Madison Air Solutions Corporation Class A

Good morning and welcome to the Madison Air first quarter 2026 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. Please be advised that today's call is being recorded. I will now turn the call over to Steve Lotufo, Senior Vice President, Investor Relations. Please go ahead.

Thank you. Good morning and welcome to Madison Air's first earnings call as a public company. We're thrilled to speak with you today about Madison Air and our first quarter of 2026 earnings performance. Joining me today, Jill Lyon, President and Chief Executive Officer, and J.J. Foley, Chief Financial Officer. Before we begin, I'd like to remind everyone that certain statements on this call are overlooking in nature and are subject to risks and uncertainties that could cause actual results of different materials. For information concerning these risks, please see Madison Air's recent SEC filing. We undertake no obligation to update these statements as a result of new information or future events. In addition, in today's remarks, when comparing 1Q2026 results to 1Q2025, we're referring to our 2025 performance. Such information is presented on a combined basis for Madison Air and April Air, calculated as if April Air had been owned since January 1, 2025. We will also refer to certain other non-GAAP financial measures. You can find calculations and a reconciliation of these measures in the most closely comparable gap measure in our earnings release, presentation accompanying this call, and in the supplemental information as applicable, which can be found in the investor relations section of our website at madisonair.com. With that, I'll turn the call over to Jill.

Thank you, Steve. Good morning, everyone, and thank you for joining us for our first quarter earnings call. This call marks an historic milestone for the Madison Air team. present our earnings for the first time as a public company following our successful IPO. I'll begin by providing an overview of our business and our value creation model. I'll then hand the call over to JJ to discuss our first quarter 2026 financial results and guidance for full year 2026. And then I'll wrap things up with key takeaways before we open the call for Q&A. Before we dive in a bit of context, as you get to know Madison Ayer and our team, I joined the company as president and CEO in 2021. after serving several leadership roles with Ecolab, most recently as president, global regions, and global life sciences and healthcare. My career has spanned advanced manufacturing, operational execution on a global scale, and large-scale growth transformation, and the sum of my experiences shapes how we're building this company, and it's what gives me confidence in the opportunity ahead of us. With that, please turn to slide five. At Addison Air, we see air differently. Our mission is to make the world safer, healthier, and more productive through the power of better air. We build and scale superior air quality businesses that operate in high-value niches adjacent to traditional HVAC across commercial and residential markets. Our portfolio of leading brands, which includes Addison, Aprilaire, Big Ass Fans, Brough New Tone, Nortec Air Solutions, Nortec Data Center Cooling, and Retner, has delivered durable compounding growth and, in fact, outpaced the U.S. GDP growth rate in 16 of the last 18 years on a historical basis through 2025. Our recent IPO was a significant milestone, enabling us to advance our strategy to deliver scalable, profitable long-term growth, and we believe we have a sustainable performance trajectory for 2026 and beyond. Our three core strengths deliver better air, stronger customer outcomes, and superior returns for our investors. Medicine Air's first core strength is what we call return on air, the tangible value created when air becomes a strategic asset. It's the tangible impact our solutions have on customer outcomes in high-value environments where air affects uptime, efficiency, compliance, productivity, and health. From reducing costly downtime in data centers, which can cost our customers up to $9,000 per minute, to contributing to improved consistency and yield in semiconductor clean rooms by reducing contamination incidents, or reducing harmful volatile organic compound concentrations in homes, Madison Air delivers return on air in mission-critical environments where air quality is vital to customer success. Our second core strength is leadership in growth markets. In our commercial segment, we serve 15 structurally attractive high-growth end markets where performance matters and customers are willing to invest in highly engineered air quality solutions because of their capacity to deliver tangible results. In residential, we train contractors to identify indoor air quality opportunities and communicate the value of our complete healthy air system. And the company's third core strength is a disciplined value creation model that seeks to convert that demand into consistent profitability and strong cash flow, with a leadership team focused on strategically deploying capital to drive durable returns. Our decentralized organization structure allows us to invest closest to the point of impact, that is to say, close to the customer. And our entrepreneurial culture drives dedicated teams to wake up every day focused on the markets and customers they serve. We estimate that we've more than tripled our total addressable market since 2021 by sharpening our focus on high growth sectors with more complex process requirements and are well positioned to create durable vectors for long-term value. This model has allowed us to scale efficiently, sustain performance through cycles, and compound enterprise value over time. Being locally agile at enterprise scale is a competitive advantage for us. The powerful combination of outcome-driven solutions, focus on growth markets, a scalable operating model, and consistent execution underpins both our near-term opportunities and long-term potential. Please turn to slide six. At a high level, as of 2025, Madison Air is a $3.5 billion revenue business with strong underlying profitability and cash generation, delivering 26.6% EBITDA margins and $440 million in free cash flow last year. We've intentionally built a balanced portfolio across commercial and residential segments with meaningful exposure to replacement and upgrade activity, which helps drive resilience across cycles. We're also seeing an increasing share of demand from the aftermarket, which adds stability and more recurring revenue characteristics. Our aftermarket sales are approximately 10% of total revenue today, and the services opportunity is growing at a double-digit tagger. The available growth in services and potential lifecycle value is very attractive. We estimate this is around three times for Nortec and up to nine times for Aprilaire. We're accelerating that growth through initiatives like Nortec Care Plus, expanding our services and parts capabilities, and by building momentum at businesses like Big Ass Fans where we're growing installation and preventive maintenance. Geographically, the business is predominantly North America focused where we have strong market positions and established customer relationships. As of March 31st, 2026, we had over 8,800 employees with about 600 of those focused on R&D to drive innovation. Altogether, we believe our margin profile, strong cash conversion, and end market mix gives us a durable and balanced model for revenue growth and earnings. Please turn to slide seven. We believe Madison Air's portfolio brings together broad product and service capabilities with significant opportunity as we apply our return on air approach to high-value performance-driven end markets spanning both commercial and residential segments. We operate within an estimated $40 billion North American addressable market supported by powerful secular tailwinds, including the reshoring of advanced manufacturing, growing demand for energy efficiency, aging buildings and housing stock, increased focus on human health and wellness, and, of course, the rapid growth of AI and computers. On the commercial side, we focus on mission-critical environments like data centers, hospitals, and advanced manufacturing facilities where performance, reliability, and energy efficiency directly impact customer outcomes. Our capabilities span the full range from thermal management and air handling, humidity control, and beyond, allowing us to deliver integrated solutions rather than standalone products. In residential, we play a leading role in advancing healthy air solutions for single and multifamily homes. As homes become more airtight to improve energy efficiency, the need for indoor air quality solutions, including purification, ventilation, humidification, dehumidification, and sensors and digital controls, becomes even more important. Through our channel partners, we have about 40 million annual in-home touch points with potential customers through HVAC replacement and service opportunities, creating a powerful route to drive adoption of these solutions. Across both segments, the common thread is our focus on solving complex error challenges in ways that are tangible, differentiated, and essential to our customers. Please turn to slide eight. Our new business pipeline remains strong with continued growth across key end markets, combined company orders through 29%, including Aprilaire orders prior to the Aprilaire acquisition, and reached a 1.4 times book-to-bill ratio in the first quarter. While our orders can naturally fluctuate quarter to quarter based on project timing and customer schedules, our first quarter results reflect solid underlying demand despite a dynamic macro backdrop. We exited the first quarter with record backlog of $2.5 billion, up 116% year-over-year on a combined company basis, providing good visibility into near-term revenue. And our pro forma net sales growth of 13% reinforces the growth momentum we are driving across the portfolio. At the same time, we are closely monitoring the potential impact of the Middle East conflict on our supply chain, where we have been building resilience since the post-COVID dynamics of 2021. We're also watching the pace of customer decision-making while staying focused on execution and on controlling what we can control operationally. As of today, we are not seeing a material impact. Additionally, as a reminder, orders face tougher comps in the second half, particularly in the fourth quarter of 2025, where the commercial segment printed a book-to-bill of 2.2 times last year. On the right, this example with big-ass fans illustrates how our innovation can translate directly into customer value to deliver tangible productivity, gains, safety, improvements, and cost savings, which is central to our customers and to our ability to sustain both growth and value pricing. This example demonstrates what return on air means for our customers. Our Velocity trailer comfort solution, which is mounted on the side of a manufacturing dock door, enables a big-ass Vans customer to gain up to five additional trailer loads per dock per day and delivers cooling performance in approximately half of the time of our closest competitor. It's also a great example of how our innovation is often born through the deep customer insights we gain over the course of long-standing relationships, which in this case was through our direct sales channel. Slide 9 ties together how we translate our return on air value proposition into consistent value creation. At the core, we transform air from a commodity into a strategic asset that drives tangible business outcomes. For customers, this means higher productivity, lower energy costs, health, comfort, and home preservation, and protection of mission-critical operations. We strive to leverage this to expand our presence in advantaged, higher growth end markets where we believe there's meaningful runway for continued growth. We actively drive both organic growth and disciplined capital allocation into adjacencies, supported by a focused 80-20 operating model and a strong ownership mindset across our culture. The results of business designs deliver sustainable, profitable growth and strong cash generation over time. One essential element of our unique value creation model is our team, the 8,800 plus people who power Madison Air. We invest in our team and our culture to create consistency and alignment and to ensure the value creation model is embedded across the organization and shows up in how we execute every day. Over the past few weeks alone, we've put more than 60 leaders from across Madison Air through rigorous sales and 80-20 training courses, sharpening our focus on the highest impact levers that drive growth across our businesses. We've hosted immersive sessions, equipping our team to use AI as a growth enabler and to build capability throughout the organization so we can move faster and deliver stronger outcomes. We also held an enterprise-wide innovation summit, which I host at least twice every year. These summits convene a diverse cross-section of leaders from engineers and R&D to sales and marketing to solve our customers' thorniest challenges through innovation, all while sharing ideas, servicing opportunities, and scaling best practices across the company. This is collaboration with impact, grounded in solving real customer problems and delivering return on error. When our people are aligned, equipped, and moving with speed and with clarity, it shows up in how we perform, and the result is a business designed to deliver sustainable, profitable growth and strong cash generation over time. And with that, I'll turn it over to JJ to walk through our first quarter financial performance and the outlook.

Thanks, Jill, and good morning, everyone. I'm excited to be here with you today on our first earnings call as a public company. It's been an energizing and rewarding journey to get here, and for those of you ramping on Madison Air, I've been with the company since early 2021. Prior to joining, I held several executive finance roles at GE, most recently serving as the Senior Director of Investor Relations. At Madison Air, we're focused on building credibility and transparency with our new public market stakeholders. With that, please turn to slide 11. On a pro forma basis, net sales were up 13% and adjusted EBITDA grew 16%, with adjusted EBITDA margins expanding 70 basis points. All three demonstrate the power of consistent execution. Pro forma net sales grew 13% year-over-year to $924 million, with strong volume growth and price realization in the commercial segment, as well as strong demand for healthy air systems and price realization in the residential segment. That top-line growth along with productivity gains and disciplined cost management translated into formula 16% adjusted EBITDA growth, with margins increasing by approximately 70 basis points to 25.3%, despite ongoing growth investments in the business. Because of the organizational transactions associated with our April IPO, the share count for the first quarter EPS is not comparable to what we expect for the remainder of the year. To that end, we're reporting our adjusted debt income figure here, which was $93 million in the quarter and represents 36% performer growth year-on-year, driven by revenue and pre-tax earnings growth mentioned above. On cash, we generated $50 million of reported free cash flow in the quarter, which represents free cash flow conversion of 117%. Moreover, we met our three IPO de-levering goals for the quarter, reducing net leverage by nearly a quarter turn from year-end 2025. It's important to note that the first quarter cash flow generation was in line with our expectations, which included a normal seasonal working capital bill that we expect will normalize throughout the course of the year and is enabled by our asset light model. Overall, the quarter demonstrates our ability to convert revenue growth into earnings growth and cash generation. With that, let's review the second level performance on slide 12. In commercial, we drove solid orders growth. Orders were up 41% year-over-year on a combined company basis, reflecting continued momentum in key technology platforms, including thermal management, air handling, and energy efficiency. Backlog increased 124% on a combined company basis, providing good visibility and solid future revenue momentum. Strong customer demand drove 24% year-over-year reporting that sales growth, or 18% growth on a combined company basis, to $610 million, which is driven by a combination of volume, pricing, and payable mix. This is particularly applicable in higher value applications. Reported segment adjusted EBITDA grew 25% to $161 million, outpacing revenue growth reflecting operating leverage, supported by volume growth, ongoing productivity investments, expense management, and pricing disciplines. Overall, the segment continues to benefit from exposure to mission-critical end markets, including data centers, clean energy, health care, and other commercial applications, and we remain focused on executing our backlog and sustaining our growth momentum. Now please turn to slide 13 for residential results. The residential segment performance was solid, reflecting a more balanced demand environment. Given the short cycle nature of this business, order and backlog is less relevant than commercial single digits in the quarter. We continue to benefit from strong demand for Aprilaire's healthy air system. Despite softness and housing starts and remodeling activity, our first quarter results demonstrate the resilience of our model, which was purpose-built to navigate headwinds like these with vast white space penetration opportunity, opening paths to growth and otherwise suboptimal residential conditions. In addition to a full suite of trusted brands and patent-protected solutions across the portfolio, Our Aprilaire Academy has trained an army of contractors to sell indoor air quality solutions like purification and dehumidification throughout cycles. Reported net sales increased 60% or 4% on a combined company basis to $316 million, supported by pricing, while overall volume was roughly flat. In addition, reported segment-adjusted EBITDA grew 84% to $79 million, with margin expansion driven by cost actions, productivity, and payable mix. Overall, the segment continues to demonstrate strength and remains differentiated in product, channel, and results from more traditional residential HVAC providers. We remain focused on driving growth through innovation and channel penetration execution to effectively position us as demand and flex. Please now turn to slide 14. We'll talk a little bit about the balance sheet. The strength and flexibility of the balance sheet is supported by continued strong cash generation. As of March 31st, net debt was approximately $5.5 billion, with net leverage at 5.7 times. As a reminder, as of March 31st, Madison Air was still a private company, and therefore the first quarter debt levels do not yet reflect the approximately $2.6 billion in net proceeds from the IPO, where the full green shoe was exercised and we executed a concurrent private placement. The IPO was the first and important step in strengthening our balance sheet. 100% of the net proceeds were used to retire debt, including accrued and unpaid interest. This includes our full $2.4 billion initial term loan and an incremental additional $200 million on the incremental term loan, improving financial flexibility and positioning us to continue investing in organic growth, de-levering the balance sheet, and strategic acquisitions. If we include the proceeds from the IPO and the concurrent private placement, our net leverage would be three times trailing. We believe we have a clear line of sight to achieve our long-term targeted range of less than two-and-a-half times NEVDA's EBITDA in the next 12 months. As in the first quarter, we maintained solid liquidity of roughly $563 million, including $229 million of cash on hand and $334 million of available capacity on our revolver, providing ample flexibility to support operations and strategic initiatives. In the second quarter, our ratings were upgraded two notches by the rating agencies, reflecting our lower leverage and financial performance. Additionally, we completed an upsizing of our revolver at $1.3 billion, which will become active in the second quarter. We want to reiterate our thanks to our great banking partners for their continued support. The business continues to generate strong cash flow and reported free cash flow conversion of approximately 117% in the first quarter, with driven by disciplined working capital management and earnings growth. Reported LTM free cash flow margins were 12%, and organically, we expect free cash flow conversion of that income below 100%. With that, please now turn to slide 15 to discuss capital allocation priorities. Our capital allocation framework remains consistent and disciplined, focused on deploying cash to maximize shareholder returns, centered on three clear priorities. First, we continue to invest in high-return organic growth opportunities, particularly in mission-critical, defensible technologies and durable end markets, where we see the strongest demand for margin expansion potential. Second, we're committed to maintaining a strong, flexible balance sheet with a clear path to be able to deliver that leverage of less than 2.5 times NAVDOT to EBITDA in the next 12 months. And third, we intend to pursue disciplined and strategic M&A to accelerate growth and strengthen the portfolio. We're focused on assets that expand our capabilities, enhance our technology platforms, and deliver clear strategic and financial long-term returns. We're willing to flex leverage modestly above our targeted range for the right opportunities, but with a clear commitment to deliver post-acquisition. Overall, we believe this balanced approach positions us to drive long-term value while creating or maintaining our financial flexibility. Please turn to slide 16. As a newly public company, we're taking a disciplined approach to evaluating our financial guidance strategy to support long-term value creation and transparency. For 2026, we're providing annual guidance and, as appropriate, may offer directional or qualitative updates throughout the year. We expect to further refine and communicate more formal guidance framework next year. We're introducing full-year 2026 guidance that reflects continued growth and disciplined execution across the portfolio. We are planning for net sales of $3,750,000,000 to $3,850,000,000 representing mid-single to high single-digit growth year-over-year on a pro forma basis, which we expect will be driven by sustained growth offense in our core markets. This 2026 growth outlook is above our longer-term mid-single-digit growth ambition that we discussed throughout the IDEO process. Looking at second quarter visibility, we see mid-single-digit plus Total net sales growth against a tough prior year comp of mid-teens growth. That's using $868 million as a second quarter 2025 performance jumping off point. Margins in the second quarter will step up sequentially. However, the year-on-year comparison is a top comp. We anticipate full year 2026 adjusted EBITDA of $1.2 billion to $1.6 billion for high single-digit growth to low-level digit growth on a pro forma basis. This is also an increase from our longer-term high single-digit growth emission, with 27% resulting in adjusted EBITDA margins as a result of expected continued operating leverage, productivity initiatives, and fair pool mix. On free cash flow, we continue to plan free cash flow conversion to be greater than 100% of net income. Our outlook assumes a demand environment that remains stable overall the continued strength in our four commercial end markets, including gas centers, logistics, and healthcare. In residential, we're assuming slow but steady improvement in the housing sector with potential growth underpinned by our healthy air white space opportunity. In addition to the headline guys, we expect CapEx investments to be less than 2% of sales, interest expense of approximately $250 million, an adjusted effective tax rate of 29%, and diluted share count of approximately 510 million. We've also included approximately $40 million in central expenses, which includes the required activities that come with being a public company. Our guidance assumes gross tariff costs in the range of $100 million, which are a near-term margin headband that we expect to offset over time through a number of actions, including pricing and operational activities. We are not yet seeing meaningful near-term impacts in the Middle East conflict at present, but continue to monitor the global environment closely. And as Jill mentioned, we've been proactively building our supply chain resilience since 2021, and that work is paying off. We feel like we're in a position to play growth offense despite some of the challenges or uncertainty in the macro backdrop. With that, I'll turn the call back to Jill.

Thank you, JJ. Our recent IPO was a significant milestone, and our team at Madison Air is excited for the future. Entering the public markets will provide us the opportunity to invest through cycles, strengthen our position in high growth and markets, and accelerate innovation where performance matters most. What will remain constant is who we are. Our mission is to make the world safer, healthier, and more productive through the power of better air guides us. Return on air is the standard for the value we create for our customers. Our values, trust, bias reaction, entrepreneurialism, and our focus on safety define the way we lead and how we serve our customers. And our decentralized, growth-oriented culture empowers our people and fuels our performance in the future. We thank you for listening to today's call, and now we'd like to open it up for questions. Thank you, and Amy, I'll turn it back to you.

Thank you. We will now begin the question and answer session. To ask a question, you may press star 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Please limit yourself to one question and one follow-up. If we have further questions, you may re-enter the question queue. At this time, we will pause momentarily to assemble our roster. The first question is Dean Dre, RBC Capital.

Thank you. Good morning, everyone, and congrats to the entire team on the public company launch.

Thank you, Dean. Good morning.

One of your top growth verticals is data center. Would love to get some additional color there. Talk about data center orders, if possible, and maybe kind of separate what you're seeing in terms of liquid cooling versus what would be kind of traditional air conditioning, computer room air conditioning, what kind of growth you're seeing there. And anything about the hyperscale mix would be helpful. Thank you.

So thanks for the question, Dean. I agree. Data centers were a primary commercial orders and revenue growth driver in the quarter. But again, I would highlight they're one of 15 end markets that we serve. We saw nicely broad-based growth across the majority of our markets, areas like institutional and government and clean energy, which are really supported by our broad technology platform-based in-air movement or handling thermal energy and energy efficiencies. And so we like how we are intentionally positioned across mission-critical end markets. Data centers remain strong. I would say the second part of your question, air versus liquid, I would say very balanced. Liquid is a larger share of the pie, if you will, than it was last year. So we see that trending nicely. And as we spoke about late last year and early into 2026, we really like how the diversification not only amongst the hyperscale community, but between hyperscalers and co-locators. We continue to really advance the ball nicely, diversify across the players that we believe are the stars to hook our wagon to, if you will, in the quarters and years ahead. So feeling good about data centers, but more broadly about the broad-based growth we saw across a majority of our end markets. We think, again, that's this idea that our portfolio is well positioned and our decentralized operating model means we've not abandoned our core or those core customers while we pursue data center growth exposure.

The next question comes from Julian Mitchell at Barclays. Please go ahead.

Hi. Good morning and congratulations on the first set of results. Maybe just wanted to understand how you're thinking about the commercial business so it looks like you're guiding about 600 million of sales each quarter which is what you did in Q1 so it looks odd because sequentially there should be a step up through the year and you had orders of I think a billion in Q1 almost so maybe help us understand that conversion of orders to revenues in commercial and is that just a lot of conservatism in that revenue guide for the year in terms of very limited sequential step up from Q1 sales thank you

Julian, good morning, and thanks for the question. You know, I think just grounding everybody back on where we were, so we saw 13% growth of net sales in the quarter, 18% of that out of commercial, orders up 29 with orders in commercial up 41%. You know, I think you saw about $610 million of sales for commercial in the quarter. I would expect some step up, you know, as we get into the second quarter, not only, you know, you think about businesses like Big Ass Fans, which do pick up as you kind of get into that eating season. But we do expect to ramp the data center business throughout the year. I would remind you, again, that same seasonality that we see pick up going into the hot months do kind of come off. So there is a little bit of that. And so you kind of have the data center business filling in some of that seasonality. So I think, you know, as you look in the back half of the year, you know, we are playing with a range of outcomes here. But I think we feel confident about the order's Scott Davis at Milius Research.

Please go ahead. Hey, good morning, everybody.

I'm Joel and JJ.

Good morning, Scott.

Can you guys talk about your customer inventories and your different channels? I mean, it's a fair amount of price that you probably have had to get here and there. So is there Trying to get a sense if there's anything pulled forward in the backlog or just a better sense, perhaps, of where inventories stand, particularly on the resi side where they might be a little bit volatile.

Yeah, I would, you know, if I zoom up, of our 13% net sales growth, volume was about nine points. Price was about four. Commercial growth was mostly volume-driven. You know, that's typically a backlog-driven business. On the residential side there, you know, across the segment, volumes were more flattish. Well, price was positive on a pro forma basis. You know, broad comment with regards to pricing. Obviously, there's a lot of inflation between tariffs and, you know, commodities inflation, some of which has been induced by the tariffs. We've got to stay on top of that. But at the end of the day, we are very focused on delivering value for customers. driving their return on air, you know, better tangible, better business outcomes. And we feel like we get paid fairly for that value. So we feel from a pricing standpoint, our interests are aligned with those of our customers. I would say no big, you know, change from a residential perspective in terms of, you know, channel-based backlogs. That business was up, you know, mid-single digits. So I think a great hallmark of our continued resilience, particularly, you good demand for the healthier solutions on the Aprilaire business. And I think at the end of the day, the biggest message there is we still feel like we're in the early innings of a very significant penetration opportunity. 92% of U.S. homes have nothing that we offer in terms of the healthier solutions. So that's how I'd sort of characterize our point of view on pricing and what we're seeing in terms of residential inventories and the like.

The next question comes from Nigel Coe at Wolf Research. Please go ahead.

Thanks. Good morning, everyone, and congrats on the IPO as well. I just wonder, maybe you could fill in some more details around the business unit performance. Clearly, Datacenter had a very strong quarter. I think it's up 50%. Just wondering if you can maybe comment on that. It looks like Big Ass Fans had a very strong quarter as well, but maybe just fill in some of the details there. And perhaps, JJ, could you just clarify on the tariffs? You said $100 million of gross impact. Is that over and above what you were planning, or was that brought in line with where you expect it to be?

Yeah, good morning, Nigel. Thank you for the question and for being here today. I'll start. You know, you're right. You know, very good first quarter in terms of broad-based growth across the majority of our end markets. We talked about the 15 verticals. The majority of them grew in Q1. Yes, strong demand across institutional markets. government and markets, you know, clean energy, especially as we talk about, you know, behind the meter power and the like. So all of that growth supported by the air movement, air handling, and energy efficiency platforms in commercials. So we were very encouraged by both the orders and the sales performance there in Q1 and think that bodes well for broad-based continued strength and performance across portfolios. So, you know, again, I think a good function of how intentionally positioned we are across a number of mission-critical end markets, not just the data center space, but also the fact that our decentralized model, you know, we align focused teams to ensure that we have balanced growth because we get up every day and focus on driving innovation and, you know, moving the needle from a return on error perspective in a broad array of end markets, all while pursuing this, you know, nice up cycle, if you will, in data centers. JJ, I'll turn it to you for the second half of that question.

Perfect. Good morning, Nigel. I would say on tariffs, you know, we definitely on a net basis expect more inflation. So that's including raw materials and tariffs. And we expect to be able to manage that for the full year. It's incorporated in the guidance we shared earlier. That being said, you know, it's an approximately a $50 million increase in 2026. So 50 was in the run rate last year, 50 incremental, so 100 total. given the latest tariff announcements and those are gross figures excluding our mitigation actions uh and as we said earlier you know expect to recover on a dollar basis in the year and rate basis exiting the year i would say it's important to note uh those figures that i just walked through exclude any potential liable refunds uh we'll submit for those refunds you know but that is a smaller piece of the total landscape and not factored into the guidance and then related margins We covered cost and margin in the first quarter at the total company level, given the work that we did last year, and we're confident that we're making continued progress in 26.

The next question comes from Joe Ritchie at Goldman Sachs. Please go ahead.

Hey, good morning, Jill and JJ, and I echo my congratulations as well. I guess the question I have is really around backlog. So I think your backlog was up around $500 million sequentially. I'm curious, as you're thinking about the duration of that backlog now, given that you are seeing continued strength in data center, how much of that is actually pushing out into 2027 at this point?

Yeah, so good morning, Joe, and thank you for the question. I would answer backlog in a couple of key respects. You know, first and foremost, we're confident in our positive sales momentum, and I think that backlog, particularly in the commercial side, gives us good visibility into that near-term revenue. About two-thirds of the company is backlog-driven. The backlog tends to extend one to three-quarters in duration typically. In some verticals, data centers being one of them, that is being extended not because our lead times are extending necessarily, but because the customer really wants longer-term visibility to what's happening there. They want us to have the supply chain ready. We want to be partnered with them, see the orders coming down the pipe such that we can continue to execute. So that backlog, principally in the thermal management technology platform, the data center business, may be four to five quarters in duration, so a little bit longer than what we continuously see. And then the only other thing I'd add is just to sort of put a finer point on what we talked about in the prepared remarks, we continue to monitor the potential impact of what's going on in the world, whether that be the Middle East conflict and its effects on the supply chain or the pace of customer decision-making, but we're not seeing anything that we foresee as we sit here today will materially impact us. So we're continuing to focus on good, solid execution, delivering that backlog according to the customer's timetable, and continuing to control what we can control operationally.

The next question comes from Jeff Sprague at Vertical Research. Please go ahead.

Hey, thanks. Good morning, everyone, and congrats. Just one on sort of price mix for me, if we could. Just on mix specifically within commercial. I think, JJ, I think you said it was positive in the quarter. I would have thought the really strong data center growth would have been mixed negative as opposed to positive. So maybe just touch on that. And then 4% price is very significant in the quarter. I just wonder what you're expecting on a four-year basis for price.

Yeah, so maybe in reverse order, I would say on the pricing side of things, first of all, good morning, Jeff. You know, we're thinking probably a few points of price for the total year. To your point, you know, four points of price in the quarter was pretty strong. Much of that was carrying as a function of the work that we've done last year, primarily linked to the conversation that we had around offsetting inflation and tariff pressures. As it relates to the commercial business itself, you know, we saw very good volume growth. There is a little bit of business mix pressure that kind of nets out when you kind of think about that falling to the bottom line. But there were a number of the smaller businesses that had very nice incremental margins, and that was really withdrawal of that positive mix. So the more that we can get some of those DU businesses contributing to top line growth, they're going to come through with very solid incrementals and allow us to kind of deliver that full year guidance that we talked about.

Next question comes from Tim Walsh at Baird.

Hey, everybody. Good morning, and thanks for all the details, and congrats. Maybe just the question I wanted to focus on is just on Aprilaire. You know, if I do the calculations on the M&A contribution, it looks like that business might have been up mid-teens on a year-over-year basis, so just want to verify that. And is that type of growth, you know, something that you could expect to continue this year? Because that's, you know, meaningfully above, you know, what we're seeing on the Resi-HVAC side.

Hey, Tim. Thank you. Good morning, and thank you for the question. Yeah, I mean, our residential segment, very proud of our team, up 4% in Q1, showing good, strong, continued resilience and outperformance, as you noted. These would be more traditional HVAC shipments in Q1. Aprilaire, as you mentioned, yes, you know, grew very nicely in the quarter. Real kudos to that team. We saw demand for healthier solutions that was in the low double-digit growth territory. So this has just been a terrific additional, you know, addition to our residential segment. I would attribute that to a couple of things. And I think we, as we noted, you know, throughout the process of going public, the Aprilaire business has grown in you know, high single-digit taggers since 2007. And I really attribute that to they are still in the very early innings of a lot of white space penetrating and opening up and cracking into white space. 92% of U.S. homes have nothing, you know, no purification, ventilation, humidification, dehumidification, sensing, or control. So we've got a lot of white space to penetrate the healthy air system. We really benefited from that $40 million at-bats. you know, 30 million times a year, an HVAC contractor is in the home to do a service, you know, annual or biannual service checkup. And the balance of those 40 million at best, the remaining 10 million are typically HVAC replacements. So real strong, you know, very strongly poised, if you will, to make that purchase, you know, decision. And really coupled with the contractor conversion opportunities still really largely lies ahead of us. I think there are More than 70,000 HVAC contractors, if my facts are correct, in the U.S., and we are maybe 15%, 18%, 20% penetrated. So I think when you combine those factors, it really provides a durable growth runway for us in residential. You know, not to say that we're immune from housing starts or OEM volumes, but at the end of the day, we just get up working to control what we can control and craft into that white space. And I think you saw that again in Q1.

The next question comes from Steve Oakman at Jefferies.

Hi. Good morning, guys. Thanks for taking the question. Jill, I think actually maybe both you and JJ mentioned the services opportunity. Can you just sort of talk about how you view that evolving over the medium term? You know, where can that go for you and how do you prosecute that? Thanks.

Thank you, Steve, and good morning. Thanks for being here. Yeah, we're excited about the services opportunity. We expect our aftermarket opportunity to continue to grow at a faster rate than equipment volumes, which it did. You know, it's been growing at a strong double-digit CAGR. It cleared that hurdle again here in Q1. You know, as we've talked about in the past, we don't target a specific percentage of sales from aftermarket, but I would expect it to continue to grow as a percentage of sales You know, it's a little bit of the equipment sales number continues to grow quite rapidly, and so that impacts the math mapping, if you will. But for us, services is all about focus. You know, there's no structural barriers there. It's really about focus, and it's part of our total story around being in the early innings of a long and profitable growth story. And so we're invested. You know, we prioritize the four businesses. that we're really excited to continue to build our service presence around. Each of them, as I sit here today, has what we call a segment leader, or maybe more commonly referred to as a business unit leader. We are deploying growth capital into our services businesses, whether that be more people, digital tools, digital platforms, parts and distribution infrastructure. And like I said, saw continued strong growth in the first quarter, very excited about our momentum here. So whether it's at Big Ass Fans, where, you know, we basically built from the ground up a certified nationwide installer network that allows us to, with one phone call, serve, you know, multi-unit customers across the nation, or, you know, in Nortec data center cooling business, where we are literally sending our own personnel in to start up, commission, and service those data center assets, which get run pretty hard out in the fields. With our own personnel, we're excited about services, and in one queue, again, we showed good, strong growth, and the focus is paying off.

The next question comes from Andrew Cattlewood at Citi.

Hi, good morning. This is Natalia on behalf of Amy Capowitz. Congrats on the IPO and the quarter as well.

Thanks, Natalia. Good morning.

Thanks for being here. Hi, good morning. Thank you. You reiterated a path forward under two and a half times net leverage within 12 months, and your free cash flow conversion was strong this quarter as well. So should we think about deleveraging as the primary use of cash flow near term, or is there some flexibility for incremental M&A sooner? And if so, what would make it the right opportunity to acquire another company?

Yeah, I'm happy to hit on leverage, and then, Jill, maybe you can hit on just M&A or thinking up front. But, you know, I think As we mentioned in the prepared remarks, we're at three times trailing after, you know, applying the net proceeds. I think, you know, for us, we continue to invest, number one, in organic growth, and we love to have you think about us as an organic growth company with M&A as an upside lever. And then the second priority for us is de-levering, and the third being able to pursue that. So we've got about half a turn of leverage reduction to go, which, as we said earlier, both EBITDA and cash flow contribute to achieving that goal here over the course of the next 12 months. And we feel pretty good about doing that. Yeah, near-term focus is getting down to that less than two and a half times.

Yeah, you know, very proud of the team. I mean, I think we are below, you know, right about at three times trailing ahead of what we had committed. So not only as a function of the IPO proceeds, 100% of which on a net basis were used to retire debt, but just the continued efficient generation of our free cash flow that our team has. continues to deliver. As JJ mentioned, the capital allocation priorities have not shifted. From an M&A perspective, again, I'd say, Natalia, you should think of us as an organic growth company with M&A as a lever. I'm really excited, and hopefully Q1 builds broader excitement as well about our organic growth prospects. And so we continue to be busy deploying growth capital into the As JJ noted, we're committed then as well to delivering on that de-levering, you know, our balance sheet commitment. And, you know, M&A is very much within our sights. We believe that we have a pretty special and proprietary M&A capability. You know, real shout out to Larry Geese there who's been planting seeds, our founder and the chair of our board, and cultivating relationships for many, many years. Over time, you will see us continue to do high return M&A where it strengthens our ability to grow. So we're always underwriting what's next and we're never in a hurry. So while we would be willing to flex leverage for the right deal with a path to bring that leverage back down, we remain very much aligned with investors and seeking a long-term leverage chart as well two and a half times. So that's kind of how I'd size it up. Thanks for the question, Tyler.

The next question comes from Ryan Merkel at William Blair. Please go ahead.

Hey, everyone. Nice job this quarter. I wanted to ask about the commercial air handling business you mentioned in the release. It was down a little bit, just a little more color and what's driving that. And then what's the outlook look like? Do you think you'll return to growth this year?

Yeah, on that front, you were referring really to sales in the first quarter. Here, I would say, I mean, first and foremost, I'd start with the benefits of a diversified portfolio and our decentralized operating models such that, you know, the majority of our 15 end market verticals grew in the first quarter. This is, you know, the dynamic we saw on the air handling technology platform sales in the first quarter really dates back to what JJ and I talked about sort of late last year, which was In the aftermath of Liberation Day 2025, sort of the middle of last year, our pipelines were healthy. They continued to grow. Our pipeline was as big as it had been at the time. But customers were just a little bit hesitant to press the go button on new projects. And so we saw that in the first quarter on sales. That said, if you look at orders rates in Q4, momentum picked up very nicely in that and other technology platforms. And that strong orders performance year on year continued in the first quarter. So, you know, between just some hesitancy on behalf of customers, as we noted in the prepared remarks, orders can be lumpy. You know, they come in at different points in time. But at the end of the day, you know, exiting the year and saw continued orders momentum in the first quarter and really continuing to benefit from our diverse exposure to both residential and commercial markets and 15 end markets in the commercial segment.

The next question comes from Nathan Jones at Stifel.

Good morning, everyone. My congratulations on the IPO as well. I'll ask one on April there. It's been about a year since you've owned that business. Now, can you just talk about the integration, whether that's complete energy generation and whether there's more to generate out of that as we go forward here? And then if there are any cost synergies or revenue synergies remaining to come out of other acquisitions that you've made along the way over the years would be helpful to answer the question.

Yeah, so maybe I'll take Aprilaire, then JJ, you can hit on residual synergies from other deals. You know, delighted with the acquisition of Aprilaire Research Products, as it's known, just a phenomenally mission-driven and committed team of folks. who've dedicated their professional lives to making the world safer, healthier, and more productive through the power of better air. As we noted, I mean, April air grew very nicely in the quarter with strong demand for the healthier solutions. It's a $15 billion residential market. 92% of homes have nothing in terms of indoor air quality solutions or healthier systems. And the, you know, large bolus of contractor conversion opportunity lies ahead. So, We are, you know, very proud of our residential segment teams and very grateful to the Aprilaire opposition. I mean, we don't really call them integrations. We call them transitions because one of the things we do, you know, that we think makes our M&A capability pretty special is we buy businesses to allow them to continue to do what they do. And you saw, you know, you've seen Aprilaire do that since May of 2025 when we acquired them. As for your question on synergies in the Aprilaire opposition, that is on track. to the previously stated commitments that we've conveyed exiting 2026. We're on track. And that is really a combination of growth acceleration and some cost out. I would also note that we were together a few weeks ago for one of the innovation summits that I host. And our team there, the Aprilaire team, showcased the forward-looking view of their innovation roadmap just on the heels of launching new technologies like Wi-Fi-enabled dehumidification, and one of the most water-efficient humidification platforms on the market, they've just got a great lineup. So a lot to look forward to both in terms of cracking into that white space, delivering better return on air both for contractors and homeowners through some of the innovation they've launched and have on the come. So Synergy's on track. Business is performing. Just very, very grateful to that team. JJ, anything you'd add on other broader deals introduced?

Yeah, Nathan, I appreciate the question. Look, you know us. With 80-20, you're never done. It's a mindset. And so I think there's a number of spots where we're doubling back at different parts of the portfolio and really making sure that we're seeing those 80-20 benefits ring through, particularly around focus on growth. We actually took one of the commercial businesses that came with the Aprilaire acquisition through the 80-20 earnings. And to Jill's point, that's really just getting started. I think for us, more broadly, you'll see that show up as we think about material cost reduction, freight optimization, and productivity in the factories. So there's still a number of sort of mindset how we run the business synergies to be achieved on Nortec and a number of the other businesses over time. But thanks for the question.

The next question comes from Zachary Shechtman at Wells Fargo. Please go ahead.

Hey, guys. Congrats on your first print as a public company, and thanks for taking my questions.

Thank you. Good morning. Appreciate it.

Good morning. Just on the Aprilaire and IAQ piece and just want to dive a little deeper on the building blocks, the penetration. If I remember correctly, the 8% market penetration assumes just one device per household. I think Aprilaire has five. I'm assuming that one device can mean just a standalone plug and humidifier. So, Like, on average, how many devices does Aprilaire sell on a first-time sale? I'm just trying to think through how much growth you expect to be from market penetration in terms of homes versus more content in the home.

Yeah, I think both opportunities. So, you know, it's both taking the 8% of U.S. homes that on average have one device to more of the healthier pillars around purification, ventilation, humidification, dehumidification, sensing, and controls. And even on that 8% of U.S. homes, if we go from one to two solutions, that doubles the April air business. So there's real compounding tailwind, if you will, to, you know, further penetration of the 8% of homes that have something. And then, you know, you noted it today. So I would say on average, it is one pillar per sale. And then, you know, you still have that 92% of homes that have Nothing. And, you know, with our new Wi-Fi enabled dehumidification platform, there are 40 million basements in this country, 20 million crawl spaces in this country. That innovation, you know, opened up a new channel to market for us in the form of the basement crawl space pest elimination channel. And so, you know, this team is just really very focused on growing the core, penetrating the white space, becoming an embedded and indispensable partner to their HVAC contractor partners, and they get rewarded with growth. And frankly, when HVAC shipments are down, our contractor partners need us more than ever. So we feel good about that business, we feel good about that team, and we have continued to deploy growth capital there to ensure they have everything they need to continue to grow that franchise.

That's all the time we have for questions at this point. I would like to turn the conference back over to Steve Lotufo for any closing remarks.

Great. Thank you again. And thank you, everyone, for your time and continued interest in Madison Air. Additional information from today's call is available on our website at investors.madisonair.com. We look forward to updating you on our progress in the next quarter. Thank you again.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.