Good morning, ladies and gentlemen. And welcome to Modine Manufacturing Company’s Third Quarter Fiscal 2021 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. 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, Treasury, Investor Relations and Tax.

Good morning. And thank you for joining our conference call to discuss Modine’s third quarter fiscal 2021 results. I am joined on this call by Neil Brinker, our President and Chief Executive Officer; and Mick Lucareli, our Vice President of Finance and Chief Financial Officer.

Thank you, Kathy, and good morning, everyone. It’s been a busy first two months at Modine and I am encouraged by what I see. I spend much of my time connecting with the senior leadership team and getting to know the business. I am honored to be part of a company with such a long and rich history. I would also like to share my appreciation for everyone in this organization that has gone above and beyond expectation during this past year to respond to the global pandemic. In addition to all of our employees, I would also like to thank members of our supply chain for keeping us running efficiently and for our customers who have continued to give us their business and their trust. This has been a difficult year to say the least and we wouldn’t have been able to deliver our financial results without the hard work from all these key stakeholders. The team has also done a great deal of heavy lifting in preparing for the exit of the Automotive business and those plans are on track. As a reminder, last quarter, we announced the sale of our liquid-cooled business to Dana. Both teams are currently working through all pre-closing items, including the required regulatory approvals around the globe. This process has been initiated and we anticipate a close sometime in the June quarter. For the air-cooled business, which represents a much smaller portion of the Automotive segment, we are diligently working on multiple exit strategies. As previously discussed, we have talked with several interested parties and are getting closer to a definitive exit plan. The exit of the Automotive business is an important step in our strategic transformation that will allow us to further focus on the future.

Thanks, Neil, and good morning, everyone. Please turn to slide eight. I am pleased to report a good third quarter and before walking through the underlying results, I’d like to review two large items that impacted our GAAP results this quarter. First, we recorded $134 million of impairment charges, primarily related to the liquid-cooled Automotive business. As a result of our agreement to sell this business, we wrote down the associated assets. Upon closing, we would anticipate reporting a final and much smaller non-cash loss on the sale. Also, connected to the third quarter impairment charges, we recorded valuation allowances on deferred tax assets in the U.S. and abroad. These were partially offset by tax benefits related to the impairment charges. The net tax impact of these items was $79 million. In order to provide a true comparison, slide eight is focused on adjusted operating metrics. As usual, our appendix includes an itemized list of adjustments and a full reconciliation to our GAAP results. Third quarter adjustments totaled $139.1 million, mostly comprised of the non-cash asset impairment I just reviewed. The remaining balance includes $3 million related to the Automotive exit, along with $1.7 million of restructuring activities, environmental charges, and CEO transition costs. Now shifting to the key metrics, third quarter sales increased by $11 million or 2% as compared to the prior year. The increase was largely driven by favorable currency translation. I am happy to report gross profit of $83 million, which was higher than the prior year by $9 million. Our gross margin once again exceeded 17% and improved 160 basis points.

Thanks, Mick. In conclusion, I would like to reiterate what an exciting time it is for Modine. With the introduction of the COVID-19 vaccine, we are on a road to recovery. But in the meantime, I am so proud to be part of this organization that has been positively impacting people’s lives during this difficult time. Since the pandemic began, our Building HVAC team has emphasized how important indoor ventilation is for school environments. Our school ventilation units can greatly improve indoor air quality, lower energy costs, and help prevent the spread of pathogens in the air. Clearly, important objectives for our school districts around the country. Our HVAC systems clearly have a positive impact on people’s lives in keeping schools safe with intelligent cooling and greener data centers. We will continue to invest in and grow these important product lines. Lastly, I would like to say a final word about 80/20. As I mentioned, we are launching a pilot of the 80/20 process with our data center expansion and have developed goals and KPIs to allow us to track our progress. I believe that this pilot and future company-wide launches will have a positive impact on all of our key stakeholders and will become the future lifeblood of Modine. 80/20 will drive our decisions and will become part of who we are. Although we anticipate some early positive results, this is a journey that we will be on for some time. I am even more confident than when I started that Modine has great potential. We will leverage the great legacy and culture to make this a truly great company. With that, we will take your questions.

Your first question is from Matt Summerville of DA Davidson.

Thanks. Good morning. Maybe just start with mentioning the tariffs a couple of times during the prepared remarks, rollbacks as well, can you talk about how that’s impacting Modine? What sort of financial impact can we expect in that regard? What the company can and will do to mitigate that? How much you ultimately feel you will be able to recoup and also that includes the recent escalation we have seen in input costs as well? So maybe just spend a few minutes parsing those things out, talking about how we should be thinking about that?

Yeah. Good morning, Matt. It’s Mick. I will give you some of the numbers behind what we are seeing and then I will let Neil wrap up with all the work he’s been doing with the supply chain during the mitigation effort. So, some new tariffs came through. There were tariffs put on stainless steel and products we had coming in from China. And we eventually were given exclusions on those and those exclusions -- some of those were expired and or removed and now we have some exposure there on the stainless steel side. Then, late in the fall, there was a large anti-dumping tariff applied of 50% plus on aluminum products coming in from Europe and that caused another large impact to the company. In the quarter, we estimate it’s about a $2 million to $3 million impact in Q4. And through our mitigation efforts, we have both on the supply chain and where we produce, where we import materials to, and where we convert these materials to finished products, we have some mitigation efforts. We think next year that that’s probably a $3 million type net headwind for us. Obviously, if you annualize the $2 million to $3 million in the quarter, that’s a big annual number. But we have got a number of actions between switching suppliers, I mentioned bringing products into different Modine locations and also sharing relationships between our suppliers and our customers. So, I will pause there and see Neil if you want to add anything from your side.

Yeah. Good. Thanks, Mick. Hi, Matt. Yeah. That’s a great question. This has certainly highlighted an area for us where we can improve our ability around our agility and flexibility with our operations’ footprint and our supply chain strategies. We are actively looking at short-term and long-term countermeasures on how we are going to mitigate that, which ranges from shipping production plants that aren’t impacted by the tariffs to shipping equipment from plants based on demand, as well as the impact of tariffs. So this has really opened up an opportunity for us to look at our operations footprint, to look at our supply chain strategies, and break that down by commodities and come up with some very creative ways to mitigate this issue.

Got it. As a follow-up maybe, Neil, spend a minute talking about kind of 80/20. I know you have only been in place for about two months now, so it’s still very early. But maybe just, if you have some high-level observations in terms of maybe what you feel will be borne out of that effort in the near-term versus maybe the longer term and what sort of external metrics you might be willing to provide us so we can sort of gauge your progress on the deployment of 80/20 and the segmentation process associated with it?

Yeah. Very good question, Matt. 80/20 is a systematic way of expanding the business and focusing its precious resources -- and I mean they are precious here. We are running pretty lean on the highest growth opportunities, while reducing complexity and improving the margins to product and market rationalization. My early observations are, we have got to get a quick win and I think our best opportunity -- I know our best opportunity after consulting with a leadership organization here is on the data center side. There’s just some things that we can do right out of the gate that make a lot of sense not only externally but internally so that we can drive accountability into the teams and we can give them what they need to win and they are very much commercial and focused with our customers. It’s pretty early in the process to your point. We are working through what those KPIs will look like. So I am excited to say that we have got some consulting coming in next week that’s going to help us with this journey to accelerate it. There’s no need to move at a slow pace here with the data. I think we can accelerate that and over the next, let’s say, 30 days when we get through the data analytics, we are going to be able to come up with some pretty strong KPIs in terms of what we expect to achieve.

Great. Thank you, guys. I will get back in queue.

The next question is from Michael Shlisky of Colliers Securities.

Hey there. Good morning, everybody.

Good morning.

Great job reducing the leverage over the last, well, couple of years really but this quarter in particular. Give us a sense like what is the company’s current kind of comfort level? What you would like leverage to be and how much would you lever up for a decent size M&A deal sort of 1%?

Yeah. Great questions and more fun questions. Yes. So we have been out for quite a while talking about keeping Modine especially when we were 80% vehicular, leverage ratio 1.5 times to 2.5 times my hope, by the way. One of our longer-term outcomes is being more diversified industrial, less capital intensive that we might be able to look at that in a slightly different way. But the good news is, if we have got market tailwinds, we exit auto, we are quickly going to have a leverage ratio that’s already heading towards the low end of our range. So I think, Mike, one thing Neil mentioned, he’s quickly accelerated our focus and asked me to do a lot of work on acquisition funnels and targets. So that’s one thing and to your question, we have got capability within our credit agreements to do 3, 3.25 leverage and no problems there. We did that with Luvata if you recall. So I think every situation is different, but I would say, we can do 3 times and 3.25 times leverage and as long as we have a good integration synergy plan we can quickly pay it down.

Got you. Maybe another question I can bring up quickly here is, I wonder if you could give us just a quick update on anything that you are doing in the EV world. We are seeing some EV truck platforms actually coming to market, small volumes, but they are starting in 2021. You have already mentioned buses, especially one bus company going public this year, this one bus company went public. But just give your sense as to what you have won and kind of how you feel about your chances of putting, recouping to our technologies or other products on those kind of vehicles going forward?

Yeah. Mike, I think, I talked about this a little bit last quarter and then Neil has completely jumped in with their HDE team and as we think about 80/20 as well. The opportunities, as you know, on electrification in trucks is growing quite quickly. The amount of inbound calls and the amount of development activities we have going on has really grown quite a bit. We are working with a number of mainstream companies, none of which we can really talk about in a public forum, as you can imagine, plus a number of emerging and startup companies, and they have successfully seen that in production orders, development production on specialty vehicle and bus. The truck development cycles are quickly right behind there and then we are also evaluating what other last mile vehicles will be the quickest or most logical to implement from an EV’s data. Neil, do you want to add anything from your view?

Yeah. No. That’s a great question. And this is a very exciting area not only for Modine but for myself. I have spent a little bit of time here in Racine, especially in the tech center. And as I go back into the tech center, I look at where we are at and we are at an all-time high relative to EV, commercial vehicle, and bus activity with our prototypes. And the team has generated some pretty substantial wins in terms of early development for programs. This EV activity is extremely exciting for me because it’s just not component related, it’s system related. That’s a new chapter for us at Modine and driving value and improving the value with our propositions to customers with a system-related response to solving thermo challenges in the EV section, especially with commercial vehicles and buses. So it’s a great area. We are going to have some focus on that in that area, and the team has done a pretty good job in terms of getting out the prototypes in a timely way so that we can get some wins.

Excellent. I will leave it there. Thanks so much guys.

Your next question is from Brian Sponheimer of Gabelli Funds.

Good morning, everyone. Mick, good morning and welcome certainly to Neil. Neil, I have just a question for you. Taking a step back to when courtship began, what was it about Modine that attracted you from the beginning and now two months in, anything that confirms or disconfirms your initial impression of the company?

Only positive confirmations. No doubt about it. Yeah. No regrets at all. This has been great. My early observation in the journey as I work with Modine is particularly the leadership and the Board was, it’s an environment that’s ready to evolve and change. The best foot was put forward with the transaction and the divestiture that we are working through Modine and that speaks volumes in action, right? There’s a culture that’s dedicated and motivated to turn the corner, and that’s exciting to me. There are very strong innovative product technologies. That was an absolute draw. Coming from a highly engineered diversified background, that is something that, in order to be successful, you have to be innovative and creative and I see pockets of that in Modine that we just need to untap. It has a rich legacy and a strong brand, and we are going to continue to identify those target opportunities inside Modine to support its transformation. So, to me, a big part of that change was pretty exciting, drew me, not only the team and the culture and the rich legacy of Modine and its brand, but that transformational piece. To be part of that, that was very enticing.

Yeah. I guess along the same lines, what do you think your mandate is from the Board and from the shareholders?

Drive the transformation of Modine, continue to do that and do that in a productive way, while we maintain and respect the legacy of the company.

Great. Well, I look forward to eventually getting out to the scene to see you and maybe we will talk a lot. But I will -- we wish you the best and look forward to seeing what the next few years bring.

Thanks, Brian. Pleasure.

Your next question comes from Steve Ferazani of Sidoti & Co.

Good morning, everyone. You have talked about adding data center capacity in the U.S. and Spain on a previous call. Just trying to get a sense of the timing on that where you are in expanding that capacity and is that part of the higher CapEx in Q4?

Yeah. Hi, Steve. It’s Mick. No. I think Q4 will be just kind of across the board has been with plants shutdowns, people working remote. There’s just a general backlog of some things we need to get done as the world starts to open up. And then with regards to the expansion for CIS, in Spain, we will be up and running in our Q4, which is great computer room air handlers, our crawling units. And in the chiller side in the U.S., that will be the second half of our fiscal year where we will be in production from that side. Total capital spending, it’s another nice thing I like about this side of our business is relatively speaking, these are not large capital investments for us. Large capital in total is probably kind of $5 million give or take compared to one automotive program, which can be $5 million to $10 million just to launch one with one customer. So, we are really excited about it. And the footprints there, by the way, again, these are two existing facilities with proven management teams. So another reason why the capital isn’t overly large is we are leveraging the existing footprint and teams and employees there quite capable to make this more complicated systems, as Neil pointed out. Neil, anything?

No. I think you added the fact that we are in North America, as well as explaining the footprint not in Spain but in North America as well. So it’s great. Good question.

And then I just wanted to follow up on the expectation on higher metal prices and the impact. Could you -- and I just want to clarify this, did you say that those higher metal prices didn’t impact the P&L in the quarter you just reported? And then the flip side of the question would be, what’s the effort to mitigate higher prices we remain elevated for a while in terms of price resets with contracted customers or pass-throughs?

Yeah. Really good question and good clarifying for us. So when I answered a little earlier that was specific to tariff. The other, I’d say, challenge inflationary issue has been that’s going on as the world looks past-COVID is the rapid rise of commodity metals, with everybody is seeing copper, aluminum, steel, and for us, we are heavy users of copper and aluminum, a little bit of steel. In the quarter, we had a net year-over-year negative impact, pretty small for us, only about $2 million. The run really began in the metals since October. We have seen almost a 20% increase. If you look at next year average, if things hold or stay where the markets expect them to be in metals, we will see about a 20% increase on average in raw materials. In Q4, we expect to start to see the biggest impact in the next couple of quarters. As a reminder, we have a lag. We do have pass-throughs. So on CIS, that business segment much more real time as we pass through each business backed program. We use current material costs. Building HVAC, much the same way, more real-time pricing to current market condition. So then we are down to HDE, which has the long-term agreements with the large OEs. Just about every customer has a pass-through agreement, and then the difference is really how they work, the lag or the timing impact to that. We tend to think about on average it’s about six months on the HDE side. So Q4 here for us, Q1, Q2 we will be catching up by $6 million. So I am estimating impact in our Q4 and next year in total. Probably, again, now if things stay, anything can happen in the metals markets, but at least probably a $10 million or $12 million metal headwind as we try to pass through these prices and eventually catch up to the metals market. That would be in addition to the tariff numbers I mentioned earlier. Neil?

Yeah. And I think that’s a great explanation in terms of how we are maintaining the margins with the increase in metals. But in order to maintain the material velocity, we have also added safety stock and we have added safety lead times. We have executed on advance bookings and we are redirecting some sea freight to less congested ports to prevent disruption. So it’s not only on the margin side, but we have a lot of activity in order to maintain on-time delivery and lead times across the facilities.

That’s really helpful. Thanks, everyone.

We have Matt Summerville from DA Davidson return to the queue.

Yeah. In the past you have talked about the revenue associated with this large data center customer. I am sort of eyeballing a $30 million kind of revenue number from that customer in fiscal 2021. First, is that accurate, and then, second, Mick, you have talked in the past about how you expect that to ramp in fiscal ‘22. What’s your current read or current update on where you think that number goes next year?

Yeah. Good question. The CIS has really two pieces; again for everybody to make one step back to also Neil’s comments earlier. Last year we had about $40 million of data center business in Building HVAC. That is primarily U.K. systems. Great margin business, right? We want to do more of that and that’s what we are also expanding globally, when we mentioned, Spain and North America. When we acquired Luvata, there were two pieces and probably on average about evenly mixed. There’s about $40 million of coils that we sell heat exchangers into the datacenter market and we had one major hyperscale customer of about kind of equal size. So, we have run in data centers in CIS in that $60 million, $80 million kind of range. This year, as we go forward and what you are picking up is, mostly this year our biggest sales will be that $30 million, $40 million were the heat exchangers that we sell into the data center market to multiple customers. And the large hyperscale customer over the last year has really declined to pretty in this quarter and the next quarter, a very nominal level. We are at -- we are in the middle of a technology transition, so much lower -- I can’t disclose the exact numbers, Matt, for you. But again, think of it as $30 million to $40 million of heat exchanges, coils sold to multiple data center customers, plus our one hyperscale customer. In this year in total, sales will be very, very small. And then I think you asked about the ramp up, Neil talked about it, they have -- they are building their construction schedules, their site’s selected. We actually have completed all of our technology testing and this is a very complicated new and proprietary system for this customer. We are very encouraged and optimistic and have a good line of sight to ramp up in ‘21 here for the new site. We would expect them to get back to a normal level this year. One or two years in the Luvata after we acquired and we saw a really big growth. We almost kind of doubled in sales. That’s hard to say beyond that point. I’d say, short run, we see this customer getting back to an average and normal run rate for them. And then beyond that, whether there’s upside to hit a high watermark, it’s too early to tell. But nonetheless, really good opportunity here for us in the new year at that new launch starts. Neil anything?

Like in any industry, when there’s lots of capital deployment, there’s a digestion period, right? And we are seeing some digestion periods. And looking at alternative expense, the alternative expense has been in the co-lo. The good news for us in Modine is we have products and services and offerings in both, either co-location or with hyperscale. So depending on where they spend and how they deploy their capital, we are in a good position to where we can win both avenues.

Got it. And then just one follow-up on M&A. How long do you think it will take Modine to develop a pipeline to start cultivating deals? And is there anything you would characterize as actionable in the pipeline currently or is this sort of still very early innings in that process? Is it going to take the better part of, say, the next six months to 12 months to get?

I said, we do have a pipeline. We have been maintaining a good pipeline and there are actionable opportunities to me, and then, I will pause and let Neil answer. I think making sure we get through first digesting of 80/20 to ensure we are not pursuing something just transactionally, but it’s filling a strategic need is where we want to go. Once, we start going, as everybody knows, it’s a multi-month all-encompassing project plus the integration. Personally, I’d like to make sure we go after the most important and what Neil’s asking us to put together is -- I think of it as a scorecard and a forced ranking. What’s in the pipeline, what’s actionable, but then how do we force rank them?

Yeah. And I think, Mick, and the team has done a really good job in terms of thinking through exactly that. And then we want to overlay that with a filter, right, a strategic filter in terms of where we want to go with our acquisition strategies. Does it fulfill a strategic initiative? Does it fulfill a strategic need? Is it backwards, forward, or sideways integration? What are the opportunities for us because they get a certain profile? We will have a different type of profile for our targets. And then we will monitor the milestone process of the checks through the filters and that’s exactly the system, the rigor and the discipline behind that is making this team are starting to put together and then 80/20 will be a very good lens for us to start to introduce some potential candidates inside of that filter.

Great. Thank you, guys.

I am showing there’s no further questions in the queue. I’d like to turn the call back to Neil for any closing remarks.

Yeah. One last comment. I’d like to recognize, Mick, for his leadership as the Interim CEO. Mick did a great job stabilizing the company and preparing the organization for change. His efforts have allowed for a very smooth onboarding and transition for me and I thank Mick for his commitment to Modine.

Thank you, Neil. And thanks everybody on the line for joining us this morning. A replay of the call will be available through our website in about two hours. We hope everybody has a great day. Thanks.

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