SPX FLOW, Inc.

Good day and thank you for standing by. Welcome to the SPX Flow Q1 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone keypad. If you require any further assistance, please press star 0. I would like to hand the conference over to your speaker for today, Mr. Scott Gaffner. Please go ahead.

Thank you, Francis. Good morning, and thanks to everyone for joining us for a discussion of our first quarter 2021 financial results. This morning we issued a news release detailing our financial performance for the three months ending April 3, 2021. The news release along with a presentation to be used during today's webcast can be accessed on our website at spxflow.com. And a replay will also be available on our website later today. Joining me today are Mark Michael, President and CEO, and Jamie Easley, Vice President and Chief Financial Officer. Following their prepared remarks, we'll open the call for questions. Before we begin, a brief reminder that elements of this presentation contain forward-looking statements that are based on our current view of our business and markets. Those elements are subject to change. We ask that you view them in that light. Principal risk factors that may affect our performance are identified in our most recent SEC filings. In the appendix of today's presentation, we provide a reconciliation for all non-GAAP and adjusted measures presented. And with that, I'll turn it over to Mark.

Great. Thanks, Scott. Appreciate the introduction. Good morning, everyone, and thank you for joining us on the call. It's an exciting time at SBX Flow. Our mission and strategic objectives have never been clearer. We're a process solutions provider focused on improving the world through innovative and sustainable solutions in the nutrition, health, and industrial markets. Our three-year strategic objectives, which we laid out at our investor day in March, are are supported by our four foundational pillars you see here. This focus is guiding us towards both our long-term financial goals and near-term operational performance. We have intentionally changed our historical paradigms to create an inflection point in operating results which is evident in our quarterly results. First quarter performance improved as markets continued to recover and our internal initiatives gained momentum. Orders improved as short cycle demand remained solid and systems orders were significantly better while keeping project selectivity a priority. Industrial CapEx continues to recover with a building pipeline of projects. The economic recovery combined with our improved operating performance drove a 19% increase in organic revenue in the quarter that was nearly evenly split between the segments. Operating income margins significantly improved by 550 basis points and supported by a higher quality of revenue from the work we've undertaken to segment our product lines through an 80-20 lens, a positive impact from our cost programs, lower corporate expense, and effective management of price cost. We also met our commitments in the first quarter to disproportionately invest in capabilities in our high-growth and high-margin product categories that are aligned with our priority markets. We doubled our capital spending by investing in plant modernization and also increased R&D investment by more than 20% to support new product development. Our programmatic M&A process is building momentum with an attractive pipeline of opportunities. We've identified M&A targets using a disciplined approach with an objective of both high returns and alignment to our strategic priorities. This resulted in the acquisition of UTG Mixing in the quarter, and last week we announced a definitive agreement to acquire Philadelphia Mixing Solutions. Lastly, I'm pleased that we've been able to return excess cash to shareholders in the form of a dividend, which we initiated during the first quarter, along with the continuation of our share repurchase program. The economic and in-market recovery that we experienced in the first quarter was broad-based geographically, supporting our 19% organic revenue growth rate. As anticipated, the year-over-year revenue growth was most significant in China, where first quarter 2020 results were heavily impacted by the initial outbreak of the coronavirus. However, we also experienced a significant acceleration in North America and EMEA, with total revenues growing at mid-teens in North America and at low to mid-teens rates in EMEA. Jamie will provide an assessment of year-over-year orders during his prepared remarks. As we highlighted on our Investor Day, the deployment of 8020 provides a framework to create focus on an outstanding customer experience and provides clarity on how and where we want to grow profitably. Throughout last year, we built cross-functional growth teams that are empowered to own and execute our strategy of driving profitable growth, and the first quarter results highlight the success of these efforts. During the quarter, we achieved a 26% growth in revenues in our growth product lines and also built a base for future growth with a 35% increase in the CRE category, which consists of our nutrition and health systems business. We will continue to oversee our, excuse me, we'll continue to over-serve our highest priority and best customers in 2021 to drive a higher quality and improved mix of revenue. Taking a look at orders, we continue to see momentum following the low points of 2020 demand. Overall, industrial orders were sequentially stable with modest increases in demand for our short cycle product categories. Our OE project pipelines continue to improve during the first quarter, and we experienced solid growth in demand in both China and EMEA. Demand in our nutrition and health business remains robust. The commercial team did an excellent job partnering with our customers during the quarter to deliver a strong start to the year. Sequential systems orders were down as we experienced a more normalized level of order intake following an outstanding fourth quarter, most notably in China. Our short cycle orders, while down slightly on a sequential basis, remain at relatively high levels versus historical rates and have shown resiliency throughout the pandemic. The strong start to the year builds a base from which we believe we can continue to grow through the course of 2021. Our year is off to an excellent start. The improved economic outlook combined with our strategy to drive a higher quality of revenue mix and improve our cost structure gives us confidence in achieving profitable growth in 2021. Based on the solid revenue performance during the quarter, we are raising our full-year revenue growth assumptions to the high end of our prior range and now believe organic revenue will grow at a mid-single-digit rate during 2021. At the same time, our productivity initiatives are progressing to plan, which supports continued earnings improvement as we look forward. So a great start to the year and a validation of the strategic objectives we laid out in March. And with that, I'll turn it over to Jamie to cover the financial review.

Thank you, Mark, and good morning, everyone. I'll begin with a recap of the first quarter. The first quarter results are highlighted by significant operating leverage from higher volumes and operational improvements from our strategic choices. Organic orders were strong in the first quarter, up 10% with meaningful outperformance in health and nutrition, including a notable increase in our systems business. Organic revenue was up 19%, driven primarily by $40 million of higher shippable backlog to start the quarter. Importantly, we saw broad-based recovery in our short-cycle revenue streams spread evenly between our nutrition and health and industrial segments. Most notably... Operating margin came in at 11.3% of 550 basis points as operating leverage was aided by mix and structural cost improvements. We are also following through on our commitment to allocate capital in a balanced manner. To support our profitable growth initiatives by better serving our key customers, we doubled CapEx in a quarter. Those investments were focused on plant modernization and capacity expansion at critical sites. We also increased our investment in R&D by more than 20%. In March, we initiated our first ever quarterly dividend, a sign of our belief in our talented team, strategic direction, and the long-term earnings potential of the company. We also continued to return cash through our share repurchase program, acquiring $10 million of stock in the quarter. We continue to use our disciplined programmatic M&A process to identify targets that align with our strategic objectives and meet key financial criteria. I'd like to personally welcome the UTG Mixing team to SPX Flow following the close of our acquisition in January. I would also look forward to our anticipated closing of the Philadelphia Mixing Solutions transaction later in the second quarter. Both businesses represent great brands, talented staff, and innovative cultures. Looking at the segments, beginning with industrial. In total, organic orders were down 4% year-over-year, driven by timing of capital projects, which was partially offset by broad-based growth from short-cycle products. Organic revenue increased an impressive 18% in the quarter, driven by higher shippable backlog that we previously noted and an elevated level of short-cycle book-and-turn business. Most notable was the year-over-year improvement in segment margins, which were up 500 basis points to 12.1%. This result was driven by greater volume leverage, our focus on improving the mix of revenue, and managing positive price costs. Moving on to nutrition and health. We generated significant increases in orders, revenue, and segment profitability. Our orders increased over 30% with meaningful strength in China and North America driven by higher systems orders. We also experienced strong demand for our higher margin short cycle product categories, which were up low double digits with growth observed around the globe. Organic revenue is up 19%, attributable to higher shippable backlog entering the quarter and elevated short cycle book and turn business. Based on the volume recovery, along with improved mix, solid project execution, and positive price-cost outcomes, segment margins expanded by 240 basis points. Looking into the second quarter, we anticipate organic revenue momentum to continue, driven by approximately $35 million of higher shippable backlog year over year. Currency translation and completed acquisitions should add a combined 6% to the top line in Q2. We anticipate modest sequential margin improvement driven by volume leverage in the second quarter. Lastly, we anticipate closing the announced acquisition of Philadelphia Mixing Solutions later in the quarter, but anticipate a limited impact on our financial results in the period. Turning now to capital allocation. I will first reiterate some of the thoughts that we outlined in our recent investor day. Based on our capital allocation framework, we expect to fully fund organic growth investments, including increasing the amount of R&D and innovation spend more broadly. We achieved this objective in the first quarter by doubling CapEx and funding a greater than 20% increase in R&D concentrated in the product lines we were expecting the most growth. Our framework for capital allocation calls for acquiring $200 to $300 million of incremental revenue through M&A from 2021 to 2023, beginning with the first quarter closing of UTG Mixing Group and our forthcoming close of Philadelphia Mixing. Lastly, as we have cash in excess of our forecasted needs, we will return cash to shareholders, doing so through the dividend and share repurchases I previously mentioned. I'd like to close with some details regarding last week's announced signing of a definitive agreement to acquire Philadelphia Mixing Solutions. The transaction is consistent with our stated strategic and financial objectives, starting with attractive organic growth profiles in chemical, petrochemical, and environmental end markets. Philadelphia Mixers has a very high quality of revenue, evidenced by greater than 40% gross margins, with room for enhancement through aftermarket growth, operational improvements, and supply chain initiatives. The transaction will combine two of the top mixing brands in North America. It will further bolster our position as an innovative provider of essential products and process solutions that help make the world safer, healthier, and more sustainable. Based on the complimentary geographic exposure and product and process capabilities, we expect both businesses to benefit from economies of scale as well as complimentary channels and footprint. We believe we at Flow can leverage Philadelphia Mixer's strong sales team, product offering, and unique engineering capabilities to provide our key customers with a more robust lineup. We will purchase the company for $65 million, utilizing cash on hand. The purchase price represents an attractive multiple of approximately 1.3 times trailing revenue. We expect cash ROIC to exceed our WAC within three years. And with that, I will turn the call back over to Mark for some closing comments.

Great. Thanks, Jamie. As we've strengthened our focus on process solutions, it's become clear that we provide a differentiated offering to our customers, channel partners, and employees. So I'm excited to unveil our new tagline for the company, Solutions in the Making. We chose this tagline because it reflects our identity. We improve the world through innovative, sustainable solutions. We help customers clean and conserve water. We help them manufacture everything from milk and medicine to plant-based food and personal care products. and we help them lower cost, increase uptime, save energy, reduce waste, and improve quality. Solutions in the Making also speaks to our culture. We want to be known for being a great place to work where everyone has a sense of belonging. We embrace teamwork, collaboration, and innovation. We develop diverse and highly engaged teams, and we want to help provide solutions to create better communities where we live and work. We take pride in solutions in the making and all that it stands for at SVX Flow. In closing, as we look to the future, we're thinking and acting more aggressively to create an inflection point in operating results as evidenced in our Q1 results. The deployment of 8020 has created a foundation and provides a framework for focus and clarity on how and where we want to grow profitably. We've begun the process of disproportionately investing in our high growth and higher margin product categories that are aligned with our focus markets and customers. Our plans are accelerating irrespective of market conditions. We're refocusing our resources to those areas that generate the highest return while expanding margins through increased productivity. With our balance sheet strength in the cash generation of the business, we are well positioned to invest through economic cycles. Organic capital allocation will be targeted to our highest returning technologies through investing in R&D to accelerate new products and technology development, deploying CapEx to modernize our facilities and improve efficiency to meet customer demand, and roll out additional digital capabilities to create a better customer experience. Additionally, Our programmatic M&A process is building momentum following the closing of two acquisitions and the recent announcement of a definitive agreement for a third transaction. We'll continue to identify attractive M&A targets using a disciplined approach with an objective of both high returns and alignment to our strategic priorities. And when we have excess cash, we'll continue to make returns to shareholders. I'm proud of what our team has accomplished Together, our actions have created a strong culture, a more sustainable earning stream due to a higher quality of revenue, and a foundation that allows us to shift offense, which we expect will lead to accelerating growth and operating performance. And with that, we'll now open it up for your questions.

Okay. As a reminder, to ask a question, you will need to press star 1 on your telephone keypad. Please stand by while we compile the Q&A roster. And your first question comes from Nathan Jones from Mosquito. Your line is now open.

Good morning, everyone. Good morning. Good morning. Good morning. Just our first question on the guide at organic revenue growth at mid-single digits. I mean, we're close to 20 in the first quarter. The order rate suggests probably close to 10 in the second quarter. I know you do have to give back a bunch of days in the fourth quarter that creates some headwind there. But even adjusting for days, it looks like, you know, kind of the revenue guidance in the second half from an organic same-days perspective is about flat. Again, relatively easy constant with an improving economic backdrop. So I'm just wondering what it is you're seeing out there that's kind of holding back the confidence to be maybe a little bit more constructive on the revenue for the full year.

Yeah, sure, Nathan. I'll start, and maybe, Jamie, you could add any additional thoughts. You know, as you mentioned, Nathan, we agree economic indicators, as we all see in the market, are encouraging with the a good backdrop. So a continuation of performance from a market perspective should be there. We have a strong backlog going into Q2, as we indicated, up by $35 million. So really a strong view of the first half of the year compared to where we were last year. What I would mention, a couple of points that I think are important. Q4 2020 revenue as we look at last year versus this year, there's about $15 to $20 million more revenue in Q4 2020 versus this year. And as a part of our 80-20 efforts, there's about $10 million of lower margin business that we're pruning that was in Q4 last year that won't be in Q4 this year. So that's somewhere in the neighborhood of $25 to $30 million, let's say, that's not in our Q4 outlook this year. Maybe a couple other points. The short cycle nature of our business now, 70% being short cycle and really high margin quality, has gone up at a pretty steep rate over the past three quarters as we were in Q3 through Q4 and in through Q1. So the economic backdrop remains strong, but we would anticipate a bit of a flattening of that steep slope of the line as we've gone up over the last three quarters. No real concerns, just, you know, the line could flatten out. And additionally, I would say, you know, the industrial part of our business, the CapEx spend has still been a bit choppy from customers. And that's a positive, which we expect to come back. But, you know, we're still waiting to see how that shapes up. You know, so in the end, as we look at kind of the extenuating factors that are kind of existing out there still with COVID and some of the uncertainty, this pandemic big recovery we had in short cycle business, still some question marks as we look across the globe and how some of the CapEx may come back into the market. And as we've taken a look at the second half of the year, we feel like we've been very prudent. And I would just close with saying, you know, our focus and emphasis is really on the long-term strategy as we laid out, you know, a few weeks ago in March or back in early March. Annual growth rate, low to mid single digits, get to mid-teens operating margin over the next three years. Just finished a great quarter, right, so we're off to a very good start on that pathway to achieving that long-term objective. So I think we're really in a good spot as we go through the rest of the year to perform at a high level. And I want to remind everyone, too, part of that margin improvement that we're looking to achieve not only within this year in the second half, and our SG&A productivity program will also help support that long-term mid-teens margin. So as we move through the second half of the year, you know, I do expect margins to continue to improve also. So I'm really happy with where we are as we started the year. We're progressing well, and I think we'll continue to see, you know, overall improvement and profitable growth as we move through the rest of 2021.

Maybe a follow-up for me then on price-cost. You guys noted I think both segments positive on price-cost in the first quarter. There's obviously a lot of inflation out there, raw materials, freight, all kinds of things. Do you guys anticipate being price-cost positive for the full year? Does that pull back to neutral or how are you managing through all of those challenges at the moment?

Yeah, that's a good question that I know is very prominent. And I'm really proud of our team. I'll just start there. We've got a good team that's looking at cost price continuously. And this even goes back to when we saw some inflation starting to pick up back in 2018. We revamped our process around that. We have a Tiger team in place that consists of product management, our operations team, and our finance team. And they come together on a regular basis throughout the month. And then I review that with them along with Jamie at the end of each month and how things are shaping up. And we make adjustments very rapidly now when we see inflation. And we're really in front of it. We're not looking at it from a trailing perspective. So as we go through the year, I anticipate and expect we'll stay ahead of the curve on any inflationary impacts that And, you know, be modestly positive as we exit 2021. Thanks for that.

I'll pass it on.

Thanks, Nate.

Thanks, David. And your next question comes from the line of Julian Mitchell from Barclays. Your line is now open.

Hey, guys. Pretty nice quarter there. Nice job. It's Gavin. I'm for Julian, by the way. Good morning. So backlog was sort of flat organically in Q1. Sort of was wondering, can you talk about, you know, what was driving that flat backlog and how that kind of factors into your expectations, particularly for industrial in the back half?

Can you just provide a little color of what reference points you're providing on backlog?

Sure. Sure, yeah. I think it was flat in Q1 organically, driven by industrial.

Well, so a couple thoughts. One, as we've provided some assumptions for Q2, what we've said is the backlog, shippable backlog in Q2 is up $35 million. So as you're thinking about the next quarter, It's important to understand the improvements in backlog year over year. I think what you may be looking to is our total backlog stats and figures, which will gate and convert to revenue over time. But as we look at the starting position now relative to a year ago in a much better, firmer spot by way of backlog, and then the quality of backlog is there, too. So Mark mentioned a few times the nature of our business now being more short cycle. So those are going to be – product lines that have above average company margins in general convert better, go through our factory quicker, absorb nicely, and that's part of the mix and absorption improvement that you're seeing on the margin line. So that's the way we're thinking about backlog as we kind of sit here now.

Yeah, and I would just add to that, echo everything that Jamie mentioned, and the short cycle nature of our business, you know, about 75% of our revenues are in backlog going into each quarter, and we then convert about 25% of our bookings within the quarters into revenue. So to the point that just the mix of our business being so much more short cycle now, we anticipate that that'll be more the case, that you won't see dramatic swings of upticks in our backlog, given our project business is such a lower percentage. I would mention then, again, also that, you know, what we've seen in the industrial markets still is, you know, slow capex going into industrial projects compared to where we were before the pandemic. So our pipeline is building, our front log is building in industrial projects. So that's an encouraging sign. That can help the backlog going forward, but – will not expect that, you know, we're going to see things like we've historically seen in the SPX flow world when we had power and energy and, you know, a larger F&B systems business where we have, you know, backlogs that are moving up rapidly based on project-based business coming back in. Understood.

Thanks. And maybe another one for me on incremental margins, you know, pretty strong performance here in Q1. I was wondering if you could sort of update us on, you know, what you're thinking for the balance of the year in terms of incremental margin outlook. Recognize that you have gotten to that sequential margin improvement. I was just wondering if there are any changes to your way of thinking about what incremental margin should be for the year.

Yeah, thanks for the question. What I would point you back to is the assumption that we've provided in the 2021 framework, which are sequentially improving margins throughout the course of the year. And the way to think about that is a consistent level of short cycle orders. But as you think about that going through the year, that's going to provide benefits on absorption. There's going to be mixed benefits in there, too. And as well as Mark mentioned, we've got our SG&A reduction program that's running that's going to have some operating profit margin benefits in the second half of the year.

Yeah, so that's a, you know, just to add a bit on the SG&A program, it's a $25 million program as a reminder, and we're progressing on track with that program, and the majority of what we're anticipating for this year, say roughly about half of that, will hit in the second half of this year.

Right, so the assumption is, sequential improvements in operating profit margins over the course of the year off a very strong Q1, as Mark mentioned a couple of times. So really excited about that.

Awesome. Thanks so much.

And your next question comes from the line of Dean Dre from RBC Capital. Your line is now open.

Hey, this is Tyler Voigt filling in for Dean Dre. Good morning. Good morning, Tyler. I know you guys have sized, you know, call it 550 million in capacity for M&A over the next three years, and you've been, you know, pretty active this year so far. Can you just talk about kind of what the pipeline looks like from here? And, you know, should we expect more in mixing kind of as, you know, Philadelphia and UTG were, or are you looking at other areas as well?

Yeah, so I'll mention that the pipeline is very robust, as we mentioned in our prepared remarks. We're being very programmatic. We have a great program in place that Busa Malinga has orchestrated over the last few years. The process around it and how we evaluate acquisitions opportunities, building the pipeline, And importantly, are acquisitions aligned to our strategy? If you look at the acquisitions that we've done in mixing with UTG and Philadelphia Mixing Solutions just announced, that's a big priority for us. Our first screen is to evaluate how acquisitions align to to our strategy, and then we look at the economic implications and impacts, obviously. So our goal is to look at acquisitions, again, that hit the strategy, will help us provide a better presence to customers and how we serve them and stay aligned to that as we move forward. So I'm really pleased with the progress we're making. And, again, the funnel remains robust, and we'll continue to work through opportunities as they present themselves.

Great. Thank you. And then just another, in terms of your guys' kind of project selectivity efforts, you know, in nutrition and health, are you guys passing on any large system orders, or are you still, you know, fulfilling those and kind of slowly fading those away?

Well, just as a reminder, you know, we really moved away from large dry dairy systems projects. And so those were projects that really didn't fit the profile of the type of business that we wanted to participate in. So our emphasis has been on technologies where our customers see a really high value proposition. And if... they really revolve around liquid processing. So think about fermented dairy, think about plant-based foods. These type projects are very attractive for our customers because of the technology that we bring, but we also like them because that's where we build an install base. There's a lot of factory content in those particular types of applications. So those are things that we look at as a starting point. In regards to size, But, you know, we'll take on larger-sized projects in the liquid space, again, if they meet those criteria that I mentioned, because that's the first most important part of the script. Good value proposition for the customer, good factory content, builds our install base. We know we can execute them very well for our clients. And then we – and, you know, size – is not as an important factor in the determination when we think about the projects that we want to pursue that meet those criteria.

Great. Thank you. You bet. And your next question comes from the line of Nigel Covey from Wolf Research. Your line is now open.

Hi, good morning. I'm on for Nigel. I have a specific question on the supply chain. We heard that there are several supply chain constraints, and since you manage a global business, I was wondering if you are seeing any impact on your business from supply chain constraints.

Yeah, great question. It's certainly a topic that's top of mind for us and everybody. A couple of thoughts. Volumes are up around the world for sure. And I think capacity as it relates to freight is one thing that we're watching very closely. So you hear a lot about tight containers. You hear about ports being blocked, that type thing. And so it's a common issue that we're watching. Back to a couple of comments that Mark said around our pricing team. We've also been very proud of what our sourcing team, led by an individual that came into our company last year, Doug Hippel, has been able to do. So that team has really started looking at forward-looking purchases with our commercial team on expected demand and getting ahead of supply chain expectations and needs and shifting that around to the extent we need. We've also thought about and made some changes around safety stock levels so that we can continue to meet the needs of our customers. So I would frame it up as very aware and watching the situation. Team is performing at an exceptionally high level here. And so it's great to say that at this point we've not had, you know, any meaningful disruption as a result of supply chain issues. And, you know, kind of expect that that could stay that way based on some of the things we've put in place.

And I would just maybe add just a couple additional comments. You know, we source locally in the markets where we do business. 80% to 90% of the materials that we buy. So a high percentage of the materials that are going into our factories come within the regions where we do business. Again, and just to reiterate one of Jamie's points and what our supply chain team has done throughout the course of 2020 during the pandemic is is look for alternative sources as well. So we've been able to manage very well through 2020 with supply chain. We're continuing to manage well here in 2021 with our supply chain. And Doug and his team are just doing a fantastic job.

Thank you. And if I may add one more thing, What's the outlook for the NIH business, and can you break it down by region? And I was wondering how has your bidding process changed from the past, and how do you see the mix of systems versus components?

Okay, a bit to unpack there. So you're interested in region and mix, right? And what was the third thing?

The bidding process.

The bidding process. Okay, I may need some clarification on the bidding process. But, look, our nutrition and health segment is a franchise business for us. It's a very strong business across all regions. Now, there's some nuances to how business is done across regions, across Asia and Europe, we have a combination of our systems business and our components and service aftermarket. In the North America market, where we have a strong base, it's more of a component and aftermarket type business, less about systems. So that's a backdrop I think is important to always consider. So what we see typically in our order profiles for systems is, Given that that can be a bit of a lumpy business, it usually will happen between Asia and specifically China and then across Europe. So that's where the majority of that business comes from. As we look at our component business, it's very prominent across the globe as we work not only to service our own install base, we also work with integrators and across the globe. And again, predominantly, that's the market in North America as an integrator market, as well as some OE customers. So the mix we expect to really continue in a similar fashion, right? If you look at our systems business over the last couple of years on a quarterly basis, you'll see that it's between $50 and $60 million a quarter. with some upticks we've historically seen in the fourth quarter with some larger order intake. But if you look at the average, it's probably somewhere between $50 and $60 million a quarter. And we expect and want the mix as we focus on our efforts around our componentry sales in food and beverage to continue to improve as we move through the next three years. That's a part of what we're doing with our 80-20 process is really placing a high emphasis on these high margin component and aftermarket service business. So we want to see that mix continue to improve as we move through the next three years as part of our plan that we laid out back in March. Okay. Now, I'll need to ask a point of clarification on what you meant by the bidding process.

How was your bidding process changed compared to the past for the system process and so on and so forth?

Yeah, I mean, our bidding process, we made changes to our bidding process, you know, going back two or three years ago now when we, number one, started exiting the dry dairy industry. systems business. And as we did that, we placed an increasing emphasis on looking at what's the content that goes into liquid systems that go into customers and fermented dairies and plant-based foods. So as we evaluate that, what that content looks like, we'll make decisions then on what type of margin profiles make the most sense for that customer on a case-by-case basis. Because keep in mind, these projects are typically worked on for many months, and they're a bid-for-bid activity. So each project kind of has its own story, so to speak. So we have to look at them individually.

Thank you. Very helpful. You bet. Perfect, Tom.

And your next question comes from the line of Connor Lineup from Morgan Stanley. Your line is now open.

Yeah, thanks. Connor here has advertised.

Good morning, Connor.

Good morning. I was wondering if you could just help me think through the sort of holistic view that you guys are taking with M&A and sort of what you've done with the deals thus far. I guess I'm just trying to better picture Are you adding more content to the same customers? Are you adding new customers? I think you were highlighting the Salesforce on developing and mixing. So is the main channel of value creation that you can take more share on a specific project, that you can do entirely new projects? How should I think about what the growth that you're adding is beyond just buying the revenue, of course?

Yeah, so as part of our assessment that we do on each opportunity, we clearly assess cost synergies as a view of where we can do things through supply chain, for example, in the factory environment. It's an important place that we look first on the synergy side on cost. And then on the market side, there's a deep assessment that our product managers and our commercial teams do to assess where there are access opportunities to customer bases that we don't have today, that not only can we pull through technologies that may have differences between two mixing companies or two brands, but we also look at other products that could go into those same applications. So if – If a brand has a better position, in this case you mentioned Philadelphia Mixing Solutions, which we just announced, at a particular customer, there may be other products within that particular customer base that we can also supply from the other SBX Flow brands. So that's an important piece that we look at. So we look geographically, we look at the customer base, and then consider where we can get access on that. both those points, not only for the mixing piece, but the other products that we can provide into them. You mentioned the sales force. One of the things that we really think is interesting and we like about Philadelphia Mixing Solutions sales force is they do a lot of direct selling with a lot of chemical engineering sales people. So they have really strong customer relationships on The important part for how we like to position ourselves with customers around process. So we're looking to provide customers a solution in their process. And so for Philadelphia Mixing, their sales force has a great team of chemical engineers that we feel is going to be very valuable for our entire mixing business as we go in and work with customers to create a solution for them, not just sell a piece of equipment, but create a solution for them. And that's where, too, we'll look to pull through other brands and pieces of equipment that could fit that application.

Hey, Connor, I agree with all that Mark said. I'll add one more piece. You hear us talk a lot about the innovative culture that we're driving and the increased investments that we want to make organically in our business. So a screen that we look to in the acquisitions is to pick up cultures and teams that have been successful on that front. And back to the Philadelphia Mixers brand and business, that's something that they've been at for a number of years. And we're really excited about what that can bring into our team and we can utilize across the whole of our business.

And that screen, too, includes not only the culture but also the products themselves, right? So we look at what mixing capabilities we have in this case, what mixing capabilities does UTG have, what mixing capabilities does Philadelphia Mixing Solutions have, and how does that all match up to technologies as well as markets and customers that we want to serve?

Yeah, understood. And I think – maybe worth clarifying just because it sounds like you're adding, you know, more content. It sounds like you have the potential to do some larger projects or larger scope, uh, things. And I guess the contrast here versus some of the bigger projects that you've been trying to get out of and wind down is that you have a lot more control, correct? So basically what I'm wondering is, um, if we think about the, the margin potential or, or, um, you know, accretion potential. Would you say that sort of adding these types of solutions and direct sales forces could be a margin boost, or do you think it would be sort of neutral to margins but gives you more revenue?

Yeah, well, maybe a clarification point first. The project business that we exited is dry dairy systems. That's done. It's behind us. It's large dry dairy systems, right? We're not trying to get out of doing project-based business, systems-type business in our food and beverage or nutrition and health segment. We'll continue to do that. When we talk about projects in the industrial space, they're not large integrated EPC-type projects. They're still providing discrete pieces of equipment that are tailored for that process application. So it's a completely different dynamic there. When you talk about doing a food and beverage facility or plant where we're providing and creating fermented dairy products that come out or plant-based, we're working with customers in the industrial space, whether it's in wastewater or mining or chemicals, specialty chemicals, to create and provide them with equipment that meets their process application needs, gets them the outcomes they're looking for. So it's a completely different scenario. So from a margin perspective, there's no real concern or issue with margins in that space. It should be really consistent margins with opportunities to enhance pulling through the other products that we want to sell into those applications that also have good margin profiles. so we can leverage our entire base of products across our portfolio and our operations in a much greater way.

Maybe I'll just add, I think, Connor, as you were making reference to projects, you were referencing our projects in M&A transactions, possibly. So what I would say is, that the transaction in the case of Philadelphia Mixers and UTG and even going back to the PosiLock deal that we did last year, these all fit the financial profile that we laid out in our investor day, which is looking for high-quality revenues that are accretive to our gross margins and our operating profit margins and EBITDA margins. So what I would say is that all of these transactions fit that bill. Now, of course, there is a period of time in which integration activities need to happen before all that shows up in the P&L, and that's the way we frame the value creation thesis around our cash ROIC exceeding our WAC within a period of time. But just to confirm, these are high-quality revenue businesses that are attractive, and that's part of our screen.

Yeah, they approach, you know, we said we want to get to 40% gross margins, and they are at or above that, you know, and that's part of what we look at.

All right. Thanks, Connor.

Thanks, Connor.

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

Hey, guys. I just wanted to ask a question on the departure of Dwight Gibson. And, Dwight, if you're listening, congratulations on the CEO role. But I know he's been an important part of your leadership team, Mark, over the last few years and a big contributor to the strategy and where the company is going. What are you doing to cover for him in the short term, and do you guys think you have the right replacement on the bench? Are you going to conduct an external search? Just how are you going through that?

Yeah, no, I appreciate you asking the question, Nathan. I was actually hoping someone would ask that question because, you know, again, a shout-out to Dwight. We're going to miss him. He's been a great member of our team, and as you indicated, he's been a big contributor to And that legacy will carry on. The things that he brought to our team and to the business have been tremendous over the last five years or so that he was with us. Proud for him, proud for his family, and he's well-prepared. for the journey that he's about to take in his new role. What I would mention about the team, the team that Dwight assembled in the commercial organization is a very experienced and capable team. The other thing I would mention, we have a very mature business operating system now. So our commercial team is a part of that management cadence that we do every month. So I know all the commercial team leaders very well, and we meet with them monthly to review kind of key points of importance in our business. So that commercial team knows the playbook, and they're going to continue to run that, and I'm very confident in their capabilities, and they'll continue to be successful as we go through a transition period here. I am evaluating the organization. Again, we've got a strong bench, but I want to use this as an opportunity to to make any adjustments that we see and I see necessary to support this long-term strategy over the next three years. So that's what I'm in the process of doing right now. I'm going to take the next 45 days to do that, so say through the end of the quarter here, and then as we go into the third quarter, I'll be in a position to talk more about what the outcomes of that assessment.

Thanks. That was my only follow-up.

You bet.

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