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MODINE MANUFACTURING COMPANY

(MOD)
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Q2 2022 Transcript

11/05/2021 EST

Corrected Transcript

03-Nov-2021

Modine Manufacturing Co. (MOD)

Q2 2022 Earnings Call

Total Pages: 15

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Modine Manufacturing Co. (MOD)

Corrected Transcript

Q2 2022 Earnings Call

03-Nov-2021

CORPORATE PARTICIPANTS

Kathleen T. Powers

Michael B. Lucareli

Vice President, Treasurer, Investor Relations & Tax, Modine

Executive Vice President & Chief Financial Officer, Modine

Manufacturing Co.

Manufacturing Co.

Neil D. Brinker

President, Chief Executive Officer & Director, Modine Manufacturing

Co.

......................................................................................................................................................................................................................................................

OTHER PARTICIPANTS

Matt J. Summerville

Analyst, D.A. Davidson & Co.

Steve Ferazani

Analyst, Sidoti & Co. LLC

......................................................................................................................................................................................................................................................

MANAGEMENT DISCUSSION SECTION

Operator: Good morning, ladies and gentlemen, and welcome to Modine Manufacturing Company's Second 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, Ms. Kathy Powers, Vice President, Treasury, Investor Relations and Tax.

......................................................................................................................................................................................................................................................

Kathleen T. Powers

Vice President, Treasurer, Investor Relations & Tax, Modine Manufacturing Co.

Good morning, and thank you for joining our conference call to discuss Modine's second 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 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 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's my pleasure to turn the call over to Neil.

......................................................................................................................................................................................................................................................

2

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Modine Manufacturing Co. (MOD)

Corrected Transcript

Q2 2022 Earnings Call

03-Nov-2021

Neil D. Brinker

President, Chief Executive Officer & Director, Modine Manufacturing Co.

Thank you, Kathy, and good morning, everyone. Before reviewing our second quarter results, I would like to provide an update on our recent announcement regarding the Automotive divestiture. As announced, we mutually terminated the agreement with Dana for the sale of our liquid-cooled Automotive business. After spending months going through the regulatory approval process in Germany, it became apparent that we could not reach an agreement that would receive the required regulatory approval. Because of the agreement in place, we are prohibited from taking any substantial actions on the portion of the business despite the declining volumes created by the semiconductor shortage. Now that we are back in control, we can take a different approach.

Over the past few months, we've been planning for this possibility. And I'm excited because we have a real opportunity to run the business differently by applying 80/20 principles. Using 80/20 as a key tool and one that we didn't have when we made our initial decision to exit the Automotive business.

Our goal is to optimize profit margins and cash flows while focusing resources on the products where we have sustainable competitive position and where we can provide value to our key customers, while still meeting our return targets. We will initiate restructuring actions to reduce SG&A and we'll limit capital expenditures, especially in low margin areas where we don't have a competitive position. We'll also analyze and segment our business portfolio to identify those portions that are accretive to our margins and take actions where possible to improve commercial terms. When we started this process, our Automotive business was around $500 million of revenue, but with wind downs and the earlier divestiture of the Austrian air-cooled business, we now have an annual run rate of about $300 million to $350 million.

About 80% of this remaining business relates to the liquid-cooled products that have a higher margin profile and technology links to EV. The remaining balance is mostly air-cooled product that has low margin and non-strategic. This will be addressed to further wind downs or potential divestitures. Our leadership team has a very clear objective to improve and optimize the financial profile. First, the focus will be on improving the profit margin by applying 80/20 principles and reducing the cost structure. Second, the objective is to run the business on a free cash flow positive basis, including potential restructuring costs. We believe this can be done through margin improvement, reduced capital spending and targeted asset sales. Through these efforts we can appropriately manage this business and supported the broader Modine transformation, while providing better service and a more value-added focus to our customers.

I would also like to point out that we are separating our vehicle business by technology. As we recently announced, we have created a separate EV business unit that will focus on accelerating growth of our EV systems and have hired a General Manager to run this dedicated team.

As we've mentioned in the past, we have developed a battery thermal management system that optimizes the temperature of the battery system without drawing power from the battery. We are in production on this system and in development with many other bus, specialty vehicle and commercial vehicle customers. This is an attractive market for us given its growth profile and the potential to provide significantly higher content per vehicle and higher margins. Our objective is to provide this business with the resources needed to grow and to continue investing in technologies, to support the needs of our EV customers.

Switching gears, let's move to the state of our market on slide 5. The current business environment has become increasingly challenging over the past few months, which impacted not only our second quarter results, but also caused us to lower our full year forecast. In particular, raw material costs have increased further and we are

3

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Modine Manufacturing Co. (MOD)

Corrected Transcript

Q2 2022 Earnings Call

03-Nov-2021

dealing with more supply chain disruptions, including the impact of semiconductor shortage on the auto industry. All of these elements have caused us to reduce our second half outlook and to update our guidance ranges.

As I mentioned, our leaders are assembling restructuring plans to address these issues and start at path to improvement. Offsetting the headwinds, we are seeing strong demand in our BHVAC, CIS and HDE markets. Despite these challenges, we've been making many positive changes in our business, including adding several new business leaders in support of our organizational design transformation. In total, we have added seven general managers in addition to two new Vice Presidents named last quarter. The talent we have brought on board is well-versed in 80/20, organizational development, P&L management and transformational change. First, we have named leaders for our newly created EV business and for our HDE business who are actively working on the priorities. Next, in our Building HVAC segment, we've announced new general managers to lead our heating, indoor air quality and data center businesses. These are all very attractive, fast growing markets where we are actively gaining market share.

Each of these businesses are targeted for growth. And with a decentralized structure, our new leaders will be given the tools needed to significantly grow these businesses. Demand in our heating business remains strong and we are using our superior service model to convert distributors and further gain share. In indoor air quality, our focus is on further expanding our geographic reach in the school markets where we tend to have some focused concentrations. Off season demand for school is up 300% compared to last year, coming off strong summer shipments.

In data centers, we're targeting substantial growth, leveraging our many strong relationships in Europe and building our capabilities in the US. Inflation negatively impacted margins in this segment this quarter. There's often a long lead time between order and shipment and we had over 20 million backlog orders that will be shipped in the second half. We are targeting commercial actions in this business along with our heating and IAQ products to offset these negative impacts. We expect to see margin improvements in Building HVAC in the second half of the year. In our CIS segment, we announced new general managers for our coils and our coolers business. Our coils business is very complex and will benefit from the 80/20 work we are doing to reduce this complexity and improve the profitability of the business. We have a strong order book as long lead times and higher demands are causing customers to order early to secure supply.

The Coolers business is targeted for growth, particularly related to our offerings using alternative refrigerants such as CO2. Orders also remain strong, particularly in South and in Eastern Europe. Our Coatings business is also targeted for growth, especially as we expand our network of licensees. This business was already set up as a separate business unit and will continue to be run by the same management team.

The entire leadership team is highly engaged in the strategic planning process using 80/20 to define strategies to drive profitable growth and reduce complexity. Our targeted growth businesses are developing strategies to substantially increase revenues while maintaining or expanding margins. In addition, we are taking immediate pricing actions where possible and are making good progress.

Finally, we are reviewing our manufacturing footprint in certain businesses to consolidate production of key products into dedicated plants and to make rapid improvements where required. We are taking many important steps towards creating a stronger Modine, including reorganizing our business to accelerate growth and identifying experienced P&L leaders to run our business units. 80/20 is driving important strategic decisions and is beginning to yield tangible improvements across the business.

4

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Modine Manufacturing Co. (MOD)

Corrected Transcript

Q2 2022 Earnings Call

03-Nov-2021

The change in our vehicular strategy is just one element of the story. We're also providing additional resources to grow other key businesses that have strong market drivers, including data centers, eating, indoor air quality and coatings. Collectively, these initiatives will help Modine become a higher growth, higher margin and less capital intensive business. The process of transforming Modine will take some time and we are just at the beginning of this journey. During the first phase of this transformation, we will use 80/20 to help us actively manage our portfolio businesses to reduce complexity, discontinuing profitable activities and enhance our pricing model to improve and transition our challenged businesses. At the same time, we'll shift our human and manufacturing resources to better support the businesses with a greatest growth potential.

The next phase is growth acceleration. Once we have our organization structure and operating model fully in place, we plan to further invest in the products and technologies that will propel this business forward. We are excited about the prospects for the strategy and its potential to drive sustained long-term value for all of our stakeholders.

Now, I'd like to turn the call over to Mick, who will review our results for the quarter and provide the segment updates.

......................................................................................................................................................................................................................................................

Michael B. Lucareli

Executive Vice President & Chief Financial Officer, Modine Manufacturing Co.

Thanks, Neil and good morning, everyone. Please turn to slide 6. Second quarter sales were up 4% [ph] or $18 million (00:10:38) with double-digit increases in our Building HVAC, CIS and HDE segments. Included in the sales increase was $25 million of pricing to help recover rising material and other supply chain costs. Excluding pricing and foreign exchange sales volume was down 3% as increases in HVAC, CIS and HDE were more than offset by a significant decline in Automotive.

Adjusted EBITDA declined $26 million, driven by the significant rise in material costs. The quarter included a nearly $45 million increase in commodity metals, freight, packaging and tarrifs. In particular, prices for aluminum, copper and steel were significantly higher than the prior year. As I mentioned, there's an element of revenue, we adjusted prices by $25 million to offset the significant cost increases. Despite the large amount of pricing, this quarter had a $20 million net negative material impact.

In addition to materials, the quarter had a difficult comparison from temporary COVID savings, which peaked during Q2 of last year. Compared to the prior year, the absent of COVID-19 savings resulted in an $11 million cost increase. Adjusted earnings per share of $0.15, with $0.28 below the prior year. As we look back at the quarter, revenue was somewhat lower than we originally expected and materials have increased beyond what we anticipated. In particular, the Auto segment sales were well below our expectations as customers failed to meet their targets.

Before moving on, I'd like to summarize the $5.9 million of adjustments incurred during Q2. First, we recorded $3.3 million of impairment charges related to Automotive assets held for sale during the quarter. Next, we incurred $1.6 million of costs related to our 80/20 transformation with the majority relating to recruiting and severance. Finally, we incurred $700,000 of restructuring and environmental costs and $300,000 of other auto exit costs. As usual, our press release and appendix include additional information, US GAAP results, and complete reconciliations.

Now, let's review the segment results. Please turn to slide 7. The Building HVAC segment reported sales growth of 13% from prior year. This increase was driven by continued momentum in US heating sales, which were up 17%. In addition, commercial ventilation and air conditioning sales grew 12% as demand for school products

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Disclaimer

Modine Manufacturing Company published this content on 05 November 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 11 November 2021 20:36:06 UTC.


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Sales 2022 1 999 M - -
Net income 2022 41,5 M - -
Net Debt 2022 267 M - -
P/E ratio 2022 12,8x
Yield 2022 -
Capitalization 524 M 524 M -
EV / Sales 2022 0,40x
EV / Sales 2023 0,34x
Nbr of Employees 10 900
Free-Float -
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Neil D. Brinker President, Chief Executive Officer & Director
Michael B. Lucareli Chief Financial Officer & Executive Vice President
Marsha Cole Williams Chairman
Steve Langer Vice President-Information Technology
Thomas P. Drahos Vice President-Operations
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