SPX FLOW (FLOW) Q4 2019 Earnings Call Transcript

SPX FLOW (FLOW)
Q4 2019 Earnings Call
Feb 11, 2020, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the SPX FLOW fourth-quarter 2019 earnings and 2020 guidance call. [Operator instructions] I would now like to hand the conference over to your speaker today, Scott Gaffner, VP of investor relations. Please go ahead. 

Scott Gaffner -- Vice President of Investor Relations

Thanks Sara. And good morning, everyone. This is Scott Gaffner, vice president of investor relations and strategic insights for SPX FLOW. Let me start by saying thank you for joining us for a discussion of our fourth quarter and full-year 2019 financial highlights.

This morning, we issued a news release detailing our financial performance for the three months and year ending December 31, 2019. The news release, along with the presentation to be used during today's webcast, can be accessed on our website, spxflow.com. A replay will also be available on our website later today. Joining me on the call today are Marc Michael, president and CEO; and Jaime Easley, vice president and chief financial officer.

Taking a look at today's agenda. Marc will start with a safety message, and then a brief overview of our 2019 performance and 2020 guidance. Jaime will then walk you through details of the Q4 results, our financial position and guidance for the full year and Q1 2020. Marc will wrap up with an update on our strategy.

Following our 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 end 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.

Independent of today's presentation, we've provided reconciliations for all non-GAAP and adjusted measures presented. And with that, I'll turn the call over to Marc. 

Marc Michael -- President and Chief Executive Officer

Thanks for the introduction Scott. It's great to have you on the team. Good morning everyone, and thanks for joining us on the call. I'd like to start today with a safety message.

We never compromise safety. It's an important part of our culture. I would like to extend our thoughts and best wishes to our teams and communities across Asia Pacific, and especially to our team in China, who are working through challenging issues right now. Our crisis management and business continuity teams have been meeting regularly with our leaders in the region to monitor the status of our people, situation reports and other developments and to implement safety protocols.

To our teams in region and across the world, we are emphasizing safe, comfortable choices that prioritize personal well-being above all matters. I continue to encourage our global team to think safety first and do the right thing always. Reflecting on the past four years, we've been on an accelerated pace of transformation and made significant progress on our journey to high performance. 2019 was a pivotal year as we simultaneously delivered improved operational performance, executed key strategic moves and redesigned our organization to support long-term value creation.

We did this while managing through a volatile economic environment, dynamic organizational transition and evolving cultural change. I'm proud of our global team and the strong performance we delivered. I want to thank all our people for their teamwork, customer focus and positive contributions to 2019. As we begin a new decade, we are confident and excited about the next phase of our journey.

Our business operating system is maturing, and we're building strong teams and core capabilities to drive our long-term strategy. We're in a strong financial position with an attractive free cash flow profile that has us in a prime position to invest our business throughout all economic cycles and drive sustainable, high-quality revenue with ROIC above our weighted average cost of capital. Our emphasis on executing our long-term strategy with a narrow focus on the critical few areas that will drive success. First, creating an engaging winning culture for our people.

Second, delivering a differentiated customer experience. And finally, compounding investments in our business to deliver long-term value creation for all stakeholders. As our long-term strategy has sharpened, so too has our focus on our people and cultural behaviors. We had several significant accomplishments on this front in 2019.

Sticking first with safety. For the second year in a row, we improved employee safety with a 35% reduction in total recordable incident rate, that's on top of a 20% reduction in 2018. Diversity inclusion are also important aspects of our culture. In 2019, we launched empower, our employee resource group focused on women in business.

We added talent in strategic areas such as data analytics, commercial operations, sales, inventory and operations planning and materials management. We now have 14 members on our data analytics team. This team is an important part of our future, both in terms of supporting the operations of our business and how we serve customers and channel partners. In 2019, we added 32 rotational or internship roles to our early career program, infusing energy, enthusiasm and new ways of thinking across multiple functions.

We're aiming to double our new hires in this area in 2020. In operations, we hired seven new factory leaders and eight new continuous improvement professionals. And at our high-value center in India, we increased our engineering and IT capacity by 40%. As we enter the new year, we established cross-functional growth teams at the product line level, these teams are comprised of product managers, engineering, manufacturing and sales leaders who are empowered to drive high-quality, high-velocity investment decisions aligned to our strategy.

This is an important evolution in our organizational design and aimed at increasing the ownership and accountability of strategic planning and execution for our commercial and operational leaders at the product line level, who are closest to the customers and markets we serve. These important efforts to align our people and shape our culture in support of the long-term strategy. On the strategy front, we executed two portfolio moves that significantly reduced our exposure to highly cyclical commodities, specifically oil and milk powders. First, we made the decision to divest power and energy.

We announced this decision in Q2 2019 and signed a definitive sale agreement in Q4. That sale process is on track to be completed in the first half. Notably, we have received certain regulatory approvals in the U.S. and Europe.

And Jose Larios and his team are doing an excellent job preparing for the transition and planning for day 1 success. The second portfolio move was accomplished organically over the past two years. We methodically reduced exposure to milk powder commodities by delivering our backlog commitments on large dry projects and reducing our cost structure accordingly. Importantly, we maintained drying capabilities to support key customers who are investing in fast-growing areas such as plant-based protein and medical foods and beverages.

These complex applications often require integrated liquid and drying process expertise that meet customer specifications for nutritional benefits, safety regulations and sustainability goals as well as productivity, uptime and service capabilities. In conjunction with these moves, we narrowed our focus on where to play and how to win. In support of this effort, we completed a robust assessment of our products, markets and customer segments. We then developed action plans and investment road maps to enhance our customer service across the core business and disproportionately invest in organic and acquisition growth, building off market-leading positions in our portfolio today.

On the operational front, we matured certain aspects of our business operating system and brought in new leadership to support SIOP and materials management. We also deployed pathway to excellence, our lean transformation program across value streams and key facilities. And our project delivery team dramatically improved execution on many fronts in our process systems business. In summary, our team delivered on pricing, cost savings, and productivity improvements, leading to significant margin expansion and strong cash generations.

Our margin inflection in the second half of 2019 demonstrates the benefits of our strategic choices, improved operational execution and emphasis on higher-quality of revenue. This chart illustrates that point. You can see that our gross margins improved dramatically over the last five quarters, increasing over 500 points from 31% in Q4 2018 to over 36% in Q4 2019. For the second half of 2019, gross margins were 35.6%, up 390 points year over year and up 210 points over the first half.

Segment income margins were nearly 15% and adjusted EBITDA margins were over 13%. I'm very pleased with this performance. As we look to the first half of 2020, we expect lower volumes across our high-margin industrial products and food and beverage components to be a headwind to this trend. In this lower-volume environment, we continue to focus on process enhancements to improve cost efficiency and accelerate our speed of delivery to customers.

In doing so, we expect to leverage volume growth and drive strong incremental margins as market growth returns. Over the long term, we expect to drive continued margin expansion and a higher quality of revenue through operational efficiency and execution of our strategy. Looking at the full-year financial results. Revenue decreased 5.5% year over year, with about half of that decline due to currency.

Organic revenue was down 2.8% or $44 million, largely attributable to a lower level of revenue from large dry dairy projects. Across the rest of the business, we had a modest organic decline, reflecting the impact of trade and tariff discussions and the broader macroeconomic slowdown. Many of our customers and channel partners delayed capital spending decisions in 2019. This dynamic impacted order development, particularly in our short-cycle industrial product lines and food and beverage components.

Despite revenue headwinds, we delivered 230 points of gross margin expansion year over year. Segment margins were up 130 points to 13.3% with both reporting segments contributing over 100 points of margin expansion. We had a strong cash year. On a combined basis, including Power and Energy, we delivered $137 million of free cash flow.

This includes $36 million of capital investments and was driven by solid working capital performance across continuing and discontinued operations. As we look to 2020, we do not expect any meaningful improvement to global macroeconomic conditions. We anticipate the global slowdown in industrial short-cycle activity to persist. Our full-year guidance for continuing operations assumes orders remain approximately flat year over year with a modest pickup in short-cycle orders in the second half, consistent with our historical seasonality.

We are modeling organic revenue to decline mid-single digits with tougher comps in the first half of the year. Despite the top-line pressure, we plan to hold segment income flat to 2019 through pricing and cost productivity actions. On an adjusted basis, excluding restructuring expense and discrete professional fees, we're guiding to EBITDA in the range of $175 million to $195 million, approximately 13% of revenue at the midpoint. We are targeting adjusted free cash flow from continuing operations in the range of $95 million to $115 million.

This includes $40 million of capital investments that level of investment represents a 40% increase over the $28.5 million invested in our continuing operations in 2019. In summary, we are operating prudently through a slow part of the industrial cycle by managing elements within our control to deliver for customers and drive continuous improvement. And we're keeping our eye on the future by focusing on the critical few areas that drive long-term success, creating an engaging culture for our people, enhancing our customer experience and making high-quality of estimates. At this time, I'll turn the call over to Jaime. 

Jaime Easley -- Vice President and Chief Financial Officer

Thanks Marc, and good morning everyone. I'll begin with a brief recap of Q4. Our fourth-quarter financial results were in line with our guidance and capped off a good year with strong orders, free cash flow and segment margins. We delivered $364 million of revenue with gross margins of 36%, up 530 points year over year and 110 points sequentially.

Segment income margins were 14.7%, up 280 points year over year, and adjusted EBITDA was $48 million or 13.1% of revenue, up 260 points. Organic orders grew 13% sequentially and 5% year over year to $396 million. Free cash flow from continuing and discontinued operations was $60 million and net leverage at year-end was down to 1.5 times for the combined company. Adjusted EPS in the quarter was $0.52, in line with our guidance.

A reconciliation to the reported EPS is in our news release and the appendix of this presentation. Moving on now to the segments, beginning with industrial. Organic revenue declined 11% to $191 million, reflecting the global slowdown in short-cycle industrial activity throughout last year. From a product line perspective, the revenue decline was primarily due to a lower level of shipments of dehydration equipment and industrial pumps.

Segment income was $22.6 million or 11.8% of revenue. Decremental margins were a respectable 15% as a favorable revenue mix, net pricing benefits, improved factory productivity and cost savings helped to mitigate the impact from lower revenues. Looking at the Q4 results for food and beverage. Revenue was $173 million, down 10% or $20 million on an organic basis.

The organic decline was all related to a lower level of revenue from large dry dairy systems as anticipated. This decline was overshadowed by low single-digit growth in components and aftermarket sales. Consistent with Q3, nearly two-thirds of revenue was comprised of component and aftermarket sales. And systems revenue made up approximately one-third of the total.

Segment income grew to $31 million, up 38% over the prior-year period. Margins expanded 640 points to 17.9%, an all-time high for our food and beverage segment. The improved profitability reflects a number of initiatives, including pricing benefits, cost savings and higher quality of systems revenue. Throughout the year, our project delivery team drove dramatically improved execution, managing projects more efficiently through standard work processes, KPIs and disciplined cost management.

In Q4, we closed out a number of jobs on time and on budget, putting an exclamation point on a strong year by our project delivery team. Moving on to orders on a year-over-year basis. industrial orders declined 5%, reflecting weakness in Europe across most of our industrial products and markets. In Asia Pacific, industrial orders were relatively stable to the prior year.

And in North America, an increase in stocking orders for hydraulic tools offset a modest softness across our other product lines. food and beverage orders grew 17% year over year. This growth was driven by our systems business and was concentrated in Asia Pacific and Europe, where we saw an increased level of customer investment on liquid process systems. Notably, this included a $17 million order from one of our key global customers.

And encouragingly, aftermarket and service orders were up double digits. On a sequential basis, organic orders grew 13% with both segments up quarter to quarter, led by 26% organic growth in food and beverage orders. industrial orders were up 3% quarter to quarter. Moving on to our 2020 full-year guidance.

This is on a continuing operations basis and assumes the Power and Energy sale is completed within the first half. We expect organic revenue to decline 3% to 6%. This decline is primarily associated with our shippable backlog to start the year which is down approximately $60 million compared to the 2019 opening backlog. At the segments and at the midpoint of our guide, for the industrial segment, we are targeting about $790 million of revenue, with organic revenues flat to down low single digits.

industrial margins are expected to be roughly flat year over year. In food and beverage, organic revenue is expected to decline mid- to high single digits. About half of this decline, roughly $30 million is due to revenue on large dry dairy projects not repeating. This impact is concentrated in the first half.

At the midpoint, we are targeting food and beverage revenue at about $650 million and segment margins around 14%, up approximately 100 points compared to 2019. Corporate expense is expected to be approximately $52 million. This includes $2 million of costs supporting the Power and Energy business through the sale. Once closed, we expect stranded costs to be fully offset.

Adjusted EBITDA guidance is $175 million to $195 million, and we expect to generate $95 million to $115 million of adjusted free cash flow, net of $40 million of capex. This level of capex represents 1.5 times annual depreciation. The adjusted EBITDA and free cash flow guidance exclude restructuring expense and discrete professional fees supporting our strategy and rebranding actions. Other notable modeling assumptions include $29 million of interest expense, an effective tax rate of approximately 29% and  43 million shares outstanding.

For Q1 2020, we are guiding revenue in the range of $300 million to $325 million, down about 15% year over year. This reflects our opening shippable backlog position for Q1 which is about $50 million lower than the prior year, and we are modeling a two-week impact on shipment delays out of our manufacturing facility in China. On the lower revenue, we are targeting $19 million to $26 million of segment income, with adjusted EBITDA between $14 million and $21 million. Looking at the phasing of revenue by quarter.

Based on the timing of shipments and opening backlog and assuming a modestly lower book and turn orders to last year, we expect Q1 revenue to represent about 22% of the full year. We have good backlog visibility to higher volumes in Q2, with second-quarter revenue representing about 25% of the year. The second half guidance assumes 53% of revenue for the year. This implies 2% to 3% growth over the second half of 2019, concentrated in our industrial segment and factors in traction on internal growth initiatives and a modest improvement in short-cycle industrial demand.

Taking a brief look at our financial position. Cash on hand was about $300 million at year-end, and gross debt was $719 million, down $50 million or 7% from the prior year-end. Net leverage was 1.5 times, down about three-quarters of a turn from the prior year, and gross leverage was 2.6 times. Our maturities are staggered with no material principal payment required until 2022.

Between cash on hand and our revolver, we have nearly $800 million of available liquidity before considering the divestiture proceeds from sale of Power and Energy. As it relates to the divestiture proceeds, we intend to prioritize debt reduction, along with the return to shareholders. Following that, our ongoing capital allocation will broaden with an emphasis of shifting toward high-quality, attractive ROIC investments in our business, both organic and inorganic. Our guiding principles for capital allocation are illustrated on this chart.

We intend to maintain a strong balance sheet and financial flexibility to allow us to invest in our business through all economic cycles. Our target net leverage range is between 1.5 times and 2.5 times. And our investment decisions will be based on generating attractive ROIC above our weighted average cost of capital to drive compounding free cash flows. In the event of free cash flow exceeds attractive investment opportunities, we evaluate the most efficient method to return capital to shareholders.

We plan to increase the level of investment back into our business gradually over the next few years, and we are building a funnel of organic opportunities that include capex to modernize our facilities and improve our velocity, technology enhancements to enhance our digital customer experience and support our internal operations and data-driven culture, and increased levels of R&D and new product development to drive innovation with customers. We also have an acquisition pipeline that is aligned with our strategy, and we are increasing our focus and capabilities in this area. It is an exciting time as we begin the next phase of our journey. We are well positioned to create value by investing in high-quality ROIC opportunities to grow our business.

With that, I'll turn the call back over to Marc for closing remarks. 

Marc Michael -- President and Chief Executive Officer

Thanks Jaime. Clearly, we're excited about the future. These strategic portfolio moves we executed to significantly reduce our exposure to cyclical commodity markets has dramatically improved the risk profile of our business. This should yield greater consistency and predictability in our future performance.

We're building a premier process solutions enterprise with strong technical expertise, global capabilities and well-recognized brands with leading market positions. The projected financial profile is clearly more attractive than our historical performance with near-term goals of delivering mid-teen EBITDA margins and double digit ROIC. As we focus on growing high-quality revenue streams, we believe we can achieve mid-single-digit organic growth through an industrial cycle with strong cash conversion. On the strategy front, we developed an integrated set of choices to define where we will play, how we will win and the core capabilities to support a winning outcome.

Our strategy is focused on penetrating micro verticals within attractive sanitary life science and specialty industrial markets, where our technical expertise and reputation for quality is highly valued and where market growth is supported by secular trends. In support of this strategy, we established growth teams to drive a higher level of accountability, enable cross-functional teamwork and build core capabilities around customer intimacy, velocity and vitality. These capabilities are critical to delivering a differentiated experience for customers and can also be leveraged to create value through acquisitions. On that front, we have an attractive acquisition pipeline aligned to our strategy.

And we are thoughtfully building capabilities in our M&A function to prudently evaluate opportunities and support execution. In closing, 2019 represented a significant pivot point for our business as we simultaneously improved operational performance and executed on our strategy. Our second half margin performance and strong cash conversion, underscore the progress we've made on our strategic transformation and highlight the value of our underlying business, while also demonstrating the ability of our team to execute in a challenging demand environment. We are prudently managing our business through the near-term demand environment ensuring we proactively manage costs while investing at appropriate levels to enhance delivery to customers and support our long-term strategy.

Our strong financial position will allow us to invest in our business throughout economic cycles with flexibility to invest capital on the highest return opportunities. I want to thank our teams across the enterprise as well as our business partners for their hard work and positive contributions to our accomplishments last year. We're excited about the future and remain committed to creating a high-performance culture for our team and enhanced customer experience and long-term value for all stakeholders. That concludes our prepared remarks this morning.

And at this time, we'll open the call for questions. 

Questions & Answers:

Operator

[Operator instructions] Our first question comes from the line of Nathan Jones with Stifel. Your line is now open.

Nathan Jones -- Stifel Financial Corp. -- Analyst

Good morning everyone.

Marc Michael -- President and Chief Executive Officer

Hey. Good morning Nathan.

Jaime Easley -- Vice President and Chief Financial Officer

Good morning Nathan.

Nathan Jones -- Stifel Financial Corp. -- Analyst

Marc, I'd like to start with a question on some of your opening comments there. I think what I took away from some of that is that you're driving the decision-making capability further down into the organization down to kind of the product line level. Can you talk about what benefit do you think that brings to the company? What  benefits you think that brings to the customers? What benefits that brings you in terms of velocity? Those kinds of things.

Marc Michael -- President and Chief Executive Officer

Yeah, you bet. You bet. Yeah, a big change for us, Nathan, as we're going into 2020 and looking toward the future. Over the last four years, we placed a lot of emphasis on improving our functions in the business.

So across operations and our commercial activity as well as finance, IT and so on. And some really good outcomes there. We've got good transparency into the business now, much greater than ever before. We have good metrics in place.

So we're running the business really well at a functional level. And as we looked at the things we needed to do differently going forward to get a better outcome for our customers, we wanted to bring these teams closer together. So I mentioned we formed these growth teams, they're going to come together on a regular basis, I'll be doing updates with them periodically throughout the year. They're across all our major product categories.

And as mentioned, is comprised, cross-functionally of operations, product management, product engineering, and as well as support functions are attached to them, and they're going to focus on two important areas. First, on the vitality front is looking at NPDs, how we execute on value engineering opportunities, looking at our price cost performance. And then in operations where we want to create vitality, looking at investments and requirements and needs to support our factories with capital equipment to get more throughput through the factories. So we'll be looking at the front end of the business, too, in our commercial operations to improve responsiveness to customers.

So this is really focused starting on the customer, how we service them better, how we provide them better products and how we deliver to them more effectively. So big move for us, big change, and I'm really excited about it because it's going to add a different dynamic to how we think about growth and the investments we want to make into growth. 

Nathan Jones -- Stifel Financial Corp. -- Analyst

OK. That kind of does lead onto my follow-up question which was on something Jaime said in his comments about increasing the levels of investment into the business over the next few years. Can you talk about -- I mean, you've got a pretty big step-up in capex? Should we expect this is more a normal run rate? Are you looking more at 3% of sales rather than 2% of sales? What are the other kind of P&L investments that you're going to make? Where should R&D numbers eventually get to as a percentage of sales and how are you going to fund all of these investments in terms of generating productivity out of the business? 

Jaime Easley -- Vice President and Chief Financial Officer

Hey, Nathan. So I'll start with the capex. So as you said, we have about $40 million of capex in for the year. That's one and a half times our depreciation numbers.

So getting back to Marc's points on helping the factories modernize in some places to bring that forward, and then also to fund these product growth maps that the team's laid out. So maybe I'll go back to that for a moment. The product growth teams, as Marc described, what they've done is they've laid out some multiyear growth programs and then to facilitate that, we've got some capex investments that are required. And then there's also NPDs that we'd switch through -- we've got layered into that.

And then the team is also looking at inorganic opportunities for growth. So the capex number, I think, right now, we've got that expected to be stable for the next few years at around $40 million, but we'll continue to look at that and see if there's other opportunities. You mentioned some other P&L type investments that we would make. R&D comes -- just comes to mind.

So historically, we've run about 1% of revenue in our R&D line. And really what we see and what we believe is that we've got to invest more in our products. And so the strategy work that we've done here and completed in the fourth quarter has really given us clarity as to where we want to make these investments, and we believe that we've got clarity in the markets, the geographies and the product lines where the returns could be the greatest. So we've got a modest amount of additional R&D in the P&L in 2020.

And we expect that we can ramp that up over time obviously going to be contingent on how well and how fast these products can come out of the pipeline and begin to deliver growth for us. But what I would expect is over a few years, we can get to at least double current levels. 

Nathan Jones -- Stifel Financial Corp. -- Analyst

OK. I don't think anybody would argue that 1% is too low or is too much on R&D. But do you think 2% over is the target over the next several years to get to? 

Jaime Easley -- Vice President and Chief Financial Officer

I think that's fair, Nathan, but I still personally think that we could go beyond 2%, but it will take us a couple of years to probably get to that level, and then we'll see where we go from there. 

Marc Michael -- President and Chief Executive Officer

Yeah. Look, I'll just add to that. If our growth teams and these road maps put together, if they come up with really high-returning investments we want to make. We spend more than that.

Yes, absolutely. And that's what they've been designed to do is look for really high-returning investments we can make organically. And then as Jaime mentioned, if we've got gaps in our portfolio, from a technology standpoint or customer access, they're developing M&A ideas too that we're feeding into the funnel. So that's why I mentioned this is an exciting point for us and putting these teams together that's going to allow us to evaluate where to make investments more rapidly and get those in action. 

Nathan Jones -- Stifel Financial Corp. -- Analyst

OK. Thanks for taking the question. I'll pass it on.

Marc Michael -- President and Chief Executive Officer

Thanks Nathan.

Jaime Easley -- Vice President and Chief Financial Officer

Thanks Nathan.

Operator

Thank you. Our next question comes from the line of Mike Halloran with Baird. Your line is now open. 

Mike Halloran -- Baird -- Analyst

Hey. Morning everyone. 

Marc Michael -- President and Chief Executive Officer

Good morning Mike.

Jaime Easley -- Vice President and Chief Financial Officer

Good morning Mike.

Mike Halloran -- Baird -- Analyst

Hey. So can we talk a little bit about the ramp as you see it through years, specifically on the margin line. Obviously, you have some pressures from China on the supply chain side, some volume pressures as well. And then I think you laid out what was at it, $14 million or so of cost savings you're expecting more back half loaded.

But it's still a pretty sizable ramp 1Q and then into 2Q, 3Q, 4Q. Maybe talk about why you have the confidence and any other factors I didn't mention that helped provide that confidence level? 

Jaime Easley -- Vice President and Chief Financial Officer

Yes, Nate -- I'm sorry, Mike. So as you mentioned, we said in the prepared remarks, we have seen that there is a pocket here in Q1 that's developed in backlog, where our full-year backlog compared to the prior year, it's going to be down about $60 million, half of that being drawn. And when you look particularly to Q1, of that $60 million, $50 million will be in Q1. So what we're seeing is that the back half of the year, the ramp that you're seeing is supported by our backlog.

The order intake that we're expecting to complement the backlog delivery is really flat sequentially from what we've seen in Q4 with, what I'd say, it would be a modest tick up in the second half of the year. We spent a lot of time looking at a variety of economic indicators and trying to get a sense for what we think the market is going to do in the second half of the year, and also spending a lot of time with our teams and customers and markets. So the ramp itself, I would tell you is a backlog-driven phenomenon. And then the order rate is sequential from Q4, so not expecting much to change in that in the first half.

And then as we talk about, I think you're also kind of asking about the margin profile as we work into the second half of the year, we are expecting that there's going to be some benefits from price as we get into this half of the year. We've got some modest price increases in across the business. And we also believe that the  cost savings that we've planned will begin to take hold in the second half of the year. There are some carryover that we've got at the beginning of the first half of the year, but most of the delivery on cost savings begins to take shape and hold in the second half. 

Marc Michael -- President and Chief Executive Officer

Yeah, Mike, I just had one other point. Our focus and emphasis on improving the quality of our revenue streams. Our backlog margins are up 370 points year over year. So even though lower level of backlog margins are significantly better. 

Mike Halloran -- Baird -- Analyst

Yeah. And is that ramp going to be pretty sizable from 1Q to 2Q or is it a little bit more evenly sloped through the year on the margin line? 

Jaime Easley -- Vice President and Chief Financial Officer

I think it's  up a little bit from -- in Q2, and some of that is the -- what we're seeing here in Q1, as you mentioned, we've got a two-week delay plan for China. We've looked at the backlog that we've got there in that business and the potential implications to delivering that. And then we've also assumed that we will continue to pay our staff as they are experiencing hardships and challenges being out of the office. And that has a minor impact on margins here in Q1. 

Mike Halloran -- Baird -- Analyst

And then second question, just on the revenue side of things, certainly highlighting pretty sequential stability more or less through the year-to-year with a little bit of improvement in the second half. If you strip out the project side of things, is that what you saw through the fourth quarter and into the first quarter here? So are you already seeing some level of sequential stability, all else equal? 

Marc Michael -- President and Chief Executive Officer

Yeah Mike. I would say that we have seen some level of stability since a really challenging Q3. It's still choppy. Let's just describe it that way.

Part of what we see manifesting itself in Q1 with some of the backlog position is that slower Q3, where we would have expected some of those orders to be executed in Q1, if they were at a bit higher level. And then even within Q4, October was really good. December was really good. November was the worst month of the year.

So we're still seeing a little choppiness, I would describe it, across the markets. Overall, we don't anticipate or haven't planned for run rates to change in the first half of the year. We've been consistent with what we saw exiting in the second half of 2019. And that's -- we think that's prudent.

And then as you mentioned, the second half ramp in terms of order intake to support revenue is very consistent with what we saw in 2019 in terms of first half to second half.

Mike Halloran -- Baird -- Analyst

Makes a lot of sense. Appreciate the color.

Marc Michael -- President and Chief Executive Officer

Thanks Mike.

Jaime Easley -- Vice President and Chief Financial Officer

Thanks Mike.

Operator

Thank you. Our next question comes from the line of Julian Mitchell with Barclays. Your line is now open.

Unknown speaker

Hey. Good morning everyone. This is Joao on for Julian. 

Marc Michael -- President and Chief Executive Officer

Hey good morning.

Unknown speaker

Maybe one thing to dig deeper into would be if you can provide a little more color, geographic color, particularly in Europe. It seems like you're seeing some weakness there with industrial orders, but strength there with food and beverage. Can you kind of dive into what's causing that divergence and maybe just what you're seeing in the market as a whole? 

Marc Michael -- President and Chief Executive Officer

Yeah, for sure. So I'd call your attention to the quarterly order slide that was in the prepared presentation. As mentioned, it was good results. And I'm going to speak more sequentially than year over year, given kind of where we are in the cycle, I think that's more important.

So good results, up 13% sequentially. But as mentioned, it was a bit choppy still in Q4 with that weak November. I draw your attention to food and beverage, and we really saw strong orders in our systems business in food and beverage, and that was primarily concentrated in China and Europe. So good results there.

Aftermarket across our food and beverage business, you can see that overall, the combined $116 million of components in aftermarket. Aftermarket was really good. And the component part of our business remains a bit weak across the globe. So if you look at food and beverage, good performance overall, but the weak spot would still be a bit of our components business.

And that's pretty broad-based across the globe where we're seeing weakness in our components business. If you look at industrial, the chart there, you can see, we ticked up about 3% sequentially, but that's still not at a level that we feel is where the business can be. If you look and go back to the end of 2018 and through the first half of 2019, we'd like to see that business into the $200-plus million range in terms of bookings on a quarterly basis. So still, against some weakness there.

Specifically, in terms of the markets across the globe in terms of how they fared, we did see some improvements in North America for industrial albeit still choppy, as I mentioned. And in Europe, we saw some improvement, too. It adds a bit higher, but again, a bit mixed to rebound in our pumps, but the rest of the products are kind of mixed. China has been really good for us for industrial.

Continued good results across all our product lines in China. The real softness that we've seen has been across the rest of APAC. That's been soft in industrial and as well as in food and beverage. So it's still choppy out there, is the way I would describe it.

But not -- we don't see it getting significantly worse at this stage. So that's why we're being prudent as mentioned and keeping our order expectations consistent with our exit rates for the second half of 2019 through the first half of 2020. 

Unknown speaker

Got it. That's very helpful. Thank you. And then maybe to follow-up on your comments on the components business within food and beverage.

Are you still seeing that weakness kind of coming in from uncertainty with your customers? And then maybe on a tangent to that, does the recent rollback of tariffs in China announced pretty recently sort of factor into the outlook there? Do you think there's a little bit of early green shoots on customers gaining back confidence and started restarting their projects?

Marc Michael -- President and Chief Executive Officer

Yeah. It's been slow on the project part of the business. And our run rate business has held up pretty well in the components part for F&B. But when we look at the projects where integrators buy our components or our channel partners buy our components, that's the -- for projects.

That's what's remained kind of weak. So it's our customers' capex spend on doing these brownfield projects, where they're introducing new products or doing upgrades. We haven't seen that start to recover significantly to this point, something we're keeping an eye on. Hopeful that some of the resolution in tariffs will start to have a favorable impact, again, because we especially saw that impacting the North American business throughout 2019, given the tariffs that China had put on some of the food industry in the U.S.

So hopeful to see that start to rebound. But again, we haven't planned for it as we've moved -- as we look at the first half of 2020.

Unknown speaker

Perfect. Thank you. 

Marc Michael -- President and Chief Executive Officer

You bet.

Operator

Thank you. And our next question comes from the line of Robert Barry with Buckingham Research. Your line is now open.

Robert Barry -- Buckingham Research -- Analyst

Hey everyone. Good morning.

Marc Michael -- President and Chief Executive Officer

Hi Robert.

Jaime Easley -- Vice President and Chief Financial Officer

Hi Robert.

Robert Barry -- Buckingham Research -- Analyst

So just on this Q1 guidance slide. I just wanted to verify the shippable backlog down 50. It's kind of a separate issue than the China delay. It just so happened that the cadence of things created this hole?

Jaime Easley -- Vice President and Chief Financial Officer

Yeah. That's right, Robert. It's really a product of the weaker Q3 orders that we saw. And then Marc mentioned the November order intake that we had.

I'd call those two are the primary drivers of the backlog all in Q1. 

Marc Michael -- President and Chief Executive Officer

Yeah. About 70% of it Robert is F&B and probably 30% of it is in industrial. Just a little more color. And of that -- in the food and beverage piece a big portion of that is two-thirds or so is coming from the systems business. 

Robert Barry -- Buckingham Research -- Analyst

Got it. Does it still assume that the systems headwind this year and the segment is about $35 million to $40 million? 

Jaime Easley -- Vice President and Chief Financial Officer

I think it's probably going to be on the -- it's $30 million for the large dry dairy systems.

Robert Barry -- Buckingham Research -- Analyst

$30 million. OK. And this two-week shipment delay, what's the visibility to that being two weeks? And is there a way to kind of gross it up, like if it extends one week or 2, what the cost is to you or how should we think about it? 

Jaime Easley -- Vice President and Chief Financial Officer

Yeah. We've spent some time on this Robert. And whenever we  created the backup and the outlook process. We at the time knew we will, of course, be out for the one week of Chinese New Year.

And at that time, we're expecting a one week further delay. And what we see now is that our teams are back in the plant. We've applied for local applications to get the plant back up and running, and it's now done so. We're not back to full staff at the moment.

We still got some folks who weren't able to travel back to the plant or otherwise not in. But we are back, and we are focused on the most critical and high priority backlog. So it's kind of hard to say at this point how -- if it's going to be any different than the two weeks. That's kind of the best assumption that we have and we'll continue to watch it.

Marc Michael -- President and Chief Executive Officer

Yeah. Just a little more color on that, Robert. We just really got back to work yesterday. And as you can imagine, at a lower level than you would normally expect, I think in terms of around 35% of the staff being back.

And we expect that to really ramp over the next couple of weeks. We're still being very cautious with our employees. There's really a self-quarantine activity that's going on in China, and our employees are -- and we're working with them to accommodate that, obviously. And as folks are available to come back to work, we'll have them come back to work.

We're providing transportation for them. So they don't have to use these public transportation. In some cases, we're providing masks for them to wear. So safety is first priority, and we'll be ramping back up really over the next two weeks and expect to be back closer to getting up to maybe three-quarters or so of capacity in the next couple of weeks.

Robert Barry -- Buckingham Research -- Analyst

Got it. Got it. Just big picture on the outlook over the next couple of years on the margins. I think as of last quarter, you had been talking about 2 to 3 points of upside that a quarter of the cost actions for that would be done in 2020 and the rest in 2021.

So it would be kind of at a full run rate in 2021, seeing those 2 to 3 points of margin upside. Just confirming I got all that right. Should we kind of shift that out now a year or how should we think about that as the weak 1Q really just kind of intrayear timing issue in your view? 

Jaime Easley -- Vice President and Chief Financial Officer

Yeah. I think they're two separate issues Robert. So the 2% to 3% cost productivity goal that we set out to, if you kind of rewind the tape to the point in time that we  announced that was intended to be a structural change in the business and the cost profile of the business to allow our process solutions, enterprise to operate more efficiently. That was on a -- that was not dependent on volumes in any way and was specific to that point in time.

So I would tell you that the plan supporting that are well-designed, well-understood, well-programmed in the process of being executed. We had some restructuring costs that made its way into Q4, and those savings will begin to phase in in 2020. You'll continue to see that number ramp over the course of 2020, and full savings are still expected from those programs in 2021. Separate from that particular issue are a couple of other items.

We talked to you about making investments back into the business on items such as R&D over time. And we're also, of course, going to prudently watch the cost of the organization as we watch volumes and so any continued downtick and volume, we'll address separately from the structural 2% to 3%. 

Marc Michael -- President and Chief Executive Officer

Robert, I'd just add. We're controlling the things that we can control very well. The cost out program is on track. Ty and his team in operations are leaning forward and looking at how orders and backlog is developing and keeping costs in line in the factories while improving upon their ability to execute more efficiently.

So our pathway to excellence Lean program. So overall, we've got a lot of things that we're doing that are going to create the outcomes we're looking for and the operations in running the business. The real swing factor here is what happens in the markets with order development. We could really still describe it as I think is a market that is stabilized but still well off historical norms even.

So that's the swing factor, how well does volumes start to pick up going into 2021. When we see that, the business is going to leverage dramatically up as we see volume come back in with all the work that we've done within operations to get those improvements in place. So I'm really confident about where we are in our journey and a little help from the markets and we'll see some good leverage coming into the business on the margin front. 

Robert Barry -- Buckingham Research -- Analyst

Got it. Got it. I guess, just lastly for me. Was there a we can connect the dots down on the income statement but reason you're not guiding EPS? 

Jaime Easley -- Vice President and Chief Financial Officer

Yeah, Robert. I can take that one. We've got a management team that's committed to delivering our goals and our objectives and our commitments. March really driving a strong say do across the organization, I think we all feel that.

When we think about the goals that we set out for our teams on an annual basis, those tend to be around revenue growth, around margin expansion and then cash generation. So what we're trying to do with this is to make sure that there is alignment between what we're asking our internal organization to do. And the way we provide external guidance here. And what we need is alignment, top to bottom, and we think that's going to benefit us.

We are going to give enough information externally for folks to come up with estimates on the EPS line, but it's not going to be part of the guide process going forward. 

Robert Barry -- Buckingham Research -- Analyst

All right. Thanks a lot. I'll pass it on. Thank you.

Operator

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

Walter Liptak -- Seaport Global Securities -- Analyst

Hi thanks. Good morning guys. 

Marc Michael -- President and Chief Executive Officer

Good morning Walt.

Walter Liptak -- Seaport Global Securities -- Analyst

I wanted to ask about -- in the commentary, you talked about food and beverage, some fourth-quarter jobs that closed. And I wonder if we can give a little detail. It sounds like there were some success there. What geographic regions did well for that? And was it a pricing or is it an execution thing? And then I guess importantly, as we get to the back half and maybe systems pick up, is that a repeatable process? 

Marc Michael -- President and Chief Executive Officer

Yeah. So Walt, so the projects that we won, again, calling your attention to the order slide the $86 million was really concentrated in Europe and China. So good results in both for systems order intake. Our strategy and our system business has remained consistent over the last couple of years as we've exited the large dry dairy projects, we're focused on applications in liquid processing, other condiments that customers provide into the market.

And these are projects where we have a high content coming from our factories of the pumps, the valves, the homogenization equipment, the pasteurization equipment. And that creates a really strong aftermarket and service revenue stream for us. So the order profiles that we saw in Q4 are consistent with that. And we're going to maintain that strategy and approach, emphasis on high-quality processing systems for liquid plant-based proteins, other type condiments.

And what we do is, as mentioned, drying projects in the prepared remarks, when we do those drying projects we're going to focus on other high-value areas like such as medical foods and beverages, where we can get a better margin profile as well as again supporting some of our key accounts. So we're pleased with how we're progressing with our systems business and the order development we saw in Q4. That revenue really starts to flow through as you get into the second half of 2020. These projects typically when we get them into the backlog, we have to do some engineering work and it starts to ramp up as we start to produce and deliver equipment.

Operator

Thank you. Our next question comes from the line of Brett Linzey with Vertical Research Partners. Your line is now open.

Brett Linzey -- Vertical Research Partners -- Analyst

Hi. Good morning all.

Marc Michael -- President and Chief Executive Officer

Good morning Brett.

Jaime Easley -- Vice President and Chief Financial Officer

Good morning Brett.

Brett Linzey -- Vertical Research Partners -- Analyst

Just wanted to come back to the $15 million of savings you have baked in the second half. I guess, what specifically are you assuming for the carryover versus just ongoing productivity? I don't see any restructuring in the walk for 2020. So just trying to understand what underpins that $15 million in the second half? 

Jaime Easley -- Vice President and Chief Financial Officer

Yeah. So that $15 million is going to be spread across many of our functions globally. It's the product of everything that starts in our factories. So the 75% call it the lion's share of the $15 million is going to be supply chain savings,   it's going to be cost productivities in the plants are going to be -- it's going to show up in the gross margin line.

And then the other call it 25% or so, Brett, will show up in SG&A. And again, the large majority of that is going to be allocated or show up in the segment's income lines, but across all the functions and disciplines. 

Brett Linzey -- Vertical Research Partners -- Analyst

Got it. So really no cost to achieve. It's just productivity. OK.

And then maybe just shifting back to the redeployment of the P&E proceeds I think you'll get about what $380 million in the door, correct me if I'm wrong on a net basis. But you have a couple $300 million note sitting out there. Would you look to take one of those out? I'm just trying to understand the magnitude of the debt reduction you're targeting.

Jaime Easley -- Vice President and Chief Financial Officer

Yeah, Brett. So we do have a 2024 bond which is now callable. So that's been callable since August of last year at 104. That call premium does tick down in August of this year to 102 and some change.

So you're right, that's -- that would probably be one of the parts of the debt structure that we would look to do. But where we are now, as we continue to want to say that we're going to focus on debt reduction and return to shareholders, really see how things play out between now and the time that we receive the proceeds. But I think you're thinking about it the right way and in one of those bond changes. 

Brett Linzey -- Vertical Research Partners -- Analyst

OK, great. And maybe just one more. Specific to the U.S. food and beverage market, could you just give us a sense of what Q4 orders look like on a year-over-year basis? You gave some color on China and Europe.

I didn't talk a lot about what you're seeing in the U.S. in terms of F&B capex? Thanks.

Marc Michael -- President and Chief Executive Officer

Yeah. I mean, overall, again, from a -- you mentioned year over year, the business has been stepping down throughout the course of latter part of 2018 and through 2019. And I'd rather think about it sequentially, if that's OK. What we saw was some improvement in our component business kind of in the mid-single-digit kind level from a sequential basis Q3 to Q4.

Our aftermarket was also up a similar level. And our systems business is not a large part of our business, but we did see some nice small systems orders come in in Q4. So it was encouraging to see that improvement but that's off, again, historically low levels and we'd still -- it's still important to see some of that strong components business for our North American food and beverage customers start to come back which as yet obviously, to materialize to the level that we'd like to see it.

Brett Linzey -- Vertical Research Partners -- Analyst

OK. Great. Appreciate the color.

Marc Michael -- President and Chief Executive Officer

You bet.

Operator

Our next question comes from the line of Matthew Fields with Bank of America. Your line is now open. 

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

Hey everyone. 

Jaime Easley -- Vice President and Chief Financial Officer

Good morning.

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

And Congratulations to your --  to Mr. Gaffner, your new VP of investor relations and strategic insights. Just wanted to follow-up on that last question about debt reduction. Appreciate you highlighting that the 24s are callable now and step down in August.

But when you say we're going to be at a one and a half to two and a half times net debt target, you're actually already there which implies that you don't have to spend any dollars on debt reduction when you get those proceeds in. So just sort of wanted to get a handle on what we can expect from a dollar amount of debt reduction and also that you don't have to wait for a bond to step down your term loan of $100 million. Itt's prepayable now.

Jaime Easley -- Vice President and Chief Financial Officer

Yeah, sure. Thanks. And so as a reminder, the 1.5 times net leverage is still going to be on a consolidated company basis with the P&E business in, and we'll -- that's the way it will be reported until we close. You're right that once we get these proceeds in, the net leverage on a continuing operations basis, if you will, is going to be below 1.5 times.

And we think that although keeping the long-term range between one and a half to two and a half, we are going to operate below the one and a half times for a bit. And we think that's prudent, given the conditions of the market. We think that's prudent, given some of the development that we have on funnel build for organic and inorganic opportunities. So again, I would think of it in the near and medium-term is probably operating below that point while at that point.

And then over time, getting back between the one and a half to two and a half times. And then Matt, maybe actually the comment on the term loan, too. You're right, there's $100 million of term loan that is at a lower rate than our bonds at the moment and we're conscious of interest expense as we look to reduce debt.

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

OK. Thanks very much for that answer.

Jaime Easley -- Vice President and Chief Financial Officer

Thank you.

Scott Gaffner -- Vice President of Investor Relations

All right. Thanks everyone. This is Scott. At this time, we're actually going to conclude the call.

I want to thank you again for joining us on the call today. And Stewart and I will be available throughout the day to answer any questions and any follow-ups. Thank you, and hope to see you during the quarter or on the next call. Thanks. 

Marc Michael -- President and Chief Executive Officer

Thank you. 

Jaime Easley -- Vice President and Chief Financial Officer

Thanks. 

Operator

[Operator instructions]

Duration: 64 minutes

Call participants:

Scott Gaffner -- Vice President of Investor Relations

Marc Michael -- President and Chief Executive Officer

Jaime Easley -- Vice President and Chief Financial Officer

Nathan Jones -- Stifel Financial Corp. -- Analyst

Mike Halloran -- Baird -- Analyst

Unknown speaker

Robert Barry -- Buckingham Research -- Analyst

Walter Liptak -- Seaport Global Securities -- Analyst

Brett Linzey -- Vertical Research Partners -- Analyst

Matthew Fields -- Bank of America Merrill Lynch -- Analyst

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