Q1 2026 Modine Manufacturing Co Earnings Call
Good morning, ladies and gentlemen, and welcome to modine's first quarter fiscal 2026 earnings conference call. At this time, all participants are in a listen-only mode. 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, then zero on your telephone keypad. As a reminder, this conference call is being recorded.
I would now like to turn the conference over to your host. Miss Cathy Powers, vice president Treasurer and investor relations.
Hello and good morning. Welcome to our conference call to discuss modine's first quarter fiscal 2026 results. I'm joined by Neil Brinker, our president and chief executive officer and mix with gorelli our Executive Vice President and Chief Financial Officer.
The slides that we will be using. With today's presentation, are available on the investor relations section of our website modine.com.
On slide 3, a bad deck is our notice regarding forward-looking statements this call will contain forward-looking statements as outlined in our earnings release as well as in our company's filings with the Securities and Exchange Commission with that. I'll turn the call over to Neil.
Thank you, Cathy and good morning, everyone.
I'm pleased to report that modin delivered a solid start to the year giving us confidence to raise our revenue and earnings outlook for fiscal 26.
We've completed three strategic acquisitions so far this fiscal year and announced major new investments in our manufacturing capacity for our rapidly growing North American data center business.
Investments that will position us to meet continued strong market demand this year and well into the future.
These Investments are allowing us to maintain a balanced portfolio of businesses with strong organic growth. Focus on data centers, supplemented with inorganic growth to expand product offerings, and create scales and our other key climate Solutions businesses,
Mick will take us through the financial results and updated Outlook, but first, I'd like to provide additional context around the quarter's key events.
Our climate Solutions, segment continues to deliver hosting an 11%, increase in revenue and a 10% Improvement in adjusted ebita.
This performance reflects initial contributions from two of our most recent acquisitions, Absolute Air and LB White.
Both of these Acquisitions offer complimentary solutions to our heating business which Falls within our 8 back Technologies Group.
These additions broaden our product portfolio, unlock new markets and distribution channels.
Modin has been in the heating business for nearly a hundred years and has a large install base for our signature line of gas-fired unit heaters.
We also have a leading market share with Replacements, typically driving over half of our annual revenues. These recent acquisitions, allow us to accelerate growth and build scales as we continue to use 80/20 to drive both revenue and cost Energies.
earlier this month, we closed a third acquisition climate by Design International or CDI a leader in desiccant dehumidification and critical process air handlers
These Technologies integrate well with our previous Acquisitions, namely Jets and modular chillers. In Scott, Springfield's custom commercial air handlers
Broader commercial IAQ. Businesses.
All of these acquisitions are squarely in line with our business development strategy to expand our portfolio with next-gen technologies and complementary solutions in heating, indoor air quality, and data center cooling.
They also build the foundation for scale in these key markets within HVAC Technologies.
I'd like again welcome all the new Associates from absolute are lby and now CDI our teams are already integrating well and aligning around new opportunities, to drive revenue and operational synergies.
In our data center business. We continue to prioritize organic growth through capacity Investments and product innovation.
We recently announced a $100 million investment to expand manufacturing capacity across four U.S. sites, including a new facility in the Dallas, Texas area, further expansion in Grenada, Mississippi, and repurposing two existing performance technology sites.
The announcement advances are local for a local supply chain strategy to be close to our data center customers, and expand capacity, and our largest and best markets.
This investment will also enhance engineering product development and testing capabilities, to create new jobs to support the redeployment and retraining of existing Modine employees.
This expansion is a necessary response to the extraordinary demand. We're seeing especially in North America.
With our current funnel of opportunities. We believe that we can approach 2 billion of data, center revenues, and fiscal 28.
this is a lofty goal, but 1, we believe is achievable
In addition to this capacity expansion we are also innovating. An example is our new modular data center development project where we are collaborating with a large customer on a custom design built to suit their specific needs.
This innovative solution offers rapid deployment and scalability, reducing the build time for advanced centers from over a year to mere months.
An initial site can also be expanded by adding more modules to the center.
As demand accelerates in our data center, customers are pushing for higher efficiency and advanced cooling strategies.
We're not only responding but collaborating deeply with their engineering teams to create Next Generation Solutions.
We are and will continue to be a major part of these conversations often supporting the additional mechanical cooling requirements needed to address changes being made at the rack level.
For example, if a customer is looking for an alternative solution to Distributing coolant to the rack, we will work closely with their engineering teams to collaborate and Innovative alternative to meet their cooling requirements.
To be clear, these innovations aren't threats. Their outcomes of long tenures and strategic partnerships where our largest customers are seeking our expertise to meet their evolving demands.
And they are unlocking new opportunities as we advance the technology required to manage heat loads in modern data centers.
There's tremendous energy in this segment and it's not slowing down. We will continue to aggressively pursue the opportunities in front of us to ensure continued, execution and growth.
Please turn to page 5.
As expected, the performance technology segment continues to navigate tough market conditions, with revenues in the quarter down 8% and corresponding declines in adjusted EBITDA.
The downturn in vehicular markets is likely to persist for several more quarters in response. We've taken decisive action to control costs, including reallocating talent to support our high growth climate Solutions business.
As an example, we plan to transition 2 of our existing performance technology sites to expand capacity for data center production. 1 of those under consideration is Franklin Wisconsin which was previously planted to support our EV systems business. We are also evaluating plans for our Jefferson City Missouri manufacturing facility which would involve consolidating those product lines into other PT plants in North America.
For other select portions of the segment. We continue to explore strategic options to realign and optimize our portfolio.
Our PT team is doing excellent work to remain lean and focused on our key customers when volumes return.
We're well positioned to capitalize the strong incremental, margins and improve profitability.
Despite the market headwinds, we are executing on our transformational strategy.
This team has been through a great deal of change and has worked hard to improve margins and cut costs in light of these challenging market conditions.
But our 8020 strategy remains clear, the shift resources to high growth, high margin businesses.
In summary, we had an extremely busy start to the fiscal year.
We are investing in our growth, both organically and inorganically.
These are very purposeful Investments designed to build scale across our portfolio and capture near-term. Growth opportunities.
I want to thank the Modine team for their hard work and dedication.
With that, I'll turn the call over to May.
Please turn to slide 6 to review the q1 segment results.
Climate Solutions, delivered, another good quarter with an 11% increase in sales.
10% improvement in adjusted EBITDA and an adjusted EBITDA margin of 20%.
Data center sales, grew 24 million or 15% from the prior year.
Driven by higher sales in North America.
HVAC technology is sales increased 17 million or 34%.
Driven by strong heating stock, plan orders and higher indoor air quality product sales.
In addition, the recent acquisitions of Absolute Air and LB White contributed, 10 million of Revenue in the quarter.
Heat transfer solution sales declined 1% or 1 million due to lower volume to commercial and residential HVAC customers. This was, mostly offset by higher sales to Commercial Refrigeration and codings customers.
The adjusted IBA margin was relatively flat versus the prior year.
At this point, we're focused on continuing to drive earnings growth. Versus maximizing profit. Margin
While we're currently growing revenue and an exceptional rate. We're also increasing our investments in manufacturing and engineering resources to support future growth.
For example, we're once again, raising our fiscal 26 outlook for data center, Revenue growth to 45%
As capacity comes online in Revenue growth, we expect the EBA margin to increase especially in fiscal 27.
With regard to the recent acquisitions, we're in the early innings.
With the team focused on integrating and stabilizing due to ensure there are no surprises.
At times, this can mean adding incremental resources and costs to capture future benefits.
With that said, we're excited about the additional HVAC technology scale and the overall positive momentum in climate Solutions.
Please turn to slide 7.
As anticipated performance Technologies, revenues were impacted by challenging and market demand and 80/20 driven product line exits.
Heavy duty equipment sales were lower by 4% or 4 million driven by ongoing Market weakness.
Within the heavy duty area, we experience lower Jeanette, sales due to a customer moving to a dual sourcing strategy.
While we had planned on Lower volumes with this customer, we anticipated an offsetting increase with a new genetic customer.
However, this customer and others are taking longer than anticipated to convert to the new cooling module designs.
As a result, we believe it's prudent to plan on Lower growth than previously. Anticipated in the Gen set area.
On Highway application sales, decreased 8% or 15 million.
Due to the previously mentioned lower-end market demand and 80/20 product line exits.
Segment adjusted EBA to climb 14% from the prior year and adjusted avadim margin. Decrease the 100 basis points to 13.1%.
The margin decline with mostly driven by lower sales, volume and higher material costs.
This was partially offset by improved. Operating efficiencies along with significant cost. Reductions.
We're passing through increased costs from tariffs and higher material costs.
And we'll continue to recover these.
Increases through our normal pass through mechanisms.
Consistent with past practices, will recover metals on a lag basis. Averaging about 6 months,
the Tariff recovery will vary with each customer and agreements.
As we highlighted last quarter, we've been working to reorganize this business and reduce costs wherever possible.
These actions resulted in a $5 million reduction in sg&a expenses, this quarter helping to partially offset, the impact of lower sales volume
Despite the difficult market conditions and volume headwinds the team remains focused on delivering higher margins and earnings for this segment, this fiscal year.
First quarter sales increased. 3%, driven by the revenue, growth in climate Solutions, our gross margin declined, 40 basis points to 24.2% driven primarily by the unfavorable impact of lower sales and higher materials in performance Technologies.
we continue to invest in incremental, sgna to support strong growth in climate Solutions,
In addition, SG&A includes expenses related to the acquisitions completed during the quarter.
Partially offset by lower sgna costs and performance Technologies.
adjusted IBA de was better than we had anticipated at the beginning of the quarter, resulting in a small year-over-year increase
Our adjusted EBA margin was 14.9%, which was down 40 basis points from the prior year.
We anticipated that the margin in Q1 would be down slightly and on a temporary basis.
Due to the combined impacts of lower-performance Technologies volume.
And new investments in climate Solutions.
We expect to restart year-over-year, margin improvements in the second half of the year, on higher, volume and material cost recovery.
Adjusted earnings per share was a16.
2% higher than the prior year.
We're pleased with the start to the fiscal year momentum in our key growth markets, allowed us to overcome challenges and others.
And we expect positive contributions from our 3 recent acquisitions throughout the rest of the fiscal year.
Now, moving to cash flow metrics.
Please turn to slides 9.
The businesses, generated 200,000, a free cash flow in the quarter. This was lower than the prior year, primarily due to higher inventory levels in climate Solutions.
We're building significant data center, inventory to support the large amount of projects and delivery schedules in the second half of our year.
First quarter free, cash flow also included 5 million of cash payments.
Primarily related to restructuring and acquisition related costs.
Net debt of $403 million was $123 million higher than the prior fiscal year-end.
Directly related to the Acquisitions of Absolute Air and LB White.
Which were both completed in the quarter.
We invested more than 140 million in Acquisitions and capital during the quarter.
Plus the additional acquisition in July.
To support future growth for modin.
With these investments in Associated earnings, our balance sheet remains quite strong with a leverage ratio of 1.
I would also like to mention that we've extended the maturity and upsize their credit facilities. Providing us with additional liquidity and flexibility to support future organic and inorganic growth
Thank you to the great Modine treasury team and our banking partners for their support with this transaction.
Now, let's turn to slide 10.
For our fiscal 2026 Outlook.
As Neil mentioned, we're raising our revenue and earnings outlook driven by our recent acquisitions and another increase in our projected data center sales.
For fiscal 26. We're currently expecting total sales to grow in the range of 10 to 15%.
This is an increase from the previous range of 2 to 10%.
For climate Solutions, we expect fully your sales to grow, 25 to 35%.
And expect data center sales to grow in excess of 45% this year.
This is a significant increase from the previous range of 12 to 20% for climate Solutions.
Higher sales is mostly driven by our improving outlook for data center sales and the recent acquisitions in each back Technologies.
With regard to our increase in Outlook for data center sales. We anticipate a significant acceleration in the second half.
Based on customer timing and the additional capacity plans.
For example, in the first half we anticipate data, center sales will be up 20 to 25% over the prior year.
And the second half will be up by more than 80%.
For performance Technologies. We're maintaining our sales Outlook with the revenue anticipated to be down 2 to 12%.
Trade conflicts, having a negative impact on Market. Recoveries.
Performance Technologies is currently trending towards the higher or the more favorable end of this range.
However, the higher Revenue will likely be due to incremental material and tariff cost recoveries along with favorable foreign exchange rates.
With regard to our full year earnings, we currently expect fiscal 26. Adjusted IBA data being the range of 440 million to 470 million.
This represents a 20 million increase from the previous range.
The higher earnings will be recognized in the second half of the fiscal year.
As we begin to capture the full benefit of the recent acquisitions.
And our data center sales accelerate significantly.
New earnings Outlook represents another year of rapid growth based on the implied growth range of 12 to 20% with a midpoint above 15%.
With regards to cash flow, we recently announced the plan to invest in incremental, 100 million of capex.
Over the next 12 to 18 months.
As a result, we'll continue to generate free cash flow but this year will be somewhat lower as a percentage of sales at around 3%.
This includes the cash required to fully fund. Our pension, prior to our planned annualization this year.
I want to point out that we have not included cash proceeds from any potential devest this year.
Looking ahead to the next year, we anticipate that our free cash flow margin will once again improve and be in line with our fiscal 27 targets.
To wrap up. We're quite pleased with the results this quarter and these are exciting times that Modine.
We're reinvesting and redeploying significant amounts of capital.
Which are generating High Returns on investment and supporting our strategic transformation.
While laying the foundation for us to generate rapid growth well into the future.
With that Neil and I will take your questions.
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The first question is from Matt Summerville from da Davidson. Please go ahead.
Thanks morning. Couple questions. Um first can you talk about the magnitude of unabsorbed cost? You're going to experience in the climate business? Is it related to build out in the second? Can you comment on how we should be thinking about the fiscal 27 data center Revenue Target? You said back in September of 2024 it 1 billion with your current guidance, almost not being on that. Now for fiscal 26, and then I have a follow-up.
Yeah, hey Matt, it's Nick good morning and thanks for the the question. I think the the first question on the data center 6 costs, the best way to think about that is um,
on 2 pieces, the
The core capacity that we put in place is rapidly filling up.
we'll continue to convert at at good margins at, or above,
The Cs segment margin when we think about the incremental Capital Investments, the 100 million that we're making in to expand facilities adding more lines at current facilities, plus a couple brand new facilities that Neil covered.
That will start to ramp in the second half of the year and both likely won't capture the meaningful volume and um so kind of beginning the new fiscal year. And so on that uh we clearly raised our outlook here this year by about 100 million in Topline.
That'll probably convert a little bit lower. I think probably the incremental 100 million more like, uh, 15% type net number and in there is
Status quo. Um, good conversion, the incremental 100 million, probably a little bit below the normal, uh, segment average. And I think it's probably closer to 15%, although that's really hard. You know, if somebody moving pieces to predict
and Matt the second question you want to remind me of that.
Yeah, I mean, if you're up, 45%, you know, that roughly would equate to 925 950 in DC Revenue, something in that range for your target for physical. 27 is a billion. What's the reasonable sort of way to kind of think about? All right, if we're 2 billion is in 28, what's a good starting point for our thinking, with respect to 27 based on, you know, the billion dollar number that you have sitting out there
Yeah, from my side, stay tuned. But um you're right. I think for now
probably think about it as more of a straight line and
we are.
Trending towards a billion, this fiscal year. And you're right when we did our IR day last September,
We were targeting the growth rate was implying a billion next year.
So um, we have a lot of moving pieces with the, the production coming online that I think short of Us coming back and we will probably later in the year.
Neil laid out a 2 billion dollar goal in 28.
26 is clearly running towards the billion.
Until we know more, I think a straight line between the two most logical options is a good approach, unless Neil, you have anything else you want to add.
Very good. Um and then is my follow-up. You made a comment regarding profitability and how that sort of evolves first half second half. When you say the margins are set to improve, is that a comment on the whole company or on both the segment level for both climate and PT and then I'll get back to you. Thank you.
Yeah. So a couple uh a few moving pieces there with regards to the margins, so first for the total company
We still expect that we will have a margin improvement this year, and that'll be driven mostly by performance technologies. We see our total company margins.
Really beginning to step up in the second half of the Year, our Q3 and our Q4.
When we think about it by segment, I'll cover CS first and that it really ties to what we just talked about.
Big second half volumes coming in um from the data center ramp and then you can imagine uh we are currently adding a lot of costs and preparing. So
We'll be holding.
Similar kind of flat markets. We could be down a little bit and CS not in a meaningful way but it's really bringing on costs here in the first half of the year and the second half I mentioned.
The implied growth rate really is over 80% in the second half of our year for data centers. That's the kind of ramp. We're looking at including a
north of the 40 million dollar inventory, build here in the quarter.
From a PT standpoint. Um, we expect, uh, good margin lift this year, even with the flat to down volume.
To come out.
And at the same time, we'll, um, see higher volumes starting to come a little bit in the second half of the Year both, um, you know, mainly from a year-over-year basis. So it'll be
Volume a little bit of volume cost, recovery on tariff and metals and then the cost.
Cost outs on the PT side, driving the margin Improvement.
Great, thanks. Yep.
The next question is from Brian drab from William Blair please go ahead.
Hi, thanks for taking my questions. I just wanted to ask about the capacity expansion first, and just a couple of points of clarification.
Um, your recent comments about how much capacity you had. I think you were saying, you know, we're approaching like $1.3 to $1.5 billion in revenue capacity.
And then then you talked about that, you know, this this week, the 100 million investment and and uh the ability to get to to 2 billion and and and revenue roughly. You know how how much revenue
Are we thinking about adding with, you know, specifically tied to the 100 million investment?
Yeah, Brian this is Neil good question. So the the way that we're thinking about it in order for us to get to the that 2 billion goal of 28
Um, we would have to have about 2 and a half billion capacity in place. So that's we we'd want to run around 80%, uh, capacity that makes sense. So that would be the difference between the 2 of those uh, relative to the hundred million dollar investment.
And and I'm trying to get to and a lot of people are trying to get to just like what the, what's the return on investment here? But I mean it sounds like
You're getting like a billion in capacity for a 100 million investment? I mean, is it can you?
You know, help me with that.
Seems like a slam dunk roic, but this is what people are trying to calculate.
About a billion. Yeah, yeah, yeah. Um, it's a m jumping in. Uh,
the ROI that we as we've run them are.
Really high on on these Investments, you know, uh, highest we've seen well above any acquisition or organic talking about 40, plus percent type return on invested Capital. The only thing I would add um, around the capacity when we talk about it is
It really depends on the product and the reason. So when Neil lays out an estimated $2.5 billion of capacity,
The products right? Are so large it. Really the answer will always be. We want to have the right mix.
and we could always be adding more capacity, but it's
Um, Air Handlers, there's the chillers Europe versus North America, India versus North America. So when Neil makes the comment, it's a blended number and it's kind of an optimal capacity, but I think we will always get if we do in our job and we're growing, hopefully, we'll always have, um,
you know, capacity issues that we're looking at expanding, but it really depends Again by region. And by product,
Okay.
yeah, I mean I I'm I'm doing like, you know, the math 2 2 simply with the with limited information but I mean it seems like you're adding almost a billion in Revenue capacity at maybe 15% even, but the margin and getting 100
And 100 100 plus million IBA. Every, every year going forward on 100 million investment seems like
I mean, like, roughly, like better than 100% roic but I guess. Uh,
I'll I'll follow up more later, um, on that 1, but yeah, yeah.
Is, is that, am I crazy? Yeah. Like the initial thoughts. I'm having on that or no. No, I for sure. We look at well, I mentioned we're we're well north of 40. 50% return on Capital, lots of assumptions.
To make there. But I think your question, your point, the payback and the ROI is really big on these. These are Neil said it before we built the reputation with our customers, we have the right products, the right brand, the rep reputation service quality, it's about capacity and execution.
Full utilization in the in the new capacity.
Yeah, great Claire. I'm glad you clarified that. No uh long-term.
We will uh Drive significantly higher margins and it's always a step function. Phase 1 is capacity. Phase 2 is still capacity. You know, phase 3 is optimize it or, you know, Max it out and um our data center businesses. When they're running at normal capacity are at or above our segment averages. So I was just commenting with the multiple lines coming on and new facilities.
Uh, we've often been asked, like, how come our margins are going up.
Faster or more, and Neil. And I, our view has been.
Drive a lot more shareholder value by this.
30% type earnings growth. Um, and at some point you focus a lot more on capacity legislation and margin. But for now, um, we're going to continue to put the capacity in place. Given the order book and the funnel, we see in front of us,
Yeah, perfect. Thank you. I'll let others ask some questions. Thanks.
Okay, from Oppenheimer, please go ahead.
Thanks. Well, you know, obviously this back half ramp is really key for us all to understand. Um, and I I think uh I have to pair the demand visibility part of this with understanding. You know what percentage of the capacity? Uh uh the new capacity uh, is in place so, so maybe on the demand side first, um, can you just give us a sense of of really the visibility uh, to be able to, you know, raise the guide this early in the year we're talking about, you know, 9 months from now, are those orders? Pretty much baked. Um, and then on the capacity. Yeah. I mean, what has to happen, uh, in terms of percentage brought online in the guard rails, to make sure you can hit uh, or potentially even beat the target.
Yeah, thanks Noah for the question. Um certainly we have visibility um that goes beyond a year in some instances. It can go out as far as 3 years and we're in close collaboration with our customers in terms of timing and how we need to stand up. This additional capacity to meet their requirements, their demands.
Uh, and to fall in line with their data center timeline constructions and build outs.
So, you know, we essentially tie our schedule to their to their schedule and then that allowed us the uh, opportunity to to go forward, and put this uh, additional capacity in in place. So the first step is going to utilize existing infrastructures.
Existing areas where we have Workforce and supply chain established.
Um that's going to happen. Um in the next 3 to 4 months or in the back in the next couple quarters, we're going to be looking at retooling these facilities and standing them up for DC operations.
And then we have some newer facilities that we'll have to bring online that are green fields. That will take a little bit longer uh because we don't have the the set established practices that we have with the existing facilities. So those are those are likely come online um closer to the end of our fiscal year.
Okay. I mean, uh, I think to to
Thank you, Neil. I think to kind of further unpack that
Uh, to go from 30% to 45%. I mean, clearly there's been a theme, right? All this earning season of, uh, the customers wanting more speed and accelerating their build. So, you know, is it the right characterization that? Basically, you saw accelerated deployment schedules from customers in addition to expanded builds. And so, that's what's driving, your own expansion. Just want to understand kind of the sequencing here on the decisions.
Well, it's it's what's driving. The expansion is certainly accelerated growth with our customers existing customers as well as onboarding new customers.
Right. We're gaining share in this market um and and as we as we bring our Technologies on online and we bring new technologies to the market. Uh, there's there's an attraction there, so it's it's with existing customers that are moving quicker than we anticipated and it's, you know, when he share and and bringing new customers on board at the same time.
uh, last 1, uh, you know, Mick as you mentioned, uh, the, the Outlook doesn't contemplate any divestment or proceeds maybe, uh,
Can you just sort of bring us up to speed on?
How is that process moving along, um, and any potential call on time again?
Yeah. The, the 2 areas we've talked about in the past is, um,
we had announced that they was last year that uh, we had plans to sell the
Headquarters in our European location. And, uh, as a reminder we expect that to close
Later this year um that was that was that was estimated to be a 10 to 15 million dollar type transaction. We're just going through regulatory issues there or approvals local.
And then, uh, Neil and I have talked about, after the IR day, we talked about $250 million to $300 million on light duty business that we were going to.
The emphasize or exit. And um, we still have that process working in a team focused on that.
So uh for now, I'll leave it at that until we have we'll come back and we have something uh definitive to share with the with the investors.
Right. We'll stay tuned. Thank you. Yeah.
The next question is from Chris Moore from CJs Securities. Please go ahead.
Hey, good morning, guys. Lots of lots of good stuff. Uh, can you maybe just we've talked about a little bit that the, the custom modular data center that that you're developing with with clients, can you?
Talk about that a little bit further. Um, you know, and kind of of
You know, just any specifics there and and what that that uh you know kind of timeline looks as as you continue to work there.
Yeah, thanks, Chris, for the question. Um, you know, we're definitely seeing some customers in the market move in this direction.
And it's to satisfy um, 3 things.
Speed speed and speed so you can essentially see this as as a data center in a box and and it allows for our customers to ramp up their data center projects and facilities at a much quicker rate. It doesn't require the same amount of um it doesn't require the same amount of Labor as well as the skilled labor that it takes uh for construction. So we're working with a, you know, a very important customer. Uh, and we've um, you know, we've identified a location in Calgary where we're making these facil where we're making this product and we're going to expand it into the us as well. Um, and again, it's this, it's it's a to help our customers get to the market quicker with their data center Solutions.
Got it, I appreciate that. Um we've been we've talked about the ice you know rationalization for a while now are there other areas within performance technologies that uh that that you you may be focusing on less moving forward?
So, you know, we constantly in evaluation of our markets. That's the beautiful thing about 8020 is we've segmented the business into into multiple markets, uh, and and then it established the account strategy, some things will come in and some things will go out. I think, you know, make mention the Gen Set, uh, in terms of where we're seeing that business, kind of flatten uh that may allow for us to redeploy resources or activity in another area. We're in the process of evaluating uh different opportunities in PT.
Got it, maybe just the last 1 more of a modeling. Um,
Cash flow down a little bit this year, you're going to be spending more. What interest expense sense in terms of of, you know reasonable level for
For fiscal 26.
Yeah yep interest expense should be we've got a a list assumptions in the back but 28 to 30 million would be our current estimate estimate for interest expense.
Perfect.
I will leave it there. Thanks guys.
The next question is from David Tarantino, From keybanc Capital markets, please go ahead.
Hey, good morning, guys.
Good morning. Um, maybe just on the near-term data center trends, could you give us a better picture on the underlying demand you're experiencing relative to the 15% growth in the first quarter? Just particularly relative to the pauses you noted in Europe last quarter, and relative to what is clearly robust demand in North America.
Yeah. Uh hey it's Nick here and then I'll give you my view and then Neil could jump in. So
1 of the things that, uh, on the positive side that we've seen happening is we've continued to win new programs.
and so we we started the year we knew uh
Slightly lower than normal data center growth. Even though Q1 came in at 15%. Um, and then we had planned on a, you know, 30-plus percent year. Some of the locations we've been, uh, supporting, Neil's talked about. We've won more buildings or more data centers. And on top of it, Neil mentioned some of the customers have either.
Have to increase our volumes or accelerate volumes.
so all of that is led to 2 things, uh internally, we said we needed to
Have the capacity to support the growth, the customers and the orders we have in hand and then secondly to meet this, uh, you know, the growing, uh, opportunity in order book, we see for next year. So
We really have seen an acceleration here in the second half, and it's us keeping up with the increase in orders and the increase in volumes.
Do you know anything, I missed? Yeah, I would just add that we, you know, we have the orders, we have the commitments that lead to the capacity expansion, we're comfortable with that. And that, you know, us introducing our Chiller to the North. America region has really helped us uh explode and grow. It it is our our Chiller technology and the demand for our Chiller has really driven us to drive more capacity inside of the United States to keep up with with our customers expectations.
Okay great. And then maybe could you give us a bit more color around the recent deals and how much they should contribute this year? And then just thinking about at Capital allocation obviously we're investing quite a bit more in data centers. But what should we expect otherwise following both all these deals and even more uh, investment in Data Center.
Yeah, it's Mick. I'll take that 1 and again, Neil could add anything we want. So on a
partial year basis, we should see.
From the last 2 about 100 million of incremental Revenue.
And uh, from an LP white perspective, we talked about that 1.
That 1 we expect to have margins initially called in the 15% range. So it's not too far off of the climate Solutions and quickly.
Getting at or above our segment, and that also will help drive.
Kind of the second half of the Year. CDI is running below. Uh, the segment, the the last acquisition we did
That was um, a company that had also had a large business that was supporting the rapid growth on the EV battery side and the battery factories. And we bought that for different reasons. And so that 1 is really uh, drive on our side to fill that manufacturing capacity and then leverage the sales synergies and we expect to drive margins up over the next year to be in line with our segment average. So
A little bit lower margins on the CDI side and then they'll be white fell out 15 to 20% and increasing from those 2 Capital, allocation q1. I thought a 27 million 20 of that was in um Cs and mostly on data centers.
With this year. Um,
We were already. Our plan was already to spend probably 40 million dollars in capital on data center growth. So the announcement we did this week is an incremental 100 on top of that. So, we'll probably spend, um, the next year, 12 months plus
Somewhere between 140 plus million of, uh, capital and the data center side.
The PT is really an uh, maintenance mode. Um, we're really doing mostly um, preventive maintenance and select program launches there and then last thing I would say on the just Capital allocation m&a side.
You should expect that we will probably have a pause here on the acquisition side for at least a couple of quarters; we need to digest.
Be great. Thanks guys.
The next question is from Jeff Van Cinder from B Riley Securities. Please go ahead.
Uh, good morning, everyone, and great to hear about the expanding data center production.
Um, but are you also expanding data center service capabilities? Alongside that.
Certainly that, uh, that good question, certainly, that is a product offering that, we're, we often, uh, bring to the market with our product solution sales. Absolutely. Um, we've been doing some, uh, we've been doing some hiring in North America to support it. Our service group. Uh, we need to build out further service to support the growth, the tremendous growth that we have and just equipment sales in the United States to support it. Um, not only short term but long term, it's it's necessary when you get the equipment onto the field to have people in place for startup um and and installation. So, absolutely building that out at the rate that we can to keep up with the product demand as well as our, our our controls our, you know, 1 of the
1 area that we think we have a unique solution in that differentiates is our building management in our control system. So when you tie all of our equipment together and have it operate like an ecosystem, it becomes very efficient. And in these days where the demands for power is so high or or the need to reduce water reduction is so important.
Uh, those efficiencies are urgently, are those efficiencies that we drive are extremely well, positioned in the market. So, uh, it's a, it's a good point. And yes, at the rate that we're growing with product sales, we need to keep Pace with it on the server side as well.
Okay, fair enough. And then uh you had 1 large order in the DC area, I think it was 180 million somewhere in that area. Um,
With. I believe it was a Colo that you asked. You asked a few months ago, it is there other business of that magnitude out there that we could wake up and see, you know, a similar type of announcement here over the next
Several quarters that size.
Yes, that's that's essentially what drove the 2 billion in invest or the 100 million of investment to drive to that 2 billion. Mark. It's a collection of orders of magnitude like that. Correct?
Okay, good. Um, and then realize you're pausing a little bit on the acquisition front.
Um, but any thoughts on where you might?
Go or what you might look at when you resume.
Looking at acquisitions, what areas might you focus on?
Certainly, we have, I mean, we love the organic growth that we have in the Data Center market today. But we also believe it's important to maintain a diversified business portfolio for the long term. So, we'll be actively building out our funnel over the next two quarters that support our HVAC Technologies business and, uh, maybe even some vertical integration on the supply chain.
Okay. Great. Thanks for taking my questions. I'll take the rest offline.
Next question is from Brian sponheimer from gibelli and Company. Please go ahead.
Hi. Good morning everyone and uh congratulations again. Um Neil, you've had a terrific vision for the data center business, um and obviously these Acquisitions uh, within climate Solutions are bolstering the remainder, which started the year at about 800 Million Dollar business. I guess my question is
Where does that business need to get to? And where does the data center need to get to where you potentially are doing another separation? Um, where you see those two businesses stand on their own, just from a strategic perspective, but also from a financial one.
That, uh, you know, we're going to do that again at the end of this fiscal year as well.
All right. Terrific, um hope, congratulations and look forward to uh to what's next.
Thank you.
The next question is from Matt Summerville from DA Davidson. Please go ahead.
thanks just a follow-up and I apologize if you hit this, I I've lost a call for a second but uh,
Can you just flush out a comment? You just made a collection of new orders of that magnitude. In the context of this $2 billion, should we assume a majority of the build to that $2 billion is based on an order in hand, or in sort of backlog? I know you don't close orders and backlog. I guess I'm trying to get a sense of how much of that revenue objective is known and spoken for.
Today.
Does that make sense? Yeah it does make sense so there's we have a back. We have the highest backlog in data centers we've ever had
So it gives us confidence in order for us to be able to put forward that type of capital to to grow and expand. We also have we are also the income and in a lot of these data centers. So we know and we see and we have visibility of the expansion of these data centers and in our conversations, there isn't any reason for us to think that our our data center customers would take a different solution, especially when it's about growth and speed and and reliability. So it's the commitments that we have with our customers.
Customers if the orders that we have with our customers, it's the Outlook. It's the Strategic relationship to all these things coming together as, as what gives us confidence to to make that investment.
Thank you for that. And then just as a follow-up, uh, I want to go back to slide 4 talking about the modular data center that you're developing with the key customer talking about what I assume is this large air handling unit. You're developing, I assume for another customer are these Solutions sets portable across the customer base, within data centers. And if, so, how soon or is there some level of exclusivity? You, you will be granting on these. Thank you. Yes. With 1 there is definitely well. Yes, it is exclusivity, uh, with the large particularly when you're working with a hyperscalers. Yes, that's the case. Um, but you know, when it, when it comes to the modular data center, um, certainly they'll be different versions of that, right? They won't all look the same. Uh, some will be very different. The concept will be the same, but what's inside and how they operate, um, could be unique and bespoke for each 1, yes.
Thank you.
I am showing no further questions at this time. I would now like to turn the conference back to Cathy Powers.
Thank you and thanks to everyone for joining our call this morning. A replay of the call will be available on our website in about 2 hours.
Thanks.
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