Madison Air Solutions Q2 2026 Earnings Call Transcript

Quartr
Provided by Quartr
July 30, 2026

Key Takeaways

  • Positive Sentiment: Second-quarter net sales rose 14% to $991 million on a pro forma basis, while adjusted EBITDA increased 12%; free cash flow reached approximately $140 million year to date.
  • Positive Sentiment: Orders grew 45% in the quarter and the company exited with a record $2.9 billion backlog, up 133% year over year, providing visibility into 2027 and beyond. Commercial orders excluding data centers rose nearly 50%, indicating broader demand across healthcare, advanced manufacturing, logistics, and institutional markets.
  • Positive Sentiment: Madison Air raised its 2026 net sales outlook by approximately $75 million at the midpoint to $3.825 billion-$3.925 billion and maintained an adjusted EBITDA outlook of $1.02 billion-$1.065 billion, with full-year margins expected around 27%.
  • Positive Sentiment: The residential segment grew 2% despite soft housing conditions, led by continued adoption of Healthy Air Systems and AprilAire; segment adjusted EBITDA increased 36%, with margin expansion driven by pricing, productivity, and favorable mix.
  • Negative Sentiment: Commercial margins were pressured year over year by data-center project mix, capacity ramp costs, and the timing of tariff and inflation recovery. Management expects improvement in the second half, but residential margins are expected to decline somewhat sequentially after a particularly strong second quarter.
AI Generated. May Contain Errors.
Earnings Conference Call
Madison Air Solutions Q2 2026
00:00 / 00:00

There are 13 speakers on the call.

Operator

Good morning, welcome to the Madison Air second quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. Following the prepared remarks, we will open the call for a question-and-answer session. Please be advised that today's call is being recorded. I will now turn the call over to Steve Low-Tufo, Senior Vice President, Investor Relations. Please go ahead.

Speaker 1

Great, Danielle, thank you, thank you to everybody for joining. Good morning. Welcome to Madison Air's second quarter 2026 earnings call. Joining me today are Jill Wyant, President and Chief Executive Officer, and JJ Foley, Chief Financial Officer. Before we begin, I'd like to remind everyone that certain statements on this call are forward-looking in nature and are subject to risks and uncertainties that could cause actual results to differ materially. For information concerning these risks, please see Madison Air's recent SEC filings. We undertake no obligation to update these statements as a result of new information or future events. In addition, in today's remarks, when comparing 2Q26 results to Q25, or referring to our 2025 performance, such information is presented on a combined basis for Madison Air and AprilAire, calculated as if AprilAire had been owned since January 1st, 2025.

Speaker 1

We will also refer to certain other non-GAAP financial measures. You can find calculations and a reconciliation of these measures to the most closely comparable GAAP measure in our earnings release, the presentation accompanying this call, and in the supplemental information as applicable, which can be found in the investor relations section of our website at madisonair.com. I'll turn the call over to Jill.

Speaker 2

Thank you, Steve. Good morning, everyone, thank you for joining us today for our second quarter earnings call. I'll start by walking you through an overview of the business, our strategy, and the growth momentum reflected in our second quarter results. I'll hand the call over to JJ to discuss our second quarter 2026 financial results and updated guidance for full year 2026, I'll wrap it with key takeaways before we open the call for Q&A. Please turn to slide five. At Madison Air, we see air differently. Our mission is to make the world safer, healthier, and more productive through the power of better air. We build and scale superior air quality businesses that operate in high-value niches adjacent to traditional HVAC, across both commercial and residential segments.

Speaker 2

Our leading brands include Addison, AprilAire, Big Ass Fans, Broan-NuTone, Nortek Air Solutions, Nortek Data Center Cooling, and Reznor. Collectively, our businesses have delivered durable compounding growth, outpacing the core U.S. GDP growth rate in 16 of the last 18 years on an historic basis through 2025. Our strategy is built around three strengths that work together to deliver better air, stronger customer outcomes, and attractive long-term returns. The first strength is our Return on Air approach, how we help customers achieve their most critical business outcomes. We bring together technical expertise, leading brands, and collaborative partnerships to solve customer challenges in the environments we serve. Whether we're helping protect critical infrastructure and reduce the risk of downtime in a data center, improve yield and asset utilization in a semiconductor facility, or create healthier homes through our Healthy Air System, the outcome is the same. Better air produces better outcomes.

Speaker 2

The company's second strength is our leadership in attractive growth markets. Within our commercial segment, we serve 15 end markets where performance is critical and customers invest in highly engineered custom and semi-custom solutions that deliver measurable value. While data centers are an important part of that opportunity, they are just one of the markets we serve. Our brands also support hospitals and healthcare, life sciences, semiconductor chip fabs, power generation, and other mission-critical applications, supporting a broad range of high-growth opportunities. In residential, we work through our contractor and distribution channels to reach homeowners and build awareness and adoption of Healthy Air Systems. That education creates demand that didn't previously exist, giving us avenues to grow even in soft housing and soft traditional HVAC markets. Since 2021, we estimate that we've more than tripled our addressable market by expanding into larger, faster-growing sectors with more complex performance requirements.

Speaker 2

We've not only grown the business, we've repositioned the portfolio towards markets where air is mission-critical and where our technical capabilities can create differentiation. That evolution reflects both the breadth of our capabilities and our ability to apply them in new, attractive markets. The third strength is our value creation model. We combine a decentralized operating structure and lean corporate center with the capabilities and scale of the broader enterprise. Our businesses remain close to their customers and can move quickly to invest where they see the greatest opportunities while they benefit from shared capabilities, talent, technology, and capital. That combination of local agility and enterprise scale is an important competitive advantage. It enables us to pursue growth rapidly and efficiently, sustain strong profitability and cash flow, and deploy capital into the highest return opportunities.

Speaker 2

Taken together, these three strengths, Return on Air or our outcome-driven solutions, leadership and attractive markets, and a disciplined value creation model form a repeatable framework for creating long-term value. Please turn to slide six. On an LTM basis, we are a $3.75 billion revenue business with strong underlying profitability and cash generation. I'm proud of the quality of our results, 26.6% adjusted EBITDA margin and $430 million in free cash flow, which together represent the power of our unique value creation model. We built this portfolio with resilience in mind, balanced across commercial and residential, with meaningful exposure to replacement retrofit and upgrade activity that holds up across cycles. We're also seeing a growing share of demand for services and aftermarket solutions, which add stability and increasingly recurring revenue characteristics over time.

Speaker 2

Aftermarket and services represent about 10% of total revenue, and we see significant opportunity to expand those offerings over time. We're investing in service capabilities, digital tools, and simplifying how customers do business with us over the life of their systems. A great example of this is Nortek Air Solutions' new coil software selection software and mobile app. These tools are making it easier for customers to identify, quote, and order replacement parts seamlessly. Adoption has been strong, with approximately 30% of orders flowing through these self-service channels. These tools simplify routine transactions and allow our teams to spend more time solving customer problems and creating real value. It's a great example of how we're using innovation and technology to strengthen customer relationships and expand our aftermarket opportunity. Geographically, the business is predominantly focused on North America, where we have established brands, strong channel positions, and longstanding customer relationships.

Speaker 2

As of June 30th, we have over 9,000 employees, with 600 of them focused on R&D to drive innovation. Altogether, Madison Air is built to grow with strong profitability, cash generation, end market breadth, and a growing aftermarket opportunity, creating multiple avenues for success and a durable platform for profitable growth. Please turn to Slide seven. Madison Air is everywhere air matters, from clean rooms and schools to hospitals, data centers, government institutions, and single and multifamily homes. Our solutions show up everywhere people live, work, learn, and play, and that's by design. We've built capabilities across the air ecosystem, from thermal management and cooling to ventilation, air handling, and humidity control. This breadth enables us to solve complex customer challenges in a wide range of applications and environments. We have expanded into new applications and high-value markets by building on our core capabilities and expertise.

Speaker 2

We estimate our North American addressable market at approximately $40 billion, supported by powerful secular tailwinds, including the growth of advanced manufacturing, increased demand for healthier and more energy-efficient buildings, and the rapid growth of AI and compute. These trends directly align with our strengths, and while the applications may differ, our role remains the same: helping customers get more from the air in their environments. This focus reinforces our ability to create value across a broad range of customers, applications, and markets. Please turn to Slide eight. Madison Air's products and services capabilities run deep, and we see significant opportunity as we apply our capabilities across high-value, performance-driven end markets in both commercial and residential segments. Our second quarter results demonstrate the strength of this approach and the value of our diversified business mix.

Speaker 2

Within commercial, we serve mission-critical applications across 15 end markets, which provides exposure to multiple demand drivers rather than reliance on any one single sector. What makes this set of end markets so attractive is that they share several common characteristics. They benefit from long-term secular tailwinds, require sophisticated air solutions, and place a premium on performance, innovation, and outcomes. Air is essential infrastructure in the markets we serve and mission-critical to what these customers do. We believe that positions us well for continued growth. In an environment where macroeconomic trade and geopolitical conditions can shift and are shifting quickly, our diversified exposure provides resilience while significant white space remains as customers increasingly use better air to improve their business outcomes. Together, these end markets create a more durable growth profile. Please turn to Slide nine. Orders are a leading indicator.

Speaker 2

They really tell us where the business is going. Based on our second quarter results, the signals are strong. Our new business pipeline remains healthy, with combined company orders growing 45% in the quarter and 37% year-to-date. As we noted last quarter, orders can fluctuate based on project timing and customer schedules. To that end, we noted this last call, we expect year-over-year orders growth to moderate and decline in the fourth quarter against exceptionally strong comparisons from 2025. The underlying drivers of demand remain strong in our expanding pipeline. Continued opportunity conversion and record backlog give us confidence in our ability to deliver continued growth over the next several years, despite a dynamic macroeconomic backdrop.

Speaker 2

With strong order activity and a second quarter book-to-bill ratio of 1.3 times, we exited the quarter with a record backlog of $2.9 billion, up 133% year-over-year on a combined company basis. That backlog provides strong visibility into the near term and beyond, with more than 50% of that backlog expected to convert in 2027 and later, positioning us well for continued growth. More importantly, that demand is translating into performance. Our pro forma net sales growth of 14% in the quarter and 13% year-to-date reflect the broad-based growth momentum we're seeing and driving across the portfolio. We remain pleased with the balanced nature of orders in our commercial segment. While Nortek Data Center Cooling remains the largest contributor of commercial orders growth, commercial orders increased nearly 50% in markets other than data centers in the second quarter, reflecting broad-based strength across the enterprise. What's driving that demand?

Speaker 2

Well, in many cases, it's our ability to deliver Return on Air. Nortek Air Solutions, for example, recently secured a significant project supporting a leading children's hospital. The customer needed a highly engineered air handling solution capable of delivering up to 10 times the air capacity of traditional units for their 2 million sq ft pediatric facility in a southern metro area that has seen strong population growth. This is a great example of Return on Air in action. We're not simply selling equipment. We're helping customers reduce operational risk, extend asset life, maintain continuous care, and create better outcomes for the people, in this case, the children and families who depend on these facilities every day. That kind of differentiated value is what drives orders and backlog growth and builds long-term customer relationships that open services and aftermarket opportunities. Please turn to slide 10.

Speaker 2

The results and demand momentum we're discussing today are the result of a deliberate strategy to create value. The key elements of the Madison Air strategy and how we translate that, our Return on Air approach, into sustainable growth and strong cash flow are shown here. At the center of it all is Return on Air. We help customers turn air from a utility into a strategic asset that improves performance, reduces energy consumption, protects critical assets and operations, and creates safer, healthier, and more productive environments. The value we create extends beyond a SKU or even a configured product. It comes from our collaboration and co-creation with customers. From our seat at the customer's design table, we're applying deep application expertise, engineering insight, and system-level thinking to help solve problems and optimize outcomes. By engaging early and partnering closely with customers, we help shape better solutions from the start.

Speaker 2

When customers achieve better outcomes, we create value together, and that shared value drives sustainable growth for Madison Air. What makes this model powerful is that it is repeatable. We apply the same playbook across the portfolio, taking close customer collaboration, combining it with technical expertise, innovation, and disciplined execution to create value in a way that can scale across businesses, markets, and cycles. We then work to outperform the markets we serve through innovation, value-based selling, strong channel and customer partnerships, and investments in lifecycle services and aftermarket capabilities. The proof points are evident in our performance. We've consistently outpaced U.S. GDP, unlocked approximately $28 billion of additional addressable market, and generated strong margins and cash flow while continuing to invest for growth. Growth investment and execution are what make the model work, and that takes our team, the 9,100-plus people who power Madison Air.

Speaker 2

We invest in them to create consistency and alignment and to ensure the value creation model is embedded across the organization and shows up in how we execute every day. I always say people vote with their feet, and our people overwhelmingly are voting to stay with Madison Air. While I believe Gallup reported a three-point decline in global employee engagement, our employee net promoter score, which was measured as a part of our second quarter proprietary employee engagement survey, increased four points. On a related note, our monthly turnover rate remains 30% below manufacturing benchmarks, which reflects the strength of our culture and the deep commitment of our team. Engaged teams are also safer, healthier, and more productive teams, and that shows up directly in the results we deliver.

Speaker 2

Finally, we put capital to work where it can create the greatest value, and that means investing in organic growth, pursuing inorganic M&A opportunities where they make good disciplined sense, and that gives us flexibility to reinvest behind our highest return opportunities. As we pursue opportunities in high-growth markets, some parts of the portfolio will naturally be at an earlier stage of their margin journey. An example of this is the data center cooling business, which is a great business with strong fundamentals. Our experience has shown that these investments can create significant value over time as we apply the same profitable growth playbook that has driven success across Madison Air, scaling the business, strengthening our market position, and expanding margins over time as the business matures.

Speaker 2

We improve margins through a combination of value selling, continued investment in innovation, which is a great margin lever for us, profitable top-line growth that leverages our fixed cost base, expansion of higher market aftermarket and services revenue, and an ongoing focus on 80/20 and operational discipline. That same operating discipline also positions us to navigate ongoing inflationary pressures through pricing actions, productivity initiatives, and material cost reductions, together supporting our ability to protect and grow margins over time. These elements have been central to our success across Madison Air and give us confidence in the sustainability of our margins as we continue to invest in high-return growth opportunities. The result is a business designed to deliver sustainable profitable growth and strong cash generation over the long term. With that, I'll turn it over to JJ to walk through the second quarter financial performance and outlook.

Speaker 3

Thank you, Jill, and good morning, everyone. If you can please turn to slide 12, I'll pick up there. On a pro forma basis, net sales for the quarter were up 14% and adjusted EBITDA grew 12%. We delivered strong free cash flow so far this year, approaching $140 million year to date. Pro forma net sales grew 14% year-over-year to $991 million, with low single-digit price realization across both segments and double-digit volume growth driven by broad-based demand across our commercial end markets and continued strong demand for Healthy Air Systems in the residential segment. Topline growth translated into 12% pro forma adjusted EBITDA growth. Margins of 26.8% were up 155 basis points from the first quarter. Year-over-year, margins contracted approximately 59 basis points. Margins were generally in line with our expectations as we called out on the first quarter call.

Speaker 3

This is impacted by the timing of net tariff and inflation costs, commercial segment mix, which more than offset productivity gains and disciplined cost management. Because of the timing of the AprilAire IPO, the weighted average share count for 2Q is slightly lower than we are assuming for the remaining quarters this year. Given this dynamic, we'll be reporting our adjusted net income figure here in the presentation. Our adjusted net income was $148 million in the quarter and represented 83% pro forma year-over-year growth, driven by net sales and pre-tax earnings growth mentioned above. On the quarter, we generated $140 million of free cash flow year to date, which represents net income conversion of 123%. We ended the quarter with net leverage of 2.8 turns, which represented a 0.2 turn improvement versus the first quarter pro forma for the IPO.

Speaker 3

This continued improvement came from earnings growth and cash generation, which we expect to accelerate in the second half. Overall, the quarter demonstrates our ability to convert net sales into earnings growth and cash generation. With that, let me review our segment level performance on slide 13. In commercial, we drove solid orders growth. Orders were up over 70% year-over-year on a combined company basis, reflecting continued momentum in key platforms, including air, liquid, and hybrid cooling, air handling, and air movement. Backlog for the segment increased 142% year-over-year on a combined company basis, providing very good visibility and supporting solid revenue momentum into 2027. Importantly, commercial orders were up almost 50% year-over-year for markets other than data centers, and that backlog is up over 20% year-over-year.

Speaker 3

Strong customer demand drove 22% year-over-year combined company net sales growth to $659 million, driven by a combination of low single-digit pricing and high teens volume. This quarter reflects continued progress across our 15 commercial end markets that Jill spoke about as we benefit from our diversified portfolio and decentralized operating model. Reported commercial segment adjusted EBITDA grew 11% to $173 million, and reported adjusted EBITDA margin was 26.3%, in line with our expectations coming into the quarter. The year-over-year margin comparison primarily reflects rapid growth in large data center programs, including project mix and capacity addition investments, program ramp costs, and the timing of inflation and tariff recovery actions across the broader segment. We have a clear roadmap to expand margins in the second half, and we believe the key drivers are measurable and within our control.

Speaker 3

We closely track productivity, program maturization, and price realization across defined operating targets. Each is progressing in line with our plan. These operating levers we manage every single day, giving us confidence in our ability to deliver sequential margin improvement and year-over-year margin expansion in the second half. Overall, the segment continues to benefit from exposure to mission critical end markets, including data centers, aerospace, education, healthcare, and life sciences. We remain focused on executing our backlog, innovating to meet customer demands, and sustaining growth momentum. Now please turn to slide 14 for the residential segment results. The residential segment delivered 2% net sales growth on a combined company basis despite a soft housing market, performing in line with our expectations. As we've mentioned before, given the short cycle nature of this business, orders and backlog are less relevant than in commercial.

Speaker 3

With that said, orders grew low single digits in the quarter. We continue to expand Healthy Air System awareness and adoption through our contractor partners. Every HVAC replacement and service call creates an opportunity to engage homeowners amounting to roughly 40 million annual in-home touch points. That's 40 million chances every single year to educate homeowners on the value of the Healthy Air Systems and to make a sale. Our contractor education conversion efforts support white space penetration and market expansion. In the second quarter did just that, despite softer housing and HVAC environment. Overall, our residential segment continues to make sequential progress on Healthy Air System penetration, channel conversion, and price realization and productivity. AprilAire delivered double-digit revenue growth supported by contractor and distribution conversions and new product launches.

Speaker 3

Our second quarter results demonstrate the resilience of our model, which is perfectly built to be able to navigate broader market headwinds like these with vast white space penetration opportunity, opening paths to growth in otherwise muted residential conditions. Reported net sales increased 16% or 2% on a combined basis to $334 million, which was supported by low single digit pricing and approximately flat volume overall. In addition, reported segment adjusted EBITDA grew 36% to $99 million, with 423 basis points of margin expansion driven by productivity, cost actions, price, and favorable mix. Tariff refunds provided a modest benefit. Margins expanded meaningfully excluding that impact. Overall, the segment continues to demonstrate strength and remains differentiated in product, channel, and overall opportunity compared to the more traditional residential HVAC providers. We remain focused on driving growth through innovation and channel penetration to effectively position when demand inflects.

Speaker 3

Now please turn to slide 15 and our balance sheet. The strength and flexibility of our balance sheet is supported by continued strong cash generation. As of June 30th, net debt was approximately $2.8 billion, with net leverage at 2.8 times trailing. The $2.6 billion net proceeds from the April IPO and concurrent private placement were used to retire debt, including interest. This improved flexibility allows us to continue investing for the long term in organic growth, delevering the balance sheet, and strategic acquisitions. Our second quarter leverage improved approximately 0.2 turns to 2.8 times trailing net leverage compared to an IPO pro forma net leverage of roughly three at the end of March.

Speaker 3

We believe we have a clear line of sight to organically achieve our longer-term targeted range of less than 2.5x net debt to EBITDA by year-end 2026, driven by continued strong cash generation. In addition, as of June 30th, we maintained solid liquidity of roughly $1.6 billion, including $262 million of cash on hand and about a $1.3 billion undrawn revolver, which increased from $340 million in the second quarter, providing ample flexibility to support operations and strategic initiatives. The business continues to generate strong free cash flow and reported free cash flow of approximately 123% in the first half, driven by our asset-light model and disciplined working capital management. Reported LTM free cash flow margins were about 11.5%. Organically, we continue to expect free cash flow conversion of net income above 100%.

Speaker 3

Now, please turn to slide 16 to discuss our capital allocation priorities. Our capital allocation framework remains consistent and disciplined, focused on deploying cash to maximize shareholder returns centered on three key priorities. First, we continue to invest in high-return organic growth opportunities, particularly in mission-critical defensible technology platforms and durable end markets where we see the strongest demand and margin expansion potential. Second, we're committed to maintaining a strong and flexible balance sheet with a clear path to organic delevering. Third, we intend to pursue strategic and disciplined M&A to accelerate growth and strengthen the portfolio, focused on assets that expand our capabilities, enhance our technology platforms, and deliver clear strategic and long-term financial returns. As noted, we are willing to be flexible for the right opportunities while remaining committed to rapid integration and post-acquisition delevering.

Speaker 3

Our integration of AprilAire and the leverage reduction achieved since the closing of that transaction in May of last year demonstrate our ability to do just that while maintaining financial discipline. Overall, we believe this balanced approach positions us well to drive long-term value creation while maintaining financial flexibility. Now, please turn to slide 17. The strength of our first half, particularly within our commercial segment, together with visibility provided by our record backlog, supports an increase to our full year net sales guidance. We now expect net sales to be about $75 million higher than prior guidance at the midpoint, or a range of $3.825 billion-$3.925 billion. This represents high single-digit plus growth on a pro forma basis. This 2026 growth outlook is above the longer-term organic mid-single-digit growth ambition we discussed at the last earnings.

Speaker 3

Looking ahead to the third quarter, we expect net sales growth of high single-digit plus with a jumping off point of $898 million in the third quarter of 2025. On adjusted EBITDA, we anticipate $1.02 billion-$1.065 billion for the full year, or high single-digit to low double-digit growth on a pro forma basis. We continue to expect adjusted EBITDA growth that outpaces revenue growth, with resulting full year adjusted EBITDA margins of about 27%. The implied second half margin rate represents a modest step-up from the first half, driven by operating leverage, productivity initiatives, and further price realization. Beyond the headline guidance, our assumptions remain largely unchanged.

Speaker 3

We continue to expect strong free cash flow conversion, CapEx investments of less than 2% of sales, cash interest of approximately $240 million reflecting the IPO and our latest debt repricing, an effective tax rate of 29% and a diluted share count of approximately 507 million at year-end. We also included approximately $38 million in central expenses, a modest improvement from our prior estimate, which includes the required activities that come with being a public company. As discussed on the last call, we expect to offset those impacts over time through a combination of additional pricing and operational activities. At the same time, we continue to invest in innovation, commercial execution, and productivity initiatives that support our longer-term growth agenda.

Speaker 3

Stepping back, our outlook assumes a generally stable demand environment and continued strength across commercial end markets, including data centers, logistics, and healthcare. In residential, we continue to expect growth driven by white space opportunity for healthier systems. While geopolitical and macroeconomic conditions remain fluid, our teams are really focused on what they can control, serving customers, driving productivity, and executing our strategic priorities. We believe that approach positions us well to navigate an evolving macroeconomic environment and deliver on our commitments. With that, I'd love to turn the call back to Jill.

Speaker 2

Thank you, JJ. Our second quarter performance demonstrates the strength of Madison Air. Across our brands, we're participating in the right markets. Our innovation is delivering meaningful customer outcomes, and our diverse exposure continues to drive both resilience and momentum across the business. Regardless of the external environment, our priorities have not changed. Backed by strong demand, record backlog visibility, and a clear roadmap for growth, we remain focused on disciplined execution and focusing on the factors within our control. The work ahead is clear. Deliver on our backlog and our longer cycle commercial businesses. Execute our proven playbook to protect and expand margins over time as our growth investment scale. Accelerate healthy air penetration in residential and deploy capital where it generates the highest return.

Speaker 2

Our mission is to make the world safer, healthier, and more productive through the power of better air. Return on Air is how we measure the value we create for our customers and the impact we deliver every day. Thanks again for joining us. Danielle, we'd now love to open the call for questions.

Operator

Thank you. We will now begin the question and answer session. To allow as many participants as possible the opportunity to ask questions, please limit yourself to one question. To ask a question, you may press star one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star two. At this time, we will pause momentarily to assemble the roster. The first question comes from Andrew Obin from Bank of America. Please go ahead.

Speaker 4

Good morning. Thank you very much. I guess my first question is, I know everybody is going to ask about data centers, why don't I ask about the fact that ex data centers, you are up 50%? Can you just unpack for us what verticals drove this and how sustainable it is? Thank you.

Speaker 2

Yeah. Good morning, Andrew, and thank you for the question. Yeah, to your point, outside of data centers in the second quarter, the commercial segment had really great balanced growth. We saw broad-based growth across a variety of our markets. That included advanced manufacturing, and this is things like clean room manufacturing and clean energy end markets, healthcare, and other institutional segments that were really supported by demand for our air movement and customer handling platforms. I think we talked about that backlog, $2.9 billion. In commercial, it was actually up about 142%, more than half of which will convert in 2027 and beyond. Orders, because of that balanced demand, up 70% for the segment, 50% excluding data centers.

Speaker 2

Our new business pipeline, as we sit here today, is bigger than when we exited the year, bigger than when we exited the first quarter, larger than year-over-year. I think showing the benefit of how intentionally positioned and well-diversified the portfolio is. We have a diversified portfolio, very focused teams that create a more resilient growth profile. We see it, to answer your question, as sustainable. Our decentralized model has also been a very meaningful advantage to this kind of balanced growth. We have dedicated teams who drive very deep customer intimacy, are innovating for that diverse set of 15 end markets, drive sharp execution, and that helps us to stay very focused across the breadth of our commercial core.

Speaker 2

Last but not least, we think that that kind of growth, if we have anything to say about it, is sustainable as a function of the fact that over half of our portfolio, 60%, is replacement, upgrade, and aftermarket demand. We ought to be able to perform by virtue of our diversification, supported by a decentralized model such that we have teams focused across the portfolio and that very attractive 60% of demand from replacement, upgrade, and aftermarket. We feel good about the future to the extent we're trying to control what we can control.

Operator

The next question comes from Tim Wise from Baird. Please go ahead.

Speaker 2

Morning, Tim.

Speaker 5

Hey, everybody. Good morning. My question is if we kind of just maybe step back on the capital allocation side. I mean, you're, I'd say, de-levering a little faster than I think we expected and maybe investors expected. Is there an opportunity here to maybe think about incremental capital deployment in terms of acquisitions for the next 6-12 months? I guess, how's the pipeline?

Speaker 2

Great. Thank you for the question, Tim. Great to have you with us. If we go backwards in time here, whether it's over the last few years or even in the first quarter, we talked about we really think about Madison Air as an organic growth company with M&A as a lever. Clearly, as J.J. outlined and I mentioned in the prepared remarks as well, our capital allocation really is all about continuing to organically de-lever the balance sheet, investing in our core organic growth opportunities, and continuing to do strategic disciplined M&A. We are very delighted with our team's progress on converting great growth and profit to cash, and using that coupled with the IPO proceeds to continue to get our balance sheet in the spot where M&A can continue to serve as an accelerator for our strategy. What do we look at?

Speaker 2

First and foremost, we look at acquisitions that can strengthen our technology platforms. How do we beef up our ability to deliver tangible Return on Air? We love great technology. Second of all, we look for businesses that strengthen our channel presence, things like a direct channel, a direct path to the customer, for example. Lastly, acquisitions that really expand our capabilities in attractive end markets. Increasingly, we love M&A deals that increase our exposure to services and aftermarket potential. That's the sort of the sweet spot that we look for. We have just completed our annual strategy cycle with the board. We are excited about the funnel, both of organic growth prospects, but also our M&A funnel is very active. As we talked about in the past, we have a very special capability here.

Speaker 2

We have a long track record of having done M&A successfully as an acquirer of choice. 80% of those acquisitions have been sourced on a proprietary basis, i.e., they never went to auction. J.J. mentioned AprilAire, right? Which really shows the power. A business we acquired 13 months ago that is truly firing on all cylinders, and we have continued to march along the de-leverage path as we committed to you all. Given where we sit at 2.8x, and the healthy path we remain on through a combination of EBITDA and cash flow generation, we feel good about our financial and strategic flexibility, and M&A absolutely remains center plate as a capital allocation priority.

Operator

The next question comes from Jeff Sprague from Vertical Research. Please go ahead.

Speaker 3

Morning, Jeff.

Speaker 6

Hi. Good morning, everyone. It's Jeff Sprague here. Hey, good to connect. I was wondering if you could unpack for us a bit just the margin pressure in commercial between those kind of three items, mix, production ramp, and tariffs cost. I assume they're listed in order of prominence, but maybe you could shed a little bit of light on that and, in particular, where we're at on the margin ramp on the CDU business.

Speaker 3

Yep, absolutely. I think the second quarter, as expected, we ended up continuing to make the sequential progress in the second quarter with the overall EBITDA rate of 26.8%. The second quarter margins, as we highlighted, were definitely shy of the prior year through a combination of the inflation and tariff timing, where we expect are the actions that we took starting in the beginning of the quarter with the new 232 tariffs, those actions to further take effect in the second half, as well as you highlighted, the rapid growth in the data center business. I think, together, these dynamics were partially offset by the fixed cost leverage. We are seeing the fixed cost leverage that we expected. The headwinds I highlighted are things that improve as you get into the back half of the year.

Speaker 3

I think stepping back on the first half, margins at 26.1% were approximately flat. A lot of the same drivers, including inflation and tariff timing in the data center mix. We feel confident about the ability to get to the total year guide on roughly 27% margins. I think on commercial, as you highlighted, I would kind of bucket it into mix the incremental tariffs and then the ramp costs, in that order. The mix-driven piece of this as we really grow that data center business, I think Jill highlighted that as a strong business, early innings as it relates to the margin side of things. The headwind from the inflation and tariffs as well as the ramp costs. I think the ramp costs improve as you get into the second half of the year.

Speaker 3

just remember on the tariff side of things, that's more of the impact of our Canada sites shipping into the U.S., those recovery actions take hold as we get into the back half. I feel really good about the first half margins and the modest step up as we get into the back half of the year.

Speaker 2

Maybe just to add to that, Jeff, this is Jill. As J.J. mentioned, sequentially up 155 basis points, basically down slightly versus last year, which is where we predicted we would be when we last spoke. I would double-click. Data center mix was certainly a contributor, but it wasn't the only factor. As J.J. noted, we had tariffs and inflation timing, then we're investing in this continued growth ramp. We continue to view the data center business as a highly attractive business with very strong fundamentals. It is also one of 15 verticals in our portfolio, it's just really earlier in its scaling journey. I want you guys to know that, we are going to use, as I mentioned in my remarks, the same set of levers we always have that have driven us to this point. Our margin playbook, if you will.

Speaker 2

Value selling, focused on Return on Air, investments in innovation, which are a great margin lever for us because we're bringing more value to customers. Profitable top-line growth. We know how to leverage our fixed cost as we scale and upcycle, continuing to expand services and aftermarket and continuing to apply our 80/20 model. While this data center business created, and a few other factors that we're all over in terms of pricing, tariffs, inflation, and the like, we are very clear-eyed as a team. We know what we have to do. Each business leader, in the spirit of 80/20, knows there are three things, right, to deliver the back half, and we've seen it work before, and we're laser-focused and very clear-eyed on the work to do in the second half.

Operator

The next question comes from Nigel Coe from Wolfe Research. Please go ahead.

Speaker 6

Oh, thanks. Good morning.

Speaker 2

Hello, Nigel.

Speaker 7

Hello. Hello, Jill. How are you? Hi. Hey, JJ.

Speaker 3

Morning.

Speaker 7

Morning. Yeah. just on the backlog, obviously, really, really impressive. it seems like some really good traction with Nortek Air Solutions. I'd be curious, just a couple of sub-points on the backlog. Number 1, what's driving the broad-based strength in air handling? I know it's been a theme. I'm just curious, is this new builds? Is it upgrades? Just as curious on what's driving the strength there. then just in terms of that backlog, how does the price and margin look within that backlog?

Speaker 2

Thank you for the question. We are delighted with our orders and backlog performance in the second quarter. Again, very strong, $2.9 billion, up 133% year-over-year and 14% sequentially. This is really a function of the work we continue to do to build pipelines, bring more innovation, and keep our very focused teams devoted to end markets, calling on customers and controlling our own destiny. About nine months TTM average sales in the backlog. Effectively, half of it will deliver 2027 and beyond. I would say on new build versus existing construction, it is balanced. I would say I do not know if it is exactly 50/50, but we feel it is largely in line with the overall portfolio, which is 60% replacement, upgrade, and services aftermarket and 40% new construction, which is more of that data center piece.

Speaker 2

Do you want to comment on sort of price margin and backlog?

Speaker 3

Absolutely. As you look at the backlog, I think it supports the second half step up that we have talked about, the combination of the bookings, also the productivity efforts that are in flight, as well as some of that incremental price coming through. I would say the margins and backlog we feel good about. As well as supporting the second half step up on EBITDA rate for the total company that we outlined in the implied guide midpoint.

Operator

The next question comes from Joe Ritchie from Goldman Sachs. Please go ahead.

Speaker 2

Morning, Joe.

Speaker 8

Hi, good morning. Good morning, Jill Wyant. Good morning, JJ Foley.

Speaker 3

Morning.

Speaker 8

Let's just stick with data center for a second. Can you maybe just break down, give us a little bit of the composition of those wins, maybe between liquid, hybrid, traditional air cooling? Then also you had an OEM yesterday talk about capacity constraints that they're starting to see. Just talk to us about your supply chain, and your ability to deliver on the backlog that you've already booked.

Speaker 2

Yep. In terms of the composition, we feel very good about the balanced mix between hyperscalers and co-locators. As we've said before, our strategy in the data center space, which we've built entirely organically, is to really pursue what we believe to be the most resilient demand. Folks who are building in response to this sort of global shortage of compute. So we feel very good about our balance between hyperscalers and co-los, and particularly on the hyperscaler front, they had strong earnings in the first quarter. Microsoft announced very strong results this morning. We feel good about our exposure there. We love the ongoing mix, whether it be on a unit and dollars basis, between air and liquid. Liquid is what you would expect. It's growing very rapidly.

Speaker 2

Obviously, the legacy of this is air, but we have a very balanced mix between air and liquid cooling. I would also say this, I think this idea that air cooling is going to disappear is overstated. There's just a lot of thermal energy in a data center that needs to be rejected, so we see a future for both air and liquid cooling, but we like the mix. Our mix of air and liquid cooling solutions is moving where the market is moving, so we feel good about that. We have a wide range of CDU products with 300 kilowatt to 5 megawatt capacity skidded, non-skidded options, and we think our CDUs are inherently very serviceable, which is one of our unique differentiators there. They are underpinned, as we've talked about, by our cFORCE approach in the data center business.

Speaker 2

This idea that we are not shipping you a catalog, order a CDU at a given capacity, but rather it is part of a total thermal management solution for the leading lights in the industry. That's a little bit of the balance. We feel good about the balance in the data center business. As I mentioned, thinking back to just a few years ago, we had one customer, one product. That team has come a long way. In terms of our supply chain, as we said last time, look, the data center demand is straining aspects of the global supply chain, and I think we see that particularly in electrical components, which we watch very closely. We have worked over the course of years to deepen and strengthen our supply chain across the company. Obviously that work has disproportionately benefited us at this moment in time.

Speaker 2

We work very proactively and collaboratively, not only with customers. When we talk about the importance of half that backlog is 2027 and beyond, that gives us very good forward-looking visibility into what we have to have lined up to deliver. We work with our supply base and our customers, and I think a great proof point, again, of this cFORCE embedded-at-the-design-table advantage is one of our hyperscale customers actually came to us recently and said, "We want to use your lab and your very talented lab team to help us look at additional and qualify additional sources of supply." That's trust, and that's how we benefit from the forward-thinking nature of serving the most demanding leading players in the industry. I look, along with our team, at the status of our supply chain every week.

Speaker 2

We deep dive it every month, and we look at production lines that are on the floor today, and production lines that are going to have to be on the line in three or four quarters. While we can't control all the variables, we certainly start and end each day controlling what we can control. Then maybe a last comment here, both in data centers and across the company, we have the capacity we need to deliver. I would not say that we see space on the line floor as a short or medium-term constraint.

Operator

The next question comes from Deane Dray from RBC Capital Markets. Please go ahead.

Speaker 9

Thank you. Good morning, everyone.

Speaker 2

Hello, Deane. Congratulations on your pending next chapter. We're excited for you.

Speaker 9

I really appreciate that. Thank you. I just wanted to follow up on the last question from Joe on specifically capacity expansion. I think you just said you have enough capacity for the near term, but just kind of given the growth rates that we're seeing, where would you need to start to add capacity? What product lines and what the overall kind of CapEx plan in order to support this growth?

Speaker 2

Yeah, thank you, Deane. Congratulations again. Excited for you and appreciate all you have done with your team to onboard to our company and learn our story. It's been wonderful to have, albeit short in my case, opportunity to work with you personally. Look, broadly across the company, Deane, I would say we have the footprint we need. We have the footprint we need, and we have accommodated that within our asset-light model. This is where our 80/20 approach, where we focus on what are the best customers and the best products that we want to have the ability to deliver short, medium, and long term. We have done, and will continue to do all of that within our asset-light model, low single-digit CapEx as a percentage of sales. We have brownfielded to date our data center capacity.

Speaker 2

We've added a bit of capacity there. We've also added capacity in our parts capability for our 15 commercial end markets that are buying more proprietary services and aftermarket. We are building out, innovating and adding additional air purification capacity in our AprilAire business. All of that, very forward-thinking, if you will, in terms of matching firm demand with the right level of capacity we need. We like where we're sitting. We've accommodated, and we'll continue to accommodate it within our asset-light model. We feel like we are ready, as ready as we can be for the next several years as we sit here today across the enterprise.

Operator

The next question comes from Scott Davis from Melius Research. Please go ahead.

Speaker 10

Good morning.

Speaker 2

Morning, Scott.

Speaker 10

How's it going?

Speaker 2

Good morning.

Speaker 10

Morning to you guys, and congrats on a great first four months here.

Speaker 2

Thank you.

Speaker 10

I know this is just math, the orders, you've commented on orders being down in 4Q, and obviously the comp is pretty meaty there. Do you expect backlog to also be down, or is that still even a declining order environment, potentially stay flat or even potentially grow? How does that math work?

Speaker 3

I think it's a good call-out. As you said, second quarter orders were up 45%. That's up 37% for the first half with book-to-bill well over one. Demand, as Jill has highlighted, and the pipeline whatnot remain very strong. I think we expect while orders will be down, book-to-bill will remain quite healthy in the second half, and as such, the full year. I guess the rest of it is just sort of math as you think about where the backlog ends. I would just, as you highlighted, we did $1.6 billion of orders in the fourth quarter of 2025, which is just a big number, even after you see us delivering $1.3 billion here in the second quarter this year.

Speaker 10

Just to go back, I know there's a couple of questions on the cost issue, and scaling has been brought up. I think almost every company we cover has mentioned scaling in some way, shape, or form this quarter as a headwind. Does scaling become sequentially less of a headwind as we get through the rest of the year, or it remains pretty firm?

Speaker 3

No, I think it becomes less of a headwind as we move in. Right. I think as we look at the, call it 26.8%, I think as you look at what we see in the third and fourth quarter, the rate's probably between 27% and 28%, kind of at the midpoint of the guide. That's a combination of feeling like we gained some ground on price cost, as well as some of those headwinds offsetting. Really, frankly, the team's getting a little bit more time on the clock to be able to execute a number of the key productivity initiatives and the material cost reduction programs that we have on some of the critical product lines.

Operator

The next question comes from Andy Kaplowitz from Citigroup. Please go ahead.

Speaker 2

Hey, Andy.

Speaker 2

Good morning, everyone.

Speaker 3

Hey, Andy.

Speaker 11

How you doing? Good morning. Maybe you can give us a little more color regarding what's going on in residential. You mentioned modest organic volume declines in your professional distribution channels. Could we double-click on what you're seeing there? It also seems like AprilAire penetration's continuing or maybe even accelerating. Maybe if you could talk about that a little more.

Speaker 2

Yeah, absolutely. As we noted, our residential segment sales grew about 2%, Andy, despite a soft housing backdrop. That was really driven by continued very strong growth in Healthy Air Systems, good progress on contractor conversion, price execution, and frankly, continuing to open white space. Yes, the AprilAire business continues to perform very strongly. Great brand, innovative technology, and just bigger picture in our residential segment. We are playing a fundamentally different game, if you will, than traditional residential. We don't heat and cool the air. We make it better. We improve the quality of air. At the end of the day, 92% of U.S. homes have nothing.

Speaker 2

Boy, I don't know about you, but there was a day a few weeks ago when our air quality here in the Midwest was extremely hazardous due to wildfires in Canada and in northern Minnesota to a lesser degree. This business is prime for white space. They've got great innovation, a great channel presence, and our residential exposure is really predominantly exposed and tied to replacement and upgrade demand drivers, all of which is underpinned by two very strong brands, AprilAire and Broan-NuTone. We think that we deliver more consistent, durable performance as a result. We pull demand through the channel. We don't have this stocking and de-stocking and restocking dynamic that we work through. We didn't have that in 2025, and we don't foresee that dynamic in 2026, which I think allows us to just be a little smoother and more durable.

Speaker 2

It's all part of the reason why since 2007 that AprilAire business has compounded sales growth at 8% top line. Just a great business, a strong brand.

Speaker 2

Lots of white space to penetrate, lots of contractors left to convert, and a great team very focused on doing that.

Operator

The next question comes from Zachary Schechtman from Wells Fargo. Please go ahead.

Speaker 2

Morning, Zach.

Speaker 2

Hey, guys. Good morning. Thanks for taking my question.

Speaker 2

Of course.

Speaker 12

I do want to say I'm moving into a house tomorrow with an AprilAire system. I'm excited to feel the benefits of that, especially in the winter. These New England winters can be super dry.

Speaker 2

Yes, we have a new 720 dehumidifier, Zach, you'll be glad to know. Humidifier, excuse me. It can humidify up to 6,200 sq ft, and it can use up to 15,000 less gallons of water due to a proprietary humidification platform, patented. Which is about equivalent to what the average U.S. home consumes in terms of internal water usage. We are delighted that you will have a safe and comfortable winter whenever it should come to your part of the world.

Speaker 12

You'll have to report back on that.

Speaker 2

Yeah, let us know.

Speaker 12

Reporter.

Speaker 2

if your unit's old.

Speaker 12

Amazing. I'll have to look into that.

Speaker 2

we have a solution for that.

Speaker 12

Awesome. Yeah, I just wanted to, obviously, 2Q resi margin, I think, was a bit better than most expected, despite the volume pressure. Just kind of wanted to unpack that, how much of that was AprilAire synergies. Maybe you could give some color on how much was realized in 2025, the first half of this year and moving forward. Then I'm assuming the tariff refunds received were also a tailwind to resi, given resi saw the bigger headwind last year. Just some color on that, sizing, what to expect in the second half of this year, and maybe the split between segments.

Speaker 3

Yep, very good. I think, as you highlighted, resi up 425 basis points in the quarter. About a third of that was mix, meaning more AprilAire. The remaining two-thirds was stronger price and productivity, and that does include net tariffs. As you kind of think about the overall path of travel on margins, sequentially, I would expect the residential margin to be down a bit from the second quarter. We had some really favorable elements around pricing and productivity, as well as we did have a little bit of benefit from the tariff refunds. I think for us, as we kind of think about this, we're ultimately focused on delivering more value for customers against this sort of inflation and geopolitical backdrop, and we kind of think of tariffs, inclusive of refunds, as one of the many dynamics with it. We haven't necessarily quantified that.

Speaker 3

It was part of our overall price cost management, not a material impact in the quarter, but I would say very strong margin in residential, even excluding refunds.

Speaker 3

Yeah.

Speaker 3

As you think about for the total company, as we've talked about, third quarter, fourth quarter, EBITDA margin rate in that 27%-28% range. Probably around flattish in the third quarter, and then seeing more expansion in the fourth. Thanks, Zach.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Jill Wyant for closing remarks.

Speaker 2

Thank you, Danielle. Thank you all, to the research analyst community, to our investors who are on the call, other stakeholders, our team members. Really appreciate all the questions, particularly from the sell side. Thank you. We also just want to extend our sincere thanks to our 9,100 colleagues who are out there in an interesting world making it happen, making the world safer, healthier, and more productive through the power of better air every single day, controlling what they can control. Our team is really truly one of our biggest sources of competitive differentiation. We are excited, as I hope you've heard, about the company that we are building, the momentum that we have ignited and work every day to sustain. We look forward to staying in touch. Please be safe.

Speaker 2

Enjoy the rest of this beautiful summer, we look forward to speaking again soon. Thank you, everyone.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.

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