Global X U.S. Cash Flow Kings 100 ETF
Q2 2017 Earnings Call Transcript

Published: 5 Aug 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Second Quarter 2017 SPX FLOW Earnings Conference Call. At this time all participants are in a listed only mode. [Operator Instructions] As a reminder, this conference is being recorded. I would like to introduce your host for today’s conference, Mr. Ryan Taylor, VP of Investor Relations. Sir, please go ahead.

[Ryan Taylor:]

Thanks, Michelle, 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 Q2 2017 earnings release was issued this morning and can be found on our website, spxflow.com. This call is also being webcast with the presentation located in the Investor section of our website. I encourage you to follow along with the presentation during our prepared remarks. And later today, a replay of the webcast will be available on our website. 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 and adjusted financial measures presented. With that, I’ll turn the call over to Marc.

[Marc Michael:]

Thanks, Ryan. Good morning, everyone. Thanks for joining us on the call. I’ll start with a brief overview of our first half results, order trends and realignment program. Jeremy will provide a detailed review of Q2 and our guidance for Q3 and the year. And after my closing remarks, we’ll open up the up for questions. Beginning with highlights for the first half of the year, building off the positive momentum we generated in Q1, we saw continued order growth, strong cash generation and progress on our realignment program during Q2. Looking back at the last six months, we achieved positive results on many fronts. Orders grew 3% year-over-year, including two consecutive quarters of organic order growth to start the year. Book-to-bill was 1.1 times in the first half, leading to 19% or $147 million of backlog growth. We generated $110 million of cash, including $79 million of adjusted free cash flow and $31 million from asset sales. This enabled us to pay down over $100 million of debt. Net debt was reduced 12%, and net leverage is down to 3.8 times. As it relates to our realignment program, during the first half, we realized an incremental $28 million of cost savings, including $11 million in Q2. And we are in the final stages of executing the program, which I will discuss in more detail. Looking first at our Q2 results. As compared to our guidance, most of our results were in line. The one exception was segment income where $6 million of discrete operational items diluted our margins by 120 points and caused our segment income and EPS to come in below our guidance. Revenue was $498 million, near the high-end of our guidance. Currency was an $8 million benefit to revenue during the period. Segment income was $48 million, below our guidance range of $50 million to $60 million. Looking specifically at the $6 million of discrete items, we recognized about $3 million of additional cost related to complex shipments of filters and heat exchangers that were finalized in the quarter. In addition, warranty expense and excess and obsolete inventory reserves exceeded our quarterly run rate by about $3 million combined. We don’t expect these items to repeat going forward. On a positive note, we continue to identify opportunities to improve operational performance going forward. We’ve simplified our structure and implemented a metric driven approach to drive accountability and provide increased transparency to areas where we can improve execution more rapidly and serve customers more effectively, as we work towards becoming a high-performing operating company. In addition to the discrete items, we had $2 million of cost saving shift out of the quarter. This was purely related to timing as we finalized plans for several actions, which we began executing at the end of the quarter. Special charges were in line with our expectations and relate primarily to actions we are taking in the third quarter. Corporate expense was lower than expected, reflecting our cost reduction initiatives and a discrete benefit of about $1 million recognized in the quarter. Adjusted EBITDA was $51 million, near the low end of our guidance range. Adjusted EPS was $0.33, including $0.02 of foreign currency losses. And adjusted free cash flow was $51 million, a solid performance driven by cash collections in our project based business. Overall, there were a lot of positive developments in the first half that have us well positioned for growth and margin expansion in the second half of the year. Moving on to orders. We booked $504 million of orders in Q2, up 5% year-over-year on an organic basis, marking the second consecutive quarter of organic growth. The growth was broad based across our key product lines and led by our Industrial segment where organic orders were 14% year-over-year. We also experienced strong order growth for Food and Beverage components in aftermarket parts and services. Sequentially, Energy orders in the midstream market moderated as anticipated. Food and Beverage systems orders also moderated off Q1 levels. Taking a closer look at Food and Beverage. Q2 orders were $165 million, down 8% year-over-year and 10% sequentially due to a lower level of system orders. We attribute this decline to timing. The front-log for small-to-medium systems remains healthy. However, we are still not seeing a significant level of activity for large projects. In our high value component in aftermarket business we continue to see good traction on our organic growth strategy. Component orders grew mid-single digit year-over-year and sequentially. And aftermarket orders were up high single digits versus the prior year in Q1 2017. Moving on to Power and Energy. Organic orders grew nearly 10% year-over-year, highlighted by a $12 million order for nuclear safety pumps. This order is supporting a nuclear project in the U.K. We also won $18 million awards for this project in Q3 2016. Aftermarket orders were down modestly versus the prior year and down single digit sequentially. That said, the absolute level of aftermarket orders was in line with our quarterly average over the last 6 quarters. We’re investing for growth in our aftermarket business and on that front, we opened 2 new service centers during the quarter, one in Corpus Christi and one in the Middle East. Both are strategically positioned near our legacy install base and expand our service capability to customers in these areas. In our Industrial segment, Q2 orders grew 13% year-over-year to $193 million. The growth was broad-based across all product lines highlighted by double-digit growth in mixers and high single-digit growth in our hydraulic and dehydration product lines. We believe this reflects the macro trends in the industrial manufacturing and PMI indices. And we also booked a handful of small- to medium-size capital orders. This is our shortest cycle and highest margin segment with about 50% of the revenue concentrated in North America. Given our market position and momentum in the broader industrial markets, we continue to be optimistic about the growth opportunities in this segment. Moving on to our realignment program. We initiated this program in 2015, and we expect it to be substantially completed by the end of the year. I appreciate the effort and dedication of our team across the enterprise during this multiyear transformation. We’ve made significant progress optimizing our global footprint, streamlining process and improving our cost position. The majority of the actions we’ve taken have been structural in nature and focused on building a strong foundation for sustainable, long-term growth and margin expansion. Thus far, we’ve realized a total of $98 million of cost savings. And we are working to complete actions that will realize the full benefit of our $140 million savings target in 2018. We recorded a $137 million of special charges through Q2 and now expect the total cost of the program to be between $150 million and $160 million as certain actions have come in lower cost than what we had accrued. During the second quarter, certain actions were delayed as we finalize plans, which cross over multiple functions, geographies and facilities. As a result, about $5 million of savings was delayed into next year. We now expect to realize about $50 million of savings in 2017 and $20 million of savings in 2018. This level of savings combined with the order and backlog growth we’ve achieved in the first half gives us better visibility to our 2018 financial framework, which targets EBITDA of approximately $250 million. And at this time, I’ll turn the call over to Jeremy.

[Jeremy Smeltser:]

Thanks, Marc. Good morning, everyone. I’ll begin with earnings per share. As compared to our midpoint guidance, segment income was $0.12 lower due to the discrete operational items and timing of cost savings that Marc discussed. This was partially offset by $0.05 of lower corporate expense. In other expense, we recorded $0.02 of losses related to foreign currency transactions. Net of these items, adjusted EPS for the quarter was $0.33. On a GAAP basis, we reported EPS of $0.24, which includes $0.13 of special charges and $0.04 of net tax benefits. Looking at our consolidated results. Revenue was $498 million, down 6% or $31 million year-over-year. Organic revenue declined 5%, primarily reflecting a lower backlog position to start the quarter, as compared to last year. Segment income was $48 million, and margins were at 9.7%. Moving on to the segment results, starting with Food and Beverage, revenue was $177 million, down 6% versus the prior year. Organic revenue was down 5%, due primarily to lower systems revenue, which declined double digits. Aftermarket sales were down modestly. These declines were partially offset by high single-digit growth of component sales, driven largely by increased volumes shipped from Poland. Segment income was $17 million or 9.8% of revenue. Profitability was down year-over-year due to the organic revenue decline as well as increased variable incentive compensation. These headwinds were partially offset by savings from restructuring actions and cost-reduction initiatives. Additionally, our productivity in Poland was significantly better than in Q2 2016, when we had just opened the new facility. We continue to work on productivity in Poland and as volumes in that facility increase over time, we expect to see very good operating leverage. In our Power and Energy segment, as expected, our results improved significantly on a sequential basis, with revenue up 37% and profitability improving from a modest loss to high single-digit margins. Revenue was $145 million, down 7% year-over-year, including a 2% currency headwind. Organic revenue declined 5%, due primarily to a lower volume of OE pumps and valves into upstream and midstream oil applications. Aftermarket sales were also down versus the prior year. This was partially offset by an increase in shipments of lower-margin filter projects. Segment income was flat at $10 million, and margins improved 50 points to 6.9%. Savings from restructuring actions and cost-reduction initiatives offset the organic revenue decline as well as increased variable incentive compensation and higher warranty expense. And for our Industrial segment, Q2 revenue was $177 million, down 5% versus the prior year. In contrast to the order development in the quarter, organic revenue declined 4% across the segment. We saw modest growth in sales of our dehydration equipment. Segment income was $21 million, and margins were 11.8%. The decrease in segment income and margin was due primarily to the organic revenue decline, higher cost on shipments of heat exchangers and increased variable incentive compensation. These declines were partially offset by the improved efficiency in Poland and savings from restructuring actions and cost initiatives. In the second half, we expect industrial margins to be in the mid-teens driven by improved execution, incremental cost savings and organic revenue growth. Looking now at our financial position. Adjusted free cash flow was $51 million in Q2 and $79 million in the first half. We generated an additional $31 million from the sale of assets, including $11 million in Q2. Through the first half, we allocated just over $100 million to debt reduction and ended Q2 with just over $1 billion of total debt, down 9% from year-end. Cash on hand was $226 million. Net debt was $783 million, down 12% from year-end, and net leverage was down to 3.8 times. Over the balance of this year, we will continue to prioritize reducing our net leverage and finalizing our realignment program. Moving on to backlog. We ended Q2 with backlog of $931 million, up 19% or $147 million year-to-date. All three segments entered the second half of this year with a higher backlog position. On a year-over-year basis, the backlog increased 6%, driven by $52 million of organic growth. About 70% of the backlog is expected to convert to revenue over the balance of this year. This represents about two thirds of our midpoint revenue target for the second half, comparable to our backlog coverage at the same point last year. For the third quarter, we are targeting $495 million of revenue, up about 6% from the prior year. This includes organic growth of 5%. We expect organic growth in each segment as reflected in the backlog build. Segment income is expected to be between $50 million and $60 million. Note that this assumes higher variable incentive compensation expense of about $8 million year-over-year and $1 million sequentially. On a GAAP basis, our Q3 EPS guidance is $0.24 to $0.36. This assumes $3 million to $7 million of special charges. Excluding special charges, our adjusted EPS guidance range is $0.37 to $0.49. We updated our full year guidance on July 24. There are a few notable puts and takes to review. Beginning with the top line, we increased our revenue guidance to a midpoint of $1.95 billion. This $87 million increase at the midpoint includes a $64 million benefit from currency and a $23 million or 2% increase in our organic revenue target. On a year-over-year basis, currency is now expected to be neutral to the full year and organic revenue is expected to decline 1% to 3%, as compared to our original guidance of down 2% to 6%. EBITDA is now targeted to be between $195 million and $215 million, as compared to our previous guidance of $210 million to $230 million. The $15 million change is comprised of the following. A $15 million increase in variable incentive compensation linked to order growth, $5 million of total cost savings shifting into 2018, as Marc mentioned, and a $6 million of discrete operational items that impacted Q2. These changes are partially offset by favorable currency and incremental margins on the organic revenue increase. Our adjusted EPS guidance range is now $1.20 to $1.50. This reflects the changes to EBITDA as well as a $0.10 increase in interest expense, driven partially by the increase in LIBOR rates and a $0.05 increase in other expense related primarily to foreign currency losses incurred in first half. And we maintained our 2017 adjusted free cash flow guidance of $130 million to $150 million. As the year progresses, we are gaining clear visibility to our 2018 financial framework. Given the favorable currency movements and growth in orders and backlog, we are now targeting over $2 billion of revenue in 2018. Our framework for EPS, EBITDA and free cash flow is unchanged. As compared to the midpoint of our 2017 guidance, the 2018 framework implies EBITDA growth of approximately 20% to $250 million, EPS growth of about 70% to $2.30 per share and free cash flow of about $150 million or about $3.50 per share. With that, I’ll turn the call back over to Marc.

[Marc Michael:]

Thanks, Jeremy. In closing, there are a lot of positive developments in the first half, including 19% backlog growth, over $100 million of cash generated and a strengthened financial position. We are in the final stages of our realignment program with better visibility to realizing a full $140 million of cost savings in 2018. As we move forward, I expect our focus on growth execution and margin expansion to increase. On the front-end of our business, we are emphasizing strong product management and disciplined pricing. At our manufacturing facilities, we are focused on delivering high-quality products on-cost and on time. Additionally, we have applied proven root cause analytics to drive a higher level of value to our customers on large project execution and delivery. We established key performance indicators across all functions to drive an overall higher-level of performance and accountability throughout the enterprise. And we are investing for profitable growth with an emphasis on aftermarket penetration, localization of our highest value product lines and channel management. We continue to move towards an operating structure that enables greater transparency to areas where we can improve execution more rapidly and serve customers more effectively. And as we look out to 2018 and beyond, we are excited about the opportunities to execute at a higher level, expand our market share and strategically grow our business. We are still in early stages of our journey to transform SPX FLOW into a high performing operating enterprise with the vision of creating a winning culture through accountability, teamwork and a proven system for driving sustainable growth. And we are committed to supporting our customers and creating value for our shareholders. That concludes our prepared remarks. I appreciate you joining us on the call this morning. And at this time, we’ll be happy to take your questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Nathan Jones with Stifel. Your line is open. Please go ahead.

[Nathan Jones:]

Marc, the last comment that you made there, early in the journey towards becoming an operating company, can you maybe give us a little color on what’s next? You’ve executed pretty much on time on this first phase of the realignment program here? You’re largely finished with the heavy lifting in that part of the project. So what comes next? What are the next things that the company needs to do to become a high performing operating company?

[Marc Michael:]

Couple areas that we’re emphasizing. And I will start with our continuous improvement efforts. In our -- not only in our manufacturing area, but I will focus there for the first part. In manufacturing, we’ve got a distinct group of metrics, KPIs, that we’re looking at, control of the cost-per-hour, cost-quality, on-time delivery, improving our turns. These areas are not only going to help reduce our working capital, but also we expect to help expand margins. And I would also mention in operations, our supply chain activities, obviously, become very important to help expand margins going forward. Associated with expanding our margins, we are localizing products into countries where we’re underpenetrated, so our high value product lines, we expect to leverage off this better going forward with these higher margin product lines to also help expand margins as well as some investment in new products, which will also help. So all those areas are intended to help improve our margin performance going forward. And then, secondly, I would mention, as we move into 2018 and we see the cash flow performance improving, the EBITDA performance improving and balance sheet capacity does start to create itself, we’ll look to evaluate, again, focused on these high-value product line areas, how we increase that install base more rapidly. So we hope to have the capacity to do that more effectively, as we move into 2018 and beyond and look out to, let’s say, to the 2020 time horizon.

[Nathan Jones:]

You guys laid out some plans in late ‘15, early ‘16 on this current realignment initiative. Can we expect you to give us something similar maybe when you report 4Q earnings or something like that? And what the targets are for 2018, 2019, 2020, something like that?

[Marc Michael:]

Yes, that’s our goal, Nathan. That’s something we have in the works right now. And as we move through into the early part of the fourth quarter, we’ll be rounding that out. I don’t know that it will be on the Q4 call, but it will -- we’ll definitely give some insights to it, as we get into the first call of 2018.

[Nathan Jones:]

Okay. And then, just one on 2018 financial framework. You took the midpoint of the revenue outlook there up $135 million or something like that. And no change to the EBITDA target there. Can you give a little bit more color on maybe why that EBITDA target didn’t get nudged up a bit?

[Jeremy Smeltser:]

Sure, Nathan. A big chunk of that comes from currency, which doesn’t flow through at a contribution margin. Really flows through kind of an average segment margin of around 11%. So that’s a big driver of the incremental change. And then, also, I would say that the level of profitability that we saw in Q2 flows through a little bit, which hurts margin somewhat. And then, on the incentive compensation, that was an item that we had to face at some point. As profitability, orders, cash flow improved and it just so happened with the level of orders that we have achieved thus far in the first 6 months and then projecting that out to the second half, that hit us more this year rather than next.

[Operator:]

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

[Damian Karas:]

So really saw an uptick in industrial orders in the quarter. I know you’ve characterized it as being sort of broad-based, but I was just wondering if you could maybe provide a little bit more color on specific areas where you’re seeing some relative strength or weakness. And whether you’ve sort of seen a continuation of that momentum since June?

[Marc Michael:]

Yes, sure, Damian. So the industrial orders we’re -- it’s one of our segments that we really are proud of and like a lot. It’s got a -- it’s got great product lines in it that serve a lot of vertical markets. And that’s what is helpful about it when we see traction gained in the markets, these product lines touch a lot of verticals. But we did see double-digit growth in mixers and high single-digit growth in hydraulics and dehydration. So as you mentioned, it was -- it’s fairly broad-based. And again, that was driven by what we typically see from just upticks in manufacturing. When we see PMI, this group of products and this segment tends to correlate to PMI. So that was -- that’s an encouraging sign as we continue to see strength in manufacturing. And then secondly, there were a few of the -- some smaller discrete type projects when we think about projects in this segment of the $3 million, $5 million and maybe even up to $10 million range, there were a few more of those in the quarter. So overall, though, we’re very pleased with the progress in our Industrial segment and the orders we’re achieving there.

[Damian Karas:]

Okay. And then, just on the -- I know a large driver of your sort of guidance cut was on the higher incentive comp. Just kind of wondering what order rates you’re assuming for the second half. And what kind -- what would sort of be -- low level of orders be in order to sort of stay in the upper tier of that incentive comp you’re now assuming for the back half?

[Jeremy Smeltser:]

Sure. So I’ll back up a little bit and explain what you’ll see in the proxy and how we set targets as it relates to orders. Essentially, the target was order growth of 4%. And the max payout was at 8% order growth on an annualized basis in both of the periods, in 2016 as a base and 2017 actuals. We exclude orders greater than -- individual orders greater than $15 million as we measure that progress. And so if you look at what we did in the first half of the year at $535 million and $504 million, which was 4% and 5% organic growth over the prior year, what we’ve done is really extrapolate at a slight moderation in that second quarter rate to the second half of the year. But because this second half of 2016 has such low orders at around $450 million or so per quarter, that would actually equate to high single-digit growth and push us to that stretch. And so essentially what we have forecasted for the year is to max out on that order growth. And we also in that do exclude any benefits from currency. So it’s true organic order growth.

[Operator:]

Thank you. And our next question comes from the line of Joshua Pokrzywinski with Wolfe Research. Your line is open, please go ahead.

[Joshua Pokrzywinski:]

And I guess, just maybe the matter of starting out on some of the order strength that you guys have seen in Industrial, how much visibility have you gotten at this point? I know it’s one of the shorter cycle businesses. But I guess, maybe start off when do we see these orders start to converge with revenue? And can you give us some flavor on, I guess, how far that stretches out in terms of [indiscernible] facility?

[Marc Michael:]

So first, on the visibility of the orders. Yes, usually, as mentioned, this is -- typically, we got about 50% visibility going into any period on orders for Industrial, any 90-day period. So when we start a quarter, we’ve got about 50% of backlog. And then, it’s about a 50% in-for-out business. So the visibility to what we are heading into in a quarter is somewhat limited. It’s not like the other parts of the business that have larger project backlog. And even the smaller- to medium-size projects I mentioned, those have been much fewer over the past two years or so. And it’s nice to see a few of those actually hit the backlog. And so those typically execute out in three to six months, can stretch out to 12-month time period depending on the size and complexity of the projects. In Industrial, I think the key takeaway is, is that we’ve gone through a period here in the first half of the year where we’ve seen momentum and even coming out of Q4 last year, we started seeing upticks off low levels. So we are encouraged by that. And if we see the global manufacturing stay healthy and continue to stay stable and even upticking in certain parts of the world, we expect that to help sustain this as we go forward. Of course, we watch it closely. There can always be some choppiness that we can see from time-to-time from month-to-month. But again, if we look back over the last -- the first half of this year, we’ve been very pleased with the progress.

[Joshua Pokrzywinski:]

And just on the convergence with orders to revenue, just given you’ve been running a bit high on the order book lately?

[Jeremy Smeltser:]

Yes, I think, back to Marc’s comments around the typical length of time to convert the larger capital orders in Industrial, it probably takes three or four quarters for revenue, if that order rate holds at over $190 million, like we saw in Q2, but expect to take three to four quarters for revenue to gradually creep up to that same level.

[Joshua Pokrzywinski:]

And just maybe taking a step back, higher level, not even necessarily an ‘18 comment, although you guys do have a framework that is a helpful backdrop. When we think about some of big themes moving through this reporting cycle for some of our companies, project activity in general seems like it’s still pretty scarce. I think that resonates with comments that you guys have made. Pricing on those projects remains pretty difficult, but shorter cycle activity has been, perhaps, a bit healthier. How does that change the complexion of how you think about the next, call it 12 to 18 months, given that you have some ebb and flow in that mix, clearly a good amount of project exposure, but Industrial is your most profitable segment, could you square some of that away and help us think about, as that complexion changes, how 2018 shapes up? Is that a net benefit, a net headwind? Just some talking points around it would be helpful.

[Jeremy Smeltser:]

Yes. I think we agree with your assessment of the environment. And it’s stayed relatively consistent through Q2. And from the companies I watch, certainly sounded like it was pretty consistent across the group. I think the challenging part for us in that particular environment is that we have to maintain capacity in our larger factories for the project work, because it will come back. And in fact, a lot of the short-cycle orders come from the same customers back into the installed base of that project work. And so we have to be very careful on cost, but also maintaining the know-how in the business for when that expansion and investment cycle does come back for our larger customers. So it’s difficult. We’ve certainly taken a lot of cost out of the business. We continue to look at cost. And we have to monitor the order environment very closely, continue to look for more opportunities if we don’t see it improve as we get into 2018.

[Operator:]

And our next question comes from the line of Julian Mitchell with Credit Suisse. Your line is open. Please go ahead.

[Ronnie Weiss:]

This is Ronnie Weiss on for Julian. Based on the new guide down one third on the organics, wonder if you just walk through each of the segments and talk about your assumptions on the back half of the year, is each segment expected to grow and specifically in Q3, if you’re still expecting to see that kind of large shipment in power to be completed to cause the outsized growth there?

[Jeremy Smeltser:]

Yes. So I mean, as we said in prepared remarks, we do expect to see growth across all three segments in the second half. Recall the last year’s second half was quite a bit lower than last year’s first half. And so the comps are easier. So the absolute volumes don’t change so much as the percentages do. So what we’re looking at is really for P&E, specifically, I think, you asked, we did $145 million of revenue in Q2. The average of Q3 and Q4 will probably be right about that same level. We anticipate a slight sequential improvement in the second half in each quarter for Industrial and relatively the same in Food and Beverage. But again, the percentages change more dramatically because last year’s second half revenues and orders were so much lower.

[Ronnie Weiss:]

Okay. Makes sense. And then, as I look to 2018, the guide implies 55% incremental margin on the year, I think, Q3 is implied at 24%. Is all that step-up just the cost savings being baked into the entire base now, is there’s some kind of mix, tailwinds you guys are assuming, maybe Industrial growing faster than the rest of the business? And then, as I think kind of further on as we get into more normalized environment, what’s the kind of correct incremental margin you think on the kind of core volume growth for FLOW?

[Jeremy Smeltser:]

Yes, the vast majority of the incremental margin you’re seeing there is exactly that, it’s from the incremental cost savings. We’re not assuming -- consistent with how we’ve been trying to forecast the business, we’re not assuming a real mix change from the current order environment. And the last part of the question, I’m sorry?

[Ronnie Weiss:]

Just the normalized incremental margin we should kind of think about for FLOW on the volume drop there?

[Jeremy Smeltser:]

Sure. Yes, I mean, it depends, frankly, particularly on the Food and Beverage systems and the OE side of the Power and Energy group, the incremental margins are going to be lower there. I think low double digits to teens maybe on the Food and Beverage system side. On the component side, really across the board, we think about it more in the 30% range. And that has been relatively consistent with what we’ve seen without some of discrete items like we talked about in Q2 and with the variable incentives comp.

[Operator:]

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

[Robert Barry:]

Just wanted to make sure I understood the puts and takes on the cash flow. I mean, you’re keeping the outlook the same even though the EBITDA is lower by $15 million, looks like maybe $5 million of that is on less realignment spending and is the other working capital or what’s happening there?

[Jeremy Smeltser:]

Yes, your observation is right. We have lowered the cash spend on restructuring. That’s really -- as Marc mentioned earlier, comes from some of the accruals that we had out there were larger than we actually ended up needed -- needing. And the rest really is working capital. I’d also say that working capital is a relative term. Some of the expense that we’ve added to the P&L, we talked about is, is really noncash this year for that bonus accrual. That will be paid out in Q1 of next year.

[Robert Barry:]

I see. I noticed you left the working capital impact though, the same next year, it’s still a $5 million benefit?

[Jeremy Smeltser:]

We did, I think...

[Robert Barry:]

By that -- does that mean there is a positive offset?

[Jeremy Smeltser:]

Well, next year’s P&L will also have some level of bonus accrual. So you’re not going to have that as a full dollar-for-dollar headwind to conversion.

[Robert Barry:]

I see. And what is the assumption this year for working capital? Is it a source of cash, I guess, this year expected?

[Jeremy Smeltser:]

It is expected to be a source of cash when you include the project based business that Marc mentioned earlier in our prepared remarks. We’ve, obviously, had a good start to the year, better than our typical first half. We’ve got a number of programs underway that we expect to benefit the second half and hopefully carry into 2018. So we do expect a benefit overall beyond even the noncash incentive comp for this year.

[Robert Barry:]

Got you. And I guess, big picture if you’re expecting another working capital that kind of source next year even though the growth’s ramping backup, I guess, that’s just reflective of your plans, your initiatives on just better inventory management or receivables collections, things like that?

[Jeremy Smeltser:]

Exactly, both are in those areas.

[Marc Michael:]

Yes, we’ve got some pretty strong plans in place from the commercial organization as well as our shared service group on receivables. And then, of course, in our factories, Dave Kowalski and his team are really focused on not only reducing the inventory, but most of focus too is increasing the turn. So with a growing revenue base, we want to continue to increase turn, so that we’ve got efficiency in our raw materials too.

[Operator:]

And our next question comes from the line of Deane Dray with RBC Capital Markets. Your line is open. Please go ahead.

[Andrew Krill:]

This is Andrew Krill on for Deane. Can you comment on pricing in the quarter? And I think your outlook on pricing for the rest of the year, as a lot of companies this earning season have been citing this as a headwind?

[Marc Michael:]

Yes, sure. So we haven’t seen significant changes in pricing. If you go back over the last couple of years, as we’ve mentioned, the larger project-based business has gotten more aggressive in pricing, but we’ve stayed disciplined in that area. We’ll continue to stay disciplined. We’ll choose projects based on their commercial and technical merits, and we’ll work with customers where we see a long-term advantage in helping achieve outcomes for them as well as increase our high-value component base. So that’s a piece on the project part of the business. And then, in the components and more the run rate business, it’s held up very well, the aftermarket business very well. We haven’t really seen any degradation there in the pricing.

[Andrew Krill:]

Okay. And then, as a quick follow-up. Can you maybe give us an update if you’ve seen any competitive changes in your valves business as a result of Emerson buying Pentair Valves & Controls, so they kind of called out and had pretty weak valve results over this period. So I was just wondering if you guys have seen any change in the playing field as a result of that.

[Marc Michael:]

We’ve not seen any impacts from that particular transaction. So our valves business in North America is pipeline gate valves. And that’s the majority what we do. So we don’t really compete with them directly because, again, we’re focused on the midstream and gate valves. And we did, again, as we mentioned in Q1, we saw an uptick there in our pipeline gate valve business. It did moderate, again, as we expected in Q2. But again, we do have projects out there for that part of the business as we move to the second half of the year, but it’s not a direct competitor. So we haven’t seen really any impact to our business.

[Ryan Taylor:]

This is Ryan. This concludes our call for today. Per the usual, Stewart and I will be available throughout the rest of the day to answer any follow-up questions that you might have. Feel free to reach out to us via e-mail or over the phone. Thanks for joining us. And we’ll talk to you next time. Thanks, everyone.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. And you may now disconnect. Everyone, have a great day.