SPX Technologies, Inc. (SPXC) Q4 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 and Full Year SPX Corporation Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker’s presentation, there’ll be a question-and-answer session. [Operator Instructions] I would now like to introduce your host of this conference call, Mr. Paul Clegg, VP, Investor Relations and Communications. You may begin, sir.

Thank you, and good afternoon, everyone. Thanks for joining us. With me on the call today are Gene Lowe, our President and Chief Executive Officer; and Jamie Harris, our Chief Financial Officer. The press release containing our fourth quarter and full year 2020 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 March 2nd. 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, including our disclosures related to the ongoing COVID-19 pandemic. Our comments today will largely focus on adjusted financial results. You can find detailed reconciliations of historical adjusted figures to their respective GAAP measures in the appendix to today’s presentation. Our segment reporting structure includes the results of our South African operations as an Other category, which is excluded from our adjusted results. Please note that our Heat Transfer operations, which were previously reported with the South African operations, are now being reported as discontinued operations as they have been fully wound down. The table showing the restated Other segments for the quarters of 2019 and 2020 is available in the appendix to today’s presentation. Our adjusted earnings per share also excludes non-service pension items, amortization expense, intangible asset impairment charges and investment gain, certain favorable discrete tax items and onetime costs associated with acquisitions. Finally, we will be conducting virtual meetings with investors over the coming months. We will also -- we also anticipate conducting a virtual Investor Day in late spring where we intend to provide an overview and updates on our value creation strategy and key initiatives. And with that, I’ll turn the call over to Gene.

Thanks, Paul. Good afternoon, everyone. Thanks for joining us. I hope that all of you and your families have remained safe and healthy. On the call today, we’ll provide you with a brief update on our overall results and segment performances for the fourth quarter and full year. We’ll also provide 2021 guidance and our view of the key variables driving this year. Now, I’ll touch on some of the highlights from the fourth quarter and the full year of 2020. We had a solid performance in a highly unusual and challenging year. I want to thank our employees who’ve done an outstanding job of adapting to very difficult circumstances, and despite the hurdles they faced bringing about numerous successes. Finishing 2020 with year-over-year earnings growth, a stronger balance sheet and positive operational momentum demonstrate the resilience of our businesses and the perseverance of our team. For 2021, we are targeting double-digit adjusted EPS growth. We also continue to gain traction on numerous internal growth initiatives and remain highly focused on the key value drivers of our success, including continuous improvement, investments in digital and strategic acquisitions. I’m very excited about the year in front of us, our opportunities and the ability to drive attractive growth in our earnings and cash flow for years to come. In Q4, revenue increased modestly as acquisitions more than offset softer non-residential HVAC sales and delayed project sales in Detection & Measurement. Overall, segment income was solid and in line with our expectations. For the full year, we grew adjusted revenue, segment income and net income. Our adjusted EPS of $2.80 is an increase of $0.04 from 2019. We did experience several unusual items in Q4. One particular item was an increase in our estimated reserves for legacy product liability matters, which caused a decline in our operating income for Q4 and the full year 2020. Excluding the charge, full year operating income and margin were both up, reflecting the strong operational performance of our businesses. Jamie will discuss these items in more detail later in the call. Overall, I’m pleased with our operational and financial performance, and the positioning of our businesses as we move forward. As always, I’d like to touch on our value creation framework. Our business system has been instrumental in supporting our ability to manage through the challenging environment we have been experiencing over the past year. In 2020, facing a worldwide pandemic, our team continued to make safety a top priority while rapidly adapting and executing effectively on numerous initiatives, including the introduction of several new products, progress on continuous improvement programs and several important investments in our people and our culture. In addition, we closed two acquisitions, ULC Robotics and Sensors & Software for a total of 7 in the last three years. And I am pleased with the pace of our integrations. Our team’s successes are reflected in our strong financial performance. As we look forward to 2021 and beyond, SPX is very well positioned to continue our growth and value creation journey. Our key initiatives include extending our continuous improvement processes across the organization, expanding our use of digital solutions to enhance our customers’ experience and building on the successes of our employee development and diversity and inclusion initiatives. We also anticipate further opportunities to compound the growth by employing our strong balance sheet to invest and attractive platforms in closely adjacent end markets. We have multiple initiatives to further extend our digital capabilities with investments in new solutions for enhanced product configuration, rapid quotes as well as additional on-demand training modules, and easier OEM parts identification and ordering. With respect to our diversity and inclusion initiatives, we believe our emphasis on listening, learning and simply doing more are focusing us on the things that will be impactful. We are leveraging the diversity and inclusion council, which I lead; the ambassador program and several other training and education initiatives to ensure we create a culture of awareness, inclusive behaviors across SPX. We also look forward to further extending our talent management framework called RiSE by expanding opportunities for leadership development at all levels of the organization as well as mentoring programs and community engagement. And now, I’ll turn the call to Jamie to review our financial results and guidance.

Thanks Gene. To echo Gene’s comments, we are very pleased with our results. On a GAAP basis, we reported earnings per share of $0.58 for the fourth quarter of 2020 and $2.20 for the full year. On an adjusted basis, EPS for Q4 was $0.89 compared with $0.96 in the prior year. Also on an adjusted basis, we grew full year EPS to $2.80 compared with $2.76 in 2019. As Gene mentioned, net earnings include several unusual items below the segment income line that negatively impacts our adjusted EPS on a net basis by approximately $0.06. These items include adjustments to our balance sheet to reflect changes in our long-term assumptions about legacy asbestos liabilities, we had a $9.4 million charge to operating expenses and an additional $7.6 million charge included in non-operating expenses. We also had income associated with proceeds from insurance policies on former company executives. And discrete tax benefits associated with favorable tax outcomes, including audit resolutions, statute expirations and other items. We do not anticipate material changes in our ongoing use of cash or overall cash generation as a result of these unusual items. To maintain consistency with past practice, they remain in our adjusted results. Despite the impact of these items and the challenges of the pandemic, we were able to achieve year-over-year EPS growth. Turning to a review of our adjusted results. For Q4, revenues increased 2.5%, driven by 4.5% increase from the acquisitions in our Detection & Measurement and HVAC segments. Organic revenue declined 2.4% due to lower HVAC volumes. Operating income and margin were negatively affected by the $9.4 million charge I mentioned earlier. On a full year basis, revenue increased approximately 2% as the impact of acquisitions more than offset a modest decline in organic revenue. As a result of the charge, full operating income declined approximately $3 million with a 40 basis-point decline in operating margin. Excluding the charge, full year operating income was up 3.8%, with approximately 20 basis points of margin improvement. This slide gives you a view of our segments and a summary of the changes in year-over-year revenue and segment margin. Q4 segment income decreased approximately $2 million and segment margin declined 90 basis points, due largely to less favorable mix in our HVAC and Detection & Measurement segments. Full year revenue grew 1.9% as a result of the acquisitions of ULC and Sensors & Software. The performance of our Engineered Solutions segment and our HVAC Cooling international business. We also had year-over-year growth in our Genfare and QS businesses. Full year total segment income grew $7 million with 20 basis points of margin improvement led by the strength and resilience of our transformer business, the strong operational performance of our HVAC Cooling business and the acquisition growth within our location and inspection businesses. We continue to see strength in our Engineered Solutions segment and a general recovery in several of our end markets. Next, I will walk you through the details of our segment performances, starting with HVAC. For the quarter, revenues decreased 4.4%, including a 7.9% organic decline due to lower volumes in both, cooling and heating, partially offset by a 3% benefit from having a full quarter of Patterson-Kelley, which was acquired in November 2019. As a reminder, our HVAC Cooling business did have some sales pulled forward into Q3 from Q4. The residential portion of our business was solid despite comparisons with strong weather-driven results in the prior year. Non-residential sales softened, consistent with trends in the leading macro indicators we observed earlier in 2020. Segment income declined by approximately $4 million and margins decreased 130 basis points due to lower cooling volumes. Our heating businesses, despite lower volumes, reported similar segment income and margin to the prior year due to strong operational performance. On a full year basis, segment income and margin were up slightly about 10 basis points compared to the prior year. As we enter 2021, we are beginning to see early signs of increased activity in non-residential end markets. As you know, we are seeing very cold temperatures across the U.S., which generally bodes well for our heating business. As we continue to monitor these trends for the full year 2021, we are anticipating low single-digit growth in our HVAC segment revenue and a modest increase in margin. This includes a view of higher heating sales and flat cooling sales. In Detection & Measurement, for the quarter, revenues increased 17.5%, including a 2.6% organic increase, resulting from strong year-end shipments in our location and inspection and our age and navigation lighting platforms. The acquisitions of ULC Robotics and Sensors & Software contributed 13.9% growth, and we experienced a 100 basis-point tailwind from currency. As a reminder, currency is primarily a top line translation issue for SPX due to the significant natural foreign exchange hedges built into our cost structure. Segment income increased approximately $2 million, while segment margin decreased 160 basis points due to a less favorable mix associated with fewer project shipments from our communication technologies business. As anticipated, we did see shipments of slower moving projects that were impacted by pandemic restrictions begin to move forward in Q4. However, overall volumes remained below the strong levels we saw in 2019. As the year progressed, we also saw a nice recovery in our shorter-cycle businesses in Q4 and believe that we are heading into 2021, well positioned to continue that positive momentum. On a full year basis, revenues increased modestly due to primarily acquisitions, partially offset by organic volume declines of location and communication technologies equipment. Segment income and margin declined due to the impact of lower sales of these high-margin products. For 2021, including the impact of acquisitions completed in 2020, we anticipate revenue growth in the low to mid-teens and a significant increase in segment income. We anticipate approximately flat margins due to a less favorable mix associated with recent acquisitions in their first year as part of SPX and some P&L investments in growth in our location and inspection platform. As we continue to see project-related revenue rebound and we fully integrate ULC Robotics and Sensors & Software acquisitions, we anticipate an increase in segment margin. In Engineered Solutions, revenue for the quarter increased 1.3%, reflecting higher sales in both, transformers and process cooling. Segment margin decreased modestly with a strong operational and pricing performance in transformers offset by less favorable sales mix in process cooling. On a full year basis, segment revenue grew 5.2%, and segment income margin increased 270 basis points due to strategic pricing initiatives, better pricing discipline and a strong operational performance in transformers. For 2021, we anticipate revenue growth in the low single digits and approximately flat margin with higher pricing and volumes in our transformer business, partially offset by lower process cooling volumes. We anticipate offsetting higher commodity costs with pricing actions. Turning now to our financial position at the end of the year. Our balance sheet remains strong. During 2020, we deployed $104 million of capital for two acquisitions and ended the year with a net leverage ratio of 1.65. Adjusted free cash flow for the full year was approximately $123 million, which translates into a free cash flow conversion ratio of 96%. Over the last three years, the average of our conversion ratios has been greater than 100%. We anticipate strong cash generation again in 2021. Excluding any potential capital deployment for acquisitions, we would anticipate that our net leverage ratio will decline materially below the lower end of our target range, which is 1.5 to 2.5. For the full year, we used approximately $15 million in net cash associated with South Africa, including the impact of the bonding dispute with Mitsubishi that discussed -- we discussed last quarter. We feel good about the progress we have made in South Africa, and we’ll continue to focus on resolving remaining disputes with our counterparties. Despite the impact of higher legal spend associated with the dispute resolution process, we anticipate modestly lower cash usage in 2021 as we are substantially finished with our scope of work. Overall, we are very pleased with our strength of our balance sheet and we think it is a strategic advantage to us in 2021 as we pursue growth initiatives, both internally and externally. Moving to our guidance. For the full year 2021, we are estimating adjusted earnings per share in the range of $3 to $3.20. This represents an increase of approximately 11% at the midpoint compared to 2020 adjusted EPS of $2.80. On an adjusted basis, we are estimating revenue of approximately $1.6 billion and a modest increase in segment income margin from the 15.3% we reported in 2020. As discussed in our segment overview, we anticipate revenue growth in each of our segments. We currently expect relatively flat margins in Detection & Measurement and Engineered Solutions and modestly higher segment margins in HVAC and for SPX as a whole. As always, you will find details of other items driving our 2021 guidance in the appendix of today’s presentation, including our tax rate, which we currently expect to be approximately 21% to 23%. While we do not provide quarterly guidance, we currently anticipate a similar earnings cadence to 2019. I will now turn the call back to Gene for a review of two of our end markets and his closing comments.

Thanks, Jamie. Overall, we are encouraged by the trends we are seeing in our end markets as we progress through 2021, although we continue to closely monitor certain areas. In HVAC, we previously noted year-on-year headwinds for the non-resi portions of our cooling and heating business. Recently, we have begun to see early signs of increased activity in these markets, although somewhat uneven geographically. Demand for our more residentially focused boiler products appears stable and as always, remains influenced by weather trends in the short term. In Detection & Measurement, locator demand has rebounded significantly across most regions. While we have seen that demand can be sensitive to pandemic-related lockdowns, current trends remain healthy. Inspection equipment, which showed solid demand from municipalities in 2020, has shown signs of flattening but remained steady. In our project-based D&M businesses, we continue to see solid frontlog and customer interest. While the impact of travel and access restrictions have not fully abated, we have seen forward movement on communication technologies orders that were delayed in 2020 and anticipate an improvement in this business in 2021. We continue to monitor these trends closely. In Engineered Solutions, we are seeing encouraging behavior from transformer customers and solid backlog. While transformers is a longer cycle business, we are well-positioned to address opportunities for increased investment in transmission infrastructure associated with potential renewable energy and grid reliability investments. In summary, I am very pleased with our solid performance in a challenging year. The efforts of our employees and the strength of our resilient platforms helped us drive growth in our earnings during a worldwide pandemic. This year, we anticipate a return to double-digit earnings growth and remain focused on initiatives to accelerate that growth through organic and inorganic levers, continuous improvement, further investments in digital and initiatives focused on our people and sustainability. With a strong balance sheet and a highly capable experienced team, I’m very excited about the opportunity ahead to continue driving value for our shareholders. And now, I’ll turn the call back over to Paul.

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

Thank you. [Operator Instructions] Our first question will come from the line of Brett Linzey from Vertical Research.

I wanted to start with supply chain constraints affecting the whole industry, obviously, also price costs, particularly steel. How are those two items informing the cadence of the year for ‘21? Should we expect a weaker first half in terms of profit with some recovery in the second half? Any color you can provide on those two items.

Hey. This is Jamie. I’ll kick this off. So, supply chain commodities in general, we are seeing a tightening of certain products in supply chain. We are seeing some commodity price increases in certain spots in our Company. From a pricing standpoint, we think at this point in time that we’re able to cover most of the commodity or material increases through price. We’re taking actions on potential supply chain shortages or constraints, if you will. We’re doing some safety stocks. We’re making sure we have good alternative supply choices to use. And so, right now, we don’t see that being a material issue, but it is something that we’re very closely monitoring. But again, we’re fortunate, a lot of our businesses are very highly technical, specialized product, and we’re able to pass that price through to the customer, in many cases, not all.

Okay, great. And then, on the cooling side, just wanted to square the comments with an early signs of recovery in the non-res piece, but you are guiding flat for the year against relatively easy comps. So, just conservatism, something else we should be considering there?

Brett, this is Gene. Yes, I think, if you look at what we have seen the -- last year, if you look at where the Dodge index was, had a little bit of a downward impact and projections for 2021. The latest projections, if you map out where the Dodge is versus our end markets, as a reminder, in non-resi, we’re very diversified. We’re in data centers, health care, commercial, hospitals, education. If you look at it, I think, the situation has improved. And the current Dodge index would probably have us at a plus 1%, maybe 2% according to the market demand, with a little bit more coming in the back half of the year. So, I do think it’s been a little bit of a positive change that we’ve seen in the market dynamics. So, I think, that is a fair point.

Just to follow up on the HVAC side, and particularly the heating side, I mean, we’re almost two-thirds of the way through the quarter. Have you seen the channel load in given some of the colder weather conditions in your served markets, or what’s the dynamic and kind of the early pulse here in the first quarter in heating?

Yes. So, I think, if you look outside, we have seen a lot of cold impacts across the U.S., something we monitor very closely is heating degree days. If you look at the data, our heating degree days is positive versus last year. It’s up nicely. But, having said that, it’s actually lower than our normal averages over the longer term. So, we are seeing positive versus last year, but a little bit lower than before. But we think that that would set up a favorable comparison in Q1. And then, obviously, as you think about how that flows through, having a nice second half of the shoulder, let’s say, Q1 sets you up well as you go into the preseason and the off-season. So, we think net-net, the weather to date has been more favorable and will be a positive for us this year.

And our next question comes from the line of Bryan Blair from Oppenheimer.

In terms of your D&M sales guide, I was wondering if you could break out what the team is thinking in terms of organic sales, carryover M&A and FX contribution to get to the low to mid-teens range?

Yes. We are -- sort of the low to mid-double-digits teens on D&M as a whole, a large part of that will be -- there will be some organic growth in there. A large part of that will be as a result of our ULC acquisition and our Sensors & Software acquisitions from both of which occurred in the fourth quarter, September, November, respectively, of last year. FX, we do have a little bit more -- we see in a little bit more contribution from FX. I think, it’s less than two points, maybe between 1.5 and 2 of FX. But the majority -- a large part of the gain -- of the increase will be from the acquisition side of the house, primarily ULC because it was the larger of the two. In terms of the organic, we are seeing a nice rebound in our shorter cycle businesses, in particular, location and inspection. We saw that happen -- begin to happen in the second half of 2020. We saw it accelerate a little bit more in Q4, and we are seeing it as we enter into 2021. As we look at our communication technology business, and that’s obviously a project-oriented business, and it carries the profile where there’s a project shipment that carries high dollars in revenue and a large incremental margin contribution when it happens. That business, 2020 was down rather significantly from where it was in 2019. We’re seeing a very nice rebound in that in 2021. We will not be back to the levels of 2019. And as you probably remember, 2019 was a level, both at the top line and the segment income line that probably historic record for SPX with that business. So, we’re not back there, but we are seeing a very nice rebound. And then, in our Genfare business, which are transportation business, we’re seeing that recover, but also carries the run rate business as we think, is doing well. That business also carries the characteristic of having a lot of big sales. And so, we’re seeing good frontlog out there. We also -- those projects have to execute. In terms of both of those businesses, it does involve working with governmental agencies. And so, we still see things moving positively along, although they still -- it can be difficult at times, especially with people still in being in a remote environment. But, all signs are positive there.

Very helpful color. Thank you. And anything you can offer in terms of ULC and Sensors & Software, integration, trends, et cetera? Curious what accretion you’re expecting from the deals in 2021? And maybe more important, how they’re influencing R&D and product development across your businesses?

Well, why don’t I take a crack at the first part of that and then I’ll hand it to Jamie on some of the accretion. We feel really good about the businesses there and the technologies that were required there. As a reminder, you’ll see robotics, their core business is a CISBOT. This is a very, very unique solution that only they have that goes into gas lines and can really remediate underground infrastructure in a way that no one has been able to do. We like that business. It’s a good, steady business. It’s a really good value proposition. And so, we’ve talked about that business a good amount. But, what we really like is they have an R&D business, which is about a quarter of the revenue. And in there is a number of different technologies that typically ULC Robotics will be solving a solution that has never been solved before, for an end customer. It could be an industrial customer, could be utility. Could be a variety of end customers. And what we’re doing right now is, we have a process where we’re going through this portfolio, and we’re focusing on a smaller number. I think, we’re down to the top four technologies. And we really like what we see. Now, commercialization of some of these things does take some time. And you have to get some of these in a production-ready environment. But, what I would say is, there’s always a little bit of risk when you bring a company in and you really learn everything about it backwards and forwards. And I would say, net-net, we’re feeling more positive about the technology that we’ve brought into the Company. They’re very strong obviously in robotics, but they’re also very strong in AI. And one of the solutions that they have that’s already actually in bidding commercially has to do with an AI solution. So, it’s still early there. And there’s still a lot more work to do, but I actually think that they are greatly enhancing our technology capabilities in our Detection & Measurement area. And as you know, one of the things we like to talk about is our location and inspection business, which two years ago was $95 million is now approaching $250 million run rate. And they’re all working on underground infrastructure, and there is a lot of sharing. So, ULC is already working with cues, which is working with radio, and we’re seeing opportunities where we can help each other out, on the commercial or the sales side or on the technology side. So, very encouraged there. The other one, Sensors & Software, we like that business. As a reminder, that’s a business that we’ve known very well. We basically resold their product as our name for many years. So, it’s a very long-established product. Ground penetrating radar is a growing portion of the market, a very important product line, and we’re very glad that that’s under our umbrella, and we actually see some areas for growth. That’s relatively small one. If you look at it, I think, they’re in the neighborhood of $12 million, but because we were selling $5 million, I think the incremental was small, maybe $7 million but we actually see a lot of opportunities to significantly increase that being radio detection where we’re the global leader in the Americas and Europe and in Asia, we have a channel that a smaller company -- that’s a smaller technology company just doesn’t have. And so, one of the things we’re really looking at is expanding that. So, net-net, from the technology side and the integration side, I’ve been very pleased. To the specific question, Jamie, on what that means for...

Yes. So generally speaking, I think, when we put out a press release about ULC, I think we sort of indicated that we would -- we’re expecting to see a segment margin, incremental result from ULC and once fully integrated. And generally speaking, we see that as being year two or probably 2022. From what Gene said, the piggyback on integration, it is going very well to date. The R&D business is very exciting. You have a business there that’s got a nice UK business, a nice U.S. business, what I’ll call more of a run rate business and then R&D really offers a lot of opportunity. I think, one of the things about this business, just from a P&L perspective, it does carry with it a larger than normal amount of depreciation relative to our other D&M businesses. And so, when you look from the segment income margin to the EBITDA margin, it carries very high EBITDA margins. And so, -- but we see a 2022 rather large, good increase in our segment margin for this business. In the Sensors & Software side, I would think about that, as Gene said, a smaller. But think about that more as a product extension than necessarily a standalone acquisition. We do integrate all of them into the SPX family, if you will. But, the Sensors & Software becomes much more integral part of radio immediately because we’re already doing business and transacting business together. So, not as meaningful in terms of the total P&L, but a much quicker integration process for us.

And Brian, this is Paul. Just one -- I’ll throw in one modeling point here to help out the group. The combined annualized revenue from Sensors & Software and from ULC together is somewhere in the neighborhood of $50 million. In 2020, on a combined basis, they were about $17 million. Obviously, we only had them for a portion of the year.

And then, one last one, if I can. How are you thinking about your M&A funnel in early 2021? What are the prospects for getting some more strategic deals to come through? You obviously executed a couple during the pandemic. You’re towards the low end of targeted net leverage, so plenty of capacity. Just wondering if you can speak to confidence in further acceleration there this year?

Yes. Bryan, I think, it’s a good point. What I would say is, we’re seeing activity increasing. We obviously did the two acquisitions we just talked about. I really am excited about ULC Robotics and Sensors & Software. But, having said that, those were actually in discussions in ‘19. So, they actually -- they didn’t come up during the COVID time. We were actually already in discussions with both of those businesses beforehand. What we are seeing is more opportunities starting to pop up, I would say, particularly in the past two to three months. I wouldn’t say that we’re at a full normal run rate but we are -- I’d say, we’re rapidly getting to that point. From what we’re seeing, I would say, valuations seem consistent. As you know, we’ve been very disciplined on valuations across our acquisitions. Our average blended value has been 10.5 times pre-money or pre-synergy and 8.5 times post synergy. So, we think that’s probably still consistent with what we’re seeing in front of us. So, I’m very optimistic about the opportunities we have in front of us. What I would say is, we see a good amount of opportunities in Detection & Measurement, very good technologies, very strategically relevant, very good businesses. But I would say probably a little more on the smaller side. And then, we’ve seen, I’d say, a good opportunity set as well on the HVAC side. And then, I’d say probably more what I’d characterize as larger opportunities to us. And larger to us might be anywhere of north of $75 million. And so, -- but, where we sit today, we like the opportunities in front of us. We think we’re in the early innings of building out our platforms. We’ve seen, as you know, a dramatic shift in both our Detection and our HVAC businesses. And we think there’s a lot of runway to go there.

[Operator Instructions] Our next question comes from the line of Damian Karas from UBS.

I wanted to touch back on your margin guidance for the year. Just curious in particular, D&M and Engineered Solutions, you guys are calling for kind of flattish margins there. I know you called out potential M&A impact in D&M. But apart from that, I mean, kind of what’s going on with margins that -- with the underlying growth that you’re expecting that you’re not getting a little bit more operating leverage there? And maybe if you could just clarify on your prior comment, I think, you said that kind of expect price cost to be more or less neutral. But maybe if you could just kind of parse out what your expectations are?

Yes. This is Jamie. I’ll take that one. So, a couple of factors that really impact the margin on the D&M side, the largest of which is back to the project-oriented businesses, specifically communication technologies for us. And it carries -- a project, has a large amount of revenue, high margin, very high contribution margin, if you will. And we’re seeing a nice rebound of that business from 2020. It was down rather considerably from ‘19. So, we are seeing a nice rebound there. That being said, we are also -- we have other things going on in the P&L. We are making some, what I call P&L investments here and there. Things like -- we’re putting some feet on the Street in our location and inspection business to filling gaps in geography. We’re doing new product innovation product launch, marketing and to get it out in the marketplace. And so, those things, while not really hurting margins, they’re not improving it today as much as we hope, and we believe it will see next year and years down the road. As Paul mentioned a few moments ago that if you look at the guidance on the incremental from the acquisitions, I mean, it totals roughly total of about 50 in total from about 17 in last year. So, that’s incrementally up about 30 to 35. And so, that margin, that business does come in, in hear one, primarily ULC in hear one of the acquisition, a little bit lower than what our overall segment margin. So, it begins to dilute, if you will, the rebound that we’ve experienced from the communication technology resulting in sort of the flattish type guidance. Again, we’re still very bullish on the D&M. We think it’s a great platform for us to leverage our business off of. We have many different directions we can go in. And we do expect these margins to go up in outer years. And we think the investments we’re making today and the actions we’re taking today will be a big part of that. On the Engineered Solutions side, different business profile, as you well know. What we saw in Engineered Solutions in Q4 and relative to all of 2020, you saw a 2020 that I think had margin improvement at 270 basis points from about 7, 8 up to 2, 5. In the fourth quarter though, you saw it more of a flattish. And if you go back to 2019 Q4, that was the first quarter where we -- the Company had seen some of the strategic pricing and some of the operational improvements, really one of the first places that CI really had taken hold in the Company began to show through in the P&L. So, when we got to Q4 2020, we began to cycle a much different P&L profile from prior year in Q4. And so, we’re still very high on that segment. The Engineered Solutions, obviously in 2020 performed with great resilience, especially in the tough economy. But I think, from -- we see next year in the flattish range, we actually see transformers being up slightly. Our process cooling because of some service mix probably down slightly that averages that out to a flattish kind of guidance. But overall, we’re still very high and very optimistic about that.

Okay. Got it. That makes a lot of sense. And I guess, sticking on engineered systems and transformers. Gene, I was wondering what some of the current issues that we’re seeing and hearing about kind of mean for the business? So thinking about what’s going on down in Texas with the outage situation down there. Also, if you think about the automotive world and really hearing about an acceleration in these EV platform intentions going forward. Obviously, that means there’s got to be some charging station build-out. When you think about all that, are these things that start impacting your business sooner rather than later, or is the right way to think about transformers still, it’s basically kind of this long cycle replacement story? What’s the trajectory when you think about that business?

Yes. I think, Damian, if I look at where that business is, I actually feel really good. And I think the points you bring up are really relevant. If you just kind of start with the operations of the business and where it’s been, the team has really done a great job driving continuous improvement, driving strategic pricing. I think, it’s just a much healthier business. You know it’s in the leadership position. It has a very, very strong place in the market. And it is a long lead cycle business. So, you typically start a year with somewhere in the neighborhood of three quarters of the orders in your back pocket already. So, you’re really booking in the second half, sometimes Q4, sometimes even the year after in some occasions. But, I think, the team has really built a strong foundation there, and it is a really strong business. They’ve also been able through CI, which has opened up capacity to grow. And they’ve had some nicer growth in the market over the past two years. And I think the point that you bring up are very real. I think the question would be of timing. I do think there are some mega trends that are very, very real. Electric vehicles obviously going to be very real. General Motors is getting out of internal combustion engines, right? And there will be a shift, and that will drive more generation. And whenever there’s more generation, particularly if it’s renewables, that drives T&D demand. And you’re right, the bulk of our business has been replacement because there is such a large aged infrastructure. But, if you see more -- if you look overall in the U.S., there has not been a lot of growth in energy usage over the past couple of years, but there are some things that could really drive that like EV, like data centers, like an upgrade of the general infrastructure. I absolutely do think those could be positive drivers over time. I think that those have set a very positive table looking forward. What could impact us in the short or the medium term? If there are infrastructure bills, I know there’s still a lot of discussion about if and when there’ll be an infrastructure bill and what that would look like. You typically see a good amount of T&D in those bills, or if there’s investments in renewables or investments in more generation, that would, I would say, drive incremental demand and provide more opportunities for growth to where transformers is. So, yes, I do think everything is highlighting is real and will happen, and it’s more a question of timing of when that will happen. But, we feel good about the transformers business. I actually think the performance of the transformers business in a -- last year was a very challenging year. The team really, really did a great job. Brian Mason and the team there is really a strong team, and we like to really strengthen that business have really put good foundations underneath that.

I’m currently not showing any further questions in the queue. I’d like to turn the call back over to speakers for any closing remarks.

Okay. Well, thank you all very much for joining us for this call. We look forward to updating you at our Investor Day in late spring and then next quarter again. Stay safe.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.