Good morning, ladies and gentlemen, and welcome to Modine's First Quarter Fiscal 2026 Earnings Conference Call. 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.

Hello, and good morning. Welcome to our conference call to discuss Modine's first quarter fiscal 2026 results. I'm joined by Neil Brinker, our President and Chief Executive Officer; and Mick Lucareli, 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 3 of that deck is our notice regarding forward-looking statements. This call will contain forward-looking statements as outlined in our earnings release as well as in our company's filings with the Securities and Exchange Commission. With that, I'll turn the call over to Neil.

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 '26. We've completed 3 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 context around the quarter's key events. 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 2 of our most recent acquisitions, AbsolutAire and L.B. White. Both of these acquisitions offer complementary solutions to our heating business, which falls within our HVAC Technologies Group. These additions broaden our product portfolio and unlock new markets and distribution channels. Modine has been in the heating business for nearly 100 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 80/20 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. These technologies integrate well with our previous acquisitions, namely Jetson modular chillers and Scott Springfield custom commercial air handlers. As we integrate this business, we will use 80/20 to improve their mix and raise margins, while exploring opportunities to utilize excess U.S.-based manufacturing capacity to support growth in the broader commercial IQ 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 AbsolutAire, L.B. White and now CDI. 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 million investment to expand manufacturing capacity across 4 U.S. sites, including a new facility in the Dallas, Texas area, further expansion in Grenada, Mississippi and repurposing 2 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. 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 billion of data center revenues in fiscal '28. 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. 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. 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 on an innovative alternative to meet their cooling requirements. To be clear, these innovations aren't threats. They are 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. We will continue to aggressively pursue the opportunities in front of us to ensure continued execution and growth. Please turn to Page 5. 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. As an example, we plan to transition 2 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. 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 80/20 strategy remains clear: to shift resources to high-growth, high-margin businesses. In summary, we had an extremely busy start to the fiscal year. 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 want to thank the Modine team for their hard work and dedication. With that, I'll turn the call over to Mick.

Thanks, Neil, and good morning, everyone. Please turn to Slide 6 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 million or 15% from the prior year, driven by higher sales in North America. HVAC Technologies sales increased $17 million or 34%, driven by strong heating stock plan orders and higher indoor air quality product sales. In addition, the recent acquisitions of AbsolutAire and L.B. White contributed $10 million of revenue in the quarter. Heat Transfer Solutions sales declined 1% or $1 million due to lower volumes to commercial and residential HVAC customers. This was mostly offset by higher sales to commercial refrigeration and coatings customers. 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 2026 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 '27. 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 cost to capture future benefit. With that said, we're excited about the additional HVAC technology scale and the overall positive momentum in Climate Solutions. Please turn to Slide 7. As anticipated, Performance Technologies revenues were impacted by challenging end market demand and 80/20-driven product line exits. Heavy-duty equipment sales were lower by 4% or $4 million, 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. On-Highway application sales decreased 8% or $15 million due to the previously mentioned lower end market demand and 80/20 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 and 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. Consistent with past practices, we will recover metals on a lagged basis, averaging about 6 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 million reduction in SG&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. Now let's review the total company results. Please turn to Slide 8. 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&A to support strong growth in Climate Solutions. In addition, SG&A includes expenses related to the acquisitions completed during the quarter, partially offset by lower SG&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 recoveries. 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 that others have faced, and we expect positive contributions from our 3 recent acquisitions throughout the rest of this fiscal year. Now moving to cash flow metrics. Please turn to Slide 9. The business has 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 million of cash payments, primarily related to restructuring and acquisition-related costs. Net debt of $403 million was $123 million higher than the prior fiscal year-end, directly related to the acquisitions of AbsolutAire and L.B. White, which were both completed in the quarter. We invested more than $140 million 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 1. I would also like to mention that we have extended the maturity and upside to our credit facilities, providing us with additional liquidity and flexibility to support future organic and inorganic growth. 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 2026 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 '26, 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%. 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. In the second half, will be up by more than 80%. 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 conflict having a negative impact on market recoveries. Performance Technologies are currently trending towards the higher or the more favorable end of this range. However, the higher revenue will likely be due to incremental material and tariff cost recoveries, along with favorable foreign exchange rates. With regards to our full-year earnings, we currently expect fiscal 2026 adjusted EBITDA to be in the range of $440 million to $470 million. This represents a $20 million increase from the previous range. 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 acquisition, 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 million of CapEx over the next 12 to 18 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 plan annuitization this year. I want to point out that we have not included cash proceeds from any potential divestitures this year. Looking ahead to next year, we anticipate that our free cash flow margin will once again improve and be in line with our fiscal '27 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 questions.

The first question is from Matt Summerville from D.A. Davidson.

A couple of questions. First, can you talk about the magnitude of unabsorbed costs you're going to experience in the Climate business? Is it like build out in the second? Can you comment on how we should be thinking about the fiscal '27 data center revenue target you set back in September of 2024 at $1 billion with your current guidance, almost knocking on that now for fiscal '26? And then I have a follow-up.

Yes, Matt, it's Mick. Thanks for the question. Regarding the data center fixed costs, the best way to view this is in two parts. The core capacity we have implemented is quickly being utilized. We will continue to convert at solid margins that are at or above the segment margin. Concerning the additional capital investments, we are committing $100 million to expand our facilities, which includes adding more production lines and a few new facilities that Neil discussed. These will start to ramp up in the second half of the year and are unlikely to capture significant volume at the beginning of the new fiscal year. As a result, we have revised our outlook this year upward by approximately $100 million in revenue, which may convert at a slightly lower rate than expected. I estimate that the additional $100 million will convert closer to a 15% net margin. While we anticipate good conversion on the gross profit line, we are also investing heavily in resources and engineering to support future growth. In summary, for the core business, we expect steady performance with good conversion, while the additional $100 million may yield slightly below the usual segment average, possibly around 15%, due to various unpredictable factors. Matt, can you remind me of your second question?

Yes. I mean, if you're up 45%, that roughly would equate to $925 million, $950 million in DC revenues something in that range, but your target for fiscal '27 is $1 billion. What's the reasonable sort of way to kind of think about, all right, if we're $2 billion-ish in '28. What's the good starting point for our thinking with respect to '27 based on the $1 billion number that you have sitting out there?

Yes. 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 $1 billion this fiscal year. And you're right, when we did our IR Day last September, we were targeting the growth rate that implied $1 billion next year. So we have a lot of moving pieces with 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 billion goal in '28, '26 is clearly running towards the $1 billion until we know more, I think, kind of doing a straight line between the 2 would be the most logical unless, Neil, you have anything else you want to add?

No, I think that's a good approach.

Very good. And then as my follow-up, you made a comment regarding profitability and how that 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 the queue.

Yes. There are several factors impacting the margins. For the total company, we still anticipate margin improvement this year, primarily driven by Performance Technologies, with total company margins expected to rise in the second half of the year, particularly in Q3 and Q4. Focusing on the segments, starting with CS, we expect significant volume growth in the second half from the data center ramp. Currently, we are incurring extra costs in preparation, which may result in flat margins for CS. There could be a slight decrease in CS margins, but not significantly, due to these upfront costs. In the second half, we anticipate an implied growth rate exceeding 80% in data centers, including over $40 million in inventory build this quarter. From a PT perspective, we expect a solid margin increase this year, even with flat or declining volume, which aligns with our transformation strategy. We believe we can achieve around 100 basis points of margin improvement, particularly in the latter half of the year. This is due to ongoing cost reductions and a slight increase in volume, primarily on a year-over-year basis, along with cost recovery from tariffs and metals, all contributing to margin enhancement.

The next question is from Brian Drab from William Blair.

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 billion to $1.5 billion in revenue capacity. And then you talked about this week, the $100 million in investment and the ability to get to $2 billion in revenue roughly. How much revenue are we thinking about adding specifically tied to the $100 million investment?

Yes, Brian, this is Neil. Good question. In order to reach our $2 billion goal by 2028, we would need to have approximately $2.5 billion in capacity in place. We aim to operate at around 80% capacity, so that highlights the difference between those two figures in relation to the $100 million investment.

I'm trying to understand what the return on investment is here. It seems like you're getting $1 billion in capacity for a $100 million investment. Can you clarify that? It looks like it relates to the return on invested capital, but this is what people are trying to figure out.

About $1 billion. Yes, this is Mick. The returns on our investments are significantly high, reaching over 40 percent on invested capital, which is the highest we have observed compared to other acquisitions or organic growth. Regarding capacity, it truly varies by product and region. When Neil mentions $2.5 billion in estimated capacity, it’s important to consider that the products are quite substantial. We aim to maintain the right mix and are always open to expanding our capacity. However, this varies between different regions, such as Europe and North America, or India and North America. Neil's figure represents a blended number reflecting optimal capacity. If we are successful in our growth efforts, we will likely always be addressing capacity challenges, which will continue to depend on the specific region and product type.

I’m trying to do the calculations based on limited information, but it appears that you’re potentially adding nearly $1 billion in revenue capacity with an estimated 15% EBITDA margin, which could result in over $100 million in annual EBITDA from a $100 million investment. This looks like it could yield better than 100% return on invested capital. I’ll need to explore this further later. Am I on the right track with these initial thoughts?

No. We definitely look at our return on capital, which is well above 40% and 50%, although there are many assumptions involved. Your question about payback and ROI is very significant. As Neil mentioned, we've established a strong reputation with our customers. We have the right products, brand, reputation, and service quality. The focus now is on our capacity and execution.

Okay. Regarding the 15% EBITDA margin you mentioned, Mick, do you believe that will be the long-term margin level for the additional capacity coming online, or is that more of a short-term expectation as you ramp up and achieve full utilization in the new capacity?

Yes, I'm glad you clarified that. Long-term, we will achieve significantly higher margins, and this process has distinct phases. The first phase focuses on capacity, the second phase is still about capacity, and the third phase is about optimizing or maximizing that capacity. Our data center businesses, when operating at normal capacity, meet or exceed our segment averages. I was commenting on the introduction of multiple lines and new facilities. We often get asked why our margins are increasing more rapidly, and Neil and I believe that we can create much more shareholder value through this 30% earnings growth. At some point, the focus will shift more towards capacity utilization and margins, but for now, we will continue to expand capacity based on the order book and the opportunities we foresee.

The next question is from Noah Kaye from Oppenheimer.

This ramp in the second half of the year is crucial for our understanding. It's important to connect the visibility of demand with the knowledge of how much new capacity is ready. To start with demand, could you provide insight into how certain we are about raising guidance this early in the year? We are looking nine months ahead—are those orders essentially finalized? Regarding capacity, what needs to occur in terms of the percentage of capacity coming online to ensure we meet or possibly exceed our targets?

Thank you for the question, Noah. We definitely have visibility extending beyond a year, sometimes up to three years. We work closely with our customers regarding the timing and the necessary capacity expansions to meet their needs and align with their data center timelines and construction projects. Our schedule is synchronized with theirs, which has enabled us to proceed with adding this capacity. Initially, we'll utilize existing infrastructure and areas where we already have workforce and supply chains established over the next three to four months. In the upcoming quarters, we will retool these facilities for data center operations. We also have some new facilities that need to be brought online, which will take longer as they lack the established practices of our current facilities. Those are expected to be operational by the end of our fiscal year.

Okay. I mean I think to kind of further unpack that, to go from 30% to 45%. I mean, clearly, there's been a theme, right, all this earning season of the customers wanting more speed and accelerating their build. So 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. I just wanted to understand kind of the sequencing here on the decisions.

Well, what's driving the expansion has certainly accelerated growth with our existing customers as well as onboarding new customers. We're gaining market share, and as we bring our technologies online and introduce new technologies, we're seeing traction. Existing customers are moving quicker than we anticipated, which is helping us win share and bring new customers on board at the same time.

Okay. 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?

Yes. We previously announced plans to sell our European headquarters, which we expect to complete later this year. This transaction is estimated to be between $10 million and $15 million, and we are currently addressing regulatory approvals. Additionally, Neil and I discussed our strategy after the Investor Relations Day regarding light-duty business, where we plan to downsize or exit operations valued between $250 million and $300 million. This process is ongoing with a dedicated team. For now, I'll hold off on further details until we have definitive updates to share with investors.

The next question is from Chris Moore from CJS Securities.

Can you provide more details about the custom modular data center you are developing with clients, including any specifics and the timeline as you continue to advance this project?

Yes, thank you for the question. We are definitely noticing some customers in the market moving in this direction, primarily to achieve three key goals: speed, speed, and speed. You can think of this as a data center in a box, which enables our customers to accelerate their data center projects and facilities significantly. It also requires less labor and specialized skills compared to traditional construction. We are collaborating with a crucial customer and have identified a site in Calgary for manufacturing this product, with plans to expand into the U.S. This approach is aimed at helping our customers bring their data center solutions to market more quickly.

Got it. I appreciate that. We've discussed the ICE rationalization for some time now. Are there other areas within Performance Technologies that you might focus on less in the future? So we're constantly evaluating our markets, that's the beautiful thing about 80/20 as we've segmented the business into multiple markets, and then established key account strategy. Some things will come in and some things will go out. I think Mick mentioned the Genset in terms of where we're seeing that business kind of flatten that may allow for us to redeploy resources or activity in another area. We're in the process of evaluating different opportunities in PT.

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 an $800 million 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 doing another separation, where you see those 2 businesses stand on their own, just from a strategic perspective, but also from a financial one?

That's a great question, Brian. I appreciate it. Having a vision is one thing, but having a team that can implement it is another. I credit the team for their efforts. We need to reevaluate as we continue to adjust our portfolio. Over the past few years, we have divested multiple plants and made new acquisitions while also experiencing organic growth that has surpassed our expectations in other areas. Our business has evolved significantly since we introduced the original segments a few years ago to align with our IR Day. This is definitely something we will need to consider going forward as we rebalance and reposition the company. It's a regular part of our annual 80/20 strategy, and I expect we'll do that again by the end of this fiscal year.

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

Yes, it does make sense. We have the highest backlog in data centers we've ever had, which gives us confidence to invest in growth and expansion. We are also the incumbent in many of these data centers, allowing us to see and anticipate their expansion. Based on our discussions, there is no reason to believe our data center customers would choose different solutions, especially regarding growth, speed, and reliability. The commitments, orders, outlook, and strategic relationships we have with our customers all contribute to our confidence in making this investment. Yes, there is exclusivity with the large hyperscalers. However, for the modular data center, there will certainly be different versions. They won't all look the same. Some will be very different, but the underlying concept will remain consistent. What’s inside and how they operate could be unique and tailored for each one.

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

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 2 hours. Thanks.

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