Good morning, ladies and gentlemen, and welcome to Modine Manufacturing Company's Fourth Quarter Fiscal 2022 Earnings Conference Call At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Miss Kathy Powers, Vice President, Treasurer, Investor Relations, and Tax. Please go ahead.

Good morning, and thank you for joining our conference call to discuss Modine's fourth quarter fiscal 2022 results. I'm joined on this call by Neil Brinker, our President and Chief Executive Officer, and Mick Lucareli, our Executive Vice President and Chief Financial Officer. We'll be using slides for today's presentation, which can be accessed either through the webcast link or by accessing the PDF file posted on the Investor Relations section of our website, modine.com. On Slide 3 is our notice regarding forward looking statements. This call will 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 Neil.

Thank you, Kathy, and good morning, everyone. Before covering our quarterly results, I would like to go over some changes that we've made to our segment structure at the beginning of our new fiscal year. We have reorganized into two separate reporting segments, and will begin reporting under this structure in the first quarter of fiscal ‘23. Our first segment is Performance Technologies, which is comprised of our heavy-duty equipment, automotive, EV, and coatings businesses. We are now managing this business by technology and product groups, and will report revenue based on three sub-segments. The first sub-segment contains our air-cooled applications, which includes components that are traditionally attached to the powertrain. These include radiators and condensers sold to our traditional vehicle end markets, commercial vehicle, off-highway, and automotive. The second sub-segment focuses on liquid-cooled applications, including components such as oil coolers and exhaust gas recirculation coolers sold to these same end markets. The third sub-segment is Advanced Solutions, which includes EV systems and components, and coatings. The focus here is rapid growth, and we are allocating a significant number of strategic resources to Advanced Solutions. Our second segment is Climate Solutions, combining our building HVAC and CIS segments. There is significant overlap between the end markets served by these businesses. So, consolidating allows for better focus on growing and our key target markets. This segment also has three sub-segments, heat transfer products, HVAC and refrigeration, and data centers. Heat transfer products is our coils business, which primarily sells into HVAC and refrigeration end markets. HVAC and refrigeration includes our heating and indoor air quality products, along with refrigeration and industrial coolers. The final sub-segment is our data center business, including data center systems and services. We believe that simplifying our segment structure provides us with numerous benefits. This leaner, more…

Thanks, Neil, and good morning, everyone. Please turn to Slide 7. I'm pleased to report solid revenue growth this quarter, which was driven by a combination of pricing and volume increases. Fourth quarter sales were up 12% or $60 million, as building HVAC, CIS, and HDE, experienced significant gains. $41 million of the increase was driven by higher volume, which is a significant improvement over the last few quarters. Pricing and material pass-throughs accounted for $33 million of the increase, while FX was negative, offsetting these gains by $14 million. Adjusted EBITDA increased 34% or $15 million year-over-year. Conversion on the higher sales volume, plus increased pricing, accounted for the majority of the earnings increase. Through the hard work of our various teams, we're recovering material cost inflation, and addressing the lowest margin areas of our businesses. During the quarter, commodity metals, freight, and packaging, increased $32 million from the prior year. However, our pricing mechanisms recovered more than 33 million, which resulted in a net positive EBITDA impact. Last, we’re closely managing our SG&A costs, which favorably impacted adjusted EBITDA by $2 million. Clearly, we're seeing momentum from our various actions, which resulted in both sequential margin improvement from Q3, and a year-over-year improvement of 170 basis points. Adjusted earnings per share of $0.57, was $0.06 above the prior year. Before moving on, I'd like to point out that we had $21.7 million of Q4 earnings adjustments. The largest was a $21 million charge primarily related to previously announced plans to implement targeted headcount reductions in the European automotive business. The balance of smaller adjustments can be found in our press release and appendix, which includes additional information, US GAAP results, and complete reconciliations. Now, let's review the segment results. Please turn to Slide 8. Building HVAC reported sales…

[Operator instructions]. Our first question comes from Matt Summerville from D.A. Davidson. Please go ahead. Your line is open.

Thanks. A couple of questions. First, just with CIS and where you're at with the 80/20 process there, maybe talk in baseball analogy with where you're at with implementation. And that was a pretty striking margin performance in fiscal Q4. How should we think about that in the context of sustainability moving throughout the fiscal ‘23?

Yes. Thanks for that question, Matt. I appreciate it. Good morning. We've moved a long way in the CIS business. It's just proof to show that segmentation is working. We have a strong leader in place there that has executed on the strategies that are deployed through 80/20. And we expect to see this positive trend as we move forward. I'll let Mick comment in terms of where we see it in the next fiscal year.

Yes. Hey, Matt. So, you know for quite a while that business had been operating in the - more in the mid, sometimes upper single digits. And with the early wins here on the 80/20, you saw that pop to a 14% type margin. Our goal all along has been to get this into first the low double-digit range, and then longer-term, see if we can push it above there. I think Q4 was kind of a perfect storm for us in a positive way. We had a lot of catch-up on price, which helped, really, really strong volume as well, which was a positive surprise for us. So, short answer is, I would expect that we won't be able temporarily to keep that level of margin, but certainly well above where we've been, I think running that more in the 10$ to 12% in the short run, and then certainly, Neil and I, would like to see it get to a 14$ or 15$ more long-term.

Got it. And then as a follow-up, can you be a little more specific around how much revenue and or profit was impacted in fiscal Q4, and what you expect the impact to be in fiscal Q1 with respect to the COVID - the mandated COVID-related lockdowns in China? And then, how should we be thinking about mix, the roll-forward of that $20 million in savings in the auto business? Thank you.

The 20 - what was the last part?

Restructuring.

Oh, yes, great. And the restructuring.

Yes.

Yes. So, in Q4, sales in Asia were down about 20%. I'll let you do maybe the math on that, Matt, but it is a profitable business for us, and really above the vehicular average margin. So, it was a decent impact in Q4, probably about the same amount in Q1. So, and then by all indications, both what we see externally and what our teams are telling us, we're expecting that by the end of Q1, we should be back to more normal capacity and operations. So, about - probably think of that as about a 20% revenue impact in Q4 and Q1 on the Asia business. Then on the SG&A reduction in Europe, our target is at least $20 million in annual savings. That will start to kick in in the second half of this year. My expectation would be, we'd love to get half of it, but I think somewhere, maybe a third to half of it would be the goal this year, just based on the timing of how those processes work.

And just as a quick follow-up, and then I'll get back in queue, with respect to that restructuring initiative, your deployment in Europe, have you already received all the needed workers, council approvals, and all that stuff?

Yes. So, I mean, it's all - it's a process that we are well into it and fully engaged with the works council right next to us. We're - I'd say, we're pleased with how it's working and now we're into the heavy lifting of it, the hard work, but it's absolutely side by side with the works council.

Understood. Thank you, guys.

[Operator instructions]. Our next question comes from Steve Ferazani from Sidoti and Company. Please go ahead. Your line is open.

Hey, thanks. Good morning, Neil, and Mick. Do want to ask about guidance. I know how challenging that is in this kind of environment, particularly to put out full year numbers, and given the various end markets you operate in. But clearly, we're running into a situation where the expectation is the economy cools a bit. At minimum, growth slows, maybe flattens out. I'm trying to think about how you're incorporating that into guidance and what portions of your business do you think can grow through that type of an environment?

Yes, that's a great question, Steve. Thanks. This is Neil. We’ve - through 80/20 and our segmentation process, we've targeted growth areas for the business. And those areas that we've targeted, we believe we have opportunity to expand in those places and spaces. We’ve invested heavily into data centers. We've invested into IAQ, our indoor air quality group. We've invested into EV, and we believe that there's expansion there. We can gain more market, even in a challenging economy, potentially a challenging economy coming up. So, we're going to stay focused there. We're invested. we're going to resource it. We're going to provide the capital, and those are the areas where we think we can continue to grow, and that's a major driver in terms of how we've forecasted our guidance.

When I think about the sales guidance, can you give any sense, I know it's kind of hard to break out pricing versus volume versus mix when you're thinking about that.

Yes. I was just - yes, Steve, I was going to - that was the one point I would add to what Neil said was, based on our guidance, I won't give you the specifics, but we have a heavy mix, I call it mix, of price recovery that's contractually owed to us and another component of price negotiations with customers, whether we attribute that to 80/20 or recovery, and then volume. So, our guidance has - a good portion is a heavy balance, I would say, of price recovery versus volume. And then, if you spread the volume across the areas Neil walked you through, I would say a lot of our growth businesses have a very strong order book, which is good. And then a lot of our business is also replacement. And so, we feel good about that. I think the thing Neil and I are watching the most more than volume would be inflation and cost.

Okay. When I think about that increase in CapEx expected, I'm assuming - you've talked a lot about the investment in the growth segments. Can you kind of walk through the CapEx and how you're sort of allotting that?

Yes. For the first time in my years at Modine, we're going to have a bigger portion of our capital spending in our growth businesses, specifically in that Climate Solutions area, to support data center growth, ventilation, indoor air quality, heating. And then, the balance is a very small amount supporting the old automotive segment, and then more maintenance capital in the other areas of the business.

Okay. And it sounds like you're very bullish on the indoor air quality, particularly related to schools. I would have expected you would have seen a strong surge in that and the folks that needed it, get it, and then we would start seeing slowing. That doesn't sound like that's what you're expecting or indicating.

No, that's a fair question. No, we don't expect that because of the amount of infrastructure that needs to be put in place. It's going to take several years for that to be deployed. And typically, the peak season is in the next three to four months because schools are going to be letting out. And this is where you see the maintenance and the installations occurs during the summer times.

Okay, perfect. Thanks, everyone.

Our next question comes from Matt Summerville from D.A. Davidson. Please go ahead. Your line is open

Just to follow up on 8 80/20, and what I think you refer to on Slide 13 as some planned revenue reduction. Can you maybe quantify that and how that's going to - kind of how we should - what we should be considering as we attempt to kind of model that? And is CIS the only business - legacy reportable business segment that is going to be impacted by what I would just call deliberate revenue attrition?

Yes. Hey, Matt, it’s Mick. I'll give you the first kind of quantitative answer, and then Neil can give you some other color by segment. In the near term and really in the upcoming six to 12 months, the heaviest impact we see is in CIS. And again, we'll fold that into the new segment. But since you've got historical data, we really see that flat to maybe down 5%. So, and I mentioned at the beginning, that's really - as far as innings go, they're the furthest along. So, they're well into product rationalization and those elements of 80/20. So, I think from a guidance and a modeling, the only material impact we would see in that, and I'll just leave it with a flat to modestly down in CIS. I'll let Neil comment, because I know there's a lot going on, even on the building HVAC side with product rationalization.

Yes. That's a good question, Matt. Certainly, we go through each one of these segments, and there's going to be a mix, right? Sometimes you have some price and some commercial excellence that offsets some of the volume decline. Sometimes we're working through the SKU reductions, and you'll see some volume decline. We've spent a lot of time in terms of SKU reductions and eliminating product lines that are below our target margin thresholds. So, we're working through each one of the segments one by one, and we spend most of the time in Climate Solutions. We're starting the pivot now into Performance Technologies. We're going to get into that in a pretty big way over the next three to six months. And as we shift our energy from Climate Solutions, because we've got - we're in motion and we're happy with the progress that we've made, we can now start to really focus on that peak - on the Performance Technologies segment. And I would expect as we go through the same process as we did in Climate Solutions, that we're going to see some of that. We're going to see some product lines that we're going to want to exit. We're going to see some areas that we're not going to want to continue to fund. So, we just need to get a little bit further into the process in Performance Technologies, which is the HDE and Automotive Group. We're starting to do sub-segmentation in that business, and then we're really going to start to get into the data.

Got it. And then, I would assume as you let that business attrite in CIS, that that's going to have a natural margin benefit to that as that unfolds. I assume that would be a correct assumption and fair.

That's a correct assumption as we continue to reduce complexity and simplifying that business.

Got it. Okay. Thanks, guys. That's all for me.

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

Thank you, and thanks to everyone for joining us this morning. You'll be able to access the replay of this call through our website in about two hours. We hope that you have a great day. Goodbye.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.