Modine Manufacturing Company (MOD) 2019 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Modine Manufacturing Company's Third Quarter Fiscal 2019 Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

各位女士、先生，早安，歡迎參加 Modine Manufacturing Company 2019 會計年度第三季財報電話會議。（接線員指示）提醒各位，本次電話會議將被錄音。

I would now like to turn the conference over to your host, Ms. Kathy Powers, Vice President, Treasurer, Investor Relations and Tax.

現在我想將電話會議交給本次主持人——Kathy Powers 女士，副總裁、財務長、投資人關係與稅務主管。

Good morning, and thank you for joining our conference call to discuss Modine's third quarter fiscal 2019 results. I'm 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 with 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.

早安，感謝各位參加我們的電話會議，一同討論 Modine 2019 會計年度第三季業績。我與 Modine 總裁暨執行長 Tom Burke，以及我們的財務副總裁兼財務長 Mick Lucareli 一同出席。今天的簡報將使用投影片，各位可透過網路直播連結存取，或至我們網站 modine.com 的投資人關係專區下載已張貼的 PDF 檔案。

This morning, Tom and Mick will present our third quarter results and update our outlook for the remainder of fiscal '19. At the end of the call, there will be a question-and-answer session.

今天上午，Tom 與 Mick 將說明我們第三季的業績，並更新 2019 會計年度剩餘期間的展望。電話會議最後將進行問答環節。

On Slide 2 is our notice regarding forward-looking statements. This call may contain forward-looking statements as outlined in our earnings release as well as in our company's filings with the Securities and Exchange Commission.

投影片第 2 頁為我們關於前瞻性陳述的聲明。本次電話會議可能包含前瞻性陳述，相關內容已於我們的財報新聞稿以及公司向美國證券交易委員會提交的文件中加以說明。

With that, it's my pleasure to turn the call over to Tom Burke.

接下來，很高興將電話會議交給 Tom Burke。

Thank you, Kathy. Good morning, everyone. We recorded another strong quarter with significant increases in both sales and earnings. Sales increased 6% or 8% on a constant currency basis. Each of our segments recorded higher sales this quarter as compared to the prior year, led by the off-highway, data center and commercial HVAC markets.

謝謝你，Kathy。各位早安。我們再度繳出強勁的一季，營收與獲利皆大幅成長。營收成長 6%，若以固定匯率計算則成長 8%。本季我們各事業部門的營收皆較去年同期增加，其中以非公路（off-highway）、資料中心與商用 HVAC 市場帶動最為明顯。

Third quarter adjusted operating income was $34.8 million, up 29% to prior year. Similar to last quarter, strong performances from CIS and Building HVAC segments were partially offset by lower earnings from the VTS segment.

第三季調整後營業利益為 3,480 萬美元，較去年同期成長 29%。與上一季類似，CIS 與 Building HVAC 事業部門的強勁表現，部分抵銷了 VTS 事業部門獲利下滑的影響。

Mick and I will provide more details, but we continue to be negatively impacted by the direct and indirect impact of tariffs on raw material purchases within the VTS segment.

Mick 和我將提供更多細節，但我們仍持續受到 VTS 事業部門在原物料採購方面，關稅所造成的直接與間接影響而承壓。

After reviewing the segment results for the third quarter, Mick will provide an update on our consolidated results and our outlook for the rest of fiscal 2019. I will then provide an update on our strategic initiatives, including our review of the strategic alternatives for the automotive business that was announced earlier this week.

在檢視第三季各事業部門的表現後，Mick 將更新我們的合併財務結果，以及 2019 會計年度其餘期間的展望。接著我將更新我們的策略性計畫，包括本週稍早宣布的汽車業務策略替代方案評估進度。

Please turn to Page 5. Sales for the VTS segment increased 3% or 6% on a constant currency basis, driven primarily by increase in the Americas and Asia, partially offset by lower sales in Europe. Growth in the Americas region was across all end markets, while growth in Asia was primarily driven by higher off-highway sales.

請翻到第 5 頁。VTS 事業部門營收成長 3%，若以固定匯率計算則成長 6%，主要由美洲與亞洲地區的成長帶動，部分被歐洲地區營收下滑所抵銷。美洲地區的成長涵蓋所有終端市場，而亞洲地區的成長主要來自非公路市場銷售增加。

Adjusted operating income for the VTS segment is $15 million for the quarter or $5 million lower than the prior year. And adjusted operating margin was down 180 basis points to 4.6%.

VTS 事業部門本季調整後營業利益為 1,500 萬美元，較去年同期減少 500 萬美元；調整後營業利益率下滑 180 個基點至 4.6%。

Over the past couple of quarters, we have mentioned the direct and indirect impact that tariffs continue to have on our raw material cost at VTS. Although we source much of our raw material domestically, our raw material suppliers are using tariffs to apply leverage for the cost increases. In fact, some of our suppliers have increased their fabrication cost by more than 20%, and some are choosing to exit the heat exchanger business altogether, resulting in our having to resource supply in order to fulfill our commitments to our customers. These changes are unplanned and are resulting in a significant cost burden to the VTS segment. In addition, we're also bearing the direct cost of tariffs on certain imported items from certain countries, primarily China.

過去幾季我們提到，關稅對 VTS 的原物料成本仍持續造成直接與間接影響。雖然我們多數原物料在國內採購，但原物料供應商正利用關稅作為槓桿來推升成本。事實上，部分供應商的加工成本提高超過 20%，也有一些供應商選擇完全退出熱交換器業務，導致我們必須重新尋找供應來源，以履行對客戶的承諾。這些變動並非原先規劃，正為 VTS 事業部門帶來顯著的成本負擔。此外，我們也承擔來自特定國家進口之部分品項的關稅直接成本，主要來自中國。

Overall, the negative impact of tariffs on our margins has been greater than we originally expected. We are therefore attacking this issue from many angles and exhausting all tools at our disposal to address these market pressures. Our procurement group is working tirelessly to secure the supply of raw materials that we need. And our commercial teams are working with our VTS customers to reach cost-sharing arrangements to help cover these higher costs. In addition, we continue to monitor the status of the exclusion request that we filed with the government.

整體而言，關稅對我們毛利率的負面影響大於原先預期。因此，我們正從多個面向著手，並用盡手上所有工具來因應這些市場壓力。我們的採購團隊正不懈努力，以確保所需原物料供應；商務團隊也正與 VTS 客戶協商成本分攤安排，以協助涵蓋這些較高成本。此外，我們也持續追蹤先前向政府提出的豁免申請進度。

We are also still experiencing some operating inefficiencies in a few of our VTS plants but are starting to see some significant improvements. We have made leadership changes at the affected plant locations within the segment, and we are confident these changes will accelerate improvements.

我們在少數 VTS 工廠仍面臨一些營運效率不彰的情況，但已開始看到顯著改善。我們已在該事業部門受影響的廠區進行領導團隊調整，並有信心這些變更將加速改善進程。

Please turn to Page 6. Sales for our CIS segment increased 5% or 7% on a constant currency basis, primarily due to a 36% increase in sales to data center customers. The segment reported adjusted operating income of $13.6 million, more than double the prior year. The adjusted operating income margin was up 460 basis points year-over-year to 8.1%. This improvement was driven by higher sales volume, favorable sales mix and improved performance. We continue to benefit from both the strength of the data center market and higher market share, which is driving both top line growth and margin improvement. In addition, we are benefiting from operational improvements and from the restructuring actions taken in Europe last year. We continue to be very pleased with the performance of this segment.

請翻到第 6 頁。我們 CIS 事業部門營收成長 5%，若以固定匯率計算則成長 7%，主要因對資料中心客戶的銷售成長 36%。該事業部門本季調整後營業利益為 1,360 萬美元，較去年同期增加逾一倍。調整後營業利益率年增 460 個基點至 8.1%。此改善主要來自銷量提升、有利的產品組合，以及營運表現改善。我們持續受惠於資料中心市場的強勁需求與市占率提升，帶動營收成長並改善利潤率。此外，我們也受惠於營運改善，以及去年在歐洲採取的重整措施。我們對該事業部門的表現仍感到非常滿意。

Please turn to Page 7. Sales for our Building HVAC segment increased 14% or 16% on a constant currency basis, driven both by a strong North American heating season and higher air-conditioning sales in the U.K. Operating income increased 41% from the prior year to $13 million, and operating margin increased 380 basis points to 20.3%. This increase was driven by higher sales volume along with improved pricing and a decrease in SG&A expense.

請翻到第 7 頁。我們 Building HVAC 事業部門營收成長 14%，若以固定匯率計算則成長 16%，主要受惠於北美強勁的供暖季，以及英國空調銷售增加。營業利益較去年同期成長 41% 至 1,300 萬美元，營業利益率提升 380 個基點至 20.3%。此成長主要由銷量增加所帶動，並受惠於定價改善以及 SG&A（銷售、一般及管理費用）下降。

As I mentioned, this has been an exceptionally strong heating season for us. In addition to benefiting from strong market conditions, we've also gained market share in both the U.S. and Canada. There was clearly a great deal of momentum in this segment. We always benefit from a strong heating season, but we're also working to build our reputation as an industry leader in data center cooling as we are winning significant new business both in precision cooling and chillers out in the U.K.

如我所提，這對我們而言是異常強勁的供暖季。除了受惠於良好的市場環境外，我們在美國與加拿大也提升了市占率。該事業部門顯然具備相當強的動能。我們一向會受惠於強勁的供暖季，但同時也正致力於建立我們在資料中心冷卻領域的產業領導地位；目前我們在英國的精密冷卻與冷水機（chillers）業務上，正贏得多項重要新案。

With that, I'd like to turn it over to Mick for an overview of our consolidated results and an update on our outlook for the remainder of fiscal 2019.

接下來，我想把時間交給 Mick，請他概述我們的合併財務結果，並更新 2019 會計年度剩餘期間的展望。

Good morning. Please turn to Slide 9. First, I want to say that we're pleased with the quarterly sales and earnings growth within our 2 primary industrial segments. Total company sales increased $28 million or 6%, including a negative foreign currency impact. Revenue improved in all business segments this quarter, with the highest rate of growth in the off-highway, data center and commercial HVAC markets.

各位早安。請翻到投影片第 9 頁。首先，我想表示，我們對兩大主要工業事業部門本季的營收與獲利成長感到滿意。公司整體營收增加 2,800 萬美元或 6%，其中包含外幣匯率帶來的負面影響。本季所有事業部門的營收皆有所改善，其中成長率最高的市場為非公路、資料中心與商用 HVAC。

Gross profit of $92 million was up 7%, and our margin was up 20 basis points. The Building HVAC gross margin was higher than the prior year, and CIS showed a significant improvement as well.

毛利為 9,200 萬美元，成長 7%，毛利率提升 20 個基點。Building HVAC 的毛利率高於去年同期，CIS 也同樣呈現顯著改善。

On the VTS side, we had positive impacts from higher sales volume and ongoing purchasing initiatives. However, this was more than offset by higher tariff and tariff-related costs. As Tom described, these costs relate to tariffs on imported materials and large price increases from certain domestic suppliers that are leveraging their current position. We're working hard to recover these cost increases from our VTS customers, but this is proving more difficult than we anticipated.

在 VTS 方面，較高的銷售量與持續的採購措施帶來正面影響。然而，這些效益被更高的關稅及與關稅相關的成本所抵銷，且抵銷幅度更大。如 Tom 所述，這些成本與進口材料的關稅，以及部分國內供應商利用其目前地位而大幅調漲價格有關。我們正努力向 VTS 客戶回收這些成本增加，但這比我們原先預期更為困難。

With regards to CIS and Building HVAC, we are generally able to pass through these cost increases in the normal course of business.

就 CIS 與 Building HVAC 而言，我們通常能在正常營運過程中將這些成本增加轉嫁出去。

In addition to the material costs, we incurred a number of incremental costs related to rapid volume increases, program launches and a facility expansion. To help offset the material challenges, we continue to tightly manage SG&A. At $57 million, SG&A improved 130 basis points as a percentage of sales. The 6% decrease in SG&A includes a $1.1 million recovery of environmental costs.

除了材料成本之外，我們也因快速的出貨量增加、專案啟動以及廠房擴建而產生多項新增成本。為協助抵銷材料方面的挑戰，我們持續嚴格管理 SG&A。SG&A 為 5,700 萬美元，占銷售額比重改善 130 個基點。SG&A 下降 6% 包含 110 萬美元的環境成本回收。

Adjusted operating income was $34.8 million, up 29%, due primarily to the gross margin improvement in CIS and Building HVAC segments. The appendix includes an itemized list of adjustments and a full reconciliation to our U.S. GAAP results. These adjustments totaled $1.2 million and relate to strategy consulting fees, restructuring expenses, impairment charges and environmental charges related to previously owned manufacturing facilities.

調整後營業利益為 3,480 萬美元，年增 29%，主要來自 CIS 與 Building HVAC 事業部門毛利率的改善。附錄包含調整項目的明細清單，以及與我們美國 GAAP 結果的完整調節。這些調整合計 120 萬美元，與策略顧問費用、重整費用、減損費用，以及與先前持有之製造設施相關的環境費用有關。

I also want to point out that we recorded an $8.6 million income tax expense, which is significantly lower than the prior year. Last year, we recorded a significant income tax expense related to U.S. tax reform. In our adjusted taxes and adjusted EPS, we have excluded these impacts. After these adjustments, our effective tax rate was 23% compared to 9% for the same period in the prior year. The low adjusted tax rate in the prior year was due to a Hungary development credit.

我也想指出，我們認列了 860 萬美元的所得稅費用，顯著低於去年。去年我們因美國稅改而認列了大額所得稅費用。在我們的調整後稅額與調整後 EPS 中，我們已排除這些影響。經上述調整後，我們的有效稅率為 23%，相較去年同期為 9%。去年調整後稅率偏低係因匈牙利開發抵減所致。

And last, our adjusted earnings per share was $0.42, which was up $0.07 or 20% from the prior year.

最後，我們的調整後每股盈餘為 0.42 美元，較去年增加 0.07 美元或 20%。

Turning to Slide 10. Our year-to-date operating cash flow of $67 million benefited from a solid third quarter, which was $31 million. After a slow start in Q1, our free cash flow has improved with third quarter free cash flow of $10 million. Year-to-date free cash flow is $9 million, but we are running below the prior year. Please note that this includes about $15 million of cash spent on restructuring and related activities.

接著看第 10 頁投影片。今年截至目前的營運現金流為 6,700 萬美元，受惠於第三季穩健表現（第三季為 3,100 萬美元）。在第一季開局較慢之後，我們的自由現金流已改善，第三季自由現金流為 1,000 萬美元。今年截至目前自由現金流為 900 萬美元，但仍低於去年。請注意，其中包含約 1,500 萬美元用於重整及相關活動的現金支出。

The other large impacts on free cash flow are inventory and capital spending. We are running higher inventory due to program launches and the tariff impact on domestic supply. Year-to-date capital spending is about $4 million higher than last year. Based on the current trends and outlook, we expect our full year free cash flow to remain positive, but we'll finish below the prior year.

對自由現金流的其他重大影響因素為存貨與資本支出。由於專案啟動以及關稅對國內供應的影響，我們的存貨水位較高。今年截至目前的資本支出約較去年高出 400 萬美元。基於目前趨勢與展望，我們預期全年自由現金流仍將維持正值，但將低於去年。

Our leverage ratio was 2.2, which is within our target range of 1.5 to 2.5. And as we announced last quarter, our Board authorized a $50 million share repurchase plan. We have purchased 50,000 shares in December at an average price of $11.37. We'll follow our capital allocation strategy and balance share repurchases with our priorities on investments that support diversification and growth. In addition, we remain committed to delevering our balance sheet and keeping the leverage ratio within our targeted range.

我們的槓桿比率為 2.2，落在我們 1.5 至 2.5 的目標區間內。且如我們上季所宣布，董事會核准 5,000 萬美元的庫藏股回購計畫。我們已於 12 月以平均價格 11.37 美元買回 50,000 股。我們將遵循資本配置策略，在股票回購與支持多元化與成長的投資優先事項之間取得平衡。此外，我們仍致力於降低資產負債表槓桿，並將槓桿比率維持在目標區間內。

Let's turn to Slide 11 with our fiscal 2019 outlook. We adjusted our outlook based on our most recent quarter and the evolving tariff situation. In summary, we tightened our sales and EPS range. In addition, we tightened our adjusted operating income range and reduced the low end by $2 million. With regards to revenue, we are lowering the top end of the range and project sales to be up 3% to 7%. From a VTS perspective, the tariff situation is creating cost challenges within the supply chain that our teams are working through, but it's proving more challenging than we anticipated.

接著看第 11 頁投影片，為我們 2019 會計年度展望。我們根據最近一季表現以及不斷演變的關稅情勢調整了展望。總結而言，我們收窄了銷售與 EPS 的區間。此外，我們也收窄了調整後營業利益區間，並將下緣下調 200 萬美元。就營收而言，我們下調區間上緣，並預估銷售將成長 3% 至 7%。從 VTS 的角度來看，關稅情勢正在供應鏈內造成成本挑戰，我們的團隊正努力因應，但其挑戰程度高於我們原先預期。

We now expect our adjusted operating income to be in the range of $128 million to $134 million compared with our previous range of $130 million to $140 million. Despite the adjustment, we continue to see year-over-year growth of 7% to 12%.

我們目前預期調整後營業利益將介於 1.28 億至 1.34 億美元，先前區間為 1.30 億至 1.40 億美元。儘管有所調整，我們仍預期年對年成長 7% 至 12%。

With regards to other key assumptions, we expect the annual interest expense of approximately $24 million. As usual, we're using current foreign exchange rates. And last, we expect our adjusted tax rate to be approximately 21% to 22% in fiscal '19. Given these factors, we're tightening our adjusted earnings per share range to be between $1.50 and $1.60.

就其他關鍵假設而言，我們預期年度利息費用約 2,400 萬美元。如同以往，我們採用目前的外匯匯率。最後，我們預期 2019 會計年度的調整後稅率約為 21% 至 22%。基於這些因素，我們將調整後每股盈餘區間收窄至 1.50 至 1.60 美元。

And to wrap up, we're happy with the earnings growth this quarter but anticipate some pressure in our fourth quarter, mostly in the VTS segment. Even with some temporary cost challenges, we have an opportunity to deliver another record year of sales and earnings.

最後總結，我們對本季獲利成長感到滿意，但預期第四季將面臨一些壓力，主要在 VTS 事業部門。即使存在一些暫時性的成本挑戰，我們仍有機會再創銷售與獲利的紀錄年。

So with that, Tom, I'll turn it back to you.

那麼，Tom，我把時間交還給你。

Thanks, Mick. Please turn to Slide 12. As we've been discussing over the past several quarters, our strengthened, diversified and growth strategy is driving our focus on areas targeted for improved organic and inorganic growth and on the areas of our business that we plan to deemphasize.

謝謝，Mick。請翻到第 12 頁投影片。如同我們在過去幾個季度所討論的，我們強化後的多元化與成長策略，正驅動我們聚焦於可望提升內生成長與外延成長的目標領域，以及我們計畫降低比重的業務領域。

Soon after completing the Luvata acquisition, we began a strategic analysis of our portfolio of businesses, including our major end-market drivers and the performance of our current product portfolio in those markets. You may have already seen us take some strategic action by selling our South African business and exiting the geothermal product line. What has been clear, however, is that even though some of our highest growth rates are within our automotive engine products, there are significant and persistent competitive forces in the industry that we believe will limit our long-term return on capital, given the high capital intensity and ever-increasing competitive pressures in this business.

在完成 Luvata 收購後不久，我們便開始對業務組合進行策略分析，包括主要終端市場驅動因素，以及我們現有產品組合在這些市場中的表現。各位可能已看到我們採取一些策略行動，例如出售南非業務並退出地熱產品線。然而，清楚的是，儘管我們最高的成長率之一來自汽車引擎產品，但該產業存在顯著且持續的競爭力量；考量此業務資本密集度高且競爭壓力持續加劇，我們認為這將限制我們的長期資本報酬率。

Last quarter, we specifically mentioned that we had identified approximately $200 million of sales to automotive markets that were undergoing a strategic review. As we further evaluated this business, we widened the scope of the review to include our entire automotive business, which accounts for approximately 25% of our total company revenues. As discussed in a separate press release we distributed earlier this week, we are now exploring strategic alternatives to find the most successful path for this whole business in order to best serve our customers and provide the greatest return for our shareholders.

上季我們特別提到，我們已辨識出約 2 億美元、面向汽車市場且正在進行策略檢視的銷售額。隨著我們進一步評估該業務，我們將檢視範圍擴大至整體汽車業務；該業務約占公司總營收的 25%。如同我們本週稍早在另一份新聞稿中所述，我們目前正在探索策略替代方案，為整體汽車業務尋找最成功的發展路徑，以便更好地服務客戶並為股東帶來最大回報。

Let me be clear: we have great products, technology, customer relationships and a very talented team that service this market. Further, we have been producing products for the automotive customers for nearly 100 years. This is an incredible legacy, but at this point, we need to determine what it will take to expand our portfolio with the necessary adjacencies to be a global full-system supplier in the automotive market. This investment would be significant and needs to be carefully evaluated, along with other strategic alternatives under consideration. We believe that Modine and our shareholders could be better served by more appropriately allocating our capital in higher-return opportunities that will drive profitable growth and further business diversification.

我想說清楚：我們擁有優秀的產品、技術、客戶關係，以及服務此市場的非常有才華的團隊。此外，我們為汽車客戶生產產品已將近 100 年。這是一項令人驚嘆的傳承，但在此時此刻，我們需要判斷要如何擴展我們的產品組合，並補足必要的相鄰能力，以成為汽車市場的全球全系統供應商。這項投資將相當可觀，且需要與其他正在考量的策略替代方案一併審慎評估。我們相信，若能將資本更適切地配置於報酬更高、可推動獲利成長並進一步提升業務多元化的機會，將能更好地服務 Modine 及其股東。

I want to be very clear that we remain fully committed to the commercial vehicle and off-highway markets in VTS, which share many characteristics with the rest of our industrial portfolio. We have full -- we have and will continue to make the necessary investments in people and capital to ensure this global business is successful.

我想非常清楚地表示，我們仍然完全致力於 VTS 的商用車輛與非公路市場，這些市場與我們其餘的工業產品組合有許多共同特性。我們完全——我們已經並將持續在人才與資本上進行必要投資，以確保這項全球業務取得成功。

In addition, we aim to grow our global market-leading positions in the rest of our industrial market segments, both organically and inorganically, building on the momentum and success of the CIS and Building HVAC segments. We will complete this assessment of strategic alternatives over the next several months, and we'll provide more information once complete. I understand there may be questions about the potential outcomes of this process and about the future financial impact to Modine. However, at the current time, we can only comment on the status of our assessment, and we'll provide more information when there is something more definitive to share.

此外，我們的目標是在其餘工業市場細分領域中，持續擴大我們在全球的市場領先地位，無論是透過有機成長或併購等非有機方式，並在 CIS 與 Building HVAC 事業部的動能與成功基礎上再接再厲。我們將在未來幾個月內完成對策略替代方案的評估，完成後會提供更多資訊。我理解大家可能會對此流程的潛在結果，以及對 Modine 未來財務影響有所疑問。然而，就目前而言，我們只能就評估進度發表評論；一旦有更明確可分享的內容，我們會再提供更多資訊。

And with that, we'd like to take your questions.

那麼，接下來我們想回答各位的提問。

(Operator Instructions) Our first question comes from David Leiker with Baird.

（接線員指示）我們的第一個問題來自 Baird 的 David Leiker。

This is Joe Vruwink for David. I wanted to start on the topic of tariffs. Could you maybe just walk through what got worse relative to your thinking a quarter ago? I'm wondering, is it the inflationary pressures from your suppliers that worsened? Or did some of the Modine mitigation actions maybe just take a little bit longer to go into effect, and so there's maybe a benefit still to come on the horizon?

我是代替 David 的 Joe Vruwink。我想先從關稅這個主題開始。你們能否說明一下，相較於一季前你們的想法，哪些情況變得更糟？我想知道，是供應商端的通膨壓力加劇了嗎？還是 Modine 的一些緩解措施可能只是需要更長時間才會生效，因此未來仍可能有一些效益即將顯現？

Let me give you a couple of points, then I'll let Mick chime in. The indirect impact of tariffs has been much greater than we anticipated, okay? As I highlighted in my comments, that the domestic suppliers have been very aggressive in using the opportunity for rising cost and higher demand to leverage their capacity against us. That's been very significant and forcing us to then -- and one example, as I mentioned, I mentioned it's up over 20% in one case. And that's pretty much -- it varies across the board, but just about everybody that is impacted by this [supply growth] is taking advantage of that. One supplier has actually said, "Hey, look, I'm going to send my capacity someplace else other than heat exchanger raw material."

我先給你幾點說明，然後再請 Mick 補充。關稅的間接影響遠比我們預期的大，好嗎？正如我在評論中強調的，國內供應商非常積極地利用成本上升與需求增加的機會，藉此以其產能對我們施壓。這影響非常顯著，迫使我們——舉個例子，如我提到的，其中一個案例漲幅超過 20%。而這基本上——雖然各家情況不一，但幾乎所有受這個［供應成長］影響的供應商都在趁勢而為。有一家供應商甚至說：「嘿，你看，我要把我的產能轉去別的地方，而不是用在熱交換器原材料上。」

So that has then had a knock-on effect of having to bring on new suppliers that are from outside the country, quite frankly, that has then a tariff impact potentially, still better than what -- the price gouging that we were going through, and then having to go through the cost of running that material and testing it and getting it approved through the system. That is a full-court press, okay? So you're flying in materials, you're spending overtime, you're [bidding] parts, you're getting tests done, working with customers to keep our customers in product. So that's been very -- something that we didn't quite anticipate last quarter.

因此這又產生了連鎖效應：坦白說，我們不得不導入來自國外的新供應商，這可能仍會帶來關稅影響，但仍然比我們先前遭遇的——那種被哄抬價格的情況要好；同時還得承擔導入該材料的試跑成本、測試成本，以及在系統中完成認證核准的成本。這是一場全力以赴的攻堅，好嗎？你得空運材料、支付加班費、［競標］零件、完成測試，並與客戶合作以確保我們能持續供貨給客戶。所以這一點非常——是我們上季並未完全預期到的。

The rest of the kind of planned tariffs, okay, is going along as planned. And clearly, as Mick mentioned, negotiation with our customers, which, again, with the contract terms we have, have to be kind of walked back in and discussed, okay? And they have the ability to kind of say, do they support a negotiation or not? That has been a little more difficult as well. And -- but I will say that overall, we -- from a procurement standpoint, the contracts we had, we've got those, for the first round of the tariffs, besides negotiations, had things long-handed, this indirect impact has been worse. Mick, do you want to add anything to that?

其餘原本規劃中的關稅，好嗎？基本上都按計畫進行。而且很明顯，如 Mick 提到的，與客戶的協商——再說一次，依我們的合約條款，必須把一些內容重新帶回來討論，好嗎？而客戶也有能力決定是否支持協商。這部分也變得稍微更困難一些。並且——但我會說，整體而言，從採購角度來看，我們原先的合約都在；第一輪關稅除了協商之外，我們原本都已經處理得很周全，這個間接影響反而更糟。Mick，你要補充什麼嗎？

Two other things to add with regards to the sharing that we've talked about. We assumed there would be a sharing, and that's proving out to be the case, so that -- no surprise there. But I mean Tom was on the road in January personally, and what's taking a long time is to get the agreements in writing. So we actually had one customer that we're able to get everything buttoned up for Q3, and we've got a lot of progress with other customers. Those contracts or legal agreements do have to be buttoned up. Obviously, they want to protect themselves if these go away.

關於我們談到的分攤（sharing），我再補充兩點。我們原先假設會有分攤，而目前證明確實如此，所以——這點並不意外。但我的意思是，Tom 在一月親自出差拜訪客戶，而真正耗時的是把協議落實成書面文件。所以我們其實有一位客戶已經把第三季（Q3）的所有事項都敲定了，其他客戶也有很大進展。那些合約或法律協議確實需要把細節全部敲定。顯然，如果這些關稅之後取消，他們也想保護自己。

The second point would be the exclusions. The government shutdown didn't help us at all. We had comment periods expiring. And so we believe strongly, we have valid exclusions from certain tariffs, and that was taking a longer progress -- or process than we expected, Joe.

第二點是豁免（exclusions）。政府停擺對我們完全沒有幫助。我們有一些意見徵詢期到期。因此我們強烈相信，我們對某些關稅具備有效的豁免資格，但其進展——或流程——比我們預期更久，Joe。

So that's helpful. So a quarter ago, you kind of tweaked the fiscal year guidance by $5 million. This quarter, you're tweaking it by $6 million, so let's call it an $11 million EBIT adjustment the last 2 quarters. And over that period of time, I would imagine that the contribution from the industrial business has been a lot better than you would have originally assumed as well. So are we talking about something that's maybe $15 million, plus or minus, adversely impacting you relative to 6 months ago? And then how much of that, if I'm right, $15 million, give or take, can maybe be mitigated into fiscal 2020?

了解，這很有幫助。所以一季前，你們把本財年的指引調整了 500 萬美元；這一季又調整了 600 萬美元，所以過去兩季合計大約是 1,100 萬美元的 EBIT 調整。而在這段期間，我想工業業務的貢獻應該也比你們原先假設的好很多。所以我們是在談，相較於 6 個月前，可能有大約 1,500 萬美元上下的不利影響嗎？如果我這個 1,500 萬美元左右的估算大致正確，其中有多少可能可以延後到 2020 財年再加以緩解？

Yes. I'll take a stab at it first, Joe. It's Mick. So I'm not going to comment specifically on your math. It's probably just -- I can help you with the direction. From -- the magnitude that you're laying out is much -- is higher than we have seen. But from a material standpoint, we talked about, in fiscal '19, about a $6 million to $7 million challenge, cost increase this fiscal year. And on top of it, at the time, we were talking about potential risks of domestic suppliers.

是的，Joe，我先試著回答。這是 Mick。我不會針對你的數學計算做具體評論。大概——我可以協助你掌握方向。就你提出的幅度而言，確實——比我們所看到的要更高。但就實質面來說，我們談到在 2019 財年，本財年大約有 600 萬到 700 萬美元的挑戰，也就是成本增加。此外，當時我們也談到國內供應商可能帶來的風險。

If you roll in the indirect or the domestic price increases, a lot of those came, Joe, late in the calendar year in a lot of frantic moving over the holidays, frankly, with price increases coming January 1, another $4 million to $6 million. So somewhere between $10 million and $13 million, $14 million, just price increases. And then it gets to the sharing that I've talked about. The $4 million to $6 million that has come in from domestic suppliers, there is no sharing there. That's a renegotiation or resourcing that Tom walked you through, and we'll find a way through that. I'll let Tom comment. But we will -- we are vetting, evaluating and resourcing where appropriate on those, and we are getting sharing agreements even though it's slower. So I think probably $10 million to $13 million in total tariff-related headwinds. And absolutely, we should be able to make progress on closing that gap as we head into fiscal '20.

如果把間接影響或國內價格上漲也算進來，Joe，其中很多是在曆年年底才發生的；坦白說，假期期間我們非常緊迫地在移轉，因為價格上漲在 1 月 1 日生效，另外還有 400 萬到 600 萬美元。因此大約在 1,000 萬到 1,300 萬、1,400 萬美元之間，單就價格上漲而言。接著就回到我談到的分攤。來自國內供應商的那 400 萬到 600 萬美元，並沒有分攤可言。那是重新談判或重新尋源，Tom 已經向你說明過，我們會找到方法度過。我讓 Tom 補充。不過我們將——在適當之處進行審核、評估並重新尋源，而且即使進度較慢，我們也正在取得分攤協議。所以我認為關稅相關的逆風總計大概是 1,000 萬到 1,300 萬美元。而且絕對地，隨著我們邁入 2020 財年，我們應該能在縮小這個缺口方面取得進展。

The other challenge in there, if you think, in the last 6 months, Tom talked about some of the program launches and inefficiencies. We are seeing improvements, but honestly, they've been, frankly, a little bit slower than we anticipated. And again, when we look to fiscal '20, we -- these are things, both on the material and the launch costs, that we should be able to work through. Tom?

另外一個挑戰是，如果你回想過去 6 個月，Tom 談到了一些專案啟動以及效率不彰的情況。我們確實看到改善，但坦白說，改善速度確實比我們預期的要慢一些。再者，當我們展望 2020 財年時，我們——無論是材料面還是啟動成本面——這些都是我們應該能夠逐步解決的事項。Tom？

No, I think you hit that squarely. I'll just add, on the performance, as far as launch performance and inefficiencies, we are improving. I'm not satisfied with the rate of improvement. I noted we've made some leadership changes as a result, and I expect that to significantly improve at a higher rate. So that's the other portion that we're getting through.

不，我認為你說得很到位。我再補充一下，就績效而言，特別是啟動績效與效率不彰方面，我們正在改善。但我對改善的速度並不滿意。我提到過，我們因此做了一些領導層調整，我預期這將使改善以更高的速度顯著提升。所以這也是我們正在克服的另一部分。

But Joe, they're great questions. We -- from a quarter, this thing got much more complicated quickly with the indirect impact. We are managing the direct impact, as we talked about before, in a very structured way. But this -- kind of the dam broke loose a little bit here with the challenges with our domestic suppliers. Very unfortunate and, quite frankly, not acceptable on how -- we've had long-term relationships with a lot of these suppliers that we're talking about. And to see them react this way has been very disturbing, but we are managing through that, focused on making sure, number one, we keep our customers in supply, which we're confident we will; and then making sure that we get the best deals possible. But it's been a full-court press from nearly every function in the VTS world.

不過 Joe，你的問題都很棒。我們——從單一季度來看，因為間接影響，情況很快就變得更複雜。我們正在以非常有架構的方式管理直接影響，正如我們先前談到的。但在這裡——由於我們國內供應商的挑戰——情況有點像堤壩突然潰決。這非常不幸，而且坦白說，這樣的反應是不可接受的——我們與許多正在談的供應商都有長期合作關係。看到他們以這種方式反應令人非常不安，但我們正在設法應對，重點是確保第一，我們能持續供應客戶，我們有信心可以做到；第二，確保我們能爭取到最好的條件。但這幾乎動員了 VTS 世界裡各個職能部門，全力以赴。

Okay. So focusing on the good news now. CIS profitability was pretty remarkable this quarter. And I seem to remember that seasonally, the December quarter should actually be the weakest of the quarters for CIS, so even more remarkable in that regard. Maybe walk through some of the things that surprised you on the upside. And then in thinking about upcoming quarters, does this become a new high watermark where you kind of build from here? Or are there certain things to contemplate where maybe there's a bit of moderation in upcoming quarters?

好的。那現在把焦點放在好消息上。CIS 本季的獲利能力相當驚人。而且我記得從季節性來看，12 月季度其實應該是 CIS 各季度中最弱的一季，所以在這方面更顯得難能可貴。也許請你談談有哪些超出預期的正面因素。再來，展望接下來幾季，這是否成為一個新的高水位，讓你們從這裡往上建立？還是有一些需要考量的因素，可能使未來幾季出現些許降溫？

Well, as mentioned in my comments, Joe, we were benefiting from several factors in CIS. First off, we were a focused leadership team on building levers in their strategy that are important to improve operating performance, manage opportunities with the restructuring that we did in Europe last year that we invested in with the plant in Austria to give them a better performance there. And clearly, the data center market has been -- the surge in orders there has been very positive for us, both in the market and in gaining share, okay, that we feel across different -- throughout the different channels in the data center market.

嗯，正如我在評論中提到的，Joe，我們在 CIS 受惠於幾個因素。首先，我們有一個專注的領導團隊，在其策略中建立了幾個重要的槓桿，以改善營運表現；同時也把握我們去年在歐洲進行重組所帶來的機會，並且透過在奧地利的工廠投資，讓那邊的表現更好。當然，資料中心市場——那裡的訂單激增——對我們非常正面，不論是市場本身的成長，或是我們在不同——在資料中心市場各個通路中——所感受到的市占提升。

So I can only say that I'm very pleased. The cash flow predictability in this segment is great. The ability to not be in hammerlock because of tariffs because of our ability to price and pass through is very refreshing. So overall, I'm just very pleased. Mick, you want to quantify anything more to that?

所以我只能說我非常滿意。這個事業部的現金流可預測性很棒。由於我們具備定價與轉嫁的能力，不會因關稅而被卡死，這讓人耳目一新。總體而言，我真的很滿意。Mick，你要不要再量化補充一下？

Yes, Joe. I think as much as we love it, I think this business will regress to what we talked about when we bought it. I think we should all be thinking about this as a low single-digit top line grower, and the margins are just going to plateau here and stabilize. We've got a lot of benefit from everything from the synergies fully coming through, operational improvements, mix. But I think we -- this is going to start to level off, which is fine because it's also a very nice cash generator. And we want to build off of it, both organically and inorganically. But booyah, there -- this is a -- several good things have gone our way, favorable from a market standpoint. And I think we still think of this business, long term, as a low single-digit top line and a nice margin, cash flow generator going forward. And then we can supplement that growth through other strategic and acquisition kind of measures.

好的，Joe。我想儘管我們很喜歡這樣的表現，但我認為這個業務會回歸到我們收購時所談到的樣貌。我認為大家應該把它視為營收端低個位數成長的業務，而毛利率/利潤率將在此處趨於平台並穩定下來。我們從各方面獲得了很多好處，包括協同效益完全釋放、營運改善、產品組合等。但我認為我們——這些效益會開始趨於平緩，這也沒問題，因為它同時也是非常好的現金產生器。我們希望在此基礎上持續建設，無論是有機或無機成長。不過，確實——有幾件好事同時發生了，從市場角度來看也相當有利。我們長期仍把這個業務視為營收端低個位數成長、具備不錯利潤率與現金流的現金產生器。然後我們可以透過其他策略與併購等措施來補充成長。

And then my last question, and I'll turn it over. The growth in Building HVAC was also very remarkable this quarter. Do you have a sense -- this would, I guess, apply only to your U.K. business, but a sense of stocking ahead of some uncertainties in Q1, thinking about Brexit primarily? But anything that would indicate that not only was end demand strong but stocking as well, so there's some moderation due into coming quarters?

然後我最後一個問題，問完我就交回去。本季 Building HVAC 的成長也非常亮眼。你是否有感覺——我想這可能主要適用於你們英國業務——在第一季面臨一些不確定性之前有提前備貨的情況，主要是考量脫歐？或者有任何跡象顯示，不僅終端需求強勁，備貨也同樣強勁，因此未來幾季可能會出現一些降溫？

Yes. Well, as far as orders, we're right now in very good shape as far as the order book. I mentioned the real focus on data center business there with the expansion of data center -- colo centers in Ireland, England, the Netherlands and Germany, which we're receiving nice orders and really gaining share. So the order book looks fine -- not fine, it looks great. So I'm really pleased with that. And the performance -- operating performance of our U.K. business, as you recall from a couple of years ago, has really improved as well with focused leadership and really driving improvement.

有的。就訂單而言，我們目前的訂單簿狀況非常好。我提到我們非常聚焦於資料中心業務，隨著資料中心——共置（colo）中心——在愛爾蘭、英格蘭、荷蘭與德國擴張，我們收到不錯的訂單並且確實在提升市占。所以訂單簿看起來很好——不只是好，是非常好。我對此非常滿意。另外，英國業務的表現——營運表現——如你回想幾年前，也在專注的領導與持續推動改善下大幅提升。

As far as the -- what was the second part? Oh, Brexit. As far as Brexit is concerned, it's -- clearly, we're preparing. We have about 40% of our parts that we supply, that we get, comes from the mainland in Europe. So we -- what we're doing to counter that a little bit is we've built some inventory, banked up on those parts just to have some flexibility there, okay, depending on what happens here. But we're staying really close, but that's really the one countermeasure we put in place right now as well as staying close to what the latest developments are. But very good question.

至於——第二部分是什麼？喔，脫歐。就脫歐而言——很明顯，我們正在做準備。我們供應所需的零組件中，大約有 40% 來自歐洲大陸。所以我們——為了稍微因應這點，我們建立了一些庫存，把那些零件先備起來，以便視接下來的情況保有一些彈性，好嗎？但我們會保持非常密切的關注，而目前我們採取的主要對策就是這個，以及持續緊盯最新進展。不過這是個很好的問題。

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

（接線生指示）我這邊顯示目前沒有其他提問。我現在想把電話會議交回給 Kathy Powers。

Thank you for joining us this morning. A replay of this call will be available through our website in about 2 hours. We hope you have a great day. Goodbye.

感謝各位今天早上加入我們。本次電話會議的重播將在約 2 小時後於我們的網站提供。祝各位有美好的一天。再見。

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

今天的電話會議到此結束。您現在可以掛線。