Ladies and gentlemen, thank you for standing by and welcome to the SPX Corporation First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to turn the conference to your speaker today Paul Clegg, Vice President of Investor Relations. Please go ahead sir.

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 Scott Sproule, our Chief Financial Officer. The press release containing our first quarter 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 the webcast will be available on our website until May 7th. 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 including our disclosures related to the ongoing COVID-19 pandemic. Our comments today will largely focus on adjusted financial results. You can find detailed reconciliations of historical adjusted figures to their respective GAAP measures in the appendix to today's presentation. Our segment reporting structure combines the results of our Heat Transfer and South African operations into an all other category which is excluded from our adjusted results. Our adjusted earnings per share also excludes non-service pension items including our true-up of actuarial assumptions, amortization expense, and one-time costs associated with acquisitions. Finally, we will be conducting virtual meetings with investors during the second quarter including our participation in the Oppenheimer Industrials Growth Conference on May 5th. Additionally, we will be virtually hosting our Annual Stockholder Meeting on Thursday, May 14th at 8 A.M. Eastern Time. And with that, I'll turn the call over to Gene.

Thanks Paul. Good afternoon everyone. Thanks for joining us. Before we get started, I hope that all of you and your families are safe and well. These are certainly challenging times and we appreciate your support as we all navigate through the health crisis. I also wanted to take the opportunity to thank the entire SPX team for their strength and continued perseverance. I'm really impressed with how our people have adapted and succeeded in a rapidly changing environment. On the call today, we'll provide you with a brief update on our overall results and segment performances for the first quarter. We'll also get into a more detailed discussion regarding the impacts of the COVID-19 pandemic, the actions we have taken, and our process for dealing with continued uncertainty. Now, I'll touch on some from the highlights from the quarter. We had a strong first quarter with a solid increase in revenue and adjusted operating margin. The COVID-19 impact to the quarter was relatively small and concentrated in China. However, during March, the impact accelerated as containment measures implemented in Europe and the Americas quickly took effect, while China on the other hand began to reopen. Given the rapidly changing business environment and the economic uncertainty surrounding the pandemic, we are withdrawing our full year 2020 guidance. SPX ended the quarter with a strong balance sheet and liquidity position and we believe the company is well-positioned to manage through the current situation. Turning to our adjusted results for the quarter. Revenues increased 3.9% from the prior year to $365 million and EPS was $0.62, an increase of 21.6%. We experienced revenue growth in our detection and measurement and engineered solutions segments. This growth was partially offset by lower HVAC heating volumes associated with warmer winter weather compared with a much…

Thanks, Gene. I'll start with our results for the first quarter. On a GAAP basis, we reported earnings per share of $0.50. On an adjusted basis, which excludes the impact of the items noted by Paul, EPS was $0.62, an increase of 21.6% from the prior year. Overall, our solid results for the first quarter were driven by our Detection & Measurement and Engineered Solutions segments. Turning now to our adjusted results. Revenues increased 3.9% during the quarter. This included 3.7% growth from acquisitions as well as modest organic growth. The organic growth was driven by our Detection & Measurement and Engineered Solutions segments partially offset by organic declines in our HVAC segment. Segment income grew to $7.5 million or 16.2% and adjusted segment margins expanded 150 basis points. The increase in income and margin were due to higher volumes and margin expansion in Engineered Solutions. Now, I'll walk you through the detail of our results by segment starting with HVAC. For the quarter, revenues decreased 7.7%. An 8.5% increase from the acquisitions of SGS and Patterson-Kelley was more than offset by an organic decline of 15.7% and a modest negative currency effect. The decline in organic revenue was due primarily to lower market demand for heating products. In the first quarter of 2019, our heating business benefited from stronger-than-typical seasonal demand, while during the first quarter of 2020, heating degree days were notably weaker than average historical levels. While the China cooling business experienced lower volumes associated with the COVID-19 virus, this was largely offset by higher revenue in other regions. Segment income decreased by $2.6 million or 14.1% with margins decreased 100 basis points. The decline in income and margin were due to lower heating revenue, partially offset by improvements in our Americas cooling business. In Detection &…

Thanks Scott. As we move through the current uncertain period, it is useful to understand where the demand for SPX's products comes from and how demand has reacted to economic downturns in the past. Looking at a breakdown of last year's revenue, more than half is associated with regulated electric, water and other utilities or government spending. Our products keep critical infrastructure functioning safely and efficiently. The consequences of not having them are high. While nearly 30% of our exposure is to non-residential markets, it is a mix of more cyclical demand, such as office and other commercial construction, as well as more stable end markets, such as institutional and areas that are currently seeing increased demand, such as health care and data centers. Our residential exposure was approximately 11% last year. But is primarily break/fix and break/replace boiler demand, which has historically shown a low correlation with GDP, and a high correlation with winter weather. As we've noted, recent market demand for heating products is down significantly year-on-year, due primarily to the warmer second half of the 2019-2020 heating season. Finally, industrial demand made-up approximately 8% of our revenue and is among the areas that experienced more economic sensitivity. But again, there's a component of replacement and service revenue here, that has typically remained resonant, during downturns. With this background, I think it is helpful to review, how we think about the cadence of our business cycles, in a typical economic downturn, recognizing of course that the current environment is unique. While our early cycle businesses, such as location and a portion of commercial HVAC are experiencing initial declines, the later cycle businesses most notably transformers, exhibit stability and continue to perform with little impact on the results. This is due to customer spending profiles that are less sensitive…

Thanks Gene. We are now ready to go to questions.

Thank you. [Operator Instructions] Our first question comes from Bryan Blair with Oppenheimer. Your line is now open.

Good afternoon, guys. Solid start to the year.

Thanks, Bryan

I appreciate all the color regarding end market exposures and near-term demand sensitivities. Hoping we could focus there a little bit more. If we look at Slide 20, how should we think about run rate sales performance, April rate, second quarter expectations? Scott, I believe you said an organic decline of 10%, net of all these exposures. How should we think about the rates of growth or decline moving from less severe to more severe range of that spectrum?

Yes. I think the purpose wasn't necessarily to show different rates at those levels but more just where they are being more directly impacted. But specific to Q2, as I said, overall, 10% organic decline. You have to offset that with the acquisition growth which would be similar to what we saw in Q1, so around 3%. And then if you look within organic, as I said in my remarks, we expect growth in Engineered Solutions. So you're really feeling the effect of the decline in HVAC in Detection & Measurement, specifically within the commercial portions of HVAC but we're also seeing recovery in our Asia Pacific business, China specifically but that's a smaller piece of our portfolio and in our locator business. So those are – the organic growth in Engineered that's always a modest lower single-digit type of a number, so then you kind of back into the combined organic decline across the other two.

Yes, that's helpful. Thank you. And any additional insight or directional guide you can offer on Detection & Measurement project timing, over the near term and how that factors into the incremental decremental range you put out there?

Yes. I think we feel good about the project timing, specifically when we talk about – you're talking about transportation and communication technologies most – where the biggest piece of that project is. The thing that we're watching is really customer access, their ability to take acceptance of shipments or come in and do final inspections. Those are the things that could probably impact it the most but we don't see that as certainly an issue for the near term. It's more of a – could something in Q – expected with Q2, expected with Q3 or even potentially things that we're looking to execute in Q3 come in earlier. So it's a little bit – with all the disruption that's going on right now, it's a little hard to really accurately pinpoint that.

Got it. Okay. One more if I can. Any color you can offer on commercial boiler trends and COVID-19 impacts? I know that's not yet a major product line for you but it has been a nice growth initiative. Just wondering how that's trending.

Yes. I would say, if you look at our commercial business for – there is a portion of that that is typically linked to new buildings where there's typically a longer lead time. And we don't see much impact at this point in time. There's also a portion of a break/fix. We are upgrading older boilers. We would expect to see somewhat of a similar impact on our commercial boiler business as we do on our commercial cooling business. They have we think similar drivers. So we would expect some modest impact there but not a significant or severe impact there.

Okay. Thanks, again.

Thanks, Bryan.

Thank you. Our next question comes from Brett Linzey with Vertical Research Partners. Your line is now open.

Hey, good morning, guys. I appreciate all the extra color you gave.

Hi, Brett.

Just a finer point on cost actions. What is the size of the savings that you currently have in hand from some of the discretionary actions you've taken? And then just thinking about some of the modularity or perhaps the variability of the market outlook, how large of a bucket of actions do you have kind of at your disposal as we go forward here?

Sure. I'll take that one. So what I'll say is when we're looking at this we've obviously taken the actions here in Q2 and have I'll say a playbook of actions we can take. One of the keys though is when you look at what actions we would take it's not necessarily every action would be taken across the enterprise evenly because as we said we have businesses like transformers that is growing and healthy and need support for expansion. And that's obviously a very sizable part of our earnings profile that we want to continue to support versus other sides and we talked about locators and partial – and portions of the HVAC commercial side of the business and the heating side, which is more weather-related really unrelated to COVID. It just happened to be same time frame. We're taking – I will say we're taking further actions than kind of the rest of the business. So it's a playbook of actions to take based on the severity that we see for the businesses, but it's not applied equally across all businesses. So that said, we've taken the actions here in Q2. We put it in place. We're really looking to see how we're going to be exiting. What's the evolution of treatments, identification, tracing? And kind of as the economy start opening up, how can they stay opened? I mean those are going to be a lot of the big indicators along with our order books of what the second half and beyond could look like. But if we were to keep the actions that we have in place and extend through the balance of the year, we feel like just in 2020 they would be in the neighborhood of $15 million to $20 million of cost reduction from kind of our LTM Q1 position.

Okay. Yeah, perfect. And then just coming back to March-April trends, whether its orders or sales, are you able to provide some order of magnitude of what that range looks like? And I would assume that what you're seeing in April is informing that down 10% or are you expecting some improvement in May and June?

It is. I mean I would say that of -- coming into April or so far in April, we're trending as we would expect and kind of aligned with that 10% decline. And you're seeing it in -- for the HVAC businesses within the Americas and within EMEA, but seeing a sharp rebound back in China. It kind of looks like that was more of a pause and it's getting a sharp recovery here in the month. And then we are definitely seeing it in the locator businesses. The other businesses, it's looking month-to-month on the project side of those businesses. And quarter-to-quarter, it's not as relevant. On a year-over-year basis, it's more from our expectation. And I would say things are progressing along with our expectations there. And then we're seeing good activity within Engineered, but looking at the quarterly activity for right now is less relevant because of our backlog coverage that goes out through the majority of this year and into 2021. So orders now are largely 2021-indicative, not 2020-indicative.

Yeah. The way I think about it Brett, is Engineered is holding strong on bookings and a good portion of Detection & Measurement is very steady and we're seeing nice activity there. The one exception would be the location business where -- which is our shortest cycle business is where we've seen the most significant impact. And then in HVAC we're having some modest some modest impacts there.

And maybe just sneaking one more. Thinking about the front log in HVAC what is your visibility? I would imagine there's some delays and it's tough to get to work sites and whatnot but, if this does open back I mean are there projects that are just delayed and underway but continue? And then just thinking further into the second half in 2021 how the pipeline looks in HVAC?

So, HVAC I'll kind of break it into the two pieces of how we think about it, so cooling and then heating. So really on the cooling side, as a reminder, that's approximately half new, half replacement, the replacement revenue always seems to be there. It actually is very, very steady throughout different markets. The new build is influenced by the Dodge Index. So like if you were to see a really big recession, you could see a decline in demand. Now we are typically later in the cycle. So typically from the time of new building, we would get the PO around seven minutes -- seven months later. So there would be a delay. So for buildings that are in process and funded are being constructed, we would expect that to go for some period of time. But in looking at this on that portion of the business and looking at the HVAC cooling, the -- and again this is a unique circumstance, but the peak to trough decline in our cooling business is approximately 15% in the 2008 recession. So if we do go into a bad recession, you -- it would be reasonable to assume a similar demand profile as that. On the HVAC side, it's different.

Heating, yes.

I'm sorry. On the heating side, it's different because it's really driven much more by break/fix and break/replace. We think that's north of 80% of the demand profile. And we are innovating new products. We are broadening at different portions of the market, but that is very, very steady. And I would say for Q2 and Q3, you have a little bit of what I would almost call artificial demand. That's where people are doing their stock-ups. The distributors get some discounts to stock up in Q2 and Q3. And if there are liquidity concerns within our customer base, you could see a little bit of suppressed demand there, but really the demand is driven by break/fix. And so, we wouldn't anticipate that to evaporate, but you could see some timing shifts there. So I don't know if that's helpful, but that's how we think about.

I would just add to that and talk about the heating. When traditionally -- or historically I should say, when we come off of a weak, kind of, that Q1 shoulder heating season when there's weak demand in that portion of the season, it's natural and it's the trend that the channel is more conservative in their buying behaviors during the Q2, Q3 time frame until you get to the more natural demand coming through in Q4. And so we are experiencing that. We expected that. And I would say it probably is a little bit more exacerbated now in the current environment just given the macro and the concerns around liquidity throughout -- by everybody.

Okay, great color. I appreciate it. And congrats on all the efforts to navigate the situation. That’s all. Thanks guys

Thanks, Brett.

Thank you. Our next question comes from Joe Mondillo with Sidoti & Company. Your line is now open.

Hi, good afternoon, everyone.

Hi, Joe.

Good afternoon.

So the HVAC business just in terms of the quarter, how would you describe, how much the organic decline was related to the warm weather and the boiler business? And then how much would it be related to the COVID effects?

It was -- yeah, the vast majority of it was related to the heating side of the business and the weather. There was about $4 million of impact in -- from COVID in China and…

In cooling.

…in cooling, yes. And -- but really from an overall HVAC, the predominant driver was -- for both the revenue and the margin performance was the heating demand. And remember that really was coming off a very, very high comp for Q1 of 2019.

Okay. And I don't know if we can get this granular, but just in terms of in the month of March and as we've entered the month of April, the HVAC business overall, could you -- I don't know if you want to quantify anything, but could you describe what you saw towards the end of March into April in terms of decline of activity?

Just -- I'll just pick up from where we were just talking. I think what we started seeing is in China you start seeing the recovery, in our China cooling business where it was very down significantly in Q1, but it's come back sharply here from an order perspective in the early parts of Q2. And we're seeing -- I would say, the reverse effect of that you started seeing declines in the Americas, which is our largest portion of that group. And we're continuing to see declines there as Gene just mentioned. And then on the HVAC heating side of the business, it's really the weather behavior that I just mentioned.

Okay. And are you -- what about bookings? Are -- have bookings, sort of, dried up or had an effect here too, or are you continuing to book out for the rest of the year?

My comments actually were around the bookings trends, the orders trends.

Okay. And just in terms of commercial HVAC, do you have any visibility to see -- with the shutdown, and I mean I imagine a lot of this is related to shutdowns in the second quarter, job sites being shutdown. Do you have any visibility into thoughts on a recovery in the back half of the year relative to where we're at in 2Q?

I think it's too many uncertainties there, which is part of the reason why we pulled the guidance is just not sure to be able to see what that visibility is. So we just try to give some sense for Q2 and what we're seeing in the immediacy of what we see in front of us.

Okay. Can I ask this though? The month of April, do you think that will be the trough, or is the visibility still that unclear that you're not sure?

I mean our hope like everybody is that things get under control here over the next two months. And if we get better testing, we get better some levels of treatment, the opening up of the economy show that that can be managed. And the economy can stay open. It doesn't have to shut back down. And then we can get back to some level of normalcy. But really like everybody we have to see that play out here. And it's just such a fast-moving animal that we're dealing with that the next two weeks, two months, it's hard to predict. So I think we – well, obviously, when we're back together here talking about our Q2 results, we'll have a position on what we think for the second half.

Okay. You mentioned what the peak to trough was in the commercial HVAC business back in 2008. I was wondering if you know, or if you would like to share what the Radiodetection business did back then? I'm just curious of how cyclical that business could be?

Sure. And just Joe to be clear with you the peak to trough that I did mention there was really on the cooling side, so that's -- which is predominantly all commercial or B2B variety of customers there. Radio, I believe the peak to trough was in the neighborhood of 20%?

On a constant currency basis.

On a constant currency basis. And the rest of the Detection & Measurement portfolio actually grew during the recession. So the one area that we do see real impact that's shorter cycle is our locator business or our Radiodetection brand. But as we've talked about many times over the years we do have a lot of asynchronous drivers of demand and a lot of those are really regulatory-driven in our Detection & Measurement business. And we think that those tend to hold up pretty well and are not directly correlated with GDP. So that's where we were with Radio in the last recession.

Yes. I think it's fair to say, we've been consistent in saying Radio definitely kind of follows global GDP and that's definitely what we're seeing. And then in the transportation, communication technologies businesses they have different drivers. Those are kind of micro market drivers that don't necessarily follow GDP. That's what we saw back in the recession -- the 2008 recession and that's what we're seeing now. They're not going to have to be the exact same. There's obviously differences in there but we just point that out to say they are acting similarly. The ultimate -- how high or how divergent they are to the GDP will play itself out.

Okay. And then just one quick question on the cost restructuring that you're doing. When were these initiated? Because I don't think I saw -- maybe I missed it but I...

Yes. These are -- we have not taken any restructuring actions. So these are all temporary in nature. So it's really a curtailment of what we said all non-essential spend. So whether it's travel spend, whether it's project-oriented spend, CapEx spend anything that's been temporary in nature or discretionary in nature we put the lock on. We restricted headcount additions. There have been certain areas where we've done furloughs, but that's on the exception but -- so that -- it's those all more temporary-type activities. And of course, partial within there is our -- your STI program works on a predication of growth. We're not showing -- we're not anticipating that right now. So that has a moderation effect as well.

Okay. Okay. And I guess just to follow up on that what would -- I guess you would need to see more of a trend of declines in the economy or whatnot to make an initiation to restructure a little more aggressive because a lot of companies that we've seen have gone about doing some restructuring already, but I would imagine maybe that's related to the fact that you are so asynchronous. And maybe even if you're -- even your cyclical aspect of the company even that is actually tied to later cycle commercial non-residential, which could come back in the back half of the year. Is that, sort of, the thinking behind not making a bigger structural change at this point?

Yes.

Yes Joe. I think you hit the nail on the head. Most of the most severe impacts are in some of the other -- some aerospace automotive retail things like that that we really don't have a lot of exposure. We do have a different set of demand drivers. But if we were to see a severe and persistent recession to come we would be very well-prepared to address that.

Yes. We're just -- I would say right now you're right. We're trying to wait and see how things play out and to see if we think that this is a deep extended type of situation or is this going to be something a little bit shorter term? I'm not saying it's going to be a V recovery. Nobody believes that. But our priority is to help manage our workforce through this unprecedented time and try to take every lever before we have to go down to those permanent reductions.

Okay. All right. Thanks a lot. Good luck.

Thank you.

Thank you.

Thank you. [Operator Instructions] Our next question comes from Damian Karas with UBS. Your line is now open.

Hey. Good evening, guys.

Hi, Damian.

Hey, Damian.

I think we covered a lot of ground. Most of my questions have been asked, but I appreciate all of the detailed portfolio analysis across your businesses. Scott just a clarification, I think you alluded to about $15 million to $20 million or so of possible cost takeout if things got worse. It sounded like that was, sort of, the I guess the total number. But in terms of the non-essential discretionary stuff how much of -- have you actually executed already that we can think of will flow through earnings this year?

Yes. So I was trying to give the -- what -- that is the range that would be the impact of this year -- impact this year just as a kind of, I would say a full year effect of the actions we have in place as of right now. So if we were to continue this type of lockdown and we don't see a benefit -- an improvement in the near-term that would be the effect that we can get this year, and then there's further actions we could still take -- I would say further temporary actions we could take to go further. Obviously, you'd get a Q1 effect as you start going into 2021. And then if we see it going longer that's where we would be looking at potentially having to rightsize -- take rightsize actions.

Okay, makes sense. Thanks for clarifying. And then I wanted to ask you guys about transformers. I get that it's a little bit longer lead time. You guys are typically operating kind of nine-plus months type of lead time in there, but you've kind of had this period where we're running, I mean, 18 months two years where you've seen very strong growth in transformers. I mean, double-digit, high single-digit double-digit. I'm just wondering is there something to that fundamentally going on? Are you guys gaining share? Is there something changing in the pricing environment? Because that seems a little bit like outsized growth relative to how you guys have characterized that business that would, I think typically be more of kind of a low single-digit GDP type grower.

Right.

And I guess kind of as an add-on to that, I mean, you see the visibility there for the rest of the year and your order backlog for transformers. Is there any reason -- I know you pulled guidance across the business, but is that the reason why you wouldn't be able to hit that 8.5% ES margin this year?

So let me start and Gene will jump in. I think it's helpful to kind of maybe go backwards a little bit about the performance of the transformers over the last several years. If you go back even 2016, 2017, the business was performing extremely well. We're kind of double-digit EBITDA in the business even low double-digit EBIT. And then we had a challenging 2018, that carried forward into 2019 in Q1 a little bit, and that's why you see kind of this comparison point of Q1 to Q1 is really not -- you'd do better to compare Q4 to Q1 to see the sequential, because we did have sequential improvement in the operations of the business throughout 2019. Just given the lead time of that business it takes -- it is a little bit of a lag to see it come through the financials, but we did see that through the Q2 forward in the business and then it's continuing on. And in my comments when I talk about operational I think there's a natural thought about just thinking within the four walls of the plant and that obviously is doing improvement, but it also includes our pricing approaches and disciplines. And so there's been a lot of improvements there, a lot of improvements that are trying to be price leaders in the market and given the strength of our backlog our ability to be selective in the market around the types of units that we are executing on. So it's a host of things that we're seeing the improvement on. And we're pleased to where the business is. It's performing extremely well. And we do have good visibility and customer confirmations around the forward demand. So we are feeling good about where we are in this year. Now could there be things out there that could change that? Of course, but right now we're feeling pretty good.

Yes, Damian. I'd just add that we think that market is healthy. If you track some of the public utilities Southern Company reported today and actually confirmed their CapEx. And as you know a lot of these rate cases that they put in place are three to five years in duration. And we have a lot of relationships with a lot of these large players. So we feel really good about the prospects the demand prospects of that over the next several years. On your question about market share and other areas, I do think the team is executing really well. And they are growing -- as you remember, we're very strong in medium power and we have a lower market share in EHV and high voltage. We are expanding that. We are growing that. And we are seeing some indications of some customer preference moving towards more domestic manufacturing. Now as a reminder the large was typically a lot of that is imported from Germany and Europe, but we're seeing some potential shifts there, which could be an opportunity. But the team's done a nice job, and we feel good about that business and the forward prospects there.

That's great. Thanks for all the color. And good luck.

Thanks, Damian.

Thanks, Damian.

Thank you. I am not showing any further questions at this time. I would now like to turn the call back over to Paul Clegg for closing remarks.

Okay. Well, thanks all of you for dialing in. Everybody be safe. And we look forward to talking to you again next quarter. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.