SPX Technologies, Inc. (SPXC) Q3 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q3 2017 SPX Corporation Earnings Conference Call. Currently at this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will follow at that time. [Operator Instructions] Also as a reminder, this conference call is being recorded. I would now like to turn the call over to your host Paul Clegg, VP of Investor Relations and Communications. Sir, you may begin.

Thank you, Dillon, 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 third quarter 2017 results was issued just after the 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.com. I encourage you to follow along with the slide presentation during our prepared remarks. A replay of the webcast will be available on our website until November 9. 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. Specifically, we will focus on adjusted Core operating results, which exclude the results of the South African projects and we will separately provide an update on those projects. Additionally, Q3 2017 Core segment income excludes the gain related to a contract settlement within our Engineered Solutions segment. Other adjustments in our GAAP results this quarter consist of an adjustment for nonservice pension items including the gain and certain favorable discrete tax items. You can find reconciliations of all adjusted figures to the respective GAAP measures in the appendix to today's presentation. Finally, we plan to be on the road this month meeting with investors. And with that, I will turn the call over to Gene.

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 and end market conditions before going into Q&A. During the third quarter, our core businesses continued to perform well. The initiatives we've been implementing since the spin have helped to drive significant segment income growth and each of our segments is now contributing meaningfully to our overall profitability exceeding our ROIC targets and driving shareholder value. Strong operational execution resulted in more than 300 basis points of operating margin expansion. Our solid balance sheet and Core cash flow performance leave us well positioned to execute on both our organic and inorganic growth plans and our South African project initiatives remain on track. Overall, we are very pleased with the performance of our company. Based on the strength of our year-to-date results and our visibility into customer demand for Q4, we are increasing our full year guidance for 2017 adjusted EPS to a range of $1.70 to $1.80. Turning to our results. We reported adjusted earnings per share of $0.36. Adjusted operating income grew 75% to approximately $25 million on year-over-year Core revenue growth of 3.5%. A very strong performance in our detection and measurement segment was the key driver on the year-over-year margin improvement in addition to continued benefits from our business model shift in engineered solutions. As always, I would like to give you a brief update on the progress we made during Q3 on our value creation initiatives. Over the last two years, we've been taking actions to drive growth and increase profitability across the company including strengthening our market presence by making investments in our sales organization and commercial leadership roles as well as introducing numerous new products that have helped to lay the foundation for future growth. In our HVAC segment, we have enhanced our already strong strategies around new product development and channel management. In our detection and measurement segment, we have made numerous structural changes and have taken specific actions to strengthen and broaden our sales coverage. In engineered solutions, our successful introduction of a more value added transformer design involved a careful and deliberate process of value selling to our end market buyers. And our initiatives to expand our components and services sales and our process cooling business required significant adjustments to our sales model and approach to customers. I'm happy to say that all of these actions and investments are paying off in our results. Apart from process cooling, where we are repositioning our business, our total year-to-date bookings have increased approximately 9% from the same period last year. Our efforts to further optimize production are resulting in more level loaded quarterly results, which has historically been heavily concentrated in the fourth quarter. And we are also seeing more balanced contributions from all of our segments due primarily to the operational improvements and growth of our detection and measurement and engineered Solutions segments. For the first three quarters of 2016, detection and measurement and engineered solutions accounted for approximately 50% of our segment income. For the same period this year, they generated 62% of total segment income. As a reminder, two years ago, the margins in our engineered solutions segment were about 1%. This year, we are now targeting 7% segment margins. We are well on our way to achieving our long-term target of 8% to 10% and the segment is currently operating at a double-digit ROIC. I'm also proud of our successes with new product introductions, which are the result of prudent investments in R&D and intelligent product management. As a part of our business system toolkit, we have developed consistent and repeatable processes for converting voice of the customer into new value-added products and understanding and quantifying the detailed value propositions of our products for our customers. These skill sets are becoming a competency of SPX and are being leveraged across our business units as we implement multi-year product line development plans and roadmaps throughout the company. And this will serve as the blueprint for driving incremental value as we integrate acquisitions in targeted growth areas. A great example of this process is our NC Everest Cooling Tower, which provides customers with up to 50% greater cooling capacity, higher energy savings, fewer components and lower maintenance costs. Since this launch in late 2016, the Everest has had very strong customer interest and numerous orders. With an already strong reputation as the best-in-class solution, we will be introducing a product line based on an Everest platform that significantly broadens its end market applications and opportunity while continuing to reduce power consumption and improve efficiency compared with currently available factory sound solutions. Other products successes within HVAC cooling include our new Recold LC Evaporative Condenser, which significantly reduces refrigerant charge and lowers energy consumption compared to conventional evaporative condensers and we just secured our largest order to date for this product. In detection and measurement within our fare collection business, we continue to see a favorable customer response to our Genfare Link solution. Its efficient tracking and reporting features are driving greater interest in both the software and associated hardware. In process cooling within our engineered solutions segment, we continue to progress in our strategy of expanding components and aftermarket sales. Our recently introduced M Series Geareducer, a direct replacement product for using non-Marley cooling towers has received numerous orders to date. This fall we plan to add more Geareducer models to pair with larger cooling tower motors. And now, I'll turn the call to Scott to review our financial results.

Thanks, Gene. I'll start with our net results for the quarter. On a GAAP basis, we reported earnings per share of $0.50. On an adjusted basis, our earnings per share were $0.36. Our year-to-date adjusted EPS is $1.18, a significant improvement over the $0.78 in the prior year period. As Gene noted, our operating initiatives are helping to provide a more balanced distribution of earnings across the segments and quarters. As we typically do, our adjusted earnings per share exclude the results associated with our South African projects and non-service pension items. This quarter’s GAAP results also include a number of favorable items that we've adjusted out of earnings as they are one-time in nature. In our engineered solutions segment, we’ve reached a favorable settlement related to the cancellation of a legacy customer contract resulting in the receipt of $9 million of cash and a gain of $0.17 per share. We also had a favorable ruling associated with a legal challenge to aspects of the U.S. postretirement benefit plan. The ruling allowed us to significantly reduce our outstanding postretirement liabilities triggered an update of extra assumptions resulting in a $0.04 per share gain. And lastly, we've been working to resolve various tax matters associated with a pre-spin SPX. During the quarter, we successfully resolved various legacy matters that resulted in a $0.07 gain. For Q3, Core revenues were up approximately 3.5%. The increase was primarily due to strong order conversion in our detection and measurement segment, partially offset by the timing of transformer shipments and the business model shift we have been executing in our process cooling within engineered solutions. As a reminder, this shift entails increased selectivity with respect to cooling projects and refocusing on components and service sales. During the quarter, portions of our business were also moderately affected by the hurricanes in southern part of the U.S. The affect was primary felt in our HVAC and engineered solutions segment with both experiencing some delays in sales as a result of the storms. Core segment income margin increased to 11.9% compared with 9.2% in the prior year due mostly to the favorable performance of our detection and measurement segment as well as continued improvement in engineered solutions. Now I'll walk you through the details of our results by segment starting with HVAC. Revenues for the quarter increased 2.1% from the prior year including a modest currency benefit segment. Segment margins were similar to the prior year. Our heating business continued to execute within our expectations. Sales of cooling products continued to perform well despite a modest negative impact from the hurricanes as well the effect of the project delay related to customer site readiness. Together these delays are accounted for more than $3 million, but we expect these shipments to deliver during Q4. Overall, we are pleased with our HVAC team’s continued focus on operational improvements in both the heating and cooling businesses. For the full year, we expect the segment to deliver modest revenue growth and similar margins to 2016 driven largely by strong cooling order activity and win rates. Looking at margins, we are seeing some headwinds from the net impact of commodity cost increases. Given the nature of our businesses, the impact of commodity prices is generally not material, but this year we expect this to weigh our margins by approximately 30 basis points to 40 basis points concentrated in the second half of the year and have adjusted our full year guidance accordingly. In detection and measurement, revenues increased 27.9% in Q3 including a modest currency benefit. Segment income margins were 24.7%, an increase of 980 basis points due to operating leverage from increased sales as well as somewhat lower SG&A spend associated with previously implemented cost reduction initiatives. Each of the product lines contributed to strong segment results. In particular, the communication technologies businesses both signal monitoring and obstruction lighting saw substantial year-over-year growth with increases in order conversion as well as improved run rate sales. Year-to-date detection and measurement sales were up 10% and margins have improved almost 600 basis points, which is one of the key drivers of our guidance increase for full year. These strong results are well above our long-term growth rate of 2% to 6% reflect a return to more normal levels of revenue from the prior year and we saw closer to trough levels of performance in certain businesses. As a reminder the backlog driven portions of our communication technologies businesses have been experiencing delays in order conversion over the past year and a half, particularly from international markets. We're now seeing demand in these markets firm up to more typical level while our investments in commercial leadership and sales support are driving better market coverage and improved order flows. As always we want to remind you that detection and measurement segment margins can be impacted by project mix and timing from period a period, which can affect quarterly and annual comparisons. To that point our Q4 2016 detection and measurement results included several project deliveries with higher margins and those we expect to deliver in Q4 2017. In our engineered solutions segment, excluding the results of the South African projects, revenues were $144.5 million during the third quarter down approximately 4%. The revenue decline in Q3 was primarily due to the timing of transformer shipments, which we continue to expect to be similar to 2016 levels on a full year basis as well as the effect of our business model shift in process cooling. Both transformers and process also experienced modest timing delays associated with the hurricanes that we expect to see recover in Q4. When compared with the prior year, segment income increased 20% and margins improved 100 basis points to 5.1% due primarily to the continued effect of changes in our operating model for process cooling and the cost reduction benefit which were taken in 2016. Overall, our Q3 performance in engineered solutions was in line with our expectations. We feel good about our ability to achieve our full year revenue and margin guidance for the segment. Before discussing our balance sheet, let me quickly touch on the South African projects. Losses during the quarter are in line with our expectations. This includes the impact of restructuring initiatives we began in the quarter to reduce headcount and overhead costs in South Africa. Cash usage of $16.9 million was consistent with our expectations for the quarter. Overall, we are executing in accordance with a revised outlook provided last quarter, while the completion of the projects is not without risk. We remain on track to achieve substantial completion by the end of 2019. Turning now to our financial position. Our balance sheet remains solid. We ended the quarter with cash and equivalents of approximately $87 million. Our net leverage was 2.1 times at the end of Q3, down slightly from the 2.2 times we reported last quarter. Based on our expectations for cash flows from our Core business, we expect to end the year with a net leverage ratio below the midpoint of our target range of 1.5 to 2.5 times. For 2017, we continue to target cash flow conversion of our adjusted net income of greater than 100%. As a reminder, due to the seasonally weighted operating profile of certain businesses, the majority of our cash flow generation typically occurs in the fourth quarter. We also continue to expect to have more than $400 million of capital available for deployment over the next three years to invest in value creation for our shareholders including acquisitions where we currently have a very active pipeline. Now turning to our guidance. We’re increasing our full year adjusted EPS guidance range to $1.70 to $1.80 from $1.65 to $1.75 previously. Our new guidance point of – midpoint of $1.75 implies about 200 basis points of segment margin increase and over 20% growth in operating income over the prior year. For the full year, we continue to expect Core revenue to be in the range of $1.35 billion to $1.4 billion with a somewhat higher contribution from detection and measurement. We now expect Core segment income margin to be approximately 13% to 13.5% and we continue to expect adjusted operating income margin in the 8.5% to 9% range. This represents a more balanced distribution across the quarters in the prior two years when fourth quarter segment income represented around 40% of the full year. This is due largely to strong results in our detection and measurement and engineered solutions segments. For our segment guidance, we continue to expect HVAC organic revenues around the lower end of our long-term target range of 2% to 4% and now expect margins similar to the prior year. As a reminder, our full-year outlook anticipates somewhat warmer than typical winter similar to 2016. We now expect detection and measurement organic revenues to increase approximately 10% in 2017 and expect segment income margins of approximately 24%. This is the second time we have raised our margin target for detection and measurement with increase largely due to operating leverage on higher sales. In our Core engineered solutions segment, for 2017, we continue to expect an organic revenue decline in the mid single-digit percentages reflecting our business model shift and process cooling. We now expect segment income margin of approximately 7%. Additionally in the appendix of today's presentation, you'll find updates for other factors driving our guidance. One of the changes you will see is higher variable compensation costs reflected the increase in earnings and investments being made to deliver future growth. We've also lowered our expected tax rate for the full year to reflect the benefits favorable discrete items during the first three quarters. The impact of these two items essentially offset each other. So when you look at our EPS guidance increase, the key driver has improved segment income. As a reminder, our full year adjusted EPS calculation is based on average diluted share count of approximately $44 million and we expect to see some share growth in the next year. Before handing the call back to Gene, I want to briefly comment on 2018 while we plan to provide detailed 2018 guidance on our Q4 call on February. We'd like to share some initial thoughts with you now. We are in early stages of the planning process when we’re thinking about our segment growth expectations. The long-term target ranges we have previously communicated for revenue and margins remain a good proxy for 2018. One exception to this is in engineered solutions, where the impact of our business model change will continue into 2018, lowering the revenue profile but improving margins. Last quarter, we provided the graph in the appendix of our presentation depicting this effect. Finally, there's been discussion – there's been a lot of discussion about tax reform. We have not yet built this into our expectations. Internally, we currently use a rate of approximately 29% when assessing our forecast. That said the tax performed is implemented in a matter similar to current proposals, we’d expect it to be meaningfully positive to our results given that we are largely a U.S. based company. And with that I’ll turn the call back to Gene.

Thanks, Scott. Turning to an update of our end markets. Overall, SPX remains well positioned for the remainder of 2017 and into next year. In HVAC cooling, the order pipeline remains solid and the business is performing well on an operational level. In HVAC heating, we continue to gain traction on new product initiatives and see steady demand albeit at low levels consistent with the prior year. In detection and measurement, we are still seeing steady demand for run rate products as well as increased order intake and solid frontlog conversion on our larger project orders, particularly communication technology and fare collection systems. Transformer pricing remains stable and the market continues to display consistent demand for medium power units and lead times remain in the 30 to 40 week range. Our engineered solutions segment continues to reflect the benefits of our business model shift and process cooling. We also remain on track to see improved bottom line results from our strategy to enhance our focus on service and components where we're seeing a favorable customer response to our product introductions. Before opening the call for Q&A, I'd like to say that I'm very pleased with the performance of our businesses this year and the more balanced profit contributions across our segments. Our Core business has continued to perform well as we executed on operational and growth initiatives and continued to drive substantial year-over-year margin and profit increases particularly in our detection and measurement segment. With our strong balance sheet and solid cash flow profile, we expect to have access to more than $400 million of incremental liquidity through 2020 providing us with substantial flexibility to pursue organic and inorganic growth as well as other opportunities to create value for our shareholders. We are well positioned to achieve our full year objectives and to continue executing on our long-term value creation framework. This includes the commitment to sustainable double-digit earnings growth and we are confident in our ability to deliver on our target of $2.25 to $2.50 of adjusted earnings per share in 2020. And now, I'll turn the call back to Paul.

Thanks, Gene. Dillon, we are ready to go to questions.

Thank you, sir. [Operator Instructions] Our first question comes from Ronnie Weiss of Credit Suisse.

Hey, good afternoon guys.

Hi, Ronnie.

Hi, Ronnie.

On the cash used for South Africa about $70 million a quarter, so we stick to the original plan which has laid out last quarter $55 million outflow for 2017 and that would imply by about $10 million, $11 million in Q4. Just wondering if that’s the right run rate to think about of cash use going forward? Are you guys going to try to pull forward some of that cash burn more quickly than that $10 million to $11 million?

Ronnie, it’s Scott. Yeah, I think that you are looking at it right. We had said 25 to 30 over the second half. We're probably thinking more towards the higher end of that range for this year and then we do expect to see a significant step down in cash as we go into 2018 forward based on the completion of the project scopes that we talked about as well as starting to get the benefit of the restructuring actions that we implemented this quarter.

Okay, got it. And then ES shift of strategy here, how far along would you say we are here? And how much of the overall segment is made up of components in aftermarket? And kind of what's that thinking longer-term? What's the right level of mix there?

So, you know, on the process cooling, Ronnie, let me take a crack at this and maybe Scott can jump in. There's a couple components to the aftermarket. There's servicing of towers what we call recon, what we're rebuilding and servicing our existing towers and then there's also components, which is actually selling a component, which could go in our towers or someone else's towers and our initiatives are really to grow those businesses. And we actually think we're in the early innings of that opportunity. On the component side, this is a very new initiative for us, but we've made some really nice traction winning over a lot of new customers and it's customers that we had not traditionally sold to. So I would expect our components business to grow significantly that is I don't know if we have disclosed what that is today that could be something we – is going into our 2018 framework as we give guidance to give a little bit more meat on that, but the service will be growing the smaller components, but very profitable components will be growing. And then the larger projects, which have the lowest margin profile, we have been very disciplined and we see that becoming a smaller portion of our portfolio. And we do – I think that could be something that we do introduce in our 2018 guidance as we come out because it is a pretty meaningful shift. And we have seen some of the benefits on the margins already and we think that's going to continue going forward.

Yeah, I'll just add, Ronnie. You can see the margin enhancement in the segment this year. Really as we’ve said the transformer business, which is clearly the largest business there is more of a study results year-over-year top-line and margin performance. So really you're seeing the benefit of margin improvement coming from the process cooling changes and the restructuring actions we did in 2016. As you go forward and we gave that kind of – that depiction of what that looked like from a revenue profile. It will be a pretty significant drop in revenues. And the reality is that we – we've already got benefits that our exit rate coming out of this year is at a higher level of margin performance than the 7%. So we'll go into more detail of that when we get our guidance.

And it goes without saying we're more focused on profit and ROIC rather than empty calories and just top-line revenue that doesn't deliver value to our company.

Understood, thanks guys.

Thanks.

Thank you. Our next question comes from Damian Karas of UBS. State your question please.

Hey, good afternoon guys.

Hi, Damian.

Hi, Damian.

So the 10% organic growth guidance for detection and measurement segment for the year, if math is correct here implies I think around 6% in the fourth quarter that obviously would be a little bit of a step down from what you've seen in the last – a few quarters here. So I was just wondering if you could maybe give us some color on the current backlog on what’s your expectations are there?

Sure, I’ll jump on that one. So, yes, I'd say you probably want to go back and maybe look at the numbers just a little bit closer, but we will have good strong organic growth in Q4. It's not going to be certainly at the pace that we showed in Q3. Really Q3 was stronger growth than we had anticipated. We had higher shipments than we had anticipated in the quarter, which led to a stronger margin performance based on the higher volumes in Q3. And that's part of why we raised our guidance both the performance there as well as the strength of the frontlog that we're seeing particularly around the steady run rate businesses and then the project oriented businesses with com tech and fare collection. So it's going to be a strong, so strong organic growth quarter in Q4. The other thing to think about is this is a pretty big growth for the segment. We're getting back to what we call and think of its more normalized revenue performance and margin performance for detection and measurement in 2017. As you're thinking about going forward, as I try to say out in the kind of guidance framework, you think more around the long-term growth rates for the segment from this point forward because obviously the base has increased significantly in 2017.

Okay, that's helpful. Thanks. And a question on HVAC, I know we've had a couple consecutive warm winters that's really dragged on heating business, but it seems that consensus is forming in some of the more populated regions of the country like the Northeast, we could have a colder winter at least relative to the last few. So I know you're still assuming another warm winter in your 2017 guidance. But what kind of sensitivity around organic growth would you expect for the HVAC statement from those assumptions to say a normal winter or even that colder than normal winter?

And so, Damian, let me start and – this is Gene. When we kind of look at our business, the HVAC segment about half and a half in terms of the top-line, as a reminder, the cooling really has no, no impact to weather whereas the boiler or the heating products and the boiler products business weather can be a top-line driver. So it can be meaningful just to kind of reset when we kind of talked about what type of organic growth do we see in the segment. We really see 2% to 4% in the planning horizon, we said 3% to 4% with the heating be at the lower end of that and the cooling at the higher end of that. And that's what we've seen. This year has come to fruition largely like we thought it would, but to your specific point if we were to get a very strong cold snap that would early, that could have a meaningful impact. And Scott, do you have a feel for what that could do or how they frame that out for – what that would mean or what that would look like?

I think you – so we have set pretty much our expectations for [indiscernible] as I said. And we’re not – we're not kind of will see the forecast obviously, but what we need to do – be able to do is see consistent cold and for a period of time to really kind of drive a spike in demand. And that really needs to start happening in the near term for to affect Q4 on a meaningful basis. So depending on what kind of range you look at of demand, it could generate another one maybe one to have a really cold 3% type of impact for organic in the quarter. And you know from the downside probably less than, it wouldn't be as big of a range on the downside because it was a pretty, pretty – it was a warmer than typical winter last year. So we're kind of towards the – we're below the normalized average of seasons.

Okay, just to clarify those impacts were for the entire segment or just the heating side?

Yeah, that was for the segment…

Okay.

For just the quarter though.

Okay, got it, thanks and one last quick one if I could here. Scott, you alluded to the impact of the hurricanes on the third quarter shift, I just expecting to kind of see that come back in the fourth quarter. I’m just kind of wondering though giving your leverage to the power grid through transformers as well as just general infrastructure. I am wondering if you're maybe already seeing or potentially foresee any incremental business as these areas that have been devastated start to rebuild.

Hey, Damian, we've actually been talking quite a bit with our businesses about that. And what we have seen is the types of weather impacts and hurricanes and the flooding in Houston typically do not break a transformer or require a replacement transformer. If a transformer does get flooded, it could need to be reserviced, reset, you might need to change some controls. But on one of the things we've been really looking at is, hey is there incremental growth or opportunities across our businesses with these weather impacts. And we haven't seen a lot. I think there have been some incremental cooling parts sales in some of the power and petro chems and some general industrial, but it tends to be the more smaller drift eliminators, fan stacks, not really the more expensive mechanical equipment the Geareducers, the fans, the motors and so forth. So we do see some modest opportunities there, but we don't see really a large incremental, we've spent a lot of time with our businesses and we just – we don't see much there. Scott did I missed anything on the…

No, I think that’s right. I think it's – somewhat it's the nature of the products. On the cooling tower side, they're designed for wind tolerances. They're really not going to get the water damage and we really didn't see a significant level of damage to drive significant more demand. And similarly on transformers, yeah, they can be submerged for a period of time and not negatively impact their operability. So we're really not seeing a spike. So, right now, the most material aspect is the timing shift really from Q3 to Q4 of these deliveries.

And I think on the cooling, for example, we saw a lot of package cooling towers in Florida, but Florida has very specific building code requirements and they – the towers that go in there have very specific high wind load requirements. The products have to be [indiscernible] tested and looks like that's actually paying dividends because those products are really sustaining through some of these adverse weather conditions.

Okay, very helpful color. Thanks guys. Congrats on the quarter.

Thanks, Damian.

Thanks.

Thank you. Our next question comes from Brett Linzey of Vertical Research. Question please.

Yeah, I just wanted to come back to HVAC. You called out 30 bps to 40 bps of price cost headwind here in the second half. I guess what was the gross price you realized? And I understand a lot of the contracts have passed through escalators and such. But are you needing to take additional price actions to recapture some of the rising input costs and that neutralizes into 2018? Or is there a little bit more transitory pressure as we look into the front half of next year?

That’s exactly the process that we're going through and looking at whether or not to do another price increase now whether the market will bear that from a competitive perspective. And how well – if we – even if we can't do pricing are there other cost actions we can do from efficiency wise to offset that impact from margins on a go forward basis.

But I wouldn't anticipate it being a negative into 2018 to kind of the 2018 portion because we do adjust our pricing when we do see these. And I think for everyone on the call, one of the things, as a part of our company, we don't have a tremendous amount of commodity impacts because a lot of our products are engineered to order, but this is a case where we did see some impact when there is a fair amount of very rapid price movement. There can be times when there are modest positives and negatives in the PPV.

Okay. And then just sticking with HVAC, the data and the commentary is a little bit mixed on non-res overall. Maybe just talk about some of the market trends you're seeing via commercial industrial institutional that you experienced in the quarter. And how frontlogs look in those particular pieces of the business?

Sure. I think from where we sit on – and the cooling business is predominantly commercial. So that's really our strongest window into that end market. We've seen healthy demand and we've seen a lot of activity. We have had a very good bookings rate for this year from what we see on the activity level we think that there will be reasonable growth next year. We typically track the dodge report and if you look at the trains and the carriers, their commercial businesses are usually a reasonable proxy for our businesses, but what we see going into 2018 is we still expect sustained growth. And then also our products are also using some other application areas. Our products could be used in for example data centers, industrial applications, manufacturing, hospitality, hospitals or healthcare. So we're seeing – we haven't seen any signals of negative decline. What we are seeing in front of us is continued growth, not high single digit or double digit growth, but we are seeing a sustained growth from where we sit going into 2018.

Okay, great. And then just one follow up on D&M, very strong incrementals in the quarter close to 60%. I mean certainly that's probably not sustainable, probably saw some good absorption there. But I guess if you're seeing com tech and Genfare as sort of the leading businesses here on the growth curve into 2018. I mean is it reasonable to think about a 50% type incremental margin in that business as we kind of shape the year, next year?

Yeah, I think, looking 50% might be a little bit high, but you know in that area is a reasonable level of incremental margins. What you're seeing this year is we're getting both the benefit of the volume leverage, but we did do some cost reduction actions and reorganization actions in 2016 that's further benefiting it. So really we're getting the double edge or the double benefit of that.

Okay, great. Thanks guys. I'll pass it.

Thanks, Brett.

Thanks, Brett.

Thank you. [Operator Instructions] Our next question comes from Robert Barry of Susquehanna. Question, please.

Hey, guys. Good evening.

Good evening.

Hey, Robert.

Just a follow up on a couple of things. So just to clarify the spike in D&M, you've been talking about some backlog delays for a little while. Did a lot of that just flush through this quarter or is it more project lumpiness?

Robert, I think, the way I think about the detection and measurement business is there's a – the largest portion of that is really run rate, let's say about two thirds. And then there's about a third project. We've been talking about – last year we felt was what we had called our trough year in terms of the number of projects, some of those projects are global in nature, some of the rapid decline in oil prices, really caused some customers to delay their CapEx decisions. Where we sit today, we think is more of a normalized rate. We have grown ahead of where we thought we'd be and I'd say the biggest change is really in the project conversion. But as we look where we sit today, we still see healthy demand in our normal run rate businesses and we still have a frontlog of projects. And as we go into 2018, we think we're going to be at our normal end market growth rates for those products. So did…

Yeah, the only thing I would add to that is I do – in Q3 we did see accelerated conversion rates of some of the frontlogs than what we had been experiencing and we're seeing that continue. So we’ve talked about last quarter, we’re seeing good orders, rising backlog. We've been already on the fare collection side of the business, have been very steady run rate there and kind of had made that change to as more stabilized platform kind of towards the end of last year. And it was on the com tech side that we were still seeing the delays. So we saw – I would say we saw a nice step in Q2, when we saw even more incremental step from an order rate conversion into shipment. And so that's really the basis for how we're resetting the guidance.

Got it. On the tax rate, I think in the past you’d talked about kind of a 30% to 35% rate. It sounds like maybe now just for modeling purposes. We should dial-in something in the high 20s as a base case. Is that correct?

Yeah that – that's right. We have taken that down kind of towards the beginning of this year. And so – but on a go forward basis, I think around the 29% rate is what we're thinking about when we do our modeling. And then as I said if tax reform does come through, it would be meaningful to us.

Right, yeah, just since you brought that up I mean I know it's super early, but big picture how would you see using additional cash if you got that that relief on the tax front.

Yeah, I think we would definitely try to deploy that cash towards acquisitions and that's obviously our preference for capital allocation is to be driving available capital towards acquisitions.

Got it, thank you.

Thank you. Our next question comes from Asaf Fligelman of Selz Capital. Your question, sir.

Hey, congratulations on the quarter.

Thanks, Asaf.

Thanks, Asaf.

Have you guys noticed the customers holding back on CapEx ahead of this tax bill?

Not that – I think that’s a work of the businesses. And look we haven't seen any change in behavior or seen anything atypical. Most of – if you look at a lot of our business, the commercial businesses, you’re building a new business or a new building, a lot of times that gets put into motion a year or two years before. And so there's a long tail on a lot of these elements. But, no, I can't think of – if I look across our HVAC, look across our detection and our process and our transformers, I can't think of anything where we’re seeing that CAGR [ph].

Okay, great. Thanks so much. Congratulations again.

Okay, thank you.

Thank you, Asaf.

Thank you. [Operator Instructions] I show no further questions in the queue at this time. I like to turn the call over back to Mr. Paul Clegg, VP of Investor Relations and Communications.

Thanks, Dillon. Thank you all for joining and we look forward to updating you again next quarter. Have a good evening.

Thank you, ladies and gentlemen, for attending today's conference. This concludes the program. You may all disconnect. Good day.