Modine Manufacturing Company Q2 FY2026 earnings call

1. Climate Solutions: Continues to deliver, with a 24% revenue increase. Includes contributions from 3 acquisitions earlier this year. Organic sales increased 15% excluding acquisitions, driven by a 42% increase in data center sales. Made progress on capacity expansion in multiple locations, launched chiller production in Grenada, Mississippi, and has plans for expansion in other locations. Hiring and training of workforce is a hurdle, but expects margin improvement in Q4. Successfully launched production in Chennai, India, and plans to expand chiller capacity in the U.K. 2. Performance Technologies: End markets are challenged, but actions taken have a positive impact. Adjusted EBITDA improved 3%, and adjusted EBITDA margin increased by 90 basis points. Reorganized the business, reduced SG&A expenses, and is led by Jeremy Patten. Focused on margin improvement despite ongoing challenges.

1. Climate Solutions: Delivered strong revenue growth with a 24% increase in sales. Data centers grew $67 million or 42%, HVAC Technologies increased $17 million or 25% due to inorganic sales from recent acquisitions, and Heat Transfer Solutions grew 2% or $3 million. Climate Solutions' second quarter profit margins were lower than normal, with adjusted EBITDA declining 4%. 2. Performance Technologies: Revenue declined 4% from the prior year, but adjusted EBITDA was up 3% and the adjusted EBITDA margin increased by 90 basis points to 14.7% due to cost control measures. 3. Total company: Second quarter sales increased 12% driven by Climate Solutions. Gross margin declined 290 basis points to 22.3%. SG&A expenses declined, and adjusted EBITDA was up 4% from the prior year with a margin of 14%. Adjusted earnings per share was $1.06, 9% higher than the prior year.

1. Raised total company sales outlook for fiscal 2026 to grow in the range of 15% to 20%. 2. For Climate Solutions, raised full-year sales outlook to grow 35% to 40% with data center sales expected to grow in excess of 60% this year. Anticipates sequential increases in Q3 and Q4 with second half year-over-year sales growth exceeding 90%. 3. For Performance Technologies, raised sales outlook to be flat to down 7% from the prior range of down 2% to 12%. 4. Held full-year adjusted EBITDA outlook for fiscal 2026 to be in the range of $440 million to $470 million. 5. Anticipates generating free cash flow in the second half of the year but lower as a percentage of sales compared to the prior year, with full-year free cash flow expected to be in the range of 2.5% to 3% of sales. 6. Anticipates free cash flow margin will return to previous levels and be in line with fiscal '27 targets next year.

1. Heavy lift of hiring and training workforce for data center capacity expansion, resulting in temporary cost increases and margin erosion. 2. Terminal market demand challenges for Performance Technologies, including ongoing trade conflicts and cautious market sentiment. 3. Uncertainties in the start-up and operation of production facilities during capacity expansion.

Q: Can you parse out year-over-year margin contraction on climate side, get back to 'normal' in fiscal fourth quarter and frame the potential of Climate having higher profitability going forward?

A: Matt Summerville's question was addressed by Michael Lucareli and Neil Brinker, breaking down margin components, discussing ramp of capacity, and explaining the potential for higher profitability as volume increases and learning from launches.

Q: 90 days ago, you mentioned data center goal approaching $2 billion in fiscal '28, now talking over $2 billion just 90 days later. What changed with order activity, funnel, customer acquisition?

A: Neil Brinker responded that order and funnel rates have increased, with more demand, evolving relationships with customers, and new products and market opportunities leading to increased confidence in deploying CapEx.

Q: How to think about data center market share and contribution of air vs liquid cooling to $2 billion target?

A: Neil Brinker stated that Modine is growing above the market, gaining share, and both air and liquid cooling are needed in the data center space, with growth driven by AI expansion, and the margin profile is relatively consistent across the product suite.

Q: Is the right way to think about front-loading investments in data center capacity ramp and confidence in normal incrementals?

A: Michael Lucareli and Neil Brinker explained about the challenges of starting new facilities, learning from launches, volume and lean initiatives, and the consistency of past performance and ability to repeat successful strategies.

Q: How to view customer concentration, new customers, and modular product demand in data center?

A: Neil Brinker discussed evolving customer relationships, expansion with hyperscalers and neocloud providers, and the progress of modular product demand, with ongoing discussions and positive interest from customers.

Q: Color on range of outcomes in data center ramp and HVAC technology trends?

A: Michael Lucareli and Neil Brinker addressed the balancing of demand and manufacturing targets, and the trends in HVAC technology including acquisition progress, indoor air quality performance, and the upcoming heat season impact.