Modine Manufacturing Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

Key Takeaways

  • Record Q1 performance with 15% top-line growth and adjusted EBITDA of $80.4 million, up 91% year-over-year.
  • Completed acquisition of MAHPS Technology and the Jetson brand to bolster the indoor air quality portfolio, targeting the school ventilation market.
  • Data center sales more than doubled year-over-year with margins above segment targets, driving a raised outlook of 60–70% growth to over $270 million this fiscal year.
  • Performance Technologies revenue rose 18% while adjusted EBITDA margin doubled to 11.2%, fueled by better commercial terms and growth in EV systems and genset applications.
  • Heating product sales declined nearly 40% and heat transfer revenues fell 7%, prompting a cautious outlook for those markets in the second half.
AI Generated. May Contain Errors.
Earnings Conference Call
Modine Manufacturing Q1 2024
00:00 / 00:00

There are 8 speakers on the call.

Operator

Good morning, and thank you for joining our conference call to discuss Modine's First Quarter Fiscal twenty twenty four Results. I'm joined on this call by Neil Brinker, our President and Chief Executive Officer and Mick Lucarelli, our Executive Vice President and Chief Financial Officer. We'll be using slides for today's presentation, which can be accessed either through the webcast link or by accessing the PDF file posted in the Investor Relations section of our website, modine.com. On Slide 3 is our notice regarding forward looking statements. This call will contain forward looking statements as outlined in our earnings release well as in our company's filings with the Securities and Exchange Commission.

Operator

With that, it's my pleasure to turn the call over to Neil.

Speaker 1

Thank you, Kathy, and good morning, everyone. This has been an exciting quarter for Moheen. First, we delivered another record quarter with 15% top line growth an adjusted EBITDA of $80,400,000 an increase of 91% from the prior year. 2nd, we completed our first acquisition since announcing our transformation strategy with the addition of MAHPS technology and the Jetson brand to our product portfolio in early July. MAPS has a small chiller range that fits nicely within our indoor air quality business, providing an additional product line for our target schools market.

Speaker 1

I'm excited to welcome NAP's President, Sam Neel and his team to Modine and look forward to continuing to manufacture this great product at their facility in Longview, Texas. This acquisition is directly in line with our growth strategy, which is focused on differentiated technologies and systems that address real world needs. Most importantly, this acquisition demonstrates our commitment to responsibly investing in key verticals, where our objective is to grow faster than the market. As a result, we're making great progress towards our financial targets and planting the seeds for future growth. But this doesn't mean that we're reaching the end of the journey.

Speaker 1

In fact, I would say, we're still in the early stages of this transformation. There is an additional opportunity for incremental revenue and margin growth our business portfolio shifts to the growth column and as we further simplify and rationalize low margin products. Please turn to Slide 5. The Climate Solutions segment delivered another strong performance this quarter with revenue up 11% from the prior year and an adjusted EBITDA margin of 18.3%, up 500 basis points from the prior year. In Climate Solutions, we are well along in our eightytwenty journey and have proved about the effectiveness of this approach.

Speaker 1

We stabilized the business by providing the leadership, resources and strategies necessary to improve our operating margins and accelerate top line growth. I've often said that data centers is the tip of the spear and it's leading the way in both revenue growth and margin improvement. In the Q1, data center sales more than doubled from the prior year at margins above our segment targets. This is the result of a dedicated focus and strategy to grow, investing capital and resources as we've never done before. Mick will provide more detail in a minute, but we're raising our outlook for data center revenue growth this year, company is now targeting a 60% to 70% increase, which would equate to over $270,000,000 in data center revenue this fiscal year, up from $174,000,000 last year.

Speaker 1

This large change in our forecast is primarily due to higher than expected orders in Q1, which will positively impact the back half of the year. We have a strong backlog, including both hyperscale and colocation customers. In addition, we have a pipeline of new products and new customers that we are confident will fuel above market growth in the future. I often get questions about our next generation technology and data center arena, particularly as it relates to high performance computing, supporting AI, machine learning and other applications that require more advanced cooling technologies to deal with a higher heat load. This technology is still developing and it's an area that we're very interested in and we've done some R and D here in the past.

Speaker 1

We will continue to develop this technology organically, inorganically or both and are actively monitoring and assessing the landscape. We see this as a great opportunity for us to add to our portfolio of data center cooling products. As data center products become a bigger portion of our portfolio, this revenue stream provides a level of diversification away from our traditional heating and HVAC markets, both in the HVAC and HTP verticals. Our heating sales were down nearly 40% in the quarter due to weak market conditions and the sales of heat transfer products were down 7% from the prior year. Despite this decline, margins actually improved due to lower material and freight costs and greater labor efficiency.

Speaker 1

When demand started to change, we quickly shifted our efforts to operational improvements leading to the solid performance. Please turn to Slide 6. Performance technologies segment also delivered strong results this quarter with revenue up 18% from the prior year and an adjusted EBITDA margin of 11.2%, an improvement of 560 basis points. In fact, the margin is exactly double the prior year. Much of this gain is due to the hard work the team has put into improving commercial terms and our long term contracts, helping to recapture margin loss to material, labor and overhead inflation over the past several years.

Speaker 1

In many cases, we benefited from these adjustments earlier than expected, leading to our quarterly performance exceeding our expectation. The important thing to understand is that our teams are focused on the value that we deliver to our customers and their negotiating agreements that are fair to both parties. In addition, we're winning incremental business in targeted markets with accretive margins. Much of this is due to the eightytwenty work that we've done so far in the PT segment. We are evaluating our business using a data driven approach and are simplifying, improving wherever possible.

Speaker 1

For example, and our liquid cooling applications business, we've eliminated 73 SKUs, representing over $20,000,000 of annual revenue that was at negative gross margins. In some cases, we're getting favorable commercial terms as we negotiate exits on non strategic product lines. As the business wind down, we plan to replace it with higher margin opportunities. An example of this is the genset business, which I had mentioned before. We have been in this business for a long time, It was never a strategic focus.

Speaker 1

Now we are working with existing and new potential customers to support the conversion from copper brass to aluminum heat exchangers, similar to what the vehicular OEs did decades ago. Aluminum has both a cost and performance advantage and we have the technology and global footprint to deliver in region. There are great drivers for the growth in this business as data centers, hospitals and other critical applications secure backup power to guarantee continuity of energy supply. This was about a $50,000,000 business for us last year and we expect this business to have a 30% CAGR over the next 3 years, definitely in the growth column. Another business in the growth column is our EV Systems business.

Speaker 1

We have a number of important launches this year, but some are being delayed due to supply chain constraints, but the demand is there. Our commercial funnel, we are up to 25 program wins, including 2 wins for our fuel cell product. This pushes our awarded revenue at peak annual production

Speaker 2

earnings call

Speaker 1

is now open to

Speaker 2

over $150,000,000 Again, I'd

Speaker 1

like to reiterate that we are just getting going on eightytwenty in the PT business, but are seeing remarkable early results. We are investing in those businesses that have the right growth drivers and addressing low margin business in different ways throughout the segment. We've simplified our product offering and are negotiating favorable exits, while also working to improve commercial terms to recapture the value that we provide to our customers, all while further investing in the technology of the future. I'm very proud of the work being done in both segments and the results we have delivered this quarter. Now, I'd like to turn the call over to Mick, who will review our results for the quarter and provide segment financial updates.

Speaker 3

Thanks, Neil, and good morning, everyone. Please turn to Slide 7 to review the segment results. Climate Solutions had another great quarter with improved earnings on higher sales. Segment revenue was up 11%, driven by our data center vertical with sales up 124% or $38,000,000 The data center increase is fantastic, given it supports one of our most attractive markets and is quickly becoming a very large portion of Modine's total revenue. A significant piece of the increase is related to North American chiller sales as we ramp up production at our new plant in Virginia.

Speaker 3

We entered the year with a strong backlog and realized some of the sales much earlier in the year than originally planned, which added to a stronger than anticipated Q1. HVAC and R sales were down a modest 2% or 1,000,000 driven by lower sales of heating products, partially offset by higher indoor air quality sales, which were up 40%. The heating market remains down largely due to higher field inventories and lower pre season stocking sales. Sales of heat transfer products decreased 7% or $9,000,000 As anticipated, there was some market softness with commercial refrigeration customers and in various residential related markets, and we are also continuing eightytwenty product rationalization activities. We're pleased with the very strong earnings conversion as adjusted EBITDA increased 53%, resulting in a 500 basis point margin improvement to 18.3%.

Speaker 3

The earnings and margin improvements were primarily driven by higher sales volume and benefits from Eightytwenty Initiatives. The Climate Solutions segment continues to perform very well and is off to a strong start to the year. The growth in data center sales is driven by a robust press release backlog, which is continuing to grow. With regards to heating and heat transfer products, we're maintaining a cautious outlook for second half of the year, which has been incorporated into our revised guidance. Given these factors, we believe we're likely to see more level loaded quarters or less seasonality than in previous years.

Speaker 3

Please turn to Slide 8. Performance Technologies also had another great quarter with sales up a very strong 18% are $55,000,000 Revenue benefited from both volume and commercial improvements, many of which results were realized earlier than expected. Sales volume accounted for $37,000,000 or 12% revenue growth. Advanced Solutions sales were up 31% or $10,000,000 with continued growth of our EV Systems and Components sales. Liquid cooled application sales increased 21 percent or $24,000,000 due to higher sales across all end markets.

Speaker 3

Lastly, air cooled application sales increased 13% or $20,000,000 primarily due to continued strong demand from off highway customers with higher sales in genset or stationary power applications, which we see as a significant growth area. Performance Technologies converted the higher revenue to an extremely high level of earnings. Adjusted EBITDA was up 135%, resulting in an 11.2% margin and a 5 60 basis point improvement. As Neil mentioned, the Performance Technologies segment has worked hard at modifying long term contracts. And in some cases, we benefited from these adjustments earlier than expected.

Speaker 3

While we're making great progress towards our margin targets, I want to point out that it will be difficult to sequentially match this Q1 result. As we entered the year, the team had a long list of projects to execute we believe the results would ramp over the year consistent with most of last year. As I just mentioned, we're pleased that some of our commercial negotiations were results were completed earlier than expected and were also able to capture some retroactive commercial benefits during the quarter. Lastly, as previously discussed, the team is pursuing multiple eightytwenty product rationalization strategies, which could result in some reduced revenue. I want to be clear that these are planned actions and relate to business that cannot meet our margin objectives.

Speaker 3

Based on all of these factors and as we look to the balance of the year, our full year outlook for this segment has improved and we now see more even results over each of the 4 quarters. Now let's review the total company results. Please turn to Slide 9. 1st quarter sales were up 15% or $81,000,000 Higher sales volume drove approximately $62,000,000 of incremental sales or 11% growth. Commercial pricing added another $19,000,000 to the top line.

Speaker 3

Gross margin improved 5.20 basis points, primarily driven by the factors I reviewed for Climate Solutions and Performance Technologies. SG and A increased $5,000,000 primarily due to higher employee and incentive compensation expenses. However, SG and A as a percentage of sales was 50 basis points lower than the prior year. I'm happy to report that adjusted EBITDA was very strong in the quarter with an increase of 91% or 38,000,000 This equates to an adjusted EBITDA margin of 12.9% or a 510 basis point improvement from the prior year. This also represents the 6th consecutive quarter of year over year margin improvement.

Speaker 3

Adjusted earnings per share was $0.85 An increase of $0.53 or 166 percent from the prior year. Before moving to the balance sheet, I'd like to reiterate that the quarter was clearly stronger than expected. We now see a more level loaded year for several reasons. First Q1 revenue was higher than initially expected in our plan, including a faster ramp than anticipated in some areas such as data centers. 2nd, Performance Technologies is achieving eightytwenty benefits earlier than expected, including the settlement of new commercial agreements and some retroactive adjustments that will not carry through to future quarters.

Speaker 3

3rd raw material costs have been below our previous projections, which is favorable to Modine Until we pass on the lower costs through our material pass through agreements over the next few quarters. As a result, a portion of the strong Q1 earnings was due to timing and the accelerated benefit from some of these items. In a few minutes, I'll further discuss how we're rolling these impacts and the strong operating performance into our full year outlook. Now moving to the cash flow metrics. Please turn to Slide 10.

Speaker 3

We generated $27,000,000 of free cash flow in the quarter, which is a significant improvement over the Q1 of fiscal 2023. This was primarily driven by higher operating earnings, partially offset by higher working capital and higher payments for incentive compensation. Net debt of $265,000,000 decreased $20,000,000 this quarter. Net debt coupled with strong earnings resulted in a leverage ratio of 1.1. This fiscal year, we expect continued growth in free cash flow, driven by higher earnings and a continued focus on working capital.

Speaker 3

We anticipate the full year free cash flow will fall in our target range of 3% to 5% of sales. Modine's balance sheet remains quite strong, ready to support both organic growth and acquisition initiatives as was demonstrated by the acquisition of NAPS Technology that we announced in early July. Now let's turn to our fiscal 2024 outlook on Slide 11. As announced in the press release, we're raising our sales and earnings outlook for fiscal 2024. Before I discuss the updated guidance, I want to review some modifications to how are our results.

Speaker 3

1st, we've refined reporting of revenue by product group within the Climate Solutions segment in order to be more consistent with how we manage by general manager and manufacturing location. As part of Eightytwenty, we're continuing to align our product groups in manufacturing with each of our general managers. As a result, we've recast revenue for fiscal 2023 to be consistent with how the product groups are now reported in fiscal 2024. There are no changes within Performance Technologies, we made some minor revenue changes between data centers, HVAC and R and heat transfer products within Climate Solutions. We've provided a summary table of the recast numbers in the appendix to this slide presentation.

Speaker 3

For the prior fiscal year, the recast resulted in a $20,000,000 increase in data center revenue, a $5,000,000 increase in HVAC and R, offset by a reduction in revenue for heat transfer products. To be clear, there is no change to total Climate Solutions revenue, rather just minor classification changes Company's Chief Financial Officer of Financial Partners. As I previously mentioned, our Q1 exceeded our expectations for several reasons, and this was certainly a factor leading to our improved outlook for the year. In the Climate Solutions segment, we now expect data center revenue revenue to grow 60% to 70%, a significant increase from our previous guidance, and we now anticipate data center revenue more than $270,000,000 Moving to HVAC and R, we expect revenues to grow in the low single digits and have lowered the top end of this range as we remain cautious about ongoing weakness in the heating market. However, we anticipate this should be off set by very strong sales growth in school ventilation products.

Speaker 3

With regards to heat transfer products, we now anticipate a sales decline in the low single digits, which is a reduction from our previous guidance. This is primarily due to concerns over our general economic slowdown, especially in residential and commercial refrigeration applications. Also within Heat Transfer Products, we're adjusting our projected ramp up for sales to heat pump customers in Europe due to changes in regulations and incentives. We still anticipate this to be a high growth market for us, but at a somewhat slower ramp rate. Moving to Performance Technologies, we expect continued momentum from relatively stable markets and benefits from our Eightytwenty rollout.

Speaker 3

We expect Advanced Solutions growth to be in the 25% to 35% range, which did not change from last quarter. This growth is driven by program launches and continued demand for EV Systems and Components. We expect lower growth for liquid and air cooled products as we roll out eightytwenty throughout the segment. Market growth is expected to be somewhat offset by product financialization as we continue to deemphasize lower margin business. The product rationalization and associated lower revenue could result from negotiated program exits or from select divestitures.

Speaker 3

Let's move to adjusted EBITDA. Again, the Q1 was much stronger than we anticipated based on many factors, including sales volume, material margins and operational improvements. Based on the recent results and market trends, we're raising our adjusted EBITDA outlook for the year. We now expect our fiscal 2024 adjusted EBITDA to be in the range of $280,000,000 to $295,000,000 up from 240,000,000 $260,000,000 and representing an increase of 32% to 39% versus the prior year. Also when looking at the midpoints of the earnings ranges, our new outlook represents a nearly $38,000,000 increase.

Speaker 3

Again, much of this change is due to the performance in the Q1 and some of the Q1 benefits won't necessarily repeat and subsequent quarters, including the realization of retroactive commercial adjustments. Based on this and our higher full year outlook, We now anticipate that the next three quarters will hover around $70,000,000 versus the previous plan for a more back end loaded year. The second and third quarters could be somewhat below the $70,000,000 quarterly average with Q4 potentially above the average. Now that I've covered the very strong Q1 and associated sequential trends, I want to reiterate that our outlook assumes ongoing and very strong year over year with capital expenditures expected to be around $70,000,000 Our assumptions including interest expense, taxes, press release and amortization are all included in the appendices attached to this presentation and our press release. To wrap up, we're extremely pleased with the Q1 results and how we've started fiscal 2024.

Speaker 3

Our outlook remains strong. We're making progress towards our financial targets. And in many cases, we're trending well ahead of our initial transformation timeline and GOLs. I'm pleased to say that we're firmly on track with our transformation. But as Neil said, we're still in the early stages.

Speaker 3

This was a great quarter, but we still have plenty of work ahead of us, and we're quite confident in the entire Modine team. With that, Neil and I will take your questions.

Speaker 4

Our

Speaker 5

are.

Speaker 4

Our first question comes from the line of Matt Summerville with D. A. Davidson. Please proceed with your question.

Speaker 5

Thanks. Good morning and obviously great quarter. Couple of thoughts. Just with respect to Performance Tech, can you maybe Sure that you saw in the quarter that you would not expect to repeat necessarily looking forward.

Speaker 3

Yes. Hey, Matt, it's Mick here. Good morning. Yes, in total so total company, we estimate there is at least $10,000,000 in the quarter of pull ahead, things we got earlier than we thought would happen plus some retroactive adjustments and that's for the total company. As I look at it between PT and CS, I'd probably estimate that it's about 2 thirds, 1 third, about 2 thirds that's coming in PT and a third of that in Climate Solutions.

Speaker 5

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

Speaker 5

Thank you.

Speaker 1

Good question, Matt. Thank you. This is Neil. Sure, we've seen a very healthy pipeline within data centers, right? And when we continue to build out our customer base and broaden our customer base, particularly around the colocation side, our These orders, potential orders that are in the pipeline when they break, they make large swings, right?

Speaker 1

So we don't We typically don't predict some of these larger orders until they actually cut over to POs. That's where you're starting to see some of that adjustment our As this funnel continues to grow, more and more is transitioning through the Tollgate process into purchase orders. So We like that, we enjoy that and we appreciate the work that we're doing with our customers there to help support them and meet their sustainability targets. Relative to liquid cooling, We've been close to this. We're going to remain close to this.

Speaker 1

This has been something that Modine has participated in for over a decade. We understand the shift in the technology, but we also understand that There isn't a clear technology winner, whether that is going to be immersion cooling or liquid on ship cooling. And we want to understand where the market will continue to evolve. And as this market becomes more dynamic around liquid cooling, our We're going to continue to observe to see where the greatest opportunity is for Modine to penetrate. Again, that can be through agreements or inorganic growth or organic growth.

Speaker 1

We are in a good position to do either. And we'll move at the rate as the market adopts. Our As the market adopts, we'll make those adjustments accordingly. So we're very keen to the market. We understand it.

Speaker 1

Our customers understand it. Our customers look to Modine for these solutions, and we'll make the adjustments appropriately.

Speaker 5

Thanks, Neil. And then maybe I'll just sneak Maybe one more. And just to kind of use a baseball analogy, how would you characterize what inning we're in within the 2 business segments with respect to generating the eightytwenty benefits you fully intend to achieve within Climate and Performance? Thank you.

Speaker 1

Yes, good question, Matt. This is Neil. So in Climate Solutions, we're halfway through the first game of a 5 game series. Our and in Performance Technologies, we're just getting started. So, the teams are organized appropriately.

Speaker 1

They have picked the markets that they want to grow in. They understand the strategic initiatives and objectives and we've put in the right leadership team In order to execute on those objectives. So as you know, we started Climate Solutions a year ahead of Performance Technologies deliberately, and they're tracking right in line with what our expectations were with the financial targets that we put in place in New York last year.

Speaker 5

Got it. Thanks guys.

Speaker 4

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

Speaker 6

Our Hey, good morning, guys. Thanks for taking a couple of questions. Maybe just big picture on pricing. I know that you guys have raised prices aggressively over the past year or so, up until at least recently. You talked about still being underpriced in many areas.

Speaker 6

Just wondering, is that still the case? Is there specific areas that you could talk to there.

Speaker 1

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

Speaker 1

So frequently is the would be the answer to that question.

Speaker 6

Got it. It's helpful. Thank you. So my understanding is that auto OEMs have multiple vendor relationships with suppliers like Modine. However, they often sole source a given platform.

Speaker 6

So assuming that's accurate, do you see situations where the OEM might be reluctant to allocate the internal engineering resources necessary to get vendor is back in even though your pricing has gone up significantly?

Speaker 1

Yes, it's a good question, Chris. I think OEMs have All OEMs have different strategies. They could have dual supply chain, single supply chain, triple. That depends on how they want to balance the strategic or Supply Chain Risk, if there is any, whether that's an issue with factory output production or it's an issue with logistics or maybe even price. Our I think they all have their own unique strategy.

Speaker 1

But there's that element that you just described and there's also an element of we've seen a conversion over to EV. And as we look at opportunities on the internal combustion engine side and maybe there's adjustments there commercially that are made, I think you also have to consider whether or not it's worth the time and effort and energy in order to maybe find additional suppliers to provide that product knowing that the platform is going to end and it's going to convert to EV anyway.

Speaker 6

Got it. Very helpful. Our Maybe just last one for me. So it sounds like this 25 EV program wins, dollars 150,000,000 I'm just trying to understand over what timeframe are you kind of looking at that?

Speaker 3

Yes, it's Mick. It's going to be a significant ramp. So and our last year was about $50,000,000 or so in EV business and we estimate that that will grow At a 40% to 50% compound growth rate. So if you kind of extend that out, you get a feel for when you think when we think we'll be hitting that run rate.

Speaker 6

Got it. Very helpful. I'll leave it there, guys. Our

Speaker 4

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

Speaker 7

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

Speaker 1

Hey, Jeff, good question. This is Neil. Thanks for that. We're evaluating our capacity and we're looking at redundancy and we're making investments there. So as you know, 2 years ago, primarily most of the data center output and revenue came from the U.

Speaker 1

K, out of one facility. And since then, we've expanded to 2 facilities in the U. K. We've retooled an existing manufacturing facility in Spain to support data center growth for Continental Europe. We've built in we've modified a facility in Virginia to produce our chillers for North America.

Speaker 1

So we added additional capacity there and then we're adding capacity in Mississippi as well. So we're across 5 different footprints And we have the capacity to continue to grow at the rates. We have more capacity than the actual stated percentage of growth year over year. So I'm not concerned about capacity. It's just a matter of being able to transition the conversations that we have with our customers and provide the products and the engineering solutions.

Speaker 1

The capacity in terms of factory, we're in a good position.

Speaker 2

Okay, great to hear.

Speaker 7

And then maybe if you could delve a little bit more into what you're seeing in the school market for indoor air quality, just a little bit of an update there.

Speaker 1

Our Yes, that's a great business for us. We continue to gain share there in that space. We're working on the process of actually dedicating a facility to that. There's enough volume now that we can dedicate an entire facility to that. So we're getting that positioned and ready to grow.

Speaker 1

We see this outlook of growth at this rate for our next couple of years as well. It's the funding is continuing to flow through into the schools. They're making the decisions. They're upgrading the infrastructure. And we put ourselves in some pretty good positions with our reps and distributors to fulfill the needs of the customers.

Speaker 7

Okay, great. And then I had sort of a P and L question on the gross margin that came in substantially better than we expected, which we know has been a focus during the current phase of transformation. Can you maybe speak to whether you believe the level of gross margin we saw in Q1 is sustainable? I know that you mentioned some of the Maybe a little bit of a non linear progression over the next few quarters and the revenues, just wondering how we should think about gross margin over the remainder of the year.

Speaker 3

Yes. Hey, Jeff, it's Mick. The I mentioned to Matt's question, We estimate at least about $10,000,000 in Q1 of good things that are more network pull ahead. If we look at having an average the next few quarters around $70,000,000 plus or minus, it's about probably about a point of margin. So I think for sure the gross margin is driving the earnings.

Speaker 3

We talked about that eightytwenty is going to come through at the gross profit line. It wasn't an SG and A story, and we expect that to remain elevated. But going like from Q1 forward, I would say it will remain elevated, but probably about a point or so below where we were In Q1, obviously, in all my comments, I think ramping towards the latter part of the year, our As Neil said, we're still early phases of eightytwenty. So super hard to repeat all the one timers benefits we've got in Q1, But then ramping again later in the year and I'd say about a point probably lower for the next couple of quarters.

Speaker 7

Okay, that's helpful. Thanks for taking my questions. I'll take the rest offline and please keep up the fantastic work.

Speaker 2

Our

Speaker 4

our next question comes from the line of Tim Moore with EFI. Please proceed with your question.

Speaker 2

Thanks and reiterating the very impressive beat and raised for the quarter. I was going to drill into data our 2 of their analysts beat me to it, and most of my questions. But just maybe following up with one more question on data centers, given the increased guidance and the sales growth coming in maybe 4 times what you expected. Our Just back there on the capacity, you explained that, I plan to visit the Virginia site next week for your plant tour. Are you getting enough labor there?

Speaker 2

And for the co location our I mean, how much lead time do you need on that? And I'm also just wondering, given the rapid growth of it This year, do you think that pulls in a little bit of the sales growth from next year or is this incremental market share wins do you think?

Speaker 1

Yes, good questions. Thanks for that, Tim. We have a pretty broad labor force in BV. As you know, the Rockbridge facility where We produced the chillers. We've been able to secure the amount of good work and assembly workers there and pipefitters to help us with that.

Speaker 1

We also have a facility in the factory that employs several 100 people that's 10 miles away, and we can flex labor back and forth. So if heating volumes were down. You could arguably flex the workforce in Rockbridge as well since we have multiple facilities in that campus and in that county. So labor isn't a concern for us at the moment. The second question was?

Speaker 3

With regard to the visibility and the ability to pull ahead from next year.

Speaker 1

Yes. So relative to visibility, typically we see these we start engagements with our customers, and we start to move them through our pipeline and it could take anywhere

Speaker 2

are Great. That's helpful. You're to get air quality, and I was going to and I've been talking to Kathy about that with all the wildfires and the smoke pollution. But maybe I'll just switch gears, I mean, given air quality was up so strong and we know you probably have orders for the schools. But just my other question is really around acquisitions, given that you've kind of given that sales acquisition goal.

Speaker 2

Have you seen for your Climate Solutions acquisition pipeline, the asking prices become more reasonable over the last few months or are they still pretty lofty by the sellers?

Speaker 1

Our No, that's a good question. It depends on the technology. It depends in terms of what the technology that they have to offer and what level of adoption rate it is or if it's specified respect into the product that's being consumed today by the end users. So certainly there's some hot markets as we grow out our inorganic pipeline. And I'll tell you, I'm really pleased with what the team has been able to do there.

Speaker 1

We've got multiple opportunities at different levels and different gates. We're going to be cautious And we're going to do the right things for the business as long as it aligns with strategy. But certainly, we're starting to see some areas like you just are Great.

Speaker 2

That's helpful. And that's it for my questions. Thank you.

Speaker 4

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

Speaker 5

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

Speaker 1

100%, yes, doors will be opening to other hyperscalers. And the business mix is healthy on both sides. So we're seeing the growth in colocation and we're seeing the growth with our hyperscale customer as well. So that combination of the 2 is why we're increasing are our year over year objectives and targets and data centers.

Speaker 5

And then I think I can't remember which one you guys mentioned But I thought I heard that out of the 5 growth opportunities, right, you guys talk about a lot of it's EV battery, it's data center, it's indoor air, it's gensets and then European Heat Pump. And it sounded like that the growth rate on the latter might be decelerating a bit whereas in some of the others it Sounds like it may be accelerating. So what's driving the pace of the rate of change on the European heat pump side of things? And Does that give you pause with some of the capacitization you've been undertaking there?

Speaker 1

We're going to continue to grow our Serbia facility and factory with CapEx, and we're going to continue to install machines and dedicate lines to the heat pump growth targets that we expect. Our So we're going to continue to invest in Serbia and build out that facility. The thing that gives us a little bit of a pause is the turmoil in the European market relative to what the priority is on regulation. As you know, there was a strong movement and there was a lot of followership behind moving away from natural gas in Europe. And there was regulations are incentives that were deployed to do just that.

Speaker 1

But recently, we've seen a different priority that's got some traction in Europe around reducing GWP. And in order to do that, you have to use a different refrigerant and a lot of the heat pump manufacturers aren't there yet to move at the same rate. So it's almost like we slammed the accelerator to move forward to deploy heat pumps in the European market and then we hit the brake at the same time relative to regulations around GWP. So we know that the European Commission will be getting together after the summer recess sometime likely in September. And I think as soon as they work that out, we'll get back to the levels of key pump adoption that we had predicted.

Speaker 1

But for now, because there seems to be a little bit of conflict between the two agencies there, we're watching this and observing.

Speaker 5

Got it. Thanks, Neil.

Speaker 4

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

Operator

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

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