Q1 2021 Modine Manufacturing Co Earnings Call
I'm showing company's first quarter fiscal 2021 earnings conference call at this time, all participants I need only mode.
Lisa we will conduct a question answer session and instructions will follow at that time.
If anyone should require assistance during the conference. Please press Star then zero on your touched on telephone I.
As a reminder, this conference call is being recorded I'll now like to turn the conference over to your host Ms., Kathy powers, Vice President Treasury <unk> Investor Relations.
Please go ahead Madam.
Good morning, and thank you for joining our conference call to discuss Nordion first quarter fiscal 2021 result.
Im here with Vice President Finance, and Chief Financial Officer, Michael correctly.
We issued a press release announcing a CEO transition plan, which included the announcement that make has also been named interim President and Chief Executive Officer effective immediately while the board conducts a search for a permanent CEO.
The board is very thankful for the more than 12 years that Tom Burke served as president and CEO and he will remain with the company and advisory role until August 28, 2020 to ensure smooth transition.
The board decided that this was the right time to make a leadership change and is committed to finding the right leader they will execute our industrial strategy and accelerate modines future growth, we remain committed to our current strategy, including the exit of the automotive business.
The board is confident that making the rest of our senior leadership team will continue to execute against our strategic vision until that leaders in place.
We will not provide any further details about the transition on this call, but we will certainly provide updates as the search progressive.
Now moving on to the quarter.
We will be using five foot 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 loading dotcom.
On slide two is our notice regarding forward looking statements. This call may contain forward looking statements as outlined in our earnings release as well as in our company's filings with the Securities Exchange Commission with that it is my pleasure to turn the call over to make with grilling. Thank you Kathy and good morning, everyone.
Although it was a challenging quarter Q1 revenue and earnings were in line with our expectation and the positive free cash flow was better than anticipated.
From an operational standpoint.
Our plans have been opened since late may but most are running at reduced capacity.
All locations are falling strict measures to protect our employees health and safety, including social distancing wearing face masks and following enhance sanitation protocols.
Also during this downturn.
Evaluating ways to improve our manufacturing efficiency as a result, we made progress on several important operational initiatives during the quarter. The most important of which was the consolidation of the CIA us manufacturing footprint in China. We expect this to be completed in September and provide immediate cost savings.
While still providing sufficient capacity for growth in the region.
Another priority is tightly managing their capex spend is part of efforts to maintain positive cash flow capital spending was relatively low this quarter and we continue to target a 25% reduction overall in capex spending from the prior year.
Strategically we are moving forward with the automotive exit we spent a significant amount of time and money separating the automotive business last year in support of the strategy.
Our automotive businesses now successfully carved out as a separate reporting segments from what we are now calling our heavy duty equipment segment or HDD.
As a reminder, HD will focus on several heavy duty markets, including medium and heavy truck bus and specialty vehicle agriculture, and construction equipment in power generation.
Unfortunately, the automotive exit has taken longer than expected and was further delayed by the onset of Cobas 19.
I am encouraged as we have successfully reengaged with interested parties and we are progressing with a number of productive conversations.
I can provide a definitive timeline, but rest assured this is our top strategic priority.
In the meantime, we will be running the business to optimize earnings and cash flow.
On the growth side.
We are reallocating more resources to our datacenter business.
As discussed last quarter, we believe we can grow our share in data center cooling, which is a large and growing market.
Our existing products in the UK and relationships with customers provide leverage for expansion into the European and North American markets.
Ultimately our right to win in these markets is linked to our ability to provide the full customized solution within on a global footprint.
Our goal is to provide our customers was the lowest possible total cost of ownership by maximizing system efficiency.
With a clear strategy prioritize tactics, we are looking to accelerate our growth plan over the next several years.
Now, let's cover our first quarter segment results. Please turn to page four.
Sales in our CIO segment were down significantly in the quarter impacted by coal with related plant closures and the general economic slowdown.
Overall sales were down 27% with the largest drop to commercial HPC in refrigeration customers.
Please note that more than 20% or the sales decline in the quarter related to one large data center customer.
The pullback in data center construction is consistent with our expectations as this customer expects lower volumes to continue for the balance of fiscal 2001 with a strong recovery next fiscal year.
In addition, the team is making improvements to our business model in order to improve variable margins. For example, we are focused on cost reductions at our manufacturing facilities and improvements in our pricing models.
Our procurement group has been successful and lowering our material costs, while other cost savings initiatives are driving SGN a savings.
On the growth side, we're making significant strides.
With our coating business, where we have introduced an anti microbial coating that complements the anti corrosive properties of our existing spray co products.
This product has great potential in HPC systems for hospital hotels restaurants schools in anywhere else bacteria mold for Fung IR a concern.
We're also seeing a strong uptick in orders for products to the recreational vehicle market.
There remains a great deal work to do in Crs, but the framework is in place to improve profit margins and capitalize on the volume recovery as we go forward.
Please turn to page five.
Building HPC sales held up relatively well given the pandemics down 3% in the first quarter.
This was primarily driven by lower sales of heating and ventilation products.
Partially offset by higher data center sales in the UK I want to highlight that adjusted EBITDA increased 30% from the prior year, primarily due to improved pricing and lower material and labor cost as well as improved operating leverage is the result of management cost actions.
This type of performance demonstrates the potential for modine. After we address the auto business and reallocate capital.
We expect growth in building HPC.
To be driven by datacenter sales, where our order book remains strong we anticipate that north American heating and ventilation will be relatively flat to prior year, but this remains somewhat dependent on weather conditions.
We also expect cost savings actions taken during the quarter will drive earnings improvement as we make strategic investments to grow the datacenter business.
Please turn to slide six.
As expected we had a significant revenue decline in our heavy duty equipment or HD East segment. As a reminder, most of these markets were entering a downturn before the pandemic.
Then the markets further softening the pandemic spread and impacted the global economy.
Sales for the HD segment were down 43% from the prior year.
On a more positive note the markets appear to be stabilizing in June as compared to April and May and we are beginning to have more confidence in customer order projections.
Last quarter, we mentioned our customer outlook was extremely limited.
We now appear to be it through the worst of this challenging of heightened confidence in our customer data.
In addition, we are seeing recovery and growth in the China construction market.
Although we are predicting a year over year sales declined to continue we anticipate the rate of decline to stabilize and improve.
With a focus team on H.D., we're strengthening customer relationships, while focusing on cost effective solutions and superior service.
Recently, we were awarded to supplier awards in Asia, and we continue to win Genset business.
In the transit in school bus market, we are winning incremental business with the industry leading Oems.
There is significant activity in this market to industrialize alternatives power trains that range from hybrid the fuel cell in full battery electric all of which require advanced thermal management solutions Modine has developed a full portfolio of cooling modules and complete bad.
Three thermal management systems to address the needs of these growing markets.
Another benefit of separating the automotive business is that highlights further areas for improvement in the HPP segments, both short term and long term.
For example, we have aggressively reduced SDMA and have access government support programs where possible.
We have also lowered our level of capital spending to conserve cash and are aggressively working to reduce working capital.
Please turn to slide seven.
I'd like to now shift to our new segment automotive, which is the auto business previously reported as part of the VTS segment.
As we communicated last year with the announcement of our automotive exit strategy. This business is challenged from a margin and cash flow perspective, as we focus on reallocating capital amongst our segments.
Combined with the coal that impact you can clearly see the challenges we face in this segment.
Isolating the business with a separate team and objectives is a critical step as we continue our exit strategy.
As most of you know the global automotive industry is the one of the hardest hit by the global pandemic.
Sales in the automotive segment were down 45% from the prior year was the biggest decrease coming in Europe, which is also our largest market.
Sales in Asia were relatively flat from the prior year in North America sales were down in line with the market.
Sales during the quarter were also significantly impacted by customer shutdowns.
As all of our automotive plants, where eventually force to close.
All plants, where reopened by the end of May and we began to see a recovery in June particularly in Europe.
Similar to the East segment Theres been a strong focused on cost control in this segment as a result of the volume declines.
Again, it's difficult to predict a market outlook for this segment, but overall, we expect the market in Asia to be flat to slightly up.
In Europe, and North America to be down 10% to 20% from the prior year.
We expect the first quarter to be a low point for us with sequential improvements in revenue and earnings each quarter.
Yes, sure that this business is being managed much differently than in the past with an emphasis on cash flow, while we reallocate capital to the higher margin businesses.
Please turn to slide eight.
As we navigate difficult market conditions brought on by the pandemic, we've taken actions to minimize their downside results.
And prepare for an eventual recovery.
First quarter sales declined by 181 million or 34% led by slower demand and vehicular markets commercial hvdc in our markets.
And with our largest datacenter customer.
Downside conversion on the lower revenue was supported by favorable operating performance in labor cost reductions across all segments.
Our gross profit decreased by 37 million to 46 million, resulting in a gross margin of 13.3%.
Despite the gross profit declines I want to highlight the progress achieved in our billing Hvdc segment, which is one of our targeted future growth areas.
SDMA, a 45 million was lower than the prior year by $19 million or 30%.
This decrease was driven by lower spending on the automotive exit strategy.
And difficult actions to lower employee compensation costs and discretionary spending.
While we anticipate a recovery in the second half of our fiscal year, we've expanded our savings initiatives to address potential headwind.
Adjusted EBITDA of 20 million was down 27 million from the prior year. This was driven by the previously mentioned volume declines and partially offset by favorable gross margin performance and as Jumei reduction.
As usual our appendix includes an itemize list of adjustments in a full reconciliation to our us GAAP results.
Our first quarter adjustments totaled 5.1 million, including 4.6 million from restructuring activities as we reduce headcount and consolidate footprint.
As previously discussed the automotive separation costs were minimal in the quarter.
We had a small tax benefit in the quarter on the pretax loss. This was driven by losses in jurisdictions with valuation allowances and by changes in the mix of former in USA earnings.
Adjusted earnings per share was a negative nine cents.
Down 40 cents from the prior year.
Turning to slide nine.
I'm very pleased with our first quarter free cash flow of 3.2 million, which represents a $23 million improvement from the prior year, we typically experienced negative cash flow in the first quarter, our adjusted free cash flow was nearly 11 million.
The positive cash flow was driven by a number of items, including lower spending on the automotive exit strategy, good working capital management and lower capital spending.
Net debt decreased slightly during the quarter and our leverage ratio of 2.9 times was well within our covenant limits.
I want to highlight in these difficult times, we continued have ample liquidity to run the business and execute our strategies.
Now, let's turn to slide 10 for our fiscal 21 outlook.
With so much uncertainty surrounding the global account economic recovery.
We will not be providing formal guidance at this time instead, we will provide high level insights and outlook for the balance of the fiscal year.
Although we are pleased with the performance of our plants worldwide. We are still planning for difficult market conditions to continue through the summer, especially in our vehicular markets with a slow recovery in the second half of our fiscal year.
There have been no major changes to our market outlook since we reported last quarter.
And we expect the datacenter market to continue to drive growth in our building Hvdc segment.
We're clearly seeing positive trends, but the recovery will be slow we expect second quarter sales levels will be sequentially higher than the first quarter, who could be down as much as 20% from the prior year.
We will continue to offset negative volumes with cost actions, including salary and benefit reductions furloughs in short and work weeks where appropriate.
In addition, we continue to aggressively manage our cash through a lower capex spending and working capital management and expect this to result in positive cash flow for the year.
Maintaining a strong balance sheet and preserving cash is a high priority.
We continue to navigate through this crisis with an equal focus on cost control cash generation and targeted growth.
Loading will emerge stronger with a better mix of higher margin and growth businesses.
In closing I'd like to take a moment to acknowledge David Leiker from Robert W. Baird, who passed away recently, David was a highly respected analysts and more importantly, a great person who was a pleasure to work with David and his engagement. During these calls will be greatly missed.
I'd like to personally think Tom Burke, who established a world class culture at Modine and served as a mentor for many.
We are undergoing a lot of changes that are fortunate to have a strong and experienced leadership team and dedicated employees around the world.
Our cost cutting actions have impacted everyone in the company and we have not made these decisions lightly fourteens progress and success is due to the sacrifice and dedication of all employees around the globe.
With that we'll take your questions.
If you have a question ill defined please press the star then to one key on you touched on this phone.
If your questions asking him topped all you wish to remove yourself from the Q. Please press the pound key.
Our first a question is from Mike Sneeze key of Holier Securities. Your line is helpful.
Good morning, guys.
Hey, good morning, Mike.
Ill decayed my question to David who I also knew was a great guy as well.
So starting off with.
Your outlook for the particular markets for the year, you had mentioned that.
Hi was slow recovery in the back half of the year.
Does that kind of imply that the.
The second fiscal quarter here will be now my shares in the first.
Yes, Mike, we're expecting second quarter to be sequentially better than Q1.
And.
No versus a 34, 35% revenue decline in Q1, we think Q2 will be sequentially better, but revenue will be down it could be as I said between 15, 20% down versus the 35.
And then we expect as we continue Q3 in Q4 will sequentially B.
Better as we go through the year.
Okay.
Switching to those source will grow new CEO.
Let me talk if you're looking at Los Angeles, Carol tumors Dino if the board has engaged with outside nuclear declined somewhat.
Yes, so Mike as you can imagine that the board data search committee I am not involved with the board discussions, but I can share with you what weve.
Issued in the press release in what the board has shared in that is they have engaged with the search firm that is well underway and that they are willing to consider both external and internal candidates in the process.
Okay.
Turning to your auto the auto potential auto sales that business.
Are you engaging with the chain buyer that you're looking before or have you basically said a whole new process at this point.
Yes, it's.
As we talk to last within our Q4 in Tomlin sucking coming a little on say coming out of the pandemic, but as things were starting to stabilize we engaged reengaged with both parties that had been active tree Colvin.
And though is that.
Hadn't really fully engaged so there's a caught there's been a combination of.
Buyers jumping right back in and then new ones, becoming more engaged.
Okay.
I want to also ask that you have a hot topic. These days.
Yeah.
Alternatively fueled trucks.
I guess.
Can you think shareholders will both be more detail about what what gives modine has to offer to a hydrogen fuel cell system.
Okay, Let's say Redwood battery powered or diesel powered vehicle is either similar content per vehicle.
Yes, I'll stop there, but maybe I should also asking the same question you know application.
I think develop a.
Well portfolio of products to be.
These truck makers needs in this area.
Do you have any feel for whether your competitors have done as far as as you have to work with the Oems and.
Hey, good awful a whole product lineup Don.
Yes, so a few questions I mean, there's a lot in there Mike I think hub.
Still on the us on the specialty is saw specialty vehicle side, we have a leading position there and from a leading share positions. We feel very confident based on our book of business and the trends, we see moving very rapidly there towards.
Especially on the electric side that we've got a competitive advantage the truck side is.
Picking up pace as well the number of the inbound calls in development projects has been increasing.
And as you mentioned there is of a full slate of product offerings, including the battery thermal management systems that we've been actively working on with several key customers that like the rest. The truck my assumption is our competitors are working as hard as we are I can cause.
Comment whether.
We're ahead of them or I think all parties are pushing hard on that regard on the truck side.
We're excited because I think I will my estimation as the dollar value of content and the opportunity for us on a profit margin standpoint.
It is improved anytime there is a technology change.
So we're excited about the opportunity.
As the is this trough, we see truck going that way.
Also good progress I think the team was talking about in Germany. There was a large stimulus package release like 7 billion worth for transit in commercial vehicle incentives to.
Electrification and hydrogen based vehicle, so we see things picking up Mike and anytime that the technology change as a good opportunity for us.
Thanks ill offer one last one in there and just can you just your thoughts on the aluminum and channel raw material market, both in quarter and maybe in the current second quarter so far.
Yes, it's been a favorable for us this year coming down we see it it's been holding stable which is good.
We do have some expectations in the second half the year that we may see a slight rise in aluminum, but generally this has been something that's been in our favor this year and we don't see as a major obstacle going forward.
Okay got it. Thanks, so much I will hop back into queue, yes. Thanks, Mike.
Your next question is from Joseph Mondillo side on the on coal your line is open.
Hi, good morning, Mick Kathy.
Good morning over doing well.
I wanted to start with on the cost side, just wondering how significant is.
Consolidation in China bus.
Segment, and then maybe just broadly.
If you've been able to take out any costs on a permanent basis.
Yes to the.
On the China project, that's a plant consolidation and we estimate about 2 million of annualized savings would those savings will start to kick in in the September a corridor.
And there is also so little bit of government incentives built in so that I think total charge and cost to consolidate those plans to around 2 million or a little under in the first year savings on that will be 2 million, there's a quick payback.
And then with regards to.
Our cost cutting actions this year part of our.
SDG actions that started last year, we estimate about 10 million.
The permanent cost reduction actions.
This year and then as part of coal that activities.
That are more temporary in nature.
There is about 14 or $15 million worth of.
Temporary actions cost cutting measures that are in our outlook for this year that won't be permanent at some point those will return.
Okay, and so a couple of follow ups there the the $2 million related to the China footprint is that baked into the $10 million that you originally expecting or is that incremental to overcome.
Yes, thats incremental ups as part of our cost of goods sold reduction.
Okay, and the 14 to 15 that's.
Mainly a savings that you see this year, although I'm sure volume dependent.
So at this time, you expect to see those savings this year and start to return and 21.
Borrowing.
Stronger recovery in volumes.
Yes, correct we're.
The run rate were asked this year, our SGN A.O., probably the run rate were on Friday between 195 and 200 million.
I would say normalized when.
People are still employees are still under wage reductions in that type of activity.
A normal SGN a run rate is probably about 15 million higher than that.
Okay perfect.
The CIO segment.
Paul I have in my notes.
Stated on that Youre sort of anticipating maybe a 20% decline that that data center customer in the presentation. You noted that you anticipate.
Flat to up this year, so have things shifted maybe with stay at home and cloud at pivoting to do this update us with your thoughts on that particular revenue stream.
No I think I confused do on that on on that message, we expect the market to be flat to up we still see growth in the data center market in SIIA gas, where clearly expecting our datacenter revenue to be down this year and naturally.
Cause still much as CIA asked is driven by a one customer.
And then but I do what I do want to be clear about is we are we need we know we need to diversify our customer base on data center and we are the building hvdc that the datacenter growth outside of the one customer this quarter was north of 50% and were.
Adding 40% to 50% type datacenter growth this year for modine out excluding the one customer.
Okay and are you still looking for me.
This sort of backing in its you know.
Im calculating that potentially you could see about CHF datacenter customer potentially a 50% increase in fiscal 2002 is that.
The kind of.
Visibility that you have in difficult pointer.
Yes, we typically with regards to.
Good.
Orders and firm commitments.
And guidance from the customer as typically those three to six months out, but we have regular conversations with them in for.
Several months now the indication from them is that is that's a heavy ramps that theyre planning for our next fiscal year should begin.
Later this fiscal year early calendar 21, but calendar 21, this customer's anticipating a ramp up in their build rates and thats been consistent.
Okay.
As far as your mouth market outlook, I guess I got a little confused with market outlook and.
Yeah enterprise are anticipating I can see than in the presentation now.
Could you just decipher why the market outlook is different commercial HVAC, exzeo yachts, and the ventilation and they see market outlook.
Truck segment, and then related to the.
Could you comment on what your thoughts are with nonresidential construction and people are low maybe a little concern with the nonresidential construction starts in the second quarter and maybe we see.
In terms of.
Towards the end of this here into early next calendar year.
Yeah for sure. So let me first talk about the the difference between.
Building HPC and on CMBS Theyre building HVAC segment has a much heavier mix our products in there are ventilation equipment.
Products that go in the commercial a C and.
On the T.I.S. side, it's a heavy most of that our replacement coils that go into across the HPC industry, including residential and refrigeration. So we're we're able to narrow down our markets a lot more.
In the building HPC side, and we expect that commercial ventilation air conditioning, and we also were seeing good orders, we have to help sell products into the school market.
So thats why we expect this slightly better market outlook and building HVAC and then see I ask you can think about it thats a pretty broad.
Brush across the entire hbaonec industry, and I said, it including residential and a lot of replacement business as well and to your question as we look about.
No construction and that we.
On the building Hvdc side, both heating and the AC and air conditioning side, although there's a lot of replacement business as a heavy replacement into a high commercial applications. So when we think about the rest of the year.
We are expecting kind of flat heating market, but also weather plays a major component.
And then we are seeing a real strong order book in building HPC, that's giving us a lot of confidence of as we head into the second half of the year and those are custom solutions for either new or replacement applications.
And then back to see so much of that is short order replacement.
We saw on that first quarter. The age eight track side was down about 24% refrigeration down about 35%, it's much broader of really tied to the general economic conditions.
From the CIA EPS side than anyone any one indicator, though one bright spot I pointed out is we do sell products that go into recreational vehicle market.
And with.
Everybody seems to be taking.
Travel vacations, instead of flying and we're seeing a good uptick in products in SIIA coils that go into the recreational vehicle market.
Okay and lastly.
Ill jump back in two regarding the segment.
Could you give us an idea of how your bookings trended from April July I'm guessing.
It was a pretty big fluctuation when you look at that on a monthly basis, just from what I've heard from some of the Oems, but could you.
Tell us what you've seen in your business there.
Yes, it a couple big changes we've seen one across the board seems to be the most strengthen recovery coming out of China.
And I believe the month to June excavator sales will not modine, but the market was up like 60% Theres a lot of.
Government incentives going on all the way across auto too.
Truck income and off highway equipment, so across the board we are seeing both in auto and HD. He probably the best recovery coming out of China, and then with regard to Europe, and North America H D.
Europe seems to be strengthening a little bit quicker.
Now in our HD East segment, Europe, So really it really relatively small piece, where a heavy north America base.
And what we're seeing in North America from our last on our when we talked at the end of May was very little customer communication. This may be what you're hearing the customer communication and guidance with regard to order input order.
Entry was very limited.
Thats been firmed up and what we've seen in the past months is a lot more stability what the caught up customers are ordering they're taking for delivery. So we feel good about that and and that bodes well for the improvement in Q2.
What what's still an open question, even I think among the Oems is just how the second half.
Our second half of the year, we'll look this September December quarter end.
Heading into early 21.
Okay, Great will hop back in queue. Thanks off all right. Thanks.
Your next question is from Mop Somerville of D.A. Davidson Your line is open.
Thanks, Good morning.
Mick will whats a realistic free cash flow conversion rate per modine, this year and how should we around net income and then how should we be thinking about decremental margins across the businesses going forward.
Yes, so we had.
Hi, good decremental, we think of it as a gross margin conversion I commented about in our SGN a run rate for the.
First part of the are for the full year. Our Q1 downside conversion was just a little over 20%.
And as we go through the year I think we're targeting the whole that about that.
If we.
If we're just converting at a variable rate and that taking out any fixed costs, our conversion rate would be 25 or 30% to down on a gross profit line.
So we're trying to pull that down and also manage fixed costs. The best we can so short answer.
Trying to hold it around a 20% downside conversion at the gross profit line.
We don't necessarily Matt look at free cash flow too.
To a net income level, but we are targeting.
About 50 million a free cash flow this year.
And so I think.
Based on our while we do ratio door EBIT.
[music].
I think.
Probably do ratios to EBITDA, I think anywhere between 30% to 50% of EBITDA would be what we'd be targeting.
Got it and then you mentioned in your prepared remarks to you access governmental support programs was there any sort of.
PML benefits from that in the quarter.
Yes, so on the.
On the gross profit side, it's really a wash.
For for mostly across the globe, we have people on layoffs are temporary work and then they collect on employment.
And then on the in Europe, it's a slightly different situation where they.
They have the companies continue to pay for the.
Workers salary, even though they're not working and then you get reimbursed or the worker gets reimbursed. So is it short answer is on the cost of goods really awash in Europe, we do have.
Some what we call short workweek programs that are government sponsored that's about a $5 million benefit or savings this year and when I talked about 14 or 15 million a cost savings that are really going to be temporary this year. That's part of it about five of it would be.
Based on.
Government programs.
Got it some them.
You mentioned to a prior question kind of talking through the HDD business on how things trended over the course of the last few months can you maybe just spend a minute talking about the other three segments, maybe how how far down incoming order rates fell on a year over year basis in April and may be how those are.
Trendy now in July just to get us fuel for the cadence you bet experiencing thank you.
Yes the.
The best way to answer it is when we headed into April and May.
The amount of visibility in order intake almost completely stall.
At one point we had.
60% of our factories, where either closed or running at.
Single ships.
And now.
May starting in May we simply start to see some firming up of.
Late May orders in June was really the first.
Month, we saw some stability where orders coming in and.
Taking delivery, we also had some situations where.
Customers weren't adjusting the order.
And they were taking the orders that were in the system and we were trying to adjust to that as well. So I can't give the us from you know sales numbers by month delay I can tell you as we've seen a nice trend from April to May to June and it seems to be continuing in July of.
What people are placing that they're taking and the orders seem to be improving at the the rate we've been projecting in planning on.
Got it thanks bye.
Yeah, I just wanted to clarify when I mentioned in the cash flow I was referencing adjusted free cash flow for the year. So what we're targeting.
Great. Thank you yes.
Yeah.
Again, if you have a quick Tom. Please press Star then one key on you touched on telephones.
Your next question is from duplex loan deal side on the young coal your line is open.
Hey, Mick just two quick follow up questions as far as.
I guess be track in FY <unk>, yes.
One of the concerns I guess within the eight track space just in general.
So.
Probably more so new construction, but ER construction of retail hotels office as you can imagine.
Those end markets potentially could three more of a.
Also year hit to the to the market there is related to covert I'm wondering what your exposure rose to those.
Construction markets.
Specifically.
Yep.
Relatively small we.
We have a small and growing ventilation business.
When you break that down the ventilation air conditioning businesses about.
40% of 200 million dollar segment.
And then that's split between the commercial applications.
And school their school business as I mentioned as well.
Right now we've got really good order intake. So we're feeling good and a lot of that is.
Don't as I mentioned, a fair amount of that his replacement.
The only the one caution the team has said we're watching is making sure on the school side projects are fully funded sometimes we've seen where we've been awarded of a project and then funding can get delayed.
So.
Based on you know us having kind of small growing business in the mix that we have.
And in the UK, we have a lot of ventilation business that kind of goes into hospital settings, I forgot to mention that there's been some positive trends, obviously was cold bid, where we have getting orders and inquiries for equipment that go into hospital settings.
I think pretty balanced I understand your concerns that seems to be pretty balanced with regards our age HVAC system.
Okay, and then at Celia specifically I.
I know for a little while it's been a focus of trying to.
Improve the margins above business.
Just wondering could you remind thats I can't remember if you have financial goals out their targets.
But where you think.
The margins at this business could be in how long of a timeline that would take.
Yes.
Tom as mentioned in the past and I still firmly believe that that our CIO gas segment should be operating at.
12% to 13% EBITDA margins.
We had been operating in the 10 or 11% range. There a couple of things going on that over the last.
Year, that's been a lot in noise.
After fiscal 19, so last fiscal year, we saw a significant drop 30% plus tight with our datacenter business.
Which is.
Impacts our mix than our margins and then as we head into this year. There was another plan drops so that's one thing happening behind the scenes.
And then coal that as well from a pure volume impact has impacted our business.
We do have a team isolating the biggest opportunity for us is our coils business, which is the largest business within SIIA.
Three to 400 million dollar business.
And we have a team focused on that.
And we do see improvement when you isolate the mix issue a data center.
Volume issues and the last report for example, and we looked at the trends do last fiscal year. We saw an 80 basis point improvement through the work the team and done on costing and pricing.
Going to take a little while the work through there and then there is also going to be some.
Customers that we have to address pricing list that we may not retain but obviously when we do that we feel strongly that.
The right decision for the company, if we do not if we happen to lose a piece of business silver low margin.
Hope to answer to question, Yeah, I know it doesn't just just a quick follow up related to that though.
And some more so related to the outlook so yes.
I don't I may have missed this in your prepared commentary, but datacenters, obviously expected to be down for a log.
For the year.
And then refrigeration I'm guessing is probably the other big headwind in that segment.
Relative to the decline that you saw in the first quarter.
How do you think about the rest of year as far as about 27% decline in the first quarter.
Yes, great question.
It's very similar to how we see the rest of the company and we see Q2 for SIIA, yes.
And I'll just talk revenue will be sequentially better not only in dollars that that percentage decline and then we see Q3 better than Q2.
And we're optimistic as we get to our Q4 and remember that next calendar year, we start to see things starting to rebound and even start heading into a revenue growth territory. So we see sequential improvement each quarter.
Okay. Okay.
I appreciate that thanks for taking my follow up questions and good luck with everything.
Thank you.
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