Modine Manufacturing Q3 2024 Earnings Call Transcript

There are 9 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to Modine's Third Quarter Fiscal 20 24 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. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms.

Operator

Kathy Powers, Vice President, Treasurer and Investor Relations.

Speaker 1

Good morning, and thank you for joining our conference call to discuss Modine's 3rd quarter fiscal 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 on the Investor Relations section of our website, modine.com. On Slide 3 is our notice regarding forward looking statements. This call will contain forward looking statements as outlined in our earnings release as well as in our company's filings with the Securities and Exchange Commission. With that, it's my pleasure to turn the call over to Neil.

Speaker 2

Thank you, Kathy, and good morning, everyone. I'm pleased to report another successful quarter, highlighted by very strong margin expansion and earnings growth. Our results this quarter further demonstrate our ability to improve our earnings profile as we shift towards faster growing and higher margin businesses. Despite all of our early success, I continue to believe that we are in the early stages of our transformation and are just beginning to realize the opportunities we've identified in each of our core market verticals. In many cases, We are recommitting our focus on operational excellence, adding additional resources for lean manufacturing and supply chain to improve productivity, quality and cost realization.

Speaker 2

Coupled with the success of our commercial team, this approach enhanced by Eightytwenty will help to support our ongoing progress towards our goals. Overall, on the M and A front, we feel very good about the pipeline of opportunities available to us. We are not focusing on large transformational deals, but instead are looking for bolt on acquisitions that bring complementary products and technologies to our key growth verticals. Our recent acquisitions of NAPS Technology and the IP and select assets of TMG Core are perfect examples of this approach. We benefit from a very strong balance sheet, which will help support our inorganic growth targets as we remain vigilant in our search for attractive opportunities that fit our focus areas.

Speaker 2

Mick will go over our Q3 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 5. Starting with our Climate Solutions segment, We observed many of the same trends we saw in the Q2. Our data center business remains very strong with revenue up 34% compared to the prior year. Meanwhile, certain markets for our heat transfer products remain soft and our revenues continue to be strategically impacted by the exit of low margin businesses in connection with the Eightytwenty initiatives.

Speaker 2

Earlier this month, we shared some very exciting news about the purchase of the IP and select assets of PMG Corp, a specialist in single and two phase liquid immersion cooling technology. This expands our global data center product offering, allowing us support the future requirements of our customers as they manage the demands of high density computing. Our investment in emerging cooling technology, Along with the internal development of a cooling distribution unit or CDU allows us to expand our product portfolio to address technology gaps while accelerating our ability to be prepared for the technology needs of the future. Further, this new technology will complement our existing high performance products that maintain the temperature in the hall and add additional opportunities for the development and integration of a complete hybrid data center cooling system. We believe that the best strategy is to have multiple solutions with a complete suite of products that can be customized and optimized to the customers' needs.

Speaker 2

I'm very excited for the data center team to begin working on commercializing this technology in support of our colocation and hyperscaler data center customers. In further recognition of the expected growth in our data center business, we are transitioning our existing Grenada, Mississippi manufacturing plant to be a data center facility, similar to what we did in Europe at our Spain and UK facilities. Overall, I'm extremely pleased with the performance of the Climate Solutions segment. We are making the right investments to ensure that our data center business continues to grow and are delivering strong year over year earnings improvements despite challenging markets the heat transfer and heating products. Please turn to Slide 6.

Speaker 2

Turning to our PT segment, while our Advanced Solutions business continues to perform well, We have seen some leveling of the volumes in our air and liquid cooled businesses, which is in line with our expectations. Despite flat revenues, Our margins continued to benefit from 80 20 initiatives focused on commercial improvements and productivity enhancements. In addition, our PT segment also made some important announcements this quarter. First off, our EV Systems business announced important partnership for our eVantage Thermal Management Systems with Bosch Rexroth, a recognized leader in driving controls technologies. Given Bosch Rexroth's strong market position, we are very excited about this opportunity to partner on electrified solutions for the off highway market.

Speaker 2

This partnership is still in development phase, but is expected to provide additional growth opportunities in the future. At this point, The team has booked 31 program wins, including 4 additional wins since the end of last quarter, equating to a projected annual revenue run rate of over $160,000,000 of program maturity. And in addition, the team was also recently recognized by Frost and Sullivan with its 2023 North American Product Innovation Award. This award recognizes our commitment to quality, reliability and customer service, while also helping our customers achieve their sustainability goals by accelerating decarbonization. I'm so proud of what this team has been able to accomplish And with the previously announced capacity expansions in the U.

Speaker 2

S. And Europe, we have ensured that we have the capacity to meet our commitments and future goals. Now I'd like to pivot to another growth area in the PT segment, our genset business. Stationary power is a market ripe for growth. With ever expanding needs for energy security for critical applications such as data centers and healthcare facilities.

Speaker 2

As we recognize the growth potential of market, we established a dedicated team devoted to understanding the market and building this business. We are very encouraged by our early progress and expect this to be a key growth area for Modine in the future. Last quarter, we announced that we had completed the divestitures of our German operations that supported the European light vehicle market. We have been transparent about our intentions to exit certain product lines that don't meet our margin targets and these actions were in line with that strategy. We also mentioned that we would need to reduce certain overhead costs that have historically supported these markets And we're taking action to address these requirements by consolidating our technical services capabilities.

Speaker 2

These actions are in line with our broader initiative of focusing resources on opportunities that carry higher growth profiles and more attractive returns through both divestitures and acquisitions. I'm very pleased with our progress and our performance this quarter. Our team is operating at a very high level and we are not only executing on our strategies, but are putting in the plans in place to reach our next set of goals. With that, I'll turn the call over to Mick.

Speaker 3

Thanks, Neil, and good morning, everyone. Please turn to slide 7 to review the segment results. Climate Solutions completed another excellent quarter, driven by a 29% improvement in adjusted EBITDA. Revenue was down slightly due to a decrease in heat transfer products and mostly offset by strong growth in data centers and a favorable FX impact. As discussed over the last two quarters, We've experienced some reductions in several markets served by heat transfer products.

Speaker 3

Based on these trends, we lowered our full year outlook for this product group. The adjustment is primarily due to lower demand within commercial and residential HVAC markets, including European heat pumps, along with eightytwenty initiatives. Data center sales grew 34% or $15,000,000 driven by strong demand from both hyperscale and colocation customers. Our data center outlook remains quite strong while anticipating a very strong 4th quarter and full year growth in excess of 60%. HVAC and R sales were higher by 2% or $2,000,000 driven by an increase in IAQ sales and the acquisition of NAPS Technology that we completed last July, along with higher sales in power industrial coolers.

Speaker 3

Our heating sales were somewhat lower than expected as the overall market remains depressed from previous levels. We expect this softness to continue for at least another quarter, but the market data is indicating a potential bottom, and we believe it will improve through calendar 2024. We're very pleased with the Climate Solutions strong earnings conversion resulting in a 4 70 basis point margin improvement to 18.9%. Our eightytwenty discipline is at the heart of these quarterly margin At a segment level, we continue to prioritize earnings and margins improvement over revenue growth. To wrap up on Climate Solutions, we remain cautious in a few markets for HVAC and Heat Transfer Products businesses, but fully anticipate further year over year improvements next quarter to finish a great year.

Speaker 3

Please turn to Slide 8. Performance Technologies also had a great quarter with a 52% increase in adjusted EBITDA. Revenue increased 2% driven by higher average selling prices and a favorable FX impact. Sales volume was down in the quarter, partly driven by the recent German divestitures, which negatively impacted revenue by 12,000,000 Excluding the impact of the divestitures, our sales would have improved by 6%. Performance Technologies remains focused driving rapid earnings growth and that was very evident again this quarter.

Speaker 3

As I previously explained for Climate Solutions, The eightytwenty efforts in Performance Technologies are focused on improving earnings and margins versus segment revenue growth. Advanced Solutions sales were up 27% or $10,000,000 with continued growth of EV Systems and Components sales, including higher sales to commercial and specialty vehicles along with higher coating sales. Liquid cooled application sales decreased 4% or $5,000,000 mainly due to the divestitures and lower automotive demand. Lastly, air cooled application sales grew 2% or $3,000,000 primarily due to higher sales to Off Highway and Genset customers. The growth was partially offset by lower automotive sales also related to the German divestitures.

Speaker 3

Much like Climate Solutions, Performance Technologies earnings conversion was excellent, resulting in a 12% adjusted EBITDA margin and a 3.90 basis point improvement. For the balance of the year, we anticipate ongoing eightytwenty progress and further year over year improvement with a sequential earnings increase in Q4. Now let's review the total company results. Please turn to Slide 9. 3rd quarter sales were relatively flat as we continue to see rapid growth in our targeted growth areas such as data centers and advanced solutions.

Speaker 3

These were somewhat offset by planned eightytwenty activities and divestitures, along with temporary weakness in select HVAC markets. Excluding the impact of the divestitures in Germany, sales were up 3%. Our transformation initiatives are clearly benefiting the gross margin, which improved 5.30 basis points. SG and A increased $10,000,000 driven primarily by higher employee compensation expenses, including incentive compensation. I'm happy to report that adjusted EBITDA was very strong again this quarter with an increase of 39% or 21,000,000 This equates to an adjusted EBITDA margin of 13.2 percent or 3 70 basis point improvement from the prior year.

Speaker 3

And this now represents the 8th consecutive quarter of year over year margin improvement. In addition, adjusted earnings per share was $0.74 54 percent higher than the prior year. We're very pleased with another exceptional quarter resulting in a year to date EBITDA margin that is above our targeted fiscal 2024 transformation range. Now moving to cash flow metrics, please turn to Slide 10. We generated $47,000,000 of free cash flow in the 3rd quarter, which puts our year to date free cash flow at $131,000,000 This represents a significant improvement compared to $33,000,000 generated in the prior year.

Speaker 3

Net debt of $184,000,000 was $102,000,000 lower than the prior fiscal year end and $39,000,000 lower from the last quarter. Also during the quarter, we repurchased 100,000 shares. For the fiscal year, we are well on track to deliver our improved cash flow conversion targets driven by higher earnings and a continued focus on working capital. We maintain a relatively low level of debt supporting a strong balance sheet and ready to support both organic growth and acquisition initiatives. Now let's turn to Slide 11 for our fiscal 2024 outlook.

Speaker 3

As announced in the press release, we're raising Our full year earnings outlook for fiscal 2024, while raising earnings were also slightly lowered our full year sales outlook to recognize the impact of the European divestitures in Q3, along with lower expectations for our heating and HTP product sales. In the Climate Solutions segment, we continue to expect data center revenue growth of 60% to 70% with the forecast trending towards the high end of this range. Moving to HVAC and R, we expect revenue to be flat, slightly lowering the range from the low single digits last quarter. This is mostly due to a slower recovery in heating than originally anticipated. With regards to heat transfer products, we expect sales to decline in the range of 10% to 15%, which is a reduction from our previous guidance.

Speaker 3

This is primarily due to the ongoing weakness in a few end markets, especially the residential and commercial refrigeration applications and the European heat pump market. For Performance Technologies, we expect Advanced Solutions to grow in the 25% to 35% range, which did not change from the last quarter. This growth is driven by program launches and continued demand for EV Systems and Components. We're holding the outlook for liquid and air cooled products, but we'll be trending towards the lower end after adjusting for the recent divestitures. From an earnings perspective, I'm pleased to report that we're once again raising our adjusted EBITDA outlook for the year.

Speaker 3

We now expect our fiscal 2024 adjusted EBITDA to be in the range of $305,000,000 to $313,000,000 representing an increase of 44% to 48%. In addition, we anticipate good free cash flow this fiscal year, resulting in an improved ratio to sales and capital expenditures are expected to be in the range of 70,000,000 Other assumptions, including interest, taxes, depreciation and amortization are included in appendices attached to this presentation and the press release. To wrap up, we're extremely pleased with the results from the Q3, while we maintain momentum towards our interim and long term

Operator

Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. Our first question comes from the line of Matt Summerville with D. A. Davidson.

Operator

Please proceed with your question.

Speaker 4

Thanks. Good morning. A couple of questions. First,

Operator

how much

Speaker 4

do you feel like you're seen incremental market weakness in the areas you highlighted in climate versus more of a function of just eightytwenty kind of making its way into the business. And along these lines, if the market headwinds you see today are there and are going to be prevalent in 2025. Is there any reason that shifts The momentum at all with respect to the massive amount of EBITDA margin and EBITDA dollar

Speaker 3

Yes. Good morning, Matt. It's Mick. Let me give you a couple Comments on revenue and then I'll turn over to Neil to add some more color just around the eightytwenty impact. I know there were some questions just around our revenue adjustments.

Speaker 3

First, I just want to be clear that our revenue adjustments aren't solely tied to market softness. There's clearly an eightytwenty element in there. So last quarter, We had the automotive divestitures closed right at our quarter end on 31. And as We analyzed our revenue impact at that point. We were estimating we're running a little bit below the midpoint of the range last quarter.

Speaker 3

And as we announced last night, we're raising the earnings outlook and adjusting the overall revenue range down a little bit. That's about that 2% adjustment to our sales outlook for the year about $50,000,000 And then That's in 3 areas and we'll get to your question, right? So one of them is in heat transfer products, We lowered our outlook and that's a combination of market and eightytwenty activities. Again, I'll let Neil comment in a second. The second one, we talked about air and liquid in the divestitures.

Speaker 3

So We're running towards the lower end of our air and liquid range combined by adjusting and truing up the full year outlook for the closing of the deal, the divestitures and we've seen some softness on the automotive side across the globe, especially on automotive EV, both ICE and EV vehicles. But that's strategically okay with us and also tied to eightytwenty. And then last, we talked about HVAC and R and there I want to be clear. It's really the heating market has been slower to recover. It was basically relatively flat.

Speaker 3

So we're not seeing it getting worse. It's and we're in the industry data showing that we seem to be turning a quarter, but we thought it would recover at a little bit faster rate. So again, the way we Today, Matt, we're running about the middle of the revenue range, about the midpoint that we put out last night. And again, it's just I want to highlight, it's really a combination of the market adjustments in eightytwenty activities. And that's really what's allowed us to drive the key driver to our rapid earnings growth and margin improvements.

Speaker 3

So just maybe before we wrap it up, Neil, maybe a couple of comments around

Speaker 2

the eightytwenty impact. Yes, Matt, this is Neil. Thanks for the question. That's a good summary for Mick in terms of how we're thinking about it and especially when we think about heat transfer products. And we see some softening in some markets that we potentially We'd consider exiting, we accelerate those opportunities, so we can continue to drive margin expansion and profitability in that business.

Speaker 2

HTP is a big business. Not all of it is ready for growth. It's still going through eightytwenty activity. We've isolated some areas in HTP where we found favorable markets trends in customers that we're preparing strategic initiatives to grow that business in the next fiscal year, but there's still a lot of work to clean up with the tens of thousands of SKUs and customers that we serve. So when we see an opportunity to accelerate that three eighty-twenty because of market softness, we react pretty quick.

Speaker 4

Thanks for that color. And then as my follow-up, just on the data center side of things, Neil, can you talk about what the go forward funnel looks like, how much visibility you have looking ahead into fiscal 2025 in that business? And when would you expect to start to see a little bit of liquid related activity start to creep in?

Speaker 2

Yes, great question, Matt. So, we've got visibility with some of our customers out as far as 2 years. I'd say on average, it's between 12 18 months. Funnel continues to grow. It's been growing at the rates that we'd assumed it would grow at, hence the revenue targets that we've been pretty public about, projections that we've been public about.

Speaker 2

So we're happy with where we're at working with our customers in both North America as well as in Europe on co locations and hyperscalers. Relative to liquid, We had the acquisition of technology acquisition of assets, IP and assets, which is going to really help us with our product portfolio and making sure that we have the most current technologies in the liquid side and that's immersion. Then we announced we were going to go into with a couple of customers around our cooling distribution unit or CDU, which is direct to chip liquid cooling. And we Expect to be into prototype in the next quarter or 2 on a CDU with a couple of customers. And if their markets and their end customers have demand for high performance computing, they'll have a solution in place, assuming we pass the validation and testing with our customers.

Speaker 2

So CDUs, Direct to chip, I think, is closer to generating revenue than emerging cooling is at this time. But having the emerging cooling allows us to be part of conversations around next generation data centers that we weren't a part of prior to the acquisition of assets from TMG Core.

Operator

Understood. I'll get back in queue. Thank you. Our next question comes from the line of Chris Moore with CJS Securities.

Speaker 5

Hey, good morning guys. Thanks for taking a couple of questions. Maybe just Start with margins. It looks like fiscal 'twenty four operating margin will be in 10 plus range, Q4 being a little bit lower than the 1st 3 quarters were adjusted in that 6% to 7% range. I realize you're not giving guidance for 25%, but What are the puts and takes to Modine being able to match or perhaps improve on this On the 24 margins in 2025?

Speaker 3

Yes. Hi, Chris. It's Mick here. So I'll just talk EBITDA margin, but same drivers, right? And I'd say first, we'll wrap up this year As a company of well above the target we set out, we wanted to be in the 10% to 12% range and we're clearly trending between the 12 13.

Speaker 3

So we're ahead of schedule, but that doesn't mean we're not going to our plan is fully to drive further improvement next year. And to your question, where that comes from, a couple of elements. On the growth side and mix, We still anticipate growth in those targeted areas that we've been through, whether that's on the genset side and ET or data centers or IAQ, EV systems, we see growth and that's good margin and earnings mix up for us. And then if you go through where we're at on our eightytwenty journey, Early days, there's a lot of simplifying the business, looking at pricing and there's still elements of that for us, but also then move into a heavy focus on operational and productivity, right, leaning out and getting the benefits of those things where you simplified your businesses. So, it will be kind of like this year and where we started the journey.

Speaker 3

Some of our businesses, we are not going to worry about the top line. We're going to drive earnings and margins through PLF, ProtoClime Simplification eightytwenty, while continue to accelerate growth in the targeted areas.

Speaker 5

Got it. Very helpful. Maybe talk a little bit more about M and A. I know that in the prepared remarks, you guys talked about primarily looking at bolt on acquisitions. At the Investor Day, you talked about needing roughly $400,000,000 to $600,000,000 in M and A between $24,000,000 and $25,000,000 to comfortably reach your Climate Solutions goals.

Speaker 5

You have subsequently indicated not necessarily need to get to that level. I'm just Wondering if you can give kind of any updates in terms of what a more reasonable range might look like moving forward?

Speaker 3

Yes. Again, Mick, I'll go first just from the kind of the math and then Neil can add some more color. Early days when we Neil first came in that we're literally assembling the current team and we're spinning through the data. When we look at it from an eightytwenty perspective, We weren't really sure how much business we want to retain, how much stays when we go through all of our activities. And I think as we've had the last 4 to 6 really strong quarters, one of the messages Neil and I've had is We're getting everything we thought we would get from the improvement.

Speaker 3

And in many cases, as we better serve our customers, focus on key customers, orders are up. So all of that said, we reason why we don't see the need for large acquisitions to get to our financial targets is really around the lessons we've learned in from an eightytwenty about the stickiness of some of our business. And then the second thing I'd say to turn over to Neil, we've continued to uncover JUUL within Modine that we didn't necessarily Nowhere there that we can grow organically.

Speaker 2

Yes, that's a great point, Mick, and thanks for the question. The 400 to 600 Number was the very first days of our eightytwenty journey a couple of years ago. We've learned so much more, especially with the fact that we've got more organic growth that we can drive within the company, which requires less inorganic growth for us to meet our inorganic for us to meet our financial targets. So We have spent a lot of time on the organic growth and the businesses that we want to stand up and create organizations around it to drive. And then at the same time, we have been active on the M and A front.

Speaker 2

We've done multiple divestitures and a couple small deals in the last couple of quarters. And we're doing that in strategic areas where it helps us build out our product portfolio, helps us expand in a geography or most importantly, it helps us improve our technology in the areas that we want to serve.

Speaker 3

Just on that last point, really hard to quantified due to timing and opportunity, but I think it's safe to say that that original number is at least half, right from what we thought we would need. So again, it really depends on the funnel and exact timing, but it's significantly below but we'll still be doing out looking at M and A.

Speaker 5

Got it. Very helpful. I will jump back in queue. Thanks guys.

Operator

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

Speaker 6

Good morning, everyone. And let me first say impressive work on margins and overall cash flow. Maybe you can give a little bit more color on the status of the heat pump market, what you're seeing there, the latest? And then also on the genset business, how is that evolving? And then I guess the outlook there and any quantification around that for those two businesses?

Speaker 2

Yes. So on the heat pump market, we continue to see some softness there as this heat pump adoption has been elongated out over an additional couple of years based on the European regulations. Some excess inventory in the system and we're pacing our investments in heat pump to adjust to that. Long term, I'm personally with what we're doing and the actions that we put in place, We're confident in this space, in this market. It's just a short term reset based on the extension of the adoption rate.

Speaker 2

So That's kind of what we're seeing. We're working through it. It's real time. It's live. And the team is making appropriate adjustments.

Speaker 2

On the genset side, We've got a nice technology there. We're helping essentially the industry move towards a lower cost, more reliable, higher quality product that is starting to get adopted. The earlier adopters are starting to win share and I think A lot of people are taking notice of that and they're looking for the solution that we can provide with Modine.

Speaker 6

Okay, that's helpful. And I know there's been a lot of talk about eightytwenty and you seem to be executing phenomenally well on everything you're doing there. I guess, are there other low margin businesses that you are planning to exit or you might contemplate exiting? And as you look at your entire enterprise, how much business do you have that you'd like to either divest or wind down at this if we were to kind of look at that in overall dollars?

Speaker 2

Yes, it's a good question. So certainly as we continue to improve our profit profile And we expand margin in the business, it sets the bar and raises the bar and then you always have some bottom quartile business that needs to be addressed. And that's just the evolution of eightytwenty and that will essentially be how we operate the company going forward. So there's always going to be that level of business that we have to question. Is it strategic that we want to be in it if it's low margin?

Speaker 2

If not, then let's we have a series of different approaches and activities in terms to address it. We haven't gone out with a specific number in terms of what that looks like. But I can see it being in the same range of what we've been able to address over the last 18 months within eighty-twenty. It's what $300,000,000 to $400,000,000 of revenue that we've through divestitures and product line simplification so far. And I would expect somewhere in that $100 plus 1,000,000 range as we go forward that there's always going to be something that's underneath the threshold.

Speaker 3

Yes. I think too, we look at the data, it aligns where Neil was going. And as Neil was saying, there's always The bottom quadrant, the Quad 4 stuff and just for any company for us, that's going to be 4% or 5% of sales. I think where we're at, it's probably a little bit more than that. So there's probably a $200,000,000 $250,000,000 type number of what we would call when we say that Quad 4 is the lowest volume product, the lowest volume the margin products with customers that are lower on our volume scale.

Speaker 6

Okay. That's helpful. And then if I could just squeeze in one more, I wanted to circle back to the liquid cooled for data centers for just a moment. Just to clarify, I think you said that you'll start to go after data centers that previously you did not. Maybe just touch on strategy to win business in those?

Speaker 2

Yes, we're absolutely, we've cast a net on the hyperscaler side to go into Make sure that the hyperscalers that are winning share in this space understand the technology advantages that we have with Modine and our Airedale brand. 100% we're having those conversations and that takes time to cultivate those relationships. Relative to the liquid cooling pieces, This allows us to get into conversations of next generation data centers that are planning for high performance computing, where air Cooling, traditional mechanical cooling solutions are not sufficient. It needs to be augmented and it typically is augmented through a liquid cooling or immersion cooling technique. So we did not have that product and we did not have those assets, which meant we weren't invited to those conversations on How do we use technology to solve for high performance computing?

Speaker 2

Now that we have those assets, we have something to sell and help them solve their problems. They're looking for us as well as our competitors in terms of how we can advance the next generation of data centers, our own high performance computing driven by all the things that we know, AI, AL, MB, and not having the TMG assets, we weren't in those discussions, but we are today now.

Speaker 6

Okay. And the new liquid cooled CDU that will be out in Q4 or Q1 we think?

Speaker 2

Yes. We're targeting for Q1 of the next fiscal year and getting on some pilots and working closely with our customers, with some of a couple of our co location customers, correct.

Speaker 6

Okay, great. Thanks for taking my questions and best of luck.

Speaker 2

Yes, of course.

Operator

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

Speaker 7

Good morning, everyone. Congratulations on another great quarter.

Speaker 3

Thanks, Brian. A couple of questions

Speaker 7

And a lot has been addressed already. Just on the German businesses, I'm looking at the cash flow statement, it doesn't look like there was Any cash in, were

Operator

you able

Speaker 7

to jettison any liabilities with those businesses when they went out the door?

Speaker 3

Yes. Hey, Brian, it's Mick. Yes, there was actually a small cash benefit on the ultimate transaction, but immaterial. And then 2 answers on your liability question. Actual liabilities, The biggest one on the balance sheet would be some pension liabilities that went and that was a fairly material number, which we're happy about.

Speaker 3

And then the second one, and you know it well, it was, the potential liability, right? If you took each of those facilities In a situation where we would exit them, the liability that Modine and the shareholders would have if we would have retained them was quite a large potential liability.

Speaker 7

Okay. Yes, I certainly appreciate that. And Forgive me, but these businesses show that roughly $30,000,000 or so of revenue was not in the prior 6 to 11 sales contemplation for growth that was given at the end of the second quarter?

Speaker 3

We had built We factored that in, Brian, just in the days heading into our earnings call and we were trending a little bit lower towards the lower end of the range. What we did this time is we trued it up. We made some adjustments. And then on top of it, For our remaining automotive business, we took that down a little bit.

Operator

Okay. All right.

Speaker 7

Understood there. I guess last one for me. Last year in Q4, you had a valuation allowance adjustment that tweaked your GAAP earnings. Anything as we think about this Q4 from a tax perspective that could move the needle one way or the other. Obviously, the algos are going to see year over year declines in EPS.

Speaker 7

But Anything we should be thinking about for the Q4 here?

Speaker 3

No. A good point about The reported number that's going to be tough. We'll do our we'll make sure we highlight that. But from this coming Q4, We're not anticipating any large events or impacts to that.

Speaker 7

Understood. Well, you all keep raising the bar higher and higher each quarter. So congratulations and look forward to talking to you later.

Speaker 2

Thanks, Brian.

Operator

Our next question comes from the line of Tim Moore with EF Hutton. Please proceed with your question.

Speaker 8

Thanks and congratulations on the continued impressive EBITDA margin expansion and self help catalysts to drive highly impressive EPS growth that was You may exceeded my street high estimate. I got a really good sense of the data center's differentiation edge when touring, that facility in August in person. I just want to address another business line actually. For Advanced Solutions, those revenues were flat sequentially in the quarter, but your guidance at the midpoint implies about a 25% sequential growth in the March quarter from the December quarter.

Operator

Can you just give us a

Speaker 8

little bit more of an update on battery thermal management, as we kind of look out over the next 12 months? And that timing, Without pinpointing exactly the $160,000,000 sales of maturity, how far out do you think that is? And then while you're on the topic for thermal management, How is planning of a launch in Europe going?

Speaker 2

Yes, good questions. Thanks for the questions. This is Neil here. We continue to invest into our battery thermal management system and electronics cooling package. Certainly, we're seeing Continued interest in the product and we're expanding our capability and capacities.

Speaker 2

We've we opened up the earnings In my script, at least to talk about the $160,000,000 that would be at peak volume. So think 2 to 3 years out that's when you're running at peak volume within these programs that we won. So we're excited about that because the trend continues to grow quarter over quarter in terms of the potential revenue there. More investments are being made and we've been in contact and had some really good conversations in Europe with some of our customers that we've targeted and the fact that we've been public about the expansion in an existing facility that has existing infrastructure and Modine employees that are already very attuned to making sure that we have good reliability, quality and delivery for this industry has been well received. So we're going to continue to ramp up our investments.

Speaker 2

We're going to continue to open up the space in the facility in Italy for us to be able to grow in Europe and we've had positive conversations with those customers and we continue to trend in the direction that we'd expect with the amount of investment that we put into this

Speaker 8

business. Great. That's really helpful color. Just switching gears, during my visit in August, the facilities, Not just data centers, but client on HVAC. I get a sense of really the customer's focus and the emphasis there live in the shops, dedicated Customer areas and such.

Speaker 8

But I'm just wondering, as you progress through eightytwenty more so on performance technology side, Are you uncovering more savings and efficiencies than you budget or expected a year ago? And then I'm just wondering, just thinking about this whole customer Maximization, as you go through both segments on eightytwenty, I mean, how do you maybe avoid going too lean as you achieve the value based pricing?

Speaker 2

Yes, good question. So certainly on both sides of the business, not just Performance Technology, the Climate Solutions and Performance There's opportunity for productivity gains, without a doubt. And I think we've been able to display that through the success that you've through the margin expansion. We've done that through commercial excellence programs and we're pivoting into the operational excellence program. So that's anything from labor to supply chain procurement or purchase price variance or PPV.

Speaker 2

So there's a lot of activities that we can do on operations front and the team has been working diligently to put those together. And that will be the next phase in terms of our margin expansion within the business as we've reached the thresholds that we would expect through some of our price expansion. So operations improvement and excellence theirs in both sides of the business, not in PT. And the teams are putting together the funnels and the activities and the list of projects for the next annual operating plan. So that will be a good indicator of how big that is.

Speaker 8

Great. Thanks for that elaboration. It's a good carrot for margin expansion in the next fiscal year.

Operator

Our next question is a follow-up question from the line of Matt Summerville.

Speaker 4

In your fiscal Q4?

Speaker 3

It's going to be $20,000,000 to $25,000,000 as the Estimated impact in Q4.

Speaker 4

And then the DTMS business 2 to 3 years ramping to 100 and $60,000,000 or so thereabouts, based on the programmatic wins you've had. Fiscal 'twenty four, Realizing this is buried alongside the coatings business, the EV components business, how big is the BTMS business for you guys this year to kind of think about how that trajectory looks out over the next 2 to 3?

Speaker 3

Yes. So that The ATS business excluding coatings is about $100,000,000 And I think And we just had that question too. I think we'll provide an updated long term outlook, Matt, that we've this year, We're talking about 30% type growth. And we said we think the CAGR on that, the 35% to 40%. I think as far as growth for next year, we'd expect it to stay in that range.

Speaker 3

So that $100,000,000 growing at a In that compound growth rate range of that 35% to 40% would seem reasonable.

Operator

Got it. Okay. That's all for me. Thank you. There are no further questions in the queue.

Operator

I'd like to hand the call back to Kathy Powers for closing remarks.

Speaker 1

Thanks so much and thanks to everybody for joining us this morning. You'll be able to access the replay of EPAL through our Web

Operator

Ladies and gentlemen, this does conclude today's teleconference.

Earnings Conference Call
Modine Manufacturing Q3 2024
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