Well, good afternoon, everyone. Welcome back to day two of Oppenheimer's 21st Annual Industrial Growth Conference. I'm Noah Kay, Managing Director in Oppenheimer's Industrial Innovation Research Practice. We're very happy to welcome back to the conference, the management of Mo Dean Manufacturing, President and CEO Neil Brinker, CFO Mick Luccarelli, VP of IR and Treasurer Kathy Powers. Thank you all for being here and looking forward to the discussion.
Thank you for having us, Noah.
And, you know, Kathy, I don't know if you were going to say this, but I'll just remind everyone that the company is in quiet period. So now that we've gotten that out of the way, let's talk about the business. Starting with data center, you know, over the past few years, you consistently outperformed the data center growth targets that you'd set publicly. When we look at the CAGR target that you have put out through fiscal 28, it looks like it anticipates a pretty high utilization rate on new capacity. So, one, is that a fair characterization? How are you thinking about capacity buffers? And two, what would achieving the high end of that 50% to 70% CAGR require?
Yeah, thank you for the question. Certainly what we're putting in place today, and we started this process several quarters ago as we add additional facilities and factories, mainly in the United States, that gives us enough capacity to reach the FY28 targets that we've been public about. So we can reach those targets with existing customers and existing products. But if we see opportunity as we develop as an engineering leader and a technology leader, which I would anticipate, as we see new product development enhance and the desire and need for new product, yes, we could add additional capacity for further expansion based on that new product development or technology. So what we have in place today is with existing products, existing customers, where we're growing the business and we're taking the capacity is for that FY28. But definitely, that is not a one-time CapEx deployment. Every year, we've been pretty consistent with adding capital, not to this level. Certainly, this is five, six, seven times greater than normal. But we will always have a need and a desire to invest back into the business with capital and data center.
yeah we we talk with others in the industry about the concept of buffer capacity you don't necessarily want to use that buffer right because then you're running over time or you know expediting freight things like that so is is my prior question around kind of the the capacity buffer uh does that sort of hold here is there a good sort of rule of thumb that you use when you're
planning out your build? We do. We try to put in around a 20% buffer. That allows us for spikes in terms of order management. You see this, you'll see projects shift. They can come in, they can come out of a quarter, and you need to be able to react to that quickly. So having that 20% capacity or an extra shift's worth of capacity within specific designated plants is certainly something we want to plan to. As a project-based business, as we evolve further into the project-based business, you see these orders and these, you know, these sales for the month and the quarter are pretty large. So you could have a data center that you've been preparing for to ship to and build to that's maybe 50 megawatts or 100 megawatts, and it's the last surge of supply that gets to that. It could be a $100 million a month. It could be a $50 million a month. And if they have a delay, a logistics issue, a delay in permit, a delay with the contractor because they didn't finish up what they needed to finish in time and they want to push it by two weeks, you have to swing pretty hard right. And that's a large amount of capacity that needs to be filled, which allows for that spike of around 20%.
It's an interesting point you raise, Neil. You know, the project timelines moving around a quarter or two, it's really nothing new in the industry. I think as long as we've been covering you, we've thought about some of those timing considerations. But there's sort of some cross currents here that I'm curious about, you know, which is one, your business is getting bigger. It's getting more diversified, you know, both in terms of products and customers. So that would seem in some respects to help smooth out some of those flows. On the other hand, the power and other gating factor constraints that we see across the industry are only increasing. So what do those sort of cross currents mean for you as you think about planning and flexibility going forward?
Yeah, well, one is that we have built really strong relationships with the hyperscalers, as well as a neocloud provider and many, many co-locations that give us that visibility that's out beyond 12 months. For the longest time, it was six to 12 months you had that visibility with our strategic customers for three years, if not five years. So you're talking about projects where they haven't acquired the land, they haven't entered the country, and they don't have permits. And the same conversation you're talking about having the ability to commit to a ship to a project that is going to, The data center is scheduled to open two months from now. So you have this broad array of projects at different degrees of completion. That ability, that visibility allows for us to not only stand up our supply chain and get our supply chain prepared, but it allows us for future regional manufacturing capability development. So we can think about how we want to do it within region based on the three to five year visibility they have. They may want to be more aggressive in Asia or less aggressive in Asia, which helps us determine how much capacity we want to put in there. They might want to be more aggressive in North America versus Europe, which allows us. You can see that capacity shift we've recently made here in the last year. I mean, that's a direct correlation with where the customers are going. So it depends on regulations. It depends on power usage. It depends on changes in regulations that you're starting to potentially see. So all those factor in that you have to have that large visibility, and it allows us to steer our manufacturing strategy to align behind where we think that they're going to win.
And that plays into my next question, which is we've seen pretty robust order strength continue so far, even this quarter, off of a strong quarter last quarter, really across power and cooling vendors. And project timelines have continued to extend out a little bit. And we've now started to hear about companies undertaking longer-term capacity agreements, both for power equipment and even now for some HVAC equipment. And this is something the company's talked about, the prospect of a long-term agreement for some of the new capacity you're bringing online for a couple of quarters now. So can you maybe help us understand how you look at the key considerations in those discussions and what would kind of push you and your customer to make a long-term capacity versus preserving?
Yeah, thank you. You're right. I mean, order intake has been strong. We've had back-to-back strong quarter intakes, record-breaking, breaking records consistently quarter over quarter in terms of our order intake, which solidifies the investment that we're making. in the demand that we're seeing for our product. If we had the capacity today, we would be shipping well above what we ship today. We would generate revenue well above what we do today. We just don't have the capacity, so we're ramping that capacity. So capacity is precious. And when we talk about these conversations with customers, whether that's engaging in short-term or long-term agreements, we're considering several factors one is are they an 80s customer are they a priority customer for us and are they technology driven if they're a priority customer for us and this is you know we have a small collection of customers that fit this scale then that is someone that we would suggest we would want to dedicate some capacity long term to that customer if they if we believe in their if we are aligned with our technology roadmaps and directionally where they want to go Another important reason why that strategic relationship with the customer and having that three to five-year visibility, not only on projects, but on the technologies and where they're going to take it. And that we have a technology roadmap that's aligned with it. That's another check. So we have technology. They're investing in the business. They're winning in the business. They're an 80s customer. Now, you know, we can have greater conversations on what degree of capacity and how much of that capacity we want to dedicate to those customers. So we have to do that while at the same time managing some level of diversification, right? You want to be able to have capacity set aside for the hypers and co-locations, but you also at the same time want to figure out a way to over-serve your most important customers that are winning in this race that have the technology and you have alignment behind your projects and your MPD roadmap. So there's a lot of factors that come into play. And it's, you know, it's symbiotic in terms of how we work that relationship. And we want to make sure that where we have the best opportunity to grow, and we have the best opportunity to maintain the margins and deliver for our investors, that those are the customers that we're partnering with.
Yeah. Your comment, Neil, about an 80s customer, I mean, just for those who may be less familiar with the story, you're really talking about, you know, a top tier customer, you know, under your sort of 80-20 rule. Can you talk a little bit about your technology roadmap here and how you're trying to align it with successive generations of chips and increasing water and energy efficiency considerations?
For sure. So when you think about some of these customers that are leaning in on that effort, and they're looking at power use effectiveness or water use effectiveness, and they want to work with us to design creative solutions, like a hyperscaler that wants to work with us to design a modular data center that eliminates the need of a CDU, for example, so that you can go to a stainless steel chiller. That's the type of innovation that we're talking about, eliminating the amount of metal, eliminating the amount of components, eliminating the amount of energy that's drawn, and having that all containerized within one component. So that is alignment of our roadmaps, and that's alignment of technology, and then that's alignment of market penetration that we believe in, and we want to make sure that we're supporting that customer. So when we think about next generation racks, when we think about next generation data centers and how they're cooled, hybrid cooling, the hybrid chillers, next generation chillers, larger megawatt chillers above two megawatts, those folks that are kind of pushing the paradigm and they're moving into that to figure out a way to do more compute in a smaller space more efficiently, that's where we differentiate. That's where we lean in with our engineering. That's where we apply our engineers, where our projects could last sometimes six, eight, nine, ten months with our engineers dedicated to that before we even see an order. So that we have a custom bespoke solution for that generation of data centers. So that's where we found our ability to really penetrate. That's where we found our value in the market. That's where they value us. And that's where we want to continue to dig them over.
Well, there's a theme we've seen of the industry moving towards modularization and the integration of solutions, right, converge physical infrastructure. And I think, you know, your competitors have invested very heavily with a lot of M&A to try to capture more wallet share across the thermal chain and physical infrastructure broadly. You know, you have organically developed your own modular, you know, liquid cooling offerings. rings, maybe just update us on how the uptake for some of your products outside of air handling and chiller look, and how you think about competitive positioning today.
The modular market's interesting. It's in its infancy, but there's some clear indication that that is a market that's going to grow over time. It's about speed. You can get into a market, you can move into a market, the data center companies, the OEMs, the co-location providers, the neocop providers, they can move into a market relatively quick with modular data center sets because it doesn't require the same level of permitting. It may not require the same level of power, and it doesn't require the same level of investment in land and resources. So you could, instead of building out a hundred megawatt data center that takes two years of approvals and construction, you can move in 10 megawatts or 15 or 20 megawatts of containerized solutions into that market pretty quickly. So it's about speed, speed, speed. And if that market grows and there is an end user for that, like there is some projections that there are, we want to make sure that we have a product that's viable for that new segment of the microspace today. We have partnered with one hyperscaler and we are now working on the second and soon to be third generation of that modular data center. We worked with them over the last year, you know, shipped several of these out into the field. They're in operation today, and we're looking at the next generation of data center to include stainless steel chillers, right? So that is who we're working with. And from that platform, we can leverage that platform, and we can provide solutions for other hyperscalers or neocloud providers with the modular data set. So we're learning a lot. The customer is learning a lot. We're developing together. We're in several generations of this now. We didn't necessarily have to make a lot of acquisitions to get there. We did it organically, and we did the design, and we'll see if the market turns out to be what's expected.
We've thought about your solution, particularly the free cooling chiller, as being a highly efficient, leading efficiency solution. The question that we've gotten from investors is, as we look around, you know, thermal and thermal chain integration, right, more liquid cooling in the white space, you know, how much efficiency gain is there from full system integration on your own suite of offerings? You know, and how would that compare to efficiency gains just from using a chiller product versus the pure offering?
That's a bit dependent based on the structure, what we're cooling, what's in there. Is it memory? Is it CPU? Is it cloud storage? Is it generative AI? Is it GPUs? They're all a little bit different. But in general, what we can say is that if you buy, say, our chiller or our air handling unit, those typically are going to be best in class in terms of energy and power usage. So they can win alone. that's how we've been able to win alone without our full product offering and that's how we've been able to break into some new markets into some new customers with just the product on its own head-to-head what I can say is that it's better it's more enhanced if you add additional products to it if you add the evaporators the fan walls the computer room air conditioners the CD use the controls our firmware if you provide that full ecosystem ecosystem of an offering. It's going to be better than just the component, just the product alone. So we know we can win head to head and we can have a price premium on just the product. What we're trying to do now is educate and get with our customers to do validation and test the full system architecture because we can show that it unlocks additional value and reduces overall energy costs. So it takes time. You know, we really have got into this North America market in a serious way in the last couple of years, primarily driven on the chillers and the chillers performance. And now that we're delivering on the chillers and we're adding capacity and they gain further confidence that we're committed to them, they're willing to open it up and say, okay, we want to look at your indoor products. We want to look at your other offerings and let's put this together. So I think you earlier asked the question in capacity and expansion and how much more, again, that's with existing products and existing customers. If we wanted to move into, say, more indoor air equipment because our chillers are now starting to pull that through, that's another opportunity that is,
you know, quite honestly, not in the FY28 numbers. It's a great distinction, Neil. And I guess the follow-up to this is, you know, we've historically thought about your kind of TAM per megawatt, maybe in the $600,000 range. If we think about, you know, some of these add-on products and the hybrid solutions, the modular offering, where do you start to see that kind of TAM per megawatt
move towards? Yeah, you know, we're seeing that increase for us, especially as you bring in more opportunities on the service side and after markets, and as you get more and more saturation in the field over time, that would increase. Just in the last year, we're seeing the potential of but moving from 600,000 per megawatt to 700,000 per megawatt. And, you know, I don't see it going the other way. So as we add more product and we add more offerings and we add more solutions and we get further confidence from our customers that we're able to produce and we're able to maintain the quality, because that's primarily what we're driven on is quality, because you have to pay for the value of what we provide. It's not cheap. So you got to deliver on that. then that gives them more confidence to give us more well to share.
Maybe a last one for now, at least on the data center market, before we turn to the rest of the business, you know, certainly that the ramp and capacity that you're executing now, it's been, it's been a headwind to broader climate solutions margins, you know, and we understood why there was a lot of upfront investment required. You know, we've seen the company already starting to benefit from a little bit of improving absorption so you know how do we sort of baseline data center margins for 26 and and how should we think about margins progressing as revenue and capacity ramps
over the next couple of years you want me to jump in there neil sure yeah yeah noah so we've talked uh historically about for the climate solutions group the segment that data centers was generally in line with that segment margin in terms of EBITDA that would imply a 20% type EBITDA margin last year um last fiscal year actually running a little bit above the the segment average and as to your question as we've gone forward with the amount of capacity that we're putting in place we've been running a few points below the norm and a little bit below our segment average as we go forward i've kind of described it as a slow and steady climb it's all about sometimes we'll get questions about pricing pressure anything like that if there's no uh changes and our pricing and our standard product margins it's solely about capacity and capacity utilization and while we're growing revenue and earnings you know north of 50 percent a year through data center neil and i have challenged the group with maximizing earnings growth as long as we stay above a minimum profitability level and what will happen over time is when when or if things regress more towards a market growth then we'll shift and we'll think about getting those last few points of margin out which frankly will drive earnings growth even beyond right the hyper growth phase so that's how we're thinking about it'll be a slow steady climb we've got a lot more revenue to bring on obviously with the guidance it implies a couple more billion of revenue over the next couple years so um expect that margins will do that kind of slow and steady climb but in the meantime it's it's really about uh putting that capacity in place and then beginning to
leverage each new line we put in place appreciate that mick um maybe moving to uh the hvac Technologies business, soon to be its own segment. Outside of data center, there are certainly end markets within HVAC that have exhibited a fair degree of cyclicality in the last couple of years. I think in the past, you've outlined mid to high single digit organic growth as a potential baseline for this business. Maybe just think about, tell us how you think now about market growth, you know, expectations for the end markets that are served? And what might be the drivers of, you know, revenue outperformance for the business? Well, if we go back a couple
years ago, we certainly were impacted more heavily by the cyclical nature of some of these businesses because the baseline was smaller, the total revenue smaller. You had an indoor air quality business that was focused on a K through 12 elementary school and high school market in the United States that, you know, swelled during certain parts of the year because kids were not in school or if kids were in school, it was reduced because you couldn't go in and install our new product, right? So you saw that cyclicality based on the school year. And then in the heating product line, you saw some cyclicality based on weather conditions, weather patterns, primarily in North America. So those businesses were impacted by that cyclicality. Fast forward to where we're at a year and a half later, two years later, we've made four acquisitions in that space and we've diversified. We've brought in Jetson and Absolute Air and CDI and LBY. So we've added incremental revenue to the business through acquisitions. So you've seen the revenue grow. And then we've diversified it in terms of our markets. Now, what we're working now, what we're working through as we work on the RMT and GenTherm on the performance technology side, and then the ramp-up capacity and data center side to go deliver on the great demand that we have. Here in this business, it's around focusing our resources and our energy around our new portfolio of products. Existing plus new. We've got new channel access. We've got new distribution access. We've got new products. So how do we take, we've got great new engineers that were brought on in terms of this acquisition. So how do we take this basket and collection of goods that are very valuable and we start to align this through further 80-20 segmentation and focusing on the markets? So that's the process we're going through right now. Likely we'll have that done for the next fiscal year. We'll have the general managers and the segment presidents in place to go drive whatever the strategic initiatives are through this segmentation process. Some of those folks, through the way it works in 80-20, will be maintain a market rate. If the market rate is GDP, that's what we want. That's what we would expect. Generate cash, dig them out, and then we'll deploy that cash in another area. Some of these businesses will be whatever market growth rate is, you're tasked to double it because we're going to give you more resources, more capital, and more influence than the other parts of the business because the market is more attractive or the market is better positioned with the technology that we have. So as we bring these acquisitions together with the existing businesses that were more cyclical, we'll now put together this segmented approach on how we address each of these markets, who will be hyper growth, who will be market growth, who will be maintained, and that's how we'll operate that business going forward.
Can you just elaborate a little bit more on the integration process itself and, you know, kind of what the key milestones have been in the progress there? Because these were disparate types of businesses. You know, how do you sort of bring them onto the common platform? And I guess, you know, more broadly, how do you think about sort of the M&A muscle that you've built and the ability to kind of replicate that going forward?
Yeah, so in terms of the tactics of bringing these businesses on board, we're in line with what we expected. We have a 12-month action plan for each one of these. We have to hit certain milestones, everything from getting accounts turned over to having them on our payroll systems to benefits to SAP, ERP implementation. And that's pretty tactical. And that's important as you bring privately held companies into a publicly traded organization to maintain the integrity of the financials. So that is the focus. And we are on path for that. As we get through that, we'll migrate towards this segmentation portion that is talked about. We're working through the organization today. And then when we land on that, that will start to solidify what the strategies are based on how we categorize these businesses. So it's early on in terms of the long-term strategy, but it's not too early for us to be thinking about how we set the goals for year one, year two, and year three. So that's the process we're in. So it's tactical. We're executing on the tactical piece, and we're at the point now where it's evolving into how do we assimilate these businesses through channel distribution market product, and then where do we position them in the markets going forward with the specific initiatives based on the category of what we expect from them.
and then maybe just a follow-up and this could also be for mick as well because i know you're you're doing a ton of the work here just how you think about what you've done on the m&a front you know as you get these integrations done translating to something that looks sort of more programmatic with bolt-ons over time just talk about kind of the muscle that you've built there how you think about the opportunity set i mean should we assume by the way that bolt-on will be within HVAC Tech.
Yeah, and Noah, we really have built not only a strong team, but a process and a discipline that's, I think, parts of it are unique to Modine. What's really unique, if you build a really solid business development process and you connect that with 80-20, we can rinse and repeat and keep doing that. And in the markets, the target markets we're looking at will allow us to go do more acquisitions, you know, once we complete the integration of the three Neil talked about and spin off the PT business.
Very good. I guess we've got about five minutes left here. I did want to touch on tariffs and management of cost inflation. Again, I know we're in a quiet period here, but I think historically most of your Mexico exposure has been on the PT side of the business. You've got some exposure in Canada on the data center side. Maybe just can you talk investors through what your 232 exposure looks like today? and how much of the production capacity is based outside of the U.S.?
In the data center side, yes, we have capacity outside of the U.S. and Canada. And on the COIL side, we do have some in Mexico. But to sum it up, we don't expect significant impact from the 232 tariffs. There's HTS codes that we deliver to that some are exempt, some are not exempt. There's conversations we're having with customers in terms of landed cost fees and variable costs and how that would how we'll share that or they absorb it. So it's something that we monitor. Unfortunately, we're becoming professionals at this. We've got an entire group that studies this and works on this in terms of these wild swings of tariffs in and out. And we've actually it's there's a pretty mechanical process we have behind it, behind the individuals that are driving it now. So we're pretty good at it at this point and no significant impact.
Yeah, and I guess the follow-up here is to drive value in whatever market we serve.
So I believe that the teams are aligned, the management team and the leadership team and everybody across our 13,000 employees are dialed in. And we're excited to serve the customer. We're excited to serve our communities, and we're excited to serve the investors.
We look forward to what comes next. We wish you all success. We hope everyone has a great conference. Please let us know if we can help with any follow-ups. Neil, Mick, Kathy, thank you all for the time today.
Thank you. Thanks, Noah.