Global X U.S. Cash Flow Kings 100 ETF
Q1 2019 Earnings Call Transcript

Published: 5 May 2019

[Operator:]

Good morning, ladies and gentlemen and welcome to the SPX FLOW Q1 2019 Earnings and Strategy Announcement. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Ryan Taylor.

[Ryan Taylor:]

Thank you, Bella and good morning everyone. Thank you for joining us. With me here today are Marc Michael, President and CEO and Jaime Easley, our Chief Financial Officer. Our Q1 2019 earnings release was issued this morning and can be found on our website, spxflow.com. Additionally, in a separate news release, we announced our decision to narrow our strategy towards building premier process solutions enterprise. And in conjunction with that decision, we initiated the sale of our power and energy business. This call is also being webcast. The webcast presentation includes details of our Q1 results and the strategy information. That presentation is located in the Investors section of our website. As a reminder, a replay of this webcast will be available on our site later today. Note that elements of the presentation contain forward-looking statements that are based on our current view of our businesses and their markets. Those elements are subject to change and we ask that you view them in that light. Principal risk factors that may impact our performance are identified in our most recent SEC filings. In the appendix of today’s presentation, we have provided reconciliations for all non-GAAP and adjusted measures presented. On the strategic news, we intend to provide further detail on the call this morning. With that said, with respect to the divestiture of power and energy, we intend to provide comments and updates only when we determine that further disclosure is appropriate or required by law. Specifically, we will not discuss confidential elements of the sale process. This morning, we also reaffirmed our full year guidance. Note that our guidance is on a combined basis, including the power and energy business. With that, I will turn the call over to Marc.

[Marc Michael:]

Thanks, Ryan. Good morning, everyone and thanks for joining us on this very exciting and significant day for our team at SPX FLOW. Over the past few years, we have made great progress on our journey to transform SPX FLOW into a high-performing operating enterprise and I am proud of our teams across the company for their efforts on this front. As we discussed on our Q4 earnings call, the journey to high performance continues in 2019 as our global team is aligned on the key initiatives we are emphasizing to drive a higher quality of revenue, continuous operating improvement and a world class customer experience. Our Q1 results reflect continued progress on these initiatives. We delivered solid growth over the prior year, with adjusted EBITDA up 22%, organic revenue growth of 5% and adjusted operating margin up 170 points. Our Q1 results exceeded our guidance expectations on the back of strong operational execution. With a strong start to the year, we have reaffirmed our full year guidance. I am proud of our teams across the world for their contributions to our first quarter results. In addition to the solid operating performance in Q1, we have been actively working to accelerate our strategic initiatives. On that front today we announced the next step on our journey to high performance. After a thorough strategic review of our product lines, core competencies and customer segments, we determined that the value proposition to customers in process applications differs from those in flow control applications. To best serve customers in both these areas, we have chosen to narrow our strategic focus on process solutions and to pursue a divestiture of power and energy. We are very excited about this strategy and believe these actions will unlock significant value for shareholders and position our teams in both businesses for future success. We will discuss this strategy in detail later on the call. Before we dive into that discussion, Jaime and I will provide a high-level recap of our Q1 performance. In the first quarter, we delivered 5% organic revenue growth, led by our food and beverage and industrial segments. On an adjusted basis, operating income was $42 million, exceeding our guidance range, with operating margins up 170 points year-over-year. Adjusted EBITDA grew 22% to $54 million. Adjusted EBITDA margins improved 190 points to 11%, marking our seventh consecutive quarter of year-over-year margin expansion and we generated $15 million of free cash flow, a good start to the year as compared to our historical seasonality. On the order front, we experienced a slow start to the year, with organic orders down 5% versus Q1 2018. The year-over-year decline was concentrated in long-cycle, customer CapEx-oriented orders in power and energy and to a lesser extent, food and beverage. On a positive note, industrial orders grew low single-digits over the prior year, led by our mixer and hydraulic tools product lines. Notably, we saw a pickup in orders across all three segments during March giving us positive momentum into Q2. Looking more closely at organic orders through the lens of our product line investment roles, in our aggressive growth products, organic orders declined modestly versus the prior year due primarily to lower demand for Industrial pumps used in fracking and general industrial applications. This decline was largely offset by solid order growth in mixers and hydraulic tools. In the opportunistic and enhanced categories as compared to the prior year, we booked a lower level of midstream pumps and valve orders in power and energy and a lower level of system orders and long-term service agreements in food and beverage. Quarterly comparisons in these product lines tend to be lumpy. We are not overly concerned with the Q1 order levels given the healthy frontlog activity our teams are seeing from customers. Specifically, strong quoting activity for pipeline valves in North America and for liquid process systems in Asia-Pacific. We anticipate orders in these areas to pick up as the year progresses. It is important to view our order and backlog development in context of our strategy to drive a higher quality of revenue, expand gross margins and reduce the risk profile inherent in large projects. Overall, we continue to execute towards these goals through disciplined pricing initiatives and selectivity on large projects. Our pricing initiatives have been well executed year-to-date and I am pleased with the improvement in our processes across the board on this front. Backlog margins continue to improve, a positive trend that we expect to contribute to the favorable mix shift anticipated in our revenue and margin guidance for the second half. Sequentially, organic orders in our aggressive growth category increased 3% with good momentum across the majority of the product lines. On a trailing 12-month basis, our aggressive growth product orders are up 4% year-over-year, a good indicator of the long-term organic growth profile in these products. To support future growth, Ty Jeffers is aligning talent, investments and operating initiatives at the key factories that deliver these products. Over the last 9 months, we have added talent to our global manufacturing team with an emphasis on strong site leadership and continuous improvement capability. We have a strong team in the field, and we are counting on to help us increase our velocity and throughput to win operationally going forward. At this time, I will turn the call over to Jaime.

[Jaime Easley:]

Thanks, Marc and good morning everyone. I will begin with earnings per share. On an adjusted basis, Q1 EPS was $0.44 per share, up 22% from the prior year and exceeded our guidance range. As compared to our guidance, segment income was $0.12 benefit, concentrated in our industrial and food and beverage segments. Overall, our teams across all three segments delivered solid operating execution in the period. Taxes were a $0.04 headwind as the geographical mix of earnings drove an effective tax rate of $0.34 versus our guidance assumption of 29%. On a GAAP basis, we reported earnings per share of $0.46. This included the following items

[Marc Michael:]

Thanks, Jaime. Overall, it was a solid quarter that in many ways reflects the improvement in our operational performance across the business. Now we will dive into the details of our strategic transformation. Starting with an overview of the actions we are taking. First, we are executing a comprehensive plan to narrow our strategic focus on building a premier process solutions enterprise on the foundation of our current food and beverage, industrial and Bran+ Luebbe product lines. In conjunction with this decision and with strong support from our board of directors, we are pursuing a sale of our power and energy business. That process is underway. We made this decision after conducting a thorough review of our product portfolio, and we believe it is a logical next step for us. We’re confident in this strategic transformation is the best way to serve customers and maximize future potential, and we are ready to take our business to the next level to deliver a world-class customer experience, elevate our operational excellence, strengthen our balance sheet and add significant capacity for future value creation. Digging a bit deeper on the strategic rationale, today, we play in two main categories

[Operator:]

[Operator Instructions] Your first question comes from the line of Mike Halloran with Baird. Your line is open.

[Michael Halloran:]

Hi good morning everyone and congratulations on the decision.

[Marc Michael:]

Yes. Thanks, Mike. Good morning.

[Michael Halloran:]

So, on the strategic decision, a couple of questions. First, why now, what about the timing made this an ideal move from your perspective?

[Marc Michael:]

Yes. So, we Mike, we’ve been headed down a path to focus our strategy since the beginning of last year. And if you reflect back to March in 2018, when we had our Investor and Analyst Day, we set the strategy and pathway forward to focus on product lines, which really created a higher quality of revenue stream. And as we refined our view of that during the course of the past 12 months, we came to the conclusion that it was the right move at this time to really focus our efforts around this process solutions part of our business. The customer intimacy we have and the capabilities that our organization has to support customers in this space, our manufacturing capabilities, it all fit nicely in where we want to head going forward. Now that said, too, the Power and Energy business, we’ve done a lot of work on the Power and Energy business over the last 2 years to get it healthy. Jose and his team have done a fantastic job, along with our operations, to get Power and Energy into a healthy position after quite a significant downturn in the markets. So, everything really converged at this point on both fronts to make it the ideal time.

[Michael Halloran:]

No. That makes sense. And when you think about the RemainCo company, one, what’s the growth profile that you’re envisioning for the company once all of the moving pieces are kind of aligned? And what’s the cadence for how long it will take you to get towards that EBITDA margin mid-teen type goal?

[Marc Michael:]

Yes. So, the growth profile that we would expect would be something better than GDP, in the 4% to 6% range. If we look back over the course of the last couple of years and we carve out this part of the business, ex systems, again which we’ve been systematically reducing our exposure there to dry dairy, but if we carve out the rest of the business, it’s been growing in that kind of range, in the 4% to 5% range. So, we expect that to be something that’s achievable, given markets staying in a relatively consistent manner. So that’s how we’re thinking about the future. Again, that’s why we like this part of the business, that it has a growth profile greater than GDP. And a lot of the product lines, again, are reflective of how we’ve restructuring today and that aggressively invest to grow as well as in the opportunistically invest to grow. And the timeline for achieving the mid-teens EBITDA margin, we expect to be taking the steps that we need to over the next 12 months, so that we’re in a position as we exit 2020 that we should be achieving that type of margin profile.

[Michael Halloran:]

Makes sense. And then last one from my side, could you just talk a little bit about seasonality as you work through the year here? 2Q is probably a little below what I would have expected from a seasonal perspective. Obviously, prepared remarks gave some nice color on why the margins ramp through the back half of the year, but maybe just some help with how you’re thinking about that cadence through the year with a little more color and depth, a little emphasis on the revenue side and then any more help on the cost side would be appreciated.

[Jaime Easley:]

Yes, Mike. So, you’re spot on. Kind of Q2 is going to be relatively flat with Q1, up a bit in revenue and the margin profile is pretty similar. But what we’re looking at in the second half is the benefits of improved order intake in Q2, we made reference to that in the prepared remarks, but expecting that some of the business that didn’t book in Q1 is going to come back there. We are seeing favorable pricing in the backlog and the actions that we’ve taken year-to-date so we expect that that’s going to have benefits coming through in the margins in the second half. The team is also working on a number of actions in the factories, some operational improvements, some naturally that you would expect to come through on higher volumes. But then others that we believe have a very good probability of taking hold here in the second half. And then I will make mention of the restructuring again. So we’ve made announcements here in Q1 to action the restructuring plans that we believe that, as those actions begin to take hold, we’ll see the effects of those in H2. And then I think we’ve previously talked a bit about the carryover that will apply to the following year. But really, it’s the product of price, factory performance, restructuring and then the last part would be mix. So as the lower dry systems revenue works itself off in Q1 and the intake that we’ve seen here in Q1 and we expect to continue to see in Q2, we think the quality of revenue’s going to be better in the second half.

[Michael Halloran:]

Appreciate the color. Thanks.

[Jaime Easley:]

Thanks Mike.

[Operator:]

Your next question comes from the line of Nathan Jones from Stifel. Your line is open.

[Nathan Jones:]

Good morning everyone.

[Jaime Easley:]

Good morning Nathan.

[Marc Michael:]

Good morning Nathan.

[Nathan Jones:]

Congratulations on this decision. I think this is a great move to unlock value for shareholders here. A couple of questions along those lines, you have talked about multiple, kind of, avenues to redeploy that capital from potential repos, organic investments, et cetera. Is offsetting the earnings dilution from this deal through share repo something that you would look to do to, kind of, neutralize that? Or is that not part of the thinking here?

[Jaime Easley:]

Yes, Nathan. So, it’s still early in the process for us and we need to see a few things materialize between now and the time of close, everything from narrowing in on the likely proceeds to various valuations, et cetera. So, what I’d reiterate is that we intend to de-lever down to the bottom end of the range we discussed this morning. So that would be 1.5x to 2.5x. That’d be one piece of it. The other would be to begin to look more aggressively at our organic investment opportunities. So, Dwight and team are really looking at NPD funnels, Ty and his team looking at opportunities to make investments in the plant to increase capacity, increase operational efficiencies. And then there will be, in our current plans, a shareholder return in that. So again, a few different avenues that we haven’t landed on yet, anything from share repurchases, special dividends, but those are on the table, and we’ll continue to evaluate those as we get closer to the time.

[Nathan Jones:]

Okay. And Marc, when I listen to you talk about what your vision of this company is in the future from this process solutions focus, there are still some businesses and product lines in the portfolio that I think probably don’t fit into that focus. Is there potential here for some further pruning of the portfolio to maybe to even more narrowly focus you on that kind of process solutions area that you’re looking at? I know we don’t want to probably talk about the specific businesses that those are. But is that something that’s on an ongoing discussion with you guys, with Ryan, that we could see some more of here in the future?

[Marc Michael:]

Yes. Good question, Nathan. I mean, this is our work over the last 2 years getting to this point is a culmination of all the things that we’ve discussed on the call and historically. And we’re in a great position. We’re really resetting the company to move forward. And as a part of that reset, all the things we’ve mentioned and the margin profiles and our capacity to deploy capital, we’re going to be in a really healthy position. And as part of that strategy in capital deployment, we’ll look for high ROIC inorganic opportunities. So, we want to be active in M&A but be very disciplined and good stewards of investor capital. And as a part of that process, we’ll look at all the options that are out there for us, including acquisitions and possibly additional divestitures. But we like where we are, is what we’ve defined right now, and we want to continue to build out this process solutions platform. I will mention we have got some great brands and great products that maybe don’t quite fit that definition. In many cases, they are number two, number three in the global market space. And so, they are very valuable to us, and they’re a good part of what we’re doing right now.

[Nathan Jones:]

And just maybe one more for Jaime and I guess for Marc as well, SPX prior to this split did pay a dividend, and I think you guys have always said that in the long run, you did intend to pay a dividend. You’re certainly getting the balance sheet into a much better position now with businesses that are going to be much more predictable. Should we be expecting, at some point maybe in the next 12 months or so, that a dividend does get initiated here?

[Jaime Easley:]

Nathan, good question. I’ll tell you that it’s certainly on the table. We’re talking about it. I think what I’d prefer to see unfold would be, let the process play out here, look at what opportunities we see by way of organic investments within the business and where the inorganic markets are at that time. There is a strong desire on our side to grow but grow in a very disciplined way in deploying capital that has the right returns. And so I think we need to really see the next 9 to 12 months play out and make sure we fully understand the position and what’s available in the M&A markets and then, kind of, make that decision at that time. But we are actively thinking about it.

[Marc Michael:]

Yes. And the one thing I would add to that, Nathan, is that we’re going to be generating really great cash flows. So, valuations in the market for acquisitions right now are still at pretty high multiples. And so again, we’re going to be very disciplined in that assessment and what Ryan and his team are taking a look at with Vusa Mlingo, who joined us about a year ago. And in the absence of opportunities in the markets, we do have organic investment programs that are accelerating. But even with that, we’re going to have a lot of available cash left if we don’t have an inorganic opportunity. So that leaves us with two options for returning to shareholders, which would be looking at repurchases and dividends and so that’s the great part about this next step of the journey and where we are and why this all made sense to us now. This is really kind of the exclamation point on the reset for us and all the work that we’ve been doing to put the company in a great position going forward to have tremendous flexibility.

[Nathan Jones:]

Great. Thanks for the color and congrats again. I think it’s a great decision.

[Marc Michael:]

Appreciate it, Nathan. Thank you.

[Operator:]

Your next question comes from the line of Robert Barry with Buckingham Research. Your line is open.

[Robert Barry:]

Hi, guys. Good morning.

[Marc Michael:]

Good morning Robert.

[Jaime Easley:]

Good morning Robert.

[Robert Barry:]

Echo the congratulations. So does the second half sales outlook similar to what it was before, essentially or maybe even a little better?

[Jaime Easley:]

In general terms, I think it’s really first half to second would be unchanged to what we previously guided.

[Robert Barry:]

Got it. But since the orders decelerated, I guess, I’m curious what kind of acceleration you’ve either seen already or are planning to have occur in order to kind of keep the back half the same as it was before on the revenue line?

[Jaime Easley:]

Yes. It’s a good question and it, kind of, goes back to the comments that we made around being confident that our front logs are healthy, the markets in which we participate are healthy, and we would expect those lumpy orders that were not booked in Q1 to be booked in Q2. So, I would tell you the watch-and-see quarter for us is going to be here in Q2 and see how order intake materializes as it relates to the second half volume assumptions.

[Marc Michael:]

Yes. And the one thing I would add to that, Robert, if orders were not to progress over the next this quarter and early part of Q3 the way we expect, I mean, there is the potential we could be towards the lower end of the range we’ve defined. But we’re again, counting on and expecting orders to start to pick up. And again, as we mentioned in the prepared remarks, a big part of the miss really came from more of the project-related businesses or the shortfall from what we expected, the lower level in the project-based businesses in Food and Beverage as well as in our Power and Energy and some of our pump and valve business. But having said that, the front logs are healthy and indications are from the teams is that we expect that to start to recover. I’d also remind everyone that our aggressively invest to grow product lines, which carry the highest margins, were about 50% of our order intake in the first quarter. And sequentially, those orders were up, kind of in the low single-digit range. So, there is still some momentum out there, especially in the Industrial markets. And if we can get some pickup and some of these projects to break loose here in Q2 that we expect to, we’ll be positioning ourselves to be successful in the second half of the year with the revenue ramp.

[Robert Barry:]

Got it. I mean is it just that there was some macro uncertainty and that’s kind of alleviated now and so the orders will start flowing again? I mean is that what the customers are saying?

[Marc Michael:]

Yes. I think some of these projects can be a bit lumpy, and it’s kind of a bit difficult to look at them quarter-to-quarter sometimes. We like to we say that there’s we look at them kind of a 6-month block of time and they are coming out of Q4 last year, things were a little slower and customers looking at when they were going to release capital. And that did continue a bit here into Q1, but indications are that they will move forward. And again, that’s been primarily in P&E for some of the pumps and valves part of the business, but projects are there in some of the systems business that we were looking at and anticipating across Asia-Pacific. But again, as I mentioned, I’ll just reiterate, what I’m really pleased about is the industrial product lines are holding up well and all the product lines that are kind of really in that aggressively grow category for the most part are still on a – we’re on a growth profile sequentially.

[Robert Barry:]

Got it. On the EBIT margin target that you had, the 12% for 2020, so what does that look like pro forma for this planned sale? You talked about the EBITDA margin, but kind of feels like that 12% is lower, but just asked to let you answer, what is it pro forma?

[Jaime Easley:]

Yes. So, I think the way to think about it is that the new remaining business is going to be mid-teens EBITDA margins. And as we kind of said, the build to that is going to be a few things that will probably take the next 12 months to 18 months to get to – there’s a few of the carryover restructuring items, which will flow through. And then we also have cost savings that we’ve talked about here that would be a product of streamlining some of our functions, reorienting the business to growth and making sure that we’re balanced for the size company that we are. So, the – at this point, being that far off in the activities that we need to execute between now and then, we’re kind of prepared to talk to the mid-teens EBITDA margins out at the end of 2020, and we’ll kind of provide additional information as we move forward.

[Robert Barry:]

Got it. I mean, I think you have about 3 –

[Jaime Easley:]

Sorry?

[Robert Barry:]

I was going to say I think you have about 3 points of D&A, right? So, if EBITDA margin is 15, it implies the EBIT is 12. But now it sounds like that’s happening in 2021, even though you’re removing a lower margin business, it just feels like the Remainco is tracking weaker as well.

[Jaime Easley:]

Yes. What I would suggest, Robert, is to let us continue to work through the future state models and to – I think Stewart and Ryan can work and help tie off all the various looks at the P&L as it relates to the mid-teens EBITDA margins the end of 2020.

[Robert Barry:]

Fair enough. Great, thanks guys.

[Marc Michael:]

Thanks, Robert.

[Operator:]

Your next question comes from the line of Walter Liptak with Seaport Global. Your line is open.

[Walter Liptak:]

Hi, thanks. Good morning, everyone. I’ll say congratulations to you on the big transformation that’s ahead of you.

[Marc Michael:]

Hi, Walter, I appreciate that.

[Walter Liptak:]

I wanted to ask about just – and you may have talked about this so I apologize, but the divestitures, are you thinking of this as a series of transactions or bundles of businesses or the whole segment going in one transaction?

[Marc Michael:]

Walter, it’s the whole segment except for our Bran+Luebbe metering pump brand, which currently sits in Power and Energy, because we believe that the Bran+Luebbe product line fits well into the process solution space with the metering pumps that we do that go into different types of industrial and personal care applications.

[Walter Liptak:]

Okay, okay. And is there a calendar for this that you can share with us or what should we expect for a timeframe?

[Marc Michael:]

Yes. We will just say that we have initiated the process. B&P is supporting the efforts and the process is underway. And as we know, these things are a little bit tough to pinpoint, but we have started the process is what I would say at this point.

[Walter Liptak:]

Okay. And from an accounting perspective, when are you allowed to do a discontinued operation in the financial statements?

[Jaime Easley:]

Yes. Walt, so there are requirements under U.S. GAAP as to when that will go into discontinued operations. A few of the most important features are that management has made a decision to pursue this sale, which was decided in the month of April. And then the assets need to be actively marketed and we expect them to close within a year. So, I think what we really need to see develop over the course of Q2 would be the expected timing of the transaction and make sure that we’re comfortable with a probable valuation from the business as it relates to the progress of the process, and at that time, we’ll put it into discontinued operations.

[Walter Liptak:]

Okay, got it. Thank you. And maybe a last one, will there be any changes to corporate expense post the divestiture?

[Jaime Easley:]

Yes, Walt, we would expect that a part of the cost savings that we’ve identified would relate to the corporate line.

[Marc Michael:]

Yes, and I would just add to that, on the cost front during the course of the last 4 months, our teams have done a lot of work, including we’ve used some external advisors to assess our cost structure across what our new process solutions business will look like. And we’ve gotten a lot of good support and good plans going forward. So, this isn’t something we’re starting from scratch. As I mentioned, we’ve laid the foundation for this for quite some time. And we’ll be ready to start executing on some of those initiatives as we move into the second half of the year. So, the plans are identified and again, we’ll be ready to launch the process towards the 2% to 3% margin expansion so that we get there by the time we exit 2020.

[Walter Liptak:]

Okay. Sounds good. And then just a last one for me. The project lumpiness that you talked about, I wonder if you’ve been able to analyze it on like a geographic basis, U.S. versus Asia or Europe, has it has been more lumpy in some geographic region?

[Marc Michael:]

Yes, it’s a good question, Walt. So, our valve business is primarily a North American business. So, when we see lumpiness in our midstream valve business, that’s a North American business. So, we did see that a bit slower. But again, frontlogs are healthy and we’re expecting recovery here in Q2. And if we look over the past couple of years now, our M&J midstream valve business has been very consistent and we don’t anticipate that changing with the number of projects that are out there to expand pipeline valve capacity to get oil out of the Permian. So, a lot of good activity in the valve business, again, can be a bit lumpy. So that’s a North American view. Our pump business, in large pumps, ClydeUnion Pumps, also a bit slower across North America and Europe. But again, it’s project-based and we had some large orders in Europe in Q4 in ClydeUnion, so, those didn’t repeat in Q1. But again, frontlogs are healthy and a big part of our pump business for ClydeUnion is associated with the U.S. and European market. And then on Food and Beverage projects, our emphasis there has been in Asia-Pacific. So, some slower intake there sequentially as we saw pretty good order intake in Q4 for the systems business in specifically China. So, I would kind of sum that up is that in Power and Energy, it’s been kind of North America and a bit in Europe and then for Food and Beverage systems, it’s been more Asia-Pacific related.

[Walter Liptak:]

Okay, great. Okay, thank you.

[Marc Michael:]

Thank you.

[Operator:]

Your next question comes from the line of Nigel Coe with Wolfe Research. Your line is open.

[Bhupender Bohra:]

Hi, good morning, guys. This is Bhupender here for Nigel.

[Marc Michael:]

Hey, good morning.

[Jaime Easley:]

Good morning.

[Bhupender Bohra:]

Hey, so the first question, just wanted to focus on the 250 bps margin improvement in the second half versus first half. Could you just talk about like some of the big buckets which – I know volume would be – you’re expecting improvement on the top-line. Any other big buckets, which we should be thinking about which is leading to that kind of expectation here? Thanks.

[Jaime Easley:]

Yes, thanks. See looking at the move from H1 to H2, you’re spot on that we do expect revenue to be up mid-single-digits and that’s really the story of the progression of orders here through Q2. The other largest buckets are coming from price. We mentioned that we’ve had some success in the pricing actions that we’ve put in place. We continue to see the margin and backlog expand as a product of price and where we are on inflation. We also have some assumptions around factory performance in the second half a bit of that is leverage on the volume, a little bit of that also would be various initiatives that Ty and his team have in place to improve the factory performance. And then I kind of wrap with saying that the mix in backlog is much improved from H1 to H2 and some of that is the dry systems orders that are working their way off in Q1 –I’m sorry, in H1. As a reminder, those were some large systems that we booked back in 2017. And as we get into the second half of this year, those will be de minimis. And then we also have the higher margin aggressively grow product lines that we’ve seen up low single-digits here in the first half of this year. We’re going to see those coming through in revenue, which will have improved margins. And then lastly, it would be the restructuring savings from some of the actions that we announced this quarter and the accounting of that was partially split between Q4 of last year and Q1 of 2019.

[Bhupender Bohra:]

Okay. Got it. Thank you. The other question was on the corporate line. Is 1Q a good run rate actually for the rest of the year?

[Marc Michael:]

I’m sorry, could you repeat the question please?

[Bhupender Bohra:]

On the corporate, like $13 million corporate, is that a good run rate for the rest of the year?

[Marc Michael:]

In our adjusted guidance, Bhupender, we’re carving out any deal-related fees. So, in that corporate expense for Q1 of $13 million, I think it was reported in our adjusted models, it’s $12 million, and I’d say kind of between $11 million and $12 million is a good place to model corporate expense on the adjusted basis for the balance of the year.

[Bhupender Bohra:]

Okay. Got it. And lastly, this is a pretty good transaction here which you have in place to be completed over time. Any – you talked in some conversation around inorganic growth here. How should we think about your portfolio? I mean, what kind of asset that you would be looking at with a new – the Remainco company? Any thinking on like product portfolio holes you have right now in the portfolio, which you would like to kind of add on or to cover in terms of markets?

[Marc Michael:]

Yes, sure. So first and foremost, we would look at things that are close to the core in the process solution spaces that we serve and we’re focused on, so, in the sanitary and the industrial spaces. In industrial, we do a nice business in chemical processing so we think that’s a nice space to look into, and then sanitary, both in Food and Beverage and Pharmaceutical. But we’re going to and have been assessing, let’s say, micro verticals within those segments. And Ryan and his team have been working with our product managers to start to identify opportunities that would be nice close fits to our core capabilities as a starting point, where we can leverage our current core competencies in our operations and our engineering and our product management. So, those would be the first steps that we’ll be taking and looking at and assessing. Again, what I want to reemphasize is that we tend to be prudent in that process, be good stewards of shareholder capital, look for high return opportunities. And we’re pretty excited about that because again the strength of the company, the balance sheet capacity and the cash flows that we have are going to put us in a great position.

[Bhupender Bohra:]

Okay. Got it. Thanks a lot.

[Marc Michael:]

You bet.

[Operator:]

Your next question comes from the line of Julian Mitchell with Barclays. Your line is open.

[Jason Makishi:]

Hi guys, this is Jason Makishi on for Julian.

[Marc Michael:]

Hi, good morning.

[Jason Makishi:]

Good morning. Just – since it seems like everything in Q1 kind of trended more or less how you thought it would from a top-line perspective specifically looking at Q2 since it came in a little bit light of expectations. Was there anything in terms of margin expectations that you saw either in the quarter or late in the Q that caused you to revise down profit since it seems as if earnings – segment earnings, however you want to put it, just came in a little bit light?

[Jaime Easley:]

No, I wouldn’t say that there was anything that developed at the end of the quarter, which would suggest that there’s a difference in the margin profile in Q2. What – I will go back to the order development over the course of Q1, and I think we’re guided appropriately to give credit to where we ended up the quarter by way of orders. So, I think what at least on the operating profit line, you’ll see a fairly consistent quarter from Q1 to Q2. So, in the near-term in the next 90 days, we’d expect performance to be pretty flat to Q1.

[Jason Makishi:]

Great. And just as a quick follow-up, because I know I’m running out of time here. Is the guidance of earnings and margin profile being somewhat similar in Q2 to Q1 sort of broad-based across all 3 segments or are there sort of areas of strength and weaknesses to call out there?

[Jaime Easley:]

Yes. I think it’s pretty consistent, Q1 to Q2., there are some strength and pockets that have developed. Marc made reference to really strong performance that we had in our industrial segment, both order intake and then performance wise. So, I think there’s some puts and takes, but on – on the whole, I think it’s fair to assume it’s about flat.

[Jason Makishi:]

Great. Thank you very much.

[Marc Michael:]

Thank you.

[Operator:]

Your next question comes from the line of Deane Dray with RBC Capital Markets. Your line is open.

[Andrew Krill:]

Thanks. Good morning. This is Andrew Krill on for Deane. So, with the planned P&E divestiture, hydraulic technologies is going to become a bigger part of your – the Remainco business, so, and one of your competitors is also undergoing a similar simplification drive. So, can you comment on any changes in the competitive playing field there and should we expect this to be a focus area as it’s historically been a pretty good margin and good growth business? Thanks.

[Marc Michael:]

Yes. So, it’s still a good business for us. Again, as I mentioned, several of our product lines are kind of in the number 2 spot in the market and I would look at our hydraulics business as kind of position there. We’ve always competed head-to-head with the other players in the industry and I don’t really anticipate that, that would create any significant change, what we’re doing now in the competitive environment.

[Andrew Krill:]

Got it. And then just a quick follow-up, I mean, I know with your sales increase solid in the quarter it doesn’t seem like it, but was there was any pull-forward you guys saw related to tariffs or any dynamic of that?

[Jaime Easley:]

No, we’re not aware of any meaningful pull-forwards for reasons such as tariffs.

[Andrew Krill:]

Okay, great. Thank you.

[Jaime Easley:]

Thank you.

[Ryan Taylor:]

Okay, this is Ryan. I want to thank everybody for joining us on the call today. Stewart will be available throughout the day to answer any follow-up questions. You can reach out to me as well. Appreciate you joining us and look we forward to the next call. Thank you.

[Marc Michael:]

Thanks, everyone.

[Jaime Easley:]

Thank you.

[Operator:]

This concludes today’s conference. Thank you for your participation and have a wonderful day. You may all disconnect.