Only one that I told not to be careful.
Okay, I think we'll go ahead and get started. I knew this would be a full room. Thank you, everyone, for coming. I'm Brian Drab, the William Blair analyst covering industrial technology, and welcome to the Modine presentation. I have to remind you right off the bat that you can find a full list of research disclosures on our website, williamblair.com. Today we have with us CEO, Neil Brinker and CFO, Mick Lucarelli. Thank you both for being here. I imagine most people in the room are familiar with Modine, a world leader in heating and cooling technologies. The company's gone through a major transformation over the last four years or so. I could give you a couple of metrics here. EBITDA margin's gone from 6% or 7% up to around 15%. The team has been upgraded significantly, led by Neil.
Neil had an analyst day last September, and I joked with him a little bit afterward. He made his point. He had all four of his senior leaders of the different businesses up on the stage, and he asked them to tell everyone in the audience, "How long have you been with Modine, and where were you before?" And the first person said, "Three years, Danaher." The second person said, "Three years, Danaher." I'm like, "We get the point." It is a great team at Modine. There is a lot happening with data centers that is really exciting and other business lines. At this point, I'll get out of the way, and thank you again.
Yeah, sure. Appreciate it. Thanks, Brian. Okay, thanks, everybody, for participating today. I see some familiar faces and some new faces, so that's always a good mix. This is the deck that we've uploaded that you guys will be able to have for your use for this conference. I want to start here. This is where we started in the transformation roughly four years ago. This essentially is how we looked at setting forth the strategy for the company, our mission, values, and purpose. Whenever you do a transformation, I think it's really important that you get your organization aligned around your true north. We all have something to rally around in the difficult times and in the positive times. For us, that was our purpose statement. Our purpose statement is engineering a cleaner, healthier world.
Sounds simple, but it's embedded in every single thing that we do. I worked with some close friends at the Aspen Institute. We literally went off-site for an entire week with a leadership team to kind of come up with that one-liner. That's based on everything that we do in the organization. Recently, at the last investor day, we announced our vision that's tied directly to our DNA of 80/20, always evolving our portfolio of products in pursuit of highly engineered mission. That's who we are. We're mission-critical thermal solutions. That's the core of the business. Our mission, you can see there, and everything from reducing water and energy consumption that can be in data centers to EV specialty vehicles business to using environmentally friendly refrigerants in our coolers in our HVAC space. And then our values.
This is kind of our true north, our strategy, how we'll evolve over time, and then we're staying focused on our core, who we are. At a glance, the company's been around for a long time, 110 years. We are truly global. We have 41 manufacturing facilities with 11,300 people, $2.6 billion of revenue, and $392 million of EBITDA last year. In this last year that we just reported, you can see Climate Solutions is now larger than two segments. That's the first time in a 100-year history. When I started four years ago, Performance Technologies was roughly 70%-75% of the revenue of the business. The Climate Solutions was quite small. We've done a great job in terms of building that out, and I'll talk about the details in terms of how that transformation has taken place.
If I go back and I look at just the strategic pillars of how we've been able to transform to get to where we're at, number one is we stay true to our core, experts in deep thermal management. Anywhere there's power, anywhere there's need for precision cooling, anywhere where there's a desire to maintain a temperature, that is exactly who we are. That's what we've done for 100 years. It was in the vehicular space for the longest period of time. We're pivoting into new markets. We leverage our highly engineered mission-critical solutions that we have through different product groups and different product lines, and we figure out a way, can we utilize those products and those groups into different markets, different channels so that we can continue to drive up the value curve of highly engineered. We like multi-growth year cycle businesses.
We like to get in behind some of these early. We make investments early, and then we can then pivot and shift because of the fact that we're diversified. We can move into different sectors. This has all been driven through 80/20. 80/20 is at the core of who we are and what we do. 80/20 has been around for, I don't know, 30 years plus. It was originally developed in Illinois here with Illinois Toolworks, ITW, and there's some other companies that have adopted it, and it works well. I've done it. After I left Danaher, I went to IDEX in 2012. We deployed 80/20 at IDEX, and it was very successful. I did it in semiconductor when I was at Advanced Energy. It worked there. I did it in pharmaceuticals. It can work here too. We are always evolving this portfolio over time to compound shareholder value.
Deep expertise in thermal management, what does that mean? It means you can be niche. A century's worth of leadership, strong relationships with customers. We have two customers that we've been doing business with for over 100 years. 100 years. Patent protected. We have hundreds of patents, and then we really have invested heavily in our design and test facilities, particularly in the data center space. We put a lot of capital into that because we see that as a differentiator, and it creates a high barrier to entry for the competition. What does 80/20 mean?
A lot of people like to ask, "Where are you at in the journey?" Often people say, "What inning are you in?" I'll say, "Look, we're in the third inning of the first game of a five-game series." Here in this picture, you can kind of see we're pretty early on in the process, and we're continuing to evolve, and we're continuing to climb up that staircase of value. We're in two business segments today. The first segment was the legacy business. That's the performance technologies. This used to be the largest portion of the business, but over time, through divestitures and SKU count reductions, we've reduced the size of that business, and we've grown the climate solution side. That segment is made up of our heat transfer solutions business, which is coils.
Most of that business came from our Luvata acquisition in 2016, so it was a bolt-on to diversify away from automotive. Our HVAC technologies is a subsegment, and then data centers, which is the one that's growing the fastest with our niche business. In performance technologies, you can see it's about $1 billion in sales. To note is the rapid margin improvement in terms of going from 11.5% to 13.5%. When I did this slide in 2022 in New York, the very first investor day conference that we ever did, as a graph for PT would say 5%. We have gone from 5% in 2022 to 13.5%, and we still got room to grow. We still got room to grow our earnings and our margins.
There's still another several hundred basis points improvement that we're working on that we see opportunity to get this year and next. Climate Solution side, this is really a growth business. You go back to fiscal year 2022 in New York when we did this for the first time at our very first investor conference. It was $500 million, roughly $600 million in revenue. The growth here has been pretty phenomenal, as well as the margin improvement. That business started out, I believe, around 12% EBITDA when we started the transformation, and we just broke 20%, 21%. What do we do in the data center space with climate solutions? We have HVAC solutions, and we have designed custom bespoke engineering systems for the data center. That can range anywhere from a chiller that sits on the outside of a data center.
You can see on top of this photo here those chillers that are on the top. Each one of those is about the size of this room. Then on the inside of the data center, attached to the chiller through plumbing, is going to be an evaporator, which we call a CRAC, crawl, computer room air handler, computer room air conditioner, dry coolers, and then fan walls. We also have CDUs. CDUs are important. There's a big movement towards direct-to-chip. Direct-to-chip is a liquid cooling technique that's used for high-performance compute, especially with AI. CDUs are a way to remove the heat from the rack. If you think about what we do, it's about cooling the infrastructure of the data center. We're not in the rack. We're all the way up to the point of the rack. We stop at the CDU.
Anything in the infrastructure that's in place to keep the temperature, typically these data centers are around 92 to 94 degrees Fahrenheit. What are the market drivers here? There's just exponential growth in compute power. There's exponential growth in terms of high-performance compute. There's a desire to reduce data center operation costs. The total cost of ownership of a data center is a key metric for us. We provide a product, and how we differentiate is through our custom solutions and then our ability to show them that they can reduce the operating cost of the facility. That's how we get the price premium that we get. We're typically 15%-20% more than our competitors, but we get that premium because we can show that if you run our products, it's more efficient, your power use effectiveness and your water use effectiveness will go down.
Your utilities will go down. To run a data center, about 45% of the cost and utilities is in the HVAC equipment alone. If you can just show any type of efficiency there, it shows a pretty quick payback. Here are some of the financial trends over the last few years. You can see revenue continues to grow. Not as fast as EBITDA, but that's because we're removing products, we're exiting businesses, and we're replacing it on the climate solution side at a faster rate. You can see margins are moving up and to the right, revenue moving up and to the right, free cash flow up and to the right, and leverage from left to right down. Those are the things that you want to be driving. Deleveraging while we're generating more income. What does that do for us?
That puts us in place to be able to deploy these four strategies for capital allocation. One is investment in organic growth. We have a lot of capacity expansion that we are putting in place around data centers, and that is a big element of it. We put out a press release, I think maybe three weeks ago, of another $38 million investment into our facility in Grenada, Mississippi, where we are retooling an existing Modine site to support data center growth. We are doing some restructuring, also deploying cash to restructure. We just announced another restructuring in the performance technologies business so that we could get another $15 million of cost out of that business this year. Strategic acquisitions. We have been pretty active in this space. We are looking at bolt-ons, niche players, bolt-ons that can slide into our existing subsegments. And then, of course, share repurchase.
We just did a share repurchase recently after the DeepSeek news. We saw that as a real opportunity. Then acquisition and divestiture targets. We put these out on September 11, FY 2025 to 2027. We want to acquire $200 million-$400 million. We want a one-year accretive for margins and earnings. We're going to continue to exit business. We've got another $250 million-$300 million of business that we need to exit that's non-strategic that will be replaced by organic and inorganic growth. This is the constant evolution of what we're talking about with 80/20 and how we're managing the portfolio. Here's evidence. 2005 to 2016, Modine did two acquisitions over an 11-year period. From 2022 to 2025, we've done seven, right? We're exiting, we're adding, we're exiting, we're adding.
This is essentially the engine that we've built in terms of our M&A group. We've hired some pretty talented people. We have an M&A team now. We didn't have that in the past. It's led by Mick. We've got folks that we brought over from Danaher, Dover, KKR, and that's their job is to identify these targets and figure out ways for us to continue to build on along our niche product lines. Here is the next set of targets. We actually had to bring these out a year in advance because the last time we did this, we beat a year in advance. We did this on September 11th. Our targets now, 10%-13% revenue growth. Revenue growth in the markets that we've targeted for hypergrowth are much higher than that. This is just muted because of the divestitures that you see in PT.
Adjusted EBITDA of 16-18%.
We have plenty of time for Q&A. Thanks, Neil. Yeah. By the way, it's great to have you at the conference for the first time. Thank you again for being here. I'll just ask you a couple of questions, kind of frequently asked questions of me about the company that I think people would like to hear you address, and then open it up to Q&A. You mentioned DeepSeek. There's been so much concern in the investment community around this. Are we not going to need as much high-performance compute as a result? Is there not going to be as much heat generated in these facilities as a result? Do you not need as much cooling technology going forward? Maybe a company like Modine will not be the first to know when these hyperscalers and NeoClouds and co-locators start to pull back on investment.
What can you tell the group here, and I guess everyone on the webcast, that help us have confidence that there is this great long-term opportunity in cooling within data center?
Yeah. Even with that news, if you could get that level of efficiency that was claimed, people would suggest that there's Jevons paradox there, that if you can make it that cheap and you can make it cheaper, then there'll be more demand for it. I think there's people that suggest that that's an opportunity. I agree with that. Also, I just know that when we're talking to the chip providers, the chip manufacturers, the server rack manufacturers, the OEMs, the cloud providers, the NeoCloud providers, and the hyperscalers, we're in contact with all of them. They're not seeing it. They're not seeing it in terms of what was reported. We recognize that we're there to help them continue to gain efficiencies, and our precision cooling can help them improve. Our funnel, our capacity is being expanded.
The desire and the need for our equipment, with or without that news with DeepSeek, continues to be extremely strong. I was here, not here, but our headquarters is only 25 miles up the road here. Last year, maybe a year and a half ago, I was pretty adamant about being at $500 million-$600 million of capacity in data center, and we would be in good shape. Fast forward to where we're at today, we have about $1.5 billion of capacity, and we're adding more because the demand is there. We have visibility out five years and sometimes beyond with our most strategic customers.
Can you talk about that large order that you announced earlier this year? I do not think you touched on the size of it here in this presentation. If you could just level set everyone and then also talk about the longer-term prospects for just that one project that you are working on.
Yeah, that's an important project for us. This was a pure play AI win. There's some very specific companies that are in place that have the funding, tens of billions of dollars of funding to build AI infrastructure. There's a few of them out there that you guys can see that there's four primarily large NeoCloud providers, anyone from Crusoe to CoreWeave. I mean, you guys can see how those companies are doing. And when we sold into this NeoCloud provider, that is for 100% AI for a new hyperscaler for us. Now we're working directly with five hyperscalers. That's in an area of Central Texas that's going to force us to put in more service and support to expand in that growth. It was a $180 million order. What does that mean in terms of megawatts?
Consider every 100 MW of desire or demand in the data center. That's a $60 million opportunity for us if we sell all of our products into that space. This $180 million, you can kind of back into how many megawatts that is. That's just the very beginning of this long-term project.
I guess in this first phase of the project, you're not even selling all of your—can you talk more specifically about that? I don't want to press you for.
No, no.
I think you're only selling half of your portfolio of chillers.
Only half.
It would be more like $30 million opportunity per 100 MW, right?
Correct. Yes. Total $60 million, but right now we're at $30 million with this specific order. We only sold half of our product into this NeoCloud provider. To be completely transparent, that's because they didn't understand or know that we had the other half of the product. We're going through that. We're going through that work with the customer so that they understand what's available.
Right. That's what struck me is that it's a $180 million order. You're only selling half the portfolio. It feels like this might be like phase one of four or five plus phases. In phase II, you have the opportunity to sell more of the portfolio.
Correct.
Is that right?
Correct. That is just one of five hyperscalers. That is just one of four NeoCloud providers. You still have the whole co-location market that we serve today. Of our data center business, half of it is in hyperscalers and revenue. The other half is in co-locations.
One of the other questions I get all the time is, what differentiates Modine from others in the space? There are a lot of good companies in the space. Obviously, the tide has been and will probably continue to raise all of the boats. You touched on your premium price as a premium provider. We have other companies here at the conference. I saw the guys from AAON walking down the hall and said hi to them half an hour ago. I think probably everyone in the room is familiar with AAON as well. It is Trane and all these other good companies that you're competing with. How do you differentiate? I know I asked Neil this question the other day when I was up in Racine, and he explained it for 90 minutes on the whiteboard.
We do not have enough time to go into all the detail, but can you just talk about the segmentation, where you are winning different niches of the market and how you compete?
Yeah. AAON, great company. Trane and Carrier, great companies. We found an area that we can protect, a moat that we can protect. We can protect it with a moat, and it's a niche space, so we're not going head-to-head with some of the larger competitors with the same type of products. If you go back, let's say four years ago when we first started the transformation and we said, "We're going to do less PT, we're going to do more CS," and then when we do more CS, at the tip of the spear of the transformation will be data centers. We were doing like $40 million in revenue. Fast forward to $650 million last year. In that area that we were doing the $40 million revenue was in a very niche space of the total available market.
That niche space were people that were absolutely obsessed with sustainability targets. There was one hyperscaler we were working with and a few co-location companies. That was their way to differentiate in the market, was sustainability. They really, really pushed us hard to provide product to them that had the best power use effectiveness score as well as water use effectiveness score so that they can say and they can market, "We use less water. We use less power than anybody else. This is why our premium is a data center." You fast forward to where we're at today, that little niche space has quadrupled that segment because of power. The demand for power in the industry is incredible. There is not enough power today to keep up.
Now that we have these leading technologies and products that are really focused on differentiating around total cost of ownership, power use effectiveness, water use effectiveness, that little niche market is now four times bigger. That has allowed us to continue to scale. That is how we can continue to defend and differentiate, because we have got a head start. We were there very early on. We are in the data centers, in the design with the data centers. You cannot call us up and ask for a product and order it out of a catalog by a specific SKU. That is not how it works. You call us up if you have a complicated problem and you need our engineers to help you design the data center and the HVAC solution system. We will spend five, six months on that.
We'll take a standard platform and then we'll make it custom and bespoke for that specific application for that specific customer. That's our value prop. That's our value add and our value sale.
I'm going to ask one more on data center that we want to make sure we touch on the balance of the business as well in the Q&A. You talked about the capacity expansion. How many facilities did you have making data center products? How many do you have now? What's happening in India? Can you go through that?
Yep, of course. That's a great question. Over the last few years, we started with one facility in the U.K. You fast forward to where we're at today, we've got 10 facilities. You go back a few years ago, we had one technology. You fast forward to where we're at today, we have four technologies. We've got the closed water loop chilled process for traditional air cooling. We've got the evaporative cooling, which we've gained through the acquisition of Scott Springfield. We've got CDUs for direct-to-chip. We acquired TMGcore, which has single-phase and two-phase liquid cooling through inorganic growth and organic growth from one to 10.
Of those 10, eight of them have been repurposed facilities that were in the existing portfolio of the company where we've either exited Performance Technologies business because of SKU count reduction, or we've converted some of maybe lower volume products in our Climate Solution business and consolidated some plants to where we can make room within our existing footprint. It gives us an advantage when we're building out capacity because we have an existing workforce. We have existing supply chain. We're tied in with the communities. We can move a lot quicker and more agile than doing greenfields. We have done one in the U.K. with Bradford. There is potential for another one in the United States, but for the most part, that slide I showed earlier, 41 facilities in 14 countries with 12,000 people.
As you think about 80/20, you're always going to be carving off an area that is non-strategic or not performing at the levels that we expect. That gives you an opportunity to either divest it or retool it into where you have better opportunities.
Speaking of 80/20, I'd love to remove 20% of these glass cylinders that are clanking around in this room every time I'm in here. Can you talk about the balance of the business and the Performance Technologies specifically? You're going through this reduction of SKUs, divesting some of the business and selectively, like with pricing, moving on from some of the business. Where are you with that? And what could we see this year potentially with that? I got the sense from last earnings call there could maybe be a larger piece of that business, like a larger chunk of that business at one time, maybe, ultimately moving on.
Yeah. We've been, over the last few years, if you just look at the trends, it's about $100 million a year we're exiting, almost all exclusively in Performance Technologies. That's being replaced with $100 million or more of organic growth and inorganic growth in Climate Solutions. We still have another $250-$300 million of business that we've determined is non-strategic. That's an area where we've isolated it. We know that we have a perimeter around it. Mick and I have thought about this extensively, and we would like to do that in one transaction versus three transactions over three years this year. We've got opportunities organically on the data center side to offset that. Obviously, we've seen we've done some acquisitions.
I think we've done two acquisitions just in the last month that can help offset some of that EBITDA that would exit. That business is entirely focused in automotive. That's high volume, low mix commodities business that doesn't fit the new Modine.
How do you feel longer term about the heavy-duty side of that business?
Yeah, that's an interesting question. That would leave us with about $800 million of heavy-duty equipment that supports construction, mining, agriculture, some commercial vehicle business. I think there'll be a new low bar there, and we'll have to go through 80/20 to determine what that is. I still believe we have an opportunity to get several hundred basis points of value out of Performance Technologies in terms of what we can do. We've done really well in terms of positioning ourselves with pricing. We've done very well with positioning ourselves with tariffs. We've done extremely well with positioning ourselves for further consolidation and driving more savings in performance technologies. There's just more upside on that base business.
How about the growth in that business longer term? I mean, it's been under pressure. I was with the CEO of Donaldson a few months ago, and he said, "When these businesses come back, it's the same problem, right? A heavy-duty engine on road, off road." He said, "When it comes back, it's not going to be up 5%. It's going to be up much more than that." I mean, do you feel like this is a business that can grow longer term?
It's cyclical, right? It's a very cyclical business. We've been doing this. We've been on that side of the ledger for 100 years. We've seen these cycles, and we can see the trends. These typically last around 18 months. We're 14 months into it. I would expect at the back half of the year to start to see some level of recovery or some rebound. The thing that's been unique about this cycle is that the ag, the construction, and the commercial vehicle cycle all hit at once. Usually, they're phase shifted a little bit, but they all happen at one time, which has really suppressed volume. What we've done is on flat revenue to down revenue, on a three-year CAGR, we've improved the margins by 30%. 30% every year, we're improving the margins on flat or down revenue. That's the trend.
We do not necessarily need the volume in order for us to hit those strategic goals that are up there. If it does come back, the way we have positioned it, the way we have right-sized the company, and the way the cost that we have most recently taken out, the flow through will be a lot better, the best the company has ever seen.
Yeah, please.
Can you get a sense for the data center revenue, how much is tied to new build versus retrofitting the old ones for liquid cooling or power management systems?
If you can just repeat it for the webcast.
Yeah. The question is, how much of data center revenue is for new build versus retrofits? It's an interesting question. Most of our revenue is for new builds. We do have some revenue for brownfields where they're using infrastructure or buildings today that already have power. They're not designed for data centers, but they actually have power, and that's what's scarce in the market. That would be a brownfield. And then some that are retooling for AI and high-performance compute. That's exactly the issue we ran into this quarter with Europe is that Europe has paused. A couple of our key customers have paused. I don't believe that they are hitting the capacity that they need for AI. The traditional compute data centers that we were building for them, we're helping them build, they want to determine if they want to convert those to AI.
They may use a certain amount of square footage to go AI versus just the standard building that we anticipated, which was traditional compute, which we were shipping to. The reason why they have to evaluate that is because that's a larger CapEx expense for them to put in another cooling loop for AI. I think the demand for AI is causing other customers to pause with existing sites to see if they need to retool them. I don't think I know.
We have time for one more quick one.
Yeah. Do you like to know this? But the difference in the cost between building out the original equipment for a data center and then the MRO to be able to lighten that equipment, is that high margin and just to be sized like the revenue of going with an old one versus 20-year or 25-year?
Yeah. It's going to be there's five-year warranty, there's commissioning, there's startup. It's about 10%. It's not that large. What that does is that creates a strong relationship. It creates a level of stickiness that enables more product sales. Our service, our startup, our commissioning, our aftermarkets, there is revenue there, and they need it and they require it. What that does is we're in there helping them solve problems. That information we use to feed our R&D team so that we can have enhanced products so they don't run into those issues going forward. It's enabled for us to sell products.
Okay. Thanks very much. We're going to wrap up here. We'll continue the conversation in the Jenny A room on the second floor. Thanks very much, Mick.
Appreciate it.
And Neil.
Thank you.