Release Date: May 22, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Modine Manufacturing Co (MOD, Financial) achieved record sales of $2.4 billion and a 48% increase in adjusted EBITDA to $314 million for fiscal 2024.
- The Climate Solutions segment reported a 31% increase in adjusted EBITDA on a 4% increase in sales, driven by strong performance in the data center market.
- The Performance Technologies segment saw a 67% increase in adjusted EBITDA on a 5% increase in sales, with significant margin improvements.
- Modine Manufacturing Co (MOD) completed strategic acquisitions, including TMGcore and Scott Springfield, enhancing their data center cooling capabilities.
- The company secured additional manufacturing capacity in Calgary and a new site in Bradford, UK, doubling their potential output for data center cooling products.
Negative Points
- Heat Transfer Product sales declined by 20%, driven by lower demand in certain commercial and residential markets, including a soft European heat pump market.
- SG&A expenses increased by $15 million due to higher employee compensation and acquisition-related costs.
- Net debt increased by $86 million compared to the prior fiscal year, largely due to the acquisition of Scott Springfield.
- The Performance Technologies segment experienced a 5% revenue decrease due to divestitures and lower automotive product sales.
- The company anticipates slightly lower sales in Performance Technologies for fiscal 2025 due to ongoing divestitures and product rationalization.
Q & A Highlights
Q: Can you talk a little bit about the critical milestones over the next 12 to 18 months for your liquid cooling efforts in data centers?
A: Neil Brinker, President, Chief Executive Officer, Director: We have seen growth in direct cooling and the addition of Scott Springfield adds evaporative cooling technology. We are expanding capacity to gain market share and have acquired TMGcore assets to engage in future data center conversations. Our CPU development for direct chip cooling is progressing, and we aim to launch it with select customers by the end of the fiscal year.
Q: Is there any reason to think growth in data centers will slow in three or four years?
A: Neil Brinker, President, Chief Executive Officer, Director: We believe both air and liquid cooling technologies will continue to grow. Air cooling often augments liquid cooling, so there is a demand for both technologies.
Q: Can you talk about your M&A thoughts and revenue targets moving forward?
A: Michael Lucareli, Chief Financial Officer, Executive Vice President: We don't see the need for large M&A to hit our financial targets. We are focusing on smaller, mid-sized transactions like Scott Springfield. We will provide updated guidance in the fall.
Q: Can we understand the margin expectations embedded in the fiscal 2025 guide on a segment level?
A: Michael Lucareli, Chief Financial Officer, Executive Vice President: We expect a 14.5% adjusted EBITDA margin, with a 200 basis point improvement for Performance Technologies and a 50 basis point improvement for Climate Solutions. We anticipate around $100 million in divestitures and product line exits for Performance Technologies.
Q: Help us understand the free cash flow walk for fiscal 2025.
A: Michael Lucareli, Chief Financial Officer, Executive Vice President: We aim to meet or beat last year's free cash flow. Factors include higher incentive comp payouts, pension contributions, interest expenses, and restructuring costs. Data center customer advances and inventory levels will also impact cash flow.
Q: How should we think about organic growth versus M&A in the data center vertical?
A: Neil Brinker, President, Chief Executive Officer, Director: We have added capacity through organic growth and acquisitions like Scott Springfield. We expect 60-70% growth in data center sales, with 30-35% organic growth and the rest from acquisitions.
Q: Can you update us on the relationship cultivation with hyperscale customers?
A: Neil Brinker, President, Chief Executive Officer, Director: We have seen cross-selling opportunities with Scott Springfield's hyperscale customer. Our state-of-the-art facilities and labs have impressed potential hyperscale customers, advancing our conversations.
Q: How should we think about the quarterly earnings cadence for fiscal 2025?
A: Michael Lucareli, Chief Financial Officer, Executive Vice President: We expect a normal year with Q4 being the strongest due to revenue and program launches. Q3 will likely be the lowest due to seasonal shutdowns in Performance Technologies.
Q: How strategic is the remaining automotive business?
A: Michael Lucareli, Chief Financial Officer, Executive Vice President: The remaining automotive business, around $300 million, has improved margins and is helping us achieve financial targets. However, it is not a strategic focus for capital investment.
Q: What is the outlook for the European heat pump market?
A: Michael Lucareli, Chief Financial Officer, Executive Vice President: The market remains down due to legislative changes and high finished goods inventory. We expect it to take time to recover and have pared back capital spending and resources in this area.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
