Q2 2020 Earnings Call
Presentation, which can be accessed either through the webcast link or by accessing the PDF file posted on the Investor Relations section of our web site Modine Dotcom. This morning common Mick will present, our second quarter results for fiscal 20 and will provide an update to our outlook for the rest of the year at the end of the call there will be a question and answer session.
On slide two as 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.
The past few months, we've seen a significant decline in many of the key end markets served by our Bts experienced segments.
In addition to the automotive slowdown mentioned last quarter, we're now projecting additional weakness in the commercial vehicle in off highway markets that we expect to continue through the remainder of our fiscal year end into fiscal 2021.
We're also seeing lower orders in our Crs segment, including both cooler sales to the data center market and coil sales to the Hvdc in refrigeration markets.
These conditions have led to our second quarter earnings being lower than we originally expected into significantly lower outlook for the remainder of the fiscal year.
We have therefore lowered our sales and earnings guidance for fiscal 2000.
We will provide additional details later in the call.
Given the significant changed our order outlook and market conditions, we are rapidly implementing a number of aggressive cost containment measures.
Some of these are immediate actions that will drive short term cost savings and some are longer term initiatives designed to delivering 25 and $30 million of annual savings over the next 18 months.
These measures include operational and SGN, a expense reductions, resulting from accelerated procurement savings structural changes in head count reductions with immediate goal of improving our operating earnings and cash flows.
It's important for our shareholders to know that we are experiencing a major correction in some of the markets. We serve and are taken the appropriate actions now to ensure we stay on path to meet our performance goals.
Before turning to the segment results for the quarter I would like to provide an update on the potential divestiture of our automotive business.
As most of you know we entered into a formal sale process in the late spring early summer timeframe and we've been diligently working to prepare for the sale of the business over the past several months, while managing through a challenging industry environment.
Throughout the process numerous companies expressed interest in the business and received we received bids from both strategic and financial buyers.
Over the last several months, we narrowed the group and believe that we could reach an agreement with one particular buyer.
Unfortunately negotiations with the counterparty have recently been terminated this due to a combination of factors, including general market and economic conditions deal complexity and overall value.
We have other interested parties and we'll continue with the sale process, while continuing to analyze all strategic options.
During the process has taken longer than anticipated due to the industry and economic uncertainty, but we will make the right decision for our shareholders.
The team has worked extremely hard on the separation and the investment is significant but we believe this is a prudent investment because it is a necessary step for modine to exit the automotive business.
We believe that becoming more diversified industrial company isn't the best short term and long term interest of our shareholders and we will make modine, a stronger more profitable business once complete.
Now turning to our second quarter results.
Overall second quarter sales decreased 9%.
Our building Hvdc segment had another strong quarter with sales up 12% on a constant currency basis versus the prior year. However, both our bts and CIA us businesses had year over year sales declines primarily due to continued weakness in our end markets and unfavorable currency impacts.
Our second quarter, adjusted operating income was $20.2 million down $6.3 million or 24% from the prior year, primarily due to the lower sales volume in our Bts and SIIA segments.
Turning to page four sales for the Bts segment were down 11% from the prior year or 9% on a constant currency basis.
Our key vehicular markets have slowed significantly overall sales to commercial vehicle customers were down 15% in off highway sales were down 22%.
We started seeing a decline in late in the first quarter with only significant sales softening in our automotive markets.
Early in our second quarter commercial vehicle market still appeared stable, but we began to here early word of inventory adjustments from our off highway customers.
At this 0.3rd party market research estimates continue to signal year over year growth.
By the end of the second quarter, we saw significant drop in off highway orders in started receiving mixed signals for the rest of the year.
It wasn't until early October the third party market due to begin reflecting a portion of these market declines in it we learned a full extent of the impact of the second half of our year for both off highway in commercial vehicle sales.
We continue to monitor published market data, but as we talk with our customers. We now understand the volume declines in the fourth calendar quarter of 2019 in the first calendar quarter of 2020 may be significantly worse than the current data would inc. indicate.
In some cases, we expect year over year volumes declined by as much as 20%.
We base our forecast both on market data and customer feedback in the current environment. We are taking a more conservative approach and are preparing for volumes to continue to decline for the balance of our fiscal year.
Within the off highway space the area most negatively impact has been large engines in high horsepower equipment. This includes high tonnage excavators harvesters and large tractors, where we have a higher mix of business.
These impacts were generally inline with what we have seen in heard from the earnings commentary of our large OE customers in this quarter.
Sales to customers in the Americas region were down 9% from the prior year, primarily driven by lower sales to automotive and off highway customers.
Sales in Europe were down 13% from the prior year due primarily to a steep drop in commercial vehicle sales as programs continue to wind down.
In Asia sales were down 12% due to lower off highway sales in China and Korea. This was partially offset by higher automotive sales in China.
Adjusted operating income for the Bts segment was $9.3 million for the quarter, which is $6.7 million lower than the prior year adjusted operating margin was down 170 basis points to 3.1%.
This volume driven decline has lowered our segment returns to a level is clearly below our targets.
So far we have rapidly adjusted our direct labor costs, but the Bts team is now focused on quickly reducing our fixed cost as well our operations team has aggressively rebalancing production schedules and adjusting labor requirements in overhead spending in line with our latest sales forecast.
Please turn to page five.
Our CIO segment also had another down quarter with sales decreasing 12% from the prior year.
Sales to datacenter customers were down 26% from the prior year.
Over the last year, we knew this quarter sales would be down from the strong level in the second quarter of last year.
We still have a strong relationship with our largest customers in this segment and they're happy with our performance. We're actively working with them to find opportunities to grow this business and even though there is still growing their datacenter capacity the rate of this growth has slowed which impacted both the second quarter in our forecast for the rest the fiscal year.
Part of our future initiatives for the datacenter piece of Rcs segment is the diversification of our customer base. This market, it's fairly concentrated which makes this effort difficult, but we believe the relationship and success. We've had with our largest customers is a testament to our products and services and gives us confidence in our ability to obtain new customers.
In addition to data center sales to other end markets in our CIO segment were down as well due to a tough industrial environment. This segment reported adjusted operating income of $8.9 million down 31% from the prior year.
This decrease was primarily due to lower gross profits driven by lower sales volumes and negative sales mix.
We recently announced leadership change over our CIO segment with Scott Hauser, Our Chief operations Officer, assuming responsibility for the segment.
We will also be making further structural and leadership change to ensure we drive improvement both commercial and operational sides of this business.
We clearly have some work to do in this segment and confidence gets proven leadership that this team will execute on our growth and profit improvement plans.
In particular, we're focused on profit improvement in our coils business, where we are reviewing our profitability, but product and by customer and believe there is room to strengthen our pricing structure and distribution channels. In addition, we're also examining the organizational structure of this business.
Last year VTS business moved from a regionally managed business to a global structure. In C is the group is still manage regionally with different areas of focus strengths and weaknesses around the world. We're now looking to move to a global product structure that will help to improve profitability in our coils business and further strengthen our market presence in our coolers business.
Please turn to page six.
Turning to our bright spot in the quarter sales were one building Hvdc segment increased 10% driven primarily by higher sales of school ventilation and heating products in North America in higher data center sales in the UK, partially offset by lower non datacenter product sales in the UK.
Adjusted operating income increased 35% from the prior year to $8.8 million and adjusted operating margin increased 300 basis points to 15.8%.
This increase was driven by higher sales volume and favorable sales mix, we continue to be encouraged by the strong performance in our competitive position this segment.
We recently announced so we entered into a supply agreement with Sears one of global owner and manager of data center properties to provide cooling solutions for the data center projects in Europe , Our Airedale business unit UK is in a great position to operate energy efficient cooling solutions to this growing market.
With that like turnover, Nick for an overview of our consolidated results in to update our outlook for fiscal 2000.
Good morning, everyone. Please turn to slide seven.
As I reviewed last quarter, we anticipated a challenging Q2 things are either more difficult than we expected.
Both dts than CIA at lower year over year sale, it a negative trends in that key end market.
And then as side, we experienced particular weakness with global off highway in commercial vehicle customers.
With regard to SIIA path.
We saw lower orders from data center commercial HPC and refrigeration customers.
As a result second quarter sales decreased 49 million or 9%.
Excluding the negative FX impact of 11 million sales were down 7%.
As time covered building HVAC segment sales increased 10% continuing their positive momentum.
Gross profit of 76 million was lower by 14%, resulting on a gross margin of 15.1%.
Downside conversion was generally in line with our expectations based on current fixed and variable cost structures.
In addition, foreign exchange had a negative impact on our gross profit compared to the prior year.
Yes, and SIIA segment were the primary drivers of our gross margin decline within VTS. The gross margin declined primarily due to lower volumes.
Yes, I asked margins also declined as a result, a decreased volumes in unfavorable product mix.
They drop in cooler sales to datacenter customers at a negative impact on segment margin.
In addition, we are focused on reversing a negative coils margin trend as Tom mentioned, improving coils profitability is a top priority of the new segment leadership team.
Building HVAC remains a bright spot with gross margin improving 220 basis points.
As DNA for the quarter was 67 million.
As we faced market headwinds, we remain focused on controllable cost offset lower revenue.
Also please note that 12 million event CNH was related to preparing the automotive business for sale.
These costs have been excluded from adjusted operating income and you can see the details in the appendix.
The remaining SGN a expenses decreased by 8 million.
Adjusted operating income of $20 million was down 6 million from the prior year.
As previously reviewed the earnings growth and building HVAC was offset by the decline in Bts and.
Yeah.
Lower SGN, a helped offset the volume declines and the negative foreign currency impact.
As usual our appendix includes an itemize list of adjustments and a full reconciliation of our US GAAP result.
In adjustments totaled 14.2 million.
As previously mentioned 11.9 million relates to the automotive divestiture.
The other 2.3 million relates primarily to VTS severance costs as we separate the automotive business and restructure the balance of DTF.
We unfortunately see large and unexpected swing in our tax rate, which has impacted the adjusted and GAAP results.
Firstly recorded valuation allowances against certain us tax attributes that at a significant impact on the quarterly tax rate.
Second.
Our projected pre tax loss position in the US resulted in losing the 50% adoption of our guilty inclusion which is one of the new use tax provisions introduced under the tax Act.
The loss of this deduction actually results in more tax being expensed when companies enter a loss position in the U.S.
Adjusted earnings per share in the quarter was 13 cents.
Which is down 22 cents from the prior year.
As I just reviewed the decline is due primarily to lower sales combined with the higher tax rate.
Turning to slide eight.
Our year to date cash flow is down due to lower cash earning.
And large costs related the anticipated automotive divestiture.
Year to date free cash flow as negative 24 million. However, this includes 20 million of payments related to strategy and restructuring costs.
Capital expenditures were slightly higher than prior year, and thats, partially due to the separation of our automotive business.
As I mentioned last quarter full year capital spending is expected to be slightly higher largely due to these additional costs.
In addition to the cash expenditures the operations teams have been carrying higher inventory to support our automotive plants separation.
Despite the high level of cash spending on the automotive separation, we anticipate slightly positive free cash flow in the second half of our fiscal year.
And finally, our net debt increased 25 million year to date and our leverage ratio is 2.3.
Now lets turn into our fiscal 2020 guidance on slide nine.
Based on recent results sales trends and customer feedback, we are reducing our guidance to reflect additional market weakness in the second half of our fiscal year.
As Tom reviewed we anticipate further softening across our VTS market.
Especially with commercial vehicle on off highway customers.
In addition, we are expecting ongoing weakness in our CMBS market.
Including a key datacenter customer.
Many companies have not released the 2020 outlook, but given that we have on March fiscal year end, we have tried to extrapolate the current trends.
To summarize our updated fiscal 20 guidance, we now project sales to be down seven at 12%.
This represents about $150 million move based on the midpoint of our range with the majority of this reduction coming from the second half of our fiscal year.
In building H. fee, we are expecting the sales growth to continue although slower in the second half.
With regards to see I asked we are expecting negative sales growth in the second half the year, primarily due to slowing global markets, along with a negative foreign exchange impact.
We also anticipate a significant decline in our VTS segment sales in the second half versus the prior year.
The largest decline is in the Americas, where all end markets are projected to be down.
We continue to have a challenge in Europe .
With a weakening automotive and off highway markets and the continued wind down in certain commercial vehicle programs.
We have also reduced our Asian market forecast substantially and expect to small sales declined for the year offsetting continued market share gains.
As Tom mentioned, we are taking immediate cost cutting actions and targeting significant savings.
However, we will need time to fully implement the reductions and achieve the full effect.
Adjusted operating income is now expected to be in the range of 85 to 95 million.
The change in our earnings outlook represents the downside conversion of approximately 20% based on the corresponding sales change.
In addition to the unusual tax items I previously mentioned our estimated full year tax rate is now projected to be higher due to our mix of earnings.
And specifically foreign business tax regulations.
For example in some jurisdictions, we will have income tax expense despite pre tax losses.
Based on the expected tax rate of approximately 34%, we anticipate adjusted earnings per share will be between 75 cents and 90 cents.
By separating the automotive business and reducing our cost structure, we are protecting modine from further market downturns and aggressively positioning the company for significant margin improvements.
We remain focused on the areas that we can control and executing on the strategic plan.
I'll turn it back to you. Thanks, Mick four years ago, we announced our strengthen diversify and grow strategic platform that enabled us to become a more diversified thermal management company.
Platform is serve as a framework for decision, making and risk management efforts as a company we executed on at plan and have continued to execute on this strategy, which led us to the decision to exit the automotive business. This is an important step for us to allow us to better focus our capital management time on continuing to strengthen diversify and grow our business going forward with a new said.
Our strategy strategies that will help us reach our financial and operating targets in the future.
This process has taken longer than originally anticipated, but we remain committed to moving towards a structure and valuation that will be in the best interest of our shareholders, who over the recent downturn or end markets is forcing us to take additional more immediate actions, which includes the cost savings plan, we're targeting 20 $530 million an annual savings over the next 18 months.
As I mentioned these savings will come from a variety of sources, including head count reductions procurement savings plant consolidations and other SGN and overhead reductions we're starting to take the initial steps and we'll continue to taken actions necessary to meet this target and timely.
We've been through this before and have not only executed with have met our goals. We have a proven track record of responding quickly the market downturns and this time will be no difference is a matter of fact, we're in a much better position than we've been in the past when the markets have moved against us.
Our CIO segment, we have made a significant leadership change and we'll make additional changes to how this segment is managed I'm confident that these actions will get this segment back on track.
Meanwhile, our building Hvdc segment continues to generate strong margins and earnings and we're optimistic about the segments future growth prospects as it continues to contribute more and more to our total company results.
We are well positioned in our key end markets with leading shares under non automotive businesses, we will focus our investment in growth on these industrial markets with strong long term mega trends, where we have a right to win we will prioritize capital investment businesses that will prove our margins and cash flows with that will take your questions.
If you have a question at this time. Please press Star then one on your Touchtone phone.
A question has been answered or you wish to move your so from the Q. Please press the pound cake.
Our first question comes from the line of Mike.
Well, Steve Doctrine company your line is open.
Good morning, and today.
Remitting all Mike.
Okay. So I wanted to.
You touched on some of the some of the onetime costs around in the auto parts divestiture.
We'll go back over the glass bunch of core as it looks like we ended up its units.
At least $27 million.
So far I think if I'm wrong correctly there.
Okay, guys little color as to what those costs are.
I'm not sure why were cost so much to sell something.
Is relatively small from an EBITDA perspective, as you might have actually already spent the whole.
Segments EBITDA.
On these fees.
So I'm just curious as though some more detail there and if you don't end of selling it for some reason I was just here is there any contractual vision as you get some nights.
That cash back from your from your vendors.
Yes, Hey, Mike its Mick uptake that first shot and then time can comment on the non financial side, yes.
We knew heading into the process and we've talked about.
That Clos to prepare the business for divestiture would be significant and the primary reasons are the biggest driver as we need to stand this up as a separate business otherwise we can't carve it out.
And having that then integrated into multiple business units over the past and then most recently.
Three of four regions all part of the VTS segment. There is a significant amount of accounting and financial work to be able to separate out the financials not only on a historical basis, but on a monthly and go forward.
Second big piece of that is from an 80 standpoint, we have to duplicate in stand up the T systems in order for us to be able do.
Separate the business.
The challenge lift that in year to your question about kind of cost benefit.
Is the alternatives as as you know.
The footprint of the business.
And the alternatives that thinking about a wind down are really significant costs to modine in the shareholders sale, Tom and I continue to believe that spending the investment to separate the business.
Gives us the most flexibility to determine what to do with a going forward, but thats. The main drivers of the costs. We've spent we anticipate.
Probably another quarter or two of investment and then.
We'll be ready to stand this business up as a separate entity.
And that will help us going forward quite a bit from vault visibility and.
Our full separate entity timing thing, yes, no and I think maybe just a general statement overall I mean this remains a strategic priority for the company. The divestiture of auto we went through a process very thorough process.
This narrowed down we had.
Were quite a big into interest at the beginning that narrowed down to a smaller number that we selected one.
Potential buyer to go into when negotiation with the net just completed decided not to go forward to this last weeks time, principally because of a quite frankly valuation from our standpoint, and also I think concerns on the market conditions. The head of factor on that but this remains a top priority. We're this will happen where to get back.
We are getting back into the flow of second around the globe alternatives or would we consider in its.
We'll keep you posted on the timeline, but frankly, we want to make sure. It's a good deal for the company for shareholders that we can go so we're going to.
Focus was to get the done in this quarter, but we decided not to pursue that because the reasons I. Just said still remains a priority is we will happen as a matter of time of planning right arrangement with the rate buyer.
Okay, and just to exist as a housekeeping item on this and your comments about looking to save 25 million to 30 million over next 12 to 18 months, that's not just simply not repeating some of these onetime.
Costs for them.
Auto parts divestiture right, it's all the center expenses.
Yes, great Great question. Good clarification now the 25 to 30 million Tom talked about our operating costs within the company it completely separate for separate from the onetime costs were spending now to separate the auto business.
Okay. Thanks for that kind of wanted just to.
I ask quickly here, maybe a two part question. One can can you give us a little color some commentary as to how how is it to move to a global structure for that business given some of the changes in regulations between countries or other other issues. So shipping in facilities and how you acquired relative.
Sales and.
Also will there be any.
I think any additional onetime costs, there or footprint changes that have to happen.
And then secondly on Cdas.
Given what's going on and where your forecast is headed and what's happening now for a few quarters here in data centers.
Is there any risk of goodwill write down in that in that business.
But what was last question mechanism.
I was just curious if given what's happened with your forecast over the last couple quarters in data centers and elsewhere in that business.
Curious if there is a risk of a goodwill write down.
To provide deal I'll take the first part in this way back the mic on the second or the question then as far as of right and we've just made the announcement from the leadership change, we're making assessment, we've been globalizing the functions within.
Yes for sometime now with the integration so things like procurement.
That are over involved with optimizing the bites.
For the global basis are already done no. This is a matter of that really aligning the product strategies, we have for instance.
This is the largest.
Sure.
Oil in the open market position globally that varies by market into in different regions and we have really.
Dressed optimization of how we run commercially with this book to how we go to market in or selling proposition and also operationally. So there's a lot theres things on both ends of the so we could really optimized, but making sure have oversight and a global basis, yes. It comes down to running regionally from an operations and sales standpoint, with those overall strategy the product whether it be coils we.
It is really with the concentration is and also coolers were very strong position in Europe are bringing that focus to North America and other regions as well so it's really bringing the strategy to a global level operational and commercial consistency around the globe best we're focused on and feel very confident with with that is going to bring.
Yes, Mike I'll just jump in on the goodwill question any impairment.
Short answer is no, but we always go through we always look at impairment indicators and we do a heavy looks each fiscal year end in spite of our planning process.
You know coming out.
After the acquisition, we had actually at a one or two years or really strong earnings growth. So we're coming off of what is we're not happy with it but the dip is coming off of some really good growth basis higher than where we bought the business. The other thing is done the technical accounting side a lot of that.
Goodwill is applied to different areas of the business and some those areas within SIIA, they're doing quite well have strong margins that support some that those intangibles on the balance sheet. So yes, we'll keep looking at it and.
Next review will be as part of our planning process.
Good my could go back to your first question. This is Tom.
What are the things you're talking about CIA us, but as we globalize strategies in the performance prioritization and drive that you know that we've had.
Data center business and see is it really focuses on say on the cloud computing side and we have a.
Pure data center focus in the UK out of our building each group, we'll look at how we can link those two together to have one strong face to the market. It's early days that something we're concentrating on as well to make sure that we can take advantage of both goes.
Channels to market and smarter way to grow that business is a priority.
Okay.
Slide ask.
A question also on the upcoming cost savings.
We will all the cost savings be in.
Just vcs and see I asked so I am happy in the auto business, that's being to carved out here.
And also as they are going to be in the age in the.
In the HVAC business or is all have you in those two main segments will clearly the focus and priorities on the Bts and see I guess side, but we're going to look at all low flows of workflows and where we can have on opportunities.
On the growth side of building each rep want to make sure we're leveraging everything possible. There. So as I mentioned the data center business. We've had recent announcement of the success with serious one recently on co location across Europe opportunities in so we're going to be careful look that up front, but we want to support that and deliver fully and be able to grow at even further with the main focus bps.
Yes, and then of course, we mentioned using procurement savings accelerating opportunities there so.
In notice will be will be a legacy.
Targeted in spots, but mostly be bts and serious mix into that yeah. Just yes, a balancing act will have to do with regards to your question on the automotive side versus the rest of VTS.
Early automotive as down as well as part of VTS.
So that the same time Lear.
At times indicated we're talking to buyers and sale.
To be very careful about the level of adjustments reductions, we would take in the middle of the of the sale process I think via much heavier look obviously, our 25 to 30 million is.
On their focus on the remaining company. So your question about that coming out of the onetime separation costs are Dakota lean and put all these costs into business things that aren't going to stay with us they won't help us in the long run so well to the focus is going to be on the remaining part in the team.
Okay. Okay.
And then just squeeze in one more here in front pass along I was wondering from.
In the quarter there were no major impacts to your.
To your numbers due to the auto auto strike at one of the Big Oems.
And maybe as a secondary to that question.
One of their plans as or something actually on a few of them or not far from your facilities maintenance by coincidence or from Oles question ships Im curious if you've seen any good.
Good hiring trends for for I guess folks who are other set up for trying something new from the auto business. We saw first part of the question as we work had some impact okay, but not material. Okay to two mentioned here with us with supplying.
Engine products to to the GM.
In North America, specifically.
And as far as personnel and answer that I don't know I don't know that decided where we have our operations were probably going through.
Some levels of reductions across.
The plant operations first about rebalancing loads will.
No the answer that one but.
With the first part is clearly.
Impacted but not materially.
Okay, guys I appreciate the color. Thanks, so much.
You Mike.
Our next question comes from the line of David Leiker Baird. Your line is open.
Good morning, everyone.
And David Hey, David.
On the building a stack doing well there are there when you look on the horizon or are there any signs that.
Yeah. There is there some some issues that are popping up there some weakness in the end markets or anything along those lines that.
Come up in the next couple of quarters.
If you look and we mentioned in the non data center sales in the UK are down some okay, so offset by significant growth.
Data centers, so I think because of Brexit issue with things slowing down in.
England, but right now its.
That's what we see at this point vacancy in North America.
The the.
Sales are great you have a brief heating sales season going on right now I mentioned school products sales are going strong so not really seen any indication in North America.
And then on the data center side.
I know you've been working in China, broadening that but are there any actions there.
Things that you ever be able to break and some other customers in that data center to help smooth out the flow Sir.
We're putting a lot of time into that Dave as we talked last quarter with some questions and we've got to a team of people.
Pulling together and I mentioned it earlier in the follow up question.
Your color that.
Bringing together with this change will meet and leadership in CIA us.
Bringing together team is one face to the market that we can leverage.
Relationships that were building in both both segments now, but leverage that into one voice to the market for instance in the UK repeat the serious one.
Order that we received significant going there that is a north America based company.
They clearly are interested in us and supplying them in this region, Okay, and we're really looking the best way to do that that also means that you deal through.
Engineering firms and contractors. So the specify relationships are very important we've got a very strong the square relationship arrangement set up based on on both sides of.
Both channels to market that we're putting in place to leverage so.
Were put on a time, putting in a REIT resources and again addressing our approach to market that we should be able to talk a lot more about that in the next earnings call.
Okay great.
Just 111 more item on Cie is there any.
Are there any targets you can share in terms of.
What you hope to accomplish to reposition that in terms of.
Future profitability growth rates.
A long along the way or any parts of that business you may not want to be on that just don't offer the opportunity you want.
We currently have some targets out there with making into those in detail, but we want to get the.
I'm thinking two to 300 basis points with improvement going really driving the changes that Scott is leading right now the Nick you were going through the color within.
Yes, and we were on a where we're frankly on a really good role we get the.
Good execution of our initial synergies we had the.
Good momentum behind us with.
One of our alert the large datacenter customer and.
And last year, we finished David about 9.5% EBITDA.
We think.
DAP business should be running more in 12% to 13% in the next.
One to two years here, a year and a half.
We've got and a good path forward I think we know.
Your question about businesses, we need to exit now.
The big everybody knows the largest piece of that business is in coils and Tom talked about that that's just getting back to blocking and tackling with regards to how we build cost and price that product.
We see significant margin improvement this year will probably be down a little bit more like a 9% EBITDA that our goal in the teams target is 12 or 13% EBITDA on the next 18 months.
Okay. Thank you.
And our next question comes from the line of Matt Summerville D.A. Davidson Your line is open.
Thanks couple of questions first can you give us some sort of feel for what your book to Bill look like in the commercial vehicle in off highway portions of VTS, and then whether or not.
Results were seen in your coils business are indeed indicative of market share loss.
Okay, So booked business and commercial vehicle I mean, obviously, we we don't project will give out that data.
We're very pleased with their business wins around the globe.
Commercial vehicle.
So.
We spent time recently with their sort of over commercial vehicle customers and really understanding their strategies, but more importantly, what they see coming up the next will be two months in their outlook, which is one of the reasons, we adjusted our sales down, but we're winning business, we're well positioned as a top three position in.
Eric in Europe smaller in China of course, but growing with both the.
Multinationals in the domestic customers there we did see some push out with delayed launches due to China six in China with the with the.
In order to specific customers there that.
Were part of part of that delay so, but so very very strong position.
Well good product platforms that we offer that we will leverage and and smart manner and and of course going into specialty bus and truck with deeper into the commercial vehicle segment, great position in North America and growing in Europe .
Specially with electrification opportunities, we're seeing there that were involved with all the major bus companies and specialty truck companies as well so.
Very very positive on our position in commercial vehicle in at the debt perspective.
On the second part of your question was getting back to.
Yes, I think it was oil where coil share and Doug.
From that standpoint, we believe.
Oils shares again, as I mentioned or large orders independent position, we think good.
We're approaching 20, 530% market share in the in at globally that we supply and leveraging as we are important.
Thousands of customers the the visibility there as far less as far as lead time sales and that type of thing, which is one of the strengths. We have is responding to orders at a fast way.
In met or weeks in so we.
So we need to focus on how we manage that commercially making sure we're getting all the value from a value proposition and pricing standpoint, it really working on the investments necessary to you'll have fast response and be able to respond to those customers needs to get the door in also vertical integration, which helps us on a call.
Side too so.
Its share wise, we feel that were.
Leading position, which need to leverage that better to take advantage of that position.
With respect to the 25 to 30 million of anticipated restructuring related savings to make what is the cash cost out the door to accomplish that and can you give us some sort of sense in terms of the cadence of realization as we look out through the balance of physical 20 in into your early part of.
Physical 21 please.
Yes. Good question, Matt till we estimate right now it's early but most likely the cash cost to achieve that savings will probably be between three and $5 million.
Total.
With regards to Annualizing the savings, we feel confident leaking yet.
Four to 5 million in this fiscal year.
And then the balance of it.
90% of hitting in next fiscal year.
And we've got obviously, we're targeting other ideas above and beyond there, maybe a little bit that carries over.
Our goal here is to get the full 25 to 30 within the next 18 months again with four to five hitting here in the next.
Four or five months.
Is there way maybe to parse out if you look at the EPS guide take down parse out how much of that is being driven by the dynamics you talked about in commercial vehicle off highway in VTS, how much is being driven by.
Yes, and then what the.
Hi, good calculate applicable what the impact is on tax rate change if you havent.
Yes so.
When we think about the change in the guidance going back to last quarter.
From an operating income standpoint, the it's really.
Pretty evenly split little bit more on the VTS side, but it's been a heavy.
Next year.
Bts and see yes.
And.
The tax side AVOD quantified, what we could do that with you offline. We clearly moved up on the tax side from a 26% rate to at 34% rate.
So.
The the downturn has been really then split on the VTS and see I asked signs.
Got to them, what with respect to building a track I just want to make sure I heard you guys correctly, you anticipate that business still growing organically in the back half of year, maybe help me understand some of the drivers there given you're up against a plus 16 organic comp in Q3 and up costs 25 organic comp in Q4, So maybe talk.
Hello.
Yes, well clearly in Q3 will be fishing overheat or sales which is.
And.
Which is our strength.
North American side of that business coming off the strong school season, which was more of a Q1 Q2 type of Phenomenas recruiting schools. The big focus on the back in two years into in the UK as well with the data center orders that we landed Sears one deliveries there talked about so we feel very very positive.
About the organic so that growth opportunity and expanding on it.
Got it thank you guys.
Thank you Matt.
And our next question comes from the line of Brian Sponheimer.
Jeff elephants your line is open.
Hi, good morning, guys.
Hi.
Couple of different questions here.
Just going back to the comment at the cash costs out the door to save 25 to 30 million on annual basis is $3 million to $5 million I guess the question then becomes why why wasn't.
Well I wasn't that done sooner.
I guess will start there.
Yes, well clearly.
The timing of this drop Mick mentioned that the majority of the drop is in the second half of the year.
The truth is still in front of US we are.
On the driving.
The sales.
In the focus that Glenn. So this is this is kind of a recessionary, let's get ready okay that talked about it Mike really comments that were in better seasonal responding early to where I think is going to be a pretty deep and broader potential contraction in our markets anyway.
So with that in mind, we focused on making sure that we.
Our being as aggressive we need to be in case. So yes, we're going to take some risk here with some changes we're going to manage that we think we'll do it in a smart way.
We want to come out of this thing with the merchant not taking our eye off those targets on.
On our margins that Mick mentioned as far as what Weve striving for the company to be in this is the necessary change to adjust for that.
Contraction so.
It's a procurement side those savings that we've put a lot of investment into our procurement team over the last couple of years and stored and deliver and now we're broadening even more not only just use rate the directbuy, but indirect by logistics savings and those type of things I think is a natural maturity level, where our with our whole supply chain management focus so I think thats just.
Right in line with the timing of building out of fully functional and which operational excellence within supply chain and the rest of this contracting on on the.
Variable side, and then I think were structurally going to have to make some changes to get through this contraction. So.
Good question, Mick you want to add to that add to some more color on the forecast question and pulling levers sooner.
As we were on the call last time, and we talked in July we knew there was some softness and also back to the automotive discussion we had been pulling levers. This year on cost reductions also planning for the separation of auto sale year to date, we had already.
Full cost reduction head count levers in the tune of five to 6 million.
And our annualized and then.
The second quarter came in a little bit lighter on the topline than we expected that was closing out.
September forecast, we saw a drop has significant drop in.
Yes, and Dts.
And then in October we took a really hard look again.
Tom talked about some mixed signals, we're getting from each order rates from customers versus what we were seeing or actual pulls out of that so we went back and we did and now they're really deep scrub in October rolled that up and down as we come to you today, obviously, we immediate.
Lee went into Okay based on current forecast and concerns Tom laid out about now everybody looking in that 2020 that someone said, we're going to set a bigger target and go get it right now that telly, where we ended up today Brian .
Okay. So just I just want to be clear on this because it's it's a six ex payment just six ex recovery on this and and a two year timeframe, which seems like an amazing return. This is more loss prevention. So so it stands to reason that when things do get better.
That some of that that 25 to 30 million is to is clearly going to have to come back in it and into the business.
Well I mean the.
This 25 to 30 million includes some investments we're going to make okay dimension data center focus where we know we need to add some key resources and talented we're planning on so.
So it's not just.
Well the cargo up the side of the ship here, we're making sure that were what was ready for for the future when this growth so.
The procurement savings again is more than investment of resource and processes.
So that if you look at.
The target we have sitting there, which we havent publicly split that out yet, but it's a significant portion it's a matter more effective and efficient.
I will focus on driving not only direct sales that technical.
Let me direct by but also technical changes to help optimize the by getting deeper into indirect by using data analytics and in smart things. We can do there as well as I mentioned, who will supply chain. So so there. It's there it's just natural progression, where we're going our supply chain management.
On on the on the sales side of adjusting down it's really focused on getting ready for him scenes of is a pretty deep abroad.
Drop in some key markets that we need to be prepared for and.
Not going to be caught sustaining let's put it so combination.
Okay, all right so let's go over to the.
I missed opportunity on the sale of the business.
How far apart where the two groups.
To be clear, so the $20 million or 27 million that's incentive spend so far in separating light vehicle business, how much of that is consulting fees and banker fees.
Yes.
There's been no.
Banking fees.
Brian in that amount sell down majority of it in.
It's not.
Consulting per se its.
Third party it accounting work to do this separation.
And legal work so most of it is accounting.
Sunlight t. and legal in there no banking fees.
Okay and could you help contextualize, how far apart buyer and seller we're in this price perspective.
No probably not but at the same time I can tell you that we had the.
Valuation that we feel comfortable starting off with it quite frankly weren't comfortable we get done through the exclusivity period. So.
Again, it's doing the best thing can for the company position ourselves for our strategy and also for shareholders. So we decided that we needed to step out of that yes, we really targeted a second quarter close it was important to us as winter commitment was that we found ourselves in a position where this is not the right thing to do for those reasons I just said.
But saying that year focus moving forward the strategy the investment due to carve it out and set up as a separate.
Entity within the company it is going to allow us to do that in a smarter way leadership team I want to give a lot of credit to our automotive leadership team. That's that's the.
Going through that transition in a lot of people supporting them, but it gives you commanders motionless has been long term part of our company located.
Going back to multi and more and so.
Making that changes was not an easy emotional decision that was an easy financial decision. When you look at the factors in that we with that we're going to continue down this path.
In complete this this key tactic in our strategy, we want to take the company's first becoming a more industrial it company.
No and our respective the emotion that's involved here last one from me, though on this now that the sale of just the light vehicle. It doesn't appear to be something that you can do in the near term is there any thought to adding the entirety of vehicle business as something that will be put up for sale given.
You see the cyclicality that takes place within the commercial vehicle in off highway markets, Yes.
Any thought to fully yes. The answer is no. Okay. We have put a lot of work in the Matador, both the organizationally and product strategy wise and focused on making sure that.
We have a position we can maintain our strong.
Ones that are out there and grow that global yes, one of the challenges that is cyclicality nature of those businesses and we're going to wait and see that for the next whatever the number of quarters.
But we feel very strong there again I mentioned relationships that are strong business wins that were that we're pleased with.
In that we can we can drive Fred this business forward and quite frankly, the cash will return profile as we are good taking that all into account, yes. The cyclicality standpoint makes it a challenge at times, but rebalancing that with more diversified industrial business opportunities, whether its data center and growth we have directly in front of this or other inorganic opportunities that will be more freed up to be.
Able to do without the cash constraints given by automotive business is going to be a lot more flexibility strategically to reveal to move on.
Okay. Thank you first entertaining my questions.
Thank you Brian .
I'm showing no further questions at this time I would now like to turn the conference back to capitalize.
Thank you. Thank you all for joining us. This morning, a replay of the call will be available through our website at about two hours.
If you have a great Dane and great. We ended up thanks.
This concludes today's conference call you may now disconnect have a great day.