Modine Manufacturing Company Stock

Good morning, ladies and gentlemen, and welcome to Modine's Second Quarter Fiscal 2027 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Kathy Powers, Vice President, Treasurer and Investor Relations.

Hello, and good morning. Welcome to our conference call to discuss Modine's second quarter fiscal 2027 results. I'm joined by Neil Brinker, our President and Chief Executive Officer; and Mick Lucareli, our Executive Vice President and Chief Financial Officer. The slides that we'll be using with today's presentation are available on the Investor Relations section of our website, modine.com.

On Slide 3 of that deck is our notice regarding forward-looking statements. This call will contain forward-looking statements as outlined in our earnings release as well as with our company's filings with the Securities and Exchange Commission. With that, I'm going to turn the call over to Neil.

Thank you, Kathy, and good morning, everyone. This morning, I'm going to start out with the segment updates and then turn it over to Mick to review the financial results for the quarter. Let's jump in. Starting with data centers, we delivered another impressive quarter with revenues increasing 95% from the prior year. We achieved our fourth consecutive quarter of record orders, exceeding $1 billion in quarterly order intake for the first time in our history.

Strong demand has pushed our backlog to another historic high. In addition, we recently received a major new program award with a strategic hyperscaler customer. Through this partnership, we will supply more than $400 million of custom air handling units through calendar year 2027 to cool next-generation data centers. We have continually added manufacturing capacity to support the surging demand for our air handling products since acquiring the Scott Springfield business in 2024. To that end, we are currently launching production at our third dedicated data center facility in Calgary and are actively increasing throughput at our facility in Franklin, Wisconsin. Demand continues to be incredibly strong across our entire data center cooling portfolio, and we are strategically using 80/20 principles to manage this growth. Regarding our overall capacity expansion, we remain firmly on track.

We currently have 13 chiller lines up and running and remain fully committed to reaching 20 operational lines by the end of the fiscal year. A massive part of executing this capacity expansion has been stabilizing our supply chain, and I'm pleased to report that we have made significant progress during this quarter. Over the past few months, the reliability of our supply chain has steadily improved, and we have entered into multiple LTAs with key suppliers to lock in volume for critical components in 2027.

We've also continued to share our future volume requirements with our suppliers so that they can confidently increase their own capacity but their expansions take time to ramp. This supply-demand imbalance is leading to higher prices incremental to the materials inflation and tariffs. We are working on cost sharing and pass-through mechanics, but that takes time as well. In addition, we occasionally get surprised by other smaller disruptions. While these may not result in material production impacts, they can still create delays in short-term inefficiencies. Furthermore, we continue to leverage the specialized capabilities of our Commercial HVAC segment to support the rapid growth of our data center business. Commercial HVAC is already successfully producing V-Block subassemblies for our chillers and recently passed testing for another critical component, officially adding them to our qualified supplier panel.

Scaling our supply chain as we expand capacity to meet demand presents a number of challenges that need to be continually managed. That said, we are in a much stronger position than we were 90 days ago, and I'm incredibly proud of what the team has accomplished. Please turn to Slide 5. The Commercial HVAC segment also delivered a strong quarter with revenues increasing 23% from the prior year. Our coils business continues to benefit from higher sales to data center customers.

Our CHVAC segment has a significant opportunity to drive incremental growth in the data center market, and we are currently executing on several strategic fronts. First, we have been selling coils directly to various external data center cooling companies for some time, which was a primary driver of our revenue growth over the past several quarters. Second, we are capitalizing on a developing trend where hyperscalers are getting involved in downstream sourcing, specifically identifying qualified Tier 2 suppliers for custom data center cooling products. We are currently in active discussions with one of our strategic customers to become a key coils provider within their supply chain.

This represents a major incremental opportunity for our Commercial HVAC business that could lead to significant future orders. Additionally, our coil sales are creating a strong pull-through effect for our coatings business as many customers request specialized coatings to prevent corrosion in harsh environments. Our coatings business had an outstanding quarter with revenues up 28% from the prior year. Finally, CHVAC has multiple opportunities to support our own data center business.

As I mentioned, we're currently producing V-Block subassemblies for our chillers and plan to start supplementing our current supply needs with additional CHVAC manufactured products later this fiscal year. These are exciting opportunities that should drive revenue growth in the near term, fully supported by our disciplined 80/20 focus. We are also seeing excellent growth opportunities elsewhere in the segment. Specifically, we are expanding our product line for portable heating products that we acquired as part of the LB White transaction last year. Overall, there's a wealth of opportunities for both revenue growth and margin expansion within the CHVAC segment. Please turn to Slide 6.

As you know, we successfully closed on the spin-off of our Performance Technologies business and merger with Gentherm on October 1 as planned. Preparing for this transaction of this scale was a massive undertaking for both teams, and I'm pleased to report that the initial phases of the transition are going smoothly. I want to extend my sincere gratitude to our internal team who tirelessly manage the complex work streams required to execute this transaction as well as to our external advisers.

Gentherm has been an outstanding partner throughout this process, and we are confident they will provide a fantastic home for that business. For Modine, this milestone represents a clean strategic separation that allows us to focus 100% of our resources on our highest growth, highest margin thermal management opportunities. Finally, I'd like to remind everyone of our upcoming Analyst and Investor Day planned for November 18. We are holding the event in Chicago with a live webcast for those not planning to attend in person. We will provide an in-depth review of the company's strategy, including growth opportunities for both segments, along with our new long-term financial targets. It should be a great event. With that, I'll turn the call over to Mick.

Thanks, Neil, and good morning, everyone. Please turn to Slide 7 to review the Q2 segment results. Beginning with data centers, I want to highlight the exceptional rate of revenue and earnings growth, which continues to outpace the rest of the market with a 95%, increase in sales. Americas sales grew 132%, driven by strong demand from hyperscale customers and EMEA sales decreased 6%, mainly due to the timing of shipments. Adjusted EBITDA grew 66%, resulting in an adjusted EBITDA margin of 15.4%. As I discussed last quarter, we reported a nice sequential margin improvement from the first quarter. However, this was somewhat lower than we anticipated. On the positive side, we continue to see a lower impact from the fixed cost absorption and expansion costs. This was relatively in line with our expectations.

However, the supply chain and material impacts were larger and are lingering longer than we had expected. These can be grouped into a few key baskets, including logistics with a negative impact from tariffs, raw material inflation and higher prices paid to our suppliers to secure volume. We're working on commercial actions for current and future programs to address these additional costs, and we're confident that we can recover these costs.

We remain excited about the overall positive momentum in this segment and anticipate further margin improvements through the second half of the year. Based on our updated revenue and margin outlook, we anticipate that the Data Center segment will generate earnings growth in excess of 80% this year. Please turn to Slide 8 to review Commercial HVAC. Commercial HVAC also delivered strong revenue growth with a 23% increase in sales.

HVAC Technologies sales increased 20% and Heat Transfer Solutions sales improved 16%. Adjusted EBITDA increased 22%, while the adjusted EBITDA margin was flat to the prior year at 15.1%. Similar to the Data Center segment, we anticipated a higher margin in the second quarter. The major driver of the flat margin was the mix of product sales along with higher material and tariff costs. Commercial HVAC remains on track for the year as the leadership team focuses on driving both growth and margin expansion through 80/20 initiatives.

We expect double-digit earnings growth and incremental improvements in the adjusted EBITDA margin during the second half of the fiscal year. Please turn to Slide 9. For Performance Technologies, I'll keep my comments relatively brief given the recently completed spin-off and merger with Gentherm. Sales were relatively flat with Heavy-Duty up 11% and On-Highway down 5%. Adjusted EBITDA declined 3% from the prior year and adjusted EBITDA margin was 14.2%. These results were generally in line with our expectations. As Neil covered, the separation plan and merger with Gentherm was completed on October 1. We are very proud of the improvement made these past few years by the Performance Technologies business and its legacy for Modine. Gentherm and Modine are a fantastic combination with a bright future, and we wish them all the best.

Now let's review the total company results. Please turn to Slide 10. Second quarter sales increased 35%. And I want to point out that if we just look at our remaining data center and commercial HVAC segments, revenue growth was 59%.

Gross margin declined by 160 basis points to 20.7%, driven by lower margins in all 3 segments and largely due to material cost inflation. Although we continue to invest in incremental SG&A to support growth, we're controlling the spending as a percentage of sales. Reported SG&A also includes $14.1 million of expenses directly related to the spin-off of the Performance Technologies business.

I'm pleased to report that adjusted EBITDA increased $32.4 million or 31%, resulting in a 13.7% adjusted EBITDA margin. As I previously discussed, the actual margin was somewhat lower than we anticipated, but there continues to be sequential improvements as we launch more volume and recover material costs. In Q2, there was a 150 basis point improvement from the first quarter, and we expect to see further improvements in the second half of the year.

Adjusted earnings per share was $1.35, 27% higher than the prior year. This excludes $29.5 million of income tax expense related to legal entity restructuring steps required to spin off the Performance Technologies business. Now moving to cash flow metrics. Please turn to Slide 11. Free cash flow was negative in the second quarter, primarily due to the working capital and capital investments in data centers, along with expenses related to the Performance Technologies spin-off. As expected, we're deploying cash for working capital to support our growing data center customer demand and protect our production from supply chain constraints. In addition, we incurred $27.7 million of cash payments, primarily for restructuring and disposition-related costs.

Lastly, cash taxes were higher than normal due to some unique situations and significant customer LTA payments. Net debt was $211 million higher than the prior fiscal year-end, but we received approximately $200 million (sic) [ $199 million ] from Gentherm on October 1, which was used to repay debt. Based on our current outlook for earnings and cash flow, we expect the leverage ratio will decrease further by year-end.

Now let's turn to Slide 12 for our fiscal '27 outlook. As announced in our press release, we're updating our fiscal '27 guidance to reflect our higher revenue outlook for our remaining businesses and the successful spin-off of the Performance Technologies business. Starting with the third quarter, we'll report historical results for this business as discontinued operations. So our current outlook now excludes Performance Technologies revenue and earnings for the full year. Table is available in the appendix providing a recast of financial information for net sales and adjusted EBITDA by quarter for fiscal '26 and year-to-date fiscal '27. We expect total company sales to be in the range of $3.1 billion to $3.2 billion, representing a 50% to 55% increase from the prior year, excluding Performance Technologies revenue from both periods.

We expect data center sales to grow 80% to 90% and expect commercial HVAC sales to grow 10% to 15% from the prior year. I want to highlight that both of these ranges represent an increase from our segment outlook last quarter. With revenue expectations increasing, we're still expecting continued margin improvement in the back half of the year. However, we believe that margins will improve at a lower rate than originally anticipated, mostly due to ongoing cost increases across the supply base.

Given the revenue outlook and ongoing improvements in margins, I'm pleased to say that we expect fiscal '27 adjusted EBITDA to be in the range of $470 million to $500 million, representing a growth rate in excess of 50%.

Again, this outlook excludes Performance Technologies from the full fiscal year. From a free cash flow perspective, we expect to generate positive cash flow for the full year, making up for the use of cash in the first 2 quarters. And as I previously mentioned, we received approximately $200 million (sic) [ $199 million ] of cash on October 1. And while it is not included in our free cash flow calculation, it was used to repay debt. And to wrap up, we remain excited about our fiscal '27 outlook with outstanding revenue and earnings growth. Very few companies are generating earnings growth in excess of 50%.

And I'm proud to say this would represent our fifth consecutive year of adjusted EBITDA growth in excess of 20%. We're looking forward to our next chapter as Modexus Solutions as we're truly a new company and have an exciting future to share with our shareholders. As Neil mentioned, we're holding an Analyst and Investor Day on November 18. Neil and the entire team are looking forward to providing a new strategic update on this next phase of our transformation, along with an exciting financial outlook for fiscal '28 and for fiscal '29. With that, Neil and I will take your questions.

[Operator Instructions]

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

Can we maybe start with data center margins? To keep it easy, if you did roughly 15% EBITDA in the first half of the year, sort of implies you need to get to somewhere in the low 20s, let's say, in the second half of the year if data center profits are set to rise by 80% as indicated in the deck and in prepared remarks. Can you specifically spell out what gets you there? Why not maybe derisk that cadence more meaningfully? And I guess, why should investors feel that this is a dependable sort of outlook? And can you bridge how much of this gap between, say, 15% and 21% first half, second half? -- how much of that is sort of solved by price capture? And if you can comment on the cadence between the 2 quarters, that would be helpful. And then I have one follow-up.

Matt, it's Mick. So as we look at second half of the year, we continue to expect a step-up each quarter sequentially. You're right in the high-level math based on our public comments there. Q3, we'd expect to see 100 to 200 basis point sequential improvement and then another step up in Q4 with the target of getting to 20% or above in Q4. And 2 major drivers. So we've talked a lot about first half of the year around labor and overhead. Those have been, as expected, those were coming in much in line with our outlook for Q2.

So as we talked about, materials has been a significant increase. And in the quarter, that was about 375 basis points. So when we look to the second half of the year, there's 2 big drivers. One, volume is a big one. The conversion rate on incremental volume is quite high, way above, as you can imagine, at a variable level. So more volume we're putting through is coming through at a much higher margin than our targets of being at a 20% level. Secondly, we are going to recover material costs. And we have contracts in place. We already have commercial negotiations. So that recovery of material cost is going to improve our material margin. And again, if you just look at first half, second half, again, Q2 was 375 basis points at a minimum between all of our material cost increases. This was kind of the headwind or the penalty in the quarter.

And then I'm sure you guys internally have been talking about potential election outcomes. And I would imagine if I don't ask, it's going to get asked on the call. But does this outcome change the shape of your growth trajectory or the fundamental thermal backdrop for you in the United States? And putting that aside for a second, just given that we're looking at a stock price sub-$100, how are you thinking about potential aggressive share buybacks given the state of your balance sheet?

Matt, this is Neil. Yes, certainly, we've all thought about the outcome of the elections, and I don't think there's really a big surprise here in terms of what shook out last night. I know that we're seeing a robust, healthy backlog that goes well beyond 2 to 3 years, and there's an immediate demand even today.

So there's already many data centers that are in flight that have been permitted that are going to require multiple years of building and preparing. So those things are kind of in position and in place. For us, I believe that we're going to see even increased demand from this because as you remember, when we broke into the data center market, we broke in as a sustainability play. We broke in as our first data center customers were the only customers that offered a carbon-neutral data center.

And when you offer a carbon-neutral data center, you have to have the best power use effectiveness and the best water use effectiveness. You have to be able to ensure that you are conserving energy and water. And that has been our niche and that has been our play. And I believe going forward with data centers, particularly in many local communities here in the United States, that that's going to be important for people to understand that you're using the best technology in order to drive down energy costs and drive down water usage.

That's our play. That's our differentiation. That's how we broke into the market. I think that's going to continue to trend that way.

And Matt, on the buyback, we're -- like everybody this morning, we're digesting the news to the elections and how the markets reacted to the data center space. But to your question, at the current share price, that will obviously be a big topic with our Board as soon as we meet with them. More to come there, but that will clearly be a topic with our Board.

The next question is from Noah Kaye from Oppenheimer.

Yes, I would like to follow up on the margin trajectory as well. Mick, I think you said maybe 100 to 200 bps step-up is what you contemplated for 3Q on data center margins. Is that correct?

Yes, correct.

Yes. So that would imply 4Q margins materially above 20%. I want to confirm that. And I understand what is sort of the -- if any, outsized margin benefit you get in that quarter. I don't know if there's a timing that's anticipated on material recoveries. Or is that kind of really the right level to think about as a jumping off point going into '28. Maybe you can comment on that. And maybe even following up on that point, the visibility you now have into the cost base through some of these LTAs that I know have been a big lift for the company over the last couple of months.

Yes. I'll go first, Noah. There's a lot to what you said there, but I'll try to hit it all. Yes, the -- so Q4 would be another sizable lift from if we're in a 16.5%, 17.5% margin in Q3 and Q4. The big driver in Q4 besides continued improvement in our material cost ratios is volume. So if we look at second half implied volume that's kind of in a 80%, 90% range Q3, I would see in another like 80% type growth rate. And obviously, Q4 gets us 90% plus. So that level of volume going through is a big lift.

Also, the more programs that we are quoting, launching and so forth are all adjusting pricing real time. What I kind of want to make sure we cover with all of you is when we've talked the last few quarters, we started seeing some of the a few key components, and we talked to all of you about that, and we've gone back to our customers to recover those. At the same time, there's just general inflation we're seeing across aluminum, copper, steel, 30% core Q1, 30% Q2. These are things we didn't necessarily anticipate in the agreement. So they've had to go back.

And Neil can comment, our customers are very supportive about recovering those. So we have a little bit of a lag effect on that element. But then certainly, as we're quoting new programs and receiving new POs, we're negotiating that upfront, which is a combination of tariffs, raw material costs and then purchase component cost. That's what -- so that's the impact in Q2, but the opportunity set for us as we go into Q3 and Q4.

And to tie into that -- I'm sorry, Neil, I don't know if we were going to add anything else. But to tie into that, I mean, these 4 quarters of record orders, your book-to-bill was greater than 2 this quarter. I guess, how is the better pricing that you're talking about embedded in the orders in the backlog? And can we just get a sense of where this backlog coverage really puts you both for the back half and even into '28?

So just to build a little bit on what Mick was saying, obviously, when we negotiate these LTAs and we negotiate these program wins, we want to make sure that we can open up the agreements when there are things that are material in terms of margins. And we have been able to display that willingness to work with our customers, and that's where you're going to see some of this improvement in the back half to Mick's point. Certainly, to your other question, there'll be a -- this will be very clear in the IR Day update for FY '28 and '29 -- next week, 2 weeks.

Mind that.

We're looking forward to it like it's next week. But I know there's a bunch of others with questions, so I'll turn it over...

The next question is from Chris Moore from CJS Securities.

Obviously, lots of noise out there. Maybe just kind of how you would characterize 2 things from a customer kind of standpoint. One would be what you're hearing in terms of from availability from a cash flow perspective to build? And two is the kind of certainty in terms of the final geographic destination? Is it still -- is that still up in the air on a lot of the work that you're doing at this stage?

I think for the work that we're considering that beyond '28 into '29 and 2030, certainly, there's some of that in terms of locations and exact size of gigawatt campuses, there's a little uncertainty there, but we're working through that in terms of how to close that gap. But in the immediate 24 months, it's there. Remember, Chris, we're one of the last products to go into the data center. So we can see a site that's been permitted and they start the construction of the site and that can take anywhere from 12 to 18 months. And then you start to bring our equipment in. So the equipment that we're preparing our inventories around that we're going to be building over the next several years are for sites that are permitted and are in place.

So more of the backlog that we're working on in terms of size as well as locations where that may change from state to state, which we have seen that happen in the past, in size. They continue to get bigger rather than smaller. That's beyond 2 years from now, Chris.

Got you. Very helpful. And maybe just -- I know that with Gentherm, there's still, I think, $20 million to $25 million additional costs in the second half for the transition services agreement. Are these costs included in the EBITDA estimate or they'll be adjusted out?

Great question. In our guide is about full year and when we do disc ops, and we remove Performance Technologies from the full year, there would be about $10 million to $15 million of temporary stranded costs. Obviously, we had PT for half the year. But if you just back them out in our guide, that includes that. And when we first announced the spin-off, we said we didn't anticipate much in the way of stranded, and we still believe that where those costs will be reabsorbed is through the data center growth. So in other words, all those resources we have working on Performance Technologies at the rate of growth we're adding on data centers, those will be fully absorbed by next fiscal year.

It's just more of an internal accounting. But to be clear, in this interim period with now with PT gone $10 million to $15 million, and it's really a half a year's impact in the second half, about, I'd say, $7 million to $8 million here that we need to redeploy into the data center business. Hope that answers your question.

The next question is from David Tarantino from KeyBanc Capital Markets.

Maybe following up on the data center margins. Can you just take us through how these headwinds progressed through the quarter? I'm particularly thinking back to last quarter's commentary around margins improving in June. So can you give us some color on how this evolved through the quarter and through October as you locked down more supply and worked on price with your customers?

Yes. Neil can add more color, David, that I would say that -- again, I go back to what we talked about last quarter was what's really started was we were surprised by some short shipments of a few key components. And Neil talked quite a bit about working through those. What's continued to happen, I'd say, through the quarter, it would be other suppliers coming forward either with shortages or their own volume challenges. And then what comes with that, what -- when I talk about material costs, we have expedited freight and logistics and tariffs. So a couple of things that what's happening as the quarter continued to go on. And I think Matt Summerville had asked a good question. We're trying to get in front of it and make sure why we talked about reducing our outlook for the rate of margin improvement is expecting that this will linger longer. But in some cases, we had some sheet metal suppliers or something that don't -- weren't hitting their deliveries.

Other cases, we're getting the deliveries that we asked for, but they show up on a Friday instead of a Monday or we're shipping parts that we have in Europe over to North America, so we can utilize them. So a lot of inefficiencies getting the product in the door to keep the lines moving. And I know it's a lot, but it isn't just that, hey, someone called us and we are negotiating a price increase or an LTA that we should've known about. I think it's just almost the day-to-day evolution. Neil, any other color?

No, I think that's good color. I mean, ultimately, we have a decision to make. When we have these challenges in the operations environment with the supply chain, you can look at your customer and apologize and not do anything or you can react to it and try to continue to delight your customers. And sometimes that decision to react to it and do the best you can to meet their commitments and our expectations to meet our delivery schedules is it gets quite costly. When we have to -- when we have key components that are sourced locally and they fall through, we have to then use their international sources to get the components in. And to double that, you expedite the freight at the same time. So there are many instances where we had some suppliers prior to the LTAs that were not able to meet their commitments locally, we had to go with international shipments with expedited freight in order for us to keep the delivery schedules.

Okay. Great. And then maybe could you give us some color on the pricing discussions in data center? My understanding is there were pass-throughs for inflation, but securing supply at higher cost is somewhat unique. So what does the pricing look like in the LTAs from your suppliers? Where are the discussions at this point with your customers on price? And how much more work is there to do on these discussions?

Well, I think the important piece here, David, is that it's not fixed. We have the -- we've got the agreement with our customers that pricing is variable, especially when we have challenges in the metals inflation as well as tariffs, expedited freight costs, those kind of things, there's a willingness to have a conversation and there's a willingness to help us in terms of making sure we can meet their delivery commitments and help share the costs in order to do that. That is a very -- those are very active conversations that take place on a sometimes weekly basis with some of our biggest customers.

The next question is from Neal Burk from UBS.

On the commercial HVAC guide, you guys have just done 2 quarters of pretty good double-digit organic sales growth. But I think the guide assumes a step down in the back half. Can you elaborate on that? Do comps get harder? Or is there some timing? Or is this just conservatism?

Yes. With the heating season, one thing that was positive here and helped with HVAC in the really strong Q2, we've had a really good preseason for heating, preseason orders. So we are being a little bit cautious that for those that have been with us a while, we always -- you don't know what unfortunately, weather is going to be. So there's one element of we try to go in with a relatively conservative heat outlook. Secondly, the -- that new leadership team is really going through a heavy lift on 80/20, and we have planned exits, cost reductions and attrition, much like, again, people have been with Modine for a while, we'll see because also implied in there is a pretty healthy second half margin lift.

Again, from the first half, I think we'd probably be looking at, at least 300, 400 basis point plus improvement in the second half of the year, and part of that is from the 80/20 activities, along with price recovery on material costs because there was also a little bit of that in the HVAC segment for Q2.

Yes. I want to follow up on that. I think I think last quarter, you were pointing to kind of maybe 200 basis points of margin expansion climate for the year. And so can you kind of update where we are now relative to that? I mean you kind of guided back half, but was 2Q how much worse than you expected? And what's the sort of ramp in the back half? How do you kind of break that out between cost recovery and price?

Yes. I see the full year being up, call it, 100 basis points or so. When we look to the back half of the year, I expect a 50 to 100 basis points year-over-year improvement in Q3 and then another big lift in Q4. And again, where -- in as far as Q2, we were a little bit light, and that was also majority was around material costs and mostly raw material costs on the coils business, really strong order intake, in fact, a lot of growth driven by data center business, but that's a lag in timing recovery of like copper, aluminum and steel.

The next question is from Brian Drab from William Blair.

Can you touch on that opportunity that you have with the data center customer within the coils business, the timing of that and how significant could that be for that segment?

Yes, that is definitely significant. We're going to have to do a lot of 80/20 work there to ensure that we're using the appropriate capacity for this key customer. Definitely is significant in terms of the revenue growth. And it would be helping them supply -- helping them secure supply so that they can continue to navigate the shortages in the supply chain. We've talked about fans as a shortage in the supply chain. You've heard lots of companies talk about that. We've talked about things like evaporators and compressors.

Coils is now bumping up as one of the one of the areas where they're seeing a severe shortage in the industry and the fact that we're the largest independent coil producer in the world is in our advantage. So we have a lot of opportunity there, and we can partner with them, and we are partnering with them. That will be a significant mix shift in that business going forward.

Can you say what the specific application is for the coil? Like what type of system or units would be...

Liquid cooling, rig or heat exchangers, liquid cooling for direct ship.

Okay. Got it. And then you just mentioned the shortages of fans and other components. Can you sum up at this point, like how many suppliers are an issue? How many parts are an issue? This has been a very acute problem throughout the last 6 to 12 months. But is it still an acute problem? Or has it kind of broadened?

Well it hasn't broadened. It was for the -- you have limited supply with 4 key components of those 4 key components fans. We have now entered into an LTA with one of the fan suppliers. We've also entered into long-term purchase agreements a blanket PO is out 12 months for a second. So we have comfort now that we will be able to get the requested supply that we didn't have that comfort 90 days ago. With the evaporator suppliers, we've entered into an LTA. With the compressor supplier, we're in negotiations, and I would expect to close an LTA on that relatively soon. It's just a matter of how much more capacity that they need to add and how many more plants they need to add to support us. So what we see now in coils, obviously, the last, and we're vertically integrated with coils. So that's a nonissue for us. It is for others.

So with these LTAs, we have targeted the ones that were critical a quarter back that had caused a lot of disruption. And as we enter into these LTAs and we enter into these agreements with our suppliers, this is beginning to stabilize around the strategic supply chain. Now you still have the other suppliers that need to deliver. Those are more acute in terms of an issue where you kind of work through it, maybe it delays you a week or maybe it delays you a couple of weeks, but you can -- you have an alternative source that you can ramp up quicker, much quicker because they don't have the same level of technology. So that for us is a different challenge. But the first and the most important thing to do is to lock up your suppliers that are strategic and then we'll work on the ones that are more of an acute issue throughout the weeks and months.

Okay. And then if I could just ask, now that you have those LTAs in place, you have an understanding of the pricing that goes along with those. And I guess this is asking you to maybe comment on a time period further out than you want to. But in the past, we've talked about the potential for EBITDA margin for the data center business to be well north of 20% once you get to some sort of steadier state. Is that still where you're trying to drive the business towards? What is the goal for EBITDA margin for this business?

Yes, that's absolutely what we're trying to drive the business for. But remember, we are in the middle of a ramp. We are ramping products. We're ramping new launches. We're ramping chiller lines. We're ramping air handling units. We're adding $100-plus million of capacity and expanding in a way that we've never done in the past. So there's going to be challenges with the ramp in terms of margin compression with all the things that we talked about. We're what, 13 lines into the 20 lines for chillers now complete. You go back a quarter ago, it was half of that. So by the end of the calendar year, we'll have the capacity in place and you'll start to work through these inefficiencies. But there's often margin compression in the middle of the ramp, and that's exactly what we're in to keep up with the enormous demand that we have for the most efficient product in the industry.

The next question is from Tim Wojs from Baird.

Maybe just on the data center guidance, the midpoint going from 70% growth at the midpoint to what's 85% now. How much of that is volume versus price?

In terms of majority of that is volume driven, Tim.

Okay. And so I guess when you're thinking about kind of the commercial actions that you need to do to kind of recover the higher component costs, I mean, how much of that have you already went and gotten versus how much you still need to get? And I guess, what is embedded in the fourth quarter? Because I mean, there's still a pretty sizable ramp from Q3 to Q4. And I'm just trying to kind of understand your ultimate visibility to that at this point.

Let me try to answer it the best way I can. I would say based on -- so 2 things we have happening at any one time. We have our 2 major long-term agreements with a couple of hyperscalers, one we announced last year. That had well-defined pricing mechanisms in there. And as Neil said, they're open to it. And in some cases, we didn't -- both sides didn't contemplate some of the things we saw coming. So we're working through those now, and there's a lag effect on getting those approved then into the system, the invoice and so forth.

The second element is every single new discussion we're having commercially, Neil and I are having the teams ensure all of this is upfront and such that incremental programs are addressing even like if it's 6 months between award and completion, we want to be sure that if there's inflation between us getting award for a new site that we can adjust that price before we ship the product. And from what I can kind of see just on pricing we've agreed to and passing through, I see at least like a 250 basis point lift for us on discussions we've already had with customers on current activities. So I hope that gives you a little bit of transparency. And then obviously, new programs, new POs where our full intent is to get those priced upfront when those ship.

Okay. Okay. Yes, that's helpful. So when you think about you're not necessarily guiding to put words in your mouth, but what's implied is probably a 450, 500 basis point improvement Q3 to Q4 in EBITDA margins. Part of that is price that you do kind of have visibility to and there's a lag to it. And then parts of it will also just be kind of volume growth and better efficiencies within the existing lines. It's really like those 2 main factors.

Yes, it's a good summary. I mentioned a few minutes ago, I see in Q2 a 375 basis point material headwind. And then I mentioned to you that what I can see in our system is at least, call it, 250 basis points catch-up right now that we've gone and then you have new programs. So the other thing, right, we have to get in front of and it's a little bit of what we're talking about is then make sure we're factoring in what could come that we're not aware of yet as far as asks from the supply base. And I think -- I'll let Neil comment. I think we're well in front of that. I'm not raising that because it's a message we're trying to send is that if we have all this catch-up, then we have to make sure we don't get surprised with any incremental price increases from our supply base. I think where we're at today, I feel good about. Neil, I don't know if...

Okay. Okay. And then I guess when you think about -- just -- I guess, when you're thinking about the supply chain itself, -- is there a way to just to give us some color on just how supply has tracked for you over the last few months? I mean, are you -- I guess, for Q3, are you kind of operating at that margin level today in terms of the data center business? And are you seeing like weekly or monthly sequential improvement in supply? Or is it still pretty kind of whack-a-mole?

We have seen improvement. September was the first time that we hit 100% on-time delivery from each of our chiller plants. October was the second time we hit 100% on-time delivery for our chiller plants. And that's because of some of the stability we've got back in the supply chain.

The next question is from Jeff Van Sinderen from B. Riley.

You sort of just answered part of my question. I was going to ask you, though, have you seen any customers pull forward demand with more urgency considering the political backdrop?

We have seen a lot of that. I don't know if it's completely driven by the political backdrop or if it's more driven by just the breakneck speed that we see around the competitive forces with AI and high-performance compute. There is a scramble for building out as much capacity as fast as possible and outpacing their competitors, and you're starting to see a lot of interesting new technologies as well as requests for us to be able to pull some of these schedules in, whether part of that is politically driven or if it's just the pure competition in order to add the capacity faster.

Okay. And so you said you're adding 100% on-time delivery for chillers now. If you could produce more data center product right now, do you have other data center customers or potential customers that want that product?

Yes. It's -- we have more demand, more requests even with the amount of capacity that we're putting in place with air handling units, with CDUs, with chillers that V-dry air coolers, adiabatic coolers, all these products that go into the data center space far exceeds our capacity.

So you really -- at this point, you're having to sort of turn away some potential customers or you're having to -- I don't want to say put on allocation, but it's almost as if you're sort of allocating to some degree.

We are trying to navigate these relationships. We leverage 80/20 with how we identify customers that we consider are what we call perfect prospects internally because of their cash position, because of their ability to win because of their technology, because of their strategy. It aligns with our technology road map. When there's a high degree of fit of partnership, we have preference for those customers. It would just be a longer lead time for the others.

Understood. Sounds like a good way to operate. And then just given the balance sheet considerations of some of the smaller data center players, how are you thinking about mitigating that smaller player customer balance sheet risk, if you will?

We typically don't engage.

We have enough -- yes, we have enough demand from our top 10 that we don't have to engage.

The next question is from Manish Somaiya from Cantor.

My first question is on the inventory buildup and the working capital ramp that you've had in anticipation of product deliveries. And my question specifically is if customer site schedules move to the right, how fungible is that inventory across customers and projects?

So typically, we build a product that is anywhere between 70% to 80% that's scalable. The last 30 -- 20% to 30% is more customizable. So the majority of the product would be able to be shared with other projects and other demand.

Yes. Most of the inventory is actually in raw state, and we try to time shipments and even negotiations of when our products are done that they take possession of them. So most of it is raw and as Neil said, and then you can reuse that for various products.

Okay. That's helpful. And then on '27 CapEx, I think you have guided to $150 million to $200 million with the 20 chiller lines targeted by year-end. How should we think about '28? I mean, does that kind of normalize from a capital intensity perspective? And I guess, looking ahead to cash conversion, if you can just help us with that as well.

Yes. So a few items. I'm going to push out, as Neil did to our IR Day only when we're looking into '28. But directionally, we will see a more normalized level of capital spending. It will -- I expect it will decline. But as the size of the company kind of stay at a -- for sure, we'll be over $100 million a year, I'd expect just for preventative maintenance and to support future growth. And the conversion, we expect will fully improve as we go forward from a free cash. While I'd like to see -- 2 things I'd say, while I'd love to see bigger free cash flow conversion this year, I think it's a really big positive that we're generating 90% data center growth and the company is fully funding from operating cash flows, our growth, which is great.

But also just this year is a little bit of a unique situation when you look at our full year and even year-to-date with regards to the spin-off of the company. We mentioned that we'll probably have somewhere between $30 million, $50 million this year of cash separation costs plus some capital to separate the company. And then we had talked about cash taxes, both because of the spin-off and frankly, the LTA where we got a large upfront payment, we have about $70 million plus of higher-than-normal cash taxes. So just in this year, I think we've got $100 million of non-normal operating cash items that I wouldn't expect to continue into the future.

And then just lastly, we're sort of in the middle of the third quarter for you guys. And as I process the discussion we've had for the past 1 hour pertaining to the targets for '27 with margins, et cetera. From your perspective, Neil, what are some of the biggest risks that you are focused on that we should at least be aware of?

We have to hit the schedules for our customers. The demand that we have is critical for them to be successful. And marrying the supply chain ramp with the factory ramp with the labor ramps has been a delicate balance over the last couple of quarters. We're getting better at it, no doubt about that. And just making sure that we can continue to meet our customers' delivery schedules is critical for the future of our success because they're -- the projects and programs that we have with them extend well out into 2030, so 2031.

So we want to make sure that we're meeting the commitments early, even if it's more costly for us to do it because we see this as strategic customers with long-term potential.

There are no further questions at this time. I would like to turn the floor back over to Kathy Powers for closing comments.

Thank you to everyone for joining us this morning. The replay of the call will be available through our website in a couple of hours. We're looking forward to seeing many of you on November 18 in Chicago. Have a great day. Thanks. Bye.

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

Good morning, ladies and gentlemen, and welcome to Modine's First Quarter Fiscal 2027 Earnings Conference Call. [Operator Instructions]

As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Kathy Powers, Vice President, Treasurer and Investor Relations.

Hello, and good morning. Welcome to our conference call to discuss Modine's first quarter fiscal 2027 results. I'm joined by Neil Brinker, our President and Chief Executive Officer; and Mick Lucarelli, our Executive Vice President and Chief Financial Officer. The slides that we will be using with today's presentation are available on the Investor Relations section of our website, modine.com.

On Slide 3 of that deck is our notice regarding forward-looking statements. This call will contain forward-looking statements as outlined in our earnings release as well as in our company's filings with the Securities and Exchange Commission. With that, I'll turn the call over to Neil.

Thank you, Kathy, and good morning, everyone. Before covering the quarterly results, I'd like to share a couple of personnel updates. As we've recently announced, Michael Mahan has joined Modine as the new President of our Commercial HVAC segment reporting to me. We are very excited to have Michael join our team, bringing extensive experience managing global P&Ls, executing portfolio transformations and driving product development and technical innovation.

The priorities of this segment have not changed. We are focused on improving margins throughout the segment while driving organic growth and pursuing inorganic growth opportunities. We expect to create significant value in this segment through our ongoing 80/20 work and through the integration of our last 3 acquisitions. Michael is the right leader to help us achieve these goals. Secondly, Art Laszlo, who has been leading our global Data Center business, has resigned from his role at Modine for unexpected personal reasons and will be leaving at the end of July.

We are grateful for his contributions over these 4 years and wish him the best for his next chapter. We have initiated a search for his replacement. In the interim, I will step in to lead this organization. Given the level of growth and complexity of this business, I will be spending a great deal of my time and focus on making sure that we are executing on all of our many priorities in this segment. This includes launching and ramping production in North America to support our strategic customers and their growth targets, including ensuring that we are ready to perform on our long-term capacity commitments starting in 2027.

This is a heavy lift, but I have confidence in our global team and our ability to delight our customers while staying at the forefront of technology. Please turn to Slide 4. This is the first quarter that we are reporting under our new 3-segment structure, Data Centers, Commercial HVAC and Performance Technologies. Starting with the Data Center segment, revenues increased 90% from the prior year, but were down sequentially from the previous quarter as expected.

As we discussed last quarter, we began experiencing supply chain shortages of certain key components that impacted production volumes in the quarter. In response, we started taking decisive action to secure supply. Our existing suppliers are expanding capacity to meet market demand, and we are negotiating commitments to secure the volume of components we need for fiscal '27 and beyond. While we regularly assess our supply chain risks, recent component shortages materialized even earlier than anticipated. We quickly activated our contingency plans, which included dynamically resequencing our capacity rollouts. Because we are actively staffing and preparing our broader network for significantly higher volume, these sudden part shortages caused temporary downtime and lower-than-planned capacity utilization across our expansion sites.

As a result, both labor efficiency and overhead absorption were below our normal levels, which negatively impacted our margins in the quarter. The key takeaway here is that these margin pressures are a transitional timing issue, not a structural one. While these supply chain realities expand the time line to reach full operating efficiency across our network, they do not impact our ability to meet our recently announced long-term capacity agreements or our financial targets for this year.

Most importantly, the underlying demand for our products is unprecedented. We just logged our third consecutive quarter of record order intake, driving another significant increase in our backlog. We remain firmly focused on executing our expansion and securing critical components so that as the supply chain normalizes, our facilities are primed to effectively deliver on this massive demand. Commercially, we continue to focus on our strategic customers and perfect prospects, which include high-quality hyperscalers, Neoclouds, and colocation customers, and our new product launches have been a commercial success.

I spent time last week visiting our Data Center plants in North America, and I just want to reiterate my confidence in this team. As I jump in to lead this business over these next few months, my focus is ensuring that we are executing on our capacity expansion to support our strategic growth plan. I anticipate that we will have periodic challenges and setbacks with this exponential growth business. Over the last 3 years, we have grown revenue at a compound annual growth rate of more than 80%. Even with temporary cost or margin headwinds, a very few companies can grow earnings at these exceptionally high double-digit rates.

Our visibility and confidence in revenue and earnings growth over the next 2 to 3 years remains as high as it's ever been. Please turn to Slide 5. Our commercial HVAC business delivered a strong quarter with revenues up 22%. This was largely driven by our acquisition last year and higher coil sales to our Data Center customers. As I previously mentioned, Michael Mahan will be leading this next phase of the 80/20, including a renewed vertical segmentation, which will help to accelerate our acquisition integration, along with very specific targets and actions for each of our general managers. We are taking strategic actions to optimize our manufacturing footprint in this segment in support of our 80/20 focus and to improve our overall cost structure.

Product lines are being consolidated into our Owatonna, Minnesota facility, which was part of the CDI acquisition last year. In addition, we have consolidated coils production in Grenada and Juarez, in order to allow for the capacity expansion for the chiller lines in Granada while preserving capacity for growth in coils to support our Data Center customers. Commercially, we're also taking decisive pricing actions to offset inflationary cost increases, including materials and tariffs. This, along with ongoing 80/20 focus will help improve margins through simplification and efficiency. Please turn to Page 6. The Performance Technology team continues to focus on preparations for the planned spin-off and merger with Gentherm and was able to hit several significant milestones since our last update. Gentherm completed its S-4 submission to the SEC. And once it becomes effective, they will request approval for the transaction from their shareholders. We have also completed the filing required for an IRS determination letter on the tax treatment of the Reverse Morris Trust transaction and expect to receive a favorable ruling prior to close. Internally, we have been working on the IT separation and legal entity reorganization to allow us to deliver a stand-alone operating business to Gentherm.

Overall, these processes remain on track, and we are still expecting to close the transaction before the end of the calendar year, presuming that all the necessary approvals are received and closing conditions are met. With that, I'll turn the call over to Mick.

Thanks, Neil, and good morning, everyone. Please turn to Slide 7 to review the Q1 segment results. As Neil mentioned, this is the first quarter reporting results under the new operating segments, Data Centers, Commercial HVAC and Performance Technologies. Please refer to the 8-K filed last week for the historic recast of our results under this new structure. Beginning with Data Centers, this segment continues to grow at an exponential rate with a 90% increase in sales. Americas sales grew 112% and EMEA sales increased 18%, mainly from growth with strategic hyperscale and colocation customers. As we discussed last quarter, we anticipated that Q1 revenue would be up significantly year-over-year, but down sequentially from Q4. This was due to a significant impact from supply chain shortages that limited our production volume in the quarter and which ended up lasting longer than we originally anticipated. In addition, we also had a customer program delay and a few delayed shipments at the end of the quarter. The entire industry is continually adjusting to supply and demand changes. And despite a few challenges this quarter, the segment was able to deliver well above-average earnings growth. Adjusted EBITDA grew 27%, resulting in an adjusted EBITDA margin of 14.8%. As expected, the adjusted EBITDA margin was down versus the prior year. This decline was due to a few temporary factors. First, there was a 150 basis point warranty variance year-over-year, which was due to a large warranty settlement in the prior year. Also as part of our production ramp to meet future customer volumes, we've added significant labor and overhead costs. The supply chain shortages caused significant inefficiencies in our plants as we ramped our labor and manufacturing capacity to handle higher volumes. The excess labor, along with unfavorable overhead absorption on the lower volumes had a 450 to 550 basis point impact on margins during the quarter. Last, we experienced unfavorable product mix combined with some higher material costs, partially related to supply chain shortages. These will be addressed through our commercial agreements, and we expect this will contribute to sequential margin improvement next quarter. With regards to the operating income and adjusted EBITDA margins, our rate of revenue growth is far exceeding the increase in SG&A spending, which had a positive impact on our margins. SG&A was down nearly 400 basis points as a percentage of sales. As supply chain catches up, capacity comes online and revenue grows, we expect adjusted EBITDA margin to improve. We fully expect the segment margin will improve in Q2 and continue that trend in the second half of fiscal '27. Despite some periodic growing pains, we're excited about the overall momentum in this segment. Based on our revenue and margin outlook, we anticipate that the Data Center segment will generate earnings growth in excess of 85% this year. Please turn to Slide 8 to review the Commercial HVAC segment.

Commercial HVAC also delivered strong revenue growth with a 22% increase in sales. HVAC Technologies sales increased $24 million or 45% with acquisitions contributing $20 million of revenue in the quarter. Heat Transfer Solutions sales improved 7% or $11 million with strong volume in North America coils supporting Data Center customers. Adjusted EBITDA increased 7%, while the margin was down 220 basis points versus the prior year. Similar to the Data Center segment, we anticipated a negative margin comparison for Q1, mostly due to a temporary business mix. First, the recent acquisitions have contributed to a lower mix impact on adjusted EBITDA margin. As part of the integration plan, the team is consolidating the manufacturing footprint, and that resulted in some inefficiencies in the quarter.

We also had some unfavorable revenue mix with a higher mix of lower-margin coil business and a lower mix of our higher-margin heating and coolers businesses. Overall, Commercial HVAC is on track for the year with great opportunities for this leadership team to drive both growth and margin expansion through new 80/20 initiatives. We're anticipating double-digit earnings growth this fiscal year with incremental improvements in adjusted EBITDA margin each quarter.

Please turn to Slide 9. Performance Technologies revenues remain impacted by challenging end market demand. Heavy-duty equipment sales were higher by 1% or $1 million, driven by higher GenSet product sales, partially offset by lower sales to off-highway agricultural equipment customers. On-highway application sales decreased 5% or $9 million due to lower end market demand from automotive and commercial vehicle customers. The segment adjusted EBITDA declined 3% from the prior year and adjusted EBITDA margin decreased 10 basis points to 13%. The margin decline was mostly driven by lower sales volume and the lag effect of recovering higher commodity metals and tariffs.

Based on the current metals trends, we do believe this situation will become more favorable in future quarters. Cost savings initiatives resulted in a $2 million reduction in SG&A expenses this quarter, helping to partially offset these impacts. Despite these challenging market conditions, the team remains focused on delivering higher margins and earnings for the segment this fiscal year. As Neil covered, the separation plan and merger with Gentherm is progressing nicely and remains on track. Now let's review the total company results.

Please turn to Slide 10. First quarter sales increased 28%, driven by the revenue growth in Data Centers and Commercial HVAC. Gross margin declined 340 basis points to 20.8%, driven by the lower margins across all 3 segments. We continue to invest in incremental SG&A to support strong growth in Data Centers while redeploying resources across all areas of the company from an 80/20 perspective. Incremental spending has been partially offset by lower SG&A in Performance Technologies. In addition, corporate SG&A includes $7.1 million of expenses directly related to the PT spin-off, primarily for professional services to prepare for the transaction. As revenue continues to accelerate at a faster pace than SG&A, total company SG&A declined 60 basis points as a percentage of sales to 11.8%.

Adjusted EBITDA grew 5%, resulting in a $5.1 million year-over-year increase. Due to the specific items I reviewed in each segment, the adjusted EBITDA margin was down 270 basis points to 12.2%. Again, as I previously covered, we anticipated most of the change in margins. This includes working through supply chain shortages in the Data Center segment, along with a Q1 negative mix impact in commercial HVAC and reflecting the low market volumes and rising costs and tariffs in PT. We believe these are all transitory, and we have very specific actions to improve margins in all 3 segments as the year progresses and we remain on track to deliver our full year targets.

Last but not least, from an EPS perspective, adjusted earnings per share was $1.53, or 44% higher than the prior year. This includes a favorable income tax benefit related to shares issued for stock-based incentive compensation awards during the quarter. However, we expect this benefit to be largely offset in the remaining quarters by other offsetting items and our full year effective tax rate will be generally in line with our previous estimate. Now moving to the cash flow metrics.

Please turn to Slide 11. Free cash flow was slightly negative in the first quarter. This was lower than the prior year by $5 million, mostly due to a few factors. First, we had higher capital expenditures versus the prior year. In addition, the first quarter had over $60 million of other cash flow items, including higher contract assets related to revenue recognition, cash taxes and incentive compensation. These were partially offset by favorable working capital improvements. Last, first quarter free cash flow included $14.9 million of cash payments, primarily related to restructuring and disposition-related costs.

Net debt of $433 million was $70 million higher than the prior fiscal year-end, driven mostly by the repurchase of treasury stock in connection with Modine's share-based compensation program. Participants are allowed to sell a portion of their shares back to the company to cover their income tax withholding requirements. However, the shares are repurchased and held as treasury stock, reducing the number of shares outstanding used to calculate earnings per share. Our balance sheet remains strong with a leverage ratio of 0.9. And based on our current outlook for earnings and cash flow, we anticipate the leverage ratio will decrease further by year-end.

Now let's turn to Slide 12 for our fiscal 2027 outlook. As announced in our press release, our current revenue and earnings outlook is unchanged. Delivering on these results would represent our fifth consecutive year of record results. Also, our outlook includes Performance Technologies for the full fiscal year. Once we know when the pending transaction will close, we'll provide an update on our full year outlook for the remaining business. Then we'll report the historical results for PT in discontinued operations starting for the quarter in which the transaction closes.

For fiscal '27, we expect total company sales to grow in the range of 20% to 35%. For the Data Center segment, we expect sales to grow 60% to 80%. For Commercial HVAC, we expect sales to grow 5% to 10% this year. For Performance Technologies, we anticipate sales to be flat to up 5%, driven primarily by pricing mechanisms in our customer contracts for higher materials. We're expecting most markets to be flat with an opportunity for improvement in the back half of the year. We expect fiscal '27 adjusted EBITDA to be in the range of $650 million to $680 million, representing a growth rate in excess of 40% -- and this implies at least 100 to 200 basis points of margin improvement, driven by a margin increase in all 3 segments. And from a sequential standpoint, we expect a step-up in margins from Q1 to Q2. And for the remaining 3 quarters, we anticipate that each quarter will result in strong double-digit year-over-year earnings growth, along with favorable margin comparisons.

From a free cash flow perspective, we expect that we'll generate a higher level of free cash flow. And as a percentage of sales, we believe full year free cash flow will be between 4% and 6%. Please see the appendix in this presentation for all the key assumptions, including interest expense, taxes, depreciation and amortization. As we currently look at the next several quarters, we expect that margins and earnings will increase sequentially through the year, driven by the Data Center trends and our material cost recovery plans. To wrap up, we remain excited about fiscal 2027 and expect to deliver another year of record sales and adjusted EBITDA.

Despite a few margin-related headwinds in the first quarter, we remain confident that our strategy and investments will generate continued long-term and sustainable growth for Modine shareholders. With that, Neil and I will take your questions.

[Operator Instructions]

Our first question comes from Noah Kaye with Oppenheimer.

I think just trying to unpack the outlook here, implied in the 85% segment earnings growth for the Data Center segment, some pretty healthy margin expansion there for the full year. Maybe that's a good place to start. Can you help us understand the trajectory as you see it moving through the year? I know you talked about sequential improvement, but just how to think about the shaping of that if possible. And it would really, I think, get into kind of level of confidence around supply chain issues abating and improving deliveries. So maybe you can comment on all that.

Let me go first, Neil. All right. Noah, it's Mick. When -- so just kind of level set again, and we provided the recast, we had talked about over the last several quarters last year, the Data Center business hovering around the 20% EBITDA level, and we can go through any more questions with regard to the current quarter. But Q4, we were between 19% and 20%. Q1 a year ago, I mentioned the warranty issue where we had a large settlement, but that was about 20% normalized. When we look at going into Q2, we would expect right now a lift to be back between 19% and 20%, really driven by a significant lift in the volume recovering. We expect to see about $100 million of incremental revenue, which would put us back ahead of our Q4 level. And with that, we'd recover or capitalize on those fixed costs. So from a sequential and a step-up around our confidence in that, we see Q2 getting quickly back to where we've proven we can be and where we've been even with all the expansions. And then the second part of your question, second half, we continue to have more and more as a percentage of our total capacity online and the throughput will continue to flow through at higher incrementals. So we see the second half of the year clearly to get to our targets, we'd see a step-up in Q3 from Q2 in margin and then another step-up in Q4 from Q3.

Obviously, the plan here is our second half would be operating for the first time in a while with the higher volumes above that 20% EBITDA margin range second half of the year. Neil, did I miss anything?

Sorry, I didn't -- Neil, if you want to add anything else, but -- that's extremely helpful, Mick. I think the question around demand, I think your results continue to speak to that. Another -- a third record quarter of orders. You talked about the backlog sort of more than doubling. Maybe you can talk a little bit about kind of conversion cycle times on backlog at this point. Are you seeing kind of backlog extend out? And how does that factor into your capacity planning?

Yes. Thanks, Noah. This is Neil. Certainly, it does factor into the capacity planning, especially when we have to arrange the schedules within our plants based on available parts. So we take these orders, we bring in and build our backlog, and we base it upon our launch schedules of our product lines as well as existing lines that we have. So the backlog isn't totally made up of just product that needs to be produced in chiller facilities. We also have a great amount of backlog on our air handling units and with Scott Springfield as well, which has very stable manufacturing at this time. So yes, those are considered. We take that -- we factor that into our forecast. We factor that into our materials planning as well as our product launches inside the facilities.

Our next question comes from Matt Summerville with D.A. Davidson.

A couple of questions. First, can you talk about whether you've started to see your [ AQuad ] customer begin to execute orders against that capacity LTA? And based on your ongoing discussions with this customer, how you see that LTA cadencing out between '27, '28, and '29. And then I have a follow-up.

This is Neil. Thanks, Matt. Yes, we are seeing that. We've taken a couple of orders already. We anticipate more orders as early as next week. And that is right in line with what we expect for orders for order intake in Q4. So typically, we would suggest it'd be anywhere between a 4 to 6-month lead time in order to prepare for that, and we're right in line with what our expectations were. In regards to the rollout in '27, '28 and '29, it's 20% to 25% in '27. And then Kathy, it's 40% --

35% to 40%.

35% to 40% in '28 and '29.

Got it. As a follow-up then, -- maybe walk through exactly what's kind of been happening supply chain-wise and help us better appreciate your confidence in your ability to lock down the remaining supply you need for this fiscal year and talk through whether or not you're considering a longer-term sort of supply LTA, if you will, to synergize with your own capacity agreement?

Sure. That's a good question. Yes, the answer is yes. And with our critical suppliers, we are actively engaged and in discussions with LTAs and would expect to have that for FY '28 as well as FY '29 in place soon. In regards to today and now, I've been very public about the amount of suppliers that we've worked with. We doubled our supply chain spend year after year after year as we've grown the business, and this was yet another year of that. So this is something that we're familiar with in how we manage it. And I was pretty public that we would have 4 suppliers that we would put into that category that would potentially make us vulnerable. And we identified that early on in our risk management process.

The issue here was the timing. The shortages hit faster than we anticipated. With that, we decisively engaged our current suppliers, and we're expanding our own capacity, and we're aggressively taking additional steps to mitigate this. In one instance, we're even considering vertical integration. So we have done some pretty interesting things. I'll give a lot of credit to the operations team. We really upskilled in operations. We've really invested in operations and brought in some key talent, particularly in the plants and at the most senior levels that are negotiating these long-term contracts as well as helping us dynamically balance our launch schedules in line with the available capacity.

And then just I'm going to sneak in one more. When do you envision activating the remaining chiller lines in Grenada, Jefferson City and the Dallas area? And I dropped for a second, so I apologize if you already covered that. And then are you thinking any differently about the 50% to 70% Data Center organic framework you initially laid out and supported on your last earnings call for fiscal '28. I think that was a comment from Mick last quarter.

Yes. We're confident in the numbers that we put out, Matt. And we're going to get the flow from the materials corrected. We're going to get our supply chain situation resolved, and we'll be able to catch up and we'll be able to deliver on those numbers as we ramp lines. But certainly, the capacity that we would anticipate that we are expanding in those regions you just asked about, by the end of the fiscal year, we'll be back on track and on schedule.

Meaning the lines will be up and established at some level of efficiency by the end of the fiscal year for each of those regions.

Our next question comes from Neal Burke with UBS.

You mentioned backlog doubling. Like I know you don't quantify this, but can you provide some indication of the level of coverage you have relative to sales expectations for this year? I just wonder in maybe like a more negative scenario with the supply chain issues, is there potential for some of the strong demand in the Data Center market to maybe be met by others who are less, kind of restricted on supply chain?

Yes, I'll go first. It's Mick. Probably the best way to think about the revenue outlook and order book is when we start a year, we have probably 70%, 80% of it in firm orders or for us being a March year-end, we'll typically talk about really -- and also Neil said typical POs being, call it, 6 months or so, really, really firm 6 months out, 2 quarters. That's about production supply chain execution, a little bit softer a third quarter and our fourth is customers are there. They're giving us full visibility, but we always say we don't have firm POs. As we're moving through the year now and it will be the roll forward, Neil was talking about and about also the LTA we have with the hyperscaler, the orders and POs for our Q4 will start coming in. And that's another reason why each year, we've tried to start with a wider band and make sure we have contingency plans in there with our hope is as the year goes on, we're not only firming up our Data Center revenue, but hopefully pushing it to the higher end. Neil, anything you want to add on the second part?

Yes. And to your question, Neal, could they go somewhere else for that capacity? I would be more concerned if we were a commodity, but we're not. We have a value-added product that our customers desire to help solve their critical challenges and help them with their efficiency goals that they want to gain. So what we have to do is we have to approach this in the right manner, which is leveraging 80/20 on how we handle these commercial engagements. So our largest customers get priority. So when we see these shortages, we make sure that we keep up with demand with our largest customers at our key accounts, which means we have to have some more difficult conversations with some of our smaller customers, which we have. And with our smaller customers, they understand as long as we give them enough time and we give them enough visibility, they're willing to work with us because they want the product. Fortunately, for us, there's longer lead time issues in the Data Center supply chain that when we are building Data Centers, there are some things that are beyond even some of our longest lead times. So if we give them the proper visibility and they can plan for it, we don't surprise them, then we maintain those orders and those relationships and sales.

That's helpful. And one other question, Mick, you mentioned that you expect data center revenues, I think, up $100 million in 2Q. And you mentioned that volume and margin improvements as the quarter progressed. So any indication like we're towards the end of July here, -- like any indication how the month is trending in terms of availability and Data Center volumes?

Yes, sure thing. Neil, I'll let you go first with regards to anything with regards to -- are you really -- you're kind of asking about how the first month here of the quarter is kind of looking?

Yes, yes.

So we've secured supply chain for -- going forward for this year, assuming that they deliver on what our expectations are and what we've agreed to, then we'll have the supply chain necessary to meet our demand.

Our next question comes from David Tarantino with KeyBanc Capital Markets.

I just want to follow up on that -- those last comments you're making, Neil. I think you said that the supply chain issues hit faster than expected, but I think in the release, you also mentioned that you saw improvement as the quarter progressed. So maybe just kind of paint us a picture on how it progressed through the quarter, maybe give us some color on how it kind of progressed through June and July and how that the actions you've taken showed through sequentially.

Yes. So when a few suppliers, critical suppliers across this space, and I think you've seen it with other -- some of our competitors, we've even seen this with it, these critical suppliers essentially shut a lot of us down with a hard stop and then we had to go in to negotiate specific volumes. The original projected volumes that they provided us were not going to be accepted. And the team did a really good job punching above their weight in order to secure supply, considering that everybody in the industry needed these components. So we were able to negotiate with them and secure that supply and then get the facilities back up and running. Now during that period of time, we had to make a decision, right? We've got some lines that are in the middle of launching that require these parts. They require these components. And we now have to reposition these parts that become available to our highest producing, most efficient lines so that we can get the throughput necessary, which means you have to idle some other areas, which means you have to carry overhead and you have to carry the labor in order to do this, knowing that this is a short-term problem. So those are the decisions we make. We're going to continue to train our employee base. We're going to carry that additional overhead. We're going to carry that labor because we know this is a short-term issue that we're going to be able to get through in a couple of months while we start to establish these long-term agreements with these suppliers and then look at other ways to risk mitigate this. So there's multiple ways that the teams are working on risk mitigation. So when we have these types of issues, we can pivot and we can adjust faster.

Yes. Just one thing to add to that. I want to make sure, too. When we look at the margins and the growth and the outlook, to me, from the finance standpoint, it's all about volume and the throughput. You always talk the product is there, the demand is there. It's a premium product. Even when we look at the quarter, I can tell you that to your question, the third month or the month of June, we were right -- right where we normally want to be from a margin standpoint. So I won't go into details by month, but I can tell you, the first month or 2 where we're really having the shortage and where we finished the third month of the quarter was right back where we'd expect to be and where we've been.

And then so when we look at Q2, it's like Neil said, assuming parts are there, it's all about the volume, the conversion, the margin will come through.

Okay. Great. Yes, that's very helpful color. And then you talked about record orders backlog in Data Center. So maybe could you give us some color on the drivers between customer types and technologies here? And maybe just update us on the pipeline opportunities beyond the orders you received in the quarter and how that's evolved, particularly relative to kind of some of the incremental growth opportunities around both new products and customers?

A big driver of that was with a couple of hyperscalers for us that they continue to provide larger forecasts as we see the growth with their Data Center build-outs. And then the third one was with a large Neocloud provider that we've worked with closely. So it's basically the 3 largest customers that we have that are hyperscaler and Neocloud that continue to increase their forecast with us.

Our next question comes from Brian Drab with William Blair.

That last one was going to be my first question, so I got that answer. Neil, can you just address again, are you seeing any change in demand for chillers related to evolving cooling system architectures and inlet fluid temperature spec for future GPU designs?

Yes. I mean it helps us improving. It's increasing for us because of the technology that we have with free cooling. As these temperatures increase, we have, I think, a really strong product to support that. And it just will continue to enhance in terms of the desire and the need for chillers. You saw that with the LTA that we took with a large hyperscaler out into '29. And we continue to see that with increased forecasts as we introduce the chiller product line. And our enhanced 3-megawatt chiller as well to our customers are very, very excited.

So it is the idea that the idea that's driving the continued demand even if inlet temperatures are going to be higher. So I mean, really, is it the combination of your chiller technology with the free cooling and the chiller, it has to be there for almost like an insurance policy, even if it's only -- if it's used maybe fewer days throughout the year than it would have been otherwise?

That's exactly correct. So even if you're running at a higher inlet temperature, that's great because you can drive further efficiency and reduce the amount of power consumed to the Data Center. We're all for that. And that's why we want to go into that free cooling mode. But in the event where you reach a temperature above that, then you have put everything at risk if you don't have the insurance policy of the chiller in the refrigerant cycle.

And can you give any sense for like the last wave of orders that you've gotten, pick the time period in the last 6 months or a year. Do you have a sense for the breakdown of your chiller demand across the 2 categories of facility cooling versus incorporation into direct-to-chip liquid cooling system?

Well, they support both. So it's hard for us to kind of delineate between the 2 because you'll have the -- you'll have similar models and SKUs on the same rooftop of a Data Center that does both. So without getting inside of the DC, it's hard for us to measure that. But I can tell you that the orders have increased, and that's where we're seeing the backlog in particular with our air handling units as well as our chillers.

Okay. And then last one, if I could. You essentially sold most of your chiller capacity, I believe, with that LTA and like more than half of it at least and probably well more than half in the out years. So I'm wondering if you're seeing other customers maybe step up and considering -- more strongly considering an LTA to get their share of the product going forward?

Yes, I'd say about half of it was part of the LTA, and I think that will be reduced over time as we get more efficient with our product manufacturing as well as when we launched the 3-megawatt chiller. -- we'll be able to produce more and the capacity will increase based on the ratio of 2 megawatt versus 3 megawatt. But certainly, we're in conversations with folks on timing. I don't see any LTAs of the same level of significance that we had with our first hyper. But definitely, there are conversations as this -- as we continue to scale and ramp our facilities. We're looking at agreements that 12 to 18 months that are not necessarily as long as the 3-year agreement we had with the hyperscaler.

Our next question comes from Jeff Van Sinderen with B. Riley Securities.

Just regarding the customer-driven delays that I think you mentioned in your prepared comments, are there any other major delays or shifts in timing by your customers that are potentially pending that they maybe made you aware of that you're watching closely that could impact demand timing? And then also, are any of those factored into guidance that could shift in or shift out? And then finally, what's the root cause of the delays? Is it centered around supply chain?

I'll take the last one in terms of what the root cause is. That is based on new product launch. So that is a design that we're doing with a specific hyperscaler around a unique product that's for the hyperscaler that we're in probably the third iteration of the design cycle. And when we went through some updates to the print and some updates to the overall specifications of the product, and it adjusted it out of the quarter for the build.

Yes. And second, Jeff, we have at all times in our forecast with the nature of the markets and some of the large construction projects attached. We do have contingencies and we try to take different scenarios to this. I think candidly, in Q2 was just a little bit of a perfect storm of some of the supply base items Neil talked about were deeper or longer -- and then when the parts come in, these are such large components, you can't just make them up in a week or 2 with the lines and labor, even though parts are coming in the door. And then combined with what Neil said, and I reiterate that it wasn't like chiller orders getting canceled or pushed out. That was a new product launch. So I think -- but going forward, we do try to build in contingencies and flexibility into our outlook, knowing things are going to go. We see ins and outs almost daily in the order intake and the production plans.

Okay. That's helpful. And then just kind of regarding the fiscal Q2 metric framework, wondering how you're thinking about order of magnitude for EBITDA or EBITDA margin recovery. Do you think it's kind of more gradual maybe in Q2 and then sharper in Q3 and Q4? Or how are you thinking about that for the remaining quarters of the year?

Yes. So a couple of things. And Performance Technologies, I think we'll just address that. That's -- we expect pretty much the next quarter or 2 about the same. It's at the same market conditions, and they are doing a nice job to offset any cost or inflation there. So kind of similar level of margin there. Q2, we see a step-up with commercial HVAC. I already mentioned on the call a large step-up in Q2 for Data Centers, really getting back to where we've been in that range again. And if you put that all together for us, it would be a nice step-up in our Q2 here, probably a 200, 250 basis point lift. So we -- and I mentioned on the call, we see Q2, 3 and 4 having more favorable year-over-year, obviously, margin comparisons as well. So a pretty good step-up in Q2. And then someone had asked earlier, obviously, what's implied for the full year with Data Center is we would expect a margin step up in Q3 and in Q4 as well. So that will be a big driver of our second half.

Our next question comes from Chris Moore with CJS Securities.

Just in terms of the product launches you were talking about, I wasn't sure if you were -- I know in the past, you've talked about modular Data Centers and you're partnering with one hyperscaler working on the second generation, soon to be third generation. Are you -- were you talking about the modular Data Center? Or is that a separate topic to discuss here?

No, that was it, Chris. It was the same that product.

Got you. Okay. And just in terms of kind of as we move forward with Out Performance Technologies, looking at when things normalize a little bit, just maybe from a gross margin perspective, looking at Data Center and looking at commercial HVAC, is there, kind of a normalized level that we should be thinking about? Or which of those segments likely is going to drive the higher gross margin moving forward?

Really good question. And we haven't yet done the official pro forma for you, but I'll let you guys do that math. Clearly, part of the challenge on the PT side has been around the gross margin. Frankly, the commercial HVAC and Data Center, Neil and I have talked about their ability to operate at like a 30% type gross margin -- some of those businesses within there have already been there, are there and have been there. And I think in the case of Data Centers, Neil and I said that's a direction to go as we start to get more level loaded in a capacity utilization or a fixed cost absorption. But you're right, if you back out Performance Technologies, we're probably thinking about somewhere between 7% to 10% type gross margin lift when we are a pure HVAC Data Center company.

Our next question comes from Matt Summerville with D.A. Davidson.

I just have a quick follow-up. Have you -- kind of where are you, I guess, in your decisioning on whether or not Modine will ultimately need incremental fixed capacity or thinking about migrating more towards a variable model as you think about being able to more broadly address some of the hyperscalers that weren't part of the discussion when you referenced 3 specific customers as being the main driving force behind your air handlers and your chiller orders and backlog?

Yes. We certainly have these conversations in terms of our manufacturing footprint and our supply chain strategy. And it's also at the forefront of our design as well. So as we think about our design, we're designing for the ability to be more modular, not the modular unit, but modular as a term, meaning we have more flexibility because you have more of a systems approach in the factory. So when we think about that, the range is right around $4 billion that we feel we have the capacity for over time with the existing CapEx deployment as well as the facilities and rooftops we have in place today. To get beyond that, it would be a different level of CapEx outlay if we were to choose to do that or it could be a combination of both incremental additional facility or more efficiency on the existing lines and then leveraging some supply chain to help produce that overflow capacity. So I think we've got time to figure that out, and we will. But certainly, we get more and more confidence that this is a problem that we are happy to solve for as we see the backlog and order increase.

Perfect. And then I just want to make sure I understood Mick correctly. So the Data Center side of the business in the month of June was hitting sort of your desired profitability objective you kind of laid out for the September quarter in that 19% to 20% range and July is functioning along those same lines. Did I interpret that correctly? Or am I interpreting that correctly?

You are -- you're adding a little color, but that's okay. It is, but that was my point. I'm not tracking margins mid-month here. But what I wanted to make sure, it was a good question, I think, from David. When we went through the quarter, we really saw the impact of that supply chain and having the plants waiting for parts. But I was really happy to see when we started the lines up again, we finished the quarter. I think what I was saying, I'd say is it was up much more in range with where we'd expect it to be. So yes, you heard it right. I didn't comment on July, but frankly, that's just because I'm not tracking -- I'll get profitability reports here as we come to the end of the month next week. But I did want to say that June was a big uptick, and that's a really positive signal.

Our next question is from David Tarantino with KeyBanc Capital Markets.

Just had 2 quick follow-ups. Maybe on commercial HVAC, we haven't touched on that yet. Just good to see some updates here on 80/20 initiatives here. But now that we can see the margins here more clearly, could you frame for us the opportunity here and how we should expect margins to progress both this year and kind of what the opportunity on 80/20 is longer term?

Yes. I'll take it and Neil can add any color if we want. Yes. I mean, we that HVAC business, especially when we look at our heating business as one of the most profitable across our companies. In a normal environment, I think we'd like to see that operating north of 20 or in the low 20s from an EBITDA percentage. I mentioned that we're going to see an uptick here in Q2, probably 150 basis points or so. And we still think this business will end the year somewhere between 18% and 20%. But from an 80/20 perspective, that is the opportunity set that I think you're asking about. If we -- last year it was about 16.7, so the goal here is to add a 200 basis points this year. And then I would expect we could do it again the following year. Frankly, the products are there the business is there and the demand. It's -- we're doing a lot of plant consolidation right now from an 80/20 perspective, and we can drive significant margin improvements through leveraging 80/20 from an operations standpoint.

Okay. Great. And then maybe just a quick one on capital allocation. Clearly, organic investments is a focus, but balance sheet still remains pretty clean. So just following the drawback here in shares, like would you consider leaning more into buybacks?

Yes. I think we have -- well, I know we have regular dialogue, Neil and I with the Board on that. And yes, for sure. I think the 2 things we've said, and hopefully, we'll come here to the last stretch of the spin-off. But we've said we'll also need to gear up with an M&A outlook post that. But obviously, with the shares trading down, we'll always have that discussion with the Board as well.

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

Thank you, and thanks to everyone for joining our call this morning. The replay will be available through our website in a couple of hours. We hope everybody has a great day. Thanks.

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

Greetings, and welcome to Modine's Fourth Quarter Fiscal 2026 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Kathy Powers. Thank you. You may begin.

Hello, and good morning. Welcome to our conference call to discuss Modine's fourth quarter fiscal 2026 results. I'm joined by Neil Brinker, our President and Chief Executive Officer; and Mick Lucareli, our Executive Vice President and Chief Financial Officer. The slides that we will be using with today's presentation are available on the Investor Relations section of our website, modine.com.

On Slide 3 of that deck is our notice regarding forward-looking statements. This call will contain forward-looking statements as outlined in our earnings release as well as in our company's filings with the Securities and Exchange Commission.

With that, I will turn the call over to Neil.

Thank you, Kathy, and good morning, everyone. I'm pleased to report another strong quarter, capping off our fourth consecutive year of record-breaking revenue and adjusted EBITDA. This is a testament to the hard work and dedication of the entire team. Even more importantly, we've built strong business momentum and significantly advanced our strategic transformation, accelerating the evolution of our portfolio to become more focused on higher-margin and higher-growth businesses.

Earlier in the year, we announced 3 strategic acquisitions: AbsolutAire, L.B. White and Climate by Design, which collectively added $119 million in incremental revenue this year. These acquisitions added key products to our portfolio and opened new end markets and channel partners for our HVAC businesses. In the second quarter, we announced an incremental $100 million investment to expand capacity for our data center products in the U.S. We are more than 6 months into this work, and I'm happy to report that we are firmly on schedule with this crucial initiative. When completed, our investment to expand our operations footprint in the U.S. will provide critical capacity close to our North American customers, allowing us to further advance our market positions in this hypergrowth market. In January, we announced that we will further accelerate our transformation by spinning off our Performance Technologies segment and combining it with Gentherm. This transaction will allow us to focus on our high-growth businesses while providing an ideal home for our Performance Technology team.

And finally, to close out this remarkable year, I'm proud to announce a landmark long-term capacity locking agreement with a key strategic data center customer. Under the terms of this LTA, we will guarantee capacity to supply more than $4 billion of data center cooling products during calendar years 2027 through 2029. This agreement highlights the confidence our customers have in Modine and validates our need for our current investment in capacity expansion. This has been a year of tremendous accomplishments. I'm so proud of our team's execution and commitment. While we celebrate these successes, we are even more energized by the significant opportunities that lie ahead.

Please turn to Slide 5. Climate Solutions delivered another outstanding record-breaking year. The segment reported a 43% increase in revenues for the full fiscal year, including acquisitions. Organic sales grew 32% in fiscal 2026. Sales growth in this segment was also driven by data centers, which increased 73% to $1.1 billion. We ended the year with a strong fourth quarter performance in data centers with over $400 million in revenue. To put this in perspective, our chiller production in North America increased fivefold as compared to the prior year. This was despite production delays where we lost 20 shifts due to severe weather in the South. The team worked extremely hard to overcome the impact of this missed production and make sure we delivered on our customers' commitments, which included significant overtime hours.

In addition, we ended the year with our second consecutive quarter of record order intake. I recently toured several of our data center facilities, and I'm pleased to report that the expansion plans are progressing well. We've already shipped our first chillers from Jefferson City, Missouri, and we shipped air handling units and CDUs from our Franklin, Wisconsin plant in the fourth quarter. Overall, I'm very pleased and proud of this team's work. Their efforts have been instrumental to our revenue growth this quarter and will continue to allow us to grow to meet future demand. As we continue to execute on our capacity expansion, we are proactively managing our supply chain to ensure our growth trajectory. We are currently addressing challenges with a few key suppliers, which is affecting our production schedules and efficiency. We began to see a shortage of certain components late in the quarter, and we are implementing corrective actions.

We have a dedicated team actively working on solutions, including qualifying new vendors to ensure a stable supply of components. We're confident in our ability to manage through these short-term challenges. And while this will temporarily impact our Q1 production plans, we do not anticipate any impact on our full year outlook. From a market demand standpoint, we're in a great competitive position. The outlook remains incredibly strong, and we see no signs of slowdown. The hyperscalers are continuing their significant investments with a heavy concentration in North America. We are deepening our partnership with strategic customers, codeveloping innovative products to meet their current and future cooling needs.

One of the products I'm most excited about is our groundbreaking 3-megawatt chiller, which delivers a 50% increase in cooling capacity with only a 9% increase in footprint. As chip densities increases, data centers will require more cooling capacity within the same footprint. Our 3-megawatt chillers modular design will be the solution for handling higher heat loads within the same space. We believe this will be a game changer. Innovating alongside our customers for what are dynamic cooling requirements over multiyear periods is giving us greater visibility into future demand, allowing us to invest in our key growth initiatives and products with greater conviction.

Now turning to the rest of our Climate Solutions segment. Our HTS business delivered a great quarter with revenues up 19%. This was largely driven by higher coil sales to data center and heat pump customers. In HVAC Technologies, revenues increased 51% from the prior year, driven by recent acquisitions. Our HVAC business on the East Coast and in the South also lost significant production time due to severe weather. Looking forward, we have a great deal to be excited about across this segment. The commercial HVAC portion of the Scott Springfield business is poised for a strong recovery from a down year. This business was negatively impacted by tariffs this past year, but is expected to rebound in fiscal '27.

We are also seeing continued momentum in our coils business, not only with data center customers, but also in commercial HVAC markets. Similarly, our heating businesses are also expected to have a good year, led by agricultural heating and markets served by L.B. White.

In summary, I'm very pleased with the performance of the Climate Solutions segment, and I'm confident in our strategy as we head into the fiscal year '27. Please turn to Page 6. The Performance Technologies segment is making excellent progress on preparing for the planned spin-off and merger with Gentherm. There are numerous work streams preparing for the separation, including standing up IT systems to ensure that we can deliver a stand-alone operating business to Gentherm at close. We have completed several major milestones and have others ahead of us, including Gentherm's S-4 submission to the SEC and its subsequent shareholder approval as well as a receipt of our IRS determination letter on the tax treatment of the Reverse Morris Trust transaction. Overall, this process remains on track, and we are still expecting to close this transaction before the end of the calendar year, presuming that all these necessary approvals are received.

The team is excited about the road ahead. We have worked diligently to improve our business with higher adjusted EBITDA margins on flat to down revenues. Margins were lower this quarter as anticipated, primarily due to higher material costs, including the impact of tariffs. We expect this to improve in fiscal '27 as we pass through and recover these costs. While our vehicle markets have been challenging, we are seeing bright spots and opportunities for growth. The stationary power market continues to be strong, and we expect this to return to growth in fiscal '27. We are also encouraged by the emerging growth in our automotive and construction equipment businesses.

Regarding the latest 232 aluminum tariffs, we are proactively working to mitigate their impact on our business. We have a proven track record of managing these situations and are in the process of working through this current round. We have factored a range of expected costs in our guidance, which Mick will discuss in more detail.

Before I hand it over to Mick, I'd like to remind you of our upcoming changes to our segment reporting structures. The Performance Technologies segment under the leadership of Jeremy Patten, will continue to be reported as a segment until the expected spin-off and merger with Gentherm closes later this year. Our Climate Solutions segment has been split into 2 segments beginning in fiscal 2027. Data Centers led by Art Laszlo and Commercial HVAC currently led by Eric McGinnis. Eric has announced that he will be retiring in June and his successor will be named at a later date. I'd like to sincerely thank Eric for his leadership and invaluable contributions to Modine over the past 5 years. We wish Eric a long, happy and well-deserved retirement.

With that, I'll turn the call over to Mick.

Thanks, Neil, and good morning, everyone. Please turn to Slide 7 to begin reviewing the Q4 segment results. Climate Solutions delivered a strong quarter with sales up 87% over the prior year. The main driver was data centers, which grew $246 million or 158%. HVAC Technologies sales increased $33 million or 51%, driven by our recent acquisitions, partially offset by slightly lower sales of heating and indoor air quality products. Heat Transfer Solutions sales grew 19% or $26 million, primarily driven by coils with higher sales to commercial HVAC and data center customers.

I'm pleased to report that Climate Solutions fourth quarter adjusted EBITDA grew 63%, driven by strong data center earnings growth from the prior year. As anticipated, the Climate Solutions adjusted EBITDA margin was down versus the prior year, but improved sequentially from the prior quarter. And all 3 product groups generated strong year-over-year earnings growth, including a near doubling in our data center business. One headwind during the quarter was severe weather and storms across the United States. As Neil stated, we lost 20 production shifts in data centers and another 35 shifts in other parts of the business due to weather-related shutdowns. The team largely made up this work, but with additional costs for overtime that negatively impacted gross margin.

As we discussed last quarter, HVAC Technologies is currently experiencing a negative mix impact along with higher costs while we are integrating several acquisitions. These factors are temporary, and we expect that the margins will continue to improve. We also saw a nice sequential margin improvement in Heat Transfer Solutions contributing to the rapid earnings growth.

With regards to the Data Center Group, I'm happy to say that we saw another sequential margin gain in Q4. While the margin improved, there were some negative margin impacts during the lost production days tied to the weather and a shortage of some critical parts. As Neil discussed, we expect the team will address the shortage of a few critical components during our first quarter, and I'll provide some additional information in our guidance section. Despite some planned and unplanned challenges in growing revenue by more than 85%, our Climate Solutions segment delivered over 60% earnings growth.

As Neil noted, starting in fiscal '27, this segment will be split into 2: data centers and commercial HVAC. I'll discuss our outlook in more detail at the end, but we anticipate another year of earnings growth driven by strong top line growth and further margin improvement.

Please turn to Slide 8. Performance Technologies revenue remained relatively flat from the prior year with lower sales offset by FX, which positively impacted sales by $12 million. Heavy-duty equipment sales were down 5%, primarily driven by lower genset revenue. On-highway sales were up 4% with higher sales to automotive and commercial vehicle customers. As expected, the EBITDA margin was down versus the prior year, primarily due to lower sales volume, along with higher material and tariff costs. Given the difficult market conditions and higher material costs, adjusted EBITDA declined 15% from the prior year.

As we've done in the past, we'll recover tariffs through surcharges and mitigate increasing metals prices with pricing mechanisms in our customer contracts. As a reminder, there is typically a 3- to 6-month lag before these price adjustments take effect. SG&A expenses were $5 million lower versus the prior year as the segment continues to benefit from cost savings initiatives implemented earlier in the year. The team has been quite diligent in managing all controllable costs this year with the full fiscal year EBITDA margin improving 30 basis points to 13.8%. This was a nice improvement given the lower revenue and various cost headwinds. We expect margins to further improve during fiscal '27 as we adjust commodity-related pricing, recover tariffs and maintain our 80/20 focus and discipline.

Now let's review the total company results. Please turn to Slide 9. Fourth quarter sales increased 47%, driven by revenue growth in Climate Solutions. Gross profit increased 29%, driven primarily by higher data center sales volume, along with contributions from the acquisitions in Climate Solutions. The lower gross margin was due to the combination of factors that I covered with Climate Solutions and Performance Technologies. SG&A expenses increased but at a much lower rate than overall revenue growth. We increased SG&A spending in Climate Solutions, partially offset that with Performance Technologies cost savings initiatives.

As a result, SG&A as a percentage of sales fell by 190 basis points to 10.7%. I'd also like to note that the reported SG&A included $12.5 million of disposition costs related to the pending spin-off of Performance Technologies. These have been added back to arrive at adjusted EBITDA and are referenced in the reconciliation schedule.

From an earnings standpoint, I'm pleased to report a 40% improvement in adjusted EBITDA. And while I reviewed the temporary items that have impacted this year's margin, the adjusted EBITDA margin continues to improve with a 40 basis point increase from the third quarter while growing revenue at an exponential rate. Adjusted earnings per share increased 53% to $1.71.

To summarize our consolidated results, Q4 represented another strong quarter of revenue and earnings growth. We're pleased to have delivered another record year. The team is managing well through a strategic transformation and exponential data center growth. This year represents the fourth year of earnings growth of 20% or more, resulting in a compound annual growth rate in excess of 40%. As we look ahead, we expect to continue to capitalize on this momentum and drive further margin improvement as the data center production volumes ramp.

Now moving to the cash flow metrics. Please turn to Slide 10. Free cash flow was a positive $153 million in the fourth quarter. As Neil announced, we reached a long-term capacity agreement with a key strategic data center customer and received an upfront cash payment of $165 million. This payment is intended to support our capacity expansion and to meet future volume commitments under this agreement. From an accounting standpoint, the customer payment represents a down payment to secure future volumes. It did not impact the income statement and was recorded as a contract liability. and this liability will be reduced over the life of the contract based on future volumes.

Net debt of $363 million was $84 million higher than the prior fiscal year-end. This included the funding for the 3 acquisitions completed earlier this year, the investments in CapEx and working capital required to grow our data center business.

Our balance sheet remains quite strong with a leverage ratio of 0.8x. And based on our earnings and cash flow outlook, we expect it will decline further in fiscal '27. CapEx for fiscal '26 totaled $143 million. As I explained last quarter, some of the data center capital investments will carry over into the next fiscal year as we continue with our capacity expansion to meet our future customer demands.

Now let's turn to Slide 11 for our fiscal '27 outlook. Similar to last year, there's a great deal of uncertainty across the markets and the global economy, especially around input costs, tariffs and the overall supply chain. With regard to trade and tariff risk, our team is continually assessing the impact on our business, including the recent announced 232 tariffs on metals. We believe that we'll be able to recover the majority of these impacts with pricing and surcharges. While the net risk is quite manageable, we can be impacted by the timing of the material price adjustments.

Our guidance ranges to start the year reflects the current level of uncertainty in the markets and input costs. Also, our outlook includes a full year of Performance Technologies. Once we know when the pending transaction will close, we'll provide an update on our full year outlook for the remaining business. For fiscal '27, we expect total company sales to grow in the range of 20% to 35%. For the Data Center segment, we expect sales to grow 60% to 80%. This is ahead of our previous multiyear estimate of 50% to 70%. We don't anticipate that the part shortages we started to experience in Q4 will impact our full year production, but will temporarily impact our capacity ramp.

Consistent with the previous year, we expect that each of the quarters will show very rapid year-over-year sales growth in excess of 50%. And from a sequential standpoint, we anticipate that Q2, Q3 and Q4 will all show sequential increases. For Commercial HVAC, we expect sales to grow 5% to 10% this year. This is driven by accelerated growth in our heating and IAQ businesses. In addition, we expect that the recent growth trends in the coils business will continue with mid-single-digit growth in fiscal '27.

For Performance Technologies, we anticipate sales to be flat to up 5%, driven primarily by material pass-through agreements and growth in stationary power programs. We are expecting most other markets to be flat with opportunity for improvement in the back half of the fiscal year.

With regard to our full year earnings, we expect fiscal '27 adjusted EBITDA to be in the range of $650 million to $680 million, representing a growth rate in excess of 40%. And this implies at least 100 to 200 basis points of margin improvement. We expect that this will be driven by a margin increase in all 3 business segments. From a free cash flow perspective, we expect we'll generate a higher level of free cash flow and as a percentage of sales, we believe it will be between 4% and 6%.

Please see the appendix in this presentation for all our key assumptions, including interest expense, taxes, depreciation and amortization expense. As we currently look at the next several quarters, we expect that margins and earnings will increase sequentially throughout the year, driven by the data center trends I described and our material cost recovery plans. From a year-over-year perspective, we anticipate that each quarter will result in double-digit earnings growth with favorable margin comparisons to begin in Q2 and continuing through year-end.

As Neil and I previously noted, we are now operating under 3 business segments and to assist everyone with modeling and analysis, we'll provide a recast fiscal '26 segment results, and we'll begin reporting this way with our first quarter results.

To wrap up, we're excited about our fiscal '27 outlook and fully expect to deliver another year of record sales and adjusted EBITDA. Very few companies are planning to grow earnings in excess of 40% this year and drive meaningful margin improvements. I'm proud to say that this team has executed on these types of results over the last several years. They've worked hard to execute on our strategy using 80/20 as a guide. The recent announcements related to the LTA and pending spin-off of Performance Technologies are truly historic. We remain confident that these actions are setting the stage for long-term sustainable growth for Modine shareholders.

With that, Neil and I will take your questions.

[Operator Instructions] Our first question comes from Matt Summerville with D.A. Davidson.

Mick, I was wondering just a question on margins. As we kind of think about looking at Modine in the context of a climate only sort of RemainCo entity, what would your profitability expectation be for the PT business that's been factored into your guide as, again, we think about how to best build and for others to best build a climate only RemainCo sort of model looking ahead?

Yes. Matt, I think it's going to be -- good news is relatively clean and your ability to estimate it until we do the recast and then eventually the disc ops after the deal closes. We're looking at this year. So I mentioned already from a top line, flat to 5%. So relatively consistent top line with last year. From a margin, we see it early this year being between probably like a 14% to 15%, maybe up -- that would be up maybe 25 to 100 basis points. So that will give you a good idea of impact to PT or how to back that out. There's some complexities around corporate costs that will stay or go with. But net-net, there wasn't a large material difference in remaining SG&A. So for the most part, I think you'll have the pieces to try to estimate Modine without PT.

That's helpful. And then maybe if you guys could talk a little bit, you're guiding fiscal '27 data center business to up 60% to 80%. You have this massive long-term agreement for capacity that you disclosed yesterday. How does all of this influence the multiyear CAGR of 50% to 70% that you previously discussed for the data center business? And secondarily, do you see more LTAs? And is the one you just signed accretive to profitability? And if so, maybe talk about that.

Yes. I'll go first. We're not -- we don't see a reason to change our longer-term outlook, and we'll do this year -- later this year, we'll do probably -- we'll go out another year of more formal guidance. But in short, Matt, raising this year up to 60% to 80%, I don't think that changes our outlook for the next year being 50% to 70%. Some people have asked, would that mean imply a decline? No. We still don't see the funnel shrinking or squeezing the back end of the funnel. So I'd say for now, we still hold with the fiscal '28, 70% up. And before Neil can jump in, the LTA would definitely be accretive to where we are today or say it another way, it's absolutely within the target margins of where we want the data center business to be.

Yes, I agree, Mick. We're in those conversations with customers. We'll always entertain a conversation with the customer relative to an LTA or a derivative of an LTA, some form of it. Honestly, that's -- we're seeing the market move, but nothing of this significance for sure. But yes, there could be potential opportunities for smaller versions of that, yes.

Our next question is from Noah Kaye with Oppenheimer.

Just a follow-up and congratulations, by the way, on making that LTA. So two related questions on it. First, does this result in you expanding capacity beyond the scope of the expansion that you outlined in July? In other words, is this incremental as an increase in your revenue capacity? How much, if so? And second, I think I understood you Mick, but I just want to be crystal clear, the LTA you're saying is not really incremental to the targets you've already given us? Or is it more that you are after this fiscal year going back to the 50% to 70% CAGR on top of where you'll exit fiscal '27?

Noah, this is Neil. I'll take the first part of that question. It's in -- the LTA that was announced is in the numbers of the capacity expansion that we've talked about over the last few quarters. And we believe with the annual CapEx that we traditionally spend each year, particularly in the data center business, that annual cycle of CapEx spend will be sufficient for us to continue to grow capacity beyond this LTA.

And then to your question on growth rates, no, I'll try. Again, I'm glad to make sure there's no confusion. This year, we see revenue growth higher, 60% to 80%. And after -- as we roll forward then to next fiscal year, I would still hold to a 50% to 70% growth rate on top of the year we'll finish this year.

All right. That's extremely helpful. And then just you called out the weather impacts across the business in the quarter. Just so we kind of have that as a data point heading into next year. Can you maybe dimension what the cost impact was, whether it was sort of a lost profitability, lost EBITDA numbers, that's something that you can have and can share with us?

Yes, from a Climate Solutions side, Noah, I think the weather cost about 50 to 100 basis points in the Climate business from a gross margin standpoint.

Our next question is from Neal Burk with UBS.

Mick, I think you just mentioned data center growth of 60% to 80% for this year but also for fiscal '28 if I heard that right. Can you just kind of remind us like the number of production lines that you had running exiting the year and how many you're expecting to get to by year-end?

Yes. I'll go quick and Neil then can talk about capacity. We see 60% to 80% growth this year on the data center side. So that's, call it, $1.8 billion to the $2 billion range this year. And then for the following fiscal year, I would still use a 50% to 70% range for our fiscal '28. We'll dial that in, and we'll know more. That's why I said later this calendar year, either through an IR meeting or an IR Day, we'll likely give a more firm fiscal '28 or even a '29 outlook for all of you. But in the interim, I would assume next year is still going to be a 50% to 70% growth rate.

On to capacity, we have -- this is specific to chillers and data centers. We have half of the capacity running at various rates of efficiency today. We'll be doubling that by the end of the fiscal year.

That's helpful. And then just a follow-up on -- just to make sure I understand for the current year. I know you said calendar 2027 is when you start recognizing revenue for that $4 billion long-term agreement. Do you have enough visibility to say like is there just basically 1 quarter assumed in the guide for this year of revenue recognition because one quarter alone off of that $4 billion should be pretty substantial.

We actually have a little bit of that built into our current guide. And part of it is we know where the LTA is, and we have windows where they give us firm commit. I don't think we're quite there yet to know what that exact number will be in Q4. And then also, I would just add, as we've tried to do in previous years, I would say we've got the most firm commitments and delivery schedules for the next 6 months, Neal. And when we get to our Q4 and where we've tended to update our Q4 or raise guidance, if we're fortunate enough, would be probably we get halfway through the year. So Q4 is kind of our best placeholder for this time, and we're just balancing the known and unknown at this point with regards to that LTA.

Our next question comes from Chris Moore with CJS Securities.

So in terms of -- obviously, data center growth, 60% to 80% this year, continued rapid 50% to 70% and strong beyond that. So that recognizes the market is dynamic, the mix of products to get there might change. Maybe just strictly from a fiscal '27 perspective, is the mix pretty locked in? And if so, roughly what percentage of that is chillers?

So you're right. And that's why we have the modularity with our factories so that we can adjust and pivot to whichever design that we move forward with. The last number we gave was around half of that was chillers.

40% this year, and then [indiscernible] about 50%.

Chris, to be specific. So there is a little bit of a mix shift there. And then the balance of that, the other side would be air handling units, CDUs, other products, fan walls. That would be the -- that's what we have factored into the mix so far.

Got you. Very helpful. And just on the heat transfer side. So the growth this quarter, you've talked about driven both by data center and heat pump customers. Moving forward, just from a data center perspective, how much of that growth is on the data center side? And is that going to be kind of a constant moving forward over the next 5 years, that piece of the heat transfer growth?

On the -- so within the coil side, the Heat Transfer Solutions. Clearly, the largest rate of growth is coming out of the data center side. I would say the balance of it is -- tends to be more based on replacement cycles or GDP cycles. Neil, anything you want to add?

Yes. And it's pretty new in terms of the growth on the data center side that we're seeing over the last quarter or so. We're still building out the funnel. We're engaging with customers to understand what the short-term and long-term commitments are. But definitely, there's interest there on the data center side as we see our customers wanting to lock up some supply.

Our next question comes from David Tarantino with KeyBanc Capital Markets.

Maybe following up on the LTA, understanding that there's often NDAs covering this, but could you give any color on kind of the profile of the customers? Is it new or an existing customer and what technologies the agreement covers? And then maybe within that, how should we be thinking about how the $4 billion shows through in terms of time line as the capacity continues to ramp here?

Yes. Thanks, David. So with an existing customer, yes, it's someone that we've had a relationship -- we've got great relationships with our data center customers, and this is just further evidence. And this LTA specific for our chillers.

Okay. Great. And any thoughts on how...

No, go ahead, David.

Just any thoughts on how the $4 billion shows through kind of as capacity is still ramping here?

Yes. So we mentioned a minute ago, it's calendar. So we'll see some ramp beginning in Q4. We'll know more here probably in another quarter or so. And then it is over 3 years and I don't know the exact ramp, but we don't see any more than $2 billion a year right now. So still early days, but hopefully, that kind of helps if you look at $4 billion over 3 years and no more than $2 billion in any 1 year, definitely in a ramp up.

Okay. Great. And then maybe looking at data center as a whole, could you give any -- some more color on the pipeline here, maybe ex the LTA? I think you mentioned another quarter of record order intake, but kind of any color on continued opportunities as we think about the long-term growth profile? And then maybe talk about your confidence in delivering for those other customers as you ramp capacity for the LTA as well?

Yes. Certainly, we'll balance this to make sure that we meet our commitments with all of our data center customers. There's no doubt about that. So before we commit to this or we agree to any kind of long-term agreement around capacity, we want to make sure that we keep all of our customers in mind and we are able to deliver on those commitments. So that's considered to your point. What was the second part of your question, David?

And just the pipeline as a whole, if you kind of exclude the LTA from this quarter, kind of give some color on how it continues to evolve as you kind of put up these record order numbers, how much more is out there?

Yes, it continues to evolve. You're right, and it's growing at significant rates. I think if you look at the trends in the last couple of years, it continues to follow that trend line. And as we move things through our probability funnel, we get to points where we can publicly announce LTAs, which gives hopefully everybody further confidence that we can execute on these things. So the funnel is large. It continues to grow. Our hit rate continues to increase because of our technology and because of that, we feel very confident with the guidance that we gave relative to data centers.

Our next question comes from Brian Drab with William Blair.

I'm curious if you would say anything about what the probability was that you had assigned to the orders or the opportunity associated with the LTA when you gave us the 50% to 70% forecast for '27 and '28?

From my side, we factored in -- Neil always talks about the funnel. And when we set those longer-term goals, we're really building it customer by customer and program by program. So we were aware of this opportunity. So there's some of that, that gets factored in, but we don't obviously know -- we didn't know at the time what the magnitude or the scale or -- would flow over, Brian.

Yes. So, yes, so I'm trying to get a sense for -- is it really incremental? We don't know if you had $4 billion in sales over that period with 80% probability on it? Or was this something like a win where it was like 30% and it's more of a surprise, but you can't help any further with that?

No. Maybe the way I would say and maybe it will help is when we give a multiyear look like that and we talk about the funnel, we've been -- we're clear that short of an LTA, we don't have multiyear POs and what this one did is it gave us a really high confidence in a big portion of our 2-, 3-year outlook. If you run that 60% to 80% and 50% to 70%, right, it implies we had talked about being north of $2 billion, and that implies we're at a $3 billion type plus. This is a big component of it that in that funnel that gives us more visibility and certainty of that outlook.

Yes. I would just say, when we get out to outside of the fiscal year we're in, it's really difficult to have certainty on what those order rates could potentially be. You see the projects for sure. You have them in that 25% to 50% range, but anything outside of the calendar year can be really difficult to predict. So if you're looking at things in '27 and '28 and '29, those are going to be the lower end of the profitability funnel. The LTA simply accelerate through the probability funnel to a high degree of confidence. So it's significant, Brian.

Yes. I mean it feels really significant. I'm just going to press with one more on it just because if it's $4 billion over 3 years and you're doing -- you said not over $2 billion in any year, I think, a second ago. But I mean, on average, it's like $1.4 billion. And if you're hitting a run rate in fiscal '28 of $3 billion-plus in data center and a little more than half of that is chillers, you're doing like $1.5 billion-plus in chillers, but this one LTA is $1.4 billion on average over 3 years. So I'm just trying to see if that thinking makes sense because what it feels like observing from the outside here is that there's a big step-up like step function increase in data center revenue coming in either fiscal '28 or '29 because you have a lot more customers than just this one. I know there was a question...

Well, no, I don't see that as the way you're thinking about it in terms of they absorb a huge amount of capacity. And we can always add further capacity based on demand with our annual CapEx budget that we have in place. We've looked at that. We've done the analysis, and we're comfortable with growing with our customers and having further conversations on if we want to invest in more chiller lines and how to go about it. So it's a fair point.

Okay. And then just the last one. Can you give any further color on the first quarter? You said supply chain impacting volume. I don't know if you said if volume would be down year-over-year or up year-over-year. Like how directionally, like can you give us some sense for how to model first quarter and then also first quarter margins for Climate Solutions?

Yes. Are you -- Brian, just to narrow that down. Were you talking about data centers in particular or the total company or...

I guess just Climate Solutions EBITDA margin, first of all, I'm wondering -- because I think you said favorable comparisons or something along those lines for the second, third and fourth quarter. I'm just wondering what you're trying to tell us about the first quarter for Climate Solutions EBITDA margin? And then also how much is volume -- sales volume going to be impacted for, I guess, data center or Climate Solutions, however you want to talk about it for the first quarter?

Yes. So -- from a margin standpoint -- actually, maybe I'll just kind of talk about revenue. I think total company revenue in the first quarter should be right in line with our annual revenue range, probably closer to the midpoint from a total top line. From a margin standpoint versus prior year, we expect that the HVAC -- commercial HVAC and data center businesses will be -- margin will be down year-over-year in Q1, similar to the trend we've had the last few quarters starting in Q2 last year, where we've been improving the margin, but on a year-over-year basis, it's been down from a year-over-year comparability.

And then as I mentioned at the beginning of the call, we expect that to flip in Q2 for actually all 3 segments. We would expect beginning in Q2 and then continuing in 3 and 4 that in addition to that top line growth, we'll have favorable year-over-year margins for the balance of the year. So Q1 is really working through from a data center, the supply chain shortage and then we'll -- and we'll then be able to continue to ramp our volumes on the data center side. And then HVAC, it's -- we'll be on a holiday, we'll kind of anniversary on those 3 acquisitions, and that will have a positive impact there beginning in Q2.

[Operator Instructions] Our next question comes from Jeff Van Sinderen with B. Riley Securities.

I'm just wondering, is there a way to break out how much of your data center business is AI related versus cloud? And I guess, what are your latest thoughts on how the longer-term mix of that will evolve between AI and cloud? And then just maybe how long do you believe the rapid growth of AI data center can continue? Just trying to get, I guess, a sense of how you think about longevity of there versus kind of the ongoing cloud demand.

We look at -- we have projects at different levels of scale in our funnels that go beyond, so we look at -- and we talk to customers, and we have our technology road maps that obviously go beyond that as well. So we feel pretty confident over the next several years into 2030 with our projections and our guidance based on the supply chain and the data center capacity that's being added globally. It's difficult for us to know where the product is being used in certain applications. Our product is universal, so it can go into cloud. It can go into compute. It can go into AI. It's -- the product can serve multiple end-use applications. So it's really hard to know exactly what some of these data centers are actually used for based by the product type that they buy from us. But when it is specific for CDU, then we know that it's for liquid cooling and there's a high degree of certainty that, that's part of the AI infrastructure ramp-up. And that continues to grow at the rate that's pretty public. I don't see a reason to think it's going to be any less than that over the next couple of years.

Okay. Fair enough. And then just, I guess, thinking about obviously this LTAs is going to be a pretty substantial part of your business. And I guess as we think about kind of challenges ahead that you're navigating relevant to further ramping production, maybe you can just touch a little bit more to the degree that you want to on those and maybe speak to initiatives to kind of get beyond those obstacles to getting production higher?

Yes, that's good. It's a good question, and I just have to commend the team at Modine for this. I mean all the businesses pitching in to support the data center business, the entire organization pitching in to support the data center because we have such great technology and product that the demand is so high. It's all hands on deck. We've doubled the data center business 4 years in a row. And to double that business every single year, it's been extremely hard. And this is the first time we've actually started to bump up against some headwinds on the supply chain side. We're getting to that level of scale. So we're talking with our suppliers. We're working with our suppliers and we're engaging in a way we haven't engaged in the past to ensure continuity of supply.

We're looking at our suppliers strategically. And then we are also helping our suppliers with the daily cadence and the daily management to ensure that we can keep the capacity at the rate that we want to keep it. So it's a balancing act. It's a mix of tactics and strategy. It's one of our top priorities as a company. We've invested there significantly with the human capital to support that. We've hired some very talented people to support that. And it's the front of the radar for us as we continue to double our capacity or I should say, double the business over the last several years.

We have a follow-up question from Matt Summerville with D.A. Davidson.

Just a couple of quick ones. As we think about the context of this LTA and the chiller lines that you publicly disclosed you're standing up the 14 lines in the U.S., the 2 lines in the U.K. When all of those lines are ramped, how much of your chiller capacity will be spoken for potentially by this LTA? And how should we think about Modine sort of playbook to at some point down the road, serve the 2 hyperscalers that you currently have onboarded as customers, but those that you're not able to supply chillers to at this moment? And then I have another quick one.

Yes. Well, the ones that we are having conversations with that are beyond the LTA today, absolutely, we can make adjustments and we can make pivots, but we're looking for certainty to deploy any additional CapEx. So we would engage in similar conversations and discussions and how we could potentially lock up capacity for a specific customer. We know how to do it. We know the process. We know the playbook. We can do more of it. It's just once we get to that point and the negotiations long term, what years would that impact?

I don't have an answer to that right now because we're in discussions. The existing capacity that we have today, a high degree of it is going to be for the LTA. I can't give you a specific number because these are all ramping at different rates. And the -- with the LTA and how we put this together, it's not an equal amount each year. It's different based on project timings and completion of construction. It's a high degree, and we have the ability to adjust if we need to make adjustments to add additional customers.

Got it. And then just finally, maybe to kind of get off of the DC topic for a minute. Can you just talk about your M&A funnel actionability and how we should be thinking about M&A in the context of fiscal '28 -- or excuse me, fiscal '27 for Modine?

Yes. We're still maintaining an active funnel, Matt, and that's important. It took us a while to build those relationships, and we want to keep doing our homework on those. In the next -- I'd say, for the bulk of this calendar year, it's still going to be heads down. And we talked a lot about the data center business and how many people at Modine and Neil talked about are supporting a business growing at that rate.

And then some of the same people or those that aren't doing that are also actively working daily to stand up the Performance Technologies group so we can complete that spin-off. So I'd say for the bulk of this calendar year, that's a lot plus the 3 acquisitions we're integrating in HVAC. Anything could happen, but I really think for our sake or where Neil and I are focused in the next 6 months or so is going to be just heavily focused on the spin-off and the data center growth.

We have reached the end of the question-and-answer session. I'd now like to turn the call over to Kathy Powers for closing comments.

Thank you. Thanks to everyone for joining our call this morning. A replay will be available through our website in about 2 hours. We hope everyone has a great day.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.

Good morning, ladies and gentlemen, and welcome to Modine's Third Quarter Fiscal 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.

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

Hello, and good morning. Welcome to our conference call to discuss Modine's third quarter fiscal 2026 results. I'm joined by Neil Brinker, our President and Chief Executive Officer; and Mick Lucareli, our Executive Vice President and Chief Financial Officer.

The slides that we will be using for today's presentation are available on the Investor Relations section of our website, modine.com. On Slide 3 of that deck is our notice regarding forward-looking statements. This call will contain forward-looking statements as outlined in our earnings release, as well as in our company's filings with the Securities and Exchange Commission.

With that, I will turn the call over to Neil.

Thank you, Kathy, and good morning, everyone. Before launching into our quarterly results, I'd like to take a moment to review some of the details from last week's announcement regarding the future of our Performance Technologies segment.

Since launching our transformation at our first Investor Day, we have made significant progress evolving our portfolio of businesses by investing in high-margin, high-growth businesses, while improving our lower-margin businesses and making strategic divestitures. This past summer, we launched a process to divest our remaining automotive business and instead identified an opportunity to accelerate our transformation by [indiscernible] the Performance Technologies segment and combining it with [ Gentherm ], a leading player in thermal management and [ pneumatic ] comfort technologies.

Modine will receive approximately $210 million in cash, and Modine shareholders will receive stock in the new business and a tax-free distribution, equaling 40% of the combined ownership. The combined business will provide renewed focus on investment and growth for Performance Technologies business and create cross-selling opportunities for Gentherm across new attractive markets. This values the Performance Technologies business at $1 billion, or 6.8x the 12-month trailing EBITDA. This recognizes and reflects the hard work we put into improving margins in the business, and allows current Modine shareholders to participate in future synergies and the strong earnings conversion we expect from the business once market volumes improve. The transaction presented an exceptional opportunity to find an ideal home for our PT business while maximizing value for our shareholders and further accelerating our transformation.

The remaining business will consist of our current Climate Solutions segment, plus corporate support functions. This is a business where we've been focusing on our investments for growth, including 6 acquisitions over the past 3 years, and a significant CapEx for expanding capacity for our data centers product. The transaction will allow us to further concentrate on these high-margin, high-growth businesses, allowing us to become a pure-play, highly focused, diversified climate solutions company. This is the right transaction for Modine and for the shareholders at the right time, allowing us to further our vision of always evolving our portfolio of products in pursuit of highly engineered, mission-critical thermal solutions.

Now turning to our quarterly results and the strategic updates. Please turn to Slide 5. Our end markets in the Performance Technologies segment continued to be challenged and volumes remained down this quarter. However, commercial execution and cost recoveries resulted in revenues increasing 1% from the prior year. The segment's adjusted EBITDA margin increased by 400 basis points to 14.8%, reflecting the hard work done over the past year to reduce costs and reallocate resources to the Climate Solutions segment.

Now that we've reached an agreement with Gentherm, the next several quarters will be spent preparing the business to be spun off in anticipation of the combination. We will also be working on getting the necessary regulatory approvals for the transaction, which we expect to close in the fourth quarter of this calendar year. The Performance Technologies team has worked very hard to improve the business over the past several years and deserves the opportunity to grow. I'm confident that Gentherm will provide a great home for this business, and the structure of this transaction will allow Modine shareholders to continue to participate in their success. We are at a major turning point for Modine. We are making unprecedented investments in the future of our company, while simultaneously accelerating the transformation of our portfolio by merging our Performance Technologies segment with Gentherm.

Please turn to Slide 6. Our Climate Solutions segment delivered another quarter of outstanding growth, with a 51% increase in revenues, including the contributions from acquisitions. Organic revenue growth from the segment was 36%, driven by a 78% increase in data center sales. Our capacity expansion remains on schedule, supporting the sequential margin improvement we saw this quarter. We commissioned 4 new chiller lines this quarter, including the first 2 lines in Jefferson City, Missouri. We have 4 lines scheduled to come online in the fourth quarter, the final 2 lines in [ Grenada ], Mississippi and the first 2 lines in Dallas. We've also launched an initial production in Franklin, Wisconsin, providing additional capacity for the products currently produced in Calgary, including air handling units and modular data centers.

We are often asked if we are concerned about ending up with too much capacity. And the simple answer is no. Not at all. Our current projections fully support the capacity we're putting in place based on known demand with existing customers. In fact, we had record order intake this past quarter, further solidifying our confidence in our strategy and financial projections. Looking forward, if there is a change in the mix of the products that we need to produce, we'll easily be able to pivot to other data center products on the same lines we are building today. A chiller line can be converted to produce modular data centers or large air handling units. This gives us flexibility to manage future demand and meet customer requirements in what continues to be a dynamic environment.

We've also received many questions regarding the recent comments on the ability of next-generation chips to operate at higher temperatures, and the potential impact to the future of data center cooling. First off, none of this was a surprise to us. We are constantly working with our customers to ensure that we are designing the data center cooling solutions they need today and into the future. Having a higher ambient temperature for water running through the liquid cooling group is a positive development, as it potentially reduces the energy required to run mechanical cooling processes by leveraging a hybrid technology, utilizing free cooling options currently available on our chillers.

In fact, we recently announced the launch of a new 3-megawatt turbo chilled chiller platform, that is specifically designed to provide advanced free cooling heat rejection for high-density, next-generation GPU power data centers. Power remains a focus for data center operations, so increasing [ PUE ] by reducing energy consumption in the cooling process as a major advantage and why we continue to gain market share.

It's also important to realize that there are many different approaches to data center cooling, and our goal is to provide a full range of solutions that are customizable at scale. We see our market opportunities continue to grow as we continue to invest in both capacity and product development to cement our position as a technology leader in the market. We previously shared our target of delivering over $1 billion in data center sales this year, and we remain on track to deliver on that goal. We have also shared that our current capacity expansion will allow us to reach $2 billion in data center sales by fiscal 2028, and I'm happy to report that [ we remain ] confident in this target as well further supported by our record order intake last quarter.

We've recently updated our data center revenue projections and currently expect to deliver 50% to 70% annual growth in data center revenue over the next 2 years, which would put us comfortably ahead of this target. Our confidence in this target comes from understanding our customers' long-term strategic road maps. The industry is moving towards long-term supply agreements that lock up supplier capacity in advance. Our team is actively engaged in these discussions, which we expect to lead to multiyear orders.

Our recent success in growth stems from our 80/20 focus and market-leading technology. The feedback from our customers is clear. Our products are the most efficient in the market, resulting in substantial savings from lower energy costs. This allows us to be a key partner in developing next-generation cooling products, cementing our role as a key strategic supplier. As we scale our production capacity, we are in prime position to continue capturing market share. I'm very proud of all the hard work put in by the Climate Solutions teams this year. We've completed 3 strategic acquisitions and embarked on the largest capacity expansion in the history of the company, all squarely in line with our strategic goal of investing in high-growth, high-margin businesses.

With that, I'll turn the call over to Mick.

Thanks, Neil, and good morning everyone. Please turn to Slide 7 to begin reviewing the Q3 segment results.

Performance Technologies revenue increased 1% from the prior year, including a 3% decrease in heavy-duty equipment, offset by a 6% increase in on-highway product sales. Despite typical Q3 seasonality and market challenges, adjusted EBITDA improved 38% from the prior year, and the adjusted EBITDA margin increased 400 basis points to 14.8%. The margin increase was driven by significant cost reductions and improved operating efficiencies across labor, overhead and materials. Pricing was also a benefit in the quarter, driven by tariff recovery through surcharges and our normal pass-through mechanisms. In addition, with the reorganization of this business, SG&A expenses were nearly $7 million lower versus the prior year. As we look to Q4, we expect a sequential ramp in revenue, which will be primarily driven by the typical seasonal pattern, we remain focused on costs and operating efficiencies which will allow us to drive higher operating leverage and margins when market volumes begin to recover.

Please turn to Slide 8. Climate Solutions delivered another quarter of strong revenue growth, increasing sales by 51%. The main growth driver was data center, which grew $130 million, or 78%, as we begin to capitalize on our investments and utilize the new capacity. As anticipated, there was a 31% sequential revenue growth for data center products in Q3, and we expect significant incremental volumes in the fourth quarter as well.

HVAC Technologies sales increased $35 million, or 48%, driven by our recent acquisitions and stronger heating product sales. Fee Transfer Solutions sales grew 14%, or $17 million, mainly due to higher coils and coatings demand. Climate Solutions third quarter adjusted EBITDA improved 29%, given the strong top line growth. We made good progress this quarter with sequential improvement in the adjusted EBITDA margin to 17.9%. And we continue to expect further margin improvement in Q4. The Q4 margin improvement is expected to be driven by the increasing data center volumes and leveraging our recent capacity investment, along with the ongoing integration of the last 3 acquisitions. Before moving on, I want to reiterate that as the demand for Modine data center solutions continues to grow, we are again increasing our revenue outlook for the current fiscal year.

Now let's review the total company results. Please turn to Slide 9. Third quarter sales increased 31%, driven by revenue growth in Climate Solutions. Gross profit increased 24%, driven primarily by higher data center sales volume in Climate Solutions, along with the margin improvement in Performance Technologies. SG&A expenses increased 9% due to increases in Climate Solutions, which were partially offset by the Performance Technologies cost savings initiatives. Looking at earnings, I'm pleased to report a 37% improvement in adjusted EBITDA, and a 70 basis point margin improvement to 14.9%.

With regards to EPS, the adjusted earnings per share increased 29%, to $1.19. Please note that this excludes the $116 million noncash settlement loss recorded in connection with the termination of our U.S. pension plan. I'm happy to report that this project was completed, removing a liability from our balance sheet, along with the time and expense of the ongoing administration.

To summarize our consolidated results, Q3 represents another good quarter of revenue and earnings growth. As we look to Q4, we continue to expect that the adjusted EBITDA margin will sequentially improve and begin to reach more normalized levels as the data center production volumes ramp up. Based on this outlook, we expect to exit the fiscal year at the highest quarterly margin rate and expect further margin improvement next fiscal year.

Now moving on to cash flow metrics. Please turn to Slide 10. Free cash flow was negative $17 million in the third quarter. As discussed last quarter, the lower cash flow is primarily due to inventory builds and higher CapEx in Climate Solutions. However, this represents much needed and temporary investments to prepare for additional sales growth for our data center products.

Also, third quarter free cash flow included $24 million of cash payments primarily related to the U.S. pension plan termination and restructuring. Net debt of $517 million was $238 million higher than the prior fiscal year, including the 3 acquisitions completed earlier this year, along with the incremental data center investments. Our balance sheet remains quite strong with a leverage ratio of [ 1.2 ], and based on our earnings and cash flow outlook, we expect that it will decline further by fiscal year-end. We anticipate generating positive free cash flow in the fourth quarter and are now expecting CapEx to be in the range of $150 million to $180 million for the full fiscal year. From a timing perspective, we anticipate that some of the data center capital investments will now carry over to the next fiscal year. And looking ahead to next year, we anticipate that our free cash flow will rebound, aligning with our long-term goals of improving the free cash flow margin.

Now let's turn to Slide 11 for our fiscal '26 outlook. As we enter the fourth quarter, we're happy to announce that we are raising the revenue and earnings outlook. For fiscal '26, we now expect total sales to grow in the range of 20% to 25%. For Climate Solutions, we're raising our outlook for full year sales to grow 40% to 45%, up from 35% to 40%, with data center sales expected to grow in excess of 70% this year. For Performance Technologies, we're holding our sales outlook, with revenue anticipated to be flat to down 7%. We expect that the end markets will remain depressed over the next quarter. As expected, more favorable foreign exchange rates and material cost recoveries will support sales, but the underlying market volumes are not recovering yet.

With regards to our full year earnings, we're raising our fiscal '26 adjusted EBITDA outlook to be in the range of $455 million to $475 million. This reflects the strong performance this quarter and further improvement in Q4. To wrap up, we're encouraged with our Q4 outlook and fully expect to deliver another fiscal year of record sales and earnings. The teams have worked very hard to execute on our strategy, using 80/20 as a guide. And the recent announcement to spin off Performance Technologies is truly historic. We remain confident that these actions are setting the stage for long-term sustainable growth for Modine shareholders.

With that, Neil and I will take your questions.

[Operator Instructions] Our first question comes from the line of Matt Summerville with D.A. Davidson.

So I want to understand a couple of things. Can you talk about kind of the puts and takes embedded in the margin outlook for both climate and PT in the fourth quarter? On the last conference call, you sort of led us down a path whereby climate, kind of, ends the year in Q4 with further sequential margin improvement maybe in a range of 20% to 21%. So if you can kind of backfill on the margins across the two segments?

And then also help us understand what defines, kind of, the high and low end of the algebra on that 50% to 70% CAGR. Because obviously, you extrapolate that out 2 years. It's a pretty wide range. Is it demand? Is it capacity? So a little bit of help there as well.

Yes, Neil -- Matt. I'll go and then Neil can add on the CAGR comment. So yes, as we look at the outlook and for the balance of the year, I want to be clear about that. We are comfortable with the margin improvements in Climate Solutions after the 120 basis points sequentially in Q3. We're still on track for a 200-plus basis point sequential improvement in Q4. So we still see Climate Solutions in that 20% to 21% range.

On the PT side, we do expect a step down in the EBITDA margin. So that might be one thing that you're trying to model out. And we couple of things happening there. One is we see this as a Q4 temporary dip. We've got some material pass-through mechanisms that will be catching up. We've had a spike in aluminum, copper, steel. We also have some timing of the tariff recovery and also some Q4 inventory cleanup, write-off work that's been tied to our 80/20 [ PLS ] activities, and some of the [ plant ] conversions we did from -- going from PT plants to data center plants.

So we're comfortable. I should also say we're comfortable with analyst estimates in dollars that have been out there in Q4, and that would imply we're trending above the midpoint of the range. So we are trending towards that above the midpoint in the range in dollars. But again, CS fully on track for Q4. Margin improvement, and that's being led by HVAC and data centers, and then a Q4 dip in margin for PT, and we expect PT to rebound in Q1 back to that 14-plus percent type range.

So let me throw it over to Neil and then you can come back, Matt.

No, I think that's covered well, Nick. Any other questions on that, Matt?

On that, no. If we can get to the kind of data center question on what defines kind of that high low-end range when you extrapolate out 50% to 70% growth of the 26 [ basis of $1.1-plus billion ] you get a wide range. Is it capacity, is it timing, is it demand? Maybe you can just help out a bit there, that would be great.

Yes. When we think about that in terms of the capacity expansion, we -- we're giving ourselves plenty of space there. As we get to further -- we get further along in our project launches, in the U.S., particularly in Jefferson City and Dallas, I think that we'll have -- we'll be at a tipping point of having the majority of capacity in place and online, and that would give us more confidence to tighten that range.

Perfect. And then as a follow-up, can you maybe talk about how we should be thinking organically around the nondata center businesses in Climate over the course of calendar '26?

Yes. At a high level, we're seeing good business, particularly on the HVAC side and our heating product line. We've seen great business in orders and the into air quality portion of the group. We've seen, obviously, really good results from the acquisitions. And then we've seen some softness in the [ HTS ] business relative to the margins. So there's been some pressure on the margins there as we've seen a spike in materials, and we've been able to obviously counter that through commercial activities like pricing. But we -- there's a lag there. So we've got a little bit of time to catch that up.

Our next question comes from the line of David Tarantino with KeyBanc Capital Markets.

You mentioned record order intake in data center. Can you give us some color around the profile of these orders? How much of the growth is being driven by expanding relationships with customers and/or adding new ones versus your existing customer set? And what do you have embedded here in the longer-term growth profile around expanding these relationships beyond what you currently do?

Yes. So that's a good question in terms of the profile and the concentration. This expansion is coming with our existing customer base primarily. Certainly, we are actively working with all the hyperscalers but at different degrees and different levels. And there's potential for even greater upside when you think about some of these hyperscalers if we were to win orders at -- the order rates that we have with the ones that we have the longest relationships with. So this order intake and the upside that we see is with our strongest relationships with our longest customers, and we are still working through, and doing quite well with the other hyperscalers and some of the [indiscernible] providers as well.

Great. That's helpful. And then maybe just on free cash flow. The CapEx investments are pretty well documented. But -- could you talk about the working capital investment side of things related to the ramp? And specifically, what gives you the confidence that free cash flow begins to return to more normalized levels next year?

Yes, it's Mick. We've been trending about 19% to 20% working capital to sales. So I think that going to hold relatively well. But two things that were happening that will, kind of, cause us to get back to more normal free cash flow levels. What's the rate of the ramp that when we did the expansion this year when we announced it beginning of the year? A lot of prebuy, so we actually have spiked above our normal inventory carrying levels. And then secondly, the amount of CapEx, whether you look at it as the onetime spend or percentage of sales also had a spike.

So I think what will happen, David, is we'll trend back down. I don't think it will be a step function, inventory, working capital, [ we'll ] trend back towards normal ratios to grow with sales and same with CapEx. We'll still have some CapEx carrying over into next year and elevated. But as a ratio or a driver of capital, we won't have -- this year is probably $200 million. We probably have $400 million that we invested in capital spending and working capital builds.

Our next question comes from the line of Noah Kaye with Oppenheimer.

It was really helpful to get your commentary just now on the Climate Solutions margin outlook for 4Q. Basically, this is going to be, then, if you hit that a couple of quarters in a row where you get roughly, call it, 200 bps, a 100 bps to 200 bps margin expansion sequentially even as you're adding a bunch of new chiller lines, right.

So I guess the question is really how do we extrapolate this and thinking about where margins could be going here? You've talked about kind of mid- to high [ 20s ] as a longer-term target. But should we think about that kind of margin progression as continuing into the future quarters as you continue to add more lines but get better absorption?

A couple of things, Noah, that I don't -- I wouldn't extrapolate and we're not implying that we'll have 200 bps sequentially every quarter. I think this was -- we talked about it in Q2. We had a significant decline and is tied to the amount of fixed costs we added. So the climb back out we said we'd expect it to be kind of 2 quarters to pick up whatever that was, 400, 500 basis points. And then from there, it's going to be more of a normal climb, step by step up.

We've been clear with Climate Solutions that the goal next year would be 20% to 23%. We'll provide some guidance in our Q4 and a reminder for the group when we announced our announcement on Performance Technologies, we're going to split and have two Climate Solutions segment. So we can provide some other color in Q4 for data centers. But I'd say short until we come out with specific guidance by the two Climate Solutions segments, I think next year being taken that midpoint of that range is a fair starting point and we'll tighten that up and give you some more color in Q4.

Okay. Very helpful. Neil, it's good to hear you talk about the record orders intake. Obviously, not historically disclosed orders. But can you talk a little bit about just sort of a sense of magnitude of that order intake, and also the composition, how diversified it is among the customer base? What does it imply about kind of your customer mix as we head into next year?

Yes. Thank you. It's -- it's roughly 50-50 in terms of the products where 50% of it is with chillers and 50% is with the rest of the products that we have into -- for the full solutions in data center. It's a larger -- more of the majority of the revenue is with our hypers. And what gives us great confidence is these are projects and programs that we've seen -- that have been in the funnel for a while, and they're starting to come to fruition in terms of purchase orders.

So long-standing relationships, strong relationships with these customers, seeing these things progress through our probability funnel moving from 40% or 50% probability into the 80% to 90% category at a much heavier and faster rate than we've ever seen. So those are the things that give us confidence in terms of our customers, who we're serving as well as the products, knowing that we have the capacity to keep and it consists with our ramp schedule that we're public about a couple of quarters ago.

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

Obviously, as you talked about the 50% to 70% growth in '27, '28 recognizes the market's dynamic. The mix of products there might change. I think on the follow-up call on the PT spin-off, you talked about chillers potentially being better than 50% of the mix in '28. Maybe can you just talk a little bit about how the ultimate mix impacts your margins and kind of what the biggest wildcards are?

Yes. I'll go first and Neil can add. It's pretty uniform across the data center space. And so just take a step back. One thing I think Neil has covered and will help is we -- now the data center has gotten to the scale we think it's the right time to carve that out as a segment. But when you peel back the onion in Climate Solutions, what we've had over the last few quarters, right? So total segment is the 3 acquisitions we brought on and then Neil said on the coils or HTS side, we've had some lag effects on material pass-throughs. So kind of putting that off to the side, that's had some impact in the margins that you've all seen.

Across the data center than product portfolio, it's a pretty uniform margin profile. Obviously, we really like the service element. So I don't think it's as much there. I would leave it at as a pretty uniform mix is not going to be as big of a driver for us. The other one then the factor, as you know, over the last 3 to 6 months was just the amount of fixed costs we brought on with greenfield facilities. So that's a [indiscernible] on your question. I think the main drivers are in data center capacity utilization and then less about product mix.

Got it. I appreciate that. And maybe just a follow-up on -- in terms of the capacity ramp. So is the expectation that by the end of fiscal '27 you will have the capacity in place to manage the high end, the 70% CAGR for both '27 and '28. '28 specifically. Is there more? If you're doing that 70%, that implies in that $3 billion range in '28, will you have that capacity in place by the end of '27?

We would expect to have the capacity in place by the end of '27. However, they may not be at full utilization yet.

Our next question comes from the line of Neal Burk with UBS.

Apologies if I missed this on capacity utilization, but I think your guidance, based on my math at least, has annual data center revenues kind of exiting the year at $1.6 billion. Is that the correct way to think about the annual number? And what is the kind of capacity utilization that, that assumes?

Yes, quick. I'll jump in on that where Neil, [indiscernible]. Yes, our Q4 has implied a $400-plus million sales quarter. So yes, that would be an annualized run rate of [ $1.6 billion ].

Neil, do you want to add anything on capacity here?

Yes. Again, capacity is in line with where we want it to be. We're -- it's as expected. We're getting more efficient. You saw it in the margin improvement this quarter, and we're very comfortable in terms of getting back into that 20% range as we continue to add more capacity to data centers.

All right. And one more follow-up, again, on the point of demand. I know you said record orders in the quarter, but maybe just like taking a step back, like the data center pipeline as you see it, can you talk about how that's trending? And like specifically, do you have more visibility on future orders and revenues than you did, say, 6 to 12 months ago?

Yes. And that's an interesting question because I say yes to that, every time that's asked every 6 to 12 months. Because it just gets bigger and bigger and the visibility gets broader and broader. So if you go back 3 years ago, we had 8 to 12 months visibility. And if you go back a year ago, we had 24 months visibility, 36 months visibility. Now we're looking out as far as 5 years. And certainly, the top of the order [indiscernible] swelling for sure.

Our next question comes from the line of Jeff Van Sinderen with B. Riley Securities.

Just kind of -- maybe this is a little bit premature, but given that your next fiscal years upon us and you're ramping production. How do you think we might see the growth cadence of the Climate Solutions business trend in the next fiscal year? And might we anticipate sequential revenue growth for the next several quarters?

Total climate solutions? [indiscernible] sure I understood your question. Yes. Yes. Well, I think I'd separate again. I would expect, again and Neil can jump in, that the greater growth in order intake on the data center side, and that's becoming a much bigger piece, right, of the entire Climate Solutions segment, that we will see sequential growth for quite a while on data centers. Have to go back and study a little bit the HVAC side. We get seasonal patterns with heat and then you have a coil HTS business that can be heavy replacement, and also some of that tied to residential OE customers. So I think of that as more normal and that we've said that's probably a high single-digit organic grower annually.

The last thing I'd say, I don't want to be too repetitive, but it will help when we give you some more color in Q4, and I could split those two dynamics. HVAC is a very different dynamic to HVAC&R versus data center. So hopefully, that's enough color to give you some direction.

Okay. And I'm sorry, just to clarify. For Q4, are you going to start breaking out in the P&L, the 2 segments for Climate Solutions?

So beginning our Q1, Q1 with our new fiscal year, we will have 3 segments. We'll have a data center segment, a commercial HVAC segment, and obviously, Performance Technologies until that transaction closes. And we'll report as we have with our other segments, revenue and earnings. What we'll just do in our Q4 is we'll provide some guidance for the new year outlook. But to be clear, I won't be able to give you those segments split until we hit our Q1.

Okay. Fair enough. And then maybe for Neil, you're talking to your data center customers what is really top of mind for them at this point in determining their go-forward cooling needs? How are those needs evolving? And then, I guess, as a result, how is Modine evolving its products for the future?

So a few things. One is there's a lot of conversations about the now, which is securing capacity. How do we ensure that the strategic suppliers that they've selected are investing in capacity and investing in production, and investing in their own internal supply chains, so that they can keep up with the demand as you see the hyperscalers continue to raise their CapEx spend almost every quarter, they're raising their CapEx spend. So what are we doing now to ensure that we're in sync and locked in with their progress as well as their build-out. That's one.

The next piece is around our innovation and technology. What are we doing to make sure that we deliver products that help them solve two critical problems. One is the lack of power, so energy consumption. And the other is around water and the amount of water that's used typically in some data centers. So if we can continue to innovate and evolve with better use in terms of power and water, which are often measured through [ PUE and WUE ], we can continue to improve their metrics and stay innovative in that regard. Those are two critical problems that we're trying to solve for in the industry in addition to keeping up with the [indiscernible] of CapEx deployment.

Our next question comes from the line of Brian Drab with William Blair.

First, I wanted to ask on the capacity expansion, you have the -- it sounds like $1.6 billion in revenue capacity for sure now as you're going into the fourth quarter. But to get to the $3 billion, how much additional investment is this going to take? Just trying to get this whole framework in place. I think that Mick made some comments on the call last week, but we're getting a lot of questions on this. Like how do you get to $3 billion? And does it -- how much additional investment beyond the $100 million that you talked about before? And then also, are you just getting there from some higher utilization or increased pricing? Can you frame all of that for us?

Yes. High level, we can get there on the amount of capital that we've been public about in terms of what we need to spend to get to the $3 billion. But $40 million of that will carry over from this year into the next fiscal year.

Yes. And the -- we'll have another -- we had about $40 million of capital spending in Q3. So just in Q4, and this is -- this will be equipment that won't even be producing really much in revenue. We'll have another $40 million to $50 million in Q4, and Neil just mentioned a $40-plus million amount that we'll spend in the new year. So one other maybe data point, if you take that almost $100 million left of that spending that Neil talked about that we've laid out that isn't even in the production sales numbers yet, that will be supporting future sales growth.

How many -- can I ask how many pillar lines would you be at as you enter fiscal '28 to execute on the plan?

[ 20 ].

Got it. And last question, Neil, I don't know if you want to provide -- or if there's any update to provide on this, but you had talked late last year about a couple of new potential hyperscaler customers for chillers who had not purchased chillers in the past looking for sample product and just wondering how are you -- how many total hyperscaler customers are you working with? And then can you give a specific update on anything that's developed and potential new customers for chiller specifically?

Yes. Obviously, we're working with all of them at different levels of engagement. And then if you recall from last quarter, I talked about one of the reasons that we had that miss and the margins in data centers was that we had to cut production and with a couple of hyperscalers that we hadn't sold chillers to in the past, and they needed some pilot builds for fiscal year '27 and '28. So pending the results of the field trials, which we would anticipate to be in line with how we typically perform. We'll continue to grow with those other hyperscalers with chillers.

Did they give you any visibility to when you'd hear about the field trial result?

Yes. Typically, it will be -- we'll hear about it all the time in terms of we'll get feedback regularly, but a decision will be made for a couple of quarters.

Our next question comes from the line of Matt Summerville with D.A. Davidson.

I just have one follow-up here. Neil, Mick, how are you strategically thinking about LTA's long-term agreements? How much of your capacity will ultimately be willing to have sort of spoken for over what kind of time frame? And I guess, in turn, what price kind of considerations are you thinking about, and would you be able to structure these almost as a take-or-pay arrangement such that you're not absorbing risk?

Yes. Well, it's not that we couldn't structure -- it's not as if we could structure it in a way that it's completely risk-free. But certainly, derisk substantially, and it gives you higher confidence and great confidence that the commitment of the customer is there as well, particularly long term. So certainly, I mean, we'd be willing to do LTAs for all of our capacity, why wouldn't you, right? So we're -- that's definitely new. And certainly, part of this capacity expansion equation that we're seeing with our large OEM customers.

So those conversations are being had. I think you've seen evidence of this happening with other suppliers that these things can happen. And we strategically align ourselves behind our [indiscernible] customers that we believe are our best customers, and those would be the ones that we would lean in, in terms of providing more capacity with an LTA.

Do you think, Neil, obviously, it's been tough for you to name use specific customer names. If you sort of begin to go down the road where LTA start getting [indiscernible] is this something we can expect to be publicly announced and communicated?

Yes.

Our next question comes from the line of Brian Sponheimer with Gabelli Funds.

I'm curious, the heavy focus on data centers and yet within this past fiscal year, you found [ that'll ] be [indiscernible]. Just curious about that pipeline maybe outside of the data center set on climate from an M&A perspective, you're going to end pro forma you'll be less than 1x levered when this is all said and done with Gentherm.

Yes, you're right. CDI, AbsolutAire and [indiscernible] certainly inside of that HVAC business. As we continue to look at ways to diversify around some of these higher-margin businesses that are not typically in data centers. We believe we have what we need in the data center space. Right now, we continue to cultivate the funnel. We're often in conversations and different milestones with many potential targets. Probably over the next couple of quarters, it's all hands on deck on our project with Gentherm. But we can still work in the background on the active funnel that we currently have around additional businesses and technologies that we see would continue to help evolve our portfolio inside of the HVAC business, for sure.

Could you give -- I mean, with the understanding, Gentherm probably happened fairly quickly. Could you give any color as to what that pipeline looked like prior to you engaging with Gentherm?

Yes, it's Nick -- Brian. It's good. It's -- there are some things we paused on when that accelerated, but that HVAC space is a lot of privately owned and fragmented businesses. So it's a classified as -- there's a funnel of businesses from $50 million to $100 million sweet spot in revenue that we can relaunch discussions with.

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

Thank you, and thanks to all of you for joining us this morning. A replay of this call will be available on our website in a couple of hours. I hope you all have a great day. Thanks.

Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.

Good morning. Welcome to our conference call to discuss this morning's joint announcement regarding the future of Modine's Performance Technologies segment. I'm joined on this call by Neil Brinker, our President and Chief Executive Officer; and Mick Lucareli, our Executive Vice President and Chief Financial Officer. The slides that we'll be using for today's presentation are available on the Investor Relations section of our website, modine.com.

On Slide 2 of that deck is our notice regarding forward-looking statements. This call will contain forward-looking statements as outlined in our press release as well as in our company's filings with the Securities and Exchange Commission. With that, I'm pleased to turn the call over to Neil.

Thank you, Kathy, and good morning, everyone. We appreciate you all joining us for this call on short notice. If you were unable to join the Gentherm hosted investor call earlier this morning, I encourage you to listen to the replay. On this call, I will provide a brief overview of the transaction and then focus on the significant benefits for Modine.

Please turn to Slide 3. Our team has been in a strategic and transformational journey, which was launched at our first Investor Day back in 2022. Our goals have been consistent and transparent throughout the process, and we've established a track record of exceeding our targets. We have a long history of leveraging critical thermal applications to build a top-performing diversified industrial company while accelerating growth and improving our margin profile.

We've seen great success over the last 5 years as we've made 80/20 a core part of our DNA and realigned our product portfolio to better capitalize on favorable secular megatrends. Today's announcement is both historic and extremely exciting, accelerating our strategic transformation.

Please turn to Slide 4. Since beginning our 80/20 journey, we've been executing a focused plan to evolve our portfolio. With 6 divestitures and 6 acquisitions over the past 5 years, we've made tremendous progress shifting our business mix towards high-growth, high-margin businesses, driving improved profitability and creating substantial shareholder value. As we previously discussed, we've been looking to exit nonstrategic portions of our Performance Technologies segment, including our automotive business. While that work was ongoing, the opportunity to combine the PT business with Gentherm presented itself.

After a thorough evaluation, we determined this is the best path forward for our shareholders and all of our stakeholders. This is the right transaction at the right time to maximize future shareholder value in both business segments. The tax-free spin-off and combination of our Performance Technologies business with Gentherm presents a unique and compelling opportunity to accelerate the evolution of our portfolio in a way that we believe will immediately benefit our shareholders and allows the remaining Modine to become a high-growth, pure-play climate solutions company. It is also clear that Gentherm is the right natural owner of the PT business as it looks to scale through a broader portfolio of thermal management solutions and increase its presence in the power generation, commercial and heavy-duty end markets. And our shareholders will be able to participate in the upside potential of the powerful combination of Performance Technologies business with Gentherm as a combined company positioned to drive profitable growth.

Please turn to Slide 5. This transaction creates two strong focused companies, each equipped to serve its end markets more effectively, accelerate growth and drive long-term value for shareholders, customers and employees. Combining our Performance Technologies business with Gentherm will establish a scaled leader in thermal management solutions with expanded technologies and capabilities in precision flow management. The combined company will be well positioned to serve a broad range of customers with expanded highly competitive product portfolio. For Modine, this is the start of an exciting chapter in our long history as a pure-play climate solutions company. This strategic step is designed to unlock significant additional value and accelerate growth in attractive end markets. The transaction enables us to sharpen our focus on the Climate Solutions segment. With a streamlined business model, we will be better positioned to allocate capital and resources to high-growth, high-return initiatives and drive long-term shareholder value.

This includes completing our capacity expansion for data center cooling products and exploring further inorganic growth opportunities. As an 80/20 company, the new Modine will be more agile, allowing us to be more responsive to a dynamic and accelerating industry demands and ensuring that we remain a premier partner to our customers. This is a pivotal moment for Modine and our stakeholders. We are creating a new leader in the vehicular thermal management while transforming Modine into a more focused, high-growth company dedicated to innovating climate solutions.

Moving to Slide 6. I'd like to quickly touch on the transaction structure and highlights. The transaction is structured as a Reverse Morris Trust in which Performance Technologies will be spun off and simultaneously combined with Gentherm. The relative sizes of the two businesses, along with the substantial overlap in shareholders presents a unique and compelling value as it allows the transaction to be tax-free for Modine and our shareholders. The transaction values our Performance Technologies business at approximately $1 billion or 6.8x our trailing 12-month adjusted EBITDA as of September 30, 2025, a fair valuation that reflects both the cost structure improvements we have achieved and the additional margin upside as industry volumes recover.

At closing, Modine will receive $210 million in cash, subject to certain adjustments, and our shareholders will get approximately $790 million of Gentherm stock. The structure provides Modine shareholders with 40% ownership of the combined company and 100% ownership of Modine. We expect the transaction to close in the fourth quarter of calendar year 2026, subject to receipt of Gentherm shareholder approval and other customary closing conditions, including required regulatory approvals and certain tax payments.

Please turn to Slide 7. Let's now take a closer look at the new Modine following the transaction. The strategic rationale is compelling. It accelerates our transformation into a market-leading climate solutions company focused on high-growth, high-margin opportunities. With our long-standing leadership in thermal technologies, we will expand product development and innovation to support next-generation requirements, especially in the rapidly growing data center cooling market.

Over the 12 months ending September 30, 2025, our Climate Solutions segment generated $1.6 billion in revenue. We expect revenue growth of 35% to 40% to nearly $2 billion this fiscal year, driven by strong organic growth in the data center market and recent acquisitions within HVAC Technologies. On a pro forma basis, we fully expect a significant profit margin improvement based on previous Climate Solutions results. The segment delivered strong profitability with trailing 12 months adjusted EBITDA margin of 19.6%. This represents $307 million of adjusted EBITDA. Meaningful growth in revenue and EBITDA is expected for the Climate Solutions segment in fiscal 2026, a solid financial foundation for future growth. I want to highlight that these numbers reference Climate Solutions previously reported segment results. We do not anticipate any significant change in our corporate costs, especially given our plans to replace the PT revenue with future growth. We will report recast financial statements after the close of the transaction.

Revenue will remain well diversified across end markets with data centers representing 45% of last year's segment revenue, positioning us squarely in one of the fastest-growing sectors of the global economy. We will continue to maintain leading positions in HVAC and refrigeration markets, including coils, coolers, heating, indoor air quality and coatings. In addition to these benefits, we have a streamlined business model and sharper management focus that will enhance our ability to pursue both organic and inorganic growth. In short, this transaction results in a simplified and more powerful operating structure. The new Modine will operate through two primary business segments: data centers and commercial HVAC&R. We plan to begin reporting our current Climate Solutions business under this structure in the first quarter of fiscal 2027. Clearly, this transaction creates a financially stronger, more focused and significantly more agile Modine, well positioned to lead and win in our most attractive Climate Solutions markets.

Please turn to Slide 8. I'd now like to take a closer look at our data center business and explain why we're so excited about this market and why we believe we can continue to generate top quartile organic growth and compound shareholder value. Over the last 2 years, our data center business has grown an impressive 93% CAGR. We believe that the market demand for thermal cooling will continue for the next 5 to 10 years, and we are continuing to invest to support the future growth. Based on our current targets, we anticipate 50% to 70% annual growth over the next 2 years, putting us well on track to exceed our previous $2 billion revenue goal for fiscal 2028. Within the next 12 to 24 months, we expect to replace the $1 billion of Performance Technologies revenue with revenue from the data center market alone. We recognize that recent commentary has raised questions about the future of data center cooling, given advancements in chip technologies. I want to address this directly. Our suite of technologies is positioned to benefit from this evolution.

The fundamental need to remove the heat from data center is not decreasing, it's intensifying. It's important to note that the heat can be removed in multiple ways, both at the chip level and at the data hall. That is exactly why we have built a comprehensive suite of cooling solutions that address the diverse needs of our customers. This includes [ antimicrobial ] solutions from our Scott Springfield product line and advanced free cooling technologies from our Airedale portfolio. Our success is rooted in a century of thermal management expertise, enabling us to design solutions that meet both today's requirements and tomorrow's demands.

We've also cultivated a diverse customer list with broad exposure to both traditional data centers and those dedicated to high-performance computing. Our customer list spans leading hyperscalers as well as colocation data center customers, providing us with exposure to varied chip designs, manufacturers and rack architectures. Our customers are at the leading edge of chip technology development, and we're working closely with them to design the data centers of the future, whether they're modular solutions, higher capacity chillers and air handling units or more efficient free cooling solutions. As data center cooling architecture and customers need to evolve, the new Modine will be leaner, more focused and more readily capable of meeting those demands. We are committed to being a technology leader because that is what we do best.

Please turn to Slide 9. This slide gives you a sense of our excitement about this transaction and the potential for the new Modine. The Climate Solutions business' track record speaks for itself. From fiscal 2022 through the trailing 12-month period, our Climate Solutions segment has compounded revenue growth at 15% and grown adjusted EBITDA at 34%. We expect the simplified operating structure of the new Modine to enhance our ability to grow in our targeted markets and improve our organic growth CAGR.

Please turn to Slide 10. The value proposition of the new Modine is clearly supported by strong underlying fundamentals. We've demonstrated over the past few years our ability to deliver growth rates that are among the highest in the industry. We've done this through our positioning as a technology leader for mission-critical applications and our unique ability to meet the rapidly changing industry demand for complex and other bespoke cooling solutions. All of this has produced an attractive financial profile and a clear ability to accelerate both organic and inorganic investment opportunities to advance our industry-leading position. We believe this strong performance, coupled with a simplified operating structure focused on high-growth verticals provides the opportunity to earn a market valuation that is more in line with our comparable industrial peers.

Please turn to Slide 11. In conclusion, we are incredibly excited about this strategic step for Modine and for our shareholders. This is a meaningful acceleration of our transformation and greatly enhances the ability of both the PT business and the new Modine to grow and drive shareholder value through more focused operating structures. We believe that combining our Performance Technologies business with Gentherm through the RMT structure creates the strongest path for growth and success, providing our shareholders with a more focused, high-growth new Modine while allowing them to benefit from the substantial anticipated future market recovery in PT end markets through the retained 40% ownership in the combined company.

For the new Modine, we will build on the progress we've made in accelerating growth and improving margins. With sharper focus on product development, organic growth and targeted acquisitions, we will continue to evolve our portfolio and compound shareholder value. With that, we will now take your questions.

[Operator Instructions] The first question comes from Matt Summerville with D.A. Davidson.

A couple of questions. First, can you address how we should be thinking about any stranded costs associated with executing this transaction? You mentioned probably holding corporate expense flat, but I'm wondering if there's another bucket of stranded costs we need to be thinking about. And if also, Neil, you could put a little bit of a finer point on the why now for PT given that cyclical upturn is still in front of us? And then I have a follow-up or two.

Yes. Matt, so I'll take the first one. Neil can do the second one. The good news is we're not anticipating any significant stranded costs. So as you mentioned, we think our corporate costs are going to remain relatively flat. And in addition, as Neil went through it, if you think about while we will be transitioning away from the PT business and merging that with Gentherm, the rate of growth in the Climate Solutions business is so great that those corporate resources and costs are going to be fully absorbed in the new Modine going forward. And it's -- both CS and PT really look kind of pro forma the way we've been representing them on our financial statements over the last couple of years, which is good. There will be some onetime deal costs, but nothing then in addition with regards to what you might consider material stranded costs. Neil?

Yes. Thanks, Matt. As you know, this is just a natural step in the transformation as we move towards becoming a pure-play climate solutions company. So streamlining the business model, allowing us to apply our resources towards these large initiatives in the data center market, commercial HVAC and refrigeration, while at the same time, I think it's key is that Performance Technologies will expand Gentherm's portfolio, and it's very complementary. So altogether, the transaction established two stronger, more focused companies. And with the 40% ownership of the combined company, there's still opportunity for the shareholders to participate in substantial anticipated market recovery in PT.

As a follow-up, I'm curious, as you -- just thinking about how 80/20 sort of works, if you are repositioning your resource base and putting even more energy and emphasis and R&D dollars into the data center business, could this theoretically unlock an even greater iteration of growth in that business versus what you're even talking about today? And is your conviction on the 50% to 70%, is that based on incoming orders? Is that based on backlog funnel? Or is it more a function of this capacity iteration? And then just to clarify, what's the base we should extrapolate that 50% to 70% growth CAGR off of?

Yes. Matt, it's a combination of -- I mean, you hit on all the variables there, and it's a combination of all those variables. So when we think about that and we project these numbers that we projected, the confidence behind it is our order books that we're seeing, the backlog that we have visibility of, our comfort as we continue to ramp these facilities and we can continue to execute. And that is what gives us comfort in terms of why we would suggest what we can do in the data center. So streamlined, focused, the CapEx deployment, the project plan, the backlog, it's all there to give us the ability to move and be very excited about this market and be very focused on the execution that we need to deliver on over the next 12 to 24 months.

Yes, Matt, real quick, it's Mick. With regards to the growth rate, we're taking that off of where we think we'll be we've guided to this year. So I would say, think of it as the starting point as the $1 billion starting point, and then we see 50% to 70% in each of the next two fiscal years.

The next question comes from David Tarantino with KeyBanc Capital.

Congratulations, everyone. Maybe just thinking about 80/20 as it relates to climate. Obviously, the focus was more on PT previously. But could you talk about the areas of opportunity you see in climate to drive more meaningful 80/20 improvement once you have that more streamlined focus?

Yes. That's a fair question. So when I think about 80/20, I think about utilizing 80/20, the processes, the techniques, the tools and then just how it's organically in our DNA to bring stability to the organization, make sure that you're leaning into your most profitable opportunities. And the ultimate end game of 80/20 is growth, reduce the complexity, reduce the noise, get focused on what's most important and put your resources behind the best potential. So when we think about 80/20, it's not just a mechanism for profit improvement, it's a mechanism for high growth. So when we think about the Climate Solutions business, that's exactly what we're doing with the CapEx deployment, the resource deployment, how we align the organization on data centers because we've done a lot in terms of profitability there, and it's about execution and growth. When I think about the other parts of the Climate Solutions business, same thing. The reason why we're acquiring in the HVAC side is because we continue to see that we roll out these acquisitions, it's about growth. It's about channel expansion. It's about cross-selling. So when we think about 80/20, the ultimate end game is grow, grow with a profitable profile. So it's a combination of many things. But at the end of the day, it's about driving high growth.

Okay. Great. That's helpful. And then maybe to follow up on Matt's question in data center. Like how does the greater long-term target, thinking about kind of the greater than $2 billion and the more streamlined portfolio change the way we should think about the investment curve within data center specifically?

Yes. This is Mick. From a CapEx perspective, we'll probably be this year -- this year was a big lift for us. So we'll probably be in that $125 million to $150 million type number. And I'd expect that to be a similar number next year to support that growth that Neil and I covered. That will put us -- we'll be -- have plenty of capacity to be in that $2 billion to $3 billion revenue range based on that capital investment.

The next question comes from Neal Burk with UBS.

So it sounds like you're very confident in the $2 billion target or over $2 billion target in data center sales by fiscal '28. Like I know that part of that plan was based on converting some performance technology production lines to data center. Like does this change kind of how you get to that over $2 billion target?

No, it does not. And you're correct, we are confident in that. And there was one facility that we were converting that's not in the perimeter.

Okay. Understood. And I mean with HVAC being a bigger piece of the mix now going forward, I know there's a lot of moving parts with like M&A, but can you just kind of give us an update on what kind of like long-term growth profile we should think about the HVAC business? Is this kind of a mid-single-digit organic grower, and anything on kind of incremental margins through the cycle?

Yes. As we think about the remaining business, the Climate business, based on the guidance we provided, we should have an HVAC business, the commercial ventilation and heating business that's north of $350 million. And that should grow organically high single digits, and our goal would be through more M&A to grow that at a low double-digit rate. We also have a nice -- we have about $200 million between coatings and refrigeration and process cooling. And that should have a really nice similar high single-digit type organic growth rate. And then the balance of the business is really around our coils business. As Neil has talked before, we really peel that onion back within their applying 80/20 parts of coils will grow and expand and others, we're just going to optimize the profit and the cash flow out of that side. And then obviously, growing off that the other $1 billion type run rate this year off the data center side. Hope that helps, Neal.

The next question comes from Noah Kaye with Oppenheimer.

Congratulations on the news. I just want to double-click on the consideration around the data center capacity ramp and where the PT exit fits in there. You mentioned it shouldn't impact from a facilities perspective. How about from a staffing perspective? And then maybe -- it doesn't look like you're updating obviously '26 numbers today. We appreciate that. But any implications for how the capacity ramp is going right now?

Yes. Thank you, Noah. So no, we've had the -- as we operated in two independent segments between PT and Climate Solutions, we've had the organization split and established over time, and we made some iterations and some changes to it several quarters back, but we're stable, and we have exactly what we need. So I don't -- we don't anticipate any issues there at all. So that won't be a concern. We've got what we need in order to execute. It's a matter of just getting the execution done. And the second part of your question?

Just how the capacity ramp is proceeding is basically on track and this doesn't affect the trajectory.

Yes. We're on track. It doesn't affect the trajectory. We have a strong order intake. We have very strong order intake. We've got a growing backlog. It gives us this confidence to come out and say what we're saying today. And the fact that we're executing at the level that we are, and we're learning from the previous quarters in terms of our launch, and we're learning fast, I'm impressed with what the team has been capable of doing. That's why we feel comfortable about this today, Noah.

Yes. And Neil, I want to ask you a follow-up on margins. In the past, the company shared a target of 20% to 23% EBITDA margins in Climate Solutions. Obviously, with a higher growth trajectory now for data center and sort of a more focused business, how should we think about where Climate Solutions margins pre-corporate costs can go over the next few years?

Yes. I think those numbers make a lot of sense in a stable environment as we continue to insert change here and grow, we're going to see some inefficiencies until we get a lot of this production capacity in place. So you think about that for the next couple of quarters. I think those baseline numbers are pretty good numbers, but we're in -- there's a lot of change, right? And with change, that means there's costs. So as we continue to do what we suggested last quarter, we're going to incrementally prove and get back to those baseline numbers, we're -- that's where we're headed. We're on path.

The next question comes from Jeff Van Sinderen with B. Riley.

Kind of a multipart one here. You touched on it a bit in your prepared comments, but maybe you can expand how do you expect the NVIDIA Rubin architecture to evolve the data center cooling market, the overall demand for cooling for data centers and the types of cooling used and then also your overall business?

Yes. I'm excited about it. I mean as we see the temperatures rise, you see the heat loads intensifying at magnitudes that we would only dream about years ago, and we're here, and it plays perfectly into our chiller strategy in terms of our new product development and our innovation. So as this market continues to have higher heat loads, we really, really value our free cooling capacity and capability, which we believe from voice of customers, it's one of the best in the industry. So that is something that differentiates us with free cooling because your total cost of ownership goes down as the heat loads intensify inside of the data center. So I feel like the market is moving towards our chiller technology, and we've got a great set of liquid product offerings that over time, I hope to become the industry standard.

Okay. Great. And then just a little bit sort of a longer-term question. I know it's a ways here even before this transaction closes. But when we think about just the Climate Solutions business on a go forward as sort of a stand-alone, what do you think the EBITDA margin potential is for that business? What are you kind of thinking about might be attainable there?

Yes. It's Mick. I'll just -- I'll build on where Neil was going. I'd say it's a little early for us to set the new. I think that was Noah's question. We've been public about wanting to be operating in the low 20s -- 20% to 23%. I want to reiterate what Neil said, with the expansions, we still see that margin improving. We talked last quarter about it improving sequentially to Q3 and Q4 and having seen us back in that 20% plus range in Q4 here. We're going to -- and then we've also been public that we want to move towards a top quartile HVAC type company. And that would mean, in our mind, we move from the low 20s to the mid-20s, even upper 20s in terms of EBITDA margins.

So we'll hold on that until we're ready to come out with our next set of 1- or 2-year targets. But if you're asking us for a long-term vision, it was first operate in that low 20s range. And then we really think we'd love to be operating in the upper 20s is where we know and part of this message today, we're so excited about is focusing in the climate area, fully opens the door for us to operate in that environment.

Well, the high 20s, I think, would create some multiple expansion on your stock. I appreciate you guys answering that. Congratulations on the deal. We'll take the rest offline.

The next question comes from Brian Drab with William Blair.

Most things have been asked, I think, now. But just to put a finer point on the data center revenue outlook. I just want to make sure that we're all doing the math correctly and in line with how you're thinking about it. If $1 billion is the base and the high end is 70% growth for 2 years, that gets you to $2.9 billion. I'm just wondering, is that kind of almost $3 billion level in play?

Yes. When you do that -- we're doing the same math that's absolutely that you're thinking about it the right way.

And what is the mix of the revenue, just roughly? Like is this -- is it going to be more than 50%, like more than half chillers? Or can you break that out at all to give us a sense?

Yes. Yes, I'm glad you asked. So this year, to be clear, we expect less than half of our revenue will come from chillers. I think next year, it will be about -- we'll be closer to 50-50. So I think it's still going to be a nice -- a well-balanced portfolio.

Okay. And then maybe just the last one for now. Is there anything to talk about regarding regulatory challenges in getting the deal done?

Yes, I'll do -- I'll take that as well, too. No, nothing that we're concerned about or be noncustomary. With an RMT, there's shareholder approval on the Gentherm side. There's IRS ruling. And then with any transaction, you've got some legal or local approvals. But as we covered today, and I thought the Gentherm team did a great job, really nice overlap in synergies. But today, we're not in the same product base at all. So as far as like regulatory approvals, we see a really clear path to that. I also wanted to mention there was a question, just Neil and I wanted to make sure we help clarify. There was a question about what stays and goes with regards to the data center. I want to make sure -- we made sure everyone understood. Everything going with PT is exactly as we've presented over the last couple of years. It's Modine's legacy on-highway, off-highway business, including the cooling modules for power generation genset units and CS stays with Modine as reported, including all the data center revenue that we've been discussing and reporting. So I just wanted to make sure if there was any follow-ups or questions on that, we addressed it.

The next question is a follow-up from Matt Summerville with D.A. Davidson.

Mick, you actually answered one of my questions. So thank you for that clarification. There did seem to be a little bit of maybe confusion on that from the other call. In any event, I'm wondering if, again, thinking through an 80/20 lens, if this prompts you guys to rethink or recast the M&A net, so to speak, meaning do you look to acquisitively broaden your solution set in the data centers or broaden your other sort of HVAC capability? Do you start to think about M&A? Does that evolve as part of this process? And then I have one other quick follow-up.

Yes. For sure, it does evolve in terms of thinking more along the lines of deploying cash in areas in the HVAC technology side because there's a lot of opportunity there as well as moving in towards precision cooling in different markets that we don't necessarily play in today. It's the same technologies. It's the same thermodynamics. It's the same physics. It's the same principles. We have the expertise that we can move into precision, whether that's in life sciences and medical or test and measurement. So we're exploring those opportunities.

With regards to data center, we feel we have what we need to win today, and we have evidence in that in just this call. And when we think about what we need to do in data center, it's about execution. Now that doesn't mean if there's a technology that we believe is essential for the go-forward plan that we decide and determine the fastest way to get it is to acquire it versus building it out internally or developing it internally, we reserve the right to do that. But for the most part, data center, with all the technologies, all the acquisitions we've made over the last few years, the tremendous order funnel and backlog, it's about execution there.

If we have a gap or we see some evolution in the industry where we can accelerate or get there faster or leapfrog the technology through acquisition, we'd absolutely explore that. But for the most part, it's about continuing to balance our portfolio and make sure that we have good mix with products in the HVAC technology side and venturing into a new segment.

Understood. And then kind of building on, Neil, you sort of proactively addressed, I think, some of the dialogue coming out of CES. But to put a finer point on that and maybe a little more specificity. In a 45C environment, does your content per megawatt change good, bad and different?

Yes. We have -- it's roughly $600,000 per megawatt. It's the same in terms of a slight uptick. The chillers with free cooling will be slightly more expensive, but what they do is critically important to ensure they're solving the problems inside of that space. So as you see these heat loads increase, certainly, you can do it with more free cooling technologies, but you will -- what we understand from the market is you need the insurance of the chiller. So even if you can free cool 90-plus percent of the time, there are those spike events where you have these high heat loads and they happen. You want to make sure that you have the insurance of the chiller. That's why we feel real confident in our new product design and that chiller that we launched years ago that now it's going to have significant place in the marketplace as the water temperatures rise.

The next question comes from Chris Moore with CJ Securities.

Yes, most have been asked already for me. But maybe you talked about it a little bit, but perhaps just you're targeting Q4 for the close. Can you just kind of walk through again kind of the key milestones between now and then kind of how financials will be presented in the interim and just kind of the key steps between now and then?

Yes. Sure, Chris. So tactically, one of the first things we need to do is complete a carve-out audit. And then there will be filings with the SEC and the IRS and a shareholder vote on the Gentherm side that -- and all this is a pretty typical time line for an RMT transaction given the tax-free nature of it. And from the Modine side, PT, Performance Technologies will continue to be reported through our continuing operations until the close. So our Q4 as we talk about next year and until we get to a close, we will guide and share with all of you our results. And at the same time, we'll continue to separate the climate and the PT and corporate such that anybody who wants to do their own pro forma will have all the pieces there to do that work. Last, I would say is with the carve-out audits, that we'll prepare for closing a recast. So when we close, we'll be able to provide you with the recasted financials to help you with the modeling.

I am showing no further questions at this time. I would like to turn the conference back to Kathy Powers. Thank you.

Thanks, and thanks to everybody who joined us this morning to hear about this exciting news. A replay of the call will be available through our website in about 2 hours. We hope everyone has a great day.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.

Good morning, and welcome to today's call to discuss Gentherm's combination with Modine's Performance Technologies business.

I would now like to turn the call over to Greg Blanchette, Gentherm's Head of Investor Relations. Greg, please go ahead.

Thank you. Hello, everyone, and thank you for joining us to discuss Gentherm and Modine's announcement of our plans for a spin-off and merger of Modine's Performance Technologies business with Gentherm, which is intended to be tax-free for Modine and Modine shareholders. This morning, Gentherm and Modine issued a news release regarding this announcement, and Gentherm has posted a presentation that we will reference during this call. The release and presentation deck are available on the Investors section of Gentherm's website.

The comments during today's call and the accompanying presentation contain forward-looking statements within the meaning of the safe harbor provisions of Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts are considered forward-looking statements. These statements are based on management's current expectations and beliefs, as well as a number of assumptions concerning future events. Such forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from the results discussed in the forward-looking statements. Some of these risks and uncertainties are identified and discussed in the company's filings with the SEC.

We'll also refer to non-GAAP financial measures today. These non-GAAP measures should not be used in isolation or as a substitute or alternative to results determined in accordance with U.S. GAAP. In addition, Gentherm and Modine's definitions of these non-GAAP measures may not be comparable to similarly titled non-GAAP financial measures reported by the companies.

With me today are Bill Presley, Gentherm Chief Executive Officer; Jon Douyard, Gentherm Chief Financial Officer; and Jeremy Patten, President of Modine Performance Technologies. After the prepared remarks, we'd be pleased to take your questions.

Now I'd like to turn the call over to Bill.

Thank you, Greg, and good morning, everyone. We appreciate you joining us to discuss this exciting announcement of our definitive agreement to combine Gentherm with Modine Performance Technologies. Over the past year, we've laid out our strategy to drive strategic profitable growth, build operational excellence and achieve superior financial performance. And during 2025, we made significant progress. This is a transformational announcement for the company that accelerates our strategy, and I look forward to sharing why we believe this combination provides value to our shareholders.

Let's begin on Page 4. This combination nearly doubles the scale of the company, taking revenue to approximately $2.6 billion while driving -- while delivering pro forma synergy adjusted EBITDA of 13% with clear expansion opportunities into the mid-teens. Strategically, this serves as a building block that expands Gentherm's portfolio with highly complementary thermal management products and engineering capabilities while accelerating the company's access to key growth markets outside of light vehicle, including power generation, commercial vehicle and heavy-duty equipment.

This combination creates incremental value creation and commercial opportunities, including cross-selling, product innovation and integration, as well as geographic expansion into new global markets. We're bringing together two organizations with a common culture and shared focus on operational excellence. This creates opportunities for us to learn from each other and also enables us to deliver approximately $25 million in identified annual cost synergies.

Upon closing, we will have a compelling financial profile that includes a strong balance sheet and access to capital. This positions us well to continue to execute against our strategic framework and capital allocation priorities. We are excited about the opportunity ahead.

Moving to Slide 5. We are bringing together two industrial pioneers. Gentherm brings more than 30 years of leadership in thermal management and technology innovation, and Modine Performance Technologies has a history that stretches over a century in mission-critical thermal management. It is that expertise in leadership and thermal management that is a common link. We both have strong competitive advantages and market-leading positions. Together, we will leverage our complementary capabilities, expanding our global reach across attractive markets while building greater scale in thermal management solutions.

Before we dive deeper into the strategic and financial benefits of this transaction, I'd like to invite Jeremy Patten, President of Modine Performance Technologies, to say a few words about this great business. Jeremy has a strong track record of industrial leadership, having led businesses and operations at ATS Corporation, IDEX and Danaher. He brings a strategic mindset and commitment to operational excellence that makes him a great addition to our leadership team.

Jeremy and I have gotten to know each other well throughout this process. We have traveled together to multiple locations, and what we observed has reinforced everything I already believed about this business. The team is highly skilled and brings a relentless focus on quality and execution. I've been incredibly impressed with his and his team's strategic vision and operational discipline. This gives me confidence that Modine Performance Technologies will be an excellent fit, and we look forward to welcoming them to Gentherm. Jeremy?

Thanks, Bill, for the kind words, and hello, everyone. We should be on Slide 6. I'm really excited to be here today and even more excited about our future with Gentherm.

For those of you who aren't familiar, Modine Performance Technologies is a leader in mission-critical thermal management technologies with $1.1 billion in revenue. We serve heavy-duty applications, commercial and light vehicles, and through our 80/20 efforts, we've recently increased our focus on the high-growth power generation market. We have blue-chip customer base of OEMs and Tier 1s across all of these end markets. These are customers with whom we've maintained a strong relationship over decades because they greatly value the reliability and innovation that Modine Performance Technologies has consistently delivered to them.

On the right side, you get a view of the mission-critical products in our portfolio. We're an innovator of highly engineered products developed to deliver optimal thermal performance, improve efficiency and ensure reliability in the toughest environments.

As part of this transaction, Gentherm will acquire the Modine brand, and we'll continue to go to market as Modine. The brand has strong recognition in the industries we serve, and our employees will be excited to continue building on its legacy as a part of Gentherm. As I've become familiar with Gentherm, I've grown even more enthusiastic about the opportunities ahead for our team and our future as a combined company.

I'll now hand it back to Bill to go into more detail around what makes this combination so compelling.

Thanks, Jeremy. Turning to Slide 7. While Gentherm and Modine Performance Technologies both focus on thermal management have complementary capability, a key benefit of bringing us together is that it significantly shifts our revenue mix outside of light vehicle while accelerating the growth of Gentherm's core platforms into markets we identified as attractive when we identified our strategy in 2025.

The commercial vehicle and heavy-duty equipment markets are markets we have been working to develop organically. With Modine Performance Technologies, we now have direct access in an established commercial channels that will allow us to cross-sell Gentherm's existing product portfolio into a broad customer base. While these markets have been challenged recently, Modine Performance Technologies maintains a strong competitive position and customer relationships, and the business is well positioned to support the industry-wide turnaround that we expect.

Also, Modine Performance Technologies' presence in the high-growth market of power generation creates a unique opportunity for the combined company. The power generation market is expected to grow rapidly, driven by the need for reliable energy for mission-critical operations, including data centers. In addition, aging and increasingly unstable grid infrastructure is creating demand for reliable backup energy sources. These factors provide tailwinds for growth.

In the light vehicle market, Gentherm has a strong backlog, and we continue to see increasing adoption and take rates for innovative solutions, which gives us confidence in Gentherm's ability to outgrow the industry [ production ]. Looking across these end markets, we expect that the combination of Gentherm and Modine Performance Technologies will outperform growth in several markets through technical leadership, a strong product portfolio and established customer bases.

Now on to Slide 8. Our core capabilities are aligned, as both Gentherm and Modine Performance Technologies are experts in thermal management. Our team spent time in Modine facilities across every region, and I personally visited several manufacturing locations and their R&D test center in Racine, Wisconsin. We both engineer our products using the same physics, advanced simulation and virtual testing.

As demonstrated by the graphics on this page, when designing products, we both build complex models that predict performance outcomes long before a product ever hits the road or the field. The products we bring to market are sophisticated and require precision in both engineering and manufacturing to ensure they meet the rigorous requirements of our customers. While Gentherm has historically been focused on human-centric solutions and Modine has been focused on machinery, there is little difference in the way we approach these thermal and flow management solutions. By bringing together our combined thermal management capabilities, our strong patent portfolios and a deep bench of technical experts, we will be able to innovate product solutions for multiple end markets that will drive profitable growth.

Turning to Slide 9. Bringing our companies together unlocks value across multiple fronts. We have spent a significant amount of time interacting with their team and analyzing combined spending. As a result, we have identified actionable run rate cost synergies of approximately $25 million by the end of 2028. The areas of opportunities that we have identified include efficiencies in direct materials, indirect purchasing, logistics, as well as support costs related to the overall company operating model. In addition to the identified synergies, we continue to evaluate footprint and equipment capacity utilization, and we believe there is additional value to be realized over a longer period. This transaction is really about growth, and we are excited by the tangible and attainable incremental commercial opportunities that this deal creates.

In recent months, our teams have been working together to identify areas of potential revenue synergies with great success. I'd like to share a few examples. We have identified clear opportunities to leverage Modine's long-standing relationships and leading market position to cross-sell Gentherm's climate and comfort solutions. During one of our workshops, the Modine team explained that the agricultural tractors that they supply are fully equipped with enclosed cabins that benefit from climate and comfort solutions. This echoes the conversations we have had with several equipment manufacturers, and we believe their relationships can accelerate adoption of our solutions.

Product integration is another substantial opportunity. Modine's products and the systems they go into require valves, and Gentherm is a leading global valve provider. We have an opportunity to integrate our extensive valve technology into the same systems that require their heat exchangers. And third, this combination opens up new global markets, and we will look to leverage their footprint and capability in markets including India, a target region for Gentherm where demand for our solutions is accelerating.

In closing, there are cost synergies to be provided through scale. We can accelerate growth through customer access and combined innovation capabilities, and we gain access to new regions. Together, we can accomplish our goals faster than either company could achieve alone.

Turning to Slide 10. Since joining Gentherm a year ago, one of the key priorities has been cultivating a culture of operational excellence. We are progressing on our journey through standardizing our operating system and key performance indicators, aligning our inventory and supply chain and transforming our footprint to maximize plant and equipment utilization.

Modine Performance Technologies has a well-established operating system that has delivered a lean company with world-class quality. They utilize 80/20 principles to drive significant financial and operational improvements. This culture, combined with their established operating systems, has resulted in expanded margins in a flat revenue environment. By focusing investments toward high-growth markets, the Modine Performance Technologies team has positioned their business to capture the opportunities for growth in areas like power generation.

These two companies come together at an ideal time. Gentherm can learn from Performance Technologies' well-established operating system and 80/20 philosophy. Together, we can accelerate our objective of operational and commercial excellence to expand margins and create shareholder value.

I will now turn it over to Jon to discuss the financial profile of the combined company.

Thanks, Bill. Turning to Slide 11, where I will take you through the company's financial profile. This transaction will nearly double Gentherm's revenue, meaningfully broaden our end market exposure and preserve our flexibility to allocate capital and drive shareholder returns. The combined pro forma revenue is approximately $2.6 billion with synergy adjusted EBITDA margin of approximately 13%. As we have discussed in the past, we are confident in Gentherm's path to mid-teens margin. And as we look at Performance Technologies, we expect a similar trajectory based on the anticipated growth in higher-margin markets as well as operational improvements.

Gentherm has historically had a strong balance sheet, and we are excited we will be able to maintain this position while transforming the business. With expected leverage of approximately 1 turn and an ability to generate strong cash flow, we expect to have ample access to capital to fund strategic priorities. Overall, this combination gives us a strong financial foundation to deliver sustainable value. We will have increased scale, less reliance on the light vehicle markets and a path to deliver meaningful margin expansion.

Turning to Slide 12, and I'll take you through the key elements of the transaction. Gentherm and Modine Performance Technologies are coming together through a Reverse Morris Trust transaction that is intended to be tax-free to Modine and Modine shareholders. In the transaction, Modine will spin out its Modine Performance Technologies business to Modine shareholders, and at the same time, merge that business with Gentherm. The deal is valued at approximately $1 billion, which represents a multiple of approximately 6.8x based on $147 million pro forma synergy adjusted EBITDA for the trailing 12-month period ended September 2025. This valuation includes adjustments for stand-alone costs as well as identifiable run rate cost synergies of approximately $25 million. These synergies do not include the benefit we expect from the commercial opportunities that Bill discussed earlier. Gentherm shareholders will own approximately 60% of the combined company, with Modine shareholders holding 40%. As part of the transaction, Modine will also receive a $210 million cash distribution.

Upon closing, we will continue to operate under the Gentherm name and will remain listed on NASDAQ. Our headquarters will remain in Novi, Michigan, and we will retain a significant presence at key Modine locations. Importantly, as Jeremy noted earlier, we are acquiring the Modine brand as part of this transaction. Bill will remain our CEO, and I will continue serving as CFO. We expect that the existing Modine Performance Technologies leadership team will continue to run the business as a segment within the broader company. Modine will nominate 2 directors to the Gentherm Board, which will be expanded to 11. We are targeting a transaction close in the fourth quarter of calendar year 2026, subject to Gentherm shareholder approval and other customary closing conditions.

I'll now turn it back to Bill for closing remarks.

Thank you, Jon. Today is a transformational day for the company. We believe these companies are better together. I am confident in our team's ability to execute and deliver, and I am excited about the future of Gentherm.

With that, I will turn the call back to the operator to begin the Q&A session.

[Operator Instructions] Our first question comes from the line of Ryan Sigdahl with Craig-Hallum.

All right. Curious -- so I get all the positive reasons and synergy potential, et cetera. Curious, if there's any cannibalization on the product side? I see some light vehicle overlap, but maybe across end markets, any concern there? Or what have you quantified potentially from a cannibalization standpoint?

Hey Ryan, 0 worry there. The products that we share in the light vehicle market are remarkably different. So 0 cannibalization. What this is really about, what we're excited about, and I know you get it is we've been talking since Q1 of last year that our products scale markets other than light vehicle. We've been trying to establish those channels organically. And with this transaction, we have established channels to really accelerate our push into other markets with our product.

The other one, the power generation is an exciting one because that will really allow us to expand the valves business. And as you've heard me say before, I really love the valve business.

Yes, Ryan, I would just add, I think when we look at the automotive business that they bring, which is about 20%, 25% of the company, we actually view it as a cross-selling opportunity for us, similar to other recent transactions that we've done where we've got broad access to global OEMs. And we view that as an opportunity for us.

Zero is an easy answer to understand. Very good. Data centers, good segue there. Curious, I know Modine has a core data center business doing some cooling, et cetera, et cetera. I'm not going to act like I fully understand exactly everything they do. But curious, what is coming with this transaction from a data center standpoint, what is staying with Modine and kind of how that separation was broken out?

Yes. So I would characterize it this way, just very clearly. So what's coming with Performance Technologies is they're in the power generation space. So they do the thermal management of the large generators that provide the backup power to the data centers. What's staying with Modine Climate Solutions is the stuff that's actually in the data centers, the cooling plates, the cooling systems that they have, the thermal management inside the data centers themselves.

And our next question comes from the line of Matt Koranda with ROTH Capital Partners.

I wanted to hear a little bit more about the breakdown of end market exposure post the combination, what's it going to look like in terms of automotive exposure versus commercial vehicles versus sort of all the other Modine end markets?

Yes. This is Jon, Matt. I'll take this. I think as you look at the business, right, and as you've heard us talk over the last year, we've really been thinking about from a strategic perspective, becoming less than 70% light vehicle. This transaction actually gets us there. And so as you look at the combined light vehicle business, it's about 63% of the combined revenue on a pro forma basis.

If you look at commercial vehicles, in heavy-duty applications and think there, you can think like agriculture and those types of things, that's about 30%. Power generation is -- will be about 6% of the business, but it will be the fastest-growing portion, just given the power reliability needs across the globe. Medical will be -- continue to be a small portion for us, but a place that we want to continue to invest.

Got it. And then I wanted to hear a little bit more about the growth of the end markets, especially at Modine. I guess you referenced some headwinds as of late in the business. Where are they in sort of the demand cycle, I guess, for heavy applications in commercial vehicle, power gen? And are they expected to sort of -- to grow this year?

Yes. I mean, we do expect the business to grow. We've seen continued strong performance or recent performance, even while the top line has been flat to down on margin expansion across. So we're excited about the margin potential of the business. But when you look at the end markets, we would say across the industry as you look at commercial vehicles and heavy-duty that we're getting towards the end of the down cycle and would expect to see a rebound here as we get into 2026, 2027. And so we're excited about that. I'm excited about the competitive position of this business.

Power generation is, call it, a secular growth. We view a long-term growth model that's -- we're suggesting is in the 20-plus percent range for this business. And so as we think about the mix of the portfolio, that will continue to shift over time. But we like the businesses where they fit. We've obviously been trying to get into these businesses organically. We think this accelerates it, and we think the time is right from a market cycle perspective.

Okay. Makes sense. And then maybe I'll just ask one on commercial synergies. You guys mentioned the purpose of the acquisition is really growth-oriented, and you referenced sort of the capability of cross-selling some of your thermal comfort technologies into Modine's customers. Curious, how to think about quantifying that opportunity and how near term that could be? Do you guys want to take a crack at sort of just kind of trying to quantify that for us? Because I know it wasn't broken out in the synergies. I think those are all cost related.

Yes. I don't know that we could quantify it exactly. What we would say is we've identified those markets as attractive, Matt. We think it's -- if I were going to bound it, we think it's more than $100 million, but less than $0.5 billion, if I were going to put a bound on there. So I think that's just the cross-selling is just one.

The other aspect that we're very excited about is the product integration. If you look at the products that Modine Performance Technologies supplies, it's all about fluid and air management, thermal equation. And all of their systems have valves. And we're a large supplier of valves. They make no valves today, that's all outsourced. So we're excited about the product integration there. And then again, the third thing is they have footprint in markets we've been trying to figure out access where we see our demand growing for our climate solutions like India.

Yes. I think I would just add to that, Matt. I mean, Bill talked in the prepared remarks about the amount of time we spent with the team throughout this process and how we continue to be more excited about it as we move on. He talked about a workshop that we had. And I think the level of excitement in that workshop where they were able to define a pipeline of actionable revenue opportunities. That was north of $100 million. Yes, in a very short period of time, just speaks to the power of the opportunity here. I don't -- but we're not going to necessarily commit to that number today. There's a lot more work to be done from a commercial perspective, but we continue to be excited about it as we learn more about this business.

Our next question comes from the line of Luke Junk with Baird.

Bill, maybe hoping to start -- circle back to the cross-selling opportunity. And I guess I'm trying to get a better handle on some of the things that you've workshopped and understanding channels to market at these new customers where you're gaining relationships. Is there enough similarity in terms of who the purchasing folks are and how those organizations are set up in parallel relative to the new entity that we're going to have here? And then you also made reference to some of the things that have happened in the past. And I'd be curious, especially what we should think in terms of comparing or contrasting this opportunity, for instance, with the opportunity that we saw stemming from Alfmeier.

So I think it's an opportunity very similar to Alfmeier. Jon alluded to that before, right? We view this as a cross-selling opportunity. In working with the Modine team and working with Jeremy, they have the right channels to cross-sell the products into the markets we're interested in. Specifically in agriculture and mining equipment, that's a direct OEM model. So they have those channels directly there. On the commercial vehicle, it's more on the fleet side. So we've been working to develop that organically, but very strong channels already established for cross-selling climate and comfort solutions into those markets.

Okay. Then for a follow-up, Bill maybe, or Jon, you could jump in here too as well. We've talked a little this morning about the Modine operating system and some of what's been going on in this business from a top line headwind, but some growth momentum from an earnings standpoint. How should we just think about that dropping into Gentherm strategically given some of the footprint actions that are already in motion, and then sort of as a combined entity, maybe what you envision leveraging as you acquire some of those capabilities and whatnot?

Yes. I would say from the operating system, Luke, you and I have talked about this, right? Gentherm, 30 years old, born out of acquisition. So we've been spending a lot of time standardizing operating models, KPIs, plans for every part, a lot of the things we've talked about. So we're getting there.

Modine is a 100-year-old company. They have a well-established operating system. And they're an 80/20 company. They use the 80/20 philosophy. That's something that the Gentherm team could benefit directly from that philosophy. So we plan for a direct, what I would call, sharing of knowledge read across.

I spent a lot of time in their plants. I think personally, I walked through 6 of their assembly plants. Their plants are run well. Their plants are very connected digitally, which is something that we can learn from because that's a journey on. They have very high overall equipment effectiveness. So they use their equipment well when it's running, which is something we've been focused on developing as well. So we just think that there's a lot of knowledge sharing to be had there from a 100-year-old company versus the journey that we really started last year. Jon, what would you add?

Yes, I would just add, I mean, very lean structure. I think the team has done a really nice job there. Capital intensity is low. It's in the 2.5%, 2% to 3% range. And so I think as we look at this over the long term, we talked about there being the opportunity for more synergies. We'll continue to look at that. But really great asset and well-run company.

For my last question, maybe if you could just touch on the deal structure. Obviously, a lot of equity going to be involved here, but I think you're viewing it through the lens of keeping the balance sheet flexibility into the future. Is that the right way we should think about the structure?

Yes. I mean, we're excited about the structure, doubling the size of the company. We think the multiple roughly in line with where we are today and will be levered about a turn approximately upon closing. And so it gives us a lot of flexibility as we move forward.

Obviously, we'll have a lot to work to do here, but continue to view investing organically in the business as well as other ways to generate returns as a significant opportunity for us as we move forward. So we appreciate the flexibility that the transaction structure got us. And it provides us another platform for growth into other markets that we didn't necessarily have direct access to historically.

Thank you. And ladies and gentlemen, we have reached the end of the question-and-answer session, and this also concludes today's conference call. Thank you for your participation, and have a wonderful day.

Good morning, ladies and gentlemen, and welcome to the Modine Second Quarter Fiscal 2026 Earnings Conference Call. [Operator Instructions]

As a reminder, this conference call is being recorded.

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

Good morning, and welcome to our conference call to discuss Modine's second quarter fiscal 2026 results. I'm joined by Neil Brinker, our President and Chief Executive Officer; and Mick Lucareli, our Executive Vice President and Chief Financial Officer. The slides that we will be using for today's presentation are available on the Investor Relations section of our website, modine.com.

On Slide 3 of that deck is our notice regarding forward-looking statements. This call will contain forward-looking statements as outlined in our earnings release as well as in our company's filings with the Securities and Exchange Commission.

With that, I'll turn the call over to Neil.

Thank you, Kathy, and good morning, everyone. Last quarter, we announced plans to significantly expand our U.S. manufacturing capacity for data center products. We are continuing to invest in our fastest-growing businesses and are actively advancing the strategy. In fact, we are accelerating other planned investments to meet the unprecedented demand for our products.

Our Climate Solutions segment continues to deliver, posting a 24% increase in revenue. This includes contributions from our 3 acquisitions earlier this year: AbsolutAire, L.B. White and Climate by Design International. As we integrate these businesses, we are applying 80-20 principles to drive value by improving margins, increasing capacity utilization and unlocking commercial opportunities to cross-sell into new markets. Bringing these respected brands into the Modine portfolio not only broadens our product offerings, but also bring scale to HVAC Technologies.

Excluding these acquisitions, organic sales increased 15% from prior year, driven primarily by a 42% increase in data center sales.

Over this past quarter, we've made substantial progress on our capacity expansion. I'm pleased to report that we have officially launched chiller production in our Grenada, Mississippi facility. In total, we plan to have 5 chiller lines in Grenada and are currently producing on 2 of these lines. We are working on getting the incremental production lines in place and are on schedule to launch full production by the end of this fiscal year.

We've also made good progress in Franklin, Wisconsin and Jefferson City, Missouri. Franklin is scheduled to launch initial production of data center products this quarter, with volumes ramping through Q4. We will have 4 chiller lines in Jeff City, with the first 2 launching the fourth quarter and the remainder planned for later next fiscal year.

The final site for our expansion has been secured in Grand Prairie, Texas just outside of Dallas. This facility is planned to fully come online early next fiscal year and will have 5 chiller lines. Both the Franklin and the Dallas locations are being designed for flexible manufacturing with the ability to produce multiple products that can be flexed based on demand. Both facilities will be able to produce modular data centers, which we see as a great opportunity.

We've made initial shipments to 1 customer and are currently working through some design modifications. In addition, we are in early stages of discussions with others, including both hyperscaler and neo-cloud customers. We are excited to be able to support our strategic customers with an innovative product that offers rapid deployment and scalability. We are making good progress overall, but current hurdles include the hiring and training of the workforce, which is a heavy lift for the organization.

In total, we've hired 1,200 employees to support data centers so far this year, including temporary and contract workers, and talent we've strategically redeployed from our Performance Technologies segment. This added significant additional cost this quarter, with little incremental revenue, resulting in temporary margin erosion in Climate Solutions. We expect this to continue in Q3 and then improve in Q4 when volumes begin to ramp. We expect a significant jump in revenue between Q3 and Q4 and driven by new capacity coming online.

Outside the U.S., we successfully launched production of data center products at our new Chennai, India facility. This strengthens our ability to serve customers in the APAC region with locally manufactured product. Furthermore, we are planning to expand chiller capacity in the U.K. to support demand for both hyperscaler and colocation customers in Europe. This incremental capacity is anticipated to come online early next fiscal year.

I currently see a path to deliver more than 60% revenue growth in data center this year on our way to achieve over $2 billion in revenues in fiscal 2028. This year marks a period of major investment in our data center businesses, driven by strong market demand. This is hard work for our organization, and we are addressing challenges in making adjustments along the way.

In addition, this represents a major transition for the business, evolving from a low-volume, high-mix manufacturing operation to a high-volume producer. This is not a shift in strategy as we remain committed to serving as a premium, highly customizable provider. However, we will now be able to deliver these specialized products at scale to meet the needs of our largest customers.

This is important as large data centers, especially those specializing in AI applications, require our products to be delivered at a much greater rate than we have historically provided. Fortunately, Modine is highly capable of ramping scale production on highly engineered product designs. At competency, we have honed over many years with our Performance Technologies business.

This expertise is also why we have been successful in leveraging internal resources to support these critical projects. We have the right team in place, and we are hyper focused on execution to deliver these innovative products our customers require. I want to stress again, this is a very heavy lift for the data center team, but I remain confident in our ability to execute, meeting our targets and customer commitments.

Please turn to Page 5. Our end markets in Performance Technologies segment continues to be challenged, but actions we've taken in response to these conditions are having a positive impact. Although revenues this quarter were down 4% from the prior year, adjusted EBITDA was up 3%. The segment adjusted EBITDA margins increased by 90 basis points, primarily due to cost control measures we've taken out over the past few quarters, including actively reallocating resources to the Climate Solutions segment. We are monitoring market conditions closely and we'll continue to make adjustments as necessary.

I'm pleased to announce that the segment is now being led by Jeremy Patten, who joined our team as the President of Performance Technologies segment last month. Jeremy's previous experience with transformational change with an 80/20 mindset makes him uniquely qualified to take on the challenges and opportunities ahead. I'm happy to welcome Jeremy to the team and have confidence that he will continue the momentum created over these past quarters to drive margin improvement as we transform this portfolio.

I'm extremely proud of the hard work being done in both segments to drive towards our vision of evolving our portfolio in pursuit of highly engineered mission-critical thermal solutions. This is creating a great deal of organizational change and a heightened level of complexity. This includes integrating 3 acquisitions, expanding capacity across multiple locations around the globe to support data center growth and exploring strategic divestiture opportunities in Performance Technologies.

We are moving people into new roles in support of these plans and are incurring temporary cost increases to support future growth. Although we will encounter obstacles along the way, this team is up for the challenge, giving me further confidence in our ability to reach our long-term targets.

With that, I'll turn the call over to Mick.

Thanks, Neil, and good morning, everyone. Please turn to Slide 6 to begin reviewing the Q2 segment results.

Climate Solutions delivered another quarter of strong revenue growth with a 24% increase in sales. Driving this growth was data centers, which grew $67 million or 42%. HVAC Technologies increased $17 million or 25%, driven by inorganic sales from our recent acquisitions. This was partially offset by lower indoor air quality sales and lighter preseason stocking orders for heating products. Heat Transfer Solutions grew 2% or $3 million due to higher volume with commercial refrigeration and coatings customers.

Climate Solutions' second quarter profit margins were lower than normal and adjusted EBITDA declined 4%. I want to review a few temporary factors that contributed to the decline this quarter.

The largest impact was due to significant investments relating to the data center capacity expansion, including direct and indirect labor and overhead expenses needed to build out new production lines and facilities. As Neil previously covered, we're expanding production lines at several existing locations while also preparing to launch a few new facilities. These actions are required to meet the growing customer demand for Modine products and more than double our revenue. While we expect to see sequential revenue growth in Q3, we won't begin to realize significant volumes in the new production facilities until our Q4.

We also had a lower margin in HVAC Technologies, which was mostly due to a negative mix impact. This was driven by lower preseason heating sales, combined with the early integration steps for the 3 most recent acquisitions. Heating represents some of our highest margin products and the acquisitions are very early in the integration 80-20 phases. Within this product group, we anticipate a sequential margin improvement as we enter the heating season and begin to implement 80/20 across the acquisitions.

And finally, in HTS, the prior year included several million dollars of commercial pricing settlements from heat pump customers.

As we implement a major step-function change in our data center production capabilities, we anticipated that there would be significant unabsorbed costs as we launch the expansion plans. Looking to the second half of the year, we currently expect sequential margin improvement in Q3, but the margin will remain below normal operating levels until Q4. Then in Q4, we should begin to see more significant volumes from our new production lines, which will allow us to more fully absorb the fixed incremental costs and exit the year at more normalized profit margins.

Before moving on to Performance Technologies, I want to highlight that the demand for Modine data center solutions continues to grow, and we're increasing our revenue outlook for the current fiscal year. In order to support this growth and achieve our $2 billion goal, we need to make significant capacity investments while still delivering on our earnings targets. And this will set the stage for further revenue growth and margin improvement, with the ability to move well above historical profit margins.

Please turn to Slide 7. Performance Technologies revenue declined 4% from the prior year. Heavy-Duty Equipment revenue was relatively flat, with stronger sales to construction and mining customers, offset by lower GenSet sales. On-Highway Applications decreased 3% or $7 million, driven by lower commercial vehicle demand, including specialty vehicle and bus customers.

Despite the tough market conditions, adjusted EBITDA improved 3% from the prior year, and the adjusted EBITDA margin increased by 90 basis points to 14.7%. The margin increase was mostly driven by significant cost reductions and improved operating efficiencies.

Tariffs remain a significant challenge for all market participants, but our team is working hard to recover these increases through surcharges along with our normal pass-through mechanisms. In addition, we're reorganizing this business and reducing costs wherever possible, which resulted in a nearly $7 million reduction in SG&A expenses this quarter.

The team remains focused on margin improvement despite ongoing challenges with the end market demand. As we look ahead, Q3 typically represents the lowest volume quarter due to seasonal patterns and holiday shutdowns by our OE customers. As a result, we expect that the Q3 margin will be down sequentially from Q2, but should be above the prior year, then stepping back up sequentially in Q4 as we've done in previous years. Until the markets turn around, we'll stay focused on costs and operating efficiencies, which will allow us to drive higher operating leverage and margins when volumes improve.

Now let's review total company results. Please turn to Slide 8. Second quarter sales increased 12%, driven by the revenue growth in Climate Solutions. The gross margin declined 290 basis points to 22.3%, driven primarily by the factors I covered on the Climate Solutions slide. SG&A expenses declined in the quarter, driven by Performance Technologies cost savings initiatives, partially offset by incremental SG&A and the acquisitions in Climate Solutions.

The net result was a 4% improvement in adjusted EBITDA from the prior year, with a margin of 14%. With regards to EPS, the adjusted earnings per share was $1.06 or 9% higher than the prior year.

I want to again summarize the key items that impacted the Q2 margin and how we currently see our consolidated results for the balance of the year. For Q2 consolidated results, the adjusted EBITDA margin benefited from the year-over-year improvement in Performance Technologies. This was offset by the lower margin in Climate Solutions, as I reviewed on that segment slide.

As we look to Q3, we anticipate the adjusted EBITDA margin will remain below normal levels in this quarter. Then based on the sequential improvements by both segments in Q4, we expect a significant increase in the sequential margin, which should be more in line with the prior year. Based on this second half outlook, we would exit the fiscal year at the highest quarterly margin rate, and we would fully expect additional margin expansion in the new fiscal year, consistent with our fiscal '27 goals.

Now moving on to cash flow metrics. Please turn to Slide 9. Free cash flow was a negative $31 million in the second quarter. We anticipated lower cash flow primarily due to higher inventory builds and CapEx in Climate Solutions. We continue building significant data center inventory to support customer demand and delivery schedules in the second half of the year. And second quarter free cash flow also included $9 million of cash payments primarily related to restructuring and acquisition-related costs.

Net debt of $498 million was $219 million higher than the prior fiscal year-end, directly related to the acquisitions of AbsolutAire, L.B. White and Climate by Design. With the investments in acquisitions and capital during the first half of the year and the associated earnings, our balance sheet remains quite strong with a leverage ratio of 1.2. Based on our earnings and cash flow outlook, we expect that the leverage ratio will decline further by fiscal year-end.

Now let's turn to Slide 10 for our fiscal 2026 outlook. As we cross the midpoint of our fiscal year, we're raising our revenue outlook and reaffirming our earnings outlook. For fiscal '26, we now expect total company sales to grow in the range of 15% to 20%. For Climate Solutions, we're raising our outlook for the full year sales to grow 35% to 40%, with data center sales now expected to grow in excess of 60% this year. With regards to data center sales growth, we anticipate sequential increases in Q3 and in Q4, with the second half year-over-year sales growth exceeding 90%.

During the next quarter, the team will be further preparing numerous production lines both in existing and new facilities to support the strong orders. In Q4, we anticipate our first full quarter of significant production volume from these new production lines.

For Performance Technologies, we're raising our sales outlook with revenue now anticipated to be flat to down 7%, improving from the prior range of down 2% to 12%. We expect that the end markets will remain depressed with the ongoing trade conflicts and cautious market sentiment having a negative impact on market recoveries. However, last quarter I explained that revenue was trending more favorable due to foreign exchange rates and the large amount of material cost recoveries. While the underlying market volumes have not recovered, we expect higher revenue as these trends have continued, and we're adjusting the outlook accordingly. I want to point out that while the large cost recoveries helped to protect our absolute level of earnings, they don't have a positive impact on our profit margins.

With regards to our full year earnings, we're balancing the higher revenue outlook with margins running temporarily below normal levels. Based on this, we're holding our fiscal '26 adjusted EBITDA outlook to be in the range of $440 million to $470 million.

For cash flow, we anticipate generating free cash flow in the second half of the year, but lower as a percentage of sales compared to the prior year. For the full year, we expect free cash flow to be in the range of 2.5% to 3% of sales. This is directly related to the significant investment in data center capacity that we're making this year, along with higher working capital to support this rapidly growing business. This also includes cash required to fully fund our U.S. pension plan prior to our planned annuitization in the third quarter. With the conclusion of this large project, we'll be able to remove a very large liability from the balance sheet along with the time and cost to manage it. And consistent with our previous outlook, we're not including any cash proceeds from potential divestitures this year. Looking ahead to next year, we anticipate that our free cash flow margin will return to previous levels and be in line with our fiscal '27 targets.

To wrap up, we have a lot of moving pieces this quarter, including significant cost reductions in Performance Technologies combined with large investments in Climate Solutions for the 3 acquisitions and the data center expansion. This represents a lot of change and the team will continue to execute as we've done throughout our transformation.

These activities are critical elements of our strategic transformation and capital allocation strategy. We remain confident that these actions are setting the stage for long-term sustainable growth for Modine shareholders.

With that, Neil and I will take your questions.

[Operator Instructions] And our first question will come from Matt Summerville with D.A. Davidson.

Can you maybe first, on the Climate side of business, can you maybe first parse out year-over-year margin contraction? Sort of what's data center driven, what was mix driven, and what those headwinds were, maybe providing a bridge in basis points? And then sort of more of a definitive sort of layout in terms of how you get back to "normal" in fiscal fourth quarter, which I would assume implies 21%-ish at the segment level.

And then, Mick, in your prepared remarks, you also added color on a comment that Climate has the potential going forward to punch well above historical profitability. So maybe if you could frame that, and then I have a follow-up.

Yes. Neil, do you want me to take it first? Yes. Matt, thanks for the question. So if we start first with your Q2 question, as we break down the margin, if we want to talk about basis points, the biggest portion of the margin in the quarter was on the data center expansion side, about 225 to 250 basis points on the data center side. And that was about $10 million to $12 million of higher cost, really split between labor and overhead, a little bit of material in there, and Neil can talk a little bit more about that.

And then on the HTS side, last year, we had some really large heat pump settlements, if anyone would recall, after the market downturn. That was about 125 basis points. And then on the HVAC Technologies and kind of other, it was about 100 basis points. HVAC Technologies was mostly a mix issue and some start-up integration costs on the acquisitions.

So that's the breakdown of Q2. Neil and I can give you a walk to -- as we get to Q3 and Q4. Before I turn it back to Neil, the thing I would -- you asked at the end about beyond. So when we give you the walk, we are building capacity to not only get to our goal of the $2 billion, but we'll have capacity to produce more than that. That's not running every plant 3 shifts 7 days a week. Obviously, once you get to normal production levels and you move -- start moving towards full capacity, the incremental margins are quite high. So that's why I said, once we get to normalized levels -- production levels, we'll get to more normal EBITDA margins for CS, and then beyond, very high incremental or variable contribution rates.

Neil, maybe I'll turn it back to you on how we're looking at Q3 and Q4.

Yes. The piece that I'll add to that is that we expected some level of launch costs. I mean that's to be expected; we added over 1,200 people into the organization over the last few months. Those are a little -- turned out to be a little bit more -- a little higher than what we anticipated, but we have to understand the root cause on what that is, and we do understand that. Essentially, we had such high demand, and expectations for our customers that [ pulled end ] dates and ship product early, that we had to divide our resources, and we went with multiple launches at once.

So we recognize the impact of that. We recognize the cost of that. And we have now reverted back to the standard launch process, which is more controlled. We have the right amount of specialists on the job in terms of how we do it. We're leveraging 80/20 for scheduling and lead times. And we've got better alignment around our customer expectations and schedules. So we try to do something a little bit different to meet the demand. We try to do something a little bit different to launch faster to help our -- support our customers' schedules, and it was costly to do that.

Appreciate that color. If I can stay in -- yes.

Just quick, you asked about the ramp too. The step-up, we talked about some improvement in Q3 and then you'd asked -- I want to make sure we addressed, you asked about getting back to a 20-plus percent type level in Q4. For us, implied guidance, about 90% in the second half. We do see sequential growth, so the growth rate continuing to improve.

And for us to get to our Q3 targets, we probably need $40 million to $50 million of incremental capacity coming online. And that's if we have 2-plus chiller lines, we're good there. To get to Q4, another $75 million to $100 million of volume revenue capacity, and that would be roughly, minimum, another 5 chiller lines. And we can cover that with you guys online or off-line. A lot of you know those plans were on track.

And that doesn't include sales of any other products, air handlers or on the modular side. But if you're thinking about that ramp-up, it's really bringing on, fully producing at least 2 lines in and then another 5 lines, talking chillers only, in Q4.

Super helpful, appreciate all that detail. I want to stay inside the data center business for my follow-up. 90 days ago, you mentioned establishing a data center sort of goal approaching $2 billion in fiscal '28. Now you're talking about a number over $2 billion just 90 days later. Did something change with order activity, funnel, customer acquisition? And ultimately, as you get to the tail end of this capacitization journey, both in North America and now in the U.K., where will your capacity actually be? And should we be thinking about maybe something a bit materially higher than $2 billion in '28 based on what I'm describing there?

Yes. Thanks, Matt. What's changed in the last 90 days is definitely the order and the funnel rates. And we're seeing more demand. We're seeing our relationships with our customers continue to evolve in a great way. And the aperture in terms of the scheduling and the outlook has widened to where we can see more. And it gives us more confidence to continue to deploy CapEx. So that's what has changed.

We've seen it with not only expanding our product lines and what we have today, but also new products that we're going to market with and launching. One example of those would be our modular data centers. So the market looks pretty promising and we feel that we have the right technology to support it and we feel we have the right time lines to meet the customer demands. And it's just confidence, giving us more confidence in terms of where we're at.

And our next question comes from David Tarantino with KeyBanc Capital Markets.

So I just want to follow up on the margin commentary. Just what gives you the confidence that margins to normalize going into 4Q beyond just the accelerated capacity just given investments should continue? And I know it's further out, but how should we think about margins as it relates to the longer-term targets that you laid out as you accelerate the rate of production here? Is the 4Q implied run rate a sustainable way to think about kind of the longer-term margins?

Yes. So thank you, David. A few things, right? We're doing a lot of -- there's a lot of new. New products, new process, new plant, new people. And that's not efficient most of the time in these launches, and we recognize that. But every time we do this for every product that we ship, we learn from it. And when we learn from it, that's going to make us better.

So as we work through the Grenada launch, and we worked through our Rockbridge launch in data centers, we learned a lot that we know that we can apply those lessons learned as we continue to roll out more chiller lines, for example, or more modular lines in different facilities, in different factories.

So it's the learning. It's the ability to get more efficient. It's our expertise in terms of design, design for manufacturability, design for quality. And those things that we're getting better at as we launch gives us the confidence that it will improve the margins as we move out later in the calendar year.

Yes. David, the only thing I would add is that margin improvement is twofold, building on what Neil said. So if you think about the challenges of starting a new facility or a new line. So one, I'd say our mature data center regions and plants are operating at margins at or above the segment. And we knew as we hold more volume into existing stable facilities, we could get the margin higher.

Then as we launch a new greenfield, there's fixed cost absorption issues just to get to a scale to cover the incremental fixed costs. And then what Neil also covered in some of these cases where we've had extra labor or training, you have inefficiencies.

So the message in how the ramp will work is we are -- as the new lines come on, we are now bringing on more volume to leverage our fixed costs. And as we get better at it, the negative on a normal conversion is inefficiency, we're also shipping away and improving our processes. So it's a volume and a lean initiative, if you want to think about it that way.

Okay. Great. And I want to follow up on Matt's second question just given the acceleration of investments here. How are we thinking about this as it relates to the shape of the growth longer term to get to the targeted above $2 billion in sales by fiscal 2028? I just want to want to clarify that that is kind of a slight raise versus prior expectations. And if so, where -- what is the new target in terms of sales capacity in terms of the investments you're making?

Yes. We -- I mean we haven't come up with a specific number. We're always going to give ranges. But again, the order profiles, the new product launches, the new product development that we're working on, new regions that we see that are timed perfectly for our execution in terms of how we launch these facilities and factories and deploy the CapEx. So we just have a lot of visibility, and there's a lot of interest and there's a lot of desire for our products because of the technologies.

We've put ourselves in a really good position over the last few years where we've acquired the right technologies, we've developed the right technologies, we've built the relationships with all the major hypers, neo-cloud providers, colocation providers. They're generally growing at pretty good rates. So we have -- our funnel continues to grow, which gives us the further confidence to deploy capital and to hire people to launch products.

And moving next to Chris Moore with CJS Securities.

Let's stay with data centers. So when you've talked about data centers in the past in terms of Modine's positioning, expected growth, one of the consistent themes has been you're focused on providing a relatively small subset of the market exceptional products and services. So when you think about just, for example, $2 billion data center target in fiscal '28, I'm just trying to get a sense as to how you view the total addressable market in calendar '27. I mean is $2 billion, is that 10% of the available HVAC market? Is it a bigger percentage of that? Just trying to understand kind of where that puts Modine in the overall kind of structure of the HVAC market on the data center side.

Sure. Thank you for that. Around $2 billion -- and remember, the TAM is going to continue to grow, as we've seen the amount of CapEx that's being deployed in the data center market across the board. So your TAM is expanding, and are we expanding at a similar rate. We're growing above the market. We're growing faster than the market. So we're gaining share. So we were single digit, low single digit when we started this journey. Last year, we got into double digit, low double digits. And if we get into the $2 billion range with some assumptions that we've made on market size and what that available market is that we can address, it probably puts us anywhere between 15% and 20% at that point, Chris.

Very helpful. And maybe just my follow-up, recognizing you don't necessarily look at your data center solutions discretely, air cooled versus liquid cooled. When you talk again about the $2 billion target, how do you view the relative contribution of air versus liquid at that level?

Well, you need both for -- you need both in this space today. It requires both. They complement one another. But where we're seeing a lot of the growth and where we're seeing a lot of the demand with our closest customers is with the deployment of AI. So it's going to require a great chiller product, which we have. It's going to require the air cooling products that we have to help augment it, and CDUs as well. So we're seeing the growth, and a lot of the growth is coming from AI expansion.

On the margin, there's a relatively consistent margin profile across the product suite. Obviously, service is at the highest end. And we get a lot of questions on that. That will grow as our installed base grows over time. But the contribution margin is relatively consistent across our product suite.

Our next question comes from Noah Kaye with Oppenheimer.

I mean so much focus today on this margins and the incrementals, certainly for good reasons. I may want to ask a different way. Is the right way to think about what's going on here that you've largely front-loaded a lot of the investments associated with the multiyear capacity ramp, and that perhaps starting with 4Q, we started to see more normal incrementals in CS and specifically in data center? If that's the case, even though you're opening more plants over the coming years, again, what gives you confidence that we can see that kind of level of normal incrementals based off of the specific products that you're making and the configuration of the lines that you're setting up?

You want me to take that? Yes. Noah, it's Mick. Well, probably the best example we can give if we look at the last year, where 1.5 years ago or before that, we moved and we launched production of chillers in North America for the first time, and last year on the data center side, we were able to generate margins that were in line with the rest of the segment or the rest of our data center business. And if I recall, we had a quarter or 2 of really high margin on leveraging that volume and we had nice improvement last year.

It really is about, and Neil is talking about this, it's a rinse and repeat of products -- existing products that we know how to make, and doing that in a disciplined manner. Challenges can become when you're making a new product in a new location. But we're basically -- it's a copy-paste of what we've been doing in the U.K. and North America.

And so it's a bigger -- again, the bigger issue, like you said, for the first 6 months, it's literally getting the building, the equipment, and then bringing in everyone in training and then bringing in all the materials. And then there's still a practice and an improvement as you launch. That to me is the biggest hurdle. And then once that's done, then we've been doing this for 10 years, we know what the profit margins will be.

Yes. So then to put a finer point on it, what should incrementals look like as we get into '27?

Early to say in '27, but what I would say on incrementals is, typically at a gross profit line, we'd be looking at a 30% type incremental gross profit to each dollar of sales when we're running at existing facilities and we're adding more volume.

Very helpful. And then just ask 1 question on PT. Bringing Jeremy and getting some traction on margin improvement. Maybe just talk a little bit about current focus areas for the business and any update on the divestiture process.

Yes. Certainly, it's a great resource to have having Jeremy on board, and he's going to continue to drive the same playbook that we've been driving. Continue stabilizing the business, making sure that we are running the businesses efficiently as possible, stay close to our customers, continue to build out the order funnel -- the order and the funnel. So when we start to see some market recovery, we're put in a really good position that we can execute on platforms and programs that we've won through our innovation and technology.

So it's the same playbook, and he's going to be able to accelerate that and bring some more structure around it.

Any update on the divestitures, or we save that for another call?

Business as usual there. I mean we're always looking strategically in terms of what our best options are. I think we've got a pretty good history and a trend that -- through product line strategies, that we can execute on those year-over-year. You've seen that over the last few years, and I'm pleased with where we're at in terms of the progress of that.

We'll go next to Brian Drab with William Blair.

Just given that we just touched on the Performance Technologies there, what are you seeing, Neil, in those end markets, off-road, on-road, demand for your components in those end markets over the next 12 months?

Yes. We've been in this cycle for quite some time. I mean it's been 1.5 years. These cycles typically can last anywhere from 1.5 years to 2 years. And really following the trends and the announcements of the large OEMs to position ourselves for when there is a rebound in the market. So we're tracking that closely with our customers, the largest OEMs. We're looking at their inventory levels. We understand what programs we're on and where we can where we can facilitate and turn on manufacturing faster. But it's -- we're reading the end markets through OEMs at this point.

I mean -- and my sense there is that it's stabilizing. I mean, would you agree with that or do you think there's another...

Yes. I think there's some recent reports as of today that suggest there could be some stabilization and that the inventory levels are right. Those are early indicators, I'd like to see a trend first. But yes, that's fair.

Okay. There's no surprise, I'm going to ask a question on data centers. So there's some massive projects, obviously happening all around the world. And I'm just wondering, specifically in the U.S., some of these massive projects, I assume, you'll be part of? Is there -- are you seeing any -- in some different regions where you don't have manufacturing capacity, maybe close enough to the site or service capability close enough to the site that have come up in the last several months where you're saying, okay, we're going to be -- we won this business, we're probably going to have to set up some new capabilities closer to one of these massive sites, kind of like I think you're doing in Texas?

Yes, it's a fair question. And yes, you're correct. There's opportunity to expand globally. Priority one, priority one is the United States. I mean that is where our biggest customers are, that is the biggest market that's half the global market. We've got to make sure that we're executing and we're delivering on the products that are desired in this industry today, which we provide, that improve total cost of ownership, improve power use effectiveness and improve water use effectiveness. We need to do that in the U.S., we need to do that well, and that's what we're working on.

We've also launched in India recently. So we did our first pilot build there. And that new India facility will help us with our customers as they grow, and not only in India but in Southeast Asia as well. So that's another area that we have a disparate team that's focused on that, that is going to launch and follow our customers per their request.

And then we're also seeing demand in Europe as well. We have our facilities there. We can support Europe. We're adding another chiller line there. We added a facility there last year, another 400,000 square foot facility to help expand and grow in Europe.

And then lastly, we're seeing large opportunities, and we're communicating with potential customers with large -- in large region, particularly in the Middle East. So we have won some orders there. We've been able to service those orders out of our Spanish -- out of our Spain facility. And at some point in time, would we make some investments there? Potentially. But with the current capacity that we have, we can serve the Middle East through India as well as Spain, and we're pretty comfortable with that.

But definitely, we're global. Definitely, we see the reach. We see expansion. Probably the biggest programs and projects outside the United States and Europe, we're seeing in the Middle East.

Okay. And then just one more on that topic. Inside the U.S., when you've won this opportunity in Texas, it came -- my impression was that it came kind of suddenly and was just this incredible opportunity that presented itself. Have you had any other situations like that? Or maybe as a result of that one where there's -- you've had another giant project come your way over the last -- I guess, since we talked to you last on the 1Q call?

Yes. Yes. I mean we -- for sure. And we're seeing these things and it's -- we're on earlier stages. We're in earlier stages, and we have more ability to have influence as well.

[Operator Instructions] And we'll go next to Jeff Van Sinderen with B. Riley Securities.

Just since we're on the topic, in the data center area, is there any more color you can provide on maybe how customer concentration is evolving? You mentioned some other customers, you might pick up. I think at one point, you spoke to 1 -- there was 1 hyperscaler that you maybe didn't have yet as a customer. Has that converted to a customer? Are there still major new customers spending that could further increase demand? And then also just curious on the modular product demand, how that's progressing.

Yes. Thanks for that question. We have great relationships with the hyperscalers, and we're building relationships with -- we're building further along with some of our new hyperscalers. We're advancing our products, we're advancing our discussions that gives us confidence that we can grow those.

So if we think about the 5 major hypers today, 2 of them are the majority of what we do today. So there's a lot of expanding -- an expansion that can happen now that we have the networks inside the other 3 and now that we have the technical specs and capabilities that we've been able to prove and meet with them. So there's a lot of expansion just within the hypers today.

And then you can expand outside of that with the neo-cloud providers. So I think we've been very successful with 1 neo-cloud provider that gives us the ability to -- it's proven our capabilities that it drove -- driven genuine interest with the others. And then geographically, we talked about some other areas that there are going to be some large players where we can expand.

So certainly, there's the ability to do that. And the only reason why we have that ability is because we have the products and now we have the relationships with the biggest -- with some of the biggest data center providers in the world.

Okay. Great. And then I think you mentioned in some of your earlier comments about having a wider aperture and generally improving visibility for the data center product demand. How far out can you see in the data center business at this point? And I know sometimes maybe customers pull sooner than you think, I think you spoke to that a little bit. What does demand for the data center solutions look like if you go out a year or 2 years or as far as you can see?

Well, you're right. So some of these things are pretty urgent, sudden and they can be -- we want to do the best we can to please our customers, especially our largest ones. So those are things that we have a pretty quick reaction and we're very quick to react in terms of being able to produce and get that product up. Albeit inefficiently, we can at least drive the revenue growth and satisfy the customers' demand.

But when that's not the case and you have -- it's more strategic and you're working with customers that are thinking about where they're going to advance and where they want to move and deploy capital, we can see anywhere from 3 to 5 years out. And I would say, again, with the majority of our largest customers, we have that visibility. And that's really helpful in terms of allowing us to make sure that we're strategically deploying capital in the right places and that we're adding the facilities and factories in the right regions.

I mean one example of that is what we did in India, right? I mean that was in place -- we've talked about that a year ago, and we -- the major driver to move and have facilities and capacity in India was because our customers asked for it. They specifically said, "Hey, we're going to be here in a couple of years and we need your help and support. Are you guys willing to invest in that region?" So that's a good example of the outcome of having these conversations years in advance so that we can have the facility up in time.

Right. So in other words, you're not going in some place with the new facility where there might not be demand. You're really -- you're building to demand?

Correct. Yes. We're building to demand. And demand is high. There's great demand for our products. There's -- the technology and the solutions are a premium in the marketplace. And we see it. And that's why we're deploying the amount of CapEx that we are.

Okay. And then if I could just squeeze in 1 more. Just on the CDU part of your business. I guess, how do you see the liquid cooling business evolving? Maybe does that become a concentration business for you? How much of the business do you think liquid cooling could comprise, I don't know, a couple of years out?

Yes, that specific direct-to-chip liquid cooling, all of our products can apply in the liquid cooling space. You need our products for that. The air cooling solutions will apply in the liquid cooling space if you get direct-to-chip, CDUs are certainly beneficial and helpful.

I continue to see that market evolve. I think there's been some new technologies in that space. I think there's some interesting areas that we've helped our customers in terms of providing different ways of doing that. And you can see some of those announcements out there. So we'll have a product and there will be customers that need it, but not everybody, in order to do liquid cooling. And it's just -- it's one more product in an ever-evolving suite of products that we have. And we'll always try to do it in a way to differentiate, so it's not a me-too product. So we'll do a unique, custom, bespoke CDU for our customers, tied to our firmware and software. So it does things that others can't do, and it's differentiated. But again, it's just one1 more product in a series of products that we have that continue to evolve.

And we have a follow-up question from David Tarantino with KeyBanc Capital Markets.

Could you just give us some color on the range of outcomes you embedded within the ramp implied in the second half? Just kind of what's inside and outside of your control in terms of hitting both the sales and margin targets this year?

Yes. We've really tried to take it, as we always do, David, down the middle. We've got, as Neil said, one of the challenges we're trying to balance is the demand has increased. Neil has said this before multiple times. But the more we can make, the more we can sell. So we're -- we've aligned to internal targets that we're stretching to get to from manufacturing. And we've pulled those back and both with customers, so we don't disappoint them, and with guidance, where we've tried to kind of strike down the middle.

On the other side, you always have risks that you have a hiccup with a line or some more inefficiencies. But I would say as we look at it now, we try to go right down the middle.

In addition, we talked a lot about the chiller ramp. The other areas where we're getting equal-right opportunities for more [ cracks crossed ] on the air side. And certainly, a lot of customers are interested on the modular side, even though those are early days. And those are things we've tried to balance and keep to balance out the chiller launch risk as well.

Yes. Great. And then maybe one more, if I may. Just on HVAC Technologies and the weakness there. Could you break out kind of the underlying trends between the core business and the recent deals and how we should expect this to progress through the balance of the year on both the top and margin lines?

Yes. And generally, the acquisitions are on target. They're doing what we would expect them to do. The indoor air quality business is performing well. It's in line with what we expect at market rates. And what we're entering now is what we call our heat season. This is the next couple of quarters for the heat business is going to be big for us. So that's the traditional Modine heaters as well as the L.B. White acquisition. This is the time of year where we start to see our customers and distributors really start to draw on our inventory levels.

Yes. Just a quick couple of numbers on that to help you out. In -- as we look at the total segment for CS in there with the acquisitions, we would assume HVAC Technologies would have growth -- total growth well over 40%, 45%. And organically, that would be mid- to high single-digit organic, with the balance being from the acquisition.

And that does conclude our question-and-answer session. I would now like to turn the conference back to Kathy Powers.

Thank you, and thanks to everybody for joining us this morning. The replay will be available through our website in about 2 hours. Thanks.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.