SPX Technologies, Inc.

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Welcome to the Q4 2022 SPX Technologies Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. You'll then hear an automated message advising that your hand is raised. To withdraw your question, press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Paul Clegg, Vice President of Investor Relations and Communications. Please go ahead.

Thank you, and good afternoon, everyone. Thanks for joining us. With me on the call today are Gene Lowe, our President and Chief Executive Officer, and Mark Carano, our Chief Financial Officer. Also available during Q&A will be our Chief Accounting Officer, Mike Riley. The press release containing our fourth quarter and full year results for 2022 was issued today after market close. You can find the release in our earnings slide presentation as well as a link to a live webcast of this call in the investor relations section of our website at spx.com. I encourage you to review our disclosure and discussion of GAAP results in the press release and to follow along with this slide presentation during our prepared remarks. A replay of the webcast will be available on our website until March 2nd. As a reminder, portions of our presentation and comments are forward-looking and subject to safe harbor provisions. Please also note the risk factors in our most recent SEC filings. Our comments today will largely focus on adjusted financial results, and comparisons will be to the results of continued operations only. You can find detailed reconciliations of historical adjusted figures to their respective gap measures in the appendix to today's presentation. Our adjusted earnings per share exclude primarily non-service pension items, asset impairment charges, amortization expense, and a loss on the divestiture of asbestos-related assets and liabilities. One change you will notice in our press release in our 10-K is that we have aligned our definition of segment income with the way it is presented in our earnings presentations, which excludes the impact of amortization expense and acquisition of related items. Finally, we will be conducting meetings with investors over the coming months, including at the UBS infrastructure and EMT conference in Dallas, as well as at Sedoti's virtual small cap conference. And with that, I'll turn the call over to Gene.

Thanks, Paul. Good afternoon, everyone, and thank you for joining us. On the call today, we'll provide you with an update on our consolidated and segment results for the fourth quarter. We'll also provide guidance for 2023. This is our first call with Mark Carano as our CFO. Mark joined us in early January and has been quickly coming up to speed. Mark is a great fit with SPX's growth and operational excellence initiatives. He brings a depth of experience in strategy, finance, and business development. He has an impressive back track record as a public company CFO and a strong background in engineered products, growth investments, and operational excellence initiatives. We're excited to have him here.

Mark, welcome to the team. Thanks, Gene. I've already met several of you who are on the call today, and I'm looking forward to getting to know more of you over the coming weeks and months. SPX has an impressive team and a great business that is well positioned for the opportunities ahead. I'm excited to be here.

Thanks, Mark. Now I'll touch on some of the highlights from the quarter and provide some perspective on our 2023 guidance. Our Q4 results exceeded our expectations with strong performances in both HVAC and detection and measurement. Both segments drove revenue and margin growth, and we continue to experience solid demand across our end markets. During the quarter, we made further progress on a number of our key initiatives, including the establishment of ESG commitments additional progress in our digital and continuous improvement initiatives, and a significant reduction in legacy liability exposure. Looking ahead, we are starting 2023 with a historically high level of backlog. We're also seeing some easing of supply chain and labor constraints, which along with our continuous improvement initiatives is benefiting our operational execution. Today, we're providing 2023 guidance for adjusted EPS in a range of $3.30 to $3.55, which reflects approximately 10% growth at the midpoint. Turning to our high-level results. For the quarter, both segments helped drive strong organic revenue growth of more than 18%, and our recent acquisitions performed well. Adjusted operating income grew 48% year-on-year with 290 basis points of margin expansion. On a four-year basis, adjusted operating income grew 39%. I'm very pleased with our Q4 and four-year performance, as well as our momentum entering 2023. Despite mixed macroeconomic data, we believe our diverse portfolio remains resilient. The significant capital availability and active acquisition pipeline and multiple organic growth and margin enhancement initiatives, I'm confident in our ability to deliver on our SPX 2025 plan. As always, I'd like to touch on our progress and our value creation framework. As you look back over 2022, our teams worked hard to mitigate supply chain and labor constraints, leveraging our business system to meet strong levels of customer demand. We introduced multiple new products, made progress on our key initiatives, and reduced complexity and risk by divesting our legacy asbestos liabilities. I'm also very proud of our momentum on our ESG initiative. SPX is well positioned to thrive in a Paris Accord world where long-term targets on carbon emissions are realized. From our highly efficient cooling towers to our inspection equipment that helps detect and remediate leaks in underground water and gas pipes, SPX offers a wide array of innovative products that enable a safer, more efficient, and sustainable future. In 2022, we more formally incorporated ESG as a key element of our strategic planning process for each business unit, significantly expanded our disclosures, adopted a human rights policy, and saw considerable increases in our scores among key ESG rating entities. Recently, we adapted company-wide sustainability commitments, including a 30% reduction in greenhouse gas emissions intensity by 2030. We're also named by Newsweek as one of America's most responsible companies. We are honored to be recognized and pleased that the hard work of our team is being acknowledged. Another area where we have strong momentum is in our digital initiative. As the new name of our company reflects, it is more important than ever to leverage technology solutions to help our customers continue to be successful. Each of our platforms is focused on providing innovative designs, products, and tools enable our customers to be more efficient productive safer and more sustainable a few examples of where we continue to see customer traction include our pro tools tech app within our hvac heating business which helps field technicians become hydronics experts by putting our boiler product information at their fingertips in a mobile platform in 2022 we took market share in boilers and we believe that our digital initiatives a key reason for this success in our cooling business our cool spec software is enabling customers to compare select and configure highly engineered cooling solutions faster and easier than ever before in detection and measurement we're seeing strong adoption of genfair link our modular cloud-hosted fair processing platform which provides valuable data and analytics and efficient management of transportation networks. With GenFair Link, transportation authorities can now offer account-based rider management, website and portal support, and customer service functions all in one place. At this point, we have won more than 50 accounts on GenFair Link. And our Q's GraniteNet software platform continues to develop new ways to drive efficient management of critical infrastructure the municipal water authorities, including the use of AI to prescreen potential areas of concern and the ability to geotag maintenance priorities with LiDAR-enabled robotics. I will now turn the call to Mark to review our financial performance.

Thanks, Gene. We are very pleased with our performance for the quarter and full year. In the fourth quarter, our adjusted EPS grew 33% year-on-year to $1.17. Full year adjusted EPS was $3.10, also up 33% year-on-year. The most notable adjustment to our GAAP results is a loss on the previously announced divestiture of our asbestos liabilities and associated assets. Other customary adjustments include the removal of mark-to-market pension gains, acquisition-related costs, amortization expense, and asset impairment charges. In addition to the segment drivers, which I will review momentarily, a higher effective tax rate created a year-on-year headwind to adjusted EPS in the fourth quarter of approximately 12 cents, compared with an unusually low effective tax rate in the prior year. A review of our results reflects strong growth across our company. Revenues increased 22.7% year-on-year, including 18.4% organic growth with strength in both our HVAC and detection and measurement segments. Acquisitions contributed inorganic growth of 6.3% related to Cincinnati Fan and ITL. Partially offsetting our top line organic and acquisition growth was a 2% FX headwind resulting from the strong dollar. As a reminder, currency fluctuations generally have little effect on our overall profitability. due to significant natural hedges in our cost structure. Segment income grew by $23.2 million, or 34.5% to $90.5 million, while margin increased 190 basis points. These increases were driven by strong performance in HVAC and to a lesser extent in detection and measurement. In addition, price cost remained a modest tailwind in both segments. For the quarter, in our HVAC segment, revenues grew 29.5% year on year. Heating and cooling both contributed to organic growth of 21.1%, driven by increased volume and price in both platforms. During the quarter, we also benefited from improvements in the availability of labor and the easing of supply chain constraints. Inorganic growth was 9.4%, reflecting the acquisition of Cincinnati Fan. The strong dollar was a modest FX headwind. Segment income increased by $19 million, and margin increased 320 basis points, reflecting improvements in throughput from favorable operational execution, particularly in cooling, and favorable price-cost trends in heating. Overall, bookings remained solid, and in the fourth quarter, segment backlog increased by approximately 7% year-on-year, to $243 million. For the quarter in detection and measurement, revenues grew 12.2% year on year. Location and inspection, ComTech, and ATON were all strong contributors to organic growth of 14.4%. The strong dollar resulted in a 3.7% currency headwind. Segment income increased by $4.2 million, and margin grew 20 basis points. We continue to experience solid run rate demand and a strong environment for project sales. Segment backlog at quarter end was $250 million, up 63% year on year, primarily due to large project orders. Turning now to our financial position at the end of the quarter. Our balance sheet remains strong and we have significant liquidity available to support our strategic growth initiatives. At quarter end, we had cash of $157 million and no borrowings under a revolving credit facility. Our cash balance included the impact of divesting our asbestos liabilities, which was funded with approximately $139 million cash on hand. As a result, we concluded the year with net leverage of 0.4 times. For the full year, adjusted free cash flow was approximately $97 million, In 2022, cash generation was affected by strategic working capital investments related to supply chain management. During 2023, we anticipate a return to a more normalized run rate of cash generation. Moving on to our guidance. We are initiating 2023 guidance for adjusted EPS in a range of $3.30 to $3.55. the midpoint reflects year-on-year growth of approximately 10%. One notable change between 2023 and prior years is that we now anticipate an effective tax rate of approximately 24% compared with an effective tax rate of approximately 21% in 2022. The change is due to a higher percentage of income in the United States and higher statutory rates in certain jurisdictions. In our HVAC segment, we anticipate revenue in a range of $935 million to $955 million. Segment income margin is anticipated to be in a range of 15.25 to 16% or an increase of approximately 80 basis points at the midpoint, reflecting more efficient production in our heating and cooling facilities and a favorable price-cost environment. In our detection and measurement segment, we anticipate revenue in a range of $565 million to $585 million. Segment income margin is anticipated to be in a range of 20.5 to 21.5%, or a modest year-on-year increase at the midpoint. In 2023, we anticipate significant project revenue at lower than typical project margins due to the amount of pass-through content in certain large projects. With respect to the cadence of the quarters, we anticipate that it will be similar to 2021 when approximately 43% of EPS fell in the first half of the year and 57% in the second half. As always, you will find modeling considerations in the appendix to our presentation. I'll now turn the call back over to Gene for a review of our end markets and his closing comments.

Thanks, Mark.

Overall current market conditions remain supportive of solid growth in 2023. Across our HVAC businesses, supply chain and labor constraints remain but are improving. In HVAC cooling, we continue to see solid demand for our products in North America and the APAC region. In our heating business, bookings remain steady, driven by commercial and industrial demand and residential replacements. And in detection and measurement, Our run rate demand is solid overall with some regional variations while the environment for project orders remains attractive. In summary, I'm pleased with our very strong close to the year and our momentum on multiple important initiatives. We are beginning 2023 in a strong position to achieve full year earnings growth of approximately 10% at the midpoint of our guidance. With a solid balance sheet and an active M&A pipeline, we are well positioned to continue compounding our growth through strategic acquisitions. I'm proud of our highly capable, experienced team, and I'm confident in our ability to continue executing on our value creation roadmap for years to come. As you look ahead, I'm excited about reaching our SPX 2025 targets. And with that, I'll turn the call back to Paul.

Thanks, Gene. Operator, we are ready to go to questions.

Thank you.

At this time, we'll conduct the question and answer session. As a reminder, to ask a question, you'll need to press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, press star 1 1 again. Please stand by while we compile the question and answer roster. Our first question comes from the line of Damian Karras of UBS. Your line is open.

Hi, good evening, everyone.

Hey, Damien. Hey, Damien.

Hey. So I wanted to open by asking you about your sales outlook. Gene, I know you guys try to be very prudent about setting achievable financial targets. but just hearing some of your commentary related to the healthy backlog, uh, continued orders growth, um, and kind of what you're seeing across your business, uh, I guess kind of the 4% or so sales growth, um, maybe just sounds a little bit light. So, uh, I was wondering, you know, is that related to just kind of the tougher comps that you're going to have, or are you factoring in some, you know, potential macro weakness in your year this year? Uh, Really, any color on kind of how you're thinking about the sales outlook?

Yes, I think it's a good question, Damon. I think if you look at it, very positive year in 22. We had approximately 33% earnings growth, about 10% this year. I do think when we put together our plan, we did look at the macroeconomic environments. As you know, GDP is expected to be relatively flattish or no growth in North America, which is the bulk of our sales. Having said that, where we sit today, we do come in with a very strong backlog. And in our end markets, we're seeing solid order rates. So what I would say is what we have out there for our guidance is what we believe is the appropriate guidance have out there. And having said that, we're always looking to achieve higher than that. So that's, you know, you always want to achieve higher. And I don't know if you have any other comments you guys would like to share.

Yeah, Damien, I'll just kind of add to that. Listen, there's a number of factors out there that are going to probably impact how we fall within the range that we put forward. As Gene mentioned, the macro environment, right, the signals are mixed out there. Today, you know, look at things like non-resi and some of the leading indicators that folks look at. Unclear what they're signaling. They're probably flashing yellow. Supply chain and labor, you know, those are moderating for us. But I would say we're not out of the woods on both of those issues yet. Getting better, but not back where they were. You know, and while price-cost has been a tailwind for us in the first half, what we expect it will be in the first half of the year, know we don't have a lot of visibility on what that might look like in the back half of the year you know so if you sort of think about the businesses and and some of the elements you would think about you know on the on our hvac business particularly on the heating side you know weather is obviously a key element uh in that business you know that that obviously is something that will play out more on the back half of the year but it definitely drives that business uh and its performance You know, cooling, despite my comments on the leading indicators and caution around those, while we aren't seeing weakness there, you know, our visibility is limited in that market, you know, out, you know, up to about six months. So it's hard for us to see much beyond that. You know, and then on the DNM side, that is, you know, a slightly different profile. But as you know, a portion of that business is short cycle, particularly the radio detection business, which is more sensitive. you know, to the economic environment. And in the event that there is weakness towards the back half of this year, you know, we would expect that business would be impacted by that. So I think net-net, I mean, our view is it's a reasonable range in targeting kind of this 10% earnings growth, you know, based off of the revenue and segment income guidance that exists.

Understood. Appreciate all of that. And then my second question is with respect to the detection and measurement margin guide. So you're expecting some nice top line growth, kind of mid-single digits, but more flattish type margin trajectory. So, you know, is that primarily mix related or maybe if you could just kind of lay out the margin bridge for DNS and how you're thinking about that?

Yeah, Damian, I'll start. It's really, you hit on it, it's primarily a mixed issue, right? We've got some large project orders in there that we mentioned that you saw or we referenced in the backlog, and they include some pass-through revenue, which ultimately results in what I guess I would call a lower-than-average margin than we see from these projects and in that business.

Got it. Makes sense. I'll get back in the queue. Thanks, guys.

Thanks, Damian.

Thank you. One moment, please.

Our next question comes from the line of Brian Blair of Oppenheimer. Your line is open.

Thanks, guys. Great finish to the year. Thanks, Brian. Obviously, EPS came in solidly ahead of expectations. Maybe offer a little more color on the sources of the

uh the 20 cent beat and i guess i'm particularly curious if we should consider anything one-timish in that regard so um brian first of all just uh i'll start the uh this is paul speaking um a lot of it was really around x really strong execution you'll see that we have very strong results in our hvac business in both heating and cooling where we have large backlogs And as supply chain improved and our labor position also improved, we were able to get through nice amounts of that backlog and drive better throughput in our plants in HVAC.

Yeah, and I think, I mean, just adding on to that, right, that's really what drove the margin increase that you saw in HVAC quarter over quarter, year over year, the 320 basis points, right? As supply chain eased, as the labor environment and its impact on some of our plants receded somewhat, we were able to really drive throughput.

Understood. Results were excellent.

Maybe offer some additional detail on infrastructure opportunities, the SVX platforms most likely to benefit going forward, and when we may see those tailwinds really accelerate and reach through to growth.

Yeah. Brian, I'll give you some color on that. I think that the most immediate place we see when we look at that is more on the detection and measurement side. I'd say the first place that we've seen it would be on transportation, our fare collection platform, where there's been a lot of activity. And you see the municipalities, you know, some of the larger projects that they have out there really starting to move to fruition. And we see that as something that's actually happening right now. kind of look across our portfolio there's a lot of different places that the infrastructure monies could be beneficial you know having said that it's not all at the same time it's not all year one you know you look at for example our lighting business where we provide lighting solutions for uh windmills or 5g towers uh you know those don't typically go up in a few months it's typically a longer process and so we're typically the at the tail end of that process. On the other side are things like fare collection or some other areas. So I do see it hitting a lot of areas. I would also say on the cooling side, we're seeing some pretty interesting pockets in a couple of areas. We're seeing batteries being quite intriguing. We're seeing semiconductor and data center activities being very healthy. And those typically have a lot of needs for our type of cooling equipment. So I'd say that's an area that I think is seeing some benefit from some of the government funding. It's something that should be out there for a number of years. Paul, I think one to bring up is always radio detection. Radio detection is, you know, we're the leader in underground scanners. part of our location and inspection platform. That's really a good proxy for economic activity because you have to scan before you dig for Google Fiber or whether you're putting in gas lines or whether you're putting in non-resi buildings or hospitals or educational, any type of activity, bridges, you need to scan typically. And that is a net driver of end-to-market demand for us. the more general activity you'll see some of our infrastructure technology get pulled along with that. Q's is the last one that I'll highlight, which is robotics for water and wastewater applications. And we have seen some monies that have gone to the municipalities there. You know, we haven't seen that converting into orders as of yet. We are seeing some programs where there's some opportunities. So if you look at it across the portfolio, I do think this will be a net benefit to us over the next couple of years. We do see some areas that will provide some nice demand support for us.

All helpful detail. And if I can ask one more. The tone on your M&A opportunity is unsurprisingly positive. Any additional color you can offer there in terms of the progression of your M&A pipeline, any shift in composition of the funnel? seller expectations, actionability over the near term, anything along those lines would be great.

Yeah, Ron, I'd say that overall, we feel really good about our strategy. So for each of our six platforms, we have very detailed growth plans and we're executing against those. In terms of the activity level, I would say it is a very healthy level of activity. You know, we did see some slower level of activity during some of the COVID years, but I'd say that's not the case right now. We're seeing very healthy levels. That's despite, you know, where interest rates are today. So, we are very pleased. We haven't seen, you know, it's interesting, we always get the question on multiples, you know, when things are very high, they're going up. When things are going the other way, they're going down. You know, we're very disciplined on our multiples. As you know, we've acquired some really good companies, typically engineered products, leading positions, typically 20% EBITDA, sometimes more, good growth rates. And on average, we've brought these in at around 10 to 11 times. And, you know, we don't see any material change in that profile. You know, we've always said if you look at a larger, you know, opportunity, you could get a higher turn or two on some of those. But where I sit on our growth opportunities for 23, I think we have a very attractive set of growth opportunities. But having said that, as we always caution, we're going to be very disciplined here, and we're going to be very careful

But I would say we're feeling very positive on the program.

Understood. Thanks again, guys. Thanks, Brian.

Thank you. One moment, please. Our next question comes from the line of Steve Sarozani of Sudoti. Your line is open.

Good evening, Gene. Welcome, Mark. I do want to follow up that last question in terms of how well you're now positioned to hitting those SPX 2025 targets. I think we're now almost 10, 11 months since the last significant acquisition. I know they hit when they hit, but any reason to start pushing that back, given the length of time between the most recent acquisition?

Steve, I don't believe so. You know, I think you're spot on. It was a slow year, really. The only bullpon we did was ITL. That was our slowest year in four years. There's various reasons for that. You know, one of the ones I will point out was the magnitude of the sale of our asbestos liabilities where we had to reorganize the company, restructure, sale did consume a lot of management time and attention. In addition to, you know, various things that happened during the year, you know, we don't give color on what didn't happen, I guess you could say. But what I would say is I feel very good about 2025, and I feel very good about our pipeline. So, you know, we have a very strong balance sheet. We're sitting here at 0.4 times net debt, and we think we have some very – smart ways to deploy that going forward. And so really, it's up to us in executing it. But yeah, to answer the primary part of your question, I don't feel we need to move back our 2025 targets. Great.

Thanks. And then also on capital allocation, Mark, you noted that you expect more of a normalization in terms of working capital, which would indicate much stronger cash flow in 2023. Any thoughts outside of M&A? Would you be looking at debt reduction or anything else you might want to do with what should be increasing cash flow?

Yeah, I mean, I think, listen, as Gene kind of alluded to, right, our first focus is on growth, whether that be organic investing in the business in CapEx or inorganic and driving the business in that method. I think with respect to other return of capital options, we have repurchased shares in the past. That was at a unique moment where we felt like the stock was undervalued at that time. And clearly, we'll have a keen eye on that and wouldn't rule that out as an option. But I wouldn't say it's sort of a primary focus at the moment with respect to deployment of capital.

Yeah, I'd say, you know, we kind of have allocated up to 10%. And I think that's always out there. If we see dislocation in the stock, which we had last year, I think we're very comfortable. But we do see some very attractive growth opportunities.

On that note, it sounds like CapEx is a little bit higher this year, $25 million.

That's right. Yeah, we are looking.

Yeah, we are looking at some various growth opportunities that we have, probably leaning a little bit more towards the HVAC business, both heating and cooling at the plant level, where there are some strong opportunities to improve our overall throughput, efficiency, and growth rates. So that's why I don't anticipate that that will be sort of a permanent feature of our cash flow. But for this year and perhaps next year, you might see a little bit of an elevated level while we make those investments.

Great. If I could squeeze one last one in, just to go back to the really healthy HVAC margin this quarter, and you talked about working through more backlog. But as I recall a quarter ago when you were guiding and there was some caution there that you were going to see some older price backlog work through, I'm just trying to figure out how that kind of worked itself out. Sort of how that syncs with the margins that we – With the higher margin, if you had so much for a price backlog that was sitting in there.

Yeah. But we were pushing through a lot more volume, Steve, and I think that's really the driver there. As you look at those, you know, there's a certain amount of efficiency that you see as you have the labor on site and have all of the supplies or most of the supplies that you need. to drive efficiencies. You're not having to switch people from different lines and things like that. So that all plays to a much nicer drop through covering those fixed costs and being able to push up those margins in the fourth quarter.

Yeah, I think we feel good about where our price cost is. I mean, we feel like where we're supposed to be and we're getting the margins associated with that. And one thing, Steve, that you asked about on debt repayment, it's probably worth noting Our term loan A is locked at the low twos.

We do, yeah.

So, you know, we're not going to pay back, you know, our term loan A when you're sitting at 2.3% or so. So that gives us some nice, again, some further ability there.

Fair enough. Thanks. Thanks for answering questions tonight, folks.

Thank you.

Thank you. One moment for our next question. This question comes from the line of Damian Karras of UBS. Your line is open.

Hey, guys. Just a few follow-ups here. First on HVAC, I was wondering if you could maybe parse out kind of the growth expectation for heating and cooling. Is it kind of the same or, you know, expecting one kind of stronger than the other?

And so really, we would see more of the growth come from the cooling side. You know, heating, as you know, Damian, when we enter the year, we are typically more reliant on weather in the fourth quarter to determine what that fourth quarter heating throughput is going to look like or the fourth quarter volumes. That wasn't the case in 2022. As you know, we were looking at a fairly high backlog going into the fourth quarter, and we were able to execute well on that. But as we go into this year, That's a consideration we have to take into account in our guidance.

And I think, Paul, it sort of ties back to some of the comments Gene made earlier about some of the opportunities that we're seeing, you know, for our cooling product, right, that are being driven by some of this infrastructure spend, so. Okay, great.

And then, you know, 2022, I guess from a free cash flow perspective, was a little bit of a, you know, messy. Obviously had the asbestos matters, but working capital also a bit of a drag. So how are you thinking about the cash flow outlook from here? Do you think you can get back to more like 100% conversion number this year, or is it going to take a little bit more time?

I think, Damian, I think, you know, we think there's a path back to a more normalized range of free cash flow conversion. You know, my expectations would be somewhere in that 90 to 100% range as I think about 2023. I do think working capital will normalize, particularly around inventories over time. But, you know, that may be not a 12-month period. That could be a 24-month period as that normalizes. What that's really driven by, though, is not everything that we're out there sourcing for inventory, but there are pockets of the supply chain that still remain constrained, if you will, on availability. So strategically, we've decided to carry more inventory there to support the business.

Understood. And then one last one. Gene, you had mentioned some of the digital initiatives. ProTool sounds like that's more or less just a complimentary service that's helping you outgrow the market in boilers. but you also talked about Gen Fair Links and a few others, and, you know, so 50 new accounts with Gen Fair Links. Is that, should we be thinking of that as, you know, an incremental revenue opportunity? Are you capturing additional, you know, sales on these accounts? Is this like a software subscription? How should we think about that?

Yeah, and I think you're right. I think broadly speaking, if you think about our digital initiatives, on the HVAC side, it's much more of tools and solutions and capabilities to really help either us or our reps or our partners in the field win. And I think, you know, we talked about the heating business, the hydronics, they had a great year. And I think the digital tools that we provide to the contractors is a key factor of why we gained so much market share this year. So we, you know, feel really good at that. Really, when you look on the detection and measurement, it's different. Most of our detection measurement products come with software. So it's really part of the solution that you're providing to the customer. And in general, what you see is this software on a relative basis is small relative to the revenue of the overall segment. You're talking in the neighborhood of, let's say, $20 million, $25 million. Having said that, it's extremely strategically important because this software we provide provides data, analytics oftentimes. A lot of times it's asset management, and it engenders customer loyalty such that once they buy our equipment, they buy all of their equipment with us. And so, for example, specifically on the Gen Fair example, once a municipality goes on our platform, they are on our platform for the next 20 years, let's say, typically. And so every piece of equipment that attaches into that fair collection area will be the Gen Fair solution because it plugs into their software. But to your very specific question, Yeah, we are building revenue streams. Now, I'd still say those revenue streams are smaller, you know, relatively speaking to the equipment. So, like, let's say on the GenFair side, the amount of software we're selling, it's SaaS software typically, is growing every year. And it's doing, you know, doing very well and would keep winning more accounts. But it is still relatively a smaller portion of the overall revenue. revenue of the business, you're probably talking high single digits in terms of revenue and in terms of margin. Actually, it's getting more material. You're probably talking, you know, because it's such high margin, you're probably talking higher than that. But yeah, that might give you some flavor, Damian, for how we think about it.

It does. That's really helpful. Thanks a lot, guys. That's a lot.

Thank you, Damian. Thank you. I would like to now turn it back to Paul Clegg for closing remarks.

Thank you all for joining us on the call today, and we look forward to updating you again next quarter. Thank you for your support.

And thank you for participation in today's conference. This does conclude the program, and you may now disconnect.

The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1 1.

Thank you. you Thank you. Thank you. Thank you. Thank you.

Good day, and thank you for standing by. Welcome to the Q4 2022 SPX Technologies Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 1 on your telephone. You'll then hear an automated message advising that your hand is raised. To withdraw your question, Press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Paul Clegg, Vice President of Investor Relations and Communications. Please go ahead.

Thank you, and good afternoon, everyone. Thanks for joining us. With me on the call today are Gene Lowe, our President and Chief Executive Officer, and Mark Carano, our Chief Financial Officer. Also available during Q&A will be our Chief Accounting Officer, Mike Riley. The press release containing our fourth quarter and full year results for 2022 was issued today after market close. You can find the release in our earnings slide presentation as well as a link to a live webcast of this call in the investor relations section of our website at spx.com. I encourage you to review our disclosure and discussion of GAAP results in the press release and to follow along with this slide presentation during our prepared remarks. A replay of the webcast will be available on our website until March 2nd. As a reminder, portions of our presentation and comments are forward-looking and subject to safe harbor provisions. Please also note the risk factors in our most recent SEC filings. Our comments today will largely focus on adjusted financial results, and comparisons will be to the results of continued operations only You can find detailed reconciliations of historical adjusted figures to their respective gap measures in the appendix to today's presentation. Our adjusted earnings per share exclude primarily non-service pension items, asset impairment charges, amortization expense, and a loss on the divestiture of asbestos-related assets and liabilities. One change you will notice in our press release in our 10-K is that we have aligned our definition of segment income with the way it is presented in our earnings presentations, which excludes the impact of amortization expense and acquisition related items. Finally, we will be conducting meetings with investors over the coming months, including at the UBS infrastructure and EMT conference in Dallas, as well as at Sudoti's virtual small cap conference. And with that, I'll turn the call over to Gene.

Thanks, Paul. Good afternoon, everyone, and thank you for joining us. On the call today, we'll provide you with an update on our consolidated and segment results for the fourth quarter. We'll also provide guidance for 2023. This is our first call with Mark Carano as our CFO. Mark joined us in early January and has been quickly coming up to speed. Mark is a great fit with SPX's growth and operational excellence initiatives. He brings a depth of experience in strategy, finance, and business development. He has an impressive back track record as a public company CFO and a strong background in engineered products, growth investments, and operational excellence initiatives. We're excited to have him here. Mark, welcome to the team.

Thanks, Gene. I've already met several of you who are on the call today, and I'm looking forward to getting to know more of you over the coming weeks and months. SPX has an impressive team and a great business that is well positioned for the opportunities ahead. I'm excited to be here.

Thanks, Mark. Now I'll touch on some of the highlights from the quarter and provide some perspective on our 2023 guidance. Our Q4 results exceeded our expectations with strong performances in both HVAC and detection and measurement. Both segments drove revenue and margin growth, and we continue to experience solid demand across our end market. During the quarter, we made further progress on a number of our key initiatives, including the establishment of ESG commitments, additional progress in our digital and continuous improvement initiatives, and a significant reduction in legacy liability exposure. Looking ahead, we are starting 2023 with a historically high level of backlog. We're also seeing some easing of supply chain and labor constraints which along with our continuous improvement initiatives is benefiting our operational execution. Today, we're providing 2023 guidance for adjusted EPS in a range of $3.30 to $3.55, which reflects approximately 10% growth at the midpoint. Turning to our high-level results, for the quarter, Both segments helped drive strong organic revenue growth of more than 18% and our recent acquisitions performed well. Adjusted operating income grew 48% year on year with 290 basis points of margin expansion. On a full year basis, adjusted operating income grew 39%. I'm very pleased with our Q4 and full year performance as well as our momentum entering 2023. Despite mixed macroeconomic data, we believe our diverse portfolio remains resilient. With significant capital availability, an active acquisition pipeline, and multiple organic growth and margin enhancement initiatives, I'm confident in our ability to deliver on our SPX 2025 plan. As always, I'd like to touch on our progress in our value creation framework. As you look back over 2022, our teams worked hard to mitigate supply chain and labor constraints, leveraging our business system to meet strong levels of customer demand. We introduced multiple new products, made progress on our key initiatives, and reduced complexity and risk by divesting our legacy asbestos liabilities. I'm also very proud of our momentum on our ESG initiative. SPX is well-positioned to thrive in a Paris Accord world where long-term targets on carbon emissions are realized. From our highly efficient cooling towers to our inspection equipment that helps detect and remediate leaks in underground water and gas pipes, SPX offers a wide array of innovative products that enable a safer, more efficient, and sustainable future. In 2022, we more formally incorporated ESG as a key element of our strategic planning process for each business unit, significantly expanded our disclosures, adopted a human rights policy, and saw considerable increases in our scores among key ESG rating entities. Recently, we adapted company-wide sustainability commitments including a 30% reduction in greenhouse gas emissions intensity by 2030. We're also named by Newsweek as one of America's most responsible companies. We are honored to be recognized and pleased that the hard work of our team is being acknowledged. Another area where we have strong momentum is in our digital initiative. As the new name of our company reflects, it is more important than ever to leverage technology solutions to help our customers continue to be successful. Each of our platforms is focused on providing innovative designs, products, and tools to enable our customers to be more efficient, productive, safer, and more sustainable. A few examples of where we continue to see customer traction include our Pro Tools tech app within our HVAC heating business, which helps field technicians become hydronics experts by putting our boiler product information at their fingertips in a mobile platform. In 2022, we took market share in boilers, and we believe that our digital initiatives were a key reason for this success. In our cooling business, our CoolSpec software is enabling customers to compare, select, and configure highly engineered cooling solutions faster and easier than ever before. In detection and measurement, we're seeing strong adoption of GenFair Link, our modular cloud-hosted fare processing platform, which provides valuable data and analytics and efficient management of transportation networks. With GenFair Link, transportation authorities can now offer account-based rider management, website and portal support, and customer service functions all in one place. At this point, We have won more than 50 accounts on Gen Fair Link. And our Q's GraniteNet software platform continues to develop new ways to drive efficient management of critical infrastructure, the municipal water authorities, including the use of AI to prescreen potential areas of concern and the ability to geotag maintenance priorities with LiDAR-enabled robotics. I will now turn the call to Mark to review our financial performance.

Thanks, Gene. We are very pleased with our performance for the quarter and full year. In the fourth quarter, our adjusted EPS grew 33% year-on-year to $1.17. Full year adjusted EPS was $3.10, also up 33% year-on-year. The most notable adjustment to our GAAP results is a loss on the previously announced divestiture of our asbestos liabilities and associated assets. Other customary adjustments include the removal of mark-to-market pension gains, acquisition-related costs, amortization expense, and asset impairment charges. In addition to the segment drivers, which I will review momentarily, a higher effective tax rate created a year-on-year headwind to adjusted EPS in the fourth quarter of approximately 12 cents, compared with an unusually low effective tax rate. in the prior year. A review of our results reflects strong growth across our company. Revenues increased 22.7% year-on-year, including 18.4% organic growth, with strength in both our HVAC and detection and measurement segments. Acquisitions contributed inorganic growth of 6.3% related to Cincinnati Fan and ITL. Partially offsetting our top line organic and acquisition growth was a 2% FX headwind resulting from the strong dollar. As a reminder, currency fluctuations generally have little effect on our overall profitability due to significant natural hedges in our cost structure. Segment income grew by $23.2 million or 34.5% to $90.5 million while margin increased 190 basis points. These increases were driven by strong performance in HVAC and to a lesser extent in detection and measurement. In addition, price-cost remained a modest tailwind in both segments. For the quarter, in our HVAC segment, revenues grew 29.5% year-on-year. Heating and cooling both contributed to organic growth of 21.1%, driven by increased volume and price in both platforms. During the quarter, we also benefited from improvements in the availability of labor and the easing of supply chain constraints. Inorganic growth was 9.4%, reflecting the acquisition of Cincinnati Fan. The strong dollar was a modest FX headwind. Segment income increased by $19 million, and margin increased 320 basis points. reflecting improvements in throughput from favorable operational execution, particularly in cooling, and favorable price-cost trends in heating. Overall, bookings remained solid, and in the fourth quarter, segment backlog increased by approximately 7% year-on-year to $243 million. For the quarter in detection and measurement, revenues grew 12.2% year-on-year, Location and Inspection, ComTech, and Aton were all strong contributors to organic growth of 14.4%. The strong dollar resulted in a 3.7% currency headwind. Segment income increased by $4.2 million and margin grew 20 basis points. We continue to experience solid run rate demand and a strong environment for project sales. Segment backlog at quarter end was $250 million up 63% year-on-year, primarily due to large project orders. Turning now to our financial position at the end of the quarter. Our balance sheet remains strong, and we have significant liquidity available to support our strategic growth initiatives. At quarter end, we had cash of $157 million and no borrowings under our revolving credit facility. Our cash balance included the impact of divesting our asbestos liabilities, which was funded with approximately $139 million cash on hand. As a result, we concluded the year with net leverage of 0.4 times. For the full year, adjusted free cash flow was approximately $97 million. In 2022, cash generation was affected by strategic working capital investments related to supply chain management. During 2023, we anticipate a return to a more normalized run rate of cash generation. Moving on to our guidance. We are initiating 2023 guidance for adjusted EPS in a range of $3.30 to $3.55. The midpoint reflects year-on-year growth of approximately 10%. One notable change between 2023 and prior years is that we now anticipate an effective tax rate of approximately 24% compared with an effective tax rate of approximately 21% in 2022. The change is due to a higher percentage of income in the United States and higher statutory rates in certain jurisdictions. In our HVAC segment, we anticipate revenue in a range of $935 million to $955 million. Segment income margin is anticipated to be in a range of 15.25 to 16% or an increase of approximately 80 basis points at the midpoint, reflecting more efficient production in our heating and cooling facilities and a favorable price-cost environment. In our detection and measurement segment, we anticipate revenue in a range of $565 million to $585 million. Segment income margin is anticipated to be in a range of 20.5 to 21.5%, or a modest year-on-year increase at the midpoint. In 2023, we anticipate significant project revenue at lower than typical project margins due to the amount of pass-through content in certain large projects. With respect to the cadence of the quarters, we anticipate that it will be similar to 2021, when approximately 43% of EPS fell in the first half of the year, and 57% in the second half. As always, you will find modeling considerations in the appendix to our presentation. I'll now turn the call back over to Gene for a review of our end markets and his closing comments.

Thanks, Mark.

Overall current market conditions remain supportive of solid growth in 2023. Across our HVAC businesses, supply chain and labor constraints remain but are improving. In HVAC cooling, we continue to see solid demand for our products in North America and the APAC region. In our heating business, bookings remain steady, driven by commercial and industrial demand and residential replacements. And in detection and measurement, our run rate demand is solid overall with some regional variations while the environment for project orders remains attractive. In summary, I'm pleased with our very strong close to the year and our momentum on multiple important initiatives. We are beginning 2023 in a strong position to achieve full year earnings growth, approximately 10% at the midpoint of our guidance. With a solid balance sheet and an active M&A pipeline, we are well positioned to continue compounding our growth through strategic acquisitions. I'm proud of our highly capable, experienced team and I'm confident in our ability to continue executing on our value creation roadmap for years to come. As you look ahead, I'm excited about reaching our SPX 2025 targets. With that, I'll turn the call back to Paul.

Thanks, Gene. Operator, we are ready to go to questions.

Thank you.

At this time, we'll conduct the question and answer session. As a reminder, to ask a question, you'll need to press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, press star 1 1 again. Please stand by while we compile the question and answer roster. Our first question comes from the line of Damian Karras of UBS. Your line is open.

Hi, good evening, everyone.

Hey, Damien. Hey, Damien.

Hey. So I wanted to open by asking you about your sales outlook. Gene, I know you guys try to be very prudent about setting achievable financial targets. but just hearing some of your commentary related to the healthy backlog, uh, continued orders growth, um, and kind of what you're seeing across your business, uh, I guess kind of the 4% or so sales growth, um, maybe just sounds a little bit light. So, uh, I was wondering, you know, is that related to just kind of the tougher comps that you're going to have, or are you factoring in some, you know, potential macro weakness in your year this year? Uh, Really, any color on kind of how you're thinking about the sales outlook?

Yes, I think it's a good question, Damon. I think if you look at it, very positive year in 22. We had approximately 33% earnings growth, about 10% this year. You know, I do think when we put together our plan, we did look at the macroeconomic environments. As you know, GDP is expected to be relatively flattish or no growth in North America, which is the bulk of our sales. Having said that, where we sit today, we do come in with a very strong backlog. And in our end markets, we're seeing solid order rates. what we believe is the appropriate guidance have out there. And having said that, we're always looking to achieve higher than that. So that's, you know, you always want to achieve higher. And I don't know if you have any other comments you guys would like to share.

Yeah, Damien, I'll just kind of add to that. Listen, there's a number of factors out there that are going to probably impact how we fall within the range that we put forward. As Gene mentioned, the macro environment, right, the signals are mixed out there. Today, you know, look at things like non-resi and some of the leading indicators that folks look at. Unclear what they're signaling. They're probably flashing yellow. Supply chain and labor, you know, those are moderating for us. But I would say we're not out of the woods on both of those issues yet. Getting better, but not back where they were. You know, and while price-cost has been a tailwind for us in the first half, what we expect it will be in the first half of the year, know we don't have a lot of visibility on what that might look like in the back half of the year you know so if you sort of think about the businesses and and some of the elements you would think about you know on the on our hvac business particularly on the heating side you know weather is obviously a key element uh in that business you know that that obviously is something that will play out more on the back half of the year but it definitely drives that business uh and its performance You know, cooling, despite my comments on the leading indicators and caution around those, while we aren't seeing weakness there, you know, our visibility is limited in that market, you know, up to about six months. So it's hard for us to see much beyond that. You know, and then on the DNM side, that is, you know, a slightly different profile. But as you know, a portion of that business is short cycle, particularly the radio detection business, which is more sensitive. you know, to the economic environment. And in the event that there is weakness towards the back half of this year, you know, we would expect that business would be impacted by that. So I think net-net, I mean, our view is it's a reasonable range in targeting kind of this 10% earnings growth, you know, based off of the revenue and segment income guidance that exists.

Understood. Appreciate all of that. And then my second question is with respect to the detection and measurement margin guide. So you're expecting some nice top line growth, kind of mid-single digits, but more flattish type margin trajectory. So, you know, is that primarily mix related or maybe if you could just kind of lay out the margin bridge for DNS and how you're thinking about that?

Yeah, Damian, I'll start. It's really, you hit on it, it's primarily a mixed issue, right? We've got some large project orders in there that we mentioned that you saw or we referenced in the backlog, and they include some pass-through revenue, which ultimately results in what I guess I would call a lower-than-average margin than we see from these projects and in that business.

Got it. Makes sense. I'll get back in the queue. Thanks, guys.

Thanks, Damian.

Thank you. One moment, please.

Our next question comes from the line of Brian Blair of Oppenheimer. Your line is open.

Thanks, guys. Great finish to the year. Thanks, Brian. Obviously, EPS came in solidly ahead of expectations. Maybe offer a little more color on the sources of the the 20-cent beat, and I guess I'm particularly curious if we should consider anything one-time-ish in that regard.

So, Brian, first of all, I'll start. This is Paul speaking. A lot of it was really around really strong execution. You'll see that we have very strong results in our HVAC business in both heating and cooling where we have large backlogs. And as supply chain improved and our labor position also improved, we were able to get through nice amounts of that backlog and drive better throughput in our plants in HVAC.

Yeah, and I think, I mean, just adding on to that, right, that's really what drove the margin increase that you saw in HVAC quarter over quarter, year over year, the 320 basis points, right, is supply. As supply chain eased, as the labor environment and its impact on some of our plants receded somewhat, we were able to really drive throughput.

Understood. Results were excellent.

Maybe offer some additional detail on infrastructure opportunities, the SVX platforms most likely to benefit going forward. and when we may see those tailwinds really accelerate and read through to growth.

Yeah, Brian, I'll give you some color on that. I think that the most immediate place we see when we look at that is more in the detection and measurement side. I'd say the first place that we've seen it would be on transportation, our fare collection platform, where there's been a lot of activity and you see the municipalities some of the larger projects that they have out there really starting to move to fruition. And we see that as something that's actually happening right now. If you kind of look across our portfolio, there's a lot of different places that the infrastructure monies could be beneficial. Having said that, it's not all at the same time. It's not all year one. You look at, for example, our lighting business where we provide lighting solutions for uh windmills or 5g towers uh you know those don't typically go up in a few months it's typically a longer process and so we're typically the at the tail end of that process on the other side are things like fair collection or some some some other areas um so i do see it hitting a lot of areas i would also say on the cooling side we're seeing some pretty interesting pockets in a couple of areas. We're seeing batteries being quite intriguing. We're seeing semiconductor and data center activities being very healthy. And those typically have a lot of needs for our type of cooling equipment. So I'd say that's an area that I think is seeing some benefit from some of the government funding. It's something that should be out there for a number of years. Paul, I think one to bring up is always radio detection. Radio detection, as you know, we're the leader in underground scanners. That's the part of our location and inspection platform. That's really a good proxy for economic activity because you have to scan before you dig for Google Fiber or whether you're putting in gas lines or whether you're putting in non resi buildings or hospitals, educational, any type of activity bridges you need to scan typically. And that that is a net driver of end market demand for us. So the more general activity, you'll see some of our infrastructure technology get pulled along with that. Q's is the last one that I'll highlight, which is robotics for water and wastewater applications. And we have seen some monies that have gone to the municipalities there. You know, we haven't seen that converting into orders as of yet. We are seeing some programs where there's some opportunities. So if you look at it across the portfolio, I do think this will be a net benefit to us over the next couple of years. We do see some areas that will provide some nice demand support for us.

All helpful detail. And if I can ask one more, the tone on your M&A opportunity is unsurprisingly positive. Any additional color you can offer there in terms of the progression of your M&A pipeline, any shift in composition of the funnel, seller expectations, actionability over the near term, anything along those lines would be great.

Yeah, Ron, I'd say that overall we feel really good about our strategy so for each of our six platforms we have very detailed growth plans and you know we're executing against those in terms of the activity level i would say it is a very healthy level of activity you know we did see some slower level of activity during some of the covid years But I'd say that's not the case right now. We're seeing very healthy levels, and that's despite, you know, where interest rates are today. So we are very pleased. We haven't seen, you know, it's interesting, we always get the question on multiples, you know, when things are very high, they're going up. When things are going the other way, they're going down. We're very disciplined on our multiples. As you know, we've acquired some really good companies, typically engineered products, leading positions, typically 20% EBITDA, sometimes more, good growth rates. And on average, we've brought these in at around 10 to 11 times. And we don't see any material change in that profile. You know, we've always said if you look at a larger, you know, opportunity, you could get a higher turn or two on some of those. But where I sit on our growth opportunities for 23, I think we have a very attractive set of growth opportunities. But having said that, as we always caution, we're going to be very disciplined here, and we're going to be very careful

But I would say we're feeling very positive on the program.

Understood. Thanks again, guys. Thanks, Brian.

Thank you. One moment, please. Our next question comes from the line of Steve . Your line is open.

Good evening, Gene. Welcome, Mark. I do want to follow up that last question in terms of how well you're now positioned to hitting those SPX 2025 targets. I think we're right now almost 10, 11 months since the last significant acquisition. I know they hit when they hit, but any reason to start pushing that back, given the length of time between the most recent acquisitions?

Steve, I don't believe so. You know, I think you're spot on. It was a slow year, really. The only bolt-on we did was ITL. That was our slowest year in four years. There's various reasons for that. You know, one of the ones I will point out was the magnitude of the sale of our asbestos liabilities, where we had to reorganize the company, restructure, sale, did consume a lot of management time and attention. In addition to, you know, various things that happened during the year that, you know, we don't give color on what didn't happen, I guess you could say. But what I would say is I feel very good about 2025 and I feel very good about our pipeline. So, you know, we have a very strong balance sheet. We're sitting here at 0.4 times net debt. And we think we have some very... smart ways to deploy that going forward. And so really, it's up to us in executing it. But yeah, to answer the primary part of your question, I don't feel we need to move back our 2025 targets. Great.

Thanks. And then also on capital allocation, Mark, you noted that you expect more of a normalization in terms of working capital, which would indicate much stronger cash flow in 2023. Any thoughts outside of M&A? Would you be looking at debt reduction or anything else you might want to do with what should be increasing cash flow?

Yeah, I mean, I think, listen, as Gene kind of alluded to, right, our first focus is on growth, whether that be organic investing in the business in CapEx or inorganic and driving the business in that method. I think with respect to other return of capital options, we have repurchased shares in the past. That was at a unique moment where we felt like the stock was undervalued at that time. And clearly, we'll have a keen eye on that and wouldn't rule that out as an option. But I wouldn't say it's sort of a primary focus at the moment with respect to deployment of capital.

Yeah, I'd say, you know, we kind of have allocated up to 10%. And I think that's always out there. If we see dislocation in the stock, which we had last year, I think we're very comfortable. But we do see some very attractive growth opportunities.

On that note, it sounds like CapEx is a little bit higher this year, $25 million.

That's right. Yeah, we are looking.

Yeah, we are looking at some various growth opportunities that we have, probably leaning a little bit more towards the HVAC business, both heating and cooling at the plant level, where there are some strong opportunities to improve our overall throughput, efficiency, and growth rates. So that's why I don't anticipate that that will be sort of a permanent feature of our cash flow. But for this year and perhaps next year, you might see a little bit of an elevated level while we make those investments.

Great. If I could squeeze one last one in, just to go back to the really healthy HVAC margin this quarter, and you talked about working through more backlog. But as I recall a quarter ago when you were guiding and there was some caution there that you were going to see some older price backlog work through, I'm just trying to figure out how that kind of worked itself out. Sort of how that syncs with the margins that we – With the higher margin, if you had some much poorer price backlog that was sitting in there.

Yeah. But we were pushing through a lot more volume, Steve, and I think that's really the driver there. As you look at those, you know, there's a certain amount of efficiency that you see as you have the labor on site and have all of the supplies or most of the supplies that you need. to drive efficiencies. You're not, you know, having to switch people from different lines and things like that. So that all plays to a much nicer drop through covering those fixed costs and being able to push up those margins in the fourth quarter.

Yeah, I think we feel good about where our price cost is. I mean, we feel like where we're supposed to be and we're getting the margins associated with that. And one thing, Steve, that you asked about on debt repayment, it's probably worth noting that Our term loan A is locked at the low twos.

We do, yeah.

So, you know, we're not going to pay back, you know, our term loan A when you're sitting at 2.3% or so. So that gives us some nice, again, some further . Fair enough. Thanks.

Thanks for answering the questions tonight, folks.

Thank you.

Thank you. One moment for our next question. This question comes from the line of Damian Karras of UBS. Your line is open.

Hey, guys. Just a few follow-ups here. First on HVAC, I was wondering if you could maybe parse out kind of the growth expectation for heating and cooling. Is it kind of the same or, you know, expecting one kind of stronger than the other?

And so really, we would see more of the growth come from the cooling side. You know, heating, as you know, Damian, when we enter the year, we are typically more reliant on weather in the fourth quarter to determine what that fourth quarter heating throughput is going to look like or the fourth quarter volumes. That wasn't the case in 2022. As you know, we were looking at a fairly high backlog going into the fourth quarter, and we were able to execute well on that. But as we go into this year, That's a consideration we have to take into account in our guidance.

And I think, Paul, it sort of ties back to some of the comments Gene made earlier about some of the opportunities that we're seeing, you know, for our cooling product, right, that are being driven by some of this infrastructure spend, so.

Okay, great.

And then, you know, 2022, I guess from a free cash flow perspective, was a little bit of a, you know, messy. Obviously had the asbestos matters, but working capital also a bit of a drag. So how are you thinking about the cash flow outlook from here? Do you think you can get back to more like 100% conversion number this year, or is it going to take a little bit more time?

I think, Damian, I think, you know, we think there's a path back to a more normalized range of free cash flow conversion. You know, my expectations would be somewhere in that 90 to 100% range as I think about 2023. I do think working capital will normalize, particularly around inventories over time. But, you know, that may be not a 12-month period. That could be a 24-month period as that normalizes. What that's really driven by, though, is not everything that we're out there sourcing for inventory, but there are pockets of the supply chain that still remain constrained, if you will, on availability. So strategically, we've decided to carry more inventory there to support the business.

Understood. And then one last one. Gene, you had mentioned some of the digital initiatives. ProTool sounds like that's more or less just a complimentary service that's helping you outgrow the market in boilers. but you also talked about Gen Fair Links and a few others, and, you know, so 50 new accounts with Gen Fair Links. Is that, should we be thinking of that as, you know, an incremental revenue opportunity? Are you capturing additional, you know, sales on these accounts? Is this like a software subscription? How should we think about that?

Yeah, and I think you're right. I think broadly speaking, if you think about our digital initiatives, on the HVAC side, it's much more of tools and solutions and capabilities to really help either us or our reps or our partners in the field win. And I think, you know, we talked about the heating business, the hydronics, they had a great year. And I think the digital tools that we provide to the contractors is a key factor of why we gained so much market share this year. So we, you know, feel really good at that. Really, when you look on the detection and measurement, it's different. Most of our detection measurement products come with software. So it's really part of the solution that you're providing to the customer. And in general, what you see is this software on a relative basis is small relative to the revenue of the overall segment. You're talking in the neighborhood of let's say $20 million, $25 million. Having said that, it's extremely strategically important because this software we provide provides data, analytics oftentimes. A lot of times it's asset management, and it engenders customer loyalty such that once they buy our equipment, they buy all of their equipment with us. And so, for example, specifically on the Gen Fair example, once a municipality goes on our platform, they are on our platform for the next 20 years, let's say, typically. And so every piece of equipment that attaches into that fair collection area will be the Gen Fair solution because it plugs into their software. But to your very specific question, Yeah, we are building revenue streams. Now, I'd still say those revenue streams are smaller, you know, relatively speaking to the equipment. So, like, let's say on the GenFair side, the amount of software we're selling, it's SaaS software typically, is growing every year. And it's doing, you know, doing very well and would keep winning more accounts. But it is still relatively a smaller portion of the overall revenue. revenue of the business. You're probably talking high single digits in terms of revenue and in terms of margin. Actually, it's getting more material. You're probably talking, you know, because it's such high margin, you're probably talking higher than that. But yeah, that might give you some flavor, Damian, for how we think about it.

It does.

That's really helpful. Thanks a lot, guys. That's a lot.

Thank you, Damian.

Thank you. I would like to now turn it back to Paul Clegg for closing remarks.

Thank you all for joining us on the call today, and we look forward to updating you again next quarter. Thank you for your support.

And thank you for participation in today's conference. This does conclude the program, and you may now disconnect.