Modine Manufacturing Company (MOD) Q2 2020 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. And welcome to Modine Manufacturing Company’s Second Quarter Fiscal 2020 Earnings Conference Call. At this point, 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, Investor Relations. Please go ahead.

Good morning. And thank you for joining our conference call to discuss Modine’s second quarter fiscal 2020 results. I am here with 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, 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. This morning, Tom and Mick will present our second quarter results for fiscal ‘20 and will provide an update to our outlook for the rest of the year. At the end of the call, there will be a question-and-answer session. 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. In the past few months, we have seen a significant decline in many of the key end markets served by our VTS and CIS segments. In addition to the Automotive slowdown mentioned last quarter, we are now projecting additional weakness in the commercial vehicle and off-highway markets that we expect to continue through the remainder of our fiscal year and into fiscal 2021. We are also seeing lower orders in our CIS segment, including both cooler sales to the data center market and coils sales to the HVAC and refrigeration markets. These conditions have led to our second quarter earnings being lower than we had originally expected and to a significantly lower outlook for the remainder of the fiscal year. We have therefore lowered our sales and earnings guidance for fiscal ‘20. Mick will provide additional details later in the call. Given the significant change in our order outlook and market conditions, we are rapidly implementing a number of aggressive cost-containment measures. Some of these are immediate actions that will drive short-term cost savings and some are longer term initiatives, designed to deliver between $25 million and $30 million of annual savings over the next 18 months. These measures include operational and SG&A expense reductions, resulting from accelerated procurement savings structural changes and headcount reductions with the immediate goal of improving our operating earnings and cash flows. It’s important for our shareholders to know that we are experiencing a major correction in some of the markets we serve and are taking the appropriate actions now to ensure we stay on path to meet our performance goals. Before turning to the segment results for the quarter, I would like to provide an update on the potential divestiture of our Automotive business. As most of you know, we entered into a formal sale process in the late spring, early summer timeframe and we have been diligently working to prepare for the sale of the business over the past several months, while managing through a challenging industry environment. Throughout the process, numerous companies expressed interest in the business and we see -- we received bids from both strategic and financial buyers. Over the last several months, we narrowed the group and believed that we could reach an agreement with one particular buyer. Unfortunately, negotiations with the counterparty have recently been terminated. This is due to a combination of factors, including general market and economic conditions, deal complexity and overall value. We have other interested parties and we will continue with the sale process, while continuing to analyze all strategic options. Though the process is taking longer than anticipated due to the industry and economic uncertainty, but we will make the right decision for our shareholders. The team has worked extremely hard on the separation and the investment is significant. But we believe this is a prudent investment because it is a necessary step for Modine to exit the Automotive business. We believe that becoming more diversified industrial company is in the best short-term and long-term interest of our shareholders, and will make Modine a stronger, more profitable business once complete. Now turning to our second quarter results, overall, second quarter sales decreased 9%. Our Building HVAC segment had another strong quarter with sales up 12% on a constant currency basis versus the prior year. However, both our VTS and CIS businesses had year-over-year sales declines, primarily due to continued weakness in our end-markets and unfavorable currency impacts. Our second quarter adjusted operating income was $20.2 million down $6.3 million or 24% from the prior year, primarily due to the lower sales volume in our VTS and CIS segments. Turning to page four, sales for the VTS segment were down 11% from the prior year or 9% on a constant currency basis. Our key vehicular markets have slowed significantly, overall sales to commercial vehicle customers were down 15% and off-highway sales were down 22%. We start seeing a decline late in the first quarter with only significant sales softening in our Automotive markets. Early in our second quarter, commercial vehicle market still appeared stable, but we began to hear early word of inventory adjustments from our off-highway customers. At this point, third-party market research estimates continue to signal year-over-year growth. By the end of the second quarter, we saw a significant drop in off-highway orders and started receiving mixed signals for the rest of the year. It wasn’t until early October that third-party market data to begin reflecting a portion of these market declines and that we learned a full extent of the impact of the second half of our year for both off-highway and commercial vehicle sales. We continue to monitor publish market data, but as we talk with our customers, we now understand that the volume declines in the fourth calendar quarter of 2019, in the first calendar quarter of 2020, maybe significantly worse than the current data would indicate. In some cases, we expect year-over-year volumes declined by as much as 20%. We base our forecast both our market data and customer feedback. In the current environment, we are taking a more conservative approach and are preparing for volumes to continue to decline for the balance of our fiscal year. Within the off-highway space, the area most negatively impacted has been large engines and high horsepower equipment. This includes high tonnage escalators, harvesters and large tractors, where we have a higher mix of business. These impacts were generally in line with what we have seen and heard from the earnings commentary of our large OE customers in this quarter. Sales to customers in the Americas region were down 9% from the prior year, primarily driven by lower sales to Automotive and off-highway customers. Sales in Europe were down 13% from the prior year, due primarily to a steep drop in commercial vehicle sales as programs continue to wind down. In Asia, sales were down 12% due to lower off-highway sales in China and Korea. This was partially offset by higher Automotive sales in China. Adjusted operating income for the VTS segment was $9.3 million for the quarter, which is $6.7 million lower than the prior year. Adjusted operating margin was down 170 basis points to 3.1%. This volume driven decline has lowered our segment returns to a level that is clearly below our targets. So far, we have rapidly adjusted our direct labor costs, but the VTS team is now focused on quickly reducing our fixed cost as well. Our operations team is aggressively rebalancing production schedules and adjusting labor requirements in overhead spending in line with our latest sales forecast. Please turn to page five. Our CIS segment also had another down quarter, with sales decreasing 12% from the prior year. Sales to data center customers were down 26% from the prior year. Similar to last year, we knew this quarter sales will be down from the strong level in the second quarter of last year. We still have a strong relationship with our largest customers in this segment and they are happy with our performance. We are actively working with them to find opportunities to grow this business and even though they are still growing their data center capacity, the rate of this growth has slowed, which impacted both the second quarter and our forecast for the rest of the fiscal year. However, our future initiatives for the data center piece of our CIS segment is the diversification of our customer base. This market is fairly concentrated, which makes this effort difficult, but we believe the relationship and success we have had with our largest customers is a testament to our products and services. It gives us confidence in our ability to obtain new customers. In addition to data center, sales to other end markets in our CIS segment were down as well, due to a tough industrial environment. This segment reported adjusted operating income of $8.9 million, down 31% from the prior year. This decrease was primarily due to lower gross profits, driven by lower sales volumes and negative sales mix. We recently announced leadership change over our CIS segment was Scott Bowser, Chief Operations Officer, assuming responsibility for the segment. We will also be making further structural and leadership changes to ensure we drive improvement in both the commercial and operational sides of this business. We clearly have some work to do in this segment. I am confident in Scott’s proven leadership that this team will execute on our growth and profit improvement plans. In particular, we are focused on profit improvement in our coils business, where we are reviewing our profitability by product and by customer and believe there is room to strengthen our pricing structure and distribution channels. In addition, we are also examining the organizational structure of this business. Last year our VTS business moved from a regionally manage business to a global structure. In CIS, the group is still managed regionally with different areas of focus, strengths and weaknesses around the world. We are now looking to move to a global product structure that will help to improve profitability in our coils business and further strengthen our market presence in our coolers business. Please turn to page six. Turning to our bright spot in the quarter. Sales for Building HVAC segment increased 10% driven primarily by higher sales of school ventilation and heating products in North America and higher data center sales in the U.K., partially offset by lower non-data center product sales in the U.K. Adjusted operating income increased 35% from the prior year to $8.8 million and adjusted operating margin increased 300 basis points to 15.8%. This increase was driven by higher sales volume and favorable sales mix. We continue to be encouraged by the strong performance in our competitive position in this segment. We recently announced that we entered into a supply agreement with CyrusOne, a global owner and manager of data center properties to provide cooling solutions for the data center projects in Europe. Our Airedale business unit in U.K. is in a great position to provide energy efficient cooling solutions to this growing market. With that, I’d like to turn over to Mick for an overview of our consolidated results and to update our outlook for fiscal ‘20.

Good morning, everyone. Please turn to slide seven. As I reviewed last quarter, we anticipated a challenging Q2, the things are even more difficult than we expected. Both VTS and CIS had lower year-over-year sales, due to negative trends in their key end markets. On the VTS side, we experienced particular weakness with global off-highway and commercial vehicle customers. With regards to CIS, we saw lower orders from data center, commercial HVAC and refrigeration customers. As a result, second quarter sales decreased $49 million or 9%. Excluding the negative FX impact of $11 million sales were down 7%. As Tom covered, Building HVAC segment sales increased 10%, continuing their positive momentum. Gross profit of $76 million was lower by 14%, resulting in a gross margin of 15.1%. Downside conversion was generally in line with our expectations based on current fixed and variable cost structures. In addition, foreign exchange had a negative impact on our gross profit compared to the prior year. VTS and CIS segments were the primary drivers of our gross margin decline. Within VTS, the gross margin declined primarily due to lower volumes. CIS margins also declined as a result of decreased volumes in unfavorable product mix. The drop in cooler sales to data center customers had a negative impact on segment margins. In addition, we are focused on reversing a negative coils margin trend. As Tom mentioned, improving coils profitability is a top priority of the new segment leadership team. Building HVAC remains a bright spot with gross margin improving 220 basis points. SG&A for the quarter was $67 million, as we face market headwinds, we remain focused on controllable cost offset lower revenue also, please note that $12 million of SG&A was related to preparing the Automotive business for sale. These costs have been excluded from our adjusted operating income and you can see the details in the appendix. The remaining SG&A expenses decreased by $8 million. Adjusted operating income of $20 million was down $6 million from the prior year, as previously reviewed the earnings growth in Building HVAC was offset by the decline in VTS and CIS. Lower SG&A helped offset the volume declines and the negative foreign currency impact. As usual, our appendix includes an itemized list of adjustments and a full reconciliation of our U.S. GAAP results. These adjustments totaled $14.2 million as previously mentioned, $11.9 million relates to the Automotive divestiture. The other $2.3 million relates primarily to VTS severance costs as we separate the Automotive business and restructured the balance of VTS. We unfortunately see a large and unexpected swing in our tax rate, which has impacted the adjusted and GAAP results. First, we recorded valuation allowances against certain US tax attributes that had a significant impact on the quarterly tax rate. Second, our projected pre-tax loss position in the U.S. resulted in losing the 50% deduction of our GILTI inclusion, which is one of the new U.S. tax provisions introduced under the Tax Act. The loss of this deduction actually results in more tax being expense when companies enter a loss position in the U.S. Adjusted earnings per share in the quarter were $0.13, which is down $0.22 from the prior year. As I just reviewed, the decline is due primarily to lower sales combined with the higher tax rate. Turning to slide eight, our year-to-date cash flow is down due to lower cash earnings and large costs related to the anticipated Automotive divestiture. Year-to-date, free cash flow was negative $24 million. However, this includes $20 million of payments related to strategy and restructuring costs. Capital expenditures were slightly higher than prior year and that’s partially due to the separation of our Automotive business. As I mentioned last quarter, full-year capital spending is expected to be slightly higher, largely due to these additional costs. In addition to the cash expenditures, the operations teams have been carrying higher inventory to support our Automotive plant separation. Despite the high level of cash spending on the Automotive separation, we anticipate slightly positive free cash flow in the second half of our fiscal year. And finally, our net debt increased $25 million year-to-date and our leverage ratio is 2.3. Now let’s turn to our fiscal 2020 guidance on slide nine. Based on recent results, sales trends and customer feedback, we are reducing our guidance to reflect additional market weakness in the second half of our fiscal year. As Tom reviewed, we anticipate further softening across their VTS market, especially with commercial vehicle and off-highway customers. In addition, we are expecting ongoing weakness in our CIS markets, including a key data center customer. Many companies have not released their 2020 outlook, but given that we have a March fiscal year end, we have tried to extrapolate the current trends. To summarize our updated fiscal ‘20 guidance, we now project sales to be down 7% to 12%. This represents about $150 million move based on the midpoint of our range, with the majority of this reduction coming from the second half of our fiscal year. In Building HVAC, we are expecting the sales growth to continue, although slower in the second half. With regards to CIS, we are expecting negative sales growth in the second half of the year, primarily due to slowing global markets, along with a negative foreign exchange impact. We also anticipate a significant decline in our VTS segment sales in the second half versus the prior year. The largest decline is in the Americas, where all end markets are projected to be down. We continue to have a challenge in Europe with the weakening Automotive and off-highway markets and the continued wind down of certain commercial vehicle programs. We have also reduced our Asia market forecast substantially and expect a small sales decline for the year, offsetting continued market share gains. As Tom mentioned, we are taking immediate cost cutting actions and targeting significant savings. However, we will need time to fully implement the reductions and achieve the full effect. Adjusted operating income is now expected to be in the range of $85 million to $95 million. The change in our earnings outlook represents a downside conversion of approximately 20% based on the corresponding sales change. In addition to the unusual tax items I previously mentioned, our estimated full year tax rate is now projected to be higher due to our mix of earnings, and specifically, foreign and business tax regulations. For example in some jurisdictions, we will have income tax expense, despite pre-tax loss. Based on the expected tax rate of approximately 34%, we anticipate adjusted earnings per share will be between $0.75 and $0.90. By separating the Automotive business and reducing our cost structure, we are protecting Modine from further market downturns and aggressively positioning the company for a significant margin improvement. We remain focused on the areas that we can control and executing on the strategic plan. Tom, I will turn it back to you.

Thanks, Mick. Four years ago, we announced our strengthened diversified and growth strategic platform that enabled us to become a more diversified thermal management company. This platform has served as a framework for a decision making and risk management efforts as a company. We executed on our plan and have continued to execute on the strategy, which led us to the decision to exit the Automotive business. This is an important step for us to allow us to better focus our capital and management time on continuing to strengthen, diversify, grow our business going forward, with a new set of strategies that will help us reach our financial and operating targets in the future. This process is taken longer than originally anticipated, but we remain committed to moving towards a structure and valuation that will be in the best interest of our shareholders. However, the recent downturn in our end markets is forcing us to take additional more immediate actions, which includes the cost savings plan. We are targeting $25 million to $30 million in annual savings over the next 18 months. As I mentioned, these savings will come from a variety of sources, including headcount reductions, procurement savings, plant consolidations and other SG&A and overhead reductions. We are starting to take the initial steps and we will continue to take the actions necessary to meet this target and timeline. We have been through this before and have not only executed but have met our goals. We have a proven track record and we responded quickly to market downturns and this time will be no different. As a matter of fact, we are in a much better position than we have been in the past when the markets have moved against us. In our CIS segment, we have made a significant leadership change and we will make additional changes to how this segment is managed. I am confident that these actions will get this segment back on track. Meanwhile, our Building HVAC segment continues to generate strong margins and earnings, and we are optimistic about the segment’s future growth prospects as it continues to contribute more and more to our total company results. We are well-positioned in our key end markets with leading shares in our non- Automotive businesses. We will focus our investment in growth on these industrial markets with strong long-term mega trends, where we have a right to win. We will prioritize capital invest in businesses that will improve our margins and cash flows. And with that, we will take your questions.

[Operator Instructions] Our first question comes from the line of Mike Shlisky of Dougherty & Company. Your line is open.

Good morning, everybody.

Good morning, Mike.

Good morning, Mike.

Okay. So I wanted to just briefly touch on some of the one-time costs surrounding the auto parts divestiture. When I go back over the last bunch of quarters, it looks like when you add up, it’s you have spent at least $27 million so far, I think, if I am wrong, correct me there. Can I ask you a little color as to kind of what those costs are? I am not really sure why it would so much to sell something that is relatively small from an EBITDA perspective. You might have actually already spent a whole segment EBITDA on these fees. So I am just kind of curious as some more detail there. And if you don’t end up selling it for some reason, I was just kind of curious is there any contractual provision that you get some of that cash back from your vendors?

Yeah. Hey, Mike. It’s Mick. I will take the first shot and then Tom can comment on the non-financial side. Yeah. We knew heading into the process and we have talked about the cost to prepare the business for divestiture would be significant and the primary reasons are the biggest driver is we need to stand this up as a separate business, otherwise we can’t carve it out. And having that then integrated into multiple business units over the past and then most recently three, four regions, all part of the VTS segment, there is a significant amount of accounting and financial work to be able to separate out the financials, not only on a historical basis, but on a monthly and go forward. The second big piece of that is from an IT standpoint. We have to duplicate and standup the IT system in order for us to be able to do separate the business. The challenge with that and your question about kind of cost benefit is the alternatives is as you know, the footprint of the business and the alternatives of thinking about a wind down are really significant costs to Modine and the shareholders. So Tom and I continue to believe that spending investment to separate the business, is this the most flexibility to determine what to do with it going forward. But that’s the main drivers of the costs we have spent. We anticipate probably another quarter or two of investment and then we will be ready to stand this business up as a separate entity and that will help us going forward quite a bit from both visibility and full separate entity. Tom anything do you want to add?

Yeah. No. I think maybe just a general statement overall. I mean this remains a strategic priority for the company, the divestiture of auto. We went through a process, very thorough process, this narrowed down, we had quite a big interest at the beginning that narrowed down to a smaller number then we selected one potential buyer to go into final negotiation with and that just completed, decided not to go forward in this last week’s time frame, simply because of, quite frankly valuation from our standpoint and also I think concerns on the market conditions, the head of factor on that, but this remains a top priority, this will happen. We are going to get back. We are getting back into the flow of second -- a round of alternatives what we can consider and that’s -- we will keep you posted on the timeline. But frankly, we want to make sure it’s a good deal for the company, for shareholders that we can -- going to be, our focus was to get that done in this quarter, but we decided not to pursue that because of the reasons I just said. So it remains a priority. This will happen, and it’s just a matter of time of planning the right arrangement with the right buyer.

Okay. And just a housekeeping item, and your comments about looking to save $25 million to $30 million in the next 12 months to 18 months, that’s not just simply not repeating some of these one-time cost for the auto parts divestiture, right? That’s a whole other set of expenses going to?

Yeah. Yeah. Great. Great question. Good clarification. No. The $25 million to $30 million Tom talked about are our operating costs within the company. It’s completely separate from the one-time costs. We are spending now to separate the Auto business.

Okay. Thanks for that. Kind we move on just to CIS quickly here maybe a two-part question. One, can you give us a little color or some commentary as to how easy is it to move to a global structure for that business, given some of the changes in regulation between countries or other issues as far as shipping and facilities and how you acquired raw materials? And also will there be any -- do you think any additional one-time costs there, or footprint changes that have to happen? And then, maybe secondly, on CIS, given what’s been going on and where your forecast is headed and what’s happened now for a few quarters here in data centers. Is there any risk of global write-down in that business?

What was the last question Mike I didn’t get?

I was just curious if given what’s happened with your forecast over the last couple of quarters in data centers and in elsewhere in that business. I am curious if there is a risk of a goodwill write-down from about the deal?

I will take the first part and then swing it back to Mick on the second part of the question then. As far as we have just made the announcement on the leadership change we make an assessment. We have been globalizing the functions within CIS for some time now with the integration. So things like procurement that are over involved with optimizing the buys on a global basis that are already done. Now this is a matter of that really planning the product strategies, we have, for instance, obviously the largest share of coils on the open market position globally that varies by market in different regions and we haven’t really addressed the optimization of how we run commercially as both how we go to market in our selling proposition and also operationally. So there’s a lot -- there’s things on both ends of this, so we can really optimize by making sure we have oversight on a global basis. Yes, it comes down to running regionally, from an operations and sales standpoint, but those overall strategy of the product, whether it be coils, which is really where the concentration is and also coolers, we have a very strong position in Europe of bringing our focus to North America and other regions as well. So it’s really bringing the strategy to a global level operational and commercial consistency around the globe best what we are focused on and feel very confident with what that’s going to bring.

Yeah. Mike, I will just jump in on the goodwill question and any impairments. The short answer is no. But we always go through, we always look at impairment indicators and we do a heavy you look each fiscal year-end and it’s part of our planning process. As you know coming out after the acquisition, we had actually had a one year or two years are really strong earnings growth. So we are coming off of what is -- we are not happy with it. But the dip is coming off of some really good growth phase higher than where we bought the business. The other thing is on the technical accounting side, a lot of that goodwill is applied to different areas of the business and some of those areas within CIS are doing quite well, have strong margins that support some of that, those intangibles on the balance sheet. So, yes, we will keep looking at it and next review will be as part of our planning process.

Mike, if I go back to your first question. This is Tom. One of the things, we are talking about CIS, but as we globalize the strategies in the performance prioritization and drive that. You know that we have a data center business in CIS that really focus is, I say, on the cloud computing side and we have a data center focus in the U.K. out of our Building HVAC Group. We are really look at how we can link those two together have one strong face to the market. That’s early days, but that’s something we are concentrating on as well to make sure that we can take advantage of both of those channels to market in a smarter way to grow that business is a priority.

Okay. Just wanted to ask a question also on the upcoming cost savings, will all the cost savings be in just VTS and CIS or it will even be in the auto business that’s been carved out here? And also I think it’s going to be in the in the HVAC business or is it all going to be in those two main segments?

Well, clearly, the focus and priority is on the VTS and CIS side. But we are going to look at all flows of workflows, where we can have opportunities and on the growth side of Building HVAC, we want to make sure we are leveraging everything possible there. So as I mentioned, the data center business had the recent announcement of the success with CyrusOne recently on co-location across Europe opportunities and so we are going to be carefully look at that front, but we want to support that and deliver fully and be able to grow that even further. But the main focus VTS and CIS and then of course we mentioned using procurement savings, accelerating opportunities there. So in others will be, let’s say, targeted in spots, but mostly it will be VTS and CIS. Mick, you would add anything to that?

Yeah. Just, yeah, it’s a balancing act, we will have to do with regards to your question on the Automotive side versus the rest of VTS. Clearly, Automotive is down as well as part of VTS. So but at the same time we are at times indicated we are talking to buyers and so you have to be very careful about the level of adjustments reductions we would take in the middle of the sale process. I think it will be a much heavier look, obviously, our $25 million to $30 million as Tom and I are focused on the remaining company. So your question about the coming out of the one-time separation costs at Dakota. We lean and put all these costs into business, the things that aren’t going to stay with us, they won’t help us in the long run, so most of the focus is going to be on the remaining part of Modine.

Okay. Okay. And then just maybe I squeeze in one more here before I pass along, I just want to confirm. In the quarter, there were no major impacts to your numbers due to the auto strike at one of the big OEMs? And maybe as a secondary to that question, one of their plans was -- I think, last year, a few of them are not far from your facilities, maybe that’s by coincidence or from old relationships. I am curious if you have seen any good hiring trends for, I guess, folks who are either fed up or to try something new from the auto business for yourself?

First part of that question is we look at some impact, okay? But not material, okay, to mention here with supplying engine products to the GM in North America specifically and as far as personnel, I can’t answer that, I don’t know, I don’t know the inside of where we have our operations, we are probably going through some levels of reductions across the plant operations as far as rebalancing load. So I don’t know the answer to that one, but with the first part, it’s clearly impacted but not materially.

Okay guys. I appreciate the color. Thanks so much.

Thank you, Mike.

Our next question comes from the line of David Leiker with Baird. Your line is open.

Good morning, everyone.

Hi, David.

On Building HVAC, you are doing well there, are there -- when you look on the horizon, are there any signs that there is some issues that are popping up there, some weakness in the end markets or anything along those lines that could come up in the next couple of quarters?

If you look, and I mentioned the non-data center sales in the U.K. are down some, okay? So, offset by significant growth, the data center. So I think that’s a Brexit issue with things slowing down in England. But right now it’s -- that’s what we see at this point. I can say in North America the sales are great. We have a great heating sales, season going on right now, I mentioned school product sales are going strong. So we have not really seen any indication in North America.

And then on the data center side, I know you have been working and trying to broaden that, but are there any actions or any signs that you are able to break into some other customers in that data center to help smooth out the flows there?

Yeah. We are putting a lot of time into that, David. As we talked last quarter with some questions and we have got a team of people that we are pulling together. And I mentioned it earlier in a follow-up question of the earlier caller that bringing together with this change we made in leadership in CIS, bringing together a team is one phase to the market that we can leverage relationships that we are building in both segments now, but leverage that into one voice to the market. For instance, in the U.K., I repeat the CyrusOne order that we received significant going there, that is a North American based company. They clearly are interested in us supplying them in this region, okay? And we are really looking at the best way to do that. That also means that you deal through engineering firms and contractors that, so the specifier relationships are very important. We have got a very strong relationship arrangement set up based on both sides of both channels to market that we are putting in place the leverage. So we are putting on our time, putting on the right resources and again addressing our approach to market that we should be able to talk a lot more about that in the next earnings call.

Okay. Great. Just one more item on CIS, is there any -- are there any targets you can share in terms of what do you hope to accomplish to position that in terms of future profitability growth rates along the way? Are there any parts of that business, you may not want to be in that just don’t offer the opportunity you want?

Yeah. We clearly have some targets out. I will let Mick it into those in detail. But we want to get, I am thinking 200 basis points to 300 basis points improvement going in really driving the changes that Scott is leading right now. But, Mick, you want to go into further color with that?

Yeah. Were on -- we are frankly on a really good roll. We get the good execution of our initial synergies. We had some good momentum behind us with one of our large -- the large data center customer. And last year, we finished, David, about 9.5% EBITDA. We think that business should be running more in 12% to 13% in the next one year to two years, year-and-a-half. We have got a good path forward I think we know. Your question about businesses, we need to exit, no. The big -- everybody knows the largest piece of that business is in coils and Tom talked about that, that’s just getting back to blocking and tackling with regards to how we build, cost and price that product. But we see significant margin improvement. This year will probably be down a little bit more like a 9% EBITDA, but our goal and the team’s target is 12% or 13% EBITDA in the next 18 months.

Okay. Thank you.

And our next question comes from the line of Matt Summerville of D.A. Davidson. Your line is open.

Thanks. A couple of questions. First, can you give us some sort of feel for what your book-to-bill look like in the commercial vehicle and off-highway portions of VTS? And then whether or not the results were seeing in your coils business are indeed indicative of market share loss?

Okay. So book-to-business in commercial vehicle, I mean, obviously, we don’t project, we don’t give out that data publicly. We are very pleased with our business wins around the globe on commercial vehicle. So we spent time recently with their several of our commercial vehicle customers and really understanding their strategies. But more importantly, what they see coming up the next 12 months to 18 months in their outlook, which is one of the reasons we adjusted our sales down. But we are winning our business. We are well position as a top three position in North America and Europe, smaller in China, of course, but growing with both multi-nationals and domestic customers there. We did see some push out with delayed launches due to China 6 in China with one or two specific customers there that were part of part of that delay. So but I saw a very, very strong position, very well good product platforms that we offer that we are able to leverage in a smart manner and then, of course, going into specialty bus and truck little bit deeper into the commercial vehicle segment. Great position in North America and growing in Europe, especially with the electrification opportunities we are seeing there that we are involved with all the major bus companies and especially truck companies as well. So I am very, very positive on our position in commercial vehicle in that perspective. On the second part of your question was getting back to CIS, I think, it was coils share and from our standpoint we believe our coils share is again, as I mentioned, the largest independent position we think good, we are approaching 25% to 30% market share in that globally that we supply and deleveraging that is very important thousands of customers. The visibility there is far less as far as the lead time sales and that type of thing, which is one of the strengths we have is responding to the orders in a fast way in a matter of weeks and so we have -- we probably need to focus on how we manage that commercially making sure we are getting all the value from a value proposition and pricing standpoint. And really working on the investments necessary to have fast response and be able to respond to those customers needs to get out of the door and also vertical integration, which helps us on a cost side too. So it’s share wise we feel that we are in a leading position, which we need to leverage that better to take advantage of that position.

With respect to the $25 million to $30 million of anticipated restructuring related savings, Mick, what is the cash cost out the door to accomplish that. And can you give us some sort of sense in terms of the cadence of realization as we look out through the balance of fiscal ‘20 and into your early part of fiscal ‘21, please?

Yeah. Yeah. Great question, Matt. So we estimate right now it’s early, but most likely the cash cost to achieve that savings will probably be between $3 million and $5 million total. With regards to annualizing the savings, we feel confident we can get $4 million to $5 million in this fiscal year and then the balance of it, 90% of it hitting in next fiscal year, and we have got obviously, we are targeting other ideas above and beyond. There may be a little bit that carries over, but our goal here is to get the full $25 million to $30 million within the next 18 months, again, with $4 million to $5 million hitting here in the next four months or five months.

Is there a way maybe to parse out, if you look at the EPS guide take down parse out, how much of that is being driven by the dynamics you talked about in the commercial vehicle off-highway in VTS, how much is being driven by CIS and then what the -- I could calculate what the impact is on the tax rate change, if you have it?

Yeah. So when we think about the change in the guidance going back to last quarter. From an operating income standpoint, it’s really pretty evenly split a little bit more on the VTS side, but it’s been a heavy mix here of VTS and CIS. And tax side, as I haven’t quantified it, but we could do that with you offline. We have clearly moved up on the tax side from a 26% rate to a 34% rate. So the downturn has been really then split on the VTS and CIS side.

Got it. And with respect to Building HVAC, I just want to make sure I heard you guys correctly, you anticipate that business still growing organically in the back half of the year, maybe help me understand some of the drivers there, given you are up against a plus 16 organic comp in Q3 and plus 25 organic comp in Q4, so maybe talk through that a little bit?

Yeah. Well, clearly, I mean, Q3 we will be finishing out heater sales, which is in -- which is our strength of the North American side of that business coming off the strong school season, which was more of a Q1, Q2 type phenomenon with retrofitting schools. The big focus on the back in the years in the U.K. as well with the data center orders that we landed the CyrusOne deliveries that I have talked about. So we feel very positive about the organic side of that growth opportunity and expanding on it.

Got it. Thank you, guys.

Thank you, Matt.

And our next question comes from the line of Brian Sponheimer of Gabelli Funds. Your line is open.

Hey. Good morning, guys.

Hi, Brian.

Hey. A couple of different questions here, just going back to the comment that the cash cost out the door to save $25 million to $30 million on an annual basis is $3.5 million. I guess the question then it becomes, why wasn’t that done sooner, I guess, we will start there?

Yeah. Well, you clearly the timing of this drop, Mick mentioned, that the majority of the drop is in the second half of the year, if it is still in front of us. We are working on driving the sales and focus that went, so this is kind of a recessionary, let’s get ready, okay? We have talked about it, Mike, early comments that we are in better shape now responding early to what I think is going to be a pretty deep and broader potential contraction in our markets anyway. But so with that in mind, we are really focused on making sure that we are being as aggressive as we need to be, okay? So, yeah, we are going to take some risk here with some changes within the management we think and we are doing it in a smart way. We want to come out of this thing with -- we are not taking our eye off those targets on our margins, as Mick mentioned, as far as what we are striving for the company to be and this is the necessary change to adjust for that contraction. So it -- on the procurement side, those savings that we have put a lot of investment into our procurement team over the last couple of years and starting to deliver now we are broadening even more, not only just through straight, the direct buy, but indirect buy, logistics savings and those type of things. I think is a natural maturity level, where we are with our whole supply chain management focus. So I think that’s just great in line with the timing of building out a fully functional and I would say operational excellence within supply chain, and then the rest of this is contracting on the variable side. And then I think we are structurally going to have to make some changes to get through this contraction, so good question. Mick, you want to add to that?

Yeah. Just a little more color on the forecast question and pulling lever sooner. As we were on the call last time and we talked in July, we knew there was some softness and also back to the Automotive discussion, we have been pulling levers this year on cost reductions, also planning for the separation of auto. So year-to-date we had already pulled cost reduction, headcount levers in the tune of $5 million to $6 million and annualized. And then, the second quarter came in a little bit lighter on the topline and then we expected as that was closing out. September forecast, we saw a drop, a significant drop in CIS and VTS. And then in October, we took a really hard look again. Tom talked about some mixed signals we were getting from EDR order rates from customers versus what we were seeing or actual pulls out of that. So we went back and we did another really deep scrub in October, rolled that up and as we come to you today, obviously, we immediately went into, okay, based on the current forecast and concerns, Tom laid out, about everybody looking into 2020, that’s when we said we are going to set a bigger target and go get it right now. That’s how we -- where we ended up today, Brian.

Okay. So just -- I just want to be clear on this, because, I mean, it’s a 6x payment, it’s a 6x recovery on this in a two-year timeframe, which seems like an amazing return. This is more loss prevention. So it stands to reason that when things do get better that some of that $25 million to $30 million is clearly going to have to come back into the business?

Well, I mean, I think, the $25 million to $30 million includes some investments we are going to make, okay? I mentioned data center focused, there we know we need to add some key resources and talent that we are planning on. So it’s not just built the cargo upside of the shipyard. We are making sure that we are focused and ready for the future, where we want to grow. So the procurement savings, again, it’s more of an investment of resource and processes. So that -- if you look at the numbers -- the target we have set in there, which we haven’t publicly split that out yet, but it’s a significant portion. It’s a matter more effective and efficient focus on driving not only direct sales, but technical -- direct buy, but also technical to help optimize the buy getting deeper into indirect buy using data analytics and in smart things we can do there, as well as I mentioned, the whole supply chain. So there it’s -- just natural progression where we are going on our supply chain management and on the sales side, we are adjusting down, it’s really a focus on getting ready for I am seeing there is a pretty deep and broad drop in some key markets that we need to be prepared for and we are not going to be caught standing flatfooted so combination.

Okay. All right. So let’s go over to the missed opportunity on the sale of the business. How far apart were the two groups, hey, I want to be clear, so the $20 million or $27 million that’s been spent so far in separating light vehicle business, how much of that is consulting fees and banker fees?

Yeah. the -- there has been no banking fees, Brian, in that amount. So the majority of it is not consulting per se, it’s third-party accounting work to do the separation and legal work, so most of it is accounting some IT and legal in there, no banking fees.

Okay. And could you help contextualize how far apart buyer and seller were in this from a price perspective?

No. Probably not, but at the same time, I can tell you that, we had a valuation that we felt comfortable starting off with. But quite frankly we weren’t comfortable when we get done through the exclusivity period. So, again, it’s doing the best thing we can do for the company position ourselves for our strategy and also for shareholders. So we decided that we needed to step out of that. Yes, we really targeted a second quarter close it was important to us that’s what it commitment was, but we found ourselves in a position where this is not the right thing to do for those reasons I just said. But saying that, we are focused on moving forward with the strategy, the investment to carve it out and set it up is a separate entity within the company that’s is going to allow us to do that in that in a smarter way, leadership team, I want to give a lot of credit to our Automotive leadership team that’s going through that transition and a lot of people supporting them. But it’s -- as you can imagine it’s emotional. This has been a long-term part of our company, okay? And it’s going back to Model T and more, and so making that changes was not an easy emotional decision, it was an easy financial decision, when you looked at the factors and with that. We are going to continue down this path and complete this key technique in our strategy. We want to take the company’s for us becoming a more industrial company.

Yeah. No. And I respect the emotion that’s involved here, last one for me though, on this -- now that the sale of just the light vehicle, it doesn’t appear to be something that you can do in the near-term. Is there any thought to adding the entirety of the vehicle business as something that would be put up for sale, given you see the cyclicality that takes place within the commercial vehicle and off-highway markets…

Yeah. Yeah.

… any thoughts on that?

Yeah. The answer is no. Okay. We have put a lot of work in a Matador, both organizationally and product strategy-wise, and focused on making sure that we have a position that we can maintain our strong positions that are out there and grow that globally. Yes, one of the challenges that is cyclicality nature of those businesses and we are going to send see that for the next whatever number of quarters. But we feel very strong that, again I mentioned, relationships that are strong, business wins that that we are pleased with and that we can drive this business forward. And quite frankly, the cash flow return profile is very good, taking that all into account, yes, the cyclicality standpoint makes it a challenge at times. But rebalancing that with more diversified industrial business opportunities, whether it’s data center and growth we have directly in front of this or rather inorganic opportunities that will be more freed up to be able to do without the cash constraints, given by our motor business is going to be a lot more flexibility and strategically, we are going to be able to move on.

Okay. Thank you for entertaining my questions.

Thank you, Brian.

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

Thank you. Thank you all for joining us this morning. A replay of the call will be available through our website in about two hours. We hope you have a great day and a great weekend as well. Thanks.

This concludes today’s conference call. You may now disconnect. Have a great day.