would say, we're at the high end, I'd like to see another quarter and address a couple - make sure we have good visibility in a couple of the risk areas that I highlighted.

Okay, that's fair and the other question I think I left, but I think I have to ask it. A few weeks ago we heard the media that Tesla started to asking for some of their partners who they're working with for some cash back on some projects that they might have done over the last few years that maybe didn't pan out as they expected. So I want to confirm and want to just Chuck was Modine being asked for any cash back by that partner?

No, we weren't.

Okay, just making sure, thanks very.

Your next question comes from the mind of David Baker with Baird. Your line is open.

Thanks for squeezing back in. I wanted to ask by adding CIS you have a lot of seasonal business, but in the past the Q1 to Q2 had decremented margin and sometime is pretty wide. Would you expect something similar. You know you'd expect the year over year and command post to actually improve that spirit goes on which would imply a lot of seasonality that historically you've seen but anything to consider? I am thinking about a kind of a Q1 and the Q2 seasonality.

Yeah, so kind of macro point and then a micro comment for you more specific. Yeah last year we were very pleased with more so Joe right then we've ever seen you've been with us a long time almost kind of for even quarters and as we go forward we expect that this year would be similar more level loaded. As you look to Q2 we're not looking for a dramatic historic drop or a change in our margin you know that used to be that when you start entering the slowdown especially in Europe on vehicular side and the shutdown. I would say VTS will have a little bit - from a revenue side a little bit of the impact of Europe slowdown. On the other hand we started to ramp up sequentially in building HVAC and it's also started to ramp up or continue to ramp up in CIS. So I think short answer is we should look for a significant change in Q2 from Q1 other than within the pieces maybe a little bit, the summer slowdown from VTS in Europe and then sequential growth in CIS and HVAC..

Okay, great thank you very much.

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

Thank you for joining us this morning. A replay of this call will be available through our web site in about two hours. We hope that you have a great day.