Q4 2023 SPX Technologies Inc Earnings Call
Yes.
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Operator: Hello, and thank you for standing by. Welcome to SPX Technology's 4th Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode.
Operator: After the speaker's presentation. Thank you for your attention and question session. To ask a question during this session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is. To withdraw your question, please press star 11 again.
Paul Clegg: I would now like to hand the conference over to Paul Clegg. You may begin. Thank you and good afternoon, everyone. Thanks for joining us. With me on the call today are Eugene Lowe, our President and Chief Executive Officer, and Mark Carano, our Chief Financial Officer. A press release containing our fourth quarter and full year 2023 results was issued today after the market closed. 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.com. I encourage you to review our disclosure and discussion of GAP results in the press release and to follow along with the slide presentation during our prepared remarks. A replay of the webcast will be available on our website until February 29th.
Hello, and thank you for standing by.
Welcome to S. P X technologies fourth quarter 2023 earnings conference call.
At this time all participants are in a listen only mode.
After the Speakers' presentation.
And an answer session.
Ask a question during this session you will need to press star one on your telephone.
You will then hear automated message advising your hand is raised.
To withdraw your question. Please press star one again.
I would now like to hand, the conference over to Paul Clegg you may begin.
Yeah.
Thank you and good afternoon, everyone. Thanks for joining us.
With me on the call today are you lower our president Chief Executive Officer.
Paul Clegg: As a reminder, portions of our presentation and comments are forward-looking and subject to the safe harbor provision. Please also note the risk factors in our most recent SEC filing. Our comments today will largely focus on adjusted financial results, and comparisons will be made to the results of continuing operations. 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 exclude primarily acquisition-related costs, non-service pension items, mark-to-market changes, amortization expense, and a charge associated with recent legal settlements. Finally, we will be hosting Investor Day on March 26th in New York. The event will be webcast.
Corona, our Chief Financial Officer.
Press release containing our fourth quarter and full year 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.
Play of the webcast will be available on our website until February 2009.
As a reminder, portions of our presentation and comments are forward looking and subject to safe Harbor provisions.
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 to the results of continuing operations only.
Paul Clegg: If you would like to attend in person, please send a request to our investor relations email address, as noted at the end of today's press release and on our website. And with that, I'll turn the call over to Gene. Thanks, Paul. Good afternoon, everyone, and thank you for joining us.
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 exclude primarily acquisition related costs non service pension items, mark to market changes amortization expense and a charge associated with recent legal settlement.
Eugene Joseph Lowe: The call today will provide you with an update on our consolidated and segmented results for the fourth quarter and full year 2023. We'll also provide our full year guidance for 2024. We had a strong close to the year.
Finally, we will be hosting an investor day on March 26th in New York.
That will be webcast.
I'd like to attend in person. Please send your request to our Investor relations email.
Eugene Joseph Lowe: We grew Adjusted EBITDA by 50% and delivered Adjusted EPS near the upper end of our guidance. During Q4, we continued to execute well and saw robust demand continue across most of our end markets. Our HVAC segment in particular achieved excellent margin performance compared with very strong results. I'm proud of our team's accomplishments over the past year.
At the end of today's press release and on our website.
I'll turn the call over to Jim.
Thanks, Paul.
Afternoon, everyone and thank you for joining us.
On the call today, we will provide you with an update on our consolidated and segment results for the fourth quarter.
The year 2023, we'll also provide our full year guidance for 2024.
We had a strong close to the year, we grew adjusted EBITA, 50% and delivered adjusted EPS near the upper end of our guidance range.
Eugene Joseph Lowe: You made great progress on our digital continuous improvement and sustainability. We also completed two strategic acquisitions in our HVAC segment that helped strengthen our positions in the attractive engineered air movement and electrical heating market. Recently, we made another significant addition to our HVAC segment with the acquisition of Ingenia, a provider of high-value custom air handling, that broadens our growth opportunities and geographic reach in engineering and air movement.
During Q4, we continued to execute well and saw robust demand continue across most of our end markets are.
Our HVAC segment in particular achieved excellent margin performance compared with very strong results in the prior year period.
I'm proud of our team's accomplishments over the past years.
Great progress on our digital continuous improvement and sustainability initiatives.
We also completed two strategic acquisitions in our HVAC segment that help strengthen our position in the attractive engineered air movement and electrical heating markets.
Eugene Joseph Lowe: Looking ahead, market conditions report continued robust growth for SPX, and we remain well positioned to continue our strong operational execution. Today, we're providing 2024 Midpoint Guidance for Adjusted EBITDA Growth of 25% and Adjusted EPS Growth of 16%. At the midpoint of $5 per share, our adjusted EPS guidance would achieve a key SPX 2025 target a year ahead of schedule.
Recently, we made another.
In addition to our HVAC segment with the acquisition of engineer.
I'll provide a high value customer handling systems.
With our growth opportunities and geographic reach.
Engineered air movement.
Looking ahead market conditions support continued robust growth for SPX and remain well positioned to continue our strong operational execution.
Today, we're providing 2020 midpoint guidance for adjusted EBITDA growth of 25% and adjusted EPS growth of 16%.
Eugene Joseph Lowe: Turning to our high-level results, in the fourth quarter, we grew revenue by 9.3% and adjusted operating income by 18.7% year-on-year, with 150 basis points of large and expanded... We ended the year with a healthy backlog, solid overall demand trends, and positive operations. As always, I'd like to touch on our value creation trend. Over the past quarter, we continue to see the benefits of our Continuous Improvement Initiative. Including investments in efficiency and throughput that have allowed our HVAC segment to serve historically high levels of customer demand and achieve record segment margins. We also continue to introduce new, innovative products to meet our customers' sustainability needs. At the recent AHR trade show, we showcased a new adiabatic cooling solution that balances the water-saving benefits of air-cooled heat rejection with the energy efficiency of a water-cooled solution.
At the midpoint of $5 per share our adjusted EPS guidance would achieve a key SPX 2025 target a year ahead of schedule.
Turning to our high level results.
For the fourth quarter, we grew revenue by nine 3% and adjusted operating income by 18, 7% year on year.
150 basis points of margin expansion.
We ended the year with a healthy backlog solid overall demand trends and positive operational women.
As always I'd like to touch on our value creation framework.
Over the past quarter, we continued to see the benefits of our continuous improvement initiatives, including investments in efficiency and throughput.
Allowed our HVAC segment to serve historically high levels of customer demand and achieve record segment margins.
We also continue to introduce new innovative products to meet our customers' sustainability needs.
Eugene Joseph Lowe: This product serves an attractive niche for Customers Facing Water Conservation. In our location and inspection platform, we launched an advanced solution that enables faster, simpler, and less costly precision location and Instant Mapping of Underground Utilities. This process is critical to many utilities whose pipes and cables were buried up to 50 years ago and who may lack accurate records.
At the recent HR Tradeshow, we showcased our new adiabatic cooling solution that balances the water saving benefits of air cooled heat rejection with the energy efficiency.
Installation.
This product serves as an attractive niche.
For customers facing water conservation challenges.
And our location and inspection platform, we launched an advanced solution that enables faster simpler and less costly precision location.
Eugene Joseph Lowe: We've also continued to advance our inorganic growth initiative. Earlier this month, we announced the acquisition of Ingenia, a leader in the design and manufacture of high-quality air handling equipment, headquartered just outside of Montreal. We are very pleased to welcome our new colleagues to the SPX team. Virginia has a strong reputation for quality customer handling solutions in diverse end markets, including healthcare, pharmaceutical, food processing, and other demanding industrial applications. Ingenia brings together strong engineering capabilities with a highly automated production process and proprietary configuration software. This combination enables them to provide demanding customer air handling configurations and Unmatched Speed and Flexibility.
And instant mapping of underground utilities.
Process is critical to many utilities.
Pipes and cables were buried up to 50 years ago and it may lack clear records.
We've also continued to advance our inorganic inorganic growth initiatives.
Earlier this month, we announced the acquisition of engineer.
Later in the design and manufacturer of high quality Air handling units headquarters just outside of Montreal.
I'm very pleased to welcome our new colleagues to the SPX team.
<unk> has a strong reputation for quality customer handling solutions and diverse end markets.
Health care pharmaceutical food processing and other demanding industrial applications.
Mark Carano: We are excited about NGENIA's significant technical and production advantages and their opportunities to address large and growing imports. Now I'll turn the call over to Mark to review our financial results. Thanks, Gene.
In January that brings together strong engineering capabilities with a highly automated production process and proprietary configuration software.
This combination enables them to provide demanding customer air handling configurations with unmatched speed and flexibility.
Mark Carano: Q4 was another solid quarter for SPX Technology. Year-on-year, our adjusted EPS grew approximately 7% to $1.25. Full year adjusted EPS grew 39% to $4.31. We're near the upper end of our guidance. $4.22 to $4.00. As noted by Paul, in addition to our typical items, our adjusted results for Q4 and the full year exclude a charge associated with a legal settlement. The after-tax impact on adjusted EPS was approximately $0.14. This was a highly unique and isolated event related to a dispute with a former business.
We are excited about engineered significant technical and production advantages and there are opportunities to address large and growing market.
Now I'll turn the call over to Marc to review our financial results.
Thanks Gene.
Q4 was another solid quarter for SPX technologies.
Year on year, our adjusted EPS grew approximately 7% to $1 25.
Full year, adjusted EPS grew 39% to $4 31.
We're near the upper end of our guidance range $4 22 to $4.32.
As noted by Paul in addition to our typical items, our adjusted results for Q4, and the full year exclude a charge associated with the legal settlement.
Mark Carano: For the quarter, total company revenues increased 9.3% year-on-year. Acquisitions drove the increase, while organic revenue declined modestly. FX with a slight tailwind.
The after tax impact to adjusted EPS was approximately <unk> 14.
This was a highly unique isolated event related to a dispute with a former business right.
For the quarter total company revenues increased nine 3% year on year.
Mark Carano: Segment income grew by $12.3 million, or 13.6%, to $102.8 million. The segment margin increased to 80 days. For the quarter, in our HVAC segment, revenues grew 14% year-on-year. Acquisitions contributed growth at 15.7% and included Temco in our cooling platform and Aspect in our heating platform. On an organic basis, revenues declined 2%, driven by lower sales of hydronic equipment associated with unseasonably warm weather in our environment.
Acquisitions drove the increase while organic revenue declined modestly FX was a slight tailwind.
Segment income grew by $12 3 million or 13, 6% to $102 8 million, while segment margin increased 80 basis points.
Yes.
For the quarter in our HVAC segment revenues grew 14% year on year.
Acquisitions contributed growth of 15, 7% and included Temco and our cooling platform aspect in our heating platform.
On an organic basis revenues declined 2% driven by lower sales of hydraulic equipment associated with unseasonably warm weather in our key markets.
Mark Carano: This followed a substantial increase in heating volumes in the prior year. The year-on-year decline was partially offset by higher volumes of cooling products, serving by continued strong customer demand. Segment income grew by $19.7 million, or 37%, and segment margin increased by $390 million. Segment income and margin continue to benefit from operating leverage and higher throughput of cooling platforms, as well as accretion from our TAMCO and Aspen. Backlog remained healthy at $306 million, up approximately 13% organically compared with the prior year end.
This followed a substantial increase in volumes versus the prior year period.
Year on year decline was partially offset by higher volumes of cooling product sales driven by continued strong customer demand and throughput.
Throughput.
Segment income grew by $19 $7 million or 37%.
<unk> margin increased 390 basis points.
Segment income and margin continued to benefit from operating leverage and higher throughput in our cooling platform as well as accretion from our Tam Cowen aspect acquisitions.
Backlog remained healthy at $306 million up approximately 13% organically.
With the prior year end.
Mark Carano: With a quarter in detection and measurement, revenues increased 1.2% year-on-year with flat organic sales and a modest FX tailwind. While we achieved our full-year revenue guidance, our Q4 margin performance was disappointing. In Q4, we experienced lower-than-anticipated volumes of run-rate product sales that have high incremental margins. This was offset by higher Comtech project shipments that passed through, resulting in a lower than anticipated market. During the quarter, we also incurred elevated expenses within this segment, including higher R&D to support future growth. Year-on-year segment income declined by $7.4 million, with a 500 basis point reduction in margin, resulting in a full-year margin approximately 80 basis points below our mid-year target. Segment backlog at quarter end was $245 million, down modestly from the prior year.
For the quarter and detection and measurement revenues increased one 2% year on year flat organic sales and a modest FX tailwind.
While we achieved our full year revenue guidance, our Q4 margin performance was disappointing.
In Q4, we experienced lower than anticipated volumes of run rate product sales and have high incremental margins.
This was offset by higher contract project shipments that have pass through contracts, resulting in a lower than anticipated margin mix.
During the quarter, we also incurred elevated expenses within this segment, including higher R&D support future growth initiatives.
Year on year segment income declined by $7 $4 million with a 500.
Hundred basis point reduction in margin.
Resulting in a full year margin approximately 80 basis points below our midpoint guidance.
Segment backlog at quarter end was $245 million down modestly from the prior year.
Mark Carano: Turning now to our financial position at the end of the quarter, we ended Q4 with cash of $105 million and total debt of $558 million. Our leverage ratio, calculated under our bank credit agreement, declined to 1.3 times from 1.7 times in Q3, reflecting strong free cash flows. Full-year adjusted free cash flow was $231 million, or approximately 115% of adjusted net income.
Turning now to our financial position at the end of the quarter.
We ended Q4 with cash of $105 million and total debt of $558 million.
Our leverage ratio as calculated under our bank credit agreement declined to one three times from one seven times in Q3, reflecting strong free cash flow generation.
Full year, adjusted free cash flow was $231 million or.
Approximately 115% adjusted net income.
Mark Carano: Including the impact of closing the Ingenia acquisition, net leverage was two times as of Q4, 2023. We anticipate our leverage ratio declining to the lower end of our target range, 1.5 to 2.5 times, assuming no additional capital. Moving on to our guidance, today we introduce full year 2024 guidance, which includes Ingenia. We anticipate revenue in a range of $1.93 billion to $2 billion, and segment income margin in a range of approximately 21% to 22%. Jenny expects to have annualized revenue of approximately $100 million in 2020, with revenue growth and margin rates that are above the segment average. Starting in 2024, our guidance for total company performance will include adjusted EBITDA, The primary difference between Adjusted EBITDA and Adjusted Operating Income is depreciation. Please also note that our bank-leveraged covenant uses a different terminology, see in our credit. In 2024, we anticipate the Justin Evett Diner range of $375 million to $405 million.
Including the impact of closing the <unk> acquisition net leverage was two times as of Q4 2023.
We anticipate our leverage ratio declining to the lower end of our target range. One five to two five times by year end, assuming no additional capital deployment.
Moving on to our guidance.
We introduced full year 2024 guidance, which includes in Jennie O.
We anticipate revenue in a range of $1 $93 billion 2 billion.
Segment income margin in the range of approximately 21% to 22%.
Jenny as anticipated have annualized revenue of approximately $100 billion in 2024 with revenue growth and margin rates that are above the segment average.
Starting in 2020 for our guidance for total company performance will include adjusted EBITDA.
Primary difference between adjusted EBITDA, and adjusted operating income and depreciation.
Please also note that our bank leverage covenant using a different EBITDA measure is defined in our credit agreement.
In 2024, and we anticipate adjusted EBITDA in a range of $375 million to $405 million.
Mark Carano: At the midpoint, this reflects a margin of approximately 20% year-on-year adjusted EBITDA growth of 25%, following a 50% increase in the prior year. Our adjusted EPS guidance range of $4.85 to $5.15 reflects 16% growth at the midpoint over our strong 2023 report. In our HVAC segment, we anticipate revenue in a range of $1.325 billion to $1.375 billion, reflecting an increase of approximately 20%. We anticipate HVAC segment margin of 21.25% to 22.25%, for an increase of approximately 85 basis points in the midst of the pandemic, as we benefit from further operating leverage and favorable margin mix from acquisitions. In our detection and measurement segment, we anticipate a significant reduction in our contact project as we deliver the bulk of a large project order. Despite this headwind, we anticipate section and measurement segment revenue in the range of $605 million to $630 million, with the midpoint almost flat with the prior. Excluding the decline from the ComTech Pass-Thru project, we expect underlying sales to grow mid-single digits.
At the midpoint. This reflects a margin of approximately 20% year on year adjusted EBITDA growth of 25% following a 50% increase in the prior year.
Our adjusted EPS guidance range of $4 85 to $5 15.
It reflects 16% growth at the midpoint over our strong 2023 results.
In our HVAC segment, we anticipate revenue in a range of $1 $3 billion to $5 billion.
The $1 375 billion.
Reflecting an increase of approximately 20%.
Mark Carano: This includes solid growth and project sales and a continuation of flatter market conditions for our run rate. We anticipate D&M segment revenue in a range of 20% to 21%, with the year-on-year increase largely due to a more favorable mix associated with the reduction in contact. With respect to gating, we anticipate that the cadence of net earnings will be similar to 2023, with 46% of adjusted EPS delivered in the first half and 54% in the second half. In Q1, we anticipate significantly stronger year-on-year results in HVAC, while we expect detection and measurement segment income to be roughly flat year-on-year. As always, you'll find modeling considerations in the appendix to our presentation.
The reduction in contact project sales.
With respect to <unk>, we just basically.
<unk> earliest will be similar to 2023.
46% of adjusted EPS.
Was delivered in the first half 54% in the second half.
Q1, we anticipate a significantly stronger year on year results in HVAC. When we expect detection measurements segment income roughly flat year on year.
As always you will find modeling considerations in the appendix for our presentation.
Eugene Joseph Lowe: Current market conditions are supportive of our 2024 outlook. At NHVAC, we continue to see strong demand for our cooling products across a broad set of end-market applications, including data centers, semiconductor plants, and industrial facilities. In heating, we continue to see solid demand associated with decarbonization in our commercial and industrial markets.
I will now turn the call back over to Jane for review of our end markets and is closing comments.
Thanks Mark.
Current market conditions are supportive of our 2024 outlook.
And then H back we continue to see strong demand for pulling products across a broad set it and market applications, including data centers.
Dr plans and industrial facilities.
And heating we continue this is solid demand associated with Decommunization.
Marshall and industrial markets.
Eugene Joseph Lowe: As always, residential sales are affected by... In detection and measurement, we are experiencing uneven global demand in our short cycle business. However, all project orders remain healthy, and customers continue to signal significant approaching demand.
As always residential sales are affected by with the temperatures.
And detection and management, we are experiencing uneven global demand in our short cycle businesses.
Project orders remain healthy.
Our customers continue to signal significant approaching demand.
Sure.
Paul Clegg: In summary, I'm pleased with the solid close of 2023 and our strong full-year performance. Our acquisition of Ingenia further scales our cooling platform and broadens our growth opportunities in engineered air, with a solid backlog and positive operational momentum. And continued demand strength in key markets, we are well positioned to achieve our 2024 guidance and reach our SPX 2025 targets a year ahead of schedule. Looking ahead, I remain very excited about our future. With the right strategy and a highly capable, experienced team, I see significant opportunities for SPX to continue growing and driving value for years to come. I'll turn the call back to Paul.
In summary, I'm pleased with a solid close to 2023 and are strong all year performance.
Our acquisition of engineer further scales are calling platform and broadens our growth opportunities and engineered air.
With a solid backlog.
Operational momentum.
And continued demand strength in key markets.
Well positioned to achieve our 2024 guidance and reach our <unk> 2025 targets.
Ahead of schedule.
Looking ahead I remain very excited about our future.
But the right strategy the highly capable experienced team I see significant opportunities for SPX to continue growing and driving value three years to come.
With that.
I'll turn the call back to Paul.
Operator: Thanks, Gene. Operator, we will now go to questions. Thank you. Ladies and gentlemen, as a reminder to ask a question, please press star 1-1 on your telephone and then wait to hear your name announced. To withdraw your question, please press star 11 again.
Thanks, Jeanne operator, we will now go to questions.
Thank you ladies.
Ladies and gentlemen, as a reminder to ask a question. Please press start one one on your telephone and then wait to hear your name announced.
To withdraw your question. Please press start one one again.
Bryant Blair: Please stand by while we compile the Q&A roster. Our first question comes from the line of Bryant Blair with Oppenheimer & Company. Your line is open.
When you stand back <unk> Boston.
Our first question comes from Milan.
Blair with Oppenheimer and accompany your line is open.
Operator: Thank you. Good afternoon, guys. Good afternoon.
Thank you.
And my afternoon.
Bryant Blair: Great, great 2023. You know, obviously, you came in about four times the EPS growth you initially guided. Uh, that's, that's quite impressive. And you're on pace to hit your 2025 targets a year early.
Great great.
Great to 123 mm.
Yeah.
And about four times D. P. S growth you initially guided.
That's quite impressive and your own.
2025 surrogacy early.
Unnamed Speaker: All of that said, let's nitpick to start out. DNM results came in a bit lower than anticipated, and you know, run rate, pressure, that surprised us a little bit and obviously the mixed impact there, I assume with radio detection. You know that that did hit the variance for the quarter, maybe offer a little more color there and how you see, you know, run rate progression throughout 2020. Brian, I'll start out here.
All of that said like like Netflix to start out.
The.
D N M results came in.
Other than anticipated.
And you know run right.
Pressure that surprised us a little bit and obviously the the next impact there I I assume with radio detection.
<unk>.
It hit the variance for for the corner, maybe offer a little more color there and how you see.
Run rate progression throughout 2024.
Yeah, Brian I'll I'll start out here with.
Unnamed Speaker: You know, with respect to some of the run rate business, you're right. We saw a flattening out in Q4 relative to our guide and where our expectations were for the quarter. We expect, and as we look into next year, we expect that to remain flat as we see it today. I think, as we mentioned in our prepared remarks, those end markets are a little bit uneven. It sort of depends on where in the world, you know, those products are being sold.
With respect to the run rate business right. We saw a plan now.
For relative to archive in one of our expectations were.
We expect and as we look in the in the next year, we expect that remains black as we see it today I think is.
As we mentioned in our in our prepared remarks, those and markets are a little bit uneven.
Depends on where in the world.
Those products are being sold into that you know that is a more global business and some of our others U S market tends to be fairly resilient.
Eugene Joseph Lowe: As you know, that is a more global business than some of our others. The U.S. market tends to be fairly resilient. So we feel pretty good there. But when you look outside the U.S. and Europe, in particular, you're seeing some weakness there that, you know, we hadn't originally forecasted, whether that's in the U.K. or on the continent. Okay, understood. Time will tell, and maybe offer a little more color on Ingenia. It seems like another great deal for your team.
We feel pretty good there, but when you look outside the U S and Europe in particular.
You're saying some weakness there that.
Hadn't originally forecast it whether that's in the U K or on the continent.
Okay I understand <unk>.
And maybe offer a little more color an engineer it seems like not a great deal.
Team.
Yeah, maybe touch on.
Eugene Joseph Lowe: Now maybe touch on the overall fit with the AM platform, or sub-platform, I suppose, and how you think about growth prospects there. You did mention revenue contribution. What are you baking in for accretion year-round?
You are all set with the platform or sub platform I suppose.
And how you think about growth prospects there and.
You did mention revenue contribution what are you.
Eugene Joseph Lowe: Yeah, why don't I start there, Brian? It probably makes sense to step back. And I think it's been a really positive year for the past 12 months on inorganic growth. I think we've done three great deals. So, TAMCO, in Engineered Air Movement, ASPEC, and Electric Heat, now Ingenia, in Engineered Air Movement. We actually think these really strengthen us.
Taking in for accretion pier one.
Yeah, well I'm going to start that Brian.
Sensitive to step back and I think it's been a really positive hero.
12 months on the inorganic growth.
And three great deals Timko and engineered air movement.
Aspect can electric heat now and Jamie and junior.
We we actually think he's really strengthen us and then I put this in context.
Eugene Joseph Lowe: Now to put this in context, we've deployed about $800 million of capital over the past 12 months. As you look at it, we had planned on being at the lower end of our... five times, here. We're down about 1.3.
About $890 a capital over the past 12 months.
At it we had planned on being on the lower end of our range of five times by the end of the year without about 1.3 times.
Eugene Joseph Lowe: Even after doing Ingenia, we also think by the end of this year, we'll be down to the lower end. We feel good about where we are in the model, specifically about Ingenia, it's a really good company. We know the space very well; we've been tracking this space for years, literally, I would say more than six years.
If you're doing in junior we also think by the end of this year will be down below.
Five times.
Laughs. So we feel good about where we are and the model specifically about and Jamie That's a really good company, we noticed space very well you've been tracking this space for for years literally I would say more than six years I think this is.
Eugene Joseph Lowe: I think this is the best company we believe in in this market. They have highly automated robotics in terms of how they make products. This actually gives them a nice advantage, both in terms of lead times, but also in terms of the amount of labor, the number of people they'd have to make a product. They're much more efficient. We actually see that in many cases they are less than half the size of certain competitors that they compete with. So really good technology.
Best Company, we believe in this market they have highly automated robotics in terms of how they are.
It's actually gives them a nice advantage.
Times, but also in terms of the amount of labor.
They have to make a product that much more efficient.
See in many cases, they are less than half.
Certain competitors.
Please.
So really good technology, they have a really innovative software solution.
Eugene Joseph Lowe: They have a really innovative software solution that allows them to custom configure down to the very fine details what they're looking for. And then they can do this much faster than their competitors. We think this gives them a lead time advantage, and they're serving very attractive end markets. You typically see them in markets where there are higher requirements, either in terms of air leakage or thermal performance, so health care, pharmaceutical areas, industrial, and they do very well in those markets, have a very nice. Having said all that, you know, they're very strong in Canada, and they've only started getting going in the U.S. I think they have maybe seven states or a smaller number of states that they've really gone after.
[noise] allows them to cost you configure it down to the to the very fine details.
Two four and then they could do this much faster.
<unk>. So you think this gives them the lead time advantage and they're serving very tragic and markets.
You typically see them.
Our kids where.
Iowa requirements, either in terms of the air leakage or a thermal performance.
So healthcare pharmaceutical areas of industrial.
Very well in those markets have a very nice.
Having said all that.
You know, they're very strong in Canada, and they've only started getting getting coming in in the U S. I think they have maybe seven states or a smaller number state really got after.
Eugene Joseph Lowe: As long as they've gone after, they've penetrated very well. But in terms of synergy, you know, we have the Marley business, the Marley cooling business, where we have really strong reps in North America, really in every corner. And we actually think we're going to be able to help them build out their channel, and we also see some nice synergies. If you think about it, every time a hospital goes in and needs a number of cooling towers and needs this type of air movement, needs this type of TAMCO damper, you see a lot of synergy across these different product categories, which is why we all have them together. But yeah, we're really excited about it. Jenny, I think.
They've gone after that penetrated very well, but in terms of synergy.
We have the barley business poorly cooling business, where we have really strong reps.
In North America really in every corner.
And we actually think we're gonna be able to help them build out their channel and we also see some nice synergies if you think about it.
Everytime, a hotspot goes and it needs a number of calling towers and needs. This type of air movement.
<unk> you see a lot of synergy across.
These different product categories, which is why.
Why we all have them together, but but yeah, we're really excited about it and Jennie I think.
Paul Clegg: We're excited. They're part of that part of the team, and we're looking forward to going forward. Yeah, Brian, this is Paul.
We're excited they are part of that part of the team and we're looking forward to going for Ya.
Paul Clegg: On the accretion question, it will be accretive. Obviously, there is a higher interest burden as a result of the borrowing that took place during the first quarter, about $300 million on a revolver at a rate of 6.5 to 7%, somewhere in the middle there. And, you know, most of that we won't start paying that down until late 2024. On the other hand, you're right about the run rate revenue being around $100 million. We'll have that for a little less than 11 months.
Brian This is Paul on the accretion question will it will be accretive obviously there are there is a higher interest burden as a result of it.
Borrowing that took place during the first quarter.
$300 million on a revolver at a rate of 6.5% to 7% somewhere in the middle.
And you know most of that we won't start paying that down until late 2024th.
On the you're right about the boundary revenue being around $100 million will have that for a little less than.
Paul Clegg: And we've said that the segment margin would be a little higher than the HVAC average. The HVAC average, according to our updated, or new, rather, midpoint guidance for 2024 is about 21.75, so something a little higher than that. Okay, understood, the breadcrumbs there, and Gene, a very helpful color on the strategic fit, and Paul, you just kind of gave me the sedway on HVAC margin, and I surmise this will be a key investor day topic, both HVAC and D&M. Is there any reason why, at this point, given the structural enhancements to HVAC, that we should see the margin profile dip below what we've seen, you know, run rates and what's guided for 2024, and then on the D&M side, any reason why they should not get back to, you know, the low to mid-20s or, you know, perhaps even higher over time as platforms, Yeah, Brian, I think with respect to HVAC margins, you know, we feel very comfortable with our guide for the year when you when you step back and think about the market backdrop and capabilities we've got there.
11 months and we have set up this segment margin would be a little higher than the HVAC average each back average according to our updated.
New rather midpoint guidance for 2024 is about $21 75 or something.
Other than that.
Okay, I understand and.
And the bread crumbs and Erin Jean.
<unk> very helpful color on the strategic plan and.
Oh, you're just kind of gave me a <unk> you know a track margin and I'm I surmise. This will be key investor day topic voltage, Matt Candy and M. I is there any reason why at this point given the structural enhancements day track then.
We should see the margin profile <unk>.
You know what we've seen you run raised and what guided for for 2024, and then on the Dnm side.
Any reason why they should not get back to you know the low to mid twenties or perhaps even higher over time this platform scale.
Yeah, Brian I think with respect to H back margins, we feel very comfortable with our guide for the year. When you when you step back and think about Ah market backdrop.
And in case the.
Abilities, we've got there.
Really in a very good position, particularly with the backlog that were coming into the year with and you look at the demand drivers around it so that in combination with some of the investments we've made into the platforms helped drive incremental efficiency drive throughput.
Paul Clegg: We're really in a very good position, particularly with the backlog that we're coming into the year with and Mark Keller. So, with respect to DNM, you know, we had this mixed issue in Q4, when you think about the dynamic around weakening run rate. That was upset, obviously, by some of the project businesses, you know, some of these pass-through contracts that we've discussed in the past that were, you know, at a lower margin than typical for that business.
His confidence in those margins for for 2024.
So with respect to Dnm.
We had this mix issue in <unk>.
For when you think about the dynamic around we can even run right.
<unk> upset obviously by some of the <unk>.
Project businesses. Some of these pass through contracts that we discussed in the past that were.
At a lower margin.
Typical for that business as we roll into next year, we will have a little bit of this pass through still flowing through in the first quarter or the first half of the year, but largely those contracts will be behind us. So when I think about that impact that was pressuring margins when I think.
Unnamed Speaker: As we roll into next year, we will have a little bit of this pass-through still flowing through in the first quarter or the first half of the year, but largely those contracts will be behind. So, when I think about that impact that was pressuring margins, when I think about our flat guide with respect to the run rate business, there's a path back to, you know, the margin guide that we have here, which is sort of up 130 basis So, and maybe I'll come back to your first question and my response there. I think the other thing you should think about with respect to the run rate business. The program is flat, but we're not really seeing any downward pressure on it today.
[noise] about our flat guide with respect to run right business, there's a pad back too.
Ah margin guide that we have it here just sort of up 130 basis points year on year, when you come to the midpoint of the guidance.
So.
Maybe I'll come back to.
Your first question and and my response, there I think the other thing you should think about with respect to the run rate business. It's.
It's flat, but we're not really seeing any downward pressure on it today. So when you think about radio when you think about some of those other businesses given the high margins that we haven't nose.
Unnamed Speaker: So when you think about radio and you think about some of those other businesses... given the high margins that we have in those, you know, to the extent that that business turns up beyond where it is today, you'll see that benefit flow through on the margin. We should create incremental upside, you know, at the material line. Helpful detail. Thanks again, Ash.
The extent to that business turns up beyond where it is today, you'll see that benefits flow through on the margin side, we should create incremental upside.
Materializes.
Now will detail.
Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Steve Berezany with Sidoti. Your line is open. Good evening, everyone.
Thank you thanks, Brian.
Please stand by for our next question.
And next question comes from Atlanta, Steve.
<unk> with Fidelity your line is open.
Good evening everyone.
Unlimited organic.
Steve Berezany: On the organic growth on HVAC this quarter, you cited, obviously, we did have a very warm start to winter. I think this was a record December. But last year was pretty mild, too. What's the sort of?
Organic crossing an H factors corner and you decided obviously, we did have a very warm start to winter I think to some record December.
But last year was pretty mild to what's the sort of.
Steve Berezany: difference. It's the breaking point where you stop seeing the sort of boiler sails because I thought last winter was going to be weak. And it wasn't.
Difference the breaking point, we stop seeing the boil ourselves because I thought last winter was gonna be weak and it wasn't it was very strong if you can truly differentiate.
Paul Clegg: It was very strong, if you can sort of differentiate it. Yeah, sure. Steve, this is Paul.
Sure Yeah sure. Steve This is Paul <unk>. The last year was was a little bit of a different situation you're right about the weather the weather actually didn't matter of last year.
Paul Clegg: Last year was a little bit of a different situation. You're right about the weather, but the weather actually didn't matter last year. We had an elevated level of backlog, and we were seeing supply chain and labor return to more normalized conditions. That allowed us to send out just absolutely as much as we could get out for the plant. So last year in the fourth quarter, our heating business was up by about 25% year-on-year. So we've got a weak comp this year against a very, very strong comp in the prior year.
We had an elevated level of backlog and we were seeing supply chain and labour returned to normalize conditions that allowed us to.
Send out just absolutely as much as we can get out of the plan. So last year in the fourth quarter are heating business was up by about 25% year on year. So we've got a week camp this year against a very very strong confidence prior year.
Okay.
Yeah, so I'm going to add to that if you.
I'm sorry go ahead go ahead.
Alright.
What when is miles too mild.
Yeah.
Steve Berezany: I guess my question is, Is there any way for us to predict this? And obviously, December..., record, noted. But what's the sort of breaking, I don't want to say breaking point, but the inflection point where you start really seeing an impact?
Is there any way.
And obviously December was was <unk>.
Record as it is.
Noted.
What's what's the sort of breaking I don't Wanna say breaking point, but.
<unk> when you start really seeing an impacted you've been doing this a long time is there any way you can sort of.
Paul Clegg: You've been doing this a long time. Is there any way you can sort of help us with that? Yeah, I think it has been confusing just given that you have the dynamics of the post-COVID world coming up against changes in weather here. So, let me run through that for you with respect to 2024. In Q1, we're still seeing warm weather. We did have a, you know, kind of promising cold snap at the beginning of the quarter, but then it got warmer again.
Help us with that.
Yeah, I think it has been confusing just given that you have the dynamics of the post Covid worlds coming up against the changes in weather here. So let me run through that for you is with respect to 2024.
Q1, we're still see warm weather we.
We did have a kind of a promising cold snap at the beginning of the corner, but then it got warmer again. So we would expect 20, we would expect to the first quarter.
Paul Clegg: So we would expect the first quarter heating to be down organically. And that is actually against, again, a very strong comp in the prior year where you were still living off backlog. And I think that one was up year on year.
<unk> to be down organically and that is actually against.
Yeah, and a very strong comp in the prior year, where you are still living off backlog.
Paul Clegg: Now I'm talking about first quarter of 2023 was up around 22%. So, again, a weak weather quarter against a strong sort of post-COVID living off backhaul quarter. If you roll forward to the fourth quarter of this year, and we're then forecasting the fourth quarter, which is our other big weather quarter, to be a normal long-term winter, so that would be up year-on-year in the fourth quarter, in heating for the fourth quarter of 2024.
I think that one was up to your on your no no I'm talking about first quarter of 2023 was up around 22% year on year. So again, a week whether quarter against the strong sort of course quote.
<unk> living a backlog quarter.
You will fall into the fourth quarter of this year, and then forecasting the fourth quarter, which is our other big leather quarter.
A normal longterm winter, so that would be up year on year in the fourth quarter and heating for the fourth quarter of 2024, so hopefully that helps a little bit I think when you look at the full year, we would expect some organic growth and heating.
Steve Berezany: So hopefully that helps a little bit. I think, you know, when we look at the full year, we expect some organic growth in heating, but that's really going to come more in the back half because of those dynamics. Yeah. Okay, that makes sense. It's helpful.
But that's really gonna come more in the back half because of those dynamics yep.
Unnamed Speaker: Thank you, and I think one other thing. The one other data point on that, if you look at it, and this can probably be obvious, right? If you look at Q4 and HVAC, right? If you strip out the impact of the hydronics.
Okay that makes sense that's helpful. Thanks.
Okay.
Yep.
Steve one other data point on that if you look at it.
This can probably be obvious right Q for an H back right.
Strip out the impact of the hydronic business organically.
Steve Berezany: Organically, we would be up in single digits. When I think about that, does that, should that indicate, and it would make sense, that obviously the hydronics business is a very good replacement market, with very good cash flow? But you had a much better margin than you were expecting; should that tell us that it's typically a good cash flow and less cyclical, but not quite the same type of margin? Yeah, that's fair. Yeah, we've historically said that while cooling and heating are similar in margin, the electrical heating side is a higher margin than hydrogen oxide. That's right. Uningenious.
In single digits.
Right.
When I think about that does that should that indicate and it would make sense.
That obviously vitronics business.
Very good replacement market for good cash flow.
You had a much better margins and you were expecting showed that tell us are probably that's that's a typically good cash flowing and why cyclical but not quite the same type Martin.
Yeah.
Yeah, We agreed historically said that while cooling and heating or similar margin. The electrical heating our site is at a higher margin and how did you want I'm sorry, that's right.
Okay.
Steve Berezany: Paul, you often like to talk about the types of multiples you pay pre-synergy and post-synergy, and a lot of your success has been not overpaying. This looked like a really, really good acquisition when you look into it and what they're doing technology-wise. Can you give us any sense of what you paid versus your historic 13, 14 acquisitions? Yeah, so historically, we've talked about our average being just a little under 11 times. And that includes ranges from about 8 to 12.
<unk> PA you you often like to talk about the types of multiples you pay pre cinergy impulse center chance what are your successes pan not overpaying just looked like a really really good acquisition, we look into it and what what they are doing technology wise can you give us any sense <unk> what'd you paid versus.
Historic 13 14 acquisitions.
Yeah. So historically, we've talked about our average b just do a little under 11.
And that includes ranges from about eight to 12.
Paul Clegg: I wouldn't say that it's changed all that. It really hasn't changed as a result of that. You know, very, very similar in terms of the average. Any extension of this technology, given the use of robotics and the less labor-intensive and the precision of it, any extension of this technology to some of your other cooling businesses, either could be, in particular, our package business, the level of, and many more. Thank you; the software solution is incredibly high. And there could be many applications of that in our package cooling business, which is a very similar type of Bill of Materials, Bill of Materials, lasers, punches, so forth, so I think that there could be many.
I wouldn't say that it's changed all that and it really hasn't changed as a result of that you know very very similar in terms of the average.
Okay and any extension of this technology given.
Given the use of robotics.
Less labor intensive and the precision of it any extension of this technology to some of your other.
Businesses.
Dave there could be in particular are package business.
Is the case.
And their software solution is incredibly impressive.
And there could be very much applications of that.
Package cooling business, which is a very similar type of.
Bill of materials, Bill lasers punches, so so I think that very much.
I also think.
Eugene Joseph Lowe: I also think... If you have a better solution, and you're really only playing in a portion of the market.
If you have a better solution solution.
And do you really only playing in a portion of the market.
Eugene Joseph Lowe: You know, the key question is, can you play in more of the market? We actually think that's another, as I mentioned earlier, another potential synergy where we have very good coverage across North America. They have, and that's an area that we think we can help them accelerate as well. Great. Thanks, everyone. Thank you. Our next question comes from the line of Walter Liptak with Seaport Research. Your line is open.
The key question is can you play in the market, we actually think Thats matter.
Another potential synergy.
We have very good coverage across North America.
May have happened.
<unk> that we think we can help them accelerate as well.
Excellent.
Great. Thanks, everyone.
Thanks for <unk>.
Please stand by for our next question.
Our next question comes from the line of work elliptic with Sea Port Research. Your line is open.
Walter Scott Liptak: Yeah, congratulations on a great year. So I wanted to ask a couple of follow-on questions, one on HVAC, and you know, the 390 basis points of margin improvement look great. I wonder if you could help us understand, you know, what's going on there with automation and, you know, your go-to-market strategy, whatever, to improve the market. Yeah, I think, Walt, I'll start when you look at that increase in Q4, you know, and what we're forecasting into our guide into 2024. And a lot of this is being driven by two elements.
Hi, Thanks.
Yeah, congratulations on a great year.
So I wanted to ask a couple of <unk> went on H B C.
And the 390 basis points of margin improvement looks great.
I Wonder if you could help us understand.
What's going on there with automation and.
You go to market strategy whenever to to improve the margins.
Yeah, I think well so I'll start when you when you look at that increase in in queue or knowing what we're forecasting into our guidance of 2024 and a lot of this is being driven by two elements. The majority of it is just the operational improvements that we've made in that business I kind of rapid.
Unnamed Speaker: The majority of it is just the operational and I kind of referenced this earlier. We've made a substantial investment from a capital perspective to improve the quality of the equipment in there, to automate it, and to reduce labor. All of those elements have helped drive throughput on the PROSPE HVAC platform, and particularly on the cooling side. In addition, I think, you know, certainly the last two acquisitions that are impacting 2023 and then Ingenia in 2024, all three operate at higher margins than the segment has traditionally operated at. So you're getting kind of a benefit from both. You know, we haven't really quantified that with numbers, but I would say probably two-thirds of it is really coming from the operations. You know accretion and quality.
This earlier in the call that a substantial investment.
From a capital perspective to to improve the quality of the equipment in their automated to reduce labor content on it all of those elements of health drive throughput.
The property.
<unk> platform and particularly on the cooler side.
<unk> I think you know certainly the the last two acquisitions that are that are impacting 2023, and then junior in 2024, all three operate at higher margins than the <unk>.
Segment is traditionally operated at so you're getting kind of a benefit from both.
Haven't really quantify that with numbers.
I would say probably two thirds of it is really coming from the operating side with the balance from accretion.
The quality of the businesses that we've acquired.
Paul Clegg: Okay. Now that you're at this nice level of margins, it sounds like you'll keep pushing those margins higher. What do you think the operating leverage, the incremental margins will be in HVAC with some revenue growth? So, well, historically, we look for incrementals in the 30s in HVAC.
Okay.
Now that you are at this nice level of margins it sounds like you'll you'll keep pushing those margins higher what do you think the the operating leverage the incremental margins will be an H back with some revenue growth.
So what was it historically, we look for incremental sudden in the thirties and HVAC. What we will say is that if you. If you do some maths around there are 2024 guidance, you're gonna see that there is a little bit of P&L investment baked in there to support some of our growth initiatives.
Eugene Joseph Lowe: What we will say is that if you do some math around our 2024 guidance, you'll see that there's a little bit of P&L investment baked in there to support some of our growth. Okay, great. And then, you know, thinking about some of the good things that HVAC has done, you know, could you incorporate, is it possible to incorporate some of those things into DNM? to, you know, improve their profitability.
Okay.
Okay, Great and then.
I'm thinking about you know some of the good things that each Mac is done could you in court is it possible to incorporate some of those things into D. N M.
To to improve their profitability.
Eugene Joseph Lowe: Yeah, well, you know, we actually feel very good about the path of the DNM at Vaughan. We have had very strong success at HVAC and one of the things you're going to see at our investor day next month is we're going to go a lot deeper in the strategy and the value creation model at both HVAC and DNM. And you're actually going to hear it from Sean McClanahan over HVAC and John Swan, over detection and management.
Yeah, well, we actually feel very good about the past of the Dnm at Dawn. We have had very strong success at age back in one of the thing that you're gonna see it.
And yesterday next month.
So we're gonna go a lot deeper and the strategy and the value creation model that those H M. PNM and you can actually gonna hear it from from Sean Mcclanahan H.
Don Swan.
Over a detection and management actually feel really good about that things were doing and I do feel like we're gonna be on a good path error. So I think we're gonna get a lot more detailed and and I do believe we will get back to where we can historically detection and management, we are a lot larger.
Eugene Joseph Lowe: I actually feel really good about the things we're doing, and I do feel like we're going to be on a good path there. So I think we're going to get a lot more detail, and I do believe we'll get back to where we were historically in detection and management, although we are a lot larger.
Eugene Joseph Lowe: Some of the businesses, you know, had a little bit different margin profiles, which I'm really good about. Okay. All right. Sounds great. And then thinking about the DNM business and just the flattening in the run rate business, why did that? I mean, you may have said that I just didn't pick it up.
Some of the businesses.
A little bit different Marshall profiles really good about what I'm gonna call.
Okay, Alright sounds great.
And then thinking about.
Dnm business in the just the flattening and the the run rate business or.
Mmm why did that I may you may have heard that I've just didn't pick it up why did that business right now.
Eugene Joseph Lowe: Why did that business let now? Yeah, well, I mean, really, relative to our expectations, I think we saw more softness outside the US than we had originally expected, as I mentioned earlier. It was primarily, you know, in Europe.
Oh.
Really we relative to our expectations I think we some softness.
Softness outside of the U S than we had originally expected as I mentioned earlier it was primarily in Europe.
Eugene Joseph Lowe: But, as you know, some of those economies are weaker than we're seeing in the US. The US platform has been resilient, so we feel good about that, and the demand driver is behind us. Okay, and then maybe a last one for me is the working capital this year looked good. You know, if you think about the core business, you know, can you get more working capital in 2024? And cash inflow, I mean, from working capital. Yeah, well, I would say working capital is approaching normalized levels, particularly when I look at inventories. We're not entirely there yet. I think we've mentioned this in the past, and I still believe that's the case. It'll be, you know, a kind of two-year journey, 23 and 24. By the end of 24, we should see it normalized. We do still see a few isolated supply chain issues, particularly around printed circuit boards and other specific areas. But there's probably some incremental upside there, but we're well on our way to normalizing working capital.
And you know some of those economies or weaker than we're seeing in the U S U S.
Platform has been resilient, so we feel good about that and the demand drivers behind.
Okay great.
Okay, and then maybe a last one for me is the working capital is this your <unk>.
Look good.
If you think about the core business can you get more working capital in 2024 in cash inflow from the working capital.
Yeah, well I would say you know working capital is approaching normalised levels, particularly when I look at inventories were not entirely there yet I think we've mentioned in the past and I still believe that's the case it'll be you know, it's kind of a two year journey 23, and 24 by the end of 24, we should see as normal.
Lives.
We do still see a few isolated supply chain issues, particularly around circuit boards and other specific areas, but there's probably some incremental upside there, but we're well on our way to normalize important capital environment.
Mark Carano: Okay, got it. Okay, thanks a lot. Thanks, Walt. Thank you. As a reminder, ladies and gentlemen, that's star 11 to ask the question.
Okay got it okay. Thanks much.
Thanks all.
Thank you.
As a reminder, ladies and gentlemen that start one one to ask the question.
Paul Clegg: I'm showing no further questions in the queue. I would now like to turn the call back over to Paul for his closing remarks. Thank you all for joining the call, and we look forward to seeing many of you at our Investor Day on March 26th. If you would like an invitation to attend in person, please email the Investor Relations email address listed on our website.
I'm showing no further questions in the queue.
Now like to turn the call back over to Paul for closing remarks.
Thanks, all for joining the call and we look forward to seeing many of you at our Investor Day on March 26.
You would like an invitation to attend in person. Please email the Investor Relations E Mail list.
Operator: Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Thank you for watching!
Listed on our website.
Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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