Ladies and gentlemen, thank you for standing by and welcome to the SPX Corporation Third Quarter 2020 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference to your speaker today Paul Clegg, VP, Investor Relations and Communications. 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 Jamie Harris, our Chief Financial Officer. A press release containing our third quarter and year-to-date 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 November 5. 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, amortization expense and investment gain and one-time costs associated with acquisitions. Finally, we will be conducting virtual meetings with investors during the fourth quarter, including our participation in the Baird Annual Industrial Conference on November 12th. And with that, I'll turn the call over to Gene.

Thanks, Paul. Good afternoon, everyone. Thanks for joining us. I hope that all of you and your families have remained safe and healthy. On the call today, we'll provide you with a brief update on our overall results and segment performances for the third quarter. We'll also provide updates on the current environment and our view of the key variables driving the remainder of the year. This is our first call with Jamie Harris as our CFO. Jamie joined in mid-August and he is already an invaluable member of our team. Jamie brings a strong background and record of success in strategic planning, continuous improvement and growth. Jamie, welcome to the team.

Thanks Gene. I appreciate the kind words. I have already had the pleasure of meeting many of you who are on the call today and look forward to meeting more of you over the next several weeks. I have thoroughly enjoyed my two plus months at SPX. I really like the culture, the people and the business opportunities. I look forward to the future of our company.

Thanks Jamie. Now I'll touch on some of the highlights from Q3. I'm very pleased with our third quarter performance, which shows continued strong execution by our team despite pandemic related headwinds. During the quarter, we took another step in our growth journey with the acquisition of ULC Robotics in our Detection & Measurement segment. Looking forward, we anticipate a solid level of earnings and cash generation for the fourth quarter. On a full year basis, we now anticipate our earnings to be modestly above the prior-year level. While the pandemic initially slowed some of our M&A activity and continuous improvement initiatives, we are now actively pushing ahead with these programs. I feel very good about where we are today as a company. Looking across our businesses, we have a strong team and the right resources in place to continue executing our growth journey in 2021 and beyond. Turning to our adjusted results for the quarter, both revenue and operating margin were modestly higher than prior year levels. The benefit of acquisitions and a strong performance in our HVAC and Engineered Solutions segments, more than offset headwinds in our Detection & Measurement segment. I'm very pleased with our adjusted EPS of $0.64 or nearly 7% above the prior year. On a year-to-date basis, our performance remained strong with a growth of approximately 9% in adjusted operating income. As we did last quarter, I think it is helpful to discuss the current environment, as well as what has changed since our second quarter earnings call. First, our facilities continue to be operational and our safety protocols have been effective. We continue to maintain close communications with local health officials and engage in a continuous review of our processes to identify and implement any enhancements till the COVID situation evolves in our…

Thanks Gene. I'll start with our results for the quarter. On a GAAP basis, we reported earnings per share of $0.49. On an adjusted basis, which excludes the impact of the items noted by Paul, EPS was $0.64, which represented a 6.7% increase over Q3 2019. A result we were very pleased with, given the uncertainties in the macroeconomic environment over the past several months. Overall, our solid results for the quarter were driven by strength in our HVAC and Engineered Solutions segments where we saw growth in both revenue and segment margins. This was partially offset by pandemic related declines in our Detection & Measurement segment. The company's adjusted revenue was modestly higher than in the prior year, a 2.4% reduction in organic revenue was more than offset by the benefit of acquisitions and a currency tailwind. Segment income increased $2.4 million or 4.7% and segment income margin rose 50 basis points. Given the headwinds associated with the current environment, we are very pleased with these results. Now, I will walk you through our segments in detail. Starting with HVAC, revenue increased to 10.3% including organic growth of 4% and 6% from the Patterson-Kelley acquisition, currency with a modest tailwind. The organic increase was driven by stronger international cooling sales, partially offset by lower domestic cooling and heating sales. Our cooling team did a great job of executing on our backlog, including processing several orders during Q3 that were originally anticipated for Q4. Adjusted segment income rose by $4.7 million and margin increased by 160 basis points, as a result of the higher international volumes, strong operational execution and a more favorable product mix in our domestic cooling business. Looking ahead into Q4, we would expect a mid to high single-digit percentage decline in year-over-year revenue, with lowering --…

Thanks Jamie. Overall our end markets continue to reflect the resilient nature of our portfolio. In HVAC, we are pleased with the performance of our non-residential business on a year-to-date basis. We are well positioned with significant amount of replacement revenue in the diverse mix of end market exposures, however, as noted, we are seeing continued sign of moderating nonresidential order and quote activity. With respect to our Heating business while it's still early, current trends in order patterns for Heating are stable and winter weather remains a key Q4 driver. In Detection & Measurement, Locator demand has rebounded significantly, especially in China. We continue to see solid frontlog in our project-based businesses and movement on delayed orders in communications technologies, however headwinds associated with travel and access restrictions have not fully abated and project timing remains a key area of focus. In Engineered Solutions, we continue to see largely stable transformer customer behavior and solid backlog. In summary, I'm very pleased with our strong performance for the quarter and for the year-to-date period. Despite this challenging environment, we expect full year earnings to be modestly higher and anticipate ending the fourth quarter with a strong balance sheet and liquidity position. While our growth and margin enhancement initiatives were temporarily slowed by the pandemic, we are now on track to make significant strides over the coming year. We are well positioned to drive substantial value for our shareholders, including through the deployment of capital to accelerate our growth in 2021 and beyond. I'm very excited about the path in front of us. I believe we have the right plan, the right resources and the right team to continue our successful value creation journey. Now I'll turn the call back to Paul.

Thanks, Gene. Operator, we are now ready to go to questions.

[Operator Instructions] Our first question comes from Damian Karas of UBS. Your line is open.

I wanted to ask you about the HVAC statements and the guidance is sort of a mid-single digit to high single-digit decline in the fourth quarter there and noted a couple of items such as the pull forward of some projects and then you have some tougher comps seasonally versus last year. I'm just wondering, if you were to sort of strip out those, those one-off -- can you give us a sense for what the kind of normalize, underlying growth rate is? And as you kind of think about where we might be next year, obviously, I think Dom, our people feel like we might be in for a slower non-res environment for some time here, so maybe you could just give us a sense on the underlying rate there..

Yes. Damian, let me take a crack at that. So I think, it's a good question, I think we're very focused on the non-resi market. It is a reminder, you know that we are very balanced in terms of replacement versus new build in our segment, but as you look forward to 2021, the biggest market indicator that we've always talked about is the dodge index, and if you look at the various market industry analyses, you're seeing an expectation for, I would say, a modest decline in 2021 in terms of the market demand profile -- the -- if you look at it across the different prognosticators, you probably get a mid single-digit decline and I'm really talking about the U.S. here. As a reminder, in our cooling business, we also have an international business, which is about 50% of the size of the, our US operations, but when I look at it and what we are seeing for 2021, we would expect to do better than the market. If I look at our geographic mix, I look at our product introductions, I just look at where we are, I would say and again, we're not giving our guidance today or anything like that, but you know, we would expect 2021 to be, I would say flattish, is with all the data we have available to us today. And that's kind of how I think -- that's kind of how we're thinking about things and really in the non-resi segments what I'm talking about here. And Jamie, do you have anything you'd like to add on Q4, if you.

Yes, the only thing I would add to that in Q4, as we talked about in the script in the call, yesterday -- you called it earlier -- we did have some pull forward with some of our projects that brought some dollars into the third quarter that we were actually expecting in the fourth quarter, and if you go back to the earlier part of the year as the pandemic hit, we had a lot of orders on the books, we've seen those flow through and as we're six months past the beginning of the COVID pandemic and yeah, we are starting to see what the order book looks like as a result of, maybe a six month lag, which is typical in that business.

And then Gene, you talked a little bit about getting back to the operating initiatives, which kind of have been on pause due to the pandemic. I was wondering if you might be able to give us a better sense on the LEAN and other opportunities you're speaking to? What kind of margin opportunities exist? And when I look at that incremental margin framework that you have for the three segments, does that kind of bake in your LEAN and Business System initiatives or would that sort of be an incremental opportunity above that?

Yes, it's a good question, Damian. I think the way that I think about it is, from the time we spent to where we are today, we've driven our EBITDA margins from approximately 6% to approximately 13%. So we're sitting in low-teens, right now. We really want to get that the high-teens. And we believe we can do that and really the primary way for us to do that I believe is through RCI initiatives. At the end of the day, we're all in competitive businesses, we all have inflationary pressures. If you are not doing CI, you're actually going to be moving backwards. But the way that I think about it at a high level framework is we push all of our businesses to expand their margins 50 basis points a year, and in order to do that, you just can't do it on your good looks right, you have to have a plan, you have to have a strategy and we actually think LEAN and AD-20 are the best tools for us to really drive value. Now, if I look at where we are today as an enterprise, I do believe we have built a really good business system and how we run the company. Everything we do from our planning, to our strategy, to our goal deployment, our KPIs, the integration processes have been excellent. And I would argue that's really a best practice and what we're really focused on doing, is bringing in the CI leg to our business system. it's a cultural change, the tone at the top, it's how you behave, it's how you act, it's how you reinforce it, it's not something that happens overnight, but it's a process and we actually are very excited about this journey. So, yeah, so I think COVID, frankly we had a lot starting at the beginning of this year, which COVID took a lot of our programs and slowed them down due to, frankly due to travel. And you can't do as much training, you can't do much as travel but we feel good about our direction and it's something you're going to hear us talking about a lot more. But then again, we haven't put a number in there, but the way I would think about it, Damian, is we have to do this to drive our margin tire and this is the primary tool and not enough. Jamie, Paul, you guys have, anything else you'd like to add there?

Damian, this is Paul. I was going to add to your prior question, get a couple of things in there from a modeling perspective, it may help you out here for the fourth quarter. Number one, just a reminder that we did do the PK acquisition in mid-November last year, so that's around -- let's call that around $5 million plus or minus of revenue, that would be inorganic in the fourth quarter. And then, you asked about the timing of the shift in cooling between 3Q and 4Q. And that was around $10 million on the international...

And Gene, for the record, I think Scott Sproule would probably argue that he could get your 50 basis points a year, margin expansion on good looks alone. But I think that's enough for the day. On that note, I will get back on the queue. Thanks guys.

Our next question comes from Brett Linzey from Vertical Research Partners. Your line is open.

Just wanted to come back to D&M in specific on the Q4 outlook, it sounds like there is some timing in moving around. What is your level of visibility on those deliverables? I mean, are they taking order really into October here and what particular businesses gives you the confidence that snaps back in the fourth quarter here?

Brett, this is Jamie. So a couple of things as we talked about for Q3 are communication technologies business, we had some projects that is -- as we go through the government approval process and delivery. The folks not working, made it a little bit more difficult to get approved, some of the travel restrictions of getting the deliveries made. We at the end of the third quarter, really began to see some projects begin to move through the platform, move through the system or through the network. As we've entered the fourth quarter, we see that continuing to happen. As we look at our book right now, we have really no concerns about the amount of business that we have. We do have questions about timing, just by definition with the process that some of our governmental orders go through, it just takes time and with a lot of the folks in the approval process not at their offices it probably takes more time than historically has. That being said, we actually feel really good about the business and some of the activity that we're seeing, we don't see an issue with funding. We don't see an issue with demand. And so it's really more of a question of timing, might some of the projects bleed from Q4 into Q1 possibly. But over the period of the next couple of quarters we certainly think, we will see the shipments come to pass. On our radio business, which is our Locator business, we saw some catch-up from Q2 that resulted in Q3. So it was actually a comparable quarter in that business. That is one of our more short cycle businesses, so it was one of the quicker ones to save a track during COVID but it was also one…

Okay. Yes, thanks for that. And then maybe just shifting gears to Engineered Solutions, the down low-single digits and this is really kind of a Q4 but even into next year. What are the expectations for Transformers and Process? Is the complexion similar in Q4, both kind of trend down here? And then specific to Transformers, anything you could add on to lead times, it sounds like pricing is better, but it is maybe visibility in early parts of 2021?

Yes, I'll take a pass at that as well. So Engineering Solutions has done extraordinarily well this year, have been one of our really strong points of a resilient part of our business during the pandemic. We ended the year with a good book of business, we enter next year with a good book of business. If you go back to Q4 of last year, a lot of the -- some of the pricing activities that we saw flow through the first three quarters began last year in the fourth quarter, some of the operational and some of the mix improvements that we made, we saw in the fourth quarter of last year. So the comp of last year included a lot of the operational and pricing improvements that we have benefited from in the first three quarters of this year. As we look into next year, we do see a modest organic decline we see maybe a modest margin decline. But that being said, we still think we have a lot of opportunities for that to be a solid contributor and as Gene said, this is one of the opportunities, I think that are continuous improvement. There is a lot of dollars there that that the LEAN process, AD-20 process will be very well suited to help us gain some margin improvement there as well.

Our next question comes from Bryan Blair with Oppenheimer. Your line is open.

Doing well, thanks. Great to see the continued recovery in locator demand and something we could drill down on that a bit. What is in the cadence of that business, month-by-month? And what are you seeing in early Q4? I was wondering how locators impacts the Q4 guide.

I'll take a crack at that, Bryan. I think as we talked about on the really the Q1 call, the Q2 call, on this call and as Jamie had highlighted that is our shorter cycle business. So when the pandemic started, we saw that very, very quickly. And so that was the first to really have the demand impacts, but since that, we really started seeing in March. But since the downturn sequentially every month has been improving and as Jamie had alluded to or had mentioned, Q3 was really comparable to Q3 of last year and now we did benefit from a little bit of revenue was closed down in Q2. There might have been a little bit of a catch up there, but sequentially we're seeing nice solid strength there. Having said that, I would caution as everyone would -- there is a global, shut down or -- we always have to keep our eyes on that. But what we see today is very positive and that sequential continuous sequential improvement has continued even up to this point today.

Okay.

I would just point out that we did have a very strong fourth quarter in locator in 2019.

And ULC seems like a great fit with your portfolio. If we think about financial profile, how should we think about modeling near and longer term growth rates? And I guess same question on margin trajectory.

So why don't I start there. One of the things we talk, I know you're right, that is a great fit for our business, as you know CUES is tethered robots that go underground up to 1500 feet, that there really manages, remediates and fixes water and wastewater lines. These are tethered robots that go underground and do the same for gas lines. So it's a really comparable business. The -- we do think this is a really nice addition to us. There is two parts to that business. One is their core what I'd call robot-as-a-service business, which is about three quarters of the revenue and then there is their R&D business, they actually -- one of the things, it's really unique about ULC Robotics, is they solve problems that have never been solved before. So for example their sysbot, robot is the only robot that we're aware of in the world that can do this. And so we have a really nice situation where that solution has come out of their R&D. They have a wide variety of R&D projects they have underway right now but that's about a quarter of their business. But roughly speaking we think that, that is in the neighborhood of a $40 million business. We think the margins are higher than our D&M average. I don't know Paul, exactly what -- we're comparable to higher.

Yes, higher.

And then we would expect the growth rates to be higher. So if you think about our Detection & Measurement, that's a growth rate we believe on average around 4%. We would view this to be a little bit higher than that, modestly higher than that as we think about that going forward.

Appreciate the color there and Jamie, you have been in your seat for a little while now. Curious what if anything has surprised you about SPX and what you think some of the best opportunities are for the company going forward?

Yes, great question. But it's surprise wise it's, this is a great company first of all and so I think the things I like about it before I came and its been confirmed, since I've been here, it has a great can-do, winning culture, which I really love, everybody works together, very collaborative. Gene set of a great team. I mean that is at the ELT and everybody that we've worked with had been so so welcoming. We have a great diverse set of businesses here. We do -- we serve many different end markets, which gives us a nice blend of diversity. As has been evidenced by the last two quarters, the Transformer business, as an example to emerge as such a resilient business during the pandemic, to offset some of the decline we saw. So in the short-term for Detection & Measurement has been really nice to see how the portfolio works together. We have a great balance sheet and we have an ELT and a Board, who want us to use it wisely. They want us to invest it wisely, which I think is exciting. Gene talked about CI and the LEAN projects or the AD-20 programs, I think that can be a real earnings boost. It can be a greater efficiency, that can be a great customer service tool where we can diversify our -- differentiate ourselves to the customers, so that we can be a preferred supplier, as well as seeing it go to our bottom line, back to balance sheet. We have a large amount of opportunity Gene has mentioned that the pipeline is strong on inorganic growth, but we also have from what I've seen a lot of channel opportunities, a lot of product segmentation opportunities and so there is -- I think…

Our next question comes from Walter Liptak with Seaport. Your line is open.

I wanted to ask about the D&M business and specifically the comm-tech, it's nice to see those order delays starting to loosen up a little bit. I wonder if you guys -- are you guys saying that there is, just a few orders that have started to loosen up that you have visibility to now or is it -- have they have they figured out the government regulators or approval process. Have they figured out how to work in this new normal and get more of those projects moving forward?

Yeah, I would say probably a combination of all of the above, that you mentioned. I think certainly figuring out or learning how to process during this environment is a key, I think not coincidentally, we just passed, the end of last fiscal year and the beginning of the new fiscal year for the Federal Government and given that particular segment has so much of our customer base that relies on some type of federal funding. Moving into a new budget year, I think it's important as dollars are used up in the old fiscal year and reappointed or re-portioned in the new fiscal year. We are not just seen a couple of orders, we are seeing, I would say, a normal flow of orders. That business has -- it has a number of smaller orders, but it has a couple of large ones that will come through, I think the company called that run rate, we have had some run rate business that are the smaller items, but I think it's, -- I think we're seeing a normal frontlog as we look into the year. The question is what are the steps that we have to go through to get them shift. And yeah, I think it's -- that business being a project-oriented business getting better visibility and having better visibility now than we probably did six months ago gives us a lot of good confidence.

Okay. And thinking that these have been delayed for a while, are the margins still solid in that business, or has there have been some degradation?

I mean, I think generally speaking, they're very similar, it doesn't necessarily show up in the P&L because we do have a fixed cost structure there but over the long-term, as shipments balance out, we haven't seen any really decline in the margin structure thus far.

If I can try one in the heating season, your understanding with your heating businesses is replacement. But we've seen this kind of resurgence in residential spending, could we see a better than normal replacement cycle this year?

We could Wal and I think as we go into heat season, the way we think about that market is, it's a big steady market it grows some every year probably low-single digits to mid-single digits, and just normally, organically and then as always the big driver will be weather. Right? A really cold winter could expand the market by 10% or really warm winter could shrink it by 10%. So we're always keeping our eyes on the winter, on the Heating Degree Days, both the number of them then also when they hit. The earlier, they all have a benefit to drive up demand. So those are the things we're keeping our to keeping our eyes on. The other thing I would say you want to make sure that there is not overstocking or under stocking and all that information we have today is that there is pretty balanced inventory in the channel. So going into the heating season, we actually feel pretty good. We also like our products. We launched a really nice Ecotech product that we think has a great value proposition. So yeah, we actually feel good about the trajectory of that business and where we are going into Q4.

Thank you. And I'm showing no further questions at this time, I'd like to hand the conference back to Mr. Paul Clegg for any further comment.

Okay, thank you all for joining our call and we look forward to catching you up again next quarter on our accomplishments. Please stay safe. Take care.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a great day.