SPX Technologies, Inc. (NYSE:SPXC) Q4 2022 Earnings Call Transcript

SPX Technologies, Inc. (NYSE:SPXC) Q4 2022 Earnings Call Transcript February 26, 2023

Operator: Good day and thank you for standing by. Welcome to the Q4 2022 SPX Technologies Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Paul Clegg, Vice President of Investor Relations and Communications. Please go ahead.

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. Also available during Q&A will be our Chief Accounting Officer, Mike Reilly. The press release containing our fourth quarter and full year results for 2022 was issued today after market close. You can find the release in our earnings slide presentation as well as a link to a live webcast of this call in the Investor Relations section of our website at spx.com. I encourage you to review our disclosure and discussion of GAAP results in the press release and to follow along with the slide presentation during our prepared remarks.

A replay of the webcast will be available on our website until March 2. 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 GAAP measures in the appendix to today’s presentation. Our adjusted earnings per share exclude primarily non-service pension items, asset impairment charges, amortization expense and a loss on the divestiture of asbestos-related assets and liabilities. One change you will notice in our press release and our 10-K is that we have aligned our definition of segment income with the way it is presented in our earnings presentation, which excludes the impact of amortization expense and acquisition-related items.

Finally, we will be conducting meetings with investors over the coming months, including at the UBS Infrastructure and EMC Conference in Dallas as well as at Sidoti’s virtual SmallCap Conference. 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 will provide you with an update on our consolidated and segment results for the fourth quarter. We’ll also provide guidance for 2023. This is our first call with Mark Carano, as our CFO. Mark joined us in early January and has been quickly coming up to speed. Mark is a great fit with SPX’s growth and operational excellence initiatives. He brings a depth of experience in strategy, finance and business development. He has an impressive track record as a public company CFO and a strong background in engineered products, growth investments and operational excellence initiatives. We’re excited to have him here. Mark, welcome to the team.

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

Gene Lowe: Thanks Mark. Now I’ll touch on some of the highlights from the quarter and provide some perspective on our 2023 guidance. Our Q4 results exceeded our expectations with strong performances in both HVAC and Detection & Measurement. Both segments drove revenue and margin growth, and we continue to experience solid demand across our end markets. During the quarter, we made further progress on a number of our key initiatives, including the establishment of ESG commitments, additional progress in our digital and continuous improvement initiatives and a significant reduction in legacy liability exposure. Looking ahead, we are starting 2023 with a historically high level of backlog. We are also seeing some easing of supply chain and labor constraints, which along our continuous improvement, along with our continuous improvement initiatives, is benefiting our operational execution.

Today, we are providing 2023 guidance for adjusted EPS in the range of $3.30 to $3.55, which reflects approximately 10% growth at the midpoint. Turning to our high level results, for the quarter, both segments helped drive strong organic revenue growth of more than 18% and our recent acquisitions performed well. Adjusted operating income grew 48% year-on-year with 290 basis points of margin expansion. On a full year basis, adjusted operating income grew 39%. I am very pleased with our Q4 and full year performance as well as our momentum entering 2023. Despite mixed macroeconomic data, we believe our diverse portfolio remains resilient with significant capital availability and active acquisition pipeline and multiple organic growth and margin enhancement initiatives, I am confident in our ability to deliver on our SPX 2025 plan.

As always, I’d like to touch on our progress in our value creation framework. As you look back over 2022, our teams worked hard to mitigate supply chain and labor constraints, leveraging our business system to meet strong levels of customer demand. We introduced multiple new products, made progress on our key initiatives and reduced complexity and risk by divesting our legacy asbestos liabilities. I am also very proud of our momentum on our ESG initiative. SPX is well positioned to thrive in a Paris accord world where long-term targets on carbon emissions are realized. From our highly efficient cooling towers to our inspection equipment that helps tech and remediate leaks and underground water and gas pipes, SPX offers a wide array of innovative products that enable a safer, more efficient and sustainable future.

In 2022, we more formally incorporated ESG as a key element of our strategic planning process for each business unit, significantly expanded our disclosures, adopted a human rights policy and saw considerable increases in our scores among key ESG rating entities. Recently, we adopted company-wide sustainability commitments, including a 30% reduction in greenhouse gas emissions intensity by 2030. We’re also named by Newsweek as one of America’s most responsible companies. We are honored to be recognized and pleased with the hard work of our team is being acknowledged. Another area where we have strong momentum is in our digital initiative. As the new name of our company reflects, it is more important than ever to leverage technology solutions to help our customers continue to be successful.

Each of our platforms is focused on providing innovative designs, products and tools to enable our customers to be more efficient, productive, safer and more sustainable. A few examples of where we continue to see customer traction include our Pro Tools tech app within our HVAC heating business, which helps field technicians become hydronics experts by putting our boiler product information at their fingertips in a mobile platform. In 2022, we took market share in boilers, and we believe that our digital initiatives were a key reason for this success. In our cooling business, our CoolSpec software is enabling customers to compare, select and configure highly engineered cooling solutions faster and easier than ever before. In Detection & Measurement, we’re seeing strong adoption of Genfare Link, our modular cloud-hosted fare processing platform, which provides valuable data and analytics and efficient management of transportation networks.

With Genfare Link transportation authorities can now offer account-based rider management, website and portal support and customer service functions all in one place. At this point, we have won more than 50 accounts on Genfare Link, and our CS branded net software platform continues to develop new ways to drive efficient management of critical infrastructure, in municipal water authorities, including the use of AI to prescreen potential areas of concern and the ability to geotag maintenance priorities with LiDAR-enabled robotics. I will now turn the call to Mark to review our financial performance.

Mark Carano: Thanks, Gene. We are very pleased with our performance for the quarter and full year. In the fourth quarter, our adjusted EPS grew 33% year-on-year to $1.17. Full year adjusted EPS was $3.10, also up 33% year-on-year. The most notable adjustment to our GAAP results is a loss on the previously announced divestiture of our asbestos liabilities and associated assets. Other customary adjustments include the removal of mark-to-market pension gains, acquisition-related costs, amortization expense, and asset impairment charges. In addition to the segment drivers, which I will review momentarily, a higher effective tax rate created a year-on-year headwind to adjusted EPS in the fourth quarter of approximately $0.12 compared with an unusually low effective tax rate in the prior year.

A review of our results reflects strong growth across our company. Revenues increased 22.7% year-on-year, including 18.4% organic growth with strength in both our HVAC and Detection & Measurement segments. Acquisitions contributed inorganic growth of 6.3% related to Cincinnati Fan and ITL. Partially offsetting our top line organic and acquisition growth was a 2% FX headwind resulting from the strong dollar. As a reminder, currency fluctuations generally have a little effect on our overall profitability due to significant natural hedges in our cost structure. Segment income grew by $23.2 million or 34.5% to $90.5 million, while margin increased 190 basis points. These increases were driven by strong performance in HVAC and to a lesser extent, in detection and measurement.

In addition, price/cost remained a modest tailwind in both segments. For the quarter, in our HVAC segment, revenues grew 29.5% year-on-year. Heating and cooling both contributed to organic growth of 21.1%, driven by increased volume and price in both platforms. During the quarter, we also benefited from improvements in the availability of labor and the easing of supply chain constraints. Inorganic growth was 9.4%, reflecting the acquisition of Cincinnati Fan. The strong dollar was a modest FX headwind. Segment income increased by $19 million and margin increased 320 basis points, reflecting improvements in throughput from favorable operational execution, particularly in cooling and favorable price cost trends in heating. Overall, bookings remained solid.

And in the fourth quarter, segment backlog increased by approximately 7% year-on-year to $243 million. For the quarter in Detection & Measurement, revenues grew 12.2% year-on-year. Location and inspection, Commtech and Aton were all strong contributors to organic growth of 14.4%. The strong dollar resulted in a 3.7% currency headwind. Segment income increased by $4.2 million and margin grew 20 basis points. We continue to experience solid run rate demand and a strong environment for project sales. Segment backlog at quarter end was $250 million, up 63% year-on-year, primarily due to large project orders. Turning now to our financial position at the end of the quarter, our balance sheet remains strong, and we have significant liquidity available to support our strategic growth initiatives.

At quarter end, we had cash of $157 million and no borrowings under our revolving credit facility. Our cash balance included the impact of divesting our asbestos liabilities, which was funded with approximately $139 million cash on hand. As a result, we concluded the year with net leverage of 0.4x. For the full year, adjusted free cash flow was approximately $97 million. In 2022, cash generation was affected by strategic working capital investments related to supply chain management. During 2023, we anticipate a return to a more normalized run rate of cash generation. Moving on to our guidance. We are initiating 2023 guidance for adjusted EPS in a range of $3.30 to $3.55. The midpoint reflects year-on-year growth of approximately 10%. One notable change between 2023 and prior years is that we now anticipate an effective tax rate of approximately 24% compared with an effective tax rate of approximately 21% in 2022.

The change is due to a higher percentage of income in the United States and higher statutory rates in certain jurisdictions. In our HVAC segment, we anticipate revenue in a range of $935 million to $955 million. Segment income margin is anticipated to be in the range of 15.25% to 16% or an increase of approximately 80 basis points at the midpoint, reflecting more efficient production in our heating and cooling facilities and a favorable price cost environment. In our Detection & Measurement segment, we anticipate revenue in a range of $565 million to $585 million. Segment income margin is anticipated to be in the range of 20.5% to 21.5% or a modest year-on-year increase at the midpoint. In 2023, we anticipate significant project revenue at lower than typical project margins due to the amount of pass-through content in certain large projects.

With respect to the cadence of the quarters, we anticipate that it will be similar to 2021 when approximately 43% of EPS fell in the first half of the year and 57% in the second half. As always, you will find modeling considerations in the appendix to our presentation. I’ll now turn the call back over to Gene for a review of our end markets and his closing comments.

Gene Lowe: Thanks, Mark. Overall, current market conditions remain supportive of solid growth in 2023. Across our HVAC businesses, supply chain and labor constraints remain, but are improving. In HVAC cooling, we continue to see solid demand for our products in North America and the APAC region. In our heating business, bookings remained steady, driven by commercial and industrial demand and residential replacements. And in Detection & Measurement, our run rate demand is solid overall with some regional variations while the environment for project orders remains attractive. In summary, I’m pleased with our very strong close to the year and our momentum on multiple important initiatives. We are beginning 2023 in a strong position to achieve full year earnings growth of approximately 10% at the midpoint of our guidance.

With a solid balance sheet and an active M&A pipeline, we are well positioned to continue compounding our growth through strategic acquisitions. I’m proud of our highly capable experience team, and I’m confident in our ability to continue executing on our value creation road map for years to come. As we look ahead, I’m excited about reaching our SPX 2025 targets. With that, I’ll turn the call back to Paul.

Paul Clegg: Thanks, Gene. Operator, we are ready to go to questions.

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Q&A Session

Operator: Thank you. Our first question comes from the line of Damian Karas of UBS. Your line is open.

Damian Karas: Hi, good evening, everyone.

Gene Lowe: Hi, Damian.

Mark Carano: Hi, Damian.

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

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

Mark Carano: Yes, Damian, I’ll just kind of add to that. Listen, there is a number of factors out there that are going to probably impact how we fall within the range that we put forward. As Gene mentioned, the macro environment, right, the signals are mixed out there today, look at things like non-resi and some of the leading indicators that folks look at unclear what they are signaling they are probably flashing yellow. Supply chain and labor, those are moderating for us. But I would say we’re not out of the woods on both of those issues yet, getting better, but not back where they were. And while price cost has been a tailwind for us in the first half, what we expect it will be in the first half of the year, we don’t have a lot of visibility on what that might look like in the back half of the year.

So if you sort of think about the businesses and some of the elements you would think about on our HVAC business, particularly on the heating side, weather is obviously a key element in that business. That obviously is something that will play out more in the back half of the year, but it definitely drives that business and its performance. Cooling, despite my comments on the leading indicators and caution around those, while we aren’t seeing weakness there, our visibility is limited in that market out up to about 6 months. So it’s hard for us to see much beyond that. And then on the D&M side that has a slightly different profile. But as you know, a portion of that business is short cycle, particularly the radio detection business, which is more sensitive to the economic environment and in the event that there is weakness towards the back half of this year.