Modine Manufacturing Company

Good morning, ladies and gentlemen, and welcome to Modine's fourth quarter and fiscal year 2025 earnings conference call. At this time, all participants are on a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference call is being recorded. I would now like to turn the call over to your host, Ms. Kathy Powers, Vice President, Treasurer and Investor Relations. Thank you. You may begin.

Good morning and welcome to our conference call to discuss Modine's fourth quarter and full year fiscal 2025 results. I'm joined by Neil Brinker, our President and Chief Executive Officer, and Mick Liccarelli, our Executive Vice President and Chief Financial Officer. The slides that we will be using for today's presentation are available on the investor relations section of our website, modeen.com. On slide three of that deck is our notice regarding forward-looking statements. This call will contain forward-looking statements as outlined in our earnings release, as well as in our company's filings with the Securities and Exchange Commission. With that, I'll turn the call over to Neal.

Thank you, Kathy, and good morning, everyone. We closed out the year with a strong fourth quarter performance. This was another record year for Modena, with the highest reported sales and profitability in our history for the third year in a row. For the past three years, our strategy has been to shift our business mix to drive top-line growth and expand EBITDA margins. We've made significant investments in order to spur this growth, and for the first time in our history, the climate solutions segment reported higher revenues than performance technologies. The rate of earnings growth has far outpaced revenue growth, driven by 80-20 and the favorable business mix shift. This year, our adjusted EBITDA was up 25% on a 7% sales increase. Mick will cover our fourth quarter financials results and provide our outlook for fiscal 26. But first, I'd like to reflect on some of our accomplishments over the past year. Please turn to slide five. Summit Solutions delivered another outstanding year. the segment reported a 30% increase in revenues, including the benefit of the Scott Springfield acquisition, and a 45% increase in adjusted EBITDA. This resulted in a 220 basis point improvement in adjusted EBITDA margins to 21%. Sales growth in the segment was driven by data centers, which were up 119% to $644 million. Scott Springfield's data center sales were $197 million in fiscal 2025, meaning that about half of the increase came from organic data center growth. Most of the organic growth was in North America, and demand for our chillers continues to be extremely strong. The past quarter, we announced an exciting business with a new cloud customer who is building out AI infrastructure for a new hyperscaler. This is an important win for us, as this is planned to be a multi-phase, multi-location project. Because of this and other orders for chillers in North America, We are increasing production capacity, both at our Rockbridge, Virginia facility and in Grenada, Mississippi. In Grenada, we are adding new production lines for the chillers and end-of-line testing capabilities. This is primarily in response to orders in hand and will also support growth for opportunities in our pipeline. We are also excited to launch a new modular data center cooling solution and are preparing to take our first order in North America. The powerful combination of Airedale by Modine data center cooling solutions incorporated into a modular approach allows us to address the market's need for high density compute infrastructure that's flexible, scalable, cost effective, energy efficient, and can be deployed rapidly to meet the evolving demands of our customers. And finally, we're making progress on our India expansion and are on track to launch production in Q2. We're actively quoting from multiple customers as we plan to service Southeast Asia, and the Middle East from this location. Data centers have been a focus of our investment for some time, but we're also working to grow our commercial indoor air quality and heating businesses. We recently completed the acquisition of Absolute Air, a heating products company, with a complimentary product line and distribution channel to our own. Our business development team is also working on other opportunities for bolt-on acquisitions to grow these product groups. There's a great deal of activity in the climate solution segment, and the key to our success will be executing on all the growth initiatives in front of us. Please turn to page six. The performance technology segment delivered a strong fourth quarter performance despite challenging market conditions. The segment reported a 15% adjusted EBITDA margin in the fourth quarter, resulting in 13.5% adjusted EBITDA margin for the fiscal year, a 200 basis point year-over-year improvement. Our vehicular markets have been in an extended downturn that is currently projected to last several more quarters. In addition, we are experiencing delays in the launch and ramp of electric vehicle programs using our EP Systems products with further uncertainty ahead. This is causing us to lower our expectations for near-term growth for the Advanced Solutions product group. In response, we are making several changes to our business. First, we had previously announced a change to our product groups in the segment and are moving forward with that. are now pivoting to two groups rather than three. Heavy-duty equipment will include off-highway and stationary power products, and on-highway applications will include automotive, commercial vehicle, and specialty vehicle products for both ICE and EV powertrain. Next, we are taking a renewed, critical look at the business processes to streamline operations and lower costs. This involves further cost reductions throughout PT with redeployment of key resources to open positions and climate solutions wherever possible. These actions, along with a simplified org structure, will provide better focus on our customers and end markets while reducing operating costs, allowing us to continue improving margins during this downturn, leading to even greater conversion once the markets recover. It is challenging to improve margins on flat or lower revenue, but that's exactly what we've been doing in the PT segment. Since we started on this journey three years ago, we've improved adjusted EBITDA margins by 800 basis points on flat revenues. We are making great progress towards the EBITDA margin targets introduced at our investor day last September, and we're not backing away from those targets despite these challenging and uncertain market conditions. During this period of heightened global uncertainty and trade concerns, we're focusing on controlling what we can and taking decisive actions where necessary. It is difficult to predict the impact of tariffs on our supply chain as well as on our customers in the broader economic environment. Our market position is strengthened by our global manufacturing footprint and local for local approach. In addition, our supply chain team has navigated these hurdles in the past and will continue to refine their sourcing strategies to keep us cost competitive. It is clear that the execution of our strategic plans and the investments to grow in key markets have resulted in our third consecutive year of record performance. while equally setting the stage for better things to come. With that, I'll turn the call over to Mick.

Thanks, Neil, and good morning, everyone. Please turn to slide seven to review the Q4 segment results. Climate Solutions delivered another strong quarter with a 28% increase in sales, a 48% improvement in adjusted EBITDA, and an adjusted EBITDA margin of 21.4%. Data center sales grew 69 million or 80% from the prior year, driven by higher North American sales and the Scott Springfield acquisition. HVAC and R sales rose by 21 million or 27%, driven by a surge in late season demand for heating products and improvements across indoor air quality and refrigeration products. Key transfer product sales declined 11% or $12 million due to lower volume to commercial and residential HVAC and commercial refrigeration customers. Overall, we're very pleased with Climate Solutions' strong earnings and conversion, which resulted in a 290 basis point improvement in adjusted EBITDA margin to 21.4%. This quarter completed another great year for Climate Solutions. We anticipate continued revenue and earnings growth in the new fiscal year. And as Neil said, our business development team is actively pursuing additional acquisitions. Please turn to slide eight. As we anticipated, performance technologies delivered strong sequential earnings and margin improvement, despite weakness we are experiencing across most of our end markets. Foreign exchange rates were an additional headwind this quarter, negatively impacting sales by nearly 8 million or 2%. Advanced solution sales were lower by 12% or 4 million, driven by a decline in EV auto and EVantage system sales, partially offset by higher sales to specialty vehicle customers. Liquid-cooled application sales decreased 7% or 8 million due to the previously mentioned lower end market demand. Lastly, air-cooled application sales were lower by 13% or 22 million, also driven by market dynamics. Partially offsetting the lower market demand for air-cooled products was a 29% increase with Genset customers. Adjusted EBITDA improved 5% from the prior year, despite the lower sales. Adjusted EBITDA margin increased 220 basis points. This segment is clearly benefiting from the proactive restructuring and other cost initiatives taken earlier in the year. As Neil mentioned, we're reorganizing this business and taking further actions to simplify the org structure and reduce costs. We expect these actions to generate more than $15 million in annual savings as we continue to reallocate our costs and resources to the highest growth businesses. To wrap up, performance technology segment achieved another year of earnings improvement and significant margin expansion. Modine's 80-20 approach is a critical element of these results, and we will lean on these principles to drive continued improvement in the upcoming fiscal year. Despite the difficult market conditions and uncertainties around the global trade situation, we anticipate higher margins and earnings for this segment in fiscal 26. Now let's review total company results. Please turn to slide nine. Fourth quarter sales increased 7%, driven by revenue growth and climate solutions. The climate solutions growth is partially offset by market-related volume declines in performance technology. Our gross margin improved 330 basis points to 25.7%, driven primarily by higher sales volume and favorable mix, along with the benefits from restructuring cost savings initiatives in the performance technology segment. We continue to invest in incremental SG&A to support the strong climate solutions growth. In addition, SG&A includes expenses related to the SSM acquisition, including incremental amortization related to intangible assets. Adjusted EBITDA was exceptional this quarter with an increase of 32% or 25 million, and the adjusted EBITDA margin was 16.1%. representing a 300 basis point improvement from the prior year. This now represents the 13th consecutive quarter of year-over-year margin improvement, and we achieved our highest adjusted EBITDA margin since beginning Modine's strategic transformation. Adjusted earnings per share was $1.12, 45% higher than the prior year. We're pleased with the strong finish to the fiscal year. Momentum in our key growth markets allowed us to overcome challenges and others. Our full year adjusted EBITDA margin ended at 15.2%, which is 210 basis points above fiscal 24. These results are on track and aligned with our investor day targets for fiscal 27. Now moving to cash flow metrics, please turn to slide 10. The businesses generated $27 million of free cash flow in the fourth quarter, and this included $6 million of payments primarily related to restructuring. This puts our full-year free cash flow at $129 million, allowing us to further strengthen the balance sheet. Net debt of $279 million was $92 million lower than the prior fiscal year end and $8 million lower than last quarter. With a leverage ratio of 0.7, our balance sheet remains in great shape and we anticipate another year of excellent cash flow in fiscal 26. During the quarter, we announced $100 million stock buyback program and completed $18 million of share repurchases. Now let's turn to slide 11 for our fiscal 26 outlook. As Neil mentioned, there's a great deal of uncertainty across all markets and the global economy, and our team is continually assessing the tariff impact on our business. We're analyzing a number of factors that may, in some way, have an impact this fiscal year. These include the impact on material costs of imported products through our supply chain, any tariffs paid to ship finished products from one location to another, the cost sharing and or price adjustments to address these costs, and the overall impact on product demand for Modine or our customers. Beyond the trade and tariff risk, there are some positive elements for Modine. First, we estimate that less than 10% of our annual purchases are subject to new tariffs. based on our regional supply chain strategies. Second, and with regards to shipping of finished goods, we have commercial agreements with many customers that proactively address this error. And last, we have a global footprint, and that is allowing us to help customers with their new sourcing strategies, which could lead to incremental revenue. Given the volatility and uncertainty in the markets, We are providing wider than usual ranges for our outlook. We've factored all known information at this time into our revenue and earnings outlook. We'll provide updates each quarter and tighten the ranges as the year progresses and adjust as we gain more information and certainty. In the appendix, we provided a table summarizing the current tariff situation and Modine exposure. For fiscal 26, we currently expect total company sales to grow in the range of 2 to 10%. For climate solutions, we expect full-year sales to grow 12 to 20%. This growth is largely driven by our outlook for the data center and commercial IAQ product group. With regards to this product group, we remain quite optimistic in the full-year outlook for data centers. with anticipated revenue growth in excess of 30%. While the European market appears to be adjusting to changing hyperscaler plans, we're not seeing any slowdown in North America. In fact, our challenge remains the ability to keep up with demand. For performance technologies, we're anticipating sales to be down 2% to 12%. Based on the assumption that the end market will remain depressed, and that the current trade conflicts may have a negative impact on those market recoveries. As Neil mentioned, we've reorganized the PT segment into two product groups. The first product group, heavy-duty equipment, is presented at our investor day and will serve the agriculture, construction, mining, and genset markets. The second group will be on-highway applications. which will serve the automotive, commercial vehicle, and specialty vehicle markets, including electric vehicles. Consolidating the performance technology segment into two product groups will help the team to further focus on key end markets and customers, which is a critical element of 80-20. And this will allow us to reduce our cost structure and further improve profit margins. Our strategy remains consistent in the segment to exit non-strategic businesses, which we believe will be in the best interest of all stakeholders, including our employees, customers, and suppliers. The team is actively working on this and will provide more information . With regards to our full year earnings, we currently expect fiscal 26 adjusted EBITDA to be in the range of 420. to $450 million. Using the midpoint of this range, this results in an increase of 11% and another year of solid earnings growth. In addition, we anticipate that we'll generate a higher level of free cash flow in fiscal 26, continuing to increase our cash generation in line with our IR day target. Before wrapping up, I want to remind everyone about the planned product group changes we reviewed at our investor day and during the call today. For climate solutions, we'll report revenues under the three product groups, data centers and commercial IAQ, HVAC technologies, which will include our heating and school indoor air quality businesses, and heat transfer solutions, which will include our coils, coatings and commercial refrigeration coolers business. As I previously covered, performance technologies will be broken down into two product groups, heavy-duty equipment and on-highway applications. To assist everyone with modeling and analysis, we'll provide a restatement for fiscal 25 revenue using these new product groups, and we'll begin showing the new product groups with our first quarter results. To wrap up, We're extremely pleased with the results from the fourth quarter and fiscal 25. The Modine team worked extremely hard to deliver a third consecutive year of record results, despite some significant market headwinds. In addition, this team has demonstrated their ability to manage all the levers that they can control, including the successful addition of several acquisitions. We've delivered on our financial targets over the last several years and remain on track to achieve our fiscal 26 and 27 goals. With that, Neil and I will take your questions.

Thank you. If you have a question at this time, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset. before pressing the star keys. Our first question is from Chris Moore with CJS Securities. Please proceed with your question.

Hey, good morning, guys. Congrats on another good quarter. Thanks for taking a couple. So maybe we'll start with data center. So talking about 30% growth on fiscal 26. As you said, Europe may be a little more cautious. North America is strong. Can you maybe just talk a little bit about the data center visibility, how far out are your customers sharing their build schedules? 24 months, 36 months, just trying to get a sense as to how far out they're giving you inclination to their plans.

Hey, Chris, this is Neil. Thanks for the question. Yeah, we're very confident in the opportunities we have in the data center market. We continue to build strong relationships both with our best colocation customers as well as the hyperscalers that we've built relationships with over the years. As you know, we've gone from one significant relationship with a single hyperscaler to five in a short period of time where we have opportunity to do business. As we build those relationships with our customers both on colocation as well as on the hyperscaler side, we have visibility of upwards of five years We have high confidence in a year outlook. We have moderate to high confidence in, you know, two years out. But we have visibility with some of our customers that go out three to five years.

Very helpful. Thanks. The tariff disclosure slide is very helpful. A couple of things there. Is there anything that you source from China that is especially hard to find elsewhere?

That's a good question. Thanks for that, Chris. We've worked on this over the last three to four years in terms of local for local strategy relative to our supply chain. Having 38 facilities in 14 different countries, it's really important to do that. For one, making sure that we have a redundant supply chain and funnel also because of just total landed costs. So we've reduced the dependency on supply chain from China significantly over the last few years. It started with COVID and the reduction of supply chain and moving more domestically for regional supply chain support. And then, you know, with the port strike in L.A. and then the Suez Canal. There's all kinds of reasons that we needed to reduce our dependency on China. So we feel very comfortable where we're at with our local for local supply chain. And we think that's going to be an advantage for us as we move forward in this tariff environment.

Perfect. Maybe just last one on that note. So you kind of went through the different areas on the tariffs that could be an issue. It sounds like ultimate product demand is probably the biggest uncertainty. Is that a fair statement? And is it in one segment more than another?

Yeah, Chris, it's Mick. With regards to the outlook, Chris, around volume, I think the largest uncertainty for us would definitely be about the rate of market recovery, and specifically in performance technologies, as you and Neil covered on the climate side, the heating and school IAQ business. We expect to have steady double-digit growth this year, which is great. The 30-plus percent top line for Beta Center. And then, you know, back down the PT side, it really will be about the rate of recovery or stability across ag, construction, and commercial vehicle.

Got it. I appreciate it. I'll jump back in line.

Our next question comes from Matt Somerville with DA Davidson. Please proceed with your question.

Thanks. Couple questions back on the BC business. Can you put a little bit of finer point on your Comment regarding having a hard time keeping up with demand in North America. Is that primarily being driven by these newer relationships? And then, Neil, you mentioned five hyperscalers. I just want to make sure that that count is accurate. And then also, if you could address in Europe some of the tentativeness you're seeing on spend. Is that a function of macro or repurposing of original build plans to include AI? And then I will follow up.

Yeah, Matt, thanks for the question. Really, it's a matter of execution in North America for us. We have tremendous opportunity. We recently put out a press release where we're going to add additional capacity and employment in Mississippi to keep up with that demand. We're seeing incredible need to continue to ship and produce products in DC, particularly around chillers. And we had that dedicated plant in Virginia. that we've already maxed the capacity, and we're going to now have to increase capacity in Mississippi as well to add additional chiller lines. So we've been able to win commercially with a very, very good product. We've got a lot of attention in North America, particularly with our growth with our hyperscalers as well as co-locations. So it's a matter of execution at this point. We feel very comfortable with the relationships. We feel very comfortable with the pipeline. We understand the need. We understand demand. The growth schedules with these customers, and again, it comes down to us being able to simply produce and ship the product that our customers are standardizing around.

Thanks, Neal. And then I just wanted to put a little finer point on what the comments with respect to Europe, whether or not the dependent on spend there is more macro driven or more reflective of repurposing of original build plans to include AI. And then I just want to make sure we have the hyperscale customer count right. I thought you mentioned five and I was kind of thinking that number was maybe four.

Yeah, thanks. You know, we're seeing that in terms of the trends in the EU versus North America. Definitely the growth is on the North America side. Certainly with our hyperscalers, there is an element where they're thinking about the different technologies and opportunities. So as we've grown with some of these folks and our hyperscalers in Europe, we're having technical conversations in terms of what it looks like for the next generations and the current generations of the builds. and certainly some of these projects can be delayed a quarter or two, no doubt about that. We're also recognizing that we've got a very strong brand in Europe. It's a premium brand, and at times we're not going to concede relative to pricing because of who we are and the product that we have. So Europe is... is in somewhat of a good position. We're seeing some downturn there relative to some of our customers based on the technologies that they're adjusting to. But again, it comes back to North America and what we can do in North America with the relationships that we've been able to build there and that we can keep this RAMP schedule. If we can execute or over-deliver on the RAMP schedule, then we feel very confident in the data center business.

And then lastly, maybe just spend a minute talking about M&A funnel actionability and sort of your views on whether or not you think you might have a reasonable chance of being successful in moving on from the businesses that you had previously publicly identified as being non-strategic to Modine. Thank you.

Yeah. Hey, Matt. It's Nick. That's been a huge focus for us and we talked in the last call or two about kind of sharing with everybody incrementally how we're feeling about both the buy side and any exits and feeling really confident right now in the funnel and it's grown more from the last time we all connected. I think from our side we're gaining TAB, A lot of confidence that we can execute at least one transaction on the buy side in the first half of the year, which is really great. TAB, We'll keep filling that funnel and pursuing those and then on the strategic exit to the divestiture is we've been public voice and Neil came in and in our day about the strategic TAB, Exit from automotive and we think That really is in the best long-term interest of employees, the customers, our shareholders, and make sure that business is in the right long-term hands. Our focus this year is going to be heavy on executing on that strategy. And we've been really transparent and public about the goal would be to do that in one transaction versus a series of smaller ones. So I'd say short answer on the strategic exits. gaining more confidence and energy to execute there. And then, as I mentioned, building a lot more confidence of getting at least one buy, another acquisition done here in the next quarter or two.

Our next question comes from Brian Drab with William Blair. Please proceed with your question.

Hi, thanks for taking my questions. The first one on my mind is just, can you tell us what your split in data center revenue was roughly for fiscal 25 between US and Europe?

I will see if I can grab that at my fingertips. Well, wait, Neil, can we address any other questions you have? If not, I'll just give you a back on it. But let me see if I've got it nearby.

OK. Yeah, I'm assuming it's like 80-20, but in line with your, you know, often mentioning 80-20. I bet that's the answer. And then, can you talk at all about the cadence of data center revenue expected in fiscal 26? You know, we had, you know, a great year of data center performance and the, you know, kind of the average quarterly revenue run rate was like 160 million per quarter. It's a big ramp up. If you're going to grow 30%, it's going to average like 210 a quarter. But how does that potentially ramp throughout fiscal 26?

Yeah, I can explain the process and what we're working on when I talk about execution and the ramp cycle. And Mick can come with some more specific numbers. But we have a large opportunity. We have built great relationships with customers. We have a very good product set. We have a complete solution that solves for the problems that our customers are experiencing. And we continue to invest capital and resources, redeploying some of our most talented people across the organization in order to ramp. If we can get our Grenada, Mississippi facility up faster, then obviously it would accelerate even more. But it's a matter of equipment. It's a matter of getting our labs in place. It's a matter of getting people trained. And, you know, we're going to have more than double our capacity that we currently have once we get Mississippi up and running. Now, we would expect to have, you know, probably a 12-month cycle to get to that point. Some of these things can accelerate. We could potentially move a little bit faster based on hiring, based on equipment coming in early. But the relationships are there. We have demand. We have demand. It's a matter of ramping these facilities each quarter.

Yep. Brian, I just wrapped it. You're a good guess. You were close. But with the mix last year, it was about 75%, 25%, 75% being North America.

OK. OK. Thanks very much. And just on that second question I asked, wondering um should we expect data center revenue to be more back-end loaded in fiscal 26 does it ramp up throughout the year as you bring on that capacity or do we kind of set function up from 160 million a quarter to 210 a quarter right away no i'm glad i'm glad you look you uh you asked that with

We expect Q1 to be the softest quarter and with it ramping. So we do see Q1 being a growth rate lower than what we've been experiencing. And it really goes back to the discussion Matt and Neil had. So we saw some volume declines in Europe based on the market conditions there in Q1. And at the same time, we are rapidly ramping up capacity in North America in this quarter. So we're adding capacity. I think we're getting daily reports. So it's building. But as you can imagine, in our Q1, we won't have had all the capacity in place. For the full year, as Neil said, and certainly as you get to Q3 and Q4, we're going to be running not at full capacity, but we're going to have, meaning we'll have excess capacity, but we're going to be being able to keep up with all the demand by the second half of the year.

Okay. Thanks very much for taking my question.

As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. One moment, please, while we poll for questions. Our next question comes from Noah K. with Oppenheimer. Please proceed with your question.

Noah K. Hey, good morning. Thanks for taking the questions. We'd like to unpack the growth outlook for Cleaned Solutions a little bit more. So data center revenue at at least 30% growth. I think off the revenue base you just did, that implies, I don't know, close to 14% total growth for the segment. and then you got about two points, almost two points of the M&A contribution. So, you know, is sort of the assumption close to the midpoint of the guide that all of the revenues besides those are kind of flat? And importantly, I think, is that kind of consistent with the trajectory you're seeing in those other businesses?

Yeah, so, yes, generally. The... Heating in the school business, while it's smaller, relatively speaking, about a $200 million business, we see that growing low double digits this year. The heat transfer products area, a much larger business, we're planning on that to being flat to even maybe down slightly, call it zero to maybe 5%. For there, it's a lower visibility business than Neal's talked about right now. Still excess coil capacity in the markets. We talked last quarter about some customers deciding to make more coils on internal insourcing those, using those to their capacity to fill that production. And so that would be the balance. So you've got the 30 plus percent data center growth, low double digit on HVAC heating. and then we're taking a pretty cautious stance on the COIL side.

Okay. It sounds like what sort of unlocks the upside of the plus to the 30% data center is your ability to add or liberate more capacity, you know, in North America. So please correct me if I'm mischaracterizing that. But Neil, I think you said that, you know, you will, have more than double your current revenue capacity and data center. Was that in reference to North America specifically or is that global? Because I think when we last spoke, you know, the company's revenue capacity was north of a billion dollars.

Yeah, it is. It's north of a billion dollars, a global capacity, but we have such a demand in North America, the capacity that we had built out in North America, that surge has exceeded the North America capacity. So, you know, in general, if you look at it across globally, if all the orders were to come in, you know, a third, a third, a third, then we would be okay. But that's not the case. So we have to double the capacity in North America.

Okay. So it's North America. Great. And then I think, yeah, go ahead, Max.

Sorry. I was just going to say, too, ramping up the air side versus the chiller side, different requirements.

Yep. Makes sense. And then can we understand, you know, to the point around PT, just what divestitures or kind of planned business exits are embedded in the guide for the year?

Yeah, right now we've anniversary the last three or four divestitures. And so in the guidance, we don't have any divestitures built into that. what um the area i talked about a little while ago which would be the the area we've been focused on would be that last portion of automotive which has been running i would say between 200 and 250 million if we execute on a transaction this year uh we will come back you know at that point we would have certainty of something we'd have timing and we'd be able to look at how that will impact the fiscal year. But just to be clear, we have the automotive business in here for the full year.

Got it. So there's no, like, bleed down of that in the guide. Okay. Last one for me. You know, I think all in for the company, implied incrementals are around 20%, I think, when that's right at the midpoint of the guide. You know, the business did close to 45% incremental this past year. I guess given the mixed tailwinds and some of the 80-20 actions that you're clearly getting some traction on, does incremental seem a little conservative? So can you maybe help us understand how to think about the margins by segment within the guide? What kind of operating leverage and climate solutions? What's the trajectory for margins in PT?

Yeah, so there's a lot to unpack there, and maybe I'll give you some color around it. On the performance technology side, a lot of conversion we've been seeing there, and it's really been on 80-20 and cost reduction for, as you were referencing, fiscal 25 on down revenue We were able to increase EBITDA and add the 200 basis points. Heavy gross margin lift there this year in performance technologies. As we look to the new year, we're expecting to do more of the same, especially while the markets are staying down and probably target 125 to 175 basis point type improvement in performance technologies. Dan Barahona- Right now, based on you can tell in our guidance and our assumptions that's going to be heavily based on cost reduction activity and productivity improvements through 8020 Dan Barahona- Climate Solutions probably more flat margin and we that's not a surprise to us might be up a little bit. But yes, Neil is just covering the balance we have is Every time we see increasing demand on the data center side, there will be a few quarters where we're reinvesting not only in the people in engineering, but in the fixed cost to support that future growth. So I don't see it being a headwind for climate solutions, but we're really driving growth and we're okay having a 20 plus percent type EBITDA margin. We wrap that up. move up a little bit yeah you kind of blend that in we should be up a little bit but higher conversion on uh pt and then the standard conversion on climate very helpful thanks yeah our next question is from matt summerfield with da davidson please proceed with your question thanks uh just a couple of quick follow-ups um

With this new modular data center system, if that's the right word, Neil, does that unlock incremental TAM for you guys? And can you help me maybe understand the use case versus a system like that versus maybe the legacy, if you will, DC offering?

No, that's a great question. I don't believe it unlocks additional TAM. I think this is Well, I'm certain it's a different product solution to solve for the speed at which the data center wants to add capacity in the global market. So, traditionally, we would sell our systems to a system integrator, we would sell our systems to the end user, and they would have a group of engineers and tradespeople that would assemble our product in the data center. Because the data center customers want to move quickly, because it's literally a race to build capacity here, they are looking for a more convenient way to start up their data centers. So they're looking for us to build modular DCs that they can plug and play. So essentially, our product, in addition to some supply chain that they would traditionally buy, we would take that supply chain internally we would put the product together into a modular data center unit. It would go to the DC and it would be more of a plug and play versus the assembly process that they go through today. So it's a conversion in terms of the data centers and it will allow them to move much quicker. So similar TAM, but just the speed in which they can start up a data center is accelerated because we do a lot of the work internally and we build more of a system an advanced system for them that is easier for them to install.

Thank you for that, Collar. Just a couple of additional ones. As you sit here looking at that billion dollar data center target you have in terms of top line for fiscal 27, are you more confident in attaining and or beating that target? Is that maybe part of the signal here with the doubling of chiller capacity? in North America, how should we interpret that in the context of that target? And over time, Neil, do you start to think about strategic optionality for the DC business?

Yeah, thanks, Matt. Yes, for sure. I mean, at the rate of capacity that we're deploying, it's about execution. I've become more confident every day as we've gone through the hard part. The hard part was building the relationships. The hard part was getting the customer profile. The hard part was providing and developing highly engineered product for our customers that are specific for their need. Purpose-built, specific, highly engineered products for these customers. And we're through that. We've got that. And it's a matter of execution. Build, produce, ship. And the more capacity that we put inside of North America, the more confident that I get.

And then, Neil, just the question on potential strategic optionality as you further scale this business, you know, realizing that the vision, you know, extends beyond 27, certainly given in some instances you have a three- to five-year broad look ahead. How are you thinking about that?

I'm really focused on execution right now and making sure that we can deliver on the needs of our customers today. The pipeline is extremely healthy, and we're focused on the next 24 months because that's paramount. We have to stay in execution mode.

Understood. Thanks, Neil.

I am showing no further questions at this time. I'd like to turn the conference back to Kathy Powers.

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