MAIR

Good morning, welcome to the Madison Air Q2 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, thank you to everybody for joining. Good morning. Welcome to Madison Air's Q2 2026 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's 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 Q2 2026 results to Q2 2025, 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 owned since January 1st, 2025.

We will also refer to certain other non-GAAP financial measures. You can find calculations and a reconciliation of these measures to the most closely comparable GAAP measure in our earnings release, the presentation accompanying this call, and in the supplemental information as applicable, which can be found in the investor relations section of our website at madisonair.com. I'll turn the call over to Jill.

Thank you, Steve. Good morning, everyone, thank you for joining us today for our Q2 Earnings Call. I'll start by walking you through an overview of the business, our strategy, and the growth momentum reflected in our Q2 results. I'll hand the call over to JJ to discuss our Q2 2026 financial results and updated guidance for full year 2026, I'll wrap it with key takeaways before we open the call for Q&A. 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, Broan-NuTone, 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 Healthy Air 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 an important part of that opportunity, they are just one of the markets we serve. Our brands also support hospitals and healthcare, 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 Healthy Air Systems. 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 a 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 margin 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 add 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 coil 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 longstanding customer relationships.

As of June 30th, we have over 9,000 employees, with 600 of them focused on R&D to drive innovation. Altogether, Madison Air is built to grow with strong profitability, cash generation, end 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 multifamily 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 approximately $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's 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 Q2 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. Please turn to slide nine. Orders are a leading indicator.

They really tell us where the business is going. Based on our Q2 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. To that end, we noted this last call, we expect year-over-year orders growth to moderate and decline in the Q4 against exceptionally strong comparisons from 2025. The underlying drivers of demand remain strong in 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 Q2 book-to-bill ratio of 1.3x, we exited the quarter with a 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 Q2, 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 10x the air capacity of traditional units for their 2 million sq ft 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 opportunities. Please turn to slide 10.

The results and demand momentum we're 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 engaging 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 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 9,100+ 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 Q2 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 disciplined 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 has 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 Q2 financial performance and outlook.

Thank you, Jill, and good morning, everyone. If you can 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. Topline growth translated into 12% pro forma Adjusted EBITDA growth. Margins of 26.8% were up 155 basis points from the Q1. Year-over-year, margins contracted approximately 59 basis points. Margins were generally in line with our expectations as we called out on the Q1 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 AprilAire IPO, the weighted average share count for Q2 is slightly lower 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% pro 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 2.8x, which represented a 0.2x improvement versus the Q1 pro forma for the IPO.

This continued improvement came from earnings growth and cash generation, which we expect to accelerate in the H2. 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 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 EBITDA 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 H2, and we believe the key drivers are measurable and within our control.

We closely track productivity, program maturization, and price realization across defined operating targets. 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 and year-over-year margin expansion in the H2. Overall, the segment continues to benefit from exposure to mission critical end markets, including data centers, aerospace, education, healthcare, and life sciences. 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.

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 touch points. That's 40 million chances every single year to educate homeowners on the value of the Healthy Air Systems and to make a sale. Our contractor education conversion efforts support white space penetration and market expansion. In Q2 did just that, despite softer housing and HVAC environment. Overall, our residential segment continues to make sequential progress on Healthy Air System penetration, channel conversion, and price realization and productivity. AprilAire delivered double-digit revenue growth supported by contractor and distribution conversions and new product launches.

Our Q2 results demonstrate the resilience of our model, which is perfectly built to be able to navigate broader market headwinds like these with vast white space penetration opportunity, opening paths to growth in otherwise muted residential conditions. Reported net sales increased 16% or 2% on a combined basis to $334 million, which was supported by low single digit pricing and 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. 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 penetration to effectively position when demand inflects.

Now please turn to slide 15 and 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 2.8x trailing. The $2.6 billion net proceeds from the AprilAire 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 Q2 leverage improved approximately 0.2x to 2.8x trailing net leverage compared to an IPO pro forma net leverage of roughly 3x 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 2.5x 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 Q2, 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 H1, 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 delevering. 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 H1, 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 $3.825 billion-$3.925 billion. This represents high single-digit plus growth on a pro forma basis. This 2026 growth outlook is above the longer-term organic mid-single-digit growth ambition we discussed at the last earnings.

Looking ahead to the Q3, we expect net sales growth of high single-digit plus with a jumping off point of $898 million in the Q3 of 2025. On Adjusted EBITDA, we anticipate $1.02 billion-$1.065 billion for the full year, or high single-digit to low double-digit growth on a pro forma basis. We continue to expect Adjusted EBITDA growth that outpaces revenue growth, with resulting full year Adjusted EBITDA margins of about 27%. The implied H2 margin rate represents a modest step-up from the H1, driven by operating leverage, productivity initiatives, and further price realization. Beyond the headline guidance, our assumptions remain largely unchanged.

We continue to expect strong free cash flow conversion, CapEx investments of less than 2% of sales, cash interest of approximately $240 million reflecting the IPO and our latest debt repricing, an effective tax rate of 29% and a diluted share count of approximately 507 million at year-end. We also included approximately $38 million in central expenses, a modest improvement from our prior estimate, which includes the required activities that come with being a public company. As discussed on the last call, we expect to offset those impacts over time through a combination of additional pricing and operational activities. At the same time, we continue to invest in innovation, commercial execution, and productivity initiatives that support our longer-term growth agenda.

Stepping back, our outlook assumes a generally stable demand environment and continued strength across commercial end markets, including data centers, logistics, and healthcare. In residential, we continue to expect growth driven by white space opportunity for healthier systems. While geopolitical and macroeconomic conditions remain fluid, our teams are really focused on what they can control, serving customers, driving productivity, and executing our strategic priorities. We believe that approach positions us well to navigate an evolving macroeconomic environment and deliver on our commitments. With that, I'd love to turn the call back to Jill.

Thank you, JJ. Our Q2 performance demonstrates the strength of Madison Air. Across our brands, we're participating in the right markets. Our innovation is delivering meaningful customer outcomes, and our diverse exposure continues to drive both resilience and momentum across the business. Regardless of the external environment, our priorities have not changed. Backed by strong demand, record backlog visibility, and a clear roadmap for growth, we remain focused on disciplined execution and focusing on the factors within our control. The work ahead is clear. Deliver on our backlog and our longer cycle commercial businesses. Execute our proven playbook to protect and expand margins over time as our growth investment scale. Accelerate healthy air penetration in residential and deploy capital where it generates the highest return.

Our mission is to make the world safer, healthier, and more productive through the power of better air. Return on Air is how we measure the value we create for our customers and the impact we deliver every day. Thanks again for joining us. Danielle, we'd now love to open the call for questions.

Thank you. We will now begin the question and answer session. To allow as many participants as possible the opportunity to ask questions, please limit yourself to one question. To ask a question, you may press star one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star two. At this time, we will pause momentarily to assemble the roster. The first question comes from Andrew Obin from Bank of America. Please go ahead.

Good morning. Thank you very much. I guess my first question is, I know everybody is going to ask about data centers, why don't I ask about the fact that ex data centers, you are up 50%? Can you just unpack for us what verticals drove this and how sustainable it is? Thank you.

Yeah. Good morning, Andrew, and thank you for the question. Yeah, to your point, outside of data centers in Q2, the commercial segment had really great balanced growth. We saw broad-based growth across a variety of our markets. That included advanced manufacturing, and this is things like clean room manufacturing and clean energy end markets, healthcare, and other institutional segments that were really supported by demand for our air movement and customer handling platforms. I think we talked about that backlog, $2.9 billion. In commercial, it was actually up about 142%, more than half of which will convert in 2027 and beyond. Orders, because of that balanced demand, up 70% for the segment, 50% excluding data centers.

Our new business pipeline, as we sit here today, is bigger than when we exited the year, bigger than when we exited Q1, larger than year-over-year. I think showing the benefit of how intentionally positioned and well-diversified the portfolio is. We have a diversified portfolio, very focused teams that create a more resilient growth profile. We see it, to answer your question, as sustainable. Our decentralized model has also been a very meaningful advantage to this kind of balanced growth. We have dedicated teams who drive very deep customer intimacy, are innovating for that diverse set of 15 end markets, drive sharp execution, and that helps us to stay very focused across the breadth of our commercial core.

Last but not least, we think that that kind of growth, if we have anything to say about it, is sustainable as a function of the fact that over half of our portfolio, 60%, is replacement, upgrade, and aftermarket demand. We ought to be able to perform by virtue of our diversification, supported by a decentralized model such that we have teams focused across the portfolio and that very attractive 60% of demand from replacement, upgrade, and aftermarket. We feel good about the future to the extent we're trying to control what we can control.

The next question comes from Tim Wojs from Baird. Please go ahead.

Morning, Tim.

Hey, everybody. Good morning. My question is if we kind of just maybe step back on the capital allocation side. I mean, you're, I'd say, de-levering a little faster than I think we expected and maybe investors expected. Is there an opportunity here to maybe think about incremental capital deployment in terms of acquisitions for the next 6-12 months? I guess, how's the pipeline?

Great. Thank you for the question, Tim. Great to have you with us. If we go backwards in time here, whether it's over the last few years or even in Q1, we talked about we really think about Madison Air as an organic growth company with M&A as a lever. Clearly, as JJ outlined and I mentioned in the prepared remarks as well, our capital allocation really is all about continuing to organically delever the balance sheet, investing in our core organic growth opportunities, and continuing to do strategic disciplined M&A. We are very delighted with our team's progress on converting great growth and profit to cash, and using that coupled with the IPO proceeds to continue to get our balance sheet in the spot where M&A can continue to serve as an accelerator for our strategy. What do we look at?

First and foremost, we look at acquisitions that can strengthen our technology platforms. How do we beef up our ability to deliver tangible Return on Air? We love great technology. Second of all, we look for businesses that strengthen our channel presence, things like a direct channel, a direct path to the customer, for example. Lastly, acquisitions that really expand our capabilities in attractive end markets. Increasingly, we love M&A deals that increase our exposure to services and aftermarket potential. That's the sort of the sweet spot that we look for. We have just completed our annual strategy cycle with the board. We are excited about the funnel, both of organic growth prospects, but also our M&A funnel is very active. As we talked about in the past, we have a very special capability here.

We have a long track record of having done M&A successfully as an acquirer of choice. 80% of those acquisitions have been sourced on a proprietary basis, i.e., they never went to auction. JJ mentioned AprilAire, right? Which really shows the power. A business we acquired 13 months ago that is truly firing on all cylinders, and we have continued to march along the deleverage path as we committed to you all. Given where we sit at 2.8x, and the healthy path we remain on through a combination of EBITDA and cash flow generation, we feel good about our financial and strategic flexibility, and M&A absolutely remains center plate as a capital allocation priority.

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

Morning, Jeff.

Hi. Good morning, everyone. It's Jeff Sprague here. Hey, good to connect. I was wondering if you could unpack for us a bit just the margin pressure in commercial between those kind of three items, mix, production ramp, and tariffs cost. I assume they're listed in order of prominence, but maybe you could shed a little bit of light on that and, in particular, where we're at on the margin ramp on the CDU business.

Yep, absolutely. I think Q2, as expected, we ended up continuing to make the sequential progress in Q2 with the overall EBITDA rate of 26.8%. The Q2 margins, as we highlighted, were definitely shy of the prior year through a combination of the inflation and tariff timing, where we expect are the actions that we took starting in the beginning of the quarter with the new 232 tariffs, those actions to further take effect in the H2, as well as you highlighted, the rapid growth in the data center business. I think, together, these dynamics were partially offset by the fixed cost leverage. We are seeing the fixed cost leverage that we expected. The headwinds I highlighted are things that improve as you get into the H2 of the year.

I think stepping back on the H1, margins at 26.1% were approximately flat. A lot of the same drivers, including inflation and tariff timing in the data center mix. We feel confident about the ability to get to the total year guide on roughly 27% margins. I think on commercial, as you highlighted, I would kind of bucket it into mix the incremental tariffs and then the ramp costs, in that order. The mix-driven piece of this as we really grow that data center business, I think Jill highlighted that as a strong business, early innings as it relates to the margin side of things. The headwind from the inflation and tariffs as well as the ramp costs. I think the ramp costs improve as you get into the H2 of the year.

Just remember on the tariff side of things, that's more of the impact of our Canada sites shipping into the U.S., those recovery actions take hold as we get into the H2. I feel really good about the H1 margins and the modest step up as we get into the H2 of the year.

Maybe just to add to that, Jeff, this is Jill. As JJ mentioned, sequentially up 155 basis points, basically down slightly versus last year, which is where we predicted we would be when we last spoke. I would double-click. Data center mix was certainly a contributor, but it wasn't the only factor. As JJ noted, we had tariffs and inflation timing, then we're investing in this continued growth ramp. We continue to view the data center business as a highly attractive business with very strong fundamentals. It is also one of 15 verticals in our portfolio, it's just really earlier in its scaling journey. I want you guys to know that, we are going to use, as I mentioned in my remarks, the same set of levers we always have that have driven us to this point. Our margin playbook, if you will.

Value selling, focused on Return on Air, investments in innovation, which are a great margin lever for us because we're bringing more value to customers. Profitable top-line growth. We know how to leverage our fixed cost as we scale and upcycle, continuing to expand services and aftermarket and continuing to apply our 80/20 model. While this data center business created, and a few other factors that we're all over in terms of pricing, tariffs, inflation, and the like, we are very clear-eyed as a team. We know what we have to do. Each business leader, in the spirit of 80/20, knows there are three things, right, to deliver the H2, and we've seen it work before, and we're laser-focused and very clear-eyed on the work to do in the H2.

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

Oh, thanks. Good morning.

Hello, Nigel.

Hello. Hello, Jill. How are you? Hi. Hey, JJ.

Morning.

Morning. Yeah. just on the backlog, obviously, really, really impressive. it seems like some really good traction with Nortek Air Solutions. I'd be curious, just a couple of sub-points on the backlog. Number one, what's driving the broad-based strength in air handling? I know it's been a theme. I'm just curious, is this new builds? Is it upgrades? Just as curious on what's driving the strength there. then just in terms of that backlog, how does the price and margin look within that backlog?

Thank you for the question. We are delighted with our orders and backlog performance in the Q2. Again, very strong, $2.9 billion, up 133% year-over-year and 14% sequentially. This is really a function of the work we continue to do to build pipelines, bring more innovation, and keep our very focused teams devoted to end markets, calling on customers and controlling our own destiny. About nine months TTM average sales in the backlog. Effectively, half of it will deliver 2027 and beyond. I would say on new build versus existing construction, it is balanced. I would say I do not know if it is exactly 50/50, but we feel it is largely in line with the overall portfolio, which is 60% replacement, upgrade, and services aftermarket and 40% new construction, which is more of that data center piece.

Do you want to comment on sort of price margin and backlog?

Absolutely. As you look at the backlog, I think it supports the H2 step up that we have talked about, the combination of the bookings, also the productivity efforts that are in flight, as well as some of that incremental price coming through. I would say the margins and backlog we feel good about. As well as supporting the H2 step up on EBITDA rate for the total company that we outlined in the implied guide midpoint.

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

Morning, Joe.

Hi, good morning. Good morning, Jill Wyant. Good morning, JJ Foley.

Morning.

Let's just stick with data center for a second. Can you maybe just break down, give us a little bit of the composition of those wins, maybe between liquid, hybrid, traditional air cooling? Then also you had an OEM yesterday talk about capacity constraints that they're starting to see. Just talk to us about your supply chain, and your ability to deliver on the backlog that you've already booked.

Yep. In terms of the composition, we feel very good about the balanced mix between hyperscalers and co-locators. As we've said before, our strategy in the data center space, which we've built entirely organically, is to really pursue what we believe to be the most resilient demand. Folks who are building in response to this sort of global shortage of compute. So we feel very good about our balance between hyperscalers and co-locators, and particularly on the hyperscaler front, they had strong earnings in Q1. Microsoft announced very strong results this morning. We feel good about our exposure there. We love the ongoing mix, whether it be on a unit and dollars basis, between air and liquid. Liquid is what you would expect. It's growing very rapidly.

Obviously, the legacy of this is air, but we have a very balanced mix between air and liquid cooling. I would also say this, I think this idea that air cooling is going to disappear is overstated. There's just a lot of thermal energy in a data center that needs to be rejected, so we see a future for both air and liquid cooling, but we like the mix. Our mix of air and liquid cooling solutions is moving where the market is moving, so we feel good about that. We have a wide range of CDU products with 300 KW to 5 MW capacity skidded, non-skidded options, and we think our CDUs are inherently very serviceable, which is one of our unique differentiators there. They are underpinned, as we've talked about, by our C-Force approach in the data center business.

This idea that we are not shipping you a catalog, order a CDU at a given capacity, but rather it is part of a total thermal management solution for the leading lights in the industry. That's a little bit of the balance. We feel good about the balance in the data center business. As I mentioned, thinking back to just a few years ago, we had one customer, one product. That team has come a long way. In terms of our supply chain, as we said last time, look, the data center demand is straining aspects of the global supply chain, and I think we see that particularly in electrical components, which we watch very closely. We have worked over the course of years to deepen and strengthen our supply chain across the company. Obviously that work has disproportionately benefited us at this moment in time.

We work very proactively and collaboratively, not only with customers. When we talk about the importance of half that backlog is 2027 and beyond, that gives us very good forward-looking visibility into what we have to have lined up to deliver. We work with our supply base and our customers, and I think a great proof point, again, of this C-Force embedded-at-the-design-table advantage is one of our hyperscale customers actually came to us recently and said, "We want to use your lab and your very talented lab team to help us look at additional and qualify additional sources of supply." That's trust, and that's how we benefit from the forward-thinking nature of serving the most demanding leading players in the industry. I look, along with our team, at the status of our supply chain every week.

We deep dive it every month, and we look at production lines that are on the floor today, and production lines that are going to have to be on the line in three or four quarters. While we can't control all the variables, we certainly start and end each day controlling what we can control. Then maybe a last comment here, both in data centers and across the company, we have the capacity we need to deliver. I would not say that we see space on the line floor as a short or medium-term constraint.

The next question comes from Deane Dray from RBC Capital Markets. Please go ahead.

Thank you. Good morning, everyone.

Hello, Deane. Congratulations on your pending next chapter. We're excited for you.

I really appreciate that. Thank you. I just wanted to follow up on the last question from Joe on specifically capacity expansion. I think you just said you have enough capacity for the near term, but just kind of given the growth rates that we're seeing, where would you need to start to add capacity? What product lines and what the overall kind of CapEx plan in order to support this growth?

Yeah, thank you, Deane. Congratulations again. Excited for you and appreciate all you have done with your team to onboard to our company and learn our story. It's been wonderful to have, albeit short in my case, opportunity to work with you personally. Look, broadly across the company, Deane, I would say we have the footprint we need. We have the footprint we need, and we have accommodated that within our asset-light model. This is where our 80/20 approach, where we focus on what are the best customers and the best products that we want to have the ability to deliver short, medium, and long term. We have done, and will continue to do all of that within our asset-light model, low single-digit CapEx as a percentage of sales. We have brownfielded to date our data center capacity.

We've added a bit of capacity there. We've also added capacity in our parts capability for our 15 commercial end markets that are buying more proprietary services and aftermarket. We are building out, innovating and adding additional air purification capacity in our AprilAire business. All of that, very forward-thinking, if you will, in terms of matching firm demand with the right level of capacity we need. We like where we're sitting. We've accommodated, and we'll continue to accommodate it within our asset-light model. We feel like we are ready, as ready as we can be for the next several years as we sit here today across the enterprise.

The next question comes from Scott Davis from Melius Research. Please go ahead.

Good morning.

Morning, Scott.

How's it going?

Good morning.

Morning to you guys, and congrats on a great first four months here.

Thank you.

I know this is just math, the orders, you've commented on orders being down in Q4, and obviously the comp is pretty meaty there. Do you expect backlog to also be down, or is that still even a declining order environment, potentially stay flat or even potentially grow? How does that math work?

I think it's a good call-out. As you said, Q2 orders were up 45%. That's up 37% for the H1 with book-to-bill well over one. Demand, as Jill has highlighted, and the pipeline whatnot remain very strong. I think we expect while orders will be down, book-to-bill will remain quite healthy in the H2, and as such, the full year. I guess the rest of it is just sort of math as you think about where the backlog ends. I would just, as you highlighted, we did $1.6 billion of orders in the Q4 of 2025, which is just a big number, even after you see us delivering $1.3 billion here in the Q2 this year.

Just to go back, I know there's a couple of questions on the cost issue, and scaling has been brought up. I think almost every company we cover has mentioned scaling in some way, shape, or form this quarter as a headwind. Does scaling become sequentially less of a headwind as we get through the rest of the year, or it remains pretty firm?

No, I think it becomes less of a headwind as we move in. Right. I think as we look at the, call it 26.8%, I think as you look at what we see in Q3 and Q4, the rate's probably between 27% and 28%, kind of at the midpoint of the guide. That's a combination of feeling like we gained some ground on price cost, as well as some of those headwinds offsetting. Really, frankly, the team's getting a little bit more time on the clock to be able to execute a number of the key productivity initiatives and the material cost reduction programs that we have on some of the critical product lines.

The next question comes from Andy Kaplowitz from Citigroup. Please go ahead.

Hey, Andy.

Hey, Andy.

How you doing? Good morning. Maybe you can give us a little more color regarding what's going on in residential. You mentioned modest organic volume declines in your professional distribution channels. Could we double-click on what you're seeing there? It also seems like AprilAire penetration's continuing or maybe even accelerating. Maybe if you could talk about that a little more.

Yeah, absolutely. As we noted, our residential segment sales grew about 2%, Andy, despite a soft housing backdrop. That was really driven by continued very strong growth in Healthy Air Systems, good progress on contractor conversion, price execution, and frankly, continuing to open white space. Yes, the AprilAire business continues to perform very strongly. Great brand, innovative technology, and just bigger picture in our residential segment. We are playing a fundamentally different game, if you will, than traditional residential. We don't heat and cool the air. We make it better. We improve the quality of air. At the end of the day, 92% of U.S. homes have nothing.

Boy, I don't know about you, but there was a day a few weeks ago when our air quality here in the Midwest was extremely hazardous due to wildfires in Canada and in northern Minnesota to a lesser degree. This business is prime for white space. They've got great innovation, a great channel presence, and our residential exposure is really predominantly exposed and tied to replacement and upgrade demand drivers, all of which is underpinned by two very strong brands, AprilAire and Broan-NuTone. We think that we deliver more consistent, durable performance as a result. We pull demand through the channel. We don't have this stocking and de-stocking and restocking dynamic that we work through. We didn't have that in 2025, and we don't foresee that dynamic in 2026, which I think allows us to just be a little smoother and more durable.

It's all part of the reason why since 2007 that AprilAire business has compounded sales growth at 8% top line. Just a great business, a strong brand. Lots of white space to penetrate, lots of contractors left to convert, and a great team very focused on doing that.

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

Morning, Zach.

Hey, guys. Good morning. Thanks for taking my question.

Of course.

I do want to say I'm moving into a house tomorrow with an AprilAire system. I'm excited to feel the benefits of that, especially in the winter. These New England winters can be super dry.

Yes, we have a new 720 dehumidifier, Zach, you'll be glad to know. Humidifier, excuse me. It can humidify up to 6,200 sq ft, and it can use up to 15,000 less gallons of water due to a proprietary humidification platform, patented. Which is about equivalent to what the average U.S. home consumes in terms of internal water usage. We are delighted that you will have a safe and comfortable winter whenever it should come to your part of the world.

You'll have to report back on that.

Yeah, let us know.

Reporter.

if your unit's old.

Amazing. I'll have to look into that.

we have a solution for that.

Awesome. Yeah, I just wanted to, obviously, Q2 resi margin, I think, was a bit better than most expected, despite the volume pressure. Just kind of wanted to unpack that, how much of that was AprilAire synergies. Maybe you could give some color on how much was realized in 2025, the H1 of this year and moving forward. Then I'm assuming the tariff refunds received were also a tailwind to resi, given resi saw the bigger headwind last year. Just some color on that, sizing, what to expect in the H2 of this year, and maybe the split between segments.

Yep, very good. I think, as you highlighted, resi up 425 basis points in the quarter. About a third of that was mix, meaning more AprilAire. The remaining two-thirds was stronger price and productivity, and that does include net tariffs. As you kind of think about the overall path of travel on margins, sequentially, I would expect the residential margin to be down a bit from Q2. We had some really favorable elements around pricing and productivity, as well as we did have a little bit of benefit from the tariff refunds. I think for us, as we kind of think about this, we're ultimately focused on delivering more value for customers against this sort of inflation and geopolitical backdrop, and we kind of think of tariffs, inclusive of refunds, as one of the many dynamics with it. We haven't necessarily quantified that.

It was part of our overall price cost management, not a material impact in the quarter, but I would say very strong margin in residential, even excluding refunds.

As you think about for the total company, as we've talked about, Q3, Q4, EBITDA margin rate in that 27%-28% range. Probably around flattish in Q3, and then seeing more expansion in Q4. Thanks, Zach.

This concludes our question and answer session. I would like to turn the conference back over to Jill Wyant for closing remarks.

Thank you, Danielle. Thank you all, to the research analyst community, to our investors who are on the call, other stakeholders, our team members. Really appreciate all the questions, particularly from the sell side. Thank you. We also just want to extend our sincere thanks to our 9,100 colleagues who are out there in an interesting world making it happen, making the world safer, healthier, and more productive through the power of better air every single day, controlling what they can control. Our team is really truly one of our biggest sources of competitive differentiation. We are excited, as I hope you've heard, about the company that we are building, the momentum that we have ignited and work every day to sustain. We look forward to staying in touch. Please be safe.

Enjoy the rest of this beautiful summer, we look forward to speaking again soon. Thank you, everyone.

This concludes today's conference call. Thank you for your participation. You may now disconnect.

Good morning, and Welcome to the Madison Air First Quarter 2026 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's call is being recorded. I will now turn the call over to Steve Low-Tufo, Senior Vice President of Investor Relations. Please go ahead.

Thank you. Good morning, and welcome to Madison Air's first earnings call as a public company. We're thrilled to speak with you today about Madison Air and our first quarter 2026 earnings performance. Joining me today, 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's 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 1Q 2026 results to 1Q 2025, we're referring to our 2025 performance.

Such information is presented on a combined basis for Madison Air and AprilAire, calculated as if AprilAire had been owned since January 1, 2025. We will also refer to certain other non-GAAP financial measures. You can find calculations and a reconciliation of these measures in the most closely comparable GAAP measure in our earnings release, the presentation accompanying this call, and in the supplemental information as applicable, which can be found in the investor relations section of our website at madisonair.com. I'll turn the call over to Jill.

Thank you, Steve. Good morning, everyone, and thank you for joining us for our first quarter earnings call. This call marks an historic milestone for the Madison Air team to present our earnings for the first time as a public company following our successful IPO. I'll begin by providing an overview of our business and our value creation model. I'll hand the call over to JJ to discuss our first quarter 2026 financial results and guidance for full year 2026. I'll wrap things up with key takeaways before we open the call for Q&A. Before we dive in, a bit of context as you get to know Madison Air and our team. I joined the company as President and CEO in 2021 after serving several leadership roles with Ecolab, most recently as President, Global Regions and Global Life Sciences and Healthcare.

My career has spanned advanced manufacturing, operational execution on a global scale, and large-scale growth transformation. The sum of my experiences shapes how we're building this company and is what gives me confidence in the opportunity ahead of us. 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 commercial and residential markets. Our portfolio of leading brands, which includes Addison, AprilAire, Big Ass Fans, Broan-NuTone, Nortek Air Solutions, Nortek Data Center Cooling, and Reznor, has delivered durable compounding growth and in fact outpaced the U.S. GDP growth rate in 16 of the last 18 years on an historical basis through 2025.

Our recent IPO was a significant milestone, enabling us to advance our strategy to deliver scalable, profitable long-term growth. We believe we have a sustainable performance trajectory for 2026 and beyond. Our three core strengths deliver better air, stronger customer outcomes, and superior returns for our investors. Madison Air's first core strength is what we call Return on Air, the tangible value created when air becomes a strategic asset. It's the tangible impact our solutions have on customer outcomes in high-value environments where air affects uptime, efficiency, compliance, productivity, and health.

From reducing costly downtime in data centers, which can cost our customers up to $9,000 per minute, to contributing to improved consistency and yield in semiconductor clean rooms by reducing contamination incidents, or reducing harmful volatile organic compound concentrations in homes, Madison Air delivers Return on Air in mission-critical environments where air quality is vital to customer success. Our second core strength is leadership in growth markets. In our commercial segment, we serve 15 structurally attractive high-growth end markets where performance matters and customers are willing to invest in highly engineered air quality solutions because of their capacity to deliver tangible results. In residential, we train contractors to identify indoor air quality opportunities and communicate the value of our complete healthy air system.

The company's third core strength is a disciplined value creation model that seeks to convert that demand into consistent profitability and strong cash flow, with a leadership team focused on strategically deploying capital to drive durable returns. Our decentralized organization structure allows us to invest closest to the point of impact, that is to say, closest to the customer. Our entrepreneurial culture drives dedicated teams to wake up every day focused on the markets and customers they serve. We estimate that we've more than tripled our total addressable market since 2021 by sharpening our focus on high-growth sectors with more complex process requirements and are well-positioned to create durable vectors for long-term value. This model has allowed us to scale efficiently, sustain performance through cycles, and compound enterprise value over time. Being locally agile at enterprise scale is a competitive advantage for us.

The powerful combination of outcome-driven solutions, focus on growth markets, a scalable operating model, and consistent execution underpins both our near-term opportunities and long-term potential. Please turn to slide six. At a high level, as of 2025, Madison Air is a $3.5 billion revenue business with strong underlying profitability and cash generation, delivering 26.6% EBITDA margins and $440 million in free cash flow last year. We've intentionally built a balanced portfolio across commercial and residential segments with meaningful exposure to replacement and upgrade activity, which helps drive resilience across cycles. We're also seeing an increase in share of demand from the aftermarket, which adds stability and more recurring revenue characteristics. Our aftermarket sales are approximately 10% of total revenue today, and the services opportunity is growing at a double-digit CAGR.

The available growth in services and potential lifecycle value is very attractive. We estimate this is around 3x for Nortek and up to 9x for AprilAire. We're accelerating that growth through initiatives like Nortek CarePlus, expanding our services and parts capabilities, and by building momentum at businesses like Big Ass Fans, where we're growing installation and preventive maintenance. Geographically, the business is predominantly North America-focused, where we have strong market positions and established customer relationships. As of March 31, 2026, we had over 8,800 employees, with about 600 of those focused on R&D to drive innovation. Altogether, we believe our margin profile, strong cash conversion, and end market mix gives us a durable and balanced model for revenue growth and earnings. Please turn to slide seven.

We believe Madison Air's portfolio brings together broad product and service capabilities with significant opportunity as we apply our Return on Air approach to high-value, performance-driven end markets spanning both commercial and residential segments. We operate within an estimated $40 billion North American addressable market supported by powerful secular tailwinds, including the reshoring of advanced manufacturing, growing demand for energy efficiency, aging buildings and housing stock, increased focus on human health and wellness, and of course, the rapid growth of AI and compute. On the commercial side, we focus on mission-critical environments like data centers, hospitals, and advanced manufacturing facilities where performance, reliability, and energy efficiency directly impact customer outcomes. Our capabilities span the full range from thermal management and air handling to humidity control and beyond, allowing us to deliver integrated solutions rather than standalone products.

In residential, we play a leading role in advancing healthy air solutions for single and multi-family homes. As homes become more airtight to improve energy efficiency, the need for indoor air quality solutions, including purification, ventilation, humidification, dehumidification, and sensors and digital controls, becomes even more important. Through our channel partners, we have about 40 million annual in-home touchpoints with potential customers through HVAC replacement and service opportunities, creating a powerful route to drive adoption of these solutions. Across both segments, the common thread is our focus on solving complex air challenges in ways that are tangible, differentiated, and essential to our customers. Please turn to slide eight. Our new business pipeline remains strong with continued growth across key end markets.

Combined company orders grew 29%, including AprilAire orders prior to the AprilAire acquisition. We reached a 1.4x book-to-bill ratio in the first quarter. While our orders can naturally fluctuate quarter-to-quarter based on project timing and customer schedules, our first quarter results reflect solid underlying demand despite a dynamic macro backdrop. We exited the first quarter with record backlog of $2.5 billion, up 116% year-over-year on a combined company basis, providing good visibility into near-term revenue. Our pro forma net sales growth of 13% reinforces the growth momentum we are driving across the portfolio. At the same time, we are closely monitoring the potential impact of the Middle East conflict on our supply chain, where we have been building resilience since the post-COVID dynamics of 2021.

We're also watching the pace of customer decision-making while staying focused on execution and on controlling what we can control operationally. As of today, we are not seeing a material impact. Additionally, as a reminder, orders face tougher comps in the second half, particularly in the fourth quarter of 2025, where the commercial segment printed a book-to-bill of 2.2x last year. On the right, this example with Big Ass Fans illustrates how our innovation can translate directly into customer value to deliver tangible productivity gains, safety improvements, and cost savings, which is central to our customers and to our ability to sustain both growth and value pricing. This example demonstrates what Return on Air means for our customers.

Our Velocity Trailer Comfort solution, which is mounted on the side of a manufacturing dock door, enables a Big Ass Fans customer to gain up to five additional trailer loads per dock per day and delivers cooling performance in approximately half of the time of our closest competitor. It's also a great example of how our innovation is often born through the deep customer insights we gain over the course of long-standing relationships, which in this case was through our direct sales channel. Slide nine ties together how we translate our Return on Air value proposition into consistent value creation. At the core, we transform air from a commodity into a strategic asset that drives tangible business outcomes. For customers, this means higher productivity, lower energy costs, health, comfort and home preservation, and protection of mission-critical operations.

We strive to leverage this to expand our presence in advantaged higher growth end markets where we believe there's meaningful runway for continued growth. We actively drive both organic growth and disciplined capital allocation into adjacencies, supported by a focused 80/20 operating model and a strong ownership mindset across our culture. The result is a business designed to deliver sustainable, profitable growth and strong cash generation over time. One essential element of our unique value creation model is our team, the 8,800+ people who power Madison Air. We invest in our team and our culture to create consistency and alignment and to ensure the value creation model is embedded across the organization and shows up in how we execute every day.

Over the past few weeks alone, we've put more than 60 leaders from across Madison Air through rigorous sales and 80/20 training courses, sharpening our focus on the highest impact levers that drive growth across our businesses. We've hosted immersive sessions equipping our team to use AI as a growth enabler and to build capability throughout the organization so we can move faster and deliver stronger outcomes. We also held an enterprise-wide innovation summit, which I host at least twice every year. These summits convene a diverse cross-section of leaders from engineers and R&D to sales and marketing to solve our customers' thorniest challenges through innovation, all while sharing ideas, surfacing opportunities, and scaling best practices across the company. This is collaboration with impact grounded in solving real customer problems and delivering Return on Air.

When our people are aligned, equipped, and moving with speed and with clarity, it shows up in how we perform, and the result is a business designed to deliver sustainable, profitable growth and strong cash generation over time. With that, I'll turn it over to JJ to walk through our first quarter financial performance and the outlook.

Thanks, Jill, and good morning, everyone. I'm excited to be here with you today on our first earnings call as a public company. It's been an energizing and rewarding journey to get here. For those of you ramping on Madison Air, I've been with the company since early 2021. Prior to joining, I held several executive finance roles at GE, most recently serving as the Senior Director of Investor Relations. At Madison Air, we're focused on building credibility and transparency with our new public market stakeholders. With that, please turn to slide 11. On a pro forma basis, net sales were up 13% and adjusted EBITDA grew 16%, with adjusted EBITDA margins expanding 70 basis points. All three demonstrate the power of consistent execution.

Pro forma net sales grew 13% year-over-year to $924 million, with strong volume growth and price realization in the commercial segment, as well as strong demand for healthy air systems and price realization in the residential segment. That top line growth, along with productivity gains and disciplined cost management, translated into pro forma 16% adjusted EBITDA growth, with margins increasing by approximately 70 basis points to 25.3% despite ongoing growth investments in the business. Because of the organizational transactions associated with our April IPO, the share count for the first quarter EPS is not comparable to what we expect for the remainder of the year.

To that end, we're reporting our adjusted net income figure here, which was $93 million in the quarter and represents 36% pro forma growth year-over-year, driven by revenue and pre-tax earnings growth mentioned above. On cash, we generated $50 million of reported free cash flow in the quarter, which represents free cash flow conversion of 117%. Moreover, we met our pre-IPO delevering goals for the quarter, reducing net leverage by nearly a quarter turn from year-end 2025. It's important to note that the first quarter cash flow generation was in line with our expectations, which included a normal seasonal working capital build that we expect will normalize throughout the course of the year and is enabled by our asset-light model. Overall, the quarter demonstrates our ability to convert revenue growth into earnings growth and cash generation.

With that, let's review the second level performance on slide 12. In commercial, we drove solid orders growth. Orders were up 41% year-over-year on a combined company basis, reflecting continued momentum in key technology platforms, including thermal management, air handling, and energy efficiency. Backlog increased 124% on a combined company basis, providing good visibility and solid future revenue momentum. Strong customer demand drove 24% year-over-year reported net sales growth, or 18% growth on a combined company basis, to $610 million, which was driven by a combination of volume, pricing, and favorable mix. This is partially, particularly applicable in higher value applications. Reported segment adjusted EBITDA grew 25% to $161 million, outpacing revenue growth, reflecting operating leverage supported by volume growth, ongoing productivity investments, expense management, and pricing discipline.

Overall, the segment continues to benefit from exposure to mission-critical end markets, including data centers, clean energy, healthcare, and other commercial applications. We remain focused on executing our backlog and sustaining our growth momentum. Please turn to slide 13 for residential results. The residential segment performance was solid, reflecting a more balanced demand environment. Given the short cycle nature of this business, order and backlog is less relevant than in commercial. With that said, we saw orders growth in the low single digits in the quarter. We continue to benefit from strong demand for AprilAire's healthy air system. Despite softness in housing starts or remodeling activity, our first quarter results demonstrate the resilience of our model, which was purpose-built to navigate headwinds like these with vast white space penetration opportunity, opening paths to growth in otherwise suboptimal residential conditions.

In addition to a full suite of trusted brands and patent-protected solutions across the portfolio, our AprilAire Academy has trained an army of contractors to sell indoor air quality solutions like purification and dehumidification. Throughout cycles, reported net sales increased 60% or 4% on a combined company basis to $316 million, supported by pricing while overall volume was roughly flat. In addition, reported segment adjusted EBITDA grew 84% to $79 million, with margin expansion driven by cost actions, productivity, and favorable mix. Overall, the segment continues to demonstrate strength and remains differentiated in product, channel, and results from more traditional residential HVAC providers. We remain focused on driving growth through innovation and channel penetration execution to effectively position us as demand is less. Please now turn to slide 14. We will talk a little bit about the balance sheet.

The strength and flexibility of the balance sheet is supported by continued strong cash generation. As of March 31st, net debt was approximately $5.5 billion, with net leverage at 5.7x. As a reminder, as of March 31st, Madison Air was still a private company, and therefore, the first quarter debt levels do not yet reflect the approximately $2.6 billion in net proceeds from the IPO, where the full greenshoe was exercised, and we executed a concurrent private placement. The IPO was a first and important step in strengthening our balance sheet. 100% of the net proceeds were used to retire debt, including accrued and unpaid interest.

This includes our full $2.4 billion initial term loan and an incremental additional $200 million on the incremental term loan, improving financial flexibility and positioning us to continue investing in organic growth, delevering the balance sheet, and strategic acquisitions. If we include the proceeds from the IPO and the concurrent private placement, our net leverage would be 3x trailing. We believe we have clear line of sight to achieve our long-term targeted range of less than 2.5x net debt to EBITDA in the next 12 months. As of the first quarter, we maintained solid liquidity of roughly $563 million, including $229 million of cash on hand and $334 million of available capacity on our revolver, providing ample flexibility to support operations and strategic initiatives.

In the second quarter, our ratings were upgraded two notches by the rating agencies, reflecting our lower leverage and financial performance. We completed an upsizing of our revolver at $1.3 billion, which will become active in the second quarter. We want to reiterate our thanks to our great banking partners for their continued support. The business continues to generate strong cash flow and reported free cash flow conversion of approximately 117% in the first quarter was driven by disciplined working capital management and earnings growth. Reported LTM free cash flow margins were 12%. Organically, we expect free cash flow conversion of net income above 100%. Please now turn to slide 15 to discuss capital allocation priorities. Our capital allocation framework remains consistent, disciplined, focused on deploying cash to maximize shareholder returns centered around three clear priorities.

First, we continue to invest in high return organic growth opportunities, particularly in mission-critical defensible technologies and durable end markets where we see the strongest demand for margin expansion potential. Second, we're committed to maintaining a strong, flexible balance sheet with a clear path to be able to deliver net leverage of less than 2.5x net debt to EBITDA in the next 12 months. Third, we intend to pursue disciplined and strategic M&A to accelerate growth and strengthen the portfolio. We're focused on assets that expand our capabilities, enhance our technology platforms, and deliver clear strategic and financial long-term returns. We're willing to flex leverage modestly above our targeted range for the right opportunities, but with a clear commitment to delever post-acquisition. Overall, we believe this balanced approach positions us to drive long-term value while creating or maintaining our financial flexibility.

Please turn to slide 16. As a newly public company, we're taking a disciplined approach to evaluating our financial guidance strategy to support long-term value creation and transparency. For 2026, we're providing annual guidance and, as appropriate, may offer directional or qualitative updates throughout the year. We expect to further refine and communicate more formal guidance framework next year. We're introducing full-year 2026 guidance that reflects continued growth and disciplined execution across the portfolio. We are planning for net sales of $3.75 billion-$3.85 billion, representing mid-single to high single-digit growth year-over-year on a pro forma basis, which we expect will be driven by sustained growth offense in our core markets. This 2026 growth outlook is above our longer-term mid-single-digit growth ambition that we discussed throughout the IPO process.

Looking at second quarter visibility, we see mid-single-digit plus total net sales growth against tougher, a tough prior year comp of mid-teens growth. That's using $868 million as a second quarter 2025 pro forma jumping off point. Margins in the second quarter will step up sequentially. However, the year-on-year comparison is a tough comp. We anticipate full-year 2026 adjusted EBITDA of $1.02 billion-$1.065 billion for high single-digit growth to low double-digit growth on a pro forma basis. This is also an increase from our longer-term high single-digit growth ambition, with 20%-27% resulting adjusted EBITDA margins as a result of expected continued operating leverage, productivity initiatives, and favorable mix.

On free cash flow, we continue to plan free cash flow conversion to be greater than 100% of net income. Our outlook assumes a demand environment that remains stable overall with continued strength in our core commercial end markets, including data centers, logistics and healthcare. In residential, we're assuming slow but steady improvement in the housing sector, with potential growth underpinned by our healthier white space opportunity. In addition to the headline guides, we expect CapEx investments to be less than 2% of sales, interest expense of approximately $250 million, an adjusted effective tax rate of 29%, and diluted share count of approximately 510 million. We've also included approximately $40 million in central expenses, which includes the required activities that come with being a public company.

Our guidance assumes gross tariff costs in the range of $100 million, which are a near-term margin headwind that we expect to offset over time through a number of actions, including pricing and operational activities. We are not yet seeing meaningful near-term impacts from the Middle East conflict at present, but continue to monitor the global environment closely. As Jill mentioned, we've been proactively building our supply chain resilience since 2021, and that work is paying off. We feel like we're in a position to play growth offense despite some of the challenges or uncertainty in the macro backdrop. With that, I'll turn the call back to Jill.

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

Amy, I'll turn it back to you.

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

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

Thank you, Deane. Good morning.

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

Thanks for the question, Deane. Agree, data centers were a primary commercial orders and revenue growth driver in the quarter. Again, I would highlight they're one of 15 end markets that we serve. We saw nicely broad-based growth across the majority of our markets in areas like institutional and government and clean energy, which are really supported by our broad technology platform base in air movement or handling thermal energy and energy efficiency. We like how we are intentionally positioned across mission-critical end markets. Data centers, you know, remain strong. I would say, you know, second part of your question, air versus liquid, I would say very balanced. Liquid is a larger share of the pie, if you will, than it was last year. We see that trending nicely.

You know, as we spoke about late last year and early into 2026, we really like how the diversification, not only amongst the hyperscale community, but between hyperscalers and co-locators, we continue to really advance the ball nicely, diversify us across the players that we believe, you know, are the right ones to hook our stars to hook our wagon to, if you will, in the quarters and years ahead. Feeling good about data centers, but more broadly about the broad-based growth we saw across a majority of our end markets. We think, again, that's this idea that our portfolio is well-positioned and our decentralized operating model means we've not abandoned our core or those core customers while we pursue data center growth exposure.

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

Hi, good morning, and congratulations on the first set of results. Maybe just wanted to understand how you're thinking about the commercial business. It looks like you're guiding about $600 million of sales each quarter, which is what you did in Q1. It looks odd because sequentially there should be a step-up through the year, and you had orders of, I think, $1 billion in Q1 almost. Maybe help us understand that conversion of orders to revenues in commercial. Is that just a lot of conservatism in that revenue guide for the year in terms of very limited sequential step-up from Q1 sales? Thank you.

Julian, good morning, and thanks for the question. You know, I think just grounding everybody back on where we were. We saw 13% growth of net sales in the quarter, 18% of that out of commercial. Orders up 29% with orders in commercial up 41%. You know, I think you saw about $610 million of sales for commercial in the quarter. I would expect some step-up, you know, as we get into the second quarter. Not only, you know, you think about businesses like Big Ass Fans.

Which do pick up as you kind of get into that heating season. We do expect to ramp the data center business throughout the year. I would remind you again that same seasonality that we see pick up going into the hot months do kind of come off, so there is a little bit of that. You kind of have the data center business filling in some of that seasonality. I think, you know, as you look in the back half of the year, you know, we are playing with a range of outcomes here. I think we feel confident about the orders momentum here in the quarter, and feel good about, you know, that high single-digit type plus guide that we talked about for commercial for the year.

The next question comes from Scott Davis at Melius Research. Please go ahead.

Hey, good morning, everybody. Jill and JJ.

Good morning, Scott.

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

You know, if I zoom out, of our 13% net sales growth, volume was about nine points, price was about four. Commercial growth was mostly volume-driven. You know, that's typically a backlog-driven business. On the residential side there, you know, across the segment, volumes were more flattish. While price was positive on a pro forma basis. You know, broad comment with regards to pricing. Obviously, there's a lot of inflation between tariffs and, you know, commodities inflation, some of which has been induced by the tariffs. We've got to stay on top of that. At the end of the day, we are very focused on delivering value for customers, driving their Return on Air, you know, better tangible, better business outcomes. We feel like we get paid fairly for that value.

We feel from a pricing standpoint, our interests are aligned with those of our customers. I would say, no big, you know, change from a residential perspective in terms of, you know, channel-based backlogs. That business was up, you know, mid-single digit. I think a great hallmark of our continued resilience, particularly good demand for the healthier solutions on the AprilAire business. I think at the end of the day, the biggest message there is we still feel like we're in the early innings of a very significant penetration opportunity. 92% of U.S. homes have nothing that we offer in terms of the healthier solution. That's how I'd sort of characterize our point of view on pricing and what we're seeing in terms of residential inventories and the like.

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

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

Good morning, Nigel. Thank you for the question and for being here today. I'll start. You know, you're right. You know, very good first quarter in terms of broad-based growth across the majority of our end markets. You talked about the 15 verticals. The majority of them grew in Q1. Yes, strong demand across institutional markets, government end markets, you know, clean energy, especially as we talk about, you know, behind the meter power and the like. All of that growth supported by the air movement, air handling and energy efficiency platforms in commercial. We were very encouraged by both the orders and the sales performance there in Q1 and think that bodes well for broad-based continued strength and performance across the portfolio.

You know, again, I think a good function of how intentionally positioned we are across a number of mission-critical end markets, not just the data center space. Also the fact that our decentralized model, you know, we align focused teams to ensure that we have balanced growth because we get up every day and focus on driving innovation and, you know, moving the needle from a Return on Air perspective in a broad array of end markets. All while pursuing this, you know, nice upcycle, if you will, in data centers. JJ, I'll turn it to you for the second half of that question.

Perfect. Good morning, Nigel. I would say on tariffs, you know, we definitely on a net basis expect more inflation, so that's including raw materials and tariffs. We expect to be able to manage that for the full year. It's incorporated in the guidance we shared earlier. That being said, you know, it's an approximately a $50 million increase in 2026. Fifty within the run rate last year, $50 incremental, so $100 total, given the latest tariff announcements. Those are gross figures, excluding our mitigation actions. As we said earlier, you know, expect to recover on a dollar basis in the year and a rate basis exiting the year. I would say it's important to note, those figures that I just walked through exclude any potential AprilAire refunds.

We'll submit for those refunds, you know, but that is a smaller piece of the total landscape and not factored into the guidance. Related to margins, we covered cost and margin in the first quarter at the total company level. Given the work that we did last year, we're confident we're making continued progress into 2026.

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

Hey, good morning, Jill and JJ, and I echo my congratulations as well. I guess the question I have is really around backlog. I think your backlog was up around $500 million sequentially.

I'm curious, as you're thinking about the duration of that backlog now, given that you are seeing continued strength in data center, how much of that is actually pushing out into 2027 at this point?

Good morning, Joe, and thank you for the question. I would answer backlog in a couple of key respects. You know, first and foremost, we're confident in our positive sales momentum. I think that backlog, particularly on the commercial side, gives us good visibility into that near-term revenue. About two-thirds of the company is backlog driven. The backlog tends to extend one to three quarters in duration typically. In some verticals, you know, data centers being one of them, that is being extended, not because our lead times are extending necessarily, but because the customer really wants longer term visibility to what's happening there. They want us to have the supply chain ready. You know, we want to be partnered with them, see the orders coming down the pipe such that we can, you know, continue to execute.

That backlog, you know, principally in the thermal management technology platform, the data center business, may be four to five quarters in duration, a little bit longer than what we continuously see. Then, you know, the only other thing I'd add is, and just to sort of put a finer point on what we talked about in the prepared remarks, we continue to monitor the potential impact of what's going on in the world, whether that be the Middle East conflict and its effects on supply chain or the pace of customer decision-making. We're not seeing anything that we foresee to, as we sit here today, will materially impact us. We're continuing to focus on, you know, good, solid execution, delivering that backlog according to the customer's timetable, and continuing to control what we can control operationally.

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

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

Yes. Maybe in reverse order. I would say on the pricing side of things First of all, good morning, Jeff. We're thinking probably a few points of price for the total year. To your point, four points of price in the quarter was pretty strong. Much of that was carry-in, as a function of the work that we had done last year, primarily linked to the conversation that we had around offsetting inflation and tariff pressures. As it relates to the commercial business itself, we saw very good volume growth. There is a little bit of business mix pressure that kinda nets out when you kinda think about that falling to the bottom line.

There were a number of the smaller businesses that had very nice incremental margins, and that was really what drove that positive mix. The more that we can get some of those DOAS businesses contributing to top line growth, they're gonna come through with very solid incrementals and allow us to kind of deliver that full year guidance that we talked about.

Next question comes from Tim Wojs at Baird.

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

Hey, Tim. Thank you. Good morning, and thank you for the question. I mean, our residential segment, very proud of our team. Up 4% in Q1, showing good, strong, continued resilience and outperformance, as you noted, needs to be more traditional HVAC shipments in Q1. AprilAire, as you know, grew very nicely in the quarter. Real kudos to that team. We saw demand for health air solutions that was in the low double-digit growth territory. This has just been a terrific additional, you know, addition to our residential segment. I would attribute that to a couple of things. I think as we noted, you know, throughout the process of going public, the AprilAire business has grown, you know, high single-digit CAGR since 2007.

I really attribute that to they are still in the very early innings of a lot of white space, penetrating and opening up and cracking into white space. 92% of U.S. homes have nothing, you know, no purification, ventilation, humidification, dehumidification, sensing or controls. We've got a lot of white space to penetrate the health air system. We really benefit from that 40 million at bats. You know, 30 million times a year an HVAC contractor is in the home to do a service, you know, annual or biannual service checkup. The balance of those 40 million at bats, the remaining 10 million are typically HVAC replacements. Real strong, you know, very strongly poised, if you will, to make that purchase, you know, decision. Really coupled with the contractor conversion opportunity still really largely lies ahead of us I think there are more than 70,000 HVAC contractors, if my facts are correct, in the U.S., and we are maybe 15%, 18%, 20% penetrated. I think when you combine those factors, it really provides a durable growth runway for us in residential. You know, not to say that we're immune from housing starts or OEM volumes, but at the end of the day, we just get up working to control what we can control and crack into that white space. I think you saw that again in Q1.

The next question comes from Stephen Volkmann at Jefferies.

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

Thank you, Steve. Good morning. Thanks for being here. Yeah, we're excited about the services opportunity. We expect our aftermarket opportunity to continue to grow at a faster rate than equipment volumes, which it did. You know, it's been growing at a strong double-digit CAGR. It cleared that hurdle again here in Q1. You know, as we've talked about in the past, we don't target a specific percentage of sales from aftermarket. I would expect it to continue to grow as a percentage of sales. You know, it's a little bit of the equipment sales number continues to grow quite rapidly, so that impacts the math mapping, if you will. For us, services is all about focus. You know, there's no structural barriers there.

There's it's really about focus, and it's well, part of our total story around being in the early innings of a long and profitable growth story. We're investing. You know, we've prioritized the four businesses that we're really excited to continue to build our service presence around each of them. As I sit here today, as what we call a segment leader or, you know, maybe more commonly referred to as a business unit leader, we are deploying, you know, growth capital into our services businesses, whether that be more people, digital tools, digital platforms, parts and distribution infrastructure. Like I said, saw continued strong growth in the first quarter. Very excited about our momentum here.

Whether it's at Big Ass Fans where, you know, we've basically built from the ground up a certified nationwide installer network that allows us to, with one phone call, serve, you know, multi-unit customers across the nation or, you know, in our data center cooling business, where we are literally sending our own personnel in to start up, commission, and service those data center assets which get run pretty hard out in the field with our own personnel. We're excited about services and in 1Q again, we showed good strong growth and the focus is paying off.

The next question comes from Andrew Kaplowitz at Citi.

Hi. Good morning. This is Natalia on behalf of Andrew Kaplowitz. Congrats on the IPO in the quarter as well.

Thanks, Natalia. Good morning. Thanks for being here.

Hi, good morning. Thank you. You reiterated a path toward under 2.5x net leverage within 12 months, and your free cash flow conversion was strong this quarter as well. Should we think about deleveraging as the primary use of cash flow near term, or is there some flexibility for incremental M&A sooner? If so, what would make it the right opportunity to acquire another company?

Yeah, I'm happy to hit on leverage, and then Jill, maybe you can hit on just M&A, our thinking on that front. I think as we mentioned in the prepared remarks, we're at 3x trailing after you apply the net proceeds. I think, for us, we continue to invest, number one, in organic growth, and we love to have you think about us as an organic growth company with M&A as an upside lever. The second priority for us is deleveraging, and the third being able to pursue that. We've got about a 0.5 turn of leverage reduction to go, which as we said earlier, both EBITDA and cash flow will contribute to achieving that goal here over the course of the next 12 months. We feel pretty good about doing that.

Yeah, near term focus is getting down to that less than 2.5x.

Yeah, you know, very proud of the team. I mean, I think we are below, you know, right about at 3x trailing ahead of what we had committed. Not only as a function of the IPO proceeds, 100% of which on a net basis were used to retire debt, but just the continued efficient generation of our free cash flow that our team continues to deliver. As JJ mentioned, the capital allocation priorities have not shifted. You know, from an M&A perspective, again, I'd say, Natalia, you should think of us as an organic growth company with M&A as a lever. I'm really excited and hopefully Q1, you know, builds broader excitement as well about our organic growth prospects. We continue to be busy deploying growth capital into the core.

As JJ noted, we're committed as well to delivering on that delevering, you know, our balance sheet commitment. You know, M&A is very much within our sights. We believe that we have a pretty special and proprietary M&A capability. You know, real shout out to Larry Gies there, who's been planting seeds, our Founder and Chairman of the Board, and cultivating relationships for many, many years. Over time, you will see us continue to do high return M&A, where it strengthens our ability to grow. We're always underwriting what's next, and we're never in a hurry. While we would be willing to flex leverage for the right deal with a path to bring that leverage back down, we remain very much aligned with investors in seeing a long-term leverage target below 2.5x.

That's kind of how I'd size it up. Thanks for the question, Natalia.

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

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

Yeah. On that front, you were referring really to sales in the first quarter. Here, I would say, I mean, first and foremost, I'd start with the benefits of a diversified portfolio and our decentralized operating model such that, you know, the majority of our 15 end market verticals grew in the first quarter. This is, you know, the dynamic we saw on the air handling technology platform sales in the first quarter really dates back to what JJ and I have talked about. Sort of late last year, which was in the aftermath of the general election of 2024, sort of the middle of last year, our pipelines were healthy. They continued to grow. Our pipeline, you know, was as big as it had been at the time, but customers were just a little bit hesitant to press the go button on new projects.

We saw that in the first quarter on sales. That said, if you look at orders rates in Q4, momentum picked up very nicely in that and other technology platforms, and that strong orders performance year-over-year continued in the first quarter. You know, between just some hesitancy on behalf of customers, as we noted in the prepared remarks, orders can be lumpy. You know, they come in at different points in time, but at the end of the day, you know, exiting the year and saw continued orders momentum in the first quarter and really continuing to benefit from our diverse exposure to both residential and commercial markets and 15 end markets in the commercial segment.

The next question comes from Nathan Jones at Stifel.

Good morning, everyone. My congratulations on the IPO as well. I'll ask one on AprilAire.

Thank you.

It's been about a year since you've owned that business now. Can you just talk about, you know, the integration, whether that's complete synergy generation, and whether there's more to generate out of that as we go forward here? Then if there are any cost synergies or revenue synergies remaining to come out of other acquisitions that you've made along the way over the years, would be helpful. Thanks for the question.

Maybe I'll take AprilAire, and then JJ, you can hit on residual synergies from other deals. You know, delighted with the acquisition of AprilAire or Research Products, as it's known. Just a phenomenally mission-driven and committed team of folks who've dedicated their professional lives to making the world safer, healthier and more productive through the power of better air. As we noted, I mean, AprilAire grew very nicely in the quarter with strong demand for the healthy air solutions. It's a $15 billion residential market. 92% of homes have nothing in terms of indoor air quality solutions or healthy air systems. The, you know, large bold list of contractor conversion opportunity lies ahead. We are, you know, very proud of our residential segment teams and very grateful to the AprilAire acquisition. I mean, we don't really call them integrations.

We call them transitions, because one of the things we do, you know, that we think makes our M&A capability pretty special is we buy businesses to allow them to continue to do what they do. You know, you've seen AprilAire do that since May of 2025 when we acquired them. As for your question on synergies in the AprilAire acquisition, that is on track to the previously stated commitments, you know, that we've conveyed exiting 2026. We're on track. That is really a combination of growth acceleration and some cost out.

I would also note that we were together a few weeks ago for one of the innovation summits that I host, and our team there, the AprilAire team, you know, showcased the forward-looking view of their innovation roadmap just on the heels of launching new technologies like Wi-Fi-enabled dehumidification, and one of the most water-efficient humidification platforms on the market. They've just got a great lineup. A lot to look forward to, both in terms of cracking into that white space, delivering better Return on Air, both for contractors and homeowners, through some of the innovation they've launched and have on the come. Synergies on track, business is performing. Just very, very grateful to that team. JJ, anything you'd add on other broader deal synergies?

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

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

Hey, guys. Congrats on your first print as a public company. Thanks for taking my question.

Thank you. Good morning. Appreciate it.

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

Yeah, I think both opportunities. You know, it's both taking the 8% of U.S. homes that on average have one device to more of the healthier pillars around purification, ventilation, humidification, dehumidification, sensing and controls. Even on that 8% of U.S. homes, if we go from one to two solutions, that doubles the AprilAire business. There's real compounding tailwind, if you will, to, you know, further penetration of the 8% of homes that have something. You know, you noted it today. I would say on average, it is one pillar per sale. You know, you still have that 92% of homes that have nothing. You know, with our new Wi-Fi-enabled dehumidification platform, you know, there are 40 million basements in this country, 20 million crawl spaces in this country.

That innovation, you know, opened up a new channel to market for us in the form of the basement crawl space pest elimination channel. You know, this team is just really very focused on growing the core, penetrating the white space, becoming an embedded and indispensable partner to their, to their HVAC contractor partners, and they get, you know, rewarded with growth. Frankly, when HVAC shipments are down, our contractor partners need us more than ever. You know, we feel good about that business. We feel good about that team, and we have continued to deploy growth capital there to ensure they have, you know, everything they need to continue to grow that franchise.

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

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

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