Modine Manufacturing Company Q1 FY2026 earnings call

• Completed 3 strategic acquisitions: AbsolutAire, L.B. White, and Climate by Design International (CDI). AbsolutAire and L.B. White complement the heating business, while CDI integrates with previous acquisitions in desiccant dehumidification and critical process air handlers.
• Announced $100 million investment to expand manufacturing capacity across 4 U.S. sites for the North America data center business, including a new facility in Dallas, Texas area, further expansion in Grenada, Mississippi, and repurposing existing sites. This supports organic growth and product innovation in data centers.
• In Performance Technologies, took decisive action to control costs, reallocating talent to support high-growth Climate Solutions, and evaluating strategic options to realign and optimize the portfolio.

Climate Solutions: Revenue up 11%, adjusted EBITDA up 10%, adjusted EBITDA margin 20%. Data center sales grew $24 million (15% from prior year). HVAC Technologies sales increased $17 million (34%) due to heating stock plan orders and indoor air quality product sales. Recent acquisitions of AbsolutAire and L.B. White contributed $10 million in revenue. Heat Transfer Solutions: Sales declined 1% ($1 million) due to lower volumes to commercial and residential HVAC customers, mostly offset by higher sales to commercial refrigeration and coatings customers. Performance Technologies: Revenues down 8% due to challenging end market demand and product line exits. Heavy-duty equipment sales lower by 4% ($4 million) and On-Highway application sales down 8% ($15 million). Segment adjusted EBITDA declined 14% from prior year, margin decreased 100 basis points to 13.1% due to lower sales volume and higher material costs, partially offset by operating efficiencies and cost reductions.

• Fiscal 2026 total sales expected to grow in the range of 10% to 15% (up from previous 2%-10% range).
• Climate Solutions full year sales expected to grow 25% to 35%, with data center sales growing in excess of 45% (up from previous 12%-20% range).
• Fiscal 2026 adjusted EBITDA expected in the range of $440 million to $470 million (a $20 million increase from previous range).
• Plan to invest an incremental $100 million of CapEx over the next 12 to 18 months for data center expansion, resulting in lower free cash flow as a percentage of sales this year at around 3%.

• Performance Technologies faces tough market conditions with ongoing vehicular market downturns persisting for several quarters.
• Integration risks with recent acquisitions, which may require adding incremental resources and costs in the early stages.
• Tariffs and higher material costs impacting margins, with recovery of metals on a lagged basis and tariff recovery varying by customer and agreement.

Q: Can you talk about the magnitude of unabsorbed costs in the Climate business and the fiscal '27 data center revenue target?

A: The core capacity of the data center business has good conversion. The incremental $100 million investment for expansion will likely have a lower conversion rate, around 15%. Trending towards $1 billion in data center revenues this fiscal year, with a $2 billion goal in '28.

Q: What's the return on investment for the $100 million data center investment?

A: ROIC is well north of 40%, with high returns on capital due to strong customer reputation, right products, and execution.

Q: How much visibility do you have on data center demand to raise the guide early in the year?

A: Have visibility beyond a year, sometimes up to 3 years, tied to customer schedules for data center constructions and build-outs. Accelerated growth from existing and new customers driving expansion.

Q: Any updates on divestiture proceeds?

A: Expect to close the sale of the European headquarters later this year (estimated $10 million-$15 million), and ongoing process for light-duty business divestiture with a team focused on it.

Q: Are you expanding data center service capabilities?

A: Yes, hiring in North America to support service, necessary to keep pace with product growth, including building management and control systems for efficient operation.

Q: Any large orders similar to the $180 million one in the D.C. area?

A: Collection of orders of magnitude like the $180 million one drive the $2 billion goal, based on high backlog and strategic relationships with customers.

Q: Where might you focus on for acquisitions when resuming?

A: Bolstering HVAC Technologies business and potential vertical integration of the supply chain over the next 2 quarters.