On Wednesday, Modine Manufacturing (NYSE:MOD) discussed fourth-quarter financial results during its earnings call. The full transcript is provided below.
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Summary
Altria Group Inc reported strong financial performance with record-breaking revenue and adjusted EBITDA for the fourth consecutive year.
The company advanced its strategic transformation by focusing on higher-margin and higher-growth businesses, including strategic acquisitions that added $119 million in incremental revenue.
A significant long-term capacity agreement was signed with a key data center customer, ensuring $4 billion in product supply from 2027 to 2029.
The Climate Solutions segment saw a 43% increase in revenues, with data centers contributing significantly to growth.
Management expressed confidence in managing supply chain challenges and projected continued strong market demand and growth opportunities.
Full Transcript
OPERATOR
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 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 modeen.com on slide three 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 culminating in 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 three strategic Absolute Air, LB White and Climate by Design which collectively added 119 million in incremental revenue this 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 US we are more than six 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 US will provide critical capacity close to our North American customers, allowing us to further advance our market positions in this hyper growth market. In January we announced that we will further accelerate our transformation by spinning off our performance technology 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 capacity in North America increased fivefold as compared to the prior year. This was despite production delays where we lost 20 ships 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 cooling distribution units (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 co developing 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 density 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 our dynamic cooling requirements over multi year 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 H Vac technologies. Revenues increased 51% from the prior year driven by recent acquisitions. Our H Vac 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 H Vac 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 was 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 H Vac markets. Similarly, our heating businesses are also expected to have a good year led by agricultural heating and markets served by LB 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 Technology segment is making excellent progress on preparing for the planned spinoff 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 standalone operating business to Gentherm at close. We have completed several major milestones and have others ahead of us, including Gentherm’s S4 submission to the SEC and its subsequent shareholder approval, as well as a receipt of our IRS ruling 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. Costs While our vehicular 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 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 Technology segment under the leadership of Jeremy Patton will continue to be reported as a segment until the expected spinoff and merger which ends the term closes later this year. Our Climate Solutions segment has been split into two segments beginning in fiscal 2027 data centers led by Art Laszlo and commercial H vac 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 five years. We wish Eric a long, happy and well deserved retirement. With that, I’ll turn the call over to Mick.
Mick Lucarelli (Executive Vice President and Chief Financial Officer)
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 technology 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 H Vac and data center customers.
Mick Lucarelli (Executive Vice President and Chief Financial Officer)
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 three 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.
Mick Lucarelli (Executive Vice President and Chief Financial Officer)
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, H Vac 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.
Mick Lucarelli (Executive Vice President and Chief Financial Officer)
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.
Mick Lucarelli (Executive Vice President and Chief Financial Officer)
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 two Data Centers and Commercial H Vac. 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 foreign exchange (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.
Mick Lucarelli (Executive Vice President and Chief Financial Officer)
As a reminder, there is typically a three to six 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 8020 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.
Mick Lucarelli (Executive Vice President and Chief Financial Officer)
The lower gross margin was due to the combination of factors that I covered with Climate Solutions and Performance Technologies, SGA expenses increased, but at a much lower rate than overall revenue growth. We increased SGA spending in Climate Solutions partially offset that with Performance Technologies cost savings initiatives. As a result, SGA as a percentage of sales fell by 190 basis points to 10.7%. I’d also like to note that the reported SGA included 12.5 million of disposition-related costs related to the pending spinoff of Performance Technologies.
Mick Lucarelli (Executive Vice President and Chief Financial Officer)
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.
Mick Lucarelli (Executive Vice President and Chief Financial Officer)
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.
Mick Lucarelli (Executive Vice President and Chief Financial Officer)
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 three 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 0.8 and based on our earnings and cash flow outlook, we expect it will decline further in fiscal 27.
Mick Lucarelli (Executive Vice President and Chief Financial Officer)
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 in the global economy, especially around input costs, tariffs and the overall supply chain.
Mick Lucarelli (Executive Vice President and Chief Financial Officer)
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 reflect 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 multi year 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.
Mick Lucarelli (Executive Vice President and Chief Financial Officer)
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 regards to our full year earnings, we expect fiscal 27 adjusted EBITDA to be in the range of 650 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 three 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 and 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 in our Material cost recovery plan. 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 three 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 8020 as a guide. The recent announcements related to the LTA and pending spinoff 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.
Matt Somerville (Equity Analyst at D.A. Davidson)
davidson. Your line is now live.
Mick Lucarelli (Executive Vice President and Chief Financial Officer)
Thanks Morning Nick. 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 remain-co entity, what would your profitability expectation be for the PT business? It’s been fact into your guide is again we think about how to best build and for others to best build, you know a climate only remain-co sort of model Looking ahead.
Matt Somerville (Equity Analyst at D.A. Davidson)
Yeah hey Matt, I think it’s going to be good news is relatively clean and your ability to estimate it. Until we do the 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’d be up maybe 25 to 100 basis points. So that will give you a good idea of impact of 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 you know, remaining sga. So for the most part I think you’ll have the pieces to try to estimate modine without pt.
Mick Lucarelli (Executive Vice President and Chief Financial Officer)
Thank you, 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 you know the multi year Compound Annual Growth Rate (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 to profitability and if so maybe talk about that. Thank you guys. Yeah, I’ll go first. The we’re not we don’t see a reason to change our longer term outlook and we’ll do, we’ll do this year later this year we’ll do probably we’ll go out another year of more formal guidance but in shorten that raising this year up to 60 to 80 I don’t think that changes our outlook for the next year being 50 to 70 or 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’d still hold with the fiscal 28 70% up and before ANIL 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.
Neil Brinker (President and Chief Executive Officer)
Yeah, 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 yeah, there could be potential opportunities for smaller versions of that. Yes.
Matt Somerville (Equity Analyst at D.A. Davidson)
Thanks guys, I’ll get back with you.
OPERATOR
Our next question is from Noah K with Oppenheimer. Your line is now live. Just a follow up and a Congratulations, by the way, on inking 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 of 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
Noah K (Equity Analyst at Oppenheimer)
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? Hey, Noah, this is Neil. I’ll take the first part of that question. It’s in the capacity. 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.
Mick Lucarelli (Executive Vice President and Chief Financial Officer)
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.
Noah K (Equity Analyst at Oppenheimer)
All right, that’s extremely helpful, thank you. 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 number. Is that something that you can have and can share with us? Yeah.
Mick Lucarelli (Executive Vice President and Chief Financial Officer)
From a climate solutions side, Noah, I think the weather costs about 50 to 100 basis points in the climate business from a gross margin standpoint.
Neil Burke (Equity Analyst at UBS)
Thank you very much, sir. Our next question is from Neil Burke with ubs. Your line is now live. Hey, thanks for the question, Nick. 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.
Mick Lucarelli (Executive Vice President and Chief Financial Officer)
Yeah, I’ll go quick and Neal then can talk about capacity. We see 60 to 80% growth this year on the data center business. So that’s, you know, 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.
Neil Brinker (President and Chief Executive Officer)
Once at the 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 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 one quarter assumed in the guide for this year of revenue recognition? Because 1/4 alone off of that 4 billion should be pretty substantial.
Mick Lucarelli (Executive Vice President and Chief Financial Officer)
We actually have little, a little bit of that built in to 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 six months. Neil. 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.
Chris Moore (Equity Analyst at CJS Securities)
Okay, thank you. Our next question comes from Chris Moore with CJS Securities. Your line is now live. Hey, good morning, guys. So in terms of obviously Data center growth, 60, 80% this year, continued rapid, you know, 50 to 70% and strong beyond that. So that recognizes the market is a dynamic. The mix of products, you know, to get there might, might change. Maybe just strictly from a, from a fiscal 27 perspective, is the mix pretty locked in? And you know, if so, roughly what percentage of that is chillers? So you’re right. And that’s why we have the modularity with our factory 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, about 40%. 40% this year and it’ll probably about 50%. Flip to 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, you know, cooling distribution units (CDUs), other products, fan walls. That would be the. That’s what we have factored into the mix so far. Gotcha. 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 five years? That piece of the heat transfer growth.
Neil Brinker (President and Chief Executive Officer)
So within the coil side of heat transfer solutions, clearly the largest rate of growth is coming out of the data center side. I would say the balance of it tends to be more based on replacement cycles or GDP cycles. Neil, anything you want to add? Yeah, and it’s pretty new in terms of the growth on the data center side that we’re seeing. It’s 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. Got it. I appreciate it guys. I’ll jump back in line. Our next question comes from David Tarantino with Keybanc Capital Markets. Your line is now live.
David Tarantino (Equity Analyst at KeyBanc Capital Markets)
Hey, good morning everyone. Maybe following up on the LTA understanding that there’s often NDAs covering this, but could you give any color on kind of profile the customer, 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 timeline as the capacity continues to ramp here?
Neil Brinker (President and Chief Executive Officer)
Yeah, thanks David. So with an existing customer. Yes, it’s someone that you know, we’ve had relationship. We’ve got great relationships with our data center customers and this is just further evidence. And this LTA is specific for our chillers. Okay, great. And any thoughts on how. Oh, go ahead. No, go ahead, David. Just any thoughts on how the 4 billion shows through kind of as capacity still ramping here?
Mick Lucarelli (Executive Vice President and Chief Financial Officer)
Yeah, 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 three years. Don’t know the exact ramp, but we don’t see any more than 2 billion year right now. So it’s still early days, but hopefully that kind of helps. If you look at 4 billion over three years and no more than 2 billion in any one year, definitely in a ramp up.
Chris Moore (Equity Analyst at CJS Securities)
Okay, great. And then maybe looking at data center as a whole, could you give any, some more color on the pipeline here? Maybe X the lta, I think you mentioned another quarter of record order intake, but kind of any color on continuing 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 the capacity for the LTA as well.
Neil Brinker (President and Chief Executive Officer)
Yeah, certainly we will balance this. 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?
Chris Moore (Equity Analyst at CJS Securities)
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 put up these record order numbers, how much more is out there?
Neil Brinker (President and Chief Executive Officer)
Yeah, it continues to evolve, you’re right. And it’s growing at, you know, significant rates. I think if you look at the trends in the last couple 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 LTA’s 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
Brian Drab (Equity Analyst at William Blair)
that we gave relative to data centers. Okay, great. Thank you guys. Our next question comes from Brian Drab with William Blair. Your line is now live. Hi, thanks for taking my questions. I’m curious if you would say anything about what the probability was that you had assigned to the orders or the, you know, the opportunity associated with the LTA when you gave us the 50 to 70% forecast for 27 and 28
Mick Lucarelli (Executive Vice President and Chief Financial Officer)
from my side with, 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
Brian Drab (Equity Analyst at William Blair)
and program by program.
Mick Lucarelli (Executive Vice President and Chief Financial Officer)
So we were, you know, 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 the would flow over. Brian?
Brian Drab (Equity Analyst at William Blair)
Yeah, so yeah, so I’m trying to get a sense for is it really incremental? You know, we don’t know if you had, you know, 4 billion in sales over that period with a 80%, you know, 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.
Mick Lucarelli (Executive Vice President and Chief Financial Officer)
So maybe the way I would say maybe it will help is when we give a multi year look like that and we talk about the funnel we’ve been, we’ll clear that short of an lta, we don’t have multi year pos. And what this one did is it gave us a really high confidence in a big portion of our two, three year outlook. You know, 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, you know, 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.
Neil Brinker (President and Chief Executive Officer)
Yeah, 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, 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 probability funnel. The LTA simply accelerates it through the probability funnel to a high degree of confidence. So it’s significant. Brian? Yeah, 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 three years and you’re doing, you said not over 2 billion in a 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 three years. So I’m just trying to see if that thinking makes sense because 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, but I know there wasn’t a question there. Yeah, that’s. Well, no, that’s true. That’s 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
Brian Drab (Equity Analyst at William Blair)
if we want to invest in more
Mick Lucarelli (Executive Vice President and Chief Financial Officer)
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 know 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. You know, like how, how directionally, like can you give us some sense for how to model first quarter and then also first quarter margins for climate solutions?
Brian Drab (Equity Analyst at William Blair)
Yeah, are you, Brian, just narrow that down. Are you, were you talking about data centers in particular or the total company
Mick Lucarelli (Executive Vice President and Chief Financial Officer)
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 you know, or Climate Solutions, however you want to talk about it for the first quarter. Yeah. 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 H Vac, commercial H VAC 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 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 will have favorable year over year margins for the balance of the year. So Q1, Q1’s 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 H Vac, it’s, we’ll be on a holiday, we’ll kind of anniversary on those three acquisitions and that’ll have the positive impact there beginning in Q2.
OPERATOR
Okay, thank you very much. Yeah, sure. As a reminder, if you’d like to ask a question, please press Star one on your telephone keypad. One moment please. While we poll for questions, our next question comes from Jeff Van Sanderen with B. Riley Securities. Your line is now live. Good morning everyone. 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 centers can continue? Just trying to get I guess a sense of how you think about longevity 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 roadmaps 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. 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 years. Okay, fair enough. And then just I guess thinking about, obviously this LTA 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. Yeah, that’s good. You know, it’s a 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 four years in a row. And to double that business every single year has 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 of the 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. Okay, great. Thanks for taking my questions. I’ll take the rest offline. We have a follow up question from Matt Somerville with DA Davidson. Your line is now live.
Mick Lucarelli (Executive Vice President and Chief Financial Officer)
Just a couple 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 US, the two lines in the UK, 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’s sort of playbook at some point down the road? You know, serve the two 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. Yeah, 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 of how we could potentially lock 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 in negotiations long term, what years would that impact? I don’t have an answer for 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 lpa. 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, you know, it’s not equal amounts each year. It’s different based on project timings and completion of construction. It’s high degree and we have the ability to adjust if we need to make adjustments to add additional customers.
Matt Somerville (Equity Analyst at D.A. Davidson)
Finally, maybe going to get off of the D.C. topic for a minute. Can you just talk about your M and A funnel actionability and how we should be thinking about MA in the context of fiscal 28 or, excuse me, fiscal 27 for Modine. Thanks.
Mick Lucarelli (Executive Vice President and Chief Financial Officer)
Yeah, we’re still maintaining an active funnel mat 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. You know, I’d say for the bulk of this calendar year it’s still going to be heads down and we talk 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 spinoff. So I’d say for the bulk of this calendar year, that’s a lot. Plus the three acquisitions we’re integrating in H Vac, anything could happen. But I really think for our sake or where Neil and I are focused, the next six months or so is going to be just heavily focused on the spin off and the data center growth.
Matt Somerville (Equity Analyst at D.A. Davidson)
Makes sense. Thank you guys.
Kathy Powers (Operator)
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 two hours. We hope everyone has a great day.
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