Modine Manufacturing Co (MOD) 2021 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Modine Manufacturing Company's Fourth Quarter Fiscal 2021 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the call over to your host, Ms. Kathy Powers, Vice President, Treasury, Investor Relations and Tax. Please go ahead.

Good morning and thank you for joining our conference call to discuss Modine's fourth quarter and full year fiscal 2021 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 in the Investor Relations section of our website, modine.com.

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.

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

Thank you, Kathy, and good morning, everyone. Before discussing the quarter and full year results, I would like to reflect on some of our accomplishments this past year and give a quick update on some of our other strategic initiatives. This has been a challenging year for Modine to say least, but I'm very proud of the resilience of this organization and the ability of this team to deliver on commitments under less-than-ideal circumstances.

We started the year responding to the initial impacts of the pandemic, temporarily shutting down plants, sending employees home to shelter-in-place and taking actions to conserve cash. We implemented protocols to keep our employees safe and healthy, and our infection rate, thankfully, stayed very low. At the same time, we were focusing on how to keep our automotive strategy moving forward. We found a way and we're able to reach agreements with 2 separate buyers.

Last October, we announced the sale of our liquid-cooled Automotive business to Dana. And then in February, we announced that we had reached an agreement for the sale of our Austrian air-cooled automotive plant. We have previously stated that we expected both transactions to close in the first half of this year. I'm pleased to announce that we closed on the sale of the Austrian facility at the end of April, completing that transaction. The sale of that facility drives significant value, allowing us to avoid operating losses, capital expenditures, and future restructuring expenses.

The regulatory process for the pending sale of the liquid-cooled Automotive business is taking longer than we originally expected. We are currently working jointly with the buyer through this process. As a result, we aren't able to provide any guarantees regarding the timing or outcome.

Over the past few months, I've been able to visit most of our North American plants and facilities. I must say that I was impressed by the strength of our operational and technical know-how. We are experienced operators who drive on challenges presented by our customers and are ready and willing to overcome the obstacles inherent in being a global company, but I also see a great deal of opportunity for change. First and foremost, we need to reduce complexity. To accomplish this, we will adjust our organizational structure to align around market verticals.

The goal is to improve our key account and channel management, accelerate decision-making and unleash the entrepreneurial spirit. By giving the right people and the right roles and improving our commercial acumen, we'll be able to quickly deliver the systems, products and solutions valued by our customers. That is the vision for the future. While we are still in the early stages of this transformation, we have gathered the data and are working through this segmentation process, which means getting a better understanding of our revenue and profitability by product and by customer.

The early result of this process is very encouraging. As we reduce complexity, we will focus our resources on our key priorities where we have the greatest opportunity to unlock value. One of our priorities in Building HVAC segment is to expand our presence in the data center markets and our plan to approach this market is underway. Using 80/20, we are analyzing the data and building a plan from both a commercial and operational perspective.

As a reminder, we are combining the 2 separate data center teams that previously existed in the CIS and Building HVAC segments under the leadership of our Building HVAC business unit. On the commercial side, we are using this organization to leverage the recent success with global colocation customers in the U.K. to build our North America business. We are evolving our organizational structure and key account management process to make sure that we are pursuing growth with our best opportunities.

On the operations side, we continue to work on the production expansion of chillers in the U.S. and computer room air handlers in Spain, increasing our global capacity for these products as required to support our growth strategy.

As we expand and consolidate our manufacturing operations for data center products, we will shift reporting lines and segment foundries accordingly. For example, we will shift our plant in Spain from the CIS segment to the Building HVAC segment in our second fiscal quarter beginning July 1. We are also reviewing and analyzing the results for our CIS and HDE segments. In HDE, we continue to believe that our greatest opportunity for higher returns are cooling systems for electric vehicles. We already have advanced technology for buses and specialty vehicles and are pursuing and winning business for delivery van cooling modules.

In CIS, we continue to work on growing share by providing our customers with alternative refrigerants for coils, including CO2 gas coolers. This is a particularly attractive solution for food retailers who are looking for more environmentally friendly refrigerants that are nontoxic and nonflammable.

In addition to investing in these rapidly growing segments of our markets, we will continue to simultaneously work on simplifying and improving the profitability of our core CIS and HDE businesses. We have a great deal of work ahead of us, but I'm encouraged by what I see.

Now let's cover our fourth quarter segment results on Page 4. The Building HVAC segment had another strong quarter, with sales up 22% from the prior year and adjusted EBITDA of 23%. This was driven by a significant increase in data center product sales in the U.K. and higher heating product sales in North America. Both of these markets are areas of focus for us and we expect strong growth trends to continue.

Our data center business in the U.K. has been strong, with sales up 50% in the fourth quarter and up nearly 40% for the year. We expect similar levels of growth in fiscal '22 as we continue to win market share and grow faster than the market.

Our heating markets were strong this year and we were able to capture that growth. We're also able to grow market share due to product availability and lead times. We expect these markets to remain strong with potential sales growth of about 10% in fiscal '22. In addition, the market demand in the U.S. and Canada for ventilation products is very high as we are beginning to see U.S. federal stimulus money making its way through the system, funding projects that improve indoor air quality, especially in schools. This creates a great opportunity for us. Our products directly target these markets and address the growing need for improved air quality in school buildings.

Please turn to Page 5. CIS sales were down 3% from the prior year even though there was a favorable currency impact. This was primarily due to lower data center sales, consistent with prior quarters. This quarter's data center sales were down $19 million compared to the prior year. Adjusted EBITDA was down $3.4 million. Similar to revenue, nearly all of the earnings decline was due to the lower data center sales in this segment.

As we have mentioned in the past, our data center sales in CIS consist of both coil sold to OEMs that serve the data center markets and cooler sales to a large hyperscaler customer. We expect these cooler sales to have a stable run rate in fiscal '22 at a similar level to fiscal '21. However, as I mentioned previously, we expect overall data center sales to increase significantly in fiscal '22, largely due to the growth in chillers and air handlers.

We are using 80/20 to help reassess our strategy in this area, particularly in light of the high level volatility we have recently experienced. The data will help us make decisions to better focus our commercial and operational resources where we can achieve the greatest return. We have great opportunities to enhance and improve the way we do business in the CIS segment. And I have confidence that we can not only return to growth in fiscal 22, but also improve our margins. This will be in part driven by a continued recovery in the global HVAC and refrigeration markets, where we are seeing some pent-up post-COVID demand and low levels of field inventory.

We will continue to deliver while dealing with shortages for both labor and materials, commodity cost inflation and logistics constraints. We are planning to recover the material cost increases through price pass-throughs and surcharges for aluminum, steel and lumber.

Please turn to Page 6. Sales in the HDE segment were up 17% from the prior year, with higher sales to off-highway and truck customers as markets continue to stabilize. Adjusted EBITDA was up 16% despite the negative impact of higher material costs and tariffs on imported materials. We are expecting this trend to continue into fiscal '22 with double-digit market improvements in North America and Europe. We continue to operate amid the unfortunate COVID crisis in India and are prioritizing shipments to customers where necessary. As always, the health and safety of our workforce remains a top priority.

From a supply chain standpoint, we are dealing with issues on multiple fronts. We are managing procurement and logistic challenges for castings, resins and metals, while working to minimize the impact to our customers and manage cost increases. Not only do we have increases related to material costs but also logistics and freight. Overall, we expect solid sales growth and conversion this year despite these challenges.

Please turn to Page 7 and I'll shift to the Automotive segment. Sales were up 7%, but down 1% on a constant currency basis, driven by a lower market demand in North America, partially offset by higher sales in Asia. Adjusted EBITDA for the segment was $5.9 million, up 11% from the prior year, also due to positive currency impacts. We expect lower sales in our Automotive segment compared to the prior year, primarily due to the sale of the Austrian air-cooled Automotive business. Excluding that impact, we expect market recovery in the European region, partially offset by lower sales in North America and Asia.

With that, I'll turn it over to Mick to review the total company financial results.

Thank you, Neil, and good morning, everyone. Please turn to Slide 8. I'm happy to report that we maintained positive momentum throughout fiscal '21 and posted solid fourth quarter results despite various commodity and supply chain challenges.

Our fourth quarter sales benefited from favorable foreign exchange rates, with sales up nearly 5% on a constant currency basis. As Neil reviewed, main revenue drivers were the HDE and Building HVAC segments. Gross profit was better than the prior year by $9 million with a margin improvement of 50 basis points.

The current quarter benefited from reduced depreciation due to the classification of our liquids and air-cooled automotive businesses as held-for-sale. Material costs were significantly higher due to commodity metals, tariffs and logistics. Despite our price adjustment mechanisms, we absorbed approximately $8 million of higher material costs.

SG&A increased by $4 million, but was 20 basis points lower as a percentage of sales. As usual, our appendix includes an itemized list of adjustments and a full reconciliation to our U.S. GAAP results. These adjustments totaled $42.1 million. There were 3 main areas of adjustments this quarter. First, we recorded $32.4 million of asset impairment charges primarily related to the completed sale of our air-cooled Automotive business. Next, we had $6.4 million of restructuring expenses from targeted headcount reductions and plant consolidations with the largest portion related to our automotive businesses. Finally, we incurred $2.5 million of costs directly associated with the Automotive separation and $800,000 of CEO transition costs.

The resulting adjusted EBITDA was lower than the prior year by $2 million, driven mostly by the lower volume and mix in CIS along with higher material costs in the vehicular businesses. Adjusted earnings per share of $0.51 was $0.27 higher than the prior year. I want to point out that there was a tax benefit in the quarter. This resulted from a pension accounting adjustment combined with our U.S. valuation allowance.

Turning to Slide 9. As anticipated, our free cash flow in fiscal '21 reached a historical high of $117 million. This was due to a number of items, including low capital spending, effective working capital management, operating cost reductions, reduced Automotive exit spending and certain government programs.

In addition, our fourth quarter was stronger than expected due to the timing of certain cash payments. Throughout the year, we used excess cash to lower our debt, which resulted in a leverage ratio of 1.9. Maintaining a strong balance sheet and cash flow will be key to supporting our future strategic initiatives.

Now let's turn to Slide 10 for our fiscal 2022 outlook. As we look to the new fiscal year, we are encouraged by positive trends and general recoveries across most of our end markets. We anticipate 15% to 25% revenue growth across our 3 focus segments: HDE, CIS and Building HVAC, partially offsetting our strong revenue growth are cost increases in a few key areas.

First, like most companies, we will incur higher wage and benefit costs after significant reductions during the global pandemic. To put this in perspective, total fiscal '21 savings from COVID recovery measures was approximately $21 million. In addition, we are dealing with significant cost increases across the supply chain. These include higher raw materials, packaging and freight. We expect minimal tariff impacts, but key metals are up 30% to 50% over the prior year. While our pass-through agreements and pricing mechanisms will recover much of these increases, we will be impacted by the normal contractual lag on pass-throughs.

We anticipate that the net metals cost increase could exceed $20 million this fiscal year. I would also like to point out that our guidance includes a full year of our Automotive segment, including the pending divestiture of our liquid-cooled business to Dana. We've included the assumption of lower Automotive earnings, including the recently completed sale of our Austrian business. Upon completion of the larger liquid-cooled automotive sale, we will obviously need to adjust the guidance accordingly.

With regards to other key assumptions, we expect the annual interest expense in the range of $14 million to $15 million, with the adjusted tax rate to be in the mid-20s. Based on all these factors, we anticipate sales growth of 12% to 18%. This translates to adjusted EBITDA of $170 million to $185 million. As we look at the quarterly run rate and sequential earnings, I want to point out that we anticipate that our first quarter will be at a low point. Material costs will be the highest in Q1 as we begin to adjust prices and pass-through cost increases. Therefore, Q1 earnings and margins will be below the most recent run rate in Q4. However, we expect Q1 earnings will be significantly higher from the prior year.

After Q1, we anticipate steady sequential improvement through the balance of the year. Overall, we are excited about the new year. We foresee positive market trends, new product development and benefits from deploying 80/20. We expect all of these factors to favorably impact our underlying financial results, both in terms of growth and profitability improvement.

With that, I'd like to turn the call back to Neil for his concluding comments.

Thanks, Mick. In conclusion, we have performed well under difficult conditions. Looking forward, we have the benefit of improving markets but also have the challenges associated with this current global economy namely: material, labor shortages, logistic issues and cost inflation. We are working through those issues while addressing our bigger strategic priorities. We have the tools in place to make those strategic decisions and to continue to transform Modine.

What's truly exciting is that our technology enables our customers to meet their goals, especially around clean air and sustainability. Our products improve indoor air quality, heat and cool with greater energy efficiency and reduce toxic emissions. Our products make this world a better place and that's why I'm proud to work at Modine.

With that, we will take your questions.

(Operator Instructions) Our first question comes from Michael Shlisky with Colliers Securities.

Can you maybe comment first on a couple of growth end markets that you mentioned during your prepared comments? Maybe can you talk first on electric vehicles? Can you give us some color as to the approximate number of how many platforms you're on today?

And can you tell us whether you're involved in some of the hydrogen fuel cell platform, which also have batteries in them? Are you involved in any of those? Those seem to be really strong candidates for long-haul trucking as well as a lot of foreign markets outside the U.S. like to have a testing hydrogen recently. Any comments there would be appreciated.

Sure, Michael. This is Neil. In terms of some of the programs and platforms around, we continue to gain traction in that arena. There's probably over 2 dozen different programs that we're working through that are in various phases from inquiry to development. And they range from medium to heavy-duty trucks. So there's obviously demand there. We see more inquiries that are coming in and we have the organization in place to support that.

Relative to fuel cell and hydrogen-based powertrains, as you know, those require significant thermal management systems. There's a global consensus that feels that there's a growing need for this for the heavy-duty long-haul commercial vehicles. And Modine is engaged currently with major North America and European OEMs in this early phase of fuel cell work.

Got it. Can we then turn into some of your data center business? Can you give us a little bit more color as to maybe some of the end markets driving that business? I know you've got the one big customer, we don't have to discuss that one. But more broadly speaking, I mean, there's been a lot of interest recently in crypto, which obviously can run very hot. And obviously, there's been some growth in e-commerce as well, which is -- has some capacity issues. Have you seen any growth outside of your main customer, whichever company that is, has there any growth outside of that big customer in some of these growth in your data center sectors?

Yes. We're seeing -- it's a good question. We're seeing strong growth in the colocation market, certainly. And if buying behaviors change and you start to see this with some of the larger hyperscalers looking at different ways to go to market, we see that in colocations and that's driving a lot of our growth. So not only is it driving growth for the current product, but it is really starting to fill our funnel in terms of new product development and how we can continue to satisfy the growth in that arena.

Got it. Maybe I'll just ask one quick one on HDE. It sounds like, just like we saw last time with the tariffs a couple of years back, you've got it under control as far as your pricing and the mechanisms in your contracts, there is a lag but it does end up working out okay in the end. I am curious, do you have to feel that the OEMs feel good about their entire supply chain being as solid as Modine's right now? I'm just kind of curious, if certain areas of the supply chain just can't deliver and you can, they still not ask for a shipment from you even if right now you're currently ready to ship. If they can't get a steering wheel or other parts, they're just not going to be able to actually build the truck. Have you gotten any feedback from the OEMs about any pushback in any build rates, thanks to other companies not being ready, even if Modine is?

Yes, that's a fair question. I think we're all keeping a very close eye on semiconductor. I think that's driving a lot of the plant shortages globally. A lot of the auto customers and heavy-duty truck customers are very public in terms of plants that they're having to shutter based on shortages with semiconductor. We haven't felt many issues relative to our scheduling and our inventory, but we're just-in-time, that potentially could happen. It's a fair question. But at the moment, we've been able to time our inventory position, time our roll with are finished as well as with the schedules of our customers and it hasn't been a significant impact for us.

Your next question comes from Matt Summerville with D.A. Davidson.

A couple of questions. First, with respect to the air cool divestiture that just got completed a few weeks back. How much revenue and adjusted EBITDA goes away with that divestiture? And then what sort of EBITDA assumption are you guys using in the $170 million to $185 million for the Auto segment this year?

Yes. It's Mick talking. So the air cool businesses, we had described it in the past, was -- it was in the $40 million to $50 million range revenue-wise, slightly negative from an EBITDA perspective, mostly immaterial to the total company. So revenues down -- will be down a little bit, lost revenue from that, Matt. The earnings, slightly better but right around breakeven to slightly negative on that business.

From an Automotive standpoint, we're assuming they're similar in that liquid-cooled business. We had talked about it historically being in a $25 million run rate range and that's a good go-forward number for that business as well.

Got it. And then with respect to CIS and the data center business there, I want to make sure I'm clear on Slide 5. So I was anticipating stable run rate in fiscal '22, similar levels as '21, but then you have 30% to 40% growth also in the upper right-hand corner there. So can you sort of explain that and make sure I understand what the moving pieces may be there?

Yes. Yes, I'll go first here, and then Neil can add any color. So as Neil talked about, Matt, one of the things that we're in the process of doing is putting all of our commercial and -- engineering and operational groups together under data centers. And we're planning to make that change July 1. And so until that point, we still -- for Q1, we will have some data center revenue in CIS as we have in the past and we have some in Building HVAC.

We are -- if you recall, we are launching our Modine products. Think of it as -- and Neil talked about our colocation, our chillers, our computer room air handlers in Spain and in the U.S., and we're launching those in CIS facilities. So in total, we see 30% to 40% growth this year in our data center business. And in the Q1, that will be in both segments. And then we'll come back and we'll restate for you and help -- we'll do a restatement and then going beginning in Q2. The vast majority of all our data center business will show up in Building HVAC, which will make the communication, the modeling a lot easier.

Got it. That makes sense.

Yes. Okay. So what you're seeing there is the launch of our -- and the growth of our sales to none outside of that one customer, to the growth Neil was talking about in the first part of the year here, that will show up. Part of it in CIS and part within HVAC.

With respect to that large customer, I guess some of the impressions coming out of last quarter, you thought that business was poised to potentially re-ramp pretty significantly in fiscal '22 and maybe even more so in fiscal '23. Is that not -- are you no longer thinking about it that way?

Yes. It's a good question, Matt. It's just a matter of timing. And also, what I described in terms of some of the buying behaviors, some of these larger hyperscalers continue to digest their capacity. A lot of -- there is a shift and it's driving some growth in the colocation market which is why you're seeing some of the growth in our colos at the rate that we're growing at.

Got it. And maybe one final one, if I could. How do you feel the Building HVAC business is positioned to benefit from these school retrofits? Are you able to size that opportunity? Maybe talk about your relative market share in that space and what you've kind of factored into your Building HVAC outlook just as it pertains to that specific driver.

Yes, for sure. Thanks, Matt. I'll let Mick comment on the numbers. But relative to where we're at and where we're positioned, we have strong positions regionally throughout the United States and Canada. We have strong partners as well in order to deploy our solutions into schools to help with improving air quality. And it's a selling cycle that takes a period of time and it requires multiple decision-makers. So we partner with system integrators, we partner with engineers, we partner with builders and contractors in order to do that. So it's a network that we've built.

We're strong in multiple regions throughout the United States. In the areas where we recognize we don't have that position, we know what we need to do to win. We know how to sell. We know how to partner and we're trying to replicate that model and scale it in other regions of the United States and Canada.

Your next question comes from Brian Sponheimer with Gabelli.

Just a question on the Dana business or the business you're selling to Dana rather. Can you talk a little bit about the approval process there and what the specific holdups are? What jurisdictions are potentially the hang-ups here?

Yes, sure. Brian, it's Mick. So we did 2 filings: one in China and one in Germany. When we looked across the markets, both parties felt like -- and eventually, there will be one in Austria -- but where the volume of the business is at, those were the 2 primary ones.

The China one, we received approval on and that went relatively quickly compared to what we thought could happen with relations between the U.S. and China. The German regulatory approval process entered a phase 2, which takes a lot more time. There's a lot more paperwork. There's a lot more analysis, meetings, filings when you get into a phase 2.

I think we want to be clear, even though it's take -- we're taking longer than we expected. We've got a purchase agreement with Dana. Both parties are working side by side, this isn't one party or the other, and we're just going through the regulatory process in Germany right now.

Would it be reasonable to assume that this can get done by midyear? Or are we looking further out?

Yes. Unfortunately, we're not able to comment on the timing. And it's strictly a matter of it's something that's outside our control, Brian. We're going to push as fast as we can, and I wish we could give you more, but we just can't. It's not something we can control.

Okay. I respect that. I understand it. Just going to the data center business. When this is all said and done, can you quantify what you expect the data center business will be on a run rate basis in total from a revenue perspective? Just so -- I think it really takes -- it's an exciting part of the business for you. Just to understand the size of it, I think, this quarter.

Yes. Thanks. So last fiscal year, the year we just ended, our run rate for Modine is around $100 million. And next year, we expect that to grow between 30% and 40%. And looking at our compound growth rate in the next few years, we've got targets to maintain a compound growth rate of a 30-plus percent rate.

(Operator Instructions) Your next question comes from Steve Ferazani with Sidoti & Company.

I just wanted to dig a little bit into the Building HVAC guidance. Obviously, we came off of a challenging weather this past winter. When you're putting together your guidance, particularly on the AC and Building side, how are you thinking about weather when you put together that guidance?

Yes. Dave, it's Mick. It's probably the biggest challenge the team has, and I probably drive them crazy and it drives them crazy. It's a combination of -- we don't try to do anything obviously with weather. We look at patterns over the last few years. There's a fair amount of replacement business that happens regardless of weather. There's the pricing trends and the material costs in the market. And the last factor the team looked at is really how did the channel end, right? What amount of inventory do we close the winter with? Sometimes if you have a late cold spell, we can end the season with fairly lean inventories in the channel.

So all of that puts together. We try to build what we think would be a normal market growth and we look at some third-party data factor in where we think pricing is going to go. And then the weather pattern, we try to put as -- unless it's a super warm winner, we try to position it as any kind of a colder winter is more good news than a surprise to us.

That's helpful. In terms of the significantly rising material prices, certainly have heard from other suppliers to OEs where given the dramatic rise and the fact there's huge demand for their products, efforts to renegotiate those contracts and the price reset time and, in some cases, successfully doing so, has that been something you've pursued? What kind of response are you getting?

Yes. Certainly, that is top of mind for us. We're at a point where we're weekly managing this through my staff meeting. But yes, we're looking at it not only with materials, we're looking at it with logistics. We're looking at it with pricing pass-throughs. We're doing it with surcharges. We're monitoring our supply chain in terms of expedited freight in order to get products to us in a timely fashion and how that's -- how those costs are controlled. So absolutely, we're looking at that across all regions, across all plants and globally. And for the most part, for at least in 2 of the segments, the pricing controls that we can put in place will absorb a considerable amount of this. However, we do have the lagging effect in the HDE segment. So that will come to time.

Okay. That's helpful. And then just a little bit on 80/20. We talk to companies that are further along in the process. It really starts getting down to going SKU by SKU and figuring out, all right, these products make us money. We've been selling these products for years and they're not profitable. Where are you in sort of the process in terms of getting to that type of a level? Or are you still very early on?

No. Yes, it's a good question and you're right. So where we're at in terms of the process is we've collected all the information and all the data and compiled it from our ERP systems. As you know, a company that's been built on multiple acquisitions over time, there's a lot of different ERP systems, which require us to filter the data, stitch the data together so that we can make sense of it.

We've went through that data cleanliness process and we're now at the point where we're actually pivoting the data in what we call our data cube so that we can understand the intersection of profitable products by customer, by region and by plant. So we're working through the data. We're sifting through the data, and we're actually -- we actually have information as recently as the last couple of weeks that helps us understand exactly what you've just described. So we're in the -- I would say we're in the analytical phase of that versus the decision-making phase.

Any data that surprised you? Or was the -- how useful was the process?

Certainly, the process was useful. There's surprises for sure. But there's always ways to react to it and there's a technique that we can address each one of these. But certainly, I would say 75% to 80% of it, the team had a hunch and the team understood this could potentially be an outcome. And then there was the things that are on the fringes outside of the standard deviation.

So it certainly it was helpful, certainly it was useful and it was necessary because as we go forward and we build 80/20 inside of our systems and our processes, we're going to want to be able to collect the data in a common way so that we don't have to go through the enormous lift to clean the data and stitch the data together. We can just have it at our fingertips.

Your next question comes from Matt Summerville of D.A. Davidson.

Maybe 1 or 2 follow-ups. Maybe you can talk about how the M&A funnel has evolved since the last conference call you guys held and whether or not you're starting to see the level of actionability there improve meaningfully.

Yes, Matt, it's Mick. We have -- we mentioned last time, the big part is getting that engine going again. And I would say good news is inbound calls and the market is opening up past the pandemic. So we're seeing more looks at businesses.

The next step for Modine that Neil and I really do want to do is to be more targeted and proactive versus the inbound call and tying to 80/20 as we complete our segmentation and have targeted market verticals. We are building our growth strategies around those, both in technology, channels, products that we want to fill in those growth areas in data center we've talked about is one of the first that we're targeting with 80/20.

So I'm optimistic. What I'm most excited about is the balance sheet, as you know, is in a great position. And there's -- as we get the Automotive divestiture behind us, which has been a huge amount of resource and effort, then having the targeted -- very targeted acquisition strategy is where we'll be able to accelerate, I would say, and be more aggressive on the acquisition side.

And then just lastly, one clarification. I think it was in your prepared remarks, Mick, you mentioned that the impact of metals-related inflation, the unabsorbed headwind that you've incorporated into your guide, that is that $20 million number you shared? Do I have that correct?

Yes. The 2 big headwinds are material and it's about $20 million. Most of that is HDE and Auto. So again, Auto, part of it will depend on when the transaction were to close, but that's the right number. The other one is the COVID cost, recovering salaries, wages and benefits and is about another $20 million, $21 million. A little less than half of that was up in cost of goods sold with furloughs and things of that and $8-or-so million in the SG&A side.

And I think it was Matt who asked, I was just -- I don't know if they had closed the loop on schools. I want to make sure we address that. Last year, we estimate the school market for us is about $100 million. It should be growing exponentially. This was pre-COVID numbers and pre-government spending and our sales in that market last year were right around $20 million or so.

There are no further questions at this time. I'll now turn the call back to Kathy Powers.

Thank you and thanks to everybody who joined us this morning. A replay of this call will be available through our website in about 2 hours. We hope you all have a great day. Thanks.

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