Summary of Modine Manufacturing Company Conference Call Company Overview - **Company**: Modine Manufacturing Company (NYSE:MOD) - **Industry**: Thermal management solutions, specifically focusing on climate solutions and data center cooling Key Points and Arguments M&A Announcement - Modine announced a strategic transaction involving the spinoff of its Performance Technologies (PT) segment and its combination with Gentherm, aimed at maximizing shareholder value [1][2][4] - The transaction is structured as a reverse Morris trust, allowing it to be tax-free for Modine and its shareholders [8][9] Strategic Transformation - Modine has been on a strategic journey since 2022, focusing on transforming into a high-growth, pure-play climate solutions company [2][4] - The company has executed 6 divestitures and 6 acquisitions over the past 5 years, shifting towards high-growth, high-margin businesses [3][4] Financial Highlights - The PT business is valued at approximately $1 billion, with a trailing twelve-month adjusted EBITDA of 6.8 times as of September 30, 2025 [8] - Modine will receive $210 million in cash and shareholders will receive approximately $790 million in Gentherm stock, resulting in 40% ownership of the combined company [9][8] Growth Projections - Modine's climate solutions segment generated $1.6 billion in revenue over the 12 months ending September 30, 2025, with expected revenue growth of 35%-40% to nearly $2 billion in the upcoming fiscal year [10][11] - The data center business has experienced a 93% CAGR over the last 2 years, with anticipated annual growth of 50%-70% over the next 2 years [12][13] Market Positioning - The new Modine will focus on data centers and commercial HVAC, maintaining leading positions in HVAC and refrigeration markets [11][12] - The company aims to enhance its product development and innovation to support next-generation requirements, particularly in the rapidly growing data center cooling market [9][10] Operational Efficiency - The transaction is expected to streamline Modine's business model, allowing for better capital allocation towards high-growth initiatives [6][12] - The company anticipates maintaining flat corporate costs while absorbing resources from the PT business into the climate solutions segment [20][21] Future Outlook - Modine aims to achieve EBITDA margins in the low to mid-20s range for its climate solutions business, with a focus on high-growth verticals [52][54] - The company is exploring M&A opportunities to broaden its HVAC capabilities and precision cooling technologies [68][69] Additional Important Information - The transaction is expected to close in Q4 of calendar year 2026, pending shareholder and regulatory approvals [9][76] - Modine will report recast financial statements post-transaction, maintaining a diversified revenue stream across end markets [11][76] This summary encapsulates the key points discussed during the conference call, highlighting Modine's strategic direction, financial expectations, and market positioning within the thermal management industry.

Financial Data and Key Metrics Changes - The company reported a 12% increase in total sales for the second quarter, driven primarily by growth in the Climate Solutions segment [19] - Adjusted earnings per share (EPS) was $1.06, reflecting a 9% increase compared to the prior year [20] - The gross margin declined by 290 basis points to 22.3%, primarily due to increased costs associated with data center capacity expansion [19][22] Business Line Data and Key Metrics Changes - Climate Solutions segment revenue increased by 24%, with data center sales growing by 42% [14][24] - Performance Technologies segment revenue declined by 4%, but adjusted EBITDA improved by 3%, with adjusted EBITDA margins increasing by 90 basis points to 14.7% [10][18] - HVAC technologies within Climate Solutions saw a 25% increase in sales, driven by acquisitions, but faced lower margins due to a negative mix impact [14][15] Market Data and Key Metrics Changes - The company anticipates data center sales to grow in excess of 60% for the fiscal year, with expectations of over 90% year-over-year growth in the second half [24] - The Performance Technologies segment is expected to see revenue flat to down 7%, improving from a prior range of down 2% to 12% [24] Company Strategy and Development Direction - The company is focused on expanding its U.S. manufacturing capacity for data center products and has secured additional facilities in Texas and the UK [3][5][8] - The strategy includes integrating recent acquisitions to enhance product offerings and improve margins through the application of 80/20 principles [3][11] - The company aims to transition from low-volume, high-mix manufacturing to high-volume production to meet the demands of large data centers, particularly those specializing in AI applications [8][9] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the ability to meet customer demands and execute on strategic plans despite current challenges in hiring and training a workforce [7][9] - The company expects significant revenue growth in Q4 as new production lines come online, with a path to achieve over $2 billion in revenues by fiscal 2028 [8][24] - Management acknowledged temporary margin erosion due to increased costs from capacity expansion but anticipates a return to normalized margins by Q4 [15][21] Other Important Information - Free cash flow was negative $31 million in the second quarter, primarily due to higher inventory builds and capital expenditures [22] - The company raised its revenue outlook for fiscal 2026, expecting total sales growth in the range of 15% to 20% [24][25] Q&A Session Summary Question: Can you parse out year-over-year margin contraction on the climate side of the business? - The margin contraction was primarily driven by data center expansion costs, accounting for about 225 to 250 basis points, with additional impacts from HVAC technologies and mix issues [31][32] Question: What gives confidence that margins should normalize going into Q4? - Confidence stems from learning and efficiency improvements from previous product launches, which will enhance margins as production ramps up [50][51] Question: How does the company view the total addressable market for data centers? - The company estimates that reaching $2 billion in sales could represent 15% to 20% of the available HVAC market, indicating significant growth potential [60] Question: What is the expected contribution of liquid cooling to the business? - Liquid cooling is seen as a complementary product to air cooling, with ongoing developments expected to enhance its market presence [95]