SPX Technologies, Inc.

Good day, and thank you for standing by. Welcome to the SPX Technologies Q1 2023 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. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would like now to hand the conference over to Paul Clegg, VP of Investor Relations and Communications.

Thank you, operator, 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. A press release containing our first quarter 2023 results 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 the slide presentation during our prepared remarks. A replay of the webcast will be available on our website until May 11th. 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 acquisition and strategic transformation costs, non-service pension items, mark-to-market changes, amortization expense, and a gain on the change in the value of an equity security. Finally, we will be conducting meetings with investors over the coming months, including at the William Blair Growth Stock Conference in Chicago on June 7th. 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 first quarter. We'll also provide an update on our four-year guidance for 2023 and our recent M&A activity. Our Q1 results exceeded our expectations and were the strongest for our first quarter in more than a decade. This performance is driven by a combination of a high starting backlog, continued demand strength across our end markets, and efficient execution by our teams, which is helped by more stable supply chain and labor conditions. Strong performances in both segments helped drive revenue growth of approximately 30 percent. HVAC, in particular, had very strong results, achieving segment margin of 19 percent, the highest ever for a first quarter. In April, we announced the closing of one acquisition in our HVAC cooling platform. And more recently, we announced an agreement to acquire a second company in our HVAC heating platform. Together, we expect these acquisitions to add more than $170 million in run rate revenue and to enhance the margin and growth rate of our HVAC segment. I'll speak about these acquisitions in a moment. Considering our strong performance in the acquisition of TAMCO, We are raising our full-year 2023 guidance for adjusted EPS to a range of $3.80 to $3.95, reflecting year-over-year growth at the midpoint of approximately 25%. I'm pleased to say that with TAMCO, our revenue guidance for our HVAC segment is now more than $1 billion, a new milestone for our company. Turning to our high-level results, for the quarter, Both HVAC and detection and measurement grew revenue by more than 30% organically. Adjusted operating income grew 132% year-on-year with 640 basis points of margin expansion, reflecting the strong segment results. I'm very pleased with our Q1 performance and our positioning for the remainder of 2023. As you look ahead, we continue to see solid demand across our end markets. With a strong backlog, robust order trends, and operational momentum in our plants, I feel confident in our ability to achieve our updated guidance and to continue progressing towards our SPX 2025 targets. As always, I'd like to touch on progress in our value creation framework. During Q1, our teams worked hard to drive efficiencies in our plants and accelerate delivery times to our customers. reflecting the benefits of our continuous improvement initiatives. We also continue to introduce our customers to the benefits of our new digital tools and software applications that can significantly reduce labor in the field, improve quality, and streamline planning and workflow, which enhances customer experience and loyalty. This includes our Q's AI-enabled GraniteNet software, which helps customers with the inspection and condition assessment of water and wastewater assets, and Weill McLean's ProTool tech app, which helps field technicians solve problems on-site, eliminating the need for multiple site visits. We've also made significant progress on our inorganic growth initiative. On April 3rd, we announced the acquisition of TAMCO, and this week, we announced an agreement to acquire Aspect Heating Group. TAMCO is a market leader in motorized and non-motorized dampers that control airflow and large-scale specialty applications in commercial, industrial, and institutional markets. They are well-known for eco-friendly solutions with very low levels of air and critical thermal applications, such as data centers and healthcare facilities. TAMCO further extends our positioning in the attractive engineered air movement market within our cooling platform. We see significant opportunities for further growth in this market by combining TAMCO's high-quality solutions with SPX Technologies' global footprint, marketing and channel infrastructure, and existing air movement offerings. TAMCO has annual revenue of more than $50 million, and its anticipated margins and revenue growth rate are higher than the HVAC segment average. This week, we announced an agreement to acquire Aspect Heating Group, which provides electrical heating solutions for high-value applications in industrial and commercial markets. We anticipate that Aspect will have run rate revenue of more than $120 million in 2023 with higher than average margins. The closing of this transaction is subject to antitrust regulatory approval, and we currently anticipate completion of the transaction in late Q2. This will be our largest acquisition since the spin and will more than double the size of our electric heating product revenue, an area where we see attractive growth opportunities, including decarbonization. Through the combination of Aspect with our Marley Engineered Products business, we see multiple opportunities to drive value for our customers, including more efficient distribution channels, voice of customer-led innovation, digital tools, and the development of next-generation eco-friendly products. I'm very excited about the positioning and growth opportunities that both TAMCO and Aspect create for our HVAC segment, which I believe will provide significant value for our customers and shareholders alike. And now I'll turn the call over to Mark to discuss our financial results in more detail.

Thanks, Gene. It was an outstanding quarter. In Q1, our adjusted EPS grew 133% year-on-year to 93 cents. The adjustments from GAAP results covered earlier by Paul are consistent with our historical practice. Overall, revenues increased 30.2% year-on-year including 30.6% organic growth, with strength in both our HVAC and detection and measurement segments. The acquisition of ITL in April 2022 contributed modest inorganic growth, and FX was a headwind of 1.1%. Segment income grew by $34.8 million, or 88%, to $74.4 million, while margin increased 570 basis points. These increases were driven by strong operational performances in HVAC and detection and measurement. Price-cost remained a margin tailwind in both segments due primarily to our pricing actions over the last 12 months. For the quarter, in our HVAC segment, revenues grew 30.3% year-on-year. Heating and cooling both contributed to organic growth of 30.9%. driven by a balanced contribution of increased volume and price in both platforms. FX was a modest headwind. During the quarter, we continued to drive strong throughput in our plants, particularly in cooling, as a result of process improvement, favorable operational execution, and a more stable supply chain and labor conditions. Segment income increased by $27.1 million and margin increased 830 basis points, reflecting operating leverage on higher volumes and favorable price-cost trends. In Q1, we also experienced an incrementally higher mix of aftermarket parts sales in our cooling business, which benefited our segment income margin. By comparison, in the prior year quarter, we experienced headwinds related to supply chain, labor, and price cost. Bookings remained strong, Despite the historically high Q1 HVAC sales, segment backlog increased again this quarter, up modestly year-on-year to $270 million and up 11% sequentially from Q4. For the quarter, in detection and measurement, revenues grew 30% year-on-year. Organic growth of 30.1% was driven by increases across all of our platforms but was particularly strong in our project-focused businesses. ComTech, and transportation. The acquisition of ITL contributed inorganic growth of 1.8% and FX with a headwind of 1.9%. Segment income increased by $7.7 million and margin expanded 130 basis points. We continue to experience solid run rate demand and a strong environment for project sales. Segment backlog at quarter end was $245 million up 60% year on year, primarily due to large project orders in ComTech and transportation. 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 $213 million, including $67 million from borrowings under our credit facilities. to fund the closing of the TAMCO acquisition, which took place after the end of the quarter. Net leverage remained at 0.4 times. On a pro forma basis for TAMCO, net leverage was 0.8 times. With the anticipated closing of the acquisition of Aspect in Q2, we have amended our credit agreement to include an incremental $300 million term loan based on similar terms to our existing credit facility. We expect to draw on this facility to fund the acquisition. Following closing, we would expect our leverage ratio to increase to approximately two times by the end of the second quarter, and then subsequently decline to approximately one and a half times by year end, as we typically generate the bulk of our annual cash flow in the second half of the year. In line with typical seasonal patterns, adjusted free cash flow was a nominal use for the quarter. As we noted last quarter, we expect a return to a more normalized run rate of cash generation for the full year 2023. Moving on to our guidance, we are increasing our 2023 guidance for adjusted EPS to a range of $3.80 to $3.95. The new midpoint reflects year-on-year growth of approximately 25%. In our HVAC segment, we now anticipate revenues in excess of a billion dollars or a year-on-year increase at the midpoint of approximately 14%. Segment income is anticipated to be in the range of 17.25 to 18.25%, or a year-on-year increase of approximately 300 basis points at the midpoint. The anticipated strong revenue and margin performance in HVAC reflects a combination of continued solid demand trends, a high starting backlog, improved pricing, strong operational execution at the plant level in both heating and cooling, and the acquisition of TAMCO, which is higher than segment margins. In our detection and measurement segment, we anticipate modestly higher revenue in a range of $570 million to $590 million, or a year-on-year increase of approximately 6%. We continue to anticipate full-year segment income margin in a range of 20.5% to 21.5%. With respect to the cadence of the quarters, we expect year We expect the year to be modestly second half weighted, with Q4 being our highest quarter for adjusted EPS, as is typically the case. We would expect Q2 earnings to be sequentially lower than Q1, but up year on year. We currently anticipate closing the aspect acquisition in late Q2, subject to antitrust clearance. Once closed, we intend to update our full year 2023 guidance to reflect the transaction. including the impact of increased interest costs associated with financing the acquisition, we would expect ASPECT to be modestly accretive to the second half of 2023 and increasingly accretive in subsequent periods as we grow the business and reduce debt with cash generation. As always, you'll 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. Current market conditions remain supportive of our outlook for the remainder of 2023. Across our HVAC businesses, supply chain and labor have been more stable overall. In HVAC cooling, we continue to see growing 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 strong. In summary, I'm pleased with our very strong start to the year. I am excited about the significant opportunities we see to drive value through our recently announced acquisitions and continued execution on our key initiatives. With a strong backlog and good operational momentum, I feel confident in our updated four-year guidance, which reflects approximately 25% year-on-year growth at the midpoint. With our highly capable, experienced team, I look forward to continuing to drive towards our SPX 2025 targets and executing on our value creation roadmap for years to come. And with that, I'll turn the call back to Paul.

Operator, we are ready to go to questions.

Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A roster. Our first question comes from Damian Karras with UBS.

Hey, good evening, everyone.

Good evening.

Really nice work. I have to say, looking like the best results and outlook updates I've seen this earnings season. Gene, maybe we could just start with the – so you made some brief comments on just the market trends. Maybe you could just – you know, elaborate on that and talk to us about the order trends, you know, you've seen as you've kind of moved from the first quarter into April. You know, you highlighted some areas where there's stable orders or maybe still up. Are there any pockets where you may be seeing things flip at all or generally speaking, you know, just overall order expansion to date?

Yeah, sure, Damon. I think overall we feel really good about what we're seeing across our platforms. The way that I think about it, I'll break it down to the platforms. So if you start at HVAC, HVAC cooling, which was our largest platform, we just feel really good about the demand drivers there. As you saw, we had a very strong quarter there. but we actually grew our backlog. I believe we're very well positioned there. I would say the one area of lightness there would be in commercial office buildings. That's a relatively smaller portion of our business. New commercial might be around 5%, but if you look at a lot of the other markets, I'll highlight data center, battery storage, semiconductor, Not to mention institutional and education. We're just seeing very strong drivers there. And so with that, we feel very good about 23 and frankly, very good about 24. As I think about heating, heating is starting to get back to its more normal cadence where we're largely, you know, we're getting to more similar lead times. and we're in a market that will grow. And then in the winter, you know, winter, the weather will have an impact, um, on us. Whereas last year, you know, we had so much backlog users getting, getting the product out the door, but overall we're seeing, uh, as we've talked about previously, we've seen some nice share shift. I think our products are winning in that market. Uh, we talked about the ecotech last year and the success we're having on that, but, um, But, yeah, we're feeling very positive about the heating business as well, which you know is a heavy replacement market. And then if you look at detection and measurement, the way we usually think about this is really the projects and the run rate business. The projects are about a third. Run rate is about two-thirds. The project strength is very strong. And we feel very good about what we're seeing for 23 and, frankly, looking into 24 projects. Um, across all of our platforms there on the run rate, I would say it's steady. Um, there's some pockets that are stronger. There's some pockets that are a little bit flatter. I would say, uh, continental Europe's a little bit flatter. That's pretty small portion of our business. But, but, you know, with, with what we see today, we feel very good about the demand profile for this year. And even, uh, you know, as we think early about, uh, looking into 24, I like the backlog we're building and the wins that we're getting, particularly in these large projects. And with what we're seeing, we're feeling positive. And Mark or Paul, if you guys have anything you'd like to add to this overview.

No, I think you largely covered it, Gene. Sentiment is positive, really, across the board.

That's a really helpful insight. And you guys have obviously been quite busy on the deal front. If you had to boil things down, what would you say drew you most to Tamco and Aspect? And how do you foresee them integrating with your business, just thinking about potential cross-selling opportunities or cost savings?

Sure, sure. I'll start. And as you know, Cincinnati Fan is It was acquired last year. Very good business. We're very pleased with what we're calling the engineered air movement business. TAMCO fits very nicely right next to Cincinnati Fan and then Strobeck is the other brand. We actually see some nice opportunities there with regards to cost synergy, shared procurement, how we do things there. There's also a really nice customer overlap, in particular with Strobic. Strobic serves very much of the similar channels as PMCo, which tend to be the more, the harder, the higher performance applications. Those would be things where they have thermal requirements, low leakage levels. These are things like data centers, healthcare, pharmaceutical, And that has a high amount of overlap with our Strobeck business. So, so, you know, the reason we're bringing these, and this will be managed by the same business unit. So the, the, the leader who's responsible for Cincinnati fans and Strobeck will also be responsible for TMCO. So we see some really nice synergies on the cost side, but more importantly, we see some really nice opportunities on the growth side. So we're very excited about TMCO. We think it's a really nice addition to the, to the team. With regards to Aspect, Aspect has been our number one target in our heating business since the time of the spin. This is a really good business. We really like the team. We really like their positioning. It's a high-margin, high-growth business. They have very strong competitive positions. They have great brands. Indico is the trade brand there that is very, very well known in the market. Interestingly, they have a very nice mix of commercial and industrial. Industrial is actually larger there, and their product lines are largely complementary. We don't overlap with them a lot, if we're very little. They have a great ESG story because electric heat, is really growing at the expense of steam and gas heat. And so you're seeing that more and more. So we believe Aztec is very well positioned in that market, and we think that's going to allow it to grow faster. They have very customized products. They don't sell kind of just a standard off-the-shelf product very often. A lot of what they do is work with a customer, get an engineered product for them, and become the basis of design oftentimes with larger OEMs. And what this means is you get a lot of recurring revenue. So when you look at it, we think it's a great fit for us. We're very excited for both TAMCO and ASPEC. I will highlight TAMCO obviously is closed. ASPEC is, we've signed a definitive agreement, but That's in a Hart-Scott-Rodino review right now. So we would anticipate that really being closed, assuming things stay on track towards the end of Q2. And at that point in time, we plan on having a call and diving into a little bit more details here of how this all fits together. But overall, we're very, very pleased with these businesses. You know, I think one of the questions we've had is, well, what does this do to your debt? You know, how do you think about your balance sheet? You know, and as Mark pointed out in our prepared remarks, this would move us up to about two times net debt, probably a little bit below that. And then 1.5 or less by the end of the year. And as we've always stated, Our target range is 1.5 to 2.5, and we feel very comfortable in that range. So we feel very good about where we are, and we think that these two businesses are very aligned with our strategy and are really going to strengthen our platforms.

Thanks for all that, Collar. I'll pass it along.

Thanks, Damian. One moment for our next question. Our next question comes from Brian Blair with Oppenheimer.

Thank you. Good evening, guys. Hey, Brian. Hey, good evening. Fantastic start to the year. And I'm wondering if you can offer a little more color on how we should think about the revenue and earnings seasonality going forward, just given the outsized nature of the Q1 beat and kind of netting to your revised framework. Particularly curious about, you know, HVAC given, you know, just really standout performance from the segment in Q1.

Yeah, I'll start, Brian, and maybe I'll start with HVAC just first, because it was such a strong performance in the quarter. You know, it's interesting, you look back to Q4, we had very strong performance in HVAC then, and the business was really kind of starting to hit on all cylinders. given some things I'll talk about in a minute, but really turning that corner, I think as we looked into Q1, you know, our sense was, you know, some of that may or may not have been durable. It turned out to be the case. You know, I think about the labor environment and the supply chain environment that we were facing earlier in the year that began to improve. We didn't really feel like we were out of the woods in Q4, but I think it has continued to stabilize, at least for the time being. And then we've been doing a lot of work. We've talked about some of the capital that we're deploying incrementally higher than prior years to really improve, really across all the platform, but cooling is an area of particular focus. And some of the CI efforts that we have employed there that are driving what I would call structural cost improvements in the business. So that combined with the pricing actions from last year, creating a price cost benefit to us really set us up for, you know, frankly, a very strong Q1. There was a unique dynamic that I referenced in my prepared comments around some aftermarket work that we had in that quarter. And we kind of circled that at about 4 million of operating income or segment income, if you will, of a benefit. You know, that was something that probably isn't necessarily going to recur again throughout the year. That's sort of a unique opportunity where we had some FEP and some aftermarket opportunities there, which were fairly substantial and related to some large projects. So if you kind of pro forma that out, you've got a quarter that looks, from a margin perspective, very similar, I think, to where our guidance is for the full year, call it in the 17.5% range. So then if you kind of take that and then you look forward to the full year and, you know, what we're guiding there, you know, I would say, listen, I think our view is it's pretty balanced. We've tried to kind of weigh both the risks and the opportunities that are out there. We feel good about the cooling business and the performance. I think that will continue to be strong throughout the year. You know, the heating business, you know, our backlog there has normalized, which actually is a good thing. We're back to more of a steady state. But the flip side of that is that we're going to largely be tied to the heating season that will take place, you know, here in late Q3 and into Q4. So depending on those trends, that will drive that business. And then, you know, with DNM, you know, while we're in a good position with respect to our project businesses and the opportunity there, you know, Part of that business is short cycle in nature, right? And it is sensitive to the kind of the near-term economic environment. So I think we're being, you know, cautiously optimistic around that business as we look at the back half of the year. So hopefully that gives you some colors to how we think about the full year and particularly the second half.

Yeah, I'll just jump in with a little bit of modeling help here. As we said on the call, the fourth quarter, as is typical, will be the largest quarter. That's in part because of higher heating revenue, as Mark and Jean referenced earlier. Of course, last year, we had a lot of backlog. We were not dependent on the weather. So when you do the year-over-year comparisons, when we set guidance for the full year, we are going to call for, we are going to, in our model, assume a more normalized long-term winter in the fourth quarter of this year. The only other thing I would add is that as you look at the detection and measurement, quarters, we would look for a similar margin progression to what we saw last year in 2022, where the mix of projects and what's called the timing of certain projects that have more margin associated with them are realized closer to the back half of the year or more in the back half of the year.

Okay, very helpful. And sorry if I missed the detail, but what is being baked in to the UpGates update guide for TAMCO accretion in the back half. And similarly, if Aspect closes on time by the end of the second quarter, perhaps quantify the modest accretion there. And then most importantly, looking forward, what's a full combined year one accretion run rate and with some debt pay down and the actions that your team has planned? you know, a year or two lift from the acquisitions.

So, yeah, Brian, for the TAMCO part of it, 10 cents, and I think if you just kind of run rate that across three quarters, that's fine. That's going to include, obviously, some interest cost impacts over those quarters. With respect to the combined businesses, we're going to hold off on giving more detail on this. We did say modest when it came to aspect and We'll get into more detail about that. But I think one thing that we could say to give you a more magnitude here of the overall impact of these two acquisitions, once we close on the Aspect transaction and it becomes part of SVX, the combined annualized EBITDA for those two businesses, for Tamco and Aspect together, would be approximately $45 to $47 million. And, you know, I think you picked up from our press releases, we'd also expect a combined growth rate of above the company average.

Understood. Appreciate the color there. And then last one, you know, sounds like, you know, both sides detection measurement, your run rate business and project, you know, trending well, near-term outlook is positive. If we look later in the year and into, you know, know 2024 and likely 25 and beyond um where should we see uh infrastructure spending uh read through as a catalyst for uh for the businesses and in what sequence is it reasonable to expect that you know i i think brian you know the infrastructure spending is sort of interesting um

We are just, I think, on the front end of seeing some of those dollars come through. So my expectation is we'll really begin to see that at the back half of this year and into 24. We are seeing some of those dollars in, let's just say, for example, our transportation business. I think one of the dynamics with all these dollars that I think everyone is seeing, the money's been allocated, it's available, but You know, if there's not a project ready to go, you know, there's nothing there to use those dollars in the near term. So it's probably been a little bit more delayed relative to maybe what everybody has thought. But, you know, in sum, I think it's probably the back half of this year and into 24 is when we'll really see that benefit.

Understood. Thank you again. Thank you.

One moment as we bring up our next question. Our next question comes from Lawrence DeMaria with William Blair.

Hey, thanks. Good afternoon everybody. So just staying on the on the deal questions there. Obviously begs the question after two deals here. One obviously hasn't closed yet. Are we in a holding and digest pattern? And also, is there, you know, does DNM become a priority at this point? So I'm just kind of curious about the cadence going forward.

Yeah, Larry, I'll start there. I think, you know, we've always said we really like, you know, our portfolio has changed quite a bit over the years. And where we sit today, we really like both segments and our six platforms. You know, we have done a lot more DNM deals. You typically see smaller deals, but more of them. We really like both of these HVAC opportunities. But if I were to think about your question, the way that I think about it is, in this market, we're being very careful on debt levels. You know, you think about where we'll be sitting at the end of the year, 1.4, 1.5 times debt. You know, we still have capital to deploy. We actually have a very robust front log. So, you know, I think that we have a flywheel, a way that we've done these bolt-ons. As you know, ASTEC would be our 13th acquisition over the past several years. I think that we are still out there, but having said that, being very careful and cognizant of debt levels. And I don't know, Mark, Paul, anything else you guys like to add on this topic?

I think, I mean, there's sufficient liquidity out there, obviously, in the event that we decided to pursue something, you know, here later this year. But to Gene's point, I think we're going to be very thoughtful about the balance sheet, making sure that we remain, you know, within leverage levels that we think are appropriate for the business.

Okay, thanks. That's good color. It makes sense, obviously. I think you said the DNM backlog is $245 million. Can you quantify the HVAC backlog and the mix in there between obviously heating and cooling? And then secondly, price was obviously important in the quarter. Can you just let us know how to think about it, how it plays out for the rest of the year and whether that contribution tails off on maybe pricing comps or just how to think about pricing as we go through the year as a contributor?

Yes, very good, Paul. So on the backlog question with respect to HVAC, Backlog for HVAC was 270 million, which was actually up a little bit, about 11% from the fourth quarter, despite the very strong results in the first quarter. At this point, the value of that backlog is actually now cooling 80 or 85% or so, whereas, you know, if you looked at that the middle of last year, it would have been 60, 40, something like that. So that's just a reflection of us seeing the, you know, heating backlog getting down closer to normal levels there. Your other question was on, I think, price. If you look at the first quarter, price and volume were distributed not quite evenly, but we were about 60-40 volume price. And HVAC was more price-weighted. DNM was more volume-weighted. As you look across the year, our guidance implies around 11% growth, let's call it two or three of that percent acquisitions, another eight or nine percent organic. We would look for that to be a little bit flipped in the other direction, 40% volume, 60% price.

Okay. That's a really good color. Thanks, Paul, and good luck this year.

Thanks.

Thanks. Stand by for our next question. Our next question comes from Steve Farazani with Sidoti.

Evening, everyone. I'd echo some of the other comments in terms about it being one of the stronger earnings releases of the quarter. I mean, to me, the big difference is we've seen a lot of companies beat pretty handily Q1. But given the economic uncertainty that's developed since fourth quarter calls, a lot of caution on the second half. you don't seem to be as concerned. And it sounds like Booking's project orders is reducing your concern. But just what gives you the confidence given what we know is clearly some economic uncertainty into the second half?

Yeah. Steve, I think if you look at on the HVAC side, I think we have very good visibility for 23. And even projects going into 24. So I'm talking more on the cooling side. So not only do we have a very high amount of backlog, but we have good visibility, good bidding. If there is a recession, and let's say a severe recession, it would take some time to work through and really hit that market. And it would not be this year, we don't believe. I think that, um, if you look at the heating business as, as, as we've alluded to, that's going to be much more of a normal business. That's the business that grows X percent a year. And then, uh, the weather can drive the market, you know, up a little bit or down a little bit. So the weather impacts the TAM of the market in the, uh, in the winter season. And so I think that'll be looking like a normal, you know, a normal year for us and we have a normal level of backlog and, uh, The channel is pretty balanced. So as you know, most of that business is replacement. So we don't see a lot of deviation there. And then if you look at it on the DNM side, we just, the backlog we have on projects is very strong. So we feel very good about that part of the business. And then on the run rate, what I would say is if we were to go into a severe recession, let's say, you know, the back half of the year, you know, that could affect some of our run rate businesses in detection and measurement. So that would be the area that we'll keep our eyes on. We've always said our earliest canary in the coal mine is our radio detection business. But as you know, a lot of our businesses tend to go to government or municipal or buyers that are not as they don't whipsaw as much with regards to GDP. They tend to be more stable. A lot of our stuff you have to buy, think of our Aton lighting, or think if you're working on water or wastewater pipes, you're not really doing that for fun. You're doing that because you need to do that, do that work. And, you know, the example I would go back to is during COVID, many of our peers were down 20% in revenue when everything shut down and, the world went into a recession, our revenue, we certainly got impacted. We had some business lines that went down, but all in, our revenues were flat. And I think that's a testament to some of the markets we serve in. But I would say if we were to get into a recession or a severe recession, we'd keep our eyes on the detection and measurement run rate businesses, because I'd say that would be the portion of our business that is most closely linked to GDP.

And Steve, I might add, you know, this infrastructure spending dynamic or federal dollars that are flowing into the market while the timing has been longer, we should benefit from that. Maybe it's not a 23 impact as much as we would like, but certainly it ought to be in 24. And that, you know, that's a ballast to that side of, parts of that side of the business for sure.

That's helpful. Thank you. I ask you this every time I speak to you, Gene. It's probably a much easier answer this time in terms of your confidence level in hitting 2025 targets. Seems a lot easier now. Is there much more work left to be done?

There's always work to be done. There's always a lot of work to do.

On the M&A side.

Yeah, I tell you, we are very pleased with both TAMCO and ASPEC, knowing ASPEC's not closed yet. But we really like these businesses. We really like the people that are part of these businesses. We really think they're going to strengthen our platforms. And we think we can add a lot of value and we'd like to help them grow faster. So this certainly does take a big step in the direction. As you can see from our guidance this year, before anything with ASPEC, we're starting to push up on the high end of close to $4. And as we've said, $5.25, I have good conviction that we're going to get there. And I think that we're doing the right things. But It's not easy. There's a lot of hard work. There's a lot of new products. There's a lot of new CI. There's a lot of digital we got to put out there. We got to win in the markets. But yeah, I'm feeling very, I like where we are and we feel very good about meeting our commitments there.

We don't ask about this too much because you managed it so well. But I think what we did see in Q1 from a lot of companies that were having very significant supply chain constraints, was very clear easing. Now, you've managed it well, but would you echo that, that supply chain constraints are making things a little bit easier on your end and also on labor side, given the growth projections? Are you fully staffed to meet the growth?

Yeah, I would say from a supply chain perspective, I mean, it has eased, right, whether that's steel or some of the big commodity input costs. Lead times can be long on certain areas still, like printed circuit boards and areas like that, but availability is much greater than it was before. And I think on the labor front, I mean, listen, we're not probably out of the woods on that front entirely. There's still strong competition for labor out there, particularly in certain markets, but we are in a much better place than we were a year ago and probably even a couple quarters ago.

Yeah, much better. There's still supply chain challenges that you're wrestling with, but overall, there's much improvement in both of those. And I think that trend has been why, as we talked about, a key contributor to the operational performance.

Thanks, Gene. Thanks, Mark. Thanks.

And stand by for our next question. Our next question comes from Walter Liptack with Seaport Research.

Hi, thanks. Great quarter, guys.

Hey, Walt.

Welcome to the spot. So, a question I've got is about the DNM backlog. I wonder if you could help us just kind of review the timing. I think you said it was 245 million. up 60%. Was that the number? And, you know, I guess one question is, you know, I think the order started picking up around this time last year. So, you know, are you starting to count that or higher backlog in the second or third quarter?

Yeah, you did see the increase in backlog occur really the second, third quarter, that's right, where a lot of it did happen last year. Well, and your number of 60% was right. As we look through the remainder of this year, we'll see some of that, you know, roll out of our backlog and into revenue, obviously. And as you know, in detection and measurement, because of the project nature of some of the businesses, that can be a little bit lumpy. But where we sit today and looking at our front log and looking at the discussions we're having, about many of these same products that are doing quite well and in markets. You know, I'm not sure that we would expect our backlog to go down this year. Actually, I think we were looking for quite a good setup for next year, as Gene mentioned.

Oh, that sounds great. And you mentioned that it was ComTech and Transport that are both up. Are those both up equally, or is there higher weighting towards one or the other?

Yeah, actually much more weighted towards, more heavily weighted towards ComTech in terms of the increase.

Okay, great. And then, Mark, in your prepared remarks, you mentioned, again, that, you know, first half revenue a little bit weaker, or not weaker, but, you know, a lower percentage and then more weighting in the back half. And I think last quarter you guys talked about 43% in the first half, 57% in the back half. Can we still use that?

I think the reference that you're making was we said it would be more like the prior year in terms of the split in DNM. So it's probably not far off. You know, if you were, you know, 45, maybe 45, 55, first half, back half. But, you know, I think an important thing to point out is that if you look at the margin profile, the mix and the timing of those key projects, it becomes important. And we would model out a progression of the margins that is similar to what you saw last year in 2022, where you saw the margins getting progressively larger throughout the year as more of those higher margin projects were being delivered in the back half.

Okay, great. All right, thanks, guys. Thank you.

Stand by for our next question. Our next question is from Damian Karras with EBS.

Hey, again, guys. Just had a quick follow-up question on the heating business. So, one of your large public boiler competitors lowered their outlook this past quarter, and they talked about inventory destocking taking place. Gene, you sounded like you're seeing your business as more stable, but just curious where you think channel inventories are. And I know you had some outside supply chain issues last year, but what's your sense for how you're performing versus the overall boiler market?

Yeah, you know, just so you know the process I do, I talk to all the presidents of every business on the day of these earnings calls. And we actually run through a lot of the numbers and so forth. And so the gentleman who runs Wild McClain, they actually have good visibility to the channel and the stocking, not for all of the distributors, but a good chunk of them. And, you know, I think that where we sit today is it's actually very balanced. We feel good. It's not overstocked. It's not understocked. The only place that we are Behind in delivering, where we just have more orders than we can handle, is standard efficiency, really our cast iron commercial boilers. And that we're still, I'd say the rest of the businesses are more operating in a normal cadence. And we have a balanced, you know, we believe the channel is balanced. But that's the one that we're still trying to get a lot of products out the door and get back to our normal lead times. Understood.

Thanks again. Best of luck, guys. Thanks, Damian.

Thanks, Damian. At this time, I would like to turn it back to Paul Clegg for closing comments.

Thanks, all of you, for joining our call today, and we look forward to speaking to you again next quarter or during the quarter at one of the events we're attending. Thanks.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.