Modine Manufacturing Company (MOD) Q3 2026 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call reveals strong growth prospects, particularly in data center sales, with expected revenue growth of over 60% this year and significant capacity expansion. Despite some margin pressures, the guidance is optimistic with substantial revenue projections. The Q&A section supports this with increased visibility and confidence in order intake. While there are some uncertainties, the overall sentiment is positive, driven by strategic investments and growth in key areas.
Key Financial Performance
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. Reasons for change include cost reductions, improved operating efficiencies, and tariff recovery through surcharges.
Performance Technologies adjusted EBITDA Improved 38% from the prior year, with the adjusted EBITDA margin increasing 400 basis points to 14.8%. This was driven by significant cost reductions, improved operating efficiencies, and lower SG&A expenses.
Climate Solutions revenue Increased 51%, driven by a 78% increase in data center sales and a 48% increase in HVAC Technologies sales. Reasons include contributions from acquisitions, capacity expansion, and stronger heating product sales.
Climate Solutions adjusted EBITDA Improved 29%, with the adjusted EBITDA margin increasing to 17.9%. This was due to strong top-line growth, increasing data center volumes, and leveraging recent capacity investments.
Total company sales Increased 31%, driven by revenue growth in Climate Solutions. Reasons include higher data center sales volume and margin improvement in Performance Technologies.
Gross profit Increased 24%, primarily due to higher data center sales volume in Climate Solutions and margin improvement in Performance Technologies.
Adjusted EBITDA Improved 37%, with a 70 basis point margin improvement to 14.9%. Reasons include strong revenue growth and cost-saving initiatives.
Adjusted earnings per share (EPS) Increased 29% to $1.19, excluding a $116 million noncash settlement loss related to the termination of the U.S. pension plan.
Free cash flow Negative $17 million in the third quarter, primarily due to inventory builds, higher CapEx in Climate Solutions, and cash payments related to the U.S. pension plan termination and restructuring.
Net debt $517 million, $238 million higher than the prior fiscal year, due to acquisitions and incremental data center investments. The leverage ratio is 1.2.
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Operating Highlights
New 3-megawatt turbo chilled chiller platform: Designed for advanced free cooling heat rejection for high-density next-generation GPU-powered data centers.
Data center market: Achieved record order intake and projected 50%-70% annual growth in data center revenue over the next two years. Targeting $1 billion in data center sales this year and $2 billion by fiscal 2028.
Capacity expansion: Commissioned 4 new chiller lines this quarter, with 4 more scheduled for the next quarter. Expanded production in multiple locations to meet demand.
Operational efficiencies: Performance Technologies segment improved adjusted EBITDA margin by 400 basis points to 14.8% through cost reductions and resource reallocation.
Spin-off of Performance Technologies segment: Modine to receive $210 million in cash and shareholders to get 40% stock in the new business. The segment will merge with Gentherm to focus on high-margin, high-growth businesses.
Focus on Climate Solutions: Invested in 6 acquisitions over 3 years and significant CapEx for data center product expansion. Transitioning to a pure-play climate solutions company.
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Risk or Challenges
Performance Technologies Segment Challenges: End markets in the Performance Technologies segment continue to be challenged with declining volumes this quarter. Despite some revenue increase, the segment faces ongoing market volume challenges and requires regulatory approvals for the planned spin-off, which could delay or complicate the transaction.
Climate Solutions Segment Capacity Expansion Risks: The company is heavily investing in capacity expansion for data center products, which could lead to overcapacity if demand projections are not met. Although management expresses confidence, there is a risk of misalignment between capacity and actual market demand.
Economic and Market Uncertainty: The Performance Technologies segment's end markets remain depressed, and there is no clear timeline for recovery. This economic uncertainty could impact revenue and profitability in the near term.
Free Cash Flow and Debt Concerns: Free cash flow was negative $17 million in Q3 due to inventory builds and high capital expenditures in Climate Solutions. Net debt increased by $238 million compared to the prior fiscal year, raising concerns about financial flexibility.
Regulatory Approval Risks: The planned spin-off of the Performance Technologies segment requires regulatory approvals, which could face delays or complications, impacting the timeline and execution of the transaction.
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Guidance & Outlook
Revenue Growth: Total sales are expected to grow in the range of 20% to 25% for fiscal 2026. Climate Solutions sales are projected to grow 40% to 45%, with data center sales expected to grow in excess of 70% this year. Performance Technologies revenue is anticipated to be flat to down 7%.
Data Center Revenue Projections: The company expects to deliver over $1 billion in data center sales this year and projects 50% to 70% annual growth in data center revenue over the next two years, targeting $2 billion in data center sales by fiscal 2028.
Adjusted EBITDA Outlook: The fiscal 2026 adjusted EBITDA outlook has been raised to a range of $455 million to $475 million, reflecting strong performance and further improvement in Q4.
Margin Improvement: Adjusted EBITDA margin is expected to sequentially improve in Q4, reaching the highest quarterly margin rate by fiscal year-end, with further margin improvement anticipated next fiscal year.
Capital Expenditures: CapEx for fiscal 2026 is expected to be in the range of $150 million to $180 million, with some data center capital investments carrying over into the next fiscal year.
Free Cash Flow: Positive free cash flow is anticipated in Q4, with a rebound expected next fiscal year, aligning with long-term goals of improving the free cash flow margin.
Market Trends and Strategic Plans: The company is actively engaged in long-term supply agreements for data center solutions, expecting multiyear orders. Investments in capacity and product development are aimed at cementing its position as a technology leader in the market.
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Shareholder Return Plan
The selected topic was not discussed during the call.
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Key Q&A
Q:Can you talk about the puts and takes embedded in the margin outlook for both Climate and PT in the fourth quarter?
A:Michael Lucareli explained that Climate Solutions is on track for a 200-plus basis point sequential improvement in Q4, reaching a 20%-21% margin range. PT is expected to see a temporary dip in EBITDA margin due to material cost spikes, tariff recovery timing, and inventory cleanup. PT margins are expected to rebound in Q1 to 14%-plus.
Q:What defines the high and low end of the 50%-70% CAGR range for data centers?
A:Neil Brinker stated that capacity expansion and project launches in the U.S., particularly in Jefferson City and Dallas, will provide more confidence to tighten the range.
Q:How should we think organically about the non-data center businesses in Climate over the course of calendar '26?
A:Neil Brinker highlighted good performance in HVAC, heating product lines, and indoor air quality, but noted margin pressure in HTS due to material cost spikes, which are being countered through pricing adjustments.
Q:Can you provide color on the profile of record order intake in data centers?
A:Neil Brinker mentioned that the expansion is primarily with existing customers, with potential upside from hyperscalers. The strongest relationships are driving the order intake.
Q:What gives you confidence that free cash flow will return to normalized levels next year?
A:Michael Lucareli explained that working capital to sales is trending at 19%-20%. Inventory levels spiked due to prebuying for expansion, but will normalize. CapEx will also trend down from elevated levels.
Q:How should we think about Climate Solutions margin progression in future quarters?
A:Michael Lucareli clarified that the 200 bps sequential improvement seen recently is not expected every quarter. Climate Solutions margins are targeted at 20%-23% next year, with more specific guidance to come in Q4.
Q:Can you provide more details on the record order intake and customer mix in data centers?
A:Neil Brinker stated that the intake is roughly 50-50 between chillers and other products, with the majority of revenue from hyperscalers. Long-standing relationships and a growing order funnel provide confidence.
Q:How does the mix of products in data centers impact margins?
A:Michael Lucareli noted that margins are uniform across the data center product portfolio, with service elements being particularly favorable. Capacity utilization is a bigger driver than product mix.
Q:Will you have the capacity to manage the high end of the 70% CAGR by fiscal '27?
A:Neil Brinker confirmed that capacity will be in place by the end of fiscal '27, though not fully utilized.
Q:What is the capacity utilization implied by the annualized data center revenue run rate of $1.6 billion?
A:Michael Lucareli confirmed that Q4 implies a $400 million-plus sales quarter, equating to a $1.6 billion annualized run rate. Capacity is in line with expectations.
Q:How is the data center pipeline trending, and do you have more visibility than 6-12 months ago?
A:Neil Brinker stated that visibility has increased to as far as 5 years, with a growing order funnel.
Q:How might the growth cadence of Climate Solutions trend in the next fiscal year?
A:Michael Lucareli expects sequential growth in data centers, while HVAC&R will follow seasonal patterns and grow high single digits organically. More details will be provided in Q4.
Q:How are data center customers determining their cooling needs, and how is Modine evolving its products?
A:Neil Brinker highlighted the focus on securing capacity and innovating to address power and water usage. Modine is improving energy and water efficiency metrics to meet customer needs.
Q:What additional investment is needed to reach $3 billion in data center revenue capacity?
A:Neil Brinker and Michael Lucareli stated that the required capital has been outlined, with $40 million carrying over into the next fiscal year. Additional spending in Q4 and the new year will support future growth.
Q:How many chiller lines will you have by fiscal '28?
A:Neil Brinker confirmed there will be 20 chiller lines by fiscal '28.
Q:What is the status of new hyperscaler customers for chillers?
A:Neil Brinker mentioned that pilot builds are underway for new hyperscaler customers, with field trial results expected in a couple of quarters.
Q:How are you thinking about long-term agreements (LTAs) for data center capacity?
A:Neil Brinker stated that LTAs are being considered to derisk capacity expansion and align with strategic customers. These agreements could cover all capacity.
Q:What is the M&A pipeline outside of data centers?
A:Neil Brinker and Michael Lucareli noted a focus on HVAC businesses, with a pipeline of $50-$100 million revenue targets. Gentherm is the current priority, but other opportunities are being cultivated.
Q:Review of Unclear Management Responses
A:Management avoided providing specific details on the magnitude of record order intake in data centers, the exact timing of field trial results for new hyperscaler customers, and the specific customer names involved in long-term agreements.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
Calgary air
Commission result
Dallas production
Day progress
GPU center
Gentherm Slide
Gentherm home
Gentherm market
Gentherm player
Gentherm quarter
Hello conference
Missouri line
PT value
PUE energy
Power
agreement
air unit
business margin
capacity expansion
capacity product
center cooling
center product
fact
future
generation
margin business
market Technologies
market share
opportunity Gentherm
order intake
portfolio
position
projection
record order
segment Gentherm
success
supplier
temperature
transaction
MOD Transcript
Modine Manufacturing Company (MOD) Q3 2026 Earnings Call Transcript
Positive2-5
The earnings call reveals strong growth prospects, particularly in data center sales, with expected revenue growth of over 60% this year and significant capacity expansion. Despite some margin pressures, the guidance is optimistic with substantial revenue projections. The Q&A section supports this with increased visibility and confidence in order intake. While there are some uncertainties, the overall sentiment is positive, driven by strategic investments and growth in key areas.
Modine Manufacturing Company (MOD) Q2 2026 Earnings Call Transcript
Positive10-29
The earnings call highlights strong financial metrics with an increased revenue growth outlook and a promising data center business expansion. Although there are some concerns about Performance Technologies, the overall sentiment is positive due to strategic investments, optimistic guidance, and expanding market presence. The Q&A session reinforced confidence in growth and margin improvements, despite some vague responses on specific targets.
Modine Manufacturing Company (MOD) Q1 2026 Earnings Call Transcript
Positive7-31
The earnings call highlights strong growth in Climate Solutions and data centers, a $1 billion revenue capacity from a $100 million investment, and optimistic long-term margin expectations. Despite some uncertainties in divestitures and light-duty business, the strategic focus on high-growth areas and robust backlog supports a positive outlook.
Modine Manufacturing Company (NYSE:MOD) Q4 2025 Earnings Call Transcript
Positive5-22
The earnings call highlights several positive aspects: a significant increase in adjusted EBITDA and gross margin, a strong stock buyback program, and robust growth in Climate Solutions and data centers. Despite some uncertainties in Performance Technologies and market recovery concerns, management's confidence in demand and strategic execution, coupled with a solid financial performance, outweighs potential negatives. The Q&A insights reveal manageable risks and a focus on execution, supporting a positive outlook for the stock price in the short term.
MOD Report
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