Q3 2023 SPX Technologies Inc Earnings Call
[music].
Okay.
Good day and thank you for standing by welcome to the Q3 2023, SPX Technologies earnings Conference call.
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I would now like to hand, the conference over to your Speaker today, Paul Clegg VP of Investor Relations and Communications. Please go ahead.
Okay.
Thank you and good afternoon, everyone. Thanks for joining us on the call today are gene Lowe, our president and Chief Executive Officer, and Mark Ron Our Chief Financial Officer.
A press release containing our third quarter 2023 results was issued today after market close.
You can find the release and 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 and to follow along with the slide presentation during our prepared remarks.
A replay of this webcast will be available on our website until November 9th.
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.
Our comments today will largely focus on adjusted financial results and comparisons will be the results of continuing operations only.
You can find detailed reconciliations of historical adjusted figures from their respective GAAP measures in the appendix to today's presentation.
Our adjusted earnings per share, excluding primarily acquisition related costs non service pension items mark to market changes in amortization expense.
Finally, we will be conducting meetings with investors over the coming months, including at the Baird Industrials conference in Chicago.
And at the UBS Industrials summit in Palm Beach, Florida.
In November.
With that I will turn the call over to Jim.
Thanks, Paul Good afternoon, everyone and thank you for joining us on the call today, we will provide you an update on our consolidated and segment results for the third quarter.
I will also provide an update on our full year guidance for 2023.
We achieved strong results in Q3, including significant year on year revenue and margin growth and solid performances from our recent acquisitions.
During Q3, our businesses executed well and we saw strong demand continue across many of our end markets.
Considering our strong year to date performance and outlook, we are raising our full year guidance for adjusted EPS by five cents at the midpoint, reflecting year over year growth of approximately 38%.
During the quarter, we finalized an agreement with Mitsubishi to settle all remaining claims between us related to the projects in South Africa.
This is a very positive development, which after many years brings an end to our involvement in these projects and allows us to further focus on growth.
Mark will discuss this in more detail.
Well I am pleased with our third quarter performance and continued strong execution on our value creation roadmap.
Turning to our high level results.
For the quarter, we grew revenue by approximately 21%, including organic growth of 10, 5% driven by strength in both our HVAC and detection <unk> measurement segments.
Adjusted operating income grew approximately 57% year on year with 390 basis points margin expansion.
With strong backlog and solid order trends and positive operational momentum.
Well positioned to achieve our updated full year guidance.
As always I'd like to update you on our value creation efforts.
During Q3, we had several successes, including in our digital and sustainability initiatives.
On the digital front, we continue to drive value for our customers for the <unk>.
Rollout of new software platforms that offer enhanced functionality.
And our fair collection business, where youre getting significant customer interest in the newly launched two quite old version of our Gen fair linked platform.
This new cloud based solution enables more efficient use of public transit assets.
Providing faster and easier data collection and enhanced reporting features.
And our locators business, we recently launched radio detection manager on line.
Our cloud based solution that provides value added insights such as scan quality and geospatial data.
These helped to improve the performance of technicians in the field and further reduce incidence of damage to underground assets.
On the sustainability front, our most recent company report reflects significant progress towards our carbon reduction target.
And notable improvements in water usage.
These results validate the process improvements and investments, we've been making to help drive efficient resource utilization.
And reduce costs. The report is available on our website.
And now I'll turn the call over to Mark to review, our financial results and guidance.
Thanks James.
It was another strong quarter for SPX technologies in Q3, our adjusted EPS grew 31% year on year to $1 <unk>.
The adjustments from GAAP results covered earlier by Paul are consistent with our historical practice.
Total company revenues increased 21, 1% year on year.
In fact in detection and measurement contributed about evenly to organic growth of 10, 5%.
Acquisitions contributed 10% growth and FX was a modest tailwind.
Segment income grew by $28 2 million or <unk> 44, 5% to $91 $6 million.
Segment margin increased 330 basis points.
For the quarter in our HVAC segment revenues grew 27% year on year.
On an organic basis revenues grew 10, 6% driven by cooling.
Acquisitions contributed growth of 16, 3% and included Tampico, and our cooling platform an aspect in our heating platform.
Segment income grew by $25 2 million or 76% while segment margin increased 570 basis points.
Segment income and margin continued to benefit from strong demand and operational performance in our cooling platform.
Our recent acquisitions were accretive to segment margin.
Despite strong Q3 deliveries backlog was virtually unchanged from Q2 at $338 million, reflecting strong quarters.
For the quarter and detection and measurement revenues grew 11, 8% year on year.
Each of our platforms contributed to organic growth of 10, 4%.
Currency had a favorable impact of one 4%.
Our project businesses showed particular strength, including some earlier than anticipated deliveries.
Segment income increased by $3 million or nine 9% and margin was similar to the prior year.
Segment backlog at quarter end was $234 million were flat with Q2, despite strong deliveries.
We continue to experience solid environment for project orders.
Turning now to our financial position at the end of the quarter.
We ended Q3 with cash of $102 million and total debt of $674 million, our leverage ratio declined to one seven times from one eight times in Q2.
Year to date adjusted free cash flow was approximately $112 million and we continue to expect full year adjusted free cash flow to be similar to our adjusted net income.
During Q3, we finalized an agreement with Mitsubishi to settle all of the remaining claims between us related to the legacy South African projects.
After many years of successfully reducing the risks associated with these complex projects.
This agreement and our involvement in South Africa, and finalize our repositioning away from legacy power related businesses as we re prioritize resources to strengthen our focus on the growth of our HVAC and DNS segments.
For the full year 2023, we now expect net cash usage related to South Africa dispute payments of approximately $12 million.
This includes a settlement payment in Q3 associated with the agreement.
Cash awards received during the quarter and a tax benefit.
After the settlement payment in the third quarter, we remain in a net positive cash position relative to Mitsubishi on the cumulative awards that were granted by various legal dispute bodies.
In 2024, we anticipate one final settlement payment of approximately $19 million, including the related tax benefit.
We are very pleased to put this chapter behind US. This agreement removes residual uncertainty related to the dispute resolution process and reflects favorable economics.
<unk>, the elimination of future legal spending of $15 million to $20 million annually.
In line with the remaining settlement payment.
Importantly, we see no impact on our capital deployment capacity and continue to anticipate our net leverage ratio at year end of one five times or lower.
Moving on to our guidance.
We are increasing our 2023 guidance for adjusted EPS to a range of $4 22.
To $4 32.
From a prior range of $4 15 to $4 30.
The new midpoint of $4 27.
Next a year on year growth 38%.
Our HVAC segment guidance remains unchanged, we continue to anticipate segment revenue growth of approximately 24% at the midpoint and segment income margin of approximately 20%.
In our detection and measurement segment, we now anticipate revenue in a range of $610 million to $620 million or a year on year increase of approximately 12, 5% at the midpoint.
This compares with a prior range of $590 million to $605 million.
We continue to anticipate segment income margin of approximately 20%.
The increase in D&A guidance results largely from stronger project deliveries in the third quarter.
As always you will find modeling considerations in the appendix to our presentation.
I'll now turn the call back over to gene for a review of our end markets and his closing comments.
Thanks Bart.
Current market conditions remain supportive of our outlook.
Within our HVAC segment, we continue to see strong demand for cooling products across a broad set of end market applications, including data centers semiconductor plants and various other industrial facilities.
And heating commercial and industrial demand remains solid and channels remain balanced.
As anticipated heating backlog has continued to normalize from last year's elevated levels. As a result, whether it's once again, a key factor influencing the level of demand during the winter months.
In detection and measurement our run rate demand is steady with some regional variation while the environment for project orders remained solid.
In summary, I'm very pleased with our third quarter and year to date performance.
With a strong backlog and positive operational momentum, we are well positioned to achieve our updated full year guidance.
Looking ahead, I see multiple opportunities to continue investing for growth, including through our active M&A pipeline.
I'm also pleased that our settlement agreement in South Africa brings to an end are long involvement there with.
With a favorable economic outcome and the elimination of this risk.
I remain very confident in our ability to continue executing on our value creation framework in the near term three years to come.
And with that I'll turn the call back to Paul.
Thanks, Jim Operator, we are now ready to go to questions.
Okay.
And I'll just ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Please standby, while we compile the Q&A roster.
And our first question comes from the line of Bryan Blair with Oppenheimer. Your line is now open.
Thank you good afternoon guys.
Hey, Brian good afternoon.
So it will provide a little more color on the order rates in early Q4, and if there's any divergence from the underlying trends that we are obviously favorable through Q3 and that would be great to hear how you're thinking about demand visibility and growth opportunities into 'twenty four across SPX platforms.
Yes, Brian I'll take a crack at that I think overall, we feel very good about what we're seeing.
I break it down across our different segments, what I would say is calling remains very strong as a couple of drivers there, but even across the board, we're seeing seeing nice strength in our overall coin business, which is really our largest platforms I think we're very.
Well positioned as we look forward into 2024 there.
Shifting over to our heating business.
<unk> business is largely normalized a lot of that is replacement demand.
And I think we're in a more normal.
<unk> so on the hydraulics side.
Oiler side Youre going to see steady growth there every year and.
The weather have any particular.
Winter can can drive demand for suppress it a little bit.
And then electric heat, we're seeing solid solid demand there across the board. So we feel good about what we're seeing across our HVAC businesses today.
And actually feel good looking ahead to 2024.
If I look on the detached management side, what I would say is we typically think about the projects from the run rate businesses.
Had a very strong year on projects.
Both.
Over the past two years.
Done a nice job booking and revenue ing.
A lot of orders, but we feel very good on the projects going into 2024.
There's been a lot of awards and we think we're very well setup on that side of the equation and then really you get to run rate business is in run rate remains steady.
I think that.
Our markets are holding up.
Obviously, we've got to keep an eye on that.
<unk>.
And what's going on there, but what we see today, we feel very good about the balance of the year and we feel like it's still early we're still putting together our planning.
24, but I would say, we're moving in a positive direction, there mark kind of setting us you'd like to add.
Yes, Thanks gene I would say, Brian when I look.
At the tailwind and some of the broader drivers across the business that we've talked about over the last handful of quarters I mean, they remain solid.
And positive in many cases and I think some of it whether it's some of this federal spending government spending from the infrastructure Bill.
Driving both opportunities and dnm or on the HVAC side, whether it's re shoring.
Or just general sort of industrial activity all of those trends remain positive today. So we feel good about the backdrop.
I don't think it's really changed as we sit today and interestingly enough. As you look ahead to 2004, even though we are really accelerating our shipments this year and having a very good revenue year.
We believe we're going to be nicely up on backlog as we go into 'twenty four so I think we're going to be starting in a strong position. So yes, but what we see today in our end markets.
Feeling positive.
No that's great to hear I appreciate all the color.
Would you be willing to put some numbers.
<unk> two.
How much data centers and semiconductor plants factor into your confidence on the HVAC side, what kind of growth has the HVAC segment seen in those verticals in 2023, and what should we expect in 2012.
Yes, I can.
I can make a few comments there.
We've always been in data centers.
And actually when you download.
It'll be about 10% of our this year's cooling revenue, we anticipate would come from data centers for example, Bryan that's up pretty nicely from the prior year.
And as you probably heard US say also we have a lot of it.
An increasing amount of exposure.
For semiconductor manufacturing and battery plants and all three of those if you do look at those.
Customer base, there is pretty good visibility into their forward years. So we feel very good about the opportunity there.
And then the other thing I would say is even if you strip out.
Those end markets, we're seeing nice growth across.
Our other end markets. So you take hospitality institutional education.
So it's those are a nice growth drivers no doubt and we do feel like there is some nice forward demand there and that that Tam that market has expanded.
Even in our other segments, we're seeing nice success, there as well so yes, we feel good about that Brian is good luck.
Look into 'twenty, four and 'twenty five.
Again very encouraging.
Last one any.
Additional detail you can offer.
Date on Tampa, one aspect that that would be great. Yes that was integration tracking.
The house financial contribution relative to the year one deal plan for both cases any update on that.
Partial year 2023 accretion and how should we think about carryover into 2024.
Yes, I'll start I think.
Overall, we're feeling very good I'm feeling very good about both of them.
<unk> is a little bit more straightforward in the sense that thats going bolting into our EAM business.
Those guys have really done a nice job, we're actually seeing some nice cross selling there.
Seeing some data center wins there.
So the Tam co side that machine is feeling.
Feeling very good I really mean.
And a lot of progress there as we've talked about all along on the aspect side. It is a little bit more complex because youre premium two scale businesses together.
Aspect is performing very well they are I believe.
Both of them are ahead of their profit.
Lands in the models that we built.
For the business, but.
But it is a little bit more of a complicated integration there we're tracking very well there we have a very seasoned leader there Randy data.
Overseeing all of the integration processes, there were actually feel really good about the direction of those businesses coming together, but that is that will take.
A little bit more time to really fully integrate those so but.
On our side is very good.
Anything else you guys like to add with regards to yes, I would just say that they are on plan from a financial perspective, Brian as we had.
Originally outlined when we made the acquisition. So we feel really good about their financial performance I believe we indicated earlier this year that would be about 20 of accretion related to those two businesses net of the obviously the funding cost and we still hold true to that I believe that would be the case.
Understood. Thanks again guys.
Thanks, Brian.
One moment for your next question.
And your next question comes from the line of Lawrence de Maria with William Blair. Your line is now open.
Hi, Thanks, good morning, everybody or good afternoon, rather.
Okay.
Hey.
So obviously a big question.
Focusing on as you just beat by <unk>.
We only raised by about <unk> <unk>.
So question is is.
There are some conservativism built into the fourth quarter or are you seeing any.
Signs to be wary of.
Okay.
Obviously, maybe we pulled forward some demand sell can you just talk to that aspect of the guidance. Please.
Yes, Larry this is Paul.
We are raising by <unk>.
<unk>.
In terms of our weather.
For a lot of the models out there we beat by about by about six times for the quarter.
About half of the improvement that we saw relative to what we were expecting was due to some pull forward from the fourth quarter and that was in the detection <unk> measurement segments.
On a project basis and that was about <unk>.
I actually have that.
Also get a tax impact this quarter that was a bit higher than.
And then what we originally anticipating and that had to do with the repatriation.
Some cash.
And the impact there was about <unk>.
Okay, I would say.
Just from a guidance perspective, I mean, I think we view it as sort of balanced given the market conditions that we're seeing out there today.
Okay that makes sense thanks for clarification.
Obviously.
Great care about <unk>, we're also looking towards 2024.
And you guys have been doing exceptionally well are there any pockets of weakness we talked about some of the strength youre seeing any.
Actual tangible signs of weakness concerns out there other than the macro tea leaves. So just kind of what are you seeing thats concerning specifically out there if anything.
Larry we're not really seeing anything as we sit today that sort of tangible weakness right. We are monitoring kind of the broader economic environment.
Which.
Depending on your perspective could be positive to mixed.
And the market share and but.
Overall, we're not seeing anywhere we continue to monitor our run rate businesses and we watch those very closely.
We've kind of characterize them as steady and largely on target. So I know.
It's kind of where we what we see as we sit today.
You talked about having a higher backlog I think exiting the year and some of the strength youre seeing out there in trends and things. So we're going to assume we're talking about incremental margins next year can you just talk in terms of our modeling how should we think about either incremental margins or versus just overall margin improvement next year based on continuous improvement.
Just some perspective on how we should be thinking about that.
Yes.
Jean mentioned several tailwind that we think are blowing favorably for us in the <unk>.
<unk> space around cooling. So we think we're in a very good position there you've heard us talk about some of the continuous improvement processes.
We have in place and some of the investments that we're making this year to improve our overall throughput and even extend capacity somewhat for the call.
Business I think we feel very good there about our margin opportunities. We did mentioned previously that there was probably about 100 basis points of price cost.
Benefit in our in our HVAC segment overall.
At some point, if we were to see some.
The progression and the price cost equation, we could get some of that back but.
I think overall, we feel good about our opportunities.
In HVAC to continue pushing the margin profile in detection and measurement.
As you know we had about 100 basis points headwind this year associated with some mix.
In our communication technologies business and a <unk>.
Fly chain issue that we had in third quarter, which has been resolved at this point.
We're expecting those to go away next year. So as we set the stage set the table for next year with project orders, which we think look pretty good for US I think we feel good about our opportunities there also.
Okay very good thank you and good luck.
Thanks, Thanks, Larry.
One moment for the next question.
And your next question comes from the line of Steve.
Arizona with Sidoti Your line is now open.
Hi evening Jean Marc.
I wanted to follow up some of the other questions.
Obviously with a quarter left we can sort of back into how youre guiding for for Q, you addressed it a little bit.
Right, because I can back into dnm for fourth quarter and that looks.
Flat to down in another quarter, where margins are down year over year and I think you just said some of the pressures on margins for through this quarter I'm, just trying to get a better sense of your expectations.
Of the Dnm.
Particularly when we're looking at another quarter of down margins and flattish to down revenue.
So you pick that up next year and was that just simply projects hit in <unk> versus hitting in <unk> a year ago.
Yes. So you did you look you are looking at the year ago period, Youre, absolutely right that that was our highest quarter in DSM in the prior year I think our margins in that quarter, we're almost 24% which is on the higher end of what we've been doing in that segment and that was due to a concentration of some more favorable mix of products in the prior year.
Year.
This year, we did call out that we did have again that 100 basis points impact from a couple of different items. One was the again the mix of income tax and a supply chain issue that's been resolved.
We would still expect to see fourth quarter, as our highest margin quarter and detection and measurement this year.
<unk>.
We would expect to benefit from.
The.
The absence of those same issues in the subsequent year.
When we think about moving forward with with infrastructure funding, which has clearly been funneling at least through the summer.
As well as inflation reduction act and some other federal funding that could directly impact you.
Are you seeing it now and can you see a bigger impact from.
Some of those funding opportunities next year.
Steve we have seen some benefit from from some of that government funding, particularly in our transportation.
Transportation business some of those projects have already.
Benefited from availability of that funding and our anticipated we anticipate that next year, we will begin to see additional dollars benefit.
Many of the businesses across the platform, we've talked about where that could benefit a ton as.
As well as our location and inspection businesses and then clearly you may see some benefit from some of the HVAC businesses as well.
So we're watching that carefully we anticipate that we will see more of those dollars flow I think most people believe that.
The distribution of those funds has been slower than I think anyone anticipated.
We believe we will benefit from those next year and beyond quite frankly for the next few years.
Great.
We're already starting to Delever out of the <unk>.
Aspect deal clearly continues to be a strong cash flow generator any targets on where you want where we.
We're expecting or targeting net leverage to go near term versus longer term.
Yes, I think Steve what we've communicated that.
We're most comfortable in a kind of a net leverage range between one five and two five times.
And I don't think anything has changed with respect to that.
Today, obviously leverage will be.
Dependent on acquisition activity.
But as we look into next year, we'll see what sort of opportunities.
Present themselves and whether there's anything that makes sense from an M&A perspective.
Any reason to think you lean towards smaller after making the larger aspect Hill.
No not necessarily.
I think we kind of consider any and all opportunities that are out there right.
Small ones are obviously can be nicely accretive, but some of these more mid sized transactions that we completed.
This year.
Fit nicely as well I think it'll be a function of what opportunities are there is there a strategic rationale for them along with the value creation path I think thats more important obviously that size right sure. Okay. Thanks, Mark Thanks Jane.
Thanks.
One moment for the next question.
And your next question comes from the line of Walter Liptak with Seaport Research. Your line is now open.
Hi, Thanks, good evening, everyone great quarter guys.
Thanks, Paul and thanks, Paul.
When asked about the D&S segment, it did a little bit better than I was expecting.
And it was up quarter over quarter.
<unk>.
And Larry.
No question that there was some pull forward.
Projects I Wonder if you can give us a little bit more on that.
Yes, So we had about we decided that at about <unk> <unk> of impact well for the third quarter coming from the fourth quarter and that was largely related to our fair collection business, but we also had a little bit. We also did a little bit better than our <unk> business than anticipated.
Okay great.
And then maybe the same thing on orders.
The backlog looked pretty strong demand.
It looks like the orders.
It might be up sequentially and year over year I Wonder if you can talk about.
What's what's going well in.
In the different businesses within Dnm.
For orders.
Yeah.
So yes, our backlog overall at the end of the quarter wealth was around $234 million and Thats about flat sequentially. As you know in our DNS business, our backlog tends to flex up and down a little bit as you bring in.
The large projects.
From orders and then deliver them. So the variances maybe are a little less meaningful than the absolute size of that but I think what I would say is the project businesses, which make up the vast majority of the backlog.
Our very high relative to historical levels and Comtech.
And our fair collection business or really the largest contributors to that.
As ware.
But we also have seen.
Some nice backlog in our <unk> business.
Okay great.
Just thinking about those larger projects is that.
Are those.
Get a ship in the fourth quarter or are these the kind of projects that are going to be shipping in say 2024 in the first half or whatever.
Yes, it's a good question, we do have some of that backlog that goes into next year won't so if you'd like.
Feel like we're starting to be set up for.
Or 2024.
There is a little bit of it that would roll even into the subsequent year into 2025.
Okay, great. Okay. Thanks, so much.
Thank you.
Yeah.
Again in order to ask a question. Please press star one on your telephone.
Does that is star one on your telephone.
And your next question comes from the line of Damian Karas with UBS. Your line is now open.
Hey, good evening guys.
Hey, Damian.
Congrats on the official added to <unk> and Keith Hilli I remember the days.
We're talking about that literally quarter in quarter out if not more so a pretty vivid memories of all of that.
Thank you.
Very good.
Yeah.
So you don't want to John and Joe The first Atlas.
Got it. Thank you sorry, you don't want to get involved in any mega coal power projects team.
Yes, I think that's a pretty safe assumption.
Particularly augmented by the fact that we sold all of those business is about six years ago. So.
Well Mark I think it's clearly good to put that in the rearview mirror.
Most definitely.
So I appreciate all the color on the demand environment.
But I think for the.
Last question that was asked so you've mentioned solid order trends I don't want to make any presumptions about the level could you just share any numbers around the actual order rates like year over year in the quarter.
And how others line lining up.
Maybe what I can give you is that our book to Bill.
Really both segments.
Ah.
Is one or better.
And going into the next quarter into the fourth quarter, we would expect it to be a little bit better than one.
And again coming off.
On and off.
Fairly strong quarters in terms of deliveries.
Yes. Thank you.
And then I wanted to ask you.
About.
And your distribution partners I had a lot of manufacturing company certainly in the HVAC industry.
They have been experiencing destocking challenges, it's not something that you guys have really touched on I recognize you have more built to order.
Aspect to your HVAC business.
But could you just remind us kind of a cross.
SPX.
Where you do rely on kind of third party distribution and Andy and I am curious to hear any.
Any indications of distribution partners may be carrying some excess inventory.
Yes, David what I would say is youre exactly right I think the bulk of our business is engineered to order. So it's not really going into that.
Distributions zone I would say there are a couple of exceptions to that probably the biggest one to be our residential hydraulics the residential boiler business.
And that is where we actually have very good visibility into.
To how.
Where the distributors are what they're carrying.
Every distributor, but a good chunk of them and a good feel for the market. This is something we spend a lot of time on and making sure that we feel like we know what the distribution is balanced or high or low.
And what we see today is it's pretty balanced.
On that side. So we don't really have any concerns there right now on the on the boiler side, we're keeping our eyes more on the.
The weather.
<unk>.
Cold Snapple will drive.
A big chunk of extra orders and so forth there but.
So that's the biggest place that we keep our eyes on the second one I would say which is smaller.
Would be radio detection.
And I would say that we've seen perhaps a little bit of Destocking. There that's already in our numbers this year.
Obviously with interest rates going up we are seeing that some distributors, who who really.
Our leverage.
Finance inventory is coming a lot more expensive to finance inventory and therefore.
Some of these smaller distributors mid sized distributors, they're very careful about what they own but those would be the two places I would say that we need to think about it and I don't know of anything else that I missed here with regards to.
Padma.
I think you covered it.
Okay very helpful. Thank you and then one just one last quick one.
So speaking of hydronic the Doe.
Proposed some roles recently on on water heater efficiency.
I'm curious if that.
Proposal could move it all kind of into your.
Business or any discussions out there that might be happening on the regulatory front for gas boilers.
Yes, no I think that is very very systematically regulates hydraulics and typically they do five years, we actually just finished upgrading all of our residential.
Blind to the appropriate App you see appropriate efficiency and then after that was the commercial update which again is.
Moving towards more high efficiency, so, yes, and I think that's.
That's a part of the.
Never ending part of what's going on in our business typically the standards are always getting higher.
Patients are getting higher.
And we actually view that as something that typically benefit sauce. What you see is a lot of those new specifications are very hard to do.
And it takes a lot of engineering a lot of rework.
And so you have to have some scale to be able to build those new higher efficiency solutions. So.
I think this is true in hydraulics, but I think this is true in almost all the markets that we serve because we're typically leaders in the markets that we serve when you see the.
Standards being raised where typically the company that.
Most well positioned to take advantage of that and that typically I would view as a net positive. So so yeah. Those those are still going on and we would anticipate those to continue going on typically on the with the EPA its five.
Five year cycle.
Understood. Thank you very much best of luck.
Thanks, Ken.
And I see no further questions at this time I will now turn the call back over to Paul Clegg.
Thank you all for joining us and we look forward to catching up with you at upcoming conferences. Please reach out if you have questions.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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Good day, and thank you for standing by and welcome to the Q3 2023, SPX Technologies earnings Conference call.
At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to crash star one on your telephone you will then hear an automated message advising your hand is raised to withdraw your question. Please press <unk>.
SAR one one again please be advised that today's conference is being recorded.
I would now like to hand, the conference over to your Speaker today, Paul Clegg VP of Investor Relations and Communications. Please go ahead.
Okay.
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 Mark Ron Our Chief Financial Officer.
A press release containing our third quarter 2020 results was issued today after market close.
You can find the release and 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 and to follow along with a slide presentation during our prepared remarks.
A replay of this webcast will be available on our website until November 9th.
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.
Our comments today will largely focus on adjusted financial results and comparisons will be the results of continuing operations only.
You can find detailed reconciliations of historical adjusted figures from their respective GAAP measures in the appendix to today's presentation.
Our adjusted earnings per share excludes primarily acquisition related costs non service pension items mark to market changes in amortization expense.
Finally, we will be conducting meetings with investors over the coming months, including at the Baird Industrials conference in Chicago.
And at the UBS Industrials summit in Palm Beach, Florida, both in November.
And with that I'll turn the call over to Jim.
Thanks, Paul Good afternoon, everyone and thank you for joining us on the call today, we will provide you an update on our consolidated and segment results for the third quarter.
I will provide an update on our full year guidance for 2023.
We achieved strong results in Q3, including significant year on year revenue and margin growth.
Solid performances from our recent acquisitions.
During Q3, our businesses executed well and we saw strong demand continue across many of our end markets.
Considering our strong year to date performance and outlook, we are raising our full year guidance for adjusted EPS by five cents at the midpoint, reflecting year over year growth of approximately 38%.
During the quarter, we finalized an agreement with Mitsubishi to settle all remaining claims between us related to the projects in South Africa.
This is a very positive development, which after many years brings an end to our involvement in these projects and allows us to further focus on growth.
Mark will discuss this in more detail.
Overall, I'm pleased with our third quarter performance and continued strong execution on our value creation roadmap.
Turning to our high level results.
For the quarter, we grew revenue by approximately 21%, including organic growth of 10, 5% driven by strength in both our HVAC and detection <unk> measurement segments.
Adjusted operating income grew approximately 57% year on year with 390 basis points margin expansion.
With strong backlog and solid order trends and positive operational momentum, we are well positioned to achieve our updated full year guidance.
As always I'd like to update you on our value creation efforts.
During Q3, we had several successes, including in our digital and sustainability initiatives.
On the digital front, we continue to drive value for our customers for the rollout of new software platforms that offer enhanced functionality.
And our fair collection business, where youre getting significant customer interest in the newly launched two <unk> version of our Gen Fair link platform.
This new cloud based solution enables more efficient use of public transit assets.
Providing faster and easier data collection and enhanced reporting features.
And our locators business, we recently launched radio detection manager on line.
Cloud based solution that provides value added insights such as scan quality and geospatial data.
These helped to improve the performance of technicians in the field and further reduce incidence of damage to underground assets.
On the sustainability front, our most recent company report reflects significant progress towards our carbon reduction target.
And notable improvements in water usage.
These results validate the process improvements and investments, we've been making to help drive efficient resource utilization.
Reduce costs. The report is available on our website.
And now I'll turn the call over to Mark to review, our financial results and guidance.
Thanks James.
It was another strong quarter for SPX technologies in Q3, our adjusted EPS grew 31% year on year to $1 <unk>.
The adjustments from GAAP results covered earlier by Paul are consistent with our historical practice.
Total company revenues increased 21, 1% year on year.
In fact in detection and measurement contributed about evenly to organic growth of 10, 5%.
Acquisitions contributed 10% growth and FX was a modest tailwind.
Segment income grew by $28 2 million or 44, 5% to $91 6 million.
Segment margin increased 330 basis points.
For the quarter in our HVAC segment revenues grew 27% year on year.
On an organic basis revenues grew 10, 6% driven by cooling.
Acquisitions contributed growth of 16, 3% and included <unk> in our cooling platform an aspect in our heating platform.
Segment income grew by $25 $2 million or <unk>, 76%, while segment margin increased 570 basis points.
Segment income and margin continued to benefit from strong demand and operational performance in our cooling platform.
Our recent acquisitions were accretive to segment margin.
Despite strong Q3 deliveries backlog was virtually unchanged from Q2 at $338 million, reflecting strong quarters.
For the quarter and detection and measurement revenues grew 11, 8% year on year.
Each of our platforms contributed to organic growth of 10, 4%.
Currency had a favorable impact of one 4%.
Our project businesses showed particular strength, including some earlier than anticipated deliveries.
Segment income increased by $3 million or nine 9% and margin was similar to the prior year.
Segment backlog at quarter end was $234 million were flat with Q2, despite stronger deliveries.
Overall, we continue to experience solid environment for project orders.
Turning now to our financial position at the end of the quarter.
We ended Q3 with cash of $102 million and total debt of $674 million.
Our leverage ratio declined to one seven times from one eight times in Q2.
Year to date adjusted free cash flow was approximately $112 million and we continue to expect full year adjusted free cash flow to be similar to our adjusted net income.
During Q3, we finalized an agreement with Mitsubishi to settle all of the remaining claims between us related to the legacy South African projects.
After many years of successfully reducing the risks associated with these complex projects disagreement and our involvement in South Africa, and finalize our repositioning away from legacy power related businesses as we re prioritize resources to strengthen our focus on the growth of our HVAC and DNS segments.
<unk>.
For the full year 2023, we now expect net cash usage related to South Africa dispute payments of approximately $12 million.
This includes a settlement payment in Q3 associated with your agreement.
Cash awards received during the quarter and a tax benefit.
After the settlement payment in the third quarter, we remain in a net positive cash position relative to Mitsubishi on the cumulative awards that were granted by various legal dispute bodies.
In 2024, we anticipate one final settlement payment of approximately $19 million, including the related tax benefit.
We are very pleased to put this chapter behind US. This agreement removes residual uncertainty related to the dispute resolution process and reflects favorable economics.
<unk>, the elimination of future legal spending of $15 million to $20 million annually.
In line with the remaining settlement payment.
Importantly, we see no impact on our capital deployment capacity and continue to anticipate our net leverage ratio at year end of one five times or lower.
Moving onto our guidance.
We are increasing our 2023 guidance for adjusted EPS to a range of $4 22.
<unk> to $4 32.
From a prior range of $4 15 to $4 30.
The new midpoint of $4 27 reflects a year on year growth of 38%.
Our HVAC segment guidance remains unchanged, we continue to anticipate segment revenue growth of approximately 24% at the midpoint and segment income margin of approximately 20%.
In our detection and measurement segment, we now anticipate revenue in a range of $610 million to $620 million or a year on year increase of approximately 12, 5% at the midpoint.
This compares with a prior range of $590 million to $605 million.
We continue to anticipate segment income margin of approximately 20%.
The increase in Dnm guidance results largely from stronger project deliveries in the third quarter.
As always you will find modeling considerations in the appendix to our presentation.
I'll now turn the call back over to gene for a review of our end markets and his closing comments.
Thanks Bart.
Current market conditions remain supportive of our outlook.
And then our HVAC segment, we continue to see strong demand for cooling products across a broad set of end market applications, including data centers semiconductor plants and various other industrial facilities.
And heating commercial and industrial demand remains solid and channels remain balanced.
As anticipated heating backlog has continued to normalize from last year's elevated levels. As a result, whether it is once again a key factor in influencing the level of demand during the winter months.
In detection and measurement our run rate demand is steady with some regional variation.
The environment for project orders remained solid.
Yeah.
In summary, I'm very pleased with our third quarter and year to date performance.
With a strong backlog and positive operational momentum, we are well positioned to achieve our updated full year guidance.
Looking ahead, I see multiple opportunities to continue investing for growth, including through our active M&A pipeline.
I'm also pleased that our settlement agreement in South Africa brings to an end are long involvement there.
The favorable economic outcome and the elimination of this risk.
I remain very confident in our ability to continue executing on our value creation framework in the near term three years to come.
And with that.
I'll turn the call back to Paul.
Thanks, Jim Operator, we are now ready to go to questions.
Okay.
And I'll just ask a question. Please press star one on your telephone and wait for your name to be announced.
To withdraw your question. Please press star one again.
Please standby, while we compile the Q&A roster.
And our first question comes from the line of Bryan Blair with Oppenheimer. Your line is now open.
Thank you good afternoon guys.
Hey, Brian good afternoon.
So it will provide a little more color on the order rates in early Q4, and if theres any divergence from the underlying trends that we are obviously favorable through Q3 and that would be great to hear how you're thinking about demand visibility and growth opportunities into 24 across SPX platforms.
Yes, Brian I'll take a take a crack at that I think overall, we feel very good about what we're seeing.
If I break it down across our different segments. What I would say is calling remains very strong as a couple of drivers there, but even across the board, we're seeing seeing nice strength in our overall coin business, which is really our largest platforms I think.
And we're very well positioned as we look forward into 'twenty 'twenty four there.
Shifting over to our heating business, our heating business is largely normalized.
Lot of that is replacement demand.
And then I think we are in a more normal.
Situations, so on the hydraulics side.
The boiler side youre going to see steady growth there every year and.
The weather have any particular.
Winter can can drive demand up or suppress it a little bit.
And then electric heat, we're seeing solid solid demand there across the board. So we feel good about what we're seeing across our HVAC businesses today.
Actually Joe Good looking ahead to 2024.
If I look on the detach the management side, what I would say is you know.
We typically think about the projects from the run rate businesses.
<unk> had a very strong year on projects.
Both.
Over the past two years, we've done a nice job booking and revenue ing.
A lot of orders, but we feel very good on the projects going into 2024, So theres been a lot of awards and we think we're very well set up on that side of the equation and then really you get to run rate businesses and run rate remains steady.
So I think that.
Our markets are holding up.
Obviously, we've got to keep an eye on that.
<unk>.
And what's going on there, but what we see today, we feel very good about the balance of the year and we feel like it's still early we're still putting together our planning.
24, but I would say, we're moving in a positive direction there mark on of setting us you'd like to add.
Yeah, Thanks, Jami I would say, Brian when I look at.
At the tailwind and some of the broader drivers across the business that we've talked about over the last handful of quarters I mean they remain.
Solid.
And positive in many cases and I think some of the whether it's some of this federal spending government spending from the infrastructure Bill.
That's driving both opportunities and dnm or on the HVAC side, whether it's re shoring.
Or just general sort of industrial activity all of those trends remain positive today. So we feel good about the backdrop.
I think it's really changed as we sit today and interestingly enough. As you look ahead to 'twenty four even though we are really accelerating our shipments this year and having a very good revenue year.
We believe we're going to be nicely up on backlog as we go into 'twenty four so I think we're going to be starting in a strong position. So yes. So what we see today in our end markets.
Feeling positive.
No that's great to hear I appreciate all the color.
Would you be willing to put some numbers to.
How much data centers and semiconductor plants factor into your confidence on the HVAC side, what kind of growth has the HVAC cycle, we've seen in those verticals in 2023, and what should we expect from 2012.
Yes, I can.
I can make a few comments there.
We've always been in data centers.
And actually when you download, yes, probably about 10% of our this year's cooling revenue, we anticipate would come from data centers for example, Bryan that's up pretty nicely from the prior year.
And as you probably heard US say also we have a lot of it we are seeing an increasing amount of exposure.
For semiconductor manufacturing and battery plants and all three of those if you look at those.
The customer base, there is pretty good visibility into their forward years. So we feel very good about the opportunity there.
And then yes.
The other thing I would say is even if you strip out.
Those end markets, we're seeing nice growth across.
Our other end markets, Hey, take hospitality institutional education.
So it's those are a nice growth drivers no doubt and we do feel like there is some nice forward demand there and that that Tam that market has expanded.
Even in our other segments, we're seeing nice success, there as well so yes, we feel good about that Brian as we look.
Look into 'twenty four 'twenty five.
So again very encouraging.
Last one any.
Additional detail you can offer.
Date on Tampa, one aspect that that would be great. Yes that was integration tracking.
The house financial contribution relative to the year one deal plan for both cases any update on that.
The partial year 2023 accretion and how should we think about carryover into 2024.
Yeah, I'll start I think overall.
Overall, we're feeling very good I'm feeling very good about both of.
The Tam co one is a little bit more straightforward in the sense that thats going bolting into our EAN business.
Those guys have really done a nice job, we're actually seeing some nice cross selling there.
We're seeing some data center wins.
There.
So the Tam co side that machine is feeling good.
Very good I really feel like we've made a lot of progress.
<unk> there as we've talked about all along on the aspect side. It is a little bit more complex because your premium to scale businesses together.
Aspect is performing very well they are I believe.
Most of them are ahead of their profit plan.
And the models that we built.
For the business.
But it is a little bit more of a complicated integration there we're tracking very well there we have a very seasoned leader there Randy data who's overseeing all of the integration processes, there and we actually feel really good about the direction of those businesses coming together, but that is that will take.
<unk>.
A little bit more time to to really fully integrate those so.
On our side is very good.
I'll see you guys like to add with regards to yes, I would just say that they are on plan from a financial perspective, Brian as we had.
Originally outlined.
We made the acquisition so we feel really good about their financial performance.
Believe we indicated earlier this year that would be about 20 of accretion related to those two businesses net of the obviously the funding cost and we still hold true to that and I believe that would be the case.
Understood. Thanks again guys.
Thanks, Brian.
One moment for your next question.
And your next question comes from the line of Lawrence de Maria with William Blair. Your line is now open.
Hi, Thanks, good morning, everybody or good afternoon, rather.
Okay.
So.
A big question that people are focused on as you just beat by <unk> <unk>, the only raised by about <unk> <unk>.
The question is.
Is there some conservativism built into the fourth quarter or are you seeing any.
Signs to be wary of.
How come.
Obviously, maybe we pulled forward some demand sell can you just talk to that aspect of the guidance. Please.
Yes, Larry this is Paul.
We are raising by <unk>.
In terms of our.
Either.
A lot of the models out there we beat by about by about six months for the quarter.
About half of the improvement that we saw relative to what we were expecting was due to some pull forward from the fourth quarter and that was in the detection and measurement segments.
On a project basis and that was about <unk> actually.
I actually have that.
We also did get a tax impact this quarter that was a bit higher than.
And then what we originally anticipating and that has to do with the repatriation.
Plus some cash.
And the impact there was about <unk>.
Okay, I would say.
Just from a guidance perspective, I mean, I think we view it as sort of balanced given the market conditions that we're seeing out there today.
Okay.
Okay.
Thanks for clarification.
Obviously.
We care about <unk>, we're also looking towards 2024.
And you guys have been doing exceptionally well are there any pockets of weakness we talked about.
The strength of machine any.
Actual tangible signs of weakness concerns out there other than the macro tea leaves. So just kind of what are you seeing thats concerning specifically out there if anything.
Larry we're not really seeing anything as we sit today that sort of tangible weakness right. We are monitoring kind of the broader economic environment.
Which.
Depending on your perspective could be positive to mixed.
And the market share and but.
Overall, we're not seeing anywhere we continue to monitor our run rate businesses and we watch those very closely.
We've kind of characterize them as steady and largely on target. So.
It's kind of where we what we see as we sit today.
You talked about having a higher backlog I think exiting the year right and some of the strength youre seeing out there and trends and things. So we're going to assume we're talking about incremental margins next year can you just talk in terms of our modeling how should we think about either incremental margins or versus just overall margin improvement next year based on continuous improvement.
Just some perspective on how we should be thinking about that.
Yes.
Jean mentioned in several tailwind that we think are blowing favorably for us in the <unk>.
<unk> space around cooling. So we think we're in a very good position there you've heard us talk about some of the continuous improvement processes.
We have in place and some of the investments that we're making this year to improve our overall throughput.
Even extend capacity somewhat for the cooling business. So I think we feel very good there about our margin opportunities. We did mentioned previously that there was probably about 100 basis points of price cost.
Benefit in our in our HVAC segment overall.
Sure.
Some point, if we were to see some.
The progression and the price cost equation, we can get some of that back but.
Yes, I think overall, we feel good about our opportunities.
In HVAC to continue pushing the margin profile in detection and measurement.
As you know we had about 100 basis points headwind this year associated with some mix.
And in our communication technologies business and a <unk>.
Fly chain issue that we had in third quarter, which has been resolved at this point.
We're expecting those to go away next year. So as we set the stage set the table for next year with project orders, which we think look pretty good for US I think we feel good about our opportunities there also.
Okay very good thank you and good luck.
Thanks, Thanks, Larry.
One moment for the next question.
And your next question comes from the line of Pete <unk>.
Arizona with Sidoti Your line is now open.
Evening Jean Marc.
I wanted to follow up some of the other questions on obviously with a quarter left we can sort of back into how youre guiding for <unk> you addressed it a little bit.
Right, because I can back into dnm for fourth quarter and that looks.
Flat to down in another quarter, where margins are down year over year and you I think you just said some of the pressures on margins for through this quarter I'm, just trying to get a better sense of your expectations.
The DNA.
Particularly when we're looking at another quarter of down margins and flattish to down revenue.
Did you pick that up next year and was that just simply projects hit in <unk> versus heading into <unk> a year ago.
Yes. So you did if you look you are looking at the year ago period, Youre, absolutely right that that was our highest quarter in DSM in the prior year I think our margins in that quarter, we're almost 24% which is on the higher end of what we've been doing in that segment and that was due to a concentration of some more favorable mix products.
The prior year.
This year, we did call out that we did have again that 100 basis points impact from a couple of different items. One was the again the mix in Comtech and <unk> and a supply chain issue that's been resolved we.
We would still expect to see fourth quarter, as our highest margin quarter and detection and measurement this year.
<unk>.
We would expect to benefit from.
The.
The absence of those same issues in the subsequent year.
When we think about moving forward with infrastructure funding, which has clearly been funneling at least through the summer.
As well as inflation reduction act and some other federal funding that could directly impact you.
Are you seeing it now and can you see a bigger impact from.
Some of those funding opportunities next year.
Steve we have seen some benefit from from some of that government funding, particularly in our.
Transportation business some of those projects have already.
<unk> benefited from availability of that funding and our anticipated we anticipate that next year, we will begin to see additional dollars benefit.
Many of the businesses across the platform, we've talked about where that could benefit a ton as.
As well as our location and inspection businesses and then clearly you may see some benefit from some of the HVAC businesses as well.
So we're watching that carefully we anticipate that we will see more of those dollars flow I think most people believe that.
Yeah.
The distribution of those funds has been slower than I think anyone anticipated.
But.
We believe we'll benefit from those next year and beyond quite frankly for the next few years.
Alright already starting to de lever out of the aspect deal clearly continuing to be a strong cash flow generator any targets on where you want.
We're expecting or targeting net leverage to go near term versus longer term.
Yes, I think Steve what we've communicated that.
We're most comfortable in a kind of a net leverage range between one five and two five times.
And I don't think anything has changed with respect to that.
Today, obviously leverage will be.
Dependent on acquisition activity.
But as we look into next year, we'll see what sort of opportunities.
Present themselves and whether there's anything that makes sense from an M&A perspective.
Any reason to think you lean towards smaller after making the larger aspect here.
No not necessarily.
I think we kind of consider any and all opportunities that are out there right.
Small ones are obviously can be nicely accretive, but some of these more mid sized transactions that we completed.
This year.
Fit nicely as well I think it'll be a function of what opportunities are there and is there a strategic rationale for them along with our value creation path I think thats more important obviously that size. Okay sure. Okay. Thanks, Mark Thanks Ryan.
Thanks.
One moment for the next question.
And your next question comes from the line of Walter Liptak with Seaport Research. Your line is now open.
Hi, Thanks, good evening, everyone great quarter guys.
Thanks, Bob Thanks, Bob.
When asked about the D&S segment, it did a little bit better than I was expecting.
And it was up quarter over quarter.
Mentioned.
And Larry's.
No question that there was some pull forward.
Projects I Wonder if you can give us a little bit more on that.
Yes, So we had about we decided that at about <unk> of that impact as well for the third quarter coming from the fourth quarter and that was largely related to our fair collection business, but we also had a little bit. We also did a little bit better than our <unk> business in.
We anticipated.
Okay great.
And then maybe the same thing on orders.
The backlog looked pretty strong demand.
It looks like the orders.
It might be up sequentially and year over year I Wonder if you can talk about.
What's what's going well.
In the different businesses within Dnm.
For orders.
So, yes, our backlog overall.
At the end of the quarter wealth was around $234 million and Thats about flat sequentially. As you know in our DNS business, our backlog tends to flex up and down a little bit as you bring in.
The large projects.
From a orders and then deliver them. So the variances maybe are a little less meaningful than the absolute size of that but I think what I would say is the project businesses, which make up the vast majority of the backlog.
Our very high relative to historical levels and Comtech and.
And our fair collection business or really the largest contributors to that.
As ware.
But we also have seen some nice backlog in our <unk> business.
Okay great.
I guess thinking about those larger projects is that.
Are those.
Get a ship in the fourth quarter or are these the kind of projects that are going to be shipping in say 2024 in the first half or whatever.
Yes, it's a good question, we do have some of that backlog that goes into next year, well. So I feel like we're we feel like we're starting to be set up for.
Or 2024.
There is a little bit of it that would roll even into the subsequent year into 2025.
Yeah.
Okay, great. Okay. Thanks, so much.
Thank you.
<unk>.
Again in order to ask a question. Please press star one on your telephone.
Is that is star one on your telephone.
And your next question comes from the line of Damian Karas with UBS. Your line is now open.
Hey, good evening guys.
Hey, David.
And congrats on the official end to <unk> and Keith Hilli I remember the days.
We're talking about that literally quarter in quarter out if not more so.
Pretty vivid memories of all that.
Thank you.
Very good.
Yeah.
So you don't want.
Yes.
Got it. Thank you. So you don't want to get involved in any major coal power projects team.
Yeah, I think that's a pretty safe assumption and particularly augmented by the fact that we sold all of those businesses about six years because they go so.
Well first off I think it's clearly good to put that in the rearview mirror.
Most definitely.
So I appreciate all the color on the demand environment.
But I think for the.
Last question that was asked so you've mentioned solid order trends I don't want to make any presumptions about the level could you just share any numbers around the actual order rates like year over year in the quarter.
And how others line lining up.
Maybe what I can give you is that our book to bill in <unk>.
Really both segments.
Or is one or better.
And going into the next quarter into the fourth quarter, we would expect it to be a little bit better than one.
And again coming off.
On and off fairly.
Fairly strong quarters in terms of deliveries.
Yes. Thank you.
And then I wanted to ask you.
About.
Your distribution partners I had a lot of manufacturing company certainly in the HVAC industry.
They've been experiencing destocking challenges, it's not something that you guys have really touched on I recognize you have more build to order.
Aspect to your HVAC business.
But could you just remind us kind of a cross.
SPX.
Where you do rely on kind of third party distribution and Andy and I am curious to hear any indications of distribution partners may be carrying some excess inventory.
Yes, Jamie what I would say is youre exactly right I think the bulk of our business is engineered to order. So it's not really going into that.
Distributions zone I would say there are a couple of exceptions to that probably the biggest one would be our residential hydraulics of residential boiler business.
And that is where we actually have very good visibility into.
How.
Where the distributors are what they're carrying.
Not in every distributor, but a good chunk of them and a good feel for the market. This is something we spend a lot of time on and making sure that we feel like we know whether the the.
The distribution is balanced or high or low and what we see today is it's pretty balanced.
On that side. So we don't really have any concerns there right now.
On the boiler side, we're keeping our eyes more on the.
The weather typically occur.
Snapple will drive.
A big chunk of extra orders and so forth there but.
I'd say, that's the biggest place that we keep our eyes on the second one I would say, which is smaller but would be radio detection.
And I would say that we've seen perhaps a little bit of Destocking. There that's already in our numbers this year.
Obviously with interest rates going up we are seeing that some distributors, who who really.
Leverage.
Finance inventories coming a lot more expensive to finance inventory and therefore.
Some of these smaller distributors mid sized distributors, they're very careful about what they own but those would be the two places I would say that we need to think about it and I don't know of anything else that I missed here with regards to.
Thanks, Matt.
I think you've covered it.
Okay very helpful. Thank you and then one just one last quick one.
So speaking of hydronic the Doe.
Proposed some roles recently on on water heater efficiency.
I'm curious if that.
Proposal could move it all kind of into your.
Business or any discussions out there that might be happening on the regulatory front for gas boilers.
Yes, no I think the Doj is very very systematically regulates hydraulics and typically they do five years, we actually just finished upgrading all of our residential.
Blind to the appropriate App you see appropriate efficiency and then after that was the commercial update which again is.
Moving towards more high efficiency, so, yes, I think that's.
That's a part of the.
Never ending part of what's going on in our business typically the standards are always getting higher.
Patients are getting higher.
And we actually view that as something that it typically benefits off what you see is a lot of those new specifications are very hard to do.
And it takes a lot of engineering a lot of rework.
And so you have to have some scale to be able to build those new higher efficiency solutions. So.
I think this is true in hydraulics, but I think this is true in almost all the markets that we serve because we're typically leaders in the markets that we serve when you see the.
Standards being raised where typically the company that.
Most well positioned to take advantage of that and that typically I would view as a net positive. So so yeah. Those those are still going on and we would anticipate those to continue going on typically on the with the EPA It's Jeff.
Five year cycle.
Understood. Thank you very much best of luck.
Thanks, Ken.
And Nike.
Further questions at this time I will now turn the call back over to Paul Clegg.
Thank you all for joining us and we look forward to catching up with you at upcoming conferences. Please reach out if you have questions.
This concludes today's conference call. Thank you for your participation you may now disconnect.