Good morning, ladies and gentlemen, and welcome to Modine Manufacturing Company’s Fourth Quarter Fiscal 2020 Earnings Conference Call. [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 and Tax.

Good morning and thank you for joining our conference call to discuss Modine’s fourth quarter and full year fiscal 2020 results. I am here with Modine’s President and CEO, Tom Burke; and 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. On Slide 2 is our notice regarding forward-looking statements. This call may contain forward-looking statements as outlined in our earnings release as well as in our company’s filings with the Securities and Exchange Commission. With that, it is my pleasure to turn the call over to Tom Burke.

Thank you Kathy, and good morning everyone. First, I’d like to start by extending my well wishes to everyone and I hope you have all remained safe and healthy during the crisis. World’s a vastly different place since Modine reported its third quarter earnings in early February. Fiscal 2020 was a very challenging year for Modine, but we ended on a positive note with Q4 results coming in ahead of our expectations. Our main focus during this period of uncertainty was the protection of our employees, customers, and shareholders. I’d also like to highlight the press release that we issued last week regarding the amendments to our credit facilities. This was a key proactive measure we took as a part of our COVID-19 plan. Mick will summarize those details during his report. Today on this call, Mick and I will provide an overview of fourth quarter and full year results for fiscal 2020, and update on the status of our automotive exit and sale process; a segment update, including challenges and opportunities resulting from the pandemic and current market environment; a description of the actions we are taking to protect our employees and the business in response to the current economic environment in the global crisis. And finally, a brief overview of the state of our markets and expectations for the next few months. Let’s start with the actions we’ve taken so far to protect our people and facilities. As you all know, the COVID-19 crisis began early in our fiscal fourth quarter in China, and then moved into Europe and then the Americas. We have implemented the necessary steps to mitigate the risk in our manufacturing locations and administrative offices worldwide. We have remained in compliance with health organization and governmental orders in countries where we operate. This led…

Good morning everyone. Please turn to Slide 8. As expected, our fourth quarter results were impacted by multiple headwinds. Coming into the quarter, we anticipated that our end markets would remain soft and we pressed the head with savings initiatives launched during the third quarter. It then became apparent that the spread of COVID-19 would create significant disruptions. We responded with incremental cost recovery actions which allowed us to finish the year above our expectations in both adjusted operating income and adjusted earnings per share. Fourth quarter sales declined 84 million or 15%, largely from volume declines in the automotive, off-highway and commercial vehicle markets. We also experienced lower CIS sales due to our largest data center customer. Gross profit decreased by 18% or $75 million resulting in a gross margin of 15.8%. The team worked hard to achieve a 20% downside conversion during the quarter, which resulted from cost reductions earlier this year. In addition to the lower volume, CIS was impacted by a negative sales mix from the decline in data center volume. CIS and VTS margin declines were partially offset by a significantly higher gross margin in building HVAC. SG&A for the quarter was $55 million and lower than prior year by 14%. This decrease was primarily due to lower compensation related expenses, including incentive compensation, as well as cost savings initiatives across the entire organization. We have continued to aggressively control costs during downturns in our markets and the broader economy. Adjusted operating income of $25 million was down $10 million from the prior year. Again, this decline is a result of lower volumes in the VTS and CIS segments, partially offset by an improvement in building HVAC. In addition, lower SG&A helped to offset a portion of the negative impact of the volume declines. As…

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

[Operator Instructions] Your first question comes from Matt Summerville of D.A. Davidson. Your line is open.

Thanks. Good morning. Couple of questions. First now with the auto business sort of the carve-out officially complete at this point, are you able to give us a feel for what operating profit and EBITDA for that business would have looked like in fiscal 2019 and 2020? And then Mick, I was wondering if you’re able to give, even if there’s a somewhat wide range, what a reasonable free cash flow expectation might be beyond positive for fiscal 2021? Thank you.

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

Thank you guys.

Thank you.

Your next question comes from Mike Shlisky with Dougherty & Company. Your line is open.

Good morning guys.

Good morning.

Good morning.

I have a quick housekeeping question first on the restructuring costs. Could you break those down by segment? I didn’t skid into the release of the slides?

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

I am sorry, I looked for it. I didn’t see it. I’ll have to look at that again. I apologize for that.

Yes. No problem.

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

Well, no, this is a great question to clarify. Obviously, really the biggest customer we have right now is in the CIS segment with the customer that the -- large customer we have contracts with, and they have a down year this year. They’ve been projecting that for a while. So, that drop in sales in CIS of – what is it, 22 million, I think in that quarter for CIS quarter-over-quarter. I think about half of that is due to one data center customer. So, we’ve had – that’s kind of put it, overall, the data center sales drop a little more magnified. In the UK, we were very much pleased with the order book that’s coming in is strong and growing. So, we’re overall very, very bullish on a data center market, just kind of having an explanation of this count this fiscal year for the one customer in North America.

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

Yes. I think we’re seeing definitely an increase in demand, especially in the co-location piece in UK and Europe driven by a lot of this work from home technology, Microsoft and others have been very aggressive. In that, we’re supplying support through co-location companies for that growth, and that order book is really filling up well in the UK. The pause in North America was one specific customer who’s been projecting this build out of capacity of being on pause, but coming back strong in the next calendar year, our fiscal year 2022. So yes, we see all the indications being green from a standpoint of data center business we’re focused with our strategy now in North America expansion, as I mentioned in my comments. And we’re really – our intention is to have a good portion of our content capability in North America by the end of the calendar year, leveraging the capability of our CIS segment with the focus of a single base in the markets. And that we put together between billing HVAC and CIS, which is really paying off, leveraging the relationships, the product strategy, the technology to bring that capability to North America to the large addressable market here. So again, all things are looking very positive from a strategic growth strategy to build up that good market dynamic.

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

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

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

Thank you, Mike.

Your next question comes from Joe Mondillo of Sidoti & Company. Your line is open.

Hi, everyone. Good morning.

Good morning.

First, just to follow up on the CIS data center customer, is the downturn in fiscal 2021 that you foresee at this point in time. Is it still sort of the same expectations as they were before? Or has it changed at all? Is it further down? Not as down as much?

No. It is exactly what we said before, so no change. It’s going to be what we projected last quarter, like last couple quarters, because it’s been well released by the customer to us that this was going to be a year that was going to be down, especially in North America, as far as build out and so no changes there. And then the expectation is for their build out schedules to increase and that’s been consistent message from them as well. So what we’re really building on that is bringing that UK based technology to the North America market to help build that out and have that capability here to supply global customers that have opportunities in North America. So we’re really as a big press for growth in this market. Again, we see a very strong opportunity for growth that we have the right to go and participate in.

Okay. And how much does refrigeration make up of CIS?

That would – if I look at inside of…

Refrigeration is about a quarter of it.

Yes.

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

Yes. I mean, I think we have some uniqueness in our portfolio, a very strong heating business that is, a lot replacement. So that is pretty stable. So we project that to be flat versus maybe some of the down pressures that have been seen on some of the residential providers of systems. And again, our ventilation systems are growing because of – kind of coming off of a small share and projecting to larger win opportunities. So I think, our dynamics, where we’re set up in a portfolio versus a market are low position and with the data center growth on top of that, we think that that really adds to a stronger position overall.

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

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

Well, I think we said, number one, we were pass-through pricing in a pretty strong rate, which is the reason why we really enjoy that market. And then secondly, we have some great material pricing that was an advantaging us. And I think that just the mix of way that the business came through. So we had a large ventilation school of business. This was past year record for us. And that contributed well along with the heating season. And again, the mix of business in the UK really building up with – I would say, data center business unless comfort cooling, which again, is a better mix for us. So I think this is good dynamics overall in Building HVAC segment.

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

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

Okay. And I would add on that, Mick. Our procurement efficiency is also really picking up weld-off – also offset and help the decremental effects, so really pleased with it.

Okay. I guess just lastly the interest rate on the new amended investment agreement.

Yes. So versus last year and the prior year we had been between 4% and 4.5% weighted average interest rate. And this year, probably about 3.9%, 4%.

Well, even with the amendments, it’s going to be lower, actually.

Correct. Two things – two or three things, one is, if you recall last quarter, we refinanced our long-term loan, so that’s part of the year-over-year impact. And then secondly, one of the best parts about the current amendment is we really don’t see a higher interest rates, unless we move into the higher leverage ratios. So there was a little bit of movement on some other things between spreads and LIBOR. But that was immaterial. We really won’t pay more unless our leverage ratios increased plus than we’ve the long-term notes. So right around, say 3.9% to 4% as good blended rate.

Okay. Perfect. Well, thanks for taking my questions. I appreciate it.

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

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

I don’t know to answer your question. They know that we stayed real laser-focused, we can get back to you on that David, but I’m not sure, can’t get off top of my head.

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

No, it’s really a frustrating, typically, between staying close to customers and for instance, last – the third quarter, we’re out with most of our customers meetings and they were giving us this projection of what the down cycle is going to be, modeling it, and obviously, there’s plenty of pictures of seeing 20% down. It was kind of the common theme. And right now, they’ve just have communication on what they see is just bottled up. So we’re really relying on third-party right now to kind of get the best predictions. But, both on commercial vehicle and off-highway, we’re not getting much, even though, we’re in constant contact trying to pull out what they see as far as ramping back up there. They’re holding that pretty tight right now. So that’s why we’re kind of cooling the fourth quarter or first quarter projections is pretty – being pretty challenging and kind of assuming worst case. And then we’ll see what happens is that brightens up through the rest of this quarter. Hopefully, we started getting better projections, but not much of a picture coming out of the customers at all.

Okay. Thanks. And then on the data center side, this has been a big topic in the last several quarters. We have some of the companies we follow are selling products and components into that data center channel, they’re all talking about very strong growth rates, so trying to understand why this? And then we understand that your business is concentrated with one player, but it seemed like that customer is losing share in the broader data center space, is there anything you can share? Any insights you can share on that?

Yes, well, again, this has been a well forecasted production shift by the large customer we’re talking about for some time it has not varied. We’re in constant contact with them, great relationship all the way up and down as far as delivery and all the commercial elements and everything else. So they’re being very open with us in what they’re doing, I don’t know – what we’re seeing and again, I’m not really including this customer in this regard, but what we’re seeing is the co-location space, that’s the truly building out especially in Europe, we’re seeing a lot of what I would call the hyperscale people kind of building up the capacity of these co-location companies that are building out, the real estate companies that build out capacity and lease that capacity, we see some hyperscale people buying that straight up, flat up capacity of the whole building, for instance and that’s really dynamic happening in Europe. So I don’t know that – maybe that customer is participating that way and building scale right now. We’re not losing share by using co-location type thing and not making the capital investment themselves. But, what we do know is their projections to kick in capacity starting in the next calendar year is projected and we feel very positive and confident about that based on our communication. And the other thing that’s really important is that the co-location relationships that we build both with operators and specifiers is we want to leverage that because they are global and bring that to North America, so this focus on a single focus to the marketplace and combining the resources and talents of both the building HVAC and CIS, and leveraging our UK relationships, and bringing it to North America, we will have what…

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

Yes. So David, if I understand your question, right, we run pretty low working capital and as a company of 10% or so during this period first fiscal quarter, it’ll be a source of funds, right, there’ll be a decline. We think of it as it’s going to – it will come back. There aren’t areas really that I see is permanent working capital reductions. I would say last year with all the automotive stuff going on, separation and moves, we ended – we headed into the crisis a little heavy on inventory and it’s been hard to work-off inventory while customers were shutdown. So I see some maybe permanent opportunity as things improve to actually lean out inventory a little bit, which would be positive. And then the biggest source of cash savings for us besides the fluctuation of working capital would be the teams worked really hard to flex direct labor. And every country around the world has got different programs and incentives and reimbursements. And then Tom, covered from an SG&A fixed cost rate. Those – obviously those are temporary, salary reductions, furloughs are temporary in nature.

Okay, great. Thank you.

Thank you.

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

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

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