SPX Technologies, Inc.

Good afternoon and welcome to the SPX Technologies Q3 2024 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one of your telephone keypad. To withdraw from the question queue, please press star then two. Please note this event is being recorded. I will now like to turn the conference over to Paul Clegg, Vice President, Investor Relations and Communications. Please go ahead.

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 third quarter results was issued today after market closed. 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 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. 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 continuing operations only. You can find detailed reconciliations of historical adjusted figures from the respective gap measures in the appendix to today's presentation. Our adjusted earnings per share exclude acquisition-related costs, non-service pension items, -to-market changes, amortization expense, and other items. Finally, we will be meeting with investors at various events during the fourth quarter, including at the Baird Global Industrials Conference on November 13, the Wolf Research Conference on December 4, and the Sadoti Small Cap Conference on December 5. Under 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 third quarter of 2024 and discuss our outlook for the remainder of the year. Our Q3 results reflect solid revenue growth and substantial increases in our key profit measures. Our margin performance was strong across both segments, and we continue to execute on our key value creation initiatives, including sustainability and continuous improvement. We are well positioned to achieve our full-year guidance, which reflects a -on-year increase in adjusted EBITDA of approximately 35% and an increase in adjusted EPS of 28%. Turning to our high-level results. For the third quarter, we grew revenue by 7.8%, driven by strength and HVAC cooling. Adjusted EBITDA increased approximately 27% -on-year with 320 base points of margin extension. As always, I'd like to update you on our value creation efforts during the quarter. On the sustainability front, we recently published our annual sustainability report, reflecting another year of progress across our key initiatives. In particular, we achieved a 30% reduction in carbon intensity well ahead of schedule and introduced several new climate-conscious solutions that helped reduce our customers' power usage, emissions, and water usage. We also continue to see progress in our continuous improvement initiatives, including benefits from significant capital investments in equipment and processes that add to production capacity by improving throughput. We've continued to see incremental margin gains as a result of investments to improve efficiency. And now, I'll turn the call over to Mark to review our financial results. Thanks, Gene. Our third quarter results were strong. -on-year adjusted EPS grew 31% through $1.39. For the quarter, total company revenue increased .8% -on-year. Organically, revenue grew 3%, while acquisitions drove an increase of 4.4%, and FX was a modest tailwind. Consolidated segment income grew by $22.2 million, or 24.2%, to $113.8 million, while segment margin increased 310 basis points. For the quarter, in our HVAC segment, revenues grew .9% -on-year. On an organic basis, revenues increased 9%, driven by continued strength and cooling demand, while heating was similar to the prior year. The acquisition of Ingenia in our cooling platform contributed growth of 6.8%, while the FX impact was nominal. Segment income grew by $21.7 million, or 37.2%, while segment margin increased 370 basis points. The increases in segment income and margin were due to operating leverage on higher organic cooling sales and Ingenia acquisition. Segment backlog at quarter end was $438 million, up modestly from Q3. For the quarter and the detection and measurement segment, revenues decreased 7% -on-year. FX was a .8% tailwind. Decreasing revenue was driven largely by lower-complex sales associated with a large pass-through project delivered during 2023 and into the first quarter of 2024. Excluding the pass-through project, revenues grew approximately 3%, driven by transportation and ATON project sales. -on-year segment income grew $0.5 million, and margin increased 190 basis points, driven by more favorable project mix. Segment income margin also continued to benefit from our efforts to enhance the efficiency of our segment structure. Segment backlog at quarter end was $193 million, down .8% sequentially from Q3, reflecting the timing of certain project deliveries and awards. Turning now to our financial position at the end of the quarter. We ended Q3 with cash of $129 million and total debt of $738 million. Our leverage ratio, calculated under our bank credit agreement, was 1.4 times. We now anticipate our leverage ratio to decline into 1.2 times or lower by year end, a lower target range of 1.5 to 2.5 times, assuming no additional capital deployment. Adjusted pre-cash flow for the quarter was approximately $61 million. During the quarter, we amended our credit agreement to double the size of our revolving credit facility for $1 billion, in order to better match our increased size and growth opportunities. Moving on to our guidance. We are maintaining our full-year guidance for adjusted EBITDA and adjusted EPS. We are narrowing the range of our HVAC revenue guidance to $1.365 billion or $1.385 billion, reflecting -on-year growth of .5% at the midpoint. We are also slightly narrowing our range for HVAC margin guidance, while maintaining the midpoint of 23.5%, or a 260 basis points increase -on-year. In DNM, based on our -to-date performance and outlook, we are increasing our margin guidance to a range of .25% to 22%, raising the midpoint to approximately 21.6%. This represents a -on-year increase of approximately 240 basis points, compared with the -on-year increase of 210 basis points previously. In total, consolidated midpoint segment income for the company remains unchanged as a result of these adjustments. As always, we will find modeling considerations in the appendix for our presentation. I am now turning the call back over to Gene for a review of our end markets and his closing comments. Thanks Mark. Our end market conditions continue to support our outlook. Within our HVAC cooling platform, we continue to see strong demand for our products across several key end markets, including data centers, healthcare, and institutional. In our HVAC heating platform, winter temperatures are a key driver of year-end demand, as is typical. In our detection and measurement segment, we continue to experience flattish global demand in our short-cycle business with regional variations, while project orders remain healthy. Looking ahead, we anticipate ending the year with a solid backlog position, leaving us well positioned for growth in 2025. In summary, I am pleased with SPS's Q3 results, including significant margin expansion in both segments. We are well positioned to achieve our updated full-year guidance, which implies 35% growth in adjusted EBITDA and 28% growth in adjusted EPS. We see multiple opportunities to continue growing our businesses, both organically and through our attractive acquisition pipeline. Looking ahead, I remain excited about our future. With 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.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then 2. At this time, we'll pause momentarily to assemble our roster. Our first question will come from Ross Sparrenblack with William Blair. You may now go ahead.

Good evening guys.

Strong HVAC order growth there in the quarter, with the Dodge and Mid-Index continuing to climb, and all the work you guys have done to streamline the sales process. How should we think about the sustainability of the 2024 growth rates into 2025? Is it a fair base case to underwrite mid-teens for cooling and still double digits for the overall

business? Ross, first of all, I want to

be careful we don't get into a discussion about 2025 too early. I think we've had a strong year here with respect to organic growth on the cooling side. We've benefited from some of the acquisitions we've done as well. Obviously, we've also done some significant throughput improvements that have expanded our capacity. I'd say, largely, as we look into next year, we feel good about the strength of those markets that have benefited us this year. We're looking at data centers and healthcare and institutional. From the cooling side, I'd

say we still feel pretty good about where we stand.

Yeah, I understand on 2025. Maybe I'm just trying to understand the timing of when we should expect order flow from recovering Dodge and Mid-Index to hit your books if it hasn't already. Is there more to come or is this already starting to bleed through the numbers?

Ross, I'm not sure if the Dodge index is a perfect proxy for all of our HVAC business. Yeah, about 70% of it's replacement, which is not really linked to the Dodge index. Exactly. You really need to be thinking about both the replacement dynamic as well as the new build. Then, you think about some of these markets that Paul just mentioned, like data centers, like healthcare, institutional. Some of the restroying, we're seeing thematic trends there really haven't changed. They continue to be strong markets. We see those continue

through

the fourth

quarter and into next year.

Fair enough. Maybe just on the boiler side, it was a little surprising to see flat growth, just given the new product launches and share gains you guys have seen there. In some of the inter-quarter read-throughs we've seen from at least the commercial side, is there anything we should read into the fourth quarter as we look at seasonally low comp for Rezi?

Yeah, I think, Ross, it was a slower start for the heating season this year than we had initially anticipated. That in conjunction with the fact that really the lead times in our boiler business have kind of normalized. They're no longer extended. If you recall last year, they were still at longer than normal lead times. We're seeing the distributors at least manage their inventory levels a little more prudently than perhaps they have in the past. At the end of the day, it's largely driven by the weather dynamics. We just haven't seen the heating season kick in yet. As you know, when it does, it can turn quickly. This is an 80% replacement business. That business will really start to ramp up once you see the weather dynamics shift. With respect to our guide, when you think about the balance of the year, we have kind of adjusted our guide, if you will, to take into account a delayed start to the heating season.

Yeah, and Ross, you did mention the Rezi versus commercial. Yeah, I think we are stronger on the commercial side. I think Rezi, which is a much more replacement market, is where we are seeing

more of the flatness. All right. Thanks, guys. Thanks.

Our next question will come from Brian Blair with Oppenheimer. You may now go ahead.

Thank you. Good afternoon.

Hey,

Brian.

I'd like to dig in on detection and measurement, starting with your run rate business. Just your team's perspective on sustainability of demand and perhaps near-term inflection. The commentary on the slides, I may simply be reading into this too much, but you actually said in the script, Jane, that flattish turned to mixed global demand in terms of run rate. Is there anything that we should read into there? And in terms of regional variation, what is your team seeing currently? And then looking forward in terms of project business, you've been very consistent in citing healthy underlying demand, infrastructure spending being on the horizon. How should we think about the set up for project activity and perhaps catalysts going into 2025?

Yeah, Brian, let me start. I think that I wouldn't read anything too much into that word. I mean, I think in general, the run rate has been flattish with very modest growth. There is regional variation. As you know, at a company level, we're approximately 85% North American and about 15% equally split in Europe and Asia. I'd say the two areas that appear to me to be softest would be China and continental Europe. But I would say that our relative revenue there is fairly small, actually much larger in North America, UK, Southeast Asia, some of the other regions. I'd say the US is holding pretty steady. And I would say overall, we're cautiously optimistic, you know, looking into 2025. You want to be careful about not giving 2025 guidance. I would also say the project activity, as we've talked about, is healthy. And there's a lot of large projects that we're bidding on. The big thing we got to keep our eyes on is when those will actually come to fruition. There are some of these that are very large that could start to go in 2025. There are some that could start to go in 26. So, you know, really good project activity, really good success rates there. But we're going to have to manage and make sure that we're going to handle the timing of the revenues of those projects. But yeah, I would say if you look ahead to 2025, HVAC, you know, if you kind of say our normal business is -single-digit growth, I think there's more growth drivers underneath HVAC overall, whereas DNM, I would say, is probably what we're seeing a little bit lower growth as we look ahead to 2025.

Understood. Appreciate the color. And

maybe I'll offer a quick update on your M&A pipeline, you know, how, you know, frame however you may, you know, your team's confidence in executing a deal over the coming quarters. And also, I guess speak to the composition of your pipeline. What intrigues me is with your, you know, leverage moving below targeted range, having expanded your credit facility to, you know, to a billion, you're going to enter 2025 with a tremendous amount of dry powder. Are there, you know, potential deals out there that would actually utilize that kind of capacity? Or is it simply flexing to the scale of current operations?

Yeah, I think, you know, I think you're spot on. I think that we're obviously going to be below, we're generating, as you know, our businesses generate so much cash. I do think one thing, you know, our EBITDA has expanded so much, right? You know, when we got our revolver in place, our EBITDA was almost well below half of what it is today. And so part of it is just getting the appropriate size revolver with your strategy. So we feel very good about that. But having said that, we actually feel really good with our pipeline. And I would say the activity level is very strong on the M&A side. This is on the DNM side and as well as on the HVAC side. So then there's a good level of activity. And I actually feel optimistic about what we're seeing over the next 12 months in terms of the ability to keep building out our platforms. I think there's some really good opportunities there. You know, where we're seeing it, I would say, you know, we see some very interesting opportunities on the location and inspection side, on the contact side, on the transportation side. And then if you flip over to HVAC, we see some very good engineered air movement as well as some cooling. Intriguing opportunities in those five platforms. So it does feel like there's a lot going on. And, you know, with our new revolver and our relatively low, you know, multiple depth to

the

job ratio, you're right, we do have the dry powder

to grow. Thankful. That's encouraging. Thanks again. Thanks, Brian.

Our next question will come from Damian Carras with UBS. You may now go ahead.

Good morning. Excuse me. Good evening, gentlemen. Good morning, Damian. Oh, goodness. It's been a long, long few weeks. A week. Right at the end of the tunnel. Maybe just a couple follow up questions on DNM here. I just want to make sure first I heard correctly that you had a single project that had a 10 point impact on the corridor and otherwise DNM would have been up 3% organically. Did I hear correctly?

I know what you're talking about, Damian. Yeah. So, no, we're actually just giving you the, this is Paul, by the way, we're giving you the math without the pass-through projects that delivered in the prior year. You may remember that in the communication technologies business, we had a large pass-through project lower than the typical margin associated with it and that delivered through last year and into the first quarter of this year. That tended to skew our results all year and so as we do the -over-year comparisons, we just gave that math.

Okay, I see. Well, let me ask you, just the margin seems pretty strong considering sales were off 7% versus last year. So, could you give us a sense, like, were there some mixed impacts, you know, related to that stronger margin? How much would have that been versus just kind of the operating initiatives that you've been working on?

Yeah, Damian, it's really a mix of both. You know, we have been very intentional around the segment as we pulled it together and looked for operational efficiencies and opportunities to drive margin, whether that's across sourcing or IT, all sorts of initiatives related to bringing all these businesses together under one roof or one segment. And then, you know, as you mentioned, you know, we did have a favorable mix of projects in the quarter from a margin perspective. You know, these projects, as you know, they execute and they have a variety of margin profiles across them and in this case in Q3, we had a slightly higher margin profile given the mix that landed within the quarter, you know, relative to, I think, the quarter. So, I think we'll be initially anticipated. I think the team's done nice work driving margins. If you look at last year versus this year, the actions that they've taken on productivity, on pricing, on some different synergy areas have been very beneficial. So, you know, we've been talking about detection and measurement margins for a little while. It's really nice to see the progress they're making. Yeah, I might add, you probably saw, Danny, we obviously raised our midpoint guidance for DNM for the year as well, reflecting that, many of those activities. So now, I think the midpoint is 21.6, which is offering 21.25.

Yeah, yeah, no, that's great to see. And then staying on DNM, I just, you know, the updated guide for the year, just the range seemed pretty wide for just one quarter left. Anything to read into that?

No, Danny, really, it's just the timing of projects. I think that's been a, we've had a fair number of chunky projects this year, and as we look at the timing of those, that's caused us to have to kind of revisit which ones fall into which quarter during the year. So I think, you know, on average, we feel really good about where we are going into the fourth quarter. You'll see that the midpoint implies something in the mid-150s on revenue

and a pretty healthy margin.

Okay, got it. I'll get back in the queue, thanks.

Thanks. Our next question will come from Walt Liptack with Seaport Research. You may now go ahead.

Hi, thanks. I'd like to say good morning to everybody, too. It's been a long day. Hey, Walt, good morning to you, bud. Yeah, thank you. So I wanted to ask about, you know, in HVAC, just like the cadence of orders, you know, sounds like, you know, some of the data center and healthcare is doing fine. I wonder if you could talk about the order cadence there. And then with the boilers, you know, the weather has clearly been a lot warmer this year, and you don't have that, you know, the supply chain issues or whatever from last year. But what is normal for boilers? Like, when do you usually start seeing your distributors, you know, starting to take up, you know, boiler inventory?

Yeah, so that this year, we typically were expecting to see some of that start in September. We did not see much of that, as Mark referred to earlier. You did see some distributors, you know, holding off as the lead times have come down, and you're more or less at -in-time lead times. And, you know, with warm weather, there's-this puts them in a position to be able to save a little bit on their mandatory management. You know, look, I think you should start to see that in the winter-the winter months kick in here as we roll through. At this point, you're right, it's still warm in October, and we've accounted for that in our guide for the fourth quarter. So I think we feel good about where we've set guidance based on what we know so far about the fourth quarter, if you were to look at it versus historical levels. It's one of-we're forecasting it at one of the lowest levels that we've seen over the last, you know, close to the last decade here, with the exception of last year, which was particularly weak. So we're still expecting a little bit of -over-year growth in the fourth quarter. And heating, last year was particularly weak. You had sort of a double-whammy impact of it being very warm, in addition to that kind of de-stocking taking

place in a sort of post-COVID environment.

Okay, great. And then the cadence of orders, they look for the, you know, the data center, healthcare?

Overall, we're feeling really, really good while on what we're seeing there. I would say healthcare, the biggest opportunities there would be Ingenia, customary handling, which is really getting some nice awards, even starting the book into 26, very long lead times there. And Strobic, a portion of our EAM, seeing some nice growth there. Data centers remain strong, I would say, in all three regions, in the U.S., some nice projects in Europe and in Asia as well. So, yeah, I think the progression is good. And then I'd say more so in North America, institutional still remains strong. Schools, governments, universities, things like that. Good amount of replacement activity that seems to be very healthy right now as we sit today and as we look ahead to 25.

Okay, great. And then switching over to DNM, you guys called out ATON. I can't remember if that was in a good trend in the second quarter, too, but I wonder if you could just talk about ATON and what you're seeing there, any kind of order funnel or project visibility you might have.

ATON's had a very good year. So we're actually very pleased with their progression this year, both in top line growth and margin growth. You know, we're very, very pleased. I think that, you know, there's a good chunk of that. I'd say the majority of that is run rate. You know, so you're always keeping your eye on the global run rate. That's a very global business, serves Europe, Northern Europe, Southeast Asia, Canada, North America, very good presence. We're the very clear leader there, we believe globally. So yeah, we've had a really good year there, and I'd say there's nothing that signals, you know, any fall out there.

Okay. Okay, great. Thanks. Thanks, Bob.

Our next question will come from Steve Farazani with Sudoti. You may now go ahead.

Good evening, everyone. I just wanted to check in on capacity additions. I know the plan was to, you were in the process of expanding within Chania. I just wanted to check on where that progress is in terms of your ability to grow that business beyond the current markets it serves.

Yeah, I would say, Steve, it's very positive. And, you know, one of the ways you can look at it is how much you're getting out each quarter. And we've had nice expansion in Q4, and we see more expansion going into next year. You know, it's a good situation to be in where you have a very high level of demand. You know, you've got to get the product out the door, you have to make sure. And there's a lot of, that's a very automated, very, a lot of robotics in there. It's a really nice business. But, you know, it's still, it's substantially small. It's much smaller than our cooling products, but we're seeing some very nice growth there. So you will see some attractive -over-year growth from 24 to 25 in that distance.

Great. And are you, where you need to be with Marley now with the expansion? Is that expansion all completed? Do you have plenty of room to run on that side?

Yeah, actually that's gone exceptionally well. Not only has that driven more margin and throughput, it's been very, very positive. We have brought our lead times back to very competitive levels. And actually we believe we're at or below our two primary competitors there with the productivity initiatives we're putting in place. So it's a really, we feel really good about those investments. And it's, you really see it pay dividends on the margin line and on the top line line. So we feel good about those. Excellent.

You mentioned industrial reshoring. Again, do you have any sense of where we are with that? And are you still seeing demand coming from additional reshoring?

You know, I think that there are

some projects there. And the interesting thing is, is, you know, once something reshores, it's not necessarily a one-time thing, right? Let's say you bring a car plant here or a semiconductor plant here. You put cooling towers on it or you put whatever products you put on there. Those products need to be maintained on an ongoing basis and replaced. And so, you know, what has happened, it's not a one-time project. You have expanded your TAM and the subsequent aftermarket OEM parts, service, et cetera, will be there. So, you know, what I would say is the, you know, there's still projects that we are working on. We have seen a couple that have slowed down, some associated with electric vehicles. We've seen some delays there. But those as a percentage of our overall revenue are relatively small in the grand context of the segment revenue. So it's been way, you don't even see it because of the growth in some of the other areas. But there's still a good amount of activity, I would say, on that side, too. Excellent.

Last one for me, obviously another very strong cash flow quarter. Is the intention still to, until some deals come up, to pay down debt in the near term?

Yes, Steve. I mean, you know, that would be our intention, I think, in the near term to continue to reduce the debt that we have outstanding, you know, in the interim period before

we have a transaction. Great. Thanks, everyone. Thanks, Steve.

Again, if you have a question, please press star then one. Our next question will be a follow-up from Damian Carras with UBS. You may now go ahead.

Hey, again, guys.

One

thing I wanted to ask you, but I wanted to ask you, didn't hear the word hurricane mentioned, and I know obviously you guys are headquartered in the Carolinas and have some facilities kind of in the southeast U.S. here. Just wanted to ask whether you had any impacts in the quarter from the two hurricanes that we've had recently. And second to that, just, you know, considering your solutions, particularly in V&M, whether you see any potential, you know, kind of uplift activity from some of the rebuild and restoration post storm?

Yeah, Damian, we did not, we were not impacted by the hurricane, really, directly. None of our facilities were. You know, one was obviously in the line of it in Florida where we had our Q's business, but it was not impacted. So fortunately, we did not have to deal with any issues with respect to that. With regard to your second question, I wouldn't say that we've seen really any meaningful activity with respect to damage that was caused by the hurricane where we would have replacement activity. But it's early days, I think, on that front. So you're right, some of our solutions would clearly be well positioned, whether that's on the Q side of the business or aton, you know, if they work through the rebuild. And up to the other area, sometimes when you have these weather events, you'll see, you know, the coast through a more industrial area, cooling towers, you know, fan stacks, things like that. So we have, we're working to identify how we can support. We haven't seen anything materially significant at this point in time, but

we're working to support where we can. Got it. Thank you for that. And I

wanted to ask you about nuclear, which has become quite topical all of a sudden in the investor world. And I know that your business has had a pretty solid position in some areas of nuclear power gen. So could you maybe just – and in fact, I think, you know, you talked about a nice cooling project last quarter. We think that you might have been involved in a nuclear plant and doing some work there. But just thinking about all of the nuclear activity we're hearing from some of these tech companies that are trying to get data center capacity built out, what is the potential opportunity there for SPX?

What I

would say is I think it's a net benefit for our power business, you know, for the power portion, which is not a humongous portion of our business these days, but our process cooling. As you know, the majority of the cooling towers that are in nuclear facilities are really large. It's really – and, you know, we do service work and provide OEM parts. You're right, we do do some larger projects. I think net-net, you know, the growth in data centers is really going to be burdening the grid. You've had a grid that has for so long had very little growth in demand, and you actually are seeing real growth in demand, and so you have to find more capacity. New capacity takes a while to get into place. Even if you put in the fastest, you know, source, you're probably talking a couple of years, you know, for a Pico plant, a natural gas plant. Nukes take much longer, but what I would say is you're going to see some more activity on working on your new plants because any time you upgrade your cooling tower, you get a lot more power out of your plant. So I do think we are seeing a lot of activity on some service projects. The other thing, you know, there are some small modular nuclear reactors. We're typically the first person they call when they're looking for a cooling tower. There's a good amount of activity there, but what I would say is that's something that's a little further out, you know, to get to the point at which there'd be actual revenue. I would say, you know, you're probably not going to see anything material for a couple of years. I do think it's an interesting opportunity. It will be interesting to see if it actually gets fully approved and commissioned, but if it does, we think that we're very well positioned to take advantage of that opportunity. So, yeah, I would say on that segment, there's a growing level of activity, and I would expect that to continue with the pressure that the utilities have

to generate more megawatts.

Appreciate your thoughts. Thanks a lot. Best of luck,

guys. Thanks, Jimmy. Thanks.

This concludes our question and answer session. I'd like to turn the conference back over to Paul Clegg for any closing remarks.

Thank you all for joining us, and we look forward to updating you again next quarter and seeing many of you at conferences and at -on-ones

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