Global X U.S. Cash Flow Kings 100 ETF
Q4 2017 Earnings Call Transcript

Published: 6 Feb 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2017 SPX FLOW Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today’s conference, Mr. Ryan Taylor. Sir, you may begin.

[Ryan Taylor:]

Thanks, Karla, 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 Q4 2017 earnings release was issued this morning and can be found on our website at spxflow.com. We also provided our 2018 guidance which we will discuss in greater detail during the call. This morning's 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. A replay of this webcast will also be available later today 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 as well as some additional color on our 2018 guidance. And with that, I’ll turn the call over to Marc.

[Marc Michael:]

Thanks, Ryan. Good morning, everyone. Thanks for joining us on the call. Over the past two years, we created a strong foundation for future growth. We've now essentially completed our realignment program and transitioned to a customer focused operating structure which is simplifying how we work together and unlocking our potential for growth and improvement. Our people have shown tremendous resiliency throughout this transition. They take great pride in the quality of our products and have a strong desire to provide first class service to our customers. These are critical attributes for our drive to transform SPX FLOW into a world-class operating enterprise. We significantly strengthened our financial position in 2017, and we have great flexibility to invest in our business as we pivot our strategy to growth and improvement. We are prioritizing investments in our highest value product lines and emphasizing continuous improvement across the enterprise to generate margin expansion. We see great potential for margin expansion over the next few years as we dial in our focus on lean supply chain management and standardizing processes. I'm encouraged by the progress we've made and I'm confident in our strategy to create shareholder value going forward. We look forward to sharing details of our strategy with investors at our upcoming Analyst Day in March. Moving now to the results for the fourth quarter, we finished the year with a solid performance highlighted by 25% order growth, strong cash generation, and continued debt reduction. Revenue for the quarter was $529 million. This was $20 million higher than the midpoint of our guidance, primarily driven by better than expected progress on food and beverage projects during the quarter. Segment income was $59 million, in line with our guidance, and segment income margins were 11.1%, about 50 points lower than we anticipated due to an unfavorable revenue mix in Food and Beverage and a $1.5 million legal settlement recorded in our Industrial segment. Adjusted EBITDA was $62 million and adjusted EPS was $0.52 both at the high-end of our expectations. Looking at highlights for the full-year, in 2017 we had a nice quarterly progression of order and backlog growth, cash generation, and debt reduction. For the full year, orders grew 10% and backlog increased 27% to $1 billion. We generated $223 million of adjusted free cash flow and generated $37 million of additional cash from the sale of legacy assets. Our strong cash performance enabled us to reduce net debt by $262 million or 29%. Gross debt was reduced by $213 million, including $100 million of voluntary prepayments made on our term loan in Q4. In January, we made another voluntary prepayment of the term loan of $30 million. At year end, net leverage was at three times, down a full term from the prior year, a significant accomplishment that was achieved faster than we anticipated. In 2017, we also essentially completed our realignment program, and in doing so we reached our savings target of $50 million for the year. Taking a closer look at the realignment program, given the strong effort from our teams across the enterprise, we have successfully completed essentially all the major actions of the program on time and under budget. The total restructuring cost was $138 million, and we expect total savings of $140 million. We've realized 85% of the savings through 2017 and plan to realize the remaining $20 million in 2018. Two thirds of the savings are structural in nature. Key actions of the program include a 20% reduction in headcount, one shared service center consolidation, and eight manufacturing sites consolidated. Five of the site consolidations are going into our 300,000 square foot facility in Bydgoszcz, Poland that was opened in Q1 2016. This was a critical investment that has enabled us to improve our competitive position across several product lines. With our transition to an operating structure and focus on optimizing global footprints, Bydgoszcz is one of our best examples of a multipurpose site that leverages manufacturing capabilities to deliver a variety of high-value products to customers. The team in Poland continues to do an outstanding job of steadily increasing productivity and efficiency. I'm very proud of their efforts and continue to expect great things from them as we focus on maximizing our capacity at that site. Overall, the realignment program was very well executed and I'm proud of all the people on our team across the world who contributed to the success of the realignment. It was a challenging, but necessary first step in our journey to achieve excellence as a world class operating company. Moving on to orders, Q4 orders were $565 million, up $112 million or 25% year-over-year. Currency was a 5% benefit. On an organic basis, orders grew 20% or $92 million with growth across all three segments. During the quarter, we were awarded two large Food and Beverage systems awards totaling $72 million. Excluding these awards, on an organic basis, run rate orders grew 4% year-over-year and 5% sequentially, a solid performance by our commercial teams. For the full year, orders were $2.1 billion up 10% or $196 million with organic order growth across all three segments led by Power and Energy at 19%, followed by 8% growth in Food and Beverage, and 5% growth in Industrial orders. Looking at the order trends by segment beginning with Food and Beverage, Q4 orders were $235 million, up 47% year-over-year. Organic growth was 42% highlighted by the two large awards. This included a contract worth nearly $60 million to establish a dairy ingredients plant in Spain for a key customer. This Greenfield project will have the capacity to produce milk protein powders for infant formula and nutritional products. Work is underway and the plant is scheduled to begin operation in 2020. This award leverages our dairy processing expertise and will expand our market presence and installed base in Europe. The state-of-the-art powder plant will feature a variety of our fluid handling components and process technologies including valves, pumps, heat exchangers, and dispersion equipment. Our selectivity of large projects is an important aspect of our strategy in this market. The awards we won in Q4 have a good amount of our component technologies which help load our factories, increase our aftermarket annuity stream. Growing our component aftermarket business within Food and Beverage is core to our long-term strategy within the segment. In Q4, component orders were up high-single digits versus the prior year and steady sequentially and aftermarket orders grew double-digits year-over-year and low-single digits sequentially. For the full year, organic orders grew 8% in total highlighted by double-digit growth in our components business, and we began 2018 with backlog up $75 million in Food and Beverage. Moving on to Power and Energy, Q4 orders were $150 million up 23% year-over-year. Currency was up 5% or $7 million benefit. Organic growth was 18% driven by orders for pipeline valves in North America in OE pumps going into nuclear and midstream applications. Aftermarket orders were up low single digits versus the prior year and up 5% sequentially an encouraging sign leading into 2018. For the full-year orders were up 19% to $604 million driven largely by an increase in OE orders for midstream and nuclear applications. Aftermarket orders were flat. We enter 2018 with the Power and Energy backlog up $85 million as compared to the prior year. Looking now at orders in our Industrial segment. In Q4 orders increased 5% year-over-year to $180 million. Currency was a 3% benefit with organic orders up 2%. For the full-year organic orders grew 5% and currency was a modest benefit. The growth was broad-based across each industrial product line. Many of our highest value products are in this segment and they are core to our growth strategy. As such we are prioritizing investment of resources and capital here to expand our global presence in most of our industrial products. We continue to be encouraged by global PMI and manufacturing data and we are optimistic about market growth across the general industrial economy. Taking a brief look at our 2018 midpoint guidance, our guidance assumes overall run rate orders consistent to the second half of 2017 and we have not assumed any new large orders in our revenue targets. Revenue is expected to grow 5% or about $100 million. This assumes 3% organic growth and a 2% currency benefit. Operating income is expected to grow over $50 million or 38% driven by organic revenue growth and incremental realignment savings and operating margins are expected expand 220 points to 9.3%. Our midpoint EPS guidance is $2.39 per share. EBITDA is expected to grow by 25% or $50 million to $250 million. That translates to a 15% [ph] incremental margin on the revenue growth and free cash flow is expected to be $115 million or approximately 100% conversion of net income. Overall our 2018 guidance underscores the work we did in 2017 to complete our realignment program, grow orders, and reduce debt. It also assumes a modest level of increased investment for growth and improvement beyond 2018. That concludes my opening remarks and at this time I'll turn the call over to Jeremy for a detailed review of Q4 and our 2018 guidance.

[Jeremy Smeltser:]

Thanks Marc. Good morning everyone. I'll begin with tax reform. Our fourth quarter tax rate included a net benefit of $21 million from U.S. tax reform. This was comprised of a $50 million charge for the deemed repatriation tax on foreign earnings, $53 million benefit from previously accrued repatriation tax associated primarily with a gain on the sale the business back in Q4 2012, and an $18 million benefit from the revaluation of our net deferred tax liability position. From a cash perspective, we expect to pay about $20 million of repatriation tax ratably over eight years after utilizing our available NOLs and foreign tax credit. As for our effective rate going forward, based on our current assessment of U.S. tax reform we are modeling at 25% to 26% tax rate in our 2018 guidance. This is 4 to 5 points lower than the 30% tax rate used in our 2017 adjusted earnings calculation. We will continue to evaluate the impact of U.S. tax reform as additional guidance is provided. Moving on to the Q4 results, beginning with earnings per share, EPS was $0.72 in the quarter. This included $0.03 of special charges and a net tax benefit of $0.23 related primarily to the impact of U.S. tax reform. Excluding these items, adjusted EPS was $0.52 at the high-end of our guidance range. As compared to our guidance, our underlying corporate expense was modestly lower than we anticipated and we also benefited from reduced interest expense resulting from the $100 million voluntary prepayment on the term loan. Adjusted EPS also included three notable items that combined for a net $0.01 benefit to our guidance. Other income was a $0.06 tailwind due primarily to foreign pension benefit. This benefit was mostly offset by a $0.03 charge in our Industrial segment related to the legal settlement mentioned earlier and a $0.02 charge in corporate expense related to the finalization of a German tax matter associated with our spinoff from SPX Corporation. Looking at our consolidated results, revenue was $529 million up 7% or $34 million year-over-year. Currency was a 5% benefit and organic revenue grew 2%. Segment income was $59 million up 6% year-over-year. The increase in segment income was driven by savings from the realignment program and improved efficiencies in our Bydgoszcz, Poland facility. These improvements were partially offset by increased variable incentive compensation which was a headwind of 130 points year-over-year and to a lesser extent an unfavorable revenue mix in our Industrial segment. Moving on to the segment results, beginning with Food and Beverage, Q4 revenue was $197 million up 8% over the prior year. Currency was a 5% or $9 million benefit. Organic revenue grew 3% driven by growth in both aftermarket and component sales, partially offset by a decline in project revenue. Segment income was $22 million up 22% year-over-year and margins expanded 130 points to 11.3%. The increase in profitability was driven by better project execution, realignment savings, and higher productivity in Poland and these improvements were partially offset by increased incentive compensation. In our Power and Energy segment Q4 revenue was $151 million up 17% or $21 million from the prior year. Currency was a 6% or $7 million benefit. Organic growth was 11% or $14 million driven by an increase in revenue from OE valve and pumps used in midstream oil applications. Aftermarket sales grew modestly. Segment income was $14 million and margins expanded 350 points year-over-year to 9.4%. The improve profitability was driven by the organic revenue growth, realignment savings and other cost reduction initiatives. For the full year revenue was down 3.5% or $20 million. Despite the revenue decline, segment income increased $10 million or 40% year-over-year and margins expanded 200 points to 6.5%. We were pleased to see the second half margins in the high single-digits and expect to maintain that level of margin performance throughout 2018. Wrapping up the segment review with Industrial, Q4 revenue was $181 million down 1% versus the prior year. Currency was a 4% or $7 million benefit and organic revenue declined 5% primarily due to the timing of mixer shipments partially offset by high single digit growth in sales of hydraulic tools and modest growth in sales of our dehydration and pump products. The decline in mixers was due in part to a large shipment in Q4 2016 that did not repeat in Q4 2017. We also experienced a lower level of mixer shipments and aftermarket mixers sales in the U.S. and Asia-Pacific as compared to the prior year. We attribute this primarily to timing of the book-to-bill and our mixer business was healthy at 1.1 times for both Q4 and the full-year. Additionally, Q4 mixer orders were up sequentially and year-over-year and backlog grew by more than 30% in 2017 positioning our mixer business for growth in 2018. Q4 segment income was $22 million and margins were 12.3% down from $30 million and 16.1% last year. The lower-level of profitability was due to the decline in mixer shipments, higher incentive compensation and the legal settlement mentioned earlier. Moving on to backlog, we ended 2017 with total backlog at nearly $1 billion up $214 million or 27% year-over-year. Currency was an 8% or $64 million benefit. On an organic basis backlog grew $150 million or 19% year-over-year. Entering 2018 opening backlog is up across all three segments and we expect 75% to 80% of backlog to convert to revenue this year. Looking at our 2018 full year targets by segment, our revenue target reflects the higher beginning backlog position to start the year and assumes run rate orders in total stay steady until the second half of 2017. As Marc mentioned, we did not factor any new orders greater than $15 million into our 2018 guidance. Based on these assumptions we expect 4% to 6% revenue growth including mid-to high single-digit growth in our Industrial segment and low to mid single-digit growth in Food and Beverage and Power and Energy. Currency is a 2% tailwind based on December 31 exchange rates and organic revenue growth is expected to be between 2% and 4%. For segment income at the midpoint of our target we expect about a $50 million or 25% increase with margin improving 200 points to approximately 12%. The increase in profitability is expected to be driven by the revenue growth, incremental realignment savings and to a lesser extent lower incentive compensation expense. We are also assuming a modest level of increased investment for growth in improvement beyond 2018. On a consolidated basis we are targeting $2.05 billion of revenue and approximately $250 million in segment income. Corporate expense is expected to decline 10% versus the prior year to about $51 million and we have budgeted $5 million of special charges in 2018 to support continuous improvement efforts. Please note that we are not adjusting special charges out of our earnings guidance. Interest expense is expected to decline $12 million or $0.20 per share and we are assuming an effective tax rate between 25% and 26%. Based on these assumptions our 2018 earnings per share guidance range is $2.21 to $2.56 per share representing almost 90% growth at the midpoint versus the prior year. EBITDA is expected to grow about 25% to between $240 million and $260 million and we are targeting free cash flow conversion of net income to be between 100% and 120%. At this rate of conversion our free cash flow guidance range is $105 million to $125 million. This is net of an expected $30 million of CapEx and $15 million of restructuring cash payments. Note that we are also not adjusting restructuring cash payments out of our free cash flow guidance. Given the timing of certain cash flow items, we provided this slide to illustrate a few of the more notable cash inflows and outflows in both 2017 and 2018. Our 2017 adjusted free cash flow was $223 million a really strong performance and higher than we had anticipated. This was largely driven by increased focus throughout last year and reducing accounts receivable which contributed close to $50 million of cash flow. We also benefited in 2017 from the collection of approximately $20 million of down payments on large orders which we will use this year to execute the projects. Please also note that we paid zero incentive compensation in 2017. Looking at Q1 specifically we are targeting revenue to be between $470 million and $490 million. About 70% of the revenue target was in backlog at year end. Currency is expected to be about 5% tailwind year-over-year to the top line. Organic growth is expected to be in the mid-single digits driven by double-digit growth in Power and Energy. We are targeting $48 million to $55 million of segment income up about $15 million or 46% from last year and we expect to record about $2 million of special charges in Q1. Our EPS guidance range is $0.30 to $0.42 per share which assumes a 25% to 26% tax rate. We expect EBITDA of about $50 million up more than 50% year-over-year. Looking now at our financial position, our strong cash generation enabled us to reduce gross debt by $213 million. We ended the year with $264 million of cash on hand and just under $900 million of total debt. Net debt was $632 million down $262 million or 29% from the prior year end and net leverage was down a full turn to three times. We are now in a position to opt out of the covenant relief period that we entered into in Q4 2016 and we intend to do so this week. Over the last two years we have focused capital allocation on internal organic initiatives and debt reduction. In the near-term we will continue to focus on those areas. The midpoint of our 2018 guidance implies that we will approach 2.5 times in net leverage around midyear. At that level we will be in a comfortable position to expand our capital deployment options. This next slide provides an update on our debt structure. After the recent prepayments the balance on our term loan is now down to $240 million. We don't have any material required payments until 2020 and our maturities are staggered providing us flexibility as we go forward. In summary, we're in a good financial position with adequate liquidity and flexibility to execute our growth and improvement strategy. That concludes my prepared remarks and at this time I'll turn the call back over to Marc.

[Marc Michael:]

Thanks Jeremy. In closing, I want to briefly look back at our accomplishments and then touch on our strategy going forward. Two years ago we began a journey to transform SPX FLOW into a high-performing operating enterprise. We've made significant strides towards that goal by successfully executing our realignment program. As I reflect back I'm incredibly proud of our team for the things we've accomplished. We created long-term financial stability by refinancing our senior notes, reducing our net debt by nearly 30% and bringing net leverage down to three times. We reduced our cost base by $140 million in transition to an operating structure. This is simplifying how we work together in enabling quicker decision-making. We expanded our manufacturing presence in Bydgoszcz, Poland which enabled the consolidation of five European manufacturing sites and we consolidated three other manufacturing sites in the U.S., the UK and China. We also consolidated our North American shared service center into the UK reducing our shared service centers from three to two. We increased engineering, IT, HR, in other support capabilities in high-value centers located in India and the Czech Republic, and we implemented KPIs across all our functions to drive a higher level of accountability and performance throughout the enterprise. In aggregate we reduced net headcount by 20%. As a result of these actions we established a strong foundation for customer engagement growth and margin expansion. On the front-end of our business we're emphasizing strong product management and disciplined pricing. We're investing for profitable growth with an emphasis on aftermarket penetration, localization and channel management. Last year we opened two new service centers, launched new products and made several strategic hires to enhance our product management and commercial teams. During the second half of 2017 we also completed a strategic assessment of our product portfolio. This assessment has helped focus our growth strategy and prioritize our investment of time, resources and capital. As we move forward we are prioritizing investment in our highest value product lines and emphasizing continuous improvement across the enterprise to drive margin expansion. We continue to move towards an operating structure that enables greater transparency through 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 margins and strategically grow our business. Our strategy to generate growth and expand margins is centered around our people, products, and processes. A few of the key areas we are focusing on include, further enhancing our talent and capabilities, executing our product line strategies, reenergizing our lean efforts and implementing a standard SIOP process. Additionally, we're establishing a cross functional, cross regional team called Global Process Excellence. This team's primary goal is to develop standard end to end processes that will deliver a higher degree of customer satisfaction through faster cycle times and improved accuracy. We will dive deeper into the details of our strategy at our investor and analyst meeting on March 8 which is being held in New York. At that meeting will provide an in-depth review of our business as well as details of our strategy to generate growth and expand margins. And we will have additional members our senior team present including David Kowalski, who runs our global manufacturing organization; Jose Larios, President of our Industrial and Energy product lines; and Dwight Gibson, President of Food and Beverage. You can register for the event via our website. If you have any questions, please reach out to Ryan or Stuart [ph]. In summary, we're still in the early stages of a journey to transform SPX FLOW into a high performing operating enterprise with a 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 Mike Halloran with Baird. Your line is now open.

[Mike Halloran:]

Good morning guys.

[Marc Michael:]

Good morning Mike.

[Jeremy Smeltser:]

Hi Mike.

[Mike Halloran:]

So two questions on the orders/revenue, first one, I just want to make sure I understand the thoughts on guidance, so your expectation here -- your guidance assumes, excuse me that the order run rate from the second half continues, but doesn't improve. So what does that mean? Are you basically saying you're not assuming sequential improvement as you work through 2018, but things stay at a reasonable level, is there another assumption embedded in that? Could you just kind of make sure we understand that?

[Marc Michael:]

Sure, let me give you a little clarity on that Mike. What I'd say is that there are handful of the book-in-turn product lines that we have assumed some sequential growth really to offset some of the expected decline in the project related business. Less than $15 million, but not run rate orders particularly in the Power and Energy segment, so there is kind of a net increase in some of the shorter cycle products expected in a low-single digits and then an offset in the Power and Energy group where orders were up pretty dramatically in 2017.

[Mike Halloran:]

Okay, that make sense, and then on the bridging towards your 2% to 4% organic order, organic revenue guidance, so you had very strong orders this year. Backlog is up what 27% exiting the year, and yet we're coming down to a 2% to 4% orders. Could you just walk me through how that works, how much of it is timing, how much of it is comparisons year-over-year, how much of it stretches into 2018 or if there's some embedded conservatism in there as well?

[Jeremy Smeltser:]

Yes, I wouldn't call it embedded conservatism as it relates to what's in backlog at year end. We've taken a fairly consistent approach, it is what we typically do, you know, I think 75% to 80% of the $1 billion backlog is expected to convert to revenue. Where it could prove conservative is that we -- on a lot of the in for out business, particularly in the aftermarket, we haven't actually assumed the increasing sequential level of orders as we progress to 2018. And so, if the economy stays strong, and we do see a pickup in the Industrial and aftermarket orders consistent with our typical lag to this level of PMI, then I think there's a potential for things to be better, but we haven't quite seen it yet, through we saw a little bit of improvement in Q4 in a couple of key product lines. We haven't necessarily seen it yet commensurate with what we would expect at Industrial PMI in the 60 range.

[Mike Halloran:]

Well, what percentage of your revenue in a given year, it is the previous year’s yearend backlog represent typically?

[Jeremy Smeltser:]

So, this year think about it as $750 million to $800 million out of $2.05 billion, that’s not atypical.

[Mike Halloran:]

Great, thank you. I appreciate the time guys.

[Jeremy Smeltser:]

Thanks Mike.

[Operator:]

Our next question comes from Nathan Jones with Stifel. Your line is now open.

[Nathan Jones:]

Good morning everyone.

[Jeremy Smeltser:]

Good morning Nathan.

[Marc Michael:]

Good morning Nathan.

[Nathan Jones:]

I'll follow up a little bit on the guidance question. You did take up the revenue guidance from what you had in the 2018 framework at 3Q, '17, you didn't take up the EBITDA guidance. Is that some conservatism there? Is there some timing issues there? I know you guys have, couple large Food and Beverage projects in there, can you maybe talk a little bit on those about the margin guidance, margin you’ve embedded in guidance from those and what the upside and downside potential is?

[Jeremy Smeltser:]

Sure, Nathan. Yes, I mean the primary drivers, really two, you hit on one which is the Food and Beverage projects and your question is also leading incorrect in that the standard margins on those orders are quite a bit lower than our average gross margin across the business, so there is an assumption there that drags margins down, and so revenues up and you are not necessarily seeing a lot of flow-through. And the other increase in revenue that you're seeing is really from currency, and currency for us particularly with a lot of our shared service center costs in pounds, a lot of times when we see currency flow through the revenue, we actually see that flow through to segment income at lower than our average segment income margins, and that in fact is the case here where we're in the kind of 7% to 8% margin on the currency flow through. So that can certainly change. As I mentioned in the prepared remarks, we use currency rate to 12.31, obviously 10 days ago that would have been very conservative. Now we're starting to see a little bit of swing the other way, so we just have to keep monitoring rates, and we'll adjust accordingly, and we'll be very transparent as to that flow through.

[Marc Michael:]

And then I would just add Nathan, we felt this really prudent place to start the year as Jeremy indicated as we looked at the mix of the backlog. And again, having said that and there is room for improvement as we move through the year and we focus on our high value, high returning product lines, and investment in continuous improvement. So we'll watch how things develop in the run rate; and as we move through the year, we'll keep everybody posted, but again I think it's a prudent place for us to start the year.

[Nathan Jones:]

The large projects in Food and Beverage that there are going to run through the P& L this year, if you'll permit me to say, the execution on some of those large Food and Beverage projects historically hasn't been that great. But it sounds like at least this one in Spain is something that you guys are very familiar with, it's not something that's out of the ordinary. How confident are you that the business can generate the book to margins on those projects?

[Marc Michael:]

Yes, you know, Dwight Gibson and his team has done a lot of work this past year in improving our execution in our Food and Beverage systems as we mentioned. That helped the overall performance in that segment. And we do have a lower level of large projects in the backlog just based on what's been available. We booked three year in the second half of the year. We hadn't booked any since January of 2016. So they're very focused on these projects. We were very selective in looking at what that was going to provide in terms of our content and factory components and aftermarket annuity and again overall as you indicated how it fits into our capabilities. So, a lot of attention will go into this project as well as the other two we booked in the second half of the year and the team felt good about these projects and how we could execute them as we move through 2018 and 2019.

[Nathan Jones:]

Okay and then one more for me. Marc, in your prepared comments you said the company is still in the early stages of getting to be a high performing operating company. You've been pretty successful I would say over the last couple of years of putting in this structure around changing from a holding company to an operating company. Can you talk about the major buckets and the major initiatives and the kind of things that you need to do to shift from having that structure in place to really being a high performing operating company and executing against that structure?

[Marc Michael:]

Yes, sure you bet. It's a great part of or important part of our strategy and great question. I mentioned that we're launching a Global Process Excellence team. This team is going to be focused on really creating model factory capabilities for us. It affects all parts of the business. They are going to look at the value stream starting with the commercial activity and how we interface with a customer and take an order, how that flows into subsequently into engineering, into supply chain activities and into the production. So we've identified three facilities that are multipurpose sites that we're going to start with and we know that there's still a lot of room for improvement there as we work on all value streams through those locations and once we complete that, we'll continue to translate that into the other facilities across the enterprise. And look this is a journey that we'll be making over the next three years which it’s going to provide us a lot of opportunity to expand margins during that time period.

[Nathan Jones:]

Great, thanks very much for the time.

[Marc Michael:]

You bet.

[Operator:]

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

[Walter Liptak:]

Hi, thanks good morning and great quarter guys.

[Marc Michael:]

Good morning. Thank you.

[Walter Liptak:]

I want to ask about, I think in your remarks you talked a little bit about 2018 and product management and specifically pricing. I wonder if you could talk to us just about your thoughts about pricing and longer cycle projects and on aftermarket as you get into 2018?

[Marc Michael:]

Sure, yes so we break things down into the kind of two areas as you mentioned. There's the components and more aftermarket part of the business which is pretty fast cycle business. And we look at that on a monthly basis to assess how our product margins are progressing as well as any cost implications that may be creeping in, so we can adjust to that fairly rapidly. It's mostly more standard products that we sell off list pricing. And then on the project basis there's one thing that we do to protect ourselves there. Once we win a project we execute the POS [ph] to our suppliers at the time we receive the award for the major parts of the equipment, so that we lock that pricing in. So we feel we're in a good spot starting the year and we monitor it closely on monthly updates with our product management teams and with our operations teams and we'll continue to do that as we move through the year and make adjustments as needed.

[Walter Liptak:]

Okay, sounds good. And then I wonder if I can ask a question or two on the process changes. Have you, you called out a number of things here talents and you know lean, few other things. I wonder if you have - quantify those benefits that you expect to get and should we be thinking about those projects going on in 2018 benefit in 2019-20 or it’s or is there a low hanging fruit here that you can get in 2018 that might not be in the guidance?

[Marc Michael:]

Yes, we haven't assumed looking and seeing benefit from that in the guidance. As I mentioned, that's an opportunity that we would anticipate could develop as we move through the year. More importantly I think it will start to impact 2019 and 2020. There are projects that really do take a deep dive into each of our manufacturing locations. And as I mentioned there's three sites we're starting with which are larger sites that produce some of the more important products for us. So I think we'll see the developments of that start to happen more as we move into 2019 and 2020 with some potential that we could see some development as we move through 2018.

[Walter Liptak:]

Okay, great. All right thank you.

[Marc Michael:]

Thank you.

[Operator:]

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:]

I just wanted to follow up on that orders question, so it sounds like you're planning for orders being down year-over-year in first half is that right? And is that just a planning assumption or is that how the beginning of the year is actually starting to track?

[Jeremy Smeltser:]

I would say it's really just in the Power and Energy segment where we would expect orders to be down year-over-year in the first half. And that's really if you'll recall we had a booming first quarter 2017 particularly in the midstream where we had around $30 million to $35 million of large projects hit fairly early in the quarter, most of which we've actually already shipped as well as a couple of nuclear orders. That's really sort of kind of the headline in Power and Energy we would assume that Robert, but that's not what we're assuming in F&B and Industrial run rate orders.

[Robert Barry:]

Got it. I mean if you put aside some of the impact of these more lumpy projects, I guess the big picture question on whether you actually feel like across any of the Power and Energy verticals there's actually signs of a cycle building, because we've generally seen very good year-over-year orders not surprising off the trough, but kind of the sequential performance really moderating?

[Marc Michael:]

Yes Robert, I would say in Power and Energy what we saw throughout 2017 and what we're planning for in 2018 is really associated with our midstream, in terms of that performance and the consistency of the pipeline valve or the midstream, with as well as some pump orders. We're not planning on large projects in upstream offshore coming back and we're not seeing that, so the midstream seems to be steady as we move through the second half of 2017 and that's really what we're counting on and thinking about for 2018. We were encouraged that we did see little improvement in the aftermarket business within the Power and Energy segment as we went through Q4. So we'll be watching that closely. Again, if that develops that could create some opportunities as we move through the year.

[Robert Barry:]

And then, and maybe just a similar question on Food and Beverage, I mean, I know you don't want to get ahead of your skis, it's been encouraging to see a couple of these big projects, but been relatively soft there for a few years. I mean do you think we're at the beginning of a more of a building cycle in Food and Beverage?

[Marc Michael:]

Yes, so I think that what we saw happening in the commodity part of the market which is a big driver, it kind of accelerated through the end of 2016 and early 2017 and then kind of moderated through the latter part of the year and even pulled back a bit. So while there's projects out there we're going to be very selective in the ones that we choose and our emphasis will really be looking at the smaller to medium sized orders for the most part, and that's really what we're thinking about for 2018.

[Robert Barry:]

Got it. Just one last housekeeping from me, is there, sounds like there is a tailwind in the walk [ph] year-over-year from variable comp, is that a tailwind in the EBIT progression or the EBITDA progression year-over-year? How much is that?

[Jeremy Smeltser:]

Yes, that's an assumed, within the $10 million to $15 million range depending on exactly where we end up within our guidance range.

[Robert Barry:]

Got it. Thank you.

[Jeremy Smeltser:]

Thanks Robert.

[Operator:]

Our next question comes from John Walsh with Vertical Research. Your line is now open.

[John Walsh:]

Hi, good morning.

[Jeremy Smeltser:]

Good morning John.

[Marc Michael:]

Good morning John.

[John Walsh:]

So clearly very good cash execution in the quarter guiding to 110% conversion at the midpoint for next year inclusive of the restructuring cash. How should we think about that rate going forward? I mean clearly there's some enthusiasm from all of us that we are at the beginning of a cycle here, you know, large projects obviously, there will be some down payment but there is also going to be a use of cash and needs on working capital as the top line grows. What should we think about as kind of a normal range for free cash flow conversion going forward?

[Jeremy Smeltser:]

Yes, there I think that the slide that Ryan and Stuart have included here in the deck today is pretty helpful and really kind of all inclusive of what I'll call any abnormalities in timing. From a net income perspective, I mean we've been very transparent that we have around $20 million of amortization in the P&L which is obviously non-cash and around $15 million to $20 million of non-cash comp related expenses and so our goal is to continue to harvest working capital offset. Any investments we need to make and strategic investments in working capital or growth investments working capital by finding other areas to reduce, hold the line or even on a net basis reduce, and so I think thinking long term 120% conversion for me personally that's where I think the business should convert with the current mix that we have. Obviously it will be lumpy with the large project, down payments and the resultant cash outflows and what we intend to call those out and point out the like we have in the 2017 and 2018 comparison slide here. And I think one of the ways to think about that slide is to kind of average out the two-year period a little bit because of some of the lumpiness and some of those material items and that kind of gives you a flavor for directionally what we should be able to generate on an annual basis.

[John Walsh:]

Got you, thank you. And then as we think about the incremental guidance, clearly very strong conversion there, we have the restructuring savings that obviously flow through from the prior actions. You've called out the dairy project mix, FX is going to obviously hit all the different segments. But can you talk about maybe what’s helping you on the mix side in Power and Energy, in Industrial and I'm guessing some of that Industrial is the mixer business, but maybe just give us a little more color to kind of get more confidence in that?

[Jeremy Smeltser:]

Yes, so in Industrial you're right, the mixer business and I mention the backlog up 30% in that particular product line year-over-year is a nice driver for us. And I also mentioned in the last quarter's call that you know there's a real key in moving from this $180 million revenue level up towards the $200 million level for that segment to where we really start to leverage nicely up into the mid to high teens like we have historically. So we're not quite there yet, but we're starting to move in that direction here assuming our 2018 guidance. With Power and Energy is a couple of interesting things going on. One, as I recall in Q1 of 2017 we actually lost money in the segment income line and that was really driven by a very low level of revenue in that particular quarter and this year we're a little more level loaded on revenue throughout the year which is driving a lot of the improvement. So that's the tailwind, but from a headwind perspective as I mentioned earlier, we're going to see a drop off and we expect a drop off in the midstream particularly the valve product line year-over-year, even though it's steady in the second half of ’17 and that's our assumption in ’18. We had an incremental $30 million to $40 million of shipments that very good stated margin from those pent up projects that we were awarded in Q1, 2017. So there's kind of couple line items go in two different directions for us. And the other thing in that bridge I think I would just reference and Marc mentioned it briefly. As we have assumed some incremental investment in strategic hires around the commercial organization, some in engineering as well as this Global Process Excellence team that Marc mentioned we would assume those are greater at the end of the year progresses, but don't show much if any benefit until the out years.

[John Walsh:]

And then if I could just sneak one last one in, as we think about the one third of the realignment program that was related to volume declines in the non-structural piece, what sales level would you expect to have to start bringing back in some capacity?

[Jeremy Smeltser:]

Yes, I think we really have to look at that product-by-product and our goal is to me it maximize the efficiency and continued improvement, improve the throughput and that's what this process excellence team is working on and again it's very cross functional including a lot of folks from our GMO. So we look at the utilization in each factory again on a monthly basis and see how orders are shaping up and then we adjust direct labor accordingly. We don't expect that we'll need to add in overhead as a result of order increases. It will be really associated with our direct labor needs based on the order intake.

[John Walsh:]

Great, thank you for the time.

[Jeremy Smeltser:]

Thanks John.

[Marc Michael:]

Thank you.

[Operator:]

Our next question comes from Brett Kearney with Gabelli and Company. Your line is now open.

[Brett Kearney:]

Hi guys, good morning.

[Marc Michael:]

Good morning, Brett.

[Jeremy Smeltser:]

Good morning.

[Brett Kearney:]

I want to ask somewhat related question, I know your CapEx guidance of about $30 million pretty consistent with the 2018 framework you communicate earlier. And I know you also indicated you guys are evaluating adding a few more machines in 2018. I just want to see if you're thinking has evolved at all or whether there are some flexibility, more opportunities with the accelerate depreciation on 2018 or if that number could fluctuate at all?

[Jeremy Smeltser:]

It certainly could fluctuate, Brett. I think that number based on the projects that we see in the pipeline is probably directly the right number right now. I think you know overall impact of tax reform I don't think it will have a dramatic impact on our investment approach. I would say in general the improving environment though and our desire as Marc mentioned a couple of times here to really switch the focus for the realignment program to growth and continuous margin improvement will drive us to make some of those investments in 2018 and likely in 2019 and 2020 as well and it is still I think with depreciation a little over $40 million, we have room to invest more if the returns are there and we see the growth and certainly we have ample liquidity to do so.

[Marc Michael:]

And then one thing I would mention also is based on our actual spend from where we exit 2017 it is a about a 50% increase, and the focus is on our high returning product lines and probably 60% to 70% of the investment that we want to make is going to go into our highest returning product lines. And this has been a benefit the outcome of our strategy assessment and development in the second half of last year and looking at all the product lines that we sell into the market and what type of return we get for those. So it's really been a good process for us in the second half of the year to align where we're going to deploy capital in the broader sense as we move through not only 2018 but into 2019 and into 2020 as we look at the key product lines.

[Brett Kearney:]

Great, very helpful. Thank you, guys.

[Ryan Taylor:]

Thanks Brett. This is Ryan. That concludes the - that's the time we have for the call today. We really appreciate everybody joining us. Stuart and I'll be available throughout the day to answer any follow up questions that you may have. So, thanks again for joining us and we'll talk to you next time.

[Operator:]

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