SPX Technologies, Inc. (SPXC) Earnings Call Transcript & Summary

I got the good one finally. So thanks so much. And we have the management of SPX Technologies. We have Gene Lowe, President and Chief Executive Officer; and Mark Carano, who is Vice President and CFO and Treasurer and a former colleague. So I'm sure he's happy to be back, one Bryant park. But with that, I think the company has some slides, and then we're going to go into Q&A. Thank you so much for being here.

All right. Good afternoon. Let's get started. My name is Gene Lowe. I'm the CEO of SPX Technologies. We're coming up on our 10-year anniversary of being a stand-alone public company, and I'll give you a little overview of who we are and what our strategy is. Located in Charlotte, 2 segments. I'll go into these in a little bit further detail, about $2.2 billion in revenue. Probably worth noting, we're very North American based. About 83% of our revenue is really predominantly in the U.S. and Canada with some international coverage in Europe and Asia. This chart is a chart that we first presented at our Investor Day last year. It gives a good feel for the range of products that we serve in the markets today. Our bigger segment is HVAC, and we provide a whole set of engineered products into the HVAC segment. In this example, this is a hospital, this could be a data center, this could be an airport, really any HVAC application, you'll see our products really all around there. We believe we're the global leader in cooling towers. We invented the cooling tower. Boilers, we believe we're the leader in boilers in North America. We provide duct heating, customer handling, electric heat, a wide variety of applications here, really engineered products for HVAC applications. On the other side, we have Detection & Measurement. And this is a little more complicated. There's 4 platforms within here. Our largest platform is what we call Location & Inspection. This is where we manage underground assets. So if you've ever seen anyone scan before they dig, we're the global leader in that technology, that software. If you think about robotics, that goes underground, managing your water, wastewater or your gas lines. We believe we're the leader in North America with our CUES robotics brand. This would be a ULC Robotics brand, some very good innovation there. But we also have technologies that go above ground. Our CommTech business manages RF signals. We have an AtoN segment, a very good business. If you think about lighting, obstruction lighting. It's the lighting, it's the modems, it's the NOC that monitors these on a real-time basis. So a lot of good engineered products here that we see have lot of opportunities for growth. This is a cut, a little bit deeper in terms of some of our product categories, our relative size. You can see that HVAC is larger than Detection & Measurement, both in the mid-20s in terms of segment income. Probably most notably about our business is that we have a lot of replacement sales. Approximately 2/3 of our revenue is replacement revenue. And about 90% of our revenue, we're either #1 or #2 in the markets we serve. We have a very strong leadership position. We really like that. And if you think about it, what we have here, these are really the trade brands that are very well known in the markets that they serve. Marley cooling towers, radio detection, underground inspection equipment, flash technology, Weil-McLain boilers. It's actually a very strong set of brands, which we think gives us a nice advantage in the markets that we serve. This is another cut of our businesses. And then one of the things that people ask is what defines you, what ties your businesses together. It's very simple, engineered niches, leading positions, tech-enabled with moats and sustainable. And this is just some other color, a little bit different in terms of where our revenues are by geography and by segment. Here's our track record. We've grown our EBITDA from $160 million to -- at the midpoint, we'll be at $483 million this year. It's a CAGR of around 32%. And you can see what that has meant in terms of EPS. We believe that we are getting categorized often as a compounder. We do believe we have a good model in terms of organic growth augmented with investments and further growth. I'll get into a little bit of that coming up. This is really the slide that we laid out last year, which is really our vision going forward. This is our Investor Day. We have another Investor Day in 5 years. Last year, EBITDA, '23 was $310 million, we said we're going to double that. And we're going to double it really with our 6 initiatives that we talked about here. Now we're ahead of plan here. As I said, we're around $480 millions if you look at this year, but we feel very good that we're on the path to continue our momentum. And then this is really how I think about the company. This is our one-page strategy in a box. So we kind of talked about the things that define all of our businesses. Leadership, engineered niches, tech-enabled, sustainable. This is kind of who we are today. And then this is really how we add value. This is both with our existing businesses, but also acquired companies that come into the portfolio. We spend a tremendous amount of time on digital. I think we're in a very strong position in a lot of our digital positions. CI, Lean, Talent, M&A, I'm going to talk about a little bit, but the other thing I would say is product management. If you're in engineered products, you live and die based on product management. You put it all together, our target is that sustained 15% plus EBITDA growth over the long term. Just a quick run through of our segments. You can see the trajectory. This is our HVAC segment, predominantly North American based around 90% -- 91% North American. Our cooling business has some nice businesses in Europe and in Asia. You can see we've grown that from around $900 million a couple of years ago, margins around 25%. We view this as a 5% to 6% organic and then we can drive additional growth through inorganic here, very good business, very good platform for us. We really like our HVAC segment. And then this is really the other side of our Detection & Measurement segment. As I mentioned earlier, Location & Inspection is our largest platform. We have 3 other platforms, a lot of replacement revenue. This is a more global business. You can see about 1/3 of our business is ex North America. And this business has grown from around 5 -- say, $550 million to north of $700 million this year, very good business. A lot of technical equipment that always has software attached to it, very strong competitive positions here. In terms of balance sheet, this just shows how we manage our balance sheet. We target 1.5x to 2.5x in terms of net debt to EBITDA. We've been pretty consistent. You saw a big negative here. That's when we sold our Transformers business. We basically had been in power at the time of spin, which we divested all of it. And then we redeployed that and growing our HVAC and our Detection & Measurement. If you look at where we are today, around [ 1.9x ], we've deployed about $0.5 billion over the past 4 months, but we believe we will be down around 1.3x by year-end. Our businesses generate a lot of cash. We have a very high cash conversion and generate a lot of cash flow. If you look at our M&A strategy, here's some data. We've deployed about $2 billion. We brought in about $812 million in revenue. This is at about a 20% EBITDA margin, average deal size, around $130 million, so there is some variance in there. Some might be smaller on the $30 million, $40 million , some might be larger, $300 million or so. But in general, modest-sized deals, average multiple around 11x, 2 turns of synergy, 1.5 to 2 turns of synergy and has really expanded our TAM. So actually, we feel like we have a lot of momentum and we have a lot of further opportunities ahead of us. Our most recent acquisition is called Sigma & Omega, and this would be a typical -- this could be a hospital. This could be a residential building. This could be a hotel. But this type of solution, we would provide the cooling tower, we would provide the boiler. We would not provide the heat pumps in between. With the acquisition of Sigma & Omega, we now do provide that. So very strong synergy with our existing channel. We're very excited about this. This is a company in Canada, about 2/3 of their revenue is in Canada, and we actually think we can really help them grow into the U.S. Our second most recent acquisition is called Kranze Tech, or KTS digital interoperability. Again, a very great technology that we see a lot of opportunities for that we've combined with TCI and ECS, really in spectrum monitoring. This has some military applications, some non-military applications, but a very strong communications technologies platform with us. This has grown to about $200 million in top line, approximately 25% EBITDA margins. And then I'm not going to get into this. I know Andrew has a lot of questions for us. So I'll make sure we have time for that. But how we have built other platforms, engineered air movement is really a great platform for us. Since we have acquired TAMCO, who we believe is the leader in the market segment they served, we have doubled their business since we have bought Ingénia. Similarly, Ingénia has doubled their business since it's come into our -- under our tent, and we see the opportunity to continue acquiring really good engineered products and scaling their growth. We have very good channels into these markets. We've built a very strong business here. Similarly, in electric heat, we've been in Marley Engineered Products for decades and decades, a very good business, very strong spec position with the acquisition of ASPEQ, we've actually seen some really nice synergies here, as ASPEQ is known as a leader in duct heating. Oftentimes, the main heat source can't heat a whole building, so you'll have heating in the ducts. ASPEQ actually invented and has the original patent for duct heating, has very good innovation, very good market position there. So we see actually some very attractive further growth in both engineered air movement and electric heat, again, with our theme of engineered products with attractive growth rates. So the punchline is, we really like our 2 segments. We actually think there's a lot of growth in them, both in terms of organically and inorganically, continuing to build the platforms. Our business system, I believe, works, and it drives growth and it drives margin. Those are the 6 areas I talked about. We have a very experienced M&A team as well as operating leaders who are very strong with M&A. And as I said before, we generated a lot of cash. We typically target mid-90s to 95% of net income cash conversion. So with that, Andrew, we'd be glad to...

Yes, sure. So maybe -- so maybe we can start because you do touch so many verticals. What's your -- what's the latest view that you guys have on industrial manufacturing renaissance in the U.S., if there is any? And how are you poised to benefit? And specifically, what have the conversations been like over the past 4 to 8 weeks?

Yes. So I think industrial manufacturing and growth in manufacturing in general is a great opportunity for us. I'd say if you look at cooling towers, where cooling towers are everywhere. So semiconductors. We have done a lot of business with the big semiconductor names. Oftentimes, we're the basis of design, we're specified in. Same with battery plants, same with automotive, electric automotive. So if there is a renaissance, we actually feel we'd be very well positioned to participate and grow with that. I would say predominantly on the cooling side, but there'd be some other areas that we would see some tailwinds. I'd say, over the past 4 to 8 weeks, we feel good about what we're seeing in front of us. We wouldn't have raised year, if didn't like what we're seeing in our order rates, our backlogs and our booking rates. We feel good about '25 and then '26 with what we're seeing today, we also feel good.

Just another question, I'm sure. Maybe we can talk about most recent order trade trends. Any change or anything of concern across platforms as the world has responded to tariffs, trade wars? And whatever it is that happened on Monday?

Yes, it's been -- I mean, it certainly is a choppy macroeconomic environment. Mark, you want to talk about how we think about tariffs. We did share some of that in our earnings and obviously, with the rollback or the change in China that changes our impacts.

Yes. I think on the tariff front, in our most recent earnings call, we quantified the impact there as frankly, relatively small for us, about $6 million of segment income, net impact, which is effectively about $0.10 a share. We gave a range. So -- but the majority of that is coming from China, right, components that we buy from China that are utilized in our products, right? Most of what we manufacturer is made and sourced in country for country, but we do have some components that are sourced overseas. So the change that we saw on Monday, obviously, well, we haven't quantified that publicly certainly, it will impact us in a positive way.

And when you talk to your supply base, and I guess, some of the customers, have you seen any change in their behavior over the past 2 months? Any more consideration given to moving production to North America, rearranging supply chain? Just when you talk to folks, what has been the reaction so far? Or is it just wait it out and see what happens?

It's interesting. We -- going through COVID was a little bit of a prelude of a lot of supply chain disruption, making sure you have multiple sources of supply, making sure you have diversities of countries that are serving you where that is a possibility. I mean I can think of -- I don't think a lot has changed. I can think of 1 or 2 suppliers, very good suppliers, Chinese-based that we'll be talking about different countries to manufacture, to provide access, different Asian -- Southeast Asian countries. That would be all -- Mark, I don't know if you heard things that you think could be relevant.

Yes. I mean nothing beyond what you said, Gene. I mean, I think we're very focused on making sure that we're well positioned. I think coming out of COVID all companies really refocused their thinking around supply chain. So as part of our business system, as part of our teams, they are very, very thoughtful about making sure that we're secured from that standpoint.

Of course. So I know that data centers a key focus for investors. What are you seeing in the market? And -- and then my follow-up question also is that if you look at the satellite photos for all the data center, you can see your product is everywhere. And -- but that's...

We like that.

Yes. So yes, but maybe what's happening with demand from data centers?

Yes. I think for us, personally, data centers is very meaningful. We've been around data centers for years and years and years. And so we have some very long established relationships with some of the large tech companies. As we've shared data centers at a company level was getting into the 7% range, 11% of our HVAC segment. We'd expect that to be probably a point higher as we're seeing very nice growth in our data center business. Really where we participate is we do play globally for cooling. And we have a very strong position in cooling towers. So the way that we're competing there is we're focusing on our existing products, predominantly cooling towers, Marley and then actuated dampers, that would be our TAMCO business. And then we're innovating and getting into some adjacent areas. So one of the areas we've talked about, TAMCO has come up and has been very successful winning a new segment called Building Envelope. And so that's a new area.

And what's that?

It's basically not a part of the custom air handler. It would be a solution for certain data centers that have like rows and rows of this type of equipment on their walls, the direct air entry. And...

So Microsoft, an example design like that or....

Microsoft has a design like that. We don't share who typically we were dealing with...

But it's like water-free design. Is that what it is?

Yes. So you get some free air or you can exhaust hot air out or cold air in. So that's -- so the TAMCO business, which we thought was a great engineered product. Like I said, we have doubled that business since we have owned them, and we actually are so capacity constrained. We're continuing to add capacity there. The other area we play is cooling towers, and I do believe we're the global leader in cooling towers there. Having said that, there is a big portion of the market that we don't serve today, which is dry cooling and adiabatic. And so we have recently launched early in Q1, what we believe is a great product for that market, the OlympusV Max. Actually, Mark and I are going to be out there. The first one has been built, and we're bidding a lot of business.

And what's the fundamental technology changing between what you have in dry cooling. Can you just explain to us?

It's interesting. It's -- at the end of the day, we want to make the heat exchange products that our customers want. What you typically see is small applications go dry because it's very easy, the local 7-Eleven will get a dry cooler. But as you get larger in size, dry cooling is such a performance penalty, you probably double the amount of electricity that you need. So you've got a lot more electricity, a lot more cost, lot more carbon emissions. So typically, once you get to, let's say, 200 tons, almost everything flips over to water cooled where you need a cooling tower. So if you look out the window here, almost every building here, has cooling towers at the top of it, because it's the most efficient way to cool. Data centers, to me, most logically would fit for cooling towers and some technology companies have gone that way. Some technologies have different designs. And so we want to be able to serve those customers that have a different design is the way I would think about it.

And so what percent of the TAM, your existing portfolio for data center services right now?

There's not precise equipment or data, and there is changing of architectural and you look at air cooled and liquid cooled and immersion cooled. And as you know very, very well, there's a lot of dynamics changing in different solutions and different architectures. One of the things I'd probably make sense pointing out is irregardless of how you do your heat exchange in the building, right? So a variety of technologies. You got to get out and reject.

That's exactly right.

So it doesn't change for us right now. We're in the heat rejection business. We don't care what you do. We're Switzerland in that regard. So -- but what I would say is the air cooled in adiabatic, I would say is probably as big or bigger than our cooling tower business. So it's an attractive area for us to grow.

And how much difference, how customized between different hyperscalers? How different, who comes up with the design? Do you come up with the design? Or do they come up with the design and you sort of -- or you work together?

I would say it's always our design, always our intellectual property. What I would say is they have strong opinions, and I can think of some technology companies that want this or that feature. And what they typically do, I can think of one of our larger customers, they will get a standard and they'll get a standard chiller cooling power combination and in that same product, they'll order that 200 times order after order after order. But they know what they want. They can figure it to their exact design. But as you know, every cooling tower is custom. They don't build a single one of those to stock. But they have good engineers and they have -- everyone has strong opinions about what they want, and we meet that need.

And have you seen sort of any signs of investment slowing, pull forward on data centers, anything there?

I haven't. I know there's been a couple of people have mentioned Microsoft in Canada or a few things here and there. What I would say is when we started the year to where we are today, we are more positive on data center. Some of that might be -- we're getting good signals and our customers typically share their growth projections over a couple of years. But I think we're also some of our new innovations, we're feeling positive about.

And speaking about product innovation, sort of touch on variety of adiabatic products sort of talk -- what are the key industry verticals that open up once you add this to your portfolio?

So adiabatic, what I would say is, we already are in the adiabatic. We actually launched a small product that you might see in small buildings around here. Pretty small for us, $1 million, a couple of million bucks there. I would say the new product, the OlympusV Max is more suited towards data centers because at least as we see it, the other large companies like semiconductor, batteries, steel, those, they still want cooling towers. So I would say the OlympusV Max with most of the opportunities would be [indiscernible] large tech companies, but this application would be the predominant one that we see today.

And when do you expect initial orders?

Our target is to get tens of millions of orders this year, which would lead to bookings of that order volume into next year.

Got you. And with the tariffs, you sort of highlighted Canada-based businesses. What are the plans for U.S. facility expansions? And if there are any?

Yes, absolutely, there are because TAMCO and Ingenia are two of our fastest-growing businesses are both based in Canada. TAMCO already has U.S. manufacturing, but we need to expand. Ingenia. The demand is so strong we need to expand. So what I would say is it is probably our #1 initiative right now is our organic growth, where -- if you look at our dry and adiabatic, if you look at Ingenia expansion and you look at TAMCO expansion, we have some really attractive areas where we are -- the demand is very strong, and we want to make sure that we have the supply to be able to deliver that growth.

And you sort of -- you highlighted one of your slides highlighting Sigma & Omega acquisition. I think we've seen something similar to this in like one of the buildings or during the building tours. But can you describe what's the value proposition in terms of technology? And what's the value proposition to SPX?

Yes. I mean, I think if you think of a heat pump, if you go into a hotel room oftentimes, you'll see this product or you won't see it will be behind a wall if you have a special key, you can get in there. But it's maintaining temperature. For them, they have a unique product. I think they are a little bit better than their competitors in terms of their flexibility and the amount of applications they can solve. So I think they have a broader array of solution sets. And then if you think about where the synergy is with us, it's really on the commercial side because we already have reps selling into the boiler side. We had a rep selling into the cooling side. And it's just something we haven't had on our line card. So this is really natural.

And who would you compete against? Like who would be the competitor?

They would be, I think, Unilox, they're smaller private companies -- it's not companies that you would have heard of I think 2 or 3. Do you recall, Mark, the -- I don't have that at the tip of my tongue.

But it's niches -- but it would be niche competitors.

They're not names you probably would have heard of.

Yes. No, this is great. And maybe do you see other niche opportunities like this?

Yes. I mean, I think that's where we live is kind of in these engineered niches. One of the examples would then be Ingenia, right? So people say, "Oh, customer air handling -- do you compete with carrier and transport -- absolutely not. They made great standard products that you'll see in a kind of a lot of buildings, but what we do is completely different in terms of creating a customized...

So the difference -- one thing I've heard from the industry, the large guys are just not comfortable with customization. Is that the gist of it?

Yes. I think that the level of customization. And we have commercial relationships with a lot of these guys. But they will actually -- hey, we have this application. We can't meet it . They were -- so they're actually partners to us in some -- or some rep firm.

But it's a fundamental difference in business model.

Absolutely. And I think that holds true for a lot of what we do. So for example, cooling towers, every single one is unique. Everyone is configured or engineered to order. We don't make a standard product.

No, no, that's exactly what I've...

And I'd say if you look across all of our portfolio, that's generally true. I'd say the one area that we are a little more standard would be our residential boilers, where you make more of a range, but more of a range of standardized products.

Another thing, D&M backlog increased in the first quarter. Should we think about it as reflective of improving end markets or your share capture?

Yes. I think -- so we were really pleased with what we saw across the platform in D&M. A lot of that backlog growth is coming. And just as a reminder, about 2/3 of that business is what we call short cycle and about 1/3 of it project-based. So you think about our businesses like our communication technologies business, our Genfare business, -- you also see some of that in our aids to navigation business. But primarily those 2, we're just seeing a lot of opportunity out there across those 2 businesses today. I think we're very bullish on what we're seeing in the front log. We still got to go out and win what we're seeing there for the balance of the year, but I would expect that backlog to continue to grow during the year. Now some of these are multiyear projects, right? So these are not projects that are necessarily going to -- you're going to see the revenue and the profit in 2025, or '26, '27.

That makes sense. And I think we sort of talked a bit -- you alluded to it, but momentum in D&M project pipeline, does that have bearing on '26 outlook? Does it influence your '26 outlook, the momentum in the pipeline for D&M?

Yes, I'm going to be careful. I don't share 2026 guidance. But in certain businesses, I'll take our Genfare business, for example, the transportation business. That is a business where we're really seeing -- we actually can put our finger on federal dollars from the infrastructure bill that are benefiting many of those projects. So in that business, in particular, we feel pretty good about what the next couple of years look like.

And just, Mark, maybe more questions for you. What are the changes, there's plenty of macro uncertainty, but I would imagine private equity sitting on a bunch of assets at the same time as well. What changes are you seeing in the M&A market?

I would say, I mean, we still feel very good about the opportunity set ahead of us from an M&A perspective. We like to say, I mean, we -- everything starts with, Gene often says, everything starts with strategy with our BUs and very focused on how they can grow their businesses organically, but a core part of that is also inorganic growth. So we're tracking probably close to 300 companies in our pipeline, all in various stages of development. Many of them -- probably about half of our deals have been closely held, family-owned, think of it businesses, proprietary as well. But we do buy from private equity as well. We have acquired assets that are private equity owned. But we haven't really seen -- we haven't seen the dynamic change, whether it be interest rates or the tariff dynamic. I think the pipeline of opportunities and the set ahead of us still feels good.

I think the -- typically, our competition, if there is a competitive situation would be private equity. And I think that if you look over the past 6 months with the change in interest rates, and appetite, how many turns to lend to private equity, we have seen a pullback from them as competition, either not being there or in valuations. So we think that's good.

And given what's happening just generally was the macro equity valuations. How are you thinking about your capital allocations and where do buybacks fit in?

Yes. I mean the focus is on growth. We're going to continue to allocate capital to organic projects are always first, but when you think about how much free cash flow we generate, as Gene referenced earlier, right, we can't deploy all that organically in the business. So we're going to continue to focus on growth through M&A. Returning capital to shareholders, whether it's through a dividend or buyback, that's not something that's kind of in our strategic plan today. We have done it a few years ago, but really, it was a unique situation where I felt like our value was really disconnected.

And we [indiscernible] like this dislocation will step in.

Got you. And just in terms of pricing, how should -- what's your view of inflationary environment in the second half. And did you put in price increases or surcharges earlier this year?

Yes. We put in -- so we have our standard price increases that we put forward, but specifically with respect to tariffs, we're using -- it depends on the business, and the markets they play in. But we've used both prices and surcharges. We said about 2/3 price and about 1/3 surcharge.

Right. So even it was the pullback on tariffs, you get to keep most of the pricing at this point?

Yes. That would be our hope. But of course, remember, as we said, a lot of our business is engineered to order, right? So it's manufactured -- I mean, it's designed and engineered in the pricing environment that we're in.

And just in terms of legislation, do you guys -- what really peaks you? What gets your attention? Is it accelerated depreciation? And do you think it will change any of your behavior? Or it's just a nice sweetener on top of what you were going to do?

I think if you're referring to some of the tax build changes that may be coming, I think it's more the latter, right? It's not going to change our strategy. Many of these growth and expansion plans we have underway wouldn't happen regardless of that. So certainly, bonus depreciation, things like that clearly going to be a benefit to the cash flow line.

We are out of time. Thank you so much for coming here.

Thank you, appreciate it.

Excellent.