Q3 2020 Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to Modine manufacturing companies third quarter fiscal 2020 earnings conference call. At this time all participants are in listen only mode. Later, we will conduct a question and answer session and instructions will follow that that time, if anyone should should require assistance. During the conference. Please press Star then zero on your touched.
Bill and telephone.
As a reminder, this conference call is being recorded.
I'd now like to turn the conference over to your host Ms., Kathy powers, Vice President Treasurer Investor Relations intact.
Good morning, and thank you for joining our conference call to discuss Modine third quarter fiscal 2020 result, I'm here with Marino, President and CEO, Tom Burke and make a rally or Vice President Finance and Chief Financial Officer.
Using slides for today's presentation, which can be accessed either through the web fastlane whereby accessing the PDF file posted on the Investor Relations section of our website Modine dotcom.
This morning, Thomas will present, our third quarter results for fiscal 2000, and will provide an update to our outlook for the rest of the here at the end of the call there will be a question and answer session.
Hi, too as our notice regarding forward looking statements. This call may contain forward looking statements as outlined in our earnings release as well in our company's filings with the Securities and Exchange Commission with that it's my pleasure to turn the call over December. Thank you Kathy and good morning, everyone.
Overall from core sales were down $67.6 million or 12% from the prior year.
These results were in line with her previous guidance.
Quarter, adjusted operating income was $24 million down $10.8 million for 31% from the prior year.
Primarily due to lower sales volumes are bts CIO segments.
As reported last quarter several of our end markets slowed significantly in the past few months when conditions appear to be stabilizing.
As for other highlights during the quarter Im pleased to report or free cash flow improved to $11.6 million this quarter, including auto separation and restructuring costs.
We've also strengthen our balance sheet by terming out a portion of our short term debt.
I will cover this in more detail during his section.
Are you see I ask leadership team is keenly focused on identifying opportunities to enhance their margins and improve operational efficiencies as mentioned last quarter margins in this segment's above and below our targets. We have plans in place to strengthen our coils business and grow our coolers business.
In addition, we're making organizational and structural changes to how we manage for data center business volatility of or data center sales has created short term challenges due to significant concentration with one customer with the team is making good progress and diversifying our data center portfolio I will cover more on this and another strategic priorities during my segment review.
Before diving into our quarterly segment results and would like to provide an update on our automotive exit strategy.
We spent considerable time and investment separating the automotive business from the beauty of segment and plan to start managing reported a separate auto segment in the first quarter fiscal 21.
This has been time consuming and costly I believe it was good and necessary investment and is now largely complete.
Reporting this new segment will provide improved transparency going forward as we transition away from the automotive market. This work included physically separating manufacturing operations segment of Standalone, a T systems business processes, and establishing new legal entities. We have named a season leader in management team is committed to successful separation.
Dedicated support of our automotive customers.
The separation of the automotive business will allow us to showcase the new modine, which we anticipate will generate higher margins returns on capital and cash flows.
I want to be clear our primary strategy remains to exit modines automotive business as quickly and efficiently as possible.
Our previous efforts to Silvio business, we determined that it would be more beneficial to divide the existing business to better align and appeal to strategic buyers, specifically, we're marketing to separate components of our automotive business to different potential buyers with this revised approach we have been actively engaged with numerous interested parties.
We are encouraged with revise process, so far as we assess our options and the related timelines there may be some remaining products locations that we will have to address the new scenarios. Our goal would be to complete the exit as quickly as possible with meeting or exceeding our customer commitments as we transition or phaseout of certain product lines our objectives.
Clear separate the automotive business and run it to optimize earnings and cash flow maximize the cash value by divesting the most valuable assets and exit the remaining business as rapidly as possible on a cash neutral basis.
Beginning in the first quarter fiscal 2001, we plan to report the financial results of the new auto segments separately from the remainder of the Bts segment, which will include our heavy duty equipment business.
We continue to believe that pursuing this path as of right long term decision for the company and for our shareholders, who will lower our capital intensity better focus management's attention on higher margin higher growth businesses and improve our cash flows opening up new opportunities for organic and inorganic investments.
Now turning to our third quarter results on page four.
As expected we experienced a decline in sales across our vehicular markets sales for the VTS segment were down 16% from the prior year.
As I previously mentioned, our TV ocular markets have slowed significantly in recent months and continue to be soft overall sales to our commercial vehicle in off highway customers were each down 26% and automotive sales were down 3%.
These market declines have not been nicely to any particular region as we've seen volume weakness across the globe.
Sales to customers the Americas region were down 18% from the prior year with lower sales to automotive commercial vehicle and off highway customers sales in Europe were also down 18% from the prior year due primarily to a steep drop in commercial vehicle sales as certain programs wind down.
In Asia sales were down 4% due to lower off highway steals and China Korea in India. This was partially offset by higher automotive sales in China.
Adjusted operating income for the Bts segment was $5.1 million in the quarter, which is $9.9 million lower than the prior year.
Adjusted operating margin was down 270 basis points to 1.9%.
Quickly responded to the downturn in our markets by cutting structural costs in our business to align our plants operating plans with changing customer demand. In addition, we are highly focused and other factors, we can't control such as Junaid reductions improved operating efficiencies and accelerating procurement initiatives. This drives near term margin improvements and increases our confidence.
For improved operating leverage when the markets pull out of the down cycle.
Our customer relationships are strong as we continue deliver leading performance in critical elements like quality delivery and cutting edge technology, such as E. B solutions for the bus and truck markets and as we discussed last quarter in talking with our key customers. We felt that industry volume declines could prove to be more substantial that many industry forecast, we're expecting so while these.
Year over year declines were steep the were largely inline with our projections.
A silver lining to the market weakening is that the rate of decline in these markets seems to have stabilized we were not expecting any meaningful recovery in calendar 2020.
There are some reasons to be optimistic with reverse the longer term market outlook. We believe the off highway truck markets will be challenged for the next several quarters and then to begin to recover.
Many are predicting an improvement beginning later in calendar 2020.
On the auto side, we anticipate relatively stable volumes, which is key to our divestiture process.
Please turn to page by.
The largest challenge in RCM segment was the decline in sales to one large data center customer this accounted for more than half the revenue decline.
Overall SIIA segment sales declined 12% from the prior year.
Sales to data center customers were down 25% from the prior year.
Within our served market in the segment the strong growth in cooler sales that we saw last year was result of strong capacity expansion in excess of market demand.
The drop in sales. This year is due to a temporary low end customer investment in further capacity is expected to continue into our next fiscal year.
We're currently expecting very low volumes for this business in fiscal 2001 with a strong recovery fiscal 22.
Sales to a commercial hvdc in refrigeration and markets were down as well the majority of the sales decline related to refrigeration customers driven by market decline in refrigerated transport in the U.S.
Segment reported adjusted operating income of $9 million down 34% from the prior year.
This decrease was primarily due to lower gross profit driven by lower sales volume and negative sales mix.
The new leadership team for this segment has been in place rubric quarter now in the strategic priorities and related actions have been set.
As I mentioned last quarter, we're keenly focused on improving the profitability of our coils business. We've initiated an aggressive cost reduction program to vertically integrate certain high cost components and to strengthen our manufacturing operations and business processes.
We're also reviewing our product costing and pricing practices to make sure that our courts have sufficient margin, particularly on low volume releases.
The team is working hard to take advantage of RIDEA center growth opportunities and to diversify our customer base. This being done in conjunction with 1 billion Hvdc team and I have decided to consolidate these numbers under one leader.
I'll cover this more in detail as part of the building Hvdc update.
We're also leveraging new technology to reduce energy consumption in total cost of ownership and our cooler and coatings business and our adding resources to our north American team in order to grow market share.
In the upcoming year, we expect the market supporting our coils and coolers products to be relatively flat with some continued weakness in our industrial markets.
With regard to our largest datacenter customer we're planning on very limited sales for the next several quarters based on recent communications with them over the long term demand and projections are very encouraging with projected sales and calendar 21, potentially reaching new highs.
Please turn to page six.
Sales for building Hvdc segment increased 1% driven primarily by higher sales of school ventilation in heating products in North America, partially offset by lower ventilation air conditioning sales in UK.
Operating income increased 4% from the prior year to $13.5 million, an operating margin increased 50 basis points to 20.8%.
This increase was largely driven by favorable sales mix and customer pricing.
We continue to be encouraged by the strong performance and our competitive position in this segment, we expect to favorable growth trends in our markets to continue and remain focused on growing our data center business.
In order to better capture opportunities is growing market were developed new single focus approach to the data center market by combining the resources and capabilities. We are building Hvdc NCS teams. This new structure will allow us to leverage the products across both CIA us and building hvdc running more seamless customer experience, while with a more comprehensive solution.
Offering.
The end goal is to have greater customer diversification by reaching a broader segment of these markets by introducing new highly regarded products across new geographic regions.
This change in strategy issuing early indications of success as we are growing and winning new business with other data center customers. For example in the quarter. We secured first order with a major cloud computing customer in Europe for shipment in fiscal 2001. This is a key component of our growth strategy moving forward.
Looking ahead, we see our market starting to pull back a little bit with the will remain generally positive throughout the calendar year within that we expect to see stronger growth in key markets as macro trend should remain strong.
For Datacenters strong growth continues in the Colocation and cloud data center space.
And our strong presence in the UK markets the increase certainty around Brexit should provide some stability into the general HPC market, we anticipate UK banks to release capital funding for construction opened the door to growth again.
As I mentioned earlier, our new engage global data center team has solid plans to grow and diversify this business with new customers in fiscal 2001.
With that I'd like to turn it over to mid for an overview of our consolidated results and an update to our outlook for fiscal 2020.
Good morning, everyone. Please turn to slide seven.
As we anticipated and detailed by time market softness contained well through the quarter.
Dts than SIIA segments were the primary drivers of our revenue decline.
Which resulted in difficult year over year comparisons.
As reported third quarter sales declined 68 million or 12%.
Up to $68 million decline over 50 million. Once the result of decline in truck and off highway sales along with the drop to our largest datacenter customer.
Gross profit of 74 million declined 20%, resulting in gross margin of 15.5%.
The 27% downside conversion was inline with our expectations and based on standard fixed and variable cost structures.
Besides the lower sales volume see I asked was negatively impacted by sales mix, resulting from the decline in datacenter sale.
Also impacting gross profit was approximately 2 million of costs relating to the product and equipment transfers in support of our automotive exit strategy.
Materials and metals had no impact on the quarter.
And strength in building HVAC continued with a gross margin improvement of 120 basis point.
As DNA for the quarter was 64 million.
There were two main drivers behind the SGN a numbers.
Firstly had lower compensation expenses this quarter and began seeing the benefits of our cost reduction plan.
Second we have the temporary costs related to our automotive exit strategy.
Preparing to exit the automotive business is a complicated and expensive process, including all the separation and program management work.
Facilitate this process.
We created a program management office to support all the work streams necessary to support the business and transfer products the fully separate our plants.
As discussed previously the auto business needed to be separated and stood up as a standalone fully functioning business.
This required that we carve out a quarter of the company that had been previously embedded within multiple locations throughout our global VTS segment.
Last our actual deal related and transaction work streams.
Since launching a formal sales process, we incurred costs relating to sell our due diligence accounting legal and other advisory services.
During the quarter, we incurred 12.6 million of costs related to all of this work, including the separation and sale process.
Approximately 3 million was primarily related to project management costs.
Also during the quarter, we incurred approximately $7 million of cost to separate the business.
These costs included IP human resources accounting tax legal and audit fees.
Last there were a cost tied to the sale process and related to seller due diligence legal and other advisory costs.
During the quarter. These costs were approximately 2 million.
I am encouraged that the vast majority of the separation costs are behind us and most of the incremental expenses going forward will relate to an actual sale and all our disposition of the automotive business.
Moving on to the rest of SGN and we have some positive news to report.
The balance of that cdna or the amount excluding any of the project related costs decreased by 5 million or 9%.
This was mainly due to lower compensation, including lower incentive compensation.
This decrease also included initial benefits from cost savings measures that we and detailed last quarter.
With regards to reducing operational and SGN a cost structures.
We recorded 2 million of severance expenses in Q3.
Adjusted operating income of 24 million was down 11 million from the prior year.
As previously mentioned the decline was attributable to a difficult quarter for VTS and C. diff.
Lower compensation expenses and cost control initiatives led to lower SG, inane, which helped offset the volume reductions.
As usual our appendix include that itemize list of adjustments and a full reconciliation to our us GAAP results.
These adjustments totaled 15.8 million.
Of this amount 14 million relates to the automotive divestiture, including 12 million recorded in SG, ne and the remainder in cost of sales.
We also incurred $2.6 million of restructuring expenses, which consists primarily of head count reductions and plant consolidation activities.
Finally, we sold a previously closed manufacturing facility in Germany during the quarter and recorded a gain of 800000.
Our adjusted income tax expense was zero in the quarter and was largely attributable to tax incentives in Italy, and a favorable guilty impact on us taxable income.
Adjusted earnings per share with 37 cents down five cents from the prior year.
Turning to slide eight.
As anticipated I'm pleased to report that cash flow improved during the quarter and we expect that will continue in the fourth quarter.
Third quarter free cash flow was 12 million and net debt decreased 21 million.
On a year to date basis cash flow has been impacted by lower cash earnings plus higher working capital and cost related to the automotive exit strategy.
As I covered in the SDMA costs.
We needed to make some important strategic investments to support our automotive strategy.
The cost there comprise the program management separation and deal related costs.
In general these costs will hit the cash flow statement on a lag usually a quarter or so.
To repeat and encouraged that the vast majority of the separation costs are behind us.
Most of any remaining cost should be directly linked to a sale process and we anticipate that future cash flows will benefit from potential asset sales.
Besides the improved cash flow, we made some additional balance sheet improvements during the quarter as I mentioned net debt declined and our leverage ratio was 2.3.
Plus we recently issued 100 million on senior notes with the proceeds used to prepay notes coming due in August and repay short term debt.
Not only secured new long term financing, but will also result in future interest savings.
And as another benefit we reclassified 100 million to long term debt on our balance sheet.
Now, let's turn to our fiscal 20 guidance on slide nine.
Based on our third quarter results than anticipated market trends, we are holding our guidance for sales and adjusted operating income.
We are increasing our guidance on adjusted earnings per share with the range of 85 cents to one dollar due to a lower tax assumption.
Our estimated full year adjusted tax rate is now projected to be around 26%.
While our guidance includes the automotive business, we remain focused on the separation and exit strategy.
We look forward to moving that business into a separate segment or discontinued operations in the new fiscal year, what that Tom I'll turn it back to you.
Excellent.
Theres a great deal of work ahead of us, but we are on the right path.
Although the process of fixing the automotive business taking longer than originally anticipated we have a plan im pleased to achieve the best possible solution that will be the best interest of our shareholders rolling off the automotive business as a separate business segment will allow us to run a differently. So in those businesses and assets to logical buyers and transitioning to the quarterly fast.
And to ensure there are no customers reductions.
The timing of the downturn in our end markets hasn't helped our process, but we know appear to have greater visibility to the state of our markets. We have clearly spent a significant time and money or exiting our auto business, while our core markets have softened and we also experienced a large decline in sales to our largest datacenter customer.
All these items had a significant impact on our results and cash flows this year.
However, I'm very encouraged about the opportunities in front of this.
It would be will be a different company. After the other divestiture with a clear focus on improving our truck and off highway business.
The new serious leadership team has a clear plan in place to improve the margin profile and our new Global data center approach is leading to new business opportunities.
We are developing an operating plan to reflect these actions and others to achieve the savings targets, we set last quarter.
We will share expectations for next fiscal year, when we report our fourth quarter earnings in May and with that we will take your questions.
If you have a question at this time. Please press the Star then one key on your touched on telephone. If your question has been answered or you wish to remove yourself from the Q. Please press the pound keep our first question comes from Mike Smith scheme with Dougherty and company.
Good morning, guys.
Hi, Mike.
Tom.
Any wanted to dive in first.
Yes.
What's behind some of the further down the downturn there in that business.
I guess can you give us three buckets, so thats more thematically I know this one customer.
That's giving you some challenges, but maybe is it do you know if the customers just sort of investment is it sort of pricing problem are there other companies out there that are under cutting you on.
On on pricing.
With joined just just kind of other.
Someone like what's going on there yes, great question and let me just can you give some color starting with covering those points.
First off there is absolutely a great relationship with this customer locate our teams have done a super job and supporting and servicing them where constant communication. We have a dedicated program team that supports them on a weekly basis. We've always said from the beginning this a lumpy business when it comes and build out of capacity for for that for the customer they had we have.
If you think back we had a kind of a peak year in fiscal 19 at lowered some in this fiscal year.
What's happened is there have a low and capacity build outs, which they have been clear with us on what that looks like as I mentioned, we think thats going to have an impact next fiscal year for wild is going really come back strong.
Following that as far as relationship commercially no problems on pricing service or support or new entrants coming in and undercutting us it's not where we have our our established.
Share with them, Okay, and they've made that clear so right now we just anticipate this low and capacity build out of their half that they're waiting for for they are there.
Capacity utilized further before they start adding more more.
More orders and more and more buildout for capacity.
Saying that I'm very pleased okay that with this new single your focus to the market with the organization structure is taking we've brought the best of resources from CMS and building HVAC, putting them together the services. This.
Customer and other customers broadly with the intent the not only growing by diversifying more and we did we did land in order. This this year will be.
Launched in next fiscal year with another cloud provider the search generating improving it that strategy is going to work from a diversification standpoint, so yes, theres nothing of concern about other than the fact that we're just have to live with the lumpiness, but as we build to grow and diversify the customer base more we're going to see less susceptibility to them.
Okay.
Thanks for that I want to also ask about the various.
Cost reductions you mentioned last quarter and certainly.
It's actually this past quarter.
Not sure a few months into it can you give us some sense as to the timing of.
And when those might be incurred when the fed thats might hit.
You can maybe give us some sense what might be Tom what might be next gen fit.
Let me I'll start with Mick taken from area, we've been very aggressive as Weve stated last quarter than focusing on making sure that we adjust our cost basis to adapt to what we see going forward and in some of the pressure that we've seen in this market. So we've had significant reductions.
In force.
Across.
Businesses.
Anticipating that and plus other things and procurement that I mentioned in logistics that we're driving cost focus to meet our target of 20 by over $3 million OLED mix going to give you more color on it and detail how is that going out added the total savings that Tom referenced Mike we are targeting about 50.
18 million and on people cost savings and we began our reduction in January and so far run rate savings are right around 13 million. So a well on our way on that savings run rate and talked about.
Two to 3 million dollar costs severance costs to do that in.
In the quarter here, we had about 2 million a severance charges and then run rate of 13 million, it's fairly evenly split.
Between cost of goods and SGN a.
Okay great.
I wanted to get a couple of workout Casey is also on the auto separation real quick.
Okay.
As mentioned in your.
Remarks.
First did you say that you were.
Currently pursuing two separate.
Sales in the auto.
Parts of the auto business.
Or are you guys. So one and then.
Wind down the other.
I also wanted to ask secondly, if you completed most of the process of separating the business can you give us some sanchez to the.
Most of the EBITDA results are some earnings number of that business.
Maybe third.
[music].
Yes.
It sounds like because we're going to previous into fiscal 2021 numbers.
Hi, I wanted to clarify.
I'm curious how how close you are it's actually selling this doesn't sound like this might be.
Four quarters.
In your portfolio at the very least if not more than that.
It's going to be officially in Europe in your FCC financials, starting in fiscal 2021.
Okay. So three questions there I'll take one in three to turn to over to mic as far as.
EBITDA run rate, but yes. So this just backing up the process, we announced a year ago in January which to sell the complete auto business and in that is everything globally everything is automotive.
Roughly $600 million.
Through the process and the challenges that we found some of that because market concerns and some because of.
Concerns that there are different elements in that business that some value more than others. We decided we got to the end was to pull the plug and we were looking how to come back out because our strategy still the same were our focus if when you know strategic long term we went to do.
Two.
Sell the automotive business in India and leave that segment.
So we've been looking at the perimeter and we brought it back to Theres really two natural kinds of groups inside of auto and.
When two which Ted will detail with there is what we call liquid cooled or engine related products business and there is an air cooled business, which is typically think of the powertrain cooling module for the car.
Or potential buyers have interest in either way, so we decided that excluding that and selling into looking at the divesting those in separate processes. So we have a process in place one of those right now okay I'll call. It the higher valued portion of that that will reduce with that business that process is underway and we feel positive with engagement is I mean.
Engine, but potential buyers that that that we're dealing with.
In in the other segment, we're looking at a separate process approach of the club diver of divesting that business and that is with the surface sort of.
Potential buyers that we're engaged with as well timeline.
We're on a timely to focus on the the liquid cooled the first part that I mentioned.
We expect that to be active if you went through the process in the next couple of months, Okay to see that where we come on it but we're not putting a time went out there on the finish line, we want to make sure that this is a quality.
How should we engage all the the buyers in quite a high quality fashion that have an opportunity to maximize proceeds from that but that will take the next couple of several months to complete there.
On the on the on the other side, we're working with buyers potentially to engage with in will be.
Communicating on how that moves forward from there so again that fits.
In general picture of where we are.
And mix going to handle that the EBITDA question.
From a.
Margin standpoint, Mike Leigh we havent.
Disclosed DNL specific numbers, but we can share and I think it's helpful. We look.
Probably the this is CNO use last fiscal year VTS EBITDA was around 9%.
And we said the auto business in totality it significantly below the VTS average.
Model in total is more of a mid single digit EBITDA business.
And within there as Tom broke down.
There's some pretty broad spectrum of margins Ana there I'll leave it there are margins significantly higher within auto and then there are more challenged margins that.
Auto as a total within the VTS segment and well below the.
Dts segment.
Total margin.
And.
He has been our youth largest user of capital.
And the largest require I get that say of restructuring costs over the last five years. So.
Not only we see a margin improvement post the auto divestiture, but less capital intensity in needs for that business going forward.
And Tom.
I think it's important and I mentioned that and we used the term that walled off as far as a segment reporting the starting next year. It's important that we have that enhanced transparency. So we can demonstrate the during the exit period and allow us to show what will including will look like post divestiture. I think is really important element of our strategy will be very transfer.
Turning to shareholders to say this is walled off this is what we're looking at divesting will keep the our shareholders informed on that process. When you can kind of show what I'll call. It the semi pro forma basis, what the companies would look like when we're done with that divestiture processes.
Okay.
I will pass along for now I've got some or all the top back in the queue. Thank you.
Next question comes from Matt Summerville with da Davidson.
Thanks, just a follow up on the CIO business, you sort of talk through the data center piece for more curious to see how you feel that business is performing on the commercial HVAC our side relative to underline markets and I guess the Genesis. So my question is you've had some operational executional challenges.
Do you feel your market share in that business has stabilized or is that still yet to come.
I feel it's definitely stabilized and it's good question.
We have only focus on that business with bringing key leadership in both the regarding the overall business in a key positions inside of the operating in customer facing side.
So what we're finding is that the besides the operational efficiencies that were we focused on delivering timing and which is very important to those customers and footwear team has met with all key customers, both large and small in with our distributors Representatives Skews me on how we're going to tack. This both on the performer.
Side on cost performance in delivery, but also on the on the market facing side on executing on time delivery in pricing. So I feel that we've definitely.
At or their share position is holding and expect margins to improve with implementing all these actions.
Our focus again and mentioned is we're targeting two to 300 basis point improvement.
In the next two years, okay to kind of quantify give you a target we're shooting for and in the course love. It will include the bounced back into the scope of 22 timeframe with a stronger customer orders from the large data center customer plus we anticipate growing.
Sales with the other customers net business.
The other thing that really impacted us Matt. This is the last couple quarters in that broader category has been.
Sales specifically in the transportation.
Refrigeration side.
And also on the RV side, so it's a broad category Angela and lot of people look at broad HCC industry statistics, but forget two key customers in particular that we don't see that add to share loss, but and then on top of that very specific.
Actually we had some nichey business and.
Transportation refrigeration in our the Thats just purely driven by market demand right. Now is some similar as truck capacity goes right along with in hand with his refrigerated.
Using these were transportation OPO refrigerated goods.
And then just to get back to pricing on and you made a chronicles the moment ago and in your prepared remarks historically speaking.
What has and this is just on the commercial HVAC our side what has been the historical price practice, the historical maybe lack of discipline in that business and what should the expectation would be going forward. How important is price in order to get that two to 300 bits of margin.
Improvement you're looking for yes, I mean, it's a portion of it I think are disciplined needs to improve right now we still a good portion of that business through.
Representatives that represents an exclusive basis, we've had discussions.
Discussions with those are not the discipline there we're going to follow in the been kind of the rules based approach towards bidding new business. So I think you're going to see some.
Some some improvement directly it's a portion of that two or 300, I don't want to say, how much but clearly altogether with the other factors I talked about is what were you wanting for but there is there was a portion of that that we want to hold pricing discipline and to that point, a key part of holding pricing.
It is making sure we deliver on time on quality. Okay. That's for the to go hand in hand, which I think so we'll as we fix one will help improve the other one as well besides a disciplined on pricing that we're setting.
And then as a follow up to the cost out question I think make you mentioned 15 million of people related savings and embedded in the 25 to 30 can you maybe talk about what the other major major buckets are that sort of get you. There and then out of the 25 to 30, how much is being.
Realized in your fiscal 20 versus how much should be realized in fiscal 21. Thank you yeah, yeah, great questions side of the balance.
Ill call it.
10 plus million we've got.
Two major buckets and then.
And our that catch all of other the largest would be procurement and there's a number of new initiatives on our procurement team.
Specifically focused on some da the activities the activities and indirect spend.
There is and then some than units for targeted manufacturing process improvements.
Mentioned, a little bit in pricing and then there's just a catch all the biggest.
Biggest basket of the balance would be on the procurement side.
Heavily into next year.
And to your question about this year, we shifted out of the 25 to 30, we're targeting to have about four to five in this fiscal year and then obviously the balance a majority of the balance flowing into next fiscal year.
Thank you guys, yes. Thank you.
Next question comes from David Leiker with Baird.
Good morning. This is Erin Wilson back on for David.
Tighter.
As my first question is related to kind of the continued downward revision we seen in the commercial vehicle market.
In terms of build schedules, we know it seems like your your guidance hasn't changed that with perhaps communicated.
While via your customer scheduled last quarter, but just wondering kind of what you're seeing in that market. There and if you know the continued downward revisions in that build process Sina maybe causes the need for any additional restructuring action.
Well, we've studied this backwards and forwards as far as where it's going both from market data our customer feedback new analytics into teams going through we feel that we've got underneath this thing with the where weve projected last last call.
We feel that going forward, we think we pre leased pretty stable to those projections, but the market outlook for 21.
We see.
Overall score as conditions, what we're expecting is north American mediums being dominate percent wwes down 23% in Europe.
Truck work being up 15% down so we think it's going to stay depressed as I mentioned in my opening comments, maybe the back half of the of calendar 20, we'll start seeing some improvements, but we think we've got our souls position at the right run rate.
There were sitting at now that we prepared for.
Okay. That's helpful.
And I guess, just switching to kind of this.
Combination of leadership between the Golden age Bakken segments, I guess why is now the right time kind of make this later to the chip transition any color you can share or not.
As a great question, one we've been contemplating since we acquired the this sort of CIA US a couple of years ago. The concentration on CMS has been really focused directly around one major cloud provider that they did a great job with both winning that business in our teams of but that business forward in this.
Stabs to great relationship, but the sales team really wasnt set up to provide other sales and support.
In the region.
Globally.
Besides supporting that one customer the building HVAC team when the than the other hand has a dedicated.
The center business centered out of UK, but a very deep technical competency, that's they're winning business both in cloud, which announced the just the previous comments in in the of course with the with the Colocation customers with what we announced with serious one earlier, so bringing those two teams together.
Under one leader provides us an opportunity to service both.
The UK Europe based and now the North American team that we want to grow geographically with with the competency that sits in the UK to augment and support the resources and capability that we have in North America, which again is a great team with singularly focused on customer. So so were looking switching resources and bring a key UK talent from UK.
Hi, good to provide that.
Capability and we're going have under one leader, which is our vice president of the building HVAC business that has majority that took that will come to see under his control today, but again, we'll be servicing this the customers of C is the same way so theres not any losses of book.
Or transition.
Our inconsistency in making that transition so it and we review that with the customer and end up in its received very well. So I'm very excited about the growth opportunity. This is going to generate.
Okay. Thanks, and then my last question can you just asked frame what the typical pursuit or kind of sales conversion cycle looks like when you are.
You are trying to win an additional cloud customer.
The pursuit.
Could you just clarify Lou yes, so I guess really that the question is now in terms of identifying or kind of going after additional customer opportunities. What is the timeline in terms of initial conversation to actually converting that into revenue. Yes. Great question. So I think that.
From.
My experience with this new approach, where we're looking at building.
Customer base in the in the us.
That can happen fairly quickly I mean, a project kind of a couple of years out where they want to go bringing people in the quote to job. One is probably within a 12 to 18 month cycle I would say so it's nothing like let's say the automotive or commercial vehicle side Theres, a quicker cycle of order to production.
In the pursuit in front of that is clearly the message we.
Receive loud and clear as you had the capability both to support the sales and engineering front in the manufacturing front and you've proven that we will we will consider you. So weve leveraging that serious capability in North America was the broader global teams that building HVAC support is bringing new opportunities quickly. So.
My answer your question, Gary and make sure that.
The thing so I think.
Yeah that was that was exactly I, what I was looking for thank you.
Once again, if you'd like to ask a question. Please press star one on your telephone keypad, we have a question from Mike Shlisky with Dougherty and company.
Okay. Thanks, guys for these follow ups. This couple quick ones here.
First it was announced last week that one of your major customers as maybe offer to buy the other.
On highway World. So I was wondering if I could tell us a little bit about.
Do you view.
Binding volkswagen's truck business Navistar.
Opportunity for you.
Already still pretty well on trends with both of them it might be kind of business as usual won some.
And when they combine.
Yes, no. It's great question and one we feel very good above because you answer to your point was exactly the answer we have good relationships.
A significant business with both groups now.
Engaged very deeply in.
We announced the procurement.
Initiative first which is some time ago, which we've been engaged with it that with pursuing business with the with both this with both group. So I feel that nowhere group position established and their supplier panel.
Weve last year were announced the Diamond Award winner in.
That navistar and that's leading to other can gauge wants and I'm very pleased to hear about from our team. So we think this is an opportunity to help demonstrate there's a global.
The company that supplies established with both groups that we can expect a positive impact from from that.
Okay.
And then it wasn't mentioned, it's one of the public school of the of the months can you maybe comment on.
You operation in China, and Asia with respect to the client of ours has been any changes or disruptions or issues.
You've seen so far.
We have not seen any disruption those for that sort of that's important.
And I think will mention is what we're doing is risk mitigation to that anticipation of some disruption as our procurement in.
Supply chain leadership has gone through all potential materials that can be impacted by supplier by part number looking at where we sit both in inventory today with kind of a time laid out that we think we can we have continuity to to get through most of our fiscal year.
And so we're assessing that looking what options do we have if we do see disruption. So look at six second source opportunities in working with customers. We sent letters to both our customers and suppliers with this information that that we're aware of process approaching risk mitigation. So I think we're well set up to manage what may come our way on the ground. Okay what is happening.
Physically.
Our plants as you know a pretty much things are shut down till February 10th by the Chinese government and we're waiting for the post Chinese new year holiday for people to return to work. So that's going to be a big portion and see how many people get the work on Wednesday, okay.
And so we're anticipating that will be up and running to what degree in and of course, what how much your customer base is up and running as well. So so I think next week, we'll start the demonstrating just how.
Much of an impact there is the right now I think that we've got people working from home.
Now.
Let's say our leadership team in China set up to make sure that if they can't get to work right now because of restrictions that there will be overlap caps on and we're operating seamlessly that way with the question is how much were workforce shows up on Monday and to our customers on Monday as we look forward. So I feel we're going all the work to prepare for that in the in their core in Asia.
Let's be prepared for when we come at us.
As a as it develops.
Okay.
And just throw in one one last one year on data centers.
Hi, guys as you're pursuing new customers.
In that in that world.
Are you trying to kind of leverage on the current large customer.
And that product design or are those designs protected by of IP I, just can't really well there is other folks I guess the broader question is do you have to.
Bring a lot of extra engineering cost to get these new datacenter customers or potentially.
At the business quite quite low to get that business is that the at the outset.
Well first let's say, we're pleased with the margin. So adults served with for less than were forward. So it's a large market we're targets, but 2 billion dollar market. We look at its between a broken into three categories cloud co location in an enterprise Enterprise me in the smallest.
And so we're focusing on the cloud and Colocations specifically.
As far as.
Ed earlier question from Baird representative is that that upfront proven capability demonstrate you have.
Resources and capacity in place is important so I think that we're well positioned as I just point out but one example, we won the business and UK within with a with a new club provider. So that demonstrates that the kind of the capacity capability, we have to do that as far as technology, and what's walled off or what's not a defense.
By customer of course, some customers we may be engaged in a very direct development work with them and that's their IP.
We will support that in other cases will leverage the IP we have.
To support that so engineering capacity, we have a but deep technical competency.
Phase in the UK supported by.
With that for the teams in the US both at CES in building HVAC in North America. So we think we can leverage leadership, we are transferring key leaders over that still build that established cloud computing co location computing capability in the UK to the us in that to help build those relationships. He has strong.
The key here is strong relationships both at specifying engineers that.
Support these these customers the to depend on when funds specifying firms that develop that form we have very good capability that level and as a key kind of what I would say market advantage that we have to leverage. This is the global companies that we can leverage that relationship around the world.
Okay Fair enough I appreciate the color guys.
Thank you Mike.
I'm showing no further questions at this time I would now like to turn the conference back to Kathy powers.
Thank you thanks for joining us this morning, a replay of this call will be available through our website in a couple of hours I hope everybody has a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
[music].