Welcome to the Q1 2024 SPX Technologies Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Paul Clegg, Vice President of Investor Relations. 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. The press release containing our first quarter results was issued today after market close. You can also 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 May 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. Comparisons will be to the results of continuing operations only. You can find detailed reconciliations of historical adjusted figures from their respective GAAP measures in the appendix to today's presentation. Our adjusted earnings per share exclude primarily acquisition-related costs, nonservice pension items, mark-to-market changes, amortization expense and in Q1, the favorable tax effect of stock-based compensation awards that were exercised during the quarter. Finally, we will be meeting with investors at various events during the second quarter, including at the Oppenheimer Annual Industrial Growth Conference on May 8, which will be virtual, the UBS Reshoring and Infrastructure Conference on June 4 in New York and at the William Blair Annual Growth Stock Conference in Chicago on June 6. 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 first quarter of 2024. We're also increasing our guidance for the full year. We had a strong start to the year. In Q1, our company continued to execute well and drove substantial growth in all of our key profit measures, with significant year-on-year increases in margin. We continue to experience robust demand across key markets. Our acquisitions are performing well, and our production facilities are operating at high levels of efficiency. Today, we are raising our full year 2024 guidance. Our new midpoint reflects year-on-year growth of 30% in adjusted EBITDA and 23% in adjusted EPS. Turning to our high-level results. For the first quarter, we grew revenue by 16.4%, and adjusted EBITDA by 47% year-on-year with 410 basis points of margin expansion. Last month at our Investor Day, we shared a new framework for the continuation of our value creation journey. We intend to further build on our strong foundation of niche engineered and tech-enabled products, strong positions, moats and sustainable solutions. We'll also continue to leverage our business system to drive value through growth investments and initiatives as well as through strategic M&A. Our new framework targets average EBITDA growth of 15% plus annually at margins of more than 20%. I'll update on the progress of some of the key initiatives during the quarter. In Q1, we continue to drive continuous improvement and efficiencies across our businesses, advancing on several fronts. In our HVAC segment, our initiatives are helping to expand our addressable markets by broadening our range of application-specific solutions for various price points. This includes the successful value engineering project that helped create a more flexible fluid cooler solution with reduced material costs. Integration of our recent acquisitions has also gone well in driving value. We are creating numerous opportunities for cross-selling, including broadening the sales channels for our market-leading duct heating products. Our acquisitions are also benefiting from SPX's supply chain management tools, which are helping to reduce lead times and further improve our competitive position. In Detection & Measurement, we continue to advance our digital initiatives. During Q1, we gained further traction on cross-segment software and IoT or Internet of Things, development and resource sharing. Looking ahead, we see significantly more room to continue driving value through our business system, including through continued investments in automation and R&D. And now I'll turn the call over to Mark to review our financial results.

Thanks, Gene. Q1 was a very strong quarter for SPX Technologies. Year-on-year, our adjusted EPS grew 34% to $1.25. For the quarter, total company revenue increased 16.4% year-on-year. Organically, revenue grew 2.3%, largely driven by Detection & Measurement, while acquisitions drove a 14% increase and FX was a slight tailwind. Consolidated segment income grew by $25.4 million or 34.1% to $99.8 million, while segment margin increased 290 basis points. For the quarter in our HVAC segment, revenues grew 20.2% year-on-year. Acquisitions contributed growth of 22.2% and included TAMCO and Ingenia in our cooling platform and ASPEQ in our heating platform. The FX impact was nominal. On an organic basis, revenues declined to 1.9% driven by lower sales of hydronic equipment associated with unseasonably warm weather in our end markets. This followed a substantial increase in heating volumes in the prior year period that was supported by elevated backlog following the pandemic. The year-on-year organic decline was partially offset by higher sales of cooling and electric heat products. Segment income grew by $20.7 million or 43.4%, while segment margin increased 360 basis points. The increases in segment income and margin were due primarily to our recent acquisitions, and favorable sales mix in both cooling and heating. Segment backlog at quarter end was $462 million, up 20% organically from the prior year period. For the quarter in Detection & Measurement, revenues increased 9.9% year-on-year, driven by organic sales growth and a modest FX tailwind. The increase in revenue was largely driven by higher CommTech project sales. Q1 revenue included delivery of the remainder of a large CommTech project, the majority of which shipped in 2023. We also benefited from earlier-than-anticipated delivery of other projects previously expected in Q2. Year-on-year, segment income grew $4.7 million and margin increased 130 basis points, primarily due…

Thanks, Mark. Current market conditions are supportive of our updated 2024 outlook. Within HVAC, we continue to see strong demand for our cooling products across a broad set of end market applications, including data centers, semiconductor plants and industrial facilities. We also continue to see solid demand for electric heat associated with decarbonization. In Detection & Measurement, we continue to experience flattish global demand in our short-cycle businesses with a regional variation, while project orders remain healthy. In summary, I'm very pleased with our Q1 performance and strong start to the year. With robust demand and significant operational momentum, we're well positioned to achieve our updated full-year guidance, which implies a 30% growth in adjusted EBITDA. We see multiple opportunities to continue growing our businesses both organically and through our attractive acquisition pipeline. Looking ahead, I remain very excited about our future. With the right strategy and a highly capable, experienced team, I see significant opportunity to continue driving value for years to come. And with that, I'll turn the call back to Paul.

Thanks, Gene. Operator, we will now go to questions.

[Operator Instructions] Our first question comes from the line of Bryan Blair with Oppenheimer.

Another great quarter, excellent start to the year. To kick things off, we could level set on the lift in HVAC revenue guidance, up $30 million versus the prior guide. How much of that is organic versus stronger deal contribution from the aspect a couple of months left in the inorganic period there or stronger Ingenia growth, obviously, pretty early days.

Bryan, this is Paul. I'll take that one. So yes, your -- the guidance midpoint was raised by about $30 million of the revenue line and on the margin basis, about 100 basis points. The biggest driver is really the drop-through of the higher revenue, which comes at attractive gross margins. And really, all of the revenue increase is associated with organic here. So really, the biggest single factor is organic. We did say that our acquisitions are integrating well, and we do expect them to have a little bit higher margin than we previously did.

So I know the prior outlook you would baked in something in the range of 7% organic growth in HVAC, so that moves closer to the 10% level. That's just quite robust. How should we think about that in terms of cooling versus heating contribution? I would assume that it's been notably weighted to the cooling side but better to ask and level set on that.

Yes, that's correct. Of the year-over-year increase that you're looking at here. Let me give you a little bit more here because we talked previously about something in the neighborhood of $150 million of acquisition revenue coming into this year. So that's your number is spot on pretty much for HVAC then being around 10% organic. And yes, the lift is primarily is going to be stronger on the cooling side, but we do still expect to get growth on the heating side. So if you're looking at double digits, low double digits on cooling, you're looking at something like more like single digits on mid-single digits or lower on heating.

And then for D&M, how did orders trend through Q1 and into early Q2? And what are you contemplating in terms of full year outlook for project versus run rate business? And what, if anything, is assumed in terms of infrastructure spending contribution as the year moves forward.

I'll start off that one with the numbers you're looking for, Bryan. Yes. So overall, our orders were pretty good for the overall company, but that was stronger in HVAC and a little bit less in D&M. If you comp them against last year, you got to take into account the fact that you have some large projects that got delivered both in the back half of last year and then in the first quarter here as well. So the book-to-bill was a little less than 1 in D&M is where it was about 1.2 in HVAC. As we look throughout the year, as you know, our guidance for this year for revenue, it's all organic, and it has us being roughly flat, maybe slightly down with the prior year. That includes a little bit of a hole left by the delivery of a large -- we had a large project last year in CommTech, which I called it kind of a pass-through project because it has lower than typical margins associated with it. And that left us with about a $30 million hole to fill in this year. And so we're bringing that back up with -- mostly with other projects that are coming into the year.

So Bryan, I think when you think about the growth year-on-year ex the CommTech project is about 5% top line growth. With respect to your question on infrastructure, we are seeing some benefit of the infrastructure dollars. I think we've highlighted this in prior calls, where we're really seeing it right now is primarily on the transportation side of our business. I think that's a function of the fact that those projects are probably more ready for delivery relative to other projects that may be out there that will benefit from. So that's really the first line where we're seeing activity and a benefit to the business from those various federal spending bills.

Our next question comes from Damian Karas with UBS.

Congrats on the really strong start to the year. So it seems like the majority of your EPS guidance raise for the year is coming from the HVAC margins, 100 basis points increase from your original guide. So that's quite impressive this early in the year. Could you just talk about what's driving that? And I know you mentioned maybe the acquisitions are a little bit better than you had anticipated. That's not driving all 100 basis points is it? Is there a lower heating mix that's playing in? Maybe you could just talk about that margin raise and what's supporting your confidence that this accelerated path can continue?

Damian, I'll start off. This is Gene. The -- I think overall, the HVAC end-market demand, we actually feel really good about what we're seeing. We're seeing a lot of strength. As you know, our products play in very many different end markets, but some of our larger ones really have a lot of strength. In particular, I'd call out tech, healthcare/pharma and then industrial. If you look at tech, data centers are very strong, and we are seeing some nice growth there. We just have very strong competitive positions across a number of our product lines, and we're doing very well there. Semiconductor and EVs are also had some notable wins, and we're seeing some nice strength there. Health care and pharma, this is an area that tends to have high specifications and high requirements. Those are markets that we do very well on. That is a substantial portion of our business, and we're seeing nice progress and momentum there. And the last one is industrial. Industrial is our largest end market in our HVAC area, and we're seeing very strong aftermarket also supplemented with some reassuring projects. So if you look at it, I think on the end market side, we just feel really good about our positioning and markets we play in. Do you want to talk, Mark, about the margins a little bit deeper?

Yes. I think, Damian, as we've talked about in prior quarters, right, we continue to see efficiencies across our platform on the cooling and heating side. We continue to invest in those businesses to both improve production as well as reduce labor utilization that's required in those plants. So it's really dropping through. It's creating a lot of efficiencies in those plants. And that's really a function of the new capital that we've talked about that we were deploying this year in those plants. That was a process that started last year in earnest primarily. And then also, we continue to find new opportunities on the CI front to drive more efficiency through those plants, whether that's through plant layout or footprint, things of that nature.

And Gene, very, very helpful comments on the end market verticals and what you're seeing. I was wondering if you could just maybe take us a little bit of a walk across the different units within HVAC cooling because you just have so much under the hood there now with all the acquisitions in recent years. Thinking about cooling towers, you've got the fans business, dampers, there's a lot of areas where you're playing. Are you kind of seeing a similar level of growth across there? Or are there any particular areas of the business that really stand out. I appreciate any just kind of color on HVAC cooling.

Yes. So I think cooling, we really view ourselves as the -- we invented the cooling tower. We believe we're the global leader in cooling. We just have a very strong position there. We see very nice momentum across our businesses there. We play in a lot of the attractive end markets that I discussed. We're seeing very nice growth there organically. In engineer movement, which would be Cincinnati Fan, TAMCO. TAMCO has a very strong position with data centers and is benefiting a lot of the growth, very diverse customer base there, seeing very nice growth on the D&M side. And then Ingenia is new, our newest acquisition, but our biggest challenge there is being able to produce the demand. We have very strong demand. I do believe they have a better product than what's available in the market. They really -- we're very, very pleased with that. So again, very nice growth and then also growth opportunities ahead for us there. On the heating side, what I would say is we've always said hydronics, you're not going to see particularly high growth there. That's going to be more of a mid-single-digit growth. And I think that's -- and there is the weather, which can move the TAM up or down in any given winter environment. But I'd say we're anticipating modest mid-single growth there. And then electric heat, we're also seeing some growth there. But I would say the biggest growth areas would be the 3 primary cooling product categories. But we're very -- we really like our value props in these markets. And one of the things that we talked about in our Investor Day is we see a lot of synergies and there are real hard synergies across our [ REV ] channel across our relationships with the engineers, and we're starting to unlock some of the -- we actually think it's early days for us on that path. So we feel our HVAC segment has really had some nice momentum over the past couple of years, and we like the position and the really strong team, and we feel good about where we're going there.

Our next question comes from Ross Sparenblek with William Blair.

A nice start to the year here. Looking at Detection & Measurement, I think we all understand the tough comps. But just given the backlog growth and the not revised full year guidance, I mean, it seems to indicate that locators are going to see further deceleration at least into the second or third quarter. Is that kind of the expectation?

So no, I think, Ross, what you may be seeing there is there's a little bit of a comparison issue in L&I against the year ago period. If you kind of look at it across the different quarters of last year, L&I had its lowest quarter in the first quarter of last year -- sorry, the highest quarter is what I am saying, in the first quarter last year, where you still saw fairly healthy levels of demand. We did call out that things got a little flattish during the back half of the year. As we look at the full year this year, we're expecting that to be pretty flat overall. In fact, both in terms of its contribution from a revenue and profit standpoint pretty much in line with what it was last year based on what we're seeing. So the -- again, if you look at the backlog, backlog for Detection & Measurement is down really as a result of the large order that we delivered through -- around last year. And with the final large delivery being in the first quarter of this year for that CommTech project that had lower than typical margins associated with it. Hopefully, that helps a little bit to straighten that.

Sticking on the project cycle. It sounds like second half, you have some larger projects hitting. Can you maybe give us a sense of price and how we should think about mix as it relates to, again, the guidance for the full year?

Yes. For Detection & Measurement specifically, typically, the driver this year, if you look at kind of the various parts of the business, it's really all -- or rather the vast majority of it. We'll get some price, but the vast majority of what we see in D&M is typically volume. So again, it's that decline from the volume associated with a large project, offset by improvement in other project areas, largely speaking. If you look at it on the HVAC side, price volume there or yes, price volume there. You're looking at something like 10% organic growth, I would say that's going to be modest price and mostly volume there.

And then maybe one more if I could. Can you just remind us what the minimum cash requirements are to run the business as we think about debt pay down, absent any accretive M&A?

Yes. I mean, Ross, absent M&A, really, I mean, this year, we're in a -- this year and last year, we're in a, what I would call it, a capital cycle where we're spending more than we have typically spent. We're going to be closer to 2% of revenue. But on an average basis, I think we said that should be between 1 to 1.5x as a percent of revenue just to support the business. And then you'd have normal working capital needs depending on the scale of the business and where you are in the quarter, which will vary.

Our next question comes from Steve Ferazani with Sidoti.

Great quarter. So I don't want to be too much of a downer, but I do want to ask about the sort of your one underperforming platform, the location and inspection. I know, Gene, previously, you've always talked about that being the most GDP dependent platform. I mean, I think you indicated the weakness you were expecting was going to be from Europe, while U.S. was doing okay. Can you catch us up on that? And what really would be the catalyst to generate growth in that business again? Is it just generally better GDP growth?

Yes. I think the way you framed it is, Steve's pretty accurate. If you look at location and inspection, we expect to be flattish this year. This is really predominantly run rate businesses. And having said that, what I would say, if you were to break it down by the regions, we're seeing actually meaningful growth in the U.S. We're actually doing nicely in the U.S. in most of our product categories there. But I would say it's a little bit choppy in Europe and Asia, a little bit slower. And that's why when we talked about it, we said relatively flattish with some regional areas. And I do think this is going to be stronger as the economies come back and actually in terms of some of our own initiatives there, I'm very excited, Radio has a new GPS integrated GPS locator that is doing very well in the market. This is a product that's a premium product, typically 40% higher than our core product. We also have [ Qs ] coming out with HD Robotics solution, and we also have the ULC, which is getting some really strategic wins. So if I look at it, the end mark or the GDP of the countries you can't really control. What we can control the team is doing a really nice job on margin and new products. And I actually feel really good about where those businesses are heading going into '25.

Mark, on the cash flow front, typical way this year plays out, you had the working capital build in Q1 in the first half. Do you think the real reversal is Q4 typical where the year will play on?

Yes, Steve, I think it will look similar to prior years where you're going to see cash continue to build as we move towards a free cash flow conversion target that we've signaled. I expect that will be under 100%, as we've said, of net income, but that's driven by the incremental CapEx spend that we have this year.

So chances are, depending on how robust the pipeline is, any debt reduction would probably save until late 4Q or early '25 dependent on whether the pipelines convert it into any actions, right?

Yes. I think absent any -- obviously, any other acquisitions or anything of that nature. You're correct. I mean it will be back half weighted on the pay down side.

How do you think about debt reduction given your pipeline? If you have enough stuff that's sort of -- and timing is impossible to know, is it worth paying down debt in the short term, knowing the pipeline is still pretty robust?

Steve, I mean, that's been our approach thus far. And I think when you think about the cost of capital today to borrow relative to the return you can get on that cash, it makes more sense to go ahead and pay down debt, particularly with respect to the revolver because that's obviously an evergreen instrument. We have the ability to redraw on that. But I think from an M&A perspective, supporting that, we've got plenty of capacity to do that or liquidity today to do that and obviously, capacity if we need to.

And Gene, any update on how you're thinking about the pipeline now? Obviously, you've made several larger HVAC acquisitions. How is it looking out there?

I'd say it's looking very solid. As you know, as Mark alluded to, will be at our 1.5 or actually probably likely lower than that, just kind of under normal course. There's a healthy amount of activity. There's a good pipeline. We're actually seeing a good number of Detection & Measurement opportunities. I say more in the small to midsize, some very, I'd say, attractive technology, some CommTech opportunities. Also, I'd say on the electric heat side, that it's a great opportunity that we have to continue to build and grow there. So yes, I'd say if you look at it overall, it's healthy, it's active. We have our irons in the fire. And yes, I think the machine rolls forward. So I think our strategy is working, and we expect it to keep rolling into the back half of the year.

[Operator Instructions] Our next question comes from the line of Walter Liptak with Seaport Research.

Good quarter. I wanted to ask about the CommTech pull forward. And why did that order get pulled forward?

Yes. Actually, Well, that was -- the pull forward actually wasn't the -- sorry, if we weren't clear there wasn't the CommTech project. That was already forecasted. This was other project work that pulled forward from Q2 into Q1. I mean as you know, some of these projects gating the timing of them between quarters is never easy. So it just was a function of how we executed that contract and when we were ready to deliver it relative to Q1.

So it was not one order that got pulled forward. It was many orders that pulled forward.

Yes, it was more than 1.

And could you repeat what the backlog was in CommTech -- I mean in the D&M segment, sorry?

Yes, sure. I got that for you, Walt, the D&M segment backlog was $207 million at the end of the quarter. And in HVAC, it was $462 million at the end of the quarter.

Yes, the backlog, even considering the large orders that rolled off last year and the timing of that order getting pulled forward. I mean, it's still pretty robust order activity in D&M. I wonder if you could talk about the funnel and maybe CommTech funnel are some of those projects that we saw last year. Are those -- should we -- are those done for the foreseeable future? Or is there a nice funnel in CommTech and for some of the other products within D&M?

Yes. I would say, Walt, if you look at it from where we stand, we feel good about the funnel. We did have that large pass-through project, which is a -- we're replacing that this year. So that's where we're actually seeing growth in what we would call our core. If I look at the funnel across our businesses, that's predominantly in CommTech and then in transportation. I would say activity is very healthy. Transportation. This is the one area that was called out that has been supported by some of the government infrastructure spend, and we're seeing a lot of activity there, a lot of bidding there. We actually feel very comfortable about '24. We actually see a lot of opportunities for '25 and '26. So as we said in our prepared remarks, we feel very good about the project activity there. I'd say the same is true for CommTech. There that -- as a reminder, that business is very global in nature. There's many countries, and we're seeing a lot of activity. We've gotten a lot of key wins. We like our technology. We're actually getting very big, very positive feedback from some of our newer customers that are using our technology there. So on the project side of the house, we feel very good for '24. Also looking ahead to '25, we feel like we're well positioned.

I think adding to that, when you look at the backlog, Walt, and you exclude the CommTech project that we've referred to over the last many quarters, backlog is actually up kind of high single digits.

And it's great to see orders pulled forward. I think this quarter, there were a lot of orders that pushed out. And so yes, congratulations on the next quarter.

Thank you. This concludes the question-and-answer session. I would now like to turn it back to Paul Clegg for closing remarks.

Thank you, everybody, for joining the call. We look forward to seeing many of you at the upcoming conferences and road shows, and we will talk to you next quarter. Thank you.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.