Modine Manufacturing Company

Good morning, ladies and gentlemen, and welcome to the Modine Manufacturing Company's fourth quarter fiscal 2020 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. If anyone should require assistance during the conference, please press star zero on your 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, Treasurer, Investor Relations and Tax.

Good morning and thank you for joining our conference call to discuss Modine's fourth quarter and full year fiscal 2020 results. I am here with Modine's President and CEO Tom Burke and Michael Lucareli, our Vice President Finance and Chief Financial Officer. We will be using slides with 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, modeen.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 Tom Burke.

Thank you, Kathy, and good morning, everyone. First, I'd like to start by extending my well wishes to everyone, and I hope you have all remained safe and healthy during the crisis. The world is a vastly different place since Modine reported its third quarter earnings in early February. Fiscal 2020 was a very challenging year for Modine, but we ended on a positive note with Q4 results coming in ahead of our expectations. Our main focus during this period of uncertainty was the protection of our employees, customers, and shareholders. I'd also like to highlight the press release that we issued last week regarding the amendments to our credit facilities. This was a key proactive measure we took as a part of our COVID-19 plan. Mick will summarize those details during his report. Today on this call, Mick and I will provide an overview of fourth quarter and full year results for fiscal 20, an update on the status of our automotive exit and sale process, a segment update including challenges and opportunities resulting from the pandemic and current market environment, A description of the actions we are taking to protect our employees and the business in response to the current economic environment and the global crisis. And finally, a brief overview of the state of our markets and expectations for the next few months. Let's start with the actions we've taken so far to protect our people and facilities. As you all know, the COVID-19 crisis began early in our fiscal fourth quarter in China and then moved into Europe and then the Americas. We have implemented the necessary steps to mitigate the risk in our manufacturing locations, and administrative offices worldwide. We have remained in compliance with health organization and government orders in countries where we operate. This led to a number of our locations being temporary closed either due to government mandate or a significant drop in customer demand. All of our locations are now open but many are operating at reduced capacity. We have also taken many actions to reduce cost and preserve liquidity in light of these economic conditions and in response to an expected further decrease in revenues of fiscal 21. We have reduced employee and executive salaries by 10-20% and implemented furloughs and short work weeks where possible, cut production schedules in line with customer demand resulting in a temporary layoff of many manufacturing employees, reduced planned capital expenditures by approximately 25% and reduced Board of Director cash compensation by 20% for this fiscal year. Throughout this crisis, our top priority has been the health and safety of our employees, their families and our communities. In addition, we are laser focused on maintaining adequate liquidity and continuing to serve our customers without disruption. Next, let's cover our fourth quarter and full year fiscal 2020 results. Please turn to page four. Our fourth quarter earnings were ahead of expectations despite early COVID-19 impacts. Fourth quarter sales of $473 million were down 15% from the prior year. For the full year, we reported sales just below $2 billion, down 11% from the prior year. Revenues this year were impacted by market weakness in our VTS segment and lower data center sales in our CIS segment. During the fourth quarter, we also felt the impact of COVID-related plant closures in China in the February timeframe, in Europe and North America in March. Offsetting this was a strong performance by building HVAC segment, where full-year sales increased 4% from the prior year. We reported $25 million of adjusted operating income in the fourth quarter and $97 million for the full year. We had strong conversion in the fourth quarter due to the cost saving actions taken earlier in the year in response to the market downturn. Before diving into our quarterly segment results, I would like to provide an update on our automotive exit strategy. As a reminder, we will begin reporting the automotive business as a separate segment in our first quarter fiscal 21 results. We have spent a considerable amount of time and investment during fiscal 20 separating the auto business from the VTS segment. This was a necessary investment required to allow us to operate automotive separately and ultimately exit this line of business. In January and March, we actively engaged with potential strategic buyers of this business and received multiple indications of interest. However, as we entered the March timeframe and the COVID-19 pandemic moved into Europe, we were forced to put the process on hold due to first travel restrictions and then due to global lockdowns. The process currently remains on hold, but we are staying in contact with all interested parties and are confident that we will reinitiate the process as soon as possible, taking into account the current international travel restrictions. Our objectives with regard to the automobile business have not changed. We will run the separated business segment to optimize earnings and cash flow, maximize cash value by divesting most valuable assets, and exit the remaining business in an orderly fashion to minimize cash outlay and customer disruption. The remainder of our VTS segment has been renamed Heavy Duty Equipment, or HDE, and will include sales to commercial vehicle and off-highway customers, which will also be reported as a separate business segment. As I have discussed in the past, we believe that heavy duty markets, especially truck, agricultural, and construction equipment, have fundamentally different market dynamics. Although this process has taken longer than originally anticipated, we firmly believe this is the right long-term solution for Medin and our shareholders. While we evaluate all alternatives for our auto business, we will focus on reducing costs and limiting capital investments in order to reallocate capital to other markets and growth opportunities. Now turning to our fourth quarter segment results, please turn to page 5. Building HVAC sales were down 2% in the fourth quarter, primarily driven by lower air conditioning sales in the UK, partially offset by higher sales of school ventilation and heating products in North America. Despite this drop in sales, operating income increased substantially from the prior year, primarily due to improved pricing and lower material costs. The building HVA segment has clearly been a bright spot for this year. For the full fiscal year, sales increased 4% and operating income was up $9.5 million, or 35%, compared to the prior year, driven primarily by strong sales of school ventilation and heating products in the North American market. This is a tremendous performance from this segment, and we're working hard to drive continued growth in the future. As I mentioned last quarter, we have announced a new single focus approach to the data center market by combining the resources and capabilities for building HVAC and CIS teams. This new structure has led to some exciting wins with existing European customers, primarily in the co-location arena. Another goal of this effort is to assess the North American data center market. We have commissioned a third-party study focused on understanding the needs of data center operators and specifiers. along with the product trends and buying preferences in order to develop a roadmap and a business case for expanding into this market. We are utilizing the talents of our UK team to build relationships with new and existing customers in this rapidly growing end market. The other aspect of this plan is to industrialize new data center specific products in the US. We currently manufacture these products in the UK and are making significant progress toward our goal of being able to build units in the US by the end of this calendar year. This is a key component of our growth strategy, and I'm pleased with the progress we've made despite the current environment. Based on the weekly changes and limited customer visibility, we are not providing guidance at this time. However, I can share our current outlook on certain key end markets. Again, I want to reiterate this can change almost daily, but we believe it's important to share how we currently see the markets. We expect the commercial HVAC market to be flat to down slightly and the data center market to be up slightly. Based on our current order book, I think we have strong momentum in the UK data center market and a solid growth strategy for moving into the US. The North America heating market has been strong, but we are expecting it to be flat in fiscal 2021. Obviously weather can have a significant impact beyond the general economic climate. Turning to page six, sales in our CIS segment were significantly impacted by the onset of the pandemic in the fourth quarter, decreasing 15% from the prior year. Sales to data center customers are down 25% from the prior year, with the majority of that decline coming from one large customer. This is consistent with a decrease in Q3 and our expectations. This was also aligned with a temporary low in data center construction by our major customer in this segment. We expect these lower volumes to continue into fiscal 21 with a strong recovery in fiscal 22. Sales to our commercial HVAC and refrigeration end markets were down as well, primarily related to the global crisis. Our CIS plants in China, Italy, and Spain were temporarily shut down during the fourth quarter but have subsequently reopened and are able to operate at normal production level. Plants in the U.S. have remained open but are operating at below normal capacity. Our CIS plant in Mexico was shut down by the government in late April and is in the process of reopening but at a significantly reduced volume level. Even though we are actively managing these operational challenges, we are also using the opportunity to move forward in our strategic plans for this segment. This includes continued focus on our coils pricing, our distribution model, SG&A cost reductions, and consolidation of our manufacturing footprint. In fact, we're in the process of consolidating manufacturing operations in China. We will be closing our plant in Zhongshan and consolidating production in our large coils and coolers plant in Wuxi. We were able to accelerate the timing of this consolidation due to the lower production volumes caused by the pandemic. Although the CIS segment is being impacted by the current economic environment, they have also benefited from new opportunities. For example, our ability to rapidly respond to and deliver emergency replacement coils has allowed us to support healthcare facilities and laboratories that are on the front line fighting the virus. In addition, we have seen significant increase in orders to customers that make sanitizing systems. We will continue to look for new ways to provide the best possible solutions to our customers, including continuing to play a role in supporting those combating the COVID-19 virus. Again, it is very difficult for us to provide a market outlook. But in reviewing the data we have, we expect the commercial HVAC refrigeration industrial coils markets to be down in fiscal 21. We anticipate that our first quarter will be down the most, with some slight improvement in the back half of the year. With regard to data centers, as previously mentioned, we expect the market to be up slightly, but expect our revenues to be down compared to the prior year. As I mentioned, our data center sales in the CIS segment are highly concentrated with one and a pause in their construction schedule will result in our sales being down as compared to last year. However, we have successfully managed to grow our share of water with this customer, expanding sales with additional product offerings. Please turn to page seven. As expected, we experienced a significant decline in sales across our vehicular markets during the fourth quarter. Sales for the VTS segment were down 18% in the prior year. Our key vehicular markets slowed significantly during the second half of fiscal 20 and the decline accelerated with the onset of the COVID-19 pandemic in the fourth quarter. In Asia, sales decreased 25% from the prior year, primarily due to the impact of the coronavirus in January. During this time period, all of our manufacturing operations were temporarily shut down, but were reopened as quickly as possible in line with government regulations. Today, all of our Asian plants are open at or near normal capacity. The China off-highway market is a bright spot, led by the strong recovery of the excavator market. The automotive market has also somewhat recovered, but is still operating at lower volumes than the prior year. Sales in Europe also dropped significantly during the fourth quarter, down 21% from the prior year across all major end markets. As the pandemic moved into Europe, our automotive customers quickly shut down their plants, and we closed our plants as well in response. European automotive sales decreased 9% from the prior year, and commercial vehicle sales were down 38%, including the impact of program wind-downs. All of our VTS plants in Europe have subsequently reopened, but most are operating at significantly reduced capacity. We will continue to increase production of our European VTS plants in line with customer demand. There's a similar story in America's region where sales were down 13% from the prior year. Our automotive plants were also closed in line with customer plan shutdowns, and our main automotive plant in the U.S. was just reopened last week. Off-highway and commercial vehicle production continued through the quarter in America, but at reduced volumes. Automotive sales in America's region were up 7% from the prior year, while commercial vehicle sales were down 14% and highway sales were down 19%. One of the significant issues we face in the VTS segment is a very limited customer outlook. Our customers typically provide us with a good view of the projected volumes for the next two or three months that allows us to plan our production and build our forecast. Today, we're getting very limited information from our customers as economic conditions remain volatile and overall visibility remains temporarily challenged. Our teams remain in daily contact with our customers and we continue to manage our manufacturing operations prudently and cautiously through this global crisis. Actions taken today include reducing or delaying CapEx spending, including program capital, where possible. This is somewhat of a challenge as we often need to spend CapEx well in advance of program launches. So delaying purchases now could risk program deadlines in the future. So we are communicating with our customers and putting increased scrutiny on requests for capital and postponing purchases where possible. We expect significant declines in the global automotive and commercial and off-highway markets. Similar to CIS, we expect the largest negative impact in our first fiscal quarter. Beyond that, it is extremely difficult to predict whether the recovery will be a B, U, or hopefully not an L-shaped recovery. Geographically, we expect Europe and North America to be hit the hardest. With regards to Asia, we're beginning to see some bright spots in the off-highway market with higher year-over-year excavator sales than China. While we're navigating never-before-seen challenges, there are bright spots in the BTS segment that are well worth noting. In addition to a strong demand for excavators we are seeing in China, we are actively bidding and winning heavy-duty equipment business. We had a recent win in the large genset market and also expanded our reach into the e-bus market with significant added content for battery cooling. I am pleased with the strategic work this team has done to reduce costs in light of demand challenges while staying focused on growing the business. With that, I'd like to turn it over to Mick for an overview of our consolidated financial results.

Good morning, everyone. Please turn to slide eight. As expected, our fourth quarter results were impacted by multiple headwinds. Coming into the quarter, we anticipated that our end markets would remain soft, and we pressed ahead with savings initiatives launched during the third quarter. It then became apparent that the spread of COVID-19 would create significant disruptions. We responded with incremental cost recovery actions which allowed us to finish the year above our expectations in both adjusted operating income and adjusted earnings per share. Fourth quarter sales declined 84 million or 15% largely from volume declines in the automotive, off-highway, and commercial vehicle markets. We also experienced lower CIS sales due to our largest data center customer. Gross profit decreased by 18% to $75 million, resulting in a gross margin of 15.8%. The team worked hard to achieve a 20% downside conversion during the quarter, which resulted from cost reductions earlier this year. In addition to the lower volume, CIS was impacted by a negative sales mix from the decline in data center volume CIS and VTS margin declines were partially offset by a significantly higher gross margin in building HVAC. SG&A for the quarter was $55 million and lower than prior year by 14%. This decrease was primarily due to lower compensation related expenses including incentive compensation, as well as cost savings initiatives across the entire organization. We have continued to aggressively control costs during downturns in our markets and the broader economy. Adjusted operating income of $25 million was down $10 million from the prior year. Again, this decline is a result of lower volumes in the VTS and CIS segments, partially offset by an improvement in building HVAC. In addition, lower SG&A helped offset a portion of the negative impact of the volume decline. As usual, our appendix includes an itemized list of adjustments and a full reconciliation to our US GAAP results. These adjustments totaled $19.2 million in the quarter, comprised of three main areas. First, we incurred $8.6 million of asset impairment charges relating primarily to manufacturing facilities in Austria and Germany. Next, we had $5.5 million of planned restructuring expenses from headcount reductions, equipment transfers, and plant consolidation costs. Finally, we incurred $5 million of costs directly associated with the automotive separation, most of which were incurred earlier in the calendar year. This work is now mostly complete and ongoing expenses will be minimal. Any remaining costs would mainly relate to the completion of a sale transaction. Our adjusted income tax expense was $4.3 million or 26% in the quarter and adjusted earnings per share was $0.24. Turning to slide 9. Cash flow and balance sheet protection were focal points as we adjusted to the pandemic. I'm pleased to report that we ended the year with $71 million of cash and net debt of $412 million, which is consistent with the end of the third quarter. Fourth quarter, free cash flow was slightly negative at $1 million. For the full year, negative cash flow of $13 million was significantly impacted by cash spent on the automotive exit strategy. Throughout the year, we reviewed in great detail the required actions to support our strategy and completely separate the automotive business. Also during the year, we incurred approximately $17 million of cash restructuring costs, primarily related to the headcount reduction including payments for actions accrued last year. The majority relate to plant and administrative restructuring in Europe with the balance for plant headcount reductions in Mexico and plant consolidation in China. Last week, we announced that we proactively amended our credit facilities in order to provide the maximum flexibility we may need to manage our liquidity through the COVID crisis. This was a big success, which will benefit Modine and our shareholders as the market suggests the economic ramifications of this pandemic. We ended the fiscal year with a leverage ratio of 2.4, which is well within our current covenant limits. We believe that we have sufficient liquidity, but wanted to ensure that we have plenty of leverage cushion to safely manage through the crisis. The amendment significantly raises our leverage ratio limit during the next two years, returning to the previous limit of 3.25 at the end of fiscal 2022. We also received some additional flexibility to execute on our automotive exit strategy. Overall, our balance sheet is in good shape and our liquidity is sufficient to manage through this difficult period. In addition to the cash, we had nearly 118 million of undrawn capacity on our revolving credit facility for a total of 188 million of available liquidity. This does not include additional capacity on credit lines available to our foreign subsidiaries. Last but not least, I want to point out that we have no major debt maturities in the near future. In total, we have a very manageable $16 million of mandatory repayments related to our long-term debt obligations in fiscal 21. Now let's turn to slide 10 for our fiscal 21 outlook. Based on the uncertainty surrounding the global economic environment, we are not issuing guidance for fiscal 21 at this time. We are currently getting rather limited information from our customer base. That said, we are using all information sources to track and project market trends. As Tom mentioned, we had a number of plant closures that extended into the first quarter of fiscal 21. Although all of our plants are currently open, more than half of them are operating at well below normal capacity. Based on the current economic and order trends, We anticipate a significant impact on revenue and earnings in Q1. In fact, we expect that Q1 revenue could be down as much as 40% from the prior year. Forecasting beyond Q1 is extremely difficult, but we currently believe that our markets will recover in the latter half of the fiscal year. With that, we anticipate positive free cash flow despite the lower revenue. As I wrap up, I want to assure everyone that we are taking all the necessary steps to protect our employees, customers, and shareholders. We are focused on maintaining a strong balance sheet, preserving cash, controlling discretionary spending, and reducing labor costs in order to limit the downside conversion on lower revenue and generating free cash flow. We will reevaluate issuing guidance during our first quarter earnings release. Tom, I'll turn it back to you.

Thanks, Mick. In conclusion, I would like to reiterate that we are taking all the necessary actions to protect our employees, our customers, and our shareholders. We have taken a swift and decisive action to significantly cut costs and preserve liquidity. In addition, the proactive amendments to our credit agreements ensure that we'll be able to continue to access ample liquidity should this period of reduced customer demand be prolonged. We will also tightly manage our capital investments and will work to continue towards our automotive exit strategy. I am confident that we will emerge stronger on the other side of this crisis. With that, we'll take your questions.

If you have a question at this time, please press the star then one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Your first question comes from Matt Somerville of D.A. Davidson. Your line is open.

Thanks, Maureen. A couple questions. First, now with the auto business sort of the carve-out officially complete at this point, are you able to give us a feel for what operating profit and EBITDA for that business would have looked like in fiscal 19 and 20? And then, Mick, I was wondering if you're able to give, even if there's a somewhat wide range, What a reasonable free cash flow expectation might be beyond, you know, quote, positive for fiscal 21. Thank you.

Yeah, great. Hi, Matt. Yeah, so I'll try to give you a little bit of color on the automotive, the VTS split between automotive and then what we'll call the heavy-duty equipment portion, which would be the truck, primarily truck and off-highway. If we look, you know, pre-COVID, and last year we got hit really hard on the off-highway and the truck markets, but our heavy-duty equipment business had been running EBITDA margins right around 10% or so, and we see a lot of room there for improvement. So with some additional focus on... plant operating metrics and productivity at the plant level, some manufacturing opportunities there. We do see opportunity to grow and improve the heavy-duty equipment side. Auto, same thing. If we look, call it pre-COVID, the auto business was more of a mid-single-digit EBITDA business. consumed a lot more capital, our highest capital consuming business. So it had been running more in a negative cash flow manner as well versus the heavy duty side which is less capital intensive. What's important to note too is within the auto business, and Tom has talked about this in the past, there's two-thirds or so of that business that is engine cooling, liquid cooling business that's been on a high growth path that we've seen some quarters in the last few years tied to emissions and fuel economy and EV. That has had good EBITDA margin, I would say 10% plus. The other third is our legacy air-cooled business, I think front-end module, condenser, That has been very challenged and has been operating more in a negative EBITDA level. And when we go back to the beginning when we decided to exit the auto business, the original perimeter was to exit the full piece and bundle both together. As we decided to come back out and remarket the business and feedback from buyers, What we're focused on in the sale process is that more attractive growth, higher margin engine cooling business. And then we need to look at our strategic options to de-emphasize and that air-cooled side. Last, with regards to cash flow next year. Really, really hard to predict. As you can imagine, I would say Q1, we're expecting clearly our June quarter to be a negative cash flow. If the second half of the year improves as we're looking at it with some customer feedback, I think we'd be, I mentioned positive, but probably somewhere between zero and 20 million. Not a huge Thank you, guys.

Thank you.

Your next question comes from Mike Schliske of Doherty and Company. Your line is open.

Good morning, guys. Good morning, Mike. I have a quick housekeeping question first on the restructuring costs. Could you break those down by segment? I didn't see it in the release of the slides.

Yeah, sure, we can go through. In the appendix, we've got the restructuring baskets for you. The first one on the $5 million of auto separation costs, those are at the corporate level. The impairment charges at $8.6 million. 99% of that, actually all of that is in the VTS segment. And then the restructuring charges of $5.5 million are nearly all in the VTS segment as well. In fact, we also do it in the back by segment for you, Mike, if you want to go into any more detail there.

Sorry, I looked for it. I didn't see it. I'll have to look at that again. Apologize for that.

Yeah, no problem.

I saw the numbers, but not the amount by segment in the little comment there. I'll dig into it, and I'll follow up offline if I have to. I wanted to also ask, secondly, I wasn't sure. I wanted to get some clarity on your comments on the data center business. In the final slide here, it looks like you're saying that it will be an up industry for the quarter and for the full year. But then also some of your comments kind of sounded like maybe the Modine business might be a little bit challenged. Do you think it's going to be underperforming the kind of broader market this year, or did I not hear that comment correctly?

Well, it's a great question to clarify. Obviously, the biggest customer we have right now is in the CIS segment with the large customer we have contracts with, and they have a down Year this year, they've been projecting that for a while. So that drop in sales in CIS of, what is it, 22 million, I think, in that quarter for CIS, quarter over quarter, I think about half of that is due to one data center customer. So that's kind of put an overall data center sales drop a little more magnified. In the UK, we're very, very much pleased with the order book that's coming in. is strong and growing. So we're overall very, very bullish on the data center market. Just kind of having an explanation of this fiscal year for the one customer in North America.

So just to kind of follow up there, the outlook for the industry is positive. Do you think that's because of easy cost in the previous year or are there things due to a shutdown, work from home, higher e-commerce sales?

I think we're seeing definitely an increase in demand, especially in the co-location piece in the UK and Europe, driven by a lot of this work from home technology. Microsoft and others have been very aggressive in that we're supplying support through co-location companies. for that growth and that order book is really filling up well in the UK. The pause in North America was one specific customer who's been projecting this build out of capacity of being on pause but coming back strong in the next calendar year, our fiscal year 22. So we see all the indications being green from the standpoint of data center business where folks with our strategy now in North America expansion as I mentioned in my comments Our intention is to have a good portion of our content capability in North America by the end of the calendar year leveraging the capability of our CIS segment with the focus of a single base to the market that we've put together between billing HVAC and CIS which is really paying off leveraging the relationships, the product strategy, the technology to bring that capability to North America to the large addressable market here. Again, all things are looking very positive from our strategic growth strategies to build off that good market dynamic.

That's great, Collin. Thank you. And then turning to the debt covenant or the debt restructuring that you guys did, I kind of want to get a sense to your kind of motivations for getting that done. At some point during the last few months as you sit down and look at the next 12-month period or the next 24-month period and say, yes, we're going to definitely trip our covenants. We should get this fixed up. Did you do it because maybe you thought you were going to be closer tripping or was this all about kind of taking away any kind of doubt in a worst-case scenario?

Yeah, I think the majority of the decision, Mike, is based on being overly conservative. and as we just covered, we finished the year 2.4 times and our previous leverage limit was 3.25. When the pandemic was kicking in really, really hard and we saw April, a big chunk of our plants shut down, We were doing a lot of sensitivity analysis and really the way we approached it was we wanted to model all the potential scenarios and one of the things we felt strongly about was we didn't want to wait and get into a situation where, and I think we're seeing it now talking to the banks, where they're just inundated with companies looking for amendments and new liquidity. Majority of it was not out of a necessity and a forecast that we have to run to the banks, but not knowing how this year would shake out, we wanted to just make sure we got out in front of it before there's a long line with the banks to deal with these issues.

Got it. Makes sense. Mick, Tom, thank you so much.

Thank you, Mike. Your next question comes from Joe Mondello of Sudoku Young Company. Your line is open.

Hi, everyone. Good morning.

Good morning.

First, just to follow up on the CIS data center customer, is the downturn in fiscal 21 that you foresee at this point in time, is it still sort of the same expectations as they were before, or has it changed at all? Is it further down, not down as much?

No, it's exactly what we said before, so no change. It's going to be what we projected last quarter, last couple quarters, because it's been well-released by the customer address that this was going to be a year that was going to be down, especially in North America as far as build-out. So no changes there, and then the expectation is for their build-out schedules to increase, and that's been a consistent message from them as well. And what we're really building on then is bringing that UK-based Thank you. Thank you. Inside of refrigeration is about a quarter of it.

Okay. At the BHVAC segment, your sort of outlook, a little better than I think some of the bigger peers have talked about. Is that a case in point of Maybe some of these bigger peers reporting a month ago and just not having as much visibility as you guys have at this point in time? Or is it maybe something Modine specific that you're just seeing maybe a little better than market?

Yeah, I mean, I think we have some uniqueness in our portfolio, you know, very strong heating business that is, you know, a lot replacement. So that is pretty stable. So we project that to be flat versus maybe some of the down Thank you very much. Thank you.

We have to filter through and we'll get questions on that can be heavily impacted on the residential consumer side. So obviously, HVAC's a huge industry. We just, when we break it down, we have a real large majority of our business on the commercial side. So that can be a little bit different. And then even like within refrigeration, We've got some large customers on transport, refrigeration, RVs. Then we've seen the RV market kind of go all the way from large downturns in this crisis to now. So maybe hope of people will travel more and want to do more of that via RV. So probably within the numbers is a little bit more Modine-specific.

Okay, and the margin at that segment expanded pretty significantly year-over-year. Was that a case in point of the year-over-year comp just being pretty easy, or what was the big driver there?

Well, I think we said, number one, we were able to pass through pricing at a pretty strong rate, which is another reason why we really enjoy that market. And then secondly, we have some great material pricing that was advantaging us, and I think that just the mix of the way that the business came through. So we had a large ventilation school business. This will pass your record for us, and it contributed well along with a good heating season. And again, the mix of business in the UK really building up with data center business and less comfort cooling, which again is a better mix for us. So I think just a good dynamics overall in building HVAC segments.

All right, and then on the cost reductions, I assume a majority of that's at the VTS segment. Is there any way you can help us think about decremental margins going forward and how the volume sort of affects your margins?

Yes, this is Nick. I think, so clearly, Two of the most challenged in the upcoming year will be the VTS side, auto and HDE. And also, as Tom mentioned, CIS. A little bit on the market side, but also then on top with the one customer. Both of those, we look at it at a gross margin level and then SG&A separate. Most of those would be Downside, decremental conversion rates at 25% to 30%. With all of the plant cost reduction work we're doing this fiscal year, we're trying to target the decremental gross margins in the 20%, 25% range. So that'll help a little bit. And then SG&A-wise, right now, You know, we're running and trying to target about a 10% or so SG&A reduction.

Okay. And I would add on that, Mick, our procurement efficiency is also really picking up well to also offset and help that decremental effect, so really pleased with that.

Okay. I guess just lastly, the interest rate on the new amended agreements,

Yeah, so versus last year and the prior year, we had been between 4% and 4.5% awaited average interest rate. And this year, probably be about 3.94%.

So even with the amendments, it's going to be lower, actually?

Correct. Two things. Well, two or three things. One is If you recall, last quarter we refinanced our long-term loans, so that's part of the year-over-year impact. And then secondly, one of the best parts about the current amendment is we really don't see higher interest rates unless we move into the higher leverage ratios. There was a little bit of movement on some other things between spreads and LIBOR, but Thank you. Your next question comes from David Liker of Baird. Your line is open. Good morning, everyone.

A couple things. On the automotive side of the business, from some of the suppliers, we heard that some of the assembly plants were still taking shipments of products the last two weeks of March, despite there being no production. Just kind of stockpiling inventory for restart. Did you see any of that on the automotive side of your business?

I don't know. To answer your question, I know that we stayed real laser focused. We can get back to you on that one, Dave, but I'm not sure. I can't put it off the top of my head.

Okay. And then there's pretty good news flow on where the auto industry is in terms of coming up and the choppiness in that. The truck side is a little bit more opaque. Is there anything you can share there in terms of But when the volumes might start to ramp back up there, obviously, there's inventory in the channel and the order rates aren't all that good. Any insights on that across the three regions?

It's really frustrating. Typically, between staying close to customers, for instance, the third quarter, we were out with most of our customers at meetings and they were giving us this projection of what the The cycle is going to be modeling it and obviously there's plenty of pictures of saying 20% down is kind of the common theme and right now they've just, communication on what they see is just bottled up so we're really relying on third party right now to kind of get the best predictions but both on commercial vehicle and off highway we're not getting much, even over constant contact trying to pull out what they see as far as ramping back up, they're holding that pretty tight right now. So that's why we're kind of holding the first quarter projections as being pretty challenging and kind of assuming worst case, and then we'll see what happens as that brightens up through the rest of this quarter. Hopefully we start getting better projections, but not much of a picture coming out of the customers at all.

Okay, thanks. And then on the data center side, this has been a Big topic in the last several quarters. We have some of the companies we follow are selling products and components into that data center channel, and they're all talking about very strong growth rates. So trying to understand why this, and we understand that your business is concentrated with one player, but It would seem like that customer's losing share in the broader data center space. Is there anything you can share, any insights you can share on that?

Yeah, well, again, this has been a well-forecasted production shift by the large customer we're talking about. For some time it has not varied. We're in constant contact with them, great relationship all the way up and down as far as delivery and all the commercial elements and everything else. they're being very open with us and what they're doing. I don't know if what we're seeing and again I'm not really including this customer in this regard but what we're seeing is the co-location space that's really building out especially in Europe we're seeing a lot of what I would call the hyperscale people kind of building up capacity in these co-location companies that are building out in the real estate companies that build out capacity and lease that capacity and we see some Some hyperscale people buying that straight-up, flat-out capacity of the whole building, for instance, and that's really dynamic happening in Europe. So I don't know that maybe that customer is participating that way in building scale right now or not losing share by using co-location type thing and not making the capital investment themselves. But what we do know is there are projections to kick in capacity starting in the next calendar year is projected and we feel very positive and confident about that based on our communications. And the other thing that's really important is that the co-location relationships that we build both with operators and specifiers is we want to leverage that because they are global and bring that to North America. So this focus on a single focus to the marketplace and combining the resources and talents of of both billing HVAC and CIS and leveraging our U.K. relationships and bringing that to North America. And we will have what we call a computer repair handling unit being leveraging the capability of the CIS team in our Grenada, Mississippi plant. And we're going through prototype bills right now and have that available for the market by the end of the year, which would really give us a leg into this addressable market for us, which is about a billion dollars in North America and about a billion dollars in Europe. So again, we're winning our share with multiple customers in Europe right now. We want to bring that to North America to diversify the opportunity. And I'll say, even with the large customer, we are building share of wallet with them. We are providing new products with them that don't necessarily build out with their plans. And that's what we call a dry cooler, which is when there's water restrictions in certain areas. They want a dry cooler versus a Okay, thanks. And then lastly, somewhat related questions.

One is on the cost side. A lot of companies are taking actions on the cost side to mitigate the cash outflow. And then on the other side of it, we're seeing working capital disappear as the volumes come down. What do those two dynamics look like as volume starts to ramp up? How much of that cost reduction is temporary versus permanent that we'll see benefits in the future? How much of that working capital comes back two quarters, three quarters, four quarters from now as volumes ramp back up?

David, if I understand your question right, we run pretty low working capital as a company, sub 10% or so. During the This period and first fiscal quarter, it'll be a source of funds, right? It'll be a decline. We think of it as it will come back. There aren't areas really that I see as permanent working capital reductions. I would say last year with all the automotive stuff going on, separation of moves we ended, we headed into the So, I see some maybe permanent opportunity as things improve to actually lean out inventory a little bit, which would be positive. and then the biggest source of cash savings for us besides the fluctuation of working capital would be the teams worked really hard to flex direct labor and every country around the world has got different programs and incentives and reimbursements and then Tom covered from an SG&A fixed cost rate. Obviously those are temporary, you know, salary reductions, furloughs are temporary in nature. Okay. Okay. Great.

Thank you. Thank you.

I am showing no further questions at this time. I would now like to turn the conference back to Kathy Powers.

Thank you. Before wrapping up, I'd like to point out that an ad-back adjustment by segment is included in the appendix to the slide deck. Thank you for joining us this morning. A replay of this call will be available through our website in about two hours. We hope that you have a great day.

This concludes today's conference call. You may now disconnect.