SPX FLOW, Inc.

Good morning and welcome to the SPX Flow second quarter earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Scott Gaffner, Vice President of Investor Relations and Strategic Insights. Please go ahead.

Thanks, Carrie. Good morning, and thank you for joining us for a discussion of our second quarter 2021 financial results. This morning we issued a news release detailing our financial performance for the three months ending July 3rd, 2021. The news release, along with a presentation to be used today, can be accessed on our website at spxflow.com. A replay will also be available on our website later today. As you might have seen in this morning's press release, we have changed the name of our industrial segment to Precision Solutions. This change was made to better reflect the diverse end markets the segment serves and better describe the capabilities that we provide to our customers. Joining me on the call today are Mark Michael, President and CEO, and Jamie Easley, Vice President and Chief Financial Officer of 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, and we ask that you view them in that light. Principal risk factors that may impact our performance are identified in our most recent SEC filings. In the appendix of today's presentation, we have provided reconciliations for all non-GAAP and adjusted measures presented. With that, I'll turn the call over to Mark.

Thanks for the introduction, Scott. Good morning, everyone, and thank you for joining us on the call. Second quarter performance improved as markets continued to recover and our internal initiatives based on 80-20 principles gained momentum. Organic orders were up 16% with growth ahead of expectations based on continued momentum in our short cycle business and encouragingly an increase in OE orders coming from front log related to customer CapEx projects. The absolute level of demand is important, but we're also creating an improved mix of business with outperformance in our higher margin grow and balance categories. Organic revenue was up 14% as we executed on increased shippable backlog to start the quarter, along with growth in short cycle book and term business. In addition, our 80-20 segmentation is driving higher revenue with key customers as we begin to differentiate service levels and responsiveness through our green ribbon program. Operating income margins improved significantly by 260 basis points supported by effective management of price cost, a positive impact from our SG&A cost programs, lower corporate expenses, and a higher quality of revenue. We're on track to nearly double our capital spending with emphasis on investments which generates increased productivity and improved customer experience. And during the quarter, we increased R&D spending by more than 25% to support our new product development with disproportionate investment in our high growth and high margin product categories. 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 Philadelphia Mixing in the quarter. I'm also pleased that we've been able to return excess cash to our shareholders in the form of a dividend and share repurchases. We paid our first-ever quarterly dividend during the second quarter and repurchased approximately $25 million of stock. The economic and in-market recovery that we experienced in the second quarter was broad-based geographically, supporting our 14 percent organic revenue growth rate. As anticipated, the revenue growth was most significant in North America and EMEA. China remained positive in the second quarter with organic growth up mid-single digits, and in the rest of Asia Pacific, revenue was up high single digits. Jamie will provide an assessment of year-over-year orders during his prepared remarks. As we highlighted at our investor day, the deployment at 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 to deliver profitable growth. In the first half of the year, orders for our growth product lines were up by 26% and our balance category increased by 19%. The strong order performance in the first half of 2021 supports our expected growth rates for the second half of the year with expectations for continued improvement in margins resulting from a higher quality mix of revenue. Looking at sequential orders by segment, we continue to see momentum in demand and the benefits of our efforts to win with key customers. Precision solutions orders were up 14% sequentially with continued increase in demand for short cycle product categories, particularly in North America. OE project pipelines tied to customer CapEx remained active in the second quarter with front logs continuing to convert into orders. Demand was solid in both North America and Asia Pacific. Demand in our nutrition and health segment remained robust and was consistent with the first quarter. Sequential system orders were similar to order levels in the first quarter with significant gains in EMEA. Short cycle orders were also sequentially resilient with notable growth in demand for components and aftermarket in North America and Asia Pacific. The first half of the year is off to a great start, and we are surpassing the expectations we outlined at the beginning of the year. The level of organic growth and margin expansion that we now expect to achieve in 2021 is ahead of plan relative to the three-year model we outlined at our March Investor Day, and we're projecting to be on track to our internal objectives for the year. The economic outlook combined with our strategy to generate higher quality of revenue and improve our cost structure gives us confidence in achieving profitable growth in 2021 and beyond. Based on the solid revenue performance during the first half of the year and the outlook for the second half, we expect organic revenue will grow at mid-single-digit rates during 2021. Also, our productivity initiatives are progressing to expectations, which supports continued earnings improvement. And with that, I'll turn the call over to Jamie to cover the financial review of the quarter.

Thanks, Mark, and good morning, everyone. I'll begin with a brief recap of Q2. Our second quarter results are highlighted by significantly higher volumes, strong price realization, and SG&A productivity. Organic orders were up 16 percent with meaningful outperformance in the end markets of our precision solutions and nutrition and health segments. As noted earlier, we continue to drive mix improvement evidenced by outsized growth in orders from our grow and balance categories, which drive higher margin profiles. Organic revenue was up 14 percent, driven primarily by $35 million of higher shippable backlog to start the period. The Broad Bay short cycle improvement in both segments also drove a higher revenue profile in the quarter. Adjusted operating margin continued to show meaningful year-over-year improvement and came in at 11.2 percent, up 260 basis points. with strong price realization and structural SG&A cost savings driving the majority of margin expansion. Lastly, our focus on cash conversion cycles continues to drive results. We generated $31 million of adjusted free cash flow in the quarter, which is a conversion rate greater than 100% of net income. Looking at the segments, beginning with precision solutions, Organic orders were up an impressive 23% year-over-year, driven by broad-based growth in our short-cycle products, along with increased project demand as front logs in these categories began converting into orders. Organic revenue increased 17%, driven by the higher shippable backlog to start the quarter, as we previously noted, and an elevated level of short-cycle book-and-turn business. Segment margins benefited from strong price realization to start the year, along with SG&A cost reductions, which have been actioning over the last year. The benefits of these items were offset by increased period costs to meet customer lead times and investments to support current and future growth. Specifically, we incurred higher freight expense in the quarter, driven by both shipping inflation and mode shifts to countermeasure supply chain delays we were experiencing. Our 80-20 toolbox has been deployed to drive freight efficiency in the third quarter and into the future, while continuing to over-serve our key customers. Also, we made meaningful investments in our direct labor force in the second quarter to deliver on higher volumes seen across many of our product lines. We expect improved labor productivity in the second half of the year and into 2022. As a reminder, our direct labor force is comprised of highly skilled laborers, including welders, fabricators, and assemblers. Moving on to nutrition and health, we generated meaningful increases in orders, revenue, and segment profitability. Orders increased over 7% driven by a mid-teens increase in our short cycle components and aftermarket business. Systems awards were also up year-over-year, as Mark showed on an earlier slide. Revenue was up 11 percent organically, attributable to higher shippable backlog entering the quarter and elevated short cycle book and term business. Segment margins were up an impressive 230 basis points to 16.6 percent, driven by an improved mix of business, strong price realization, and the effects of our structural SG&A cost reduction programs. Looking at the third quarter, we anticipate organic revenue momentum to continue, driven by a low single-digit increase in shippable backlog year-over-year. Currency translation and completed acquisitions are expected to add a combined 6.5% to the top line in Q3. Following a stable level of margins sequentially in the second quarter, we anticipate sequential increase in the third quarter. These improvements will be driven by the favorable mix I previously mentioned, price realization, and improved operating leverage. As you may have seen yesterday afternoon, we have taken a meaningful step forward with regards to our capital structure. We announced that debt refinancing that supports our long-term organic and inorganic growth strategies, increases the flexibility of our funding mechanisms, lowers our annual cash interest by $10 million, and now we have no significant maturities until 2026. Specifically, we entered into agreements that provide us with approximately $1 billion of committed senior secured financing. We are utilizing a new $375 million term loan A to fund the redemption of our current senior notes and to refinance our existing $100 million term loan. I would like to thank our Treasury team and banking partners for their support of this process in driving such a favorable outcome. I'm excited to highlight that during the quarter we issued our inaugural environmental, social, and governance report titled Solutions That Matter. A copy of the report can be found on our homepage, and I would encourage you all to have a look. The report is an important step forward in showcasing how we are committed to leading by example to make our world safer, healthier, and more sustainable. The report showcases specific areas that we are focused on to help our customers reach their sustainability goals. It also describes the actions we are taking to reduce our own environmental footprint through the ways we operate our facilities and oversee our supply chain. Our ESG report also underscores our safety record, commitment to community service, and culture of belonging. Our purpose is to improve the world through innovative and sustainable solutions, and we're proud of our long history of making meaningful change. That concludes my prepared remarks. I'll turn the call back over to Mark for his closing comments.

Our mission and strategic objectives are clear. With 80-20 as a foundation, the level of organic growth and margin expansion that we now expect to achieve in 2021 is ahead of plan relative to the three-year model we outlined at our March Investor Day, and we're on track to our internal objectives. Our strategy is supported by four foundational pillars, people and culture, improving customer experiences, generating profitable growth while expanding margins, and making high return investments. While only six months into the three-year strategic plan presented at our March Investor Day, the company is surpassing year one expectations for our initial 2021 framework. In 2021, we now expect organic revenue growth to be more than 200 points higher than the framework, with an improved quality of revenue coming from a better mix of orders. Our 80-20 initiatives are deepening customer relationships with key accounts by providing unmatched service, and we expect this to deliver long-term growth. Over the past two years, we've improved our pricing strategy utilizing value-based methodologies, and we're tracking ahead a plan on price realization. We've also implemented additional midyear price increases to cover the impact of escalating costs. We're also building a culture of productivity. The team is tracking ahead on our SG&A reduction program and now projects that we'll be 150 basis points lower for the year than the original 2021 framework. We're therefore raising our annualized 2022 savings target from $25 million to $30 million. The significant outperformance in these critical areas puts the company on track to exceed operating income margins for 2021 as compared to the framework. We expect to exit the year halfway between our 2020 results of 9.1% and our 2023 framework of mid-teens operating income margins. Improving operating returns is a top priority for our team. And when we combine strong returns with smart capital investments, we create the opportunity to deliver great outcomes for our customers and shareholders. We continue to reinvest in the business organically and also through our programmatic M&A playbook. So far in 2021, we have closed two transactions in our mixer business with total revenues of $70 million and our pipeline of opportunities across the portfolio remains robust. I want to thank our team members for the impressive results earned in the first half of the year. Your efforts are creating a more consistent and higher quality revenue and earning stream which is leading to value creation for our customers and our shareholders. And that concludes our prepared remarks.

Thanks. Before we turn to the Q&A portion of today's call, I want to touch on our recent announcement regarding the initiation of a strategic alternatives process. On July 26, we announced that our board of directors authorized a review of strategic alternatives, including a possible sale or merger of the company and a continued execution of the company's standalone strategy. As is typical in these instances, no assurances can be given regarding the outcome of the timing of the review process. Until completed or until we deem appropriate, we do not intend to make any further public comments around the process. I'd like to remind everyone that we are here today to discuss our results for the quarter, and we ask that you please keep your questions focused on the earnings announcements. Thanks in advance for your cooperation, and with that, Kara, we can turn the call over to questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then 2. At this time, we'll pause momentarily to enroll our roster. The first question will be from Mike Holleran of RARE. Please go ahead.

Hey, good morning, everyone. So question here on how you're thinking about underlying trends into the back part of the year. You know, obviously the guidance did single-digit organic revenue growth expectations. That implies pretty sizable decel in the back half, which isn't really different from the guidance given last quarter. Obviously comps are tough. And so What I really want to understand here is when you think about the momentum as you're getting into the back part of the year, how do you feel about it? Is the expectation pretty normal sequentials and, you know, the book and ship type businesses and any other kind of color you can give by segment?

Yeah, Mike, hey, good morning. You know, as we look at how we finished the second quarter, we don't see any deceleration as we get into the second half of the year. I think the point that you were making on year-over-year comps and revenue needs to consider the backlog that we have shippable now relative to where we were at this point last year. So I think Mark mentioned it maybe last time we were together, but the Q4 2021 shippable backlog, we do have about $20 million less systems revenue slated for that period. And then There's a few product lines as well in our precision solutions group that will see year-over-year declines in revenue because of selectivity really running that 80-20 program. So underlying demand is strong. We're seeing it consistent through Q2, and Mark will go into some of that in a moment. But the most important element, I believe, to your question is that dynamic in Q4 relative to shippable backlog.

Yeah, Mike, I would just add, again, as Jamie indicated, agree with everything that he just described. You know, shippable backlog is kind of low single digits. Importantly, the mix is improving in that shippable backlog based on that order profile that we outlined. You know, our grow categories, which have margins that are above company average year-to-date, being up 26%. And our balance category, which are at company margins, being up 19%. So that's really positive and encouraging. And when we look at the short cycle business, we knew, and I think the markets can expect, it's been a pretty steep curve or steep line, I should say, upward over the last three or four quarters now. And so you would naturally expect there would be some kind of flattening of that curve, but we're still seeing good demand coming from our short cycle business, consistent demand. Importantly, the other piece of the demand picture that is still yet to fully be realized, we believe, is related to these CapEx projects that customers have had in the queue that we've started to see released as we were going through the latter part of Q1 and through Q2. And that's both in precision solutions and continues to be in our nutrition and health business. So we're really excited about that, and we go back to the mix of revenue again, and the margin profiles that we're expecting on that mix of revenue is continuing to improve, and you couple that with the additional pricing we put into the market, along with, importantly, our SG&A program is running ahead of plan, and that'll really start to kick in in the second half of the year. While revenues are decelerating from a first half to second half, margins will continue to improve, which, you know, it's been our theme and it continues to be our theme, that long-term profitable growth. And we fully expect that to be realized in the second half of the year, that margins will continue to expand as we move through the year, especially as we get into the fourth quarter. Appreciate all that, Colin.

And then on the balance sheet side, Obviously, you made a couple nice tuck-ins here. How are you thinking about pipeline, actionability, size, anything like that? And then, you know, the related question is, does the strategic review change your ability, your desire to go after actionable properties?

Yeah, you know, we've got a robust pipeline, as we've indicated now for quite some time. We've got a fantastic process. I'm just really proud of the process that that VUSA Mlingo helped us put in place going back about three years ago now, and it's really maturing nicely. It's very cross-functional in nature, touching all parts of our organization and regional inputs as well. So a good funnel still exists. We'll be disciplined and selective just as we've always been and continue to execute on that playbook in looking at – you know, these tuck-in acquisition opportunities because those are good value creation opportunities for the business to deploy shareholder capital in that way. So that's not going to change, and we'll continue to run that playbook. Great. Appreciate it. Thank you.

And the next question will come from Nathan Jones of Stiefel. Please go ahead.

Good morning, everyone. I wanted to ask a first question on the impact of 80-20 selectivity potentially on the revenue. I mean, you guys have said that you're being more selective here. You're looking for long-term profitable growth. We're not taking lower margin, no margin projects anymore. Is it possible for you to quantify what you think the impact to revenue will be in 2021 from stuff that you've deliberately not taken? and how that might progress into 2022, 2023, as we think about your growth relative to market.

Yeah, I'll mention a few points, Nathan, that I think are important. I'll draw everyone's attention back to the page in the presentation, our prepared remarks, that outlines the mix improvement. And so the important piece is, is that Our grow categories in the order profile is increasing significantly in our balance category. And when you look at the create category, again, selectivity still remains really important there, and we're focused on projects in our systems business, which is primarily nutrition and health systems business in the create category, on those projects that Just as we've always said, match our capabilities, bring strong customer value, and create an important install base for us in applications, primarily in liquid. So those are important outcomes. Always look at the order profile as a starting point. So still really good progression in our 80-20 efforts to look at the profile of orders we want to take across our different product lines. And in the markets, importantly, too, we've identified some important key accounts. I'll share with everyone, there's about 25 key accounts, 10 of them are global, and five of them, five in each region, so 15 regional accounts. So we've got these really important regional accounts and global accounts in our key account strategy that we're focused on. So while there may be some short-term revenue impacts for some of the business that we stopped doing. The overall longer-term view, even here within the year, we expect to start to improve upon order rates from those key accounts and across the categories we're focused on. Now, one additional point I'll make, and I'll let Jamie add any comments. Jamie mentioned in the prior question An example is about $15 million of revenue in Q4 coming from some of the product categories in the balanced area that we've chosen to really emphasize productivity or margin profiles. So while there is some impact, we are offsetting it in other areas with higher margin business.

Yeah, I would agree with all that. Maybe I'll just add, Nathan, is when you – When you build out the 80-20 quads, what you see is that, to your point, you have non-key customers buying non-key products, and then the team is running to make sure that that doesn't continue. So what happens is, through a variety of actions that we'll take, we may end up finding that those customers end up buying different products, which are easier to get through our factories, etc., etc., And then what you also find is that the efforts the team was spending on those transactions gets redirected to supporting what Mark just described, which are our key accounts globally, which are getting new products into the market, which is over-serving our customers in the aftermarket space. So while, yes, there are two and multiple pieces of the equation, the net outcome of 80-20 is profitable growth. And so that's the way Mark and I are thinking about it. That's the way we're leading the team's And that's the outcomes that we would expect. Thanks for that.

Thanks for that. My follow-up question on the structural SG&A reductions, you took the targeted savings in 2022 from $25 million to $30 million. Can you comment on whether this is just an increase in the pace of realizing these savings, or if, as you're going along, you're finding opportunities to increase the total savings targeted by 2023?

Yeah, good question, Nathan. It's both. So in the first piece of your comment there, the pace, so we'll have a couple million dollars more savings in 2021, but the statement around raising the total productivity savings from 25 to 30 is still a reference to the full run rate in 2022. So the more meaningful piece of this will be that we have found more opportunity within the process that we've been running, and the teams have been able to action that quicker. So that was our goal all along, was to move quickly and swiftly with these programs, get our organization set, and get them geared up for the profitable growth journey that we're on. And so we're really proud of how the teams actioned that and also been able to continue delivering the results that you've seen today, serving customers in the way that we have. So it's really both, and I'd say – We're getting through the majority of those actions now. You've seen the restructuring charges that we've booked here to date, and as Mark mentioned, the savings will start to build up in the second half of the year. So we're in a great spot with regards to not only the structural SG&A actions we mentioned at the beginning of this year, but even some of the results that you're seeing in SG&A now are a product of the 2% to 3% cost realization programs that we've been talking about now for well over a year.

Just a quick one on price cost. Obviously, seeing more inflation than anticipated three months ago, and you also noted that you'd put in additional price actions. Can you just update us on your expectations for price costs for the full year?

Yeah, Nathan, I'll mention first price cost. We expect to be positive on price costs for the full year. And the majority of the inflationary pressures that we saw happened in freight coming in North America specifically. and it really kind of ramped up as we moved through the second part or the second half of Q2. So that prompted us to look at some additional price increases. What I would also share with everyone is we have a very thorough approach to looking at price cost. We have great processes in place that we implemented a couple of years ago on value-based pricing, and we look at that routinely throughout the course of the year. We have a team assembled that meets during the course of every week to review what's happening with price cost. So we're able to pivot very quickly to make adjustments as needed and required, and that's what you saw as we went through the second quarter and mentioning the additional price increase. Thanks for taking my questions.

The next question will be from Dean Dre of RBC Capital Markets. Please go ahead.

Thank you. Good morning, everyone. I'd like to pick up right where we left off on price-cost. Have you had any supply chain constraints where you were not able to make any shipments? Are you missing any orders, anything like that? We've heard some sporadic cases across the sector with that. I want to know if you've seen any of that.

Yeah, morning, Dean. You know, I would say that it hasn't affected any orders starting there. I haven't seen that necessarily that would point to anything. There were some, you know, minor areas in the second quarter where we did see some areas of supply chain that impacted some revenue areas. But nothing significant that I would call out, primarily in the precision solutions business is where it kind of manifested itself. But overall, we are having to be really focused, especially, again, in North America, on paying close attention to what's going on in the supply chain and, again, some of the things that we needed to do with freight as we looked at our – our planning processes were kind of reflected there. So supply chains are still tight, but we're working our way through it. The team's really on top of it, and we're not really impacting customer deliveries, which is the important piece.

Hey, I'll just add, too, that in my prepared remarks, I mentioned that we saw freight inflation in the quarter, but I also mentioned some mode shifts. So to your question about that we do see certain freight lanes are more congested than others. That has caused some delays within those lanes. And so when there is a critical order, when we've got critical customer demand, we did shift some of that to air freight in the period. And so that's what I meant by mode shifts. And that's driving a bit of the freight increase that we saw in the quarter. And so what we're working on with the teams is really using that 80-20 ratio toolkit to look at the customer segmentation, making sure that we've got proper inventory levels on hand to serve those customers for the rest of the year and into 2022. Mark mentioned some of the changes that we've made in our processes to review freight costs, to approve expedited or modified levels of freight. and then really got that PSYOP team that we put in place in the last 12 months, and we're looking really closely at making sure we're taking into account any of the supply chain delays into our stocking levels so that we don't miss out on the opportunities that I think you're referencing.

Yep, that's really helpful. And then just as a second question to circle back on M&A, and it was interesting in your press release, you used a word, I'm sure it was done purposefully, but programmatic M&A. It's not something you typically see, and it's a different characterization versus some of the other companies in the sector. And that typically means you're looking at smaller, more innovative businesses, kind of a corporate venturing type of approach to M&A. But maybe you can just Flesh out that thought as to what you're actually referring to on programmatic M&A, please.

Yeah, sure, Dean. So the important thing that we do as a first litmus test of any potential acquisition opportunity is assesses it aligned to our strategy. As we've described, an important emphasis for us is around the markets as a starting point that are most interesting to us. In nutrition and health, as we not only look at the food area, but also as we click into different personal care applications, for example, some farm applications, that's an important market screen for us. Precision solutions, you know, again, that area of the business also has some elements to it that touch personal care. We also touch water applications when we think about different applications in agriculture as well as wastewater. And then as we look at some of the more traditional kind of specialty chemical businesses and mining business. So we use that as a screen initially. And then we want to align it to the technologies that we feel like we do really well. So our mixing business, our nutrition and health components business in areas like pumps and valves. If we consider our nutrition and health business, ultra-high temperature processing is one of the cornerstones of our nutrition and health business in food applications, and it's what's made us successful in the alternative plant-based area, too, of protein-type products in nutrition and health. So we use those elements as an initial screen, the markets, the attractive ones and the ones that are aligned to the strategy, and then our products. And to your point, we get very specific on opportunities that align with that. So it may be expanding our capabilities in a certain geography. or adding a technology that maybe we have a gap in. So really a really strong process, as I mentioned, that VOOS has put in place with the team, and it's very broad-based in terms of the assessments that we do. And so that programmatic piece is a consistent rhythm we have in assessing all those opportunities. I meet with the team every two weeks, and we go through those opportunities together. And it's really a great process that we've put in place in the last two years.

That's real helpful. Thank you.

The next question will come from Julian Mitchell of Barclays. Please go ahead.

Hey, good morning. This is Trish Gorman. I'm for Julian Mitchell. CS called out significant margin improvement in the second half and improving mix. Just wondering if there's any difference to call out kind of in that margin improvement between the segments?

Hey, good morning, Trish. I mean, we're going to see the margin expansion happen across both of our segments. So as you think about the second half of the year, what I would encourage you to look back and pick up on the commentary that Mark laid out and the order profiles year to date. So it's really a story of we'll start with mix, right? So mix in both segments was better. If you look at the industrial, I'm sorry, our precision solution segment, Mark oftentimes talks about when you get over that $200 million per quarter order mark, And when the mix is good, that's really when that segment begins to take off. And so you'll see the mix driving higher margins in that segment. The volumes are going to lever nicely. And then we mentioned what we would perceive to be transitory freight costs here in the second quarter, as well as some labor inefficiencies. Maybe I'll just hit on that for a moment. This segment, that segment, the precision solutions segment, has a heavier weighting to the U.S. and its manufacturing footprint. And in the U.S., we brought in a lot of new labor to meet the increased demand. And as we did that, bringing new labor in and the inefficiencies that that has, that happened to us in the quarter, and we expect for that to get better in the second half of the year. And then in the nutrition and health segment, We do also expect to see the margin expansion happen there, starting again with mix. And then I would just point back to one comment that I made earlier, I believe, to Mike Halloran's question, which was in the fourth quarter, year over year, we do have about $20 million less systems revenue, which tends to carry lower margins, and so that will also help margins in the second half for the nutrition and health segments.

Yeah, Trish, I just add, I mean, just to maybe emphasize or summarize the points, you know, again, mix price realization, better SG&A performance. We expect operating income margins, as I indicated in the prepared remarks, to fall halfway between our exit rate of 2020 at 9.1% and our 2023 objective of mid-teens operating income margins. So significant progress in one year here in 2021. So we, again, expect all those things to really start to accelerate as we move through the second half of the year. And I can't overemphasize that SG&A piece that is, you know, things that are really under our control that we're doing really well at getting in place. And that was the reason we also raised the 2022 full-year run rate from $25 million to $30 million. So profitable growth is what we're focused on. We apply these 80-20 principles. The mix is improving. I'm really excited about where we are in the journey and what the future potential is of the business. It is tremendous what the team's been doing thus far in the journey. And as I look forward, that opportunity is going to continue to grow.

Great. Thank you both so much. That's very helpful. And then just maybe switching gears kind of on capital allocation, you guys have talked a lot about these organic investments and M&A, but can you just remind us kind of how you view buybacks within that list of priorities? I think at the Investor Day, it was kind of close to the bottom, but especially in light of kind of $85 a share kind of undervaluing the company so much.

Yeah, sure. And thanks for the question. We did have a couple of pages on this in the Investor Day, and there's one that we often use internally, which is the arrow that you may recall, where it really talks about making sure that we're fully funding all of our internal investments. So those tend to take the form of opportunities for innovation. Some of that will go through the R&D line. Oftentimes that will also go through various other pieces and cost of goods sold. But making sure that our teams know that we're intending to increase our investment in innovation is our top priority. And then as a secondary and kind of code to that would be investments in CapEx. So we've got the expectations set with our teams, and you've seen that to nearly double CapEx this year and for the next few years. Those capital investments can take the form of new machinery in our factories, which are going to help support more growth, more capacity. Those investments will also support our productivity initiatives. And then a piece of that CapEx is as well going through our IT organization, and so those would be investments to improve customer experience, make our back office more efficient, et cetera. So we are focused on making sure that we make all those investments to the extent those investments have quick returns greater than our cost of capital, and they tend to have that. Working down that chart, we then are focused on M&A, and Mark described that well a moment ago, I believe the dean's question, in regards to our programmatic approach to M&A. So that is our ongoing iterative evaluations of the opportunities that we see in the market, bringing those in, integrating those, and then continuing to look at our strategy and how we deploy that. As you then work down to excess cash, so any excess cash that we have, we will return those to shareholders, and we've made a really nice step into that this year. But as we are in this spot that we're in now, Scott mentioned we're not going to talk about the process that's underway to evaluate strategic alternatives. But what I'd say is it relates to share repurchases. In that regard, we're not buying back shares now. And just given the nature of that process, I wouldn't expect us to initiate anything new or to be in that space.

Got it. Thanks, guys.

The next question will come from Walter Liptak of Seaport. Please go ahead.

Hi, thanks. Good morning, guys. I wanted to ask, you know, maybe this is too basic of a question, but the review that you're doing for the strategic alternatives, you know, for those of us who are not investment bankers or so familiar with that, I wonder if you could just, you know, talk about the scope of the work that's going to be done and, you know, maybe who's doing it, you know, any kind of color that you can provide to us.

Yeah, Walt, hey, appreciate the question. You know, I would just ask that everyone refer to what we've announced publicly just thus far, and we're really not going to comment further at this juncture. I mean, when there's something else that we feel is important to share, we'll obviously do that. But at this stage, I think everything that we've announced, I would just refer everyone to that.

Okay. Okay, fair enough. Thank you.

And this concludes our question and answer session. I would now like to turn the conference back over to Scott Gaffner for any closing remarks.

Thanks for joining us today. If you have any questions throughout the day, please feel free to reach out to me via email or over the phone. I'll be available the rest of the afternoon. Thanks.

Thank you. The conference is now concluded. Thank you all for attending today's presentation. You may now disconnect your lines. Have a great day.