Good morning, and thank you for joining our conference call to discuss Modine’s Second 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’ll be using slides with today’s presentation, which can be accessed either through the webcast link or by accessing the PDF file posted on 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’s my pleasure to turn the call over to Neil.

Thank you, Kathy, and good morning, everyone. I’m pleased to report another strong quarter with both solid revenue growth and earnings improvements that came in ahead of our expectations. Sales increased 7% from the prior year, driven by increases in both the Climate Solutions and Performance Technologies segment. In addition, we reported adjusted EBITDA of $81.2 million, an increase of 59% from the prior year. EBITDA margin was 13.1%, a 430-basis point improvement from the prior year. As a reminder, last year we set a goal to significantly improve our EBITDA margins, targeting a range of 10% to 12% by the end of the fiscal year, and reaching 13% to 15% range by the end of fiscal 2027. We are clearly ahead of these targets, driven by a combination of key factors, including using 80/20 principles to guide decision-making throughout the organization, allocating additional resources to targeted higher-margin businesses, and focusing on the value we bring to our customers and leveraging that to drive margin improvement and profitable growth. I’m very proud of what the organization has been able to accomplish in a short period of time. I continue to believe that we remain in the early stages of our transformation as we see medium to long-term opportunities for sustainable growth that will continue to improve our financial profile. Please turn to Slide 5. The Climate Solutions segment delivered an excellent quarter with revenue of 8% from the prior year. We are benefiting from the planned diversification of our businesses, as strong growth in the data center vertical is helping offset some weaknesses in the other HVAC markets. The segment reported adjusted EBITDA of $50.4 million, a 31% increase from the prior year. This resulted in an adjusted EBITDA margin of 18.3%, up 330 basis points from the prior year.…

Thanks, Neil, and good morning, everyone. Please turn to Slide 7 to review the segment results. Climate Solutions had another excellent quarter with a 31% increase in adjusted EBITDA. Revenue grew 8%, including a $7 million favorable FX impact. The growth was driven by data center increasing 117% or $43 million. We continue to see strong demand for our products in North America and Europe, including those supporting both hyperscale and co-location customers. As Neil mentioned, the timing of these sales can be somewhat unpredictable, and shipments in the quarter once again exceeded our expectations. Based on the timing of our current customer schedules, we anticipate lower shipments in Q3 than ramping significantly in Q4. I want to highlight that while the timing can be hard to predict between quarters, our full year outlook has not changed, with growth expected to exceed 60%. HVAC&R sales were down 2% or $2 million. The heating market remains soft but has improved sequentially from Q1. We expect to see further rebound as we enter the heating season, but the weather will ultimately factor into the strength of our sales for the balance of the year. Sales of heat transfer products decreased 16%, or $21 million. As discussed in previous quarters, we’ve experienced a decline in market demand with commercial refrigeration, along with commercial and residential HVAC&R customers. We believe many customers are continuing to work down excess inventory that was created during the previous supply chain shortage. Additionally, we’ve continued 80/20 product rationalization activities to drive further margin improvements. We’re pleased with the strong earnings conversion as adjusted EBITDA increased 31% with a 330 basis point margin improvement to 18.3%. The earnings and margin improvements were driven by higher sales volume and benefits from ongoing 80/20 initiatives. Climate Solutions clearly had a very…

Thank you. [Operator Instructions] Our first question comes from Matt Summerville with D.A. Davidson. Please go ahead.

Excuse me. Thanks, good morning. I wanted to maybe start with a question on the data center business. The growth cycle you’re in fiscal 2024, what does that suggest about fiscal 2025 in the context of the backlog and order comments you made and what were in the slides here? And then I’m curious if you have any update on customer diversification initiatives within the hyperscale market and any early feedback on the CDU? And then I have a follow-up. Thank you.

Do you want to go first on CDU?

Yes, Matt, thank you for the question. Yes, so as you know, we continue to experience growth and we continue to grow the backlog in data centers. A lot of that was driven by the fact that we’ve expanded our ability to manufacture globally. The CapEx investment that we made in our labs and our factories in the United States as well as in Europe to support this growth, to allow us to build the capacity to keep up with this demand that we’re seeing. We’ve been able to expand our product portfolio on the air cooling side as well. An integral piece of this growth was being able to develop and manufacture a chiller in the United States and North American market. So we will continue to expand our product portfolio and data centers, and the next evolution of that is with the CDUs. So these CDUs are going to get us into a different area of the data center to allow us to provide liquid cooling, and that’s the VOC that we’ve collected from both our hyperscaler and colos. They pivot into more of a liquid cooling approach for areas where they have high heat density and heat loads. They’re leaning on us in order to help them provide that solution. And you know, this isn’t new to us, Matt. We’ve recognized this and we’ve realized this. We actually produced the CDU back in 2016. And, you know, this was before there was a market. And now that we see that there’s favorable trends where we can complement our current product portfolio of cooling products and data centers, adding the CDU piece just makes a lot of sense.

Yes, and Matt, on your question about next year, we’re in the middle of our planning process, so a little bit early to give a definitive number for you. But I think the way we thought about it for quite a while is the ability, obviously, to grow 60%, 70% a year is not going to be sustainable over the long-term as the business gets much bigger. But we’ve talked about longer-term growth rates in the 20%, 30% level, maybe even a little bit higher. So still really high. We’d expect very high revenue growth next year, but it won’t continue at a 60%, 70% pace.

And then I asked about any progress on hyperscale customer diversification.

Yes, we continue to have conversations and advance our conversations there. It takes time. We started the process about 18 months ago, and we’re much further along in line with where we would expect to be. Again, adding our capacity across the globe, having the global manufacturing footprint, increasing our product portfolio with liquid cooling technologies, all is in favor of us being able to continue to advance those conversations with the hypers.

Got it. And then, just as a follow-up, as I kind of think about the guidance framework you gave coming out of Q1, thinking about Q2, pretty much everything you just delivered bucked all of that guidance in a good way. And I’m just curious about the go-forward guidance. Have you really seen a step function change in the demand environment? Or are you looking at this saying, macro is a little choppy. There’s a few myths here and there in the business. Geopolitical environment is unfortunate as it is what it is, so to speak. So, maybe some conservatism here is understandable. I’m just trying to sort of more dig at kind of your guidance philosophy as we think about the second half in the setup, given how you performed in 1H?

Yes. Hey, Matt, it’s Mick. I think really fair question. And I think it’s much more of the latter. We’re not seeing a step function change in the business or any level of profitability levels. The latter, which you went through that list of the uncertainties kind of across the market, geopolitical environment, a number of things in a few markets like the heating season coming up. So I know we had thought Q2 would be a little bit of a step down from Q1, and we had another strong quarter. In there is the other thing I guess I’d add, and Neil could add any color, but as we continue to go through this transformation, the amount of complexity that we have in the organization, we’re asking the leaders to manage through businesses that we are divesting product lines we’re exiting, pricing adjustments we’re pushing through growth volumes and timing. It’s turned out for us in a positive way, the momentum is great, but our ability to predict in one quarter to the next, with that level of accuracy, there’s a large amount of complexity in the company right now. That’s just making it, we’re trying to be cautious of how we project for the next six months. Neil, do you want to add any other color on it?

Yes, I mean, when you think about how difficult it is to predict change in a stable environment when we destabilize it, through a lot of our 80/20 activities intentionally for the right thing to do, we’re transforming the company. When you’re in a destabilized mode, we’re changing many, many things all at once. It does become a little bit more difficult to predict. So we’re continuing to manage it the way we do and we want to make sure that we keep consistent with our approach in terms of how we guide.

Great. Thanks, guys.

Thank you. Our next question is from Chris Moore with CJS Securities. Please go ahead.

Hey, good morning, guys. Thanks for taking a couple of questions. Maybe I’ll just start with a quick follow-up on the data center side. The current backlog, is that all air cooling technology?

Correct.

Got you. And the time frame on the CDU development, is that a couple of years? What does that look like?

Great question, Chris. We expect to have the ability to commercialize that in the beginning of next year. And it’ll grow at the rate that we see, or we potentially could predict the market adoption of this. So it’s a nice compliment in terms of what we’re doing on the air cooling side. We’ve got multiple technologies here with the CDU. We can do liquid to liquid, we can do air to liquid. There’s just different ways to solve for the challenges that our customers see. So we’re going to be able to move and deploy product at the rate that they rate that they see that growth inside of the data centers that support high density hilos.

Got it. Very helpful. Does the competitive landscape change much as you move on to the liquid cooling side?

It’s a natural extension of what we do. The competitive landscape is similar. The technologies are different. Some of our competitors have partnered with some companies that have this technology and they position themselves well with joint ventures and other things, but it’s similar space. We’re familiar with it. We’ve been waiting for the time to make this investment when we actually start to see this market start to stabilize and has the potential to grow. Like I said earlier, we’ve developed CDUs in the past. We did this six years ago. There just wasn’t a market for it. So we believe the time is right.

Perfect. That’s helpful. Let me switch gears here. So Ford is postponing a $12 billion EV factory. The reasons given were unwillingness of customers to pay extra for its electric vehicles. Just wondering kind of how you look at that? Any impact potentially on the ICE auto business or EV business in general. Just kind of your thoughts there.

Yes, it’s an interesting question, right? We don’t focus on EV automotive. Our EV areas that we focus in terms of the electrification is on specialty vehicles. We really look at larger EV applications that require our systems and solutions. And we’ve moved away from any EV related to automotive that’s component related. So, where we see growth and where we see the demand, we’re partnered with – we’re on 119 different engagements with customers in the areas that we target for EV. We see 27 orders or platform wins that we’re very pleased to have won. We’re expanding our EV product group. We’re expanding capacity in our plants in Tennessee. We just recently put out a press release that we’re expanding into Europe. We’re going to be producing in Italy. So we see growth in the areas that we’ve defined – that is target for us in the EV. Again, that’s in systems and in vehicles like specialty vehicles, municipal buses, school buses, last mile delivery vehicles, that’s the space that we’re focused on.

No, I got that. I understand it wasn’t on the auto side. I was just curious if you’re getting any pushback from a pricing perspective. Sounds like so far, so good on that front. So I will leave it there. I appreciate it.

Thank you.

Thank you. Our next question is from Jeff Van Sinderen with B. Riley Securities. Please go ahead.

Hi. Good morning, everyone. Now you mentioned lumpiness, I think, and a pull forward, I believe you said, into Q2 in the data center segment, maybe you can, if I caught that right, maybe you can just help us understand the dynamics there.

Yes. It’s Mick. So definitely, we – from a forecast standpoint, probably the last, you know, three or four months or so, based on schedules from our customers. We knew the lowest quarter of the year would likely be our Q3. Those data center, what we’ve talked about in the past, is they can be lumpy. These are, we had a photo in the presentation, really large construction projects. And so we’re required to have product ready to be shipped. But when they’re pulled, it depends on the customer and the completion. They only want it on time, ready to go. So in Q2, we had a little bit higher revenue than we thought that was really going to be, we thought would be coming in Q3. And then in Q3, we expect to have a lower amount of revenue in Q3 and a big ramp in Q4. Again, just based on – consistent with our order book, but it’s based on the timing of where we see the customers pulling and asking for those shipments.

Okay. Fair enough. And then I just wanted to follow up on the CDU. I guess latest thoughts on how you’re approaching high performance approaching high performance in AI data centers? And then does the CDU address that, given that it’s liquid cooling or not for that market?

No, that’s a good question. Yes, it does address that. So anywhere where you need to augment your cooling capacity in a data center where you have the traditional air cooling mechanisms. And if you – as a data center or co-location want to expand into higher performance, higher computing speeds because of AI or AV or ML, machine learning, you would need a more efficient cooling technique and liquid cooling is a more efficient cooling technique. So this is liquid cooling that supports direct to chip, for example, cooling to allow for removal of heat on those heat loads on those silver racks. So yes, it is part of that – those market drivers. This helps support and solve for that problem.

Okay. And I think you said that that’s actually going to be available in the first part of calendar 2024 or did you mean? I wasn’t clear on that.

Yes, we’re looking at the first. We’re looking at the first part of next year, correct.

Okay. Great. And then just one quick one if I could squeeze it then. Any update or any updated thoughts, I guess, on what you’re seeing in terms of M&A potential targets, pipeline? Any more color to add there?

Yes. It’s been flowed a little bit, but we talked maybe a quarter or two ago with rate hikes and nervousness around the economy. We saw some deal flow and opportunities kind of slow down. People were hesitant to come to the market. I would say the last few months it’s been picking up a little bit for us. In addition, as Neil and I have talked about, we’re continuing to have more people on the Modine side being aggressive with dialogues, discussions, knocking on doors. So, we’ll continue to report back. But it’s a 100% effort going forward and I think we’re feeling good about the pipeline with opportunity we’re building.

Okay. Great. Thanks for taking my questions and continued success.

Thanks, Jeff.

Thank you. [Operator Instructions] Our next question is from Tim Moore with EF Hutton. Please go ahead.

Thanks, and congratulations on the gross margin expansion and the data centers growth. For overall Modine, I mean, it seems like you’ve harnessed the quickest and easier way to grow sales is through your current customers, that helps the margin profile quicker, and maybe a new customer that has new engineering design cost drag. As you look out over the next 12 months, I mean do you expect to take on some more new customers outside of the EV platforms that you’ve been signing up? Do you think that might weigh a little bit on gross margin expansion, or do you think the 80/20 would offset that if you’re adding new customers?

Yes. Well, it’s a good question, Tim. Certainly, we’re looking at new customers and new geographies where we’ve identified market-facing verticals that are growth. So if you think about the GenSet market, you think about what we’re doing in EV, data centers, indoor air quality, absolutely. And through 80/20, as we identify those customers, we have filters, just to be direct. We’ve got filters in place to make sure that we don’t have erosion in terms of all the hard work that we’re doing.

That’s great. That’s helpful color. I definitely enjoyed visiting your data center manufacturing facility in Virginia three months ago and got a really good appreciation of the uniqueness of the offering there. That was a great Investor Day. But what I really want to get to, I know the opening remarks you mentioned, 12 to 18-month backlog range for that. I’m just trying to get a sense if there’s a shadow backlog behind that, as you talk to your customers and they plan finding more power sources, electricity to run their co-location and hyperscale’s and you kind of think about maybe what CDU can do, the end of the calendar 2025. Do you think that, your backlog is a lot bigger than maybe the 12 to 18 months based on kind of the plans of your customers for their growth?

Yes, it’s a good question. Certainly, if we think about it in terms of our percent confidence, when we get to the point of backlog, we run it all the way through a funnel, right? So when you’re looking at backlog, this is a high degree, high visibility, high likelihood that the order is going to be placed or the order has already been placed. And even before that, we look at our commercial funnel and we say that it’s 50% visibility and it’s larger than the current backlog. And then there’s a precursor to that, which is 25%. Assuming that you have 25% visibility of it, that order is larger and bigger. As you get out in the out years, three, four, five years, it’s much more difficult to predict. But certainly we’re having conversations with our customers because as you go along that cycle, whether it’s at 25%, 50% or 75%, you have to start triggering supply chain, manufacturing, operations, and there’s an entire process. So yes, we have those conversations. Yes, we see and we do have visibility of it. But we don’t declare victory until we have the order in hand.

And that’s helpful. Thanks, Neil. I just have two more questions. Your gross margin is beat several quarters in a row versus maybe from the commentary or what the consensus number was. Any sense, if Mick wants to take a stab at this, any chance to maybe parse out how much of the gross margin expansion maybe this quarter or recently roughly is from kind of the cost-saving/efficiencies bucket versus catch-up pricing taken. We’re – I cover a lot of industrial stocks, and a lot of them have had terrific price increases the last 12 months to 16 months, but they’re starting to see it slow in October and November. So, I’m just trying to get a sense, is the 80/20 still a pretty big driver as it gets rolled out more to Performance Technologies? And are you kind of tapping out on maybe the pricing catch-up?

Yes, yes, that’s a fair question. I would answer it two different ways or two ways. If we break it down by Climate and by Performance Technologies, Climate Solutions and very intentionally as part of the transformation, the strategy has shifted towards a heavy lean on growth. And so, most of the margin improvement we’ve been seeing in Climate Solutions over the last two quarters, I would say is driven by growth. And yes, there’s mix in there, but we’re growing. The businesses that we want to grow have high margins and margins where we want them to be. And data centers is a good example. Performance Technologies, again, and Neil’s talked about this for a couple quarters, we specifically paced that. They are deep into the early phases of 80/20. So, for Performance Technologies over the last couple quarters, they’ve had a much bigger margin drive based on, I would combine it, it’s not just pricing, but product line simplification. And with that, it’s cost reduction and throughput and productivity. So, yes, we continue to think Performance Technologies for a bit is going to be cleaning, simplifying their business, focused on margin improvement with a heavy dose of growth in EV. And then we would expect probably a year out, Performance Technologies will continue to then identify those pockets where they see above market growth rates. So hope that answers the question for you.

Mick, that definitely did. That was really good granularity and gives me more optimism about the runway for margin expansion from this technology and even climate. Unlike some other industrial companies you’re seeing your pricing power have this quarter. But my last question is around your SG&A expense. I know it ran a bit high, 11% this quarter, and it seemed like the implied guidance you gave for this year is about 2.4% or -- 10.4% or so of sales. I know you guys have been focused obviously on the operation side and for a good point and the gross margin expansion has been phenomenal. But do you think maybe next year there’s some opportunity to maybe get some more SG&A leverage out and get that down to 10% instead of maybe 10.4%?

Yes. The way I think about it, I’ll give you my view and if Neil wants to add any color. There was, if we go back again to when we announced the transformation and Neil coming in, 5 or 10 years of really leaning out Modine and focused on SG&A. Over the last year, we have reinvested in some key areas to support growth and people. It’s everything from procurement to product development. And I think everybody sees the amount of earnings growth coming from those. But we will plateau. I call it kind of maybe reloading where we needed – we had some gaps in SG&A. So I would expect we’ll have SG&A dollars growing to the range I provided. And then at that point, I think from a percentage of sales, that’s a fair question. I think we’ll start to -- we’ll peak out or even start to leverage a little bit at the percentage of sales, the SG&A.

Terrific, Mick, and Neil. Thanks a lot. That’s it for my questions.

Thank you.

Thank you. Our next question is from Matt Summerville with D.A. Davidson. Please go ahead.

Thanks. A couple of questions. First, talk through data center expectations a bit. You talked through the heat pump side of things. There’s three other high growth verticals that you guys have talked about in the past. Could you maybe more directly address kind of what you’re seeing there, what expectations may look like for revenue this year, where are the pluses and minuses in those remaining three, and then I have a couple quick follow-up.

Do you want to talk GenSet?

Yes. So we continue to develop in the GenSet market some advanced products that we believe we’re going to be able to move into expanding our customer base. So certainly, we still believe in the numbers behind GenSet, we still believe in the market, we see the tailwinds behind it, and it’s favorable to the work that we’re doing. So GenSet markets on path, I’ll let Mick give the numbers when I finish on the other two. EV, we continue to develop new product. As we mentioned the expansion that we’re moving into in Europe because of the potential demand in the out years. We’re winning on platforms and programs, and we’ve launched the additional new product. In indoor air quality, we’re starting to continue to see the impact and effect of the CARES Act and the ESSER funds. We’re seeing tailwinds out to 2026 with our school unit ventilators. So again, we’re standing behind our indoor air quality growth, relative to the numbers.

Yes. For the most part, those long-term growth rates, especially in the growth businesses Neil just went through, Matt, we still feel good about those. Well, I think with the strong data center year, we’ll probably be adjusting data center long-term growth rates up to reflect this really strong year we’re in. And then we still expect similar growth rates, high double-digit growth rates across all of those. And then on a heat pump side, that growth rate we think will based on what Neil said, we’ll take it down a little bit, still be double-digit growth rate, but we see that being a slower ramp and taking a little bit longer to get to peak volume.

Got it. And just to be clear from a modeling standpoint, embedded in the reiterated top line guide, is how much headwind from either divestitures, product line exit, or otherwise, I’ll call it deliberate revenue attrition.

Yes. I would estimate that $40 million to $50 million, Matt, of product, for sure the divestitures, those three German businesses were $80 million to $90 million annualized. And then we do track all of our 80/20 product line simplification efforts. And just in context for you, we just updated that. And since we started, we’re over $300 million. Now, that includes the divestitures, but over $300 million of business that we’ve specifically targeted from a product line simplification.

Okay. And then, just lastly, early read on the heating season here in North America, I know that’s an important business for you, obviously. We had a really mild winter last year, but what does early sell-in look like into the channel, and what’s your assessment of inventory levels as they sit here today?

Yes. The last couple quarters we were looking at anticipating that we hit a bottom there relative to the amount of inventory that was in the channel and starting to see a recovery. This month, October, will be a very important month for us as we track the order rates as well as November. And we’re going to track those on a day-to-day basis to see exactly when we start to see the recovery and rebound. So I think we’re near where we thought we would be and we’re going to know a lot more in the next four weeks how strong the recovery will be, Matt.

Got it. Thanks, guys.

Thank you. As there are no further questions at this time, I would now turn the conference over to Kathy Powers. Please go ahead.

Thank you, and thanks to everybody for joining us on the call this morning. The replay will be available through our website in about two hours. We hope everyone has a great day.