Modine Manufacturing Company (MOD) Earnings

Management highlights

### Personnel Updates - Michael Mahan joined as the new President of the Commercial HVAC segment, reporting to the CEO. He brings deep experience in P&L management, portfolio transformation, and product innovation, and will lead the segment's ongoing 80-20 optimization and acquisition integration efforts. - Art Laszlo, former leader of the global data center business, resigned for personal reasons and will depart at the end of July. The CEO will lead the data center segment on an interim basis while a permanent replacement is recruited, with a focus on executing capacity expansion and meeting long-term customer commitments. ### Data Center Segment Operational Updates - The segment achieved its third consecutive quarter of record order intake, driving a significant increase in total backlog, with underlying demand described as unprecedented. Demand is driven primarily by large hyperscaler, neocloud, and colocation customers. - Supply chain shortages of key critical components hit earlier than expected, causing temporary plant downtime, lower-than-planned capacity utilization, and reduced labor efficiency and overhead absorption, which pressured Q1 margins. Management emphasized these are temporary timing issues, not structural problems, and do not impact long-term capacity commitments or full-year financial targets. Contingency plans including resequencing capacity rollouts have been activated. - Management is actively negotiating long-term supply commitments with existing and new suppliers for FY27 and beyond, and is evaluating vertical integration for at-risk components as an additional risk mitigation measure. ### Commercial HVAC Segment Operational Updates - The segment is executing 80-20 optimization initiatives, including manufacturing footprint consolidation: product lines are being consolidated into the Owatonna, Minnesota facility acquired last year, and coil production has been consolidated in Grenada and Juarez to free up capacity for chiller expansion in Grenada and support growing coil demand from data center customers. - Pricing actions are being implemented to offset inflationary material and tariff cost increases, with the goal of expanding margins through simplification and efficiency. ### Performance Technologies Spinoff Update - The planned spinoff of Performance Technologies and merger with GenTherm remains on track, with all key milestones met to date. GenTherm has submitted its S-4 filing to the SEC, and Modine has completed all filings for an IRS tax ruling, expected to be favorable. The transaction is still expected to close before the end of calendar 2027, pending regulatory and shareholder approvals. Internal work including IT separation and legal entity reorganization is progressing on schedule.

Guidance

- Full fiscal 2027 total company guidance is unchanged from prior announcements. Total company sales are expected to grow 20-35% year-over-year, with adjusted EBITDA expected in the range of 650 to 680 million USD, representing over 40% year-over-year adjusted EBITDA growth, and 100-200 basis points of full-year adjusted EBITDA margin improvement across all three segments. - Data Center segment sales are expected to grow 60-80% year-over-year, with full-year adjusted earnings growth expected to exceed 85%. Margins are expected to step up sequentially each quarter: Q2 margins are projected to return to the 19-20% range (up ~400-500 basis points from Q1), with further margin expansion in Q3 and Q4, and second-half margins expected to exceed 20%. Total Q2 revenue is expected to be approximately 100 million USD higher than Q1. - Commercial HVAC segment sales are expected to grow 5-10% year-over-year, with double-digit full-year earnings growth and incremental margin expansion each quarter, reaching 18-20% adjusted EBITDA margin for the full year. - Performance Technologies sales are expected to be flat to up 5% year-over-year, with pricing mechanisms in customer contracts expected to offset continued weak end-market demand, and margin improvement expected as commodity costs normalize. Once the spinoff transaction closes, Performance Technologies will be reported as discontinued operations, and full-year guidance for the remaining business will be updated. - Full-year free cash flow as a percentage of sales is expected to be between 4-6%, with higher total free cash flow than the prior year. The company's leverage ratio is currently 0.9x, and is expected to decline further by the end of the fiscal year. Full-year adjusted EPS is expected to be in line with prior estimates, as the Q1 tax benefit from stock-based compensation will be offset in subsequent quarters.

Segment performance

This is the first quarter Modine reports under its new three-segment structure: Data Centers, Commercial HVAC, and Performance Technologies. 1. **Data Centers**: Revenues increased 90% year-over-year (down sequentially from Q4 FY26 as expected). Adjusted EBITDA grew 27% year-over-year to an adjusted EBITDA margin of 14.8%, down from the prior year due to temporary factors including a 150 basis point year-over-year warranty variance, 450-550 basis points of margin impact from underutilization of capacity amid supply chain shortages, and unfavorable product mix and higher material costs. SG&A as a percentage of sales fell nearly 400 basis points due to revenue growth outpacing SG&A spending. This segment contributed the majority of the company's overall year-over-year revenue growth. 2. **Commercial HVAC**: Revenues increased 22% year-over-year. Acquisitions contributed 20 million USD of quarterly revenue, and higher coil sales to data center customers drove incremental growth. Adjusted EBITDA increased 7% year-over-year, while adjusted EBITDA margin fell 220 basis points year-over-year due to temporary factors: acquisition-related footprint consolidation inefficiencies, and a higher mix of lower-margin coil business. This segment makes up approximately 35% of total company revenue based on year-over-year growth contributions. 3. **Performance Technologies**: Revenues were flat overall: heavy-duty equipment sales rose 1% (1 million USD) driven by higher gen set sales, offset by lower off-highway agricultural sales; on-highway sales fell 5% (9 million USD) due to weak end-market demand. Adjusted EBITDA declined 3% year-over-year, and adjusted EBITDA margin fell 10 basis points to 13%, driven by lower volumes and lagging recovery from higher commodity and tariff costs. SG&A fell 2 million USD due to cost-cutting initiatives, partially offsetting headwinds. This segment is the smallest of the three by revenue.

Risks & headwinds

- Early, unexpected supply chain shortages of critical data center components created temporary margin and production headwinds in Q1, and could create periodic challenges as the segment scales at an exponential rate. While management has activated contingency plans, component supply volatility could continue to impact utilization and margins in the near term until long-term supply agreements are finalized. - Exponential revenue growth in the data center segment (over 80% CAGR over the past three years) creates ongoing operational complexity and scaling challenges, including the need to continuously expand capacity and upskill operational teams. - Performance Technologies continues to face weak end-market demand for on-highway and off-highway commercial and agricultural equipment, which pressure near-term margins and volumes until market conditions improve. - New product development for key hyperscaler customers can encounter iteration and design delays that shift production and revenue recognition into subsequent quarters, creating near-term revenue volatility. - While all regulatory and approvals for the Performance Technologies spinoff are on track, unexpected delays could push the transaction closing beyond the end of calendar 2027.

Analyst Q&A

• Q: What is the expected margin trajectory for the Data Center segment this year, and how confident is management that supply chain issues will abate to support this trajectory? /

  A: Management expects Q2 Data Center margins to recover back to the 19-20% range (the segment's proven historical operating level), driven by a 100 million USD sequential revenue increase that improves fixed cost absorption. Margins are expected to step up further in Q3 and Q4, with second-half margins exceeding 20% to hit the full-year 85% earnings growth target. June (the final month of Q1) already returned to target margin levels after supply chain issues were resolved mid-quarter, which management views as a strong positive signal for Q2. Demand is fully locked in, so the only constraint remains component supply, which management has secured for the full year under current plans.

• Q: Are other large customers pursuing long-term LTAs similar to the recently announced hyperscaler agreement, and how does the backlog conversion cycle impact capacity planning? /

  A: Management confirmed half of the company's current planned capacity is covered by the initial hyperscaler LTA, with capacity increasing further as the new 3-megawatt chiller launches. The company is in active discussions with other large customers for 12-18 month LTAs, but none are expected to be as large as the first three-year agreement. Orders from the initial LTA have already started coming in, with 20-25% of volume slated for FY27, 35-40% for FY28, and the balance for FY29, in line with prior expectations. Backlog includes products across multiple production lines, with stable production for existing lines already planned into capacity forecasts.

• Q: How has the evolution of data center cooling architectures impacted demand for Modine's chillers? /

  A: Demand for Modine's chillers is actually increasing as inlet temperature specifications rise, due to the company's strong free-cooling technology that supports higher efficiency targets. Even with higher normal operating inlet temperatures, chillers act as a critical insurance policy to prevent overheating during warm periods, so demand remains strong across both traditional facility cooling and direct-to-chip liquid cooling architectures. The recently announced multi-year LTA and growing backlog for chillers confirm ongoing strong customer demand, with the new 3-megawatt chiller receiving very positive customer feedback.

• Q: What is the long-term margin opportunity for Commercial HVAC after 80-20 optimizations are complete? /

  A: In normal operating conditions, the Commercial HVAC segment (particularly its core heating business) can sustain adjusted EBITDA margins in the low 20% range. The segment is targeting 200 basis points of margin improvement in FY27, reaching 18-20% full-year adjusted EBITDA margin, with an additional 200 basis points of improvement expected in FY28. Margin expansion is being driven by footprint consolidation, 80-20 product portfolio simplification, and pricing actions to offset cost inflation, with all initiatives already underway. Q2 is expected to see a 150 basis point sequential margin improvement from Q1.