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.