Good day, and thank you for standing by. Welcome to the Q2 2023 SPX Technologies Earnings Conference Call. [Operator Instructions]. Please be advised today's conference call is being recorded. I would now like to hand the conference over to your speaker today, Paul Clegg, Vice President, Investor Relations and Communications. Paul, please go ahead.

Thank you, operator, and good afternoon, everyone. Thanks for joining us. With me on the call today are Gene Lowe, our President and Chief Executive Officer; and Mark Carano, our Chief Financial Officer. A press release containing our second quarter 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 the webcast will be available on our website until August 9. 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 from their respective GAAP measures in the appendix to today's presentation. Our adjusted earnings per share exclude primarily acquisition and strategic transformation costs, non-service pension items, mark-to-market changes, amortization expense and certain discrete tax items. Finally, we will be conducting meetings with investors over the coming months, including at the Seaport Global Virtual Conference in August and at the Jefferies Industrial Conference in New York in September. And with that, I'll turn the call over to Gene.

Thanks, Paul. Good afternoon, everyone, and thank you for joining us. On the call today, we'll provide you with an update on our consolidated and segment results for the second quarter. We'll also provide an update on our full year guidance for 2023. Our Q2 results were outstanding. This performance was driven by overall demand strength across our end markets and strong execution, particularly in our HVAC segment. Considering our strong year-to-date performance and outlook, we are raising our full year 2023 guidance for adjusted EPS to a range of $4.15 to $4.30 reflecting year-over-year growth at the midpoint of approximately 36%. Our success this quarter is in part the result of hard work on our value creation initiatives, which have driven durable improvements, resulting in a new level of margin performance in our HVAC segment. As we look ahead, we see significant opportunities to continue executing on these initiatives to drive further value for shareholders. Turning to our high-level results. For the quarter, we grew revenue by approximately 15% organically with strong contributions from both HVAC and Detection & Measurement. Adjusted operating income grew 64% year-on-year with 450 basis points of margin expansion, reflecting primarily the strong performance of our HVAC segment. I'm very pleased with our Q2 and year-to-date performance and our positioning for the remainder of 2023. With a strong backlog, overall solid order trends and excellent operational performance, I feel confident in our ability to achieve our updated guidance and to continue progressing towards our SPX 2025 target of $5 per share of adjusted EPS. As always, I'd like to update you on our progress and our value creation framework. During Q2, we continued to make progress on several key initiatives. And our new product initiatives, our SPX cooling business introduced a water saving and optimization system called Marley WaterGard, which can significantly reduce water usage in our evaporative cooling products. In digital, we continue to expand customer adoption of our Cues' AI-enabled GraniteNet software, which helps drive significant efficiencies for customers when inspecting and assessing the condition of water and wastewater assets. In continuous improvement, our cooling facility in Olathe, Kansas, is seeing benefits from the optimization of our plant layout and investments in automation to reach new levels of operating margin performance. The changes we have been making are driving durable improvements and our ability to supply more of our customers' needs with greater efficiency while providing higher returns for our shareholders. I'm very pleased with the hard work of our team across the company and see numerous opportunities to continue our progress. And now I'll turn the call over to Mark to review our financial results and guidance.

Thanks, Gene. It was another very strong quarter for SPX Technologies. In Q2, our adjusted EPS grew 49% year-on-year to $1.06. The adjustment from GAAP results covered earlier by Paul, are consistent with our historical practice. Total company revenues increased 19.6% year-on-year, including 14.6% organic growth, with similar increases in both our HVAC and Detection & Measurement segments. Acquisitions contributed 5.3% growth and FX was a modest headwind. Segment income grew by $28.3 million or 50% to $84.4 million while margin increased 410 basis points, driven by a strong operational performance in HVAC. Price/cost remained a margin tailwind. For the quarter, in our HVAC segment, revenues grew 20% year-on-year. On an organic basis, revenue grew 15%, driven by Cooling, while heating's organic revenue was roughly flat. Acquisitions contributed growth of 8.6%, which included a full quarter of TAMCO in our cooling platform and 1 month of ASPEQ in our heating platform. FX was a modest headwind. Segment income increased by $26.9 million and segment margin increased 760 basis points. The year-on-year increase in HVAC segment income and margin has a number of drivers. In our cooling business, we continued to achieve strong plant throughput facilitated by our investments in plant automation and continuous improvement. This favorable operational execution was aided by a high level of backlog and a more stable labor and supply chain conditions. By comparison, in the prior year quarter, cooling experienced headwinds related to supply chain, labor and price/cost that drove lower than typical margins. For heating, segment income margin improved notably year-on-year due primarily to favorable price/cost and channel mix. In addition, our TAMCO and Aspect acquisitions were both accretive to HVAC segment margin. Bookings remained strong despite record Q2 sales, HVAC segment backlog ended the quarter at $337 million, including $31 million from acquisitions. On…

Thanks, Mark. Current market conditions remain supportive of our outlook. Across our HVAC segment supply chain and labor, have been more stable overall, which is helping us to improve plant level efficiency and throughput. In HVAC cooling, we continue to see growing demand for our products in North America and the APAC region. In our heating business, bookings remained steady overall, driven by commercial and industrial demand and residential replacements. In Detection & Measurement, our run rate demand is steady overall, with some regional variations while the environment for project orders remain strong. In summary, I'm pleased with our strong results for the quarter and performance year-to-date. Our focused execution on our key value creation initiatives has helped drive durable gains in our margins and growth profile. Looking forward, I see significant opportunity for further improvements as we execute on our road map. We also remain well positioned to continue investing for growth given our solid balance sheet, strong cash generation and active M&A pipeline. With a strong backlog position and good operational momentum, I feel confident in our updated full year guidance, which reflects approximately 36% year-on-year growth at the midpoint. And with that, I'll turn the call back to Paul.

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

[Operator Instructions]. Our first question comes from Bryan Blair from Oppenheimer.

Another great quarter, I guess.

Thanks, Bryan.

I was hoping you can offer a little more detail on the continued step-up in HVAC guidance. We know the high-level drivers, but curious if you could parse out whether expectations for ASPEQ, which per your deal call coming in $75 million or so in sales contribution, high 20s margin, whether that has increased again now that the asset is in your portfolio or if the incremental lift is on the side of legacy operations or TAMCO or some combination thereof?

Yes, Bryan, I'll run through that. And let's step back at a high level and look at our segment income margins at the SPX level first because we've been applying our business system across the enterprise, and we think it's made a positive impact. If you just step back, 2020, our segment income margins were 15.4%, 2021, they are 16.4%. Last year, we had a lot of challenges with supply chain, labor, PPV, there was 17.1%. We thought that 17.1% was a little bit lower than what it should have been. And where we sit today is 20% at segment income margin. So steady increase, basically 460 basis points in 3 years. So what that says to me is I do believe in our business system, I think it's working, and I do believe our strategy is sound. So if we drill down into HVAC specifically, the way I think about the business is, historically, we've thought about that as a 15% to 16% business. Last year, as we talked about we had a lot of headwinds. And last year, we ended up at around 14.8%, right under 15%. But again, we think a lot of the improvements that we had made in lean and the plant layout some of the investments in automation equipment was masked by some of these headwinds. So if you look at where 2022 ended to where we are in 2023. A couple of things have driven improvement. One is operating leverage. We're having growth. The second is the investments that I've talked about the investments in automation, productivity and lean are really making an impact and are very, very positive for that business, very sustainable. The third would just be the reduction of some of the issues we had last year, labor supply chain, some of those types of items. And then we did add accretive acquisitions, ASPEQ and TAMCO, which we're very pleased about. We think those have structurally brought up our segment income target is probably 100 basis points. So when we looked at it before, we thought 15% to 16% was the right target. Where we sit today, we think 18% to 20% is a very sustainable target for us going forward, the volumes that we see. So we think we've significantly and structurally improved the HVAC business, and we feel good about that. So that would be how I break [indiscernible] that down.

That's very helpful color. The 20% for this year, so that will be the high end of normalized ranges, at least for the time being. Should we see that continue to expand going forward as the platforms that comprise HVAC continue to scale, fine-tuning continues, I suspect that you'll have further accretive deal flow over time. Just curious any incremental color you can offer there?

Yes. And I think one of the things -- some of the things that I think were a little bit of a headwind last year with PPV being negative, we saw some positives this year and are in our numbers this year. So when you look at the obvious question, I think you're trying to get to is what's the right jumping off point. There could be up to 100 basis points of those more one-off type items in this year's results, but we feel very good that we have structurally improved the margins of this segment several hundred basis points. Mark, anything you'd like to add anything here?

Yes. I think to add on to Gene's comments, I mean, from a kind of a price cost perspective because it often comes up, we do believe we're in a more stable or normalized environment, and we believe that's going to be the case going forward. So as you look ahead, really 1 of the key drivers in both sustaining and maybe improving those margins. It's going to be around some of the capital that we're investing in the plant footprint. We're in the early stages of that. We'll continue to do that. You'll see it in our CapEx comments that we've made for the year. And that's really going to -- should make a meaningful difference in the efficiency that you see in those plants, whether that's reducing labor required or just driving increased throughput.

Very helpful. And the evidence of structural improvement is obviously there already. Switching to D&M was -- I guess you called out 2 factors in terms of some margin compression in the quarter and near-term headwinds. Could you quantify the impact of negative mix from the contact pass-through relative to the supply chain constraints within locators and how much both are affecting the relative moderation seems like some conservatism now being baked into the back half outlook?

Yes. Bryan, what I would say on that is really a combination of both. It's probably more heavily weighted to this kind of isolated supply chain issue that we called out with respect to the locator product line, but it was really a combination of both. I mean both the supply chain issue is temporary in nature. I think you referred to it as a one-off. That is not something that we expect to recur. And the project mix is a dynamic that has benefited us from an income standpoint this year obviously, but those projects, as we have called out in the past are at slightly lower margins than the historical D&M business margins.

And our next question comes from Lawrence De Maria from William Blair.

Larry here. A couple of few questions here. First, it seems to me you have more pricing power maybe than we thought in HVAC, where you got credit for in the last few years. Do you think you still have a fair amount of room to go on price -- positive price in HVAC over the next coming years? Or is that more inflationary? And with the 24% growth, I think you're looking at, how does that break down in price and volume?

Well, why don't I start on pricing power. I think, what we said, if you look at our portfolio of businesses, we do believe we have pricing power in our HVAC and our Detection & Measurement. The businesses that we did not feel we had pricing power we divested in our really the transformer business, some of the old legacy businesses. Having said that, we are in competitive markets. And where we sit today, we think is a balanced position. We don't think our prices are too high and coming down. We think we're aligned with our .

On the -- I'll answer on the price volume question. So for the quarter, if you look at SPX in total, it was fairly balanced between volume and price, a little more heavily weighted in terms of price. And that's with D&M being more volume weighted and HVAC being more price weighted. If you look at the full year and you look at our organic guide for the organic growth implied in our guidance for the full year. It's probably going to be something more like 60-40 price volume, and that's with us getting more price in -- on the front half of this year in comparison to the prior year, where price is still a little bit weaker. And as you get into the later quarters, it's a little bit tighter in terms of the comparisons.

Okay. I want to ask about boilers. Some companies are seeing weakness in boilers. It doesn't seem to be the case for you guys. So just what are you guys seeing and any kind of clues and why there's a divergence in the market why you guys are not maybe seeing the weakness that others are seeing?

Yes. I mean I think we have a very strong position in boilers, hydronics, our trade band, very strong. I think that what we have seen is over the past year or 2, there's been tremendous demand, tremendous backlog and working through that backlog. What we see today is a pretty balanced position, and this is one of the few areas. Most of our products are engineered to order. So we go have less where we go through channels here is where we do have a channel for our resi boilers, and we do have pretty good information about whether they're balanced, whether they're overstocked, understocked. And what we see today is it's pretty balanced. The other, of course, that's kind of on the resi side. The non-resi side, it's been healthy. And I do believe our NPI initiatives have been taking share. We talked at our share gains last year. We rolled out the Eco-Tech, which was very successful, 1 product of the year last year on the residential side. On the non-resi or commercial side, our Patterson-Kelley business has expanded their footprint, their tonnage. And we believe we're taking some share there as well. So what I would say is when I look at the boiler business, the hydronics business, it feels like we're back to normal. We're not sitting like in our cooling business where we have a mountain of backlog, but it's like a normal business where you're kind of booking and shipping. And as you look towards Q4 and Q1, the weather will have a determining factor on that market size as it usually does for the residential portion of that market. So yes, we actually feel comfortable with what we're seeing on the boiler side.

That's good color. If I could just sneak 1 more in and then I'll hang up there or pass it on. Obviously, there's some weakness in the industrial world out there that some are seeing tends to be more around big -- more capital-intensive stuff, I suppose, big projects and orders. How did orders trend through the quarter? Anything troubling, anything, any signs of weakness? Or just any color we can get more comfortable around some of the industrial economy that's out there that you guys don't seem to be seeing the weakness yet, but others are.

Yes. Larry, overall, we feel good. I would say, I'll break it down across the segments. On the HVAC side, the cooling business is strong, and we're seeing -- we are seeing a lot of projects there where our solutions are very well suited. We're also seeing some reshoring activity going on, but some particular areas of strength there would be semiconductor, data centers, batteries. If I look at our EAM business or engineered air movement, that's healthy. That tends to be generally a diversified industrial. One of the businesses is pretty heavy in medical, institutional pharma, they have a substantial amount of backlog, I believe, going all the way into next year. On the heating business, we talked about boilers, actually the electric heating business, which probably has some of the best megatrends in our business has been booking very solidly. And then if I switch to the D&M side, if I break it down, we've talked about our projects. The projects are very strong this year, but they're also strong looking into next year, particularly transportation, Commtech, AtoN and our run rate's steady. I would say on the infrastructure bill, we're seeing limited visibility. We see it hitting our transportation business, but not too much elsewhere. Mark, anything you'd like to add, you want to add a little more color on the numbers and the data?

Yes. I think I mean, Larry, when you look at sequential growth of orders, quarter-over-quarter, they've been strong, as Gene alluded to, very strong in the HVAC segment, but really across the entire platform, we're seeing positive order growth. On a total company basis, I put it kind of in the high.

Our next question comes from Steve Ferazani from Sidoti.

Just wanted to follow up briefly on the last question, which is typically, Gene, you've said in a slowing economic environment or a recessionary environment, the one place, particularly in D&M, you might feel it is locators. But it sounds like your only locator issue right now is supply chain. Is that accurate? And are you seeing any kind of demand change on locators?

No, I'd say what we're seeing on locators is it's steady. I wouldn't say it's growing rapidly. We're actually feeling optimistic about the back half of the year, some recent wins that we've had. But no, I don't see anything. I think it's a good question because locators can be the canary in the coal mine because obviously, so much economic activity goes through there, whether you're laying fiber, whether you're putting gas lines, whether you are building new houses or buildings or refurbing. So it touches a lot, but it's been holding steady -- but I would say flattish, I would say, not high [indiscernible] this year. Mark, anything you'd like to add?

Yes, I think that's right. I mean it is 1 of our more global businesses, though, and we haven't really seen any weakness around the world in all the markets that they participate in. So...

Okay. When you're guiding for leverage and you noted stronger cash flow in the second half. But just when I run through the numbers, your expectation is not to start paying down debt anytime soon. Is that accurate or not? .

No, Steve, we are using free cash flow that we generate throughout the year to pay down debt that we have outstanding. All our debt is prepayable. It's all bank debt. So we will continue to use free cash flow to drive down leverage. So you'll see leverage come down both from the repayment of debt and of course, from the denominator perspective, an increase in EBITDA. So you kind of get both [indiscernible] working.

Okay. When I think about that to pay down debt now, does that provide us any kind of clue on what the pipeline is looking like because you wouldn't necessarily rush to pay down debt if you're going to be in the market for acquisitions in the near term. Is there any read-through on that?

No, I wouldn't read through anything on that. I think the best use of our capital right now is to pay down debt. But I think of it through the context of our leverage capacity and our ability to support a transaction in the market. So we've got access to plenty of capital when the right transaction [indiscernible].

Which is $500 million.

Exactly. Yes. So we've got -- from a liquidity standpoint, we have a revolver that's $500 million in size.

When we think about your 2025 target, which now maybe a couple of years ago, seemed like far away, now it seems 1 we're getting closer. But on EPS, you're getting a lot closer even this year. Do you -- to get to the $5 plus, are you assuming you need additional acquisitions? Or can you get there with what you have?

Yes. Steve, this is Paul. So I think at this point, we're clearly above on a couple of different metrics here. And we're looking at options to update or replace this construct. Our current thinking is that's going to make the most sense to do that in the context of 2024 guidance in February. I guess what we say is we typically have talked about a model where we grow at around mid-single digits on the top line and to organically kind of double that at the bottom line. And then you have maybe another 8% or 10% associated with acquisitions. So we do that. So I think what I think we're safe saying is that we feel like we're within striking distance of that one way or the other.

Perfect. I think about the corporate expense guidance you have in the appendix, it seems like it would indicate corporate expense lower in the second half versus first half. But in your third quarter guidance, you indicated 3Q may be up. Can you just give us a sense of trending on corporate expense, particularly given you clearly had some integration costs in the first half, particularly with a very large deal aspect?

Sure. So on an adjusted basis, Steve, our corporate expense in the first half of the year. And here, I'm just talking about the corporate expense line without the stock-based comp was 25. That's with $13 million in the first quarter and $11.5 million in the second quarter. So actually, in the second half, we're expecting it to be up a little bit. It was a little between 2Q and Q3 where some of the costs that we were originally anticipating going into 2Q will actually go into Q3. So that will be a little bit higher. And then typically 4Q is our best...

Our next question comes from Walter Liptak from Seaport Global.

Congratulations from me too. And that 2025, $5 that did seem like it was far away. And so congratulations on making all the progress. I wanted -- a lot of the questions has already been covered, but I wanted to ask about with that locator [indiscernible] to beat a dead horse, but with the supply constraints, was there a push into the third quarter from the second on sales? I wonder if you could size that up for us?

Yes. Walt, so that supply chain issue, it's largely been resolved at this point, but we will ship that product that was impacted by it in the back half of this year and some of it will obviously go into next year as well. So it's sliding into -- part of it will be sliding into '24.

Okay. And then -- and you were able to maintain it just push it out there wasn't any loss share or anything like that, I guess?

Related to that, it was just purely a timing issue.

Okay. Great. And then in D&M, you talked about project orders. I usually think of that as transportation. I wonder if you could just maybe provide a few more details. Is that infrastructure-related? Is this big city projects that are in the funnel?

Yes. When we talk about projects, these 2 areas that they are most prevalent. One is transportation, which we have just seen very healthy demand for this year, but also looking ahead over the next couple of years. I would say that's the 1 area in our business that we do believe the infrastructure bill has made a change in behavior. We are seeing just a lot more activity there. So I'd say that's real positive. The other projects that we typically see is in our Commtech business, and those have been steady. We've had a lot of wins in '22, '23, looking into '24, we feel very good. So yes, overall, the project volume, I would say these 2 or 3 years have been among the strongest I've seen in 8 years. And I do think we've expanded our portfolio of what we're offering, and it's just nice to see.

Our next question comes from Damian Karas from UBS.

Who would have thought in just a few quarters, you take us from basically needing 150 basis points of margin expansion after this year to get to those 2025 goals to being there today. So very well played.

Thank you. Appreciate it.

Yes. Yes. So Gene, curious, I mean, do you think with the backlog that you've got today plus the continued demand strength you're seeing, would you say that it's lining up such that you've already got visibility into organic sales growth again in 2024?

Yes. What I would say is we feel good about what we're seeing. And it's probably premature to give '24 guidance, but what I would say, and as Mark alluded to, our orders, our backlogs, our projects. You look at really HVAC cooling is the big portion of HVAC had a great quarter, a great shipping quarter too and backlogs went up again. I mean -- and there's even more opportunities. So what I would say is on the cooling side, we feel good about the opportunity over the next couple of years. It really -- we feel like there's a very attractive opportunity there. And on the heating side, I think we're back to more normal on the hydronics and the boilers. And then on electric heat, I would expect growth there due to all the growth drivers that are out there that are very attractive. And then what I would say on the D&M we have -- like we've talked about over the past couple of quarters. Projects have been strong. We still see that holding strong, and we'll keep our eye on the run rate. If there were to be a recession, the first place we would see it would be in the run rate in our D&M in particular, we talked about radio detection. So we're not seeing that now. But where I sit today, I feel I like what I'm seeing in the end markets as we go into 2024.

Good to hear. And I'm curious how we should be thinking about the seasonal shaping for the HVAC business going forward? Historically, the fourth quarter was always a strong margin quarter. I think, kind of due the boiler seasonality. But has cooling more or less kind of -- is it at parity with heating at this point? And just with some of the new acquisitions, what's that seasonality look like for HVAC?

Yes. I think, Damian, we'll still be somewhat more seasonal towards the fourth quarter because we'll continue to have that impact of the heating demand in the fourth quarter. So for example, when you look at the shaping of the quarters for this year, we would still expect the fourth quarter to be the largest. But you do bring up a good point that your blend is a little bit different. And I think you guys have all seen the rough numbers on the acquisitions, the ASPEQ was brought on a run rate basis, around $120 million. If you kind of run rate at that or distribute it evenly across quarters, it's probably not wrong at this point. And TAMCO is more than $50 million annually. And I think for the moment, doing the same thing there would probably make sense. So the -- you're going to have puts and takes there with respect to the margin performance of those businesses quarter-to-quarter, but I think you're still looking at a seasonally stronger 4Q in any case.

And cooling is typically highest in Q4 as well. That's when alot of work gets schedule.

Okay. Great. And then maybe if I could just ask you about your acquisitions this year. How has the deal integration gone? Have you learned anything new that you didn't necessarily know kind of going into those deals and how the business has been performing thus far in the current environment?

Yes. Damian, I would say it's early. But what I would say, both are on track to do deal models. The TAMCO one is, I would say, an easier integration in the sense that that's being plugged right into our engineered air movement we have. It feels like that's already integrated and there's really a lot of progress being made there. Whereas the ASPEQ, as we've talked about, we're taking 2 electric heat businesses, 2 great businesses, and we're really putting those together. And that's a little bit more complicated. It takes some time. But what I would say is nothing has changed in our view. We're actually very, very positive about both of them. And frankly, if you think about the M&A side of where the opportunities sit, we really like the continued opportunities to continue to build out our electric heat business, which has now become quite scale. Very large, very impactful for us as well as our engineered air movement, which also has become very impactful for us. So yes, I think early days. The results are positive, but still a lot of work ahead of us and a lot of wood to chop.

I'm showing no further questions at this time. I would like to turn the conference back to Paul Clegg for closing remarks.

Thank you all for joining us on the call today. We look forward to updating you over the next quarter review on investor visits and at conferences. Take care.

This concludes today's conference call. Thank you for participating. You may now disconnect.