Q3 2020 SPX Corp Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the SPX Corporation third quarter 2020 earnings conference call at this time.

All participants are not listen only mode.

After the speaker's presentation, there will be a question and answer session.

Good question Dane recession, you won't need to press star one on your telephone please be advised that todays conference is being recorded.

Quietly for their assistance, Please press star zero.

I would now like to hand, the conference to your Speaker today, Paul Clegg VP Investor Relations and Communications. Please go ahead Sir.

Thank you and good afternoon, everyone. Thanks for joining us.

With me on the call today are gene Lowe, our president and Chief Executive Officer, and Jamie <unk> Chief Financial Officer.

A press release containing our third quarter and year to date results was issued today after market close.

You can find the release in our earnings slide presentation as well as a link to a live webcast of this call in the Investor Relations section of our website at SPX Dot com.

I encourage you to review our disclosure and discussion of GAAP results in the press release, the bubble along with the slide presentation during our prepared remarks.

Replay of the webcast will be available on our website until November sales.

As a reminder, portions of our presentation and comments are forward looking and subject to safe Harbor provisions. Please.

Please also note the risk factors in our most recent SEC filings, including our disclosures related to the ongoing COVID-19 got done it well.

Our comments today will largely focus on adjusted financial results you can find detailed reconciliations of historical adjusted figures to their respective GAAP measures in the appendix to today's presentation.

Our segment reporting structure combines the results of our key transfer in South African operations into an all other category, which is excluded from our adjusted results.

Our adjusted earnings per share also excludes non service pension items amortization expense and investment gain and one time costs associated with acquisitions.

Finally, we will be conducting virtual meetings with investors during the fourth quarter, including our participation in the Baird anyone industrial conference on November 12.

Now I'll turn the call over to Jean.

Thanks, Paul Good afternoon, everyone. Thanks for joining us.

I hope that all of you and your families have remained safe and healthy.

On the call today, we'll provide you with a brief update on our overall results and segment performances for the third quarter.

Well also provide updates on the current environment and our view of the key variables driving the remainder of the year.

This is our first call with Jamie Harris as our CFO.

Jamie joined in mid August and he is already an invaluable member of our team.

Jamie brings a strong background and record of success and strategic planning continuous improvement in gross Jamie welcome to the team.

Thanks Gene I appreciate the kind words I have already had the pleasure of meeting many of you who are on the call today.

I look forward to meeting board view over the next several weeks.

I have thoroughly enjoyed my two plus months and SPX I really like the culture. The people in the business opportunities I look forward to the future of our company.

Thanks, Jamie.

I will touch on some of the highlights from Q3.

I'm very pleased with our third quarter performance, which shows continued strong execution by our team.

Despite pandemic related headwinds.

During the quarter, we took another step in our growth journey with the acquisition of you will see a robotics and our detection and measurement segment.

Looking forward, we anticipate a solid level of earnings and cash generation for the fourth quarter.

A full year basis, we now anticipate earnings to be modestly above the prior year level.

Well the pandemic initially slowed some of our M&A activity and continuous improvement initiatives. We are now actively pushing ahead with these programs.

I feel very good about where we are today is the company looking.

Looking across our businesses, we have a strong team and the right resources in place to continue executing our growth journey in 2021 and beyond.

Turning to our adjusted results for the quarter both.

Both revenue and operating margin were modestly higher than prior year levels.

The benefit of acquisitions and a strong performance in our age back and engineered solutions segments more than offset headwinds in our detection and measurement segment.

I'm very pleased with our adjusted EPS of 64 cents.

Nearly 7% above the prior year.

On a year to date basis, our performance remains strong.

Sales of approximately 9% and adjusted operating income.

As we did last quarter.

I think it is helpful to discuss the current environment.

As well as what has changed since our second quarter earnings call.

First our facilities continue to be operational in our safety protocols have been affected.

We continue to maintain close communications with local health health officials and engage in a continuous review of our processes tried Jennifer hi, and implement any enhancements to the current situation evolves and our communities.

Our team has been doing a great job of remaining flexible and motivated in a very challenging environment.

I'm really proud of what our people have been able to accomplish.

With respect to the impact of the pandemic on our businesses.

In the nonresidential portion of our age type business.

We're very pleased with the results for the third quarter and year to date period.

The teams there have done a great job executing including delivering on some cooling orders during the third quarter, which were initially expected in Q4.

Consistent with our comments last quarter, we're seeing quote and order trends for nonresidential products indicates softer demand in the near term.

Last quarter, we also talked about the impact of the pandemic on locator sales within our detection and measurement segment.

This is our shortest cycle and highest margin business.

After reaching its low point in early Q2, we continued to see orders strengthen throughout the second and third quarters.

Overall Q3 locator sales were comparable to the prior year period.

This included the benefit of some catch up orders in Q3. Following this the disruptions from the pandemic in the first half.

We also previously indicated that we are experiencing timing delays for project sales in our communications technologies businesses.

He is delays largely continued through the third quarter, although we did begin to see some deliveries and expect more in Q4.

And in our engineered solutions segment.

Our Transformers business continues to deliver solid performance.

Turning to our value creation roadmap.

Our business system continues to prove up continues to prove invaluable in helping us manage through a complex environment.

Well the logistical challenges of the pandemic initially slowed some of our growth and continuous improvement initiatives.

Recently, we have been able to accelerate these efforts.

We have launched several programs within our businesses using tools like lean an 80 20 to drive efficiencies.

As we make these processes an integral part of SPX as culture we.

We believe that over time these programs will be instrumental in driving continued margin expansion and further growth.

I think the compound returns and deliver substantial value to shareholders.

The pace of our growth initiatives has also picked up including pursuing attractive acquisitions and closely adjacent markets.

Well these assets were disrupted by travel restrictions and quarantine rules several conversations have become more active and we have been developing processes to overcome these logistical hurdles.

We're pleased with the performance of our acquisitions and integration efforts.

Our team is well positioned to execute on other transactions and we have significant financial capacity to move forward.

Our most recent acquisition was you will see robotics, which closed at the beginning of September.

You will see use is tethered robots to receive all the joints of aging underground utility gas pipelines to provide up to 50 years of additional service life.

We have a unique and proprietary design it significantly limits the disruption associated with these repairs and reduces the cost of remediation well below competing technologies.

And there is a very large installed base of infrastructure required remediation over the coming decades.

You will see also has a custom R&D business it develops innovative solutions for utilities industrial and technology companies.

They have demonstrated very strong capabilities in deploying robotics machine learning and unmanned aerial vehicles to resolve complex business problems.

We see multiple opportunities for collaboration with other SPX businesses to leverage these capabilities and the development of innovative next generation industrial applications.

The U.L.C. acquisition is the latest step in the building of our location in inspection platform, which is now approaching 60% of our detection and measurement segment.

Prior to 2018. This platform consisted of our approximately $95 million radio detection business the global leader in the underground locators.

In early 2018, we supplemented this business with the bolt on acquisition of Sean said, the leader in magnetometers or specialty locators for ferrous materials.

With the acquisitions of cues in June 2018, we further extended our reach into high value underground infrastructure tools.

Cues nearly doubled our revenue and significantly expanded our position in the closely adjacent market for inspection and rehabilitation tools for water and wastewater utility pipelines.

You will see further builds on these capabilities using robotics as a service to inspect and remediate underground infrastructure in the gas utility market.

Looking across these businesses, we see significant opportunities to leverage our expertise in product development channel management software development and machine learning and robotics to further improve the value and efficiency, we provide to customers.

I'm very excited about the location inspection business, we have built and see a very attractive opportunity to continue expanding this platform.

And now I'll turn the call over to Jamie to review our financial performance. Thanks Jane.

I'll start with our results for the quarter.

GAAP basis, we reported earnings per share of 49 cents.

On an adjusted basis, which excludes the impact of the items noted about Paul.

Yes was 64 cents, which represented a 6.7% increase over Q3 2019.

The result, we were very pleased with given the uncertainties in the macro economic environment over the past several months.

Overall, our solid results for the quarter were driven by strength in our age back and engineered solutions segments, where we saw growth in both revenue and segment margins.

This was partially offset by pandemics related declines in our detection and measurement segments.

The company's adjusted revenue was modestly higher than in the prior year, a 2.4% reduction organic revenue was more than offset by the benefit of acquisitions and a currency tailwind.

Segment income increased $2.4 million or 4.7% and segment income margin rose 50 basis points.

Given the headwinds associated with the current environment. We are very pleased with these results now I will walk you through our segments in detail.

Starting with H. back.

Revenue increased to 10.3%, including organic growth of 4% and 6% from the Patterson Kelley acquisition currency was a modest tailwind.

The organic increase was driven by stronger international cooling sales, partially offset by lower domestic cooling and heating sales.

Our cooling team did a great job of executing on our backlog, including processing. Several orders during Q3 that were originally anticipated for Q4.

Adjusted segment income rose about $4.7 million and margin increased by 160 basis points.

As a result of the higher international volumes strong operational execution, and a more favorable product mix in our domestic cooling business.

Looking ahead into Q4, we would expect a mid to high single digit percentage decline in year over year revenue with lower you lower heating and cooling sales more than offsetting the partial quarter benefit of Patterson Kelley acquisition, which occurred last November.

Key factors driving the fourth quarter include the impact of orders accelerated into Q3 sales.

Lower non residential activity and the ultimate level of seasonal winter demand for heating products.

At this point in the year, we forecast long term normal levels of demand compared with stronger than typical levels in Q4 of last year.

Based on anticipated mix, we would expect a modest decline in margin compared to Q4 last year.

Overall, we are pleased with year to date performance or H. Sachs segment, and feel very good about opportunities for growth ahead.

Detection and measurement.

Revenue declined 12.7%, including an organic decline of 16.7%, partially offset by 3.1% increase from the U.S.C. acquisition.

Currency was a tailwind 90 basis points.

The organic decline was due primarily to delays and communication technologies project sales.

Locator sales were comparable to the prior year, but included some catch up sales delayed from earlier quarters when pandemic measures were more restrictive.

While the obstruction lighting sales also declined year on year. This was largely a function of timing compared with a particularly strong Q3 of last year.

Adjusted segment income declined $5.6 million and margin declined 330 basis points.

This decline was largely due to the decline in sales of our communication technologies project products, which have a high level of operating leverage and therefore impacted by volume changes.

As discussed last quarter revenue and margin are being impacted by delays associated with governmental approvals and travel restrictions, which have become prevalent during the cobot pandemic.

Despite this end market demand in funding continues to look solid.

In the late third quarter, we began to see some delayed projects sales deliver we have seen additional deliveries already in Q4 and expect more throughout the quarter.

While we expect this activity to pick up our current view is that the timing of certain larger projects sales may stretch past the end of this year.

For Q4, we anticipate a mid single digit percentage increase in revenue with the impact of the you will see acquisition, partially offsetting offset by an organic decline from lower project sales.

We expect margins to be up sequentially from Q3, but down moderately year over year due to lower project sales.

Our detection and measurement segment has become an increasingly important part of our growth strategy. We are excited about our acquisition of DLC robotics and the opportunities to continue to drive value.

In engineering solutions revenue for the quarter increased 1.7%, reflecting better pricing discipline and a more favorable mix.

Process cooling sales also increased modestly.

Segment income increased $3.3 million.

And margin increased 260 basis points, reflecting the more favorable transformer pricing and mix.

Looking forward into Q4, we anticipate a low single digit percentage decline in revenue and modestly lower margin than the prior year due largely to the current mix and our backlog for Transformers.

Engineered solutions continues to continued its strong performance in the third quarter has proven very resilient in a challenging macro economic environment. We're excited about the pricing and operational improvements and look forward to continued solid performance.

Now turning to our financial position.

Our balance sheet remains solid our net leverage ratio of 1.9 times reflects the September acquisition of U.L.C. robotics were approximately $88 million.

At the end of the year, we would expect leverage to decline towards the lower end of our long term target of 1.5 to 2.5 times driven by a seasonally strong Q4 cash generation.

Adjusted free cash flow was $31 million in Q3, which is similar to the prior year.

For the quarter cash outflow associated with the South Africa, South Africa was approximately $6 million net of tax benefits.

This includes the typical operational and legal costs as well as the impact of claims on bonds related to the projects.

Over the last few months, we won several disputes against Mitsubishi Our primary remaining counterparty on the projects that allowed us to collect a modest amount of cash and to reduce some of our bonding requirements.

However, recently Mitsubishi make claims on certain of our remaining bonds, resulting in cash payments to them. We believe they have no justification for their claims and we plan to vigorously pursue our contractual rights.

We are disappointed with their actions and believe we have a very strong position to recover these amounts.

We feel good about our claims our recent victories and our positioning for future dispute resolution proceedings as.

As we have previously stated we anticipate that any remaining cash impact related to the south African projects, including for dispute resolution would not have a significant effect on our plans to deploy capital for growth.

On an overall company basis, we feel good about the underlying strength of our businesses and our balance sheet.

We believe we have significant capital available to deploy for growth initiatives.

Turning to our near term outlook.

Based on our strong year to date performance and visibility into Q4, we anticipate that our full year EPS will be modestly higher than the prior year.

For Q4, we anticipate a modest decline in our adjusted revenue with the benefit of acquisitions, partially offsetting integrate and organic decline.

Based on the composition. The results. We would also expect a modest decline in margin compared to the prior year.

Key drivers of the fourth quarter include project timing and detection and measurement and seasonal heating demand and non residential orders and h. bass.

In the appendix to todays presentation. We have once again included estimated decremental and incremental margins by segment as well as some of the some additional color to help you with modeling.

With respect to corporate expense in Q4, we anticipate some additional spending on continuous improvement and excellence initiatives I'll sit in discretionary cost reductions implemented earlier in the year and bringing us more in line with Q4 2019 levels.

Now I will turn the call over to gene for some commentary on our end markets and his closing remarks.

Thanks, Jamie.

Overall, our end markets continue to reflect the resilient nature of our portfolio.

In each fact, we're pleased with the performance of our non residential business on a year to date basis.

We are well positioned with significant amount of replacement revenue.

In a diverse mix of end market exposures.

However, as noted we are seeing continued continued sign of moderating non residential order and quote activity.

With respect to our heating business, while it's still early current trends in order patterns for heating or stable and winter weather remains a key Q4 driver.

In detection and measurement locator demand has rebounded significantly, especially in China.

We continue to see solid front log and our project based businesses and movement on delayed orders and communications technologies. However.

However headwinds associated with travel and access restrictions have not fully abated and project timing remains a key area of focus.

In engineered solutions, we continue to see largely stable transformer customer behavior and solid back [noise].

In summary, I'm very pleased with our strong performance for the quarter and for the year to date period.

Despite this challenging environment, we expect full year earnings to be modestly higher and anticipate ending the fourth quarter with a strong balance sheet and liquidity position.

While our growth and margin enhancement hansmann initiatives were temporarily slowed by the pandemic.

We're now on track to make significant strides over the coming year.

We are well positioned to drive substantial value for our shareholders, including through the deployment of capital to accelerate our growth in 2021 and beyond.

I'm very excited about the path in front of us.

I believe we have the right plan the right resources and the right team to continue our successful value creation journey.

Now I'll turn the call back Paul.

Thanks, Dean operator, we're now ready to go to questions. Thank.

Thank you as a reminder to ask a question no need to press star one on your telephone to withdraw your question. Please press the pound cake.

Please standby, while we compile the <unk> roster.

Our first question comes from Damian Carrots W.P.S. Your line is open.

Hi, good evening everyone.

Hey, David.

Congrats on another solid quarter.

Thank you I wanted to ask you about the H. backstage man.

And.

You guys have sort of a mid single digit to high single digit decline in the fourth quarter, there and and noted a couple of items such as the whole, Florida from projects and then you know you have you have some tougher comps seasonally versus last year.

Just wondering kind of if you were to sort of reconcile that with those you know that is one off.

You know can you give us a sense for what the kind of normalized underlying.

Growth rate is.

And you know you kind of think about where we might be next year, obviously I think you.

You know a lot more.

Like we might be in for a slower non res environment.

You know for some time here so.

Yeah, maybe you could just give us a sense on the underlying right there.

Yeah, Jimmy let me take a crack at that so I think.

I think it's a good question I think we're very focused on the nonresi market.

As a reminder, you know that we are a very balanced in terms of replacement versus new build a in our segment.

But as you look forward to 2021, the biggest market indicated that we've always talked about is the Dodge index and if you look at the various.

And.

We are if you go back to the earlier part of the year as depend Imec hit we had a lot of orders on the books, we've seen those flow through and as you know we are six months past the beginning of the cobot pandemic and we are starting to see what the order book looks like as a result of maybe a six month.

Flag, which is typical in that business.

Okay, that's really helpful.

And then can you talk a little bit about now.

Getting back to the operating initiatives, which kind of have then on pause.

Fantastic I was wondering if you might be able to.

Give us a better sense on on the lean and other opportunities you're sticking to what kind of profit margin opportunities exist and when I look at that incremental margin framework that you have for the for the three segments.

That's kind of baked in there.

Your your lean and ER business system initiatives or would that sort of be incremental opportunity above that.

Yes, it's a good question, David I think the way that I think about it is you know from the time of spin to where we are today, we've driven our EBITDA margins from approximately 6% to approximately 13%. So we're sitting with certain low teens right now, we really want to get that high teens.

Instead, we believe we can do that.

And really the primary way for us to do that I believe is through our CRM initiatives.

At the end of the day you know we're all in competitive businesses. We all have inflationary pressures. If you are not doing C. III, you're actually going to be moving backwards, but but the way that I think about it at a high level framework is we push all of our businesses to expand their margins 50 basis points a year.

And in order to do that.

You just can't do it on your good looks right you have to have a plan you have to have the strategy and we actually think lean and 80 20 or the best tools for us to really drive value.

If I look at where we are today is an enterprise.

I do believe we've built a really good business system and how we run the company everything we do from our planning to our strategy to our goal deployment, our KPN eyes. The integration processes have been excellent and I would argue are really a best practice and what we're really for.

Focused on doing is bringing in the CDAI leg to our business system, It's a cultural change.

Tone at the top it's how you behave it's how you act how you reinforce it it's not something that happens overnight.

It's a process and we actually are very excited about this theory so.

Yes, I think Cove. It you know frankly, we had a lot.

Starting at the beginning of this year, which Cove. It took a lot of our programs and slow the down due to frankly due to travel.

And you know you can't do as much training you can't do much is travel, but we feel good about our direction and it's something you're going to hear us.

Talking about a lot more but again, we haven't put a a number in there, but I would the way I would think about it.

Damian is we have to do this to drive our margins higher and this is the primary tool not enough.

Jamie Paul you guys have anything else you'd like to add there.

Dave You know this is Paul is just going to add to your prior question get a couple of things in there from a modeling perspective may help you out here for the fourth quarter number one just a reminder, that we didn't do the PK acquisition in mid November last years, that's round, let's call that around 5 million plus or minus a revenue that would be inorganic in the.

Fourth quarter, and then you asked about the timing of the shift in cooling between Threeq and Fourq, you and it was around $10 million.

On the internal shakes out.

Got it that's really helpful.

And gene for the record I think Scott Scott Sproule would probably argue that he could get your 50 basis points in your margin expansion on good looks a lot on but I think thats helpful.

[laughter] Oh lets you do.

Yes.

On that note I'll get back into queue. Thanks, guys.

Thank you. Our next question comes from Brett Linzey from vertical Research partners. Your line is open.

Good evening everyone.

Hey, Brad Hey, good.

Just wanted to come back to Deanne.

In specific on the Q4 outlook. It sounds like there is some timing and things moving around what is your level of visibility on those deliverables I mean are they taking order really into October here, and what particular businesses give you the confidence that that snaps back.

In the in the fourth quarter here.

Hey, Brett is Jamie.

So a couple of things as we talked about for Q3, our communication technology business. We had some projects that is as we go through the governmental approval process and delivery the folks not working made it a little bit more difficult to get approved at some of the travel restrictions of getting the deliveries made we add to it.

End of the third quarter really began to see some projects begin to move through the platform moves through the system or to the network.

As we've entered the fourth quarter, we see that continuing to happen.

As we look at our book right now we have really no concerns about the amount of business that we have we do have questions about timing just by definition with the process that some of our governmental orders go through it just takes time and with a lot of the folks in the in the approval process not at there.

Offices, it probably takes more time and historically has.

That being said, we actually feel really good about that business in some of the some of the activity that we're seeing we don't see an issue with funding.

We don't see an issue with demand and so it's really more of a question of timing might some of the projects bleed from Q4 into Q1, possibly but over the over the period of no.

Next couple of quarters, we certainly think we will see the shipments come to pass.

On a radio business, which is our locator business. We saw some some catch up from Q2 that that resulted in Q3. So it was actually a comparable quarter in that business.

That is one of our more short cycle businesses. So it was one of the quicker ones to say retractor encoded was also one of the ones that came back more rapidly.

We see that being a very strong business in fact, one of our key components of the whole DNS platform to grow upon and so we see that business doing well our obstruction lighting business, we had some timing challenge.

Challenges there as well for a lot of the same reasons that being said, we see that being a very strong business in coming back to be a comparable type of business. So overall when we look at it we do we do see margins in the fourth quarter sequentially be a little bit higher.

We do see them being modestly lower than last year.

I think if you look at some of the project oriented businesses communication technologies being being one of them. They do carry fixed cost with them and so when we see timing shifts from one quarter to the next detrimental impact to the income line is a little larger the flip side of that when we see that.

The timing of shipments actually hit we should see the incremental sales out of the fixed cost equation come back so.

Overall I think it's.

Gene mentioned you will see we are very happy about that we think that gives us a no other key.

Tone of a of an exciting growth platform and so.

We see it more of a timing challenges as more so than a is that business really on solid grounds or not.

Okay. Thanks for that and then maybe just shifting gears to engineered solutions. The the down low single digits and this is really kind of a Q4, but even into next year.

What are the expectations for Transformers and processes. It is a complex and similar in Q4, both kind of trend down here.

And then specific to Transformers anything you could add on.

Lead times sounds like pricing is better, but and just maybe visibility in the early parts of 2021.

Yes, I'll take a pass at that as well.

So engineering solutions has done extraordinarily well this year have been a one of our really strong points.

Of of a resilient part of our business during the depend immix, we entered the year with a good book of business. We enter next year with a good book of business.

If you go back to Q4 of last year a lot of the.

Some of the pricing activities that we saw flow through the first three quarters began last year in the fourth quarter some of the operational and some of the mix improvements that we made we saw in the fourth quarter of last year. So the comp sales.

But last year included a lot of the operational and pricing improvements that we have benefited from in the first three quarters of this year as we look into next year.

We do see a modest organic decline.

We see maybe a modest margin decline that being said, we still think we have a lot of opportunities for that to be a solid contributor and as gene said any of this is one of the opportunities I think that for continuous improvement there's a lot of dollars there that.

The lean process 80, 20 process will be very well suited to help us gain some margin improvement there as well.

Okay, Great I will go ahead, and just leave it there and pass it along thanks.

Thanks.

Our next question comes from Brian Brian Blair.

Blair with Oppenheimer. Your line is open.

Thanks can you can guess.

Hi, Brian.

Oh thanks.

Great to see the continued recovery in locator demand and something we could drill down on that a bit.

What has been the cadence of that business month by month and what are you seeing in in early Q4, just wondering how.

Locators impacts the Q4 guidance.

I'll take a crack at that Brian I think you know as we talked about on the.

Really the Q1 call. The Q2 call on this call. It is Jamie had highlighted that is our shorter cycle business. So.

In the pandemic started we saw that very very quickly and so that was the first to really have the demand impacts, but since that we really started seeing that in march but since the downturn sequentially. Every month has has been improving and is Jamie alluded to.

Or had mentioned Q3 was really comparable to Q3 of last year and now we did benefit from a little bit of.

Everything was closed down in Q2.

You know there there might have been a little bit of a catch up there, but sequentially, we're seeing nice solid strength there.

Having said that I would caution you know as as everyone would is there is a global shutdown or panned out you know.

We always have to keep our eyes on that but what we see today is very positive and that sequential continuous sequential improvement has continued even up to this point today.

And just per airplane. So I would just point out that we did have a very strong fourth quarter in locators.

2019.

Got it.

Okay, and you will see seems like a great fit with your portfolio.

If we think about.

Financial profile, how how should we.

Think about modeling near and longer term growth rates and I guess same question on margin trajectory.

So why don't I start there you know one of the things we talk I know you are right that is a great fit for our businesses. As you know Hughes is tethered robots that go underground up to 1500 feet.

You know that really manages remediate and fixes water and wastewater lines. These are tethered robots that go underground and do the same for gas lines. So it's a really a.

Comparable business.

The we do think this is a really nice addition to us theres two parts to that business. One is their core what I'd call robot as a service business, which is about three quarters of the revenue.

And then there is the their R&D business they actually.

One of the things, it's really unique that you will see robotics is they solve problems that have never been solved before so for example, there says spot.

Robot is the only robot that we're aware of in the world that can do this and so we have a really nice situation where that solution has come out of their R&D. They have a wide variety of R&D projects that they have.

Underway right now, but that's about a quarter of their business, but roughly speaking we think that that is in the neighborhood of a $40 million business.

We think the margins are higher than our BNN average.

Paul exactly what Weve.

Comparable to higher and higher.

And then we would expect the growth rates to be higher. So if you think about our detection and measurement.

That's a growth rate, we believe on average around 4%, we would view this to be little bit higher than that modestly higher than that as we as we think about that going forward.

Okay I appreciate the color there and.

And Jamie Youve been in your seat for a little while now.

Yeah curious what if anything has surprised you that SPX and what you think some of the best opportunities are for the company going forward.

No great question, but it's a surprise was it's a you know this great company first of all and.

So I think the things I like about it before I came and has that been confirms since I've been here.

Has a great candu, winning culture, which I really love.

Everybody works together very collaborative gene said, a great team I mean that that is that the LTE and everybody that I've worked with had been so you know so welcoming you know if we have a great diverse set of businesses here. We do we serve many different end markets, which gives us a nice blend of diversity you know this.

As has been evidenced by the last two quarters.

The the.

The transformer business as an example to emerge as such a resilient business during the pandemic to to offset some of the decline we saw in short term for detection and measurement has been really nice to see how the portfolio works together.

We have a great balance sheet.

And we have in the LTE and the board, who want us to use it wisely they want us to invest it wasn't which I think is exciting.

Gene talked about the on the lean projects or the 80 20 programs I think that can be a real earnings.

Just it can be a great efficiency that can be a great customer service tool, where we can diversify our differentiate ourselves to the customers. So that we can be a preferred supplier.

As well as seeing it go to our bottom line.

Back to balance sheet, and we have a large amount of opportunity James mentioned the pipeline is strong on inorganic growth, but we also have from what I've seen a lot of channel opportunities a lot of.

A lot of product segmentation opportunities and so there's there's I think the company has a lot of options of places it can grow which I think six it is exciting because we're not going to get them all right, but we have a number of options that the ones that we find that can we can accelerate on we have the option to get do.

That.

Turns and significant opportunities you mentioned the growth side of the business. We've learned as every business has and how to manage better during coated.

What does that do in June and I were talking earlier. This afternoon about digital in May we've learned during the pandemic how the sale remotely.

Is that a way of the future who knows but it certainly allows us to get in front of more people and more of our distributors and more of our customers quicker and faster and more timely than we were if we have to travel by plane and make an appointment. So I mean theres opportunities. There how that played itself out I think as a question but.

I think the point of SPX I think the company has done a really nice job of adapting and in penetrating really to be maybe a differentiated supplier again, which I think is exciting.

I think there's opportunities in our working capital and the more efficient we are in working capital that translates into more investable dollars, we have which I think is important.

You know from capital the company as a great capital structure I think is well suited for the company with our current investment.

Current set of businesses.

How that looks in the future I don't know but is that.

Scott and the team has done a nice job of matching our business needs to the capital structure, thus far and so you know I I I had the opportunity to come into a great company. That's done very well, that's really I think well positioned for growth in the future. So it's I mean, it's been a great experience for the last almost three months now and.

And look forward to the next several.

Okay. Good to hear thanks again.

Thank you.

Next question comes from Walter Liptak Seaport. Your line is open.

Hi, Thanks, Good evening guys great quarter.

Thanks, I wanted to ask about the BNN business.

And specifically the Comtech, it's nice and see those.

Well order delayed starting to loosen up a little bit I wonder if.

Hey, you guys stand that serves.

Just a few orders that have started to loosen up that you have visibility to now or have they figured out but given the regulators are approval process of they figured out how to work in this new normal.

And get more of those projects moving forward.

Yes, I would say.

Probably a combination of all the above that you mentioned.

I think.

There's certainly figuring out are learning how to process. During this environment is a is a key.

Think not coincidentally, we just past the end of last fiscal year and the beginning of the new fiscal year for the federal government and given that that particular segment has so much of.

Of our customer base. It relies on some type of federal funding moving into a new budget year I think's important as dollars are used up in the old fiscal year and re appointed or re apportioned in the new fiscal year.

We are not just seeing a couple of orders, we're seeing what I would say a normal flow of orders.

That business has.

How the number of smaller orders, but it has a couple of large ones that will come through I think the company called run rate.

We have had some run rate business that are smaller items, but I think it's I think we're seeing a normal front log as we look into the year.

The question is what are the steps that we have to go through to get them shipped and and so I think it's.

That business would be in a project oriented business.

Getting better visibility and having better visibility now than we probably did six months ago gives us a lot of good confidence.

Okay and.

And thinking that things have been delayed for a while are the margins still.

Solid in that business or is there have been some degradation.

Yes, I think generally speaking they're very similar.

It doesn't necessarily show up in the TNL, because we do have a fixed cost structure there.

But over the over the long term it shipments balance out.

We haven't seen any really decline in the margin structure, thus far.

Okay, great if I could try one then the the heating season.

The understanding that your your heating businesses.

His his replacement.

But we've seen this kind of resurgence in.

Residential space.

Spending.

We see a better than normal replacement.

Cycle this year.

We could wall and I think you know as we go into heat season, you know when we think about that market is it's a big steady market grows.

Gross some every year, probably low single digits to mid single single digits.

Just normally.

Gan Ugly and then as always the big driver will be whether right or really cold wet winter could expand the market by 10% or really warm winter could shrink it by 10% So were always keeping our eyes on the winter.

On the heating degree days, both the number of them, but then also when they hit.

The earlier they are have a benefit to drive up demand. So those are the things we're keeping our.

Rise on the other thing I would say is you want to me you know.

Make sure that theres not over stocking or under stocking and all the information. We have today is that there is pretty balanced inventory in the channel so going into.

Going into the heating season, we actually feel pretty good. We also like our products, we launched a really nice eco tech product that we think has a great value proposition.

So yeah, we actually feel good about the trajectory of that business and where we are going into Q4.

Okay. Thanks.

Thank you and I'm showing no further questions at this time I'd like to hand, the conference back to Mr., Paul Clegg for any further comments.

Okay. Thank you all for joining our call and we look forward to catching you up again next quarter on our accomplishments. Please stay safe take care.

Ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a great day.

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