Modine Manufacturing Q1 2026 Earnings Report

Modine Manufacturing EPS Results

• Actual EPS: $1.06
• Consensus EPS: $0.93
• Beat/Miss: Beat by +$0.13
• One Year Ago EPS: $1.04

Modine Manufacturing Revenue Results

• Actual Revenue: $682.80 million
• Expected Revenue: $653.80 million
• Beat/Miss: Beat by +$29.00 million
• YoY Revenue Growth: +3.20%

Modine Manufacturing Announcement Details

• Quarter: Q1 2026
• Date: 7/30/2025
• Time: After Market Closes
• Conference Call Date: Thursday, July 31, 2025
• Conference Call Time: 11:00AM ET

Modine Manufacturing (NYSE:MOD) provides thermal management products and solutions in the United States, Italy, Hungary, China, the United Kingdom, and internationally. It operates through Climate Solutions and Performance Technologies segments. The company offers heat transfer coils, including heat recovery and round tube plate fin coils; gas-fired, hydronic, electric and oilfired unit heaters; roof-mounted direct- and indirect-fired makeup air units; duct furnaces; infrared units; perimeter heating products; single packaged unit ventilators; modular chillers; air handler and condensing units; ceiling cassettes; evaporator unit coolers, remote condensers, fluid coolers, gas coolers, and dry and brine coolers; and motor and generator cooling coils, transformer oil coolers, radiators, dryers, and industrial heat exchangers. It also provides data center products consisting of IT cooling solutions, including precision air conditioning units for data center applications; computer room air conditioning and handler units; hybrid fan coils; fan walls; chillers; condensers; condensing units; and liquid cooling solutions for high-density computing, as well as replacement parts, maintenance service and control solutions for existing equipment and new building management controls and systems. In addition, the company offers powertrain cooling products, such as radiators, condensers, engine cooling modules, charge air coolers, fan shrouds, and surge tanks; cooling module generator sets; aluminum and stainless steel engine oil coolers, exhaust gas recirculation coolers, liquid charge air coolers, transmission and retarder oil coolers, and chillers; battery thermal management systems, electronics cooling packages, battery chillers, battery cooling plates, coolers and casings for electronics cooling, and coolers for electric axles; and coatings products and application services. Modine Manufacturing Company was incorporated in 1916 and is headquartered in Racine, Wisconsin.

Modine Manufacturing Q1 2026 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Modine raised its full-year outlook for fiscal 2026 revenue to 10–15% growth (up from 2–10%) and adjusted EBITDA to $440–470 million, driven by stronger data center demand and acquisitions.
• Positive Sentiment: The Climate Solutions segment saw 11% revenue growth and a 10% increase in adjusted EBITDA in Q1, aided by contributions from the acquisitions of Absolute Air, L.B. White, and CDI.
• Positive Sentiment: Modine announced a $100 million investment to expand data center manufacturing capacity across four US sites, supporting its goal to reach $2 billion in data center revenues by FY 2028.
• Negative Sentiment: The Performance Technologies segment experienced an 8% decline in Q1 revenues due to weak vehicular markets, prompting cost reduction measures and site retooling for data center production.
• Neutral Sentiment: First-quarter free cash flow was modest at $0.2 million, down year-over-year, as inventory rose to meet data center delivery schedules and net debt increased by $123 million from acquisitions.

Presentation

[Operator]

Good morning, ladies and gentlemen, and welcome to Modine's First Quarter Fiscal twenty twenty six 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 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.

[Kathleen Powers, VP - IR & Treasurer at Modine Manufacturing Company]

Hello, and good morning. Welcome to our conference call to discuss Modine's first quarter fiscal twenty twenty six results. I'm joined by Neil Brinker, our President and Chief Executive Officer and Mick Bucharelli, our Executive Vice President and Chief Financial Officer. The slides that we will be using with today's presentation are available on the Investor Relations section of our website, modine.com. On Slide three of that deck is our notice regarding forward looking statements.

[Kathleen Powers, VP - IR & Treasurer at Modine Manufacturing Company]

This call will contain forward looking statements as outlined in our earnings release as well as in our company's filings with the Securities and Exchange Commission. With that, I'll turn the call over to Neil.

[Neil Brinker, Director, President & CEO at Modine Manufacturing Company]

Thank you, Kathy, and good morning, everyone. I'm pleased to report that Modine delivered a solid start to the year, giving us confidence to raise our revenue and earnings outlook for fiscal twenty six. We've completed three strategic acquisitions so far this fiscal year and announced major new investments in our manufacturing capacity for our rapidly growing North America data center business, investments that will position us to meet continued strong market demand this year and well into the future. These investments are allowing us to maintain a balanced portfolio of businesses with strong organic growth focus in data centers, supplemented with inorganic growth to expand product offerings and create scale in our other key climate solutions businesses. Mick will take us through the financial results and updated outlook, but first, I'd like to provide additional con context around the quarter's key event.

[Neil Brinker, Director, President & CEO at Modine Manufacturing Company]

Our climate solutions segment continues to deliver, posting an 11% increase in revenue and a 10% improvement in adjusted EBITDA. This performance reflects initial contributions from two of our most recent acquisitions, Absolute Air and L. B. White. Both of these acquisitions offer complementary solutions to our heating business, which falls within our HVAC technologies group.

[Neil Brinker, Director, President & CEO at Modine Manufacturing Company]

These additions broaden our product portfolio and unlock new markets and distribution channels. Modine has been in the heating business for nearly a hundred years and has a large install base for our signature line of gas fired unit heaters. We also have a leading market share with replacements typically driving over half of our annual revenues. These recent acquisitions allow us to accelerate growth and build scale as we continue to use 8020 to drive both revenue and cost synergies. Earlier this month, we closed a third acquisition, Climate by Design International or CDI, a leader in desiccant dehumidification and critical process air handlers.

[Neil Brinker, Director, President & CEO at Modine Manufacturing Company]

These technologies integrate well with our previous acquisitions, namely jets and modular chillers and Scott Springfield's custom commercial air handlers. As we integrate this business, we will use eighty twenty to improve their mix and raise margins while exploring opportunities to utilize excess US based manufacturing capacity to support growth in the broader commercial IAQ businesses. All of these acquisitions are squarely in line with our business development strategy to expand our portfolio with next gen technologies and complementary solutions in heating, indoor air quality, and data center cooling. They also build the foundation for scale in these key markets within HVAC technologies. I'd like to again welcome all the new associates from Absolute Air, LBY, and now CDI.

[Neil Brinker, Director, President & CEO at Modine Manufacturing Company]

Our teams are already integrating well and aligning around new opportunities to drive revenue and operational synergies. In our data center business, we continue to prioritize organic growth through capacity investments and product innovation. We recently announced a 100,000,000 investment to expand manufacturing capacity across four US sites, including a new facility in Dallas, Texas area, further expansion in Grenada, Mississippi, and repurposing two existing performance technology sites. The announcement advances our local for local supply chain strategy to be close to our data center customers and expand capacity in our largest and best markets. This investment will also enhance engineering, product development, and testing capabilities, create new jobs, and support the redeployment and retraining of existing Modine employees.

[Neil Brinker, Director, President & CEO at Modine Manufacturing Company]

This expansion is a necessary response to the extraordinary demand we're seeing, especially in North America. With our current funnel of opportunities, we believe that we can approach 2,000,000,000 of data center revenues in fiscal twenty eight. This is a lofty goal, but one that we believe is achievable. In addition to this capacity expansion, we are also innovating. An example is our new modular data center development project where we are collaborating with a large customer on a custom design built to suit their specific needs.

[Neil Brinker, Director, President & CEO at Modine Manufacturing Company]

This innovative solution offers rapid deployment and scalability, reducing the build time for a data center from over a year to mere months. An initial site can also be expanded by adding more modules to the center. As demand accelerates, our data center customers are pushing for higher efficiency and advanced cooling strategies. We're not only responding, but collaborating deeply with their engineering teams to create next generation solutions. We are and will continue to be a major part of these conversations, often supporting the additional mechanical cooling requirements needed to address changes being made at the rack level.

[Neil Brinker, Director, President & CEO at Modine Manufacturing Company]

For example, if a customer is looking for an alternative solution to distributing coolant to the rack, we will work closely with our engineering teams to collaborate an innovative alternative to meet their cooling requirements. To be clear, these innovations aren't threats. They're outcomes of long tenured strategic partnerships where our largest customers are seeking our expertise to meet their evolving demand. And they are unlocking new opportunities as we advance the technology required to manage heat loads in modern data centers. There's tremendous energy in this segment, and it's not slowing down.

[Neil Brinker, Director, President & CEO at Modine Manufacturing Company]

We will continue to aggressively pursue the opportunities in front of us to ensure continued execution and growth. Please turn to page five. As expected, the Performance Technologies segment continues to navigate tough market conditions with revenues in the quarter down 8% and corresponding declines in adjusted EBITDA. The downturn in vehicular markets is likely to persist for several more quarters. In response, we've taken decisive action to control costs, including reallocating talent to support our high growth climate solutions business.

[Neil Brinker, Director, President & CEO at Modine Manufacturing Company]

As an example, we plan to transition two of our existing performance technology sites to expand capacity for data center production. One of those under consideration is Franklin, Wisconsin, which was previously planned to support our EV systems business. We are also evaluating plans for our Jefferson City, Missouri manufacturing facility, which would involve consolidating those product lines into other PT plants in North America. For other select portions of the segment, we continue to explore strategic options to realign and optimize our portfolio. Our PT team is doing excellent work to remain lean and focused on our key customers.

[Neil Brinker, Director, President & CEO at Modine Manufacturing Company]

When volumes return, we're well positioned to capitalize with strong incremental margins and improved profitability. Despite the market headwinds, we are executing on our transformational strategy. This team has been through a great deal of change and has worked hard to improve margins and cut costs in light of these challenging market conditions. But our 8020 strategy remains clear, the shift resources to high growth, high margin businesses. In summary, we had an extremely busy start to the fiscal year.

[Neil Brinker, Director, President & CEO at Modine Manufacturing Company]

We are investing in our growth both organically and inorganically. These are very purposeful investments designed to build scale across our portfolio and capture near term growth opportunities. I wanna thank the Modine team for their hard work and dedication. With that, I'll turn the call over to Mick.

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

Thanks, Neil, and good morning, everyone. Please turn to Slide six to review the Q1 segment results. Climate Solutions delivered another good quarter with an 11% increase in sales, a 10% improvement in adjusted EBITDA and an adjusted EBITDA margin of 20%. Data center sales grew $24,000,000 or 15% from the prior year, driven by higher sales in North America. HVAC Technologies sales increased $17,000,000 or 34%, driven by strong heating stock plan orders and higher indoor air quality product sales.

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

In addition, the recent acquisitions of Absolute Air and L. B. White contributed $10,000,000 of revenue in the quarter. Heat Transfer Solutions sales declined 1% or $1,000,000 due to lower volume to commercial and residential HVAC customers. This was mostly offset by higher sales to commercial refrigeration and coatings customers.

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

The adjusted EBITDA margin was relatively flat versus the prior year. At this point, we're focused on continuing to drive earnings growth versus maximizing profit margin. While we're currently growing revenue at an exceptional rate, we're also increasing our investments in manufacturing and engineering resources to support future growth. For example, we're once again raising our fiscal twenty twenty six outlook for data center revenue growth to 45%. As capacity comes online and revenue grows, we expect the EBITDA margin to increase, especially in fiscal twenty twenty seven.

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

With regard to the recent acquisitions, we're in the early innings with the team focused on integrating and stabilizing to ensure there are no surprises. At times, this can mean adding incremental resources and costs to capture future benefits. With that said, we're excited about the additional HVAC technology scale and the overall positive momentum in climate solutions. Please turn to Slide seven. As anticipated, Performance Technologies revenues were impacted by challenging end market demand and eightytwenty driven product line exits.

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

Heavy duty equipment sales were lower by 4% or $4,000,000 driven by ongoing market weakness. Within the heavy duty area, we experienced lower Genset sales due to a customer moving to a dual sourcing strategy. While we had planned on lower volumes with this customer, we anticipated an offsetting increase with a new Genset customer. However, this customer and others are taking longer than anticipated to convert to the new cooling module design. As a result, we believe it's prudent to plan on lower growth than previously anticipated in the genset area.

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

On highway application sales decreased 8% or $15,000,000 due to the previously mentioned lower end market demand and eightytwenty product line exits. Segment adjusted EBITDA declined 14% from the prior year, and adjusted EBITDA margin decreased 100 basis points to 13.1%. The margin decline was mostly driven by lower sales volume higher material costs. This was partially offset by improved operating efficiencies along with significant cost reductions. We're passing through increased costs from tariffs and higher material costs, and we'll continue to recover these increases through our normal pass through mechanisms.

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

Consistent with past practices, we'll recover metals on a lagged basis averaging about six months. The tariff recovery will vary with each customer and agreement. As we highlighted last quarter, we've been working to reorganize this business and reduce costs wherever possible. These actions resulted in a $5,000,000 reduction in SG and A expenses this quarter, helping to partially offset the impact of lower sales volume. Despite the difficult market conditions and volume headwinds, the team remains focused on delivering higher margins and earnings for this segment this fiscal year.

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

Now let's review the total company results. Please turn to Slide eight. First quarter sales increased 3%, driven by the revenue growth in Climate Solutions. Our gross margin declined 40 basis points to 24.2%, driven primarily by the unfavorable impact of lower sales and higher materials in Performance Technologies. We continue to invest in incremental SG and A to support strong growth in Climate Solutions.

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

In addition, SG and A includes expenses related to the acquisitions completed during the quarter, partially offset by lower SG and A costs in Performance Technologies. Adjusted EBITDA was better than we had anticipated at the beginning of the quarter, resulting in a small year over year increase. Our adjusted EBITDA margin was 14.9%, which was down 40 basis points from the prior year. We anticipated that the margin in Q1 would be down slightly and on a temporary basis due to the combined impacts of lower Performance Technologies volume and new investments in Climate Solutions. We expect to restart year over year margin improvements in the second half of the year on higher volume and material cost recovery.

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

Adjusted earnings per share was $1.06 2% higher than the prior year. We're pleased with the start to the fiscal year. Momentum in our key growth markets allowed us to overcome challenges than others, and we expect positive contributions from our three recent acquisitions throughout the rest of this fiscal year. Now moving to cash flow metrics. Please turn to Slide nine.

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

The businesses generated $200,000 of free cash flow in the quarter. This was lower than the prior year, primarily due to higher inventory levels in Climate Solutions. We're building significant data center inventory to support the large amount of projects and delivery schedules in the second half of our year. First quarter free cash flow also included 5,000,000 of cash payments, primarily related to restructuring and acquisition related costs. Net debt of $4.00 $3,000,000 was $123,000,000 higher than the prior fiscal year end, directly related to the acquisitions of Absolute Air and L.

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

B. White, which were both completed in the quarter. We invested more than $140,000,000 in acquisitions and capital during the quarter, plus the additional acquisition in July to support future growth for Modine. With these investments and associated earnings, our balance sheet remains quite strong with a leverage ratio of one. I would also like to mention that we have extended the maturity and upsized our credit facilities, providing us with additional liquidity and flexibility to support future organic and inorganic growth.

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

Thank you to the great Modine Treasury team and our banking partners for their support with this transaction. Now let's turn to Slide 10 for our fiscal twenty twenty six outlook. As Neil mentioned, we're raising our revenue and earnings outlook, driven by our recent acquisitions and another increase in our projected data center sales. For fiscal twenty six, we're currently expecting total sales to grow in the range of 10% to 15%. This is an increase from the previous range of 2% to 10%.

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

For Climate Solutions, we expect full year sales to grow 25 to 35% and expect data center sales to grow in excess of 45 this year. This is a significant increase from the previous range of 12% to 20% for Climate Solutions. The higher sales is mostly driven by our improving outlook for data center sales and the recent acquisitions in HVAC Technologies. With regard to our increase in outlook for data center sales, we anticipate a significant acceleration in the second half based on customer timing and the additional capacity plans. For example, in the first half, we anticipate data center sales will be up 20% to 25% over the prior year, and the second half will be up by more than 80%.

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

For Performance Technologies, we're maintaining our sales outlook with the revenue anticipated to be down 2% to 12%. We expect that end markets will remain soft with the ongoing trade conflicts having a negative impact on market recoveries. Performance Technologies is currently trending towards the higher or the more favorable end of this range. However, the higher revenue will likely be due incremental material and tariff cost recoveries along with favorable foreign exchange rates. With regard to our full year earnings, we currently expect fiscal twenty twenty six adjusted EBITDA to be in the range of $440,000,000 to $470,000,000 This represents a $20,000,000 increase from the previous range.

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

The higher earnings will be recognized in the second half of the fiscal year as we begin to capture the full benefit of the recent acquisitions and our data center sales accelerate significantly. The new earnings outlook represents another year of rapid growth based on the implied growth range of 12% to 20% with a midpoint above 15%. With regards to cash flow, we recently announced a plan to invest an incremental $100,000,000 of CapEx over the next twelve to eighteen months. As a result, we'll continue to generate free cash flow, but this year will be somewhat lower as a percentage of sales at around 3%. This includes the cash required to fully fund our pension prior to our planned annuitization this year.

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

I want to point out that we have not included cash proceeds from any potential divestitures this year. Looking ahead to the next year, we anticipate that our free cash flow margin will once again improve and be in line with our fiscal twenty twenty seven target. To wrap up, we're quite pleased with the results this quarter, and these are exciting times at Modine. We're reinvesting and redeploying significant amounts of capital, which are generating high returns on investment and supporting our strategic transformation. While laying the foundation for us to generate rapid growth well into the future. With that, Neil and I will take your question.

[Operator]

Star then one key on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star then 2 if you would like to remove your question from the queue. The first question is from Matt Summerville from D. A. Davidson. Please go ahead.

[Matt Summerville, MD & Senior Research Analyst at D.A. Davidson]

Thanks. Good morning. Couple of questions. First, can you talk about the magnitude of unabsorbed cost you're going to experience in the Climate business as it relates to the DC build out? And then second, can you comment on how we should be thinking about the fiscal twenty seven data center revenue target you set back in September 2024 at $1,000,000,000 with your current guidance almost knocking on that now for fiscal twenty six? And then I have a follow-up.

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

Hey, Matt. It's Mick. Good morning. Thanks for the question. I think the first question on the data center fixed cost, the best way to think about that is on two pieces.

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

The core capacity that we put in place and that's rapidly filling up, we'll continue to convert at good margins at or above the CS segment margin. When we think about the incremental capital investments, the $100,000,000 that we're making in to expand facilities, adding more lines at current facilities plus a couple of brand new facilities that Neil covered, that will start to ramp in the second half of the year and most likely won't capture the meaningful volume until kind of beginning the new fiscal year. And so on that, we've clearly raised our outlook here this year by about $100,000,000 in top line. That will probably convert a little bit lower. I think probably the incremental $100,000,000 more like a 15% type net number.

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

And in there is pretty good conversion at the gross profit line, but we're also adding a lot of resources to engineering to support the future growth. So, guess, the short answer for you would be for the the core business status quo, good conversion, The incremental 100,000,000 probably a little bit below the normal segment average, and I think it's probably closer to 15%, although that's really hard with so many moving pieces to predict. And, Matt, the second question, you wanna remind me of that?

[Matt Summerville, MD & Senior Research Analyst at D.A. Davidson]

Yeah. I mean, if you're up 45%, you know, that roughly would equate to $9.25, $9.50 in DC revenue, something in that range. But your target for fiscal twenty seven is a billion. What's a reasonable sort of way to kinda think about, alright, if we're 2,000,000,000 ish in '28, what's a good starting point for our thinking with respect to '27 based on, you know, the billion dollar number that you have sitting out there?

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

Yeah. From my side, stay tuned, but you're right. I think for now, probably think about it as more of a straight line, and we are trending towards a billion this fiscal year. And you're right. When we did our IR day last September, we were targeting and their growth rate was implying a billion next year.

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

So we have a lot of moving pieces with the the production coming online that I think short of us coming back, and we will probably later in the year, Neil laid out a $2,000,000,000 goal in '28. '26 is clearly running towards the billion. Until we know more, I think kind of doing a straight line between the two would be the most logical, unless, Neil, you

[Neil Brinker, Director, President & CEO at Modine Manufacturing Company]

A good approach.

[Matt Summerville, MD & Senior Research Analyst at D.A. Davidson]

Very good. And then as my follow-up, you made a comment regarding profitability and how that sort of evolves first half, second half. When you say that margins are set to improve, is that a comment on the whole company or on both the segment level for both Climate and PT? And then I'll get back to you. Thank you.

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

Yeah. So a couple, a few moving pieces there with regards to the margins. So first, for the total company, we still expect that we will have a margin improvement this year, and that'll be driven mostly by Performance Technologies. And we see the our total company margins really beginning to step up in the second half of the year, our q three and our q four. When we think about it by segment, I'll cover CS first, and that it really ties to what we just talked about.

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

Big second half volumes coming in, from the data center ramp. And then you can imagine, we are currently adding a lot of cost in preparing. So we'll be holding similar kind of flat margins. We could be down a little bit in CS, not in a meaningful way, but it's really bringing on costs here in the first half of the year. In the second half, I mentioned the implied growth rate really is over 80% in the second half of our year for data centers.

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

That's the kind of ramp we're looking at, including north of the $40,000,000 inventory build here in the quarter. From a PT standpoint, we expect a good margin lift this year even with flat to down volume, and that's been consistent with our transformation strategy. We still think we could generate 100 basis points or so of margin improvement. And again, we see that coming in the back half of the year. Two things, The cost will continue to come out and at the same time, we'll see higher volumes starting to come a little bit in the second half of the year, both mainly from a year over year basis.

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

So it'll be volume a little bit of volume, cost recovery on tariff and metals and then the cost outs on the PT side driving the margin improvement.

[Matt Summerville, MD & Senior Research Analyst at D.A. Davidson]

Great. Thanks, Mike.

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

Yes.

[Operator]

The next question is from Brian Drab from William Blair. Please go ahead.

[Brian Drab, Co-Group Head - Industrials at William Blair]

Hi. Thanks for taking my questions. I just wanted to ask about the capacity expansion first and just a couple of points of clarification. Your recent comments about how much capacity you had, I think you were saying we're approaching, like, 1.3 to 1,500,000,000.0 in in revenue capacity. And then then you talked about the you know, this this week, the 100,000,000 in investment and and ability to get to to 2,000,000,000 in in in revenue roughly.

[Brian Drab, Co-Group Head - Industrials at William Blair]

You know, how how much revenue are we thinking about adding with, you know, specifically tied to the 100,000,000 investment?

[Neil Brinker, Director, President & CEO at Modine Manufacturing Company]

Yeah. Brian, this is Neil. Good question. So the the way that we're thinking about it in order for us to get to the that 2,000,000,000 goal of '28, we would have to have about 2 and a half billion of capacity in place. So that's we we'd wanna run around 80% capacity, if that makes sense.

[Neil Brinker, Director, President & CEO at Modine Manufacturing Company]

So that would be the difference between the two of those relative to the $100,000,000 investment.

[Brian Drab, Co-Group Head - Industrials at William Blair]

And and and I'm trying to get to and, like, a lot of people are trying to get to just, like, what's the what's the return on investment here. But, I mean, it it sounds like you're you're getting, like, a a billion in capacity for a 100,000,000 invest I mean, is it could you, you know, help me with that? Seems seems like a slam dunk ROIC, but this is what people are trying to calculate.

[Neil Brinker, Director, President & CEO at Modine Manufacturing Company]

About a billion people?

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

Yeah. Yeah. This is Mick jumping in. The ROIs that we as we've run them are really high on on these investments, investments, you know, highest highest we've seen, well above any acquisition or organic, talking about 40 plus percent type return on invested capital.

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

The only thing I would add around the capacity when we talk about it is it really depends on the product and the region. So when Neil lays out an estimated 2 and a half billion of capacity, the products, right, are so large. It really the answer will always be we wanna have the right mix, and we could always be adding more capacity. But it's air handlers versus chillers, Europe versus North America, India versus North America. So when Neil makes the comment, it's a blended number, and it's kind of an optimal capacity.

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

But I think we will always get if we're doing our job and we're growing, hopefully, we'll always have, you know, capacity issues that we're looking expanding, but it really depends again by region and by product.

[Brian Drab, Co-Group Head - Industrials at William Blair]

Okay. Yeah. I mean, I I'm I'm doing, like, you know, the math too too simply with the with limited information. But, I mean, it seems like you're adding almost a billion in revenue capacity at maybe 15% EBITDA margin and getting a 100 and 100 plus million in EBITDA every every year going forward on a 100,000,000 investment. It seems like I mean, like, roughly, like, better than a 100% ROIC.

[Brian Drab, Co-Group Head - Industrials at William Blair]

But I I guess I'll I'll follow-up more later on that one.

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

But Yeah.

[Brian Drab, Co-Group Head - Industrials at William Blair]

Yeah. Is that am I crazy? Like, the initial thoughts I'm having on that or no?

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

No. I for sure, we look at well, I mentioned we're we're well north of 50% return on capital. Lots of assumptions to make there. But I think your question, your point, the payback and the ROI is really big on these. These are Neil said it before, we built the reputation with our customers.

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

We have the right products, the right brand, the rep reputation, service, quality. It's about capacity and execution.

[Brian Drab, Co-Group Head - Industrials at William Blair]

Okay. And then the the 15 roughly 15% EBITDA margin you mentioned, Mick, is is that a level that you would think would be the long term level of margin for that incremental capacity coming on? Or is that kind of how to think about it in the near term as you ramp up and and and get the full utilization in the new capacity?

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

Yes. Great. I'm glad you clarified that. No. Long term, we'll drive significantly higher margins, And it's always a step function.

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

Phase one is capacity. Phase two is still capacity. Phase three is optimize it or max it out. And our data center businesses, when they're running at normal capacity, are at or above our segment averages. So I was just commenting with the multiple lines coming on and new facilities, we often get asked like how come our margins aren't going up faster or more.

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

And Neil and I, our view has been we drive a lot more shareholder value by this 30% type earnings growth. And at some point, you focus a lot more on capacity utilization and margin. But for now, we're gonna continue to put the capacity in place given the order book and the funnel we see in front of us.

[Brian Drab, Co-Group Head - Industrials at William Blair]

Yes, perfect. Thank you. I'll let others ask some questions. Thanks.

[Operator]

The next question is from Noah Kaye from Oppenheimer. Please go ahead.

[Noah Kaye, Senior Research Analyst at Oppenheimer & Co. Inc.]

Thanks. Well, you know, obviously, this back half ramp is really key for us all to understand. And I I think I have to pair the demand visibility part of this with understanding kind of what percentage of the capacity, the new capacity, is in place. So so maybe on the demand side first, can you just give us a sense of of really the visibility to be able to, you know, raise the guide this early in the year? We're talking about, you know, nine months from now.

[Noah Kaye, Senior Research Analyst at Oppenheimer & Co. Inc.]

Are those orders pretty much baked? And then on the capacity, I mean, what has to happen in terms of percentage brought online in the guardrails to make sure you can hit or potentially even beat the target?

[Neil Brinker, Director, President & CEO at Modine Manufacturing Company]

Yeah. Thanks, Noel, for the question. Certainly, we have visibility that goes beyond a year. In some instances, it can go out as far as three years. And we're in close collaboration with our customers in terms of timing and how we need to stand up this additional capacity to meet their requirements, their demands, and to fall in line with their data center timeline constructions and build outs.

[Neil Brinker, Director, President & CEO at Modine Manufacturing Company]

So, you know, we essentially tie our schedule to their to their schedule, and then that allowed us the opportunity to to go forward and put this additional capacity in in place. So the first step is gonna utilize existing infrastructures, existing areas where we have workforce and supply chain established. That's gonna happen in the next three to four months or in the back in in the next couple quarters. We're gonna be looking at retooling these facilities and standing them up for DC operations. And then we have some newer facilities that we'll have to bring online that are greenfields.

[Neil Brinker, Director, President & CEO at Modine Manufacturing Company]

It'll take a little bit longer because we don't have the the set established practices that we have with the existing facilities. So those will those will likely come online closer to the end of our fiscal year.

[Noah Kaye, Senior Research Analyst at Oppenheimer & Co. Inc.]

Okay. I mean, I think to to thanks, Emile. I think to kind of further unpack that, to go from 30% to 45% and, there's been a theme. Right, all this earning season of the customers wanting more speed and accelerating their build. So, you know, is it the right characterization that basically you saw accelerated deployment schedules from customers in addition to expanded build, and so that's what's driving your own expansion?

[Noah Kaye, Senior Research Analyst at Oppenheimer & Co. Inc.]

I just wanna understand kind of the sequencing here on the decisions.

[Neil Brinker, Director, President & CEO at Modine Manufacturing Company]

Well, it's it's what's driving the expansion is certainly accelerated growth with our customers, existing customers, as well as onboarding new customers. Right? We're gaining share in this market. And and as we as we bring our technologies on online and we bring new technologies to the market, there's there's an attraction there. So it's it's with existing customers that are moving quicker than we anticipated, and it's, you know, winning share and and bringing new customers on board at the same time.

[Noah Kaye, Senior Research Analyst at Oppenheimer & Co. Inc.]

Last one. Mick, as you mentioned, the outlook doesn't contemplate any divestiture proceeds. Maybe can you just sort of bring us up to speed on how that process is moving along? And any potential color on timing?

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

Yeah. The the two areas we've talked about in the past is we had announced, I think it was last year, that we had plans to sell the headquarters in our European location. And as a reminder, we expect that to close later this year. That was estimated to be a 10,000,000 to $15,000,000 type transaction. We're just going through regulatory issues there, approvals, local approvals.

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

And then Neil and I have talked about after the IR day, we talked about 250 to 300,000,000 on light duty business that we were going to deemphasize or exit, and we still have that process working and team focused on that. So, for now, I'll leave it at that until we have we'll come back and we have something, definitive to share with the with the investors.

[Noah Kaye, Senior Research Analyst at Oppenheimer & Co. Inc.]

Alright. Well, stay tuned. Thank you.

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

Yeah.

[Operator]

The next question is from Chris Moore from CJS Securities. Please go ahead.

[Chris Moore, Senior Research Analyst at CJS Securities]

Hey. Good morning, guys. Lots of lots of good stuff. Can you maybe just you we've talked about bit the the custom modular data center that that you're developing with with clients. Can you talk about that a little bit further, you know, and kind of of, you know, just any specifics there and and what that that, you know, kind of time line looks as you as you continue to work there?

[Neil Brinker, Director, President & CEO at Modine Manufacturing Company]

Yeah. Thanks, Chris, for the question. You know, we're we're definitely seeing some customers in in the market move in this direction, and it's to satisfy three things, speed, speed, and speed. So you can essentially see this as as a data center in a box, and and it allows for our customers to ramp up their data center projects and facilities at a much quicker rate. It doesn't require the same amount of it doesn't require the same amount of labor as well as the skilled labor that it takes for construction.

[Neil Brinker, Director, President & CEO at Modine Manufacturing Company]

So we're working with a, you know, a very important customer, and we've, you know, we've identified a location in Calgary where we're making these where we're making this product, and we're gonna expand it into The US as well. And, again, it's this it's it's to help our customers get to the market quicker with their data center solutions.

[Chris Moore, Senior Research Analyst at CJS Securities]

Got it. I appreciate that. We've been we've talked about the ICE, you know, rationalization for for a while now. Are there other areas within Performance Technologies that that that you you may be focusing on less moving forward?

[Neil Brinker, Director, President & CEO at Modine Manufacturing Company]

So, you know, we're constantly in evaluation of our markets. That's the beautiful thing about 8020 as we've segmented the business into to multiple markets and and then establish key account strategies. Some things will come in and some things will go out. I think, you know, Mick mentioned the genset in terms of where we're seeing that business kinda flatten. That may allow for us to redeploy resources or activity in another area.

[Neil Brinker, Director, President & CEO at Modine Manufacturing Company]

We're in the process of evaluating different opportunities in PT.

[Chris Moore, Senior Research Analyst at CJS Securities]

Got it. Maybe just the last one more of modeling. Cash flow down a little this year, you're gonna be spending more. Can what interest expense sense in terms of of, you know, a reasonable level for for fiscal twenty six?

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

Yeah. Yep. Interest expense should be we've got a a list of assumptions in the back, but 28 to 30,000,000 would be our current estimate estimate for interest expense.

[Chris Moore, Senior Research Analyst at CJS Securities]

Perfect. I will leave it there. Thanks, guys.

[Operator]

The next question is from David Tarantino from KeyBanc Capital Markets. Please go ahead.

[David Tarantino, AVP at KeyBanc Capital Markets]

Hey. Good morning, guys.

[Neil Brinker, Director, President & CEO at Modine Manufacturing Company]

Good morning.

[David Tarantino, AVP at KeyBanc Capital Markets]

Maybe just on the near term data center trends, could you give us a better picture on the underlying demand you're experiencing relative to the 15% growth in the first quarter, just particularly relative to the pauses you noted in Europe last quarter relative to what is clearly robust demand in North America?

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

Yes. Hey, it's Nick here. And I'll give you my view and then Neil could jump in. So one of the things that on the positive side that we've seen happening is we've continued to win new programs. And so we we started the year.

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

We knew it would be a little bit more back half loaded, and we talked about, for us, slightly lower than normal data center growth even though q one came in at 15%. And then we had planned on a, you know, a 30 plus percent year. Some of the locations we've been supporting, Neil's talked about, we've won more buildings or more data centers. And on top of it, Neil mentioned some of the customers have either asked to increase our volumes or accelerate volumes. So all of that has led to two things.

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

Internally, we said we needed to have the capacity to support the growth of customers and the orders we have in hand. And then secondly, to meet this, you know, the growing opportunity in order book we see for next year. So we really have seen acceleration here in the second half, and it's us keeping up with the increase in orders and the increase in volumes. Neil, anything I missed?

[Neil Brinker, Director, President & CEO at Modine Manufacturing Company]

Yeah. I would just add that we, you know, we have the orders. We have the commitments that lead to the capacity expansion. We're comfortable with that. And that, you know, us introducing our chiller to the North America region has really helped us explode and grow.

[Neil Brinker, Director, President & CEO at Modine Manufacturing Company]

It it is our our chiller technology and the demand for our chiller has really driven us to drive more capacity inside of The United States to keep up with with our customers' expectations.

[David Tarantino, AVP at KeyBanc Capital Markets]

Okay. Great. And then maybe could you give us a bit more color on the recent deals and how much they should contribute this year? And then just thinking about capital allocation, obviously, we're investing quite a bit more in data centers, but what should we expect otherwise following both all these deals and even more investment in data center?

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

Yes. It's Mick. I'll take that one. And again, Neil could add anything we want. So on a partial year basis, we should see from the last two about $100,000,000 of incremental revenue.

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

And from an L. B. White perspective, we talked about that one. That one, we expect to have margins initially called in the 15% to 20% range. So not too far off of the climate solutions and quickly getting at or above our segment, and that also will help drive kind of second half of the year.

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

CDI is running below the segment, the the last acquisition we did. That was a company that had also had a large business that was supporting the rapid growth on the EV battery side and the battery factories. And we bought that for different reasons, and so that one is really a drive on our side to fill that manufacturing capacity and then leverage the sales synergies. And we expect to drive margins up over the next year to be in line with our segment average. So a little bit lower margins on the CDI side and then LB White, call it, 15% to 20% and increasing from those two.

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

Capital allocation, q one, I thought of 27,000,000, 20 of that was in CS and mostly on data centers. With this year, we were already our plan was already to spend probably $40,000,000 in capital on data center growth. So the announcement we did this week is an incremental 100 on top of that. So we'll probably spend the next year, twelve months plus, somewhere between 140 plus million of capital on the data center side. The PT is really in a maintenance mode.

[Michael Lucareli, EVP & CFO at Modine Manufacturing Company]

We're really doing mostly preventative maintenance and select program launches there. And then last thing I would say on the just capital allocation M and A side, we'll expect you should expect from us, we'll probably have a pause here on the acquisition side for at least a couple of quarters. We need to digest three acquisitions, any of the divestiture work the team's working on, and a massive data center expansion. So balance sheet's still in great shape, but I think from a team going three different directions, all of you should expect we'll probably have a pause for at least a couple of quarters on the acquisition side.

[Operator]

The next question is from Jeff Van Sinderen from B. Riley Securities. Please go ahead.

[Jeff Van Sinderen, Senior Research Analyst at B. Riley & Co]

Good morning, everyone, and great to hear about the expanding data center production. But are you also expanding data center service capabilities alongside that?

[Neil Brinker, Director, President & CEO at Modine Manufacturing Company]

Certainly. That that good question. Certainly, that is a product offering that we're we often bring to the market with our product solution sales. Absolutely. We've been doing some we've been doing some hiring in North America to support it.

[Neil Brinker, Director, President & CEO at Modine Manufacturing Company]

Our service group, we need to build out further service to support the growth the tremendous growth that we have in just equipment sales in The United States to support it. Not only short term, but long term. It's it's necessary when you get the equipment on in the field to have people in place for start up and and installation. So absolutely building that out at the rate that we can to keep up with the product demand as well as our our our controls. Our you know, one of the one area that we think we have a unique solution in that differentiates is our billing management and our control system. So when you tie all of our equipment together and have it operate like an ecosystem, it becomes very efficient. And in these days where the demands for power is so high or or the need to reduce water reduction is so important.

[Neil Brinker, Director, President & CEO at Modine Manufacturing Company]

Those efficiencies are are extremely our those efficiencies that we drive are extremely well positioned in the market. So it's a it's a good point. And, yes, at the rate that we're growing with product sales, we need to keep pace with it on the service side as well.

[Jeff Van Sinderen, Senior Research Analyst at B. Riley & Co]

Okay. Fair enough. And then you had one large order in the DC area. I think it was a 180,000,000, somewhere in that area with I believe it was a colo that you announced you announced a few months ago. Is there other business of that magnitude out there that we could wake up and see, you know, a similar type announcement here over the next several quarters that size?

[Neil Brinker, Director, President & CEO at Modine Manufacturing Company]

Yes. That's that's essentially what drove the 2,000,000,000 in invest or the 100,000,000 of investment to drive to that 2,000,000,000 mark. It's a collection of orders of magnitude Correct?

[Jeff Van Sinderen, Senior Research Analyst at B. Riley & Co]

Okay. Good. And I realize you're you're pausing a little bit on the acquisition front. But any thoughts on where you might go or what you might look at when you resume looking at acquisitions? What areas might you focus on?

[Neil Brinker, Director, President & CEO at Modine Manufacturing Company]

Certainly, we have I mean, we love the organic growth that we have in data center market today, but we also believe it's important to maintain a diversified business portfolio for the long term. So we'll we'll be actively building out our funnel over the next two quarters to to support our HVAC technologies business and maybe even some vertical integration of the supply chain.

[Jeff Van Sinderen, Senior Research Analyst at B. Riley & Co]

Okay. Great. Thanks for taking my questions. I'll take the rest offline.

[Operator]

The next question is from Brian Sponheimer from Gabelli and Company. Please go ahead.

[Brian Sponheimer, Portfolio Manager at Gabelli Funds]

Hi. Good morning, everyone, and, congratulations again. Neil, you've had a terrific vision for the data center business. And, obviously, these acquisitions, within Climate Solutions are bolstering the remainder, which started the year at about a $800,000,000 business. I guess my question is, where does that business need to get to, and where does data center need to get to where you potentially are are doing another separation where you see those two businesses stand on their own just from a a strategic perspective and also from a financial one? Oh, that's a that's a

[Neil Brinker, Director, President & CEO at Modine Manufacturing Company]

good question, Brian. I appreciate that. And it it's one thing to have a vision. It's another to have a team that can actually drive and execute execute on on it. It.

[Neil Brinker, Director, President & CEO at Modine Manufacturing Company]

So So I I give all the credit to the team. You know, we have to relook we'll we'll have to relook at this as we continue to shift in our portfolio. As you know, we've divested, you know, multiple plants over the last few years, and we've acquired new plant we've acquired new businesses, and we've also had organic growth that's exceeded our expectations in other parts. So the business has changed quite dramatically since we launched the original segments, you know, several years back to support and complement our IR day. So definitely, that is something that we're gonna have to look at going forward as we continue to rebalance and and and reposition the company.

[Neil Brinker, Director, President & CEO at Modine Manufacturing Company]

It will be a normal process of our our 8020 outlook. So we do that every year, and I suspect that, you know, we're gonna do that again at the end of this fiscal year as well.

[Brian Sponheimer, Portfolio Manager at Gabelli Funds]

Alright. Terrific. Well, congratulations, and look forward to to what's next.

[Neil Brinker, Director, President & CEO at Modine Manufacturing Company]

Thank you.

[Operator]

The next question is from Matt Summerville from DA Davidson. Please go ahead.

[Matt Summerville, MD & Senior Research Analyst at D.A. Davidson]

Thanks. Just a follow-up, and I apologize if you hit this. I've I've lost the call for a second. But can you just flush out a comment you just made, a collection of new orders of that magnitude in the context of this 2,000,000,000? Should we assume a majority of the build to that 2,000,000,000 is based on an order in hand or in sort of backlog.

[Matt Summerville, MD & Senior Research Analyst at D.A. Davidson]

I know you don't disclose orders in backlog. I guess I'm trying to get a sense of how much of that revenue objective is known and spoken for today. Does does that make sense?

[Neil Brinker, Director, President & CEO at Modine Manufacturing Company]

Yeah. It does make sense. So there's we have a back we have the highest backlog in data centers we've ever had. So it gives us confidence in order for us to be able to put forward that type of capital to to grow and expand. We also have we are also the incumbent in a lot of these data centers.

[Neil Brinker, Director, President & CEO at Modine Manufacturing Company]

So we know and we see and we have visibility of the expansion of these data centers. And in our conversations, there isn't any reason for us to think that our our data center customers would take a different solution, especially when it's about growth and speed and and reliability. So it's the commitments that we have with our customers. It's the orders that we have with our customers. It's the outlook.

[Neil Brinker, Director, President & CEO at Modine Manufacturing Company]

It's the strategic relationships. All these things coming together is is what gives us confidence to to make that investment.

[Matt Summerville, MD & Senior Research Analyst at D.A. Davidson]

Thank you for that. And then just as a follow-up, I wanna go back to slide four, talking about the modular data center that you're developing with a key customer, talking about what I assume is this large air handling unit you're developing, I assume, for another customer. Are these solution sets portable across the customer base within data centers? And if so, how soon? Or is there some level of exclusivity you're you will be granting on these? Thank you.

[Neil Brinker, Director, President & CEO at Modine Manufacturing Company]

Yes. With one, there is deaf well, yes, it is exclusivity with the large particularly when you're working with the hyperscalers. Yes. That's the case. But, you know, when it when it comes to the modular data center, certainly, there'll be different versions of that.

[Neil Brinker, Director, President & CEO at Modine Manufacturing Company]

Right? They won't all look the same. Some will be very different. The concept will be the same, but what's inside and how they operate could be unique and bespoke for each one. Yes.

[Matt Summerville, MD & Senior Research Analyst at D.A. Davidson]

Thank you, dear.

[Operator]

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

[Kathleen Powers, VP - IR & Treasurer at Modine Manufacturing Company]

Thank you, and thanks to everyone for joining our call this morning. A replay of the call will be available on our website in about two hours. Thanks.

[Operator]

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Participants

Executives

• Kathleen Powers, VP - IR & Treasurer
• Neil Brinker, Director, President & CEO
• Michael Lucareli, EVP & CFO

Analysts

• Matt Summerville, MD & Senior Research Analyst at D.A. Davidson
• Brian Drab, Co-Group Head - Industrials at William Blair
• Noah Kaye, Senior Research Analyst at Oppenheimer & Co. Inc.
• Chris Moore, Senior Research Analyst at CJS Securities
• David Tarantino, AVP at KeyBanc Capital Markets
• Jeff Van Sinderen, Senior Research Analyst at B. Riley & Co
• Brian Sponheimer, Portfolio Manager at Gabelli Funds