SPX Technologies, Inc.

Good day and thank you for standing by. Welcome to the Q1 2024 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 will need to press star 1-1 on your telephone. You will then hear an automated message advising that 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 now like to hand the conference over to your first speaker today, Paul Clegg, Vice President of Investor Relations. Please go ahead.

Thank you, operator, and good afternoon, everyone. Thanks for joining us. With me on the call today are Jean Lowe, our President and Chief Executive Officer, and Mark Carano, our Chief Financial Officer. The press release containing our first quarter results was issued today after market close. You can also 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 gap 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 9. As a reminder, portions of our presentation and comments are forward-looking and subject to safe harbor provisions. Please also note the risk factors and our most recent SEC filings. Our comments today will largely focus on adjusted financial results. Comparisons will be to the results of continuing operations only. You can find detailed reconciliations of historical adjusted figures from their respective gap measures in the appendix to today's presentation. Our adjusted earnings per share exclude primarily acquisition-related costs, non-service pension items, -to-market changes, amortization expense, and in Q1, the favorable tax effect of stock-based compensation awards that were exercised during the quarter. Finally, we will be meeting with investors at various events during the second quarter, including at the Oppenheimer Annual Industrial Growth Conference on May 8, which will be virtual, the UBS Reshoring and Infrastructure Conference on June 4 in New York, and at the William Blair Annual Growth Stock Conference in Chicago on June 6. 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 of 2024. We're also increasing our guidance for the full year. We had a strong start to the year. In Q1, our company continued to execute well and drove substantial growth in all of our key profit measures with significant -on-year increases in margins. We continue to experience robust demand across key markets. Our acquisitions are performing well, and our production facilities are operating at high levels of efficiency. Today, we are raising our full year 2024 guidance. Our new midpoint reflects -on-year growth of 30% in adjusted EBITDA and 23% in adjusted EPS. Turning to our high-level results, for the first quarter, we grew revenue by .4% and adjusted EBITDA by 47% -on-year with 410 basis points of margin expansion. Last month at our investor day, we shared a new framework for the continuation of our value creation journey. We intend to further build on our strong foundation of niche engineered and tech-enabled products, strong positions, modes, and sustainable solutions. We'll also continue to leverage our business system to drive value through growth investments and initiatives, as well as through strategic M&A. Our new framework targets average EBITDA growth of 15% plus annually at margins of more than 20%. Now I'll update you on the progress of some of the key initiatives during the quarter. In Q1, we continue to drive continuous improvement and efficiencies across our businesses, advancing on several fronts. In our ATRAC segment, our initiatives are helping to expand our addressable markets by broadening our range of application-specific solutions for various price points. This includes a successful value engineering project that helps create a more flexible fluid cooler solution with reduced material costs. Integration of our recent acquisitions has also gone well and driving value. We are creating numerous opportunities for cross-selling, including broadening the sales channels for our market-leading dubbed heating products. Our acquisitions are also benefiting from SPS's supply chain management tools, which are helping to reduce lead times and further improve our competitive positions. In detection and measurement, we continue to advance our digital initiatives. During Q1, we gained further traction on cross-segment software and IoT for internet of things development and resource sharing. Looking ahead, we see significantly more room to continue driving value through our business system, including through continued investments in automation and R&D. And now, I'll turn the call over to Mark to review our financial results.

Thanks, Gene. Q1 was a very strong quarter for SPS technology. Year on year, our adjusted EPS grew 34% to $1.25. For the quarter, total company revenue increased .4% year on year. Organically, revenue grew 2.3%, largely driven by detection and measurement, while acquisitions drove a 14% increase. FX was a slight tailwind. The solidated segment income grew by $25.4 million, or 34.1%, to $99.8 million, while segment margin increased 290 basis points. For the quarter in our HVAC segment, revenues grew .2% year on year. Acquisitions contributed growth of .2% and included Tamco and Ingenia in our cooling platform and Aspect in our heating platform. The FX impact was nominal. On an organic basis, revenues declined at 1.9%, driven by lower sales of hydronic equipment associated with unseasonably warm weather in our end markets. This followed a substantial increase in heating volumes in the prior year period that was supported by elevated backlog following the pandemic. Year on year organic decline was partially offset by higher sales, cooling, and electric heat products. Segment income grew by $20.7 million, or 43.4%, while segment margin increased 360 basis points. The increases in segment income and margin were due primarily to our recent acquisitions, the favorable sales mix in both cooling and heating. Segment backlog at quarter end was $462 million, up 20% organically from the prior year period. For the quarter in detection and measurement, revenues increased .9% year on year, driven by organic sales growth and a modest FX tailwind. The increase in revenue was largely driven by higher ComTech project sales. Q1 revenue included delivery of the remainder of a large ComTech project, the majority of which shipped in 2023. It also benefited from earlier than anticipated delivery of other projects previously expected in Q2. Year on year, segment income grew $4.7 million, margin increased 130 basis points, primarily due to operating leverage of higher revenue. Segment backlog at quarter end was $207 million, down 16% organically from the prior year period, due to deliveries of the large ComTech project. Absent the effect of this project, backlog was up five single digits. Turning now to our financial position at the end of the quarter. We ended Q1 with cash of $106 million and total debt of $855 million. Our leverage ratio, as calculated under our bank credit agreement, was two times. We continue to anticipate our leverage ratio declining to the lower end of our target range one and a half to two and a half times by year end, assuming no additional capital deployment. Moving on to our guidance. Based on strong Q1 results and a robust demand outlook, we are increasing our guidance for adjusted EPS to a range of $5.15 to $5.40, compared with a prior range of $4.85 to $5.15. The new midpoint reflects year on year growth of approximately 23%. We are raising our guidance for HVAC and maintaining guidance for detection and measurement. We now anticipate HVAC revenue in a range of $1.36 billion to $1.4 billion, or an increase of $30 million at the midpoint for prior guidance. We also anticipate HVAC segment income in a range of 22.25%, 23.25%, or an increase of 100 basis points from the prior range. At a total company level, we anticipate adjusted EBITDA at a range of $390 million to $420 million. At the midpoint, this reflects year on year growth of 30% and a margin of more than 20%. With respect to gating, in HVAC we expect a sequential step up in revenue in Q2 through a full quarter of the Ingenia acquisition and increased cooling production capacity. We expect Q4 to be the highest revenue and margin quarter in winter heating demand. For DNM, we expect Q1 to be the highest revenue quarter as we've delivered the remainder of the large ComTech project I mentioned. We also anticipate a heavier weighting of higher margin projects 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. Current market conditions are supportive of our updated 2024 outlook. Within HVAC, we continue to see strong demand for our cooling products across a broad set of end market applications, including data centers, semiconductor plants, and industrial facilities. We also continue to see solid demand for electric heat associated with decarbonization. In detection and measurement, we continue to experience flattish global demand in our short cycle businesses with regional variation while project orders remain healthy. In summary, I'm very pleased with our Q1 performance and strong start to the year. With robust demand and significant operational momentum, we're well positioned to achieve our updated full year guidance, which implies 30% growth and adjusted EBITDA. We see multiple opportunities to continue growing our businesses both organically and through our attractive acquisition pipeline. Looking ahead, I remain very excited about our future. It's the right strategy and a highly capable experienced team, I see significant opportunity to continue driving value for years to come. With that, I'll turn the call back to

Paul. Thanks Gene. Operator, we will now go to questions.

Thank you. At this time, we will conduct the question and answer session as a reminder to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Brian Blair with Oppenheimer. Your line is open.

Thank you. Good afternoon, guests.

Hey Brian. Good afternoon.

Another great quarter. Excellent start to the year. To kick things off, we could level set on the lift in HVAC revenue guidance. So up 30 million versus the prior guide. How much of that is organic versus stronger deal contribution from aspect? We have a couple of months left in the inorganic period there for stronger ingenia growth, obviously pretty early days.

Hey Brian, this is Paul. Take that one. So yeah, the guidance midpoint was raised by about 30 million bucks, the revenue line and the margin basis about a hundred basis points. The biggest driver is really the drop through of the higher revenue, which comes at attractive gross margins. And really all of the revenue increase is associated with organic here. So really the biggest single factor is organic. We did say that our acquisitions are and we do expect them to have a little bit higher margin than we previously

did. Okay. Excellent. So I

know the prior outlook you had baked in something in the range of 7% organic growth in HVAC. So that moves closer to the 10% level. That's quite robust. How should we think about that in terms of cooling versus heating contribution? I would assume that it's notably weighted to the cooling side, but better to ask and let us set on that.

Yeah, that's correct. The year over year increase that you're looking at here. Let me give you a little bit more here because yeah, we talked previously about something in the neighborhood of $150 million of acquisition revenue coming into this year. So that's your numbers spot on pretty much for HVAC then being around 10% organic. And yeah, the lift is primarily, it's gonna be stronger on the cooling side, but we do still expect to get growth on the heating side. So if you're looking at double digits, low double digits on cooling, you're looking at something like, more like single digits on, mid single digits or lower on heating.

Understood, appreciate the detail there. And then for DNM, how did orders trend through Q1 and into early Q2? And what are you contemplating in terms of full year outlook for project versus run rate business? And what if any things assumed in terms of things assumed

in terms of infrastructure spending contribution as the year of most sore. I'll start off that one with the numbers to

look at for Brian. And yeah, so overall our orders were pretty good for the overall company, but that was stronger in HVAC and a little bit less in DNM. If you comp them against last year, you've got to take into account the fact that we had some large projects that got delivered both in the back half of last year and then in the first quarter here as well. So the book to bill was a little less than one in DNM is where it was about 1.2 in HVAC. As we look throughout the year, as you know, our guidance for this year for revenue, it's all organic and

it's being roughly flat. Maybe slightly down with the prior year. That includes, a little bit of a hole left by the delivery of a large. We had a large project last year, we had a large project last year in Comtec, which I'll call it kind of a. Pass through project because it has lower than typical

margins

associated

with it. And that left us with about a $30 million hole to fill in this year. And so we're bringing that back up mostly with other projects that are coming into the year.

So, Brian, I think when you think about the growth year on year, X the Comtec projects, about 5% top line growth. With respect to your question on infrastructure,

we are seeing some benefit of

the infrastructure dollars. I think we've highlighted this in prior calls where we're really seeing it right now is primarily on the transportation side of our business. I think that's a function of the fact that those projects are probably more ready for delivery relative to other projects that may be out there that will benefit from. So, that's really the first line where we're seeing activity and a benefit to the business from those

various federal spending bills. Understood. Thanks again, guys. Thanks, Brian.

Thank you. One moment for our next question.

Our next question comes from Damien Caras with UBS. Your line is now open.

Hey, good evening everyone. Congrats on the really strong start to the year.

Thanks, Damien. So, it seems like the majority of your

EPS guidance raised for the years coming from the HVAC margins.

Hunter Basis pulling increase from your original guide.

So, that's quite impressive this early in the year. Could you just talk about what's

driving that? You mentioned maybe the acquisitions are a little bit better than you'd anticipated. So, I think that's a good question. That's

not driving all Hunter Basis points, is it? Is there lower heating mix that's playing in? Maybe you could just talk about that

margin raise and what supporting your confidence that this accelerated passing and continued too? Can you answer this question again? with Walnut Creek certifications. So, what opportunities would you have in terms of ODEs how do we protect our oftentimes Page back, end market demand. We actually feel really good about what we're doing. As you were seeing a lot of strength, as you were seeing a lot of strength, as you were seeing column camp swing, as we know is We're seeing a lot of strength. As you know, our products play in very many different end markets. Some of our large ones really have a lot of strength. We're seeing a lot of strength. We're seeing a lot of strength. We're seeing a lot of strength. We're seeing a lot of strength. We're seeing a lot of strength. We're seeing a lot of strength. In particular, I call out Tech Healthcare. In particular, I call out Tech Healthcare. In particular, I call out Tech Healthcare. maybe do a little bit of tack. The data centers are very strong and we are so strong. We are doing some nice things of nice growth, some nice growth there. We just have very strong competitive positions. We are doing some very strong competitive positions across a number of our product lines. We are doing very well. Very well. Very well. We are doing well. very well there. Well there. Semiconductor and EVs are also well there. Well there. Semiconductor and EVs are also some notable winds and we're seeing some well there. Well there. Semiconductor and EVs

are also some notable winds and we're seeing some nice strength there. Healthcare and

Pharma, this is an area that tends to be a little bit more of a more of a more of a those are markets that we do very well on. That is a substantial of a of a of a portion of our business and we're seeing nice nice nice progress and momentum there. And the last one is industrial. industrial is our largest industrial is our largest end market in our HVAC area and we're seeing very strong aftermarket in our HVAC area and we're seeing very strong aftermarket progress. Also supplemented with some Also supplemented with some reassuring reassuring reassuring projects. If you look at it, I think on the end end market side end market side end market side We just feel really good about our positioning We just feel really good about our positioning We just feel really good about our positioning Markets we play in. You want to talk Mark about the margins a little bit deeper? Markets we play in. You want to talk Markets we play in. You want to talk aboutomo talking about Yeah. We continue to see efficiencies across the board. Across our platform on the cooling and heating side. We continue to invest in those business to both approach that you've introduced to the 3 right of data to something greater in the Divine as reduce labor utilization that's required in those plants. So it's really dropping through, it's creating a lot of efficiencies in those plants. So that's really a function of the new capital that we've talked about that we were deploying. This year in those plants

that was a process that started last year in earnest primarily. And then also we continue to find new opportunities on the CI front to drive more efficiency through those plants, whether that's through plant layout or footprint, things of that nature.

That's really helpful. Appreciate it. And Gene, very, very helpful comments on the end market verticals and what you're seeing. I was wondering if you could just maybe take us a little bit of a walk across the different units within HVAC cooling, because you just have so much under the hood there now with all the acquisitions in recent years. Thinking about cooling towers, you've got the fan business, dampers. There's a lot of areas where you're playing. Are you kind of seeing a similar level of growth across there or are there any particular areas of the business that really stand out? Appreciate any color on HVAC cooling.

Yeah. So I think cooling, we really view ourselves as the, we invented the cooling tower. We believe we're the global leader in cooling. We just have a very strong position in there. We see very nice momentum across our businesses there. We play in a lot of the attractive end markets.

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