Modine Manufacturing Company

Good morning, ladies and gentlemen, and welcome to Modine Manufacturing Company's third quarter fiscal 2021 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Ms. Kathy Powers, Vice President, Treasury, Investor Relations, and Tax.

Good morning, and thank you for joining our conference call to discuss Modine's third quarter fiscal 2021 results. I'm joined on this call by Neil Brinker, our President and Chief Executive Officer, and Mick Luccarelli, our Vice President, Finance, and Chief Financial Officer. I'd like to take a moment to introduce Neil, who joined Modine as President and CEO on December 1st. Neil came to us from Advanced Energy Industries, where he most recently served as President and Chief Operating Officer, and prior to that, led global sales, marketing, engineering, and operations for AE Semiconductor, Telecom and Networking, Data Center, Industrial, and Medical Markets. Prior to joining AE, Neil spent six years with IDEX Corporation in a variety of senior leadership roles. We are very pleased to have Neil leading our team here at Modine. We'll be using slides for today's presentation, which can be accessed either through the webcast link or by accessing the PDF file posted on the investor relations section of our website, modine.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 Neal.

Thank you, Kathy, and good morning, everyone. It's been a busy first two months of Modine, and I'm encouraged by what I see. I've spent much of my time connecting with the senior leadership team and getting to know the business. I'm honored to be part of a company with such a long and rich history. I would also like to share my appreciation for everyone in this organization that has gone above and beyond expectation during this past year to respond to the global pandemic. In addition to all of our employees, I would also like to thank members of our supply chain for keeping us running efficiently and for our customers who have continued to give us their business and their trust. This has been a difficult year, to say the least, and we wouldn't have been able to deliver our financial results without the hard work from all these key stakeholders. The team has also done a great deal of heavy lifting in preparing for the exit of the automotive business, and those plans are on track. As a reminder, last quarter, we announced the sale of our liquid-cooled business to Dana. Both teams are currently working through all pre-closing items, including the required regulatory approvals around the globe. This process has been initiated and we anticipate a close sometime in the June quarter. For the air-cooled business, which represents a much smaller portion of the automotive segment, we are diligently working on multiple exit strategies. As previously discussed, we have talked with several interested parties and are getting closer to a definitive exit plan. The exit of the automotive business is an important step in our strategic transformation that will allow us to further focus on the future. As the teams work through the auto exit work streams, I'm personally focused on the next chapter for Modine. These are certainly exciting and challenging times for our company, and I see great opportunity for growth and for further improvement to our business models. One of our key priorities is to expand our presence in the data center markets. The data center market in North America and in EMEA are large growing sectors with strong underlying drivers. We expect this growth to continue for some time. Modene has full thermal system expertise, innovative product technology focused on lowering cost of ownership, and a global footprint to support our customer locations. And Modene has strong relations with growing co-location customers and our key hyperscale client, providing leverage for continued growth in Europe and in North America markets. We've talked about growing our share in the data center market for some time, and let me reiterate and be clear, this is one of the best opportunities for Medin to drive higher growth and profit margins. Here's the immediate four-step plan on what we'll do differently to win additional market share in data centers. One, Organizationally, we're consolidating the leadership for data center solutions under one key leader here at Modine. We will align our organization around our customers and markets, which will remove internal barriers and increase our speed and accountability. Two, we are increasing our manufacturing capacity by leveraging our global footprint to deliver data center products at scale and in region. We are expanding capacity on our computer room air handlers by industrializing these product ranges in the U.S. and in Spain, and are also investing to build and test chillers for the North America market. Three, we will continue to invest and scale our commercial and technical team to better align with our customers. And finally, we will use the data center market as the pilot for our 80-20 initiative. Many of you know my background and success with 8020 companies, and Modine will adopt the same 8020 principles, helping shape who we are in the future. As I mentioned, we will launch a pilot within the data center business, training our team in advance of a company-wide rollout. As you may know, 8020 is a systematic way of examining a business and focusing resources on the highest growth and best returning opportunities. Our opportunity is to focus both on improving margins and accelerating revenue growth. We will eventually work through all of our other key markets in a disciplined manner. The 80-20 process and methodology will take some time to fully implement across the company, and we will invest time and money in this very important area. The results of this process have been successfully proven across many companies, and I am confident that Modine will be no different. Finally, I want to mention that our focus includes both organic and inorganic growth. Nick and I will spend significant time wrapping up an aggressive and proactive acquisition program here at Modine, specifically designed to shore up our products, technologies, and channels where it makes sense. Now let's cover our third quarter segment results on page four. CIS sales were down 13% from the prior year, primarily due to lower sales to our large status center customer, which were down approximately 19 million versus the prior year. Adjusted EBITDA was down $10 million. Similar to revenue, nearly all the earnings declined was due to the lower sales with one customer. I would like to take a minute and walk through the changing dynamics of this market while reiterating our competence in our strategy. As you know, our largest customer in the CIS segment is a hyperscale data center customer. While the hyperscale market has grown at a good rate this past year, many hyperscale providers have chosen to scale back their large-scale capital expenditures for DC construction. In order to keep pace with the growth, many hyperscale providers have leveraged the rapid growth of co-location to expand their DC footprints. During this period, we have collaboratively worked with our clients to design their next generation of Kuhn technology for large-scale data center construction. We expect that we'll see orders for these innovative and proprietary cooling products ramp again in fiscal 2022. In addition, I previously mentioned that we are consolidating leadership and focus on the data center markets to continue our growth with both hyperscale and colocation clients. At the same time, we will evaluate different alternatives to better align the external reporting of our consolidated data center business since it currently resides in two business segments, Besides the drop in sales, CIS margins were also negatively impacted by expenses to complete the final phase of our client consolidation in China. This is now behind us, and we expect those inefficiencies to improve going forward. Last, the team remains focused on improving the profit margins of our coils products and driving growth in coolers. I'm encouraged, and I look forward to utilizing our 80-20 process to accelerate this progress. Please turn to page five. The building HVAC segment had another strong quarter with sales up 6% from the prior year and adjusted EBITDA up 15%. This was primarily driven by increased sales of heating products in North America and of data center products in the UK. It continues to be a strong heating season for us with strong growth and share gains in our gas unit heater products. There has been a strong demand for replacement unit heaters this year. that more than 70% of our heaters are sold as replacement units. We also gain market share, mostly due to our strong distribution partners and our superior product availability. As an example, our hot dog brand of products, which are typically used in residential or light commercial applications, are up 35% in the third quarter versus the prior year, whereas we believe the market to be up around 10% in this product category. We've been able to be successful keeping up with the increased demand, often providing next-day shipping for these orders. The higher heating product sales also drove strong margin performance this quarter, with excellent conversion on the increased volume. In data centers, our UK business is having an extremely good year, with data center sales up 30% on a year-to-date basis. Third quarter sales were up slightly from the prior year, impacted by the timing of shipments, with several orders pushed to the fourth quarter. Our focus within data centers for this business is on the co-location customers. These clients value and need our thermal expertise. As mentioned previously, we will leverage these relationships formed in the UK and the EU to establish our business in the North America market. Please turn to page six. Sales in heavy-duty equipment, or HDE, were up 13% from the prior year, with higher sales to off-highway and truck customers in all regions as markets continued to stabilize. Adjusted EBITDA nearly doubled, with a significant improvement in gross margin driven by volume increase, along with savings from procurement and other cost reduction initiatives. This was clearly a great quarter for our HDE segment, benefiting from a market improvement that was ahead of our expectations. We expect this trend to continue in the fourth quarter as many of our customers are building safety stock. We continue to monitor a number of issues that may impact our raw material costs, including tariffs and the rollback of certain exclusions that we've benefited from in the past. We're always working to improve our manufacturing and supply chain strategies, which have been complicated by geopolitical and economic trends, including tariffs. This will continue to be a focus as we analyze our risk and implement mitigation strategies. This is another excellent opportunity to use the 80-20 methodology to quickly drive improvement and focus in on our supply chain activities. Please turn to page seven, and I'll shift to the automotive segment. Sales are down 3% on a constant currency basis, driven by lower market demand in North America, partially offset by higher sales in Asia. Adjusted EBITDA for the segment was $12.3 million, up significantly from the prior year, primarily due to the improved plant efficiency and the benefit of cost-saving measures. We expect further uncertainty in this market due to ongoing economic weakness, and in addition, we may be impacted by the current disruption to the auto industry resulting from shortages of semiconductors. We did not see a great deal of impact from this in the third quarter, but anticipate that it could start to impact volumes in Q4 as more and more automakers halt production due to chip shortages. As I mentioned before, we are diligently working on our exit strategy for this segment, including closing on the sale of liquid-cooled business that is still pending regulatory approval. With that, I'll turn it over to Mick to review the total company financial results.