Madison Air Solutions Corporation Q2 2026 Earnings Call

Good morning and welcome to the Madison Air Second Quarter 2026 Earnings Conference call. At this time, all participants are in a listen only mode. Following the prepared remarks, we will open the call for a question and answer session Please be advised that today's call is being recorded. I will now turn the call over to Steve Low-Tufo, Senior Vice President, Investor Relations. Please go ahead.

Great. Danielle, thank you. And thank you to everybody for joining. Good morning. Welcome to Madison Air second quarter 2020 earnings call. Joining me today are Jill Wyant, President and Chief Executive Officer. And JJ Foley Chief Financial Officer Before we begin, I'd like to remind everyone that certain statements on this call are forward looking in nature and are subject to risks and uncertainties that could cause actual results to differ materially. For information concerning these risks, please see Madison Air recent SEC filings. We undertake no obligation to update these statements as a result of new information or future events. In addition, in today's remarks, when comparing two Q 26 results to Q 25 or referring to our 2025 performance, such information is presented on a combined basis for Madison Air and Aprilaire, calculated as if aprilaire had been known since January 1st, 2025. We will also refer to certain non-GAAP financial measures. You can find calculations in a reconciliation of these measures to the most closely comparable GAAP measure in our earnings release. Presentation. Accompanying this call and in the supplemental information, as applicable, which can be found in the Investor Relations section of our website at Madison Air dot com.

With that, I'll turn the call over to Jill.

Thank you Steve. Good morning, everyone, and thank you for joining us today for our second quarter earnings call. I'll start by walking you through an overview of the business, our strategy and the growth momentum reflected in our second quarter results. I'll then hand the call over to JJ to discuss our second quarter 2026 financial results and updated guidance for full year 2026. And then I'll wrap it with key takeaways before we open the call for Q&A. And so with that, please turn to slide five. At Madison Air, we see air differently. Our mission is to make the world safer, healthier, and more productive through the power of better air. We build and scale superior air quality businesses that operate in high value niches adjacent to traditional Hvac across both commercial and residential segments. Our leading brands include Addison Aprilaire big Ass fans, Braun Nortek Air Solutions, Nortek Data Center, Cooling, and Reznor Collectively, our businesses have delivered durable compounding growth, outpacing the core U.S. GDP growth rate in 16 of the last 18 years. On an historic basis, through 2025. Our strategy is built around three strengths that work together to deliver better air, stronger customer outcomes, and attractive long term returns.

The first strength is our return on air approach, how we help customers achieve their most critical business outcomes. We bring together technical expertise, leading brands and collaborative partnerships to solve customer challenges in the environments we serve. Whether we're helping protect critical infrastructure and reduce the risk of downtime in a data center. Improve yield and asset utilization in a semiconductor facility, or create healthier homes through our healthier system. The outcome is the same. Better air produces better outcomes The company's second strength is our leadership in attractive growth markets within our commercial segment, we serve 15 end markets where performance is critical and customers invest in highly engineered, custom and semi-custom solutions that deliver measurable value. While data centers are important, part of that opportunity, they are just one of the markets we serve. Our brands also support hospitals and health, life sciences, semiconductor chip fabs, power generation, and other mission critical applications supporting a broad range of high growth opportunities. In residential, we work through our contractor and distribution channels to reach homeowners and build awareness and adoption of healthier system that education creates demand that didn't previously exist, giving us avenues to grow even in soft housing and soft, traditional Hvac markets.

Since 2021, we estimate that we've more than tripled our addressable market by expanding into larger, faster growing sectors with more complex performance requirements. We've not only grown the business, we've repositioned the portfolio towards markets where air is mission critical and where our technical capabilities can create differentiation. That evolution reflects both the breadth of our capabilities and our ability to apply them in new, attractive markets. The third strength is our value creation model. We combine a decentralized operating structure and lean corporate center with the capabilities and scale of the broader enterprise. Our businesses remain close to their customers and can move quickly to invest where they see the greatest opportunities. While they benefit from shared capabilities, talent, technology and capital. That combination of local agility and enterprise scale is an important competitive advantage. It enables us to pursue growth rapidly and efficiently, sustain strong profitability and cash flow, and deploy capital into the highest return opportunities Taken together, these three strengths return on air or our outcome driven solutions, leadership and attractive markets and a disciplined value creation model form of repeatable framework for creating long term value Please turn to slide six. On an LTM basis, we are a $3.75 billion revenue business with strong underlying profitability and cash generation.

I'm proud of the quality of our results. 26.6% adjusted EBITDA margins. And $430 million in free cash flow, which together represent the power of our unique value creation model. We built this portfolio with resilience in mind. Balanced across commercial and residential with meaningful exposure to replacement, retrofit and upgrade activity that holds up across cycles. We're also seeing a growing share of demand for services and aftermarket solutions, which adds stability and increasingly recurring revenue characteristics over time. Aftermarket and services represent about 10% of total revenue, and we see significant opportunity to expand those offerings over time. We're investing in service capabilities, digital tools, and simplifying how customers do business with us over the life of their systems. A great example of this is Nortek Air Solutions. New coils software, selection software, and mobile app. These tools are making it easier for customers to identify, quote and order replacement parts seamlessly. Adoption has been strong, with approximately 30% of orders flowing through these self-service channels. These tools simplify routine transactions and allow our teams to spend more time solving customer problems and creating real value. It's a great example of how we're using innovation and technology to strengthen customer relationships and expand our aftermarket opportunity.

Geographically, the business is predominantly focused on North America, where we have established brands, strong channel positions, and long standing customer relationships. As of June 30th, we have over 9000 employees, with 600 of them focused on R&D to drive innovation. Altogether, Madison Air is built to grow with strong profitability, cash generation and market breadth, and a growing aftermarket opportunity, creating multiple avenues for success and a durable platform for profitable growth. Please turn. To slide seven. Madison Air is everywhere. Air matters from clean rooms and schools to hospitals, data centers, government institutions, and single and multi-family homes. Our solutions show up everywhere. People live, work, learn and play. And that's by design. We've built capabilities across the air ecosystem from thermal management and cooling to ventilation, air handling and humidity control. This breadth enables us to solve complex customer challenges in a wide range of applications and environments. We have. Expanded into new applications and high value markets by building on our core capabilities and expertise. We estimate our North American addressable market at $40 billion, supported by powerful secular tailwinds including the growth of advanced manufacturing, increased demand for healthier and more energy efficient buildings, and the rapid growth of AI and compute.

These trends directly align with our strengths, and while the applications may differ, our role remains the same, helping customers get more from the air in their environments. This focus reinforces our ability to create value across a broad range of customers. Applications, and markets. Please turn to slide eight. Madison Air. Products and Services capabilities run deep and we see significant opportunity as we apply our capabilities across high value, performance driven end markets in both commercial and residential segments. Our second quarter results demonstrate the strength of this approach and the value of our diversified business mix. Within commercial, we serve mission critical applications across 15 end markets, which provides exposure to multiple demand drivers rather than reliance on any one single sector. What makes this set of end markets so attractive is that they share several common characteristics. They benefit from long term secular tailwinds require sophisticated air solutions, and place a premium on performance, innovation and outcomes. Air is essential infrastructure in the markets we serve, and mission critical to what these customers do. We believe that positions us well for continued growth in an environment where macroeconomic trade and geopolitical conditions can shift and are shifting quickly.

Our diversified exposure provides resilience. While significant white space remains as customers increasingly use better air to improve their business outcomes. Together, these end markets create a more durable growth profile. Turn to slide nine. Orders are a leading indicator. They really tell us where the business is going, and based on our second quarter results, the signals are strong. Our new business pipeline remains healthy with combined company orders growing 45% in the quarter and 37% year to date. As we noted last quarter, orders can fluctuate based on project timing and customer schedules. And to that end, and we noted this last call, we expect year over year orders growth to moderate and decline in the fourth quarter against exceptionally strong comparisons from 2025. The underlying drivers of demand remain strong, and our expanding pipeline continued opportunity, conversion and record backlog give us confidence in our ability to deliver continued growth over the next several years. Despite a dynamic macroeconomic backdrop. With strong order activity and a second quarter book to bill ratio of 1.3 times. We exited the quarter with record backlog of $2.9 billion, up 133% year over year on a combined company basis. That backlog provides strong visibility into the near term and beyond, with more than 50% of that backlog expected to convert in 2027 and later positioning us well for continued growth.

More importantly, that demand is translating into performance. Our pro forma net sales growth of 14% in the quarter and 13% year to date reflect the broad based growth momentum we're seeing and driving across the portfolio. We remain pleased with the balanced nature of orders in our commercial segment. While Nortek Data Center Cooling remains the largest contributor of commercial orders, growth, commercial orders increased nearly 50% in markets other than data centers in the second quarter, reflecting broad based strength across the enterprise What's driving that demand? Well, in many cases, it's our ability to deliver return on air Nortek air solutions. For example, recently secured a significant project supporting a leading children's hospital. The customer needed a highly engineered air handling solution capable of delivering up to ten times the air capacity of traditional units for their 2,000,000 square foot pediatric facility. In a southern metro area that has seen strong population growth. This is a great example of return on air in action. We're not simply selling equipment. We're helping customers reduce operational risk, extend asset life. Maintain continuous care, and create better outcomes for the people. In this case, the children and families who depend on these facilities every day.

That kind of differentiated value is what drives orders and backlog growth and builds long term customer relationships that open services and aftermarket opportunity. Please turn to slide ten. The results and demand momentum were discussing today are the result of a deliberate strategy to create value. The key elements of the Madison Air strategy and how we translate that. Our return on air approach into sustainable growth and strong cash flow are shown here. At the center of it all is return on Air. We help customers turn air from a utility into a strategic asset that improves performance, reduces energy consumption, protects critical assets and operations, and creates safer, healthier, and more productive environments. The value we create extends beyond a SKU or even a configured product. It comes from our collaboration and co-creation with customers, from our seat at the customer's design table. We're applying deep application expertise, engineering insight and system level thinking to help solve problems and optimize outcomes by. Being early and partnering closely with customers. We help shape better solutions from the start. When customers achieve better outcomes, we create value together and that shared value drives sustainable growth for Madison Air. What makes this model powerful and that is that it is repeatable.

We apply the same playbook across the portfolio, taking close customer collaboration, combining it with technical expertise, innovation, and disciplined execution to create value in a way that can scale across businesses, markets, and cycles. We then work to outperform the markets we serve through innovation, value based selling, strong channel and customer partnerships and investments in lifecycle services and aftermarket capabilities. The proof points are evident in our performance. We've consistently outpaced U.S. GDP unlocked approximately $28 billion of additional addressable market, and generated strong margins and cash flow, while continuing to invest for growth. Growth, investment, and execution are what make the model work, and that takes our team, the 9100 plus people who power Madison Air. We invest in them to create consistency and alignment, and to ensure the value creation model is embedded across the organization and shows up in how we execute every day. I always say people vote with their feet and our people overwhelmingly are voting to stay with Madison Air. While I believe Gallup reported a three point decline in global employee engagement, our employee Net Promoter score, which was measured as a part of our second quarter proprietary employee engagement survey, increased four points.

On a related note, our monthly turnover rate remains 30% below manufacturing benchmarks, which reflects the strength of our culture and the deep commitment of our team. Engaged teams are also safer, healthier, and more productive teams, and that shows up directly in the results we deliver Finally, we put capital to work where it can create the greatest value, and that means investing in organic growth, pursuing inorganic M&A opportunities where they make good discipline sense. And that gives us flexibility to reinvest behind our highest return opportunities as we pursue opportunities in high growth markets. Some parts of the portfolio will naturally be at an earlier stage of their margin journey. An example of this is the data center cooling business, which is a great business with strong fundamentals. Our experience has shown that these investments can create significant value over time as we apply the same profitable growth playbook that is driven success across Madison Air scaling the business, strengthening our market position, and expanding margins over time. As the business matures, we improve margins through a combination of value selling, continued investment in innovation, which is a great margin lever for us. Profitable top line growth that leverages our fixed cost base expansion of higher market aftermarket and services revenue, and an ongoing focus on 80/20 and operational discipline That same operating discipline also positions us to navigate ongoing inflationary pressures through pricing actions, productivity initiatives and material cost reductions.

Together supporting our ability to protect and grow margins over time. These elements have been central to our success across Madison Air and give us confidence in the sustainability of our margins as we continue to invest in high return growth opportunities. The result is a business designed to deliver sustainable, profitable growth and strong cash generation over the long term With that, I'll turn it over to JJ to walk through the second quarter financial performance and outlook Thank you Jill, and good morning, everyone. If you could please turn to slide 12, I'll pick up there on a pro forma basis. Net sales for the quarter were up 14% and adjusted EBITDA grew 12%. We delivered strong free cash flow so far this year, approaching $140 million year to date. Pro forma net sales grew 14% year over year to $991 million, with low single digit price realization across both segments and double digit volume growth, driven by broad based demand across our commercial end markets and continued strong demand for healthy air systems in the residential segment. Top line growth translated into 12% proforma adjusted EBITDA growth margins of 26.8% were up 155 basis points from the first quarter.

Year over year. Margins contracted approximately 59 basis points. Margins were generally in line with our expectations, as we called out on the second quarter. On the first quarter call. This is impacted by the timing of net tariff and inflation costs, commercial segment mix, which more than offset productivity gains and disciplined cost management. Because of the timing of the April IPO, the weighted average share count for Tsukue is slightly lower than than we. Are assuming for the remaining quarters this year. Given this dynamic, we'll be reporting our adjusted net income figure here in the presentation, our adjusted net income was $148 million in the quarter. And represented 83% per forma year over year growth, driven by net sales and pre-tax earnings growth mentioned above. On the quarter, we generated $140 million of free cash flow year to date, which represents net income, conversion of 123%. We ended the quarter with net leverage of 2.8 turns, which represented a 0.2 turn improvement versus the first quarter pro forma for the IPO. This continued improvement came from earnings growth and cash generation, which we expect to accelerate in the second half. Overall, the quarter demonstrates our ability to convert net sales into earnings growth and cash generation.

With that, let me review our segment level performance on slide 13. In commercial, we drove solid orders. Growth orders were up over 70% year over year on a combined company basis, reflecting continued momentum in key technology platforms, including air, Liquid and hybrid cooling, air handling and air movement backlog for the segment increased 142% year over year on a combined company basis, providing very good visibility and supporting solid revenue momentum into 2027. Importantly, commercial orders were up almost 50% year over year for markets other than data centers, and that backlog is up over 20% year over year. Strong customer demand drove 22% year over year. Combined company net sales growth to $659 million, driven by a combination of low single digit pricing and high teens. Volume. This quarter reflects continued progress across our 15 commercial end markets that Jill spoke about. As we benefit from our diversified portfolio and decentralized operating model. Reported commercial segment adjusted Ebit grew 11% to $173 million and reported adjusted EBITDA margin was 26.3%, in line with our expectations coming into the quarter, the year over year margin comparison primarily reflects rapid growth in large data center programs, including project mix and capacity addition investments, program ramp costs, and the timing of inflation and Tariff recovery actions across the broader segment.

We have a clear roadmap to expand margins in the second half, and we believe the key drivers are measurable and within our control. We closely track productivity program atomization and price realization across defined operating targets, and each is progressing in line with our plan. These operating levers we manage every single day, giving us confidence in our ability to deliver sequential margin improvement in year over year margin expansion. In the second half Overall, the segment continues to benefit from exposure to mission critical end markets, including data centers, aerospace, education, healthcare, and life sciences. And we remain focused on executing our backlog, innovating to meet customer demands, and sustaining growth momentum. Now, please. Turn to slide 14 for the residential segment results. The. Residential segment delivered 2% net sales growth on a combined company basis. Despite a soft housing market performing in line with our expectations. As we've mentioned before, given the short cycle nature of this business, orders and backlog are less relevant than in commercial. But with that said, orders grew low single digits in the quarter. We continue to expand healthy air system awareness and adoption through our contractor partners. Every Hvac replacement and service call creates an opportunity to engage homeowners amounting to roughly 40 million annual in-home touchpoints.

That's 40 million chances every single year to educate homeowners on the value of the healthier systems and to make a sale. Our contractor, Education conversion efforts support white space penetration and market expansion. And in the second quarter, did just that. Despite softer housing and Hvac environment. Overall, our residential segment continues to make sequential progress on healthier system penetration. Channel conversion, and price realization, and productivity April Air delivered double digit revenue growth supported by contractor and distribution conversions and new product launches. Our second quarter results demonstrate the resilience of our model, which is purpose built to be able to navigate broader market headwinds like these with vast, widespread penetration opportunity, opening paths to growth and otherwise muted residential conditions. Reported net sales increased 16% or 2% in the combined basis, to $334 million, which was supported by low single digit pricing in approximately flat volume. Overall, in addition, reported segment adjusted EBITDA grew 36% to $99 million with 423 basis points of margin expansion, driven by productivity, cost, actions, price, and favorable mix tariff refunds provided a modest benefit and margins expanded meaningfully. Excluding that impact, overall, the segment continues to demonstrate strength and remains differentiated in product channel and overall opportunity compared to the more traditional residential Hvac providers.

We remain focused on driving growth through innovation and channel presentation to effectively position when demand in flex now. Turn to slide 15 in our balance sheet. The strength and flexibility of our balance sheet is supported by continued strong cash generation. As of June 30th. Net debt was approximately $2.8 billion, with net leverage at 2.8 times trailing the 2.6. Billion dollars net proceeds from the April IPO and concurrent private placement were used to retire debt, including interest. This improved flexibility allows us to continue investing for the long term. In organic growth, Delevering. The balance sheet and strategic acquisitions. Our second quarter leverage improved approximately 0.2 turns to 2.8 times. Trailing net leverage, compared to an IPO. Pro forma net leverage of roughly three at the end of March We believe we have a clear line of sight to organically achieve our longer term targeted range of less than two and a half times net debt to EBITDA by year end 2026, driven by continued strong cash generation. In addition, as of June 30th, we maintained solid liquidity of roughly $1.6 billion, including $262 million of cash on hand and about a $1.3 billion undrawn revolver, which increased from $340 million in the second quarter, providing ample flexibility to support operations and strategic initiatives.

The business continues to generate strong free cash flow and reported free cash flow of approximately 123% in the first half, driven by our asset light model and disciplined working capital management. Reported LTM Free cash flow margins were about 11.5%. Organically, we continue to expect free cash flow, conversion of net income above 100%. Now please turn to slide 16 to discuss our capital allocation priorities. Our capital allocation framework remains consistent and disciplined, focused on deploying cash to maximize shareholder returns centered on three key priorities. First, we continue to invest in high return organic growth opportunities, particularly in mission critical, defensible technology platforms and durable end markets where we see the strongest demand and margin expansion potential Second, we're committed to maintaining a strong and flexible balance sheet with a clear path to organic deleverage. Third, we intend to pursue strategic and disciplined M&A to accelerate growth and strengthen the portfolio focused on assets that expand our capabilities, enhance our technology platforms, and deliver clear strategic and long term financial returns. As noted, we are willing to be flexible for the right opportunities while remaining committed to rapid integration and post-acquisition Delevering. Our integration of Aprilaire and the leverage reduction achieved since the closing of that transaction in May of last year.

Demonstrate our ability to do just that while maintaining financial discipline. Overall, we believe this balanced approach positions us well to drive long term value creation. While maintaining financial flexibility. Now, please turn to slide 17. The strength of our first half, particularly within our commercial segment, together with visibility provided by our record backlog, supports an increase to our full year net sales guidance. We now expect net sales to be about $75 million higher than prior guidance at the midpoint, or a range of