SPX Technologies, Inc. (NYSE:SPXC) Q4 2023 Earnings Call Transcript

SPX Technologies, Inc. (NYSE:SPXC) Q4 2023 Earnings Call Transcript February 22, 2024

SPX Technologies, Inc.  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, and thank you for standing by. Welcome to SPX Technologies Fourth Quarter 2023 Earnings Conference Call. At this time all participants are in a listen only mode. [Operator Instructions] I would now like to hand the conference over to Paul Clegg. You may begin.

Paul Clegg: Thank you, and good afternoon, everyone. Thanks for joining us. With me on the call today are Gene Lowe, our President and Chief Executive Officer; and Mark Carano, our Chief Financial Officer. A press release containing our fourth quarter full year 2023 results was issued today after market close. You can find the release and 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 this webcast will be available on our website until February 29. 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 the results of continuing operations only. You can find detailed reconciliations of historical adjusted figures from their respective GAAP measures in the appendix to today’s presentation. Our adjusted earnings per share exclude primarily acquisition-related costs, non-service pension items, mark-to-market changes, amortization expense and a charge associated with recent legal settlement. Finally, we will be hosting an Investor Day on March 26th in New York. The event will be webcast. If you would like to attend in person, please send a request to our Investor Relations email at noted in at the end of today’s press release and on our website.

And with that, I’ll turn the call over to Gene.

Gene Lowe: Thanks, Paul. Good afternoon, everyone and thank you for joining us. On the call today, we’ll provide you with an update on our consolidated and segment results for the fourth quarter and full year 2023. We’ll also provide our full year guidance for 2024. We had a strong close to the year. We grew adjusted EBITDA 50% and delivered adjusted EPS near the upper end of our guidance range. During Q4, we continued to execute well and saw robust demand continue across most of our end markets. Our HVAC segment in particular achieved excellent margin performance compared with very strong results in the prior year period. I’m proud of our team’s accomplishments over the past year. We made great progress on our digital continuous improvement and sustainability initiatives.

We also completed two strategic acquisitions in our HVAC segment that helps strengthen our positions in the attractive engineered air movement and electrical heating markets. Recently we made another significant addition to our HVAC segment, with the acquisition of Ingénia, a provider of high value custom air handling systems and broadens our growth opportunities and geographic reach in Engineering Air Movements. Looking ahead market conditions support continued robust growth for SPX and remain well positioned to continue our strong operational execution Today we are providing 2024 midpoint guidance for adjusted EBITDA growth of 25% and adjusted EPS growth of 16%. At the midpoint of $5 per share, our adjusted EPS guidance would achieve a key SPX 2025 target, a year ahead of schedule.

Turning to our high-level results. For the fourth quarter, we grew revenue by 9.3% and adjusted operating income by 18.7% year-on-year for the 150 basis points of margin expansion. We ended the year with a healthy backlog, solid overall demand trends and positive operational improvements. As always, I’d like to touch on our value creation framework. Over the past quarter, we continue to see the benefits of our continuous improvement initiatives, including investments in efficiency and throughput that have allowed our HVAC segment to serve historically high levels of customer demand and achieve record segment margins. We also continue to introduce new innovative products to meet our customers’ sustainability needs. At the recent HR trade show, we showcased a new Adriatic cooling solution that balances the water saving benefits of the air cooled heat rejection for the energy efficiency of a bar code solution.

This product serves an attractive niche for customers facing water conservation challenges. In our Location and Inspection platform, we launched an advanced solution that enables faster, simpler and less costly precision location and instant mapping of underground utilities. This processes critical to many utilities whose pipes and cables were varied up to 50 years ago and it may last credit records. We’ve also continued to advance our inorganic growth initiatives. Earlier this month, we announced the acquisition of Ingenia, a leader in the design and manufacture of high quality air handling units, headquartered just outside of Montreal. I’m very pleased to welcome our new colleagues to the SPX team. Ingenia has a strong reputation for quality customer handling solutions in diverse end markets, including healthcare, pharmaceutical, food processing and other demanding industrial applications.

In January brings together strong engineering capabilities with a highly automated production process and proprietary configuration software. This combination enables them to provide demanding customer air handling configurations with unmatched speed and flexibility. We are excited about ingenious significant technical and production advantages and our opportunities to address this large and growing end market. Now, I’ll turn the call over to Mark to review our financial results.

Mark Carano: Thanks Gene. Q4 was another solid quarter for SPX Technologies. Year-on-year our adjusted EPS grew approximately 7% to $1.25. Full year adjusted EPS grew 39% to $4.31, near the upper end of our guidance range of $4.22 to $4.32. As noted by Paul, in addition to our typical items, our adjusted results for Q4 and the full year exclude the charge associated with the legal settlement. The after-tax impact to adjusted EPS was approximately $0.14. This was a highly unique isolated event related to a dispute with a former business rep. For the quarter, total Company revenues increased 9.3% year-on-year. Acquisitions drove the increase while organic revenue declined modestly, Fx was a slight tailwind. Segment income grew by $12.3 million or 13.6%, $102.8 million while segment margin increased 80 basis points.

For the quarter in our APAC segment, revenues grew 14% year-on-year. Acquisitions contributed growth at 15.7% and include TAMCO and our cooling platform ASPEQ in our heating platform. On an organic basis, revenues declined 2%, driven by lower sales of Hydronic equipment associated with unseasonably warm weather in our key markets. This followed a substantial increase in heating volumes the prior year period. The year-on-year decline was partially offset by higher volumes of cooling product sales, driven by continued strong customer demand for plant throughput. Segment income grew by $19.7 million or 37%. Our segment margin increased 390 basis points. Segment income and margin continued to benefit from operating leverage and higher throughput our cooling platform as well as accretion from our TAMCO and ASPEQ acquisitions.

Backlog remained healthy at $306 million, up approximately 13% organically compared with the prior year end in the quarter. For the quarter in Detection & Measurement revenues increased 1.2% year-on-year with flat organic sales and a modest FX tailwind. While we achieved our full year revenue guidance, our Q4 margin performance was disappointing. In Q4, we experienced lower than anticipated volumes of run rate product sales that have high incremental margins. This was offset by higher contact project shipments that have passed through content, resulting in a lower than anticipated margin. During the quarter, we also incurred elevated expenses within the segment including higher R&D support future growth in this year. Year-on-year segment income declined by $7.4 million, a 500 basis point reduction in margin, resulting in a full year margin approximately 80 basis points below our midpoint guidance.

Segment backlog at quarter end was $245 million, down modestly from the prior year. Turning now to our financial position at the end of the quarter. We ended Q4 with cash of $105 million and total debt of $558 million. Our leverage ratio as calculated under our bank credit agreement declined to 1.3 times from 1.7 times in Q3, reflecting strong free cash flow generation. Full year adjusted free cash flow was $231 million or approximately 115% of adjusted net income. Including the impact of closing the Ingénia acquisition net leverage was 2 times as of Q4 2023. We anticipate our leverage ratio declining to the lower end of our targeted range 1.5 to 2.5 times by year-end, assuming no additional capital deployment. Moving on to our guidance. Today, we introduced full year 2024 guidance, which includes Ingénia.

We anticipate revenue in a range of $1.93 billion to $2 billion and segment income margins to a range of approximately 21% to 22%. Ingénia as anticipated have annualized revenue of approximately $100 billion in 2024 with revenue growth and margin rates that are above the segment average. Starting in 2024, our guidance for total company performance will include adjusted EBITDA. The primary difference between adjusted EBITDA and adjusted operating income is depreciation. Please also note that our bank leverage covenant uses a different EBITDA measure as defined in our credit agreement. In 2024, we anticipate adjusted EBITDA in the range from $375 million to $405 million. At the midpoint, this reflects a margin of approximately 20% year-on-year adjusted EBITDA growth of 25%, following a 50% increase in the prior year.

Our adjusted EPS guidance range of $4.85 to $5.15 reflects 16% growth at the midpoint over our strong 2023 results. In our HVAC segment, we anticipate revenue in a range of $1.325 billion from $1.375 billion, reflecting an increase of approximately 20% at the midpoint. We anticipate HVAC segment margin of 21.25% to 22.25%, increase of approximately 85 basis points at the midpoint as we benefit from further operating leverage and favorable margin mix from acquisitions. In our Detection & Measurement segment, we anticipate a significant reduction in our contact project sales as we delivered the bulk of a large project order with [indiscernible] content in 2023. Despite this headwind, we anticipate Detection & Measurement segment revenue in the range of $605 million to $630 million, with the midpoint almost flat with the prior year.

Excluding the decline from the Comtech pass through project, we expect underlying sales to grow mid-single-digits. This includes solid growth in project sales and a continuation of flatter market conditions for our run rate products. We anticipate D&A segment margin in a range of 20% to 21% with the year-on-year increase largely due to a more favorable mix associated with the reduction in Comtech project sales. With respect to gaming, we anticipate that the change of net earnings will be similar to 2023 from 46% of adjusted EPS was delivered in the first half and 54% in the second half. In Q1, we anticipate a significantly stronger year-on-year results in HVAC, while we expect Detection & Measurement segment income to be roughly flat year on year.

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.

Gene Lowe: Thanks Mark. Current market conditions are supportive of our 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. In heating, we continue to see solid demand associated with decarbonization, in our commercial and industrial markets. As always, residential sales are affected by weaker temperatures. In Detection & Measurement, we are experiencing uneven global demand in our short-cycle businesses. While project orders remain healthy, our customers continue to signal significant approaching demand infrastructure. In summary, I’m pleased with the solid close to 2023 and our strong full year performance.

Our acquisition of Ingénia further scales our cooling platform and broadens our growth opportunities in engineered air. With a solid backlog positive operational momentum and continued demand strength in key markets, we are well-positioned to achieve our 2024 guidance and reach our SPX’s 2025 targets, a year ahead of schedule. Looking ahead, I remain very excited about our future, with the right strategy and a highly capable and experienced team. I see significant opportunities for SPX to continue growing and driving value for years to come. With that, I’ll turn the call back to Paul.

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

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Bryan Blair with Oppenheimer & Company. Your line is open

Q – Bryan Blair: Thank you. Good afternoon, guys.

Mark Carano: Hi, good afternoon.

Q – Bryan Blair: Great 2023. Obviously, you came in about four times the EPS growth you initially guided. That’s quite impressive. And you’re obviously on pace to hit 2025, targets a year early. And all of that said, like let’s nitpick to start out. The D&M results came in a bit lower than anticipated and run rate pressure that surprised us a little bit, and obviously the mix impact there I assume with radio detection that that did hit the variance for the quarter, maybe offer a little more color there and how you see run rate progression throughout 2024?

Mark Carano: Hi, Brian I’ll start out here. With respect to the run rate business, you’re right we saw flat out in Q4 relative to our guide and where our expectations were for the quarter we expect and as we look into next year, we expect that remain flat as we see it today. And it is as we mentioned in our in our prepared remarks those end markets are a little bit uneven. It sort of depends on where in the world, those products are being sold into that you know that is a more global business than some of our others. US market tends to be fairly resilient. So, we feel pretty good there. But when you look outside the US and Europe in particular, you’re seeing some weakness there that we hadn’t originally forecasted, whether that’s in the UK or on the continent.

Q – Bryan Blair: Okay. I understand. So time will tell. And maybe offer a little more color on Ingénia. It seems like another great deal for your team and maybe touch on the overall fit with the [indiscernible] platform or sub platform as both and how you think about growth prospects there? And you did mention revenue contribution. What are you baking in for accretion year one?

Gene Lowe: Yeah, why don’t I start there Brian and it makes sense to just step back. And I think it’s been a really positive year over the past 12 months on the inorganic growth. I think we’ve done three great deals very TAMCO, Engineered Air Movement, ASPEQ and Electrical Heating now Ingénia [indiscernible] we actually think is really strengthen us on that. It puts us in context where we’ve deployed about $800 million of capital over the past 12 months, is look at it we hadn’t planned on being at the lower end of our range, 1.5 times by the end of the year. We’re down about 1.3 times. Even after doing Ingenia, we also think by the end of this year we’ll be down at the lower end of our range 1.5 times or less. So we feel good about where we are in the model.

Specifically, about Ingenia, it’s a really good company. We know the space very well. We’ve been tracking this space for years. Literally, I would say more than six years. I think this is the best company, we believe, in this market. They have highly automated robotics in terms of how they make the product. This actually gives them a nice advantage both in terms of lead times, but also in terms of the amount of labor and the people they have to make a product. They’re much more efficient. We actually see in many cases they are less than half of certain competitors that they compete with. So really good technology. They have a really innovative software solution, which allows them to custom configure down to the very fine details what they’re looking for.

And they can do this much faster than their competitors. We think this gives them a lead time advantage. And they’re serving very attractive end markets. You typically see them in markets where there’s higher requirements, either in terms of air leakage or thermal performance, so healthcare, pharmaceutical areas of industrial and they do very well in those markets, have a very nice win rate. Having said all that, they’re very strong in Canada, and they’ve only started getting going in the US. I think they have maybe seven states or a smaller number of states that they’ve really gone after. There’s one that they’ve gone after that’s penetrated very well, but in terms of synergy, we have the Marley business, the Marley cooling business, where we have really strong reps in North America, really in every corner, and we actually think we’re going to be able to help them build out their channel, and we also see some nice synergies.

If you think about it, every time a hospital goes in and needs a number of cooling towers, it needs this type of air movement, it needs this type of TAMCO dampers. You see a lot of synergy across these different product categories, which is why we all have them together, but yes, we’re really excited about Ingenia. I think we’re excited they’re a part of the team, and we’re looking forward to going forward.

Paul Clegg: Yeah, Bryan, this is Paul. On the accretion question, it will be accretive. Obviously, there are — there is a higher interest burden as a result of the borrowing that took place during the first quarter, about $300 million on a revolver at a rate of 6.5% to 7%, somewhere in the middle there. And most of that, we won’t start paying that down until late in 2024. On the — you’re right about the run rate revenue being around $100 million. We’ll have that for a little less than 11 months, and we’ve said that the segment margin would be a little higher than the HVAC average. The HVAC average, according to our updated for new midpoint guidance for 2024, is about 21.75%, so something a little higher than that.

Bryan Blair: Okay. Understood. We have the breadcrumbs there, and Gene, a very helpful color on the strategic set. And Paul, you just kind of gave me the segue on HVAC margin, and I surmise this will be a key investor day topic, both HVAC and D&M. Is there any reason why at this point, given the structural enhancements to HVAC, that we should see the margin profile dip below what we’ve seen, new run rates and what’s guided for 2024? And then on the D&M side, any reason why they should not get back to the low to mid-20s or perhaps even higher over time as platform scale?