Q3 2025 Modine Manufacturing Co Earnings Call
Good morning, ladies and gentlemen, and welcome to <unk> third quarter fiscal 2025 earnings conference call.
At this time, all participants are in listen only mode.
Later, well conduct a question and answer session and instructions will follow at that time.
If anyone should require assistance during the conference. Please press Star then 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.
Hello, and good morning, welcome to our conference call to discuss <unk> third quarter fiscal 2025 resolved.
Neil Breaker: Im joined by Neil Breaker, our President and Chief Executive Officer, and Nic look rally, our executive Vice President and Chief Financial Officer.
Neil Breaker: This mindset will be using with todays presentation are available on the Investor Relations section of our website Modine Dot com.
Neil Breaker: On slide three of that deck, it's our notice regarding forward looking statements. This call will contain forward looking statements is outlined in our earnings release as well as in our company's filings with the Securities and Exchange Commission.
Neil Breaker: With that I'll turn the call over to Neil Thank.
Neil Thank: Thank you Kathy and good morning, everyone. I am pleased to report that the team delivered a strong quarter with year over year revenue growth and margin improvement. We are successfully leveraging data center growth and climate solutions to offset some challenging market conditions in performance technologies.
Neil Thank: Nick will cover the financial results in more detail, so let's dive into the segment updates.
Neil Thank: Please turn to slide four.
Neil Thank: Our climate solutions segment had another outstanding quarter, driven primarily by continued growth in the data center business.
Neil Thank: That's been our revenues increased by 176% this quarter.
Led by strong organic growth and the inorganic benefit of the Springfield acquisition.
Neil Thank: Scott Springfield added 63 million of data center revenue, which is more than three times the datacenter revenue in the same quarter in the prior year.
Neil Thank: This has been an outstanding acquisition for us and I'm very proud of this team.
Neil Thank: They quickly increase capacity and strengthened customer relationships to drive synergies leading to the explosive growth we've seen over the past three quarters.
Neil Thank: Another area of investment has been expanding our capabilities for liquid cooling specifically, our <unk> distribution unit or see to you last.
Neil Thank: Last quarter, we showcased our CPU and multiple industry shows, including the supercomputing show or S. V 24 in Atlanta.
Neil Thank: We are receiving many request for quotes and are in design discussions with multiple hyperscale and colocation customers globally.
Neil Thank: It is important to remember that our CDU is an integral part of our data center cooling system and is therefore able to operate at a higher efficiency level. So the use of our optimizer software and monitoring system.
Neil Thank: As our customers prepared to meet the demands of high performance computing applications, we can custom design systems to meet their rapidly changing needs.
Neil Thank: Another area I would like to highlight is our global data Center service capabilities, our customers tell us to the consistency and the responsiveness of our support personnel as best in class.
Neil Thank: Our strong customer relationships are a critical differentiator as we partner with our customers for design to delivery to after sales support.
Neil Thank: This along with our purpose built products and technologies is why were winning and why we expect to continue delivering above market growth as.
Neil Thank: As I mentioned last quarter, we have decided to expand our manufacturing capacity in Asia Pacific region with new production facility in India.
Neil Thank: This facility will support both data center cooling products and cooling modules for stationary power generation.
Neil Thank: Both of these product groups will support the growing data center infrastructure in the region. Both inside the data Center Hall, and with the campus power infrastructure.
Neil Thank: We remain confident in our outlook for a data center business. There have been many headlines about improvements in their modeling and concerns about a potential slowdown in data center construction, we believe that the increased efficiency in large language modeling may increase the adoption rate for AI technologies and the need for data center infrastructure and could potentially improve the ROI on these <unk>.
Neil Thank: <unk>.
Neil Thank: Process has evolved we've.
Neil Thank: We therefore believe that improved processing efficiency is good for the industry in the long term and are here to support our customers with a cooling technologies that they need to meet these competitive technology demands.
Neil Thank: Once again the climate solutions segment is having a fantastic year as making the investments to continue delivering above market growth in our next fiscal year and beyond.
Neil Thank: Please turn to slide five.
Neil Thank: As we discussed last quarter, we anticipated that the performance technologies segment would have a challenging quarter with lower sales driven by extended seasonal shutdowns, along with ongoing softness across auto commercial vehicle and agricultural and construction equipment markets.
Nick: Nick will co market declines are a normal part of the business process cycle and the team is proactively addressing all of these areas that we can control.
Nick: This includes leveraging our 80 20 processes and implementing aggressive cost controls.
Nick: Our 80 20 focus is helping us to better navigate these market cycles over the past three years, we have raised our margins by investing in and growing higher margin product lines, while exiting or improving lower margin business in.
Nick: In addition, we've taken further steps to accelerate this transformation.
Nick: A year ago, we completed the divestiture of our three German automotive businesses and as a result have reduced the technical and administrative head count that was supporting the business in Europe. This past quarter, we reached an agreement to sell the building that houses our European headquarters and expect the transaction to close later in 2025.
Nick: We remain on track with our long term strategy, we will continue to deemphasize commoditized components, while transitioning the portfolio mix to higher margin and growth businesses.
Nick: Two great examples of that are E mobility solutions in the Gen set modules, which are at the spearhead of the strategy and transformation. These businesses have the potential to grow revenue at rapid rates, while delivering much higher profit margins.
Nick: Confidence that we're making the right decisions to evolve our business portfolio for long term sustainable growth.
Nick: In fact, the new data center production facility in India that I. Just mentioned will also provide capacity for gen set production in the region.
Nick: Looking ahead, we expect these markets to remain soft for a good portion of 2025 and are planning accordingly.
Nick: Well, you're also expecting an acceleration of growth in those areas. We are targeting for investment further improving our business mix and growing market share in our strategic markets.
Nick: We have made substantial improvements in this business and we're looking forward to closing out the year with a strong Q4, leading into an even stronger fiscal 2026.
Nick: I'll now turn the call over to Mick who will provide some further updates on the quarter and expectations for the balance of the fiscal year.
Mick: Thanks, Neal and good morning, everyone. Please turn to slide six to review the segment results.
Mick: Climate solutions achieved outstanding results again, this quarter with a 42% increase in sales.
Mick: 57% improvement in adjusted EBITDA.
Mick: And an adjusted EBITDA margin of 21%.
Mick: This includes strong organic growth along with $74 million of revenue from the Scotts Springfield acquisition.
Mick: Data center sales grew $106 million or 176% from the prior year, driven by Scott Springfield, and higher sales to North American co location customers.
Mick: Modine data center business continues to exceed our expectation.
Mick: And we are once again raising the revenue forecast for this product group.
Mick: HVA CNR sales rose by $14 million or 15% driven by indoor air quality revenue from Scott Springfield, along with higher sales of school products.
Mick: Heat transfer products sales declined 13% or $13 million due to lower sales to commercial and residential HVAC refrigeration and European heat on customers.
Mick: Market demand in the European heat pump market accounted for about half of the decline along with the recent in sourcing decision by a large HVAC customer and lower sales of custom replacement coil.
Mick: Overall, we're very pleased with climate solutions strong earnings conversion, which resulted in a 200 basis point improvement in their adjusted EBITDA margin was 21%.
Mick: As we look to the fourth quarter, our outlook remains strong and targeted markets, particularly in data centers, where we continue to invest to promote rapid growth.
Mick: Please turn to slide seven.
Mick: Yeah.
Mick: We anticipated significant performance technologies revenue headwinds in the quarter due to normal seasonal trends extended customer shutdowns and ongoing weakness in our vehicular markets.
Mick: There remains weakness across all markets, including automotive commercial vehicle and off highway customers along with the impact of the prior year automotive divestitures.
Mick: Advanced solution sales were lower by 7% or $2 million driven by a decline in EV auto and E vantage system.
Mick: Partially offset by higher sales to specialty vehicle and military customers.
Mick: The lower E. Vantage sales are driven by temporary supply chain issues impacting key north American bus customers.
Mick: Liquid cooled application sales decreased 19% or $21 million due to the previously mentioned lower end market demand along with the prior year divestitures.
Mick: Lastly, air cooled application sales were lower by 17% or 28 million also driven by market dynamics and the prior year divestitures.
Mick: Partially offsetting the lower market demand was a 16% increase in sales to Gen Z customers.
Mick: Adjusted EBITDA was down 22% from the prior year and adjusted EBITDA margin decreased by 90 basis points.
Mick: The lower earnings and margin were a direct result of the lower Q3 sales volume, especially from a fixed cost absorption perspective.
Mick: While most industry experts believe that these markets will begin to recover at some point. During 2025, we believe it was prudent to take additional proactive actions to reduce our fixed cost.
Mick: During the quarter, we took a number of severance charges with a targeted annual savings rate of nearly $15 million.
Mick: These are very difficult decisions, but necessary until we are clearly seeing the market recoveries.
Mick: In addition, as Neil mentioned, we signed an agreement to sell the performance technologies headquarters in Germany.
Mick: We expect this transaction to close later this calendar year, and we will receive approximately $12 million in proceeds once local government approvals are finalized.
Mick: As we looked at Q4, we expect a sequential ramp in revenue and earnings which will be primarily driven by the typical seasonal pattern that we've experienced in previous years.
Mick: Now, let's review total company results, please turn to slide eight.
Mick: Third quarter sales increased 10% driven by Scott Springfield, and organic growth and climate solutions.
Mick: Climate solutions growth was partially offset by $8 million of divestitures, along with the market related volume declines in performance technologies.
Mick: Our gross margin improved 160 basis points to 24, 3% driven primarily by higher data center in <unk> sales volume.
Mick: More than offsetting the lower vehicular revenue.
Mick: Yes.
Mick: This sizable margin improvement was directly attributable to our overall transformation strategy and 80 20 methodology.
Mick: SG&A includes acquired expenses from the assets and business, including incremental amortization related to intangible assets.
Mick: It also includes higher salary and incentive compensation expenses directly related to our growth and improved performance.
Mick: As previously mentioned, we implemented several cost savings measures this quarter, resulting in $8 3 million of restructuring expenses.
Mick: Adjusted EBITDA was strong again, this quarter with an increase of 18% or $13 million.
Mick: Adjusted EBITDA margin was 14, 2%, representing a 100 basis point improvement from the prior year.
Mick: This quarter and now represents the 12th consecutive quarter of year over year margin improvement.
Mick: And these consistent results are being generated during very difficult market conditions across performance technologies.
Mick: Our actions and performance will only continue to improve when those markets turn.
Mick: Adjusted earnings per share was <unk> 92.
Mick: 24% higher from the prior year.
Mick: It was another good quarter with revenue and earnings growth momentum in our key growth markets allowed us to overcome challenges and others.
Mick: Now moving to the cash flow metrics, please turn to slide nine.
Mick: We generated $45 million of free cash flow in the third quarter consistent with the second quarter.
Mick: Please note that the quarterly cash flow included $9 million of cash restructuring payments.
Mick: This puts our year to date free cash flow of $102 million, which remains on track with our full year outlook.
Mick: Net debt of $287 million was $85 million lower than the prior fiscal year and into.
Mick: $40 million lower than last quarter.
Mick: With a leverage ratio of <unk> eight our balance sheet remains strong and we anticipate another year of excellent cash flow.
Mick: Now, let's turn to slide 10.
Mick: For our fiscal 25 outlook.
Mick: With much of the year behind us, we're maintaining our fiscal 'twenty five outlook for sales adjusted EBITDA and adjusted EPS base.
Mick: Based on our Q3 results and market conditions, we now see full year revenue growth trending towards the lower end of the guidance range.
Mick: This was primarily due to two factors.
Mick: The first being softer than anticipated market for performance technologies and the second being the recent negative impact of foreign exchange changes.
Mick: We remain quite positive for the overall climate solutions outlook, we are increasing the datacenter outlook, while adjusting down HVA CNR and heat transfer products.
Mick: We now expect data center sales to grow a 110% to 120%, which follows 69% growth in the previous year.
Mick: For performance technologies, we've adjusted all ranges to reflect the current FX environment and ongoing weakness in all global commercial vehicle off highway and automotive markets.
Mick: As for adjusted EBITDA, We anticipate a sequential improvement in Q4 earnings to be more in line with Q1, and Q2, which would put the full year slightly above the midpoint of the current.
Mick: Adjusted EBITDA guidance range.
Mick: We currently expect adjusted EPS to remain in a range of $3 65 to $3 95.
Mick: And are currently trending towards the higher end of that range.
Mick: Please note that our assumptions for interest expense taxes and.
Mick: Amortization depreciation expenses are summarized in the appendix attached to this presentation.
Mick: Our view of cash flow remains consistent with prior quarters with free cash flow expected to be in line or above the prior fiscal year.
Mick: And before wrapping up I'd like to make some comments regarding potential tariffs on U S imports from Canada, Mexico and China.
Mick: We're anticipating a lot of chaos across the markets as the countries and customers navigate through the evolving situation.
Mick: But we are confident in our ability to mitigate the risks for a number of reasons.
Mick: First for the majority of Modine Global operations, we source manufacture and sell within one geographic region.
Mick: Which eliminates most trade risks.
Mick: In addition, we have a truly global footprint and can adjust their manufacturing and sourcing strategies as needed.
Mick: For our climate solutions, we have exposure tied to Canada, and Mexico, but the vast majority of those sales are covered through commercial agreements with the ability to pass through tariffs to customers.
Mick: With regards to performance technologies.
Mick: Our tariff exposure is mostly related to our Mexico plant and associated maquiladora structure.
Mick: As we've done in the past, we will implement a tariff surcharge that will remain in place through the length of the tariffs.
Mick: From a supply chain perspective, we have less than 10% of our annual spend that is subject to the proposed tariffs.
Mick: For these materials, we will implement a number of strategies, including renegotiating with suppliers.
Mick: Shifting through increases through pricing or resourcing it needed.
Mick: In terms of financial risks our analysis shows that we can mitigate the majority of the combined tariff exposure.
Mick: We'll also work to minimize any margin or lag effects tied to the path II or recovery of tariffs.
Mick: We will address each customer on a case by case basis, using our 80 20 principles.
Mick: The <unk> team is accustomed to dealing with large raw material price swings as we've seen over the years and copper aluminum and steel.
Mick: The tariffs will certainly add a lot of complexity into the markets, but we can manage through it as we've done in the past.
To wrap up we're pleased with the third quarter results and look forward to finishing the year strong our leaders have proven the ability to deliver in all market conditions, capturing exponential growth from certain megatrends and aggressively managing costs, while other markets are down.
Mick: 80, 20 is about treating businesses differently and we will continue to execute on our strategic transformation, while delivering another year of record results and corresponding shareholder returns.
Mick: With that Neil and I will take your questions.
Mick: Thank you.
Mick: If you have a question at this time. Please press the Star then one key on your telephone keypad.
Mick: I can tell them indicate your line is in the question queue.
Mick: You May press Star, then two who would like to move your question from the queue.
Speaker Change: For participants using speaker equipment it here.
Mick: We have started to pick up your handset before pressing the star keys.
Speaker Change: Thank you. Our first question comes from Chris Moore with CJS Securities. Please proceed with your question.
Chris Moore: Hey, good morning, guys. Thanks for taking a couple.
Chris Moore: On this a little bit and you know in terms of of improve processing efficiency large language modeling.
Chris Moore: From your perspective, it sounds like you know longer term you you're not worried are you seeing or hearing anything from customers regarding changes in and and build schedules for data Center you know after the deep snoek announcement.
Chris Moore: Hey, Chris Thanks for the question, Yes, certainly we've we've been we're in frequent conversations with our largest customers, particularly the hyperscale customers and that obviously has come up over the last several weeks and we've talked to our customers and they've assured us if assured us that this does not change any of their build schedules over the next couple of years. They don't think it'll be a.
Chris Moore: Slow down for them.
Chris Moore: They continue to be firm in terms of their demand for App AI applications and we've seen that in some of the most recent earnings announcements from some of the large hyperscale or has a confirmed their cap expense for data center construction.
Chris Moore: Yes.
Chris Moore: Got it very helpful.
Chris Moore: Maybe you can just go a little bit deeper in terms of you talk about many request for quotes.
Chris Moore: On the CDU.
Chris Moore: Or are these competitive bidding situations you know are there.
Chris Moore: You talked about customization, just just trying to get a better sense and you know in terms of Timeframes in and if it's.
Chris Moore: Modine and narrow or you know in the beginning are you competing.
Chris Moore: Competing with other people on some of these things.
Chris Moore: Yes, no. That's a great question, certainly theres lots of competition out there, but typically where we're at is it's a combination of youre doing competitive bidding, but at the same time, we're doing new product development. So as we're developing these solutions that are bespoke for the end user at festival for the co location of the Hyperscale or.
Chris Moore: We go through this competitive bidding process, but typically where we land is that.
Chris Moore: We have the specifications that are in line with their needs and we can provide those specification. So although there is some competitive bidding out there if we do the new product development right.
Chris Moore: We'll have the necessary features that will be desired by the customer that will help us over the finish line are win win the job ultimately.
Speaker Change: Got it and then maybe just last one for me I mean heat transfer product sales down again.
Chris Moore: Just your thoughts there in the medium term.
Chris Moore: Yeah, no. It's a good question I mean, we still seeing the the heat pump it he pulp market.
Chris Moore: In the wrong direction.
Chris Moore: We've seen some of the where we have full capacity with some of our larger customers.
Chris Moore: Utilizing our overflow capacity they have enough capacity internally.
Chris Moore: But they're not leveraging us for some of those coils, which start starting to flatten out we've seen orders kind of stabilized over the last couple of quarters year over year comparisons aren't the best but in terms of the order rate we haven't seen.
Chris Moore: The decline that we had in the beginning of the year. So we're starting to see that kind of taper off.
Speaker Change: Got it I'll leave it there thanks guys.
Chris Moore: Got it.
Speaker Change: Our next question comes from the line of Matt Summerville with D. A Davidson. Please proceed with your questions.
Kenyan haze: Good morning, you've got Kenyan haze on for Matt Summerville, Thanks for taking my questions.
Kenyan haze: As we think about <unk> being up 40% sequentially and multiples larger on the data center side year over year, what's driving that upside how does the call. It one to two year growth outlook look like for this business and how are orders and backlogs progressed to date within this business.
Kenyan haze: I've got a follow up.
Kenyan haze: So I'll talk about what's driving the business.
Kenyan haze: We've established a really good relationship with our with hyper scaler and we're gaining share so.
Kenyan haze: You know our ability to develop new product for the next generation data centers our investment in.
Kenyan haze: And our facilities our investment in capital for this specific customer our investment in R&D and labs.
Kenyan haze: For us to work together to create product for the next generation data centers built a lot of credibility and trust.
Kenyan haze: And with that credibility and trust and investment comes additional revenue and additional market share. So.
Kenyan haze: We've been able to scale, we've been able to prove that we can scale with our best in class on time delivery best in class quality standards and as long as we maintain those.
Kenyan haze: We maintain those key performance indicators than the customer is going to stick with us as we continue to work with them to evolve into the next generation. So we've been winning share and we're just building a moat, that's where we're able to get a lot of the growth within Scott Springfield.
Okay.
Speaker Change: Great. Thanks.
Speaker Change: Switching over to performance technologies based on where OEM indications are coming in inventories and then any other data points that modine might look to when forecasting demand on this side when should we start to think about the particular markets inflicting and returning to positive growth.
Speaker Change: Yeah, that's snapped up I'll take that one so <unk>, if we break it down by market.
Speaker Change: One of the things we've.
Speaker Change: Hi.
Speaker Change: Really sorry to seen see a little bit as it turn on the auto side, especially in Europe. After.
Speaker Change: A really slow December quarter.
Speaker Change: A lot of articles coming out this week about pickup in January, especially on the European side and on EV auto sales, so a little bit of rebound after a lot of shutdowns around the holidays on the auto side.
Speaker Change: Across medium and heavy duty truck I think the expectations are for <unk> and we're just following market conditions is it is going to be a soft 2025 on medium and heavy truck.
Speaker Change: And then when you look at <unk>.
Speaker Change: AG and construction.
Speaker Change: People are expecting a little bit of pickup in the second half of <unk>.
Speaker Change: 2025, and the only other thing I would say there is when we think about AG and construction.
Speaker Change: We play in very specific niche niche areas.
Speaker Change: The much larger engine.
Speaker Change: Excavators mining equipment and so forth so.
Speaker Change: That can be.
Speaker Change: It can be a positive thing for us and it can also be just a different data point then when people just put out a general aggregate construction data point.
Yeah.
Speaker Change: Thank you.
Okay.
Speaker Change: Yeah.
Speaker Change: Our next question is from the line of Noah Kaye with Oppenheimer. Please proceed with your question.
Speaker Change: And thanks for taking the questions.
Speaker Change: Neil maybe you already gave the most important answer in the opening around.
Speaker Change: The signals from your customers in data center, but I just wanted to double click on this.
Speaker Change: You know you talked about no changes in customer plans for the next couple of years, what's your confidence level today and the ability to achieve the targets you laid out at Investor day, and what gives you that confidence.
Speaker Change: Yeah, No. It's a fair question.
Speaker Change: I remain as confident as I did when we presented the goals and we are seeing in September we continue to build out the capacity. We continue to develop the product we continue to build a moat with great relationships with these large customers.
Speaker Change: We continue to win market share on the Colocation side.
Speaker Change: So those are the things that give me confidence in and we talk to the Hyperscale as we talk to the Colocation customers and the general comment is this news does that change their plans assuming that that's true.
Speaker Change: That gives me cabinets.
Speaker Change: You talked about the capacity planning that you're doing I mean, maybe just sort of a benchmark for us I think in the past you shared.
Speaker Change: A number of the capacity announcements you've made in recent quarters, what kind of gets you to above that $1 billion, mark, but just sort of level set for us.
Speaker Change: How youre doing capacity planning now moving over the next couple of years to support those revenue levels.
Speaker Change: Yes Fair question. That's a good question no. It's always good for for a reminder, there because there's a lot we've done a lot and there's a lot of moving pieces. So our expansion in Guadalajara, Spain for.
Speaker Change: Continental Europe was a big pieces, we converted an HD HCP plant into data centers are additional.
Speaker Change: An additional a building that we acquired an additional factor that we acquired in and lease region of the U K. So we've doubled our capacity there in terms of square footage.
Speaker Change: We've done that in the United States in Mississippi, and Virginia, We've done in Canada by adding a plant. So we went from essentially.
Speaker Change: A year to two years ago from one five plans to roughly 10 facilities in those 10 facilities had lapsed and the capability to for us to grow beyond $1 billion.
Speaker Change: Data center revenue.
Speaker Change: Above $1 billion.
Speaker Change: And then most recently as Youre aware in all of the expansion in Asia as well, it's gonna be a it's going to be helpful. In terms of our ability to have reach globally.
Speaker Change: Knowing that you have to be in region for region for infrastructure for data centers.
Speaker Change: Right and to and to further clarify theres the footprint there to support the greater than $1 billion and you're just going to be layering in incremental lines, our shifts to basically ramp of revenues within the footprint is that the right way to think about it.
Speaker Change: Totally.
It's all about adding additional capital in terms of just.
Speaker Change: Machining equipment, <unk> lasers, and that assembly lines. So for example, one with what we're doing at our Virginia facility as we stood up the very first pilot line.
Speaker Change: Now on the three lines of that same facility and then we're expanding additional lines in Grenada as well. So you just kind of repeat rinse repeat.
Speaker Change: And did you essentially.
Speaker Change: You duplicate processes.
Speaker Change: Assess and add a little bit of equipment inside of the.
Speaker Change: Inside of the brick and mortar.
Speaker Change: Great.
Speaker Change: Last one for me I think for now.
Speaker Change: You talked a little bit about the actions you're taking in P. T.
Speaker Change: Thank you for sharing sort of the outlook across the end markets I. Just think it is helpful to understand what the new baseline will be because you've also talked about doing more 80, 20 and shared target of taking out another I think $300 million of revenues through that process over a couple of years. So.
Speaker Change: When we do get the sort of.
Speaker Change: Upswing back in PT.
Speaker Change: How do we think about a new baseline how much sort of 80 20 optimization is kind.
Speaker Change: Coming out of prior revenue totals at this point and how much more do you expect to do so.
Speaker Change: Say by the time, where we're seeing that upswing later next year.
Speaker Change: Alright.
Nick: Nick Thanks for the question and Theres a lot.
Nick: You touched on a lot there is a lot of the complexity Dell.
Nick: We still believe and we're planning on about 300 million of planned product line exits divestitures. So.
Nick: That we're still sticking to that.
Nick: <unk>. This year has been the market downturn on top of that so I'd say you kind of blend all of the markets Theres, a 10 15 plus percent volume drop.
Nick: Across our base, you know and Thats some of its non strategic but other parts is absolutely core and I talked about the heavy duty engines on the off highway side.
Nick: Ben.
Ben: Sweet spot for us and that's been.
Ben: In part this pull down the revenue all of that said I think the best way to think about it honestly is when we are at our IR day, we guided to and we've talked about.
Ben: The performance technology business kind of being flat in that flat range I think we added <unk> to 3% and Neil and I started that a couple of years ago to if you just kind of bake everything yet.
Ben: Ups and downs of the market probably depth as we think about it more again as.
Ben: More on a flat top line side with a big lift on margins and will drive earnings due to margin improvement could we do a little bit can we do better than that if the markets recover.
Ben: When they do sure and then at the same time, we will naturally have a little bit of offset with some.
Ben: Divestiture activity. So again I think strategically we're not looking to grow the top line there, but drive a lot of margin and earnings through the 80 20 activities.
Mike: Okay I appreciate that thanks, Mike.
Mike: Thank you.
Mike: Because I can ask a question you May press Star then the number one on your telephone keypad.
Speaker Change: The next question is from the line of Brian Drab with William Blair. Please proceed with your question.
Brian Drab: Hi, Thanks for taking my questions, maybe just to kind of continue on with that last line of thinking.
Speaker Change: Sure.
Speaker Change: Talk about 16% to 18% EBITDA margin of course at the at the Investor day as well.
Speaker Change: And I'm just wondering if you could give it give us an update maybe like some more current thoughts.
Speaker Change: Where do you think you can exit.
Speaker Change: It's about 25 in turnkey EBITDA margin and.
Has the market dynamics at all.
And your expectation for where you end up in fiscal 'twenty seven.
Nick: Yeah. This is Nick.
Nick: Nick again, I'll take the first cut.
Nick: Bracket that.
Nick: <unk>.
Nick: We expect to end this fiscal year and in the Q4 as I commented typical to other patterns, where we see a lot of fewer production days in Q3, we see a step up in revenue in Q4 that happened last year and I'm sure. If we look back.
Nick: <unk>.
Nick: Over time, that's been a consistent sale with that desktop and sequential volume, we sit and the cost reduction we expect to end the year with.
Nick: A nice margin step up from Q3 and.
Nick: Probably it could be the highest margin of the year. So exiting this fiscal year at a higher margin well in that 15% to 16% range.
Nick: The climate solutions group and the leverage of the data center business has been phenomenal day or that business is well ahead of our.
Nick: Plans and trajectory next year.
Speaker Change: We are blinded manner, Jim we will drive margin improvement performance technologies, assuming the markets stay at these levels and as the markets recover when they recover that will be additional upside sale, we still believe quite strongly that.
Speaker Change: By fiscal 2007, so in one year out that performance technologies can be in that 15% to 18% range at that point, if you blend it with climate solution will be well within the targeted range that we set the company out to achieve.
Speaker Change: Okay. Thanks, very much and then on.
Data center when you say that you are gaining share in data center can you just help me think about that.
Or are you, saying in part that maybe youre selling air handlers in large part and now you're selling chillers to hyper scaler or is it that you were winning in a particular geography, maybe Europe and now you're winning business with that customer in North America can you just speak a little more specifically about those share gains.
Speaker Change: Majority of the share gains in North America, we're winning we're winning share in North America against the competition. So we're we didn't compete in the past we have facilities factories labs products and that ranges from everything that you mentioned chillers to cracks crawls bandwidth Cpus.
Speaker Change: Our optimizer software that product set that product portfolio that we've introduced into North America, where we're gaining share.
Speaker Change: Okay got it and then I'll just ask one more pronounced I can't.
Speaker Change: In India, Yes.
Speaker Change: There are some massive projects being discussed there's one one project.
Speaker Change: Talked about to be three gigawatts eventually.
Speaker Change: Are these the types of opportunities that you're seeing that you're going after in India.
Speaker Change: And it seems like you're trying to ramp up capability there pretty quickly.
Speaker Change: No. It's a great question, and we're going to India, because our customers have asked us to follow them.
Speaker Change: Those opportunities are.
Speaker Change: It's not just in India, but it's in southeast Asia.
Speaker Change: Malaysia, Singapore Thai.
Speaker Change: Thailand all of those areas are all of those regions are ripe for growth.
Speaker Change: They're not all three gigawatt.
Speaker Change: That's those are unique and special but theres plenty of there is that that are more on the traditional side that that we can serve and support certainly we would love to be able to participate in those larger projects and we will put the capacity in place as needed, but we're working with our customers and where our customers asked us we're going to deploy our products, we're going to set up.
Speaker Change: All of these to support them as they win share in those regions is a great question.
Speaker Change: Yes, thanks very much.
Speaker Change: Thank you.
Speaker Change: Your next question is from the line of Jeff and syndrome with B Riley Securities. Please proceed with your question.
Speaker Change: Good morning, everyone.
Speaker Change: I just wanted to follow up on the Hyperscale I was just wondering at this point are you working with all of our Hyperscale and then regarding the RF skus for the CPU.
Speaker Change: Don't know if you mentioned sort of what the dollar size could be an initial orders there and then when first deliveries might happen.
Speaker Change: Yes, it's a good question, yes, so we.
We are working with all the hyperscale as to some level.
Speaker Change: It doesn't necessarily mean, we have orders with all of them, but we are we do have conversations.
Speaker Change: We're building relationships with all of them and they are at varying degrees.
Speaker Change: How far along we are in the process. Obviously, we have large orders with whom we have long term relationships with one of them over a decade, but it doesn't preclude us from talking to the other certainly we're we're in those conversations they're interested in.
Speaker Change: Our products are interested in our solutions, they're all they all want to talk about our lab capabilities.
Speaker Change: Some of the different features that we provide into this environment for our total cost of ownership I think.
Speaker Change: We have a great brand out there and were recognized horse with yes, we are in conversations with all of them and have orders with some of them.
Speaker Change: Relative to the CDU.
Speaker Change: We look to be we look to have revenue.
Speaker Change: Middle of Middle of our next fiscal year.
Speaker Change: That said, that's an interesting product because we're developing that real time with our customers. So there's a lot of testing and validation that has to go into place because we don't want to have just the traditional CDU standard CDU Blackrock CDU.
Speaker Change: Other people can provide that we're looking to provide differentiation in value. So in order to do that we want to make sure that we can provide a product that can work.
Speaker Change: In tandem with our Chillers are our crack so that they can get full efficiency and better total total cost of ownership. So as we do that new product development, we're okay with taking our time and making sure we're doing it right. So that we can differentiate in the market.
Speaker Change: Yeah.
Speaker Change: Okay. That's helpful. And then you also mentioned service as part of the data Center business.
Speaker Change: Building, a moat with some great customer relationships. There can you speak more about I guess the strategy with service how much of your business is running at this point kind of what the attach rate is.
Speaker Change: Yes, so we primarily.
Speaker Change: Our concentration for service and the data center business is primarily in the U K, where we started.
Speaker Change: You go back a couple of years ago, we were relatively small data center business and the majority of that was in the U K and we had anywhere between 70 and 100 service personnel.
Speaker Change: Porting the London area alone.
Speaker Change: We like that model and we want to replicate that model as we continue to grow inside of North America. As you know, whether it's Chile facilities that we've expanded and our ability to ship more cracks and crawls out of the United States as we've gained share in the United States will have to build that capability and we're in the process of doing that so we brought over some fantastic talent from the UK to help us start that up and <unk>.
We can start to saturate specific areas in the United States in Atlanta, and Northern Virginia, Seattle areas.
Speaker Change: Areas, where we can have concentrations of service people to support our customers and we can provide value real time, we can provide.
Speaker Change: We can provide startup installation.
Speaker Change: Installation, we can do.
Speaker Change: Proactive maintenance reactive maintenance all of the things that they're going to need so that we can stay close to our customers and we can help them real time, and obviously thats just another foot in the door.
Speaker Change: A selling feature to say hey, we're not only here with our product, but we're here to make sure that the product is running it.
Speaker Change: It's optimized production.
Speaker Change: Production rates so.
Speaker Change: It's a model that we used in the U K.
It's a model that we've been told by our customers, particularly on the Colocation side in the UK that they appreciate it and they like it we want to replicate it because we did so well within the UK, we want to replicate it in the U S.
Okay. Good to hear thanks for taking my questions I'll take the rest offline.
Speaker Change: Thank you.
Speaker Change: Thank you I'm showing no further questions at this time I would now like to turn the conference back to Kathy powers.
Kathy powers: Thank you and thanks to everyone for joining us. This morning, the replay of the call will be available through our website in about two hours and we hope everybody has a great day.
Speaker Change: This will conclude today's conference. Thank you for your participation you may now disconnect your lines at this time.