Modine Manufacturing Company (MOD) Q2 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Modine Manufacturing Company’s Second Quarter Fiscal 2016 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. [Operator Instructions] 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 and Investor Relations.

Thank you. Thank you for joining us today for Modine’s second quarter fiscal 2016 earnings call. With me today are Modine’s President and CEO, Tom Burke; and Mick Lucareli, our Vice President, Finance and Chief Financial Officer. We will be using slides for today’s presentation. Those links are available through both the webcast link as well as a PDF file posted on the Investor Relations section of our company website modine.com. Also should you need to exit the call prior to its conclusion a replay is available through our website beginning approximately two hours after the call concludes. On Slide 2 is an outline for today’s call. Tom and Mick will provide comments on our second quarter results and provide an update for our review revenue and earnings guidance for fiscal 2016. At the end of the call, there will be a question-and-answer session. On Slide 3 is our notice regarding forward-looking statements. I wanted to remind you that this call may contain forward-looking statements as outlined in today’s 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. On today's call I'll first discuss two important announcements the company made last night. Then we will cover our second quarter results. After that Mick will provide a more detailed review of our financial results. I'll then provide final remarks prior to opening up the call for questions. Last night we announced our Strengthen, Diversify and Grow strategic platform for the future. We outlined this plan on page 5 of supplemental slide. This is an important transformative step for Modine that will enable us to evolve into a more diversified thermal management company while being aggressive in our effort to increase long-term shareholder value. We have created a plan to guide our actions. This plan has three major components. First, we will strengthen our business by implementing a global, product based organization. We believe this organization will improve speed to market and allow us to capture synergies among our vehicular, Building HVAC and coils businesses. We will also leverage our global scale to optimize our manufacturing footprint and drive cost reductions throughout our business. This also includes a comprehensive overhaul of our procurement process we expect to significantly reduce our total spend on materials and services. Finally, we will optimize vehicular product portfolio to drive higher operating margins and leverage technology drivers in building blocks within our product portfolio. Second, we will diversify our business; we will invest significant financial and human resources in our industrial businesses which today includes Building HVAC and Coils. This will create a more balanced exposure to our end markets, decrease our customer concentration and reduce cyclicality. Increasing resources allocated to Building HVAC and coils will bring more focus efforts to higher margin organic and inorganic growth opportunities, while allowing us to build global, market leading positions in Building HVAC and coils. Through more concentrated research allocation in these areas we expect to achieve more appropriate market recognition and value for these two important businesses. Third, we will grow our business; this means aggressively pursuing strategic acquisitions primarily in the Building HVAC and coils markets. We are looking at both large and bolt-on targets. We clearly have the balance sheet capacity to go through acquisition, but we will be responsible with the amount of leverage we carry. In addition, we will focus our R&D, product development and commercial pursuits in high growth vehicular areas. We have favorable industry churns that we will continue to require innovative thermal management solutions. We will leverage our advantage global designs in our building block strategy to increase our market share. This is ambitious plan. Our customer and competitor dynamics are changing rapidly and we must adjust our business to position Modine for a long-term market leadership position. By strengthening, diversifying and growing our business we'll improve our margins while lowering our dependence on cyclical markets. The successful execution of plan will result in significant growth in earnings improvement. Refer to Page 6 in our supplemental slide for a snapshot of these plans target. To strengthen our business we'll increase our operating margin from the current 4% to 5% to 7% to 8% by the end of fiscal 2018. This will be accomplished through expansion of our current low cost manufacturing footprint, SG&A reductions and savings achieved through our global procurement project. Overall, we are targeting $40 million to $50 million of annual savings from these initiatives over the next 18 months. Our diversify goals are to reduce our customer concentration and cyclical exposure by increasing our industrial business as a percentage of our portfolio in the current state of 15% to 20% to 30% to 40% or roughly doubling in size. I want to be very clear about something now. This does not mean we are deemphasizing our vehicular business. As is clear from our stated goals, this will remain a critical part of Modine. In order to grow our business we plan to target at least $100 million of incremental industrial revenue through acquisition by the end of fiscal 2018. We will approach any acquisition in a disciplined manner and we recognize our ability to achieve this goal depends on a number of factors some which are outside our control. We are also targeting a net debt to EBITDA ratio of between 1.5x and 2x. We will this is a responsible amount of leverage for our business. However, we acknowledge that we may operate outside this range of time due to economic changes in order to pursue compelling acquisition opportunities. The company will pursue acquisition that make sound business sense or are aligned with our strategic priorities and they are accretive to the business such they will allow us to return to our target leverage ratio of 1.5x to 2.5x within a reasonable period. Please turn to Page 7. In addition to the announcement about our strategy, we also announced that our Board of Directors authorized a share repurchase of up to $50 million of share which will expire on November 3, 2016. We'll make a decision to repurchase shares our suspend the buyback program based on a number of factors, including ongoing assessments of the capital needs of the business, stock price and general market conditions. Although our priority remains to invest in our business, we believe we can reach our target while providing a return to shareholders. Now I would like to move on to discuss our second quarter results starting on slide 8. Sales in the second quarter were down 2%, on a constant currency basis with decreases in the Americas segment more than offsetting increases in all other segments. Adjusted operating income of $8.1 million was down $800,000 from the prior year and adjusted earning per share of $0.04, $0.01 lower than the prior year. Adjusted operating income was negatively impacted by $1.2 million of foreign currency. Excluding these impacts both adjusted operating income and adjusted earnings per share would have increased year-over-year. With the first half of the fiscal year completed, we expect our second half earnings to be significantly strong than the first half. Mick will go through the consolidated results in greater detail, but now I will review the segment performance for the second quarter. Turning to Page 9. Sales for the Americas segment decreased 11% on a constant currency basis with lower sales on both North America and Brazil. Brazil is mired in a recession, it is continued to deepen and we don't believe that we have the bottom yet. Sales in Brazil were down 18% on constant currency basis with decreases to both vehicular OE and aftermarket customers. After market sales normally increase in a recession as consumer repair not replaces their vehicles. However, this is not occurring in Brazil which demonstrates this severity of the economic downturn. In response, we have transitioned to a 4-day work week and expect to stay on this schedule for at least six months. We have reduced our workforce in Brazil by one third and continue to identify synergies in our North and South American businesses. We expect to see the savings from these cost reduction efforts in the second half the year. In North America sales were down 10% with lower sales to off-highway and commercial vehicle customers. Our off-highway sales were down due to continued weakness in the agricultural equipment and mining sectors, and our commercial vehicle sales continue to be impacted by changes in our customers' market share. Gross margin improved by 190 basis points from the prior year to 16.3% as the impact from lower sales volumes were than offset by improved operating performance, lower material costs and savings from the closure of the McHenry facility. Adjusted operating income for the Americas segment was up $300,000 to $8.7 million despite the significant drop in sales and $300,000 negative currency impact. This is excellent performance from the segment considering the significant market and currency challenges. In the second half of the year we expect to see higher earnings in the Americas segment. We've significant launch activity that will benefit the top line and we are continuing to lend business throughout the segment. We have additional savings from the McHenry closure and cost saving initiatives in Brazil. We have lowered our breakeven point in Brazil and we continue to make adjustments as needed. Finally, we expect to have year-over-year savings from lower material cost. All of these will lead to a stronger second half of the year. All- in-all, I am very pleased with how our Americas team has responded to the adverse market conditions in this segment. Turning to Page 10. Sales for our Europe segment increased 4% in the second quarter on a constant currency basis as higher sales to automotive and commercial vehicle customers were partially offset by lower sales to off-highway customers. European automotive and commercial vehicle market remains strong and we expect moderate growth to continue for the rest of our fiscal year. Gross margin improved by 10 basis points from the prior year. The positive impacts from the higher volume and favorable material costs were partially offset by volume related manufacturing inefficiencies due to high automotive volumes. As I mentioned last quarter, we are working at full capacity I mean 24x7 capacity at certain production facilities in Western Europe which is driven up cost per ship premium and expedited freight. In response, we are adding first capacity our plant in Netherlands and transferring production of certain product lines from this high volume plant to our Hungarian facilities where we will also be expanding capacity. In particular, we are in a process of acquiring a land adjacent to one of our Hungarian facilities and plan to proceed with a phased expansion of this facility. This will allow us to increase our competitive position in Europe and fully alleviate our current capacity constrains. We also expect the Europe segment to have higher earnings in the second half of the year, adding full capacity in Netherlands will stabilize our manufacturing process, reducing direct labor cost, premium freight and scrap. We also expect benefit from lower material costs in the second half of the year. I'd like to take a second and address how the recent announcement Volkswagen may impact our business. As many of you know, Volkswagen is a very significant customer for us, both in automotive and commercial vehicle markets. We have automotive products on both diesel and gasoline engines across many of their brands. However it is important I point out that Modine do not supply any of the components that issue in the investigation. At this point, we have not seen any volume change from BMW. If they lower their order in the future, it likely would impact our business but we have no way to assess the likelihood of that or quantify the potential impact at this time. Turning to Page 11. Our Asia segment was up 1% compared to prior year on a constant currency basis. Increased sales to automotive customers in China and India of $4 million were partially offset by lower off-highway customer in China and Korea of $3 million. The off=highway market in China is to continued to weaken with excavator production in 30% lower than the prior year, and approximately 70% off the market high. Market conditions are worse than expected and we don't anticipate any improvement in the second half of our fiscal year. The automotive market is stable and we continue to benefit from increased launch volumes of automotive oil coolers, these programs will continue to ramp in the second half of the year, offsetting the continued decline in the off-highway market. Their operating loss was higher than the prior year due to higher personnel cost we are investing in the region. Turning to Page 12. Our Building HVAC segment had another very good quarter. The segment sales increased 11% in a quarter on a constant currency basis. This increase was largely driven by higher sales of heating and ventilation products in North America where the market continues to be strong. In the UK our sales were up slightly with increased sales of air handling units offset by lower sales of data center cooling products. The stronger British pound is creating competitive pricing pressure particularly for export to mainland Europe. Gross margin for the segment increased 70 basis points on higher sales volume during the quarter. And operating income was $700,000 to $3.9 million. We expect higher sales in the second half of the year for our Building HVAC business as compared to the first half primarily due to seasonality of our heating business. We are preparing for another strong season in North America and our current order intake indicates a sequential increase in sales in the UK as well. Work continues to progress on the rebuild of our manufacturing facility in UK after the fire that destroyed our building in 2013. We are still on track for construction to be completed in December with plan to have all business functions move out of our temporary facilities to the new building by the end of our fiscal year in March. With that I'd like to turn over to Mick for an overview of our consolidated financial results and guidance.

Thanks, Tom. And good morning, everyone. Please turn to Slide 14. Our financial results on this page have been adjusted to exclude $1 million on restructuring expenses in a non-cash charge of $39 million related to a voluntary pension lump-sum payout as described in yesterday's press release. The lump-sum payout reduces the size of the risk volatility and cost associated with our U.S. pension plan. We succeeded in reducing our pension obligation by over $60 million. We recorded $30.9 million of the settlement loss to SG&A expenses and the remaining $8.3 million to cost of sales. Our U.S. GAAP income statement is included in the appendix of this presentation and in our earnings release along with reconciliation. As anticipated we experienced slightly lower volumes in our second quarter due in part to our typical summer seasonality, we also continue to experience significant market softening in foreign exchange headwinds. As a result, our second quarter sales were down 11% primarily due to the strength of the U.S. dollar compared to last year. And as Tom mentioned, sales decreased 2% on a constant currency basis excluding an unfavorable exchange rate impact of $35 million. On a constant currency basis, sales improved in Europe Building HVAC in Asia, however these increases were more than offset by lower sales in the Americas segment where we experienced continued weakness in Brazil and in the North American off-highway market. I am pleased to report that our gross margin improved by 120 basis points to 16.2% despite the decline in sales and the inclusion of $1.3 million of consulting expenses related to our global procurement project. The improvement was driven by lower material costs and better conversion in our Americas and Building HVAC segment. With the higher margin, our gross profit was up 3% excluding $4.2 million of negative foreign exchange rate impact. Moving on to SG&A, costs were lower than the prior year by $1.9 million. And the exchange rate impact was favorable at $3.1 million in the quarter. Excluding the favorable exchange rate SG&A was up 2.5% from the prior year, a significant portion of the increase came from higher commission in our Building HVAC segment and higher sales volume. Q2's adjusted operating income of $8.1 million was $800,000 lower than the prior year; this excludes the $39.2 million lump-sum pension settlement expense and the $1 million of restructuring costs. However, our adjusted operating income does include $1.3 million of procurement consulting cost which we incurred in support of our future savings goals. And adjusted operating income was up 4.5% on a constant currency basis and 19% when excluding FX and the procurement consulting fees. Adjusted earning per share of $0.04 was down $0.01 from the prior year. We are pleased with the overall performance this quarter considering the lower sales volumes. We improve our gross margin, control our SG&A spending and positioned ourselves for a stronger second half of the year. Last, we are starting to see the positive impact of our previous cost saving efforts and restructuring actions. This includes the headcount reductions in Brazil and the recently completed closing of our McHenry plant. Turning to Slide 15. Free cash flow in the quarter was $18.5 million driven by an improvement in our operating cash flow. Working capital levels and capital expenditures were lower than the prior year. Our free cash flow in the third half of the fiscal year was $5.5 million and we continue to expect positive free cash flow for the full fiscal year. Our balance sheet remains strong. We ended the quarter with the net debt to capital ratio of 19% and $65 million of cash. Our Board recently authorized the $50 million share repurchase plan which gives us the ability to repurchase shares on an opportunistic basis. While we see solid value on our stock price especially in light of our new strategic direction, we plan to balance repurchase effort with our priorities of investment to support diversification and growth. And we believe that we are in a strong position with a solid balance sheet to make this significant investment in the company and provide a return to our shareholders. Now let's turn to our full year guidance on slide 16. While we are being proactive with our cost controls and thinking long-term with strategic actions we announced, we do continue to face challenges in many of our key end market. As most of you know more than 60% of Modine sales are located outside of the United States with the heavy dependence in both Europe and Brazil. We estimate the full year exchange rate impact will likely be $110 million on the top line. Also approximately 15% of our sales are tied to the very challenged global agriculture, heavy construction and mining market. Similar to last year, we expect a stronger second half based on several factors. First, the top line should benefit from new program launches in Americas and Asia segment. This is driven by several automotive programs with customers such as Tesla and General Motors. Also we are approaching the heating season and Building HVAC segment which typically provides higher sales and profitability. Last but not least, we expect to benefit from our restructuring actions in Brazil and North America and also expect to achieve higher operating efficiencies in several of our European plants. We are trying to manage these projected benefits with the concerns of further volume declines in Brazil or China. The team is also focused on balancing the procurement cost and savings during the balance of the year. With this in mind, we have provided the following guidance for our fiscal 2016. Sales down 2% to 7% from the prior year which is slightly lower than our previous guidance of flat to down 5%. However, on a constant currency sales guidance is actually flat to up 5%. Please note that at this time we are trending towards the lower end of sales guidance range, also we have not included any impact from the public announcement of BMW as we haven't seen any information that would cause us to lower our forecast. Adjusted operating income is anticipated to be $65 million to $70 million and is unchanged from our previous guidance. This range equates to earnings growth of flat to up 7%. On a constant currency basis, we expect adjusted operating income to be up 6% to 13%. Our adjusted earning per share guidance of $0.75 to $0.82 were up 19% to 30% is also unchanged. We have a lot of hard work in front of us in order to combat the market challenges and achieve our financial goals. However, many of the improvement in cost reductions that we have been working on and that we announced yesterday are within our control. Additionally, we announced a solid strategic framework that will allow us to strengthen, diversify and grow our business so that we will be less exposed to the cyclicality of our end market and better positioned to grow and add value for shareholders. I look forward to reporting on our progress next quarter. Tom?

Thanks, Mick. This is an exciting time for Modine. We are working hard to transform our business and I am pleased that we are able to do so from a position of strength. Our business will be more diversified and we will be able to provide higher returns to our shareholders throughout the market cycle. Moving to a global product based organization is a right thing to do. It will provide us with several advantages. We will increase our speed to market and leverage our global scale. While we continue to optimize our manufacturing footprint and take cost out of the business. We have a strong balance sheet and we will use that capacity to grow and diversify our business by investing in the segments with the highest growth and margin profiles primarily the Building HVAC and coils businesses. As I mentioned, our objective is to increase our non vehicular revenues from 15% to 30% to 40% of our business within the next three years. At the same time, while we are looking for these investments, we have the ability to provide return to our shareholders by opportunistically repurchasing Modine stock. The successful execution of our plans and will clearly result in a transformation of our business when at least to significant earnings and improvement in a more diversified global business. With that we will take your questions.

[Operator Instructions] Our first question comes from David Leiker from Baird. Please go ahead.

Good morning, everyone. So in terms of the steps the actions that you have announced here today -- and I am sure it's more complicated than it is but you essentially taken the three vehicle regional segments collapsing I mean the one and then your building products, is that the right way to look at this?

Yes. The right way to look at this David is and I am kind of go back to our last organizational change in '06 and '07 where we went from a divisional structure to regional structure supported by global product lines running through each regional segment. That was a great step forward and brought lot of strengths to the company. What we are doing now is taking that and actually concentrating our product lines as business as P&L divided into certain product groups globally. So we will kind of take the regional structure P&L and transform it towards a product line P&L globally ran so we can optimize the product strategy, the synergies across each segment and prioritize which products and allocate accordingly. So it is going to be a real true global product line, again it is going to be getting all regions but we are just removing P&L and that the decision rights of product strategy and focus and leveraging in a smart way to a full global product line.

And despite you are having regional structure, I do believe that those product development across the region, when you talk about optimizing that portfolio, where would you be -- if you know the baseball analogy, where would you be in that because you've already taken quite a few actions in that regard.

Yes. I mean I guess baseball analogy inning vertical -- is that what you are talking about what inning are we in as far as --

Yes.

Yes. So --

In terms of optimizing the product portfolio

Yes. So I mean we've a strong global product strategies include our powertrain cooling engine, now we are developing our coils and of course Building HVAC. And I would say that we are probably into the late innings so work with that -- and this is the last step I guess we are bringing in the key reliever right now okay if you were to use that analogy to close it out okay and get us to make those decisions. I don't want to say we've sub optimize our products strategies but we don't fully gain the opportunity by saying we are going to capitalize once, we are going to leverage this capacity, we are going to engineer at once, we are going to go through that portfolio of 52 product lines and optimize the best way to get the contribution out of each of those. That's the way to look at it.

I guess something came across my thoughts along the way as you were talking is this isn't necessarily a step function change so much you are doing, it is a next step of the evolution of the path that you have been on for a last eight or nine years. And this is a last step that kind of optimizes that structures you then all through your journey, is that the right way to look at that?

You actually said better than I did. Okay, this is actually the last natural evolution of how to get to or we need to go to, yes.

David, it's Mick. Just to add to that in the follow up you know when we -- Tom referenced when we did our last reorganization a number of years ago went to the global product base structure, there were a number of products and businesses we exited and we continue that discipline looking at the lower return, lower margin products, so just to emphasize what Tom said and from my seat, this is really about optimizing our global product platform and in some regions we are very well, we are very strong and have the product platform and how you take that to other regions of the globe and leverage it which is very different than big pieces of the company you are going to have to be carved out or sold off. We had gone through that heavy lifting already.

I guess that prove point that this is an incremental change not a radical change I guess is the --

Very good point.

And then just two last items. If you look at the opportunity and increased market shares, there has been a lot of consolidations in the thermal space. Do you have the scale and the product capability to compete in that environment as you got much larger competitors today than you had few years ago?

We definitely feel we do in a various byproduct family okay obviously in certain areas like our engine products group we are a leading market share participant and global range we are supporting all the major global automotive suppliers with unique engine products and expect to expand that. On powertrain cooling, a little bit more challenging in certain products especially when you get to automotive but on commercial truck and off-highway we feel very strong especially vehicles, we feel very strong about. So it's - each one varies a degree and this change, this next step of evolution is going to allow us to really concentrate on honing and on strengths we have, allocate the capital resources appropriately and make sure we gain, the opportunities are there for us to take and also maybe deemphasize, I won't use that word at any one market but in our certain products it is just don't hit that return on capital and we don't see it in future so we can make sure we can take that resource and capital and put that to work in a different place.

Okay. And then the last item here is on the margin target the 7% to 8% by fiscal 2018. If I recall correctly you always had target similar to that, some might look at this as you need to take these actions to get to that number or you could come out that this is always part of the process of getting to that level of profitability. How should we look at that?

I'll take the question first and then Tom can add. The way we approaching look at it David is yes we had this target out there for a while. If you recall when we originally did our four point plan, the biggest difference here is there have been a lot of ups and downs in the market. And as we look forward with everything we know what's going on and off-highway market, heavy equipment, volume has been the biggest challenge including FX. If we had all in the market tailwinds behind us and all of the heavy lifting we've done to get our footprint right, we can clearly get to our operating margin goals, but in addition given the climate we are in, we wanted to accelerate that and not strictly depend on volumes. So what we are doing here in addition to all the strategic benefits Tom laid out about being leaner, faster, more consistent globally, these actions are really going to move us more rapidly towards our goals regardless of what happens to the top line and in the end market.

[Operator Instructions] And our next question comes from Mike Shlisky from Seaport Global Securities.

Can you hear me? Okay, great. So maybe just a few quick questions on the new strategy here. In the past you discussed entering a lot of non truck and auto market such as the white goods market and commercial vehicles et cetera, are there any other new areas that you are going to be targeting as a part of your plan to diversify here? And outside of those two or three categories you have been talking about recently.

Yes. No, I think what we really try to specifically say that our very well established Building HVAC presence both here and in the UK and our coils business is well established and growing to $60 million in the near future in North America has leading -- North America position, both those are areas we are going to leverage for a non vehicular expansion and growth. They have adjacent opportunities that go from there okay so you can go into pure industrial areas that we are looking to expand as opportunities that include things like power generation and things of those nature, all those natures plus the coils market opens up an opportunity to get into other areas it could be food processing and other things of that nature. So we feel there is a lot of expansion opportunities that we have in our ability grow because of the strongest established positions that are non vehicular related and they are growing at a sizable rate already okay. So we want to build on that with organic -- in both organic and inorganic opportunities.

And then within vehicular going forward do you plan to maybe change the mix between truck and auto, is it -- I would assume it is a little bit better probably in truck right now as far as the margins are concerned. Is that a piece of it? And if so with so truck markets entering some of it down phase here which could last couple of years and how do you plan to address getting those volumes good enough to kind of keep the margin going?

Well, I think the best way to say is that we've always been a strong market supplier and we've always continue to be a strong truck market supplier making sure that we optimize our business there. On the automotive side, clearly the technical trends going on with fuel efficiency and that type of things really offer lot of opportunity for us to look at both electrical vehicle which we are doing well as we've talked with Tesco and a growing opportunity for tomorrow, Lexin other electrical supplier as well but also inside of the let say traditional internal combustion engine opportunities as they need more fuel efficiency, we have a lots about air and engine content that we are looking at. So we look at again I stressed in my opening comments that we are in the vehicular business, we are going to be strong in the vehicular business in all of the segments including auto and truck and off-highway are going to be still core to our future. So I guess that's the way for me to answer that.

Okay. And just throwing two more here. The first one being on procurement. How challenging is that going to be? I know when you started it sound like but how challenging would that be to kind of get to way you want to go there given that you got such low commodity prices today currently? Is this a matter of changing how you take -- imagine your actual scale of your orders, your freight cost, your kind of locking in prices over time or if we see the prices of let say copper or aluminum go up from here, is that a challenge to get in those kind of upside -- is that a challenge to kind of fulfilling kind of plan basically.

Yes. Let me -- I want to kick start and I'd like Mick to finish off on the details of which you are talking about. We've been working on this for a while, okay. And a Mick alluded we spent $1.3 million investigating, developing and really globalizing our procurement processes. This is another great example with our strategy going forward as we are really going to globalize these key functions, support functions that integrate with the business in a strong manner. So we feel very confident with the targets so to answer your question. We have not been optimizing $700 million to $800 million purchase spend, we kind of done more regionally than as ideal and by globalizing these -- whether be on raw material or purchase components or services and MR on like we see and proven and have compared ourselves, we really have the opportunities to feel on this. Mick you want to add to that?

Just as what I would add Mike is that through our analysis we've backed out the raw material content and obviously we can't control raw material prices and that but the controllable portion of our spent is where we really see the value and it is for the reason that Tom said become a truly global organization with more global standards is going to allow us to consolidate our supply base and consolidate the complexity of the number of parts we buy and the number of people we deal with in a major way. So it is a huge opportunity for the company as we go forward. And we are still really excited about it.

Let me build on little -- these actions that we are talking about today weren’t built in the last few weeks. We've been working for months and for months and even to the beginning of year working with our Board and developing how we can get ourselves to this kind of position going forward. So each one of these elements that we've defined, they have thought through and gone through benchmark against our competition on how to get market and speed at which we need to move and I just wanted to make sure that Mike that you understand, this is something it had a lot of deep thought review and analysis and process development to get to this point.

Got it, yes, sure, perfect. And then just kind of throwing one last one here on the other side, outside of the program here, I was little surprised on your Building HVAC outlook here. I mean certainly very positive but I mean I am saying normal construction trends up double digits and if you exclude oil and gas which isn't in building, we are up probably about 15% in parts of the country so is there any upside that you think possibly to Building HVAC or is perhaps sound is due to we have to kind of wait and see how cold it gets until we change the outlook here?

Well, cold weather definitely helps the heating business; there is no doubt about that. There is a direct correlation but we have the leading market share position on heating in North America. We have a developing growth strategy in ventilation business both what we call the school business and also commercially with our agrarian product line growing in North America and so the trends there will continue on a positive way as they modernize and replace giving a big install bases and other big drivers for sales for us. On the data center process, our UK business in leads, it has the leading position in the UK expanding that into the Middle East where there is growth opportunities again the drivers of that was digitalization we see favorable growth and the ventilation acquisition we made in Barkell is going to supplement -- or is going to compliment that a lot because there is a trend of moving to what we call more freight movement we talked about earlier calls to really build low energy cost to build that computer digitalization capacity is being driven by the internet of things. So we see growing strong growth trends are going to continue in those markets where we are specifically placed.

And I am showing no further questions at this time. I will now like to turn the conference back to Kathy Powers for any closing remarks.

Thank you. This concludes today's call. Thanks for joining this morning. And thank you for you interest in Modine. Bye.