SPX Technologies, Inc.
Q4 2015 Earnings Call Transcript

Published: 26 Feb 2016

[Operator:]

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the SPX Corporation Fourth Quarter and Full Year 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Now, we'd like to turn the call to Mr. Paul Clegg, VP of Finance and Investor Relations. Please go ahead.

[Paul Clegg:]

Thank you, Carmen, and good afternoon, everyone. Thanks for joining us. With me on the call today are Gene Lowe, our President and Chief Executive Officer; and Scott Sproule, our Chief Financial Officer. A press release containing our fourth quarter and full year 2015 results was issued just 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 follow along with the slide presentation during our prepared remarks. A replay of the webcast will be available on our website until March 3. As a reminder, portions of our presentation and comments are forward-looking and subject to Safe Harbor provisions. Please also note the risk factors in our most recent SEC filings. Our comments today will largely focus on adjusted financial results. Specifically, we will focus on Core operating results which exclude the results of our South African projects, and we will separately provide an update on those projects. Other adjustments to our GAAP results this quarter include a goodwill impairment, a mark-to-market pension adjustment and some additional spin-related items that were booked in the fourth quarter. You can find reconciliations of all pro forma figures to their respective GAAP measures in the Appendix to today's presentation. Finally, we plan to be on the road meeting with investors during the first and third weeks of March. And with that, I'll turn the call over to Gene.

[Gene Lowe:]

Thanks, Paul. Good afternoon, everyone. Thanks for joining us. Before I begin with comments about the business, I'd like to thank our employees for their continued hard work following the spinoff of SPX FLOW Incorporated. This is a transformative time for SPX. Not only are we focusing on building out our growth platforms to take the company through its newest chapter of evolution, we are also expending considerable effort to address our infrastructure and changing the fundamental way we are organized and operate as a company. While there's still a lot left to do, I'm very pleased with the accomplishments to date and the significant efforts and personal sacrifice being made throughout the organization. And I'm confident that we have the right team and the right plan in place to succeed in driving value across our platforms. I appreciate your continued focus and effort and we're excited about the future we're building together. Turning to the quarter. While the fourth quarter was not without its challenges, most of our businesses achieved strong results. Our HVAC and Detection & Measurement segments and our transformer business all continued to perform well and our cash flow generation was strong with our Core business generating more than $85 million of free cash flow. Our Power Generation business remained challenged, particularly in Europe, and experienced greater-than-expected pressures during the quarter which caused us to miss our full year Segment Income targets. We continue to reduce cost to better align with market demand and continue to implement process improvements. However, the fourth quarter results in Power Generation were unacceptable and we are committed to addressing the poor performance in this business. During the quarter, we had two announcements that we're very excited about and it helped move us further towards our long-term value creation goals, as well as reduce overall risk levels for SPX. First, in September, we announced an agreement with GE, one of our direct customers on the South African projects, which significantly reduces our scope and risk profile there, and we announced the pending sale of our Dry Cooling business within the Power segment. Additionally, in our press release this afternoon we announced that we have hired an advisor to help us assess strategic alternatives for portions of our Power Generation business. This will not affect all of our Power Generation businesses but is focused on certain underperforming entities. Turning to our results. On a Core basis, revenues declined in the fourth quarter from the year-ago period due primarily to a reduction in the Power Generation revenues and the translation impact from a stronger U.S. dollar. Adjusted operating income declined to approximately $32 million and 6.5% of sales from approximately $45 million and 8.1% of sales in the prior-year period. Solid year-over-year profit growth in our HVAC and Detection & Measurement segments, as well in our Transformers business was more than offset by weakness in Power Generation. I'd like to spend a moment talking about our value creation roadmap. In the past, we've laid out initiatives to drive double-digit earnings growth over the next few years. We plan to accomplish this through operational efficiencies, by expanding our growth platforms, and by reducing our exposure to lower return markets. In HVAC and Detection & Measurement, two segments where we generate more than 90% of our Core Segment Income, we expect sustained organic growth. Over time we intend to grow these platforms through bolt-on acquisitions. We also have a solid power transformer business, where we see a long runway of replacement opportunity in the U.S. market, and where we're focused on margin expansion through value engineering and productivity initiatives. In the Power Generation portion of our Power segment, we're focused on addressing challenging conditions and exploring strategic alternatives for portions of that business. To be clear, all of our businesses must have a path to attractive returns otherwise we will evaluate all options to drive shareholder value. Now, I'd like to update you on various accomplishments in 2015 that will help drive us towards our long-term goals. In HVAC, in addition to our solid performance this quarter, we had our first shipment of our new evaporative condenser product that takes us into the industrial refrigeration market and we're seeing good initial customer response to our high-efficiency residential and commercial boilers. While it's still early, we feel good about the prospects for these new products to help us meet our long-term organic growth targets for the segment. In Detection & Measurement, our Genfare Link fare collection system is now in a production environment in our first important reference market in Albany, New York and in our cable and pipe locators business, our new GPS-enabled product is getting a very favorable response from customers. Within our Power segment, our transformer backlog is up sequentially, and more than half of our customers have accepted our new value-added transformer design. The business is ahead of schedule in meeting our Segment Income margin targets, and we are taking orders into the second half of the year. Turning back to the announcements we made during the fourth quarter. In December, we announced agreements between us, GE-Alstom and our subcontractor that resulted in a significant change in our scope of work, and also resolved material outstanding issues between parties on work related to the Air Cool Condensers for the Kusile site. As part of the agreements, we successfully reduced our scope of construction work to only three of the six units at the Kusile site. We expect to complete construction on these first three units over the next 12 months. This reduced scope equates to eliminating several years of future project work and risk. SPX will continue to provide materials and engineered components, as well as support for commissioning and technical compliance for all six units at the site. However, we expect us to significantly reduce our level of staffing and associated overhead once we complete the construction of the first three units. The expected financial effect of these agreements was included in the charge that we took in the third quarter of 2015. Overall, we're very pleased with these agreements which we believe represents a significant reduction in scope and future risk for us on the South Africa projects. With respect to the sale of our Dry Cooling business, we continue to expect the transaction to close in the first half of 2016 and are in process of getting the necessary regulatory approvals. The sale price of $48 million is subject to working capital adjustments and we don't anticipate significant tax leakage on the sale. The sale of Dry Cooling is an early step in our commitment to optimize capital utilization by emphasizing businesses that fit our strategic profile. It also reduces our exposure to Power Generation overall, predominately in EMEA and Asia. Now, I'll turn the call over to Scott to review the numbers.

[Scott William Sproule:]

Thanks, Gene. I'll start with our results for the quarter. As a reminder the spinoff of SPX FLOW occurred at the end of our third quarter in late September, making the fourth quarter our first full quarter as a standalone company. On an adjusted basis, Core earnings per share were $0.52. In order to properly reflect the ongoing earnings power of the post-spin SPX, we have made various adjustments to our GAAP results. In addition to the results of the South African projects, we've adjusted our GAAP EPS to exclude the effect of noncash goodwill impairment charge of $0.32 per share related to one of our European power-based generation businesses. In the fourth quarter, we also took a charge of $0.17 per share for changes in actuarial assumptions related to legacy benefit plans. In 2013, we adopted mark-to-market accounting for our pension and post-retirement benefit plans with adjustments generally recognized in the fourth quarter of the year. We also excluded some residual spin-related costs that were incurred during the quarter. As Gene noted, our Q4 results reflect generally strong performance from the key platforms we were counting on to deliver growth. However, this favorable performance was masked by weaker than expected results from our European Power Generation businesses. Core revenues declined 13% to $486 million in the fourth quarter compared with the prior-year period. This reflects an organic year-over-year decline of 10.1% and a 2.9% currency headwind. The key contributors of the revenue decline are lower sales of Power Generation and HVAC products. Core Segment Income margin was 10.4% compared with 11.3% in the prior-year period. Segment Income improved year-over-year in both HVAC and Detection & Measurement, but these improvements were more than offset by declines in our power segment. Now I'll walk you through the details of our results by segment, starting with HVAC. Revenues declined 8.1% due to warmer-than-typical temperatures, particularly in the Northeast and Midwest, which affected sales of heating products. We were also affected by a difference in the timing of production and sales of packaged cooling products, which were more concentrated in the fourth quarter in 2014. Given the seasonal nature of this segment, the fourth quarter typically represents peak level of margin performance in HVAC and we were particularly pleased with our Q4 Segment Income margin of 19.2%, an increase of 270 basis points compared with the prior-year period. In this segment, we have focused on operational initiatives over the last few years, such as value engineering and plant productivity that allowed us to mitigate the effects of the slow start to the heating season. Based on the strength of our Q4 operating performance, we're able to end the year with segment margins of 15.2%. The full year performance was helped by a particularly strong third quarter in which we shipped a large favorable margin project. But overall performance was in line with our expectations and positioned us well for delivering on our three-year margin target in this segment. In Detection & Measurement, revenues increased 6% organically compared with the prior-year period. This was partially offset by currency headwinds of 1.9%. The organic increase reflects higher sales across most of our businesses and the timing of Communications Technology projects, which were more concentrated in Q4 compared to the year-ago period. Segment Income margin increased 250 basis points to 28.1% driven by the favorable operating leverage from higher Q4 sales in Communications Technology businesses. As a reminder, several of our Detection & Measurement businesses have high incremental margins, so our results can have a high degree of variability on a quarterly basis. Given the performance of the business units in this segment in 2015, we are pleased with delivering full year Segment Income margins of almost 20%. However, we view this as near trough-level margin performance for this segment and expect to see improvement starting in 2016 as we further benefit from leverage on revenue growth. In our power segment, excluding the results of the South African projects, revenues declined 19% compared with the prior-year period, or 14.7% excluding the effects of currency. Segment income declined 510 basis points to 0.5%. The organic declines in revenues and segment income were due to a weaker performance in Power Generation, partially offset by a modest improvement in Transformer revenues. This segment continues to show divergent levels of market performance in operating and executing between the Transformers business and the Power Generation businesses. Starting with the positive, our Power Transformer business continues to deliver improving operating results, and is a key driver towards achieving our long-term earnings growth targets. The market for transformers remained steady in Q4, and although we still do not see a near-term catalyst for meaningful price increases, we continue to see healthy replacement demand in the market. In this environment, we are concentrating on operational excellence initiatives and experienced good results from these efforts in 2015. For the Transformer business, we had previously stated a target of full year margins of around 6%. And I'm pleased to state that we exceeded this by 100 basis points, putting us ahead of schedule on our commitment to delivering 10% margins in 2018. Our Power Generation businesses are facing secular market declines, and we continue to focus our efforts on reducing costs and risks associated with these businesses. The impact from the challenges facing these businesses was more pronounced than anticipated in Q4, principally from operations outside of the U.S. where we saw more push-outs of short cycle product orders and higher than expected project costs. We are committed to improving the results of these businesses, and in the fourth quarter, we continued to focus on restructuring actions to better align our cost structure with market demand. Over the coming months, we will aggressively pursue all available options to address the parts of our Power Generation business that are not meeting operating performances or return expectations. To be clear, there are parts of the Power Generation business that are meeting our performance expectations, and these are not part of the scope of our process of exploring strategic alternatives. Now a brief update on our South African projects. There have been no material changes to the project since our last update. We remain committed to executing our scope of work and supporting our customers in Eskom to complete the projects according to the revised timeline. As a reminder, as we finalize the manufacturing phase of our projects, we're operating with excess capacity, but expect to right-size our operations in the latter part of 2016. Turning now to our financial position at the end of the year, the fourth quarter is typically our strongest cash flow quarter, and this continued to be the case in 2015. Our Core free cash flow generation, which excludes the South African project, was more than $85 million in the fourth quarter. Due to the strength of our Q4 cash flow, we were able to pay down $34 million of short-term debt in the quarter, reducing total debt to $374 million at year-end. Even after this debt reduction, we ended the year with more than $100 million in cash on the balance sheet, an increase of $18 million from the third quarter. As a result of this, our net debt position declined by approximately $52 million during Q4 and we ended the year with no outstanding borrowings under our revolving credit facility. So I'm feeling good about our future financial position and liquidity as we enter 2016. Our net leverage ratio, as calculated in our bank credit agreement, declined to 2.5 times from 2.7 times at the end of the third quarter. As a reminder, our term debt amortization does not begin until the end of September this year and we have no significant debt repayment requirement until 2020, which helps to provide flexibility for us to deploy excess capital in ways that maximize shareholder value. Turning to liquidity, we continue to expect to have cumulative incremental liquidity of at least $200 million to invest between now and the end of 2018, generated through a combination of free cash flow and the additional borrowing capacity made available to us as our EBITDA grows, but still remaining within our target leverage range of 1.5 times to 2.5 times. This does not include any cash generated as a result of the disposition of assets. As excess liquidity becomes available, we will evaluate opportunities to deploy cash towards the highest risk-adjusted return opportunities available, including organic growth initiatives, bolt-on acquisitions, and share repurchases. Given the seasonal nature of our cash flow patterns and the expected timing of the receipt of proceeds for the sale of our Dry Cooling business, we do not expect to be in a position to deploy excess capital until the second half of the year. And with that, I'll turn the call back to Gene to talk about the macro environment and our outlook for 2016.

[Gene Lowe:]

Thanks, Scott. We've had a lot of questions recently about the economic environment and how our company is likely to perform in a potential downturn. So I want to spend a few minutes talking about the company's sensitivities to some macro trends. Our businesses serve a variety of end markets with a breadth of products. When we look at the diversity of these products and end markets, as well as our geographic footprint, we believe these factors help limit the impact of some of the biggest macro concerns today. For example, about two-thirds of our revenues are replacement in nature, things that require maintenance, service, spare parts and upgrades. Low oil prices has been another major concern in the financial market. Post-spin, we have limited direct exposure to the petroleum industry. Having said that, in a portion of our businesses we do sell into economies that are oil-dependent and are monitoring those markets for weakness. Regarding the impact of a rising dollar, we would point out that a significant majority of our sales are in the U.S., more than 70% in 2015. There's also been a lot of discussion about slowing growth in China and what that means for industrial companies. Approximately 5% of our revenues are from China, excluding the Dry Cooling business. And we continue to see positive trends in the end markets we serve there. Our China exposure will decline at the sale of our Dry Cooling business, which does have direct exposure to the Chinese power market. Overall, we believe that SPX is well-positioned to endure tough economic conditions, if that is what occurs. We have strong liquidity, which we expect to be enhanced by the cash proceeds from the sale of our Dry Cooling business. We have modest debt service requirements and no refinancing requirements for several years. And we have several businesses that have performed well through prior down cycles. Having said that, if an industrial recession were to occur, we would not be immune and would be prepared to take additional actions. Turning now to our individual segments, we would expect HVAC to be relatively resilient in 2016 compared with many industrial markets. Sales are mostly North American and the segment benefits from a lot of short cycle replacement revenues, like residential boilers and other specialty heating products. Our newbuild products will typically follow general commercial construction indices, like the Dodge Index. In HVAC, weather can be as much of a factor as the economy in any given year. Having an early and sustained cold winter generally results in healthy channel stocking for the heating season. A late start to winter, as we experienced in 2015, can have the opposite effect. In Detection & Measurement, we have several different products and several different drivers. Overall, this segment is affected by global GDP, but the majority of sales are impacted by maintenance and replacement spending by governments, telecoms and other infrastructure-related entities. And certain of the businesses in this segment have shown little to no correlation with GDP throughout past cycles. That said, we are monitoring for potential sensitivity to commodity and oil-driven customer budgets and weaker local currencies in a portion of our Communications Technology business. We've received many questions about the effect of the U.S. Transportation Funding Bill that was signed into law in December. That bill includes funding for $48 billion of public transit projects over the next five years. We are starting to see early inquiries from municipalities related to the improved visibility on multi-year funding, but we wouldn't expect to see this funding begin to have a material effect on fair collection product orders into late 2016 or early 2017. In our Base Power business, our Transformers sales are all North American and rely mostly on replacement demand. We continue to expect this business to benefit from the margin enhancement efforts in 2015, and continuing in 2016. Transformers is more of a late cycle business that performed well operationally as the last major recession took hold in 2008. At that point, the business continued to work down its backlog. Today, we have a strong backlog in Transformers stretching well into the second half of 2016. Power Generation remains structurally challenged for us, where over time sales are sensitive to growth in electricity demand. While this segment has the biggest revenue exposure to currency fluctuations, the effect on our net results is muted due to the lower levels of profitability. Our exposure to coal and nuclear generation has hurt us more than what we're seeing in the power markets overall, and we're continuing to take aggressive actions to reduce overhead while we pursue strategic alternatives within these businesses. Turning to our full year guidance for 2016, we would expect Core revenues in the range of $1.5 billion to $1.7 billion. We expect HVAC and Detection & Measurement sales to grow within the long-term target ranges we laid out at our Investor Day last September. We expect HVAC's growth to be more towards the lower end of its long-term target range due to the effect of a high-dollar, high-margin project shift in Q3 last year that will make for a tough comparison. Within Base Power, we would expect Transformer revenues to continue to grow at a moderate rate, while Power Generation revenues are expected to decline as a result of the challenged end markets and the sale of our Dry Cooling business. As a reminder, the sale of our Dry Cooling business, which has annual revenues of approximately $100 million, is expected to close by mid-year. We expect Core Segment Income margin to increase to a range of 9% to 10% for 2016 from 8% in 2015, with improvement in Detection & Measurement and Transformers. We expect HVAC Segment Income margins to be roughly flat with 2015, which actually represents a solid operational improvement as the business will have to offset the margin effect of the large project that I just mentioned. In our Power Generation business, we would expect to continue executing some incremental restructuring as we consider strategic alternatives. For the full year, we expect Core operating income in a range of $80 million to $100 million, or up more than 40% at the midpoint compared with 2015. Core EPS is expected to be in a range of $0.95 to $1.25. We've also provided several modeling considerations in the appendix, as well as some details on the historical phasing of segment income to help you baseline the linearity of our quarterly results. You'll see that we expect lower corporate expense and lower restructuring charges. One item that is different than our prior disclosures is our tax rate. We are now expecting an annual rate on our Core results of 35% to 40%, or somewhat higher than we've previously indicated. Before we go to your questions, I want to say that we're off to a quick start in addressing the challenges and opportunities of the post-spin company and are proud of our accomplishments this year, including our margin improvement in HVAC and in Transformers, our structurally reduced risk profile on the South Africa projects, and the pending sale of our Dry Cooling business. As we enter 2016, in addition to building on our momentum in HVAC and in Detection & Measurement and Transformers, we're focused on exploring strategic alternatives for portions of our Power Generation business, evaluating opportunities to reduce our cost structure throughout the organization, and further reducing risk on our South Africa projects. We believe our diverse end markets and our North American focused footprint should help to temper the effects of macro headwinds and we'll continue to focus on operating initiatives to drive efficiency and further margin growth. And when we have excess liquidity available, we'll be evaluating options to deploy capital effectively. We're very confident that we have the right plan and the right team in place to unlock the significant earnings growth potential of our company and to drive substantial value creation for our shareholders. I will now hand it back to Paul Clegg.

[Paul Clegg:]

Thanks, Gene. Carmen, at this point, we are ready to open up the queue for questions and answers.

[Operator:]

Thank you. And our first question is from the line of Julian Mitchell from Credit Suisse. Please go ahead. Ronnie Weiss - Credit Suisse Securities (USA) LLC (Broker) Hey, guys. This is Ronnie Weiss on for Julian.

[Scott William Sproule:]

Hi, Ronnie. Ronnie Weiss - Credit Suisse Securities (USA) LLC (Broker) Just want to touch into the HVAC segment there and what you guys are kind of looking at for 2016, the split out in the end markets there, kind of your outlook for residential and non-res construction?

[Gene Lowe:]

So I'd say what we're seeing, as a reminder, a big portion of that is replacement revenue, which doesn't typically follow the newbuild commercial cycle. But we would anticipate to follow the Dodge Index, which we'd see low single-digits of growth in the commercial portion of that segment. Ronnie Weiss - Credit Suisse Securities (USA) LLC (Broker) Okay. And then also on HVAC kind of the pricing dynamics you guys saw in the quarter and then as you guys look to 2016 what those price cost dynamics look like?

[Scott William Sproule:]

Yeah, we really haven't seen any material pricing either positive or negative in the quarter and we're not anticipating any major changes in 2016 either. As Gene said, the order activity in the commercial side of the business really affecting mostly the cooling side of the products has been consistent. So we're seeing that – no risk there that we see as of now and then on the heating side, much of that is replacement business. Ronnie Weiss - Credit Suisse Securities (USA) LLC (Broker) Okay, great. And then I was just wondering if there's any more color you guys could give on the South African projects regarding kind of the 2016 outlook on the loss expected there? Any kind of quantification there?

[Scott William Sproule:]

Sure. I'll get into that. So, overall, there's no major changes on the project as we updated last quarter and for 2016 what we see is just a continuation of the efforts. We see ourselves completing the scope of work for the construction activities on the ACC project and continuing to move forward on the rest of our projects with our other customer. Based on the timeline of our customers and the end user, two more plants are scheduled to come online and producing power by the end of 2016, so progress remains. As I said in my comments, we do have excess capacities in the business. We would expect that somewhere around $3 million or so of losses on the projects on a quarterly basis until we're able to finish up the manufacturing scope of our work, which we anticipate being able to do in the end of the year and kind of get those capacities back in line with the overall business operations. Ronnie Weiss - Credit Suisse Securities (USA) LLC (Broker) Great. Thanks, guys.

[Gene Lowe:]

Thanks.

[Operator:]

And our next question is from David Rose from Wedbush Securities. Please go ahead.

[David L. Rose:]

Good afternoon. Thank you for taking my call. I was wondering if you could just discuss the dynamics of the margin impact on HVAC? What really drove the margin improvements despite the under-absorption of fixed costs?

[Gene Lowe:]

I'll take that, Dave. I'd say we've seen some nice improvement in the HVAC business over the past couple of years. There's been a couple of items that have driven it. I think there's been some really nice work in product management bringing out good products, higher value products. There's been a lot of work on strategic sourcing, value engineering and really changing and making our products more competitive. I'd say with, I know this is something that's been improving over the past several years, as we did point out in our comments today, we're benefiting from a very large project in Q3, which does provide a little bit of a headwind into 2016. We do think our Core businesses there will have continued margin expansion, but we're overcoming that project in Q3, which I would say made our margins a little bit higher than they would have been on an organic basis. But there's been a number of initiatives there. I think the team, Randy Powell on the Cooling side and John Swann and his team have really, really drove some initiatives that have made our business stronger and driven high margins into the business and we'd expect that to continue.

[Scott William Sproule:]

And I would just add that a lot of these initiatives really started in 2014 or the earlier parts of 2015. So Q4 we're seeing the kind of a full year effect of those benefits as they relate to products and product quality, plant operational, as well as some levels of overhead cost reduction in the businesses that were taken on earlier in the year.

[David L. Rose:]

Just to be clear, there wasn't any part of that Q3 project that bled into Q4, though, correct?

[Scott William Sproule:]

That's correct.

[David L. Rose:]

Okay. And then if you could, what were the biggest intra-quarter changes within the Power segment that really changed for you vis-à-vis expectations?

[Scott William Sproule:]

As I have mentioned, we did see some push out of shorter cycle product orders and then we did have some project write downs in the quarter, mostly higher execution costs I referred to.

[David L. Rose:]

So, Scott, is it a function of forecasting that has to be improved on that front or what has to change as you move into Q1 and the rest of next year or this year?

[Scott William Sproule:]

A lot of the project that we had some of these adjustments to are older projects that we're taking kind of near the end of them and it's not uncommon when you have longer cycle projects that as you get towards the end of them and you're working through the final commissioning stage with your customer that you're going to have some overruns here. What has been different, though, is we've changed our order evaluation and acceptance processes. We're starting right at the front end of the business, as well as increase the level of, I guess, I'll say operational excellence around project management skills within the business. So, we don't have similar type of projects in our backlog entering 2016 as we had that created these issues in Q4.

[David L. Rose:]

So, your level of confidence is improved because you scrubbed the projects better or you have a better sense of the timing of when they'll be complete?

[Scott William Sproule:]

I would say our level of confidence is improved from both the scrubbing of the backlog and really understanding the margins in there, as well as the processes that we put in place to determine which projects we're going to take. We talked about project selectivity several times in the past. And so, we're not going to take on higher risk, lower return type of projects, as well as just the operational improvements around project management.

[David L. Rose:]

Okay. Thank you very much.

[Gene Lowe:]

Yeah, Dave, just an additional comment there. I do think that there's been – while the Power Gen business performance is very disappointing in Q4, there have been a number of changes made with regards to the management of the project management and engineering, in particular, that we do believe give us much better visibility and control over the forward planning process.

[David L. Rose:]

Okay. That's helpful. Thanks, Gene.

[Operator:]

And our next question is from the line of Robert Barry from Susquehanna. Please go ahead.

[Robert Barry:]

Hey, guys. Good evening.

[Gene Lowe:]

Good evening, Robert.

[Scott William Sproule:]

Hey, Robert.

[Robert Barry:]

Just first a housekeeping item, the guidance. Does it include the Dry Cooling business or exclude it?

[Scott William Sproule:]

We've included it for the first half of the year.

[Robert Barry:]

Okay.

[Scott William Sproule:]

Anticipate it closing by the end of Q2.

[Robert Barry:]

Gotcha. So I assume when it goes out it's accretive to margins but that's already factored into the margin outlook?

[Scott William Sproule:]

That's correct.

[Robert Barry:]

Got you. On South Africa, I was wondering if you could give us some potential range in a best/worse-case scenario for what the cash flow impact could be related to the projects in 2016?

[Scott William Sproule:]

Sure. So just as a reminder, we've talked about overall projects and we took the charge in Q3 of $95 million. We said $25 million of that was related to working capital and the remainder $70 million was going to be cash over the lifecycle of the projects. And in the year, we have been investing cash into these projects to the tune of about $70 million in 2015. So as we go forward in 2016, we see that as being the highest year of cash flows over the next several years but probably roughly half the level of 2015. And then it'll abate from there given the completion of our construction work on the ACC and our ability to right size the manufacturing operations.

[Robert Barry:]

Got you. So I'm sorry. Just to clarify, in 2015 the cash outflow related to South Africa you said was about $70 million?

[Scott William Sproule:]

$70 million, correct.

[Robert Barry:]

So, something like $30 million to $40 million would be the outflow related to it in 2016?

[Scott William Sproule:]

That's right.

[Robert Barry:]

Got you. That's helpful. And regarding the hiring this advisor, just any way you can give us some rough dimension of what percent of the business is actually being contemplated for sale and what's the timing on that? Is that something that we should expect to be completed in the next quarter or two? Is it really kind of early stage?

[Scott William Sproule:]

I would say it's premature to get into the details around that. It is early stage, but we are moving aggressively. So we're working over the term of months not quarters. So we will provide updates as we have those.

[Robert Barry:]

Got you. Maybe just one more. The pressure you saw in HVAC related to the warm weather, is that continuing into first quarter? I know in New York at least it's been still pretty warm in the first quarter.

[Gene Lowe:]

No, I think we have actually seen a nice uptick in Q1 so far. And I think there's a lot of third party secondary research analyses that look at the market. We feel good about our market share and how we're doing in those markets, but as you know and as most people know, when you do have a very warm winter, it does depress the overall market demand. But some of the cold snap that came in at the end of Q4 has provided an uptick for Q1.

[Robert Barry:]

Great. Thanks a lot.

[Gene Lowe:]

Thanks.

[Operator:]

And our next question is from the line of Brett Linzey from Vertical Research Partners. Please go ahead.

[Brett Linzey:]

Hi. Good afternoon, guys.

[Gene Lowe:]

Good afternoon.

[Brett Linzey:]

Just wanted to come back on Power Gen. Could you just talk about the impact from project selectivity in the quarter? And as we go back to the Investor Day, you guys had talked about sort of a flat to down 3% CAGR for the total Power business. Given the market conditions, Power Gen continues to be pretty weak here. I guess, how have expectations changed over that three-year planning period and what's really the impact or update on profit degradation as you see it now?

[Scott William Sproule:]

Yeah. I would say for the overall planning period, the most significant difference in the revenue expectations is going to be the sale of the Dry business. And as Gene mentioned, that carried about $100 million of revenue in 2015. So, as I said earlier, we're kind of modeling it that about half of that will be there for 2016, and then in 2017 you'll see a full year effect of that impact. And then as far as on the margin aspect of it in Power Generation specifically, this is the area that we've been focusing most of our restructuring efforts. There are initiatives that have been implemented in the second half of 2015 including actions we took in Q4. So we are expecting to get some restructuring benefits there in 2016, as well as some of the charges that were taken in Q4 being more like one-time charges, will help improve the year-over-year profitability in the business. Now when you're looking at the segment as a total, the most significant aspect of that segment is Transformers. And we're very pleased with the performance of that business. As I said, we're actually ahead of our schedule on delivering our commitment to 10% margins by 2018. So that's the real driver of the profitability for the segment and our growth expectations.

[Brett Linzey:]

Okay. And just a follow-up on the restructuring. So, I guess, how would you think about the 2016 benefits from 2015 actions? And then the $5 million of incremental restructuring costs modeled in 2016, what are the paybacks there? And do you think it's deep enough and the scope is wide enough given some of the pressures you see in Power?

[Scott William Sproule:]

Sure. So to start, from a full-year basis, we're expecting about $5 million of incremental restructuring benefit in 2016 versus 2015. As a reminder, most of these efforts are focused in areas of the world where it's more like a two year payback cycle. And then as far – I'm sorry, what was the other question?

[Brett Linzey:]

Just the $5 million you are taking in 2016, do you think it's deep enough and the scope of those activities is enough to mitigate some of the challenges you see in Power?

[Scott William Sproule:]

Sure. Actually if you go back to our – when we gave our Q3 results, we actually had elevated even higher levels of restructuring. We pulled back from some of those plans for a couple of reasons. One, we had some greater levels of attrition than what we were planning for, which will additionally benefit us in 2016. But the other factor was our decision to hire an advisor to pursue a full gamut of strategic options for the business. So based on that we stopped moving on certain actions we were going to take in order to assess them more holistically.

[Brett Linzey:]

Okay. If I could just get one more in. Given some of the macro cost currents, could you just give us an update on customer tone through January/February? How activity is tracking? And then, more specifically, as we think about the quarterly cadence through the front half, is there anything we should keep in mind in terms of project timing in D&M or HVAC? Anything to be aware of there?

[Gene Lowe:]

Yeah. This is Gene. I'll try to give a little bit of commentary of what we're seeing in the first two months of the year. I'll start with HVAC. As we've talked about, I'd say we had muted demand levels in our heating portion of our HVAC business and we've seen an uptick to start in 2016. On the cooling side of the HVAC business, I'd say it's been steady and consistent. So we haven't seen any macro impacts there. If you look across our D&M platform, we've actually seen a pretty healthy frontlog there. And there's a couple of sub-drivers there, but we're not seeing any of the macro concerns. The one area I would say we're keeping our eyes on a little bit is our Communications Technology does fell into some oil-based economies, but we are seeing strength in some of our other product lines there. And then in our Power business, I would say we typically think of that in the two pieces. Our transformer business has had pretty steady demand levels. We feel good about what we're seeing there. And then on the Power Gen, this is where we've seen some pretty consistent weakness, but I would say stabilizing at a lower level. So where we are today, we don't see further deterioration, but we are at I'd say, at a low level of demand in the Power Gen business and that's really why we're focused on taking action to get those businesses healthy. That would be really where the focus of our restructuring in Q3 was focused on. That'd be really where our focus restructuring in Q4 was targeted and it's also where we're evaluating, as Scott had mentioned, alternative strategic options that we think would be in the best interest of shareholders.

[Scott William Sproule:]

I would just add for what Gene mentioned, is that in the Appendix of our presentation we did provide the last two years of kind of what the quarterly gating looks like of our Segment Income. And that's a fair representation of what we're expecting for 2016.

[Brett Linzey:]

Okay. Great. Thanks, guys.

[Gene Lowe:]

Thanks.

[Operator:]

And ladies and gentlemen, this concludes our Q&A session. I will now turn the call back to management for final remarks.

[Paul Clegg:]

Well, thank you very much for joining us for the call. We look forward to updating you throughout the year on our accomplishments. Thank you for your support. Have a good evening.

[Operator:]

Thank you for participating in today's conference. This concludes the program, and you may all disconnect. Have a wonderful day, everyone.