Q4 2020 Earnings Call
[music].
Good morning, ladies and gentlemen, a welcome to the Modine manufacturing companies fourth quarter fiscal 2020, <unk> 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 with that time.
If anyone should require assistance during the conference. Please press star zero on your cell phone as a reminder, this conference call is being recorded I.
I would now like to turn the conference over to your host Ms., Kathy powers, Vice President Treasurer, Investor Relations and sat.
Good morning, and thank you for your conference call to discuss Modines fourth quarter and full year fiscal 2020 result.
I'm here with Modines, President and CEO, Tom Burke, and then who currently our Vice President Finance and Chief Financial Officer.
We will be using slides in today's presentation, which can be accessed either through the webcast link or by accessing the PDF file posted on the Investor Relations section of our website Modine Dot com.
On slide two didn't notice regarding forward looking statements. This call may contain forward looking statements as outlined in our earnings release as well as in our company 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 first I'd like to start by extending my well wishes to everyone. I Hope you have all been safe and healthy during the crisis.
Rooms, a vastly different places Moody's reported this third quarter earnings in early February fiscal 2020 was a very challenging year for Modine, where we ended on a positive note with Q4 results coming in head of our expectations for.
Our main focus during this period of uncertainty was protection of our employees customers and shareholders, but also like the highlights the press release that we issued last week regarding the amendments to our credit facilities. This was a key proactive measure we took as a part of a cold with 19 plan that will summarize those details during his report.
Today on this call Vic and I will provide an overview of fourth quarter and full year results for fiscal 2000.
An update on the status of our automotive exit and sale process.
Segment update including challenges and opportunities, resulting from the pandemic and current market environment.
A description of the actions we are taking to protect our employees in the business in response to the current economic environment and the global crisis.
Finally, a brief overview of the state of our markets and expectations for the next few months.
Let's start with the actions we've taken so far to protect our people and facilities as you all know the cobot 19 prices began early in our fiscal fourth quarter in China, and then moved into Europe, and then the Americas, we have implemented the necessary steps to mitigate the risk under manufacturing locations and administrative offices worldwide. We have remain in compliance with.
Health organization and governmental orders in countries, where we operate.
This led to a number of our locations being temporary closed either due to government mandate or a significant drop in customer demand.
All of our locations are now opened but many are operating at reduced capacity.
We've also taken many actions to reduce cost and preserve liquidity in light of these economic conditions and in response to an expected further decrease in revenues. If this were 21, we have reduced employee and executive salaries by 10% to 20%.
And implemented furloughs in short weeks, where possible cut production schedules in line with customer demand, resulting in a temporarily of many manufacturer employees.
Reduce planned capital expenditures by approximately 25% and reduced board of director cash compensation by 20% for this fiscal year.
Throughout this crisis, our top priority has been the health and safety of our employees their families. In our communities. In addition, we are laser focused on maintaining adequate liquidity and continuing to serve our customers without disruption.
Next let's cover our fourth quarter in full year fiscal 2020 results.
Please turn to page four.
Our fourth quarter earnings were ahead of expectations. Despite early cold in 19 impacts.
Fourth quarter sales of $473 million were down 15% from the prior year.
For the full year reported sales just below $2 billion down 11% from the prior year.
Revenues this year were impacted by market weakness VTS segment, and lower data center sales in our CIO segment.
During the fourth quarter. We also felt the impact of coven related plant closures in China in the February timeframe in Europe, and North America in March.
Offsetting this was a strong performance by building HVAC segment were full year sales increased 4% from the prior year.
Reported $25 million of adjusted operating income in the fourth quarter in $97 million for the full year.
We had strong conversion fourth quarter due to the cost saving actions taken earlier in the year in response to the market downturn.
Before diving into our quarterly segment results I would like to provide an update on our automotive exit strategy.
As a reminder, we will begin reporting the automotive business as a separate segment in our first quarter fiscal 21 results.
We have spent a considerable amount of time investment during fiscal 2000 separating the out of business from the Bts segment.
This wasn't necessary investment required to allow us to operate automotive separately and ultimately exit this line of business.
In January and March we actively engage with potential strategic buyers of this business and received multiple indications of interest.
However, as we entered the March timeframe and a cold the 19 pandemic moved into Europe, we're forced to put the process on hold due to first travel restrictions and then due to global Lockdowns.
The process currently remains on hold but we're staying in contact with all interested parties and are confident we will re initiate the process as soon as possible take into account to current international travel restrictions.
For objectives with regard to the automobile business have not changed we will run the separated business segment to optimize earnings and cash flow maximize cash value by divesting most valuable assets and exits remaining business in an orderly fashion to minimize cash outlay and customer disruption.
The remainder of Bts segment has been renamed heavy duty equipment or HD and will include sales to commercial vehicle in off highway customers, which will also be reported as a separate business segment.
As I've discussed in the past, we believe the heavy duty markets, especially truck agricultural and construction equipment have fundamentally different market dynamics.
Although this process has taken longer than originally anticipated. We firmly believe this is a rate long term solution from a beating and our shareholders.
While we evaluate all our tenants or auto business, we will focus on reducing cost and limiting capital investments in order to reallocate capital to other markets and growth opportunities.
Now turning to our fourth quarter segment results. Please turn to page five.
Building HVAC sales were down 2% in the fourth quarter, primarily driven by lower air conditioning sales in UK, partially offset by higher sales the school ventilation heating products in North America.
Despite this drop in sales operating income increased substantially from the prior year, primarily due to improved pricing and lower material costs.
The building each we a segment is clearly been a bright spot for this year.
For the full fiscal year sales increased 4% in operating income was up $9.5 million or 35% compared to the prior year.
Driven primarily by strong sales of school ventilation and heating products in North American market.
This is a tremendous performance from this segment, we're working hard to drive continued growth in the future.
As I mentioned last quarter, we've announced a new single focused approach to the data center market by combining the resources and capabilities. We're building HPC and Ccas teams. This new structure has led to some exciting wins with existing European customers primarily into co location arena.
Another goal. This effort is to assess the North American data center market.
We have commission of third party study focused on understanding the needs of data center operators and Specifiers, along with the product trends in buying preferences in order to develop roadmap in a business case, we're expanding into this market.
We're utilizing a talents of our UK team to build relationships with new and existing customers in this rapidly growing end markets.
The other aspect to this plan is to industrialize, new datacenter specific products in the U.S. We currently manufacture these products in UK and are making significant progress toward our goal of being able to build units in the us by the end of this calendar year. This is a key component of our growth strategy and I'm pleased with the progress we made despite the current environment.
Based on a weekly changes and limited customer visibility, we're not providing guidance. This time, however, I can assure current outlook on certain key end markets again I want to reiterate this can change almost daily, but we believe it's important to share how we currently see the markets.
We expect that commercial HIV assay market to be flat to down slightly in the data center market to be up slightly based on our current order book I think we have strong momentum in the UK data center market and a solid growth strategy for moving into the U.S North American heating market has been strong, but we are expecting that to be flat in fiscal 2021.
Obviously weather can have a significant impact beyond the general economic climate.
Turning to page six.
Sales in our CIO segment were significantly impacted by the onset of the pandemic in the fourth quarter, increasing 15% from the prior year.
Sales to datacenter customer down 25% from prior year with majority of that decline coming from one large customer.
This is consistent with the decrease in Q3 and our expectations. This was also aligned with the temporary low and data center construction, where major customer in the segment. We expect these lower volumes to continue into fiscal 2001 with a strong recovery in fiscal 2002.
Sales to our commercial Hvdc in refrigeration end markets were down as well primarily to the global crisis.
Our CIO as plants in China, Italy, and Spain were temporarily shut down during the fourth quarter, but have subsequently reopen in are able to operate at normal production level.
Plants in the US have remained open better operating at low below normal capacity.
Our CIO as plant in Mexico was shut down by the government in late April and is in the process of reopening, but at a significantly reduced volume level.
Even though we are actively managing these operational challenges. We are also using the opportunity going forward our strategic plans for the segment.
It includes continuing focus on our coils pricing our distribution model issued a cost reductions and consolidation of our manufacturing footprint.
In fact, we're in a process of consolidating manufacturing operations in China, we will be closing our planning assumption in consulting production or large coils and coolers plant dilution.
We were able to accelerate the timing is consolidation due to the lower production volumes caused by the pandemic.
Although the CIO segment is being impacted by the current economic environment. They have also benefited from new opportunities for example, our ability to rapidly respond to and deliver emergency replacement coils has allowed us to support healthcare facilities laboratories that are on frontline fighting. The virus. In addition, we have seen significant increase in orders to customers that mean sanitizing systems.
We will continue to look for new ways to provide the best hospital solutions, where customers, including continue to play a role in supporting those combating the cope with 19 virus.
Again is very difficult for us to provide a market outlook, but in reviewing the data. We have we expect the commercial HVAC refrigeration industrial coils markets would be down in fiscal 2001.
We anticipate that our first quarter, we down the most with some slight improvement in the back half of the year.
With regard to Datacenters as previously mentioned, we expect the market to be up slightly we expect our revenues to be down compared to the prior year as I mentioned or data center sales. In this segment are highly concentrated with one customer and a pause under construction schedule result in our sales being down as compared to last year. However, we have successfully managed to grow our show.
It was discussed we're expanding sales with additional product offerings.
Please turn to page seven.
As expected we experienced a significant decline in sales across our behavior markets during the fourth quarter.
Sales for the VTS segment were down 18% the prior year.
Our key vehicular market slowed significantly during the second half of fiscal 2000, and a decline accelerated with the on syndicate with 19 pandemic in the fourth quarter.
In Asia sales decreased 25% from the prior year, primarily to the impact of the grown virus in January during this time period over manufacturing operations were temporary shutdown reopened as quickly as possible in line with government regulations to date Oliver agent plants are open at or near normal capacity.
The China off highway market is a bright spot, but with a strong recovery of the excavator market. The automotive market is also somewhat recovered, but it's still operating at lower volumes the prior year.
Sales in Europe also dropped significantly during the fourth quarter down 21% Mcgregor across all major end markets.
Pandemic moved into Europe, or automotive customers quickly shut down their plans that we closed our plants as well and response.
European automotive sales decreased 9% for carrier and commercial vehicle sales were down 38%, including the impact of program wind Downs.
Oliver VTS plants in Europe have subsequently reopened but most are operating in significantly reduce capacity.
We will continue to increase production or European Bts plants in line with customer demand.
As a similar story in the Americas region for sales were down 13% from the prior year for automotive plants were also closed in line with customer plant shutdowns and our main automotive plan to use was just reopen last week.
Off highway and commercial vehicle production continued to quarter in Americas, but at reduced volumes.
Total sales in the Americas region were up 7% from the prior year well commercial vehicle sales were down 14% in off highway sales were down 19%.
One of the significant issues, we face in the VTS segment is a very limited customer outlook.
Customers typically provide us with a good view of the projected volumes for the next two or three months that allows us to plan or production build our forecast today, we're getting very limited information from our customers as economic conditions remain volatile in overall visibility remains temporarily challenge.
Our teams remain and daily contact with the customers and we continue to manage our manufacturing operations prudently and cautiously through this global crisis actions taken to include reducing your delaying capex spending including program capital were positive.
This is somewhat of a challenge as we often need to spend capex well in advance of program launches. So delaying purchases now could risk program deadlines and future. So we're communicating with their customers in putting increased scrutiny on request for capital and postponing purchases where possible.
We expect significant declines in the global automotive and commercial and off highway markets similar to say as we expect the largest negative impact in our first fiscal quarter beyond that is extremely difficult to predict whether the recovery will be a b you are hopefully not a mill shape recovery.
Geographically, we expect Europe, and North American we hit the hardest with regards to Asia, we're beginning to see some bright spots in the highway market with higher year over year excavator sales in China.
While we're navigating never unforeseen challenges to our bright spots in the Btss well worth noting.
In addition to a strong demand for excavators, we are seeing in China, we are actively bidding and winning heavy duty equipment business. We had a recent win in the large genset market and also expanded our reach into the bus market with significant added content per battery cooling.
I am pleased with the strategic work. This team has done to reduce cost in light of demand challenges, while staying focused on growing the business did like turn over to make for an overview of our consolidated financial results.
Good morning, everyone. Please turn to slide eight.
As expected our fourth quarter results were impacted by multiple headwind.
Coming into the quarter, we anticipated their end markets would remain soft.
And we press the headwind savings initiatives launched during the third quarter.
And then became apparent that the spread of call. The 19 with creates significant disruption.
We responded with incremental cost recovery action, which allowed us to finished the year above our expectation in both adjusted operating income and adjusted earnings per share.
Fourth quarter sales declined 84 million or 15%.
Largely from volume declines in the automotive off highway and commercial vehicle market.
We also experienced lower fee I add sales due to our largest data center customer.
Gross profit decreased by 18%.
75 million, resulting in a gross margin of 15.8%.
The team worked hard to achieve a 20% downside conversion during the quarter, which resulted from cost reductions earlier this year.
In addition to the lower volume see I asked was impacted by a negative sales next from the decline in data center volume.
Yes, and VTS margin declines were partially offset by a significantly higher gross margin and building age fee.
As DNA for the quarter was 55 million and lower than prior year by 14%.
This decrease was primarily due to lower compensation related expenses, including incentive compensation as well and cost savings initiatives across the entire organization.
We have continued to aggressively control costs during downturns in our markets and the broader economy.
Adjusted operating income at $25 million with down 10 million from the prior year again. This decline is the result of lower volumes in the VTS and SIIA segment, partially offset by an improvement in building HPC.
In addition, lower SGN, a helped offset a portion of the negative impact of the volume decline.
As usual our appendix includes an itemized breadth of adjustments on a full reconciliation who are us GAAP result.
These adjustments totaled 19.2 million in the quarter comprised of three main areas.
First.
We incurred 8.6 million of asset impairment charges relating primarily to manufacturing facilities in Austria and Germany.
Next we had five in half million of planned restructuring expenses from head count reduction equipment transfers and plant consolidation costs.
Finally, we incurred 5 million of cost directly associated with the automotive separation most of which were incurred earlier in the calendar year.
This work is now mostly complete and ongoing expenses will be minimal any remaining costs would mainly relate to the completion of a sale transaction.
Our adjusted income tax expense was 4.3 million or 26% in the quarter and adjusted earnings per share like 24 cents.
Turning to slide nine.
Cash flow on balance sheet protection or focal points simply adjusted to the pandemic.
Im pleased to report that we ended the year with $71 million of cash and net debt of 412 million, which is consistent with the ended the third quarter.
Fourth quarter free cash flow and slightly negative at 1 million.
For the full year negative cash flow of $13 million was significantly impacted by cash spend on the automotive exit strategy.
Throughout the year, we reviewed in great detail the required to action to support our strategy and completely separate the automotive business.
Also during the year, we incurred approximately $17 million of cash restructuring costs, primarily related to the head count reduction.
Including payments for actions accrued last year.
The majority relate to plant and administrative restructuring in Europe.
With the balance for plant head count reductions in Mexico and plant consolidation in China.
Last week, we announced that we proactively amended our credit facilities in order to provide the maximum flexibility we may need to manage our liquidity through the coal that crisis.
This was a big success, which will benefit modine and our shareholders as the markets adjusted the economic ramifications of this pandemic.
We ended the fiscal year with a leverage ratio of 2.4, which is well within our current covenant limits.
We believe that we have sufficient liquidity, but wanted to ensure that we have plenty of leverage cushion as safely managed through the crisis.
The amendment significantly raises our leverage ratio limit during the next two years returning to the previous supplement of 3.25 at the end of fiscal.
2022.
We also received some additional flexibility to execute on our automotive exit strategy.
Overall, our balance sheet is in good shape.
And our liquidity is sufficient demand strew this difficult period.
In addition to the cash we had nearly 118 million of Undrawn capacity on our revolving credit facility for a total of 188 million of available liquidity.
This does not include additional capacity on credit lines available to our foreign subsidiary.
Last but not least I want to point out that we have no major debt maturities in the near future in total we have a very manageable $16 million mandatory repayments.
Related to our long term debt obligations and physical 21.
Now, let's turn to slide 10.
For our fiscal 21 outlook.
Based on the uncertainties surrounding the global economic environment, we are not issuing guidance for fiscal 2001 at this time.
We are currently getting rather limited information from our customer base.
That said, we are using all information sources to track and project market trend.
As Tom mentioned, we had a number of plant closures that extended into the first quarter fiscal 21, although all of our plants are currently open more than half of them are operating at well below normal capacity.
Based on the current economic and order trends, we anticipate a significant impact on revenue and earnings in Q1.
In fact, we expect that Q1 revenue could be down as much as 40% from the prior year.
Forecasting beyond Q1 is extremely difficult, but we currently believe that our markets will recover in the latter half of the fiscal year.
With that we anticipate positive free cash flow despite the lower revenue.
As I wrap up.
I want to assure everyone that we're taking all the necessary steps to protect our employees customers and shareholders. We're focused on maintaining a strong balance sheet preserving cash controlling discretionary spending.
And reducing labor costs in order to limit the downside conversion on lower revenue and generating free cash flow.
We will reevaluate issuing guidance.
During our first quarter earnings release.
I'll turn it back to you. Thanks, Mick in conclusion, I would like to reiterate that we are taking all the necessary actions to protect our employees our customers in our shareholders. We've taken the swift and decisive action to signal significantly cut costs and preserve liquidity. In addition, the proactive amendments to our credit agreements ensure that we'll be able to continue excess ample liquidity.
For this period of reduced customer demand be prolonged we will also tightly manage our capital investments and we work to continue towards our automotive exit strategy I am confident we will emerge stronger on the other side of this crisis with debt will take your questions.
If you have a question at this time. Please press the Star then one key on your touched on telephone.
For your question has been answered or you wish to remove yourself from the Q. Please press the pound.
Your first question comes from Matt Summerville of D.A. Davidson Your line is open.
Thanks morning couple of questions first now with the auto business sort of the car about officially completed at this point are you able to give us some seal core what operating profit headwind EBITDA for that business would have booked flights into fiscal might team 20, and then make I was wondering if you're able to.
Even if theres a somewhat wide range, what a reasonable free cash flow expectations might be beyond.
Positives for fiscal 21, thank you.
Yes, the great Hi, Matt.
Yes so.
I'll try to give you a little bit of color on the.
Automotive.
On the VTS split between automotive and then what we'll call. The ahead the heavy duty equipment portion, which should be the truck primarily truck and off highway.
As.
We look pre coal bed and.
Last year, the we add hit really hard on the off highway in the truck market, but our heavy duty equipment business had been running EBITDA margins right around 10% or so.
And we see a lot of room there for improvement so.
With some additional focus on.
Planned operating metrics and productivity at the plant level sum up manufacturing opportunities there.
We do see opportunity to grow and improve the heavy duty equipment side.
Auto same thing if we look to call that.
Pre coal bed.
The auto business was more of a mid single digit EBITDA business.
And.
Consumed a lot more capital our highest capital consuming business.
And then running more of the in a negative cash flow manner as well.
It is.
The heavy duty side, which is less capital intensive.
What's important to note two is within the auto business and Tom talked about this in the path.
There.
Two thirds or so of that business that is anything cooling liquid cooling business. That's been on a high growth path that be seen some quarters in the last few years time emissions and fuel economy and E V.
That has had good EBITDA margin than I would say, 10% plus.
The other third is our legacy air cooled business think front end module condenser that has been very challenged and has been operating margin and negative EBITDA level and when we go back to the beginning when we.
Decided to exit the auto business the original perimeter was too.
Exit the full piece and bundle both together.
As we decided to come back out.
And re market the business and feedback from buyers.
What we're focused on sale process is that more attractive growth higher margin engine cooling business.
And then.
Well, we need to look at our strategic options to deemphasize and that air cool side air cooled side.
Last with regards to cash flow next year.
Really really hard to predict.
As you can imagine I would say Q1, we're expecting clearly our june quarter to be negative cash flow.
If the second half the year improves as we're we're looking at it and with some customer feedback.
I would think we'd be I mentioned positive that probably somewhere between.
Zero and 20 million.
Not a huge cash flow year, but we're focused on making that a positive just a fully protect the balance sheet.
Thank you guys.
Thank you.
Your next question comes from Mike Shlisky of Stewarding and company. Your line is open.
Good morning, guys good morning.
I have a quick housekeeping questions first on the restructuring costs could you break those down by segment.
The release of the slides.
Yeah sure we can.
Thanks go through the in the appendix we've got.
The restructuring basket and for you the first one on.
5 million of auto separation costs those are at the corporate level.
The impairment charges of 8.6 million.
99% at nearly all of that actually all that is in the Bts segment, Yes, Yes, and then the restructuring charges.
Five and a half mailing in our newly all in.
The VTS segment as well in fact.
We also do it in the back by segment, where you might give you want to go into any more detail there.
Oh, I'm, sorry, I look for I assume it off we will try that again apologize for that yes, no proud all the I saw the numbers are not amounts by segment in the low comments.
Ill.
Yes.
I'll follow up offline after.
I wanted to also aspect and we I wasn't sure I wanted to give some clarity on your comments on the data center business.
And the final slide here it looks like you're saying that will lead off industries for.
For the quarter end for the full year, but then also some of your comments kind of start let Jamie.
Good morning business might be a little bit challenged.
Just going to be underperforming the kind of broader market this year or not here that comment correctly.
Well the sort of great question to clarify obviously really the biggest customer we have right now is in the Crs segment with deep.
Customer that large customer we have growth.
Contracts with the May have a down year this year, they've been projecting that for awhile so that drop.
Sales in CA us of.
What is it 22 million to thinking that quarter for serious quarter over quarter. The we'll have that is due to one do center customers. So we have bets kind of put an overall fee. The center sales drop we're magnified in the UK.
We were very very much pleased with the order book is coming in the strong and growing so we're overall very very bullish on the data center market just kind of having of explanation of this discount for this fiscal year for the one customer North America.
So just.
Just a follow up there the outlook for the industry is positive is do you think divestitures of easy constant previous year orders are there things did it shuts down working on higher E. Commerce sales, that's more dry though it is.
We're seeing a definitely an increase in demand, especially in the co location piece in the UK in Europe, driven by others work from home technology, Microsoft and others have been very aggressive and that we're supplying support through co location companies.
For that growth in that order book is really going up well in the UK.
The the pause in North America was one specific customer who's been projecting this build out of capacity of being on pause, but coming back strong to the next calendar year, our fiscal year 22.
So we see all indications being.
Green from from a standpoint.
Data Center business were both with our strategy no in North America expansion as I mentioned in my comments.
We're really printer.
Intention is to have.
Good portion of our content capability in North America, where either the calendar year leveraging the capability of were serious segment with the focus of the single based in the markets in.
We put together between billing each back in two areas, which is really paying off leveraging relationships the product strategy the technology to bring that capability in North America to this to the larger.
Addressable market here so.
Again, although all things are looking very positive from a strategic growth strategy so to build up there.
The new market dynamic.
Okay, that's great color. Thank you.
And then turning to the debt covenant.
The or the debt restructuring as you guys did.
I kind of want to get a sense to your hi, motivations for getting that done.
Good point during the last few months is down.
Your next 12 months period against 24, one creating say, yes, we're going have definitely our covenants research the tech stuff.
Did you do it because maybe your costs, you're going to close the shipping or which is all about.
Hi, anyway, any higher gout in a in a worst case scenario.
Yes, I think majority of the decision Mike is based on being.
Overly conservative and.
We discovered we finished the year 2.4.
Times.
And our occurrence our previously leverage land that was 3.25.
We blend that pandemic lists.
Kicking in really really hard and we saw April you know that more big chunk of our planned shutdown. We were doing a lot of sensitivity analysis and really the way we approach debt was.
We wanted to model all the potential scenarios and one of things we felt strongly about was.
We didn't want to wait and get into a situation where.
And I think we're seeing it now talking to the bank swear.
They're just inundated looking with companies looking for amendments in new liquidity.
Well.
The majority of it what it was not out of.
Necessity and a forecast that we have to run to the banks, but not knowing how this year would shake out.
We wanted to just make sure we we got out in front of that and before.
And there is a long line with the bank to deal with the these issues.
Got it makes sense Rick Tom Thank you, so much making right.
Your next question comes from Joe Mondillo of Sidoti <unk> Company. Your line is open.
Hi, everyone. Good morning.
Good morning.
First just to follow up on Cie is our datacenter customer is the downturn in fiscal 2001 that you foresee at this point in time is it still sort of a same.
Expectations as they were before or has it changed at all as a further down not us down as much.
Is exactly what we said before so no change it's going to be.
What we projected last quarter last couple of quarters, because it's been.
Well released by the customer to us at this was going to be a year that was going to be down, especially in north America's wears build out and so no real changes there and the expectation is further build us coders to increase has been consistent message from them as well. So we're really building on that is bringing that UK.
Based technology to the North American market to help.
Bill that don't have that capability here to supply global customers that have opportunities in North America. So we're really.
The press for growth in this market again, we seem to feel very strong opportunities for growth that we have the rate to to go in participated.
Okay, and how much those refrigeration makeup of C. I guess.
That would if I look at them.
Thanks.
Thanks.
Inside of.
Refrigeration is about.
A quarter of it.
Yep.
Okay.
BH back segments.
Your sort of outlook, a little better than I think some of the bigger peers have talked about division is that a case in point of maybe some of these bigger peers reporting a month ago and just not having as much visibility as you guys have at this point in time or is it maybe something motel.
You are seeing maybe a little better than market.
In our market Yeah, I mean, I think we have some unique this is an r. brunner portfolio very strong heating business that is it a lot replacement. So that does pretty stable. So we projected to be flat versus maybe some of the down pressures that had been seen at on some of the residential providers of systems.
Again or ventilation systems or.
Growing because of the will kind of coming off a small share in projecting to larger when opportunity. So I think youre dynamics, we were set up in the portfolio versus a marketer or will position and with the data center growth on top of that we think that really adds to stronger stronger position overall.
And sometimes some some of the market data.
We we get we have to filter through will get questions on that can be heavily impacted on the residential consumer side.
Well, obviously now aidsvax the huge industry, we just filling break it down we have them.
Real large.
That majority of our business on the commercial side.
So that can be a little bit different and then even like within refrigeration.
We've got.
You know some large customers on transport refrigeration RMB.
Than we've seen the RV market kind of go.
All the way from.
Large downturns in this crisis to now some may be hope of people travel more and.
I want to do more of that via RV, So probably within the numbers is a little bit more modine specific.
Okay, and the margin at that segments.
Expanded pretty significantly year over year was that.
Our case in point of the year over year comp.
Just being pretty easy or what was the bigger or is the big driver there.
Well I think we said number one we really are pass through pricing at a pretty strong rate, which is the reason why we really enjoy that market and secondly, we have some great material pricing that was an advantage in us and I think the just the mix of with the the business came through.
We have a large relation schoolroom school business this past year record for us.
Contributed well along with a good heating season and again the the mix of business in the UK really building a building up with them.
It's a data center business and less copper cooling, which again is a better mix for us. So I think district, good day, which will rone billion each bring segment.
Alright, and then on the cost reductions I assume.
A majority of that set the VTS segment is there any way you can help us think about decremental margins.
Going forward.
And how the volume sort of effects your margins.
Yes.
As Mick I think.
So clearly.
To the most challenged in the upcoming year will be the Bts side auto and HDD.
And also as Tom mentioned.
Yes.
A little bit on the market side, but also then on top that the one customer both of those.
In a norm, we look at a gross margin level and then SGN a separate.
Most of those would be.
Downside decremental conversion rate that 25% to 30%.
With all of the.
Plant cost reduction work we're doing.
This fiscal year now we're trying to target.
Yeah incremental gross margins in 2025% range.
So that will help a little debt and then on SGN a wise.
Right now.
We're running in trying to target about a 10% or so SGN a reduction.
Okay Thats on a bigger procurement efficiencies also really picking up weld awful also offset that help that decremental effects. So.
Pleased with that.
Okay.
I guess was lastly, the interest rate on on the new Amanda.
Hi disagreements.
Yes, so versus.
Versus.
Last year in the prior year, we then between four and 4.5% a weighted average interest rate and this year privee about 3.94%.
Even with the amendments, it's going to be lower actually correct two things.
With two or three things one is if you recall last quarter, we refinanced our long term.
Loan so that's part of the year over year impact and then secondly in one of the the best best parts about the Akorn Amendment as we really don't see.
Higher interest rates in less we move into the higher leverage ratios.
So there's always a little bit of movement and some other things between spreads in LIBOR, but that was immaterial, we really won't pay more in line our leverage ratios increase.
Plus then we at the long term notes, so relative on say, 3.9% to 4% as a good blended rate.
Okay perfect. Thanks for taking my questions appreciate it.
Thank you.
Your next question comes from day, one quarter of Baird. Your line is.
Good morning, everyone there David.
Couple things.
On the automotive side of the business some some of the suppliers.
We heard that some of the assembly plants were still taking.
Shipments of products. The last two weeks of March despite there being no production.
I'm, just kind of stockpiling inventory for restart the juice see any of that.
On the automotive side of your business.
Don't know it to answer your question I.
I know that we stayed room laser focus when you back to you on that one day, but I'm not sure kit.
We had.
Okay, and then there's pretty good news slow on where the auto industry is goes in terms of coming up and the choppiness on in that the truck side, a little bit more opaque is there anything you can share there in terms of what the when the volumes might start to ramp back up there obviously there has that been.
Sorry in the channel in the order rates aren't all that good.
Insights on that across the three it's really it's really a frustrating you're typically you know between the staying close to customers.
Clearly for instance, less less the third quarter were out with most of our customers.
Meetings and they were given this is projection of what the.
The down.
Cycle is going to be modeling it and obviously there is plenty of pictures of seeing 20% downs kind of the common theme and right now they've just communication on what they see is just bottled up so we're really relying on.
Third party right now to kind of getting the best predictions with.
On commercial vehicle hand off highway, we're not giving much even will reduce our constant contact trying to pull out what they see as far as ramping back up there, they're holding that pretty tight right. Now. So so thats why were kind of feel kind of holding the fourth quarter or first quarter.
Projections in was pretty being pretty.
[noise] challenging and kind of assuming worst case, and then we'll see what happens that brings up through the through the rest of this quarter, hopefully start getting better projections, but not much of that much with picture coming out of the customers at all.
Okay.
Thanks, and then on the data center side has a better.
Big topic in the last several quarters.
No we have some of the company as we follow or selling products and components into that data Center channel.
They're all talking about very strong growth rates.
Yeah, so trying to understand why this data and we understand that your business was concentrated with 111 player, but it seemed like that customers losing share in the broader data center space certainly moving you can share any insights you can share on that.
Yes, well.
This has been a well forecasted.
Production shift with large customer talking about for some time has not varied we're in constant contact with them great relationship.
All the way up and down as far as you know deliberation.
Our commercial elements and everything else, so they're being very open with us and what they're doing I don't know.
What we're seeing and again I'm, not really including his customer and in this regard, but we're seeing as the colocation space.
It's really building, especially in Europe, we're seeing a lot of whatever recall the hyperscale people kind of building up capacity. These co location.
Companies that are building out real estate companies have build up capacity in leasing capacity, we see some sums hyperscale people buying that screwed up flat up capacity a whole building for instance, in and that's really a dynamic happening in Europe.
So I don't know that maybe their customers participating that way in buildings scale right now, we're not losing share by using co location.
Thing about making the capital investment themselves.
But what we do know is their projections to kick in capacity.
Starting in the next calendar year is projected and we feel very positive and confident about the basin or communication. So.
In the other thing that's really important is that.
The co location relationships with bill both with.
Yes.
Operators and Specifiers is we will leverage that because the our global and bring that to North America. So this focus on a single focus to the marketplace and combining the resources of talents of both the building HVAC in Csds and leverage our UK relationships and bringing it to North America, and we will have what we call of computer room.
Computer room here handling unit.
Leveraging the king capability with Cvs team under Grenada, Mississippi plan. It we're going through prototype builds right now have it available for the Mercury by the end of the year, which would really give us.
Going into this the addressable market for us, which is about $1 billion in North American, but a billion dollars in Europe. So so again, we're winning our share with multiple customers.
In Europe right now we would bring that.
North American to diversify the opportunity again, I'll say, even with the large customer we are building share of wallet with them, we're providing new products with them the don't necessarily build out with their plans and that's what we call the dry cooler, which which is where there's water.
Frictions in certain areas, they want to dry cooling versus.
Or have you bentek solution that can be more water efficient. So we were quite a bit of business with them on them. So the relationship is good they're growing differently I think right now before they can bet given traditional route which were ready for that and plus we're bringing us ready to take advantage of the whole marketplace. Both in the North America in Europe that should.
Really help us in the future going to grow this business.
Okay. Thanks, and then lastly to somewhat related questions.
One is on the cost side a lot of companies are taken.
Actions on the cost side to mitigate the cash outflow.
And then on the other side of it we're saying working capital disappear as the volumes come down.
What do those two dynamics look like as volume starts to ramp up pump how much of that cost reduction is temporary versus permanent that we'll see benefits.
In the future and.
What how much that working capital comes back.
You know two quarters three quarters for quarter Somalis volumes ramp back up.
Yes so.
David if I.
Right I understand your question right were.
We were on pretty low working capital.
And as the company sub 10% there so.
During the.
This period in first fiscal quarter, it'll be a source of funds right. It will the.
Decline.
We think of it is it's going at it will come back.
There are areas really that I see is permanent working capital reductions I would say last year with all the automotives stuff going on separation and lose we ended we headed into the crisis, a little heavy on inventory and it's been hard to work.
Goff inventory, while customers were shut down.
So.
I see some maybe permanent opportunity as things improve to actually lean out inventory, a little bit which of the positive.
And then the biggest source of vino cash savings for us. Besides the fluctuation on working capital would be the teams worked really hard to flex direct labor.
And every country around the world is got different programs incentives and reimbursements and then Tom covered you know our from an SGN a fixed cost rate though.
Obviously those are temporary you know salary reductions furloughs are temporary in nature.
Okay. Okay, great. Thank you.
Thank you.
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