MOD - NYSE

Good morning, ladies and gentlemen, and welcome to Modine's Third Quarter Fiscal 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Kathy Powers, Vice President, Treasurer, and Investor Relations.

Good morning, and thank you for joining our conference call to discuss Modine’s third quarter fiscal 2024 results. I’m joined on this call by Neil Brinker, our President and Chief Executive Officer; and Mick Lucareli, our Executive Vice President and Chief Financial Officer. We’ll be using slides with today’s presentation, which can be accessed either through the webcast link or by accessing the PDF file posted on the Investor Relations section of our website modine.com. On slide three 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, it’s my pleasure to turn the call over to Neil.

Thank you, Kathy, and good morning, everyone. I'm pleased to report another successful quarter highlighted by very strong margin expansion and earnings growth. Our results this quarter further demonstrate our ability to improve our earnings profile as we shift towards faster-growing and higher-margin businesses. Despite all of our early success, I continue to believe that we are in the early stages of our transformation and are just beginning to realize the opportunities we've identified in each of our core market verticals. In many cases, we are recommitting our focus on operational excellence, adding additional resources for lean manufacturing and supply chain to improve productivity, quality, and cost realization. Coupled with the success of our commercial team, this approach, enhanced by 80/20, will help to support our ongoing progress towards our goals. Overall, on the M&A front, we feel very good about the pipeline of opportunities available to us. We are not focusing on large transformational deals, but instead are looking for bolt-on acquisitions that bring complementary products and technologies to our key growth verticals. Our recent acquisitions of Napps Technology and the IP and select assets of TMGcore are perfect examples of this approach. We benefit from a very strong balance sheet, which will help support our inorganic growth targets as we remain vigilant in our search for attractive opportunities that fit our focus areas. Mick will go over our third quarter financial results and provide an update to our full year outlook, but first I'd like to provide some high-level updates on each segment. Please turn to slide five. Starting with our Climate Solutions segment, we observed many of the same trends we saw in the second quarter. Our data center business remains very strong, with revenue up 34% compared to the prior year. Meanwhile, certain markets for our heat transfer products remain soft, and our revenues continue to be strategically impacted by the exit of low-margin businesses in connection with the 80/20 initiatives. Earlier this month, we shared some very exciting news about the purchase of the IP and select assets of TMGcore, a specialist in single-and two-phase liquid immersion cooling technology. This expands our global data center product offering, allowing us to support the future requirements of our customers as they manage the demands of high-density computing. Our investment in immersion cooling technology, along with the internal development of a cooling distribution unit, or CDU, allows us to expand our product portfolio to address technology gaps while accelerating our ability to be prepared for the technology needs of the future. Further, this new technology will complement our existing high-performance products that maintain the temperature in the hall and add additional opportunities for the development and integration of a complete hybrid data center cooling system. We believe that the best strategy is to have multiple solutions with a complete suite of products that can be customized and optimized to the customer's needs. I'm very excited for the data center team to begin working on commercializing this technology in support of our co-location and hyperscaler data center customers. In further recognition of the expected growth in our data center business, we are transitioning our existing Grenada, Mississippi manufacturing plant to be a data center facility, similar to what we did in Europe at our Spain and UK facilities. Overall, I'm extremely pleased with the performance of the Climate Solutions segment. We are making the right investments to ensure that our data center business continues to grow and are delivering strong year-over-year earnings improvements, despite challenging markets for the heat transfer and heating products. Please turn to slide six. Turning to our PT segment, while our advanced solutions business continues to perform well, we have seen some leveling of the volumes in our air and liquid cooled businesses, which is in line with our expectations. Despite flat revenues, our margins continue to benefit from 80/20 initiatives focused on commercial improvements and productivity enhancements. In addition, our PT segment also made some important announcements this quarter. First off, our EV systems business announced an important partnership for our Evantage thermal management systems with Bosch Rexroth, a recognized leader in drive and controls technologies. Given Bosch Rexroth's strong market position, we are very excited about this opportunity to partner on electrified solutions for the off-highway market. This partnership is still in development phase, but is expected to provide additional growth opportunities in the future. At this point, the team has booked 31 program wins, including four additional wins since the end of last quarter, equating to a projected annual revenue run rate of over $160 million of program maturity. And in addition, the team was also recently recognized by Frost & Sullivan with its 2023 North American Product Innovation Award. This award recognizes our commitment to quality, reliability, and customer service, while also helping our customers achieve their sustainability goals by accelerating decarbonization. I'm so proud of what this team has been able to accomplish, and with the previously announced capacity expansions in the US and Europe, we have ensured that we have the capacity to meet our commitments and future goals. Now, I'd like to pivot to another growth area in the PT segment, our GenSet business. Stationary power is a market ripe for growth with ever expanding needs for energy security for critical applications such as data centers and healthcare facilities. As we recognize the growth potential of this market, we established a dedicated team devoted to understanding the market and building this business. We are very encouraged by our early progress and expect this to be a key growth area for Modine in the future. Last quarter, we announced that we had completed the divestitures of our German operations that supported the European light vehicle market. We have been transparent about our intentions to exit certain product lines that don't meet our margin targets and these actions were in line with that strategy. We also mentioned that we would need to reduce certain overhead costs that have historically supported these markets. And we're taking action to address these requirements by consolidating our technical services capabilities. These actions are in line with our broader initiative of focusing resources on opportunities that carry higher growth profiles and more attractive returns through both divestitures and acquisitions. I'm very pleased with our progress and our performance this quarter. Our team is operating at a very high level and we are not only executing on our strategies, but are putting in the plans in place to reach our next set of goals. With that, I'll turn the call over to Mick.

Thanks Neil and good morning, everyone. Please turn to slide seven to review the segment results. Climate Solutions completed another excellent quarter, driven by a 29% improvement in adjusted EBITDA. Revenue was down slightly due to a decrease in heat transfer products and mostly offset by strong growth in data centers and a favorable FX impact. As discussed over the last two quarters, we've experienced some reductions in several markets served by heat transfer products. Based on these trends, we lowered our full year outlook for this product group. The adjustment is primarily due to lower demand within commercial and residential HVAC markets, including European heat pumps, along with 80/20 initiatives. Data center sales grew 34% or $15 million driven by strong demand from both hyperscale and co-location customers. Our data center outlook remains quite strong while anticipating a very strong fourth quarter and full year growth in excess of 60%. HVAC&R sales were higher by 2% or $2 million driven by an increase in IAQ sales and the acquisition of Napps Technology that we completed last July, along with higher sales in power industrial coolers. Our heating sales were somewhat lower than expected as the overall market remains depressed from previous levels. We expect this softness to continue for at least another quarter, but the market data is indicating a potential bottom and we believe it will improve through calendar 2024. We're very pleased with the Climate Solutions strong earnings conversion, resulting in a 470 basis point margin improvement to 18.9%. Our 80/20 discipline is at the heart of these quarterly margin improvements. At a segment level, we continue to prioritize earnings and margins improvement over revenue growth. To wrap up on Climate Solutions, we remain cautious in a few markets for HVAC and heat transfer products businesses, but fully anticipate further year-over-year improvements next quarter to finish a great year. Please turn to slide eight. Performance Technologies also had a great quarter with a 52% increase in adjusted EBITDA. Revenue increased 2% driven by higher average selling prices and a favorable FX impact. Sales volume was down in the quarter, partly driven by the recent German divestitures, which negatively impacted revenue by $12 million. Excluding the impact of the divestitures, our sales would have improved by 6%. Performance Technologies remains focused on driving rapid earnings growth, and that was very evident again this quarter. As I previously explained for Climate Solutions, the 80/20 efforts in Performance Technologies are focused on improving earnings and margins versus segment revenue growth. Advanced solutions sales were up 27% or $10 million with continued growth of EV systems and component sales, including higher sales to commercial and specialty vehicles along with higher coding sales. Liquid cooled application sales decreased 4% or $5 million, mainly due to the divestitures and lower automotive demand. Lastly, air-cooled application sales grew 2% or $3 million, primarily due to higher sales to off-highway and GenSet customers. The growth was partially offset by lower automotive sales, also related to the German divestitures. Much like Climate Solutions, Performance Technologies' earnings conversion was excellent, resulting in a 12% adjusted EBITDA margin and a 390 basis point improvement. For the balance of the year, we anticipate ongoing 80/20 progress and further year-over-year improvement, with a sequential earnings increase in Q4. Now let's review the total company results. Please turn to slide nine. Third quarter sales were relatively flat as we continue to see rapid growth in our targeted growth areas, such as data centers and advanced solutions. These were somewhat offset by planned 80/20 activities and divestitures, along with temporary weakness in select HVAC markets. Excluding the impact of the divestitures in Germany, sales were up 3%. Our transformation initiatives are clearly benefiting the gross margin, which improved 530 basis points. SG&A increased $10 million, driven primarily by higher employee compensation expenses, including incentive compensation. I'm happy to report that adjusted EBITDA was very strong again this quarter, with an increase of 39% or $21 million. This equates to an adjusted EBITDA margin of 13.2% or 370 basis point improvement from the prior year. And this now represents the eighth consecutive quarter of year-over-year margin improvement. In addition, adjusted earnings per share was $0.74, 54% higher than the prior year. We're very pleased with another exceptional quarter, resulting in a year-to-date EBITDA margin that is above our targeted fiscal 2024 transformation range. Now moving to cash flow metrics, please turn to slide 10. We generated $47 million of free cash flow in the third quarter, which puts our year-to-date free cash flow at $131 million. This represents a significant improvement compared to $33 million generated in the prior year. Net debt of $184 million was $102 million lower than the prior fiscal year-end, and $39 million lower from the last quarter. Also during the quarter, we repurchased 100,000 shares. For the fiscal year, we're well on track to deliver our improved cash flow conversion targets, driven by higher earnings and a continued focus on working capital. We maintain a relatively low level of debt, supporting a strong balance sheet, and ready to support both organic growth and acquisition initiatives. Now let's turn to slide 11 for our fiscal 2024 outlook. As announced in the press release, we're raising our full year earnings outlook for fiscal 2024. While raising earnings, we're also slightly lowered our full year sales outlook to recognize the impact of the European divestitures in Q3, along with lower expectations for our heating and HTP product sales. In the Climate Solutions segment, we continue to expect data center revenue growth of 60% to 70%, with the forecast trending towards the high end of this range. Moving to HVAC&R, we expect revenue to be flat, slightly lowering the range from the low single digits last quarter. This is mostly due to a slower recovery in heating than originally anticipated. With regards to heat transfer products, we expect sales to decline in the range of 10% to 15%, which is a reduction from our previous guidance. This is primarily due to the ongoing weakness in a few end markets, especially the residential and commercial refrigeration applications and the European heat pump market. For Performance Technologies, we expect advanced solutions to grow in the 25% to 35% range, which did not change from the last quarter. This growth is driven by program launches and continued demand for EV systems and components. We're holding the outlook for liquid and air-cooled products, but we'll be trending towards the lower end after adjusting for the recent divestitures. From an earnings perspective, I'm pleased to report that we're once again raising our adjusted EBITDA outlook for the year. We now expect our fiscal 2024 adjusted EBITDA to be in the range of $305 million to $313 million, representing an increase of 44% to 48%. In addition, we anticipate good free cash flow this fiscal year, resulting in an improved ratio to sales, and capital expenditures are expected to be in the range of $70 million. Other assumptions, including interest, taxes, depreciation, and amortization are included in appendices attached to this presentation, and the press release. To wrap up, we're extremely pleased with the results from the third quarter, while we maintain momentum towards our interim and long-term financial targets. With that, Neil and I will take your questions.

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Matt Summerville with D.A. Davidson. Please proceed with your question.

Thanks. Morning. A couple of questions. First, how much do you feel like you're seeing incremental market weakness in the areas you highlighted in Climate versus more of a function of just 80/20 making its way into the business? And along these lines, if the market headwinds you see today are there -- are going to be prevalent in 2025, is there any reason that shifts the momentum at all with respect to the massive amount of EBITDA margin and EBITDA dollar improvement you're generating across Modine?

Yeah. Good morning, Matt. It's Mick. Let me give you a couple comments on revenue, and then I'll turn it over to Neil to add some more color just around the 80/20 impact because I know there were some questions just around our revenue adjustments. First, I just want to be clear that our revenue adjustments aren't solely tied to market softness. There's clearly an 80/20 element in there. So, last quarter, we had the automotive divestitures closed right at our quarter end on the 31st, and as we analyzed that revenue impact at that point, we were estimating we're running a little bit below the midpoint of the range last quarter. And as we announced last night, we're raising the earnings outlook and adjusting the overall revenue range down a little bit. That's about that 2% adjustment to our sales outlook for the year, about $50 million. And then that's in three areas, and we'll get to your question, right? So, one of them is in heat transfer products, we lowered our outlook, and that's a combination of market and 80/20 activities. And again, I'll let Neil comment in a second. The second one, we talked about air and liquid in the divestitures. So, we're running towards the lower end of our air and liquid range combined by adjusting and truing up the full year outlook for the closing of the deal, the divestitures. And we've seen some softness on the automotive side across the globe, especially on automotive EV, both ICE and EV vehicles. But that's strategically okay with us and also tied to 80/20. And then last, we talked about HVAC&R, and there I want to be clear, it's really the heating market has been slower to recover. It was basically relatively flat. So, we're not seeing it getting worse, and the industry data is showing that we seem to be turning a quarter, but we thought it would recover at a little bit faster rate. So, again, the way we sit today, Matt, we're running about the middle of the revenue range, about the midpoint that we put out last night. And again, I just want to highlight it's really a combination of the market adjustments and 80/20 activities. And that's really what's allowed us to drive the -- a key driver to our rapid earnings growth and margin improvements. So, just maybe before we wrap it up, Neil, maybe a couple comments around the 80/20 impact.

Yeah. Matt, this is Neil. Thanks for the question. That's a good summary for Mick in terms of how we're thinking about it, especially when we think about heat transfer products. And we see some softening in some markets that we potentially would consider exiting. We accelerate those opportunities so we can continue to drive margin expansion and profitability in that business. HTP is a big business. Not all of it is ready for growth. It's still going through 80/20 activity. We've isolated some areas in HTP where we've found favorable markets and trends in customers that -- we're preparing strategic initiatives to grow that business in the next fiscal year. But there's still a lot of work to clean up with the tens of thousands of SKUs and customers that we serve. So, when we see an opportunity to accelerate that through 80/20 because of market softness, we react pretty quick.

Thanks for that, color. And then as my follow-up, just on the data center side of things, Neil, can you talk about kind of what the go-forward funnel looks like? How much visibility you have looking ahead into fiscal 2025 in that business? And when would you expect to start to see a little bit of liquid-related activity start to creep in?

Yeah. Great question, Matt. So, we've got visibility with some of our customers out as far as two years. I'd say on average, it's between 12 and 18 months. Funnel continues to grow. It's been growing at the rates that we'd assumed it would grow at, hence the revenue targets that we've been pretty public about, projections that we've been public about. So, we're happy with where we're at working with our customers in both North America as well as in Europe on co-locations and hyperscalers. Relative to liquid, we had the acquisition, a technology acquisition of assets, IP and assets, which is going to really help us with our product portfolio and making sure that we have the most current technologies in the liquid side, and that's immersion. And then we announced we were going to go into development with a couple customers around our cooling distribution unit, or CDU, which is direct-to-chip liquid cooling. And we expect to be into prototype in the next quarter or two on the CDU with a couple customers. And if their markets and their end customers have demand for high-performance computing, they'll have a solution in place, assuming we pass the validation and testing with that customer. So, CDU's direct-to-chip, I think, is closer to generating revenue than immersion cooling is at this time. But having the immersion cooling allows us to be part of conversations around next-generation data centers that we weren't a part of prior to the acquisition of assets from TMGcore.

Understood. I'll get back in queue. Thank you.

Our next question comes from the line of Chris Moore with CJS Securities. Please proceed with your question.

Hey, good morning, guys. Thanks for taking a couple questions. Maybe we'll just start with margins. It looks like fiscal 2024 operating margin will be in 10-plus range, Q4 being a little bit lower than the first three quarters were adjusted in that six, seven range. I realize you're not giving guidance for 2025, but what are the puts and takes to Modine being able to match or perhaps improve on the 2024 margins in 2025?

Yeah. Hi, Chris. It's Mick here. So, I'll just -- I'll talk EBITDA margin, but same drivers, right? And I'd say first, we'll wrap up this year as a company of well above the target we set out. We wanted to be in the 10% to 12% range, and we're clearly trending between the 12% and 13%. So, we're ahead of schedule, but that doesn't mean we're not going -- our plan is fully to drive further margin improvement next year. And to your question, where that comes from, a couple elements. On the growth side and mix, we still anticipate growth in those targeted areas that we've been through, whether that's on the GenSet side in PT or data centers or IAQ, EV systems. We see growth, and that's a good margin and earnings mix up for us. And then, if you go through where we're at on our 80/20 journey, early days, there's a lot of simplifying the business, looking at pricing, and there's still elements of that for us. But also, then move into a heavy focus on operational and productivity, right? Leaning out and getting the benefits of those things where you simplified your businesses. So, it will be kind of like this year and where we started the journey. Some of our businesses, we are not going to worry about the top line. We're going to drive earnings and margins through PLS - product line simplification 80/20, while continuing to accelerate growth in the targeted areas.

Got it. Very helpful. Maybe talk a little bit more about M&A. I know that in the prepared remarks, you guys talked about primarily looking at bolt-on acquisitions. At the Investor Day, you talked about needing roughly $400 million to $600 million in M&A between 2024 and 2025 to comfortably reach your Climate Solutions goals. You have subsequently indicated not necessarily need to get to that level. I'm just wondering if you can give kind of any updates in terms of what a more reasonable range might look like moving forward.

Yeah. Again, Mick, I'll go first just from kind of the math, and then Neil can add some more color. Early days, when we -- Neil first came in that we're literally assembling the current team and we're spinning through the data. We look at it from an 80/20 perspective. We weren't really sure how much business we want to retain, how much stays when we go through all of our activities. And I think as we've had the last four to six really strong quarters, one of the messages Neil and I've had is we're getting everything we thought we would get from the improvement. In many cases, as we better serve our customers, focus on key customers, orders are up. All of that said, the reason why we don't see the need for large acquisitions to get to our financial targets is really around the lessons we've learned from an 80/20 about the stickiness of some of our business. And then the second thing I'd say to turn it over to Neil, we've continued to uncover jewels within Modine that we didn't necessarily know were there that we can grow organically.

Yeah. That's a great point, Mick, and thanks for the question. The 400, 600 number was the very first days of our 80/20 journey a couple years ago. We've learned so much more, especially with the fact that we've got more organic growth that we can drive within the company, which requires less inorganic growth for us to meet our inorganic -- for us to meet our financial targets. So, we have spent a lot of time on the organic growth and the businesses that we want to stand up and create organizations around it to drive. And then at the same time, we have been active on the M&A front. We've done multiple divestitures and a couple small deals in the last couple quarters. And we're doing that in strategic areas where it helps us build out our product portfolio, helps us expand in a geography, or most importantly, it helps us improve our technology in the areas that we want to serve.

Just on that last point, really hard to quantify due to timing and opportunity, but I think it's safe to say that that original number is at least half, right, from what we thought we would need. So, again, it really depends on the funnel and exact timing, but it's significantly below what we'll still be doing outlooking at M&A.

Got it. Very helpful. I will jump back in queue. Thanks guys.

Our next question comes from the line of Jeff Van Sinderen with B. Riley. Please proceed with your question.

Good morning, everyone. Let me first say impressive work on margins and overall cash flow. Maybe you can give a little bit more color on the status of the heat pump market, what you're seeing there, the latest, and then also on the GenSet business, how is that evolving, and then I guess the outlook there and any quantification around that for those two businesses.

Yeah. On the heat pump market, we continue to see some softness there as this heat pump adoption has been elongated out over an additional couple years based on the European regulations, some excess inventory in the system, and we're pacing our investments in heat pump to adjust to that. Long-term, I'm personally with what we're doing and the actions that we put in place, we're confident in this space and this market. It's just a short-term reset based on the extension of the adoption rate. So, that's what we're seeing. We're working through it. It's real-time. It's live, and the team's making the appropriate adjustments. On the GenSet side, we've got a nice technology there. We're helping essentially the industry move towards a lower cost, more reliable, higher quality product that is starting to get adopted. The earlier adopters are starting to win share, and I think a lot of people are taking notice of and they're looking for the solution that we can provide with Modine.

Okay. That's helpful. And I know there's been a lot of talk about 80/20, and you seem to be executing phenomenally well on everything you're doing there. I guess, are there other low-margin businesses that you are planning to exit or you might contemplate exiting? As you look at your entire enterprise, how much business do you have that you'd like to either divest or wind down at this point if we were to look at that in overall dollars?

Yeah. It's a good question. So, certainly, as we continue to improve our profit profile and we expand margin in the business, it sets the bar and it raises the bar. Then you always have some bottom quartile business that needs to be addressed. That's just the evolution of 80/20, and that will essentially be how we operate the company going forward. So, there's always going to be that level of business that we have to question. Is it strategic that we want to be in it if it's low margin? If not, then we have a series of different approaches and activities in terms to address it. We haven't gone out with a specific number in terms of what that looks like, but I can see it being in the same range of what we've been able to address over the last 18 months within 80/20. It's what, $300 million to $400 million of revenue that we've through divestitures and product line simplification so far. And I would expect somewhere in that $100 million-plus range as we go forward that there's always going to be something that's underneath the threshold.

Yeah. I think too we look at the data. It aligns where Neil was going. As Neil was saying, there's always the bottom quadrant, the quad four stuff. And just for any company, for us, that's going to be 4% or 5% of sales. I think where we're at, it's probably a little bit more than that. So, there's probably a $200 million to $250 million type number of what we would call when we say that quad four. It's the lowest volume product, the lowest volume, kind of margin products with customers that are lower on our volume scale.

Okay. That's helpful. And then if I could just squeeze in one more. I wanted to circle back to the liquid-cooled for data centers for just a moment. Just to clarify, I think you said that you'll start to go after data centers that previously you did not. Maybe just touch on strategy to win in those.

Yeah. Absolutely. We've cast a net on the hyperscaler side to go into it. Make sure that the hyperscalers that are winning share in this space understand the technology advantages that we have with Modine and our Airedale brand. 100% we're having those conversations and that takes time to cultivate those relationships. Relative to the liquid-cooling piece, this allows us to get into conversations of next-generation data centers that are planning for high-performance computing where air cooling, traditional mechanical cooling solutions are not sufficient. It needs to be augmented. It typically is augmented through a liquid cooling or immersion cooling technique. So, we did not have that product and we did not have those assets, which meant we weren't invited to those conversations on how do we use technology to solve for high-performance computing. Now that we have those assets, we have something to sell and help them solve their problems. They're looking for us as well as our competitors in terms of how we can advance the next-generation of data centers around high-performance computing driven by all the things that we know, AI, AL, MV. And not having the TMG assets, we weren't in those discussions, but we are today now.

Okay. And then, the new liquid-cooled CDU, that will be out in Q4 or Q1, we think?

Yeah. We're targeting for Q1 of the next fiscal year and getting on some pilots and working closely with our customers, with a couple of our co-location customers, correct.

Okay. Great. Thanks for taking my questions and best of luck.

Yeah, of course.

[Operator Instructions] Our next question comes from the line of Brian Sponheimer with Gabelli Funds. Please proceed with your question.

Good morning, everyone. Congratulations on another great quarter.

Thanks Brian.

And a lot has been addressed already. Just on the German businesses, I'm looking at the cash flow statement, doesn't look like there was any cash in. Were you able to jettison any liabilities with those businesses when they went out the door?

Yeah. Hey, Brian. It’s Mick. Yeah, there was actually a small cash benefit on the ultimate transaction, but immaterial. And then two answers on your liability question. Actual liabilities, the biggest one on the balance sheet would be some pension liabilities that went, and that was a fairly material number, which we're happy about. And then the second one, and you know it well, it was the potential liability. And right, if you took each of those facilities in a situation where we would exit them, the liability that Modine and the shareholders would have if we would have retained them was quite a large potential liability.

Okay. Yeah. I certainly appreciate that. And forgive me, but these businesses, so the roughly $30 million or so of revenue, was not in the prior 6 to 11 sales contemplation for growth that was given at the end of the second quarter?

We had built -- we factored that in, Brian, just in the days heading into our earnings call, and we were trending a little bit lower towards the lower end of the range. What we did this time is we trued it up, we made up some adjustments, and then on top of it for our remaining automotive business, we took that down a little bit.

Okay. All right. Understood there. I guess last one for me. Last year in the fourth quarter, you had evaluation allowance adjustment that tweaked your GAAP earnings. Anything as we think about this fourth quarter from a tax perspective that could move the needle one way or the other? Obviously, the algos are going to see year-over-year declines in EPS, but anything we should be thinking about for the fourth quarter here?

No. A good point about the reported number, that's going to be tough. We will do our -- we'll make sure we highlight that, but from this coming Q4, we're not anticipating any large events or impacts to that.

Understood. Well, you all keep raising the bar higher and higher each quarter. So, congratulations, and I look forward to talking to you later.

Thanks Brian.

Our next question comes from the line of Tim Moore with EF Hutton. Please proceed with your question.

Thanks and congratulations on the continued impressive EBITDA margin expansion and self-help catalysts to drive highly impressive EPS growth that even exceeded my street-high estimate. I got a really good sense of the data center's differentiation edge when touring that facility in August in person, but I just want to address another business line, actually. For advanced solutions, those revenues were flat sequentially in the quarter, but your guidance at the midpoint implies about a 25% sequential growth in the March quarter from the December quarter. Could you just give us a little bit more of an update on battery thermal management as we kind of look out over the next 12 months? And that timing, without pinpointing exactly the $160 million sales and maturity, how far out do you think that is? And then while you're on the topic for thermal management, how's planning of the launch in Europe going?

Good question. Thanks for the questions. This is Neil here. So, we continue to invest in our battery thermal management system and electronics cooling package. Certainly, we're seeing continued interest in the product, and we're expanding our capability and capacities. We opened up the earnings, in my script at least, to talk about the $160 million that would be at peak volume. So think two to three years out, that's when you're running at peak volume within these programs that we want. So, we're excited about that because the trend continues to grow quarter-over-quarter in terms of the potential revenue there. More investments are being made, and we've been in contact and had some really good conversations in Europe with some of our customers that we've targeted, and the fact that we've been public about the expansion, and an existing facility that has existing infrastructure and Modine employees that are already very attuned to making sure that we have good reliability, quality, and delivery for this industry has been well received. So, we're going to continue to ramp up our investments. We're going to continue to open up the space in the facility in Italy for us to be able to grow in Europe, and we've had positive conversations with those customers, and we continue to trend in the direction that we'd expect with the amount of investment that we put into this business.

Great. That's really helpful, color. Just switching gears, during my visit in August, the facilities, not just data centers, but HVAC, I get a sense of really the customer's focus and the emphasis there live in the shops, dedicated customers and such. But I'm just wondering, as you progress through 80/20, more so on performance technology side, are you uncovering more savings and efficiencies than you budget or expected a year ago? And then I'm just wondering, just thinking about this whole customer maximization, as you go through both segments on 80/20, how do you maybe avoid going too lean as you achieve the value-based pricing?

Yeah. Good question. So certainly on both sides of the business, not just Performance Technologies, the Climate Solutions and Performance Technologies, there's opportunity for productivity gains, without a doubt. And I think we've been able to display that through the success that you've seen through the margin expansion. We've done that through commercial excellence programs and we're pivoting into the operational excellence programs. So that's anything from labor to supply chain, procurement or purchase price variance or PPV. So there's a lot of activities that we can do on the operations front and the team has been working diligently to put those together. And that will be the next phase in terms of our margin expansion within the business, as we've reached the thresholds that we would expect through some of our price expansion. So operations improvement and excellence is there, it's in both sides of the business, not in PT. And the teams are putting together the funnels and the activities and the list of projects for the next annual operating plan. So that'll be a good indicator of how big that is.

Great. Thanks for that elaboration. It's a good carrot for margin expansion in the next fiscal year. And thanks for my questions.

Thanks. Appreciate it, Tim.

Our next question is a follow-up question from the line of Matt Summerville. Please proceed with your question.

Yeah. Thanks. Just two quick follow-ups. Mick, what's the headwind, and I apologize if I missed it, what's the headwind from divestitures in your fiscal fourth quarter?

It's going to be $20 million to $25 million at the estimated impact in Q4.

And then the DTMS business, two to three years ramping to $160 million or so, thereabouts, based on the programmatic winds you've had. Fiscal 2024, realizing this is buried alongside the coding business, the EV components business, how big is the DTMS business for you guys this year, to kind of think about how that trajectory looks out over the next two to three?

Yeah. So that -- the ATS business excluding codings is about $100 million. And I think, and I think some -- we just had that question too, I think we'll provide an updated long-term outlook, Matt, this year we're talking about -- 30% type growth, and we said we think the CAGR on that's the 35% to 40%. I think as far as growth for next year, we'd expect it to stay in that range. So we -- that $100 million growing at a -- in that compound growth rate range of that 35% to 40% would seem reasonable.

Got it. Okay. That's all for me. Thank you.

There are no further questions in the queue. I'd like to hand the call back to Kathy Powers for closing remarks.

Thanks so much, and thanks to everybody for joining us this morning. You'll be able to access the replay of this call through our website in about two hours. We hope that everybody has a great day. Thanks. Bye.