Q2 2019 Earnings Call
At this time all participants are in a listen only mode.
Later, we will conduct a question and answer session and instructions will follow at that time.
If anyone should require assistance during the conference. Please press Star then zero on your Touchtone telephone as a reminder, this conference call is being recorded I would now like to turn the conference over to your host Vice President of Investor Relations and Communications Mr., Paul Clegg you may begin.
Thank you Laura and good afternoon, everyone.
Thanks for joining us.
With me on the call today are gene Lowe, our president and Chief Executive Officer, and Scott Sproule, Our Chief Financial Officer.
A press release containing our second quarter results was issued today after market close.
You can find the release in our earnings slide presentation as well as a link to a live webcast of this call in the Investor Relations section of our website at SPX Dot com.
I encourage you to review, our disclosures and discussion of GAAP results and the press release and to follow along with the slide presentation during our prepared remarks.
A replay of this webcast will be available on our website until August eight.
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 you can find detailed reconciliations of adjusted figures to their respective GAAP measures in the appendix to today's presentation.
Our segment reporting structure combines the results of our heat transfer and South African operations into an all other category, which is excluded from our adjusted results. Our intent is to report these entities as discontinued operations at such time as they meet the accounting requirements to do so.
Consistent with how we established our guidance and our our adjusted earnings per share also excludes non service pension items amortization expense and investment valuation true up and one time costs associated with acquisitions.
Finally, we will be meeting with investors during the third quarter on August 29th we will present at the Midwest ideas conference in Chicago.
On September 5th we will participate in vertical research partners Global Industrials conference in Connecticut.
And on September 19th we will participate in Buckingham researchers Industrials conference in New York City.
And with that I will turn the call over to Jean.
Thanks, Paul Good afternoon, everyone.
Thanks for joining us.
On the call today, we'll provide you with a brief update on our overall results segment performances end to end market conditions before going into Q and a.
For the quarter, we again achieved significant adjusted revenue growth operating profit growth margin expansion and free cash flow generation.
Our overall execution and results for the first half of the year have been strong.
The integration of our acquisitions continues to go smoothly.
And our pipeline of opportunities remains very active.
Our strong financial condition provides us the capacity to continue executing on our organic and inorganic growth plans and delivering on our performance targets.
During the quarter, we secured an agreement with GE one of our customers on the projects in South Africa.
That settled all material claims between us.
Well there is more work to do to settle claims with other parties. This is an important step forward in winding down our exposure to this legacy liability.
Scott will address this agreement in more detail in his section.
Based on the strength of our first half results are solid operational performance and our visibility into customer demand in the back half of the year, we're increasing our full year guidance for 2019, adjusted EPS to a range of $2.60 to $2.72 from prior range of $2.50 to $2.65.
Turning to our adjusted results for the quarter.
Revenue increased 6.3% from the prior year to $372 million and EPS was 67 cents, an increase of 26% compared to the Q2 2018.
Our detection and measurement and engineered solutions segment were the key drivers of our revenue growth and margin expansion.
As always I'll briefly touch on our value creation framework and the progress we made during the quarter on our organic and inorganic growth initiatives.
In our age Frac heating platform, our new stainless steel high efficiency boilers product line continues to gain traction and we have received our first orders for our new two to 3 million P.T. you size range.
Customer feedback has been positive and interest remains very strong around these larger sizes, which now range from 750000 to 3 million be to use.
This new line of boilers expands our addressable market any faster growing segment, where we had little presence just 12 months ago.
In our age HVAC cooling platform, we continue to drive growth opportunities through organic initiatives like our NC Everest cooling tower.
Which is named the 2019 environmental leader product of the year.
And is a compelling solution for larger heat rejection applications.
And our detection and measurement segment, we continue to see strong demand for our innovative communication technologies products, including our flash Vanguard high intensity L.E.D. lighting solution.
As well as our airport ground lighting installations, which we acquired as a part of the Sabic acquisition.
Turning to our most recent acquisition.
In July we completed the purchase of SGS refrigeration accompany we know well and have partnered with closely to produce a robust line of evaporative condensers.
We're excited to have them join our team.
On a full year basis, the acquisition divest, yes would have increased our 2018 revenue by approximately $12 million.
While small this transaction is an important product line extensions that expands our addressable market into industrial for refrigeration solutions, where we see favorable growth opportunities.
And now I will turn the call over to Scott to review our financial performance.
Thanks Gene.
I'll start with our net results for the quarter.
Second quarter results exceeded our expectations due primarily to projects in our detection and measurement segment delivering earlier than anticipated and the lower than expected effective tax rate.
Our GAAP EPS for the quarter was 43 cents adjusted basis, our earnings per share was 67 cents or an increase of 26% from the second quarter of 2018.
Overall, we are pleased with the Q2 results, which put us in a strong position to achieve our updated full year targets.
Before going into more detail on the results I'll provide an update on South Africa.
As gene noted during the second quarter, we finalized a settlement agreement with GE.
Well, we have more work to do to settle claims of other parties. We view this as green as an important positive step forward in winding down our exposure to the projects.
Included in the second quarter loss from the South African projects is a one time charge of $6 million associated with this agreement.
In the context. The overall projects. This settlement is significant as it lowers the amount of claims against us in the guarantees we are obligated to maintain reducing the level of uncertainty associated with our future cash flows and South Africa.
From an operational perspective, the quarter progressed as expected and cash usage associated with the projects was approximately $1 million.
Overall, we feel good about the progress we have made to complete our construction work by year end.
We're continuing to pursue opportunities to address outstanding claims with other counterparties.
Turning now to our adjusted results revenue increased 6.3% during the quarter. This included 7% growth from acquisitions in our detection and measurement segment, a slight organic decline and a modest unfavorable currency effect.
Segment income income grew approximately $7 million or 14% driven by the acquisitions in detection and measurement as well as operating leverage from organic growth in both detection and measurement and engineered solutions.
Adjusted segment margins expanded approximately 100 basis points to due to higher proportion of our total revenue coming from detection and measurement.
And improved operating performance in engineered solutions.
I'll walk through the details of results by segment, starting with a track.
Organic revenue for the quarter decreased to 5.7% and we also experienced a modest FX headwind.
Lower cooling revenue was offset by moderate growth and heating revenue.
As a reminder, each frac revenue in the second quarter of 2018 was up 16% year on year, primarily due to the concentration of cooling product shipments in Q2.
For this year adjusted segment income decreased by $1.8 million in Q2 and margin declined 50 basis points.
We are successfully capturing price in excess of input cost inflation. However, the favorable margin impact was offset by lower volumes and higher operating costs during the quarter.
As we passed the mid point of the year, we feel continue to feel good about meeting our previously stated full year targets.
Well the S.U.S. acquisition is only a modest impact on segment income for 2019. It does increase our segment revenue guidance for the full year by $6 million to a range of $576 million to $586 million.
In detection and measurement revenue increased 36.3%, including a 33.8% increase from acquisitions and a modest FX headwind.
Organically revenue increased 3.2% driven by strong project shipments in our communication technologies platform.
We had anticipated certain projects shipping in early Q3 based on customer requirements. They were delivered in late Q2 resulted in better than expected results for the quarter.
Adjusted segment income margins were 24.5% or a decrease of approximately 70 basis points.
The decrease was largely due to sales mix, including a full quarter of the queues acquisition.
Which was completed in June 2018.
Given the favorable project activity during the first half and our visibility into demand for the second half, especially in our communication technologies platform.
We are increasing our full year segment revenue guidance by $5 million to a range of $395 million to $400 million, which also resulted in a higher segment income contribution.
In engineered solutions revenue for the quarter increased 2.7%, reflecting improved execution in our transformers business.
Segment margin income segment income increased $2.6 million in margins increased approximately 170 basis points to 9.4%.
Due primarily to the strong performance from our transformed business.
Turning now to our financial position our balance sheet remains strong.
In the second quarter, we generated adjusted free cash flow of approximately $15 million, which exclude the modest cash usage associated with the south African projects and heat transfer.
Operations.
We ended the quarter with cash and equivalents.
Ultimately $35 million.
And we continue to target greater than a 110% adjusted free cash flow conversion of our adjusted net income for the full year.
Our net leverage was 1.9 times at the end of Q2, which continues to include some short term financing for the Sabic acquisition.
As we generate cash and expand our EBITDA over the second half of 2019, we expect our net leverage declined to the low end our target range of 1.5 to 2.5 times, leaving us well positioned for further capital deployment.
Turning to our 2019 guidance.
We are increasing our full year adjusted earnings per share guidance to a range of $2.60 to $2.72 from our previous range of $2.50 to $2.65.
The new range reflects growth of approximately 15% to 20% over our 2018 results.
As I noted earlier, we are modestly increasing our revenue guidance for the H. HVAC and detection <unk> measurement segments.
We continue to expect adjusted operating income margin of approximately 11%.
We've also included additional details in the appendix to help you update your models, including somewhat lower full year tax rate, specifically associated with higher R&D tax credits recognized in Q2.
As well as adjustments to other below the line items.
Lastly, regarding input cost inflation and pricing.
We continue to anticipate a favorable full year margin impact from price and costs of about 50 basis points or recovery of the headwind we experienced last year.
In summary, we feel good about where we are for the full year outlook and our businesses are performing well.
Now I will turn the call back to gene for a review of our end markets and his closing comments.
Thanks Scott.
We're on track for a strong 2019 and excited about the opportunities we see in front of us.
Freight HVAC cooling, we continue to see solid order rates and backlog that support our full year outlook.
Demand for our cooling products is driven by various end markets, including institutional light industrial and data centers. In addition to the commercial end market.
In Asia HVAC heating, we had a solid quarter as we continue to get traction on new products and initiatives.
As a reminder, we are currently in the lower volume warmer months of the year.
And channels appear well balanced and pre season demand has been typical.
In detection and measurement our front log of project opportunities in communications technologies, and Marine lighting solutions continues to grow nicely and demand for our run rate products remain solid.
The market for Transformers remain steady.
And we continue to see solid demand from our utility customers.
In summary, I'm very pleased with the year to date performance in our accomplishments throughout the organization.
A strong balance sheet and significant liquidity provide us the capacity to continue pursuing attractive growth opportunities and value, creating capital allocation initiatives.
Integration activities for our acquisitions continue to go smoothly.
And we're very happy with the strategic benefits we are realizing in the companies we have acquired over the past 18 months.
Our M&A pipeline is the most active it has been in many years.
With significant opportunities to deploy capital and to build on our strategic platforms.
The timing of acquisitions can be difficult to predict but we will continue to pursue transactions with a strong strategic fit and attractive return profiles.
Overall, we remain on track to continue generating double digit earnings growth and driving value creation for our shareholders.
And now I'll turn the call back over to Paul.
Thanks Deane.
Blair or we are ready to go to questions.
Thank you ladies and gentlemen, if you have a question at this time. Please press. The Star then the number one Keith touched on Palestine.
If your question has been answered or you wish to remove yourself from the queue. Please press the pound.
We have your first question from Brett Linzey with vertical research. Your line is no line.
Hey, good afternoon everybody.
Hey.
Just wanted to start with detection and measurement you had the pull in from Q3 into Q2.
But you still only had 3% growth and that was against a.
Flat compare I would have thought.
Pulling would have boosted results a little bit more so maybe just talk about the project activity and what the cadence looks like.
For Q3 in Q4.
For modeling purposes.
Hey, Brad this Scott.
So yeah we.
Based on customer timing, which we had said beginning of the quarter looked like it was in the early Q3 and customer one of the earlier. So we pulled it in so yes. It was positive for the quarter now as a reminder, you look at the different project business between Com communication technologies and transportation.
They operate differently. So we just had some timing differences in the transportation businesses year over year that kind of weighed on that Q2 s organic growth percentages.
And then as you look at the you look at it from a first half second half perspective, we were kind of flattish on an organic basis for.
For for the segment, but we will see organic growth across the second half.
In Q3, you actually expect some growth to even though you had a pull in there I mean, the comps really easy with that down 13.
Well I mean that part of the guide is clearly the Q2 Q3 is most is really does a timing, but the guide increase was driven by strength of the overall project profile of the how we see the order is developing.
So even though we're trying to we had to pull some and we were able to two relos in the second half for a good portion of that and then in it.
Okay, and I know you guys don't guide.
Quarterly but in terms of Q2, I mean, how did Q2 shake up.
Relative to your internal internal expectations.
Q2 was ahead of our expectations as I said it was a.
Predominantly ahead by segment income.
A lot of that really all of our businesses performed at or better than expectations, and really driven by detection and measurement and then the other benefit was the the tax rate I talked about so we have we took a higher research and development tax credits as we finalize our 2018 tax return. So there was a true up there and then we're increasing the amount. We expect so this is really tied to the elevated level of new product development that we've been doing over the last couple of years and our tax department working across the business to identify things that qualify for credits.
So really good work across the group.
Okay. Good and then maybe just shifting to engineered solutions.
Beat my forecast some really nice margins there it does look like.
You did call out Transformers is really driving that performance is that is that price cost of snapping back and getting better.
Or are you getting better productivity drops or any any color there on the bridge, it's predominantly better productivity and throughput in transformers.
Got it and then maybe just just one more.
Regarding the SGS.
I get it does fit with sort of the HVAC, our theme, but relatively small sales base.
I think it would be more of a distant.
Three four or five market position universe, some of the larger players or am I thinking about that correctly in any of that typically isn't the characteristic of the assets you do buy or have in the portfolio.
And I guess the follow on to that is do you think you need more scale here in refrigeration.
Or is this just more of a product angle that differential differentiates.
Yes, Brett this gene the we know SGS and Weve known them for a number of years, we basically.
Having evaporative condensers morally evaporative condenser that weve jointly developed with them and put through that market. So they really have the channel there.
The two really primary players in that market are two competitors that we compete with.
In our cooling age HVAC business, it's really a b C and developed how are the two players there. So we actually see a very nice opportunity to to to grow that business. There their incremental revenue to us is $12 million revenue is actually higher than that because they they sell our evaporative condenser products through their channel. So you, obviously can't can't double count that but we actually see a nice opportunity for growth. There. We think that we know that market well, we know those competitors well and we think that we can win and grow in that market. The other thing that I'd point out is if you look at our cooling business. The largest portion of that market is called open circuit cooling towers and were very very strong in that market. We are the we believe we're the leader in that market. The smaller segment really the fluid cooler market.
Is were relatively newer into that market and if you look at SGS a lot of the same products for fluid coolers can be used as evaporative condensers or very close.
Yeah very close.
A product at with with minimal changes. So we think this not only opens up a new adjacent market to us that we know well against two competitors that we think are good competitors.
But it gives us growth opportunities, but it can also help us and our our core coil market segment, which is predominately fluid cooler. So we really like this acquisition and we think it's going to provide some some opportunities for us going forward.
This is Scott out I would also add and we think about the acquisition profile you're right typically.
We're we're targeting is a little bit different profile than this but this look this is a nice product line extension extension a nice tuck in.
Similar to sean's that type of the acquisition not necessarily where were focused but when we see those opportunistically.
We will go after that and then we do see opportunities to further leverage their existing footprint and channel.
Okay, Great appreciate the color I'll pass along.
Thanks, Brett.
Thank you. Your next question comes from the line of being in Canada, maybe beyond your line is now.
Hey, good evening, guys Damian you Damian.
So congrats on the strong performance in the quarter and the guidance raise the.
Augmented outlook I'd say that so.
Little bit of a different.
Scenario than we've heard from most industrials this quarter.
Thanks, along those lines.
You know.
So I was like.
You're just about everywhere.
Things are.
Just where they were three months ago, if not better in some places.
I'm just wondering if you have a lot of.
Different moving pieces under the Hood of your three segments are there any areas, where you're maybe seeing some pockets or signs of weakness.
Yeah, and I you know, it's I think it's a good question and we're keeping our eyes very focused on the end markets, but if you look at the markets that we serve.
Yeah, I think it's always probably makes sense to remind everyone were predominately us based we have a very high amount of replacement revenue you know right below 70% and a lot of our end markets are driven by things that are asynchronous with just the broader GDP a lot of regulatory and government, particularly in detection and measurement.
But if you go through the different markets on heating.
We feel good we had a you know we like where that business is we think that business is in a share gain position and are really focused on on channel initiatives and.
Product initiatives like the VR App, that's the stainless steel boiler that we talked about cooling we feel good about that steady.
You know the you know having said that we feel good about the air we do see a commercial market.
You know some questions out there about the commercial market, we don't see any slowdown in demand in our end markets and as a reminder, that that category does serve a lot of other markets as well as health care light industrial Datacenters.
And so forth, but from what we see in our front logs, what we see in our backlogs.
Things are good on the cooling side and then on the detection side.
Run rates have been steady and actually the project level has been I would say healthier frothier than we've anticipated and we've seen some some nice conversions and that's been a contributor to the to the raise in detection and measurement for the year and then an engineered solutions I'd say.
It's about what we expected you know transformers is very steady Eddy good amount of steady demand. There every year and process has been studies. So yeah I'd say, if you look across all of our markets pretty good the only area that I think we've seen a little bit assortment softness would be in a geography would be a the UK.
With.
Some of the Brexit you know actually I think of our radio detection business has been a little bit of slow slowness, there, which people believe it can be attributed to a lack of capital investment or investment due to concerns over Brexit.
But we have seen the flip side and the U.S., where there's been a lot healthier activity. So.
You know if you look across our markets, where we what we see in front of US we feel good Scott do you have other comments.
You only have the other one I would add is an engineered solution on the process cooling side, you're seeing a bit less of the service work opportunity really related to a an acceleration of closure of coal plants.
And that's you know so we're seeing a little bit of the sluggishness there and that's a that's weighing on current year and causing current year to be flat, but as gene said the other other real market would be the UK, but thats being compensated by other markets.
Okay, that's really helpful color.
And I guess on that subject.
The process business I wanted to ask you about the.
The remaining part of engineered solutions.
The non transformer up part of the business.
I think we're kind of the year and a half two years roughly into the.
You know the strategic shifts you guys are doing less on that's a b and C type work and focusing more on kind of being a supplier selling components.
Could you maybe give an update on where things stand there were.
Have you seen some.
Progress in terms of filling out out.
Thanks, some growth and profitability increase any color you could.
Yes.
Sure.
Yeah, Dave when I think about that business I think you're spot on so then that business. The way I think about it and that business is in the neighborhood of lets say a $150 million today, there's really components their service and then there's the the new build projects and you're right. We strategically brought down the newbuild projects. We didn't think they had an attractive return profile. We thought that was more of a commodity area of the market.
And we really doubled down on on growing our components in our services business and that's been very successful we've actually seen very nice growth in our components area over the past couple of years.
As and as well as in our service and so you've seen a business that was it was very low margin.
That each year has been increasing both its margin percentage and its margin dollars. Despite.
A decline in revenue, which is the strategic decision we made to to exit the the unprofitable segments of the market. So.
So where we sit today engineered solutions, we've committed to 150 basis points of improvement. This year, we feel good about that that's that's obviously both businesses transformers as well.
But thats going to you know 8%.
Operating profit, maybe 10% EBITDA and we've committed to another 100 basis points next year. So we think the strategy has been working very well, we're seeing it in the results and Axie, we would anticipate.
You know the business moving into more of a growth mode more of a normal I wouldn't say a high growth mode, but a growth a normal.
<unk> industrial GDP growth business going forward with again, a focus on continuing to enhance our margins there.
Okay. Thanks, and one last quick one just.
And the the whole tariff issue has the largest had again a broadly today.
I.
Could you remind us I think when this was financed that are sometime back it sounded like you didn't anticipate any no material impact if it's one of the.
Kind of a next stuff.
Final China round of Caris.
It goes through can you just give an update on how you're thinking about that and how that impact business.
Yes, Scott. So you are correct I mean again looking at our profile and where we are supply chain is.
You look at our cost of sales, it's very low single digit is driven from China I'm trying to product source product. So it really does not have a significant impact for the tariffs that have been.
Do we anticipate any significant impact from these oh potential new tours.
Okay.
Thanks, Ron I'll pass it on.
Thanks, Jamie.
Thank you again, ladies and gentlemen, if you have a question at this time. Please press. The Star then the number one key and you touched on telephone. If your question has been answered or you wish to remove yourself from me can you. Please talk to the parent.
Your next question comes from the line of Robert Barry with Buckingham. Your line is now open.
Hey, good evening guys.
Hey, Robert.
Just a few things to clarify here so it sounds like that each back.
Decline in cooling nothing to do with whether that was just a.
Hey, David.
That's correct, it's really more of the the elevated performance in Q2 of last year.
Got it and should we model the tax rate in the back half.
Uh huh.
23 did all those tax credit benefits come in.
Good quarter.
Yes, the most significant change in the tax rate was from the recognition of the benefit out of it as we finalized our 2018 a tax return.
So you'll get a more normalized rate in the in the second half.
Got it and then.
Any change to the South Africa related cash flow I think the expectation was up to 15 million is that still the same post the GE deal, yes, no no change no change that for the year.
Got it and then just lastly, I think there was some commentary about the M&A pipeline being particularly robust just curious.
What you're seeing from a valuation perspective.
In what you're looking at.
You know I think Robert now not a lot of change from what we have seen prior I don't think.
You know it is a.
I would say a.
Yeah, there's not an inexpensive market, but we've been we've been disciplined and we have been successful when we've been disciplined you know as a reminder, all of our anything we always start with strategy for strategy first on how we grow and how we build out our platforms. We think about how we can gain more competitive strength, we think about how we can serve customers better and we think we can how we can really become stronger and I think a lot of progress has been made in and our growth strategies over the past year.
And I think as a result of that we see a at a very attractive opportunity set in front of US you always have to caution you know timing and obviously valuations because a we will be disciplined on our valuations and there has to be an attractive return profile for us to to move forward.
But what I would say is you know you look at the the strategies that we have developed and you look at the first for a bolt ons that we have used to build out our platforms. We really believe in our strategy and I would say that a we feel good about the opportunity sets that we see in front of us. So so back to your specific questions. You know, we obviously have the return thresholds and we will not change from those but I haven't seen a lot of changes in in multiples that you know over the past couple of quarters and what we've spoken about in the past.
Got it and just lastly, I mean, if you look at that portfolio of up or pipeline just in terms of things that you'd consider I don't know in the top quartile say of the actionable give us a sense of just what the size ranges of the things you're looking at I think at the analyst day actually you had talked about wanting to maybe Evan.
For even started.
A larger scale.
Uh huh.
Yeah, I would say you know a you know thinking tactically off the top of my head you know we've said in the past most of the opportunities that we see are probably in the $25 million to $75 million range.
We see some some pretty interesting opportunities out in that in that range.
We also see one or two are interesting opportunities that could be could be a little bit larger than that as well so.
You know the the SGS acquisition I think is very strategic for us it really.
It's a partnership that we've had in place for a number of years and it's a very natural extension for us to bring into to our business, but I think that our sweet spot is more in that range that we've communicated in the past and I'd say most of the pipeline, we see in front of us would be.
In that range.
Alright, great. Thanks, so much good night. Thank you.
Thank you and I'm showing no further questions at this time I would now like to turn the conference back to Mr. Paul.
Thanks, Laura.
Look forward to talking to all of you again next quarter. Thank you for dialing in.
Ladies and gentlemen. This concludes today's conference. Thank you for your back that space and have a wonderful day you may all disconnect.