Earnings Call Transcript - SPXC Q4 2020

Operator, Operator

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. I would now like to introduce your host of this conference call, Mr. Paul Clegg, VP, Investor Relations and Communications. You may begin, sir.

Paul Clegg, VP, Investor Relations and Communications

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 one-time costs associated with acquisitions. Finally, we will be conducting virtual meetings with investors over the coming months. We will 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.

Gene Lowe, CEO

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 in 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 impactful things. 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 and 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.

Jamie Harris, CFO

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 by 2.5%, driven by a 4.5% increase from the acquisitions in our Detection & Measurement and HVAC segments. Organic revenue declined by 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 by 90 basis points, due largely to less favorable mix in our HVAC and Detection & Measurement segments. 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 by 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 by 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 by 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 by 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 by approximately $2 million, while segment margin decreased by 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 by 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 a less favorable sales mix in process cooling. On a full-year basis, segment revenue grew by 5.2%, and segment income margin increased by 270 basis points due to strategic pricing initiatives, better pricing discipline, and 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 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 spending 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 the 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.

Gene Lowe, CEO

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-residential 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 backlog 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.

Paul Clegg, VP, Investor Relations and Communications

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

Operator, Operator

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

Brett Linzey, Analyst

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.

Jamie Harris, CFO

Hey. This is Jamie. I’ll kick this off. So, supply chain commodities in general, we are seeing a tightening of certain products in the 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 products, and we’re able to pass that price through to the customer, in many cases, not all.

Brett Linzey, Analyst

Okay, great. And then, on the cooling side, just wanted to square the comments with the 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?

Gene Lowe, CEO

Brett, this is Gene. Yes, I think, if you look at what we have seen 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-residential, 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.

Brett Linzey, Analyst

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?

Gene Lowe, CEO

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.

Operator, Operator

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

Bryan Blair, Analyst

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?

Jamie Harris, CFO

We are projecting low to mid-double-digit growth for D&M overall, which will include some organic growth. A significant portion of this growth will stem from our ULC acquisition and our Sensors & Software acquisitions that occurred in the fourth quarter of last year. In terms of foreign exchange, we expect a small contribution, estimated between 1.5 and 2 points. However, the majority of the growth will come from acquisitions, particularly ULC, which is the larger acquisition. On the organic side, we are observing a strong recovery in our shorter cycle businesses, especially in location and inspection, which began to pick up in the second half of 2020 and accelerated in Q4 as we entered 2021. Our communication technology segment, which is project-oriented, experienced a significant decline in 2020 compared to 2019, but we are seeing a solid recovery in 2021, though we won't return to 2019 levels, which were record highs for SPX. Additionally, in our Genfare business, which focuses on transportation, we are witnessing a recovery along with a healthy backlog of larger sales. These projects need to be executed, and they often involve coordination with government agencies, which can sometimes pose challenges, particularly in a remote working environment. Nevertheless, we are seeing positive trends in both areas.

Bryan Blair, Analyst

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?

Gene Lowe, CEO

I’ll address the first part of your question and then hand it over to Jamie for details on some of the accretion. We are optimistic about the businesses and technologies involved. Specifically, robotics has a core business centered around a unique solution called CISBOT, which operates within gas lines and significantly improves underground infrastructure in ways that competitors cannot. We appreciate this business for its reliability and strong value proposition. Additionally, they have an R&D segment that accounts for about a quarter of their revenue, focusing on innovative technologies tailored to solve unique problems for various end customers, including industrial and utility sectors. Currently, we are refining this portfolio and have narrowed it down to our top four technologies, which we find promising. While commercializing these solutions may take time as we prepare them for production, we are generally feeling confident about the technology we have integrated. They excel in robotics and possess strong AI capabilities, with one of their AI solutions already entering the commercial bidding phase. Although we still have more work ahead, their contributions are significantly enhancing our technology in the Detection & Measurement domain. Our location and inspection business has also seen substantial growth, jumping from a $95 million run rate two years ago to nearly $250 million now, largely focused on underground infrastructure. There’s substantial collaboration among our teams, with ULC partnering with CUES, which focuses on radio, presenting opportunities for mutual support in sales and technology. Moreover, we have a strong relationship with Sensors & Software, a business we know well, having resold their products under our name for many years. Their ground-penetrating radar technology is essential and growing, and we’re pleased to have it within our portfolio with numerous opportunities for expansion. Although their revenue is relatively small at around $12 million, we see the potential for significant growth, particularly leveraging our leadership in radio detection across different regions. Overall, I am very satisfied with our technological integration and the direction we are heading. Now, Jamie can elaborate on what this means for...

Jamie Harris, CFO

Yes. Generally, when we issued a press release about ULC, we indicated that we anticipate seeing an improvement in segment margin once it's fully integrated, likely in year two or around 2022. Based on what Gene mentioned, the integration is progressing very well. The R&D business is promising, with a solid presence in both the UK and US markets, along with significant opportunities. It’s worth noting that this business has a higher than usual level of depreciation compared to our other D&M sectors. Consequently, when comparing segment income margin to EBITDA margin, it shows very high EBITDA margins. We expect a substantial increase in segment margin for this business in 2022. Regarding the Sensors & Software aspect, as Gene mentioned, it's smaller but more of a product extension rather than a standalone acquisition. We are incorporating all of them into the SPX family, but Sensors & Software will integrate more quickly with the radio segment since we are already conducting business together. While it may not have a considerable impact on the overall P&L, the integration process will be much faster for us.

Paul Clegg, VP, Investor Relations and Communications

And Brian, this is Paul. I want to share a modeling point to assist the group. The combined annualized revenue from Sensors & Software and ULC together is around $50 million. In 2020, their combined revenue was about $17 million, but we only had them for part of the year.

Bryan Blair, Analyst

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?

Gene Lowe, CEO

Yes, Bryan, that's a valid point. We are witnessing an uptick in activity. We have recently completed the two acquisitions we discussed, and I am genuinely excited about ULC Robotics and Sensors & Software. However, it's important to note that discussions with those companies actually began in 2019, before the pandemic. Recently, we have noticed more opportunities emerging, particularly in the last two to three months. While we are not yet at a fully normal operating rate, we are quickly approaching that stage. From our observations, valuations appear stable. As you may know, we have maintained a disciplined approach to valuations for our acquisitions, with an average blended value of 10.5 times pre-money or pre-synergy and 8.5 times post-synergy. We believe this aligns with what we are currently encountering. I am quite optimistic about the prospects ahead. We see numerous opportunities in Detection & Measurement, featuring excellent technologies that are strategically relevant, albeit primarily smaller businesses. Additionally, we have identified robust opportunities in the HVAC sector, which we would classify as larger opportunities for us, starting at about $75 million. Given our current position, we are enthusiastic about the prospects before us and believe we are just beginning to develop our platforms. There has been a notable transformation in both our Detection and HVAC businesses, and we anticipate significant growth potential in these areas.

Operator, Operator

Our next question comes from the line of Damian Karas from UBS.

Damian Karas, Analyst

I wanted to revisit your margin guidance for the year. I'm particularly interested in D&M and Engineered Solutions, where you're predicting relatively flat margins. I understand you mentioned potential M&A effects in D&M, but aside from that, what is impacting the margins given the underlying growth you anticipate? It seems like there should be more operating leverage. Also, could you clarify your earlier statement about expecting price and cost to be roughly neutral? I'd appreciate it if you could break down your expectations on that.

Jamie Harris, CFO

Yes, this is Jamie. I’ll address that. There are several factors affecting the margin on the D&M side, the most significant being our project-oriented businesses, particularly in communication technologies. These projects have substantial revenue and high margins. We're seeing a strong recovery in this area compared to 2020, which experienced a significant decline from 2019. However, we also have other activities affecting the profit and loss statement. We're making investments in various areas, such as expanding our location and inspection business to cover gaps in geography, along with innovations, product launches, and marketing efforts to enhance our market presence. While these initiatives aren't negatively impacting margins, they're not boosting them as much as we would like right now. We believe that improvements will come in the following years. As Paul mentioned earlier, the guidance on incremental contributions from acquisitions amounts to approximately 50, compared to about 17 last year, indicating an increase of about 30 to 35. This new business typically has a lower margin than our overall segment margin, so it contributes to the somewhat flat guidance despite the positive rebound in communication technology. We remain very optimistic about D&M and view it as a solid platform for our business, believing that the investments we're making today will contribute significantly to margin growth in the future. On the Engineered Solutions side, the business profile is different. In Q4 and throughout 2020, we experienced a 270 basis point improvement in margins, moving from around 7% to about 2%. However, in the fourth quarter, the margins were more stable. Compared to Q4 2019, where we first saw benefits from strategic pricing and operational enhancements, Q4 2020 reflected a different profit and loss profile. We remain confident in this segment. Engineered Solutions showed resilience in 2020 despite economic challenges. For the next year, we anticipate flat margins, with slight increases in transformers and a small decrease in process cooling due to changes in service mix, averaging out to a flat guidance. In summary, we are still very positive and optimistic about this segment.

Damian Karas, Analyst

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?

Gene Lowe, CEO

Yes, I feel optimistic about the business. The team's efforts in driving continuous improvement and strategic pricing have resulted in a healthier operation that holds a strong position in the market. Given the nature of the business, we generally start the year with about three-quarters of our orders already secured, which means we are primarily booking in the second half of the year and sometimes even into the following year. The team has laid a solid foundation and has managed to expand capacity while experiencing notable market growth over the past two years. You made an important point regarding timing, especially with mega trends that are emerging, like electric vehicles. General Motors is moving away from internal combustion engines, which will lead to increased generation. Increased generation, particularly from renewables, will boost demand for transmission and distribution. While most of our business has been focused on replacing aging infrastructure, overall energy usage in the U.S. hasn't seen substantial growth recently. However, potential growth drivers such as electric vehicles, data centers, and infrastructure upgrades could positively influence future developments. In the short to medium term, the uncertainty around infrastructure bills could affect us. There's ongoing discussion about the timing and structure of these bills, but historically, they tend to allocate funding for transmission and distribution. Investments in renewables or generation could also create additional demand and growth opportunities in our transformers sector. We recognize this potential and are focused on the timing of these developments. Overall, we are confident about the transformers business, especially considering the challenges of last year. The team, led by Brian Mason, has excelled and established a strong foundation for future success.

Operator, Operator

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.

Paul Clegg, VP, Investor Relations and Communications

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.

Operator, Operator

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