Global X U.S. Cash Flow Kings 100 ETF
Q1 2018 Earnings Call Transcript

Published: 2 May 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the SPX FLOW’s First Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be provided at that time. [Operator Instructions]. As a reminder, this conference is being recorded. I’d now like to turn the conference over to Ryan Taylor, Vice President of Investor Relations. Please go ahead.

[Ryan Taylor:]

Thanks, James, and good morning, everyone. Thank you for joining us. With me on the call this morning are Marc Michael, our President and CEO; and Jeremy Smeltser, our Chief Financial Officer. Our Q1 2018 earnings release was issued this morning and can be found on our Web site, spxflow.com. This call is also being webcast with the presentation located in the Investor Relations section of our Web site. I encourage you to follow along with the presentation during our prepared remarks. A replay of the webcast will be available on our Web site later today. 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. In the appendix of today’s presentation, we have provided reconciliations for all non-GAAP measures presented. And with that, I’ll turn the call over to Marc.

[Marc Michael:]

Thanks, Ryan, and good morning, everyone. Thanks for joining us on the call. 2018 marks the beginning of the next phase on our journey to transform SPX FLOW in a high-performing operating enterprise. With our operating structure successfully established, we are now in the early stages of executing our strategy to drive sustainable growth and continuous improvement. This strategy is centered on delivering a first-class customer experience by achieving excellence in all phases of our business. To accomplish this goal we are focusing on three distinct objectives; elevating our talent and aligning and our global capabilities to best serve customers, exceeding customer expectations through continuous process improvements, and expanding our market presence in applications where we delivered the highest value to customers throughout the lifecycle of our products. Our first quarter performance reflects a solid step in our pivot to growth and improvement highlighted by 5% organic revenue growth and 240 points of operating margin expansion, including 220 points of margin improvement at the segment level. We generated $44 million of EBITDA, up 34% as compared to $33 million of adjusted EBITDA we reported in Q1 2017. Additionally, we continue to improve our financial position reducing total debt by $32 million or 4% from year-end. We finished the quarter with net leverage at 2.7x, down from 3x at year-end and 3.9x in the prior year period. EPS was $0.36 in the quarter, in line with our midpoint guidance. This included two notable items below the operating line. In other expense, we incurred $0.08 of currency loss that resulted primarily from the devaluation of the Angolan currency. And on the tax line, we recorded a net benefit of $0.08 related to the U.S. Tax Act. Jeremy will provide more details on these two items. On the order front, Q1 orders were $509 million, down 5% year-over-year. This was in line with our expectations as we anticipated difficult comparisons for our midstream energy products and our food and beverage systems. We remained disciplined and selective on large orders. Consistent with our product line strategy, underlying order growth was concentrated in our highest value product lines and in the aftermarket across all three reporting segments. Our backlog increased 5% sequentially and is now over $1 billion for the first time since 2015. This level of backlog provides solid visibility to our revenue forecast for the remainder of the year. This morning, we affirmed our full year 2018 earnings guidance which includes EPS in the range of $2.21 to $2.56 per share and EBITDA between $240 million and $260 million. We also maintained our free cash flow guidance of $105 million to $125 million which represents 100% to 120% conversion of net income. Looking at our consolidated revenue and segment income. Revenue was $490 million, up 13% or $57 million year-over-year. Currency translation was a 6% or $28 million benefit. This was driven largely by the strengthening of the British pound and euro versus the dollar. Incremental margins on the currency benefit were in the low-single digits. Organic revenue growth was 5% in line with our expectations and highlighted by double-digit growth in aftermarket sales. Segment income was $51 million, up 44% year-over-year and margins expanded 220 points to 10.3%. Overall, we saw good progress across each segment. In food and beverage, margins expanded 150 points on flat revenue driven by growth in aftermarket sales and improved operating execution. In power and energy, organic revenue grew 27% and margins expanded 980 points reflecting a sharp recovery from the prior year driven by increased aftermarket sales, a higher level of OE shipments and savings from restructuring actions. And in industrial, organic revenue growth of 4% and savings from restructuring actions helped absorb a $3 million repair cost related to a large mixer which failed while in operation at a customer site in China during Q1. This mixer is one of the largest critical mission titanium mixers ever built. It was ordered in 2015, shipped to the customer site in 2016 and installed last year at one of the largest petrochemical plants in the world. During Q1, an impeller was damaged while in operation. Subsequently, our customer’s plant was shut down until remedial action was in place. José Larios and our mixer team responded quickly to access the root cause of the damage and have provided a temporary solution to get the customer’s plant back up and running safely. We’re actively monitoring the site with our customer. In addition, we are currently building a new solution that will provide our customer a high-quality mixer suitable for their application environment. Our mixer business is highly regarded for its engineering expertise and quality design. This is an extremely rare occurrence and while we’re not pleased with the situation, I applaud our team for their responsiveness to the customer. Taking a closer look at order development in the quarter, consolidated orders were $509 million, down $26 million or 5% year-over-year. Currency was a 6% benefit. On an organic basis, orders declined 11% or $58 million. As I mentioned, this decline was anticipated and concentrated in midstream oil products, food and beverage systems and to a lesser extent industrial heat exchangers. While these declines partially reflect customer spending patterns, it also reflects our increased discipline and selectivity in these more highly engineered to order in project-related areas of our business. Our strategic growth plan is focused on aggressively growing our high-value component in aftermarket offerings. And we saw very positive developments on that front in Q1. In aggregate across the enterprise, aftermarket orders grew 6% year-over-year on an organic basis. We also drove order growth in key products including food and beverage, pumps and valves, mixers and dehydration equipment. Overall, our order development in Q1 was consistent with the product line strategy that we’ve described at our investor meeting in early March. I’m encouraged by our focus on executing this strategy which we expect to drive above market growth in select areas in a higher gross margin profile for our business over time. Looking at the orders by segment, beginning with food and beverage, Q1 orders were $171 million, down 7% year-over-year. Currency was a 7% benefit. On an organic basis, orders declined 14% due to timing of customer spending on systems. Component and aftermarket orders grew mid-to-high single digits year-over-year and sequentially were up strong with organic growth in the low-double digits. Overall, the food and beverage market is healthy with positive trends in the dairy market where rising demand in China is driving a higher level of imports and benefitting global dairy prices. The funnel of systems opportunities remains active and we continue to maintain strong discipline in our selectivity process, particularly on larger systems. Our selectivity criteria screens for opportunities that fit our technology offering and drive a high level of component pull-through and aftermarket annuity. Dwight Gibson has added new talent to his product management and project execution teams over the past few quarters. He and his team are driving growth in our higher value component and aftermarket offerings while enhancing performance in our systems business consistent with the strategy we discussed at our investor meeting. In the power and energy segment, Q1 orders were $144 million, very steady to the average order levels over the past four quarters. On a year-over-year basis, currency was a 5% or $10 million benefit. As I mentioned, the organic decline in orders was anticipated and concentrated in the midstream. In 2017, orders supporting our North American pipeline customers were quite strong in Q1 but moderated to a normalized level in subsequent quarters. In Q1 2018, our midstream orders were steady on a sequential basis and demand in North America remains healthy supporting increasing levels of oil production. Aftermarket orders were steady sequentially and consistent with the range of aftermarket orders we’ve seen over the past six quarters. Moving now to our industrial segment. Q1 orders were up 6% year-over-year. Currency was a 5% benefit and organic growth was 1%. On an organic basis, strong order growth in mixers, pumps and dehydration equipment was offset by a lower level of heat exchangers and hydraulic tool orders. On a sequential basis, we saw organic order growth across each product line highlighted by an acceleration of aftermarket orders and a pickup in hydraulic tools. José and his team are executing our product line strategy and we are encouraged by the sequential growth in our aftermarket offerings in higher value product lines. That concludes my opening remarks. At this time, I’ll turn the call over to Jeremy for a detailed review of our financial results.

[Jeremy Smeltser:]

Thanks, Marc. Good morning, everyone. I’ll begin with earnings per share. Diluted earnings per share in the quarter were $0.36 in line with our guidance and up significantly from a loss reported in the prior year period. As compared to our guidance at the segment level, food and beverage delivered $0.05 of upside through good operational execution. Power and energy had a strong year-over-year performance yet came in $0.03 below our guidance due primarily to the timing of certain valve shipments. Our industrial segment also came in $0.03 lower than anticipated due to the mixer repair costs which were a $0.05 headwind to our guidance, partially offset by a solid performance across the segment. As Marc mentioned, our Q1 EPS included two notable items below the operating income line. In other expense, foreign currency losses were an $0.08 headwind to our guidance, two-thirds of which related to Angola’s decision to shift away from a currency peg to the U.S. dollar. This led to about a 20% decline in the value of the Angolan currency during the quarter and as a result reduced the value of our cash balances in Angola by approximately $3 million. Our tax rate for the quarter was 5%. As compared to our guidance, taxes were a net benefit of $0.08. This reflects further refinement of the transition tax calculation specifically additional foreign tax credits related to transition tax provisions within the U.S. Jobs & Tax Cuts Act. Moving on to the segment results, beginning with food and beverage, Q1 revenue was $167 million, flat to the prior year. Currency was a 7% benefit and organic revenue was down 9%. The organic revenue decline was due to a lower volume of system revenue partially offset by strong growth in aftermarket sales. Segment income was $18 million, up 16% year-over-year and margins expanded 150 points to 10.8%. The increase in income and margin was driven by realignment savings, better project execution and a higher level of productivity in our facility in Poland. These improvements were partially offset by the organic revenue decline. In our power and energy segment, we saw strong growth over the prior year period including a 37% top line growth and 980 points of margin expansion. Revenue was $145 million, up $39 million from the prior year. Currency was a 6% or $7 million benefit. Organic growth was 27% or $29 million driven by sharp growth in both OE and aftermarket revenue. OE revenue was up more than 30% driven by increased shipments of pumps and valves supporting our customers in both midstream oil and nuclear applications. In the aftermarket, organic revenue growth was more than 20% reflecting end market stability and incremental growth from our investments to expand our service center footprint. Segment income was $12 million as compared to a $1.5 million loss in the prior year and margins expanded 980 points to 8.4% consistent with the high-single digit margins we saw in the second half of 2017. The improved profitability was driven by the organic revenue growth as well as realignment savings and other cost reduction initiatives. We are pleased with the performance in this segment coming off two very difficult years. José and his team have adjusted the cost structure of this segment to reflect the new normal in the energy markets. And they continue to be disciplined on new orders with an emphasis on market applications where we see growth opportunities for our energy products. Wrapping up the segment review with industrial, revenue in the quarter was $179 million, up 11% year-over-year. Currency was a 6% or $9 million benefit. Organic growth was 5% driven by an increase in capital project revenue and higher sales of pumps, hydraulic tools and heat exchangers. Aftermarket sales also grew modestly over the prior year. Segment income was $21 million and margins were 11.4%. As compared to the prior year, segment income benefitted from cost savings initiatives and the organic revenue growth. These positive contributions were offset by the $3 million of mixer repair costs which also reduced margins by 170 points. Moving on to backlog. We ended the first quarter with total backlog of just over $1 billion, up 5% from the end of 2017. This backlog build was comprised of 3% organic growth and a 2% currency benefit. This marks our highest level of backlog since Q2 2015 and provides increased visibility to revenue over the balance of the year. We see great opportunity to accelerate revenue conversion and improve productivity and absorption as the year progresses. Increasing throughput in key factories and reducing our lead times is a priority for our growth and continuous improvement efforts. Looking now specifically at Q2. We are targeting between $500 million and $520 million of revenue. Currency is expected to be about a 5% tailwind year-over-year. We are targeting segment income to be about $55 million with margins between 10% and 11%. Special charges are expected to be about $2 million. Our EPS guidance range is $0.39 to $0.51 per share and assumes a tax rate of about 30%. We are targeting EBITDA of approximately $55 million representing about 8% growth over the prior year and a 25% increase sequentially. As we move through the year, we expect increasing volumes, sales growth in our higher margin products and benefits from continuous improvement efforts to translate to a higher level of profitability in the second half of the year. For the full year, as previously mentioned, we reaffirmed our EPS, EBITDA and free cash flow guidance today. In addition, we updated our estimates for certain underlying assumptions to reflect our Q1 results, March 31st exchange rates and our revised outlook. These updates are highlighted on this slide. Our revenue target increased $30 million to 2.08 billion due to favorable currency rates. Note that we also adopted the new revenue recognition standard ASC 606 this year and we are reporting the impact of that change in our organic revenue reconciliation. Based on current estimates, we expect the adoption of the new standard to benefit 2018 revenue by up to 1%. We increased our segment income target by about $5 million to reflect improving execution in food and beverage and a modest benefit from currency. Other expense is now expected to be approximately $6 million for the year reflecting the foreign currency losses incurred in Q1. And we are assuming a tax rate between 26% and 27% for the full year. This reflects our current estimate of the geographic mix of earnings with no additional discrete items. As we continue to receive more guidance from the U.S. Treasury on the new tax regulations, we anticipate additional volatility in the rate as the year progresses. Our free cash flow guidance remains the same. We are targeting 100% to 120% conversion of net income with free cash flow in the range of $105 million to $125 million. Taking a brief look now at our financial position, we ended the quarter with $244 million of cash on hand and $864 million of total debt, down 4% from year-end. Net leverage was 2.7x, down from 3x at year end as our LTM EBITDA improved sharply reflecting the year-over-year growth in Q1. We continue to focus on reducing leverage. Since the end of 2016, we have reduced net debt by $272 million and net leverage by 1.3 turns of EBITDA. By the end of this year, we anticipate net leverage will decline to approximately 2x reflecting the free cash flow generation and EBITDA growth. I’ll wrap up with an update on capital allocation. For 2018, we intend to focus our capital deployment on organic investments and debt reduction while we continue to build our organizational capability and improve our operational performance. To that end, Vusa Mlingo recently joined our team as Vice President of Business Development. Vusa spent the last 12 years at Ingersoll Rand serving a variety of roles including corporate development and product management. He will play an important leadership role for us as we further develop our organic growth strategy and as we prepare our organization for growth through acquisitions. That concludes my prepared remarks. At this time, I’ll turn the call back over to Marc.

[Marc Michael:]

Thanks, Jeremy. In summary, our first quarter results were highlighted by 5% organic growth, 240 points of operating margin expansion and 34% EBITDA growth. Orders were at a healthy level and consistent with our strategy to drive growth in our higher value product lines. And our backlog is at its highest level since 2015. Q1 marked a solid step for us as we pivot to growth and improvement. That said, we are striving for a much higher level of operating performance as we move through the year. For the full year, we are targeting low-single digit organic revenue growth with a higher level of underlying growth in our high value product lines. And we expect to deliver approximately 230 points of operating margin expansion with operating margins around 11% as we exit this year. And we are targeting 25% year-over-year growth in EBITDA. Looking at the broader picture, we are in the very early stages on our journey to transform SPX FLOW into a high-performing operating enterprise. We believe there is tremendous potential to create value as we execute on our strategy which is centered around our people, products and processes. We are elevating our talent throughout the enterprise and have recently added some key members to our team to help lead our growth and continuous improvement efforts. We have defined strategies for each product line and as we execute this strategy, we are seeing benefits in our order development. And we have multiple work streams moving in parallel to drive continuous improvement through process simplification and standardization. Ultimately, we believe our focus in these areas will drive a higher and sustainable level of performance. Our key performance objectives are to grow orders aggressively, investing in our high value product lines and aftermarket value streams, expand margins through growth and continuous improvement and selectivity on large projects, accelerate cash generation by increasing the velocity of our working capital cycle, and importantly staying disciplined and prudent with our capital allocation decisions. In addition, based on our 2018 to 2020 plan, we anticipate having about $650 million of available capital to deploy over the three-year period while maintaining a prudent net leverage position. As we continue our journey to high performance, I’m encouraged by the energy, enthusiasm and great pride our team members across the enterprise are taking. I’m also pleased with our success in adding highly talented team members in key positions to help lead our growth and continuous improvement efforts. Our newest team member is Ty Jeffers who joined us this week after a 22-year career at GE where he gained a broad operational background by serving in a variety of global manufacturing and supply chain roles. Ty brings a measured, disciplined approach to SPX FLOW. He has a diverse background and a proven track record of enhancing operational performance, driving continuous improvement and delivering on rapid growth without compromising the customer experience. Ty will succeed Dave Kowalski, our President of Global Manufacturing who recently announced his plan to retire this year. I want to take a moment to personally thank Dave for his operational leadership and unwavering dedication to SPX over his 18-year career with us. He played a key leadership role in the successful execution of our realignment program highlighted by the establishment of our six multi-product manufacturing sites, most notably our expanded facility in Bydgoszcz, Poland. In closing, we remain firmly committed to achieving excellence across all phases of our business and I’m confident in our ability to continue to drive higher customer satisfaction, improved financial performance and greater shareholder value. This concludes our prepared remarks. At this time, we’ll be happy to take your questions.

[Operator:]

Thank you. [Operator Instructions]. Our first question comes from Nathan Jones with Stifel. Your line is now open.

[Nathan Jones:]

Good morning, everyone.

[Marc Michael:]

Good morning, Nathan.

[Jeremy Smeltser:]

Hi. Good morning, Nathan.

[Nathan Jones:]

I don’t want to dwell too much on this mixer problem, but I think it’s important for us to figure out here whether this is really a one-time item or whether these kind of things crop up periodically? So maybe you can give us some more color on how often these kind of problems crop up? What the actual problem was? Was this a problem that occurred during the manufacturing process? Was it something the customer did to break it? Just anymore color you can give us on that kind of problem there.

[Marc Michael:]

Yes, sure, Nathan. A little history on the project. So the order was received in 2015. We shipped it to the customer in Q4 2016 and was installed during 2017 and it was commissioned in December and started operation in January of this year. It’s really a large petrochemical application. It’s a rare event that we’ve experienced here. Our capabilities overall in our mixer business are quite strong. We can apply the product line and the technology to a variety of applications. And in this particular case, we used a really proven design for this particular petrochemical application. What ended up happening when we translated that design into the production environment, the mixer experienced some unforeseen forces that caused the impeller blades to fail. So as mentioned, the first step for us is always to take care of the customer and implement a temporary solution to get them back up and running. And right now we’ve got a design in place, an improvement design for the impeller. We’re in the process of building the replacement equipment and we’ll be installing that in the second half of this year. This is the largest petrochemical plant of its type in the world. It was one of the largest mixers of its type in the world. So it’s pretty unique in that regard, but still even saying that, it’s a rare occurrence for our mixer product line from a historical standpoint. We don’t have any more projects like this in the backlog right now. And again, it’s something that we’ll work through here as we move through the rest of the year putting the permanent solution in place for the customer but we don’t have anything else like this right now that’s in the backlog at this present point.

[Jeremy Smeltser:]

And I would add, Nathan. In my 16 years around this mixer business, I’ve not seen a failure like this in the field of this magnitude at all. It’s very rare.

[Nathan Jones:]

Okay, that helps. And you’ve accrued for all of the expenses that you’re likely to incur as you fix this thing up, or are we going to see more expenses coming through?

[Marc Michael:]

So we have accrued for all the expenses that we foresee to fix the problem permanently at this time.

[Nathan Jones:]

Okay. Then the 2Q guide here is a little below where I’d anticipated it coming in, which implies that you got a pretty good ramp coming up in the back half both in revenue and even more specifically in margins. Can you talk about your visibility into that? How much of that back half is in backlog? How confident you are with the margins that are in backlog that will roll through to get you to that 11% exit rate in 4Q?

[Jeremy Smeltser:]

Sure. I’ll start. So it’s about an $80 million revenue ramp when you kind of do the midpoint math. And what I’d point out is backlog’s up about $140 million from four or five quarters ago. And so we have a lot of visibility into that revenue. It’s predominately driven by food by beverage. And I would say probably about two-thirds by systems that are already in the backlog and the rest by the increased run rate we continue to see sequentially in components and aftermarket that Marc talked about earlier on the call which do drive outsized levels of margin. And the other big driver of the margin and the leverage on that revenue increase really comes from increased absorption on the volume increase in our plants. And we’re hitting a level of revenue that I’ve talked about in the past pointing specifically to industrial, for example, at around 2 million. But overall, we’re hitting a level of revenue in the second half for our business that we really start to leverage nicely and that’s really what we’re expecting from first half to second half. We have good visibility to what those projects and run rates are and in my mind it’s really about execution in the plants at this point.

[Nathan Jones:]

Okay. Go ahead, Marc.

[Marc Michael:]

Yes, I was just going to mention two and its part of what Jeremy had indicated. The backlog execution is going to be very important for us. And I’ve continued to see the sequential improvement that we’ve seen in our high value orders which again has been a focus and continue to be a focus is what we laid down in our March investor presentation. And we did see good sequential progress overall from an aftermarket perspective. We were up kind of high single digits sequentially and in our industrial product lines we were up also kind of in the mid-single digits sequentially. So getting those – continue to get those high value product lines that carry a better margin profile and that’s our focus; that will be important. We’re also really prudent in managing our price cost which is something that Barry McGinley on Dave’s and Ty’s team has been working on the cost side with our product managers to make sure that we’re taking the right steps to make sure we got the right price profiles in place based on cost. And then the other point that I would mention that improving our overall operating performance is really key to us. And again, as we mentioned at the Investor Day, we’ve put a global process excellence team in place that’s working on lean initiatives and putting a standard SIOP process in place. All these things are going to help our performance as we move through the year. We’ve already really been seeing some improvements in some of the key facilities as we’ve gone through the first quarter of this year in Poland specifically, in India where they’ve already been implementing some of these different aspects. That’s going to be really important to us as we move through the year also and into the future as we work on our overall process improvement.

[Nathan Jones:]

Is it fair to say the difference between the high end and the low end of your guidance range here is really reliant on your own internal execution and the improvement there this year?

[Marc Michael:]

Yes, as I said earlier, I think based on what we see, the revenue visibility is there and it’s really about ramping up production levels.

[Nathan Jones:]

All right. Thanks very much. I’ll pass it on.

[Marc Michael:]

Thanks, Nathan.

[Operator:]

Thank you. Our next question comes from Mike Halloran with Robert W. Baird. Your line is now open.

[Mike Halloran:]

Hi. Good morning, guys.

[Marc Michael:]

Good morning, Mike.

[Jeremy Smeltser:]

Good morning, Mike.

[Mike Halloran:]

So kind of following up on some of those questions, on the order side, obviously part of the order pressure in this quarter was just the comparison with the strong midstream business you had last year. It sounds like sequential stability though. Could you help try to give some indication of where you thinking orders end up for the year kind of from a growth perspective? And what I’m trying to get at is what kind of impact this selectivity is going to have on a full year basis? And then maybe give a little bit more granularity on some of the things you’re doing on the selectivity side? Are you walking away from projects? Are there certain types of engineering products you’re just not going after anymore and things like that?

[Jeremy Smeltser:]

Maybe I’ll let Marc start on the selectively front and then I’ll come to the numbers after.

[Marc Michael:]

Yes, sure. The important thing that we’re doing again is emphasizing these highest value product lines that have a really attractive margin profile. And sequentially including those components, the products as well as the aftermarkets, sequentially we were up kind of mid-single digits. So we’ve got good traction there and we expect that to continue to be the case because that’s where our emphasis is. On the larger projects and again you’re accurate, Mike, in that on a year-over-year basis and sequentially the biggest change was in food and beverage systems as well as in our midstream valves and even in Q1 last year we had some midstream pump business that also on a year-over-year basis is lower, but again not unanticipated for power and energy. So the selectivity piece on food and beverage, the discipline around choosing the right projects that fit our technology capabilities that have the components that come out of our factories that generate the right aftermarket profiles for us, that will continue to be the discipline that have a margin profile for those projects too that we’re comfortable with. As I look at the front log, the front log is remaining healthy and robust from a quarter-to-quarter perspective, is becoming a bit more weighted towards our liquid projects which is what we would anticipate given the focus that we’re having where that’s where the component and aftermarket annuities are generated. So we’ll continue that and Dwight and his team are being very focused on that in the F&B systems area. And I would say the same thing for José in some specific areas around our larger pump business. Again, we’re going to look at margin profiles, technology that fits our profile, that’s our capability, that have terms and conditions that we’re comfortable with. And in the large pump market, those will be the type projects that we pursue in both oil as well as in the nuclear space. And then our valve business, those projects again continue to be out there and sequentially as we look over the past four quarters has been very steady. So we’ve got a good process in place around our key products that go into these larger applications. And if you think about how we had looked at the year coming into it, we were looking at more of a normalized run rate of how our orders would develop. And that wasn’t really counting on a lot of large projects. So as you kind of cascade through the year, if we can continue to see progress in our key component areas that we’re focused on, it should shape up pretty well for us.

[Jeremy Smeltser:]

Yes, so if you point your attention back to Slide 6 on the consolidated orders, so last year 2017 did just over 2.1 billion with a $100 million called out of large orders, greater than $15 million for single orders. And then in addition to that, as you’ll recall in Q1 last year, we had around $30 million to $35 million of project orders in pipeline valve in North America that none of which were individually greater than 15 million, so we didn’t call them out. But we did expect and did experience moderation from that level as the year progressed. And so you’re looking at a little under 2 billion in what I’ll call non-project-related orders last year and we started this year with about 510 million here in Q1 of run rate orders. So to Marc’s point, we’ll continue that level with a little bit of growth sequentially. And then based on the front log, we would expect to have some level of large project orders in the year to the tune of I would say probably relatively consistent with last year based on what we see today, perhaps a bit more. We would expect some order growth year-over-year if those projects come in.

[Mike Halloran:]

That makes sense. And then specifically on the power and energy side, certainly this question is going to relate to some of the answers that you just gave. Midstream, you talked about the stability there. What about the other pieces just from an end market perspective? The nuclear aftermarket continues to move forward. Any signs of life from some of the more stress markets over the last few quarters in that power and energy side? And then obviously you’re going to be selective about going after them. Wouldn’t mind hearing how the range of opportunity looks like from a pipeline perspective?

[Marc Michael:]

Yes, the front log is improving across some of these product lines. It’s yet to be seen how well it flows through. If we look at our dehydration business where we have some aspects of that that flows into the engineered space that hits infiltration and dehydration products, we have seen improvement there. Again, the front log is improving. We have to see how it develops in terms of order translation. We’re still most optimistic though about the midstream staying steady. Again, dehydration we’ve seen improvement. And upstream, offshore is still difficult at this point for us. Nuclear, we don’t expect necessarily new projects. And as you mentioned the aftermarket, we anticipate it will stay pretty steady but we don’t expect new projects this year in terms of greenfield opportunities. And then overall I would say aftermarket has remained pretty steady and we would hope that over time it does start to pick up. There was a bit of sequential improvement coming out of Q4 into Q1, so that was nice to see kind of mid-single digit sequential improvement. So I guess in summary I would define it as from a quarter-to-quarter perspective not a lot of change but it definitely didn’t get any worse.

[Mike Halloran:]

Makes sense. I appreciate it, guys. Thank you.

[Marc Michael:]

Thanks, Mike.

[Operator:]

Thank you. Our next question comes from Robert Barry with Susquehanna. Your line is now open.

[Robert Barry:]

Hi, guys. Good morning.

[Marc Michael:]

Good morning, Robert.

[Jeremy Smeltser:]

Good morning, Robert.

[Robert Barry:]

Nice to see the restructuring reading out in the margins. But my question was on revenue and maybe it kind of dovetails with the order questions and just talk about why the organic revenue outlook is coming down a little? I’d be curious on your take but it feels like the main end markets are slowly getting better and the backlog is high. Frankly, I might have expected it to move in the other direction this organic revenue target.

[Jeremy Smeltser:]

Yes, what I’d say is we really don’t expect a different level of volume. I would say that as we started the year, we were lumping in, in the organic revenue calculation the impact of the new revenue recognition standard. And as we finalized that here in the first quarter of implementation, we’ve actually separated that 1% out of the organic revenue. And so again, volume wise guidance-to-guidance we’re actually staying pretty flat. As the year progresses, do recall that we had a very large Q4 2017 revenue quarter at $530 million. So that is just really going to lead to tougher comps as the year goes on as well. So the organic growth from a percentage perspective is front half loaded for us.

[Robert Barry:]

Got it. I mean big picture versus a quarter ago, would you say you were more or less or equally kind of optimistic about the short cycle outlook just broadly?

[Jeremy Smeltser:]

Yes, I would say somewhat more optimistic frankly. I think as the quarter progressed in the high value product lines and aftermarket, as Marc called out quite a bit earlier, we saw sequential improvement and we see really – we see good sentiment coming from customers in the market.

[Marc Michael:]

Yes, I would agree with that completely. And F&B components continues to be good for us kind of low-double digits. Aftermarket sequentially again in F&B was up high single digits across our industrial product lines which again is where a lot of high value product lines reside, we were up kind of mid-single digits. So overall, good progress where we’re placing the emphasis and that’s a tribute to what our teams are doing in the market also in terms of capturing what we believe is some additional share.

[Robert Barry:]

Got it. Maybe just also a follow up on the discussion earlier about the second half waiting, in particular around the industrial business and getting to that margin target. It seems like a pretty big gap here to get there given where we started, especially I think you called out a lot of the second half ramp on the top line is actually in food and beverage. So just maybe a little bit more color on getting to that margin target in industrial.

[Jeremy Smeltser:]

Yes, I think in the first quarter here we did 11.5% margins and that’s with the $3 million headwind from the mixer repair charge. And so we’re getting into the low teens. And as we’ve seen in the past with the right mix and as revenue improves, we can move pretty quickly into the mid teens and that’s what we expect to happen on a quarter basis, particularly in the second half of the year. And so a lot of that comes from mix and the rest does come from improved absorption as the volume increases sequentially.

[Robert Barry:]

Got it. Anything on the cadence of restructuring. I think you expected an incremental 20 this year. Is that more second half waited also or is that even?

[Jeremy Smeltser:]

So I’d say that is relatively evenly waited through the year, perhaps a little bit more heavily weighted to the front half of the year. And then on the incremental restructuring in 2018, the expense I think was just over 2.5 in Q1. We’re expecting 2 million in Q2. And so there will be obviously savings from that in the second half of the year that’s not in the first half of the year. So it depends on whether or not it’s the restructuring from last year or this year if it’s two different answers.

[Robert Barry:]

I see. Okay. All right. Thank you.

[Marc Michael:]

Thanks, Robert.

[Jeremy Smeltser:]

Thanks, Robert.

[Operator:]

Thank you. Our next question comes from Walter Liptak with Seaport Global. Your line is now open.

[Walter Liptak:]

Thanks. Good morning, guys.

[Marc Michael:]

Good morning.

[Walter Liptak:]

I want to ask about the long cycle jobs and I wondered if as you’re going through the process and focusing on more aftermarket and high value product, are you still bidding on long cycle projects but just not – but the market’s too competitive or just something where you are just not even spending time with customers to bid on longer cycle?

[Marc Michael:]

No. Walter, we’re still bidding on longer cycle projects. Nothing’s changed in our approach that we’ve really been doing for the past – through the second half of last year coming into this year. In food and beverage systems, the front log remains active. Our mix of projects we’re pursuing is better. It’s more towards the liquid side. We’re disciplined in our approach to ensure that we’re looking at projects that fit out technology as well as has the right level of content that comes out of factories that creates the aftermarket annuity and typically that is more on the liquid part of our business. So yes, we’re still very active in food and beverage. And then the same goes for the P&E segment where we see large projects, again, just being very disciplined though. We don’t want to go after low margin projects in the large pump space, for example. We don’t want to put ourselves in a position where we’re signing up for difficult terms and conditions. So again, being selective for projects that match our technology and that we are comfortable with and the terms we’re agreeing to. And that’s pretty broad based across that segment. And then there’s a bid in the industrial space too where it’s a similar scenario that we are being selective again, just making sure the technology fits our capabilities and it’s a good fit for us and the customer. I would say again the front log if you look in again food and beverage is remaining consistent, better mix developing. In industrial and P&E, it is an improving font log that we’ve seen over the past several months and we’ll just have to see how that translates into orders as we move through the next 90 days or so.

[Walter Liptak:]

Okay, good. Yes, it makes sense. That’s a good strategy. On the shorter cycle product aftermarket or the value product, how is pricing this quarter? And with the raw material inflation, have you done price increases here in the second quarter?

[Marc Michael:]

Yes, our team’s got a good process in place on cost price, as I mentioned Barry McGinley and his team that works for Dave Kowalski and will be working for Ty Jeffers. Barry’s team and supply chain management has a very good assessment of our cost position across all our product lines and we bump inflation trends up against those product lines and then tie that back into what our product managers need to do with pricing. We have increased pricing this year. And as we move through the year, we do this on a monthly basis. We look at any changes in the cost equation and assess what we want to consider in the pricing equation. And as we move through the year, each month we’ll be looking at that and making assessments and adjustments on the price accordingly. But right now we’re in good balance and we expect to be modestly price positive as we exit the year.

[Walter Liptak:]

Okay, sounds great. And just a couple more. On the food and beverage, I think you mentioned in China that the market’s improving. I wonder if you could elaborate on that a little bit.

[Marc Michael:]

Yes, we’ve just seen a steady trend over really several quarters now of improvement both on a volume perspective of imports into China from the global markets and as well as on a price basis into China with their purchasing on a price basis. So it’s been steady improvement over several quarters now which is a good sign. Again, China is buying different commodity products from the global market which can support the underlying pricing.

[Walter Liptak:]

Okay. And just a last one. Was there any margin that you picked up with ASC 606 or is that only top line?

[Jeremy Smeltser:]

Yes, there’s margin that comes along with that revenue that’s relatively consistent with our segment income margin levels.

[Walter Liptak:]

Okay. Thank you.

[Marc Michael:]

Thanks, Walter.

[Jeremy Smeltser:]

Thank you.

[Operator:]

Thank you. Our next question comes from Julian Mitchell with Barclays. Your line is now open.

[Julian Mitchell:]

Hi. Good morning.

[Marc Michael:]

Good morning, Julian.

[Jeremy Smeltser:]

Good morning, Julian.

[Julian Mitchell:]

Good morning. Good morning. Just wanted to check on the guidance of the industrial segment, because I guess I heard what you said about the accounting change and maybe that accounts for the organic growth reduction firm wide and the fact that Q1 is your high watermark for organic growth for the year. But on that business in particular I guess the rebound has been sort of pretty underwhelming considering you had had in industrial three down years in a row up to last year. So I just wondered if you’re seeing some market share loss in that business. The project selectivity actions I would have thought would be more relevant to things like food and beverage and maybe power in particular. So maybe just your own thoughts on industrial and why maybe you’re not participating in the short cycle bounce as much as a lot of other companies in industrial seem to be?

[Jeremy Smeltser:]

Well, I think what I would say is we haven’t seen a lot of capital projects coming back yet in our order book though our front log across really all the product lines has increased. And so we do have an expectation that those will come back into the market this year and which we talked about at our Investor Day. Marc called out earlier. We did see year-over-year order growth in mixers, dehydration and HEX. I would say an area where we haven’t seen a pick up that we expected was probably in the hydraulic tools area which seems relatively consistent with what we’re seeing from competitors as well, but it is an area that isn’t growing at the level we might have expected with this level of PMI. But overall, we don’t see any areas where we feel like we’re losing share. I think we do expect revenue to improve as the year progresses from the quarterly rate that we experienced in Q1 at 180 million which is part of why we do expect better margins and absorption of the second half of the year.

[Marc Michael:]

And the thing that I would add to that and it just dovetails with what Jeremy indicated. Sequentially, our orders were up mid-single digits. And as we’ve increased our emphasis around these key product lines in that segment, we anticipate that that will continue to be a trend of improvement. That’s the goal for the team and that’s what they’re focused on. The one area that as we go through this year that we’re working on to improve as we indicated in the March meeting, the Investor Day meeting, our heat exchanger business in some cases we haven’t had the margin profiles in certain parts of the market that we would have liked. And so again, we are being more selective. So heat exchangers as we move through the year may be a bit of a drag on the order profile but again we’re focusing on being more selective in better projects and better margins. So overall, we’re comfortable and confident with where we’re headed with the industrial segment and we have the right strategy in place to grow these key product lines and invest in them organically as we move through the year.

[Julian Mitchell:]

Understood. Thank you. And then just following up on the second quarter guidance specifically, so you got the sales up headline basis around 2% year-on-year. I’m not sure if you’d mentioned, apologies if you had, but just what’s the organic sales assumption within that? Do we assume that food and beverage is down again and may be one of the other two segments as well?

[Jeremy Smeltser:]

Yes, we haven’t guided specific on organic growth for Q2 but it is fair to assume based on where the timing of backlog rests right now that we would experience an organic decline in food and beverage in Q2, probably not to the extent we saw in Q1 but I would expect somewhat of a shrink turning to growth in the second half of the year.

[Julian Mitchell:]

And the other two segments should grow organically in Q2.

[Jeremy Smeltser:]

Flat to growth. P&E has a much tougher comp. Q1 2017 was a low watermark for power and energy, so right now based on the backlog I would say P&E will be plus or minus and we do expect low-to-mid single digit growth in industrial.

[Julian Mitchell:]

Thank you very much.

[Marc Michael:]

Thanks, Julian.

[Jeremy Smeltser:]

Thanks, Julian.

[Operator:]

Thank you. Our next question comes from Deane Dray with RBC Capital Markets. Your line is now open.

[Andrew Krill:]

Thanks. Good morning. This is Andrew Krill on for Deane.

[Marc Michael:]

Good morning, Andrew.

[Jeremy Smeltser:]

Good morning, Andrew.

[Andrew Krill:]

Good morning. On kind of similar way I think the power and energy organic this quarter up 27% was a lot better than we had expected and you guys called out some OE shipments. Just wondering if you can give any more color on it if some of that was more one-time in nature and then just to help us for the rest of the year? And you just touched on with Q2, but just kind of cadence through the remainder of 2018 for this segment?

[Jeremy Smeltser:]

Yes, I think Andrew the best way to think about that is to go back to your 2017 model and look quarter-by-quarter. And as we called out last year a number of times, Q1 was an extremely low level of revenue for us based on a very low backlog entering 2017. And so we only did 105 million of revenue last year in Q1 in power and energy and had a slight loss. But as the year progressed, revenues really hovered consistently between $140 million and $150 million each quarter and we did $145 million here in Q1. And so plus or minus that level is kind of what the current backlog and order run rate indicates we would expect as the year progresses as well. So somewhere in that $140 million to $150 million. So there’s nothing one-time or lumpy in the Q1 revenues, it’s just more indicative of the current run rate of the business as compared to the very low watermark of Q1 2017.

[Andrew Krill:]

Okay, got it. And then just a quick follow up on, are there any – a lot of the other companies this earning season have called out free cash sort of some incentive comps. I know you guys have spoken to that before. Just any other kind of dynamics you’d like to highlight that could be a little bit different than just the headline results would pretend? Thanks.

[Jeremy Smeltser:]

Both of those are relatively consistent year-over-year.

[Andrew Krill:]

Okay, great. Thank you.

[Jeremy Smeltser:]

Thank you.

[Marc Michael:]

Thank you.

[Ryan Taylor:]

Thanks, everybody. This is Ryan again. I appreciate everybody joining the call. This concludes our time on the Q1 2018 earnings. Per the usual, Stuart and I will be around throughout the rest of the day to answer any follow-up questions that you might have. Thanks again for joining us and we’ll talk to you next time.

[Operator:]

Ladies and gentlemen, that does conclude today’s conference. Thank you very much for your participation. You may all disconnect. Have a wonderful day.