Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2018 SPX Corporation's Earnings Conference 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. [Operator Instructions] And I would now like to introduce your host for today's conference, Mr. Paul Clegg, VP of Investor Relations and Communications. Mr. Clegg, you may begin.

Thank you, Mariel, 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 fourth quarter and full year 2018 results was issued today after market close. You can find the release and our earnings slide presentation as well as a link to a live webcast of this call in the Investor Relations section of our website at spx.com. I encourage you to review our disclosure and discussion of GAAP results in the press release and to follow along with the slide presentation during our prepared remarks. A replay of the webcast will be available on our website until February 22nd. 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. This quarter we have revised our segment reporting structure to remove the results of our Heat Transfer business and South African operations from our Engineered Solutions segment and include them as part of an all other category, when reporting our segment results. Our intent is to report these entities as discontinued operations at such time as they meet the accounting requirements to do so. For the Heat Transfer business, we expect this to occur in the first half of 2019. For South Africa, we anticipate reaching substantial completion of the projects by the end of 2019. There is also a small service business in South Africa that was previously included in the GAAP and adjusted results of Engineered Solutions, for which we are now assessing strategic options and have moved its results into the all other category. The primary practical impact of this change is a more streamlined disclosure to bridge from our GAAP to adjusted results. It has a minor impact on the reported 2018 results and 2019 guidance for our Engineered Solutions segment. There are other adjustments to our GAAP results that we will discuss in more detail during our prepared remarks. Finally, we will be hosting an Investor Day in New York on March 5th, where we will discuss our vision for SPX, as well as various operational and growth initiatives. The event will be webcast live and archived on our website. If you would like to attend, please contact us through the email address posted in the Investor Relations section of our website. We will also be meeting with investors in the Northeast during the first quarter and participating in the Seaport Global Industrials Conference in Florida on March 20th. And with that, I'll turn the call over to Gene.

Thanks, Paul. Good afternoon, everyone. Thanks for joining us. 2018 was a very positive year for SPX and I'm proud of the work our team has done to drive substantial improvement in our operational and financial performance. On the call today, we'll give you a brief update on our overall results, segment performances and the market conditions. We'll also provide guidance before going into Q&A. Overall, solid execution resulted in a very strong year-over-year performance in 2018, with significant improvements in our earnings and cash generation. Adjusted EPS increased 26%, while our segment income grew by $22 million and we continue to drive strong free cash flow conversion. Both our HVAC and Detection & Management segments performed well operationally, and we're pleased with the results and pace of our integration of our acquisitions. We are also excited by the opportunities created by our recent acquisition of Sabik from Carmanah, which enhances our specialty and obstruction lighting platform within our Detection & Measurement segment to include marine solutions. Our balance sheet remains strong and we remain well positioned to invest for sustainable double-digit earnings growth. Today, we're introducing 2019 guidance of adjusted EPS excluding amortization in a range of $2.50 to $2.65, or a midpoint of $2.58. Turning to our results for Q4 and the full year 2018, for the quarter, we reported adjusted earnings per share of $0.89, bringing us to full year adjusted EPS to $2.20 or $2.27 when excluding amortization. Adjusted operating income margin for the quarter was 13.8%, reflecting 350 basis points of increase. For the year, adjusted operating income margin was 9.9% or 110 basis points increase from the prior year. A very strong performance in our HVAC segment was a significant driver of the quarter and full year results in addition to the favorable effect…

Thanks, Gene. On a GAAP basis we reported earnings per share of $0.88 for Q4 and $1.75 for the full year. On an adjusted basis our earnings per share for Q4 was $0.89 and $2.20 for the full year. Our adjusted earnings per share exclude the results of our South African and Heat Transfer operations. As Paul discussed, as part of the change in our segment reporting structure, a small service business in South Africa, which was previously a part of our core operations is now combined with the South African projects and excluded from adjusted results. Our prior 2018 guidance included approximately $25 million in revenue and $0.03 of adjusted EPS associated with this business for the full year. Additionally, we've adjusted out one-time cost associated with closing and integrating our recent acquisitions as well as non-service pension items. Consistent with our accounting practice in the fourth quarter we record mark-to-market adjustments to true up our pension actuarial assumptions to our actual experience over the year and these items have been removed from our adjusted results. In Q4, we also experienced certain favorable discrete tax benefits that were material to our GAAP results, but have been removed from our adjusted results as they're pertaining to pre-spin activities. Turning now to our adjusted results, for Q4 revenues increased 13%, driven primarily by the acquisitions in Detection & Measurement and our strong performance in the HVAC segment. Segment income grew $17 million and margin expanded 220 basis points, with the largest impact from our strong sales of HVAC heating products, and a favorable sales mix in Detection & Measurement. On a full year basis revenue increased 8% due to stronger HVAC revenues and acquisitions in Detection & Measurement. Full year organic revenue growth was approximately 2.3% and segment margin increased 50…

Thanks, Scott. Overall, we continue to be well positioned in our end markets for 2019 and beyond. In HVAC cooling our order pipeline remains solid, while there are areas of tapering growth our core North American commercial and institutional base appears steady, consistent with overall macroeconomic fundamentals. In HVAC heating, we experienced a very strong Q4. Seasonal demand in the first several weeks of the New Year was solid overall and our channels appear to remain balanced. We also continue to experience nice traction from our new product and channel initiatives that drove strong sales in Q4. In Detection & Measurement we continue to see solid demand for run rate products and a continued firm level of orders in our project related businesses. Demand and pricing in the medium power transformer market remain steady and our backlog currently covers production into late 2019. In our process cooling business, we continue to see the benefits of our business model shift towards components, while our overall project end markets remain stable and support our 2019 outlook. We have seen some caution in energy related projects. Before I turn the call to Paul, I'd like to say that I'm very pleased with our strong performance and the state of our business, as we drive towards another year of growth and value creation. I believe we are in the strongest position since the spin to continue delivering sustainable double-digit earnings growth and substantial cash generation. With three acquisitions complete, our integrations are going well, our investments in our businesses are bearing fruit and we feel good about achieving our 2019 targets, as well as reaching our 2020 goal of $3 per share of adjusted EPS. The significant positive changes in investments we have executed to reshape our company over last few years have paid off. We have seen profits, margins and cash flows expand significantly, while maintaining a strong balance sheet. This year, we're expecting adjusted EBITDA approaching $200 million, adjusted segment income margins in the mid-teens and solid free cash flow conversion. We also retain the capacity to deploy significant additional capital for further value creation initiatives, including for further organic growth, additional M&A within our growth platforms and other modes of driving value for investors. I look forward to seeing many of you at our Investor Day in March and updating you throughout the year on our progress towards our goals. And now I'll turn it back over to Paul.

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

[Operator instructions] First question comes from Damian Karas from UBS. Your line is now open.

Hi. Good afternoon, everyone.

Hey, Damian.

Hey, Damian.

I did want to let you know that I couldn't think of a more exciting way to spend Valentine's Day evening talking quarterly earnings with you all. So thanks for helping keep things interesting over here guys.

Sorry for the timing, Damian. Thanks.

Just kidding, obviously. I did want to start out asking you about HVAC, obviously pretty outstanding year exceeding your expectation. But I was hoping you might be able to parse out a little bit your expectations and guidance for the year sounds like you're expecting hitting down mostly for seasonal factors. But could you maybe add a little bit color of what are you thinking on the cooling side how much growth of you baked into your guidance? And also just curious whether you feel like, some of the strength you saw in the fourth quarter was perhaps pull forward demand, customers just trying to get ahead of some of your most recent rounds of price increases?

Hey Damian, this is Scott, I'll take the question. So overall, we're same about flat for the year. High level, the way to look at this is that the really strong seasonal demand that we saw this year and if you look at the winter demand, so higher demand in Q1 of 2018 and then obviously higher demand in Q4 that winter - those winter seasons combined was the strongest demand we've seen in 10 years. So really was a tremendous year for us. If you would normalize that out going into 2019, that'd be about a 3% decline in the revenue profile. So what we're doing in our guide is we're saying that our organic initiatives between new product introductions, channel initiatives and pricing are offsetting that decline. So you really are seeing underlying strengthening of the organic initiatives across both cooling and heating, both contributing to that level and being able to maintain the overall level of revenues for 2019.

Okay. But anything you can offer in terms of 1Q obviously the comps are tough as you did have that stronger heating season last year, but you've also had a really cold winter as evidenced few weeks ago in the states. I mean, how should we be thinking about what the first quarter could look like for the business?

I think in total in the appendix we've kind of provide what is the segment breakdown by quarter - segment income breakdown by quarter look like over the last couple years. I'd say you have a similar profile as a percent of the obviously a larger year in this year. And as Gene mentioned in his comments, we've seen some good demand not to the same level as last year, Q1 of last year because if you remember there was a late start to winter at the end of 2016 and some of that volume actually came into 2017 or - 2017 and 2018 sorry.

Okay, got it. And staying on HVAC just kind of thinking of the industry there is a lot of talk out there about possible consolidation. I'm wondering if you have any views on that and what the implications could be for your cooling business if any of the chiller OEMs that you guys pair with were to possibly combine.

Damien, we're always keeping our eyes on the changing environment and we see a lot of the discussion and talk about that. It's something we're going to stay close to and if opportunities could arise, we'll evaluate those. What I would say is, in the markets we serve in HVAC as a reminder they're pretty distinct from the chillers and we have a very strong, we would believe leadership position in the vast majority of our HVAC product lines. But, it could provide some opportunities for us. I'd say it's something that we're tracking and if there's opportunities that arise, we'll stay close to it.

Okay. And one last quick one. Just wanted to ask you a little bit more color on capital allocation. You talked about, still having some good capacity. But now if you think back about a year ago, you talked about $600 million that you saw as available through 2020. You have taken a nice bite of the apple here with the three deals probably to the tune of about $250 million. So just curious how you're thinking about that capacity now and the timing of any future action. You feel like there's a need to maybe take a short-term or kind of steel machine kind of keep churning?

Yes, I'd say Damian absolutely not, we actually feel - or not on the balance sheet. We're generating a lot of cash. And if you look at our balance sheet, we are going to maintain a very prudent balance sheet. Just to step back on the business development side. I'm very pleased with our business development activities last year. I view 2018 is a year, where we really validated our strategies. The - all 3 of our acquisitions are in the Detection & Measurement segment and you look at CUES and Schonstedt that really has built a very strong locate and inspect platform. We really like how that has built out our platform there. Sabik, we think is really a nice acquisition that were brought in our flash product offerings. So these are all proprietary deals, I think these deals will all add real shareholder value. And I think the teams did a great job both on the deal execution and the integration, there's also going to be some that we go into a lot deeper, this is a part of our business system that we're going to go - I'd say we're going to share a lot more of that in March. But to put it very simply to your question for 2019, our strategy remains the same and we still think we have a very attractive opportunity to continue to build out our HVAC and Detection & Measurement platforms. We will be disciplined and the types of opportunities we see are going to be the same types of businesses that we are leadership positions Engineered Products, niche market things that can really help us strengthen our competitive position within our existing platform. So we view it as a good year and we actually think there's some nice momentum there. And I think in terms of our capacity anything else you'd like that there.

The only thing I'd add, you mentioned I mean from a balance sheet perspective, we feel comfortable about being able to deploy additional capital. As I said by the end of 2019 we will be back towards the low-end of our range, which is not a place we necessarily want to operate at a natural time. So we definitely have the capacity there. And then from a management team capacity we also have the capacity there Sabik is a different part of our organization than the CUES and Schonstedt acquisitions were. So there is there - and we freed up some of the other corporate resources that had been being utilized for integration. So we do have both balance sheet and people capacity to continue on.

And one last comment Damien. We did highlight the $600 million a couple of years ago, obviously our EBITDA has increased very significantly. And we will be unveiling in March what we see is the opportunity to drive shareholder value over the next couple years. So we'll get into some good details there.

Okay, thanks guys. I'll pass along.

Our next question comes from Brett Linzey from Vertical Research Partners. Your line is now open.

Hi, good afternoon all.

Hey, Brett.

Hey, Brett.

Just want to come back to HVAC, I know you faced some price cost pressures early in the year really through the year as prices feathered in. How was price cost in the quarter and if it was negative, how you're thinking about the early part of 2019?

Yes, price costs was not a significant factor for us in the quarter. So we feel good about that because obviously we had - the first half we saw pressures across the company a little bit still residual in Q3. And then, we really weren't able - weren't affected negatively materially either way from in Q4. And we have the price increases in place, they are sticking. So we're feeling good about being able to really offset the overall company about 50 bps headwind that we saw in 2018 and offset that in 2019.

Okay, good. And then sticking with HVAC, aside from maybe some conservatism and the tough comp you guys do have, is there anything internally that you're seeing be it backlog, front logs, customer project push out that would inform a slower growth scenario in 2019 for HVAC?

Brett, this is Gene. I think, what we are seeing in all the reports, all the Dodge reports, all the front log, we're still seeing growth in the commercial and institutional markets as a reminder, the bulk of our company, the bulk of our HVAC is North American based. So we're still seeing growth, but I'd say a little bit lower growth than we had last year. We have a strong front log, we have a lot of projects going on, we feel good, but we always track those indices to keep our eyes on that. The other thing just as a data point, as we've communicated many times we have a significant portion of our company that is replacement demand and that's also true for HVAC where somewhere in the neighborhood of two-thirds of our demand is really just replacements so is not as linked to new greenfield commercial builds for example. But that is something that definitely is a material portion of our businesses so we're keeping our eyes on.

Okay, good. And then maybe just one on D&M, could you maybe provide a little bit more color on the divisional level expectation organically for 2019? I know you mentioned Jan fare had some push out a little bit of lumpiness there. Any color you could share, that'd be great.

So just to clarify on Jan fare as we're talking about for 2018 there really wasn't push outs. If you remember back in 2017, we had a very large project that was executing in the latter part of the year and those were San Francisco. So just created a tough comp in the year, particularly in Q4. So it really wasn't about push outs it's about having to replace something that didn't have the same magnitude of an order for. Really not going to get into individual business unit kind of what the organic profile looks like, but what I'll say is we are seeing decent organic growth across most of the portfolio and as we said, 3% overall for the business. So, we're feeling good there. And as we've talked in the past roughly two-thirds of the business is run rate and the other third is project oriented. And we're being early in the year and with a lot of that, a good chunk of that project still not in backlog but feeling good about the order opportunities there. We try to prudently position ourselves with our guidance.

Yes, the run rate which approximately two-thirds of detection is more run rate has been showing nice steady demand. And then, the projects where the teams really did nice job converting last year we're seeing a nice project front log and that's really more in the communication technologies and then in the transportation side. So those are positive, but as Scott alluded to we try to balance that as we go into the year.

Okay, great. I'll leave it there. Thanks guys.

Thanks, Brett.

And our final question comes from Robert Barry from Buckingham. Your line is now open.

Hey guys, good evening.

Hey, Robert.

Hey, Robert.

Maybe just starting by picking up on that last question, so should we assume that the growth in detection in 1Q was a little weaker? I think that would be kind of the last quarter of lapping that project.

You're right. We did have a little bit of that project from a transportation perspective in Q1. It'll be - I mean obviously from - you're talking about just from an organic perspective, is that clear.

Yes, exactly. Just maybe some pressure there. And then - yes.

Yes, so obviously, we're not giving guide but it's going to be - it will be weaker than the full year organic, but we still see some good opportunities for growth in Q1.

Got it. Could you talk a little bit about what's happening in the Engineered business? I know you mentioned some productivity issues, some throughput, slower throughput seem to have weighed on margins. I think those came in a bit lower than you were expecting just what's happening there and how that kind of reads through into this year?

Yes, so as you'll recall, when we talked about in Q3, there was a number of things that challenged in particular in the transformers business throughout the year. So we have - we started the year with some price cost headwinds, particularly around opening backlog. We had the hurricane in Q3, and then we did have some productivity issues in the first part of the year. What we feel good about is that sequentially from Q3 to Q4, we did see improvement on the initiatives that have been put into place and the margin expansion. It just didn't meet quite our expectations that we're wanting to get to. So we're seeing improvement just a little bit slower than anticipated. As we look into 2019, we do see some modest top line growth in the business and significant margin expansion across Engineered Solutions we called out 150 basis points of improvement of which transformers will be a significant portion of the - driver of that. As will continuing to mix up in our parts and opponents initiatives and the process cooling.

Got it. And is there - like how should we think about the cadence of the margin, is it fairly similar at about 8 all year, is there like seasonality in there?

Are you talking about the timing of how we'll start seeing it?

Well just, yes, like, I'm trying to think about how we should model the margins for Engineered sequencing through the year.

Yes, I mean, you'll see sequential or year-over-year, I should say improvement throughout the year. There is - there will be steamed gathered, if you will, as you go throughout the year. Q3 is always the lowest quarter of the year, we have plant shut down for maintenance purposes in Q3, so that's always going to be the lowest quarter of margin performance there.

Got it. Sorry for this, I'm still going through all the material, but the amortization that you're excluding is that the $6 million that you mentioned on slide 23?

Correct.

Okay, so that's about what $0.11 in 2019.

Yes, $0.10, $0.11, that's right.

Got it. And then, Sabik, did you say I'm sorry, how much you expect that's going to add to the outlook?

We didn't quantify, we just said it was going to have a relatively modest impact for the year, mostly due to the borrowing costs that we have, that will be really paid down towards the second half of the year.

Meaning it will be a moderately dilutive.

No, no, no, it will be - it's accretive, it's just a modest amount from an EPS perspective.

Okay, got it. I guess, just lastly, it sounds like South Africa is mostly in the rearview mirror at this point. I know you had given some outlook for cash flow there. I mean, from a cash flow perspective is that like kind of a low-single digit million kind of outflow this year or how should we think about that.

Yes, I think for South Africa, just going back to the beginning of last year, we said it would be $25 million to $30 million of net usage for the projects for completion of our time in the projects, which was going to be frontend loaded, right. And so obviously, we reported we'll during the full year about $24 million of net usage. So we expect that there could be some modest and I think it would be modest single digit type of net for the year, you're looking at 2019, there could be periods where there'll be pluses and minuses associated with that just timing of inflows and outflows on the project. So we're feeling good about where we are, we have one last or extreme that we are working on. So we had a very significant progress on achieving our milestones we set out to achieve in 2018 so we feel very good we're always cautious with South Africa it's just - it's a volatile environment just the overall environment for the country and then the these projects. But we're feeling good that we're completing our construction works by the end of the year.

All right. Thanks, Scott.

Thanks.

We have a follow up question from Damian Karas. Your line is now open.

Hey, can you hear me?

We can hear you now, Damian, yeah.

Great. Sorry about that. I just want to ask a quick follow up on the transformer business. It sounds like you don't have expectations of any transformative change in the environment there. Just kind of curious thinking about if you sort of remain in a more sluggish pricing and growth environment, longer term, do you still see a margin opportunity in transformers? And I'm just curious if you could maybe elaborate on whether you're seeing any notable differences in the quarter between the small, medium and the higher voltage classes.

Yes Damian, this is Gene, I'll take a crack at that. I think with transformers what I would say and what we've talked about over the past couple of years it is a fairly competitive market. We think we have a really good business with a strong competitive position really a leader in the medium power transformer market and that's the largest portion of the transformer market. I think if you look at 2016 and 2017 really nice operational improvement as we talked about getting up to low-teens EBITDA margins, really nice positive impacts, but we did take a step backwards in 2018. And the biggest things that impact us was there was a lot of impacts on input costs and tariffs and some of the flow through of those, but there was also we went a little bit backwards in execution where I said, we are seeing nice sequential progress in the performance of the team. We've seen a lot of initiatives, getting that business to where we want it to be. But the way, I think about that business is, we've talked about it is; one, we think there's more margin dollars there. And the team is very focused on all of the operational excellence, value engineering, engineering design, processes to continue to expand margins there, and we do think there's opportunities there. But to have a really significant impact on margins, you'd have to get price. We had mentioned, we had been pushing for price in a couple of areas last year, and we've seen some pockets of price. But we don't think the pricing level has really changed that mark that much in the market today. And so, what we've always said is we're not going to sit around and wait for price to happen we're going to improve our operations, we're going to improve our engineering design of our products, we're going to improve our productivity, we're going to improve our cost position and that is what really drove a lot of the margins in the first couple of years. So I feel good about where we are, I do believe we're going to bounce back in Engineered Solutions. And I do think there is further margin opportunities there.

Damien, this is Scott, I just want to add. I think we spent a lot of time looking at this and I do think that there were a lot of more one-time unusual items that impacted us in 2018. We have our arms around those. We do feel like this business at a normal operational levels is a - as Gene said is kind of a lower mid-teens EBITDA margin business. And we feel good about that. We feel good about demonstrating that in 2019 and then growing on there as we move forward. So I think there's still a lot of value creation to come here.

Okay, that's really helpful. Thanks again.

Thanks, Damian.

And I'm not showing any further questions at this time. I would now like to turn the call back over to Paul Clegg for any further remarks.

Thanks, Mariel, and thanks to all of you for joining the call today. We look forward to seeing many of you at our Analysts Day in New York next month. And updating you again next quarter. Have a good evening.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. And you may all disconnect. Everyone have a wonderful day.