MOD - NYSE

Good morning, ladies and gentlemen and welcome to Modine Manufacturing Company's Second Quarter Fiscal 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instruction] I would now like to turn the conference over to your host, Ms. Kathy Powers, Vice President, Treasury and Investor Relations.

Good morning. And thank you for joining our conference call to discuss Modine's second quarter fiscal 2023 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'll be using slides of 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 3 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 I will turn the call over to Neil.

Thank you, Kathy. And good morning everyone. I'm pleased to announce another strong quarter from both a financial and transformational perspective with sales up over 20% from the prior year despite a negative FX impact. We have also had significant growth in our adjusted EBITDA and EBITDA margin, making further progress towards our targets. Mick will go through our financial results in more detail, but before that, I would like to provide an update on the progress that our segments are making towards the strategic objectives that we laid out during our Investor Day last June. You may recall that our transformation had three core work streams, focus the organization, perform, and deliver, and accelerate profitable growth. Our segment Presidents provided specific goals for each of those activities, and I'm very proud of the progress that our organization is making against each of those. Please turn to Slide 5. Our Climate Solutions segment had a great quarter. This slide shows the strategic objectives for the Climate Solutions segment, and we are making progress towards both our strategic and financial goals. First, the Climate Solutions team is deep into eighty-twenty and we are clearly seeing the results. In fact, we are driving eighty-twenty down to the business unit and plant level. For example, in our heat transfer products business, our eighty-twenty focus is on pricing for value and executing on new growth opportunities around the heat pump market. There are tremendous incentives in Europe for the heat pump adoption, many of which fully offset the premium associated with this technology. We believe that shifting resources to supporting this market will drive growth for years to come. Our leadership team is firmly in place for this segment and they are building a high performance culture focused on profitability and growth. Our business segmentation process is complete and we are refining the data and implementing daily management tools to provide early indicators that will allow us to better manage our inventory and backlog. As part of our transformational plan we expect Climate Solutions to drive revenue growth over the next several years. The business have favorable market trends and deliver double digit growth this past quarter with more to come. We are reallocating resources to these attractive businesses by creating additional capacity within our existing manufacturing footprint. For example, this past quarter we had approximately $8 million of CapEx and Climate Solutions, which is outpacing the segment’s typical spend. Additionally, our commercial teams are focused on building raving fans, including customers, engineering consultants, distributors, and sales reps. There are many factors to winning in these markets, and our products have advantages that are allowing us to gain market share. First, in the data center world, having a global footprint is key to reducing carbon miles, which is very important to many customers. In other areas, we are winning on lead time, such as in our heating and our indoor air quality businesses where we are ahead of our competition and plan to stay there. In addition, our focus on product line simplification is allowing us to increase our speed to market by reducing complexity and new sale engineering time. Based on the activities and results you can see that Climate Solutions is rapidly moving through the first two phases of our transformation, which are focus and perform. They have now earned the right to start focusing on the third element, which is accelerating profitable growth. As part of the strategy to accelerate growth, Climate Solutions is providing full solutions to customers and is expanding geographically by bringing existing solutions to new markets. This is especially true in our data center business where we're not only bringing chillers to the North America market, but we are now also able to provide full system solutions in both North America and Europe. You may have seen our press release last week where we announced that we shipped our first chillers from our new production facility in Rockbridge, Virginia as part of a sizable order from Corscale announced in July. This is a very exciting milestone for the team, which includes members from our Airedale operations in the UK and from our neighboring plant and Buena Vista. With chillers on board we now have a complete data center product line including computer room air handlers and fan walls to support both colocation and data center operations. So to wrap up on the Climate Solutions discussion, this segment is executing on its strategic objectives and has earned the right to grow. We're actively building our acquisition pipeline, identifying actionable targets in several areas. We're looking at everything from small bolt-ons to opportunities that would move the needle across multiple groups. I'm very proud of this team. Not only are they demonstrating our purpose of engineering a cleaner and healthier world, but are ahead of schedule for both revenue and earnings growth. Please turn to Slide 6. As I mentioned last quarter, in Performance Technologies, we are focusing on the phased rollout of eighty-twenty, whereas Climate Solutions is far along in the journey, the PT business is just getting started. To be clear, this was a planned phased approach. Implementing eighty-twenty requires a lot of organizational change, and each segment required our undivided attention and focus. We elected to start with Climate Solutions, given the clear, sizable and immediate growth opportunities while preparing Performance Technologies for the journey. This slide shows the strategic objectives for PT segment that were introduced in June. As I mentioned, we are early in our journey, so we are mostly working on the focus the organization activities. As a reminder, our strategic transformation includes sizable margin improvements in Performance Technologies. We are focused on improving margins over revenue growth and are anticipating a significant change in business mix over the next several years. This means exiting unprofitable legacy businesses while rapidly growing the very attractive EV business. We have completed the market segmentation for PT and had those senior leaders in place. With that being behind us, we have begun training the workforce across the organization in a similar manner to what we did for the CS segment last year. This has included numerous in-person events with our leaders that are helping the local teams understand how eighty-twenty can help reduce complexity and reallocate resources. Meanwhile, our team continues to onboard new, experienced leaders and key roles who are helping to fundamentally change the culture within the segment. This is a large, complex business with considerable, legacy challenges that we are actively addressing. For example, we have long-term contracts in this business that allow us to pass along material cost increases, but do not allow price increases for other rising costs such as utilities, fabrication, and labor. Our team is taking unprecedented actions by successfully negotiating improved commercial terms outside of our standard, contractual metals pass-through. This is having a positive impact on our margins, but it's not enough. As we continue to deal with rising costs. This requires a renewed focus on materials, productivity and plant performance. There is still a tremendous opportunity for improvement in the business, and our PT team is rising to the challenge. All this work is laying the foundation and driving towards our goal of simplifying and segmenting the business so that we can focus on our most important priorities. We're also beginning to start some of the activities under the Perform and Deliver category as well. The first of these is product simplification and exit strategies, which include deemphasizing non-profitable or end-of-life business. In other words, deciding what we stop doing. In our air-cooled business, we are pursuing last time buys on certain products in order to simplify our product portfolio. And in our liquid-cooled business we are improving our quotation process to improve commercial terms and reduce capital requirements. And finally, I want to give an update on our Advanced Solutions business, which includes our EV systems and components business. We continue to allocate resources to this business as the team focuses on new product development and commercial excellence to capture value in their key markets. We recently announced an initial order from Shyft for their Blue Arc all electric delivery vehicle. We're providing an integrated system for battery thermal management, power, electronics cooling, and passenger comfort. We now have 18 production orders with bus, specialty vehicle and commercial vehicle customers, representing peak revenue of over $90 million. This is only scratching the surface of our potential in the EV space, and we plan to become a much larger player here as we execute our strategy. To summarize our efforts, we're moving at breakneck speed just as you would expect from a startup. Our teams are exploring new market opportunities and working on the next-generation of products, all while using their thermal expertise to develop prototypes that we expect will lead to additional production orders. The limiting factor in this business isn't necessarily the rate of EV adoption, but rather the ability to produce. We have seen some delays in orders in the start of production, mainly due to supply chain challenges. Despite this, orders remain strong and I'm confident that EV can become a substantial high margin business for us in the future. I'm proud of how this organization is approaching its challenges head on and will continue to report on the progress. Now, I would like to turn the call over to, Mick, who will review our results for the quarter and provide segment financial updates.

Thanks, Neil, and good morning everyone. Please turn to Slide 7 to review the segment results. Climate Solutions had another exceptional quarter with solid revenue growth and excellent earnings improvement. Revenue was up 18% over the prior year and up 25% on a constant currency basis. Data center sales were up 81% or $14 million on strong demand from both hyperscale and colocation markets. HVAC&R sales were up 11% or $9 million with seasonal sales in heating and growth in school products. Sales of heat transfer products increased nearly $16 million or 13% from the prior year. There was broad strength across the North American markets, and we benefited from European heat pump growth. We estimate that the underlying volume excluding pricing was up 18% from the prior year. Adjusted EBITDA increased 93% with a 15% margin, which is up 580 basis points from the prior year. The earnings and margin improvements were primarily driven by higher sales volume and commercial pricing initiatives. SG&A was higher than the prior year, mainly due to wage inflation and higher sales commissions, but declined 50 basis points as a percentage of sales. As Neil discussed, Climate Solutions is progressing well on the eighty-twenty journey. Over the last two quarters the average year-over-year margin improvement has exceeded 500 basis points. Please turn to Slide 8. Performance Technologies also had a good quarter with sales up 22% or $59 million. Revenue is up 29% on a constant currency basis, benefiting from growth in all product groups, commercial pricing and metals pass throughs. We estimate that the underlying volume excluding pricing was up 22%. Within the segment, Advanced Solutions sales were up 21% or $6 million with growth in our electric vehicle product sales. Liquid-cooled product sales increased 23% or $22 million due to a strong rebound in the automotive market. Lastly, air cool product sales increased 24% or $33 million, primarily due to strong demand in the off-highway and commercial vehicle markets. Adjusted EBITDA increased 88%, resulting in a 7.4% margin and a 260 basis point improvement from the prior year. As anticipated, the impact of material cost increases on earnings was lower this quarter. We are expecting to see positive net materials in the second half of the year based on current metals projections. As Neil mentioned, the Performance Technologies segment is relatively early in the eighty-twenty journey. As we work further to segment the business, we expect margin improvements to accelerate towards our targets. Now, let's review the total company results. Please turn to Slide 9. First quarter sales we're up 21% or a $100 million driven by strong gains in both Climate Solutions and Performance Technologies. Revenue is up 28%, excluding a negative FX impact of $36 million. In the quarter, the main revenue driver was higher volume of approximately a $100 million, resulting in a volume growth rate of 21%. The balance of revenue growth was comprised of material recovery and commercial pricing partially offset by negative foreign exchange. During the quarter, materials increased $15 million from the prior year. We were able to more than offset this increase through our various pricing mechanisms. SG&A increased $7 million from the prior year, yet declined 70 basis points as a percentage of sales, primarily due to higher employee compensation-related expenses and sales commissions. I'm pleased to report that adjusted EBITDA increased 73% or $22 million. This represents a 260 basis point improvement and the third consecutive quarter of year-over-year margin improvement. Adjusted earnings per share of $0.48 cents was $0.33 above the prior year. Before moving on, I would like to point out that we had a few very small earnings adjustments in Q2 totaling $900,000. This was comprised of $600,000 for restructuring expenses and $300,000 for environmental costs. Now, moving to the cash flow metrics, please turn to Slide 10. We generated $29 million of positive free cash flow in the second quarter, which was a nice improvement from our first quarter. This puts our year-to-date free cash flow at $33 million. The year-to-date cash flow includes $10 million of cash payments primarily for restructuring activities, including the European headcount reductions announced last year. Earnings growth and improved working capital have been the key to our cash flow generation during the first half of the year. We expect positive free cash flow in the second half of the year, including approximately $9 million of anticipated cash restructuring payments, mostly tied to our European restructuring activities. I'd like to highlight that Modine’s Board of Directors recently renewed our two-year $50 million share repurchase authorization. During the quarter we repurchased 100,000 shares and plan to repurchase a similar level per quarter over the balance of the year. As a reminder, our program is currently focused on offsetting the dilutive impact of our share based incentive compensation program. Net debt of $301 million was $32 million lower than the prior fiscal year end. Our cash balance was $70 million as of September 30. And we finished the quarter with a leverage ratio of 1.7, which is within our targeted range and improved from the prior quarter. Now let's turn to Slide 11 for our fiscal 2023 outlook. We're holding our outlook for fiscal 2023 revenue growth at 6% to 12%. Despite ongoing foreign exchange headwinds, we are currently forecasting more than a $100 million negative impact on sales due to the stronger U.S. dollar. After a stronger than expected first half, we now anticipate that adjusted EBITDA will be in a range of $190 million to $200 million. This represents an increase of 20% to 26% versus the prior year. This is also an improvement from our previous range of $180 million to $195 million. We expect Q3 EBITDA to remain strong and be in a similar range to Q2, then improving sequentially in Q4. As we just reviewed, Q2 was extremely strong. In Q3 we enter the favorable heating season, but also need to factor in the traditional holiday shutdowns. And in Q4, we anticipate a further ramp up in volume combined with additional pricing adjustments with the new calendar year. We remain quite positive regarding our full year outlook, but we also realize there is a lot of global economic uncertainty. We're balancing the positive signals from strong orders and backlogs against the risks associated with a potential recession in Europe or the U.S. We'll continue to evaluate and adjust each quarter. To wrap up, we're very pleased with the second quarter results as our business leaders are executing on planned improvements. We're on track with our transformation targets presented in June. Climate Solutions is somewhat ahead of the pace. We're very encouraged by the revenue and margin outlook for this segment. In addition, Performance Technologies has begun the eighty-twenty journey. As demonstrated by Climate Solutions, we believe that Performance Technologies can generate similar levels of improvement as eighty-twenty matures. Combine, the two segments will continue to drive top line growth and additional margin improvements in the future. With that, Neil and I will be happy to take your questions.

[Operator Instructions] Our first question comes from the line of Matt Summerville with DA Davidson. Your line is open.

Thanks. A couple questions. Maybe let's start with the data center business. On the Slide 11, it looks like you raised your outlook, I think, from plus 40% to plus 50% to plus 50% to plus 60%. Obviously, you're up 80% here in the quarter, so a very strong start to the year. I want to speak a little bit more towards something referenced in the press release you put out the other day talking about the initial North American shipments in reference to the $100 million target, it was basically communicated there for the North American data center business. To my recollection last year, that would have been pretty minimal in terms of revenue contributions. So what kind of line of sight do you have in that business kind of multi-year outlook? What does the backlog look like incoming orders? Could you put some finer points around what you are seeing in the data center site? Thanks.

Hey, Matt, great to hear from you. This is Neil. Sure, absolutely. We're seeing the growth through our geographic expansion. So if we think about it, last year we didn't have a product set or product line, particularly chillers that could serve the North America market. And with our press release that came out that was specific to Rockbridge that was the chiller expansion where we expect to see the capacity that we put in generate revenues similar to what you just described. So this would be incremental in addition to the traditional data center revenues that that Modine has produced in the past.

If you think about pivoting over to one of your other high growth areas, EV thermal management systems, you mentioned cumulatively you have 18 platform wins. We'll forward 12 months from now, what could that number look like? And out of the 18 when you aggregate the 18, what's the file value associated with that, if you will, annual revenue book associated with that?

Yes, no, that's a really good question. Thanks, Matt. It's Neil again. We're engaged on 101 different systems to date. If we go back to – we'll go back say a year plus ago, that was almost in the single digit range. We're on prototypes of 56, which is up to from June. And then we have the award wins of 18, which is two more than when we spoke last in June. We go back a year and a half ago, those numbers again were single digits. With the 18 awarded wins, that's roughly $90 million that we see in terms of the run rate. The good news here on this bit where the EV team has been focused on is when we talked about the 16 wins that we had last year or this year, we talk about specialty vehicles and buses. These two incremental wins are on the last mile delivery vehicle OEM fleets. So, we're also looking at not only EV and specialty vehicle, but we've made a pivot with some of our battery thermal management, passenger thermal management, electronic cooling packages that can serve in the last mile as well as we see that as an opportunity. At the same time and you saw a press release in regards to Shyft as we spoke about those wins.

Sure. And then maybe one more, when you think about kind of where you are at with eighty-twenty in the performance side of the business if you had to handicap it today, how much of revenue do you think we could be looking at or if you can frame it up in terms of product line simplification, however, you want to term it, how much do you think gets moved out the door if you will, over the next year or two? How much revenue do you need to deliberately exit? And in doing so, just that action alone, how much would that improve profitability once you complete that iteration [indiscernible]? Thank you.

No, great question, Matt. We're thinking about it the same way as you. As we mentioned, we're really in the early stages of eighty-twenty in Climate Solutions, and we've just structured the team in a way to stand up market verticals around our air liquid and EV business in order to get to those answers. They're working through the quads in terms of how they look at the products and customers, they are looking at profitability. And we've just set this up with a new General Manager that we just hired as well to come up with these types of conclusions. So right now, there is a hypothesis. We have some assumptions. We need to vet those assumptions and in the hypothesis to determine exactly what those numbers look like. You're thinking about it the same way we're thinking about it, and just like we did in Climate Solutions, we'll work through the meticulous calculations so that we can come up with the right and proper range.

Got it. Thank you

[Operator Instructions] Your next question is from Steve Ferazani with Sidoti. Your line is open.

Good morning, everyone. I appreciate all the color on the call. Impressive margin improvement in PT, despite you're at the early stages of eighty-twenty. Can you give a sense of how much more of a contribution that can be this year? I know you are in the early stages. And just how sustainable those margins are in PT, knowing that you are seeing slowdowns from the European economies, higher energy costs, and also likely that light vehicle production, at least in Europe, probably doesn't grow quite so substantially given some of these headwinds?

Hey, Steve, great question. This is Neil. I'll start with some of the high level details of what we're working on at Performance Technologies, and then I'll let Mick respond. It's a really good question because you're right, there are some headwinds where we see some of that, but at the same time, we see opportunities within the business. First and foremost is around complexity reduction, as a team looks at its product line simplification and how we can do and be more efficient with the products and then the plants that we work in. We also see an opportunity within plant productivity and materials. That's going to be a major focus for the Performance Technologies team. The team is really excited about eighty-twenty. The team has a lot of energy around this because they saw the impact in Climate Solutions and they're ready to adopt it and embrace it. And then there is a lot of great commercial excellence programs that are working on in Performance Technologies that I suspect will start to see some of impact in the coming quarters. Commercial excellence around pricing, surcharge, minimum order quantities, non-reoccurring engineering, they are really smart this team in terms of how they are thinking about commercializing existing products and future products. Mick?

Yes, Steve, I would just add we laid out at our Analyst Day, the objective here by the end of fiscal 2024 and that two-year period was to get this business to cross the double digit margin standpoint. And so we've seen good improvement from Q1 to Q2, and then we would expect based on all the activities Neil laid out, and the next thing about that is a lot of eighty-twenty is our control versus the economic environment out there. So to your question, I think, we continue to anticipate further margin improvements in Q3 and then a further lifting Q4 on our track to getting this business to get into a double digit range.

Okay, that's helpful. Beyond data center, a couple of the areas you highlighted, I want to see if you can quantify them a bit and also ask about the tailwinds. Obviously you've benefited from the older school retrofits. Trying to get a sense of, of how much longer that tailwind could be? And then if you can quantify in dollar terms what you're seeing from the European heat pump market?

Yes, good question. So relative to the CARES Act or the ESSER Act in North America and the fundings that's in place for schools, we know that there is, at a minimum three years’ worth of funding that will be deployed across the 125,000 K–12s that are in the United States. It's a matter of the ability to install and at the rate that they can install during the off seasons, which is the summer seasons when the schools are not in operation. I suspect Steve, that that's going to go beyond three years because the installations will not be able to keep up with the pace of demand, especially as schools, and school boards, and teachers unions and PTOs really think hard about infrastructure spend and how to improve the indoor air quality within the schools and classrooms. So, I think that's a tailwind that's in place for several years. In terms of the heat pump market, in Europe, we just recently broke ground on an expansion in Serbia, we're preparing and we're ramping for that. We're flowing some more CapEx, and more machinery and equipment so that we can keep up with that demand, and we expect to see that demand over the next two to three years.

Right. So I guess that leads right into my next question, which is CapEx priorities given that Virginia's now open, it sounds like now Serbia is something on the heat bump. How are you thinking about CapEx priorities moving forward? And if I can group that in with your leverage ratio now looks like you're going to be below what your old targets were and how you're prioritizing capital allocation is leveraged clearly at a very strong rate level and getting better.

Yes, thanks Steve. We’re really happy with the leverage ratio as you pointed out on for others. We've talked for several years about trying to keep the company through a cycle between 1.5, 2.5 times, depending on acquisition pipelines, the economic environment and getting to 1.7 this quarter is really happy with that. I think going forward, we continue to expect that to decline and part of that is it's good to go into any kind of economic uncertainty with that strong balance sheet, but equally so we talked about really ramping up our acquisition pipeline. So we're trying to ensure we have the balance sheet ready for any kind of economic event. And certainly more important, I think, is strategically to support the acquisition funnel in our growth verticals. And then you're right then just on the short run, even in the quarter out of $12 million in the CapEx, we spent at least $8 million in the quarter on our Climate Solutions side. So as Neil laid out priorities to continue to expand data center production to ensure we have adequate capacity for the rapid order book intake. And then the other probably CapEx or PP&E one is Serbia, as Neil mentioned to support then growth in off the European heat pump market.

Great. Thanks everyone. I appreciate the caller.

Your next question is from the line of Matt Summerville with DA Davidson. Your line is open.

Yes, thanks. It's a couple of follow-ups. Mick can you talk about how we should be thinking about the cost savings realization associated with the European restructuring? I know you're targeting about $20 million. How should we think about that fiscal 2023 versus what lands in fiscal 2024? And can you remind what the cash cost of that program is?

Yes, so we estimated that we would get approximately half of the savings this year, Matt, and little bit more heavily weighted in the second half than the front. And then the other say half or ten million next year. So we'll get the full amount. We had originally estimated that the cost would be about $20 million to $25 million. And we're still finalizing the program. But I'm happy to say we're running clearly at the low end of that, and an opportunity might be able to do slightly better than what we had thought.

And then how should we be thinking about total CapEx for this year and if you have a preliminary view on next? And then similarly how we should be thinking about free cash conversion this year and next, bearing in mind the CapEx aspect of things as well as the cash cost with this program?

Yes, from a CapEx standpoint we're still looking in the $60 million to $70 million range for the year that we haven't spent in the first half at that rate, but we have some heavier spending on the areas we just talked about in the second half. It's about $60 million to $70 million this year, Matt. From a conversion, probably the easiest way we think about it, or especially externally, is this year looking at free cash flow to a sales margin or a conversion about 2.5% to 3%, and then improving further next year when we laid out our transformation strategy, we wanted to be within the 24-month window, 3% to 5% of sales, and then from three years on, obviously push above that range. So hope that addresses your question.

Yes. And then M&A, I guess you guys must feel good about the Climate business to start talking about M&A. I would have been under the impression maybe coming out of last quarter that we were maybe still at least six, if not 12 months off before we would start to have – or before you start to have the discussion with us, like you are having today. So maybe talk about Neil, what gets you comfortable to start thinking about M&A now as it pertains to that business. You mentioned you are looking at opportunities in a couple of areas, maybe a couple of technology areas maybe speak to that in a little more detail. And then I'd be curious as to how you're feeling about the maturity of the funnel and what kind of the high-end of deal size you might be willing to look at for that business.

Yes, all good questions, Matt. And you are right, we are thinking about it. In terms of Climate Solutions, we have each one of the market verticals inside of Climate Solutions that are segmented internally a little bit differently in terms of hyper growth or growth, or we want to maintain existing size and EBITDA dollars. So they are specific markets inside of Climate Solutions that were more aggressive with in terms of how we're thinking about filling the funnel with M&A activity. And when we focus on those areas are the ones we often talk about. We look at not only how to gain share in that space, but also adjacencies and technologies or channel that would complement what we do today, one or two degrees adjacent space is how we think about that orbit. We have worked pretty hard to build on a business development team. So, we've put some new – actually press release came out this past quarter in terms of Paul Plourde, who we just brought in to drive business development and generate and create this funnel with the support of our GMs. So I feel much more comfortable than I say a year ago where we have GMs that are in the spaces that have been identified for inorganic growth and that they're building out targets and they're cultivating relationships based on their status in terms of where we want them to spend time on M&A activity. And then we also are now creating at the corporate office a business development engine to where we can execute on the process once you get through cultivation, as you get into, say, the stages of diligence. So we're a lot further along than we were because our GMs are now in place for over a year, and they can set the strategies, they know their markets. We're building out the support and infrastructure at the corporate level. And we've accelerated the earnings improvement in Climate Solutions that allows us to really focus on this and spend more time talking about it. As you know, you can never time these things, Matt, but to have the funnel and the net as wide as it is versus what we had last year, I feel much more comfortable where we're at today.

Yes, Matt, I'd add the size question, just add in what Neil said. Super hard to answer based on all those factors that I view it as our role and my role to sort of position the company. So the opportunities may come in smaller pieces which we can't necessarily control. On the other hand we saw this years ago with Luvata. We have the new bank facilities, we've got plenty of flexibility in our covenants. So, I think the governor on site is our current bank agreements and covenant ratios there, but it gives us a lot of flexibility to do larger transactions. But ultimately it all comes down to all the details based on this specific opportunity.

Got it. Thanks Neil. Thanks Mick.

You bet.

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

Thank you. And thanks to everyone on the call for joining us this morning. A replay will be available through our website in about two hours. We hope you all have a great day. Thanks.