Good morning ladies and gentlemen and welcome to Modine's First Quarter Fiscal 2025 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and 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 first quarter fiscal 2025 results. I'm joined 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 with today's presentation are available on the Investor Relations section of our website modine.com. On Slide three 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'll turn the call over to Neil.

Thank you, Kathy and good morning, everyone. I'm pleased to report a strong start to our new fiscal year. It's clear that the investments we've made in our business are contributing to our top-line growth this quarter including the strategic acquisitions made last year in our climate solutions segment. In addition our performance technologies business reported a great quarter delivering a gross margin over 20% a 550 basis point increase from the prior year. Both segments are executing on their strategic objectives. Our financial results are ahead of our targets we outlined at our 2022 Investor Day and we are demonstrating that we can rapidly grow our margins and earnings. This is a result of the successful deployment of 80/20 across our diversified portfolio creating a favorable shift in our business mix as we prioritize and invest in our best performing businesses. Mick will go over our first quarter financial results and provide an update to our full year outlook but first I'd like to provide some high-level updates on each segment. Please turn to Slide five. Our climate solutions segment had an outstanding quarter benefiting from the Scott Springfield and Napps acquisitions last year. In particular, our data center business was up 138% driven primarily by growth in North America. Organic data center sales nearly doubled compared to the prior year. As I mentioned last quarter, we are adding additional capacity for our data center products to support future growth in North America and Europe with much of that available capacity coming online later this year. As data centers prepare for the growth of high-performance computing there is an increased need for hybrid solutions that incorporate a mix of air and liquid cooling products. By combining both air and liquid techniques in a hybrid approach data centers can achieve…

Thanks Neil, and good morning, everyone Please turn to Slide seven to review the segment results. Climate solutions is off to a strong start with a 31% increase in adjusted EBITDA and a margin over 20%. Our heavy focus and resource shift to the data center market continues to pay off driving strong revenue growth and an improved sales mix. Data center sales grew 138% or 94 million driven by strong demand from hyperscale customers along with sales from the acquired Scott Springfield business. HVAC&R sales increased 7% or 5 million including revenue from our acquired businesses. The heating market bounced back this quarter with encouraging signs for an improved market this year. Heat transfer product sales were down 21% or 29 million. The decline primarily related to a significant drop in sales to European heat pump customers and lower demand in certain other commercial and residential markets. Overall, we're very pleased with the climate solution strong earnings conversion resulting in a 100-basis point adjusted EBITDA margin improvement to 20.1%. Our 80/20 discipline remains at the heart of our quarterly earnings margin improvements including a positive mixed impact with data center sales continuing to drive a meaningful margin increase. In addition, our acquisitions are meeting or exceeding the goals we established which is further supporting the positive momentum and outlook for climate solutions. Please turn to Slide 8. Performance technologies also started the fiscal year off very well with a 25% increase in adjusted EBITDA and a 390-basis point improvement in adjusted EBITDA margin. Revenue decreased 10% which was in line with our expectations driven primarily by the German divestitures along with lower sales to automotive and off-highway customers. Excluding the negative 24 million impact of divestitures and FX rates sales decreased 1%. Performance technologies is leveraging our 80/20 model…

Thank you. [Operator Instructions] Our first question is from the line of Noah Kaye with Oppenheimer & Company. Please go ahead.

I guess we have to start with data center because there was a pretty phenomenal quarter for the results. Just trying to understand the trends as we move throughout the year here. You've got capacity expansions in the works they'll start to benefit in the back half. You raised the full year guidance. Just going off of the results here in 1Q, it would imply 1Q somewhat seasonally stronger versus prior years. Just trying to understand whether that's anything specific to large order revenue timing? Or is it really just conservatism because it would seem like you've got some additional growth levers as you move into the back half?

Yes. It's Mick. Thanks for the question. It's really the latter. I'd say not necessarily conservatism as much as we still have the incoming pipeline of programs and opportunities. And for the second half of the year, especially our Q4, we'll be able to firm that up by probably late fall. So the biggest issue for us is, we're trying to provide guidance and forecast based on our funnel, majority of that are secured purchase orders. And then, as we continue to look out for the balance of the year, again, probably part of Q3 and most of Q4, well within another quarter or so we'll be able to firm up how many of those transition to firm purchase orders.

Okay. Great. I'll follow up on that offline. I did want to ask about the reduction in outlook for heat transfer products. We get easier comps, obviously, moving through the back half of the year. But looking at some of the resi and commercial HVAC trends broadly, especially in North America, have they been quite positive quarter-to-date in the industry. So just wondering if you can sort of parse out how much of the weakness in the quarter was really the heat pumps versus the broader market? And what would create kind of a drag on growth relative to your prior outlook as we look through the full year?

Yes, it's Mick again. First, more than 3 quarters of the revenue drop was tied to the lower heat pump sales. So again, as you said, will start in the second half of the year to have easier comps to specifically tied to the heat pumps. So yes, first, vast majority of the revenue drop aside on the European heat pump sales side. The other areas really are tied to 80/20. And as the team has been continuing to kind of test the market, we've got certain areas of business we have targeted to exit and then there are other areas that I think the term we use internally is testing the price elasticity. And so they're still sorting out the other balance of the market.

Before yielding others, can you just clarify on that point for a second, actually, because I think 80/20 certainly played a factor in some of the trends within heat transfer products last year. Our impression was a lot of the optimization would basically be done as you went into this year. So how big a revenue headwind could that be as we look to the guidance for '25. Is this a point or 2 of kind of strategic exits? Is it more?

Yes. Good question. Noah, this is Neil. We're continuing to work through 80/20 execution in this business. So as we do that, we have dozens of markets that we serve. We also have thousands of SKUs that we produce to serve these markets. So we're going to continue to go through the evaluation phase. It would be a guess to give you an estimate as they're in the middle of the second phase of this. But you're right, the majority of it has been done. They've had tremendous lift in the improvement of the business over the last 18 months, and they'll continue to settle out some of these additional markets throughout the rest of this year.

All right. Well, I'll take the rest offline. See in September, really nice quarter.

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

It's actually Lee Jagoda for Chris this morning. Good morning.

Good morning.

So I guess just following up on that last question. In terms of the rationalization, I think you'd previously said you target about $100 million of revenue rationalization each year. Can you give us sort of any guidance, I guess, using that number for starters as we look to fiscal '25.

Yes. We've been pretty consistent for going back, I guess, Neil, said in the beginning when we had originally announced before Neil came in the automotive divestiture. And at that point, I think we are $500 million to $600 million. And then over the last couple of years, we've done 3 or 4 divestitures, primarily in the automotive components space. And so as we look today, $300 million type business, plus or minus, and that's primarily the area we've targeted. And we think about it, we think on average, about $100 million a year would be the goal to continue to strategically move away from. That can be done in smaller pieces like we've done, or it could be done in larger transactions. It really just depend on the situation and what the market allows us to do.

Okay. And then, I guess, as it relates to guidance, it's really constructive to see you guys raise guidance so early in the year. That being said, versus our Q1 model, you obviously beat the quarter and then the guidance for the year is sort of raised by a little less than the quarterly out performance. So just given that dynamic, can you give us any color as you kind of look out to Q2, Q3, Q4 and the cadence of that beyond the Q1 numbers?

Yes. So just a few comments on the guidance, if it helps out. Yes, stronger even than we had anticipated Q1. We're clearly rolling ahead a really strong tailwind on data centers, partially offsetting a little bit of that. We talked about additional softness, a little bit below where we thought we'd be in the ag and construction side and clearly in automotive components as well, and EV auto sales. So positive roll-through on data center, a little bit of pullback in a few areas in Performance Technologies. And then, when we look at the kind of the balance of the year, Climate Solutions from a revenue standpoint, probably relatively consistent at this time. As I did mention a minute ago, with our fourth quarter ending March calendar 1, in '25, it's out there a bit. We'll continue to evaluate our data center funnel and firm up the full year this fall. But for now, we're kind of looking at a relatively steady revenue run rate from Climate Solutions, which is good. Performance Technologies with pull back in off-highway, we're expecting a little bit of a dip in Q2. Seasonally, our Q3 of the December quarter is always the lightest that tied to holiday shutdowns with our OEs. So kind of pulling that all together for Modine, we see that from an EBITDA perspective that Q2 may be sequentially down a little bit from Q1 typically same as last year. Our Q3 is generally the lowest quarter of the year would then step back up in Q4. And all that said, and I said that last year, and as we've gone forward, all of our quarters, we continue to expect year-over-year growth in earnings and margin improvement, despite whatever seasonal trends or sequential trends we see right now. So hope that helps.

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

A couple of questions. First, on the DC side of the business, up 80 to 90. Can you break out how much of that is organically driven versus the contribution from SSM? And with respect to the latter, I'm under the impression that SSM had a $60 million data center business last year, it looks like you probably did close to $30 million alone in SSM DC in Q1. So I'd really like you to spend a minute talking about some of the successes you've had very early on with that acquisition. I'm going to have a follow-up.

Yes. Matt, it's Mick. I'll go first and Neil can add some more color specifically around SSM. So on a full year basis, we're expecting about 40% to 50% organic growth out of that full year guidance. And you're right on Scott Springfield, we were really excited about the customer that have brought and we talked about cross-selling opportunities, both in terms of customers and products. But the other thing that we felt really good about was the opportunity set for Scott Springfield order book. And what they really needed was Modine support in terms of scale, investment manufacturing capabilities in order to have those customer and a major customer release additional orders and increase that share of the order book. So what you're seeing in Q1, we're really excited about. It's running well ahead of our plans. And maybe just with that, I'll let Neil add a little bit more color about Scott Springfield.

Yes, that covers it, and that's a good summary, Mick. There's a few things. We've been really good in terms of scaling up our data center capability across the globe. And when we brought some of that skill set to Scott Springfield in addition to what they do well, that marriage has put together the rhythm that we have with growth. So a couple of things. Capital deployment in the right areas, particularly with Scott Springfield to help them with capacity and expansion and then the cross-selling of our order books between our customers has been pretty significant. So as you recall, we had a specific technology through our Airedale brand, and Scott Springfield brings an alternative technology, which is the majority of the market between the 2. Now you have that full basket of goods and products that you can take into your customers and we're seeing the synergies from that.

Got it. And then as a follow-up, maybe can you talk a little bit about kind of, I mean you mentioned initial CDU shipments commencing in Q4. What does the 2-to3-year CDU/liquid opportunity look like for Modine is a subset, or maybe the answer is it's in addition to that kind of 3-year or less $1 billion target you've laid out for your data center business. Maybe also just talk about your confidence level in that having another quarter in the rearview mirror and perhaps even more funnel visibility. And then, I also just would like to ask about on the GenSet side of the business. what you expect organic growth to be there in fiscal '25. Thanks a lot.

Good question. Certainly, Matt. Yes, that would be an addition. In addition to the capacity that we've been pretty public about that we're driving to over the strategic plan horizon. And it's going to depend on our their customers' market adoption rate that requires high-performance computing. We certainly believe that the direct chip cooling is taking foot inside of the data centers and gaining traction at the same time. And that's why it's so important for us to work closely with our largest and best customers to develop product for them to be able to win in their market space, particularly when it comes to high-performance computing. So CDU is a big play there. And it's a nice complement to the products that we already have. Like we said, it's going to be a hybrid approach in a lot of these cases where you're going to need air cooling, you're going to need cracks and crawls, you're going to need chillers, fan walls. You're going to need evaporative cooling, you're going to need the techniques and products that we have today. And then you can complement it with direct-to-chip and the cooling distribution is a major component of that. So it's one more product in our portfolio that we can continue to help our customers solve their problems.

And then just lastly, Neil, the outlook for GenSets this year. I think it was a $100 million business plus or minus from Modine last year, what your thought is this year. And if you've won any new customers as of late and what those prospects may look like? Thank you.

Yes. Matt, just on the numbers side. This year, we're expecting to hit about $120 million or so in sales, which would be up 20%. And we expect that to continue to ramp. So fiscal '25 and '26, we continue to expect to grow 20%, 30% type rate. I don't know Neil, if you want to add anything around the product or the market?

Yes. So the team has done an amazing job. Through 80/20 segmentation and aligning an organization around that dedicated product group, is really showing the results. I mean a tremendous amount of credit needs to go out to that team to be able to expand at the rate that they've been able to expand and that's what they've done. They've added capacity and as fast as they add the capacity, we're taking orders and shipping because the market is growing at that rate. And yes, we've added a second customer. So we're going to continue to dial in and stay focused on the big 4 and we've captured 2.

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

Good morning, everyone. Let me add my congratulations on terrific progress. You mentioned the new manufacturing capacity you're adding for data centers. Just wondering, can you tell us a little bit what the ramp-up of that capacity looks like? And is that capacity needed for some of the new projects you're undertaking?

So the capacity that we're putting in place is in line for the market CAGR that we put out there that we've suggested over the next 3 years. So it tracks and it's an aligned with that. And we can use existing capacity for some of the new products, particularly the CDU, we'll manufacture that here in the United States at an existing Modine facility.

Yes. I would just add to that it's been a continued reassessment and going back. I think where we were beginning of last year and our expectation for revenue, we raised it multiple times. I think we finished the year almost double and then you add the acquisitions. And then this year, we started the year what we thought was a really high growth rate, double triple the market and we raised it again. So just from the CFO side, when we get together, Neil, in the group president are always looking at our current capacity run rate, and then with the market sales were in, we continue to expand. So we're trying to stay a step ahead.

Okay. Great. And then, I wanted to maybe just get a little bit granular here on the quarterly progression. I know you did go through some comments around that. But just wondering kind of business mix impact on gross margin over the next couple of quarters? Any thoughts there?

From a gross margin standpoint, not a lot of movement, maybe a little bit just a small amount in Q3 and Q4, lower from a gross margin standpoint in Q1. One of the things in Q1, I want to mention for Performance Technologies is we had about $3 million to $4 million of pricing and commercial cancellation settlements. So that was work we had planned on the year, but we thought that would hit more later in the year. That was a good kind of onetime benefit in Q1. But your point about mix, we could talk a long time under the water level on this relatively stable gross margin that with 80/20 and everything else happening at the company, certain areas that we are divesting or moving away from a product simplification to growth and a mix shift change the kind of the short of the answer is relatively stable gross margins might have a little bit of a dip tied to some volume. But other than that, under their hopefully, what is coming through is the areas. We're growing are margin accretive to where we want to be in the areas that. We are reducing our at or below the market, the margins we want to be at. So that's certainly helping profit up.

Okay. Great. And then one last one, if I could squeeze it in. Since you're hitting prior EBITDA margin target, are you getting close or kind of gyrating around those targets. Do you have a new target that you're contemplating? Or is that something we should wait for the Analyst Day for?

Yes. That's good. Thank you for the lead, but I won't give you the answer today. Yes. We realized, right? But yes, at our Investor Day, we'll share new 2-year target. So obviously, with us achieving the first overdriving on the first phase, we're planning to raise the bar and set a new set of financial goals for a 2-year time period ending in our fiscal '27.

Thank you. Our next question is from the line of Brian Drab with William Blair. Please go ahead.

As I expected after initiating yesterday, a lot of the questions that I'm getting are around what is the underlying growth rate for this business. This might be helpful for some that are listening. It would certainly be helpful for me to hear you comment on this. So the increase in guidance in terms of dollars, about $200 million. And then I was wondering if you could just talk about the components. And I know you did this to some extent even just on the last conference call, but the components of that $200 million because I know there's acquisitions, divested revenue, 80/20 cuts. And I think the acquisition revenue, you're going to have like a full year of Scott in there, and that was $100 million, although that business seems to be growing rapidly. And then you got the 3 auto divestitures that you've got about $40 million to $45 million, I think, this year, given the timing of when you made those divestitures and then there's 80/20 cuts that I don't know. I think it's inferred that it's around $50 million of a headwind for this fiscal year. And so that kind of gets you to $100 million in headwind and then you've got Scott is a $100 million tailwind. And so I think it all kind of nets out to 0 and the midpoint of your guidance, like revenue growth of like 8% to 9% is really how we should think about organic revenue growth. I mean is that in the ballpark? And curious on any comments on that.

Yes. That's a good question. And you're hitting the heart of Modine's transformation, right? And there is some level of complexity with 80/20 and our transformation. I would say this, a lot of it. I think you hit right on the head, and Neil can add any other comments to this. But when we separate right now where we're at in our maturity, we talk a lot about 80/20 maturity. We launched 80/20 first in Climate Solutions. In fact, data centers was the tip of spear funding that, growing that. So Climate Solutions is mostly in a growth phase right now. We talked a little bit about some headwinds in HTP. But organic growth, we've said for a while can be double digits, 10% to 15%. This quarter, organic was 10% for Climate Solutions, obviously, with some M&A, that 25% type growth and indoor air quality, commercial ventilation, heating will be a little bit more mature market, but growing. And then, obviously, data center we've kind of put in a hyper-growth to balance that out, we launched Performance Technologies almost a full year after just managing the corporate, how much change happening. And you can see that, while this business is continuing to divest and shrink the top line in certain areas, the margin and the earnings growth is really pretty phenomenal. So at the beginning of the journey, we've said Performance Technologies over a long period, 3, 5 years could be flat. And under that, we would see things like that auto divestitures and the other areas you referenced are declining. And then while our bets on electrification, e-mobility, power generation, higher-margin systems business driving the earnings. So let me pause, but I think that the Performance Technology is not a focus of a top-line story right now. Climate Solutions top-line if you blend them. Yes, I think we've said again, we can be high single-digit organic type top line growth, which is kind of in the midpoint of our guidance.

Okay. No, thank you very much for going through all of that. Yes. through that and continue to help me get up to speed and understand that. Just one last question for now, I guess. In the heat pump business, which has been soft. Can you talk about what you're seeing in terms of potentially any signs of stability there? I don't think you talked about a book-to-bill, but anything in terms of order rates or that, that you're seeing in maybe even in July to give us some confidence that maybe that's stabilizing, if it is?

Yes, good question on the heap. If I want to go back though to your original question because I think it's a good question. There's a high level of complexity as we work through 80/20 in a diversified industrial. And we go back and you look at Performance Technologies in general versus Climate Solutions in general. We would say we align behind what Mick just described there. And we're not expecting high growth in Performance Technologies. And then, Climate Solutions, that's the area where we're focused growth. But if you go in a level deeper, what we try to do with our six market-facing verticals is to give you those revenues. So you can see that we're growing in the areas that are the right areas for us to grow to expand margin and to evolve the company from components to systems. So that's why you see the breakdown of data center in HVAC, liquid air ATS. So when we say in general, performance technologies will be flat, revenue over time are slightly growing. Underneath it, you see a decline in the areas where we're deliberately taking actions through 80/20. And then, you see growth in the areas of GenSet, or in our Evantage product group which is an ATS. And you see growth beyond the market rate. That growth is why we call out the percentages there. So you can see the revenue mix shift happening underneath at more of a micro level versus the general theme of the two segments. I think that's important for people to understand. Relative to heat pump, I don't expect, we don't expect to see rebound until we get later throughout the year. maybe even into next year relative to this regulatory climate and environment. I mean clearly, the heat pump demand was driven by incentives. As the incentives have dried up, it's essentially slowed the market as we get closer to the compliance date, which is further out, I would expect those applications for incentives to increase and then typically what we saw last time was the order book increased. So we have a further delay.

[Operator Instructions] Our next question is from the line of Brian Sponheimer with Gabelli Funds.

Good morning, everyone. Congratulations again on another great quarter. Just a question, which I guess probably waits for the Analyst Day, but I'm just curious of your thoughts now. Your $6 billion equity cap company. Clearly, the scope of what you're looking at has grown. I'm curious about the M&A environment and your thoughts on maybe the weaponry you can use to grow outside of just cash generated by the business, basically, you delevered at 1x. You've got a lot of firepower here.

Yes. Brian, it's Mick. Thanks for the question. Yes. We started the journey and you've clearly been along with it, but early days part of our thought was we didn't really have necessarily the balance sheet, the equity valuation and so forth to have M&A as a key strategic lever plus going out and executing on some really big goals to turn the company or ground. So as you said, as we pivoted, we're throwing off a lot more cash, have a relatively low level of leverage and then with the equity market cap. So we feel like we've got all tools at our disposal. And then also on 80/20, as we matured, we built in the core capabilities. So early days, weren't having people out knocking on doors and digging up ideas, but now we have a full team and continue to add to it globally people. And I think it has to become an equal and important part of our strategy. We're not setting financial targets requiring M&A. So that's all the positive. The only other one I would say is the positive is we're getting looks at everything we want to have looks at. In some markets, we're going to have to stay disciplined because, frankly, some of the expectations around price or multiples have really gotten exacerbated. So from my side, we'll stay discipline, but I would say we are still getting a pretty good look of ideas, both kind of privately and option based.

Thank you. As there are no further questions, I would now hand the conference over to Kathy Powers for closing comments. Kathy?

Thank you, and thanks to everybody for joining us this morning. You'll be able to access the replay of this call through our website in about 2 hours. Again, please reach out to me if you would like to attend our Investor Day in September. If you received an invitation, please follow the registration link. If you have not received an invitation, please reach out to me, and we will get that sent out to you. We hope everybody has a great day.

Thank you. The conference of Modine has now concluded. Thank you for your participation. You may now disconnect your lines.