SPX Technologies, Inc. (SPXC) Q3 2019 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to the SPX Corporation Third Quarter 2019 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Paul Clegg, Vice President of Investor Relations and Communications. Please go ahead.

Thank you, Celine, 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 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 disclosures and discussion of GAAP results in 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 November 6. 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 projects 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, our adjusted earnings per share also excludes non-service pension items, amortization expense and investment valuation true-up and onetime costs associated with acquisitions. In addition, our adjusted segment results excluding amortization and acquisition related costs. Finally, we will be meeting with investors during the fourth quarter, including presenting at the Baird industrials conference in Chicago on November, 6. 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 the end market conditions before going into Q&A. During the quarter, we achieved strong results with significant growth in adjusted revenue, operating profit, margins and free cash flow. I am very pleased with our execution for the quarter and on a year-to-date basis. For the first nine months of 2019 we have grown adjusted revenue by approximately 7% and generated an additional $24 million in adjusted operating income, expanding adjusted operating margins by 160 basis points. The integration of our acquisitions continues to go smoothly and we see more opportunity to invest for growth both organically and inorganically as we actively pursue a pipeline of attractive opportunities. As a result of our strong year-to-date performance and expectations for Q4 we are raising the lower-end of our guidance range for 2019. We now expect to report full year adjusted EPS in a range of $2.65 to $2.72 for a midpoint of $2.69 compared with $2.66 previously. Turning to our adjusted results for the quarter, revenue increased 5.2% from the prior year to $359 million and EPS $0.60, an increase of 54% compared to the Q3 2018. Strong performances in our HVAC and Detection and Measurement segments were the key drivers of our revenue growth and margin expansion. As always, I'd like to give you a brief update on the progress we’ve made during the quarter on the initiatives and our value creation framework. In HVAC heating, our new high efficiency boilers continue to strengthen our strategy of developing a stronger competitive position in the commercial and the institutional markets where we see attractive growth opportunities. And our focus on servicing channel initiative is helping to drive greater market and customer penetration. In HVAC cooling, we continue to have success with our Everest cooling towers, which have the highest cooling capacity of any factory assembled unit. We have further expanded our Everest line to introduce new models that serve a variety of end market applications and performance requirements and are seeing strong customer demand across all models. Building on our strategy of growing our market position in commercial refrigeration, we are also expanding our fluid cooler line to include products with higher efficiency and lower water usage. We recently launched a finned coil fluid cooler that provides enhanced dry operations capability. At the ASHRAE show in Orlando in February, we'll also be introducing a new line of high efficiency fluid coolers that will be among the most efficient in their class. In our Detection and Measurement segment, our new electromagnetic locator to focus on the water utility market is gaining traction by helping our utility customers prevent costly system damage. Additionally, our airport ground lighting product line which we acquired as a part of the Sabik acquisition posted the results during the quarter and remains well positioned with strong order front log activity. Within the Engineered Solutions segment, our transformer business continues to benefit from operational improvement initiatives. And now I'll turn the call to Scott to review our financial performance.

Thanks Gene. I'll start with our net results for the quarter. We had solid third quarter results due primarily to strong performances in our HVAC and Detection and Measurement segments. Our GAAP EPS for the quarter was $0.47 and on an adjusted basis our earnings per share $0.60 or an increase of 54% from the third quarter of 2018. Overall, we are pleased with the Q3 results which put us in a good position relative to our full year targets. Turning to our adjusted results, revenue increased 5.2% during the quarter. This includes a 3.1% organic increase, 2.6% growth from acquisitions and an unfavorable currency effect of 0.5% segment income grew approximately $9 million or 21% driven by higher revenue and a better overall margins which expanded approximately 180 basis points. Now I'll walk you through the details of our results by segment, starting with HVAC. For the quarter revenue increased 6.1% including organic growth of 4.2% and a 2.5% increase from the SGS acquisition which closed in early July. This growth was partially offset by an FX headwind of 0.6%, both our heating and cooling businesses contributed to the revenue growth. Adjusted segment income grew by $6.6 million reflecting a margin increase of 400 basis points. The pricing and supply chain actions we have implemented to offset the effect of commodity and freight costs, increases had a positive impact in the quarter and was a primary driver of both the revenue and margin improvement. In detection and measurement, revenue increased 15.8%, including organic growth of 10.2%, a 6.6% increase from the Sabik acquisition and an FX headwind of 1% primarily related to the British pound. The organic revenue increase was driven by strong project shipments in our communication technologies platform. Adjusted segment income margins were 23% were a modest decline from the prior year largely due to sales mix. In engineered solutions, revenue for the quarter decreased 3%, reflecting lower process cooling volumes, partially offset by increased revenue in our transformers business. Segment income decreased by $600,000 and margins decreased 30 basis points to 4.9%, due primarily to lower process cooling volumes, partially offset by improved transformer volumes. Overall, operational performance for the transformers business has notably improved for both the quarter and year-to-date period. Turning now to our financial position. Our balance sheet remains strong. Net leverage was 1.6 times at the end of Q3. We continue to expect our net leverage to decline towards the lower end of our target range of 1.5 times to 2.5 times by the end of the year, leaving us well positioned for further capital deployment. Cash and equivalents at the end of the quarter were approximately $49 million and we’ve generated adjusted free cash flow of approximately $34 million in the quarter. On the South African projects, we now anticipate full year operational cash usage to be up to $20 million or moderately higher than the $15 million we had previously conveyed. This is largely due to additional spending to close out certain project work as we approached the wind-down of our construction activities on the projects over the next two months. After this year, we anticipate operational cash usage in South Africa to be minimal. Dispute resolution will continue pass year end and we could see some variability in cash flows associated with this process. As an update on dispute resolutions, last quarter we announced a settlement with GE, and during October we resolved all outstanding issues with our former minority shareholder in South Africa. The net effect of these two matters essentially offsets one another on a full year basis, but creates cash flow timing differences with a cash inflow and Q3 and an outflow on Q4. We are pleased with our progress on the project work and look forward to achieving substantial completion on the project shortly. We will continue to pursue opportunities to resolve remaining disputes including with the other prime contractor, Mitsubishi-Hitachi. As previously stated, we did not expect cash usage for dispute resolution to significantly affect our capacity to deploy approximately $500 million of capital for growth investments at the end of next year, of which we have deployed approximately $87 million so far this year. Turning toward 2019 guidance. Our solid year-to-date performance and outlook for Q4 leave us confident in our full year segment targets and we are tracking a bit ahead of plan on certain below the line items including corporate expense. As such, we are increasing the lower end of our full year adjusted EPS guidance for new range of $2.65 to $2.72, up from the prior range of $2.60 to $2.72. We continue to expect conversion of adjusted free cash flow of approximately 110% of adjusted net income. We anticipate segment results to be within our previously guided ranges. As always, you will find a slide with updated modeling considerations in the appendix of this presentation. Finally, at the overall company level, we remain on track to recover approximately 50 basis points of margin associated with price costs, of which the vast majority has already been recognized year-to-date. Now, I'll turn the call back to Gene for review of our end markets and his closing comments.

Thanks, Scott. We're on track for a strong 2019 and we continue to see many opportunities for growth in our end markets. While, recent economic data points create uncertainty, we serve a diverse set of customers in various industries. Several of our businesses have drivers that are asynchronous with the overall macroeconomy, including government and regulatory drivers. In addition, around 70% of our revenues are driven by replacement sales. In HVAC cooling, solid order rates and backlog support our full year outlook and we continue to pursue organic growth opportunities through market share gains from new product introductions and channel initiatives. Approximately half of our cooling tower sales are from replacement orders and our demand base includes data centers, institutional, health care, educational and public buildings in addition to commercial construction. In HVAC heating, we had a strong quarter as we continued to gain traction on new products and initiatives. Channels appear well balanced as we enter peak demand – peak season demand and preseason orders have been solid. In detection and measurement, our front log of project opportunities in communications technologies and transportation remains strong. We continue to see some softness in our locator business in the UK, as Brexit uncertainty has caused spending to moderate. However, we’re also seeing strength in other markets such as the U.S. Demand for our obstruction and marine lighting products which is driven by government-related spending and regulation also remained strong. The market for transformers remains healthy and we continue to see steady demand from our customers. And in process cooling, we continue to see a solid set of service opportunities developing. In summary, I'm very pleased with our strong third quarter and year-to-date performance and we are well positioned to achieve our updated guidance range. Our significant liquidity and strong balance sheet position us to pursue additional attractive growth opportunities both organically and through our active M&A pipeline. Overall, we are on track to generate double-digit earnings growth this year, as we continue to drive value for our shareholders. And now, I'll turn the call back over to Paul.

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

[Operator Instructions] Your first question comes from the line of Damian Karas with UBS. Your line is open.

Hi, good evening, everyone.

Hey, Damian.

Good evening.

So I wanted to ask you about the communications technology business. I would have thought that, that might be an area where you could potentially see some of the recent global macro pressures out there, but apparently not for you guys. So could you give us any more color around the nature of the project activity during the third quarter? Had they been in the hopper for some time? And are you still seeing good activity in that business through October?

Yes. If we talk about the COMTEX business, I think about it in two areas. There is a substantial portion of run rate in that business. If you look at most of the specialty obstruction lighting businesses, those are really predominantly run rate. And we've had very solid run rate order activity there, both in our core obstruction lighting and also in our marine lighting. If you think of the project activity, you're right, there are – that is a very global business and there's really two primary applications there. One is more of a military application in our COMTEX area, and then the other is more of a spectrum monitoring area. And what we have seen is been really consistent steady performance in that business. And I do think some of this as a function of the sales model shift, which has yielded much higher both front log and conversion of the front log. But, as we look at both Q4 and as we look into 2020, that business has really been performing well over the past couple of years. They have a lot of momentum, they have a lot of good products and technology. And as we look at the front log into 2020, we feel good. And yes, so if I look at the COMTEX looking into next year, we're feeling positive. Scott?

Yes, Damian, I would just add that we have been seeing steady demand certainly on that kind of replacement run rate side and regulatory factors are good help there. And that's really on the specialty lighting, obstruction lighting side of the house there, we saw that good and strong demand in Q3, continued strong demand profile in Q4. And really that's one of those asynchronous type of – it’s parts of our business that Gene referred to really the whole COMTEX group. And then as far as the project natured side, that does have a longer lead time from a visibility to projects. So we do have a better sense of where that's – where those projects are. A lot of those are either government or Class 8 government agencies. So you understand, we get a visibility of where they are on the process from having funds applied to the projects to when the award ordering timeframe would be. So we have pretty good visibility certainly when we're in a 30, 60 – two quarters of visibility.

That's very helpful. Thanks. And my follow-up question. Gene, you had talked about, you're actively pursuing a pipeline of opportunities on the M&A front. I suspect there is quite a few investors out there probably eager to see some capital deployment. So just wondering, what is the plan for getting some capital put to work? Should we expect some deployment before the end of the year, as of right now, it looks like you will be sitting on a pretty nice pile of cash as you exited the fourth quarter?

Yes. It's a good question Damian. I think the way that I would frame it, I'd step back for a second and say the first thing I would say and probably the most important message is. I do believe our strategy is very sound and I have more conviction in our strategy of really building out our HVAC in detection and measurement platforms than at any time. And I do believe we've really started to prove this out, the four bolt-ons that we've executed on where were performing well. And we think there is a really nice runway for us to continue to build these further, we believe we're in the early innings. At the end of the day the strategy is extremely sound. Having said that, we have to be very disciplined in executing our strategy and particularly on pricing and valuations. And then also we have to execute flawlessly, when we bring these businesses or product lines into our business. And I think to-date the teams have really done a nice job, I think our model works there. So I do believe strongly that we have the right model and I think there's a lot of runway for us to go. With some of the specifics, it can be tough to get into some of the specifics. What I can say and what I did say last quarter is our front log opportunity is I'd say the most attractive that I have seen since we've been here. And we do believe there is going to be some nice ways to drive shareholder value. It's tough to get into the specifics of any particular things going on. But I would just say, we feel that we will have a nice opportunity to deploy capital if you're looking for it over the next quarter –couple of quarters, year, we believe the strategy sound, but we always have to be disciplined and we will be disciplined. So I'm feeling very optimistic about the opportunity we have in front of us.

Great. Well, good luck with it. Thanks.

Thank you, Damian.

Your next question comes from the line of Brett Linzey with Vertical Research. Your line is open.

Hi, good evening guys.

Hey, Brett.

Hey, Brett.

Hey. Really strong HVAC growth despite the comp. Could you maybe just offer some context how that performed relative to your internal expectation? And did you get an earlier channel load this year for the heating season? And maybe, what you expect for Q4 in terms of organic growth?

Yes, Scott. I'll take that one. So I would say we operated around where we expected to operate for the quarter. As I said in my prepared remarks, we saw a good, really good traction, we have seen throughout the year good traction on the pricing increases we've done and some of the supply chain management activities we've done throughout the year. That's a big driver, probably the predominant driver of both the growth in the margin expansion that you're seeing in the quarter. As a reminder, we were facing headwinds for the first three quarters of last year on price costs and so we have been getting the improvement here for the first nine months of this year. And that started leveling off in Q4 of last year. We did get some decent volume across the business. And the other piece is that we've had improved pricing discipline, particularly in our international markets, which has muted actually some of the growth in the cooling side of the business that we're seeing in the Americas, but resulting in better margin performance across the group.

Okay, great. And then on Slide 17, you mentioned just uncertainty within cooling, around some of the macro data specific points you're saying. I guess, how does that compare to your internal dashboard as you roll up your project funnel, you need to talk to your sales folks? Just maybe a little bit more color on the state of that business and your front log there.

Yes. I think I'll jump in there and then Gene can add on. As we look at for the balance of this year, we're feeling really good about Q4. We're not going to kind of get into piecemealing guidance here for 2020. I guess we're just reflecting that on the macro, that's an area that there we see some variability in data. Now what Gene did also talk about is that, that's probably more on the commercial construction side. But we – it's a pretty broad-based end market demand driver for the business. And remember that specifically for cooling, half the demand is driven by replacement, not necessarily new project. So overall for the company as we look at 2020, we're not going to give go into guidance here, we'll do that in February at a normal timeframe. But we do feel good about the opportunity for organic growth as we look into 2020. And then as we just talked about, we're looking and actively pursuing M&A, strategic M&A that could enhance that.

Okay. Great. I'll leave it there. Thanks guys.

Thanks, Brett.

Your next question comes from the line of Robert Barry with Buckingham Research. Your line is open.

Hey guys, good evening.

Hey, Robert.

Hey, Robert.

Thank you for giving me my Halloween back.

Importantly an important day.

Just a quick follow-up on that. I know you don’t want to get into 2020 in detail. But just as things stand now, do the kind of mid-term revenue growth ranges per segment, margin targets, et cetera, does that all still feel appropriate for 2020?

Yes. Again, I don't want to get into that level of detail, we'll do that in February. But – so I'll just keep that at the higher level that we do see organic growth for the company both – we see in our revenue organic growth and we see some internal operational improvement growth looking down from a overall drivers of organic EPS growth for the company in 2020.

Got it. I know you kind of reaffirmed everything from a segment revenue and margin standpoint for this year. But would you perhaps steer us to the higher low end of any of these ranges? In particular, engineered solutions came in a little weak this quarter at least versus what we were expecting, any thoughts there?

Yes. So you see in engineer, specifically the kind of the implied Q4 is showing some nice improvement and that's really on the process cooling side, where just the timing of some of the service type projects are more heavily weighted to key for this year. Those projects are all underway executing well, so we feel very good there. Transformers continued to have good performance, good consistent performance this year. And as you look at the really in – and you kind of look at the range of the guide, it really has to do with both the project work within D&M and the timing of how that plays out. We feel good about the activities, there is just – there is some timing variability there that could play out. And then when you’re looking at heating, it's about the natural heating demand of the season. Remember that we had a very cold heating season last year and we also had kind of a onetime unusual order for Columbia Gas last year that kind of gives us a challenging year-over-year comp. And we've kind of set ourselves for more of a normal kind of mid-season heating demand profile. And if you look at October, you're kind of off to – the order rates are not supporting a strong winter demand, it's kind of supporting where our guide is. But it could spike here in the last two months, but that's not predictable.

Okay. That's helpful. So – and on engineered in particular, it sounds like, I think you said a lot of the projects are underway, so line of sight there is pretty good.

Yes.

Okay. I guess just lastly for me, I wanted to ask about also in Slide 17, I think it's been a while, I don't know maybe ever that we've seen a mention of firming pricing in transformers, such as curious thoughts there, how significant that is? And can we actually see some potential upside to margins looking out over the next 12 months or so?

Yes, Robert, this is Gene. I think if you look at it, as we've talked about for a couple of years, that market, the team has done a really nice job of self-help initiatives and driven several 100 basis points of improvement really on operational initiatives, so value engineering, a lot of lean, a lot of cost out initiatives, but without really seeing any material change in price. I think what we see today is it still a very competitive market, there is – as a reminder that is a business where there is very steady demand, there is a lot of demand, there is a tremendous overhang of old transformers. We see a really long runway of steady demand there, but there is a lot of capacity on the market and that's what keeps pressure on the prices. And we have seen some modest benefits to pricing. Our team has done a lot of work on strategic pricing and we've seen some impacts there. And the other thing that I would call out is, some of the impacts to the Korean imports are particularly in the EHV market. We think could provide a little bit of opportunity in that segment of the market. As a reminder that might be in the neighborhood of 20% of our overall revenue in the transformers business. But we think with the change in the tariffs on the Korean import, that provides an opportunity as well. So I would say, we could see some modest improvement there, but we’re being careful.

Got it. All right, well thanks guys. Have a good night.

Thanks, Robert.

Your next question comes from the line of Joe Mondillo with Sidoti & Company. Your line is open.

Hi everyone. Good afternoon.

Hey Joe.

Hey Joe.

Want to – I had a couple of questions on the HVAC segment. The gross margins were really strong in the quarter. I think you cited price cost as being one of the positives. Could you just talk about that a little more? And where are we sort of in that inflection point of price cost? Is there more benefits going forward or could you just address the incremental margins that you saw there in the quarter?

Yes Joe, this is Scott. So price cost was the primary driver there for the quarter. It's really three factors, it's the price cost. And these are really – these pricing actions had really been already put into place, so we're seeing a stabilization of our cost structure. We talked about recovering the overall for the company, the 50 bps of margin headwind we had last year, we've largely accomplished most of that for this year. So when you look at it from a sequential perspective, we're not seeing a significant impact for Q4. And then the other factors are there is some operational improvements across the business, there was a little bit of volume increase, obviously we got some leverage there and then the pricing discipline that we've implemented in the international cooling markets that have all contributed to improve the overall margin performance for the segment.

Okay. And in terms of the guidance for the HVAC segment there, on Page 17, it sounds like heating is trending pretty well here into the fourth quarter and cooling is fairly stable, the guidance if you use the midpoint suggests revenue down and margin down in the fourth quarter. Is that anything to read into or am I just reading into that a little more?

No, it's real – it really has to do with the really difficult Q4 comp from last year. Heating had a really strong winter demand as well as those about $3 million order coming from Columbia Gas that was to repair damaged equipment from a gas line explosion. So it was really those two items. And we're – we are set our guidance for more of a kind of mid-level season demand, normal season demand for this year, not seeing any kind of impetus for early cold season coming so far in 2019.

And should the year-over-year on a price cost basis, should that be a favorable comparison 4Q to 4Q?

Moderately, we had implemented much of our price increases last year and started getting traction on that from a positive effect in Q4 of 2018.

Okay. And then on the detection and measurement segment, I know there is some lumpiness in terms of project work and you stated that the front log activity remains pretty solid, can I interpret that as going into sort of the first part of 2020 that project work looks pretty good or is that just a statement regarding the fourth quarter?

It was predominantly a statement around fourth quarter from an execution perspective, but also from looking in evening and starting to look into the total of 2020 we're still continuing to see a steady demand and now the timing on a quarterly basis, that's what becomes variable as we get into firming of our 2020 plans.

Okay. And then I wanted to ask just in terms of the guidance regarding corporate costs a little higher than you were expecting last quarter, I think you were talking about low-mid 40’s, and you increased that to mid-40’s, I'm just trying to understand what's going on with the corporate costs?

No, the guide actually at this point is for the low-40s. And we've taken that down a little bit from the mid-40s previously. So the anticipation that Scott mentioned during the prepared remarks that there were some items below the line where we were trending a little bit better than anticipated and that was one of them.

Okay. I got that around. And then just lastly I know you started early stages, but you're working through some continuous improvement initiatives in terms of trying to look at the overall – company overall and ways to improve the business. Anything that you can provide in terms of details of what you're doing, where you're at in terms of that, anything that would be appreciated.

Yes. Joe, this is Gene. You're right, this is a big initiative for us in 2020 and we do have detailed plans. The gentleman he's really a leading a spearheading a lot of this is Randy Data, who has the South Africa projects, really materially complete this year. He is going to be spending a lot more time on that. We basically are – I think we have a very good plan. We are applying resources to that. It's probably too early for us to talk about what we think the impact of that will be, but it's something that we see, it’s a nice opportunity for us and we're taking very serious and something that we are going to be executing against in 2020.

Okay. Is that – can we expect to hear more details on that on the 4Q call or is that going to be more of a something to talk about may be next year?

No, I think by the time we get to the 4Q call and we start to look at 2020 guidance, we'll have a, I think more detail to share and we'll talk about some of the specifics of our initiative, the resources and where we see the opportunities there.

Okay, perfect. Thanks a lot. Appreciate it.

Thanks, Joe.

Thanks Joe.

Your next question comes from the line of Walter Liptak with Seaport global, your line is open.

Hi, thanks. Good evening guys.

Hey, welcome Walter.

Good evening.

I just had a couple of follow-ups. I wanted to make sure I understood the process cooling. So the trend in the third sounded like it was a little bit weaker but it was just timing of projects that shifted into the fourth, is that right?

That's right, especially if you look at it from comparison to Q3, Q4 of last year.

Okay. Was there a reason for the shift from the third to the fourth, because we're hearing from other companies that are timing of projects is moving around just because of the macro things, but this could have been more project specific.

Yes. This was more around site readiness and customer timing, what I said is that, with the requirements that are in Q4, those projects are underway, those service work is underway. So those all progressing as anticipated. So we're feeling good at where we are kind of early in the quarter here.

Okay, great. And the cash flow as you indicated, it looked pretty good for this quarter and I wonder what you're thinking about for the fourth quarter for working capital items, especially inventory?

Yes, so our cash flow is always heavily weighted for the fourth quarter. We're at a much better position timing wise this year than we were last year from the requirements for Q4, but you can kind of just always count on 50% or so of our or 60% of our cash flow is really generated in the fourth quarter. A lot of that is coming from the heating businesses, whether they're doing pre-stocking activities in the third quarter, and then they start getting the working capital normalizing and getting the receipts of cash in the fourth quarter, but it's just how we're kind of structurally slanted towards Q4.

Okay. Sounds great. All right, thank you.

Yes, thanks a lot.

Your last question comes from the line of Damian Karas with UBS. Your line is open.

Hey, guys I just had couple follow-up questions.

Sure.

So Gene, you had spoken a little bit about your expansion of the number of product lines, I think you highlighted, in HVAC some of the newer Everest products and fluid coolers as well. I'm just wondering how we should think about the margin trajectory as you roll the products out. Is it fair to assume that they might carry a price premium compared to your older models, but also just trying to understand whether there are any other early costs or production issues that might impact margins near term?

Sure. So, yes, let's kind of – let's go by the two different areas. So I'll start with HVAC cooling, really there's two segments in that area. There's the open circuit cooling towers, and then there is the fluid coolers, which is closed circuit. Open circuits, the bigger one. We believe we're the leader in that market. We're very strong there. We have a very nice position, particularly in the upper-end of that market, large applications, so a very good business. On the fluid cooler market, we’re the relatively new entrant there, we just started getting products into that market, I would say maybe 15 – 10, 15 years ago. So we would be the third player in that market out of the three. It's a smaller market, but we see some nice growth opportunities in that market. If I look at margins, I would say they are in line with the rest of our business. I don't really see them being particularly accretive or dilutive. I do think, it provides some nice growth opportunities for us. We actually are broadening our product range, so it can hit – we're basically expanding our TAM, so we can go after more applications and we think that's going to provide some growth opportunities for the cooling business. With regards to the upfront costs, I would say there's – we have a lot of R&D in our cooling business, a lot of engineering hours that's always built into our model. So this is nothing outside of what's already built into our run rate business. So this is really a function of the priorities from product management who have executed it through engineering. So I wouldn't expect any upfront deviations, but we – frankly, we see this as a nice growth area and we're pretty excited about some of the innovations that have been coming out of there. It's been a segment we haven't spent as much time on as the open circuit and we think that's good. As a reminder, the company that we acquired HTF, they do have coils and coil products. So this can actually benefit us as we move to expand our presence in the fluid cooler market, so that's what we're talking about on the cooling side. On the heating side, a lot of our efforts really on building our expanding our product line in the commercial side and we've talked in great detail about the SVF, our stainless steel, high efficiency commercial product that is having a nice traction in the market. We feel really, really good about the product and how it matches up to the competitors, including Lochinvar who's the leader in that market, what we need to do is to really build out the channel where, historically we're a distribution model, resi 75% of our business, 25% is commercial. We need to continue to build out our commercial channel in line with our expanded breadth of product line. We have made a number of investments there in R&D, but that's already gone through the P&L. So we don't really see any really changes or deviation that's been built into. We have a very – a lot of focus on our NPI every year that's built into our KPIs and I don't think you'll see anything extraordinary in upfront costs with regard to those. But really I think both of those areas are good examples where there's been a pretty relentless focus from all of the businesses on organic growth initiatives and how to understand voice of the customer, how to build some really good products and strong value propositions and how to win in the market. So we're excited about the opportunities we see in the HVAC side.

Got it, that makes sense. And you noted the Brexit uncertainty, how that was impacting demand for detection and measurement in the quarter. Could you give us a sense on how much of headwind that was, what would have E&M organic growth been, if you didn't see that underperformance or I guess perhaps differently, how within radio detection, kind of how did the European growth compare to what you saw in the U.S.?

Yes, we debated putting this in, it is something we're seeing if you look at it on a broadly speaking, radio detection in the UK is relatively small, it might be in the neighborhood of – I think it's under 4% of the overall detection and measurement business, but we did see $1 million or $2 million decline there versus what we thought. We are seeing some uncertainty there, which is real, but it is relatively small amount. And we are seeing some strength in some areas. We've also, as you've seen in the prepared remarks, America is stronger than we had anticipated. We've seen some nice progress in some of our, the continent of Europe, also China is having a nice year. So, I called that out, but I wouldn't raise – I wouldn't not a four alarm fire, but something that – just an observation that we're seeing in the end markets.

Okay, great. Thanks again.

Thank you, Damian.

Thanks, Damian.

There are no further questions at this time, I will now turn the call back over to Mr. Paul Clegg.

Thanks, Celine. And thanks everyone for joining the call. We look forward to catching up with you again next quarter and updating you on our progress. Have a good evening.

This concludes today's teleconference. You may now disconnect.