Modine Manufacturing Company Q4 2023 Earnings Call
67 of adjusted EPS.
Speaker 1: $4 million of free cash flow and $0.67 of adjusted EPS.
Speaker 1: This strong performance resulted in a record year that saw the highest sales and adjusted EBITDA in our history. What is especially remarkable is that these gains were not the result of particularly strong economic conditions, but instead were driven by the internal actions that we've taken over the past two years to transform the company.
Speaker 1: It is a testament to the value we've unlocked across our business, an example of how a sound focused 80-20 approach can drive higher returns and better margins.
Speaker 1: Taking a step back, we accomplished a great deal in Fiscal 2023. We started a year by announcing a change in our segments, streamlining reporting structures, and establishing an infrastructure with focused, market-based product groups.
Speaker 1: We held our first analyst and investor day this past June , where we introduced our purpose statement, engineering a cleaner, healthier world. Our senior leadership team presented their strategies and shared their financial targets for both revenue growth and margin improvement, setting a clear path on how we plan to meet those targets over the next five years.
Speaker 1: I'm happy to say that we made outstanding progress towards these goals this past year and are even running ahead of many of them.
Speaker 1: We also established an 80-20 mindset which has created a culture shift within our organization.
Speaker 1: We started this journey with a climate solutions segment last year and immediately started seeing improved results. We began rolling out 80-20 in the performance technology segment this past fall, where we are reducing complexity and prioritizing our best opportunities.
Speaker 1: Overall, we are proud of what we have achieved through our 80-20 journey thus far and expect incremental benefits in the next fiscal year from the actions already taken.
Speaker 1: For the full year, our sales were up 12% and our adjusted EBITDA was up 34% to a record-breaking $212 million.
Speaker 1: This equates to a 9.2% EBITDA margin, up 150 basis points from the prior year. We generated $57 million of free cash flow and a reported adjusted EPS of $1.95. I am so proud of the company's remarkable accomplishments and look forward to the year ahead.
Speaker 1: Please turn to slide five.
Speaker 1: The Climate Solutions segment had a fantastic year, and I would like to highlight some of their accomplishments.
Speaker 1: Full year revenue increased 11% from the prior year, well above the 6 to 8% goal for fiscal 2024 presented on our investor day.
Speaker 1: Annual sales increased across the product groups with the largest gains in data centers, which was up 60% from the prior year. A good portion of this gain is related to North America, including sales from our new chiller plant. As I mentioned last quarter, bringing the chiller product to North America is a good
Speaker 1: makes us a full system supplier to the data center market, allowing us to better serve our colocation customers.
Speaker 1: The chiller product has been very well received and we are expecting further double digit data center sales gains in fiscal 2024.
Speaker 1: Another success in the climate solutions segment this past year was margin expansion. For the full year, the segment reported adjusted EBITDA margin of 14.6%, up 370 basis points from the prior year. This already meets our target margins for this segment of 13-15%.
Speaker 1: by the end of fiscal 2024, one year earlier than previously planned. A large part of this gain resulted from the improvements in our heat transfer products group, who embraced 80-20 early on, helping them achieve improvements in many aspects of their operations. Last quarter, I mentioned the growth in sales of heat transfer products to heat pump customers.
Speaker 1: and that we are looking at increasing capacity. We recently announced that we will be expanding our manufacturing campus in Serbia to allow us to meet the demand we are seeing in this market. Over the next three years, we are expecting these sales to more than double.
Speaker 1: Looking ahead, this segment's strong momentum is being fueled by a healthy backlog, strong markets, and from all the hard work this past year. The leadership team is shifting focus from improving commercial processes to more operational targets to further improve gross margin. This includes enhancing cost control and productivity,
Speaker 1: as we work to simplify and improve our supply chain and production processes.
Speaker 1: Our growth focus is on new product development as we use 80-20 to make decisions on where to invest when developing our technology roadmaps. In addition, our business development team is building its acquisition pipeline with a focus on supporting product and technology strategies.
Speaker 1: I'm very proud of this team. They reached their initial margin target a year early and are gearing up to make further improvements as they look ahead towards the next goal.
Speaker 1: Please turn to slide six.
Speaker 1: The Performance Technology segment also delivered strong performance this year, with full year revenue up 12% from the prior year.
Speaker 1: Sales increased in all product groups with the largest gains coming from sales of air-cooled products to the genset market.
Speaker 1: The PT segment reported an adjusted EBITDA margin of 7.6% for the full year, an improvement of 140 basis points. The segment reported 4th quarter adjusted EBITDA margin of 9.1%, 220 basis points higher than the prior year.
Speaker 1: The momentum in this segment is clearly building. Since the first quarter of this year, the PT segment has shown sequential margin improvement each quarter.
Speaker 1: Our team is on track to reach our Investor Day margin targets, due in large part to strong volumes and improved product mix.
Speaker 1: Our markets in the PT segment continue to be steady, with ongoing backlogs due to underproduction and supply chain challenges over the last few years.
Speaker 1: We expect continued market growth in gensets, construction equipment, and commercial vehicles, although we are seeing softening in certain sectors.
Speaker 1: We continue to focus on the market development for zero-emission vehicles with strong government incentives and regulations driving the transition from internal combustion engine to EV.
Speaker 1: We have recently made several new product introductions including a new BTMS with liquid cooled condenser for heavy duty applications and a fuel cell stack cooling package for the fuel cell market.
Speaker 1: The team has made great progress this year, adding 9 new programs, including one incremental program in the fourth quarter. This brings our total EV Systems program wins to 21, with over $140 million of projected revenue at mature production volume.
Speaker 1: This new product is a plug-and-play system for rapid integration into fuel cell vehicle chassis.
Speaker 1: allowing our customers to accelerate the timeline from bringing these products to markets.
Speaker 1: This is just another example of how Modine is engineering a cleaner, healthier world.
Speaker 1: To sum up fiscal 2023 was a milestone year.
Speaker 1: And I believe an inflection point for Modine.
Speaker 1: We set aggressive goals and either hit them or surpass them.
Speaker 1: Over the last few years, we have radically changed our business while significantly expanding our long-term commercial opportunities.
Speaker 1: We have a clear line of sight to reach the 2027 goals we presented to you last year.
Speaker 1: We enter fiscal 2024 with excitement and a unified vision as we continue to reposition around the greatest potential.
Speaker 1: We look forward to sharing this journey with all of you.
Speaker 1: Now, I'd like to turn the call over to Mick, who will review our results for the quarter and provide segment financial updates.
Speaker 2: Thanks, Neil, and good morning, everyone. Please turn to slide 7 to review the segment results.
Speaker 2: Climate Solutions had another stellar quarter with improved earnings and slightly higher sales.
Speaker 2: Revenue was up 1% from the prior year and improved 5% on a constant currency basis.
Speaker 2: Data center sales were up 55%, or 20 million, including the benefit of the North American chiller expansion.
Speaker 2: As anticipated, HVAC and R sales were down 9% or 8 million, driven by lower sales of heating products versus a strong quarter last year, partially offset by higher cooler sales.
Speaker 2: The heating market decline was mostly driven by a reversion to normal pre-COVID levels, along with a relatively mild winter. Sales of heat transfer products decreased 6% or 8 million from the prior year. As discussed last quarter, we anticipated some market softness around residential applications.
Speaker 2: combined with 80-20 rationalization and difficult comparisons to an exceptionally strong quarter last year.
Speaker 2: We are pleased with the very strong earnings conversion as adjusted EBITDA increased 8% resulting in 100 basis point margin improvement to 15.9%.
Speaker 2: The earnings and margin improvements were primarily driven by commercial pricing, positive sales mix, and benefits from our 80-20 initiative.
Speaker 2: As Neil previously explained, the climate solutions segment is performing well and is about a year ahead of schedule in meeting their margin objectives.
Speaker 2: We expect these improvements to continue in fiscal 24.
Speaker 2: Please turn to slide 8. Performance Technologies also had a great quarter with sales up 13% or $42 million. Revenue was up 16% on a constant currency basis, benefiting from both volume and pricing improvement.
Speaker 2: Advanced solution sales were up 25% or 8 million with continued growth in our electric vehicle product sales in both North America and Europe .
Speaker 2: Liquid cooled application sales increased 9% or 11 million due to higher sales to commercial vehicle and automotive customers.
Speaker 2: Lastly, air-cooled application sales increased 13%, or 21 million, primarily due to strong demand from off-highway customers, with higher sales in genset or stationary power applications. The performance technology team is deep into 8020 activities and the early results are clear with strong earnings growth this quarter.
Speaker 2: Adjusted EBITDA was up 51% resulting in a 9.1% margin and a 220 basis point improvement.
Speaker 2: As Neil discussed, the performance technology segment is clearly building momentum with sequential margin improvement during the fiscal year.
Speaker 2: We are tracking towards our investor day margin targets and expect the improvements to continue as we see additional benefits from the ongoing rollout of 80-20 throughout the segment.
Speaker 2: Now let's review total company results.
Speaker 2: Now let's review total company results. Please turn to slide nine.
Speaker 2: Fourth quarter sales were up 8% or $44 million driven by gains in both performance technologies and climate solutions. Revenue was up 11% excluding a negative FX impact of $18 million.
Speaker 2: Growth was driven primarily by $51 million of higher volume, resulting in a 9% growth rate. Commercial and materials pricing added another $9 million.
Speaker 2: Our gross margin improved 160 basis points, primarily driven by higher volume and pricing. SG&A increased $7 million from the prior year, primarily due to higher employee compensation related expenses.
Speaker 2: I am very pleased to report that adjusted EBITDA was higher than we anticipated in the quarter with an increase of 16% or $9 million. This represents a 70 basis point improvement and the fifth consecutive quarter of year-over-year margin improvement. Please note that earnings per share on a GAAP basis was $1.6...
Speaker 2: This is additional good news and reflects the improved earnings outlook in the U.S.
Speaker 2: excluding the valuation allowance impact and the impact of restructuring and environmental charges.
Speaker 2: Adjusted earnings per share for the fourth quarter was 67 cents, an increase of 10 cents or 18 percent from the prior year. These adjustments can be found in our non-GAAP reconciliation in the appendix of this presentation.
Speaker 2: Now, moving to cash flow metrics, please turn to slide 10.
Speaker 2: We generated $24 million of free cash flow in the fourth quarter, resulting in $57 million of free cash flow for the fiscal year.
Speaker 2: The full year cash flow includes the negative impact of 18 million of cash payments, primarily for restructuring activities, including the European headcount reductions announced last year. Net debt of 286 million improved by 22 million during the quarter, resulting in a leverage ratio of 1.4 times. During the quarter, we repurchased another 100,000.
Speaker 2: Now let's turn to slide 11 for our fiscal 24 outlook.
Speaker 2: First, fiscal 24 is fully aligned with our financial targets presented at the investor day last June .
Speaker 2: We are expecting most end markets to remain relatively stable with strong backlogs and climate solutions.
Speaker 2: We're also anticipating strong revenue growth in targeted markets, data centers, indoor air quality for schools, and electric vehicles.
Speaker 2: Last, we are proceeding with product rationalization through 80-20 activities and expect volume decreases in certain areas that we have chosen to de-emphasize.
Speaker 2: As a result, we believe total company revenue will grow in the range of 4 to 10 percent.
Speaker 2: In the climate solutions segment, we expect data center revenue to grow 15 to 25 percent.
Speaker 2: As previously mentioned, we have a strong backlog going into the year, especially in North America.
Speaker 2: We anticipate HVAC and R revenues to grow in the mid single digits as we expect some ongoing market softness, particularly in the residential heating market.
Speaker 2: However, this should be more than offset by the growth in school products, commercial refrigeration and commercial heaters.
Speaker 2: We also expect modest heat transfer product growth as strong growth to the heat pump market will be somewhat offset by ongoing weakness in residential applications and product rationalization from 80-20 action.
Speaker 2: Moving to performance technologies, we expect continued momentum from relatively stable markets and benefits from our 80-20 rollout in this segment.
Speaker 2: We expect advanced solutions to have a growth rate in the 25 to 35 percent range driven by program launches and continued demand for EV systems and components.
Speaker 2: We expect lower growth for liquid and air-cooled products as we roll out 80-20 throughout the segment. Market growth and additional pricing benefits will be partially offset by product rationalization as we continue to de-emphasize low margin business. From an earnings standpoint, we anticipate another strong year in terms of earnings **
Speaker 2: with Q1 being the lowest quarter, then increasing sequentially through the year. That said, we fully expect the first quarter to show strong year-over-year earnings and margin improvement. With regards to cash flow, we anticipate further improvement in pre-cash flow.
Speaker 2: With capital spending to be approximately 70M.
Speaker 2: Other assumptions including interest expense, taxes.
Speaker 2: depreciation amortization are included in the appendices attached to this presentation and our press release. To wrap up we are very pleased with the fourth quarter and fiscal year results including record results in fiscal 23.
Speaker 2: We are on track with our transformation and we are working towards the long-term margin and revenue targets presented in our investor day last June . As a result, we look forward to another year of improvement in fiscal 24. With that, Neil and I will take your questions.
Speaker 1: If you have a question at this time, please press the star, then one key on your telephone keypad. A confirmation tone will indicate that your line is in the question queue.
Speaker 1: You may press star then 2 if you would like to remove any questions from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker 1: One moment please while we poll for any questions.
Speaker 1: And our first question comes from the line of Matt Somerville with DA Davidson. Please proceed with your question. Please proceed with your question.
Speaker 1: Thanks. Excuse me. Morning. Wanted to first talk about 80-20, specifically as it pertains to performance tech here. Given the analytical segmentation process you've now completed, how does that inform your kind of go-forward strategy with respect to that business?
Speaker 1: to both businesses from an end to fall.
Speaker 1: Got it Matt, thanks for the question. This is Neil. Yes, so six months into it with the performance technology side of the business and as they continue to get more intelligence and information that they're learning how they want to continue to...
Speaker 1: what I'll say sub-segment further into the business so that we can have our organizational line behind those very specific verticals. So we have some ideas, we have some concepts that we're working through, and I would expect to be able to line up on some firmer ranges probably within the next couple months. assistance.
Speaker 3: Got it. Maybe I'll pivot over to data centers. We'll talk about how much of that business.
Speaker 3: In North America versus Europe , what kind of relative growth rates you're seeing in those geographies versus the guidance? If you can also speak to both the hyperscale and colocation markets as an overlay to that, thank you.
Speaker 1: Yes, this is Neil again. Thanks for the question, Matt. Certainly, the majority of the revenue that we're seeing is from Europe . That's where the core of the business is as we continue to ramp up our facility in Virginia that supports the data center market. We're gaining share, we're winning business in the North America market that continues to be a growth area for us.
Speaker 1: That area is growing at a much faster rate than it is in Europe , albeit they're both growing. So we have that focus, we've partnered with the right customers, we have the right technology, and we're excited about the products that we have. The products that we have help our customers meet their sustainability targets, and we're seeing that pull.
Speaker 1: in terms of making sure that we have our best opportunities in front of us with our customers to help them essentially grow in the market space that they're in is actually starting to pay dividends. So that focus and that energy on the critical few is why we're seeing the growth in Europe and North America as well.
Speaker 1: On the hyperscaler side, we're not seeing any slowdown there as well. We're still connected with a large hyperscaler customer. We're working with new product development with the next generation data centers, and we're pretty far along in that process.
Speaker 3: I'm going to sneak one more in. If you look at the plus 4 to 10% sales guidance, can you maybe talk about where the two businesses, where you expect them to fall relative to that range? And then if you can maybe talk about incremental cost savings, are you expecting 24 over 23?
Speaker 3: from the European structure. Thank you.
Speaker 2: Hey, Matt, it's Mick. I'll take the first part of that. I think within the range itself, we've got the lower end and the higher end. So just first, broader speaking to your first question, what is the lower end?
Speaker 2: I think planned product rationalization, as you know, in the past and early phases of 80-20, it's hard to predict which customers or business will drop off and sometimes it stays.
Speaker 2: much longer than we expect and with the higher profit margin on it, we're quite comfortable with that. So first, I would say I think the big difference between our low end and high end is really just trying to have a crystal ball about exactly which business will wind off or not. And then within your question for climate and...
Speaker 2: and for performance technologies, both are really going to be kind of within that range, not really too far off. I guess I'd probably expect slightly higher revenue growth across climate than performance technologies. With that said, we've got a lot of good...
Speaker 2: program launches in performance technologies around power generation and gen sets and significant commercial pricing initiatives kicking in this year which will both help the top line for performance technologies.
Speaker 2: And then at the end you had a question, if you could just repeat, I think it had to do with restructuring.
Speaker 2: How much incremental cost savings should hit the PML in 24 versus 23 from that European restructuring that you've completed? We've rolled through most of it. I think net, Matt, I would expect about a 5 million net just in that.
Speaker 2: German European headquarters region as far as net savings in the new year.
Speaker 3: Great, thank you guys. And the next question comes from the line of Brian Sponheimer with Gabelli Funds. Please proceed with your question.
Speaker 4: Hi, good morning everyone and congratulations. Thanks Brian .
Speaker 4: Couple questions, one on just the balance sheet we saw you know good cash flow performance but also on a year-over-year basis you've got an extra 30 million or so receivables and...
Speaker 4: 40 million of inventory. Can you just talk about the working capital needs of the business as you kind of transition in 80-20 and whether there's any sort of collection that you're thinking about as you work through the year? Yeah, hey Brian , it's Mick. You're right, really kind of beginning.
Speaker 2: parts is much improved. So there's some improvement we have there. Accounts receivable too, a little bit higher than we normally have and expect. I think part of that has been a lot of the 80-20 initiatives too, as you can imagine as we are.
Speaker 2: talking to customers and negotiating, renegotiating prices at times that can get caught up in AR. But the short answer is generally speaking, we see kind of a flat level of working capital. So we're going to hold working capital while continuing to grow revenue and then that should convert nicely from a...
Speaker 4: pre-cash flow standpoint. Okay appreciate the color there and then you know you had mentioned that you're about a year ahead of where you wanted to be in
Speaker 4: into margin targets.
Speaker 4: for performance tech, I'm sorry for climate solutions rather.
Speaker 4: Does this mean that you are just simply ahead of plan or is this potentially that you see?
Speaker 2: greater possibilities as to where the profitability of this business can go. Yeah, I'll go first. Brian's Mick again, and then Neil can jump on. Yeah, good question. We should be clear that we were really happy about how fast that team, I think it was about 370 basis points this year.
Speaker 2: first year out drove the margin improvement. From there when we were in our analyst day, we had goals from years two to five to push that margin higher. So yeah, short answer is we expect to drive further margin improvement. We don't see it.
Speaker 2: peaking out here, but really that almost 400 basis points was faster than we thought in year one. We won't do that every year, but we expect to drive it higher each year. The only thing to add? No, that's a great summary.
Speaker 2: out here but really that almost 400 basis points was faster than we thought in year one. We won't do that every year but we expect to drive it higher each year. Neil anything to add? No that's it that's a great summary. Well great congratulations look forward to.
Speaker 4: seeing what you all do next. Thank you. Thanks Brian .
Speaker 1: And the next question comes in the line of Tim Moore with EF Hutton. Please proceed with your question.
Speaker 5: Thanks and congratulations on the strong EBITDA growth against a year ago high growth comparable.
Speaker 5: just maybe shifting gears for your internal combustion engines auto business, not the EVs that you are ramping up on. But it seems like the ICE business is still maybe a little bit misconceived or biased by some investors.
Speaker 5: Isn't that just only maybe a $300 million sales business, or 13% of your sales, and you possibly might have stopped taking new orders on that, and those margins are probably going up because...
Speaker 5: of pricing hikes you've done?
Speaker 1: Yeah, it's a relatively small portion of the business overall. In PT, the revenue has declined year over year, certainly. We're still actively working with our customers there. We're serving some products. We have certain thresholds and filters that we put in place through our 80-20 analytics.
Speaker 1: And if we can provide a solution that meets those margin targets and those thresholds because we have the technology and there's value there, that's what we're looking for. And we're going to continue to shift our focus more on the system size as well. Great. That's helpful, Collier. We can't imagine the margins going up there compared to a couple years ago. Maybe just switching gears to your...
Speaker 5: European production capacity expansion for the heat transfer pumps at your Serbia plant.
Speaker 5: So I hear correctly earlier on the call that you mentioned you expect those sales to double and I'm just kind of curious over what timeframe you expected given kind of
Speaker 5: the credit subsidy for houses in Europe .
Speaker 1: Yeah, so I'll let Mick give you the timeline on that, but we're excited about that space and that market. So, we have expanded our facilities there on our campus in Serbia. We're in the process of buying capital equipment, getting that equipment into the plant so we can start up the first of several lines that we need to put in place because the order book is so healthy. You to get your flag to thank Mark sacs for the ONE
Speaker 1: It's a highly regulated market and we certainly see that market as multiple years in terms of growth. The team is in place, the team is putting in the capital and the infrastructure, and we've got a pretty healthy order book.
Speaker 2: Yeah, Neil, we've talked about that doubling within three years on the heat pump side. Currently a little bit more than 50 million, but growing really rapidly over the next few years. Im
Speaker 5: Great. That's terrific to hear and seems like a terrific use of capital allocation. You gave some color around the first quarter of the fiscal year being the lowest sales figure and then sequentially growing. I'm just trying to think about the gross margin expansion magnitude cadence.
Speaker 5: Should that also improve sequentially each quarter? I'm just wondering, will the June quarter possibly be a lower gross margin than this quarter you just reported in March?
Speaker 2: Just kind of curious about that. Yeah, a really good question. I'm glad you followed up on it. We do have, we still have a little bit of seasonality at Modine where Q4 tends to be really strong. Q1 can be typically the last few years has been
Speaker 2: the weakest quarter of the year, and that has to do with some of the business on the climate side ramping up. In HVAC and schools, it's also the slowest part of the heating year. So coming off of a really strong Q4, that's the one to be sure.
Speaker 2: We see Q1 being lower than Q4, both in probably margin a little bit and in earnings. But if you look at it year over year, Q1, we fully expect to be up significantly in revenue.
up in gross margin and up in earnings. So, can't really roll forward 2.4 to 2.1, but 2.1 on a year-over-year basis, we expect to be fully in line with our guidance. Hopefully, that helps.
That's exactly what I was looking for and kind of what I thought might happen. So that's really good investors know that for seasonality. My last question is around the data centers chilling business in the US North America.
It obviously appears you have a strong line of sight on revenue there. The co-location and hyperscale businesses and orders.
fiscal year. And I'm just wondering maybe as you think out the next few years.
How does your growth trajectory look for maybe next fiscal year? I mean, maybe you could do this year as something like 150 next year and eventually 300 million a few years down the road. How does your growth trajectory look for maybe next fiscal year?
That's what we're yeah, that's a great question because it's such a focus for us. You're right. You know when you think about those growth rates We're building the capacity in today I think we've been really clever in terms of how we're utilizing our manufacturing footprint and where we're making investments for manufacturing space as well as labs to support this growth.
But we have visibility in the market. We see where we fill a gap with our technology and we're building our capacity expansion model to fit those type of growth rates.
But we have visibility in the market, we see where we fill a gap with our technology and we are building our capacity expansion model to fit those type of growth rates.
Yeah, I was just going to add, coming off of this year, we'll wrap up a little bit north 150 million of data center sales globally.
We should expect to grow over the next three years. Similar rate, probably in the 15 to 20% range over a three to five-year window. Obviously, this year we have the next fiscal year a much higher growth rate, a lot more visibility in our guidance there, 15 to 25.
But if you want to roll it forward, I think that 15 to 20 percent over a long term is a good current target for us. That's terrific color and granularity. Thanks Neil and Mick. That's it for my questions.
Thank you. And as a reminder, if you have any questions, please press star, then 1 on your telephone keypad. A confirmation tone will indicate that your line is in the queue. You may press star 2 to remove any questions from the queue. For any participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
And our next question comes from the line of Steve Ferrazzani with Sidoti and Company. Please proceed with your question. Good morning, Neil. I appreciate all the color this morning. I wanted to follow up on the heat pump market in Europe , which we know has been very, very strong supported by government incentives. To hear more on Sidoti and Company visit Sidoti.com.
You're talking about the potential to double it, but we saw, I mean, some of the trade association data and some of the reporting from some smaller Scandinavian heat pump providers this quarter were up substantially. So I'm a little bit surprised your heat transfer products was down. Are you capacity constrained there right now or is that just as much?
running you know 24-7 with the capacity that we have as we start to expand that capacity in Serbia.
Okay, um. And I may have missed that we covered so much ground this morning. I know. Did you provide a fiscal 24 CapEx?
Okay, and I may have missed that we covered so much ground this morning. I know. Did you provide a fiscal 24 CapEx range?
Yeah, we expect that to be around 70 million or below. 70 million. Yeah, 70 million. And then we also provided in the appendix, it's important to point out with the valuation allowance coming off the US, we'll go back to being a taxpayer in the US, which is a good situation.
you know, school retrofits with all the discussions in Washington right now in terms of pulling back some some unused funds. Any risks right now to how that market is playing out and you still expect, and I don't want to, obviously can't predict government decision makers.
but how you're thinking about that market playing out over the next two or three years as it currently stands.
Yeah, that's a good question. I literally just got off the phone with the general manager of that business yesterday asking that very question. We're comfortable with where we're at in terms of the orders. We're comfortable with the production rates that we're running to. We have visibility beyond a year in terms of what the order intake looks like.
starting to become a more significant cash flow generator and balance sheets in great shape.
Yeah, hey Steve, it's Mick. Yeah, Neil and I talked for a few quarters. I think we went back a year ago where her message was head down implementing 80-20, starting to generate cash. The last few quarters was we've really rebuilt and added some really strong skills on the business development side trying to refill the funnel.
As we look today, I think Neil and I are a lot more encouraged and optimistic that we're now starting to see some potential targets in the funnel that can be actionable in the next year or so. Really good progress from the whole business development team. Yeah, I would just add one thing to that Steve is that...
Because of the success that we're having organically, with the changes that we're making organically, with the businesses that we're growing organically, we're ahead of where we planned to be a year ago in New York with climate solutions and we're kicking it off in PT, organically we have pretty good control around it. So when we're thinking about M&A, we're thinking about technology. Where do we fill technology gaps? It's not as if we need to do it.
large acquisitions to catch up with the goals that we put in place, but really where do we want to grow? Where do we want to make sure that we have leading edge technologies so that we can continue to support our growth verticals, particularly those in climate solutions? When we think about those as not net, you wouldn't be focused on it as being accretive or not accretive. You would be thinking about trying to fill a hole that maybe provides better, longer term growth? Correct.
Yeah, and anything bigger on the radar screen or would you be focused more on the bolt on touch size?
Yeah, we would continue to focus on the bolt-ons and then within our pipeline we've been pretty consistent that there are always going to be a few targets that we keep our eye on that are larger, but, and you can't control when things come to market. If we had our way, we'll continue to focus on some of those.
mid-sized ones that we can tuck in under the technology and product roadmap. Great. Thanks Neil. Thanks, Mick. And the next question comes from the line of Florence Davy with DC Capital Advisors. Please proceed with your question.
Hi, good morning, Neil and Mick. Thanks for taking the question. I have a question on the how does the acceleration in AI rollout and development.
Hi, good morning, Neil and Mick. Thanks for taking the question. I have a question on the, how does the acceleration in AI rollout and development impact your business?
I'm guessing it's more on the data center side. What sort of opportunities does that present and how are you thinking about investing in that area going forward? Thanks.
Hey Flo, good to hear from you. This is Neil. Great question. That's a very relevant question. As we start to see these technologies shift, it's really important that we as a supplier, critical supplier in this space and data centers provide current technologies to support that. So we're working with our customers as they start to evolve in the data center space, building away from.
when you have a power density issue, you get heat. From that heat, you have to have more creative ways to remove it. At some point in time, we'll hit a threshold with the mechanical heating solutions that are currently in the market today, and things will start to shift. We are working closely with our teams and our customers to make sure that we're being very innovative in that space.
It's also an area that we are very curious and we have a pretty big vet cast to make sure that we can...There's other ways to potentially acquire that technology. There's the inorganic and inorganic path. We're looking at both. Because it's at the tip of the spear for us with data centers and that's where we want to grow...
We welcome this change, we welcome this new technology, and we welcome the engineering challenge.
Thanks. On a different topic, what are you seeing on the human capital side? You know, it wasn't that long ago.
a number of companies were talking about higher turnover, difficulty hiring, what are you seeing on that front?
Yeah, and it's different regionally, but for the most part, what we're seeing is much more stability than where we were at a year ago. And that's...
Based on the fact that we've had some pretty good talents inside of our plants today that are making sure that we have the right workforce in place, and then we've got our policies here on the salary side that we can recruit and retain very talented individuals across multiple industries. That's how we've been able to...
Absolutely moving this rate that we're moving and transform the company at the rate we have. Is there any way for you to quantify the benefit to you all just cost wise from that? I didn't catch the full question. Is there any way to quantify?
reduce costs from lower turnover or less need to use recruiters for hiring? Yes. Yes. So where Vic and I watch that closely is in the margin and making sure that we're efficient. You go back a year ago and when you have a workforce that is transient.
There's a lot of time training, there's a lot of overtime that's used. You're not efficient, you're not productive. So once you get some stability in place, you start to see the margins improve relative to overtime, relative to labor hours, and relative to things like expedited freight because we don't have people in the right place at the right time. Thanks.
training, there's a lot of overtime that's used, you're not efficient, you're not productive, so once you get some stability in place you start to see the margins improve relative to overtime, relative to labor hours, and relative to you know things like expedited freight because we don't have people in the right place at the right time. Thanks. Sure.
I'm showing no further questions at this time. Now I would like to turn the conference back over to Kathy Powers. Thank you and thanks to everybody for joining us this morning. You'll be able to access the replay of this call through our website in about two hours. We hope everybody has a great day. That concludes today's conference.