Nov 2, 2016
Executives
Kathy Powers - Vice President, Treasurer and Investor Relations Tom Burke - President and Chief Executive Officer Mick Lucareli - Vice President, Finance and Chief Financial Officer
Analysts
Joe Vruwink - Baird Mike Shlisky - Seaport Global
Operator
Good morning, ladies and gentlemen, and welcome to the Modine Manufacturing Company's Second Quarter Fiscal 2017 Conference Call. At this time, all participants are in a listen-only mode.
Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.
I would now like to turn the conference over to your host, Ms. Kathy Powers, Vice President, Treasurer and Investor Relations.
Kathy Powers
Thank you and thank you for joining us today for Modine's second quarter fiscal 2017 earnings call. With me today are Modine's President and CEO, Tom Burke; and Mick Lucareli, our Vice President, Finance and Chief Financial Officer.
We will be using slides for today's presentation. Those links are available through both the webcast link as well as the PDF file posted on the Investor Relations section of our company website modine.com.
Also should you need to exit the call prior to its conclusion, a replay will be available through our website beginning approximately two hours after the call concludes. On slide 2 is an outline for today's call.
Tom and Mick will provide comments on our second quarter results and update on our Strengthen, Diversify & Grow strategic initiative and review our revenue and earnings guidance for fiscal 2017. At the end of the call, there will be a question-and-answer session.
On slide 3 is our notice regarding forward-looking statements. I want to remind you that 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 is my pleasure to turn the call over to Tom Burke.
Tom Burke
Thank you, Kathy and good morning everyone. On today's call I will discuss our second quarter results and provide an update on our Strengthen, Diversify & Grow strategic transformation including the pending acquisition of Luvata HTS announced in early September.
After that Mick will provide a more detailed review of our consolidated financial results and review our revenue and earnings guidance for fiscal 2017. I will then provide a few closing remarks prior to opening the call for questions.
Like many other global industrial companies, we experienced a continuation of weak market conditions last quarter especially in North and South America. Global off-highway markets continue to pose significant year-over-year declines except in China where recent infrastructure investments are driving meaningful improvements in construction equipment volumes.
Commercial vehicle markets are mixed with Asia and Europe seeing solid growth while North America continues to be weak and forcing run expectancy improvements in the North America heavy-duty truck market until the second half of calendar 2017. On a positive side, global automotive markets continue to be strong particularly in Europe and China.
Building HVAC markets have remained flat from the prior year with weaker than expected pre-season stocking sales of heating products in North America. Overall, our sales in the second quarter were down 4% from the prior year on a constant currency basis while largest decline was in our Americas segment driven by two things; market weakness and heavy-duty trucks and then the off-highway market and slower than expected new program launches.
Our adjusted operating income was $3.6 million, down $4.5 million from the prior year. Adjusted loss per share was $0.01 for the quarter, down $0.05 from the prior year.
Let me be clear upfront. I am disappointed with the performance of this quarter.
In addition to the volume decline, we also experienced temporary operational inefficiencies I’ll describe in more detail during my segment review. Despite these challenges, I have high confidence in our ability to deliver a much improved second half and I am pleased we will be able to maintain our full year guidance.
We are addressing these challenges head-on and in more circumstances have already corrected the issues. We are able to improve even in the phase of continued market weakness due to our focus on delivering the benefits outlined in our Strengthen, Diversify & Grow strategy.
We have achieved significant and sustainable savings today from this program and expect this to be evident in our second-half results. Now, I would like to briefly review the segment results.
Turning to page 6, as I mentioned, sales for the Americas segment were lower than expected and our gross margins were also impacted by temporary operating inefficiencies. This was a very complex quarter for the North America team doing mostly the challenging credit transfers, multiple program launches and wind downs.
We are actively addressing these issues with majority of these inefficiencies now corrected. This will contribute to second half earnings improvement.
Sales decreased 13% year-over-year on a constant currency basis primarily due to continued weakness in the commercial vehicle and off-highway markets, partially offset by higher sales to automotive customers. Sales to commercial vehicle customers in North America were down 38% from the prior year and off-highway sales were down 20%.
Brazil continues to be in a recession with declines in the commercial vehicle and automotive markets. Our largest year-over-year decline in Brazil was in our aftermarket business which was down 26% versus the prior year.
Markets were down slightly with the largest driver relating to the aftermarket decline was our SAP conversion in Brazil which necessitated an extended shut down for cut over and implementation of a new warehouse management system. We think Brazil is our last business unit to convert to SAP and we expect aftermarket sales to return to normal volumes in the second half of the year.
Gross margin declined by 370 basis points to 12.6% due to the drop in sales volume and temporary operating inefficiencies in the quarter. As I mentioned, we had higher manufacturing costs related to the transfer of production from Washington, Iowa along with hire scrap and labor inefficiencies in both launches and planned reductions in sales.
These concerns are now well in hand. In addition, we are ahead of schedule in transferring production from Washington, Iowa and expect to seize production in the plant this quarter.
SG&A was up $900,000 or 6% primarily due to $1.6 million increase in legal reserve in Brazil for a previously disclosed matter. This was partially offset by savings from our SDG initiatives.
Adjusted operating income in the Americas segment was $1.8 million, down $6.9 million from the prior year. As previously discussed, this is due to lower gross profit resulting from the lower sales volume and operating inefficiencies in the quarter.
Although we are not planning for significant market improvements in the second half of the year, we are already seeing significant improvements in our operating performance based on the actions addressing the issues I described earlier. We expect to see an improvement in volume from the product launches and in sales mix along with continued benefits from the closure of the Washington, Iowa plant and transfer production to our expanded facilities in Nuevo Laredo, Mexico.
I just returned from Nuevo Laredo and was very pleased with the progress the team is making in launching our new facility. Finally, we remain diligent in our cost reduction efforts and will continue to benefit from lower compensation related expense due to headcount reduction.
Please turn to page 7, sales for our Europe segment second was down 3% in the second quarter on a constant currency basis as a result of planned program wind downs and lower sales to off-highway customers. Automotive sales were flat during the quarter as market related volume increases were offset by $4 million decrease in BMW modules as this wind-down of production nears completion.
Gross margin improved by 160 basis points from the prior year despite the decrease in sales. This improvement was due to both favorable sales mix and operating performance.
The positive sales mix was due in part to the planned reduction of a low-margin commercial vehicle radiator program and higher volumes of automotive oil coolers. The performance improvement was largely due to procurement savings and lower exponential freight as compared to the prior year.
We continue to be pleased with the operating performance of the European segment. Adjusted operating income was up $400,000 to $5.5 million due primary to the higher gross profit.
We are seeing ongoing growth in our automotive engine business and we see further opportunities in the market as Europe’s automotive OEs intensify their development of electric vehicles promoting is well positioned with our proven technology for this growing market. In addition, I am pleased to announce that we were awarded our first business win in Europe with our new global commercial vehicle radiator platform.
As I previously mentioned, our focus is on expanding our low cost country footprint in Hungary in order to offer the best possible products to our commercial vehicle customers at a competitive price. This win along with other rewards in India, China and North America validates our commercial vehicle radiator strategy.
Please turn to page 8, sales for our Asia segment were up 41% compared to the prior year on a constant currency basis. This improvement was primarily related to higher sales to automotive and off-highway customers in China, and incremental sales related to our new joint venture.
We continue to see strong volumes for our automotive products from both market improvements and launch activities particularly for automotive oil coolers. We are pleased with the growth of our Asia segment and expect this high growth rate to continue.
In addition, we are finally starting to see improvements in the construction market in China with substantial increases in the sale of excavator. We have a strong position in this market which has been depressed for several years and I’m encouraged that we're finally seeing market and volume improvement.
The higher sales volume led to $1.6 million improvement in gross profit or 76% increase from the prior year. Gross margin improved by 310 basis points to 14.9%.
Operating income for the Asia segment increased $2 million for the second quarter compared to the prior year primarily due to higher sales volumes and lower SG&A expenses, and we are pleased with the progress that our Asia team is making across the region in growing our business. Turning to page 9, sales for our building HVAC segment were up approximately 1% on a constant currency basis.
In North America, there were lower sales of heating products during the pre-season stocking season versus the prior year and lower sales of ventilation products which market as our Canadian competitors benefited from the weaker Canadian dollar. This was offset by higher sales of both cooling and ventilation products in the UK.
Our team is focused on correcting the decline in gross margin which fell to 25.8% in the quarter. This decrease was due mainly to product mix as cooling products in UK generally have lower margins than North America heating products.
UK margins continued to be pressured by labor inefficiencies which we are actively addressing. Also, we have higher year-over-year depreciation expense related to the replacement assets associated with the Airedale fire.
Similar to the Americas segment, we expect to see significant sales and margin improvement in the second half of the year, particularly when we customarily have stronger heating sales. We have put some additional resources and expertise in the segment, and are focused on making improvements to our UK business.
This includes implementing aggressive pricing practices, reducing headcount significantly in both of our UK locations and implementing aggressive overhead reduction in spending limits. We expect that these actions will quickly result in improved profitability for the segment starting in the third quarter with the full effect in the fourth quarter.
Please turn to page 10, before turning over to Mick, let me give you an update on our Strengthen, Diversify & Grow objectives including our pending Luvata HTS acquisition. As announced on September 06, we have entered into an agreement to acquire Luvata HTS, a leading manufacturer of commercial and industrial coils, coolers and related products primarily for the HVAC&R markets.
This acquisition brings together all of the key attributes of our strength in diversifying growth strategy and is a key component in the transformation of our business into a more diversified thermal management company. After the acquisition is completed, approximately 40% of our revenue will be from sales to industrial end markets, which is directly in line with the goals laid out in conjunction with our SDG framework.
Luvata HTS will diversify our customer base, which is currently relatively concentrated in vehicular segments will also reduce our exposure to these cyclical markets. Subject to customary closing conditions, we expect this acquisition and related financing to close by the end of this calendar year.
We are also on target to achieve gross cost reductions of $40 million to $50 million designed to help move us toward a higher operating margin of 7% to 8%. In fact we will benefit yet this fiscal year from a large portion of the cost reductions, which will support our strong second half earnings forecast.
As a reminder, our operating margin target is ultimately dependent upon revenue growth since the metric is net of other economic factors. Today, we have identified or implemented actions that will lead to $40 million of total gross savings on a annual run rate basis.
To achieve these savings, we have focused on SG&A reductions, manufacturing footprint savings and our global procurement initiative. Our team in North America has accelerated the timetable for the closure of the Washington, Iowa plant as production being transferred to other Modine facilities and the plant will be closed during the third fiscal quarter, as I mentioned earlier.
We are also making changes to our European region, transferring production of certain product lines from our plant in Pontevico, Italy to one of our two facilities at Hungary. We continue to work on our plant expansions at Hungary and Mexico and are actively quoting from these cost competitive facilities.
We have achieved significant savings from our global procurement initiative and we’re still identifying and negotiating additional savings as we work through a wide range of product and commodity value streams. The procurement teams have done an excellent job in driving these savings even in markets where volumes were down year-over-year.
We announced our Strengthen, Diversify and Grow strategic framework one year ago, we remain fully confident we will be able to achieve these objectives outlined in that program within the specified timeframe. With that I’d like to turn over to Mick for an overview of our consolidated financial results and review of our fiscal 2017 guidance.
Mick Lucareli
Thanks, Tom, and good morning. Please turn to Slide 12.
Our financial results on this page have been adjusted to exclude the non-cash charge of $39 million related to a voluntary pension lump sum payout, which occurred in the second quarter of last year. This payout was done to reduce the size, risk and costs associated with our U.S.
pension plan and we succeeded by reducing our pension obligation by over $60 million. Our U.S.
GAAP income statement is included in the appendix of this presentation and our earnings release. Starting with the top line, our second quarter sales decreased due to the continued weakness in certain end markets and program wind downs in Europe.
Sales decreased 4% on a constant currency basis excluding an unfavorable currency exchange impact at $2.6 million. In our Americas segment, we continue to see lower sales in the North American commercial vehicle and off-highway markets.
We also saw temporary decrease in our aftermarket sales in Brazil, but expect these volumes to come back in the second half of the year. Lower sales in Europe were primarily driven by decline in off-highway sales and the planned wind down of certain programs.
These declines were partially offset by market growth across our automotive business. We also experienced strong growth in Asia due to higher launch volumes of our automotive engine products and some recovery in the China construction market.
The gross margin decline of 120 basis points was somewhat higher than we would have normally anticipated, but we believe the dip is temporary in nature. We had a normal fixed cost absorption impact due to the decline in sales volume.
In addition, as discussed last quarter, we passed along lower material cost to our customers. Last, there was an additional impact from temporary production inefficiencies in several plans primarily in the Americas and building HVAC segments.
In the Americas, challenges were primarily due to higher labor cost related to Washington, Iowa, the product transfer along with scrap and labor costs related to new program launches. In building HVAC, our new leadership team is working to address labor inefficiencies and improved throughput in our two UK facilities.
As Tom said, we are taking actions to address these issues and expect significant improvement in the second half the year. I am pleased to report the team’s hard work in our procurement initiatives is generating savings and help to offset the operating challenges.
Moving on to SG&A, we are benefiting from our Strengthen, Diversify and Grow initiatives along with the relentless focus on cost control. The reported SG&A of 48.7 million includes two nonrecurring items.
First, we increased our legal reserve in Brazil by 1.6 million based on our current estimate of the cost that will be incurred to resolve this previously disclosed matter. In addition, we incurred professional fees of $3 million related to due diligence and integration cost for our planned acquisition of Luvata Heat Transfer Solution.
Excluding these items, core SG&A was 4% lower than the prior year. Please note that during the quarter, we recorded $2.1 million of restructuring expenses.
These costs relate to equipment transfer and plant consolidation costs in the Americas and severance expenses in the Americas building HVAC and corporate. Finally, we record a gain on an asset sale of $1.2 million as we sold a manufacturing facility in Europe during the quarter.
Consistent with past practice, this gain was not included in our adjusted operating income. Second quarter adjusted operating income of $3.6 million was down 4.5 million and our adjusted loss per share of $0.01 was down $0.05 compared to last year.
The lower table on Slide 12, shows the walk of our adjusted operating income. As usual, we've included a full reconciliation between our reported results and adjusted operating results in the appendix.
This was clearly a difficult quarter as volume challenges in both the Americas and building HVAC segments were compounded by the impact of unplanned production inefficiencies in certain plants. That being said, I was pleased with our cost control and we continue to see the positive impact of our SDG initiatives.
Similar to the past few years, we do anticipate a stronger second half of the year and I'll go over the details with you in a minute. Turning to Slide 13, free cash flow in the quarter was 800,000, which is down from $18.5 million last year.
This is due to the combination of several items, some of which are timing related. First, we had lower cash earnings in the quarter; next, operating working capital requirements were $3 million higher; there were also other unfavorable changes in other working capital, including compensation and income tax accruals; and finally, capital expenditures were $3 million higher than the prior year, which is primarily timing related.
Please note that we received $4.3 million of cash proceeds from the sale of a European manufacturing facility, which I mentioned earlier. These proceeds are not included in our free cash flow calculation.
We expect our full year capital spending will remain in the $60 million range. We continue to forecast another positive year of free cash flow mainly driven by the stronger second half earnings.
And our balance sheet provides the liquidity necessary to support our growth and diversification initiatives specifically the announced acquisition of Luvata HTS. 108 million in net debt was up $14.3 million from prior year-end.
We also ended the quarter with $63 million in cash and a net leverage ratio of 1. Now let’s turn to fiscal 2017 full-year guidance on Slide 14.
First, we are confirming our fiscal 2017 full-year sales and earnings guidance. We expect sales to be down 1% to up 3% from the prior year.
Throughout the Americas segment, we expect difficult market conditions to continue. This includes ongoing weakness in the North American off-highway and commercial vehicle market along with difficult economic conditions in Brazil.
Currently, our revenue is trending toward the lower end of our full range, but the impact will be largely offset by continued cost reductions and operational improvements. Therefore, we continue to expect adjusted operating income to be $65 million to $71 million.
This equates to an increase of 3% to 12% over the prior year. We will continue to drive margin and SG&A improvements through action plans as part of our SDG initiative.
We expect our adjusted EPS to be between $0.77 and $0.87 with our full-year tax expense to run between 12 million and 14 million. Following the pattern of last year, we expect a much stronger second half of the year.
First, we anticipate incremental sales and earnings as we approach the heating season in our building HVAC segment. We expect our top line will benefit from the continued ramp up of program launches in Asia and improvements in the construction equipment market.
Much of the groundwork has been completed by her SDG initiatives to reduce and control costs. These actions will continue to positively impact our results in the quarters to come.
In fact much of the targeted savings are reflected in our fiscal 2017 results, which is helping to offset the volume challenges. Last and very importantly, we already implementing operational improvements at several plants and beginning to see the improvements.
We anticipate labor efficiencies and overhead improvement in the second half. We have a lot of hard work ahead of us to finish the fiscal year in a strong note.
We're also maintaining the focus on cost reduction initiatives to achieve our financial goals. We are managing these activities while many team members are working diligently on completing the Luvata HTS acquisition by the end of the calendar year.
Integration plans are well underway and we are excited to combine these two great companies into one. Finally, I want to point out that our current year earnings outlook does not include any impact from the acquisition.
We are planning to provide guidance on the combined company in connection with our third-quarter communication. Tom, I will turn it back to you.
Tom Burke
Thanks, Mick. We continue to experience challenging market conditions in certain of our key end markets.
As Mick outlined, we are holding our guidance despite a difficult second quarter and are confident that our performance will improve significantly in the second half of the year. In addition, our management team remains committed to the objectives we set out one year ago when we announced our Strengthen, Diversify and Grow strategic framework.
The acquisition of Luvata HTS is a key component of achieving these objectives and we are pleased that we’re on track to close on this transaction during the third quarter. As we previously reported, we expect this transaction will be accretive immediately with targeted annual cost savings of approximately $15 million anticipated over three to four year timeframe.
As we are very deep in integration and planning process, I'm confident we will be able to achieve these targets. Of course, we will provide an update after closing, as Mick said, likely in connection with our Q3 release.
Very excited about the benefits of this acquisition as we to deliver on the commitments of s Strengthen, Diversify and Grow strategy while transforming Modine into a more diversified thermal management company. And with that, we will take your questions.
Operator
Thank you. [Operator Instructions] And our first question comes from David Leiker from Baird.
Your line is now open.
Joe Vruwink
Hi, good morning. This is Joe Vruwink for David.
Tom Burke
Hi, Joe.
Joe Vruwink
I wanted to start, Tom, with some of the new business wins you discussed on the call and just a couple questions. Is it possible for us to say since the global product strategy was put in the place or since you started thinking about quoting from Mexico, Hungry, the low cost centers, whether your win rate or the pace of bookings have stepped up meaningfully from historical levels?
Just trying to get a sense of whether over the past year since that strategy was put in the place, whether growth rates in the backlog have stepped up?
Tom Burke
Great question, and clearly, yes. Our global product strategy has had a direct impact just kind of at a high level.
Being at Modine, we are in the best position of really understanding our product portfolio and aligning our cost strategy with that includes manufacturing footprint and our procurement strategy. So, yes, we’re better positioned than we’ve ever been before that’s been reflected in our win rate that we are very confident in this, especially as you look at engine products where we have what we think a very significant position and that we have confidence, so we can grow with a win rate that we have confidence in and a more improving power train cooling win rate on the vehicular side.
So clearly there’s been an improvement and expect to see that will drive higher incremental organic growth. Mick, do you want to add anything to that?
Mick Lucareli
No.
Joe Vruwink
And then with the lower cost footprint, are you able to expand what you're betting on, so let's say there's a particular customer that typically is very tough on pricing, Modine certainly this cycle has walked away from a lot of business in order to bring returns up. Given the cost savings you've achieved, can you essentially go back to some of those programs and customers and now bid on them profitably?
Tom Burke
I feel confident, yes, that we can. I mean, clearly, it’s – the market pressures are continuing to increase, but clearly the cost reduction, the scale we put into our plans, the location, the low cost footprint, the product designs themselves have really been aggressive on evolutionary improvements to take material cost out and improve performance has given us that confidence, so we can go back and win against any competitors out there.
Joe Vruwink
And then I wanted to shift to cadence of this fiscal year, obviously, this is a tough quarter for certainly people in my seat to model. It sounds in your seat there's things that can launch or not launch that creates some volatility.
So any help maybe you can provide in thinking about the quarterly cadence going forward of whether this ends up being a very back end weighted FQ4 type year, anything that can help may be smooth the quarter to quarter modeling of your earnings?
Mick Lucareli
Joe, it’s Mick. I will take that question.
Last year, as you recall, we had a very similar situation, I think, almost identical. Last year in the first half of the year I think we were about $22 million of operating income and nearly double that in the second half of the year and this year the first six months are about $22 million of operating income and looking at a same ramp, similar ramp rate.
When we look at it to help with the outlook and modeling the run rate of the quarters, we do see it having similar to last year still running from Q2 to Q3, we see volume and sales increasing as we come out of the slow – our weakest, typically our slowest quarter in Q2, we see some revenue increasing into Q3 and then further increasing in Q4. And then same with resulting in operating income.
We see sequential improvement from Q2 to Q3 and then further improvement from Q3 to Q4. So not fair step function, but probably more of a linear look rising all the way from Q4 with the expectation of Q4 being the highest quarter of the year similar to last year.
Joe Vruwink
And my last question related to this, it seems like achieving a 7% operating margin maybe by FQ4 is possible given where the guidance stands and that would obviously be the low end of the SDG targeted range by the – I think it was the end of fiscal 2018. It seems like end markets haven't helped you at in being able to deliver volume needed to get to that margin level, so the fact that you might be on track anyways seems like maybe the plan is running ahead of schedule or you’ve been able may be to uncover more than you expected?
Am I thinking about this right or forgetting something in the equation?
Tom Burke
I will start and then Mick add to it. Clearly, as I mentioned, that 70% sustainable is really depending on some top line growth as I mentioned in my comments, so to your point that is dependent.
However, our targeted $40 million to $50 million in savings is starting to come into fruition. So we are at the low end of that range now that we feel will be hitting, get a run rate as we get through fiscal 2018.
So that’s encouraging. And, yes, I’d say, our – as we look at the new organizational structure, that’s going to be a little bit leaner and meaner and yet more focused on strategically managing our portfolio globally on the vehicular side and the changes we are looking at the building HVAC side and of course with the added – on top of that, the acquisition opportunity, we feel strong about that.
But clearly overall in vehicular side, we need markets to kind of come our way to really hit that on a sustainable level. Mick, you want to add to that?
Mick Lucareli
Yeah, I guess, two points. When we get to Q4, I think, yes, we can touch the low end of that range Joe.
Hopefully at that point, we can be talking about Luvata combined with Modine which we know is going to help margin Modine up, that business runs a couple of hundred basis points higher in margin so that will be an additional benefit. But without that, we can touch that and you're right it's really driven by we frankly have taken more cost out and we pushed harder on the cost as the markets have been a challenge.
We really see it when we built their goals and across last year about SDG we really felt that Modine running at a 1.05 billion [ph] run rate with the cost-savings is a good model to get to that operating margin. So we do need some support here from the end markets.
And I went back and I’ve looked, you asked about the win rate, the order book - the win rate is there. In the last few years, just from the global off-highway and truck market, just on unit volumes, I estimate that’s at least the $200 million impact of Modine that we’ve been battling up despite the win rate of new programs.
We’ve had a lot of headwinds in especially the heavy equipment market, partially offsetting those launch volumes.
Joe Vruwink
That’s great color. I’ll step back in queue.
Thank you.
Tom Burke
Thank you.
Operator
Thank you. [Operator Instructions] And our next question comes from Mike Shlisky from Seaport Global.
Your line is open.
Mike Shlisky
Hey guys, good morning.
Tom Burke
Hi, Mike.
Mike Shlisky
I wanted to talk - talk quickly here about maybe calendar 2017 already. Some of the major customers that you have across off-highway and on highway are both put out some outlook for 2017.
And when you map it out, I wonder if you'll be able to - if you're thinking maybe you'll be in the same range as you are for fiscal 2017 and fiscal 2017 if everyone looking flat to down modestly. Are you thinking roughly in the same band this next year potentially with some organic growth and new product launches, is that the way to look at it right now for calendar 2017?
Mick Lucareli
Mike, it’s Mick. I think early for us to comment on that.
We were in the middle of our – while we are beginning - with the March year end, we are beginning our planning season and then as usual we'll do in our next quarter the January communication as we’ll provide some outlook to calendar 2017 as we normally do. I think from what we see and you’re referencing especially the off-highway, the heavy equipment, construction side, commercial vehicle North America, I think we are expecting flattish type market in that area.
I think where we see potential growth is clearly continued growth on automotive in Asia, launching a lot of automotive engine products in North America and in Europe, and expecting further growth in building HVAC, and then we have to model Luvata on top of that. So not to point your question, I think certainly we would have the same concerns with some of the large OEs comments about next year, but we also have to model in some of the growth opportunities we see coming before we can net all of that out for you.
Mike Shlisky
Got it. That’s excellent color.
Thank you. Also wanted to touch on building HVAC, I was wondering if you could tell us if you have a reason why it was somewhat weak here in the fiscal second quarter and whether already in October, now we’re getting closure to the wintertime, are you seeing any improvement there just over the last couple of weeks at least?
Tom Burke
I think we spoke about this before Mike. We came off of last winter with people having stock on their shelves that are distributors.
So the restocking was lower and I think there was a fear building up too much stock going into season again. So we’ve anticipated that we should see an improvement with the winter season coming on.
This is the quarter to do it. October sales are up, okay from prior quarter and prior month.
So we are hoping that, that trend continues on for the rest of this quarter, but the biggest dynamic is just the inventory management, our distributors, and of course the cold snack that generally occurs in this quarter going forward.
Mike Shlisky
All right. Also I asked about, in the Americas segment, the Brazilian agonist at least got emissions related changeover starting at the first of the year and I was wondering – and of course that market also seems to be on – at least flatting out and improving for the rest of this year.
I was wondering if you have any kind of view whether that emissions changeover is helping your business in Brazil this year and/or if you think it will help you next year if there is some higher needs for cooling technology there.
Tom Burke
It’s definitely helping now. We're winning – just about everything quote on in Brazil his words being very satisfied with our targeted in construction and in growing commercial vehicle, but clearly the products we brought down there are to support that transition.
We are winning the business. Obviously the markets are extremely low, so it's not really turning into the revenue that we would like to see.
But when it comes back, we are gaining market share significantly in Brazil.
Mike Shlisky
Okay. And then also I wanted to see if anything is changed for you since you announced it with respect to financing terms or interest rate for the Luvata deal.
Is everything the same as when you first set it or are you seeing anything better on the interest rate side if you have debt?
Mick Lucareli
No, everything has been proceeding just as planned, Mike, no changes and we expect to complete all of those financing agreements very shortly.
Mike Shlisky
Okay. I’m going to squeeze in one last one here, back to building HVAC, is the outlook for Luvata the same as or similar to your current building HVAC segment or do you see that is having a whole different set of factors which it will be watching over the next 12 to 18 months?
Tom Burke
I think they are similar factors but clearly cover a much broader market than building HVAC folks, which tend to focus on heating ventilation and the air-conditioning. These supply a lot of refrigeration and everything else is out there as far as food storage and industrial applications as well.
And those applications that are similar to building HVAC to drivers are similar. Clearly, the tech drivers are significant with getting from the field to market, single on a food storage, that really we feel is a great tech driver that they're well-positioned for another similar type of things, but right now we aren’t really involved in.
So refer to those key markets that will join, we will be able to benefit from going forward.
Mike Shlisky
Okay, great guys. I’m going to hop back in the queue.
Thank you.
Operator
Thank you. And I'm showing no further questions from our phone line.
I would now like to turn the conference back over to Kathy Powers for any closing remarks.
Kathy Powers
This concludes today’s call. Thank you for joining us this morning and thanks for your interest in Modine.
Good bye.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program.
You may all disconnect. Everyone have a wonderful day.