Thank you for standing by and welcome to the Q1 2021 SPX Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s call is being recorded. [Operator Instructions] I would now like to hand the call over to Paul Clegg, VP of Investor Relations and Communications. Please, go ahead.

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. A press release containing our first quarter results was issued today after market closed. 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 May 12. 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 and in other category, which is excluded from our adjusted results. Our adjusted earnings per share also exclude non-service pension items, amortization expense and investment gain, certain favorable discrete tax items and acquisition-related costs. Finally, we will be conducting virtual meetings with investors over the coming months, including at the UBS Global Industrials and Transportation Conference on June 8. And with that, I'll turn the call over to Gene.

Thanks, Paul. Good afternoon, everyone, and thank you for joining us. On the call today, we'll provide you with a brief update on our consolidated and segment results for the first quarter. I'll also provide an update to our full year guidance. Now, I'll touch on some of the highlights from the quarter. We had a solid start to the year. Our HVAC and Detection & Measurement segments performed well and drove strong revenue and earnings growth. During the quarter we continue to execute on our value creation framework with another attractive acquisition that bolsters our Aids to Navigation or AtoN platform in our Detection & Measurement segment. We believe that Sealite is an excellent strategic addition to our existing AtoN portfolio. We are updating our 2021 guidance for the acquisition of Sealite, which we completed in mid-April and are on-track to achieve double-digit earnings growth for the full year. In Q1 we grew adjusted revenue approximately 9% with significant contributions from both organic and inorganic drivers. Our adjusted operating income grew 8% driven by the performance of our HVAC and Detection & Measurement segments. Our cash generation was the strongest for our first quarter since the spin-off transaction in 2015. In summary, I am pleased with the quarter and our current positioning for the future. With significant capital availability and attractive M&A pipeline and several ongoing organic and continuous improvement initiatives, SPX is poised to drive value for years to come. As always, I'd like to touch on our value creation framework. I'm very proud of our team for the way they've managed through the pandemic while continuing to execute on key initiatives that will better-position SPX for the future. During the first quarter, we continue to make progress on several fronts; strengthening our AtoN platform through the acquisition…

Thanks, Gene. We are pleased with our results for the quarter as we grew adjusted EPS by $0.06 or 9.7% to $0.68. In addition to the segment income drivers, which I will review later, three below-the-line items had a modest impact on our net results. These include reduced interest expense due to lower average debt balances and lower interest rates. Other income included the release of certain funding guarantees that previously had been accrued on the balance sheet and higher corporate costs primarily associated with investments and continuous improvement and other strategic initiatives. EPS was strong for the quarter and we believe gives us a good start for the full year 2021. A review of our adjusted segment results also shows an overall positive quarter. Revenues increased 8.9%, driven by a 5% organic growth, 3.2% from the ULC and Sensors & Software acquisitions and a small favorable currency impact. The organic revenue increase was due to strong performances in our HVAC and Detection & Measurement segments offsetting lower results from Engineered Solutions. Segment income grew $5.1 million or 9.5% with a modest increase in margins of 10 basis points. Segment revenue income and margin results reflect the blended impact of the strong performances of our HVAC and Detection & Measurement segments and lower results and Engineered Solutions. Let's now review the details of our segment performances. In our HVAC segment for the quarter, revenues increased 23.6%, driven mostly about 22.9% organic growth. Cooling sales rose significantly with increases in Asia-Pacific and the Americas. Asia-Pacific sales were strong while the prior-year quarter was negatively impacted by the COVID-19 pandemic. Heating product sales also grew significantly due to higher – primarily due to higher seasonal demand compared with the historically warm heating season last year, the benefits of ongoing growth initiatives and…

Thanks, Jamie. Overall, we are encouraged by the positive trends we're seeing in our end markets and we'll be closely monitoring this progress as we move further into 2021. Certain markets and geographies have rebounded more quickly than others. Overall, markets are trending positively. In HVAC, we previously noted early signs of increased activity on the non-residential portions of our cooling and heating businesses although this impact has been somewhat even geographically. Overall, we remain encouraged by order rates in heating and continue to monitor non-residential cooling markets for both risks and opportunities. Demand for our more residentially-focused cooler products appears solid and as always remains subject to weather trends in Q4. In Detection & Measurement, locator demand continues to rebound across most regions and the demand for inspection equipment remains steady. In Engineered Solutions, we continue to see encouraging behavior from transformer customers, solid backlog and favorable pricing dynamics. And as mentioned, process cooling market remains steady. With respect to our supply chain, we are successfully managing rising input costs with price increases and taking actions to de-risk the timely supply of certain inputs. Currently, we are seeing labor availability constraints in some businesses leading to more overtime and adjustments to shifts, but we do not expect this to have a material impact on full-year results. Before our closing comments and Q&A, I'd like to address the topic that we have received multiple questions on over the past several months, which is how is SPX positioned for potential infrastructure spending? While it's difficult to quantify, we believe many of SPX's businesses are well-positioned to benefit from infrastructure spending including potential government initiatives across one or multiple areas. Our location equipment tends to experience increased demand related to activities that require digging. For safety reasons, it is mandated in the…

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

[Operator Instructions] Our first question comes from Bryan Blair with Oppenheimer. Your line is open.

Thanks. Good afternoon, guys.

Hey, Bryan.

A really strong start to the year in HVAC and certainly above expectations. You have revised the 2021 sales guidance, obviously evidencing some of that momentum. I apologize if I missed this. Did you break out what you're contemplating for heating and cooling respectively in the mid- to high-single digit organic growth?

No, it does not actually, Bryan. We obviously had a strong heating quarter in the first quarter. And as you know, when we forecast the full year, we typically forecast for the fourth quarter to be long-term normal temperatures.

Understood. Okay. Any commentary you can offer on your commercial boiler business and trends there? The largest player in the space had a very strong first quarter and provided commentary and then revised guidance that was quite a bit more aggressive than what was put out a few months ago. Just curious if you're seeing similar trends.

Yes, Bryan. We're very pleased with the commercial boiler business. We did have a very good quarter and we like the trajectory that we're seeing there. I would remind you that that is a smaller portion of our boiler business, even though with the acquisition of Patterson-Kelley and the addition of a lot of our larger products there, this is still the minority of our boiler business. But that portion is executing very well and we're very pleased with the path that they're on.

Very good. And just to level-set on the revised D&M guidance. Has there been any shift to underlying organic assumptions across your platforms or the follow-on contribution from ULC and Sensors & Software?

Nothing material. We did add in guidance for Sealite acquisition, but we've moved around that. We’ve raised the revenue guidance slightly for D&M revenue and sort of a modest decline on the margin though, but nothing material.

Okay, understood. And last one if I can, Sealite seems like a great strategic fit, maybe offer a little more color on the deal and specifically what your expanded geographic presence and more balanced geographic presence will mean for competitive position and future growth opportunities?

Sure. Yes, Bryan, we really like that business. We see this is being – as we talked about, very similar into building out our platforms like we've built out our location and inspection platform, where we feel like we really have a strong scale business there. Similarly here we started with Flash, we added Sabik, these are very tough businesses, tough environments to make products, you have to have the product, you have to have the communication technologies, you have to have the modems, you have to have real-time monitoring. And so there's a lot of logic there. With Sealite, we know Sealite very well. They're a very strong competitor being based out of Australia. They have very good coverage in the Asia-Pac region and they have some very nice products that we don't have. So not only does it give us more strength in an area that we were a little bit less present in. It gives us a much broader product line than what we had. Just a very natural logical addition. They also have one of the really important parts of this business is your monitoring capabilities, your communication and monitoring capabilities. And they have a product called Star2M, which is their software and monitoring for how you monitor these devices remotely. And we think it is a really good solution, and we actually think there's some nice synergy opportunities with the rest of our portfolio. And in addition to that, one of the things that we've done is we have engineers in Europe, we have engineers in Australia, we have engineers in the U.S. and the way we've been working together, we've already identified some very interesting opportunities that we're going after. We've also found some areas that we were duplicating some of the same work, in which case you can have one area do that work and then do more NPI in other areas. So, we see it as a very nice logical fit. They're a very well-respected brand, we know them well, and we think they have good technology and we think their technology could be applicable to the rest of our portfolio. But again, this goes to – if you think about how we are building our platforms and how we're growing, this is a $40 million business, it's now a $110 million, $115 million platform that we think really has global scale and we think there is more opportunities to build that out. So, there is a very nice strategic logic among these businesses and a lot of synergy there. Yes. So, thank you for that. We're very excited about it. It's still early days, still a lot of work to do. But we think it's a real nice addition to the family.

That's great color there. Thanks again.

Thanks, Bryan.

Thanks, Bryan.

Our next question comes from Damian Karas with UBS. Your line is open.

Hey, good afternoon, guys.

Hi, Damian.

Hey, Damian.

So why don't we start with, I guess, the one portion of the business that didn’t surprise to the upside in the quarter? So Engineered Solutions, you highlighted that that's really process cooling that's driving the 10% decline there. But I was wondering if you could maybe give some additional color on transformers. I mean how were the sales in the quarter? And it sounds like you're maybe expecting a big second quarter for transformers possibly. And then just secondly on that, just with regard to margin. Is it really just a throughput issue or anything else going on with respect to the productivity that you called out?

Yes, Damian, this is Jamie. I'll start off. Yes. So transformers, the Engineered Solutions, it was predominantly over in the process cooling side as we mentioned, had one particular project that we had some execution challenges on which we're getting straightened out and then good flow, but not as many big projects as we had prior year. But the bigger part of that segment is transformers, as you mentioned, and it really was we had – we did have some rework we had to do early on that we were getting through the system. Therefore, the throughput wasn't quite as high as we'd like for it to be. I think we've mentioned mix, you can have the medium voltage product go through, we had a little bit higher margin, we had a little bit higher amount of high voltage and extra high voltage go through the system this quarter. The thing that I would say, we're still pleased with transformer business, we're still pleased with the progress we've made over the last, really five quarters on continuous improvement initiatives there. We had a nice level of bookings for that business so far this year and we see the rest of the year shaping up to be on track with what we had planned when we entered 2021.

Okay, that makes sense. And, Jamie, you had sounded fairly positive on HVAC and called out the strong order rates to start the year and obviously a very strong performance in the first quarter from the top line perspective. The guidance does seem to kind of imply low-single-digit type of growth the rest of the year and I wouldn't say you exactly you have tough comps there. Could you just maybe elaborate a little bit on how you're thinking about the outlook for HVAC the rest of this year?

Yes, great question. We were very pleased with the quarter, both from the cooling side as well as the heating side. If you look at cooling, we had – to repeat a little bit, we had strong performance in Asia- Pacific, did very well in the Americas. We are seeing good growth initiatives and we're seeing good continuous improvement there. On the heating side, as we've mentioned, orders are strong. We had a colder winter than prior years, so that was good. As we look to the balance of the year, I'd say cautiously still very optimistic about the balance of the year. But if you look at the data in the non-resi market, it still is saying at a macro level down mid-single digits. We think our end market that we serve is better than that. We think we'll do – I think we said flattish to moderately up in that area. So, I'd say that guidance comes with some very good cautious optimism. We see a lot of good activity in both heating and cooling. We also see opportunities to continue to drive growth both the top line and bottom line.

And Damian just maybe a little more color there in terms of the market where we feel good with where we are in terms of our bookings and our front log. But we are – you look at some of the third-party data and we're being just a little bit cautious. I'd say the areas that we see a lot of activity or more active than normal is the light industrial. We see a lot of light industrial activity – education, government data centers, semiconductors – these are some areas of strength that we really see in the non-resi business. And then I would say the areas of softness that we see would be in office, retail and commercial. But net-net, there is more positive there and our mix is pretty similar in terms of greenfield and replacement. So, we feel good about where we are and as Jamie had said, we're being a little cautious with some of third-party data. And we actually feel going into 2022 very positive as well because all indicators are expecting very positive trends there in 2022.

Got it. Got it A final question on the Sealite deal, if I could. Could you just give us a sense on, I guess, the margin profile there and for a really obstruction lighting in general relative to the D&M segment? And Gene, you’ve highlighted you've become the global leader in this market. Just curious kind of how competitive is that market. I'm wondering as you kind of really fortified this leading position, how much pricing power you might be able to kind of exert in the market?

Yes, I mean, I think it's a good point. So I think, if you look at AtoN overall, their margins are in-line, if not slightly ahead of Detection & Measurement margins. Sealite might be a hair below that. It's probably more of the high-teens as opposed to anything way, way below that. We fully expect this will get to Detection & Measurement margins and exceed our average margins there. And we actually have an integration plan, we have synergies identified – all of the normal things that you typically have in acquisitions. And I think there is always opportunities on cost, there's always opportunities on pricing, there's opportunities on sharing of technology in our R&D among geographies. So, yes, there could be some opportunities for pricing and we're always looking to price to our value in all of our markets, we're in competitive markets. These are regulated markets for the most part, and when you have – which we like. So yes, I think there could be opportunities for pricing and we fully intend to take advantage of that. Jamie, I don't know if you have anything else, any other thoughts on Sealite? We feel good about – actually feel really good about this, and the fit is tremendous. And we're really excited to get started here.

One thing I would add to that good overview, we do have a very good I think thorough integration plan. And I do think we have some opportunities to expand margins for a number of reasons. We mentioned pricing, we mentioned call synergies and attractiveness of markets when you put them together. I think collectively, this is going to be a great opportunity for us to bump margins in this business.

Great. I appreciate the color. Best of luck with it all, guys.

Thank you, Damian.

Thank you, Damian.

[Operator Instructions] Our next question comes from Steve Ferazani with Sidoti. Your line is open.

Good evening, everyone. Thanks for taking my questions.

Hey, Steve.

I just wanted to ask, I've heard a lot of commentary to earning season about supply chain disruptions in some case almost horror stories. You didn't talk about it too much. It sounds like you maneuvered pretty well and I know some of the issues come with depending on the size of the global supply chain and the number of components that might go into equipment. Can you walk through just what you were seeing with the supply chain this quarter? And what do you think the risks disruptions are diminished as we get into the middle of the year?

Steve, this is Gene. Let me take a start there and then I'll let Jamie offer his thoughts. Clearly, supply chain, the cost impacts are very real. I think everyone is seeing them. When you look at steel, you look at copper, you look at PVC and I would say that where we sit today, we've been able to manage these costs. One of the things I'll remind everyone is that we really do Engineered Products. We typically do not make a product until you have a PO in hand. And what that typically has meant historically is that we have very low purchase price variance positively or negatively in our business where I'd say lower beta on that side. So, there is certainly is a lot of activity going on and the input costs are unprecedented, but I think we've been able to manage it. The one area that we do see as a challenge is on the labor side and recruiting is something that we're keeping our eye on. That's an area that we have seen a little bit of struggle in areas that we have not traditionally had some struggle there. So Jamie, you'd like to add more commentary?

Yes, good start, good overview. I think we get the question often, we hear on other calls often and it is a real issue out there. I think for us, we're taking a lot of proactive steps on the supply chain side of it, the availability side. We have a structure set up where we have a sourcing counsel that works with each of our individual businesses to both put our purchasing together so we can create scale in the procurement process, as well as work today, third and fourth level supply options, the typical things that you see a lot of companies doing while we're really trying to take a big focus on working capital management. Part of that is not just driving down working capital, it's to have the right amount of safety stock on hand, which is an area we're looking at as well. Back to pricing that Gene mentioned, we’re very – actually very in a good spot to be able to be in a Engineered Solution kind of environment for our products and therefore the amount of time between when we quote a piece of business and when we go procure pricing and again work is pretty short. And so we were able to then go out and lock in prices, sometimes through a hedging process or forward buy. Some of our contracts have pass-through abilities based on a commodity index and so it gives us really good protection. If you look at our company as a whole, Gene mentioned the big materials or commodities that we really watch closely, probably the other one is circuit boards, and I think as we look at those things and it's also concentrated in three or four of our businesses and those three or four of our businesses happened to be the ones who were probably been the most engineered in terms of a specifically designed product. And so, if we look back over the quarter, we were able to cover our cost of inflation in our materials. We had, I'd say a slight tailwind on pricing – not anything material, but slightly positive and in this environment, that's a really good outcome, I think. That's our goal. We've said in previous calls that we do believe we can cover calls and we still believe that to be the case. But as you mentioned, this is a sort of a two-headed strategy, one is price and the other is availability and so both are top focus for us.

Great. That's useful color. I might get in one on the modeling side. SG&A, was there anything there this quarter that would be non-repeatable, or is this sort of what we should be thinking about as the run rate for the year?

Yes, it's a great question. If you look at year-over-year, both in the quarter as well as the annual guidance we put out, it is up and there's probably two big drivers – or two primary drivers, I should say. On a year-over-year basis, we had some additional incentive comp accruals. Last year was a year that was under on sort of a par level, so accrual is up a little bit there. I think I'd probably focus on more as we did make some investments that we called out in our continuous improvement initiatives. And that one, it was up year-over-year, it was a very intentional spend, it was a very intentional investment. As we enter 2021, like a lot of companies, there are a number of structural headwinds that we had to do with. And our continuous improvement process that we've initiated is helping us meet those challenges, as well as overcome on them. We've got a number of initiatives going on throughout the company that we will pay benefits in 2021, but also for I think years to come as we build a culture of CI and that’s in operations, it's in engineering, it's in back office. And so what you see in SG&A is really what I call an investment running through the P&L on something that I think will pay big dividends for us down the road.

So, just trying to make sure I can characterize your commentary, SG&A, you're probably making some more strategic investments this year? SG&A is a little bit elevated, compared to prior year and also, incentive comp, but that's already in your modeling, your guidance?

That's correct. That's correct, yes.

Okay, great, that's helpful. Thank you very much, guys.

Absolutely. Thank you.

There are no further questions at this time. Please proceed with any closing remarks.

Okay. Well, thank you all for joining us on the first quarter call. We look forward to updating you again next quarter and talking to many of you throughout the quarter. Have a good evening.

Ladies and gentlemen, this does conclude the program, and you may now disconnect.