Good morning, ladies and gentlemen, and welcome to Modine's First Quarter Fiscal 2024 Earnings Conference Call. At this time all participants are in a listen-only mode. [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.

Good morning and thank you for joining our conference call to discuss Modine's first quarter fiscal 2024 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 will be using slides for today’s presentation, which can be accessed either through the webcast link or by accessing the PDF file posted in 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, it is my pleasure to turn the call over to Neil.

Thank you, Kathy, and good morning, everyone. This has been an exciting quarter for Modine. First, we delivered another record quarter with 15% top-line growth and adjusted EBITDA of $80.4 million, an increase of 91% from the prior year. Second, we completed our first acquisition since announcing our transformation strategy with the addition of Napps Technology and the Jetson brand into our product portfolio in early July. Napps has a small chiller range that fits nicely within our indoor air quality business, providing an additional product line for our target schools market. I'm excited to welcome Napps' President, Sam Neale and his team to Modine, and look forward to continuing to manufacture this great product at their facility in Longview, Texas. This acquisition is directly in line with our growth strategy, which is focused on differentiated technologies and systems that address real-world needs. Most importantly, this acquisition demonstrates our commitment to responsibly investing in key verticals where our objective is to grow faster than the market. As a result, we're making great progress on our financial targets and planting the seeds for future growth. But this doesn't mean that we're reaching the end of the journey. In fact, I would say we're still in the early stages of this transformation. There is an additional opportunity for incremental revenue and margin growth as a greater percentage of our business portfolio shifts to the growth column, and as we further simplify and rationalize low-margin products. Please turn to Slide 5. The Climate Solutions segment delivered another strong performance this quarter with revenue up 11% from the prior year and an adjusted EBITDA margin of 18.3%, up 500 basis points from the prior year. In Climate Solutions, we are well along in our 80/20 journey and have proved out the effectiveness of this…

Thanks, Neil, and good morning, everyone. Please turn to Slide 7 to review the segment results. Climate Solutions had another great quarter with improved earnings and higher sales. Segment revenue was up 11%, driven by our data center vertical, with sales up 124% or $38 million. The data center increase is fantastic, given it supports one of our most attractive markets and is quickly becoming a very large portion of Modine's total revenue. A significant piece of the increase is related to North American chiller sales as we ramp up production at our new plant to Virginia. We entered the year with a strong backlog and realized some of the sales much earlier in the year than originally planned, which added to a stronger-than-anticipated first quarter. HVAC&R sales were down a modest 2% or $1 million, driven by lower sales of heating products, partially offset by higher indoor air quality sales, which were up 40%. The heating market remains down largely due to higher field inventories and lower preseason stocking sales. Sales of heat transfer products decreased 7% or $9 million. As anticipated, there was some market softness with commercial refrigeration customers and in various residential-related markets. And we are also continuing 80/20 product rationalization activities. We're pleased with the very strong earnings conversion as adjusted EBITDA increased 53%, resulting in a 500 basis point margin improvement to 18.3%. The earnings and margin improvements were primarily driven by higher sales volume and benefits from 80/20 initiatives. The Climate Solutions segment continues to perform very well and is off to a strong start to the year. The growth in data center sales is driven by a robust backlog, which is continuing to grow. With regards to heating and heat transfer products, we're maintaining a cautious outlook for the second half of…

[Operator Instructions] Our first question comes from the line of Matt Summerville with D.A. Davidson.

Obviously, a great quarter. A couple of thoughts. Just with respect to Performance Tech, can you maybe quantify to the extent you can, how much retroactive benefit that would be kind of more onetime in nature that you saw in the quarter that you would not expect to repeat necessarily looking forward?

Yes. Hey, Matt. It's Mick. Good morning. The total company, we estimate there is at least $10 million in the quarter of pull-ahead. Things we got earlier than we thought would happen plus some retroactive adjustments, and that's for the total company. As I look at it between PT and CS, I'd probably estimate that it's about 2/3, 1/3, about 2/3 of that coming in PT and 1/3 of that in Climate Solutions.

Okay. And then a follow-up. Data center business. Obviously, you had a pretty amazing first quarter here. Neil, I want to understand a little bit more about how you're approaching the high-performance computing market, the liquid cooling strategy, realizing you may have some current development paths going on here? But I guess from a timing standpoint, when should we expect Modine to be able to address that cross section of the market head on? And then, could you give a little bit more granularity around what incoming orders and backlog might look like specifically to data center, either year-on-year sequentially? Just whatever color you're willing to provide. Thank you.

Yes. Good question, Matt. Thank you. This is Neil. Sure. We've seen a very healthy pipeline within data centers. And when we continue to build out our customer base and broaden our customer base, particularly around the colocation side, these potential orders that are in the pipeline, when they break, they make large swings. So we typically don't predict some of these larger orders until they actually cut over to POs and that's where you're starting to see some of that adjustment as this funnel continues to grow. More and more is transitioning through the tollgate process into purchase orders. So we like that. We enjoy that, and we appreciate the work that we're doing with our customers there to help support them and meet this sustainability targets. Relative to liquid cooling, we've been close to this. We're going to remain close to this. This has been something that Modine has participated in for over a decade. We understand the shift in the technology. But we also understand that there isn't a clear technology winner, whether that is going to be immersion cooling or liquid and chip cooling. And we want to understand where the market will continue to evolve. And as this market becomes more dynamic around liquid cooling, we're going to continue to observe to see where the greatest opportunity is for Modine to penetrate. And again, that can be through agreements or inorganic growth or organic growth. We are in a good position to do either. And we'll move at the rate as the market adopts. And as the market adopts, we'll make those adjustments accordingly. So we're very keen to the market. We understand it. Our customers understand it. Our customers look to Modine for these solutions, and we'll make the adjustments appropriately.

Thanks, Neil. And then, maybe I'll just sneak maybe one more. And just to kind of use a baseball analogy, how would you characterize what inning we're in within the two business segments with respect to generating the 80/20 benefits you fully intend to achieve within Climate and Performance? Thank you. A - Neil Brinker Yes. Good question, Matt. This is Neil. So in Climate Solutions, we're halfway through the first game of a 5-game series. And in Performance Technologies, we're just getting started. So the teams, they're organized appropriately. They've picked the markets that they want to grow in. They understand the strategic initiatives and objectives, and we've put in the right leadership team in order to execute on those objectives. So as you know, we started Climate Solutions a year ahead of Performance Technologies deliberately, and they're tracking right in line with what our expectations were with the financial targets that we put in place in New York last year.

Our next question comes from the line of Chris Moore with CJS Securities.

Couple of questions. Maybe just big picture on pricing. I know that you guys have raised prices aggressively over the past year or so up until at least recently. You talked about still being under-priced in many areas. Just wondering, is that still the case? Is there specific areas that you could talk to there?

Hey, Chris. This is Neil. Good question. Yes, we continually go out and evaluate the marketplace in terms of where we're positioned with price, as you know, in this inflationary environment and increases in metals and other commodities. We're often -- and regularly reassessing that and then having conversations with not only our customers, but our supply chain as well to improve those positions. So this is part of our business cycle, part of our business system, and it's how we operate. So frequently, would be the answer to that question.

Got it. Helpful. Thank you. So my understanding is that auto OEMs have multiple vendor relationships with suppliers like Modine. However, they often sole-source a given platform. So assuming that factor, do you see situations where the OEM might be reluctant to allocate the internal engineering resources necessary to get another vendor specked in, even though your pricing is picking up significantly?

That's a good question, Chris. I think all OEMs have different strategies. They could have dual supply chains, single supply chain, triple. That depends on how they want to balance the strategic -- or supply chain risk, if there is any, whether that's an issue with a factory output production or it's an issue with logistics or maybe even price. I think they all have their own unique strategy. But that element that you just described and there's also an element of we've seen a conversion over to EV. And as we look at opportunities on the internal combustion engine side, and maybe there's adjustments there commercially that are made, I think you also have to consider whether or not it's worth the time and effort and energy in order to maybe find additional suppliers to provide that product, knowing that the platform is going end and it's going to convert to EV anyway.

Got it. Very helpful. And maybe just last one for me. So it sounds like this 25 EV program wins $150 million. I'm just trying to understand over what time frame or are you kind of looking at that?

Yes. It's Mick. It's going to be a significant ramp. Last year was about $50 million or so in EV business. And we estimate that, that will grow at 40% to 50% compound growth rate. So if you kind of extend that out, you get a feel for when you think we'll be hitting that run rate.

Our next question comes from the line of Jeff Van Sinderen with B. Riley Securities.

Let me add my congratulations on the strong metrics and overall progress. If we could look back to the data center segment for a minute, just wondering how fast that segment could grow? In other words, how much capacity do you have to meet demand if it happens to exceed your internal plan kind of ahead of expectations?

Jeff, good question. This is Neil. Thanks for that. We're evaluating our capacity and we're looking at redundancy, and we're making investments there. So as you know, 2 years ago, primarily most of the data center output and revenue came from the U.K. out of one facility. And since then, we've expanded to 2 facilities in the U.K. We've retooled an existing manufacturing facility in Spain to support data center growth for Continental Europe. We've modified a facility in Virginia to produce our chillers for North America. So we added additional capacity there, and we're adding capacity in Mississippi as well. So we're across 5 different footprints. And we have the capacity to continue to grow with the rates. We have more capacity than the actual stated percentage of growth year-over-year. So I'm not concerned about capacity. It's just a matter of being able to transition the conversation that we have with our customers and provide the products and the engineering solutions. The capacity in terms of factory, we're in a good position.

Okay. Great to hear. And then maybe if you could delve a little bit more into what you're seeing in the school market for indoor air quality? Just a little bit of update there?

Yes, that's a great business for us. We continue to gain share there in that space. We're working on the process of actually dedicating a facility to that. There's enough volume now that we can dedicate an entire facility to that. So we're getting that positioned and ready to grow. We see this outlook of growth at this rate for the next couple of years as well. The funding is continuing to flow through into the schools, they're making the decisions, they're upgrading the infrastructure. And we put ourselves in some pretty good positions with our reps and distributors to fulfill the needs of the customers.

Okay. Great. And then I had sort of a P&L question. On the gross margin that came in substantially better than we expected, which we know is going to focus during the current phase of transformation. Can you maybe speak to whether you believe the level of gross margin we saw in Q1 is sustainable? I know that you mentioned maybe a little bit of not linear progression over the next few quarters and the revenues. Just wondering how we should think about gross margin over the remainder of the year?

Hey, Jeff. It's Mick. I mentioned to Matt's question, we estimate at least about $10 million in Q1 of good things that were pulled ahead. If we look at having an average in the next few quarters around $70 million, plus or minus, it's probably about a point of margin. So I think for sure, the gross margin is driving the earnings. We talked about that 80/20 is going to come through at the gross profit line. It wasn't an SG&A story and we expect that to remain elevated. But going like from Q1 forward, I would say it will remain elevated, but probably about 1 point or so below where we were in Q1. Obviously, in my comments, I think ramping towards the latter part of the year. As Neil said, we're still early phases of 80/20. So super hard to repeat all the one-timers benefits we've got in Q1, but then ramping again later in the year. And I'd say at about 1 point probably lower for the next couple of quarters.

Okay. That' helpful. Thanks for taking my question. I will take the rest offline. And please keep up the fantastic work.

[Operator Instructions] Our next question comes from the line of Tim Moore with EF Hutton.

Thanks. And reiterating the very impressive [indiscernible] rates for the quarter. I was going to drill on to data centers, to other analysts speaking to it, most of my questions. But just maybe following up one more question on data centers, given the increased guidance and the sales growth coming in maybe 4x what you expected. Just back there on the capacity, you explained that there's plan to visit the Virginia site next week your plant to work. Are you getting enough labor there? And for the colocation center projects, I mean, how much lead time do you need on that? And I'm also just wondering, given the rapid growth of it this year, do you think that pulls in a little bit of the sales growth from next year? Or is this incremental market share wins, do you think?

Yes. Good question. Thanks for that Tim. We have a pretty broad labor force in BV, as you know, the Rockbridge facility where we produced the chillers. We've been able to secure the amount of good work and assembly workers there and pipe fitters that help us with that. We also have a facility in a factory that employs several hundred people, that's 10 miles away and we can flex labor back and forth. So if heating volumes were down, you could arguably flex the workforce in Rockbridge as well since we have multiple facilities in that campus and in that county. So labor isn't a concern for us at the moment. The second question was -- yes, so relative to visibility, typically, we start engagements with our customers and we start to move them through our pipeline. And it could take anywhere from the initial conversation to the point where we actually get an order of 6 to 12 months.

Great. That's helpful. You already hit air quality, and I've been talking about that with all the mild buyers and the smoke pollution. But maybe I'll just switch gears. I mean, given air quality was up so strong and we know you probably have orders for the schools. But just my other question is really around acquisitions, given that you've kind of given that sales acquisition goal. Have you seen for your Climate Solutions acquisition pipeline, the asking prices become more reasonable over the last few months or are they still pretty lofty by the sellers?

No, that's a good question. It depends on the technology. It depends in terms of what the technology that they have to offer and at what level of adoption rate is or if it's specified or specked into the product that's being consumed today by the end users. So certainly, there's some hot markets as we grow out our inorganic pipeline. And I'll tell you, I'm really pleased with what the team has been able to do there. As we've got multiple opportunities at different levels and different gates, we're going to be cautious, and we're going to do the right things for the business as long as it aligns with the strategy. But certainly, we're starting to see some areas, like you just described, into air quality where you do see some of these elevated rates.

Our next question comes from the line of Matt Summerville with D.A. Davidson.

I apologize if you touched on this. But just back to the data center side of things, are you seeing pretty similar growth in both colocation and hyperscale markets? And are you still on the hyperscale side just doing business with the one large player? And do you think doors may be opening to some of the other hyperscalers?

100% yes, doors will be opening to other hyperscalers. And the business mix is healthy on both sides. So we're seeing the growth in colocation, and we're seeing the growth with our hyperscalers customers as well. That combination of the two is why we're increasing our year-over-year objectives and targets in data centers.

I can't remember which one of you guys mentioned it. But I thought I heard that out of the five growth opportunities, right, you guys talked about a lot of the EV battery, it's data center, it's indoor air, it's genset and then European heat pump. And it sounds like that the growth rate on the latter might be decelerating a bit, whereas in some of the others, it sounds like it may be accelerating. So what's driving the pace of -- the rate of change on the European heat pump side of things? And does that give you pause with some of the capacitation you've been undertaking there?

We're going to continue to grow our Serbia facility and factory with CapEx. And we're going to continue to install machines and dedicate lines to the heat pump growth targets that we expect. So we're going to continue to invest in Serbia and build out that facility. The thing that gives us a little bit of a pause is the turmoil in the European market relative to what the priority is on regulation. As you know, there was a strong movement and there was a lot of followership behind moving away from natural gas in Europe. And there were regulations and incentives that were deployed to do just that. But recently, we've seen a different priority that's got some traction in Europe around reducing GWP. And in order to do that, you have to use a different refrigerant. And a lot of the heat pump manufacturers aren't there yet to move at the same rate. So it's almost like we slammed the accelerator to move forward to deploy heat pumps in the European market and then we hit the brake at the same time relative to regulations around GWP. So we know that the European Commission will be getting together after the summer recess, sometime likely in September. And I think as soon as they work that out, we'll get back to the levels of key pump adoption that we had predicted. But for now because there seems to be a little bit of conflict between the two agencies there. We're launching this and observing.

I am showing no further questions at this time. I would now like to turn the conference back to Kathy Powers for closing remarks.

Thank you, and thanks, everybody, for joining us this morning. The replay will be available through our website in about 2 hours. And we hope everybody has a great day. Thanks.

And this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.