SPX Technologies, Inc. ($SPXC)

So welcome to the next session. We have SPX Technologies. And we have Gene Lowe, President and CEO; and Mark Carano, who is VP, CFO and Treasurer. We love SPX. We love SPX stock. We sort of highlighted, on a relative basis, we think it looks particularly good given recent market entrants. We can talk about that offline. But yes, I think you guys are going to have some slides, and then we're going to go into Q&A. Thanks so much.

I think, yes. Okay. Yes. Go ahead.

I didn't realize we're giving a presentation. Why not? Do you have the clicker here? I'll try to give a brief overview of who we are to set the stage. Just a quick snapshot of who we are, about $2.6 billion, around $613 million of EBITDA, 23.5% EBITDA margin. And then you can kind of see the composition of our business, really 2 segments, approximately 2/3 HVAC, 1/3 D&M, predominantly North American based. You'll see a little bit, about 11% EMEA, 7% APAC, but really predominantly North America is where our business sits today. The thing that really defines who we are is a couple of things. We really play in engineered niches with leading positions. We lead in about 90% of our revenue. We're #1 or #2 in the markets we serve. We're tech-enabled. We typically have very strong moats in the businesses that we operate, and we are very sustainable. What I mean is we're in businesses that we think have a long runway over the next couple of decades. A few things about us. We really like our core business. We have a very good growth model. I'll talk about that in a second. We typically convert 95% to 100% of net income and cash flow. We generate a ton of cash. We have a very powerful business system, which we've been operating for the past decade. And then we really focus on organic and inorganic investments, and I'll talk about that in just a second. If you think about where we play, this is a Fisher Price diagram that we like to show you. Where is SPX? I'll start on the right. This is just an example of a hospital. This could be a data center. This could be a commercial office building. This could be a -- actually the Bank of America building in Charlotte, for example, and you'll find our products all over these buildings. We basically invented the cooling tower. This is our largest business. It is cooling towers, boilers, very strong in the hydronics business. You think about electric heat and auxiliary heat, you think about custom air handling, you think about critical exhaust units, duct heating, all over a typical business, typically in the configured areas. These are nonstandard products. So what I mean by that is we don't make a single cooling tower to inventory. These are uniquely configured or engineered to your particular requirements, your Delta T, your flow rate, your sound requirements, your footprint requirements. But most of what we do are configured or engineered products. On the other side, we have a great set of businesses. This is, I would say, 10, 15 years ago, this is more precision equipment. Now it's typically precision equipment with software. And there's a couple of areas where we play. In location and inspection, we are very strong underground. We have robots that monitor water and wastewater, robots that can repair natural gas lines in the live gas line. If you've ever had your house scanned before you dig, you have to scan before you dig to identify electrical lines or gas lines. We're the global leader in that market. And then we also have products that scan above ground. This will be our CommTech business, our AtoN business, very good businesses there, and then we have a transportation business. Again, what ties them together is precision equipment or software with very strong positions. This is a snapshot of where we play in terms of our end markets. And you can see here, really, HVAC is on the left, Detection & Measurement is on the right. Some very -- a lot of exciting things going on, on the HVAC side. I think our #1 question we always get is data center. We've been growing data center very dramatically. The cooling requirements of data centers are, as you might imagine, increasing tremendously. We're participating very well in that. We see some great growth opportunities in health care, pharma, drug manufacturer. We play in institutional, commercial, and we have a little bit of resi. This is mostly replacement. And then all over industrial. This would include power. This includes industrial tech. This would include battery plants, electric cars, et cetera. Smart infrastructure is more, I would say, government regulated. In many cases, the actual purchase of the equipment is the government. You think about defense technology, obviously, that's going to militaries all over the world. Transportation, typically municipal budgets or municipal customers. And you think some of the other areas like our robots for maintaining your gas and water infrastructure, that's either directly to the government or the contractors that serve the government. Real quick, I'll walk over this way and make things more exciting. This is just a breakdown of our business. One of the things that we like about our business is we get a lot of revenue from replacement sales. So it's a very steady ballast that gives us very steady demand every year, a lot of replacement revenue. We're really leaders in the markets that we play. And you can see some of our brands that are very, very well known in the markets that we participate in. Marley for cooling tower, Cincinnati Fan, TAMCO, Ingenia is really a custom air handler, some of our detection and measurement brands down here. And you can see the composition of our products and our revenue for the different categories. This has been what our business model has produced. You can see the CAGR. I think the punchline is we believe we have a business model that's working. For the past 5 years, we've exceeded 20% EBITDA growth every year, and we actually see a lot of line of sight to continuing that in the future. We believe our business model is working and there's a lot of runway here. So it's produced some solid results. Look at our framework, this is really what we call our one-page strategy in a box. So if you look at it, as I have already talked about, here are the 5 areas that define all of our products, niches, leading positions, tech-enabled. But this is really how we drive value, both within our businesses, but also within the companies that we acquire and add to our platforms. We do a ton on digital and AI. We've been doing digital for 10 years very intently. AI has been a very big initiative. I can walk through a lot of stories of how we're using this internally, but also in the software that we sell to our customers, we've actually created new products based on AI. Still relatively small, a couple of million dollars in terms of revenue today, but we see a lot of opportunities there. Lean is very embedded in our business, and we are very focused on talent because as we grow, you have to have talent to be able to scale. On the growth side, M&A is a critical lever that we drive growth. We've done approximately 18 acquisitions over the past several years. I'll talk a little bit more about that. And then we spend a lot of time on product development and commercial excellence. The product we're most recently talking about is OlympusMAX. This is a product that we've created for data centers. That's off to a very good start. So Andrew, I think that -- I don't know how much time you want to take here, but I could probably -- I think I've already covered some of the HVAC and Detection & Measurement stuff, but could probably go -- might be a few areas I might dive into. One of the things, actually, I'll spend a second on this. Because we've been growing so rapidly, we've had to open 2 facilities. One in Nashville, Tennessee. This is really for our TAMCO damper line, which is very oriented towards data centers. The other is in Madison, Alabama, which is really focused for data centers cooling as well as our custom air handling. We actually think this investment is going to give us about $700 million additional capacity. And frankly, we're looking to overdrive that and even expand that further as our demand is very, very high for our products that we have today. Let's see if there's anything else here I'd like to touch on because I think Andrew had a number of questions. You have our guidance. You guys can see that. You can see that the bulk of our capital is really in M&A. We're very disciplined on our net debt. We actually became a separate company 10 years ago with the spin of SPX into 2 pieces, SPX and SPX FLOW. SPX FLOW, if you follow them, got bought out by private equity, recently sold to ITT. And we're the other side of that. But we're very careful. And then you can see the amount of capital that we've deployed to acquisitions over the past couple of years in how our model works. And then here's actually the companies that we've added to our portfolio over the past couple of years. You can see a visual of our different -- we have 6 platforms. We have 2 platforms in HVAC, heating and cooling. And then here are the 4 platforms that we have in our Detection & Measurement segment and how we've continued to build and strengthen these platforms. And why don't I -- I'll make this the last slide here, then we'll jump over because I know Andrew has a lot of questions. The punchline on our M&A is we've deployed about $2.5 billion. We brought in about $930 million of revenue at about 20% EBITDA. That's before synergies, somewhat modest deal size, about $140 million on average per acquisition. Our multiples we pay have been, on average, I think, across all of them around 10.7%, a little under 11%, but that's before synergies. With synergies, we think it's more in the 9x frame. So these are really good businesses that we're bringing in, that we're getting at a very attractive net price. And we've significantly, I'd say, strengthened our platforms and expanded our TAM. Andrew, why don't we leave it there?

Yes, why don't I -- I'm going to redo my script a little bit. Maybe we can dive into HVAC from the beginning because I think you outlined. So I guess one of the questions we're sort of getting is your data center exposure and your ability to support further growth. I think you've highlighted the ability to support roughly $550 million of data center revenue capacity longer term. What are the key bottlenecks to unlocking that? And how visible is customer demand beyond '26? And can you take -- what would it take to take the business beyond that?

Yes. Yes. So if you look at data centers, it's a very material portion of our business. We know these data center customers, many of whom we've been working with for years and years and years. So if you look at what it means to us specifically, approximately in '25 -- '24, we had approximately $150 million of data center revenue. '25, it was $200 million. This year, we guided for $300 million. Our demand is extremely strong. At our last quarterly update, we guided that to $350 million. We're really focusing on expanding our capacity, and we're making great progress there. Actually, we're actually pushing -- we've been pushing -- we're pushing very hard there. We're making very nice progress. So if you look at today, we've guided to $350 million, and we're going to push -- continue to push that number as we go forward. If we look at our capacity, we added $550 million of capacity to a $200 million that we already had. So you could say our data center capacity is approximately $750 million. Similarly, we're pushing to significantly expand that as well. And we're making very -- we're making nice progress, and we actually think there's going to be some opportunities. We're going to give some more updates as we go forward, but there's a lot of runway there. Where we participate is predominantly in the cooling. Cooling will account for approximately 3/4 of our data center revenue. We have cooling towers. We believe we're the global leader in cooling towers for data center. Marley is a very well-known brand in cooling towers. We literally invented the cooling tower more than 100 years ago. So every cooling tower in the world came from Marley, came from our company. Most recently, we've entered into dry and adiabatic with our OlympusMAX product, which is a different adjacent segment that we feel like we have a great solution for and a great opportunity for. What we had committed to last year when we launched that product was $50 million of bookings and $50 million of revenue. And this year, we feel very happy that we're comfortably exceeding those numbers, and we see some very attractive opportunities. So yes, so data centers has been a really big growth driver for us. Right now, we're sitting at 70% growth year-over-year. But as I look ahead to '27 and '28 and even into '30, we just see a very attractive opportunity. The last piece that I didn't talk about was in air movement, engineered air movement. So TAMCO dampers, we are the leader in actuated air movement, have a very strong position with TAMCO, and that's been a nice success story for us as well.

And so just to sort of understand it, if demand continues to grow, you have a stated capacity number, but you effectively feel comfortable that if demand is there, you can continue to support the market growth because I think the fear is that you end up ceding a lot of market share that you're somehow capacity constrained, growth comes in and SPX just gets left behind.

Yes. I would not view that as a -- I feel very comfortable. Our team is managing that. I feel very good we'll be able to scale with the growth. And I think the way that I think about it is right now, we've said $750 million for the data center. We're looking for opportunities to expand that within our existing machine, our existing infrastructure, but there's also levers we can pull as demand grows.

And maybe we can talk about because I think -- so there is some confusion about technology, the underlying technology. So how do you differentiate yourself versus competitors as data center cooling evolves towards lower power density, water efficiency and modularity? Like do you care which direction the technology goes?

Yes, it's interesting. We -- it is a confusing market and just because people use words like liquid and immersion, and we very often get the question, oh, my god, liquid cooling. This business has liquid cooling, and that means you don't need a cooling tower. And the way that I would describe it quite simplistically is if you think about under the roof of a data center, that's where the chips are, that's where the racks are, you have to get the heat away from the chip. There's a variety of ways to do that. Historically, it's just been air. They've just put air conditioning in there. As heat has gone up, there's been different technologies. There's rear door. Now liquid cooling is actually getting a lot of traction, and on the horizon is immersion cooling. That's where we actually put the whole server under water -- not under water, under a liquid to extract the heat. But no matter how you get the heat away from the chip, you still have to get it outside the building and then reject that heat. And that's really where we play. We don't play -- we're not competing for immersion cooling or on CDUs or rear-door panel. Where we play is when that fluid gets outside, we reject the heat. We're really good at that. I would argue we're the best -- I believe we're the best in the world at that. And so we like to say we're Switzerland. And as the heat load goes up, you need more cooling to extract and reject that heat. So with the amount of heat in the chips, like the Vera Rubin chip is incredibly -- and the amount of kilowatts packed into these servers, it's a net driver for us. So we see a very nice opportunity, and we're really focused on capitalizing.

So I have a very simplistic view. It's like rack-mounted engine has gone from mid- to high single digits kW to now pushing 1 megawatt. So order of magnitude 100x for us. And electrons in, basically, almost one for one equals heat out. And then somehow this heat has to leave the building and you are the escape valve.

Yes. Exactly. Exactly. You got to get out of the building and you need to reject it. One of the questions we had, Andrew, you may remember this, is the Vera Rubin chip can operate at higher temperatures. And so you don't need to get it to a lower temperature. And so that -- there was a lot of questions. Will that affect the amount of heat rejection? And it doesn't affect the amount of heat rejection at all. You still have to get that fluid out. You still need to take the heat out. You just -- in some cases, we're seeing, where some architectures of plants, they don't require a cooler to bring that temperature down even further for the chips. But it does depend on the philosophy of the data center customer and how they want to build.

But effectively, your experience is that whatever the philosophy is dry cooling, you still need -- your experience and you've seen the designs, are there designs that do not require heat rejection?

No, I haven't seen any -- and I don't know how you would not do heat rejection. We've been in the industry our whole lives. I've never seen that. Do you have any ideas, let me know.

So as data center customers push for faster delivery and customization, how do you protect returns on capital while meeting these demands?

Yes. I think if you -- I'll say -- make a few comments, and I'll throw it to Mark. I think if you look at us, we're a pretty capital-light business. Our typical CapEx as a percentage of revenue is 1.5%. As we've been growing a lot, we've been pushing towards 2%. If you look at these plant expansions, they have a profile. And Mark, do you want to kind of go into kind of how we're thinking about the cash-on-cash returns here?

Yes. I mean I think with -- we're pretty thoughtful about how we approach the -- this plant expansion really to make sure that we're able to drive the right returns. Gene sort of talked about the demand profile, right? There's more demand than there is capacity today. So we're building this capacity to meet the moment. And when I think about these customers and our ability to meet that and meet the returns that we want, this is -- these investments are very attractive, right? I mean they're generating a payback of, let's call it, less than 2 years, right, just when you think about the amount of volume that's going to come through. So we feel really good about what we spec out there. We feel good about the demand. And we've got a great team in place really bringing these plants online so that we can meet this ever-increasing demand.

And it's probably worth noting like the OlympusMAX, which we're very, very excited about. It's really an organic brand-new product that we came up with. And I would argue, this is going to be the most successful product we've ever created, and it's really got some nice traction.

And maybe can you describe the competitive positions of Marley, SGS and TAMCO versus both large OEMs and small niche players? Do you compete against -- do you compete with Trane, JCI, Carrier? Or do you go against sort of different set of competitors?

That's a great question. It's a very common question we get with our HVAC business. Hey, do you compete with Trane and Carrier, JCI? We really don't. We provide complementary products. So if you think of a typical solution for a hospital or a data center or an airport or any large application, you'll typically have a water-cooled chiller, and that's typically provided by a Trane or a Carrier, JCI, and then you need a cooling tower, and we provide that. So in our -- our largest business is cooling, and we really have 2 private companies that we compete with as our primary competitors. I think in the U.S. market, you really see us 3 accounting for the vast bulk of the market today. If you look at -- that's on the cooling power side. If you go to the dry cooling adiabatic, I think you'd see probably 2 other private companies. So it's more private companies. We don't really see the names that you would cover that you're more familiar with in those markets.

Excellent. And maybe just outside of data centers, there's -- power market is doing quite well. Maybe you sort of -- you highlighted your power exposure. It's a meaningful market for you. Can you just talk about what trends you're seeing? Do you benefit from more natural gas? Do you benefit -- what will drive -- there's a lot of talk about nuclear. Do you have any exposure to nuclear? Maybe talk about that.

Yes. So I think we're very, very strong in power. If you actually look at Marley, that's a lot of our historical legacy. If you look at our installed base across power, it's incredibly high, probably more than 50% of the market. If you look at, for example, you mentioned nuclear, we believe we are -- the vast, vast majority of those cooling solutions are ours. So we're very used to operating in a high specific...

And vast majority's market share well north of 50% to 60% to 70%.

Yes. Yes. And so there's not a lot of brand-new nuclear plants being opened in the U.S., but you have to maintain that infrastructure. Approximately, in North America, you'll have 100 nuclear plants, 50 of them use once through cooling. That's where you use like an ocean or a lake. That's not an opportunity. The other 50 have cooling towers. The vast majority of those are ours. So as you look at new power and new nuclear, I think we're very well positioned to take advantage of that. So as there's opportunities -- and we actually are seeing activity, I would say, more on the modular side, and we're actually in discussions with various opportunities out there. There's a number of modular companies that are coming to market. I've recently seen, I think, 2 of them have been approved. It usually takes a little time to get nuclear through the approval process. But yes, there seems to be some momentum there on the modular side.

And these nuclear generators, these towers sit around? Do they require any upgrades? Do you get any benefit from the fact that capacity is being -- life extension upgrades, are you getting a benefit from that?

Yes. What I would say, if you step back at 30,000 feet, one of the things that's happened is the power market has been very slow for many, many years because there has not been a lot of electricity demand growth. Every year, efficiency, it used to be GDP and electricity demand were very tightly correlated. You go back a couple of decades ago and it disaggregated. And every year, there'd be economic growth, but power growth would not -- would be flat. So it's been a very flat market for a very long time. But data centers has changed the game. And now there's so much demand from data centers that you're seeing an urgent need to get more power. One of the things you can do is add new combined cycle power plants. You've seen GE and a lot of the gas turbine guys are doing phenomenally well because there's an urgent need for more power. That means you need more cooling as well. But we're also seeing a lot of existing coal plants, nuclear plants, gas plants. Every time you upgrade your cooling tower, we can upgrade a 1,000-megawatt nuclear power plant, for example. Oftentimes, we can get 50 to 70, 80 more megawatts out of that power plant. So what does that mean? That's more dollars in the pocket of the utility, and it allows...

And you get paid for it?

We get paid for it. So you're seeing in a world where there was not as much demand growth, people are doing that, but at a more moderate pace. We are seeing more activity on people upgrading their cooling systems because they're trying to keep up with the demand increases there.

And as we think about sort of end market mix that goes beyond data centers, can we just talk about your industrial commercial infrastructure applications? What kind of growth are you seeing in the HVAC market?

Yes. So we actually -- if you look at our guide right now and if you were to pull out data centers and put it aside because there is very nice growth there, there will be a very nice growth for the next couple of years there, our core business is doing really well. So our model is about 5.5% growth for our non-data center HVAC business. And that would be -- you're really looking at markets. Health care, drug, pharma is very big. You're seeing institutional. That will be things like universities, some government buildings there. Commercial is in there. Commercial has been kind of slow. And then really all of -- if you look at our -- we have [ EMEA ] in our presentation that breaks this down. But within that industrial, you'll have things like power, industrial tech, that will be like semiconductors, battery plants. There's a lot -- one of the nice things we like about cooling towers is almost everything needs a cooling tower. You could be making Budweiser beer or you could be making agricultural products. You go to a stadium for football, you'll see -- so it's something that's needed wherever there's a lot of heat load.

And within Detection, just sort of it sounds like in HVAC, the end market continues to be strong. I think within Detection & Measurement, you have some economically sensitive businesses as well. What are you seeing in terms of the economy? March, April, May, what's your sense because you do have some sort of canary in the coal mine kind of businesses?

Yes. If you look at it, interestingly, D&M, a lot of the businesses there, very good precision equipment, typically paired to software. A lot of this is government mandated or government procured. So for the most part, that is less sensitive to the market. The one that is, I think you're right, is radio detection. So our radio detection business, that's the underground scanner. So if you've ever seen the signs scanned before you dig in America, in the U.K. and a lot of countries, you have to scan before you dig because you don't want to hit a gas line and have an explosion or hit an electrical line, that type of solution. And what you see is that is a great proxy for economic activity because everything needs to be scanned. If you're putting in a swimming pool, if you're Google Fiber is coming to your house, if you're putting in a new home, if you're revitalizing your home, anything that requires digging, which is a lot of different stuff. So to get to your point, the demand has been healthy. We're actually feeling very good about what we're seeing in that business. The -- I'd say the U.S. market is seeing steady growth. Europe has been flatter over the past couple of years. We have not seen a lot of economic growth on the continent. But I would say, overall, we're pleased with what we're seeing. And the North American market, I'd say, is holding up very well.

Maybe we can just -- just on D&M a little bit. It's been very strong growth. How sustainable it is? And should we worry about a cliff here?

Yes. I mean if you look at our businesses and one of the things we looked at since the time of spin, which is 10 years ago now, we've done a lot of analytics. Our 2 segments have both grown exactly at 11% CAGR a year. And that's 5.5% organic, 5.5% inorganic. And it's kind of interestingly how precise they were exactly at the same growth rate. So there's good growth drivers there. What you're seeing now is HVAC is going to be above organic with data center overwhelming the numbers. You're going to see better growth there, obviously. But the Detection & Measurement has some very good end markets. Ironically, we don't get as much attention on it because of some of the other drivers, but a very good business for us. We actually have been very pleased with the growth and it's been very nice. The leaders have really focused on margins, and it's a great margin story there.

Yes, the margin profile and the margin journey in that business, if you looked at it 2 or 3 years ago, you'd see it was kind of a 22% margin business. Before Q1, we had raised the guide to 25%. We actually raised it up to 25% in 3 quarters at the midpoint, which related to a distinct project that we had in Q1. But the team has done a really good job, I think, structurally resetting the margin profile of that business up to a higher level. And quite frankly, we get this question a lot. You're at a level that's above your stated target range from a few years ago. And I do think we're running at a higher level than that, at least here in the near term. So that's something we're going to look at as we get through the year.

And maybe last question on Section 232 sort of framed as a near-term headwind, but not a long-term earnings issue. Can you just talk about countermeasures you're taking to offset tariffs and how will it flow through the year?

Yes. I would say we were sort of tested last year. These are obviously different, and they really relate specifically to our products that come out of Canada going into the U.S., right, that are -- these derivative tariffs are being applied to. But really, there's 3 approaches we've got that have proved to be successful, and I'm confident we'll mitigate the tariff impact as we get through the back half of the year, and I wouldn't expect to see any impact in '27. Everything that -- almost everything we sell is engineered to order, configured to order. So that gives us the flexibility in our pricing, right? We're pricing oftentimes real time. So we have been able to offset that through price. We have a very strong business system focused on supply chain. We have a very strong, not surprisingly, team there that was tested heavily during COVID, quite frankly, and what we saw there. And even last year, looking at ways that we can mitigate those costs on the supply side. And then lastly, what I would say is the 2 businesses or the businesses that have really been impacted, we're expanding those businesses in the U.S. So they've got attractive Canadian markets. We've seen very attractive U.S. opportunities. So following on what has traditionally been our in-country for-country strategy for manufacturing and sale of products. So that kind of third leg will really mitigate as we go forward.

Excellent. We're right on time. Thank you, gentlemen.

Great.