Good morning, ladies and gentlemen, and welcome to Modine's Third Quarter Fiscal 2026 Earnings Conference Call. [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.

Hello, and good morning. Welcome to our conference call to discuss Modine's third quarter fiscal 2026 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 for today's presentation are available on the Investor Relations section of our website, 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. Before launching into our quarterly results, I'd like to take a moment to review some of the details from last week's announcement regarding the future of our Performance Technologies segment. Since launching our transformation at our first Investor Day, we have made significant progress evolving our portfolio of businesses by investing in high-margin, high-growth businesses while improving our lower-margin businesses and making strategic divestitures. This past summer, we launched a process to divest our remaining automotive business and instead identified an opportunity to accelerate our transformation by spinning off the Performance Technologies segment and combining it with Gentherm, a leading player in thermal management and pneumatic comfort technologies. Modine will receive approximately $210 million in cash and Modine shareholders will receive stock in the new business in a tax-free distribution equaling 40% of the combined ownership. The combined business will provide renewed focus on investment and growth for Performance Technologies business and create cross-selling opportunities for Gentherm across new attractive markets. This values the Performance Technologies business at $1 billion or 6.8x the 12-month trailing EBITDA. This recognizes and reflects the hard work we put into improving margins in the business and allows current Modine shareholders to participate in future synergies and the strong earnings conversion we expect from the business once market volumes improve. The transaction presented an exceptional opportunity to find an ideal home for our PT business while maximizing value for our shareholders and further accelerating our transformation. The remaining business will consist of our current Climate Solutions segment plus corporate support functions. This is a business where we've been focusing on our investments for growth, including 6 acquisitions over the past 3 years and the significant CapEx for expanding capacity for our data centers product. The transaction will allow…

Thanks, Neil, and good morning, everyone. Please turn to Slide 7 to begin reviewing the Q3 segment results. Performance Technologies revenue increased 1% from the prior year, including a 3% decrease in heavy-duty equipment, offset by a 6% increase in on-highway product sales. Despite typical Q3 seasonality and end market challenges, adjusted EBITDA improved 38% from the prior year, and the adjusted EBITDA margin increased 400 basis points to 14.8%. The margin increase was driven by significant cost reductions and improved operating efficiencies across labor, overhead and materials. Pricing was also a benefit in the quarter, driven by tariff recovery through surcharges and our normal pass-through mechanisms. In addition, with the reorganization of this business, SG&A expenses were nearly $7 million lower versus the prior year. As we look to Q4, we expect a sequential ramp in revenue, which will be primarily driven by the typical seasonal pattern. We remain focused on costs and operating efficiencies, which will allow us to drive higher operating leverage and margins when market volumes begin to recover. Please turn to Slide 8. Climate Solutions delivered another quarter of strong revenue growth, increasing sales by 51%. The main growth driver was data centers, which grew $130 million or 78% as we begin to capitalize on our investments and utilize the new capacity. As anticipated, there was a 31% sequential revenue growth for data center products in Q3, and we expect significant incremental volumes in the fourth quarter as well. HVAC Technologies sales increased $35 million or 48%, driven by our recent acquisitions and stronger heating product sales. Heat Transfer Solutions sales grew 14% or $17 million, mainly due to higher coils and coatings demand. Climate Solutions third quarter adjusted EBITDA improved 29% given the strong top line growth. We made good progress this quarter with…

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

So I want to understand a couple of things. Can you talk about kind of the puts and takes embedded in the margin outlook for both Climate and PT in the fourth quarter? On the last conference call, you had sort of led us down a path whereby Climate kind of ends the year in Q4 with further sequential margin improvement maybe in a range of 20% to 21%. So if you can kind of backfill on the margins across the 2 segments? And then also help us understand what defines kind of the high and low end of the algebra on that 50% to 70% CAGR because obviously, you extrapolate that out 2 years, it's a pretty wide range. Is it demand? Is it capacity? So a little bit of help there as well.

Yes. Neil, Matt, it's Mick. I'll go and then Neil can add on the CAGR comment. So yes, as we look at the outlook and for the balance of the year, I want to be clear about that. We are comfortable with the margin improvements in Climate Solutions after the 120 basis point sequential in Q3. We're still on track for a 200-plus basis point sequential improvement in Q4. So we still see Climate Solutions in that 20% to 21% range. On the PT side, we do expect a step down in the EBITDA margin. So that might be one thing that you're trying to model out. And we -- a couple of things happening there. One is we see this as a Q4 temporary dip. We've got some material pass-through mechanisms that will be catching up. We've had a spike in aluminum, copper, steel. We also have some timing of the tariff recovery and also some Q4 inventory cleanup write-off work that's been tied to our 80/20 PLS activities and some of the plant conversions we did from going from PT plants to data center plants. So we're comfortable. I should also say we're comfortable with analyst estimates and dollars that have been out there in Q4, and that would imply we're trending above the midpoint of the range -- so we are trending towards that above the midpoint of the range in dollars. But again, CS fully on track for a Q4 margin improvement, and that's being led by HVAC and data centers. And then a Q4 dip in margin for PT, and we expect PT to rebound in Q1 back to that 14-plus percent type range. So let me throw it over to Neil and then you can come back, Matt.

No, I think that's covered well, Mick. Any other questions on that, Matt?

On that note, if we can get to the kind of data center question on what defines kind of that high low-end range when you extrapolate out 50% to 70% growth off a '26 base of $1.1 billion plus, you get a wide range. Is it capacity? Is it timing? Is it demand? Maybe you can just help out a bit there, that would be great.

Yes. When we think about that in terms of the capacity expansion, we're giving ourselves plenty of space there. As we get to further -- as we get further along in our project launches in the U.S., particularly in Jefferson City and Dallas, I think that we'll have -- we'll be at a tipping point of having the majority of capacity in place and online, and that would give us more confidence to tighten that range.

Perfect. And then as a follow-up, can you maybe talk about how we should be thinking organically around the non-data center businesses in Climate over the course of calendar '26?

Yes. At a high level, we're seeing good business, particularly in the HVAC side in our heating product line. We've seen great business in orders in the indoor air quality portion of the group. We've seen obviously, really good results from the acquisitions. And then we've seen some softness in the HTS business relative to the margins. There's been some pressure on the margins there as we've seen a spike in materials, and we've been able to obviously counter that through commercial activities like pricing, but we -- there's a lag there. So we've got a little bit of time to catch that up.

Our next question comes from the line of David Tarantino with KeyBanc Capital Markets.

You mentioned record order intake in data center. Could you give us some color around the profile of these orders? How much of the growth is being driven by expanding relationships with customers and/or adding new ones versus your existing customer set? And what do you have embedded here in the longer-term growth profile around expanding these relationships beyond what you currently do?

Yes. So that's a good question in terms of the profile and the concentration. This expansion is coming with our existing customer base primarily. Certainly, we are actively working with all the hyperscalers, but at different degrees and different levels. And there's potential for even greater upside when you think about some of these hyperscalers if we were to win orders at the order rates that we have with the ones that we have the longest relationships with. So this order intake and the upside that we see is with our strongest relationships with our longest customers, and we're still working through and doing quite well with the other hyperscalers and some of the N cloud providers as well.

Okay. Great. That's helpful. And then maybe just on free cash flow. The CapEx investments are pretty well documented. But could you talk about the working capital investment side of things related to the ramp and specifically what gives you the confidence that free cash flow begins to return to more normalized levels next year?

Yes, it's Mick. We've been trending about 19% to 20% working capital to sales. So I think that's going to hold relatively well. But 2 things that were happening that will kind of cause us to get back to more normal free cash flow levels was the rate of the ramp that when we did the expansion this year when we announced it beginning of the year, a lot of prebuy. So we actually have spiked above our normal inventory carrying levels. And then secondly, the amount of CapEx, whether you look at it as onetime spends or percentage of sales also had a spike. So I think what will happen, David, is we'll trend back down. I don't think it will be a step function. Inventory working capital will trend back towards normal ratios to grow with sales. And same with CapEx. We'll still have some CapEx carrying over into next year and elevated. But as a ratio or driver of capital, we won't have -- this year is probably $200 million. We probably had $400 million that we invested in capital spending and working capital builds.

Our next question comes from the line of Noah Kaye with Oppenheimer.

And good to see folks earlier this week at Expo. It was really helpful to get your commentary just now on the Climate Solutions margin outlook for 4Q. Basically, this is going to be then if you hit that a couple of quarters in a row where you get roughly, call it, 200 bps, 100 to 200 bps margin expansion sequentially even as you're adding a bunch of new chiller lines, right? So I guess the question is really how do we extrapolate this and thinking about where margins could be going here. You've talked about kind of mid- to high 20s as a longer-term target. But should we think about that kind of margin progression as continuing into the future quarters as you continue to add more lines but get better absorption?

A couple of things, Noah, that -- I wouldn't extrapolate and we're not implying that we'll have 200 bps sequentially every quarter. I think this was -- and we talked about it in Q2, we had a significant decline and was tied to the amount of fixed costs we added. So to climb back out, we said we'd expect it to be kind of 2 quarters to pick up whatever that was, 400, 500 basis points. And then from there, it's going to be more of a normal climb step by step up. We've been clear with Climate Solutions that the goal next year would be 20% to 23%. We'll provide some guidance in our Q4. And a reminder for the group when we announced our announcement on Performance Technologies, we're going to split and have 2 Climate Solutions segments. So we can provide some other color in Q4 for data centers. But I'd say short until we come out with specific guidance by the 2 Climate Solutions segments, I think next year being -- taking that midpoint of that range is a fair starting point, and we'll tighten that up and give you some more color in Q4.

Very helpful. Neil, it's good to hear you talk about the record orders intake. Obviously, not historically disclosed orders. But can you talk a little bit about just sort of a sense of magnitude of that orders intake and also the composition, how diversified it is among the customer base? What does it imply about kind of your customer mix as we head into next year?

Yes. Thank you. It's roughly 50-50 in terms of the products where 50% of it is with chillers and 50% is with the rest of the products that we have for the full solutions in data center. It's a larger -- more of the majority of the revenue is with our hypers. And what gives us great confidence is these are projects and programs that we've seen that have been in the funnel for a while, and they're starting to come to fruition in terms of purchase orders. So long-standing relationships, strong relationships with these customers, seeing these things progress through our probability funnel moving from 40% or 50% probability into the 80% to 90% category at a much heavier and faster rate than we've ever seen. So those are the things that give us confidence in terms of our customers who we're serving as well as the products, knowing that we have the capacity to keep and it consists with our ramp schedule that we're public about a couple of quarters ago.

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

So obviously, as you talked about, the 50% to 70% growth in '27, '28 recognizes the market dynamic, the mix of products there might change. I think on the follow-up call on the PT spin-off, you talked about chillers potentially being better than 50% of the mix in '28. Maybe can you just talk a little bit about how the ultimate mix impacts your margins and kind of what the biggest wildcards are?

Yes. I'll go first and Neil can add. It's pretty uniform across the data center space. And so just take a step back, one thing I think Neil had covered and will help as we -- now that data centers has gotten to the scale, we think it's the right time to carve that out as a segment. But when you peel back the onion and Climate Solutions, what we've had over the last few quarters, right? So total segment is the 3 acquisitions we brought on and then Neil said on the coils or HTS side, we've had some lag effect on material pass-through. So kind of putting that off to the side, that's had some impact in the margins that you've all seen. Across the data center then product portfolio, it's a pretty uniform margin profile. Obviously, we really like the service element. So I don't think it's as much there. I would leave it at. It's a pretty uniform mix is not going to be as big of a driver for us. The other one then the factor, as you know, over the last 3 to 6 months was just the amount of fixed costs we brought on with greenfield facilities. So not to punt on your question, I think the main drivers are in data center capacity utilization and then less about product mix.

Got it. I appreciate that. And maybe just a follow-up in terms of the capacity ramp. So is the expectation that by the end of fiscal '27, you will have the capacity in place to manage the high end, the 70% CAGR for both '27 and '28, '28 specifically. Is there more -- if you're doing that 70%, that implies in that $3 billion range in '28, Will you have that capacity in place by the end of '27?

We would expect to have the capacity in place by the end of '27. However, they may not be at full utilization yet.

Our next question comes from the line of Neal Burk with UBS.

Apologies if I missed this on capacity utilization, but I think your guidance based on my math at least has annual data center revenues kind of exiting the year at $1.6 billion. Is that the correct way to think about the annual number? And what is the kind of capacity utilization that, that assumes?

Yes. A quick -- I'll jump in on that where Neal, where you're going. Yes, our Q4 has implied a $400 million plus sales quarter. So yes, that would be an annualized run rate of $1.6 billion. Neil, do you want to add anything on capacity here?

Yes. Again, capacity is in line with where we want it to be. We're -- it's as expected. We're getting more efficient. You saw it in the margin improvement this quarter, and we're very comfortable in terms of getting back into that 20% range as we continue to add more capacity to data centers.

All right. And one more follow-up, again, on the point of demand. I know you said record orders in the quarter, but maybe just like taking a step back, like the data center pipeline as you see it, can you talk about how that's trending? And like specifically, do you have more visibility on future orders and revenues than you did, say, 6 to 12 months ago?

Yes. And that's an interesting question because I say yes to that every time that's asked every 6 to 12 months because it just gets bigger and bigger and the visibility gets broader and broader. So if you go back 3 years ago, we had 8 to 12 months visibility. And you go back a year ago, we had 24 months visibility, 36 months visibility. Now we're looking out as far as 5 years. And certainly, the top of the order funnel is swelling for sure.

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

Just kind of maybe this is a little bit premature, but given that your next fiscal year is upon us and you're ramping production, how do you think we might see the growth cadence of the Climate Solutions business trend in the next fiscal year? And might we anticipate sequential revenue growth for the next several quarters?

Total Climate Solutions. I want to make sure I understood your question. Yes. Yes. Well, I think I'd separate them again. I would expect, again, Neil can jump in that at the greater growth in order intake on the data center side, and that's becoming a much bigger piece, right, of the entire Climate Solutions segment, that we will see sequential growth for quite a while on data centers. I have to go back and study a little bit the HVAC side. We get seasonal patterns with heat. And then you have a coil HTS business that can be heavy replacement and also some of that tied to residential OE customers. So I think of that as more normal and that we've said that's probably a high single-digit organic grower annually. last thing I'd say, I don't want to be too repetitive, but it will help when we give you some more color in Q4, and I could split those 2 dynamics. HVAC is a very different dynamic, HVAC&R versus data center. So hopefully, that's enough color to give you some direction.

Okay. And I'm sorry, just to clarify for Q4, are you going to start breaking out in the P&L, the 2 segments for Climate Solutions?

So beginning our Q1 with our new fiscal year, we will have 3 segments. We'll have a data center segment, a commercial HVAC segment. and obviously, Performance Technologies until that transaction closes. And we'll report as we have with our other segments, revenue and earnings. What we'll just do in our Q4 is we'll provide some guidance for the new year outlook. But to be clear, I won't be able to give you those segment splits until we hit our Q1.

Okay. Fair enough. And then maybe for Neil, as you're talking to your data center customers, what is really top of mind for them at this point in determining their go-forward cooling needs? How are those needs evolving? And then I guess, as a result, how is Modine evolving its products for the future?

So a few things. One is there's a lot of conversations about them now, which is securing capacity. How do we ensure that the strategic suppliers that they've selected are investing in capacity and investing in production and investing in their own internal supply chains so that they can keep up with the demand as you see the hyperscalers continue to raise their CapEx spend. Almost every quarter, they're raising their CapEx spend. So what are we doing now to ensure that we're in sync and locked in with their progress as well as their build-out? That's one. The next piece is around our innovation and technology. What are we doing to make sure that we deliver products that help them solve 2 critical problems. One is the lack of power, so energy consumption and the other is around water and the amount of water that's used typically in some data centers. So if we can continue to innovate and evolve with better use in terms of power and water, which are often measured through PUE and WUE, we can continue to improve their metrics and stay innovative in that regard. Those are 2 critical problems that we're trying to solve for in the industry in addition to keeping up with the breakneck speed of CapEx deployment.

Our next question comes from the line of Brian Drab with William Blair.

First, I wanted to ask on the capacity expansion. You have the -- it sounds like $1.6 billion in revenue capacity for sure now as you're going into the fourth quarter. But to get to the $3 billion, how much additional investment is this going to take? Just trying to get this whole framework in place. I think that Nick made some comments on the call last week, but we're getting a lot of questions on this. Like how do you get to $3 billion? And does it -- how much additional investment beyond the $100 million that you talked about before -- and then also, are you just getting there from some higher utilization or increased pricing? Can you frame all of that for us?

Yes. High level, we can get there on the amount of capital that we've been public about in terms of what we needed to spend to get to the $3 billion. But $40 million of that will carry over from this year into the next fiscal year.

Yes. And we'll have another -- we had about $40 million of capital spending in Q3. So just in Q4, and this is -- this will be equipment that won't even be producing really much in revenue. We'll have another $40 million to $50 million in Q4 and Neil just mentioned the $40 million plus amount that we'll spend in the new year. So one other maybe data point, if you take that, almost $100 million left of that spending that Neil talked about that we've laid out that isn't even in these production sales numbers yet that will be supporting future sales growth.

How many -- can I ask how many chiller lines would you be at as you enter fiscal '28 to execute on the plan?

20.

Got it. And last question is Neil, I don't know if you want to provide or if there's any update to provide on this, but you had talked late last year about a couple of new potential hyperscaler customers for chillers who had not purchased chillers in the past, looking for sample product. And I'm just wondering are you -- how many total hyperscaler customers are you working with? And then can you give a specific update on anything that's developed and potential new customers for chillers specifically?

Yes. Obviously, we're working with all of them at different levels of engagement. And then if you recall from last quarter, I talked about one of the reasons that we had that miss in the margins in data centers was that we had to cut production with a couple of hyperscalers that we hadn't sold chillers to in the past, and they needed some pilot builds for fiscal year '27 and '28. So pending the results of the field trials, which we would anticipate to be in line with how we typically perform, we'll continue to grow with those other hyperscalers with chillers.

Do they give you any visibility to when you hear about the field trial results?

Yes. Typically, it will be -- we'll hear about it all the time in terms of -- we'll get feedback regularly, but a decision won't be made for a couple of quarters.

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

I just have one follow-up here. Neil, Mick, how are you strategically thinking about LTAs long-term agreements? How much of your capacity will you ultimately be willing to have sort of spoken for over what kind of time frame? And I guess, in turn, what price kind of considerations are you thinking about? And would you be able to structure these almost as a take-or-pay arrangement such that you're not absorbing risk?

Yes. Well, it's not that we couldn't structure. It's not as if we could structure it in a way that it's completely risk-free. But certainly, it derisks substantially, and it gives you higher confidence and great confidence that the commitment of the customer is there as well, particularly long term. So certainly, I mean, we'd be willing to do LTAs for all of our capacity. Why wouldn't you, right? So we're -- that's definitely new and certainly a part of this capacity expansion equation that we're seeing with our large OEM customers. So those conversations are being had. I think you've seen evidence of this happening with other suppliers that these things can happen. And we strategically align ourselves behind our 80s customers that we believe are our best customers, and those would be the ones that we would lean in on in terms of providing more capacity with an LTA.

Do you think, Neil, obviously, it's been tough for you to name -- use specific customer names. If you sort of begin to go down the road where LTAs start getting signed, maybe absent specific customer names, is this something we can expect to be publicly announced and communicated?

Yes.

Our next question comes from the line of Brian Sponheimer with Gabelli Funds.

I'm curious, the heavy focus on data centers and yet within this past fiscal year, you found LB White and Climate by Design. I'm just curious about that pipeline, maybe outside of the data center set on Climate from an M&A perspective, you're going to end pro forma, you'll be less than 1x levered when this is all said and done with Gentherm.

Yes, you're right. CDI, Absolute Air and LV White, certainly inside of that HVAC business as we continue to look at ways to diversify around some of these higher-margin businesses that are not typically in data centers. We believe we have what we need in the data center space. Right now, we continue to cultivate the funnel. We're often in conversations and at different milestones with many potential targets. Probably over the next couple of quarters, it's all hands on deck on our project with Gentherm but we can still work in the background on the active funnel that we currently have around additional businesses and technologies that we see would continue to help evolve our portfolio inside of the HVAC business for sure.

Could you give -- I mean, with the understanding Gentherm probably happened fairly quickly, could you give any color as to what that pipeline looked like prior to you engaging with Gentherm?

Yes, it's Mick, Brian. It's good. It's -- there are some things we paused on when that accelerated. But that HVAC space has a lot of privately owned and fragmented businesses. So I'd say I classify it as there's a funnel of businesses from $50 million to $100 million sweet spot in revenue that we can relaunch discussions with.

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

Thank you, and thanks to all of you for joining us this morning. A replay of this call will be available on our website in a couple of hours. I hope you all have a great day. Thanks.

Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.