Q3 2021 Modine Manufacturing Co Earnings Call
Capturing companies third quarter fiscal 2021 earnings conference call at this time, all participants are in a listen only mode.
Later, we will conduct a question and answer session and instructions will follow at that time.
One should require assistance during the conference. Please press Star then zero on your Touchtone telephone.
As a reminder, this conference call is being recorded.
I would now like to turn the conference over to your host Ms. Kathy powers, Vice President Treasury Investor Relations and tax.
Good morning, and thank you for joining our conference call to discuss <unk> third quarter of fiscal 2021 results I'm joined on this call by Neil breaker of President and Chief Executive Officer, and Mike Lucarelli, Our Vice President Finance and Chief Financial Officer.
I'd like to take a moment to introduce Neill, who joined Modine as president and CEO on December one.
<unk> came to us from advanced Energy industries, where he most recently served as president and Chief operating officer and prior to that led global sales marketing engineering and operations for Aes semiconductor telecom and networking data center industrial and medical market.
Prior to joining a Nielsen of <unk> six years with IDEXX Corporation in a variety of senior leadership roles. We are very pleased to have Neil leading our team here at Modine.
We'll be using five for today's presentation, which can be accessed either through the webcast link or by accessing the PDF file posted on the Investor Relations section of our website Modine Dot com.
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 and Exchange Commission with that it is my pleasure to turn the call over to Neil.
Thank you Kevin and good morning, everyone. It's been a busy first two months of the Modine and I'm encouraged by what I see.
Most of my time connecting with the senior leadership team and getting to know the business I'm honored to be part of the company with such a long and rich history.
I'd also like to share my appreciation for everyone. In this organization that has gone above and beyond expectation. During this past year to respond to the global pandemic.
In addition to all of our employees I would also like to thank members of our supply chain for keeping us running efficiently and for our customers who have continued to give us their business and their trust.
This has been a difficult year to say, the least and wouldn't have been able to deliver our financial results without the hard work from all of these key stakeholders.
The team has also done a great deal of heavy lifting and preparing for the exit of the automotive business and those plans are on track.
As a reminder, last quarter, we announced the sale of our liquid cooled business the Dana.
The teams are currently working through all pre closing items, including the required regulatory approvals around the globe.
Of this process has been initiated and we anticipate the close sometime in the June quarter.
For the air cooled business, which represents a much smaller portion of the automotive segment.
Diligently working on multiple income strategies.
As previously discussed we've talked for several interested parties and are getting closer to a definitive exit plan.
The exited the automotive business is an important step in our strategic transformation that will allow us to further focus on the future.
As the teams work through the auto exit work streams on personally focused on the next chapter for Modine.
These are certainly exciting and challenging times for our company and.
And I see great opportunity for growth and for further improvement to our business model.
One of our key priorities is to expand our presence in the data center markets.
The data center market in North America, and in EMEA are large growing sectors with strong underlying drivers we.
We expect this growth to continue for some time.
Modine has full thermal system expertise and the.
<unk> of product technology focused on lowering cost of ownership and our global footprint to support our customer locations.
Modine has strong relations with drilling co location customers and our key hyperscale clients, providing leverage for continued growth in Europe and in North American markets.
We've talked about growing our share in the data center market for some time.
And let me reiterate and be clear.
This is one of the best opportunities for Modine to drive higher growth and profit margins.
Here's the immediate for step plan on what we will do differently to win additional market share in data centers.
Non.
Organizationally, we're consolidating our leadership for data Center solutions under one key leader here at Modine.
We will align our organization around our customers and markets, which will remove internal barriers and increase our speed and accountability.
Two we are increasing our manufacturing capacity by leveraging our global footprint to deliver data center products at scale and in region.
We are expanding capacity on our computer room air handlers by Industrializing. These product ranges in the U S and in Spain.
We are also investing to build and test chillers for the North American market.
Three we will continue to invest and scale of our commercial and technical teams to better align with our customers and.
And finally, we will use the data center market is the pilot for our 80 20 initiatives.
Many of you know my background and success with eight of 20 companies in Modine will adopt the same 80 20 principles, helping shape, who we are in the future.
As I mentioned, we will launch of pilot within the data center business training our team in advance of of companywide rollout.
As you May know $8 20 as of systematic way of examining of business and focusing resources on the highest growth and best returning opportunities.
Our opportunity is the focus both on improving margins.
And accelerating revenue growth.
We will eventually worked through all of our other key markets in a disciplined manner.
The 80, 20 process and methodology will take some time to fully implement across the company and we will invest time and money and is a very important area. The.
The result of this process has been successfully proven across many companies and I am confident the modine will be no different.
Finally, I want to mention that our focus includes both organic and inorganic growth.
Nick and I will spend significant time ramping up and aggressive and proactive acquisition program here at Modine specifically.
Designed to shore up our products technologies and channels, where it makes sense.
Now, let's cover our third quarter segment results on page four.
<unk> sales were down 13% from the prior year.
Primarily due to lower sales to a large data center customer, which were down approximately $19 million versus the prior year.
Adjusted EBITDA was down $10 million similar to revenue nearly all of the earnings decline was due to the lower sales with one customer.
I would like to take a minute and walk through the changing dynamics of this market, while reiterating our confidence in our strategy.
As you know our largest customer in the Crs segment as the Hyperscale data center customer.
While the Hyperscale market has grown at a good rate this past year. Many hyperscale providers have chosen to scale back their large scale capital expenditures for DC construction.
In order to keep pace with the growth many hyperscale providers have leveraged the rapid growth of co location to expand their DC footprint.
During this period, we have collaboratively work with our clients of design their next generation of cooling technology for large scale data center construction.
We expect that we will see orders for these innovative and proprietary cooling products ramp again in fiscal 2022 and.
In addition, I previously mentioned that we are consolidating leadership and focus on the data center markets to continue our growth with both Hyperscale and Colocation clients.
At the same time, we will evaluate different alternatives to better align the external reporting of our consolidated data center business. Since it currently resides in two business segments.
Besides of the drop in sales <unk> margins were also negatively impacted by expenses to complete the final phase of our plant consolidation in China. This is now behind us and we expect those inefficiencies to improve going forward.
Last the team remains focused on improving the profit margins of our coils products and driving growth in coolers.
Encouraged and I look forward to utilizing our 80 20 process to accelerate this progress please turn to page five.
The building HVAC segment had another strong quarter with sales up 6% from the prior year and adjusted EBITDA up 15%. This was primarily driven by increased sales of heating products in North America and of data center products in the UK.
It continues to be of strong heating season for us with strong growth and share gains in our gas units heater products.
There has been a strong demand for replacement unit heaters. This year, we estimate that more than 70% of our heaters are sold as replacement units.
We also gained market share, mostly due to our strong distribution partners and our superior product availability.
As an example, our hotdog brand of products, which are typically used in residential or light commercial applications are up 35% of the third quarter versus the prior year.
Whereas we believe the market to be up around 10% in this product category.
We've been able to be successful keeping up with the increased demand often providing next day shipping for these orders.
The higher heating product sales also drove strong margin performance this quarter with excellent conversion on the increased volume.
And data centers, our UK business is having an extremely good year with data center sales of 30% on a year to date basis.
Third quarter sales were up slightly from the prior year impacted by the timing of shipments with several orders pushed to the fourth quarter our focus within data centers for this business is on the co location customers.
These clients value, we need our thermal expertise as.
As mentioned previously we will leverage these relationships formed in the UK and EU to establish our business in the North America market.
Please turn to page six.
Sales in heavy duty equipment or hte were up 13% from the prior year with higher sales to off highway and truck customers in all regions as markets continue to stabilize.
Adjusted EBITDA nearly doubled with a significant improvement in gross margin driven by volume increase along with savings from procurement and other cost reduction initiatives.
This was clearly a great quarter for our HDD segment.
Our net fitting from a market improvement that was ahead of our expectations.
We expect this trend to continue in the fourth quarter as many of our customers are building safety stock.
We continue to monitor a number of issues that may impact, our raw material costs, including tariffs and the rollback of certain exclusions that we benefited from in the past.
We're always working to improve our manufacturing and supply chain strategies, which have been complicated by geopolitical and economic trends, including tariffs.
This will continue to be of focus as we analyze our risk and implement mitigation strategies.
This is another excellent opportunity to use the 80 20 methodology the quickly drive improvement and focus in on our supply chain activities.
Please turn to page seven and I'll shift to the automotive segment.
All of our down 3% on a constant currency basis, driven by lower market demand in North America.
Partially offset by higher sales in Asia.
Adjusted EBITDA for the segment was $12 3 million up significantly from the prior year, primarily due to the improved plant efficiency and the benefit of cost saving measures.
We expect further uncertainty in this market due to ongoing economic weakness and in addition, we may be impacted by the current disruption to the auto industry, resulting from shortages of semiconductors.
We did not see a great deal of impact from this in the third quarter, but anticipate that it could start to impact volumes in Q4, as more and more automakers pulp production due to chip shortages.
As I mentioned before we are diligently working on our exit strategy for this segment, including closing on the sale of liquid cooled business that is still pending regulatory approval.
With that I'll turn it over to Mick to review the total company financial results.
Thanks, Neal and good morning, everyone. Please turn to slide eight.
I'm pleased to report of good third quarter and before walking through the underlying results I'd like to review of two large items that impacted our GAAP results this quarter.
First we recorded a $134 million of impairment charges, primarily related to the liquid cooled automotive business.
As a result of our agreement to sell this business, we wrote down the associated assets.
Upon closing, we would anticipate reporting of final in much smaller noncash loss on the sale.
Also connected to the third quarter of impairment charges, we recorded valuation allowances on deferred tax assets in the U S and abroad.
Partially offset by tax benefits for.
Related to the impairment charges from.
The net tax impact of these items was $79 million.
In order to provide a true comparison slide eight is focused on adjusted operating metrics as usual our appendix includes an itemized list of adjustments and of <unk>.
Full reconciliation to our GAAP results.
Third quarter adjustments totaled $139 1 million, mostly comprised of the noncash asset impairment I just reviewed.
The remaining balance includes $3 million related to the automotive exit.
Along with $1 7 million of restructuring activities environmental charges and CEO transition costs.
Now shifting to the key metrics third quarter sales increased by $11 million of 2% as compared to the prior year.
The increase was largely driven by favorable currency translation.
I am happy to report gross profit of $83 million, which was higher than the prior year by $9 million.
Our gross margin once again exceeded 17% and improved 160 basis points.
The higher margin was achieved through procurement operational efficiencies and various spending reductions.
As discussed last quarter, we ramped down our Covid savings during Q3, which is leading to more normalized cost in margin as we go forward.
SG&A finished 12% of $7 million lower than the prior year the law.
Largest reduction relates to lower automotive separation costs.
We also benefited from permanent cost reductions executed late in the prior fiscal year as well of temporary COVID-19 related cost savings.
Despite the pandemic and challenging market conditions, adjusted EBITDA improved by $3 million, including a 40 basis point margin improvement.
Our adjusted earnings per share of <unk> 41.
With four cents of 11% higher than the prior year.
Margin of the previous quarter of the improved Q3 financials reflect the hard work of all employees around the globe lots of hard work cost cutting and the dedication of resulted in higher earnings and margin during this very difficult operating environment.
Let's turn to slide nine.
In addition to the income statement improvement I am pleased to report year to date free cash flow of $123 million.
This extraordinary performance was driven by a number of items, including operating cost reductions reduced the automotive exit spending lower capital spending.
Cares Act deferrals and effective working capital management.
We continue to repay debt with excess cash, resulting in a leverage ratio of one nine which is our lowest level in four years.
As we look to the full year, we expect free cash flow will be negative in Q4, due mostly to the timing of some large cash payments, including required pension contributions higher capital spending and working capital.
Again, I want to highlight that the cash flow and balance sheet position of our key successes this year, allowing us the head into our strategic transformation for the strong and flexible financial position.
Now, let's turn to slide 10.
With our fiscal 2021 outlook after analyzing the incremental tailwind van headwinds, we are maintaining our full year outlook.
Our revenue guidance reflects a 7% 12% decrease with adjusted EBITDA volume within a range of 155 two of $165 million.
Although our markets are largely recovering from the pandemic, we continue to see pockets of softness as well as rising commodity metal prices and lingering tariff challenges.
The recent trends in our heavy duty equipment market are very encouraging with automotive market semiconductor shortages needs to be closely monitored.
While holding the full year EBITDA guidance, we continue to see a dip in our Q4 margin due to a few transitory items.
Including tariffs and metal increases not yet passed through to our customers.
The delayed ramp up of <unk>.
Data center shipments to early fiscal 'twenty two.
Complete phase out of Covid recovery measures in Q4.
Finally, our fiscal 2021 outlook includes the full scope of our automotive business, including the liquid cooled portion that is in the process of being sold.
As discussed in the past we will continue to forecast annual report the auto segment results until the transaction closes for further actions triggered the change in the accounting treatment.
Given that were of March year end company and the team is in the middle of the annual planning.
That said I'd like to share some preliminary thoughts about the end markets and earnings drivers for the new year.
First we're encouraged about good market recoveries and tailwind across nearly all of our business segments.
We anticipate very strong data center growth across the entire company. We also expect the benefit from the ongoing recovery in.
In our commercial vehicle and off highway markets.
And for the broader Cif and building HVAC market, we see a slow steady recovery through calendar 'twenty one.
As we head into the new fiscal year, the volume increases will help to offset some economic headwinds that many companies are encountering.
The largest impacts will come from the rising commodity metals cost plus new tariffs.
And the resumption of the employee related cost to pre COVID-19 levels.
Last and with regards to auto we expect the transaction with Dana will close sometime in our fiscal first quarter.
Like many companies we've dealt with our fair share of the Covid related challenges.
However, the results show the strong focus on cost savings and cash flow.
We look forward to resuming and accelerating the growth opportunities that lie in front of us with that now I'll turn the call back to <unk>.
Thanks, Nick.
In conclusion, I would like to reiterate what an exciting time at as for Modine.
With the introduction of the COVID-19 vaccine, we are on a road to recovery, but in the meantime, I am so proud to be part of this organization that has been positively impacting people's lives. During this difficult time.
Since the pandemic began our building HVAC team has emphasized how important indoor ventilation is for school environments.
Our school ventilation units can greatly improve indoor air quality.
Lower energy costs and help prevent the spread of pathogens in the year clearly important objectives for our school districts around the country.
Our HVAC systems currently have a positive impact on People's lives from keeping schools safe to intelligent cooling and greener data centers.
We will continue to invest in and grow these important product lines lastly.
Lastly, I would like to say of final word about 80 20.
As I mentioned, we are launching a pilot of the 80 20 process with our data center expansion.
And have developed goals and kpis to allow us to track our progress.
I believe that this pilot and future companywide launches will have a positive impact on all of our key stakeholders and will become the future lifeblood of modine.
80, 20 will drive our decisions and it will become part of who we are.
Although we anticipate some early positive results. This is the journey that will be on for some time.
And I'm, even more confident than when I started the modine has great potential.
We will leverage the great legacy and culture to make this a truly great company.
With that we will take your questions.
If you have a question at this time. Please press the Star key then the number one on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
The first question is from Matt Summerville of D. A Davidson.
Thanks, Doug good morning.
Maybe just start with mentioning the tariffs a couple of times during the prepared remarks rollbacks as well can you talk about how that's impacting modine.
Sort of.
The financial impact we can expect in that regard what the company can and will do to mitigate that how much you ultimately feel youll be able to recoup and also that includes the recent escalation of exchange and input costs as well. So maybe just spend a few minutes parsing those things out talking about how we should be thinking about that.
Yes, good morning, Matt, It's Nick I'll give you the.
I'll give you some of the the numbers behind in what we're seeing and then I'll, let Neil wrap up with <unk>.
The.
<unk> been doing with the supply chain to address the mitigation effort. So.
The last year as you know we had some new tariffs come through there were some.
Tariffs put on stainless steel and products, we had coming in from China and we eventually.
Given exclusions on those.
And those exclusions of some of those were <unk>.
The expired and or removed and now we've got some exposure there on the stainless steel side.
Then.
Late in the fall there was a large anti dumping tariff applied of 50 plus percent of tariff on aluminum products coming in from Europe.
And that then another large impact to the company in the quarter, we estimate that it's about a $2 million to $3 million impact in Q4.
And through our mitigation efforts we've got.
Both on the supply chain, and where we produce where we import materials to and where we convert these materials to finished products. We have some mitigation effort, we think net.
The next year that that's probably $3 million tight.
Net headwind for us.
If you annualize the $2 million to $3 million in the quarter, that's the big annual number, but we've got a number of actions between the switch.
Switching suppliers, I mentioned, bringing product into the different modine locations.
Also <unk>.
Sharon relationships between our suppliers and our customers. So I'll pause there and see of Neil If you want to add anything from your side, yes. Good. Thanks, Mick Hi, Matt Yeah, that's of Great question.
This is certainly highlighted an area for us.
Where we can improve our ability.
Around our agility and flexibility with our operations footprint and our supply chain strategies. So we're actively looking at short term and long term counter measures on how we're going to mitigate and that ranges from shifting production to.
Plants that aren't impacted by the tariffs to shipping equipment from plants.
Based on demand as well as the impact of tariffs. So this has really opened up an opportunity for us to look at our operations footprint to look at our supply chain strategies and break that down by of commodities and come up with some very creative ways.
To mitigate this issue.
Got it.
A follow up maybe Neil spend a minute talking about kind of the 80 20, and I know you've only been in place for about two months of all so it's still very early but maybe just if you have some high level observations in terms of maybe what you feel will be borne out of that upwards in the near term versus maybe the longer term and what sort of external metric.
Rich.
Might be willing to provide us a week from sort of gauge your progress on the deployment of the $8 20 of the segmentation process associated with it.
Yes, very good question, Matt there are 2020.
Systematic way of examining the business and focusing its precious resources and I mean their precious here.
We run pretty lean on the highest growth opportunities, while reducing complexity and improving the margins through product and market rationalization.
And my early observations are.
We've got to get a quick win and I think our best opportunity I know our best opportunity after.
Consulting with the leadership organization here is on the data center side.
Just some things that we can do right out of the gate that make a lot of sense not only externally, but internally. So that we can we can get it drive accountability into the teams and we can give them what they need to win and they are very much commercial and focused with our customers.
And it's pretty early in the process to your point, we're working through what those Kpis will look like.
Excited to say that we've got some consulting thats coming in next week, that's going to help us with this journey to accelerate it there is no need to.
To move at a slow pace here with the data centers I think we can accelerate the and from that over the next I'd say 30 days when we get through the.
The data analytics, we're going to be able to come up with some pretty strong kpis in terms of what we would expect to achieve.
Great. Thank you guys I'll get back in queue.
Your next question is from Michael <unk> of call your security.
Hey, good morning, everybody.
Good morning.
Great job, reducing the law.
Average over the last couple of years really by the first quarter in particular.
Just a sense, Mike what is the company's current kind of comfort level on what you'd like leverage to be.
And how much would you lever up for efficacy.
M&A of Youll ask sort of 1% growth.
Great questions and more fun questions.
Yes.
We've been out for quite a while talking about keeping modine, especially when we were 80% of vehicular a leverage ratio of one five to two five times my hope by the way of one of our longer term outcomes as being more diversified industrial less less capital intensive.
With that we might be able to look at that in a slightly different way.
But the good news is.
If lead that market tailwind, we exited auto we're quickly going to have a leverage ratio that it's already at the heading towards the low end of our range. So I think Mike.
<unk> Neil mentioned he.
<unk>.
Quickly accelerated our focus and asked me to do a lot of work.
Acquisition funnel and target. So that's one thing and to your question.
<unk> got.
Our capability within our credit agreements to do three three and a quarter of the leverage.
And the mill problems, there and we did that with move out of if you recall. So I think every situation is different but I would say.
We can do three three and a quarter of times, the leverage and along with the <unk>.
Good.
Integration and synergy plan quickly pay it down.
Gotcha.
The other question quickly.
Quickly here is.
I was wondering if you're curious the quick update on the on anything that youre doing in the EV world.
We are seeing some heavy truck platforms actually come to market small volumes, but they're starting from.
Through 2021.
You've already mentioned buses has asked the one bus company going public this year.
The next one bus company went public like just give us. Your second question of what are your of maybe you have one and how you feel about your chances of pre COVID-19.
Moving to other technologies or other products on those kind of of vehicles going forward.
Yeah, Mike I think I talked about this the little debt last quarter and then Neil is completely jumped in with our HPE team and as we think about 80 20 is the well.
The opportunities.
As you know on electrification and truck is.
It's growing quite quickly the amount of inbound calls and the amount of development activities. We have going on has really grown quite a bit we're working with.
The number of the mainstream companies.
None of which we can really talk about in the public Forum as you can imagine plus a number of emerging in the startup companies and the day of successfully seen that is in production orders development production.
Specialty vehicle in box.
The truck truck development cycles are quickly right behind there.
And then we're also doing a lot of evaluating of what other last mile vehicles right.
We will be the quickest most logical the implement from and the status.
Neil do you want to add anything from your yes, no. That's of Great question and this is a very exciting area not only for modine both for myself.
I will spend a little bit of time here in Racine, especially in the Tech center and as they go back into the Tech Center I look at.
Where we're at and we're at an all time high relative to EV commercial vehicles and bus activity.
With our prototypes and the team has generated some pretty substantial wins in terms of early development for programs and the EV.
The activity is extremely exciting for me because it's just not component related to the system related.
That's a new chapter for us at Modine, and driving value and improving the value with our propositions to customers with the system related response for solving.
Thermal challenges in the EV section of especially with commercial vehicle book. So it's a great area, we're going to have some focus on that.
Net area and the team has done a pretty good job in terms of getting out of the prototypes and the timely way so that we can get the wins.
Excellent I'll leave it there. Thanks, so much for you guys.
Your next question is from Brian <unk> of Gabelli funds.
Hi, good morning, everyone Vik good morning.
Welcome certainly to the Neal.
Neil.
A question for you.
Taking the step back to when the <unk>.
Courtship began what was it about modine.
That attracted you from the beginning and now two months in.
Anything that confirms for this confirms here for the initial impressions of the company.
Only positive cash.
All of this and no doubt about it.
Nowhere address an army of this has been of great. My early observations in the journey.
As I worked with Modine, particularly the leadership and the board was.
It's an environment that is ready to evolve and change and the best book was put forward with the.
The trend the transaction and the divestiture of that we're working through with Dana.
This speaks volumes and actions right.
There is a culture of is dedicated and motivated to turn the corner and Thats exciting for me.
And there's very strong innovative product technologies that was the absolute drop coming from highly engineered diversified.
The background that is something that in order to the successful you have to be innovative and creative and I see pockets of that in modine that we just need the untapped.
It has a rich legacy of the strong brand and we're going to continue to identify those target opportunities inside modine to support the transformation. So to me to be part of that change was pretty exciting.
Drew me not only of the team and the culture and the rich legacy of Modine, and its brand, but that transformational piece to be part of that.
That was that was very enticing.
Yes, I guess the along the same lines what do you think your mandate is from from the board from from the shareholders.
Drive the transformation of loading continue to do that and do that in a productive way, while we maintain in respect of the legacy of the company.
Great.
I look forward to eventually getting out the same day.
<unk>.
Maybe the parking lots, but I will.
We wish you the best.
Okay.
All of the next few years Brian.
Thanks, Brian.
Your next question comes from Steve Ferranti of Sidoti <unk> Company.
Good morning, everyone.
You've talked about the <unk>.
Adding the data center capacity in the U S Spain.
On the previous call just trying to get a sense of of the timing of that where the where you are in expanding that capacity is not part of the higher capex in Q4.
Yes, Hi, Steve its Nick.
Now in Q4 of the just kind of across the board thats been with.
<unk> shut down people working remote there's just a.
The general backlog of some things we need to get done the work.
There is the open up.
And then with regards to the expansion for Cif.
In Spain royalty of up and running in our Q4, which is great on computer room Air handlers.
Our crawl units.
And.
And the the chiller side and the U S that will be second half of our fiscal year, where it will be in production from that side.
Total capital spending it's another nice thing I like about.
This side of our business is.
Relatively speaking these are not large capital investments for us.
Large capital and told all of the third probably kind.
Kind of $5 million give or take co.
<unk>, one automotive program, which can be <unk>.
The $5 million to $10 million, just the lunch launch one with one customer.
So we're really excited about it and the the footprint there by the way again. These are two existing facilities. The proven management team. So in other reason why of the capital isn't overly large as we're leveraging the existing footprint in the in teams of employees that are quite capable to make these more complicated.
Systems as Neil pointed out.
Neil.
No I think you added the fact that were in North America, as well expanding the footprint not only in Spain with the North America as well so that's great.
The good good question Pete.
Okay.
And then I just wanted to follow up on the expectation on higher metal prices and the impact could you and I just wanted to clarify the did you see the cash flows higher metal prices didn't impact the P&L in the quarter you just reported.
And then the flip side of the question would be what's the efforts to mitigate higher prices will remain elevated for a while in terms of.
Price resets with contracted customers of pass throughs.
Yes, really good question and good clarifying for us So my when I answered a little earlier that was specific to tariffs the other.
I would say challenging inflationary issue is going to half of it going on as the world looks that Covid is the rapid rise of commodity metals with everybody at the theme copper aluminum steel.
For us we are heavy users of copper and aluminum a little bit of steel and in the quarter, we add of net year over year negative impact pretty small for us the only about $2 million.
The Ron really began in the metals since October we've seen kind of a almost a 20% increase if you look at next year average you know if things hold this day, where the market is expected to be with metals, we will see about a 20% increase on average in the raw.
The materials.
In Q4.
We expect the start to see the biggest impact the next couple of quarters. As a reminder, we have a lag we do of pass through so on Cif that business segment much more real time as we pass through each bid stack.
Graham we use.
Current material costs.
Building HVAC much the same way more real time pricing the current market condition. The then we're down to HPE, which has the long term agreements with the large oes.
Just about every customer has the pass through of agreement and then the difference is really the holiday work the lag of the timing impact of that.
And we tend to think about on average is about six months on the HPE side sales Q Q4 here for US Q1, Q, we'll be catching up.
But of $6 million, so I'm estimating impact in our Q4.
And next year in total probably again things day and anything can happen in the metals markets, but at least probably of 10 or $12 million of the metal headwind as we try to pass through of these prices and eventually catch up for the metals market that would be in addition to the tariff numbers I mentioned earlier Neil.
And I think that's of great explanation in terms of how we were maintaining the margin.
With the increase the metals, but in order to maintain the material velocity. We've also added safety stock and we've added the.
Safety lead times, we've executed on advanced bookings and we're redirecting since three free for less congested congested ports to prevent disruption. So is not only on the margin side of the world. We have a lot of activity in order to maintain on time delivery and lead times across the across the facilities.
That's really helpful. Thanks, everyone.
We have Matt Summerville from D. A davidson return to the queue.
Yes in the past you've talked about the.
The revenue associated with this large data center data center customer.
On the sort of eyeballing of $30 million kind of revenue number from that customer in fiscal 'twenty. One first is that accurate and then second Mick you've talked of in the past about how you expect that to ramp in fiscal 'twenty. Two what's your current read of our current update on where you think that number goes next year.
Yeah.
Good question.
The.
<unk> has really two pieces.
Again for everybody to make one step back to also neil's comments earlier.
Last year, we had about $40 million of datacenter business in building HVAC.
That is <unk>.
Similarly, U K systems, great margin business right, we want to do more of that.
And Thats, what we are also expanding globally and when we mentioned, Spain in North America.
When we acquired with Nevada.
Two pieces.
And probably.
On average about evenly mix of about $40 million of.
Coils that we sell heat exchangers into the data center market.
And we had one major hyperscale customer of about kind of equal size. So.
We've run in Datacenters and.
Cif P&L in that $60 million to $80 million of kind of range. This year as we go forward and what you are picking up is mostly this year. Our biggest sales will be that $30 $40 million worth of heat exchangers that we sell into the data center market the multiple customer.
<unk>.
And the large hyperscale customer over the last year.
Has really declined of pretty this in this quarter next quarter very nominal level, where they are in the middle of the technology trends transition.
So much lower.
I can't disclose the exact numbers math for you, but again think of it as $30 million to $40 million of.
Heat exchangers coils sold to multiple data center customers.
The one hyperscale customer in this year in total sales of the very very small and then I think you asked about the ramp up of Neil talked about it.
They have.
They are building their construction schedules their sites selected.
We actually of <unk>.
Complete at all of our technology testing and this is the very.
Complicated new proprietary system for this customer.
And we're very encouraged and optimistic and have a good line of sight for the ramp up.
In 'twenty one here for.
For the new site, we would expect them to get back to a normal level.
This year.
We start to ramp that up.
But.
For one or two years into Levada can we acquired them. We saw a really big growth, we almost kind of doubled in sales.
It's hard to say beyond that point I would say so the short run we see this customer getting back to an average of normal run rate for them.
And then beyond that whether there is upside to hit a high watermark too early to tell but nonetheless really good opportunity here for us in the new year of that new launch start.
The items.
Sorry, no I think to cover the really well.
Like in any industry when there's lots of capital deployment, there's a digestion period right and we're seeing some digestion periods.
And.
And looking at.
Alternative Spence.
The alternative expense, it's been in the cargoes and the good news for US of Modine is we have products and services and offerings in both either co location or with Hyperscale.
Hyperscale, so depending on where they spend and how they deploy their capital we're in a good position to where we can win in both avenues.
Got it and then just one follow up on M&A.
How long do you think of.
Okay.
The pipeline to start to cultivate deals.
And is there anything you would characterize as actionable in the pipeline currently or does this sort of still.
Still very early innings, and Kim that process is it going to take the better part of the next six months to 12 months to get anything done.
Well I would tell you that my new boss is pushing hard.
There is.
I would say we do have the pipeline we have been maintaining a good pipeline and there are <unk>.
<unk>.
Opportunities to me and then I'll Plaza, Neil the answer I think.
Making sure we get through first.
First digestion of the 80 20.
To ensure we're not pursuing something just transactional, but it's filling of strategic need.
Is where we want to get once we start growing as everybody knows that the multi month all encompassing.
<unk> plus the integration so personally.
I'd like to make sure. We go after the most important and what Neal was asking us to put together is the.
The thing of it is the scorecard in the force ranking what's in the pipeline with actionable, but then how do we force rank them.
Yes, and I think.
Mick and the team has done a really good job in terms of thinking through exactly that and then we want to overlay that with the filter the strategic filter in terms of where we want to go with our acquisition strategies for that.
Visit fulfill of strategic initiative visit fulfill the strategic need is it backwards for orders sideways integration.
What are the opportunities for us as they hit a certain profile will have a different type of profile for the for our targets and then we will monitor.
Monitor the milestone process of the check through the filters and Thats exactly the system the rigor of the disciplined behind that.
This team are starting to put together and then in <unk> 'twenty will be of very good lens for us to start to introduce some potential candidates inside of that filter.
Great. Thank you guys.
I'm showing no further questions in the queue I'd like to turn the call back to Neil for any closing remarks.
Yes, the one last comment I would like to recognize MC for his leadership as the interim CEO.
Rick did a great job stabilizing the company and preparing the organization for change.
His efforts have allowed for a very smooth onboarding and transition for me and.
And I, thank Rick for his commitment to modine.
Thank you Neil.
And thanks for everybody on the line for joining US. This morning, a replay of the call will be available from our website in about two hours and we hope everybody has a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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