MODINE MANUFACTURING CO Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Strategic Pillars: Five pillars including thermal management expertise, 80/20 strategy, mega-trends (AI, data centers), 80/20 discipline, and portfolio evolution.
• Investor Day: Reviewed key messages, introduced new vision statement and three-year financial targets (10-13% revenue CAGR, 16-18% adjusted EBITDA margin by fiscal '27).
• Segment Updates: Climate Solutions data center growth, new CDU launch, capacity expansions in UK, Calgary, and India. Performance Technologies partnership with Gillig, smart electric components, and countermeasures for volume challenges.

Segment Performance

• Climate Solutions: Revenues more than doubled, driven by data center business growth (half organic, half from Scott Springfield acquisition). Adjusted EBITDA improved 47% with a margin above 21%. Data center sales grew 102% ($80M), HVAC&R sales up 14% ($13M), heat transfer product sales down 13% ($16M) but commercial settlements helped offset lower volumes.
• Performance Technologies: Earnings and margin growth despite top-line revenue drop from vehicular markets. GenSet module business growing. Advanced Solutions group had positive sales growth, with partnership with Gillig and smart electric component portfolio. Adjusted EBITDA up 5% with a 230 basis point margin improvement. Revenue down due to automotive divestitures and market softness, but GenSet sales up 29%.

Guidance

• Fiscal '25 Outlook: Holding fiscal '25 outlook. Climate Solutions data center sales outlook increased, HVAC&R up, heat transfer down. Performance Technologies adjusted for customer trends. Fiscal '25 adjusted EBITDA range $375M-$395M. Q3 expected lower than Q2 seasonally, Q4 ramp up. Free cash flow in line or above prior year. Adjusted EPS range $3.65-$3.95, effective tax rate 26-28%.

Risks

• Market Volatility: Temporary volume challenges in certain markets, especially in Performance Technologies. Dependence on regulatory-driven markets for heat pumps.
• Competitive Pressures: Potential challenges from competitors reacting to price increases in auto ICE business.

Question and Answer

Q: Per megawatt potential increase in content for hyperscale data center chiller sales?

A: Market pricing for 1.5 MW chiller ~$0.5M USD.

Q: Advanced Solutions business dynamics?

A: Revenue outlook lowered on auto EV component side, but battery thermal management and EV systems growing over 30%.

Q: Heat pump market recovery visibility?

A: Driven by regulations, permits and incentives take several quarters.

Q: Data center customer base expansion?

A: Focus on niche market, moving to low double-digit teens market share, based on existing customer funnel and incremental customers.

Q: PT downturn and 80/20 acceleration?

A: PT downturn enables 80/20 initiatives to offset, with focus on deemphasizing non-strategic $300M business and doubling down on growth areas like power generation and EV systems.