Conference Transcript - MAIR 2026-06-04

Mike Francis, Analyst — William Blair

Started here. Thank you all for being here. My name is Mike Francis. I'm a research associate here at William Blair, covering building products and distributors with Ryan Merkel. I need to let you all know that there's a complete list of disclosures on our website at williamblair.com. Here today is JJ Foley, CFO at Madison Air. Madison Air is a global air quality company dedicated to making the world safer, healthier, and more productive through highly engineered air solutions. Serving industries ranging from data centers and healthcare to advanced manufacturing and residential. They transform air from a commodity into a strategic asset that drives measurable business outcomes. I'm going to pass it over to JJ.

JJ Foley, CFO

Perfect. Well, good morning, everybody. Thank you so much. and Michael thanks for the great introduction I feel like you already hit some of the highlights for Madison Air but maybe just for those that are in the room by a show of hands who's familiar with the Madison Air story versus kind of getting is new to the name new to the name all right good enough Danny you're right so forward-looking statements the materials from today's presentation will be listed on our company website I'm going to spend a little bit of time so I'll introduce myself and then I'll talk a little bit about the company highlights that we'll get into the first quarter and then we'll get into some q a so uh jj foley joined the company in 2021 uh when it was about a 300 million dollar business with a big dream to be able to go build out a pure play indoor air quality player in commercial and residential end markets uh prior to being here i was at general electric for about 12 years most recently in investor relations i'm prior to that in ge aerospace as well as parts of vernova and other parts of the company so delighted to be here with you today. From a company highlight standpoint, you know, Michael hit it. These are kind of the three things that we think differentiate Madison Air and make it a very compelling investment. The first is really that we differentiate in terms of how we go to market with this return on air mindset. And this is really what allows us, and we'll see this showing up in the financials, to be able to drive value-based pricing and be able to solve problems for customers so we talk about turning air into strategic assets we serve in end markets like data centers as well as clean rooms as well as residential homes where the cost of downtime impacts business results the second is leadership and growth markets and you'll see that in the commercial side we serve 15 different end markets data centers being one of those an important one but we offer a diverse and balanced look at different end markets and we take technology into those using that return on air mindset. And then the third is our unique value creation model. We have a highly decentralized operating model where unburdened management teams come into work every single day to be able to take care of customers and deliver value. And we'll talk a little bit about where that advantages us as we get into the Q&A. But less than half of 1% of our total company headcount sits at the center, just to kind of give you an idea. Madison Air, at a glance, it's a balanced business and resilient revenue. We're about three and a half billion dollars at performing net sales. We have about 26.5% adjusted EBITDA margins, and we generate a bunch of cash, about $442 million in 2025. On an LTM basis, that's about 12% free cash flow margins, one of my favorite measures to be able to see businesses that take revenue and take growth and turn that into cash flow that we can then deploy to be able to create more long-term value for shareholders like yourselves. We're diversified end market, as well as diversified by the two segments that we go to market in. 63% of our sales are into commercial end markets, about 37% of those into residential. In exiting 2025, about 12% of our sales were into the data center end market. Our revenues are resilient. We kind of talk about 50-40-10, 50% replacement and upgrade, 40% new build construction, a big portion of that driven by the data center market, since by nature of the way that that market's growing, a lot of that is new construction, and about 10% service in aftermarket, an opportunity for us on the come. And the last is we're largely domestic, about 95% of our revenue in North America, and we have about 8,800 employees, with 600 of those driving innovation through R&D. We are everywhere that clean air matters. And so you can see just to kind of familiarize yourself around the different end markets that we serve, starting with clean rooms, logistics, data centers where the cost of downtime is up to $9,000 per minute or delaying the commissioning of a data center is over a million and a half dollars. So very critical that we deliver on time, on spec, and make sure that that commissioning and startup happens. We serve hospitality, recreation, hospitals, and life sciences. And we'll talk a little bit about in the Q&A, hopefully, around differentiation. And I'll give you an example in a hospital around where we are versus traditional HVAC players. And then you can kind of continue to see playing in clean energy and advanced manufacturing. We think about structural benefits around reshoring, investment in advanced manufacturing, and we'll play a role there, as well as in residential and single and multifamily homes. we go to market through two complementary highly differentiated segments here you can see on the left hand side of the page commercial about 2.2 billion dollars in net sales and then we take these segments and through our technology platforms which is how we're organized internally deliver impact into the end markets that they serve so whether it's in air handling air liquid and hybrid cooling the humidity and control our dedicated outdoor air systems we could talk about the brands that we use to go to market there air movement and heat that's where big ass fans and resner play a big role as well as energy efficiency enablers that go into many of the different oems in terms of driving uh real return on air better energy efficiency more fresh air into these highly tightly managed buildings and then on residential we're really the only player that brings together all five pillars of the healthy air system purification ventilation humidification dehumidification wrapped in sensors and controls and we take that into the single and multi uh family residential i love this chart this is an always owned chart so if we owned all the companies that we own today all the way back to 2007 how would the company have performed and what you see is on the left hand side from 07 to 2020 we had about a five percent growth cagger it's about a point of price and four points of volume. From 2020 to 2025, we've really bent that curve as we've been building a growth company to an 8% growth CAGR. Some of that is admittedly between 2020 and 2024 is a little bit more price than volume, but in 2025, it was more the recipe we expect to see going forward. And that was 12% growth with three points of price and about nine points of volume. So we really believe that we've bent that curve. Zooming back, what does resilient revenue look like? To me, I kind of think about it as, you know, relative to US GDP, we've outgrown that 16 of the last 18 years. And I think that's enabled by this highly diversified end market mix, the replacement driven demand, and the multiple growth factors that we have that sets the company up well to deliver in this mid single digit plus organic growth path forward. One of the things that we're proud of are our margins, you know, they're robust and sustainable with room to expand 80-20 is very much at the center of all that we do. I would say what's a little bit different about our vintage of 80-20 is it's focused on growth. So you get the margin expansion, the complexity reduction, that simplification, but you're also going to see us focus on growth, figuring out who those whales are that we want to serve in the different end markets, and then focus on being able to surround them for growth. We have about 26.5% adjusted EBITDA margins, as I highlighted, about 39% gross margins. Over the course of the last three years, incrementals have been around 40%. Go forward, we'd expect them to be at or above EBITDA margins. And we started to show that here in the first quarter. And then I think about a balanced playbook around robust and sort of margin expansion. And I think it starts and ends with being able to sell on a return on air basis, which allows us to be able to get price. We've proven that historically. We'll prove that again here in 2026. The second is our ability to drive innovation. We can talk more about that to the extent that there's questions in the room. But Joe Wyatt, who's our CEO, really brings a growth mindset to all that we do. We think about return on error as we think about greenlighting innovation. And 80-20 says, you can do anything, but you can't do everything. So how do we focus that innovation? And we think about innovation as great fuel for the top line, but also an opportunity to be able to make sure you mix positively from a margin standpoint as you bring in new products. The third is we're pretty good at levering our fixed costs as we continue to drive growth through the top line of the business. And then I highlighted that 10% service and aftermarket opportunity, which is accretive from a margin standpoint. So as we grow that, as we have been faster than equipment revenues, it naturally gives you a little bit of margin lift in the portfolio. And the last is 80-20. You know, I think that as we acquire companies, as we focus once a year on sort of our growth strategies, 80-20 is something that's never done. It's not an initiative. It's very much a way of thinking. And it's kind of like, you know, weeding your garden at home. Those weeds always kind of crop back in. You got to go back in to make sure that that simplification sticks. And that allows us to sustain those margins. the innovation as i just highlighted on the last page fuels orders and backlog growth and will do great things for us for margin over time in the first quarter we saw 29 orders growth we exited with about two and a half billion dollars of backlog the best sort of forward-looking view of the company from a revenue outlook that we've had since i've been here and we had about 13 sales growth very nice contribution in terms of price as well as balance volume and i thought the example on the right hand side of this page is our big ass fans business love this business category creator great brand and here one of our customers said to us hey we're having a hard time being able to manage the heat load in the back of the trailer so one of the worst spots to work is because it gets to 110 degrees in these trailers in the summer and so when they bring in one that's been sitting out in the yard for three hours and they bring it to that dock one of the things that keeps them from being able to drive a truck turnover and rolls in the dock is they have to cool down the actual trailer and so on the right hand side here you see one of the new innovations that's come to market called the velocity trailer fan and this is an area that in my opinion was ripe to be disrupted but here's a great example of where the customers you know our our ears are the customers lips and that's what's really feeding the innovation but here's a great you know way where they're driving productivity and that's gaining commercial momentum as we enter that cooling season and you can think about this also as a great example of opening up new TAM. One of the things we're proud of is we've added more than $30 billion of TAM to the company over the course of the time that we've been here. And this is a great new area. You think about the number of doctors across the United States, great opportunity for us to be able to go take that. So I'm going to shift gears here just to give you a highlight on the first quarter. We'll talk a little bit about capital allocation to wrap things up, and then we'll hop into Q&A. First quarter, $924 million in sales, up 13%. We saw adjusted EBITDA up 16, so expanding margins a little bit there. Very healthy EBITDA margins at 25.3%. We saw balanced growth, 18% out of the commercial side of the business and 4% out of the residential business. You think about, we spent a lot of time educating investors on how we are different from traditional HVAC. And so if you look at the last 18 of 20 quarters, we've outpaced AHRI shipments, right, just to kind of give you an idea and give you some data. But 4% growth in a, you know, a soft single and multifamily housing backdrop. And this is a business, you know, if you went back through the prospectus, we talk about the Aprilaire business being able to grow at an 8% growth CAGR over a long time. And so they just continue to do that. And we do that through a penetration game. We talk a lot about April Air being a 40 million at-bats story. So there's every single year the clock turns and there's 10 million opportunities to be able to participate in attaching a healthy air system to the replacement of an HVAC system, whether that's air conditioning or heating in a single family home. But it's the 30 million at-bats that people often overlook, which is the number of touch points that a contractor has when they enter into your home. And they walk down the stairs and they say the basement smells a little musty. We train those contractors on the opportunity to be able to upsell and really solve problems for homeowners around health and home comfort and that asset preservation. so running that penetration play we feel you know we're very confident even against this backdrop that we have today that we'll be able to continue to grow on the residential side of things and then that 80 20 model really driving continued margin expansion and our cash really in line with expectations uh you know for those that may have been involved in our credit uh since 2021 you know we are a team that does what we say we're going to do um and you know we saw that again be de-levering in the range of a quarter turn per quarter on a pre-IPO basis. And we'll talk here in a minute about where we stand today.

Mike Francis, Analyst — William Blair

So I highlighted free cash flow margins.

JJ Foley, CFO

This is 12.4 under the pre-IPO capital structure. So you can imagine as we take out $2.6 billion of debt here in the quarter, and we recently repriced our term loan, we're approaching $175 million of annualized interest expense savings for the company so that'll contribute to that uh 12.4 you know ttm free cash flow margin i think it's a great way to just look at you know take out all the noise of the cash flow statement are we turning sales dollars into cash flow and you know being in a position to be able to reinvest that post the ipo and the delevering activity we're at just under three times uh trailing leverage here uh and in the quarter we upsized our revolver to $1.3 billion here. So that'll put us in a good spot to be able to have that flexible, strong balance sheet that we want going forward. We expect leverage to be in that less than two and a half times net debt to EBITDA on a trailing basis here in the next 12 months. From a capital allocation standpoint, I think the priorities are super clear. We're very focused on long-term, durable returns for investors. The first is fueling that top line in the the organic growth and we've got a number of exciting things uh that range from the residential healthier system that we talked about to data centers which everybody wants to talk about uh we are we have a mindset uh on the data center side of things of durable demand and flexible investment and we think that we'll be able to continue to fuel the growth that we see in the future here in this sort of low single digit uh percent of sales from a capex burden standpoint The second, you know, is really around delevering and maintaining that strong, flexible balance sheet. As I highlighted on the last page, we're well on our way to where we want to be. And the third is really a disciplined M&A framework. You know, if you've spent time on the company, we've done a number of acquisitions. I think it's 11 over the course of the last five years. So we know how to do this. The management team, you know, myself, as well as those that are in the back of the room, but also not here today, are the team that has digested these acquisitions. And so we have a track record of being able to not only delever, but generate a high return on invested capital. And we have a good framework around three and five year targets that we look to hurdle. So the last thing I wanted to highlight is just sort of an inner quarter update. You know, we talked about on the first quarter call that we were comfortable and sort of at least mid single digit growth on an organic basis. And we feel good about that. We highlighted margins should improve compared to where they exited the first quarter. but year over year EBITDA incrementals will be less than what they were in the first quarter due to a tougher comp in the second quarter but also some of the timing associated with our tariff mitigation actions and the third is more of a modeling item for folks but given the fact that we went public in mid-April our reported weighted average shares outstanding for the quarter will end up being a little lower than 209 million shares and relatedly the interest expense in quarter will be a bit higher than run rate uh due to the non-cash oid charge from prepaying the debt so i will uh pause there but i'll uh end where i started i we really appreciate your interest in the name um we're delighted we very much believe that we are just getting started uh and we look forward to you know bringing you along on the journey as we build a truly remarkable company and deliver for stakeholders so with that we'll jump into your questions awesome thanks jj um wanted to start out with the return on air value prop you've mentioned it a few times in the presentation there what does that mean and how does that help drive productivity and profitability across the business yeah I think you know so from a return on air standpoint I think it's different depending on the different end market that you ultimately serve so if you think about residential which is an area that people may say I imagine that's probably a harder area to be able to come up with a return on air based sale we actually focus on the contractors so you know we think about you know somebody's HVAC business and you know there's you know 72,000 HVAC contractors that are out there we have a low penetration with them today which is another reason why we believe in the penetration but we actually bring these folks into our facility at Aprilaire in Madison Wisconsin we train them up we think about how do we actually make your business better. So we're really thinking, particularly in a time where HVAC shipments are down, contractors are looking for something to sell. And so return on air for us is lower working capital for them, a more efficient ability to get in and out, 30% faster install time than the competition, and the ability to be able to sell the healthy air system and add on to that over time. I think another example of this would be in a hospital. So here, our Nortec Air solutions business you know you think about a health care campus and when you drive into the health care campus you've got the medical office building and then you've got the main hospital the medical office building while we have products that might play there that's really not where we're focused where we're focused is on where that true return on air value proposition rings true when you move over to the main hospital they're probably gonna have a central plant that's generating the hot and cold thermal temperature but then they're gonna look to be able to move air around in the operating rooms and the sterilization suites and the patient treatment rooms where hospital acquired infections really have an impact not only on patient outcomes but the risk that that takes for the hospital here an area where our assets will last 2x the time downtime is really important to a hospital so you think about service ability. So in those cases, we are going in and selling to a customer on the basis of here's the return on air. Here's how we're going to turn air into a strategic asset that'll actually improve your bottom line. So I think for us, it's actually one of our board members said, huh, so you use this internally and externally. We do. So when we have an innovation summit where we bring the different businesses together, we actually talk about what is that return on air value proposition going to be before we green light the investment and innovation so we're starting with that end in mind and then we're working with the sales and the marketing teams to make sure that they've got that collateral but also that training to have a discussion with the business person that's deciding where are they going to put their dollars in terms of the investment so I think return on air is a scalable concept across the different end markets and hopefully those two examples you know bring that to life a little bit more I think they do.

Mike Francis, Analyst — William Blair

And I'll turn to the buzzword of the day, data centers. I'd like to hear what sort of products you offer, customers you're generally working with, and then what differentiates you going to market in that area.

JJ Foley, CFO

So data centers, and nobody's probably spent any time on that in this room. No, not at all. I think for us we've got the full surround so as you think about air liquid and hybrid cooling we have everything from the cracks and the craws and the custom air handling on the air side as well as cdus and cold plates and rear door heat exchangers on liquid we also have a hybrid technology funny enough the data center business that was born out of a relationship of building a custom product for one of the hyperscalers that was probably back in 1819 actually is very power and water efficient, which lends itself quite well as chips perform better at higher latent temperatures, because you can actually change the operating mode of the asset. But so we've got the full air, liquid, and hybrid cooling solutions. And then we go to market with what we call C-Force, which is, I think, a big part of our moat, because we are, given the fact that we are working on custom items, and, you know, these are, we're serving the likes of the top hyperscalers and we're on the inside looking out not the outside looking in as well as the top 10 to 12 co-locators and we sit down with their design team and what they're really wanting out of us is that thermal cooling expertise to say okay here's what we want from an output in terms of max it how do we get there and so we will embed a group of engineers to build a custom solution for these hyperscalers and then we become part of the reference design and that reference design is going to be used for two, three years. And, you know, we've already seen this turnover once or twice with a number of the bigger hyperscalers where they say, okay, in two years, we're thinking about going to this next reference design. Help us start thinking about that. And then we get specced into that design. So I would say to your answer, your question, we've got the full surround air liquid hybrid from a customer standpoint. You know, we are by nature of the way that the industry has come together there's a few really important players and uh we are working with them now and and thinking about what that looks like in the future and then um you talked about april air you talked about biggest fans um i know those businesses are um and relatively under penetrated in their markets can you talk a little about that white space then maybe if there's any other businesses that that have a similar opportunity yeah you know it's it's uh it's actually a mindset i think it's been a learning for me over the course of the last five years even how you think about sizing your tam right there's a there's a when you think about the number of high volume low speed fans that are sold or the hvls fan which is kind of the category creation of big ass fans that's one way to size a tam but when you think about it in terms of unfanned space you know we're kind of low single mid single digit penetration so i think for us you know 80-20 has allowed us to be able to focus and say okay what if fans were in every single manufacturing facility what if fans were in every logistics facility and you say well you know what's going to be the compelling event well at the end of the day you know our biggest competition is really doing nothing in big ass fans it's the you know hey we've got it we're just working in an unworkable hot sweaty environment you know in an area like chicago in the middle of summer where it doesn't necessarily make sense for them to spend the full amount on installing a full hvac system but an investment for a high volume low speed fan not only does that give you that cooling effect in the summer it also makes the uh heating more efficient in the winter and so you know when we get in front of customers we spend a lot of time and we it's funny these uh situations start off small so you may be selling to one location and then as soon as that one location hears about it, we will go and say, okay, where else can we help you solve this problem? And they say, well, we've got 32 other locations. And so we had a great example of a customer that, you know, came in and said, okay, let's go fix this one site. And now we're probably 27 of the 32 completed with a lot of room to run. But I just give you that example for big S fans. I think the velocity trailer cooling is another great example of unfanned, you know, unpenetrated space where the solution that's there just is not helping the customer improve their bottom line is not really focused on the energy efficiency etc uh so that's probably my biggest fans on april air i i hit on the story about the 40 million at bats but i think for us you know we are we are in on average there's one of the healthier system devices installed and that's only in eight percent of homes so we got a lot of room to run so whether you look at it by uh the number of contractors that carry april air the number of metros that were present in there's one large state where we were going through the strategy review recently and we've got low single digit sales people in there so there's just a lot of room to run and if you frame the game as this white space opportunity and you approach it with a return on airbase sale you know i think we've got a lot of uh room to run you can bring that mindset to you know a number of different end markets and then can you talk a little about the 80 20 you do you mentioned it in that answer and you talked about it a few times how's that helped enhance growth and margins for the business and how do you think about that going forward so I'm an 80 20 convert admittedly I think you know for us we wanted to be able to identify a business system that was going to be able to scale with us as we grew the company and we found 8020 to align the most with our cultural values you know trust a bias for action and entrepreneurial and that entrepreneurial spirit we actually think 8020 is a shortcut to being able to get where you want to go faster because if you only focus on the 20% of things that drive 80% of the outcome you're always going to be in a better spot and so you know I think about the you know Nortec air solutions business where it was kind to run as one blob when we first uh bought the business and now we've broken that out into the air handling and the direct expansion in the clean room and clean room breaks out into life sciences uh into semi-con and there we've got now we've got instead of you know a centralized commercial team we have dedicated teams coming to work every single day thinking about how they serve those customers in the net market so it gives you focus but it also allows us to say you know is the complexity that you've got built into the product serving the customer and so you know we've got great examples where we took a business that was maybe growing four four or five percent a year to god bless you a 15 growth cager and we added 16 points to the margin so i think you can get growth and simplification and i think that's what we look to do every single time we deploy 80 20.

Mike Francis, Analyst — William Blair

And then talk a little about service and aftermarket, something you're focused on. There's definitely some margin opportunity there. Talk a little bit about your strategy with those.

JJ Foley, CFO

Yeah, I would say, you know, we've been building the company. I just think that we haven't really gotten to the service and aftermarket piece quite yet. You know, I think for us, it's ours for the taking. There's a number in true 80-20 fashion. We're really focused on three businesses that have the largest outsized service and aftermarket potential. that's the data center cooling business the Nortec air solutions business and big-ass fans I you know in data center cooling you know I spent a lot of time in aerospace and you know we think about the equivalent of what is that chop is it one what is that chop visit to over time and how do we kind of build that into the thinking and the services model and how do we make sure that we've got a high attach rate to units that we're building this is kind of a once-in-a lifetime opportunity to be able to build an install base and and then make sure that we are set up, that we are so embedded and indispensable to the customer, that we get that privilege to serve them for the long term. And whether that's through a retrofit or a relife or parts or controls upgrades, that's at the core of it. So I think we're very early days. You can't do everything at once. We started by just putting a leader and a P&L on services in every one of the businesses. And that's got that growing faster than equipment. So a lot to go. And as I mentioned earlier, that's probably five to 10 points higher than equipment margins. All right.

Mike Francis, Analyst — William Blair

We've got just one minute here. So to wrap up, what's one thing that you're most excited for going forward as a public company? It's a good question.

JJ Foley, CFO

You know, I think a lot of what got us here will get us there, which is high quality top line growth, an ability to expand margins, to generate cash flow. i'm excited about access to the capital markets over time you know we want the world to think about us as an organic growth company with m a as a lever uh and we've got a proven track record of doing both and so i you know i i would say i think it's early days um it's exciting to be at this point and at this step and we're excited to be able to see what this does for our employees but our team members but also uh to be able to deliver returns to a broader audience so all right thank Thank you so much. Appreciate it.

Mike Francis, Analyst — William Blair

Thank you all.