Q4 2019 Earnings Call
Ladies and gentlemen, todays conference scheduled to begin shortly please continue to stand by and thank you for your patience.
[music].
At this time up or just in line sort of listen only mode.
The speakers presentation, there will be a question and answer session. That's the question. During this session you need to press star one on your telephone. Please be advised of today's conference is being recorded if you acquire any further assistance. Please press star Zero I would now like to hand, the conference over to your speaker today, Paul Clegg VP of Investor Relations. Thank you go ahead Sir.
Thank you Justin and good afternoon, everyone. Thanks for joining us.
With me on the call today, or G., lower President and Chief Executive Officer, and Scott Sproule, Our Chief Financial Officer.
The press release containing our fourth quarter and full year 2019 results was issued today after market close.
You can find the release in our earnings slide presentation as what was a link to a live webcast of this called in the Investor Relations section of our web site at SPX Dot com.
I encourage you to review our disclosure on 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 February twentyth.
As a reminder, portions of our presentation and comments are forward looking and subject to safe Harbor provisions. Please also note the risk factors and our most recent FCC filings.
Comments today will largely focused on adjusted financial results you can find detailed reconciliations of historical adjusted figures to their respective GAAP measures in the appendix to todays presentation.
ER segment reporting structure combines the results are results of our heat transfer and South African operations into an all other category, which is excluded from our adjusted results.
Consistent with how we establish our guidance or adjusted earnings per share also excludes non service mentioned items, including our true up of actuarial assumptions amortization expense, an investment valuation true up and one time costs associated with acquisitions. In addition, our adjusted segment results exclude amortization and acquisition related costs.
Finally, we will be meeting with investors during the first quarter in the Midwest and in Texas. We will also be attending to Sidoti and company Spring Research Conference in New York on March 20 seconds.
With that I'll turn the call over to gene.
Thanks, Paul Good afternoon, everyone. Thanks for joining us.
2019 was a very good year for SPX and I'm proud of the work our team has done to drive solid improvement in our operational and financial performance.
On the call today, we'll give you a brief update on our overall results segment performances and end market conditions.
Also provide guidance before going into Q and <unk>.
Overall, our strong year over year performance in 2019 was the result of solid execution.
Adjusted EPS was $2.76 an increase of 22% from 2018, well adjusted operating income grew $26 million. We also continue to generate strong free cash flow.
Businesses performed well operationally and we're pleased with the pace of integration of our acquisitions, including the recent purchase of Patterson Kelley.
Our balance sheet remains strong and we have substantial available capital to deploy for further strategic growth and value creation initiatives.
For 2020, we expect adjusted EPS in the range of $2, a 90 cents to $3.05, where a mid point of $2 a 98 cents.
Turning to our adjusted results for Q4, and the full year 2019.
Operating income for the quarter increased 4% compared to a strong prior year.
For the full year adjusted operating income increased 18% with margins up 120 basis points.
All three segments generated solid profit growth, including the effect of new product and operational initiatives and the acquisitions in our detection and measurement and H. fact segment.
Overall 2019 was another milestone year and I'm proud of the many accomplishments of our team.
As always I'd like to give you a brief update on our value creation initiatives.
Over the last year, we've been very successful, reaching our value creation goals related to organic and inorganic growth.
Employing our business system to enhance value and developing our employees.
In 2019, we continued to drive organic growth with the introduction of several new products.
She is our new line of high efficiency boilers for large applications, such as large hospitals or office buildings.
We also gained further traction to existing products, such as our Spider inspection solution, which significantly reduces the amount of time required to assess the condition of manholes.
In addition, we closed three new acquisitions for a total of five in <unk> in the last two years.
Very pleased with our progress on integration as we leverage our business system to drive results.
And we attracted new top.
Bob talent and continue to invest in the education development of our employees to ensure that our next generation of leaders have the skill sets to continue executing effectively on our vision and strategy.
Our teams successes are reflected in our strong financial performance.
I'm pleased to say that we see much more opportunity to drive value, including through additional investments that accelerate our growth objectives.
Broaden our opportunity in existing and an closely adjacent markets.
And provide important technology and product development opportunities.
The acquisition of Patterson Kelley, which closed in November is a great example, Evan investment that accelerates her strategy in a key growth area.
This transaction significantly expands our footprint in commercial high efficiency boilers, where they are a trusted leader.
Patterson Kelly's business is highly complimentary to our products channel and geographic strength.
They have highly developed technology and an extensive commercial channel broadens, our addressable opportunity across an attractive growth portion of the heating market.
We're very pleased with their talented team of engineers and product development expertise expertise.
Going forward, we'll continue to leverage our core operational strength.
And deployable capital to invest strategically in close Adjacencies.
In a track we see numerous opportunities to extend our platforms to a broader array of specialty products in heating cooling ventilation and air movement.
Areas, where we have core technical expertise as well as potential channel overlap and synergies.
We also see opportunities to extend our detection and measurement platforms with further technology focused investment that enhance our coverage of location inspection of underground infrastructure and communication technologies products, such as AIDS in the navigation.
And now I'll turn the call over to Scott to review our financial performance.
Thanks Gene I'll start with our net results for Q4 in the full year.
On a GAAP basis reported earnings per share of 75 cents for Q4, Dollarssixty seven for the full year.
On an adjusted basis, which excludes the impact to be items noted by Paul EPS was 96 cents for the quarter in $2.76 for the year.
Overall are solid results for the fourth quarter were driven primarily by our engineered solutions and each back segments.
Turning now to our adjusted results.
For Q4 revenues increased 3.8% driven primarily by the acquisitions in our detection and measurement and each back segments.
Segment income increased $4 million and margins expanded 20 basis points, the largest impact from our engineered solutions segment.
On a full year basis revenues increased 6% due to significant growth from acquisitions and organic growth across each of our reportable segments.
Organic revenue grew 1.3% and segment margin increased 80 basis points driven by the performance of our engineered solutions any track segments.
Now I'll walk you through the details of our results by segment, starting with age back.
For the quarter organic revenues increased 2.1% due primarily to strong sales and our cooling business.
Segment income increased by $1.8 million, while margins decreased 30 basis points due to sales mix.
Recall that in the fourth quarter of 2018, our heating business benefited from stronger than typical seasonal demand, including large onetime replacement boiler shipment for utility customer.
On a full year basis revenues increased 1.9%, including modest organic growth.
Segment income increased 7% segment margin rose 80 basis points, driven by positive price costs and operational improvements in our cooling business, partially offset by lower seasonal demand for heating products compared to the exceptionally strong prior year.
In detection and measurement for the quarter revenues increased 3.7% due to Sabic acquisition, partially offset by the timing of communication technology products.
Orders compared to the prior year.
Q4 segment income decreased by $2.7 million, well segment margin decreased 370 basis points due to fewer project shipments any less favorable mix.
On a full year basis revenues increased 19.8% due primarily to acquisitions. While segment income increased 12.3 person margins of 23.7% were inline with our guidance.
And engineered solutions revenues for the quarter increased 1.1%, reflecting higher sales of Transformers.
Segment margin increased 310 basis points due to the higher throughput and improved execution in our transformer business and a more profitable mix and our process cooling business.
On a full year basis segment revenue grew 2.2% and segment income margin increased 130 basis points.
The improvement was driven largely by higher transformer throughput associate productivity initiatives.
The transformer team has done a great job implementing operational improvements positioning us well for 2020.
Now to our financial position at the end of the year.
Our balance sheet remains strong.
For the full year 2019, we generated adjusted free cash flow of $140.5 million, representing conversion of adjusted net income of 113% and ended the year with cash and equivalents a $55 million.
Cash flow conversion move higher than our 110% guidance due to earlier than expected customers seats in Q4.
During 2019, we deployed $147 million or capital for three acquisitions and ended the year, where the net leverage ratio of 1.6 times. When you the lower end of our target range of one has to do enough times.
For the full year, we used $18 million a net cash for the projects in South Africa.
We feel good about the progress we've made in South Africa I'm pleased that our construction activity is now substantially complete on our final scope of work and we're in the process of winding down our second related work.
Following a recent arbitration win against the former subcontractor Mitsubishi is now the only counterparty with which we have significant remain disputes.
We expect cash usage in South Africa decreased significantly in 2020.
We anticipate the net cash used to support the wind down of project activities will be modest although we do anticipate some elevated legal spending as we ramp up dispute resolution efforts.
Before moving to guidance I'll briefly review, our recent bank credit.
Financing or refinancing.
In December we refinanced our credit facility and extended the maturity two years through 2024.
Well the overall size of our facility a similar reduce the size of our term debt you shifted more capacity to our revolver to better match, our cash flow generation patterns.
The new agreement provides increased financial flexibility improves near term liquidity.
We also benefited from more favorable pricing and financial covenant levels.
Moving onto guidance.
For the full year 2020, we expect to achieve adjusted earnings per share in a range of $2 in 90 cents to $3.05.
This represents an increase of about 80% at the midpoint compared with 2019 adjusted results of $2.76.
On an adjusted basis, we are targeting revenue of approximately $1.6 billion and an increase of about 5% versus 2019.
We are targeting segment income margin of 15% to 16% and operating income margin of approximately 11.5%.
Turning to our segments are a track guidance calls for revenue of $630 million to $640 million, reflecting modest organic growth plus the full year impact of the Patterson Kelley SGS acquisitions.
Expect eat track margins to be approximately flat compared to 2019.
And detection and measurement, we expect revenue any range of $395 million to $415 million.
Or an increase of approximately 5% reflecting growth within our long term target range of 2% to 6%.
Adjusted segment income margins are expected to be similar to 2019 levels at 23% to 24%.
The timing of projects is one of the most significant factors driving upper and lower end of our guidance range for detection and measurement.
In engineered solutions, we anticipate revenue of $550 million to $560 million or growth in a range of flat to up 2%, we anticipate margins of approximately 8.5% or an increase of more than 50 basis points Weve transformers and process cooling both contributing to the increase in the topline and margin expansion.
Regarding commodity costs in our pricing initiatives across the company.
In 2018 price cost represented a headwind of approximately 50 basis points to our results, which we fully recouped during 2019.
Looking to 2020, we expect the impact of price cost to be neutral to year over year results.
Our feet <unk> free cash flow generation conversion is expect anticipated to be between 101 hundred 10% in 2020, as we integrate acquisitions with conversion rates closer to 100% and due to the impact of earlier customers seats in 2019.
As always you will find details of other factors driving our 2020 guidance the appendix today's presentation, including our tax rate, which we expect to be approximately 20% to 22%.
While we do not provide quarterly guidance. We have included historical quarterly performance metrics in the appendix to assist with your modeling.
Overall, we are expecting similar earnings cadence to last year.
The warmer start to winter in the Corona virus impact or providing some headwinds in Q1, but we continue to anticipate modest earnings growth for the quarter.
Now I'll turn the call back to gene for a review of our end markets and his closing comments.
Thanks Scott.
[noise] overall, we continue to be well positioned in our end markets for 2020 and beyond.
Our customers and end markets are diverse with many demand drivers that are less sensitive to macroeconomic factors, including government spending and regulatory mandates.
In addition around 70% of our revenue are driven by replacement sales, which provide additional stability.
The areas of our portfolio that have more economic sensitivity or the commercial portion of our HVAC business and our locators business, which historically have shown a relationship with global GDP and construction trends.
Our guidance anticipates, some moderation in growth in these markets compared with last year.
However, we continue to see a steady pace of orders in our less economically sensitive businesses and our new suite of new products and other operational initiatives leave us well position to achieve our full year target.
One variable we continue to monitor is the krona virus.
Obviously, we have only modest direct exposure to China, but we have been assessing the risks to our overall supply chain and developing contingency plans for any potential disruption to our businesses.
During 2019, we made several positive changes and investments to strengthen our company and are on track to continue delivering value to our shareholders.
The integration of our acquisitions is going well our investments in our businesses are yielding positive results.
And we feel good about our ability to continue growing earnings and generating strong cash flows.
Our balance sheet and liquidity position are very strong.
With the recent refinancing of our credit facility, we have even more flexibility to make attractive investments.
Our pipeline of highly strategic acquisition candidates remains robust and we see multiple opportunities to expand our addressable market and growth profile, and our HVAC and detection and measurement segment.
Overall, I'm very pleased with our strong performance and the state of our business as we began another year of growth and value creation.
And now I'll turn the call back over to Paul.
Thanks Gene Justin we are ready to go to today.
Thank you Sir as a reminder to ask a question you need to press star one on your telephone to withdraw your question, but the pound Keith.
Please standby compiled accuen a roster and again that is star one if you'd like to ask the question and I first question comes from Damian Carrasco from you be asked your line is now open.
Hey, good afternoon, everyone.
I mean.
And congratulation saw enough finish in a very strong year in 2019, yeah. Thank you Keith.
So wanted to start off asking you about detection and measurement margin guidance for for 20, Twond. Scott I know you mentioned project timing when you sort of talked about the range for the segment.
But if I look at the guidance it kind of suggests flat maybe slightly up margins on 5% underlying growth.
Thank you I think you'd probably get better incrementals than that so could you maybe just walk through the.
Price cost mix or anything else that.
To any other aspects to the equation lead into your margins there yeah sure. It's really not it's not a price cost matter here, it's really does related to the project nature of the segment I'm really within the Com communication technologies and transportation businesses.
So it's really more the timing of those projects and the nature of the projects. So you know all projects are the same I'm you know we had some very strong margins two years ago into most businesses DC decent margins last year, there and when we sit there and estimate what level of projects will.
I'm into the year, you know really putting in the the high confidence level projects and making some assumptions around margins at an average level.
So that they may execute when we finalize a better that because most of these are not in the backlog.
So we try to take a prudent position there.
More when we're putting that forecast together.
Okay that makes sense.
And I guess stuff.
Question on engineered solutions in particular Transformers, you highlighted in the in the slides a moderate firming signals.
Just kind of could you maybe give us some additional color around that you know what what kind of lead to lead times are you seeing in the business right now.
Perhaps is there is there any change in the market did you know given some of the heightened focus that there has been on trade recently.
And any other color you have just on sort of the 100 basis points of improvement.
You have in the outlook for this year.
Yeah, David this chain. The we're very pleased with the progress of transformer is the they've been executing very well the facilities are executing at a nice nice level, a lot and I see I initiatives there the in terms of the market, we've seen a very steady demand.
As we all know that's a very very steady demand profile and.
The team just keeps winning orders would now we have been pushing for price and we've seen some pockets of price opportunities. So.
In general.
We feel good about the market dynamics, there and we were going to keep pushing for price. So so overall, we're very pleased with where tranche former as is and other execution and feel good about their trajectory into 2020.
Okay, great. Thanks, I'll get back in the Q.
Thanks, Tim Thanks, Daniel.
Thank you and the next question comes from Joe Mondillo from Sidoti and company.
Your line is now open.
Hi, Good morning, guys. Good morning afternoon, I guess, [laughter], Hey, Joe you haven't Hum.
As long day, so I'll, just sort of follow up on that prior question regarding sort of margins.
I'm just wondering if you can sort of walk through.
'cause, there's a lot of different pieces to that segment of where the puts and takes our the ups and downs.
Related to the mix issue, just where are you expecting maybe some of the lower margin to be higher then.
The higher there versus other parts of that business just trying to understand what's your visibility is.
How to me how to make up.
Yeah, Scott I'm. So we we don't we don't provide a that level of detail by the different platforms within detection and measurement, but really where you are seeing is in that the project portion and I've said you know those projects. All have good margins is just though the level of of margins associated with those.
Projects is what can swing margins a in the segment around a bit both from a you know what the organic revenue looks like as well is just the absolute margin level looks like you know, but when we stand back and we look at it and say you know we're going to have 20, 324% margin. We feel like that's always good performance in that business and it's not always going and work.
Take a normal where you just get volume leverage and it's all the same volume some of them project volume is a little bit different visible a wider for variability of what the margins and those projects are going to execute at.
Okay, and then at that age back segment revenue on the organic side was strong.
Gross margin was quite strong.
Tough comps.
Impressive to see that you were able to put up the numbers.
Just curious.
What sort of drove that and then number two looking.
2020, it looks like sort of excluding acquisitions, you're looking at sort of low single digits.
Organic growth correct me, if I'm wrong, there and if that's correct.
What slowing what's your take on the market dynamic.
To that slower growth relative to what you saw in 2019 and talk about sort of the backlog that you have in the visibility that you have there.
Sure I'll, let me take the 19 now a gene jumping on the on the market. So on 19 really it was just a we had great execution in our cooling business they've been doing a lot of work around operational improvements in the facility to improve their throughput.
And they really kind of they just had a really strong.
Fourth quarter, frankly, young and ended up exceeding the top end of our guidance ranges you know from a revenue perspective and that was the big driver. The other thing is even though overall the heating season was was warmer than anticipated. We did see an early demand for heating for for heating products, so that kind of.
Offsetting mitigated that so we didn't have as big of a a headwind there in the in the quarter. So you know just overall really strong demand performance by our age back each back business now going into 2020 that does leave leave us with some a a tougher comp, particularly on the heating side and with.
Some of the market dynamics.
Yeah and.
What we're seeing in if you look at the age HVAC segment on the cooling side.
You know, we've said moderating growth little bit flattening you do see some jude differences across some of the different geographies.
We like our initiatives and some of the Npis that we have and we feel good about our actions. There now there have been some positive signals.
If you look at the ended the year. If you look at the Dodge A.B. I. There's been there's been a couple of months of some signals that could be positive for US now. It typically takes six to seven months of those indicators to really a affect us to affect our demand profile. So.
What I would say is if you look at those indicators and and we're seeing some some nice.
Traction there that could that could be a positive for us in the back half for the year.
If you look at the the heating side I'd say things are steady.
We if you look at 18, we did have to cold.
Shoulders, you know in Q1 and in Q4.
We are off to a little bit warmer start of 2020, if you look at the heating degree days, but overall I feel really really solid about that business and the initiatives. The expansion of the product line. So so if you put the two together.
We feel good about the opportunities we don't we don't see dramatic growth there, but as you had pointed out we probably see modest growth there.
Okay, and lastly, I'm I was wondering if you can update us on sort of continuous improvement initiatives I know this isn't effort.
Probably still in the early stages, but could you update us on.
How you're doing with that what you're doing.
And it doesn't really seem like <unk>.
Just a higher level it doesn't seem like a whole lot it's baked into the guidance overall, maybe you can comment as well.
Sure. So so the first thing I'd say is there's actually a lot of activity going on and continuous improvement across our businesses. If you look at a lot of the impact on margins over the past year.
We've seen some really nice successes that I could 0.2, very specifically into our transformers business. Her cooling business is even some portions of our heating businesses have that have been driving some some nice see I a impacts what we don't do or what were really focused on instead of having.
Good pockets of excellence is really driving this enterprise wide.
And that's that's a key focus area for this year that will be under Randy a data as a area and we have brought on our C.I. leader this month.
We feel good about that and we do have K.P. eyes across our enterprise.
With regard to our targets, but you know when I look at this I do see a nice opportunity here you know this is not something that happens overnight.
You don't change culture overnight. This is a journey, but I actually think it's a very attractive opportunity for us and where where we're really moving in a positive direction. There. So so there's a lot going on at the end is day you have to resource it and you have to focus on.
Got it and I think this is a year, where you're going to see us really ramp up our focus there.
Okay, and then just a follow up regarding the guidance.
Would you say there is upside it sounds like there's maybe a lot of opportunity that's going to evolve overtime.
Say that the potential upside in the guidance based on continuous improvement alone depending on how things progressed through the or is that fair to say.
Yeah, the Scott I'll jump in I, I think that as far as you know seeing the fruition of specific projects, we're not expecting any any significant impact from the <unk>. The new things, obviously, there as gene alluded to there is underlying things going on at a plant by.
Location by location, but from a enterprise wide approach, we're not anticipating that we're anticipating kind of this is a year of kind of setting things up getting things establish Sutton foundations and prioritizing would be areas that we're going to be focus on and would expect maybe some latter part of the your benefits but.
Nothing of immaterial nature, and then starting to see that impact from a 2021 for.
Okay, great. Thanks, a lot I appreciate it.
Thanks, Thanks, Joe.
And thank you.
Next question comes from Robert Barry with Buckingham. Your line is now open.
Everyone. Good evening Robert.
Add my congrats to up a solid finish comments. Thank you I wanted to clarify a what you said about the segment income phasing you've referenced it but also it sounded like you were signaling that maybe one Q would be a little weaker.
Maybe some of it was the heating degree days, maybe some of it was the virus et cetera, I just wanted to clarify the message was yeah. Scott. So what we said overall is that we'll have a similar.
Gating cadence as 2019, we were identifying that hey, there there are some some things that are challenging year in Q1, but we still do expect some modest year over year EPS growth.
Okay, I guess in 2019, I it was a little less than the 20% so.
Referencing.
[music].
I'm, sorry, I didn't catch that I guess in 2019, when he was a little less than the 20%.
That's kind of on slide 20, threes yard or lowest are lowest quarter of a year later in 2019 was Ah ones one Q.
Third quarters is also typically one of the lower quarters.
Given the maintenance outages that are transformer plant.
Got it.
And I guess, a need just wanted to follow up on on engineered or talk about engineered and the margin guidance there it.
Yields like a little softer than maybe what you've been talking about recently getting up into the 9% to 10% range. So just curious what.
There if anything.
Yeah, I wouldn't say anything has really fundamentally change the way we feel good about the initiatives that are in place.
We feel really good about the progress that has been made in 2019 and continuing forward and for Transformers.
The you know the improvement in the mix profile of our process cooling business is going well it is taking probably a little bit longer to to get some of the levels of conversion that we anticipate but so we feel good about saying 50 plus percent or bases points of improvement going into 2020, and we're continuing.
To hold to that neared longer term target of 9% to 10% margins for the segment.
Got it I guess, just lastly, Ah to clarify on China, and what's going on there I don't think theres much like you said revenue in China, but maybe some supply chain what parts of the business does that impact.
Contingency built in currently for that or how big deals yeah. So as we said, we'd kind of recognize that impact to some level here in Q1.
It is everybody's having to deal with this is a very fluid situation.
But to size. It for you you know it structurally given given out you know were being still very heavily weighted towards towards a North America you know China in total as an end market is somewhere around 3% of our total revenues.
<unk> lessen as far as an earnings perspective, and then when you think about it from a supply chain perspective, it's low single digits <unk> percent of our Cogs and we think about from a supply chain. You know that's right now from a Q1 perspective, we're in good shape I'm no no shortages that.
He is talking about so really the exposure is about when does China become back fully up to two from an in country perspective, a fully operational and being in the supply chain in country fully operational and which is the same issue everybody's dealing with but structurally it's just not as material.
For us as it is for many others.
Right.
Thanks, very much thanks <unk>.
Thank you.
And our next question comes from Walter look back from Seaport. Your line is an open.
Hi, Thanks.
Okay. Most of my question is were taken so I'll I'll just ask a an easy one about the guidance you think the guidance up.
Kind of you know.
Very early.
I think you had guidance out from late last year, you know what did you see in the business. If you know that made you want to take it up this early especially with some of the Corona virus and trying to slowing and things like that going.
You talked about this year's the the growth in this years 20 twenties guidance.
Just to clarify yeah, yeah, exactly right, yes, right now 20, guys well I think as you know as it is one of the things. We've talked about is that you look around many of our businesses and the geographic him a profile of the company. There's many of our markets that don't follow some of the broader GDP. So other than what gene talked about.
Brexit has some effect to us although relatively minor given given our presence there and some of the non res construction markets in the U.S. Those are the most sensitive areas. Other otherwise we feel we see really good demand across the rest of our businesses healthy backlog healthy order books.
And you know strong execution across.
The businesses. So we feel good about the level of guidance given the initiatives, we have and the overall market backdrops.
Okay and on that slide number 22, you've got.
The things that could go well.
To the high and low case.
Obviously political science always looked bad but.
Are you seeing any yeah. This is a week or seasonal heating.
Enough to get you to the low end for this year or.
Commercial construction are you seeing any deceleration than that right now.
Yeah, well, we've we we have started a little bit slower if you look at the data on heating degree days a year to date. So it has been a little bit warmer than it was last year.
And then also you know there is a little bit of deceleration of growth in the commercial construction market, but we believe we've taken these into account as we've put together our our operating plan for 2020.
Okay I think when you look at the somewhat similar to what we experienced in 2019. When you look at kind of what is the one of the biggest variable is going to go back to detection and measurement and the the timing in scope of the.
Project nature that side of that business, that's able to execute in the year.
Okay got it okay, great. Thanks, guys.
Thanks Walt.
Thank you.
And we have a follow up question.
Deeming carrasco with you'd be asked your line is now open.
Yeah again guys.
Jimmy Dean.
Oh, so longer term question for you on H. Fac no one of the things that a lot of the Oems have been talking about recently.
Our some of the regulatory changes.
You know related to <unk> refrigerants, and obviously efficiency standards.
Over the next several years.
Just wondering on your guys world. It does that really change anything related to your your product line.
Are you kind of more or less agnostic as to what happens here with refrigeration with refrigerants and Ah Ah things it alike.
And then I mean, there's change so what I would say and pretty much in general and I get a little more specific on the H. back if you look across our portfolio.
We're typically the the you know the technology leader in in this in the niche markets that we serve so if you look at me. So what that means is typically when they the regulations get harder and more complex requiring more engineering or more more solutions that in general typically benefits.
Yes, because we're the.
Best positioned to competitor to be able to meet that spec or you know find a solution that can meet that a new regulation or new specification.
And that's definitely that the case in our age HVAC business. If you look on both the cooling and heating areas. This specific refrigerant, you're talking to is not as relevant to us but there are variety of other regulations that are very relevant to us and we sit where on the board of of al.
ASHRAE and were on any number of working committees that have a very important hand in defining the regulations that affect our end markets. So we take it very seriously. We we play I would say a very important role.
In that but in general it works to our benefit if you look at on the heating side. The deal. He will typically put out higher efficiency ratings in both residential and commercial side.
And we being a leader in that market have the a the resources to really ensure that we meet and and maintain the specifications.
Very similarly in the and the cooling side here are you, calling as a reminder is the most efficient way the most efficient form of.
Air conditioning much much more than I'm using air cooled so it it it by its nature is a very green very efficient product.
But but even with that there's always a different regulations and rules and we think we're in a nice position to be able to handle those so.
So to cut to the specific question. The refrigerant one we don't think affects us too much but we do a regulatory impact is something that we we are having almost all of our businesses and we really focus on taking a very proactive strategic approach there and in general like I.
Sad when when when the the bar gets raised that typically is a nice opportunity for us.
That's really helpful and one last quick one Scott on the tax front, sorry, if I missed this but seems like a tax came in.
Quite a bit below expectations anything to that.
Yeah, we're at though obviously lower end, what we're expecting them. We just had some there were some discrete benefits there and in a more so in 2019, so when we're looking at 2020.
We're going to be up just a little bit would that probably has more to do with the increase in revenues in the U.S., which is eyes tax jurisdiction.
Okay, great. Thanks, guys. Good luck.
Thanks Amy.
Thank you and we have a follow up question with Joe Mondillo from Sidoti <unk> Company. Your line is an open.
Hi, guys. Thanks for taking a follow up questions just regarding cash flow you guys are projecting pretty good.
Conversion from earning.
Do you have a could you just comment on your M&A pipeline, how how strong is that.
Do you anticipate to pay down any.
Good enough that you'll probably be using a good amount.
Acquisition.
[music].
Yeah, Joe This gene you know on the M&A side, what I would say is we have a very attractive front log and Oh, we do believe in our business model.
And.
And building out our platforms and as a reminder, everything Sartre strategy and all of our moves are very strategic in in how we're building out our platforms I'm I really like the the businesses that we've added to SPX. He's a good businesses that have that have really strengthened our can.
Repetitive position.
As well as an enhanced our margin and our growth profile and a if you look in front of US we actually think for in the very early innings. Here. We think we have a really good business model and there's a lot of runway in front of us so on capital allocation.
Joe Scott So from a from a capacity perspective, you know with our <unk> any or year with our leverage at 1.6 times, we're already at the low end of our of our range, where we would not be looking due to utilize cash for.
Debt debt pay down.
We'd much rather put that to work can be get our leverage below the and put it to smart strategic acquisitions, which as gene said, we feel like we have some good opportunities there.
Okay, and then just a little more specifically on cash Capex could you comment your capex is ramping up.
Here.
Comment on what you're investing in and then on inventory.
Yup.
Quite a bit.
Partially due to.
Some of the acquisition.
But how do you think about sort of the inventory levels.
Opportunity at all or sort of.
Pretty good levels.
Yeah.
Sure. So the solves first dress on the Capex side. So it is up a little bit.
Some of it is from just more more and more companies in the in the business would be acquisitions. So you know we have a little bit higher capex just from that perspective versus historical.
And the other is we are making some.
Investments as associated with some of our improvement in operational improvement issues at the facility.
Cities. So it's tied to our returns, but if you look at it overall, we're still structurally not a very heavy Capex company and we're you know or amount of Capex is below our overall depreciation.
For the company and that's just structurally how oversight set to be.
From an inventory perspective, yes. There is there was some you know some build in inventory.
Some of the is associated with you know as you build up in or eating business anticipating for for the demand here.
So nothing no no real concerns around the company or around inventory will come down <unk> naturally and we'll be able to manage it with the with the demand profile.
Okay. Thanks.
Thanks drew.
Thank you and I'm showing no further questions I would now like turn the call back over to Paul Clegg VP of Investor Relations for further remarks.
Thank you Justin and thank you all for joining the call and we look forward to updating you again next quarter.
Thank you, ladies and gentlemen, just conclude todays conference call. Thank you participating you may now disconnect.
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