Good morning, ladies and gentlemen. And welcome to Modine's Fourth Quarter and Fiscal Year 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session. Instructions will follow at that time [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. Please go ahead.

Hello, and good morning. Welcome to our conference call to discuss Modine's fourth quarter and full year 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. The slides that we will be using for today's presentation are available on the Investor Relations section of our Web site, modine.com. On Slide 3 of that deck 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, I will turn the call over to Neil.

Thank you, Kathy, and good morning, everyone. This was an important year in our transformation where our plans became actions and we delivered results. Our strong fourth quarter performance closed out another record year for Modine with a highest reported sales and adjusted EBITDA in our history for the second year in a row. Our sales were up 5% to $2.4 billion and more importantly, adjusted EBITDA increased by 48% to $314 million. This equates to a 13.1% adjusted EBITDA margin for the full fiscal year and underscores the step change in profitability that our commitment to 80/20 has produced. We have shifted our business mix to targeted markets with strong growth drivers where our products and solutions are well positioned and carry sustainable margins. This was demonstrated through both acquisitions and divestitures during the year, including two acquisitions completed in the fourth quarter, the assets of TMGcore, a liquid immersion cooling technology for data centers that we discussed last quarter, and Scott Springfield, a manufacturer of air handling units for data centers and other strategic applications. We also executed two important divestitures during fiscal 2024, including the sale of three automotive businesses in Germany that manufactured parts principally for the internal combustion engine in the European market, as well as two coatings aftermarket businesses here in the US. These actions fit squarely within our strategy of focusing on innovative engineering solutions and investing in our most attractive end markets to help us achieve our long term margin targets. Mick will cover our fourth quarter financial results and provide our outlook for fiscal '25. But first, I'd like to reflect on some of our accomplishments over the past year. Please turn to Slide 5. Climate Solutions reported another outstanding year. The segment delivered a 31% increase in adjusted EBITDA on…

Thanks, Neil. And good morning, everyone. Please turn to Slide 7 to review the segment results. Climate Solutions finished the year with another excellent quarter, resulting in a 14% adjusted EBITDA improvement. Our focus and resource shift to the data center market continues to pay off, driving strong revenue growth and higher segment earnings. Data center sales grew 40% or $25 million, driven by strong demand from both hyperscale and colocation customers. E-transfer product sales were down 20% or $24 million. The decline was generally in line with our expectations continuing the trend from the past few quarters. The lower revenue was driven by a combination of 80/20 activities along with lower demand in certain commercial and residential markets, including a soft European heat pump market. HVAC&R sales increased 1% or $1 million, including revenue from our acquired businesses. [Heating] revenues were slightly up from prior year, offset by a decline in commercial refrigeration coolers. We're very pleased with Climate Solutions strong earnings conversion, resulting in a 210 basis point margin improvement in adjusted EBITDA to 18%. Despite relatively flat sales, our 80/20 discipline remains at the heart of these quarterly margin improvements, including a positive mix impact with data center sales driving a meaningful margin increase. This quarter wrapped up another great year for Climate Solutions. We anticipate more revenue and earnings growth ahead, including the positive impact from the businesses we acquired this past fiscal year. Please turn to Slide 8. Performance Technologies also had another great quarter with a 38% increase in adjusted EBITDA. Revenue decreased 5%, driven by the recent German divestitures and lower sales of automotive products, partially offset by higher sales to off-highway and specialty vehicle customers. The negative sales impact due to divestitures in the quarter was $24 million and organic sales grew…

[Operator Instructions] Our first question is from Chris Moore with CJS Securities.

Maybe we can start, just talk a little bit on data centers. As you guys -- I think discussed at this point in time, all of current revenue is on the air cooled side. On the liquid cooling front, you have the ongoing development efforts, both direct to chip cooling and immersion cooling. Can you just talk a little bit about the critical milestones over the next, say, 12 to 18 months, where that would put you some time in calendar '25?

Certainly, we have seen growth in the markets and data center around direct cooling and now with the addition of Scott Springfield that adds a new technology with evaporative cooling that has been in the industry for some time that may or may not support or augment liquid cooling, but certainly for standard data centers, you need that product line. And we're getting market capture there. So that's significant, that's where we're seeing the expansion in the United States and some of the expansions that we've done in Europe, are to support the growth on market capture, driven by or not by liquid cooling. So that has been a milestone for us, building out the capacity so that we can continue to gain share. The other milestone is where we know it's tied directly to liquid cooling, whether that's direct to chip, single phase or two phase, liquid cooling immersion. And the acquisition of the TMG assets will help us be at the table having conversations with our data center customers for future data center generations that may adopt those technologies. So that's a milestone to be able to have those products and technologies to have conversations about the future. And then our CBU development, which I believe is right around the corner for direct to chip with adoption in the market, we're in the process of developing that product. And when we launched that with a select few customers by the end of the fiscal year that would be a milestone. So capacity expansion, setting ourselves up for success, continuing to win with our customers, over serving our customers and providing them with the products and services that we provide and then having the technologies in terms of direct to chip and full immersion cooling so that we can have conversations about future data centers with our most important customers.

And maybe just another way to look at it. From the air cooling perspective, I'm just trying to get a sense for the runway there. Obviously, we're talking about huge growth here. I mean, is there any reason to think growth slows data center wise in three or four years from now? I'm just trying to understand if everything is shifting towards liquid or air growth is going to be there significantly in liquids coming as well?

We believe, Chris, it's a matter of both. You don't necessarily need liquid cooling for everything. And we also see, in most cases, we're working with our customers and watching the trends in the industry that air often augments liquids. So there's a desire for both technologies.

Maybe just my last one. I know at Investor Day, that was -- it feels like a long time ago. We're talking about $400 million to $600 million in M&A between '24 and '26. Obviously, what you guys have done already on the M&A side and also in terms of kind of the more organic growth aren't going to need to get to that level. Can you talk a little bit more about M&A thoughts and is there a revenue target moving forward, or just kind of how you're looking at it at this stage?

I think from the original targets we laid out two and half years ago, you're right. Clearly, we didn't -- we don't see the need to have as large of a M&A funnel versus where we thought we need to be to maybe address some of the planned product line down. So through a lot of good work and margin improvement and other growth areas organically we found that's definitely come down. I think we don't have a firm target. We will try to provide updated guidance for you on that in the fall. But Neil and I have been pretty consistent with that. I think now the sweet spot we're looking at kind of the smaller to midsized transactions, probably more in the Scott Springfield size that we think are right down the middle of the road for us. But no, we don't need a lot of M&A, we don't need large M&A to hit our financial targets. So we're being pretty selective here about what we choose to bolt on.

Our next question is from Noah Kaye with Oppenheimer & Company.

Maybe we can start with margins. Certainly, margin improvement happening faster than consensus across both segments. Can we maybe understand the margin expectations embedded in the '25 guide at a segment level, if possible and any considerations around cadence? And is it also possible to ballpark the magnitude of divestitures embedded in the guide?

So if you look at our guidance in the range where if you kind of go to the midpoint, that's kind of putting that around, say, 14.5% or so EBITDA margin. And clearly, we're continuing to expect another sizable increase as we really talked about that all year, we would expect fiscal '25 for performance technologies to have a nice lift, call it another 200 basis points or so goal there. From a Climate Solutions side, we are expecting a margin improvement, but on the smaller side. And again, we've been pretty consistent about this after the first year or two in launching 80/20 first in Climate Solutions. So we're thinking there is more maybe like a 50 basis point per year plus or minus lift from a margin standpoint. From a divestitures and product exits, we're -- on the PT side, it's probably around $100 million. On the divestiture side, it's a smaller portion of that. We originally announced the divestitures last year it’s about $80 million or $90 million run rate. And so we have a partial year impact to that. Plus we've got just ongoing product rationalization efforts. So I would think -- I would say probably around $100 million on Performance Technologies in terms of divestitures and product line exits.

Before I get to data center, I wanted to just ask around free cash flow. I'm trying to do the walk here. You commented to sort of a similar level of free cash flow year-over-year. Just help us understand the free cash flow walk because, I mean, if EBITDA is up, call it, $60 million plus at the midpoint year-over-year. And you've got what looks to be about $15 million potentially or so higher tax, and feel free to check my math, and a little bit higher interest expense, seems like free cash flow should grow especially for keeping CapEx level. So help us understand what will be going on with the free cash flow conversion, your working capital was a build this year as well?

I thought it'd be a good chance to add more color on the call for that. So I mentioned similar levels. Our goal is, I would say, we want to meet or beat the free cash we did last year. The drivers that are some headwinds, so why wouldn't it just be up in line with earnings is quite a few number of items. I'll just kind of hit the high points for you. There's -- from the incentive cost point, that's accrued during the year. The cash payouts will be this year. So there's going to be a higher cash payout for incentive comp. Also, we have some flexibility. It's early but typical pension contribution can be in the $10 million to $15 million range. So we plan the year at the higher end on a pension contribution, little bit higher interest we talked about, we also announced the restructuring in Europe, and we'll have some higher cash payments from a restructuring side. And then -- so all those combined are probably at least $30 million to $40 million. And then the other kind of wildcard we see from year-to-year on the data center side, it depends on the customer and the program is at times we get cash advances tied to major builds and that can have an impact and/or just the amount of inventory we’ll carry based on a large potential data center build-out. So again, I think our goal here, right, is to meet or beat the last year's number. But clearly, there's just some timing of cash flow items that you should build into your model as well. I hope that answers your question.

Comprehensively, yes. And to bring it to data center at the end, I think, Neil, you commented in the prepared remarks around a doubling of capacity versus last year. One, I just want to make sure we probably understood that comment in terms of how to think about revenue capacity now across the business? Because certainly, if we look at the midpoint of where you think data center could be in revenue this year, it's more than doubling of where you ended fiscal '23. And maybe just how we think about organic growth versus M&A in the data center vertical?

Yes, that's right. We've added additional capacity in that space. Part of that is through the inorganic growth, adding multiple facilities through the Scott Springfield expansion and acquisition. We put out a press release where we acquired an additional facility in Bradford, UK which helps us set up for our strategy to have dedicated plants for specific equipment for the EMEA market with an intention of the long term strategy of building out capacity for $1 billion, for example.

Yes, question about organic growth, too. We talked about 60% to 70% growth this year. And that last year, we wrapped up the year we just closed was 69%, so another strong year. Within that, organic growth right now, we probably have in kind of the 30% to 35% range. There's a little bit how we look at it. Clearly, since we've acquired Scott Springfield, the commercial synergies look to be really strong. So kind of splitting hairs on what's organic or inorganic. But I think it's safe to say for now we're only modeling about a 30%, 35% organic growth and then the balance is coming from the Scott Springfield acquisition.

Our next question is from Matt Summerville with D.A. Davidson.

A couple of questions. So through SSM, you've added another hyperscale customer. I'd be curious as to where you stand with potentially adding additional hyperscale customers? I think, Neil, you'd indicated in the past, you've been having some ongoing discussions. So maybe an update on that relationship cultivation and whether or not you're finding early days, I realize that finding that there's indeed cross selling opportunity between the cooling technology that SSM provides in your existing customer base and then your core cooling technology and their customer base.

We have seen that opportunity without a doubt. It's really difficult to pass the very stringent quality audits, safety audits and the process that you have to go through to win a large hyperscaler. And I have a lot of respect for how they do that in terms of how they pick the right suppliers. And when we acquired Scott Springfield, they had already passed those audits and they had already been certified as a qualified supplier, which accelerated it for us for cross selling opportunities on the other side of the -- on the [indiscernible] side. So by acquiring that hyperscaler customers, because they already have the relationship with Scott Springfield, it really moves quickly on how you can be adopted and accepted with other products. So certainly, there has been some cross selling opportunities and we'll take advantage of that, and we're in the process of having those conversations. So relative to the other hypers, yes, we are advancing conversations. The thing that's really been able to help us is we've got state-of-the-art facilities, in my opinion, best-in-class labs that we've invested CapEx into, where we could run very stringent tests and meet their requirements. So being able to bring the hyperscalers in that are outside of the two that we've been public about, they've been impressed with our facilities and it continues to -- the conversations continue to advance. So I feel very comfortable with where we're at with the other conversations because of our labs.

And then with respect to the comment from an earlier question, just to make sure I understand. After this wave of capacity expansion, you feel that you will have the capability to, if -- assuming demand is there, have -- basically have a $1 billion data center business. And I would imagine, I don't know if maybe this is something you'll address now or at your Analyst Day. But over what time frame do you feel you can scale from, call it, roughly $500 million this current fiscal year to that $1 billion type of number?

So we're always looking at our strategic plan horizon and that's in best years in terms of how we think about our strategic plan horizon. But you're right, the capacity expansion is a big piece. And it's not just the capacity expansion, Matt, it's also the technologies that we've acquired. So to support that 35% CAGR that we've been very public about, we knew that we needed to do the expansion with capacity. And it's not just more factories. It's factories in the right places on the right -- in the right countries for delivery. And then the acquisition of new technologies like immersion cooling as well as evaporate cooling with Scott Springfield. So multipronged approach in terms of how we can get to a larger data center number long term.

And then maybe, Mick, if you can comment a little bit, how should we be thinking about the quarterly earnings cadence as we move through the year? Is there anything unusual, I guess, you would want to point out as we think about how to model kind of quarterly numbers or how we should be thiniking about first half versus second half? Any detailed color you could provide there would be helpful.

Yes, I'd like to say it's -- our expectation is for kind of a normal year. Last year, I said that, and we had some really big pricing wins to start the year. But as we look at it now, I'd say, probably a typical Modine year. And to help everybody out, I think, clearly, we expect that build each quarter. So generally, we want -- Q4 would be our strongest and that's mainly going to be driven on revenue and program launches. So I would say Q4 would be, from a top line, our strongest and then Q1 and Q2 building. And then in there, our Q3, the December quarter is -- would probably be a little of the lowest of the quarter. So kind of Q1, Q2 ramp up, a little bit of a dip. And that's seasonality why I point out the December quarter, it's pretty traditional on the performance technology side, and large OE customers do a lot of plant shutdowns around Thanksgiving, Christmas, New Year. So that said, early in the year, nothing dramatic, Matt that I would point out other than, call it, kind of a revenue build with a little bit of a Q3 seasonal shutdown built in there.

Our next question is from Brian Sponheimer with Gabelli Funds.

Obviously, market expectations, along with maybe some dynamics with the tax bump from a year ago played a role today. But I'm -- as we kind of look forward, I think it's worth maybe taking a look back, the business that had been for sale in the auto segment. How much of that remains of the -- of your revenues as you're looking into this fiscal year?

In total automotive is probably in the $300 million range, Brian.

And so what portion of that -- I don't want to nitpick too much, but what portion of that was potentially going to be bought by the Tier 1 supplier you were going to sell it to?

So that was -- when we launched the sale process that was over $500 million -- between $500 million and $600 million. And I should say on the $300 million, probably $250 million to $300 million is what's left just to clarify on that. And then the other thing I want to point out is from when we started, it was not only the $500 million to $600 million but we are pretty transparent. I think we said low single digit EBITDA margin. The team has worked really hard, the remaining amount we have, it's clearly been a driver of Modine's results. So strategically, it's still not an area we're going to focus on putting capital into. But from a margin standpoint, it’s helping us to achieve our financial goals and targets versus a couple of years ago and it's an absolute drain.

No, I think you answered my next question as to how strategic is this piece. But clearly, it's not a the drag it once was. Next question kind of goes to the CapEx profile and whether this new, call it, $85 million of CapEx. From a dollar perspective, does that look like more of a run rate going forward or are there just some bits and pieces that you named -- obviously, you named the facility that you purchased in order to expand capacity. Is this more of a -- kind of a run rate as far as what you think for the next few years?

I think the -- a little bit like the cash flow, I said at similar levels this year. Brian, I think, that's going to be on the high end. I wanted to make sure I set a bar at -- I could see it in line. But probably a little bit on the high end and what's going on there, which is important. So I probably -- we had a couple of years around 70, I'd say probably in a dollar value for now, 70 to 80 is what I'd say is probably more of a normal. And the other thing I would point out, and you know this, like if you go back to when we were trying to sell auto, we were $80 million or $90 million a year, and it was nearly all Performance Technologies. And last year was -- it's been flipped, it's $50 million or so going into Climate Solutions and about $30 million going into Performance Technologies. So we're very targeted on the Performance Technology side. So that will go down and it's been way down. And then the $50 million or so on climate back to the earlier discussion, we have been doing a lot of expansion. As soon as we bought Scott Springfield, we needed to expand. We did a couple of additional purchase -- the property purchases last year and then also at the end of the year, a larger plant expansion in the UK to support data center growth. So I think that this year is probably the -- well, I don't say last because hopefully, we'll keep an accelerated growth. But there's been an accelerated CapEx to support the data center growth.

Last one for me. You mentioned on heat transfer, European heat pump continues to be an area of softness that you've spoken to this in the past few calls. What are you looking for as far as a bottoming for that market before that can become a source of growth? Because as I recall, that's a market that is being supported by European governments as well as far as one that they want to grow, right?

Yes, I'll give a quick answer on the heat pump side, and if Neil wants to add anything you can. Last fiscal year, heat pump sales were about $50 million, hard to say in fiscal '23. And we did expect when the heat pump market took off really exponential growth. And we had talked about that last -- the fiscal '24, our sales were actually down and that was one of the big drivers in Q4 for the HTP sales decline. And what we've seen is not only the permits or the orders everybody is watching as legislation changed in Europe but finished goods inventory across our customer base. So we're heading into the new fiscal year expecting that the market is going to remain down. And what Neil and I are planning for and we'll watch it in addition how much finished goods are in the system. So again, I'd say we started at a small base. This is about $50 million, a little bit less now. But clearly, the growth plans have been delayed. We're going to -- we paired already back any capital spending and resources in that area, but it's clearly going to take a while to sort itself out. Anything you want to add, Neil?

No, I think that's clear.

Our next question is Matt Summerville with a follow-up from D.A. Davidson.

Just a quick follow-up. Just to clarify, in your data center assumption for this year, your revenue assumption at 35% or so organic. Are you assuming any contribution from liquid? And if so, what would be a reasonable expectation for -- if this is year one for a liquid business for Modine, what's a reasonable year one expectation for the liquid business?

It's -- those numbers do not include liquid Matt, to any extent, it's nominal amount.

Do you think, based on the conversations and the cadence and how this market is developing, there's optionality to start to see a liquid business materialize for Modine this fiscal year?

It's all dependent on the -- I believe, Matt, that the quickest liquid adoption in the market from what we're seeing and is my perspective is on the direct to chip side, which is tied directly to the CDU. So as we continue to develop with our customers and if our customers see that there's a true demand for that from their end users, I would expect we would accelerate our testing and our development over this fiscal year. If the market lags, I would expect it to be delayed. If it's where we're at today, we would expect to have CDUs in the market by the end of the calendar year and prototyping and as well as in validation. So it's not a -- the key piece is once we convert to direct to chip that you have the technologies to support the cross selling of all the other products that we're talking about that's growing at 35%, if that makes sense, Matt.

Yes, it does. And then I just -- I want to talk about kind of the go forward pricing strategy across the businesses. I would imagine there's still some leftover pricing goodness to be realized in fiscal '25 in PT, just given how things seem to work in that business from a timing standpoint. So one, I guess, correct me if I'm wrong with that. And then second, on the climate side, is this a business where you've put in place, Neil, kind of a commercial practice where we should expect a point or two or a couple of points of price capture in that business on kind of a normal go forward annual cadence?

We're constantly making sure we're relevant in the market where we price our products. And as you know, Matt, we're in so many -- one of the great things about Modine is we're diversified, we’re experts in heat transfer and thermal dynamics so we can serve a lot of markets. And all those markets operate differently, especially when it comes to commercial excellence and terms, Ts and Cs, pricing, whatever it is. On the Climate Solutions side, because it's typically -- there's some OEMs and a lot of it is distribution, you're correct. We can stay current and make sure that our pricing at a minimum keeps up with inflation. And then on the Performance Technologies side, where we've got through the heavy lift in terms of that activity there's certainly cleanup. And that's why we feel confident in the margin expansion that we were public about on the call.

I'd just add one comment on the data center and Scott Springfield, and want to make sure it's for the analysts that as we do organic and inorganic growth when we announced the deal, it was about evenly split. I think, about 60% data center, 40% commercial air handlers, which is really good. But -- so as a reminder -- and that's how we split it out. So we've got a really rapid growth rate on the HVAC&R side. Part of that is benefiting from Scott Springfield. And obviously, the data center side is also benefiting. But I just want to remind everyone, Scott Springfield was a split between commercial and data center as you're doing your modeling.

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

Thank you, Terry. And thanks everyone on the line for joining us this morning. You'll be able to access the replay of the call through our Web site in about two hours. We hope you all have a great day. Thanks.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.