Modine Manufacturing Co Q3 FY2020 Earnings Call

Good morning, ladies and gentlemen. And welcome to Modine Manufacturing Company’s Third 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. 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. Please go ahead.

Good morning. And thank you for joining our conference call to discuss Modine’s third 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 third quarter results for fiscal ‘20, and will provide an update for our outlook for the rest of the year. At the end of the call, there will be a question-and-answer session. 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 in our company’s filings with the Securities and Exchange Commission. With that, it’s my pleasure to turn the call over to Tom Burke.

Thank you, Kathy, and good morning, everyone. Overall, third quarter sales were down $67.6 million or 12% from the prior year. These results were in line with our previous guidance. Third quarter adjusted operating income was $24 million, down $10.8 million or 31% from the prior year, primarily due to lower sales volume in our VTS and CIS segments. As reported last quarter, several of our end markets slowed significantly in the past few months, but conditions appeared to be stabilizing. As per other highlights during the quarter, I’m pleased to report that our free cash flow improved to $11.6 million this quarter, including auto separation and restructuring costs. We’ve also strengthened our balance sheet by turning out a portion of our short-term debt. Mick will cover this in more detail during his section. Under CIS leadership, the team is keenly focused on identifying opportunities to enhance our margins and improve operational efficiencies. As mentioned last quarter, margins in this segment have fallen below our targets. We have plans in place to strengthen our coils business and grow our coolers business. In addition, we're making organizational and structural changes to how we manage our data center business. The volatility of our data center sales has created short-term challenges due to significant concentration with one customer, but the team is making good progress in diversifying our data center portfolio. I will cover more on this and other strategic priorities during the segment review. Before diving into our quarterly segment results, I would like to provide an update on our automotive exit strategy. We spent considerable time and investment separating the automotive business from the VTS segment, and plan to start managing and reporting the separate auto segment in the first quarter of fiscal ‘21. While this has been time-consuming and costly, I believe it was a good and necessary investment and it is now largely complete. Reporting this new segment will provide improved transparency going forward as we transition away from the automotive market. This work included physically separating manufacturing operations, setting up standalone IT systems and business processes, and establishing new legal entities. We have named a seasoned leader and management team that’s committed to successful separation and dedicated support of our automotive customers. The separation of the automotive business will allow us to showcase the new Modine, which we anticipate will generate higher margins, returns on capital, and cash flows. I want to be clear our primary strategy remains to exit Modine’s automotive business as quickly and efficiently as possible. Through our previous efforts to sell the auto business, we determined that it would be more beneficial to divide the existing business to better align and appeal to strategic buyers. Specifically, we're marketing two separate components of our automotive business to different potential buyers. With this revised approach, we have been actively engaged with numerous interested parties. We’re encouraged with the revised process so far. As we assess our options and their related timelines, there may be some remaining product locations that we will have to address. In these scenarios, our goal would be to complete the exit as quickly as possible while meeting or exceeding our customer commitments as we transition or phase out of certain product lines. Our objectives are clear: separate the automotive business, run it to optimize earnings and cash flow, maximize the cash value by divesting the most valuable assets, and exit the remaining business as rapidly as possible on a cash-neutral basis beginning in the first quarter of fiscal ‘20 when we plan to report the financial results of the new auto segment separately from the remainder of the VTS segment, which will include our heavy-duty equipment business. We continue to believe that pursuing this path is the right long-term decision for the company and for our shareholders. It will lower our capital intensity, better focus management's attention on higher-margin, higher-growth businesses and improve our cash flows, opening up new opportunities for organic and inorganic investments. Now turning to our third quarter results on Page 4. As expected, we experienced the decline in sales across our vehicular markets. Sales for the VTS segment were down 16% from the prior year. As I’ve previously mentioned, our key vehicular markets have slowed significantly in recent months and continued to be sought. Overall, sales to our commercial vehicle and off-highway customers were each down 26%, and automotive sales were down 3%. These market declines have not been isolated to any particular region, as we have seen volume weakness across the globe. Sales to customers in the Americas region were down 80% from the prior year with lower sales to automotive, commercial vehicle, and off-highway customers. Sales in Europe were also down 18% from the prior year due primarily to a steep drop in commercial vehicle sales as certain programs wind down. In Asia, sales were down 4% due to lower off-highway sales in China, Korea, and India, partially offset by higher automotive sales in China. Adjusted operating income for the VTS segment was $5.1 million in the quarter, which is $9.9 million lower than the prior year. Adjusted operating margin was down 270 basis points to 1.9%. We have quickly responded to the downturn in our markets by cutting structural costs in our business to align our plants’ operating plans with changing customer demand. In addition, we are highly focused on other factors we can’t control, such as SG&A reductions, improving operating efficiencies, and accelerating procurement initiatives. This drives near-term margin improvements and increases our confidence for improved operating leverage when the markets pull out of the down cycle. Our customer relationships are strong as we continue to leverage leading performance in critical elements like quality, delivery, and cutting-edge technologies such as EV solutions for the bus and truck markets. As we discussed last quarter, in talking with our key customers, we felt that industry volume declines could prove to be more substantial than many industry forecasts were expecting. So while these year-over-year declines seem largely in line with our projections, the silver lining to the market weakening is that the rate of decline in these markets seems to be stabilizing. We're not expecting any meaningful recovery in calendar 2020. There are some reasons to be optimistic about the longer-term market outlook. We believe the off-highway and truck markets will be challenged for the next several quarters and then begin to recover. Improvement is predicted beginning later in calendar 2020. On the auto side, we anticipate relatively stable volume, which is key to our divestiture process. Please turn to Page 5. The largest challenge in our CIS segment was decline in sales to one large data center customer. This accounted for more than half of the revenue decline. Overall, CIS segment sales declined 12% from the prior year. Sales to the data center customer were down 25% from the prior year. Within our shared market in this segment, the strong growth in cooler sales that we saw last year was a result of a strong capacity expansion in excessive market demand. The drop in sales this year is due to a temporary low in customer investment and further capacity is expected to continue into our next fiscal year. We are currently expecting very low volumes for this business in fiscal '21 with a strong recovery in fiscal '22. Sales to our commercial HVAC and Refrigeration end markets were down as well. The majority of the sales decline was related to refrigeration customers driven by market decline and refrigerated transport in the U.S. This segment reported adjusted operating income of $9 million, down 34% from the prior year. This decrease was primarily due to lower gross profit, driven by lower sales volume and negative sales mix. The new leadership team for this segment has been in place for over a quarter now, and the strategic priorities and related actions have been set. As I mentioned last quarter, we are keenly focused on improving the profitability of our coils business. We have initiated an aggressive cost reduction program to vertically integrate certain high-cost components and to strengthen our manufacturing operations and business processes. We're also reviewing our product costing and pricing practices to ensure our quotes have sufficient margin, particularly on low-volume releases. The team is working hard to take advantage of data center growth opportunities and to diversify our customer base. This is being done in conjunction with our Building HVAC team, and I have decided to consolidate these efforts under one leader. I will cover this more in detail as part of the Building HVAC update. We're also leveraging new technology to reduce energy consumption and total cost of ownership in our cooler and coatings business and are adding resources to our North American team in order to grow market share. In the upcoming year, we expect the market supporting our coils and coolers products to be relatively flat with some continued weakness in our industrial markets. Regarding our largest data center customer, we are planning on very limited sales for the next several quarters based on recent communications with them. However, long-term demand and projections are very encouraging, with projected sales in calendar '21 potentially reaching new highs. Please turn to Page 6. Sales for the Building HVAC segment increased 1%, driven primarily by higher sales at school ventilation and heating products in North America, partially offset by lower ventilation air conditioning sales in the UK. Operating income increased 4% from the prior year to $13.5 million, and operating margin increased 50 basis points to 20.8%. This increase was largely driven by favorable sales mix and customer pricing. We continue to be encouraged by the strong performance and our competitive position in this segment. We expect the favorable growth trends in our market to continue and we remain focused on growing our data center business. In order to better capture opportunities in this growing market, we developed a new single-focused approach to the data center market by combining the resources and capabilities of the Building HVAC and CIS teams. This new structure will allow us to leverage the products across both CIS and Building HVAC, providing a more seamless customer experience along with a more comprehensive solution offering. The end goal is to have greater customer diversification by reaching a broader segment of these markets by introducing new, highly regarded products across new geographic regions. This change in strategy has shown early indications of success as we're growing and winning new business with other data center customers. For example, in the quarter, we secured our first order with a major cloud computing customer in Europe for shipment in fiscal '21. This is a key component of our growth strategy moving forward. Looking ahead, we see our markets starting to pull back a little bit, but they will remain positive throughout the calendar year. Within that, we expect to see stronger growth in key markets as macro trends should remain strong. For data centers, strong growth continues in the collocation and cloud data center space. We have a strong presence in the UK markets. The increased certainty around Brexit should provide some stability in the general HVAC market. We anticipate UK plans to release capital funding for construction opening toward growth again. As I mentioned earlier, our newly engaged global data center team has solid plans to grow and diversify this business with new customers in fiscal ‘21. With that, I would like to turn over to Mick for an overview of our consolidated results and an update on our outlook for fiscal 2020.

Good morning, everyone. Please turn to Slide 7. As we anticipated and detailed by Tom, market softness continued well through the quarter, with VTS and CIS segments being the primary drivers of our revenue decline, which resulted in difficult year-over-year comparisons. As reported, third quarter sales declined $68 million or 12%. Of this $68 million decline, over $50 million was the result of declines in truck and off-highway sales along with the drop from our largest data center customer. Gross profit of $74 million declined 20%, resulting in the gross margin of 15.5%. The 27% downside conversion was in line with our expectations and based on standard fixed and variable cost structures. Besides the lower sales volume, CIS was negatively impacted by sales mix, resulting from the decline in data center sales. Also impacting gross profit was approximately $2 million of costs relating to the product and equipment transfers in support of our automotive exit strategy; materials and metals had no impact on the corridor, and strength in Building HVAC continued with a gross margin improvement of 120 basis points. SG&A for the quarter was $64 million. There were two main drivers behind the SG&A numbers. First, we had lower compensation expenses this quarter, and began seeing the benefits of our cost reduction plan. Second, we incurred temporary costs related to our automotive exit strategy. Preparing to exit the automotive business is a complicated and expensive process, including all the separation and program management work. To facilitate this process, we created a program management office to support all the work streams necessary to transfer products to fully separate our plans. As discussed previously, the auto business needed to be separated and stand up as a standalone fully functioning business. This required that we carve out a quarter of the company that had been previously embedded within multiple locations throughout our global VTS segment. Lastly, our actual deal-related and transaction work streams. Since launching a formal sales process, we incurred costs relating to seller due diligence, accounting, legal and other advisory services. During the quarter, we incurred $12.6 million of costs related to all of this work, including the separation and sale process, approximately $3 million was primarily related to project management costs. Additionally, during the quarter, we incurred approximately $7 million of costs to separate the business, which included IT, human resources, accounting, tax, legal, and audit fees. Lastly, there were costs tied to the sale process and related to seller due diligence, legal and other advisory costs, which were around $2 million. I am encouraged that the vast majority of the separation costs are behind us and most of the incremental expenses going forward will relate to an actual sale and/or disposition of the automotive business. Moving on to the rest of SG&A, we have some positive news to report. The balance of SG&A, excluding any of the project-related costs, decreased by $5 million or 9%. This was mainly due to lower compensation, including lower incentive compensation. This decrease also included initial benefits from cost savings measures that we detailed last quarter. Regarding reducing operational and SG&A cost structures, we recorded $2 million of severance expenses in Q3. Adjusted operating income of $24 million was down $11 million from the prior year. As previously mentioned, the decline was attributable to a difficult quarter for VTS and CIS. Lower compensation expenses and cost control initiatives led to lower SG&A, which helped offset the volume reductions. As usual, our appendix includes an itemized list of adjustments and a full reconciliation to our U.S. GAAP results. These adjustments totaled $15.8 million. Of this amount, $14 million relates to the automotive divestiture, including $12 million recorded in SG&A and the remainder in cost of sales. We also incurred $2.6 million of restructuring expenses, primarily consisting of headcount reductions and plant consolidation activities. Finally, we sold a previously closed manufacturing facility in Germany during the quarter and recorded a gain of $800,000. Our adjusted income tax expense was zero in the quarter and was largely attributable to tax incentives in Italy and a favorable impact on U.S. taxable income. Adjusted earnings per share was $0.37, down $0.05 from the prior year. Turning to Slide 8, as anticipated, I'm pleased to report that cash flow improved during the quarter and we expect that will continue in the fourth quarter. Third quarter free cash flow was $12 million and net debt decreased $21 million. On a year-to-date basis, cash flow has been impacted by lower cash earnings plus higher working capital and costs related to the automotive exit strategy. As I covered in the SG&A costs, we needed to make some important and strategic investments to support our automotive strategy. The costs are comprised of program management separation and deal-related costs. In general, these costs will hit the cash flow statement on a lag, usually a quarter or so. To repeat, I am encouraged that the vast majority of the separation costs are behind us. Most of any remaining costs should be directly linked to a sale process, and we anticipate that future cash flows will benefit from potential asset sales. Besides the improved cash flow, we made some additional balance sheet improvements during the quarter. As I mentioned, net debt declined, and our leverage ratio was 2.3. Plus, we recently issued $100 million of senior notes, with the proceeds used to prepay notes coming due in August and repay short-term debt. It’s not only to secure new long-term financing, but will also result in future interest savings. As another benefit, we reclassified $100 million to long-term debt on our balance sheet. Now let's turn to our fiscal ‘20 guidance on Slide 9. Based on our third quarter results and anticipated market trends, we are holding our guidance for sales and adjusted operating income. We are increasing our guidance on adjusted earnings per share to a range of $0.85 to $1 due to a lower tax assumption. Our estimated full-year adjusted tax rate is now projected to be around 26%. While our guidance includes the automotive business, we remain focused on the separation and exit strategy. We look forward to moving that business into a separate segment or discontinued operations in the new fiscal year. With that, Tom, I'll turn it back to you.

Thanks, Mick. There's a great deal of work ahead of us, but we are on the right path. Although the process of phasing the automotive business is taking longer than originally anticipated, we have a plan in place to achieve the best possible solution that will be in the best interest of our shareholders. Rolling off the automotive business as a separate business segment will allow us to run it differently, selling those businesses and assets to logical buyers and transitioning in an orderly fashion to ensure there are no customer interruptions. The timing of the downturn in our end markets hasn't helped our process, but we now appear to have greater visibility to the state of our markets. We have clearly spent a significant time and money on exiting our auto business, but our core markets have softened and we also experienced a large decline in sales to our largest data center customer. All of these items had a significant impact on our results and cash flows this year. However, I am very encouraged about the opportunities in front of us. Modine will be a different company after the auto divestiture with a clear focus on improving our truck and off-highway business. The new CIS leadership team has a clear plan in place to improve the margin profile and our new global data center approach is leading to new business opportunities. We are developing an operating plan to reflect these actions and others to achieve the savings targets we set last quarter. We will share expectations for our next fiscal year when we report our fourth-quarter earnings in May. And with that, we'll take your questions.

Our first question comes from Mike Shlisky with Dougherty & Company.

Maybe I want to dive in first in CIS and kind of what's behind some of the downturn there in that business. Can you give us maybe some buckets thematically? I know there is one customer that’s given you some challenges. But maybe do you know if the customer is still straight up investment? Is it a pricing problem? Are there other companies out there that are undercutting you on pricing? Are there any issues with logistics? Just kind of other thoughts of what's going on there?

Great question. And let me just kind of give some color starting with covering those points. First off, there is absolutely a great relationship with this customer. Our teams have done a superb job in supporting and servicing them. We're in constant communication. We have a dedicated program team that supports them on a weekly basis. We've always said from the beginning, this is a lumpy business that comes in peaks and capacity build-outs for that customer. They had—we had, if you think back, we had a peak year in fiscal ‘19 that blurred some in this fiscal year. What's happened is we’re going to see lower capacity build-outs which they've been clear with us on what that looks like. As I mentioned, we think that's going to have an impact in the next fiscal year for a while, and it's going to really come back strong following that. As far as relationships commercially, no, no problems on pricing, service, or support or new entrants coming in and undercutting us. It's not—we have our established share with them, and we've made that clear. So right now, we just anticipate the lower-end capacity build-out on their part as they wait for their capacity to be fully utilized before they start adding more orders and more build-outs for capacity. That said, I’m very pleased with this new single-year focus to the market with the organizational structure that has brought together the best resources from CIS and Building HVAC, putting them together to service this customer and diversify more. We did land an order this year. We launch the next fiscal year with another cloud provider. That strategy is going to work from a diversification standpoint. So, yeah, there's nothing I'm concerned about other than the fact that we're just going to have to live with the lumpiness, but as we build and grow the customer base more, we're going to see less susceptibility to them.

Thanks for that. I also wanted to ask about the various cost reductions you mentioned last quarter and how those have suddenly come into action this past quarter. Can you give us some sense as to the timing of when those might be incurred, and whether you can maybe give us some sense as to what might be in COGS, what might be in SG&A?

Well, let me—I'll start and let Mick take it from here. We've been very aggressive, as we stated last quarter, focusing on making sure that we adjust our cost basis to adapt to what we see going forward and some of the pressures we've observed in these markets. So we've had significant reductions across businesses in anticipation of that, plus other measures in procurement that I mentioned in logistics aimed at driving costs to meet our target of $25 million to $30 million. I'll let Mick kind of give a little more color on that in detail and how we see that rolling out.

Yeah, the total savings that Tom referenced, Mike, we are targeting about $15 million in people cost savings and we began our reductions back in January. We are presently tracking a run rate savings of right around $13 million, so we're well on our way with that. We've discussed a $2 million to $3 million in severance costs to do that. In this quarter, we've had about $2 million of severance charges, and the run rate savings are fairly evenly split between cost of goods sold and SG&A.

Great. I want to get a couple more clarifications also on the auto separation real quick and a few things you mentioned in your prepared remarks. First, did you say that you're currently pursuing two separate sales in the auto business? Or are you going to sell one and then wind down the other? Secondly, if you’ve proceeded with most of the process of separating the business, can you provide some sense as to the EBITDA results or some earnings number for that business? Lastly, it sounds like you’re going to be putting this into your fiscal 2021 numbers; I’m curious how close you are to actually starting this business? It sounds like there might be a few more quarters that it'll be in your portfolio at the very least if none more than that. It's going to be officially in your SEC financials targeting in fiscal 2021?

Okay. So there are three questions here. I'll take one and three, and turn to Mick as far as EBITDA run rate. But, yes, just backing up, the process we announced a year ago in January was to sell the complete auto business. That includes everything globally, roughly $600 million. Through the process, we encountered challenges that have led us to determine it would be more beneficial to divide the existing business to better align and appeal to strategic buyers. Specifically, we're marketing two separate components of our automotive business to different potential buyers. With this revised approach, we have been actively engaged with numerous interested parties, and we’re encouraged with the revised process so far. We aim to complete the exit as quickly as possible while meeting or exceeding our customer commitments during the transition or phase-out of certain product lines. We'll focus on separating the automotive business, optimizing earnings and cash flow, maximizing the cash value by divesting the most valuable assets and exiting the remaining business as rapidly as possible on a cash-neutral basis beginning in the first quarter of fiscal '20 when we plan to report the financial results of the new auto segment separately from the remainder of the VTS segment, which will include our heavy-duty equipment business. Our strategy remains to exit this automotive business quickly and efficiently. Regarding the EBITDA, I'll turn to Mick.

From a margin standpoint, Mike, we haven't disclosed specific numbers. But what we can share, which I think is helpful, is to look at last fiscal year, VTS had an EBITDA margin of around 9%, and we've stated that the auto business overall is significantly below the VTS average. Auto as a total is more of a mid-single-digit EBITDA business with a broad spectrum of margins across it. Overall, our largest user of capital and requires the largest restructuring costs over the last five years. So we expect a margin improvement post-auto divestiture, as well as less capital intensity needs for that business going forward.

I think it's important to mention how we will demonstrate enhanced transparency during the exit period—it will allow us to illustrate what we’re working toward with that divestiture. I think that's a critical element of our strategy. We want to be very transparent to shareholders so they can clearly see the progress we're making.

Okay. I'll pass it along for now. I've got some more. I'll hop back in the queue. Thank you.

Next question comes from Matt Summerville with D.A. Davidson.

Thanks. Just a follow-up on the CIS business. You sort of talked through the data center piece. I'm more curious to see how you feel the business is performing on the commercial HVAC-R side relative to underlying markets. I guess the genesis of the question is you've had some operational executional challenges. Do you feel your market share in that business is stabilized or is that still yet to come?

I feel it's definitely stabilized. It's a good question. We have a whole new focus on that business with bringing key leadership into key positions inside of the operating and customer-facing side. Our efforts have focused on delivering timing and to our customers. Our team has met with key customers, large and small, and our distributors concerning how we're going to attack this on both the performance side—cost, delivery, and timing—and on the market-facing side, executing our pricing and delivery. I feel that we are holding our share position and expect the margins to improve while implementing these actions. Our target is aiming to improve margins by 200 to 300 basis points over the next two years while also anticipating that fiscal '22 will see a rebound in strong customer orders from our large data center customer and growing sales with other customers.

Another factor that has impacted us the last couple of quarters in that broader category has been sales, specifically in the transportation refrigeration side and also on the RV side. So while it may seem like the broader HPAC industry statistics are unfavorable, we have two key customers in particular where we don't see that as a loss of market share. We have seen demand impacted specifically in transportation refrigeration and RV.

And then just to get back to the pricing aspect, you made a comment just a moment ago, as well as in your prepared remarks. Historically speaking, what has been the historical price practice and relevant discipline in that business? And how should expectations change going forward? How important is pricing to achieve that 200 basis points to 300 basis points of margin improvement you're targeting?

It's definitely a portion of it. I think our discipline needs to improve. Currently, we sell a good portion of that business through representatives that represent us on an exclusive basis. We've held discussions with those representatives on the discipline we need to follow and the rules-based approach toward bidding new business. I believe you’ll see some improvement in that aspect. It’s a portion of that 200-to-300 basis point target; I'm not going to quantify how much, but clearly it’s a key part of our strategy. Making sure we deliver on time and quality will also help; those two will go hand in hand. Positive adjustments in both areas will work together to elevate our margins.

And then as a follow-up to the cost out question, Mick, you mentioned $15 million of people-related savings embedded within the total $25 million to $30 million. Can you speak to what the other major buckets are contributing to that total? Additionally, out of the $25 million to $30 million, how much is being realized in fiscal '20 versus how much should be recognized in fiscal '21? Thank you.

Yes, great question. The other portion, approximately of that, call it $10 million plus, consists of two major categories and a catch-all. The largest would be procurement, and we have initiatives planned focused on variable air volume activities and indirect spend. There's also some targeted manufacturing process improvements we’ll initiate, as well as the catch-all for any unexpected areas we may find savings. Among those operating improvements, the bulk of these plans will heavily rely on the procurement efforts moving forward. Regarding this fiscal year, we estimate having about four to five million out of the total $25 million to $30 million realized in this fiscal year, with the balance being realized next fiscal year.

Next question comes from David Leiker with Baird.

Good morning. This is Erin Welcenbach on for David.

Hi, Erin.

So my first question is related to kind of the continued downward revisions we've seen in the commercial vehicle markets regarding build schedules. I know it seems like your guidance has been changed. So that was perhaps communicated well via customer schedules last quarter. But just wondering, what are you seeing in that market, and do the continued downward revisions in that build process create a need for any additional restructuring actions?

We’ve studied this closely both from market data and our customer feedback. We feel we have a stable handle on our market predictions. However, the overall market outlook for '20 predicts that North American medium trucks will be down about 8%, while European trucks will be down about 23%, and overall truck sales will be approximately 15% down. We anticipate these conditions will remain depressed, as I mentioned in my opening comments. However, we believe we are positioned appropriately for where we need to be when markets eventually recover.

Okay. That's helpful. Then I guess just switching to combining the leadership between the Building HVAC and CIS segments. Why is now the right time to make this leadership transition? Can you provide some insight on that?

Yes, it's a great question. We've contemplated this since we acquired the CIS asset a couple of years ago. The concentration on CIS had really focused around one major cloud provider that they did a great job with winning that business, and our teams have established a good relationship. However, the CIS team wasn’t set up to provide additional sales and support apart from that one customer. The Building HVAC team, on the other hand, has a dedicated data center business model out of the UK, with a deep technical competency winning business in both cloud and collocation customers. Bringing these two teams together under one leader provides an opportunity to service both the UK and European bases, while also growing the North American team that we want to expand geographically, using expertise from the UK. I believe we can provide better support and resources with this new configuration. We’ve communicated this change to our customers, and it's received very positively. I’m excited about the growth opportunities this will generate.

Okay, thanks. Lastly, can you frame up what you anticipate will be the typical pursuit or kind of sales conversion cycle when you are trying to win an additional cloud customer?

The pursuit timeline can be relatively quick compared to markets such as automotive or commercial vehicles. I would say the typical cycle from initial conversation to generating revenue is roughly 12 to 18 months. We're aiming to establish credibility with potential customers through our demonstrated capabilities in sales, engineering, and manufacturing fronts. Leveraging our CIS capability in North America alongside the global expertise from Building HVAC is integral to our success. The key lies in building strong relationships with specifying engineers that service these customers.

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

Thank you. Thanks for joining us this morning. A replay of this call will be available through our website in a couple of hours. I hope everybody has a great day.

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