Q3 2024 Modine Manufacturing Co Earnings Call

January 31, 2024

Later, we will conduct a question and answer session and instructions will follow at that time.

If anyone should require assistance during the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Ms. Kathy powers, Vice President Treasurer and Investor Relations.

Good morning, and thank you for joining our conference call to discuss <unk> third quarter fiscal 2024 results I'm joined on this call by Neil Breaker, our President and Chief Executive Officer, and make Lucarelli, our executive Vice President and Chief Financial Officer.

We'll be using slides with today's presentation, which can be accessed either through the webcast link or by accessing the PDF file posted on the Investor Relations section of our website Modine Dot com.

On slide three 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 it's my pleasure to turn the call over to Neil Thank.

Thank you Kathy and good morning, everyone. I am pleased to report another successful quarter highlighted by very strong margin expansion and earnings growth.

Our results this quarter further demonstrate our ability to improve our earnings profile as we shift towards faster growing and higher margin businesses.

Despite all of our early success I continue to believe that we are in the early stages of our transformation.

And are just beginning to realize the opportunities we've identified in each of our core market verticals.

In many cases, we are recommitting, our focus on operational excellence, adding additional resources for lean manufacturing and supply chain to improve productivity quality and cost realization.

Coupled with the success of our commercial team. This approach enhanced by 80 20 will help to support our ongoing progress towards our goals.

Overall on the M&A front, we feel very good about the pipeline of opportunities available to us we are not focusing on large transformational deals, but instead are looking for bolt on acquisitions that bring complementary products and technologies to our key growth verticals, our recent acquisitions of <unk> technology and the IP.

Select assets of PMG core are perfect. Examples of this approach.

We benefit from a very strong balance sheet, which will help support our inorganic growth targets as we remain vigilant in our search for attractive opportunities that fit our focus areas.

Mick will go over our third quarter financial results and provide an update to our full year outlook, but first I'd like to provide some high level updates on each segment.

Please turn to slide five.

Starting with our climate solutions segment, we observed many of the same trends we saw in the second quarter.

Our data center business remains very strong with revenue up 34% compared to the prior year. Meanwhile, certain markets for our heat transfer products remains soft and our revenues continue to be strategically impacted by the exit of low margin businesses in connection with the 80 20 initiatives.

Earlier this month, we shared some very exciting news about the purchase of the IP and select assets of <unk>, a specialist in single and two phase liquid emerging cooling technology.

This expands our global data center product offering, allowing us to support the future requirements of our customers as they manage the demands of high density computing.

Our investment in immersion cooling technology, along with the internal development of a cooling distribution unit or CDU allows us to expand our product portfolio to address technology gaps, while accelerating our ability to be prepared for the technology needs in the future.

Further this new technology will complement our existing high performance products that maintain the temperature in the hall and add additional opportunities for the development and integration of a complete hybrid data center cooling system.

We believe that the best strategy is to have multiple solutions with a complete suite of products that can be customized and optimize the customers' needs.

I'm very excited for the data center team to begin working on commercializing this technology in support of our co location and Hyperscale data center customers.

And further recognition of expected growth in our data center business, we're transitioning our existing Grenada, Mississippi manufacturing plant to be a data center facility similar to what we did in Europe at our Spain and UK facilities.

We're all I'm extremely pleased with the performance of the climate solutions segment.

We are making the right investments to ensure that our data center business continues to grow and.

And are delivering strong year over year earnings improvement despite challenging markets for the heat transfer heating products.

Please turn to slide six.

Turning to our PT segment, while our advanced solutions business continues to perform well we have seen some leveling of the volumes in our air and liquid cooled businesses, which is in line with our expectations.

Despite flat revenues our margins continued to benefit from 80 20 initiatives focused on commercial improvements and productivity enhancements.

In addition, our PT segment also made some important announcements this quarter.

First off our EV systems business announced an important partnership for our E. Vantage thermal management systems with Bosch Rexroth, a recognized leader in driving controls technologies.

Given <unk> strong market position, we are very excited about this opportunity to partner on electrified solutions for the off highway market.

This partnership is still in development phase, but is expected to provide additional growth opportunities in the future.

At this point the team has booked 31 program wins, including four additional wins since the end of last quarter equating to a projected annual revenue run rate of over $160 million of program maturity.

And in addition, the team was also recently recognized by Frost <unk> Sullivan with its 2023, North American product Innovation Award.

This award recognizes our commitment to quality reliability and customer service, while also helping our customers achieve their sustainability goals by accelerating decarbonization.

I am so proud of what this team has been able to accomplish and with the previously announced capacity expansions in the U S and Europe, we have ensured that we have the capacity to meet our commitments and future goals.

Now I'd like to pivot to another growth area in the PT segment, our Gen set business.

Stationary power as a market ripe for growth.

With ever expanding needs for energy security for critical applications, such as data centers and health care facilities as.

As we recognize the growth potential of this market, we established a dedicated team devoted to understanding the market and building. This business. We are very encouraged by our early progress and expect this to be a key growth area for <unk> in the future.

Last quarter, we announced that we had completed the divestitures of our German operations that supported the European light vehicle market, we have been transparent about our intentions to exit certain product lines that don't meet our margin targets and these actions were in line with that strategy.

We also mentioned that we would need to reduce certain overhead costs that have historically supported these markets and we are taking action to address these requirements by consolidating our technical services capabilities.

These actions are in line with our broader initiative of focusing resources on opportunities that carry higher growth profiles at more attractive returns through both divestitures and acquisitions.

I am very pleased with our progress and our performance this quarter. Our team is operating at a very high level and we are not only executing on our strategies, but are putting in the plans in place to reach our next set of goals with that I'll turn the call over to Mick.

Thanks, Neal and good morning, everyone. Please turn to slide seven to review the segment results.

Climate solutions completed another excellent quarter, driven by a 29% improvement in adjusted EBITDA.

Revenue was down slightly due to a decrease in heat transfer products and mostly offset by strong growth in data centers and a favorable FX impact.

As discussed over the last two quarters, we've experienced some reductions in several markets served by heat transfer products.

Just on these trends, we lowered our full year outlook for this product group.

The adjustment is primarily due to lower demand within commercial and residential HVAC markets, including European heat pumps, along with 80 20 initiatives.

Data center sales grew 34% or $15 million driven by strong demand from both Hyperscale and colocation customers.

Our data center outlook remains quite strong while anticipating a very strong fourth quarter and full year growth in excess of 60%.

HVA C&I sales were higher by 2% or 2 million driven by an increase in <unk> sales and the acquisition of Nap technology that we completed last July along with higher sales and power industrial coolers.

Our heating sales were somewhat lower than expected as the overall market remains depressed from previous levels.

We expect this softness to continue for at least another quarter, but the market data is indicating a potential bottom and we believe it will improve through calendar 'twenty four.

We're very pleased with the climate solution strong earnings conversion, resulting in a 470 basis point margin improvement to 18, 9%.

Our 80 20 discipline is at the heart of these quarterly margin improvement.

At a segment level, we continue to prioritize earnings and margin improvement over revenue growth.

Wrap up on climate solutions, we remain cautious in a few markets for HBC and heat transfer products businesses, but fully anticipate further year over year improvements next quarter to finish a great year.

Please turn to slide eight.

Performance technologies also had a great quarter with a 52% increase in adjusted EBITDA.

Revenue increased 2% driven by higher average selling prices and a favorable FX impact.

Sales volume was down in the quarter, partly driven by the recent German divestitures, which negatively impacted revenue by $12 million.

Excluding the impact of the divestitures, our sales would have improved by 6%.

Performance technologies remains focused on driving rapid earnings growth and that was very evident again this quarter as I previously explained for our climate solution. The 80 20 efforts in performance technologies are focused on improving earnings and margins versus segment revenue growth.

Advanced solution sales were up 27% or $10 million with continued growth of E systems and components sales, including.

Including higher sales to commercial and specialty vehicles.

Along with higher coding sales.

Liquid cooled application sales decreased 4% or $5 million, mainly due to the divestitures and lower automotive demand.

Lastly, air cooled application sales grew 2% or $3 million, primarily due to higher sales to off highway and Gen Z customers.

The growth was partially offset by lower automotive sales also related to the German divestitures.

Much like climate solutions performance technologies earnings conversion was excellent, resulting in a 12% adjusted EBITDA margin and a 390 basis point improvement.

For the balance of the year, we anticipate ongoing 80 20 progress in further year over year improvement with a sequential earnings increase in Q4.

Now let's review the total company results, please turn to slide nine.

Third quarter sales were relatively flat as we continue to see rapid growth in our targeted growth areas, such as data centers and advanced solutions.

These were somewhat offset by planned 80, 20 activities and divestitures, along with temporary weakness in select HVAC markets.

Excluding the impact of the divestitures in Germany sales were up 3%.

Our transformation initiatives are clearly benefiting the gross margin, which improved 530 basis points.

SG&A increased $10 million, driven primarily by higher employee compensation expenses, including incentive compensation.

I'm happy to report that adjusted EBITDA was very strong again, this quarter with an increase of 39% or $21 million.

This equates to an adjusted EBITDA margin of 13, 2% or 370 basis point improvement from the prior year.

And this now represents the eighth consecutive quarter of year over year margin improvement.

In addition, adjusted earnings per share was <unk> 74.

54% higher than the prior year.

We're very pleased with another exceptional quarter, resulting in a year to date EBITDA margin that is above our targeted fiscal 'twenty four transformation range.

Now moving to cash flow metrics, please turn to slide 10.

We generated $47 million of free cash flow in the third quarter, which puts our year to date free cash flow at $131 million.

This represents a significant improvement compared to $33 million generated in the prior year.

Net debt of $184 million was $102 million lower than the prior fiscal year end and $39 million lower than from the last quarter.

Also during the quarter, we repurchased 100000 shares.

For the fiscal year, we are well on track to deliver our improved cash flow conversion targets driven by higher earnings and a continued focus on working capital.

We maintain a relatively low level of debt supporting our strong balance sheet.

And ready to support both organic growth and acquisition initiatives.

Now, let's turn to slide 11 for our fiscal 'twenty four outlook.

As announced in the press release, we're raising our full year earnings outlook for fiscal 'twenty four while raising earnings were also slightly lowered our full year sales outlook to recognize the impact of the European divestitures in Q3, along with lower expectations for our heating and HDD products.

Sales.

In the climate solutions segment, we continue to expect data center revenue growth.

Of 60% to 70%.

With the forecast trending towards the high end of this range.

Moving to HVA, C&I or we expect revenue to be flat.

Slightly lowering the range from the low single digits last quarter. This is mostly due to a slower recovery in heating than originally anticipated.

With regards to heat transfer products, we expect sales to decline in the range of 10% to 15%, which is a reduction from our previous guidance. This was primarily due to the ongoing weakness in a few end markets, especially the residential and commercial refrigeration applications and the European heat pump market.

For performance technologies, we expect advanced solutions to grow in the 25% to 35% range, which did not change from the last quarter.

This growth is driven by program launches and continued demand for EV systems and components.

We're holding the outlook for liquid and air cool products, but will be trending towards the lower end after adjusting for the recent divestitures.

From an earnings perspective, I am pleased to report that we're once again raising our adjusted EBITDA outlook for the year. We now expect our fiscal 'twenty for adjusted EBITDA to be in the range of 305 million to $313 million, representing an increase of 44% to 48%.

In addition, we anticipate good free cash flow this fiscal year.

Resulting in an improved ratio to sales.

And capital expenditures are expected to be in the range of $70 million.

Other assumptions, including interest taxes, depreciation and amortization are included in the appendices attached to this presentation and.

And the press release.

To wrap up we're extremely pleased with the results from the third quarter, while we maintain momentum towards our interim and long term financial targets with that Neil and I will take your questions.

Thank you ladies and gentlemen at this time, we will begin to up during our question and answer session.

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Our first question comes from the line of Matt Summerville with D. A Davidson. Please proceed with your question.

Morning.

Couple of questions first.

How much do you feel like you've seen incremental market weakness in the areas you highlighted in climate.

He is more of a function of just 80 20 kind of making its way into the business and along these lines.

The market headwinds you see today are there.

Are going to be prevalent in 'twenty five is there any reason.

That ships, but momentum at all with respect to the massive amount of EBITDA margin and EBITDA dollar improvement you're generating across Moody's.

Yes, good morning, Matt It's Mick.

Let me, let me give you a couple.

Comments on revenue and then I'll turn it over Neil to add some more color just around the 80 to 80 20 impact because I know there were some questions just around our our revenue adjustments.

Firstly I just wanted to be clear that our revenue adjustments arent solely tied to market softness there is clearly an 80 20 element in there.

So last.

Last quarter, we had automotive divestitures closed right at our quarter end on the 30, <unk> and as we we analyzed a revenue impact at that point, we were estimating we're running a little bit below the midpoint of the range last quarter and as we announced last night, we are raising the.

<unk> outlook and adjusting their overall revenue range down a little bit.

About that.

That 2% adjustment to our sales outlook for the year about $50 million and then that's in three areas and we'll get to your question right. So one of them is in heat transfer products, we lowered our outlook and that's a combination of market and 80 20 activities.

And again I'll, let Neil comment on the second one we talked about air and liquid and the divestitures. So we're running towards the lower end of our air and liquid range combined by adjusting truing up the full year outlook for the closing of the deal of the divestitures and we have seen.

Some.

Softness on the automotive side.

The globe, especially on automotive.

Both ice and EV vehicles.

But that strategic.

Strategic strategically okay with us and also tied to 80 20, and then last we talked about HBC and are in there I want to be clear, it's really the heating market has been slower to recover it was basically a relatively flat still.

So we're not seeing.

It's getting worse.

And the industry data is showing that we seem to be turning a quarter, but we thought it would recover in a little bit faster rate. So.

We sit today, Matt we're running about in the middle of.

The revenue range about the midpoint that we put out last night and again I just want to highlight it's really a combination of.

The market adjustments, an 80 20 activities and Thats really what's allowed us to drive the.

A key driver to our rapid earnings growth and margin improvements. So just navy before we wrap it up Neil maybe a couple of comments around the <unk> 20 impact yes, Matt. This is Neil thanks for the question.

That's a good summary for <unk> in terms of how we're thinking about it and especially when we think about heat transfer products.

And we see some softening in some markets that we potentially.

Would consider exiting we accelerate those opportunities.

So we can continue to drive margin expansion and profitability in that business.

<unk> is a big business not all of it.

Is ready for growth, it's still going through 2020 activity, we've isolated some areas in <unk>, where we've found favorable markets and trends in customers that we're preparing strategic initiatives to grow that business in the next fiscal year, but theres still a lot of work to clean up with that tens of thousands of skus and customers that we serve so when we see an opportunity to accelerate that 380 <unk>.

Because of market softness.

We're at pretty quick.

Thanks for that color and then.

My follow up just on the data center side of things.

Neil can you talk about kind of what the go forward funnel looks like how much visibility you have looking ahead into fiscal 'twenty five.

That business.

And when would you expect to start to see a little bit of lift.

Liquid related activities start to creep in.

Yes, Great question, Matt So we've got visibility with some of our customers out as far as two years I would say on average it's between 12 and 18 months funnel continues to grow it's been growing at the rates that we had assumed it would grow at hence the revenue targets that we have been pretty public about projections that we've been public about.

So we're happy with where we're at.

Working with our customers in both.

North America as well as in Europe.

On co locations in Hyperscale.

Relative to liquid.

We had the acquisition of technology acquisition of assets.

<unk>.

IP and assets, which is going to really help us with our product portfolio and making sure that we have the most current technologies and the liquid side and Thats immersion and then we announced we were going to go into development with a couple customers around our <unk>.

<unk> distribution unit, CDU, which is directed chip liquid cooling and.

We expect to be in a prototype in the next quarter or two on our CDU.

With a couple of customers and if their markets and their end customers have demand for high performance computing they'll have a solution in place.

Assuming we pass the validation and testing with our customers. So CD used directed chip I think is closer to generating revenue that immersion cooling is at this time, but having the emerging cooling allows us to be part of conversations around next generation data centers that we werent a part of prior to the acquisition of assets from <unk>.

Understood I'll get back in queue. Thank you.

Our next question comes from the line of Chris Moore with CJS Securities. Please proceed with your question.

Hey, good morning, guys. Thanks for taking a couple of questions.

Maybe just start with with margins it looks like fiscal 'twenty four operating margin will be in 10, plus range Q4, being a little bit lower than the first three quarters, which were adjusted in that sense.

<unk> I realize you're not giving guidance for 'twenty five, but what are the puts and takes to modine and being able to match or perhaps improve on this on the 24 margins in 'twenty five.

Yeah, Hi, Chris It's <unk>.

<unk> here.

<unk>.

I'll, just I'll talk EBITDA margin the same drivers right and I'd say first.

We will.

We'll wrap up this year as a company well above the target we set out we wanted to be in the 10% to 12% range and where we're clearly trending between the 12 and 13. So we're ahead of schedule, but that doesn't mean, we're not going to our plan is fully to drive further margin improvement.

Next year and to your question where that comes from a couple of elements.

On the growth side and mix, we still anticipate growth in those targeted areas that we've been through whether that's on the gen set side in PT or datacenters or I E Q.

On EV systems, we see growth in that.

Good margin and earnings mix up for us.

And if you then if you go through where we're at on our 80 20 journey.

Early days, there was a lot of simplifying the business looking at pricing and there are still elements of that for US. But also then move into a heavy focus on operational productivity right leaning out and getting the benefits of those things where you simplified your businesses.

So it will be kind of like this year and where we started the journey some of our businesses. We are not going to worry about the top line, we're going to drive earnings and margin through Pls protocol simplification 80, 20, while and continue to accelerate growth in the targeted areas.

Got it very helpful.

Maybe maybe talk a little bit more about M&A I know that in the prepared remarks, you guys talked about <unk>.

Primarily looking at bolt on acquisitions.

At the Investor Day, you talked about needing roughly $400 million to $600 million in M&A between 24, and 25 to comfortably reach your climate solutions calls.

You have subsequently indicated not necessarily need to get to that level and just.

Wondering if you can give kind of any updates in terms of of what a more reasonable range might look like moving forward.

Yeah again, Nick although first just from kind of the math and then Neill can add some more color early days when we Neil first came in that were literally assembling the current team and we're spending through the data.

Look at it from an 80 20 perspective, we.

Werent really sure how much business, we want to retain how much stays when we go through all of our activities and I think as we've had the last four to six really strong quarters, one of the messages Neil and I would add is.

We're getting everything we thought we would get from the improvement and in many cases as we better serve our customers.

Focus on key customers orders are up so all of that said.

Reason, why we don't see the need for large acquisitions to get to our financial targets is really around the lessons we've learned and from an 80 20 about the stickiness of some of our business and then the second thing I'd say to turn it over Neil we've continued to uncover jewels within modine that we do.

<unk> net sales noteworthy here that we can grow organically.

Yes.

Great point, Mick and thanks for the question.

The $4 600 number was the very first days of our <unk> thousand 20 journey a couple of years ago. We've learned so much more especially with the fact that we've got more organic growth that we can drive within the company, which requires less inorganic growth for us to meet our inorganic for us to meet our financial targets. So we have spent a lot of time on the organic.

Growth in the businesses that we want to stand up an IND.

Create organizations around it to drive and then at the same time, we have been active on the M&A front, we've done multiple divestitures in a couple of small deals in the last couple of quarters, and we're doing that in strategic areas, where it helps us.

Build out our product portfolio helps us expand in a geography or most importantly, it helps us improve our technology in the areas that we want to serve.

Okay.

On that last point are really hard to quantify due to timing and opportunity, but I think it's safe to say that that original number.

First half.

From what we thought we would need so.

Again, it really depends on the funnel and the exact timing, but it's significantly below what will still be doing it out looking at M&A.

Got it that's very helpful. I will jump back in queue. Thanks, guys.

Our next question comes from the line of Jeff Van <unk> with B Riley. Please proceed with your question.

Good morning, everyone. Let me first say impressive work on margins and overall cash flow.

Maybe you can give a little bit more color on the status of the heat pump market, what youre seeing the latest and then also on the Gen set business how is that evolving and then I guess the outlook, there and any quantification around that for those two businesses.

Yes, so on the heat pump market, where we can.

To see some softness there is this heat pump adoption has been elongated out over an additional couple of years based on the European regulations.

Some excess inventory in the system.

And we're pacing our investments in heat pump to adjust to that long term.

Im personally with what we're doing and the actions that we put in place. We're confident in this in this space in this market. It's just a short term reset based on the extension of the.

The adoption rate. So that's kind of what we're seeing we're working through it it's real time, it's live.

And the team is making the appropriate adjustments on the Gen set side.

We've got a nice technology, there, we're helping the essentially the industry move towards.

A lower cost.

More reliable.

Higher quality product that.

Is starting to get adopted the earlier adopters are starting to win share and I think a lot of a lot of people are taking notice of that and theyre looking for the solution that we can provide.

With modine.

Okay. That's helpful. And then I know there has been a lot of talk about a $20 million you seem to be executing phenomenally well.

On everything Youre doing there.

I guess are there other low margin businesses that you are planning to exit or you might contemplate exiting and as you look at your entire enterprise how much business do you have that you'd like to either divest or wind down at this point, if we were to kind of look at that at an overall.

Yes, it's a good question. So certainly as we continue to improve our profit profile and we expand margin in the business. It sets the bar in our raises the bar and then.

You always have some bottom quartile business that needs to be addressed.

And Thats just the evolution of 80, 20 and that will essentially be how we operate the company going forward. So there's always going to be that level of business that we have to question as a strategic that we want to be in it. If it's low margin. If not then we have a series of different.

Approaches and activities in terms to address it.

We haven't gone out with a specific number in terms of what that looks like but.

I can see it being in the same range of what we've been able to address over the last 18 months with an 80 20.

<unk>.

It's what three to four $3 million to $400 million of revenue that we have through divestitures and product line simplification, so far and I would expect.

Somewhere in that 100 plus million dollars range as we go forward that there's always going to be.

Something that's underneath the threshold.

Yes, I think two we look at the data it aligns the <unk>.

Neal is going in as.

As Neal fan there is always the bottom quadrant.

The quad for stuff and just for any company for us can be 4%, 5% of sales I think where we're at.

It's probably a little bit more than that so there is probably.

$200 million to $250 million type number of what we would call when we say that quad for it.

The lowest volume product the lowest volume kind of a margin products with customers that are lower on our.

Volume scale.

Okay. That's helpful. And then if I could just squeeze in one more I wanted to circle back to the liquid corporate data centers.

A moment just to clarify I think you said that youll start to bulk of data centers that previously did not maybe just touch on strategy to win business in those.

Yes, we are.

Absolutely we've cast.

Net on the Hyperscale side to go into it.

Make sure that the Hyperscale or is that are winning share in this space understand the technology advantages that we have with modine and our Airedale brand, 100%, we're having those conversations and that takes time to cultivate those relationships.

Relative to the liquid cooling pieces. This this allows us to get into conversations of next generation data centers that are planning for high performance computing, where air cooling traditional mechanical cooling solutions are not sufficient and it needs to be augmented and it typically is augmented through liquid cooling are emerging cooling technique.

So we did not have that product and we did not have those assets, which meant we werent invited to those conversations on how do we use technology to solve for high performance computing now that we have those assets, we have something to sell and help them solve their problems.

Theyre looking for us as well as our competitors in terms of how we can advance the next generation data centers, our own high performance computing driven by all of the things that we know AI OMB.

And.

Not having the CMG assets, we werent in those discussions, but we are today now.

Okay, and the new liquid cooled CDU that will be out in Q4 or Q1, we think.

Yes, we're targeting we're targeting for Q1.

Of the next fiscal year and getting on some pilots and working closely with our customers with some a couple of our colocation customers correct.

Okay, great. Thanks for taking my questions and best of luck, Yes of course.

Okay.

As a reminder, it is star one to ask a question.

Our next question comes from the line of Brian <unk> with Gabelli funds. Please proceed with your question.

Hey, good morning, everyone and congratulations on another great quarter.

Thanks, Brian.

And a lot has been addressed already.

On the German businesses Im looking at the cash flow statement doesn't look like there was any.

Any cash and we're able to jettison any liabilities with those businesses when they went out the door.

Yeah, Hey, Brian it's Mick.

It's actually a small cash.

Benefit on the ultimate transaction that immaterial and then two answers on year liability question actual liabilities.

I guess, one on the balance sheet would be some pension liabilities that went in that was a fairly material number which we're happy about and then the second one and you know it well it was.

The potential liability and Ray if you took each of those facilities in a in a situation, where we would exit them.

Liability that modine and the shareholders would have if we would have retained them was.

Quite a large potential liability.

Okay.

We appreciate that and.

Forgive me, but.

These businesses, so the roughly $30 million or so of revenue was not in the prior 6% to 11.

Sales contemplation for growth that was given at the end of the second quarter.

We have built.

We factored that and Brian has been that the days heading into our.

Our earnings call and we were trending a little bit lower towards the lower end of the range.

We did this time is we true it up we made some adjustments and then on top of event for our remaining automotive business, we took that down a little bit.

Okay, Alright understood there.

Last one for me last year in the fourth quarter you had.

Evaluation allowance adjustment that.

Tweaked your GAAP earnings anything as we think about this fourth quarter from a tax perspective that could move the needle one way or the other obviously.

Al goes we're going to see year over year declines in <unk> and Etfs.

Anything we should be thinking about for those.

The fourth quarter here.

No good point about the.

The reported number that's going to be tough, we'll do we'll make sure we highlight that but from this coming Q4, we're not anticipating any large.

Events or impacts to that.

Understood.

Raising the bar higher and higher each quarter, so congratulations and I look forward to talking to you later thanks.

Thanks, Brian.

Our next question comes from the line of Chip Moore with <unk>. Please proceed with your question.

Thanks, and congratulations on the continued impressive EBITDA margin expansion and self-help catalysts to drive highly impressed with UBS you.

Even exceed at main Street high estimate.

Now you got a really good sense of the data centers differentiation edge when touring that facility in August in person. So I just want to address another business line actually.

For advanced solutions revenues were flat sequentially in the quarter, but your guidance at the midpoint implies about a 25% sequential growth in the March quarter from the December quarter can you just give us a little bit more of an update on battery thermal management as we can.

Look out over the next 12 months.

And that timing without pinpointing exactly the 160 million sales in maturity.

Do you think that is and then while you're on the topic for thermal management.

How is the planning of a launch in Europe.

Yes.

Yeah. Good question. Thanks for the questions. This is Neil here. So we continue to invest in.

Our battery thermal management system electronics growing package certainly we are seeing.

Continued interest in the product and we're expanding our capabilities and capacities we have.

We opened up the earnings.

In my script it leads to talk about the $160 million that would.

Would be at peak volumes, so think two to three years out when you are running at peak volume within the within these programs that we won so we're excited about that because the trend continues to grow quarter over quarter in terms of the potential revenue there more investments are being made and we are.

We've been in contact and they had some really good conversations in Europe with some of our customers that we've targeted in the fact that we've been public about the expansion in an existing facility that has existing infrastructure in modine employees.

That are already very attuned to making sure that we have good reliability quality and delivery for this industry has been well received so we're going to continue to ramp up our investments we're going to continue to open up the space in the facility in Italy for us to be able to grow in Europe, and we've had positive conversations with those customers.

And we continue to trend in the direction that we would expect with the amount of investment that we put into this business.

Great. That's really helpful color just switching gears during my visit in August the facilities.

Just data centers client on HVAC.

Got a sense of really the customers focus and emphasis there alive in the shops dedicated customers and such but.

I was just wondering you know as you progressed through <unk> 'twenty more so on performance technology side are you uncovering more savings and efficiencies and you budgeted or expected a year ago, and then I'm. Just wondering just thinking about this whole customer maximization as you go through both segments on 80 20.

How do you maybe avoid going to lean.

As you achieve the value based pricing.

Yeah. Good question. So certainly on both sides of the business not just performance technologies of climate solutions and performance technologies.

There is opportunity for productivity gains without a doubt and I think we've been able to display that due to the success that <unk> seen through the margin expansion, we've done that through commercial excellence programs and we're pivoting into the operational excellence program. So thats anything from.

Labour to two supply chain procurement or purchase price variance PPV. So theres a lot of activities that we can do on the operations front and the team has been working diligently to put those together and that will be the next phase in terms of our margin expansion within the business.

We've reached the thresholds that we would expect through some of our price expansion. So operations improvement and excellence as there is in both sides of the business not in PT and the teams are putting together the funnels and the activities in the list of projects for the next annual operating plan. So that'll be a good indicator of how big that is.

Great. Thanks, Thanks for that elaboration, that's a good catch.

For margin expansion next fiscal year, Thanks, and that's it for my questions.

Thanks, I appreciate it Tim.

Our next question is a follow up question from the line of Matt Summerville. Please proceed with your question.

Yes, just two quick follow ups.

What's the headwind and I apologize if I missed it what's the headwind from divestitures in your fiscal fourth quarter.

And it's going to be 20% to $25 million.

The estimated impact in Q4.

Alright.

The <unk> business two to three years ramping to $160 million or thereabouts based on the programmatic wins you've had.

Fiscal 'twenty four realizing this is Barry alongside the coatings business the EV components.

How big is the <unk> business from you guys. This year to kind of think about how that trajectory looks out over the next two to three.

Yes, so that.

<unk>.

At the Ats business.

Excluding coatings is about a $100 million.

And I think.

And we just had that question too I think we will provide an updated long term outlook, Matt that we've this year, we're talking about 30, 30% type growth and.

And we said, we and we think a CAGR on that 35% to 40% I think as far as growth for next year, we would expect it to stay in that range. So.

At $100 million growing at.

In that compound growth rate range of that 35% to 40% would seem reasonable.

Got it okay. That's all for me. Thank you.

There are no further questions in the queue I'd like to hand, the call back to Kathy powers for closing remarks.

Thanks, so much and thanks to everybody for joining us this morning, youll be able to access the replay of this call through our website in about two hours and we hope everybody has a great day.

Unnamed Speaker: Although we had tight flat revenues, our margins continue to benefit from 80-20 initiatives focused on commercial improvements and productivity enhancement. In addition, our PT segment also made some important announcements this quarter. First off, our EV systems business announced an important partnership for our eVantage Thermal Management Systems with Bosch Rexroth, a recognized leader in driving controls technology. Given Bosch Rexroth's strong market position, we are very excited about this opportunity to partner on electrified solutions for the off-highway market.

Can you to benefit from 80, 20 initiatives focused on commercial improvements and productivity enhancements.

In addition, our PT segment also made some important announcements this quarter.

First off our EV systems business announced an important partnership for our E. Vantage thermal management systems with Bosch Rexroth, a recognized leader in driving controls technologies.

Given Bosch Rexroth strong market position, we are very excited about this opportunity to partner on electrified solutions for the off highway market.

Unnamed Speaker: This partnership is still in the development phase but is expected to provide additional growth opportunities. The team has booked 31 program wins, including four additional wins since the end of last quarter, equating to a projected annual revenue run rate of over $160 million. And in addition, the team was recently recognized by Frost and Silvan with its 2023 North American Product Innovation Award.

This partnership is still in development phase, but is expected to provide additional growth opportunities in the future.

And in addition, the team was also recently recognized by Frost <unk> Sullivan with its 2023, North American product Innovation Award.

Unnamed Speaker: This award recognizes our commitment to quality, reliability, and customer service, while also helping our customers achieve their sustainability goals by accelerating decarbonization. I'm so proud of what this team has been able to accomplish, and with the previously announced capacity expansions in the U.S. and Europe, we have ensured that we have the capacity to meet our commitments and future goals. Now, I'd like to pivot to another growth area in the PT segment, our genset business. Stationary power is a market ripe for growth, with ever-expanding needs for energy security for critical applications such as data centers and healthcare facilities.

This award recognizes our commitment to quality reliability and customer service, while also helping our customers achieve their sustainability goals by accelerating decarbonization.

Now I'd like to pivot to another growth area in the PT segment, our Gen set business.

Stationary power as a market ripe for growth.

With ever expanding needs for energy security for critical applications, such as data centers and health care facilities as.

Unnamed Speaker: As we recognize the growth potential of this market, we have established a dedicated team devoted to understanding the market and building this business. We are very encouraged by our early progress and expect this to be a key growth area for Modine in the future. Last quarter, we announced that we had completed the divestitures of our German operations that supported the European light vehicle market. We have been transparent about our intentions to exit certain product lines that don't meet our margin targets, and these actions were in line with that strategy. We also mentioned that we would need to reduce certain overhead costs that have historically supported these markets, and we're taking action to address these requirements by consolidating our technical services capability.

Unnamed Speaker: These actions are in line with our broader initiative of focusing resources on opportunities that carry higher growth profiles and more attractive returns through both divestitures and acquisitions. I'm very pleased with our progress and our performance this quarter. Our team is operating at a very high level, and we are not only executing on our strategies but are putting the plans in place to reach our next set of goals. With that, I'll turn the call over to Mick.

These actions are in line with our broader initiative of focusing resources on opportunities that carry higher growth profiles at more attractive returns through both divestitures and acquisitions.

Mick: Thanks, Neil, and good morning, everyone. Please turn to slide 7 to review the segment results. Climate Solutions completed another excellent quarter, driven by a 29% improvement in adjusted EBITDA. Revenue was down slightly due to a decrease in heat transfer products but was mostly offset by strong growth in data centers and a favorable FX impact. As discussed over the last two quarters, we've experienced some reductions in several markets served by heat transfer products. Based on these trends, we lowered our full year outlook for this product group. The adjustment is primarily due to lower demand in commercial and residential HVAC markets, including European heat pumps, along with 80-20 initiatives.

Thanks, Neal and good morning, everyone. Please turn to slide seven to review the segment results.

Climate solutions completed another excellent quarter, driven by a 29% improvement in adjusted EBITDA.

Revenue was down slightly due to a decrease in heat transfer products and mostly offset by strong growth in data centers and a favorable FX impact.

As discussed over the last two quarters, we've experienced some reductions in several markets served by heat transfer products.

Just on these trends, we lowered our full year outlook for this product group.

The adjustment is primarily due to lower demand within commercial and residential HVAC markets, including European heat pumps, along with 80 20 initiatives.

Unnamed Speaker: Data center sales grew 34%, or 15 million, driven by strong demand from both hyperscale and co-location customers. Our data center outlook remains quite strong, while anticipating a very strong fourth quarter and full year growth in excess of 60 percent. HVAC and R sales were higher by 2%, or $2 million, driven by an increase in IAQ sales and the acquisition of NAPS technology that we completed last July, along with higher sales in power industrial coolers. However, our heating sales were somewhat lower than expected as the overall market remains depressed from previous levels.

Data center sales grew 34% or $15 million driven by strong demand from both Hyperscale and colocation customers.

Our data center outlook remains quite strong while anticipating a very strong fourth quarter and full year growth in excess of 60%.

HVA CNR sales were higher by 2% or 2 million driven by an increase in <unk> sales and the acquisition of NAV technology that we completed last July along with higher sales and power industrial cooler.

Our heating sales were somewhat lower than expected as the overall market remains depressed from previous levels.

Unnamed Speaker: We expect this softness to continue for at least another quarter, but the market data is indicating a potential bottom, and we believe it will improve through calendar 24. We're very pleased with Climate Solutions' strong earnings conversion resulting in a 470 basis point margin improvement to 18.9%. Our 80-20 discipline is at the heart of these quarterly margin improvements. At a segment level, we continue to prioritize earnings and margin improvement over revenue growth. To wrap up on climate solutions, we remain cautious in a few markets for our HVAC and heat transfer products businesses but fully anticipate further year-over-year improvements next quarter to finish a great year. Please turn to slide 8.

We expect this softness to continue for at least another quarter, but the market data is indicating a potential bottom and we believe it will improve through calendar 'twenty four.

We're very pleased with the climate solution strong earnings conversion, resulting in a 470 basis point margin improvement to 18, 9%.

Our 80 20 discipline is at the heart of these quarterly margin improvement.

At a segment level, we continue to prioritize earnings and margin improvement over revenue growth.

Please turn to slide eight.

Unnamed Speaker: Performance Technologies also had a great quarter with a 52% increase in adjusted EBITDA. Revenue increased 2% driven by higher average selling prices and a favorable FX impact. Sales volume was down in the quarter, partly driven by the recent German divestitures, which negatively impacted revenue by $12 million. Excluding the impact of the divestitures, our sales would have improved by 60%.

Performance technologies also had a great quarter with a 52% increase in adjusted EBITDA.

Revenue increased 2% driven by higher average selling prices and a favorable FX impact.

Sales volume was down in the quarter, partly driven by the recent German divestitures, which negatively impacted revenue by $12 million.

Excluding the impact of the divestitures or sales would've improved by 6%.

Unnamed Speaker: Performance technologies remains focused on driving rapid earnings growth, and that was very evident again this quarter. As I previously explained for Climate Solutions, the 80-20 efforts in performance technologies are focused on improving earnings and margins versus segment revenue growth. Advanced solution sales were up 27% or 10 million with continued growth of EV systems and component sales, including higher sales to commercial and specialty vehicles, along with higher coating sales. Liquid cooled application sales decreased 4% or 5 million, mainly due to divestitures and lower automotive demand.

Performance technologies remains focused on driving rapid earnings growth and that was very evident again this quarter as I previously explained for climate solution. The 80 20 efforts in performance technologies are focused on improving earnings and margins versus segment revenue growth.

Advanced solution sales were up 27% or $10 million with continued growth of <unk> systems and components sales.

Including higher sales to commercial and specialty vehicles.

Along with higher coding sales.

Liquid cooled application sales decreased 4% or $5 million, mainly due to the divestitures and lower automotive demand.

Unnamed Speaker: Lastly, air-cooled application sales grew 2% or 3 million, primarily due to higher sales to off-highway and genset customers. However, the growth was partially offset by lower automotive sales, also related to the German divestment. Much like climate solutions, performance technologies earnings conversion was excellent, resulting in a 12% adjusted EBITDA margin and a 390 basis point improvement. For the balance of the year, we anticipate ongoing 80-20 progress and further year-over-year improvement with a sequential earnings increase in Q4. Now, let's review the total company results. Please turn to slide 9.

Lastly, air cooled application sales grew 2% or $3 million, primarily due to higher sales to off highway and Gen Z customers.

The growth was partially offset by lower automotive sales also related to the German divestitures.

Much like climate solutions performance technologies earnings conversion was excellent, resulting in a 12% adjusted EBITDA margin and a 390 basis point improvement.

For the balance of the year, we anticipate ongoing 80 20 progress.

And further year over year improvement with a sequential earnings increase in Q4.

Now let's review the total company results, please turn to slide nine.

Unnamed Speaker: Third quarter sales were relatively flat as we continue to see rapid growth in our targeted growth areas such as data centers and advanced solutions. However, this was somewhat offset by planned 80-20 activities and divestitures along with temporary weakness in select HVAC brands. Excluding the impact of the divestitures in Germany, sales were up 3%. Our transformation initiatives are clearly benefiting the gross margin, which improved 530 basis points. SG&A increased $10 million, driven primarily by higher employee compensation expenses, including incentive compensation.

Third quarter sales were relatively flat as we continue to see rapid growth in our targeted growth areas, such as data centers and advanced solutions.

These were somewhat offset by planned 80, 20 activities and divestitures, along with temporary weakness in select HVAC markets.

Excluding the impact of the divestitures in Germany sales were up 3%.

Our transformation initiatives are clearly benefiting the gross margin, which improved 530 basis points.

SG&A increased $10 million, driven primarily by higher employee compensation expenses, including incentive compensation.

Unnamed Speaker: I'm happy to report that adjusted EBITDA was very strong again this quarter, with an increase of 39% or $21 million. This equates to an adjusted EBITDA margin of 13.2%, or a 370 basis point improvement from the prior year. And this now represents the eighth consecutive quarter of year-over-year margin improvement. In addition, adjusted earnings per share was $0.74.

I am happy to report that adjusted EBITDA was very strong again, this quarter with an increase of 39% or $21 million.

This equates to an adjusted EBITDA margin of 13, 2% or 370 basis point improvement from the prior year.

And this now represents the eighth consecutive quarter of year over year margin improvement.

In addition, adjusted earnings per share was <unk> 74.

Unnamed Speaker: 54% higher than the prior year. We're very pleased with another exceptional quarter resulting in a year-to-date EBITDA margin that is above our targeted fiscal 24 transformation range. Now moving to cash flow metrics, please turn to slide 10. We generated $47 million of free cash flow in the third quarter, which puts our year-to-date free cash flow at $131 million. This represents a significant improvement compared to 33 million generated in the prior year. Net debt of $184 million was $102 million lower than the prior fiscal year end and $39 million lower from the last quarter.

54% higher than the prior year.

We're very pleased with another exceptional quarter, resulting in a year to date EBITDA margin that is above our targeted fiscal 'twenty four transformation range.

Now moving to cash flow metrics, please turn to slide 10.

We generated $47 million of free cash flow in the third quarter, which puts our year to date free cash flow of $131 million.

This represents a significant improvement compared to $33 million generated in the prior year.

Net debt of $184 million was $102 million lower than the prior fiscal year end and $39 million lower than from the last quarter.

Unnamed Speaker: Also, during the quarter, we repurchased 100,000 shares. For the fiscal year, we're well on track to deliver our improved cash flow conversion targets, driven by higher earnings and a continued focus on working capital. We maintain a relatively low level of debt, supporting a strong balance sheet, and are ready to support both organic growth and acquisition initiatives. Now, let's turn to slide 11 for our fiscal 24 outline.

Also during the quarter, we repurchased 100000 shares.

For the fiscal year, we are well on track to deliver our improved cash flow conversion targets driven by higher earnings and a continued focus on working capital.

We maintain a relatively low level of debt supporting our strong balance sheet.

And ready to support both organic growth and acquisition initiatives.

Now, let's turn to slide 11 for our fiscal 'twenty four outlook.

Unnamed Speaker: As announced in the press release, we're raising our full-year earnings outlook for Fiscal 24, but while raising earnings, we're also slightly lowering our full-year sales outlook to recognize the impact of the European divestitures in Q3, along with lower expectations for our heating and HTP product sales. In the climate solution segment, we continue to expect data center revenue growth. 60 to 70 percent, with the forecast trending towards the high end of this range. Moving to HVAC&R, we expect revenue to be flat, slightly lowering the range from the low single digits last quarter. This is mostly due to a slower recovery in heating than originally anticipated.

Sales.

In the climate solutions segment, we continue to expect data center revenue growth.

Of 60% to 70%.

With the forecast trending towards the high end of this range.

Moving to HVA, C&I or we expect revenue to be flat.

Slightly lowering the range from the low single digits last quarter. This is mostly due to a slower recovery in heating than originally anticipated.

Unnamed Speaker: With regard to heat transfer products, we expect sales to decline in the range of 10 to 15 percent, which is a reduction from our previous guidance. This is primarily due to the ongoing weakness in a few end markets, especially residential and commercial refrigeration applications and the European heat pump market. For performance technologies, we expect advanced solutions to grow in the 25% to 35% range, which did not change from the last quarter. This growth is driven by program launches and continued demand for EV systems and components.

For performance technologies, we expect advanced solutions to grow in the 25% to 35% range, which did not change from the last quarter.

This growth is driven by program launches and continued demand for EV systems and components.

Unnamed Speaker: We're holding the outlook for liquid and air-cooled products, but we'll be trending towards the lower end after adjusting for the recent events. From an earnings perspective, I'm pleased to report that we're once again raising our adjusted EBITDA outlook for the year. We now expect our fiscal 24 adjusted EBITDA to be in the range of $305 million to $313 million, representing an increase of 44 to 48 percent. In addition, we anticipate good free cash flow this fiscal year, resulting in an improved ratio to sales. And capital expenditures are expected to be in the range of $70 million.

We're holding the outlook for liquid and air cool products, but will be trending towards the lower end after adjusting for the recent divestitures.

In addition, we anticipate good free cash flow this fiscal year.

Resulting in an improved ratio to sales.

And capital expenditures are expected to be in the range of $70 million.

Unnamed Speaker: Other assumptions, including interest, taxes, depreciation, and amortization, are included in the appendices attached to this presentation and the press release. To wrap up, we're extremely pleased with the results from the third quarter, while we maintain momentum towards our interim and long-term financial targets. With that, Neil and I will take your questions. Our first question comes from the line of Matt Summerville with DHS. Thanks. Morning. A couple questions. First

Other assumptions, including interest taxes, depreciation and amortization are included in the appendices attached to this presentation and.

And the press release.

Thank you ladies and gentlemen at this time, we will begin to answer your question and answer session.

If you'd like to ask a question you May press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.

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Our first question comes from the line of Matt Summerville with D. A Davidson. Please proceed with your question.

Morning.

Couple of questions first.

Matt J. Summerville: How much do you feel like you're seeing incremental market weakness in the areas you highlight in climate versus more of a function of just 80-20 kind of making its way into the business? And along these lines, if the market headwinds you see today are there and, you know, are going to be prevalent in 2025, is there any reason why they are? That ship, the momentum at all with respect to the massive amount of EBITDA margin and EBITDA dollar improvement you're generating across. Yeah. Hey, good morning, Matt. It's Nick.

How much do you feel like you've seen incremental market weakness in the areas you highlighted in climate.

He has more of a function of just 80 20 kind of making its way into the business and along these lines.

The market headwinds you see today are there.

Are going to be prevalent in 'twenty five is there any reason.

That ships, but momentum at all with respect to the massive amount of EBITDA margin and EBITDA dollar improvement you're generating across Moody's.

Yes, good morning, Matt It's Mick.

Let me, let me give you a couple.

Nick: Let me give you a couple of comments on revenue, and then I'll turn it over to Neil to add some more color just around the 80-20 impact because I know there were some questions just around our revenue adjustments. First, I just want to be clear that our revenue adjustments aren't solely tied to market softness. There's clearly an 80-20 element in there.

Comments on revenue and then I'll turn it over and Neil to add some more color just around the 80 to 80 20 impact because I know there were some questions just around our our revenue adjustments.

Firstly I just wanted to be clear that our revenue adjustments arent solely tied to market softness there is clearly an 80 20 element in there.

Unnamed Speaker: So, last quarter, we had the automotive divestiture closed right at our quarter end on the 31st. And as we analyzed that revenue impact at that point, we were estimating that we were running a little bit below the midpoint of the range last quarter. And as we announced last night, we're raising the earnings outlook and adjusting the overall revenue range down a little bit. That's about a 2% adjustment to our sales outlook for the year, about $50 million. And then there are three areas.

So last.

<unk> outlook and adjusting their overall revenue range down a little bit.

About that.

That 2% adjustment to our sales outlook for the year about $50 million and then that's in three areas and we'll get to your question right. So one of them is in heat transfer products, we lowered our outlook and Thats a combination of market and 80 20 activities.

Unnamed Speaker: And we'll get to your question, right? So one of them is in the heat transfer product, we lowered our outlook on that. And that's a combination of market and 80-20 activities. And again, I'll let Neil comment for a second.

Unnamed Speaker: The second one, we talked about air and liquid and the divestitures. So we're running towards the lower end of our air and liquid range, combined by adjusting and truing up the full year outlook for the closing of the deal, the divestitures. And we've seen some softness on the automotive side across the globe, especially on automotive EV, both ICE and EV vehicles. But that's strategically OK with us and also tied to 80

Some.

Softness on the automotive side.

The globe, especially on automotive.

EV, both ice and EV vehicles.

With that strategic.

Unnamed Speaker: And then last, we talked about HVAC and R. And there, I want to be clear. The heating market has been slower to recover. It was basically relatively flat.

Unnamed Speaker: So we're not seeing it getting worse, and the industry data is showing that we seem to be turning a quarter, but we thought it would recover at a little bit faster rate. So, again, where we sit today, Matt, we're running about the middle of the revenue range, about the midpoint that we put out last night. And again, I just want to highlight it's really a combination of the market adjustments in 80-20 activities, and that's really what's allowed us to drive the, you know, a key driver of rapid earnings growth and margin improvements. So, just maybe before we wrap it up, Neil, maybe a couple comments around the 80-20 impact. Yeah, Matt, this is Neil.

So we're not seeing.

It's getting worse.

And the industry data is showing that we seem to be turning a quarter, but we thought it would recover in a little bit faster rate. So.

Where we sit today, Matt we're running about in the middle of.

The revenue range about the midpoint that we put out last night and again I just want to highlight it's really a combination of.

The market adjustments, an 80 20 activities and Thats really what's allowed us to drive the.

Neil: Thanks for the question. That's a good summary for Mick in terms of how we're thinking about it, and especially when we think about heat transfer products. And we see some softening in some markets that we potentially, you know, would consider exiting. We accelerate those opportunities so we can continue to drive margin expansion and profitability in that business. HTP is a big business. Not all of it is ready for growth.

That's a good summary for <unk> in terms of how we're thinking about it and especially when we think about heat transfer products.

And we see some softening in some markets that we potentially.

I would consider exiting we accelerate those opportunities.

So we can continue to drive margin expansion and profitability in that business.

<unk> is a big business not all of it.

Unnamed Speaker: It's still going through 80-20 activity. We've isolated some areas in HTP where we've found favorable markets and trends in customers that we're preparing strategic initiatives to grow that business in the next fiscal year, but there's still a lot of work to clean up with the tens of thousands of SKUs and customers that we serve. When you see an opportunity to accelerate that through 80-20 because of market softness, we react pretty quick. Thanks for that color.

Because of market softness.

We're in a pretty quick.

Thanks for that color and then.

Unnamed Speaker: And then, just on the data center side of things, Neil, can you talk about kind of what the go forward funnel looks like and how much visibility you have looking ahead, you know, into fiscal 25 in that business? And when would you expect to start to see a little bit of liquid-related activities start to creep in? Yeah, great question, Matt. So we've got visibility with some of our customers out as far as two years. I'd say, on average, it's between 12 and 18 months.

My follow up just on the data center side of things.

Neil can you talk about kind of what the go forward funnel looks like how much visibility you have looking ahead into fiscal 'twenty five.

That business.

And when would you expect to start to see a little bit of lift.

Liquid related activities start to creep in.

Neil: Funnel continues to grow. It's been growing at the rates that we'd assumed it would grow at, hence the revenue targets that we've been pretty public about, and projections that we've been public about. So we're happy with where we are, working with our customers in both North America as well as in Europe on co-locations and hyperscalers. Relative to liquid, you know, we had the acquisition of technology and acquisition of assets. IP and assets, which is going to really help us with our product portfolio and make sure that we have the most current technologies on the liquid side, and that's immersion. Then we announced we were going to go into development with a couple customers around our cooling distribution unit, or CDU, which is direct-to-chip liquid cooling.

The revenue targets that we have been pretty public about projections that we've been public about.

So we're happy with where we're at.

Working with our customers in both North America as well as in Europe.

On co locations in Hyperscale.

Relative to liquid.

We had the acquisition of technology acquisition of assets.

<unk>.

IP and assets, which is going to really help us with our product portfolio and making sure that we have the most current technologies and the liquid side and Thats immersion.

When we announced we were going to go into development with a couple customers around her.

Cooling distribution unit CDU, which is directed chip liquid cooling and we expect to be in a prototype in the next quarter or two on the CDU.

Neil: And, you know, we expect to be in the prototype stage in the next quarter or two on the CDU with a couple of customers. And if their markets and their end customers have demand for high-performance computing, they'll have a solution in place, assuming we pass the validation and testing with that customer. So, CDU's direct-to-chip, I think, is closer to generating revenue than immersion cooling is at this time. But having the immersion cooling allows us to be part of conversations around next-generation data centers that we weren't a part of prior to the acquisition of assets from TMG Corp. Understood. I'll get back to you. Thanks. Our next question comes from the line of Chris Moore with CJS. Hey, good morning guys.

With a couple of customers and if their markets and their end customers have demand for high performance computing they'll have a solution in place.

Understood I'll get back in queue. Thank you.

Our next question comes from the line of Chris Moore with CJS Securities. Please proceed with your question.

Hey, good morning, guys. Thanks for taking a couple of questions.

Chris Moore: Thanks for taking a couple of questions. Maybe just start with margins. It looks like fiscal 24 operating margin, you know, will be in the 10 plus range, Q4 being a little bit lower than the first three quarters, were adjusted in that six, seven range. I realize you're not giving guidance for 25, but what are the puts and takes to which Modine is being able to match or perhaps improve on?

<unk>.

I realize you're not giving guidance for 'twenty five, but what are the puts and takes to modine and being able to match or perhaps improve on this on the 24 margins in 'twenty five.

Yeah, Hi, Chris it's Nick here so.

I'll, just I'll talk EBITDA margin the same drivers right and I'd say first.

We will wrap up this year as a company well above the target we set out we wanted to be in the.

10% to 12% range and where we're clearly trending between the 12 and 13. So we're ahead of schedule, but that doesn't mean, we're not going to our plan is fully to drive further margin improvement next year and to your question where that comments from a couple of elements.

On the growth side and mix, we still anticipate growth in those targeted areas that we've been through whether that's on the gen set side in PT or datacenters or I E Q.

EV systems, we see growth in that.

Good margin and earnings mix up for us.

And then if you go through where we're at on our 80 20 journey.

So it will be kind of like this year and where we started the journey some of our businesses. We are not going to worry about the top line, we're going to drive earnings and margin through Pls protocol simplification 80, 20, while they continue to accelerate growth in the targeted areas.

Got it very helpful.

Maybe maybe talk a little bit more about M&A I know that in the prepared remarks, you guys talked about <unk>.

I'm really looking at bolt on acquisitions.

At the Investor Day, you talked about needing roughly $400 million to $600 million in M&A between 24, and 25 to comfortably reach your climate solutions calls.

You have subsequently indicated not necessarily need to get to that level I'm just.

Wondering if you can give kind of any updates in terms of of what a more reasonable range might look like moving forward.

We're getting everything we thought we would get from the improvement and in many cases as we better serve our customers.

<unk> on key customers' orders are up so all of that said.

Reason, why we don't see the need for large acquisitions to get to our financial targets is really around the lessons we've learned.

From an 80 20 about the stickiness of some of our business and then the second thing I'd say to turn it over Neil.

We've continued to uncover jewels within modine that we didn't necessarily know where there that we can grow organically yes.

Yes.

Great point Mec and thanks for the question.

The $4 600 number was the very first days of our <unk> thousand 20 journey, a couple of years ago, and we've learned so much more especially with the fact that we've got more organic growth that we can drive within the company, which requires less inorganic growth for us to meet our inorganic for us to meet our financial targets. So we have spent a lot of time on the organic.

Growth in the businesses that we want to stand up.

And create organizations around it to drive and then at the same time, we have been active on the M&A front, we've done multiple divestitures in a couple of small deals in the last couple of quarters, and we're doing that in strategic areas, where it helps us.

Build out our product portfolio helps us expand in a geography or most importantly, it helps us improve our technology in the areas that we want to serve.

Okay.

On that last point are really hard to quantify due to timing and opportunity, but I think it's safe to say that that original number is at least half.

From what we thought we would need so.

Again, it really depends on the funnel and the exact timing, but it's significantly below what will still be doing it out looking at M&A.

Got it that's very helpful. I will jump back in queue. Thanks, guys.

Our next question comes from the line of Jeff Van <unk> with B Riley. Please proceed with your question.

Good morning, everyone. Let me first say impressive work on margins and overall cash flow.

Yes, so on the heat pump market.

We continue to see some softness there is this heat pump adoption has been elongated out over an additional couple of years based on the European regulations.

Some excess inventory in the system.

And we're pacing our investments in heat pump to adjust to that long term.

Im personally with what we're doing and the actions that we put in place. We're confident in this in this space in this market. It's just a short term reset based on the extension of the.

The adoption rates. So that's kind of what we're seeing we're working through it it's real time, it's live.

The team is making the appropriate adjustments on the Gen set side.

We've got a nice technology, there, we're helping the essentially the industry move towards.

A lower cost.

More reliable.

Higher quality product that.

Is starting to get adopted the earlier adopters are starting to win share and I think a lot of a lot of people are taking notice of that and theyre looking for the solution that we can provide.

With modine.

Okay. That's helpful. And then I know theres been a lot of talk about a $20 million you seem to be executing phenomenally well.

On everything Youre doing there.

I guess are there other low margin businesses that you are planning to exit or you might contemplate exiting and as you look at your entire enterprise how much business do you have that you'd like to either divest or winding down at this point, if we were to kind of look at that at an overall.

Yes, it's a good question. So certainly as we continue to improve our profit profile and we expand margin in the business. It sets the bar in our raises the bar and then.

You always have some bottom quartile business that needs to be addressed.

Approaches and activities in terms to address it.

Okay.

We haven't gone out with a specific number in terms of what that looks like but.

I can see it being in the same range of what we've been able to address over the last 18 months with an 80 20.

<unk>.

It's what three to four $3 million to $400 million of revenue that we've through divestitures and product line simplification, so far and I would expect.

Somewhere in that 100 plus million dollars range as we go forward that there's always going to be.

Something that's underneath the threshold.

Yes, I think two we look at the data it aligns to.

Neal is going in.

As Neal and Theres always the bottom quadrant.

The quad for stuff and just for any company for us can be 4%, 5% of sales I think where we're at it's probably a little bit more than that so there is probably a.

$200 million to $250 million type number of what we would call when we say that quad for it.

The lowest volume product the lowest volume kind of a margin products with customers that are lower on our.

Volume scale.

Okay. That's helpful. And then if I could just squeeze in one more I wanted to circle back to the liquid corporate data centers for just a moment just to clarify I think you said that youll start to bulk of data centers that previously you did not maybe just touch on strategy to win business.

Yes, we are.

Absolutely we've cast.

Net on the Hyperscale side to go into it.

Make sure that the Hyperscale or is that are winning share in this space understand the technology advantages that we have with modine and our airedale brand at 100%, we're having those conversations and that takes time to cultivate those relationships.

Theyre looking for us as well as our competitors in terms of how we can advance the next generation data centers, our own high performance computing driven by all of the things that we know AI OMB.

And.

Not having the CMG assets, we werent in those discussions, but we are today now.

Okay, and the new liquid cooled CDU that will be out in Q4 or Q1, we think.

Yes, we're targeting we're targeting for Q1.

Of the next fiscal year and getting on some pilots and working closely with our customers with some of our couple of our Colocation customers correct.

Okay, great. Thanks for taking my questions and best of luck, Yes of course.

Okay.

As a reminder, it is star one to ask a question.

Our next question comes from the line of Brian <unk> with Gabelli funds. Please proceed with your question.

Hey, good morning, everyone and congratulations on another great quarter.

Thanks, Brian.

And a lot has been addressed already.

On the German businesses Im looking at the cash flow statement doesn't look like there was any.

Any cash and we're able to jettison any liabilities with those businesses when they went out the door.

Yeah, Hey, Brian it's Mick.

It's actually a small cash.

Benefit on the ultimate transaction that immaterial and then two answers on year liability question actual liabilities.

Biggest one on the balance sheet would be some pension liabilities that went in that was a fairly material number which we're happy about and then the second one and you know it well it was.

The potential liability and Ray if you took each of those facilities in a in a situation, where we would exit them.

Liability that modine and the shareholders would have if we would have retained them was.

Quite a large potential liability.

Okay.

We appreciate that and.

Forgive me, but.

These businesses, so the roughly $30 million or so of revenue was not in the prior 6% to 11.

Sales contemplation for growth that was given at the end of the second quarter.

We have built.

We factored that in Brian.

The days heading into our.

Our earnings call and we were trending a little bit lower towards the lower end of the range.

What we did this time is we true it up we made some adjustments and then on top of it.

For our remaining automotive business, we took that down a little bit.

Okay, Alright understood there.

Last one for me last year in the fourth quarter you had.

Evaluation allowance adjustment that.

Tweaked your GAAP earnings anything as we think about this fourth quarter from a tax perspective that could move the needle one way or the other obviously.

Al goes we're going to see year over year declines in <unk> and Etfs.

Anything we should be thinking about for those.

For the fourth quarter here.

No good point about.

The reported number that's going to be tough will do or we will make sure we highlight that but from this coming Q4, we're not anticipating any large.

Events or impacts to that.

Understood well, we all keep raising the bar higher and higher each quarter. So congratulations and I look forward to talking to you later.

Thanks, Brian.

Our next question comes from the line of Chip Moore with <unk>. Please proceed with your question.

Thanks, and congratulations on the continued impressive EBITDA margin expansion and self-help catalysts to drive highly impressed with EPS growth.

Even exceed at main Street high estimate.

And I've got a really good sense of the data centers differentiation edge when touring that facility in August in person, but I just want to address another business line actually.

For advanced solutions revenues.

Revenues were flat sequentially in the quarter, but your guidance at the midpoint implies about a 25% sequential growth in the March quarter from the December quarter.

Can you just gives us a little bit more of an update on battery thermal management as we kind of look out over the next 12 months.

That timing.

Without pinpointing exactly the 160 million sales of maturity.

How far out do you think that is and then while you're on the topic for thermal management.

How is the planning of a launch in Europe.

Yeah. Good question. Thanks for the questions. This is Neil here. So we continue to invest in.

Our battery thermal management system electronics growing package certainly we are seeing.

Continued interest in the product and we're expanding our capabilities and capacities.

<unk>.

We opened up the earnings.

Script at least to talk about the $160 million.

It would be at peak volumes. So think two to three years out when you are running at peak volume within the within these programs that we won so we're excited about that because the trend continues to grow quarter over quarter in terms of the potential revenue there more investments are being made and we are.

We've been in contact and <unk> had some really good conversations in Europe with some of our customers that we've targeted in the fact that we've been public about the expansion in an existing facility that has existing infrastructure in modine employees.

That are already.

Attuned to making sure that we have good reliability quality and delivery for this industry has been well received so we're going to continue to ramp up our investments we're going to continue to open up the space in the facility in Italy for us to be able to grow in Europe, and we've had positive conversations with those customers.

And we continue to trend in the direction that we would expect with the amount of investment that we put into this business.

Great that's really helpful color.

Switching gears during my visit in August the facilities.

Not just data centers client on HVAC I got a sense of really the customers focus and emphasis there alive in the shops dedicated customers and such but.

I'm just wondering you know as you progressed through 2020.

More so on performance technology side are you uncovering more savings and efficiencies and you budgeted or expected a year ago, and then I'm. Just wondering just thinking about this whole customer maximization as you go through both segments on 80 20.

How do you maybe avoid going to lean.

As you achieve the value based pricing.

Yeah. Good question. So certainly on both sides of the business not just performance technology, the climate solutions and performance technologies.

<unk>.

Great. Thanks, Thanks for that elaboration, that's a good catch.

For margin expansion in the next fiscal year, Thanks, and that's it for my questions.

Thanks, I appreciate it Tim.

Our next question is a follow up question from the line of Matt Summerville. Please proceed with your question.

Yes, just two quick follow ups.

What's the headwind and I apologize if I missed it what's the headwind from divestitures in your fiscal fourth quarter.

And it's going to be 20% to $25 million.

The estimated impact in Q4.

Alright.

The <unk> business two to three years ramping to $160 million or thereabouts based on the programmatic wins you've had.

Fiscal 'twenty four realizing this is Barry alongside the coatings business the EV components.

How big is the <unk> business for you guys. This year to kind of think about how that trajectory looks out over the next two to three.

Yes, so that.

<unk>.

The at the Ats business.

Excluding coatings is about a $100 million.

And I think.

And we just had that question too I think we will provide an updated long term outlook, Matt that we've this year, we're talking about 330% type growth and.

And we said, we and we think a CAGR on that 35% to 40% I think as far as growth for next year, we would expect it to stay in that range. So.

At $100 million growing at.

In that compound growth rate range of that 35% to 40% would seem reasonable.

Yes.

Got it okay. That's all for me. Thank you.

There are no further questions in the queue I'd like to hand, the call back to Kathy powers for closing remarks.

Thanks, so much and thanks to everybody for joining us this morning, youll be able to access the replay of this call through our website in about two hours and we hope everybody has a great day.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.

Q3 2024 Modine Manufacturing Co Earnings Call

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