Q2 2024 SPX Technologies Inc Earnings Call
Thank you for standing by and welcome to SPX Technologies second quarter 2024 earnings conference call. At this time, all participants are in a listen only mode.
Speaker Change: After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone.
Operator: To remove yourself from the queue, you may press star one one again. I would now like to hand the call over to Paul Clegg, VP, Investor Relations and Communication. Please go ahead.
To remove yourself from the queue, you may press star 11 again. I would now like to hand the call over to Paul Clegg, VP, Investor Relations and Communications. Please go ahead.
Paul Clegg: With me on the call today are Gene Lowe, our President and Chief Executive Officer, and Mark Carano, our Chief Financial Officer. A press release containing our second quarter results was issued today after market close. Replay of the webcast will be available on our website until August 8. 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 filing. You can find detailed reconciliations of historical adjusted figures from their respective gap measures in the appendix to today's presentation. September 5, in New York.
Paul Clegg: Thank you, operator, and good afternoon, everyone. Thanks for joining us.
Speaker Change: With me on the call today are Gene Lowe, our President and Chief Executive Officer, and Mark Carano, our Chief Financial Officer.
Speaker Change: Press release containing our second quarter results was issued today after market close.
Speaker Change: 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 a slide presentation during our prepared remarks.
Replay of the webcast will be available on our website until August 8th.
Speaker Change: 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.
Speaker Change: Our comments today will largely focus on adjusted financial results and comparisons will be to the results of continuing operations only.
Speaker Change: You can find detailed reconciliations of historical adjusted figures from their respective GAAP measures in the appendix to today's presentation.
Speaker Change: Our adjusted earnings per share exclude acquisition-related costs.
Speaker Change: Non-Service Pension Items, Mark-to-Market Changes, Amortization Expense, and other items.
Paul Clegg: Finally, we will be meeting with investors at various events during the third quarter, including the Seaport Virtual Investor Conference on August 21st and the Jefferies Industrial Conference on September 5th in New York.
Paul Clegg: With that, I will turn the call over to Gene.
Gene Lowe: Your call today will provide you with an update on our consolidated and segmented results for the second quarter of 2024. In the second quarter, we grew revenue by 18.4% and adjusted EBITDA by 45% year-on-year with 400 basis points of margin expansion. We achieved several firsts in this quarter, including the first quarter since the spin-off with revenue in excess of $500 million. In Q2, we had a number of successes with new products. We have also gained further acceptance among utility customers. We also continue to see momentum in our continuous improvement initiatives, including further gains in throughput in our HVAC facilities.
Gene: Thanks, Paul. Good afternoon, everyone, and thank you for joining us.
Gene: On the call today, we'll provide you with an update on our consolidated and segment results for the second quarter of 2024.
Speaker Change: We're also, once again, increasing our guidance for the full year.
Speaker Change: We have strong results for the quarter.
Speaker Change: In Q2, our company continued to execute well and drove substantial growth in all of our key profit measures with significant year-on-year increases in margins.
Speaker Change: We continue to experience robust demand across key markets and gain momentum in our continuous improvement initiatives.
Speaker Change: Today we are raising our full year 2024 guidance.
Speaker Change: Our new midpoint reflects year-on-year growth of 35%.
Speaker Change: and Adjusted EBITDA and 28% in Adjusted EPS.
Speaker Change: Turning to our high-level results.
Speaker Change: For the second quarter, we grew revenue by 18.4% and adjusted EBITDA by 45% year-on-year with 400 basis points of margin expansion.
Speaker Change: We achieved several firsts in this quarter, including the first quarter since the spin, with a revenue in excess of $500 million.
Speaker Change: and the suggested operating income of more than $100 million.
Speaker Change: We also achieved our highest post-spin EBITDA and EBITDA margin, which reached $109M and 21.7% respectively.
Speaker Change: As always, I'd like to update you on our value creation efforts during the quarter.
Speaker Change: In Q2, we had a number of successes with new products.
Speaker Change: In our cooling business, we receive multiple orders and quotes for our newly introduced Olympus V adiabatic unit, which optimizes the balance between power usage and water usage for a number of different cooling applications.
Speaker Change: In our detection and measurement segment, our location and inspection platform continue to gain traction, converting customers to our new precision locators with instant mapping capabilities.
Speaker Change: This upgraded product simplifies and speeds up the process of mapping underground utilities.
Speaker Change: We also gained further acceptance among utility customers on our cross-bore inspection equipment which facilitates the location of risk areas between gas and water lines.
Speaker Change: On the operational front, we are executing well on cross-selling opportunities, allowing our recent acquisitions to leverage our well-established sales channels to expand their market reach.
Speaker Change: We are further broadening our exposure to robust growth markets such as data centers and healthcare.
Speaker Change: We also continue to see momentum in our continuous improvement initiatives, including further gains in throughput in our HVAC facilities.
Speaker Change: And now, I'll turn the call over to Mark to review our financial results.
Mark Carano: Thanks Gene. You too is another very strong quarter for SPX Technologies.
Mark Carano: Year-on-year our adjusted EPS grew 34% to $1.42.
Mark Carano: In addition to our typical adjustments, adjusted earnings this quarter exclude a charge for the resolution of a legal dispute.
Speaker Change: The after-tax impact to adjusted EPS was $0.13 per share.
Gene Lowe: former owner of ULC. Consolidated segment income grew by $33.2 million, or 39.3%, to $117.6 million, while segment margin increased 360 basis points. On an organic basis, revenues increased 17.7 percent, driven by higher cooling sales, including approximately $20 million from the delivery of a large cooling service project that has no equivalent in the remaining quarters of 2024 or in the prior year period. Acquisitions contributed growth of 15% and included Ingenia in our cooling platform and Aspect in our heating platform.
Speaker Change: The settlement resolved all litigation related to an earn-out payment to the former owner of ULC.
Speaker Change: For the quarter, total company revenue increased 18.4% year-on-year. Organically, revenue grew 9%, driven by HVAC, while acquisitions drove a 9.5% increase.
Speaker Change: and FX was a slight headwind.
Speaker Change: Consolidated segment income grew by $33.2 million, or 39.3%, to $117.6 million, while segment margin increased 360 basis points.
Speaker Change: For the quarter in our HVAC segment, revenues grew 32.5% year-on-year.
Speaker Change: On an organic basis, revenues increased 17.7% driven by higher cooling sales, including approximately $20 million from the delivery of a large cooling service project that has no equivalent in the remaining quarters of 2024 or in the prior year period.
Speaker Change: Acquisitions contributed growth of 15% and included Ingenia in our cooling platform and Aspect in our heating platform.
Speaker Change: The SX impact was nominal.
Speaker Change: Segment income grew by $28.5 million, or 51.6%, while segment margin increased 300 days.
Gene Lowe: Increases in segment income and margin were due to acquisitions and operating leverage higher organic cooling sales, including the benefit of continuous improvement. The decrease in revenue was driven largely by lower comtech sales associated with a large pass-through project delivered during 2023 into Q1 of this year.
Speaker Change: The increases in segment income and margin were due to acquisitions and operating leverage of higher organic cooling sales, including the benefit of continuous improvement initiatives.
Speaker Change: Segment backlog at quarter end was $434 million, roughly flat organically from the prior year period.
Speaker Change: With a quarter in detection and measurement, revenues decreased 6.2% year-on-year.
Speaker Change: The decrease in revenue was driven largely by lower Comtech sales associated with a large pass-through project delivered during 2023 into Q1 of this year.
Gene Lowe: Year-on-year segment income grew $4.7 million, and margin increased by 450 basis points. Segment backlog at quarter end was $205 million, down 12% organically from the prior year due to deliveries of the past year projects.
Speaker Change: Year-on-year segment income grew $4.7 million, and margin increased 450 basis points.
Speaker Change: We had favorable sales mix in Q2, driven by lower than typical margins on the past group project delivered in the prior year, as well as a shift in project delivery schedules.
Speaker Change: which brought forward some higher-margin projects into the Corps.
Speaker Change: Segment income and margin also benefited from efforts to enhance the efficiency of our segment structure, which we expect to continue in the second half.
Speaker Change: Segment backlog at quarter end was $205 million, down 12% organically from the prior year due to deliveries of the past year project.
Speaker Change: Absent this project, backlog was up mid-single digits.
Speaker Change: Turning now to our financial position at the end of the quarter.
Speaker Change: We ended Q2 with cash of $133 million and total debt of $790 million.
Speaker Change: Our leverage ratio is calculated under our bank credit agreement 1.6 times.
Speaker Change: We anticipate our leverage ratio declining below the lower end of our target range of 1.5 to 2.5 times by year-end.
Speaker Change: There will be no additional capital deployment.
Speaker Change: Adjusted free cash flow for the quarter was approximately $58 million.
Gene Lowe: We are increasing our guidance for adjusted EPS to a range of $5.45 to $5.60, paired with a prior range of $5.15. The new midpoint reflects year-on-year growth of approximately 28%. This guidance update reflects our strong 2Q performance and second half outlook. In particular, in March, we continue our initiative to drive segment margins to historical levels. At a total company level, we anticipate adjusted EBITDA in a range of $410 million to $430 million. At the midpoint, this reflects a year-on-year growth of 35% and a margin of approximately 21%. In D&M, we expect higher-margin project revenue to be more weighted to Q3 than Q4.
Speaker Change: Moving on to our guidance.
Speaker Change: We are increasing our guidance for adjusted EPS to a range of $5.45 to $5.60.
Speaker Change: compared with a prior range of $5.15 to $5.40.
Speaker Change: The new midpoint reflects year-on-year growth of approximately 28 percent.
Speaker Change: This guidance update reflects our strong 2Q performance and second half outlook, particularly on margins.
Speaker Change: In HVAC, we are increasing revenue guidance by $5 million to reflect stronger cooling volumes and raising margin guidance by 75 basis points to reflect more efficient production and more favorable sales mix.
Speaker Change: In detection and measurement, we are raising our outlook for segment income and increasing margin guidance by 75 basis points.
Speaker Change: As we continue our initiative to drive segment margins to historical levels.
Speaker Change: At a total company level, we anticipate adjusted EBITDA in a range of $410 million to $430 million.
Speaker Change: At the midpoint, this reflects a year-on-year growth of 35% and a margin of approximately 21%.
Speaker Change: With respect to second half gating, in HVAC, as is typical, we expect Q4 to be our highest revenue and margin quarter.
Speaker Change: While Q3 revenue is anticipated to be modestly down sequentially due to the large cooling service project we called out in Q2.
Speaker Change: In D&M, we expect higher margin project revenue to be more weighted to Q3 than Q4.
Speaker Change: As always, you will find modeling considerations in the appendix to our presentation.
Speaker Change: I'll now turn the call back over to Gene for a review of our end markets and his closing comments.
Gene Lowe: Thanks, Mark.
Gene Lowe: Current market conditions support our updated 2024 outlook.
Speaker Change: Within HVAC, we continue to see strong demand for our cooling products across a broad set of end-market applications, including data centers, healthcare facilities, semiconductor plants, and industrial facilities.
Speaker Change: In heating the world demand remains stable, and we are seeing initial traction on climate conscious solution introductions.
Gene Lowe: In detection and measurement, we continue to experience flattish global demand in our short cycle business. With robust demand and significant operational momentum, we're well positioned to achieve our updated four-year guidance, which implies 35% growth in adjusted EBIT dollars. Looking ahead, I remain very excited about our future. With that, I'll turn the call back to Paul.
Speaker Change: In detection and measurement, we continue to experience flattish global demand in our short cycle business.
Speaker Change: with regional variation while project orders remain healthy.
Speaker Change: In summary, I'm very pleased with our Q2 performance.
Speaker Change: With robust demand and significant operational momentum, we're well positioned to achieve our updated four-year guidance, which implies 35% growth in adjusted EBIT dollars.
Speaker Change: We see multiple opportunities to continue growing our businesses, both organically and through our attractive acquisition pipeline.
Speaker Change: Looking ahead, I remain very excited about our future.
Speaker Change: With the right strategy and a highly capable, experienced team, I see significant opportunity to continue driving value for years to come.
Paul Clegg: Operator, we will now go to questions.
Speaker Change: With that, I'll turn the call back to Paul.
Paul Clegg: Thanks, Gene. Operator, we will now go to questions.
Operator: Thank you. As a reminder to ask a question, you will need to press star 11 on your telephone. To remove yourself from the question queue, you may press star 11 again. Please stand by while we compile the Q&A roster.
Speaker Change: Thank you. As a reminder to ask a question, you will need to press star 11 on your telephone. To remove yourself from the question queue, you may press star 11 again. Please stand by while we compile the Q&A roster.
Speaker Change: Our first question comes from the line of Ross Sparenblek of William Blair.
Ross Sparnblack: Hey guys!
Speaker Change: Hey, Ross. Hey.
Ross Sparnblack: Hey, congrats on the quarter. Another solid beat and raise here.
Ross Sparnblack: Maybe just, you know, considering the Dodge index, I know you went through some of the end markets within cooling. Sounds like simmers are still strong, but how should we think about commentary coming out of this quarter thus far around weaker utility spend and also sounds like maybe EVs are sliding to the right. I know that's been a
Speaker Change: Decent mix within H9 cooling tower previously. Is there any changes in it there?
Gene Lowe: Yeah, Ross, I think if you look at it, we're actually feeling very good about what we're seeing in our end market strength. As you know, we're very diverse; we serve a lot of different end markets, but the number of larger markets that are very strong just provide a lot of tailwinds for us. Specifically, the data center remains very strong, and we're seeing some nice wins, nice new customers, and some very nice trends there.
Speaker Change: I think if you look at it, we're actually feeling very good about what we're seeing in our end market strength. As you know, we're very diverse. We serve a lot of different end markets, but the number of larger markets that are very strong
Speaker Change: They provide a lot of tailwinds for us, specifically...
Speaker Change: The data center remains very strong and we're seeing some nice wins, nice new customers and some very nice trends there. Healthcare Pharma has been very strong. We see continued tailwinds there.
Gene Lowe: Healthcare pharma has been very strong; we see continued tailwinds there. Institutional is now a very significant portion of our business. You're talking about governments, schools, things like that, and we're seeing nice traction there. And then the last two would be industrial and industrial tech.
Speaker Change: Institutional is now a very significant portion of our business. You're talking about government, schools, things like that. We're seeing a nice traction there. And then the last two would be industrial and industrial tech.
Speaker Change: Industrial tech would be, as you've referred to, things like
Speaker Change: Chip plants, battery plants, EVs, and you know there will be inconsistent timing on those, but there's still some large orders out there. I think if you look at it across HVAC, we still feel very good about the demand environment that we see in front of us.
Speaker Change: Both for this year, but then also looking ahead to next year as well.
Speaker Change: All right, that's very helpful. On detection and measurement, this is probably the first time I've heard you guys speak to continuous improvement, just knowing that it is more of a disparate platforms. Can you help us get a sense of what that impact was relative to mix and maybe just cross margin expectations? I know you gave some color on the second half, but...
Speaker Change: Any color would be great.
John Swan: I'll start out. I think there's been a lot of focus on margins and detection and measurement. I'd say John Swann and his team have really done a nice job.
Speaker Change: I think that
John Swan: This segment strategy is working. We are seeing some leverage in how we develop software, how we
Speaker Change: How we do things in a smarter way that is, it really makes us more productive and that you really seeing that starting to flow through in the numbers. So.
Speaker Change: I would say that if you look at it in virtually all of our platforms, then detection and measurement...
Gene Lowe: Thank you, very nice progress. It's very good.
Speaker Change: Members.
Speaker Change: Thank you. Very nice progress. It's very good.
Gene Lowe: You know, as you know, there's not as much manufacturing and detection management; there's more software and light assembly. Most of the lean initiatives tend to be, I would say, outside of the facility, more focused on things like value engineering, pushing more throughput or bidding processes, optimizing our front end, our engineering, and NPI processes. So it's just a little bit different because there's less engineering there, but we are seeing some really nice improvements in our supply chain and in our optimization, enunciated there. I mean, we just had really good traction with respect to
Speaker Change: You know, as you know, there's not as much manufacturing and detection measurements as more software and light assembly.
Speaker Change: Most of the lean initiatives tend to be...
Speaker Change: I would say outside of the facility, more focus on things like value engineering, pushing more throughputs or bidding processes.
Speaker Change: Optimizing our front-end, our engineering and NPI processes. So it's a little bit different than, because there's less engineering there, but we are seeing some really nice improvement in our supply chain and in our optimization.
Speaker Change: And from your point of view, I know you spent a lot of time on that.
Speaker Change: Enunciated there, I mean, we just had really good traction with respect to those efforts. I mean, it's been a key initiative for us as we think about driving margin levels back to
Paul Clegg: margin levels back and the expectation that we can drive more value as a margin line.
Speaker Change: The guidance, which you haven't asked that question, but I'm sure someone will go there. You think about the implied margin in our guide for the back half of the year. A lot of that benefit and the reason for that is driven by these initiatives.
Speaker Change: and the expectation that we can drive more value as a margin line for the business.
Speaker Change: as businesses in DNM.
Speaker Change: Got it. So there's nothing really to call out that would imply that incrementals should divert from the healthy levels we saw in the second quarter here.
Paul Clegg: Well, there's a little bit that's sorry, Ross, this is Paul. Maybe there are a few moving parts this quarter that may make sense to just take a step back and unpack some of that. A lot of the benefit that you saw in the 2Q margin in D&M was really timing within the year. And so what we're talking about there, we had some projects push into the quarter with higher margins and then others move out of the quarter that had, let's call it, average margin.
Speaker Change: with higher margin, and then others move out of the quarter that had, let's call it average margin.
Paul Clegg: We also had some delayed spending that we do think we'll catch up on in the second half of the year. All that is a couple of million dollars here. But we said we've made really good progress here on the initiatives. And if you look at the update in our guidance for the full year, you get an implied increase in segment income of about three to three to four million dollars, three and a half, let's call it that. And that's really the margin initiatives, and that spread through Q2 and the second half.
Speaker Change: I'll let a couple million dollars there.
Speaker Change: We've made really good progress here on the initiatives, and if you look at the update in our guidance for the full year, you get an implied increase in segment income of about $3 to $4 million, $3.5 million, let's call it.
Speaker Change: And that's really the margin initiatives, and that's spread through Q2 and the second half.
Speaker Change: Thanks, guys.
Speaker Change: Thank you.
Operator: Our next question comes from the line of Bryan Blair of Oppenheimer.
Speaker Change: Thank you.
Speaker Change: Hey Brian, how's it going?
Speaker Change: Another fantastic quarter for HVAC, specifically in your cooling platform.
Speaker Change: To level set, if you're willing to share the details on profit improvement year-on-year, how much of the 300 basis point expansion would be attributable to volume, price cost, productivity, and mix accretive deal contribution?
Brian: Maybe about a third, and then the rest of it was really an outperformance on that service project.
Speaker Change: In terms of price-cost, it is a benefit. The benefits we're seeing are not as large as we saw a year or so ago, but it was a favorable tailwind that we got caught up in the operating leverage there.
Unknown Attendee: Okay, I understand. I appreciate the detail.
Speaker Change: and perhaps offered a little a little more color on how run rate D&M orders trended to the quarter and into early Q3. I'm particularly interested in radio trends given the somewhat canary nature of that business.
Speaker Change: On the run rate businesses and then on the project businesses, I would say it's very healthy.
Gene Lowe: We expect to finish the year with a very strong backlog for D&M, significantly higher, which we think is going to set us up well for 2025 and 2026. But, but you're right, radio, and our LNI platforms, you know, radio is typically a canary in a coal mine, but radio is holding, holding steady. And actually, we're seeing things that are kind of positive there. So we feel good about where radio is, and there are positive inclinations there. The second thing would be, Okay, I believe just cut. I'd say flattish with, you know, potentially some, some positive early signals.
Speaker Change: As a matter of fact, I was just talking to the GM this morning, we're seeing some loosening and some positive signs on continental Europe , which is pretty small for us, but we're seeing some positive inclinations there. Second thing would be. Unknown Speaker Yeah. Yeah. Yeah. Yeah. Yeah. Yeah. Yeah. Yeah. Yeah. Yeah.
Speaker Change: UK, I believe, just cut.
Speaker Change: Okay, that's encouraging.
Speaker Change: Our next question comes from the line of Damian Karas of UBS.
Damian Karras: Hey, good evening, everyone. Congrats on the quarter.
Unknown Attendee: I wanted to ask you a follow up question on You know, you're raising the guidance for a few straight quarters, and that's after, you know, 300 basis points or so of expansion last year.
Speaker Change: You know, you're raising the guidance a few straight quarters, and that's after, you know, 300 basis points or so of expansion last year. So,
Damian Karras: I was wondering if maybe you could just kind of, you know, hone in a little bit on on the execution and where it's been better than expected, you know, any of those initiatives that are
Damian Karras: And how much juice do you think you got left in the tank, Gene?
Gene Lowe: Hey Damian, I'll start. I mean we've talked about this over the last few quarters as you know we've been
Gene Lowe: We've been investing a tremendous amount of capital relative to where we've been historically.
Speaker Change: This year I think we targeted $40 million plus, and that's close to 2% of revenue, so a good kind of half.
Speaker Change: percent above where we've been. And those have been just very strategic investments across the cooling platform.
Gene Lowe: in areas where we can, you know, drive both incremental throughput, drive efficiencies.
Gene Lowe: as well as reduced labor content. So we're kind of seeing it really across the footprint.
Gene Lowe: That has been ongoing really for 12 plus months. We're not through with it. There is more activities and upgrades, if you like, to those facilities that will kind of continue throughout the year.
Gene Lowe: So that's kind of, you know, in a broad stroke, what's really driving it. I wouldn't, you know, I wouldn't suggest that there's one particular change that we made. It's really the combination of all of that. And then you overlay kind of a CI mentality to it as we're thinking about the activities within these plants.
Speaker Change: One small thing I would add is, as a reminder, detection and measurement, really our target has always been 22 to 24. We believe that that business should operate there and it's nice to see them get back there.
Unknown Attendee: Really good work there. The segment has really changed.
Speaker Change: Really good work there. The segment that's really changed.
Speaker Change: You know, remember, the jumping off point of the number you're talking about was probably a little bit suppressed due to some of the COVID supply chain, some of the labor challenges, and a lot of the good work that we were doing was
Gene Lowe: was hidden at that time or it was it was impacted by those other areas.
Speaker Change: But I think that's where, you know, you think we had historically had around a 16% business and that has structurally changed as
Speaker Change: Mark has alluded to a lot of the investments in productivity, a lot of the growth in demand and the operational leverage, but also, don't forget about M&A. M&A has added, we think, in the neighborhood over the past two years,
Gene Lowe: I asked you about the acquisitions, you know, kind of three notable ones, uh, over the past year combined, you know that's a pretty sizable chunk of your HVAC segment now, so Yeah, I would just we are very pleased with these three acquisitions. So there's Ingenia, which we think all three of these businesses are very good businesses, have great value propositions, and great competitive positions. You know, we're in a situation there where we have so much demand for our product; our focus is on making sure we can expand our capacity faster. And the other thing I would say is that not only is there good performance from these individually, an Air Handling Unit, they can oftentimes influence the downstream specification.
Speaker Change: That's great. And that's actually a good segue, Gene. I wanted to...
Gene Lowe: ask you about the acquisitions, you know, kind of three notable ones over the past year combined, you know, that's a pretty sizable chunk of your HVAC segment now. So
Gene Lowe: How have these...
Gene Lowe: acquisitions been performing relative to your initial expectations. I guess kind of early thoughts on Ingenia, but Aspec and Tamco, you're kind of about a year in, so appreciate any color on that.
Speaker Change: Yeah, we are very pleased with these three acquisitions. So there's Ingenia, which we think, all three of these businesses are very good businesses, have great value propositions, great competitive positions.
Speaker Change: And then two of them are also very linked to data centers.
Speaker Change: and we have seen just some very nice growth. So I think Ingenia, ASPEC, and TAMCO, as a reminder, Ingenia's air handling, that is very linked to health care, pharma,
Speaker Change: You know, we're in a situation there where we have so much demand for our product, our focus is on making sure we can expand our capacity fast enough.
Speaker Change: We are truly capacity constrained there and a lot of our time and our effort is is building and enhancing that because we do believe we have a better solution in the market. We really have a very good product.
Speaker Change: ASPEC and TAMCO also are performing at a very solid level. I think if you look at these three put together, I would say revenue is in the neighborhood of our plans, but we're exceeding in our profit levels.
Speaker Change: And the other thing I would say is, not only is there good performance of these individually,
Speaker Change: But we actually think there's some really nice synergies that we're seeing and we're starting to capture. For example, Ingenia, when you get into the specification
Gene Lowe: For example, they can influence TAMCO, our air products, and our strobic product line, which oftentimes will actually get built into the air handling unit. We also get leads for our other product categories because we'll know a hospital is going up here or a pharmaceutical company is going up there. And some of our businesses, like Marley Cooling, we have very good coverage. So there's not a lot that we don't see, but being able to get in early and meet the engineers is meaningful. So I'd say that we see some real synergies across the businesses there. They're very synergistic. And I'd say we're still in the early days.
Speaker Change: Now, as you know, as a basis of design, they can also influence
Speaker Change: Our air products, our strobic product line, which oftentimes will actually get built into the air handling unit.
Speaker Change: We also get leads for our other product categories because we'll know a hospital is going up here or a pharmaceutical is going up there, and some of our businesses like Marley Cooling, we have very good coverage, so there's not a lot that we don't see.
Speaker Change: but being able to get in early.
Speaker Change: and meet the engineer's influence as needful. So I'd say that we see some real synergies across the businesses there. They're very synergistic and I'd say we're still in the early days.
Gene Lowe: capturing that, but we, I would say we're very pleased with all three of these. And, you know, interestingly, we had our biggest year last year where we deployed $800 million of capital, so very big for a company our size. We're going to be, we'll be materially below our 1.5 times by year end. So I think it's a testament to, you know, our model where we just generate a lot of cash.
Speaker Change: Capturing that but we I would say we're very pleased with with all three of these and you know interestingly we had our biggest year last year where we deployed
Speaker Change: North of 800 million dollars of capital, so very big for a company our size. We're going to be, we'll be materially below our 1.5 times by year end. So I think it's a testament to you know our model where we just generate a lot of cash.
Speaker Change: and it allows us to invest that cash in growth.
Speaker Change: I think last year to this year is a good example of that, as well as I think the prior four years, we kind of had it rolling, but yeah, we're so good about, you know, stepping back a little bit. One of the common questions is, what are you seeing on the M&A front? And I'd say our
Speaker Change: Thanks, I'll pass it along.
Damian Karras: Thanks, Damian.
Speaker Change: Thank you. Our next question comes from the line of Steve Ferazani of Sidoti.
Steve Forzani: Good evening, everyone. I appreciate all the detail tonight. I want to follow up your last comments, Gene. You pointed out that net leverage probably, I mean, you're well on your way to getting back below the target range.
Unknown Attendee: Looks like there's a little bit of debt reduction in the quarter. How are you thinking?
Steve Forzani: It looks like there was a little bit of debt reduction in the quarter. How were you thinking until the next deal comes along on uses of cash? Working capital was up a little bit. There was a little bit of a build, but you still generated a significant amount of cash flow this quarter.
Gene Lowe: Yeah, Steve, I mean, our priorities for the use of capital are obviously growth, right, whether that's organic or inorganic. And, you know, I think when I think about the pipeline of opportunities out there and what we're seeing in the M&A space, we feel good about where we are and the opportunity to deploy capital going forward in that. So, and really, all of our investments have been in growth.
Speaker Change: Yeah, Steve, I mean, you know, our priorities, right, for use of capital are obviously growth, right, whether that's organic or inorganic. And, you know, I think when
Speaker Change: You know, our cash flow...
Speaker Change: has been and continues to be more back end loaded.
Speaker Change: That it is in the first half of the year. So to Gene's point, you will see that
Speaker Change: But we do have a fairly substantial CapEx plan this year.
Steve Forzani: that I referenced earlier, and we're about halfway through that.
Steve Forzani: You know, there aren't any kind of other opportunities, we'll just continue to pay down debt in the near term.
Speaker Change: Yeah, and I would say, you know, if you look at historically, you know, our focus has been growth, we believe it's part of our flywheel and our model, and really all of our investments have been in growth. I would say it's unlikely to look at a dividend over the next couple of years.
Steve Forzani: A couple years ago, maybe three or four years ago, but I would say that 95% plus of our capital
Speaker Change: Over the past time frame has been really really been deployed on growth. I wouldn't anticipate that to change over the next
Gene Lowe: Yeah, I think our views are consistent with what we've kind of shared at Investor Day on that front.
Speaker Change: I'm a years scheme
Speaker Change: Yeah, I think our views are consistent with what we've kind of shared at the Investor Day on that front.
Speaker Change: Absolutely. How are you thinking about CapEx? I think, Gene, you mentioned earlier in response to one of your questions some capacity constraints on one of the acquisitions. Do you need to add capacity for some of these faster growth HVAC acquisitions and should we expect that?
Gene Lowe: Yeah, I think we will need to add capacity, but I wouldn't anticipate this to be anything that's really...
Gene Lowe: Noticeable. I think for us, you know, we think of our CapEx as normally at around one and a half times.
Gene Lowe: We did a lot of capital investments in our primary cooling business, a significant amount of lasers and punches, which drove a really significant amount of revenue.
Speaker Change: We did a lot of capital investments in our primary cooling business, a significant amount of lasers and punches, which drove a really significant amount of revenue.
Gene Lowe: I would expect to see that continue in certain areas and start to get capacity constrained. But I think, in large measure, we could have elevated CapEx in the 2% range. For HVAC, for the past two years, the organic growth alone was
Speaker Change: which really has allowed us to grow. You know, I would expect to see that continue in certain areas and start to get
Gene Lowe: Yeah, I mean, I think you kind of largely covered it, Gene. I mean, we'll just, you know, we're going to continue to deploy capital where we can generate the highest return.
Speaker Change: As we look ahead for 25 and 6, anything else, any other tellers like that? Yeah, I mean, I think you kind of largely covered it, Gene. I mean, we'll just, you know, we're going to continue to...
Speaker Change: Deploy capital where we can generate the highest return.
Speaker Change: There will be some opportunities, I think, on the organic front to continue to invest. So you could see it slightly elevated relative to where we've been historically. But, you know, ultimately it's a growth focus.
Gene Lowe: I will say the capital we have deployed, I believe, has had a tremendous impact. And, you know, not only was it the capital, but it was the lean projects that we had. And I think that has been, as you pointed out,
Speaker Change: My expectation is M&A will be at the forefront and will continue to be. I will say the capital we have deployed, I believe, has had a tremendous return.
Speaker Change: and you know not only was it the capital, but it was the lean projects that we had, and I think that has been as you've pointed out not only the ability to drive more throughput, but at a structurally higher margin.
Unknown Attendee: When I think about some of these acquisitions, like Genia, which may be on your platform, you have a much, much wider market reach. Have you been able to take that out to your full potential at this point? Or are you limited by capacity and their ability to get projects out?
Gene Lowe: Right now, we're limited by They have a multi-year plan. They have a humongous facility. There's a lot of equipment in there that we're actually operationalizing. So this is a very good plan. Right now, the demand is very strong there. You're exactly right.
Speaker Change: Right now we're limited by capacity.
Gene Lowe: They could, you know, if you think about it, they serve, they're very strong in Canada. They serve a number of states, a smaller number of U.S. states. Where our strength lies is in our Marley brand, where we are everywhere. And we tend to have a very strong representative network. We tend to have professionals in each of those regions. So, you know, as we expand capacity, we actually think we're going to see, and you're really talking about synergies, commercial synergies.
Speaker Change: They serve a number of states, a smaller number of U.S. states.
Speaker Change: Good presence, not only with the engineers, but with the mechanical contractors, as well as the service.
Speaker Change: Professionals in each of those regions so
Gene Lowe: We do believe that they are there, and we are starting to capture that where we have capacity. But right now, in that particular business, we want to make sure that we can meet the demand levels, which are very high.
Speaker Change: Of course, of course.
Speaker Change: Bye-bye.
Unknown Attendee: Hey, thanks, guys. Great quarter.
Unknown Attendee: One day, you guys are touched on this with the, you know, growth. But I wonder if you could talk about sort of your growth versus the market? Do you think you're gaining market share? And I guess why is it that from market expansions and new products. Can you provide some color?
Speaker Change: And I guess, why is it that from the market expansions and new products, can you provide some color?
Gene Lowe: Yeah, so I think if any talk in one segment talking about the company overall, well, oh, no, I yeah, sorry, I think focused on HPV. About the cooling business?
Gene Lowe: Yeah, I do believe we're taking share there. Specifically, I would say, you know, our strength in the cooling segment has always been large projects. So I'd say that I do think we've taken share, and I do think it's a function of our innovation and our product management. But I also think it's a function of the market moving in areas where we have some real strength. You put those two together, and I'd say that's why we've taken share.
Speaker Change: On the cooling business? Yeah, I do believe we're taking share there. Specifically, I would say, you know, our strength in the cooling segment has always been the large projects.
Speaker Change: Because we have done the large constructed projects in the past, we just have great technical competence in solving difficult engineering. So I would say that we have seen a lot of growth in larger projects.
Speaker Change: and that could be data centers, that could be chip manufacturers, that could be EV, and we are, that's really in our core, so I would say there's been an enhanced level of demand in our particular area of strength. Second thing I would say is
Speaker Change: We have invented the Everest product line, and that's something we've talked about over the past several years. That has essentially gone from approximately zero to pushing $100 million of revenue.
Speaker Change: And that is a truly a great innovation where even before we invented the Everest, we had the largest tonnage cooling tower in the world. With the Everest, we were able to first increase it by 50%.
Speaker Change: 1,400 1,500 tons to pushing 2,800 plus tons and a truly it's just a really good solution for the market that has been particularly favored by chip manufacturers and data centers.
Speaker Change: You put those two together, I'd say that's why we take a chair.
Paul Clegg: So, and I don't have, I'll give some, and Paul, you can pull out what we have specifically, but if you look across pooling, where a lot of this activity is, I would say the biggest areas
Speaker Change: would be one, data centers, two, healthcare pharma, and three, institutional. So those are the very big areas.
Speaker Change: Health care, the growth rate has maintained some very positive strength there. Institutional has been healthy. On what you would call industrial tech, that's a smaller portion. I'd say that's still growing.
Speaker Change: We have seen an EV plant or a battery plant move out in timeline here or there.
Speaker Change: But as it pertains to our overall demand profile,
Speaker Change: I don't think it's been something that we have seen as being material to us.
Speaker Change: So overall, and Paul, you want to get into a little more color here, you have the chart running. Yeah, so what we did call a data center is being around, and there's a slide I should say that I'm currently looking at in our Investor Day deck that has
Paul Clegg: Some breakdowns for the entire company, but data center is about 10% of the of the cooling business, and that makes it around 7% of HVAC.
Paul Clegg: which makes it around 7% of the total company and lab and health care is about 9% of the total company. Institutional, again, it's doing quite well also around 9%.
Speaker Change: So you've got quite a few, we've got a broad industrial category in there that's 20, and that's where you're going to see some of this industrial tech that Gene was talking about.
Unknown Attendee: Okay, great. And just as just switching gears to that, that service project that you had, it sounds like that came in, in the quarter, and you completed it. Is that right? And I guess maybe you could provide some detail of, you know, what was that regarding? And, you know, are there any other businesses like that that you can get in the future?
Speaker Change: Okay, great. And just as, just switching gears to that
Paul Clegg: Yeah, well, I'll start and then, you know, Paul, feel free to kind of add in. This was this was, you know, a project that was.
Gene Lowe: I don't know if I should call it a one-off, but it was not something that we normally have, given the size of it. It was a cooling service project that we completed in the northeast of the United States. It was an attractive one for us just because it had a margin profile that we don't normally see with these types of projects. So we were well-positioned to go win it, and it drove a high degree of profitability. Now, there's no comparable project like that for the balance of the year. There was nothing in last year that looked like it.
Paul Clegg: I don't know if I'd call it one-off, but it was not something that we normally have given the size of it. It was a cooling service project.
Paul Clegg: that we completed.
Paul Clegg: Up in the northeast of the United States, you know, and it was a
Paul Clegg: It was an attractive one for us just because it had a margin profile that we don't normally see you know with these types of projects. So we were well positioned to go win it and it drove.
Paul Clegg: You know, a high degree of profitability, you know, there's no comparable project like that, you know, for the balance of the year, there was nothing in last year that looked like it.
Paul Clegg: Yeah, apart from that, well, let's say we just called it out, really, because, as Mark said, it didn't have any comparable in the other quarters of the year or in the
Mark Carano: in the prior year. We just wanted people to be aware of it in terms of comparisons going forward as well. I believe it was in our backlog in the prior quarter, obviously came out of the backlog this quarter.
Unknown Attendee: So when you think about it, Walt, on a sequential basis,
Paul Clegg: So when you think about it, Walt, on a sequential basis...
Walt: You know, year over year, we thought it was beneficial that people understood what that project is and that it was in there.
Walt: Okay, great. Makes sense. Okay. Thanks much.
Speaker Change: Thank you. Again, to ask a question, please press star 1-1 on your telephone. Again, to ask a question, press star 1-1 at this time.
Speaker Change: As there appear to be no further questions in queue, I would now like to turn the conference back to Paul Clegg for closing remarks, sir.
Paul Clegg: Thank you all for joining us on the call today, and we look forward to catching up with you at upcoming conferences and investor engagements.
Paul Clegg: Thank you all for joining us on the call today. And we look forward to catching up with you at upcoming conferences and investor engagement. Thanks.