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SPX FLOW Inc (NYSE:FLOW)
Q4 2020 Earnings Call
Feb 10, 2021, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you for standing by and welcome to the SPX FLOW Q4 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Scott Gaffner. Thank you. Please go ahead.

Scott Gaffner -- Vice President Investor Relations and Strategic Insights

Thanks, Polly [Phonetic], and good morning everyone. Thanks for joining us for a discussion of our fourth quarter 2020 financial highlights. This morning we issued a news release detailing our financial performance for the three months ending December 31st, 2020. The news release, along with the presentation to be used during today's webcast can be accessed on our website at spxflow.com, and a replay will also be available on our website later today. Joining me on the call are Marc Michael, President and CEO, and Jaime Easley, Vice President and Chief Financial Officer. Taking a quick look at today's agenda, Marc will highlight our accomplishments in 2020, discuss sequential order trends and close with a view of 2021. Jaime will then walk through the details of the fourth quarter and full year results, provide some insights into the first quarter of the year, along with the discussion of both our long-term capital allocation framework and capital allocation accomplishments in 2020, and Marc is going to wrap up with an update on our strategic objectives. 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 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. And with that, I will turn the call over to Marc.

Marcus Michael -- President, Chief Executive Officer & Director

Thanks for the introduction, Scott. Good morning everyone and thank you for joining us on the call. We navigated through many challenges in 2020 and I'm proud of the courage, compassion and commitment demonstrated by our global team members throughout the year. Despite the many personal and operational difficulties caused by the COVID-19 pandemic, our people focused their efforts on what they control by creating an outstanding experience for our customers, improving our culture of belonging and driving profitable growth in our key technologies and services. These outcomes are based on the foundation of 80/20, which we launched across the company at the start of the year. 80/20 is providing a framework to build future growth and profit acceleration by identifying those products and customers in our target markets that are most likely to generate the best results while simplifying how-we-do-business. By focusing our attention and resources on high-growth and margin business, we have also been able to identify areas where we can accelerate productivity actions and reduce cost. Our progress last year was significant, and we will continue to accelerate in 2021.

We continue to invest in our people first culture by prioritizing the safety, health and well-being of all our team members. Last year, total recordable incident rates declined by 20% reaching the lowest level in company history, and team member engagement scores were up over 20%. Investments were made into our mission to create an outstanding experience for our customers through organizational alignment and new digital capabilities. In the face of a pandemic, we redefined our portfolio through the sale of Power and Energy, continued discipline on project selectivity, executed well, and sustained a focus on cost which delivered a positive outcome. And we maintained a strong financial position and liquidity while systematically deploying capital to high return organic investments and programmatically looking for value creating acquisition opportunities. We entered 2021 in a position of strength and I'm excited about the opportunities ahead of us.

As we continue our journey to high performance, I would like to highlight the meaningful strides we made in 2020. The shift to a process solutions business serving essential markets is resulting in more resiliency with orders and revenue improving sequentially following the initial impacts of COVID-19. Orders ended the year better than we originally planned as demand continued to improve. Our emphasis on higher quality of revenue and focus on productivity and cost containment was evident in our gross margin expansion of nearly 20 points despite revenues being down 10%. Notably, decremental margins were just 20% reflecting our agile operating structure. We executed on a more balanced capital deployment strategy announcing two acquisitions, completing the buyout of our Korean JV, returning capital to shareholders with $20 million in share repurchases, and reducing our outstanding debt position by $300 million resulting in $17 million of annual interest savings.

During 2020 we generated strong adjusted free cash flow of $125 million, supported by approximately a $40 million reduction in working capital. We entered this year with the strongest balance sheet in company history at a net cash position with ample liquidity to support our strategic priorities. Sequentially, orders accelerated and were meaningfully better than we anticipated heading into the quarter, with resiliency in both segments. Industrial orders were up 14% sequentially, which was ahead of expectations. Encouragingly, customers released funds for several large capital projects with concentration in North America. We also saw a follow through of sequential growth in our short cycle product categories, which was broad based by technology and geography. In Food and Beverage, orders were up 24% sequentially, which was also well ahead of expectation across all categories. The outcome for the quarter reflects the ongoing market demand for essential products that utilize our Food and Beverage systems and equipment.

In systems, we continue to see demand for our technology which provides solutions for producing specialty and plant based beverages, as well as fermented dairy products. And orders for component and aftermarket products were up double digits in the quarter, reaching one of the highest levels we've ever had for that part of the business. Overall, our orders results in Q4 exceeded our expectations across both segments, positioning us well as we enter 2021. As we enter the year, we are taking a balanced approach with our demand forecast. While it's encouraging the global economic outlook indicators have improved as demonstrated in our results exiting 2020, we are remaining prudent in our planning based on the potential for ongoing impacts from the pandemic. We're planning for revenues to grow low to mid single digits organically with operating margin showing sequential improvement as the year progresses.

We made further progress on our objective to achieve a higher quality of revenue last year, and 80/20 is providing a foundation to continue this effort. With that as a backdrop, we'll continue to focus on those items that are under our control to create a high level of performance, irrespective of market conditions. We've built an agile operating structure with the culture of productivity while instilling a profitability mindset throughout the organization. Our 2% to 3% cost-out program is yielding the desired results, but the opportunity remains high for the continued improvement. In 2021 we are actioning a $25 million productivity program that is focused on SG&A spending, but this is not just a cost-out program. Through our 80/20 initiative, we are simplifying how-we-do-business and refining where we do business, which provides direction in allocation of resources to high growth, high margin revenue streams while creating productivity. We'll also plan to systematically invest capex in the factory modernization and innovation above historical levels with disproportionate spending on those areas that have the potential to create the highest returns.

Finally, our programmatic M&A process is yielding results evidenced by the closing of Posi Lock Pullers in 2020 and UTG mixing group in January. We are encouraged that an attractive pipeline of opportunities continues to build. And with that, I'll turn the call over to Jamie to cover our financials.

Jaime Easley -- Vice President and Chief Financial Officer

Thanks, Marc, and good morning everyone. I'll begin with a brief recap of 2020. As Marc mentioned in his opening remarks, we are focused on what we control. 2020 strong operational performance in the face of significant headwinds is proof that this approach is working. Our team has met the challenge by keeping safety as the priority, manage labor plans tightly, reduced discretionary cost and optimized inventory levels while serving the demands of our customers in our central markets. In total, orders for the year were only down about 7% as markets reacted to COVID-19 with the first half being most impacted. Food and Beverage orders were down about 8% primarily due to a 16% decline in our systems business, which we think was largely due to delays in capital spending. We are encouraged that front logs and project funnels remain strong as we head into 2021.

Components and aftermarket orders were only down low-single digits, driven in part by our 80/20 focus on growing key accounts. Within the Industrial segment, orders declined 7% due to weakness in short cycle product categories. We did see demand for these products rebound in the second half of the year, but demand remains below pre-pandemic levels. Revenues declined 10% for the year, approximately half of which we expected coming into the year with lower backlog from selectivity on lower margin offerings in 2019. While such revenue declines would normally drive down our gross margins, they actually improved by approximately 20 basis points. Our purposeful efforts to create higher quality revenue streams was the primary driver, with Food and Beverage gross margins up 300 basis points due to improved mix and solid execution. For the year, decremental margins held to about 20%. The productivity initiatives of our GMO team along with strict cost controls across the business limited the impact on lower revenues and profitability.

Our fourth quarter results highlight the resiliency of our revenue and our progress toward driving a higher degree of operational improvements. Organic revenue grew 5% in the quarter as short cycle product categories continue to recover and our systems business posted strong revenue growth. Orders were only down 5% versus our expectation that they would declined 15% to 20% with meaningful outperformance across most product categories in both segments. Segment income margins were down year-over-year as we had expected coming into the quarter. We had a difficult comp and F&B in 2019 and a higher mix of project and systems revenues in 2020 which supports our higher margin aftermarket business in the long term. And lastly, our team did a phenomenal job converting our revenue into cash in the fourth quarter. Adjusted free cash flow, as we will see on the next chart was an impressive $85 million. Operational working capital balances as we define them were reduced by approximately $50 million in Q4 and $40 million year-over-year on a constant currency basis. The biggest drivers were accounts receivable and inventory. Our teams dramatically reduced past due receivables and used the cross-functional SIOP processes to optimize inventory levels. These were plans our teams have been executing against all year, and it was nice to see the benefits materialize beginning in October and hold throughout Q4. I would personally like to thank our teams for their focus on cash and our collective drive toward achieving optimal, sustainable working capital levels relative to volume.

Looking at the segments, beginning with Industrial. Orders declined 4% with strength in North America offset by weakness in China. Importantly, we did see some improvement in our short cycle high margin product categories in the quarter. We saw a high level of demand for OE projects during Q4 with a building front log of orders to start 2021 as demand for our products remained strong. Organic revenue increased 6% in the quarter and segment margins were down 90 basis points to 11.6%. This was primarily due to a higher mix of project business and less short cycle revenue.

Moving on to Food and Beverage. Orders declined 5% as increased component orders were more than offset by a decrease in systems. Component orders were relatively strong across most geographies, while the decline in systems was concentrated in Europe. Revenue in the quarter was strong with organic revenue up 5%. This was predominantly driven by our systems business, which posted a revenue increase of over 20%. Revenue for our higher margin components were flat and our service revenues were down low-single digits. This lower mix year-over-year was a primary factor in the lower gross margins. We also had a difficult year-over-year comparison in the fourth quarter of 2019 from a profitability perspective, as Q4 2019 included the positive impact of several large project closeouts, which we did not expect to repeat in 2020. As Marc mentioned, the launch of 80/20 has provided us a foundation to identify efficient areas of growth. Moving into 2021 and beyond, we are using zero based budgeting concepts to focus our spend on supporting our differentiating capabilities and key customers. We will over-invest in those areas while reducing low value or wasteful task elsewhere in the organization. By instilling a productivity mindset companywide, we see a path to sustained margin expansion and increased free cash flow over the coming years.

As Marc mentioned, we are implementing a $25 million SG&A cost productivity program, which also includes resource allocation to disproportionately invest in growth. The program is expected to realize $10 million of savings weighted in the second half of 2021 with the remaining $15 million carried over into 2020. We expect the cash cost to achieve these results to be $20 million to $25 million, most all of which should be accrued and paid in the year. We will update the progress of this program quarterly going forward.

Looking at the first quarter of the year, we are prudently optimistic regarding order trends. Customer buying patterns impacted by COVID-19 is the primary factor in variability relative to this view. We do have line of sight to improved revenues year-over-year as our first quarter shippable backlog is up $40 million versus where we entered 2020. The improvement was driven by the nature of our strong fourth quarter 2020 order rates. Based on our calendar convention, the first quarter of 2021 will have five additional shipping days. For the full year, we will have one less day, with six fewer days year-over-year in the fourth quarter. We expect segment margins in the first quarter to be flat sequentially to the fourth quarter. I will also mention that we closed the acquisition of UTG mixing group on January, the 18th, which I will cover in more detail at the end of my remarks.

Lastly, I did want to note an important change to our adjusted results. Based on our recent success in closing two acquisitions, a building pipeline of M&A opportunities and a strong balance sheet, we do expect to be more acquisitive over the next three years than we were in the first five years of being a stand-alone public company. In 2021, we are revising our definition of adjusted earnings to exclude discrete M&A cost including deal fees, inventory step-ups, and amortization of acquired intangibles. We believe this will provide investors with a more accurate measure of our performance, and it will make it easier for peer comparisons. Consistent with our historical approach, we will continue to exclude the effects of restructuring when reporting adjusted results. Instead of restating all prior periods for the impact of this change now, we will plan to revise the comparative periods each time we report results going forward.

Taking a brief look at our financial position. At the end of the year, we had a net cash position of $32 million resulting from a strong year of cash generation, along with the proceeds of the Power and Energy divestiture. A portion of those proceeds were used to retire our $300 million, 2024 senior notes in August last year. We now have close to $1 billion of available liquidity. The strength of our balance sheet and annual cash generation provide us the ability to disproportionately reinvest in organic opportunities while simultaneously pursuing high returning acquisitions in line with our strategic goals. Given the strength of our balance sheet and the importance of capital allocation moving forward, I did want to highlight our capital allocation priorities. 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. We have a programmatic M&A process that is highly aligned with our strategic priorities. Our target net leverage range is between 1.5 and 2.5 times. We are clearly below that level at the moment. Our investment decisions we based on generating attractive cash ROIC above our WACC to drive compounding free cash flows. After funding all attractive investment opportunities, we will evaluate the most efficient method to return cash -- excess cash to shareholders.

In 2020 we made meaningful progress on our capital allocation priorities. As I mentioned on the prior slide, we redeemed our 2024 senior notes following the receipt of proceeds from the Power and Energy sale, significantly reducing our gross leverage. We increased R&D expense by approximately $3 million, one of the areas which we were planning to increase our organic investment levels. We completed the acquisition of Posi Lock Puller in August and purchased the remaining shares of our Korean joint venture in the fourth quarter. In Q4, we also announced the UTG mixing group tender offer process that resulted in us acquiring the business in January. Lastly, we prudently returned capital to our shareholders through our share buyback program by buying $20 million of stock in the year.

As I mentioned, we announced our acquisition of UTG mixing group in the fourth quarter and recently closed the transaction in January. We are very excited to have the UTG team on board. UTG brings along well recognized regional brands and technologies that complement our geographic exposure and product capabilities. This acquisition is highly aligned with our strategic objectives as a company and provides both cost and revenue synergies. The business has a high quality of revenue evidenced by its gross margin profile. With that, I'll turn the call back over to Marc for closing remarks.

Marcus Michael -- President, Chief Executive Officer & Director

Thanks, Jamie. As we close 2020 and look to the future, we are thinking and acting more aggressively to change our historical paradigms to create an inflection point in operating results rather than a linear progression which is overly reliant on an end-market recovery. The deployment of 80/20 is now our foundation and provides a framework to refocus in clarity on how and where we want to grow profitably. We've successfully elevated -- excuse me, we've successfully evaluated our portfolio and began the process of disproportionately investing in our high growth and higher margin product categories that are aligned with our focus markets and customers. Our plans will accelerate as we start 2021 irrespective of market conditions. We will refocus our resources to those areas to generate the highest returns while expanding margins through increased productivity. With our balance sheet strength and the cash generation of the business, we are well positioned to invest through economic cycles. Organic capital allocation will be targeted to our highest returning technologies through investing in R&D to accelerate new product development, deploying capex to modernize our factories and improve efficiency to meet customer demand, and rollout additional digital capabilities to create a better customer experience. Additionally, our programmatic M&A process is building momentum following the announcement and subsequent closing of two recent acquisitions. We'll continue to identify attractive M&A targets using a disciplined approach with an objective of high returns in alignment to our strategic priorities, focusing on markets and technologies, with capabilities we believe we can win in. And when we have excess cash, we'll make returns to shareholders. I'm proud of what our team has accomplished. Together our actions have created a strong culture, a more sustainable earnings stream due to a higher quality of revenue, and a foundation that allows us to shift to offense, which we expect will lead to accelerating growth and operating performance.

To provide a deeper understanding of our strategic direction, we'll be hosting a virtual Investor Day on March 11 from 9 to 11:30 Eastern Standard Time. We plan to have an engaging program that will allow you to expand your knowledge of our plans for generating profitable growth and accelerating value creation. More details will be forthcoming, but if you would like, you can pre-register on our Investor Relations website. And with that we'll open it up for questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Nathan Jones with Stifel.

Nathan Jones -- Stifel -- Analyst

Good morning, everyone.

Jaime Easley -- Vice President and Chief Financial Officer

Good morning, Nathan

Nathan Jones -- Stifel -- Analyst

It sounds like we'll get some more detail on this in March. But I wanted to just talk a little bit about some of the growth investments here and investments you're making internally into the business. Last few years have averaged about $25 million of capex, you're talking about $40 million this year, you're talking about increasing the amount of R&D. Can you talk about where the capex is going, if it's likely to sustain at a higher level going forward? Where you are at R&D investments in terms of a percentage of sales kind of thing and where you would think that will end up over the next few years?

Jaime Easley -- Vice President and Chief Financial Officer

Yes, sure, Nathan. I'll take that one. So I'll start with capex. To your point, we've had about $25 million or so in the last couple of years. We are planning to increase that to $40 million. We had made good progress over the course of this year, I'll mention. But as you work toward the end of the year, had a couple of projects that were delayed and then we had some payments that will be due into 2021. So we are making progress toward increasing capex. The majority of that is going to be focused in modernizing some of the key factories that we have and also improving digital capabilities that we have. So internally investing in tools that really allow us to serve our customers better.

On the R&D front, you mentioned the additional R&D expense that we had in 2020, I mentioned that in my prepared remarks too, we had an additional $3 million. Next year, we're planning to put another $3 million to $5 million in an R&D. That's going to also be directed toward our higher growing product line. So as we talk about 80/20 and we split out our product lines around those that have the highest gross margins, those that have the highest opportunity for growth, our R&D will be spent predominantly in those categories.

Nathan Jones -- Stifel -- Analyst

And then I guess the way we should judge the success of that, I mean you're talking about higher growth, higher margin, so we should say you growing above market growth rates then we should see some expansion in gross margins here? Over the next few years I'm talking about, not necessarily in the next couple of quarters.

Jaime Easley -- Vice President and Chief Financial Officer

Yeah, that's right. I mean that's the spirit of what we're doing. We've looked critically at our product lines and we've evaluated those on the ones that have the best opportunity for growth and have the highest margins and the investments there are absolutely targeted to drive a higher and better mix over time.

Marcus Michael -- President, Chief Executive Officer & Director

Yeah, hey Nathan, this is Marc. I'll add into that, I mean that's spot on. Our mission is to profitably grow the business. And that 80/20 foundation that we referenced throughout the prepared remarks and what we worked on throughout the course of last year, aligned with our strategy, provides the framework to accomplish that. So we're laser focused on these higher growth, higher margin opportunities with key accounts and that's where our investment is going to go to, those factories, those new product development opportunities, the digital capabilities to support key customers better. So that's number one on our list. And then just the second piece I would mention is we deployed capital in a greater way back into M&A, we're going to be doing the same thing. It's looking into those same types of markets, same types of product lines, and the M&A targets will be centered around that.

Nathan Jones -- Stifel -- Analyst

Great. I'm sure we'll hear more about that in March, so I'll pass it along.

Marcus Michael -- President, Chief Executive Officer & Director

Absolutely. Thanks, Nathan.

Jaime Easley -- Vice President and Chief Financial Officer

Thanks.

Operator

And your next question comes from the line of Mike Halloran, with [Inaudible]

Michael Halloran -- Baird -- Analyst

Hey, good morning everyone.

Marcus Michael -- President, Chief Executive Officer & Director

Good morning, Mike.

Michael Halloran -- Baird -- Analyst

So first on the guide for this year. Maybe just give some help on some context, what are the assumptions for sequential improvement for the year relative to normal seasonality. Maybe some help on what the competition looks like, but between the two segments, and any kind of underlying assumptions that we should be thinking about.

Jaime Easley -- Vice President and Chief Financial Officer

Yeah, Mike. So, Marc said in his remarks that we are expecting low to mid single digits organic growth. I just want to make sure that we're calibrated too on what the growth will be. We also have about a 1.5 of growth expected from our recent acquisition of UTG. And then also on the top line, we will see growth as it relates to our FX alone, so you will have about 3.5, or 350 bps of impact on the top line. So back to the commentary we had around the discussion there with Nathan is we expect to see growth in our higher margin product categories. It's the way we plan the year, and to Marc's point it's aligned back with our strategy. We've gone through, we've repositioned our cost structure as we mentioned in some of the prepared remarks. We are disproportionately investing in capex and R&D around those product lines, really to drive disproportionate profitable growth around that. So that's what I'd say on the top line. And then as it relates to margins, we did say as well that we expect Q1 to be sequentially flat to Q4 but expecting margins to expand over the course of the year. And the way to think about that is, it's really just driven by the improved mix that we would expect over the course of the year. And then back on the SG&A line, we've got the plan for that to be roughly flat year-over-year with some headwinds on -- well I'll say roughly flat. That'll be on a basis of relativity to revenue. So with the revenues going up, some of that being FX, we've also got some headwinds on the SG&A line. And some headwinds that we've got coming into the year, deflation, merit, so the things that we would see. And then the productivity initiatives that we kicked off a couple of years back in the 2% to 3% cost-out program, really nice to see those expect to come through in 2021. And in addition to that the $25 million cost program that we're announcing this morning.

Marcus Michael -- President, Chief Executive Officer & Director

So I'll just add maybe a point of clarity too Mike on the SG&A front. We expect the SG&A on an absolute basis in terms of just the year over year as we committed to you in Q3, and I mentioned that we didn't plan on increasing our SG&A on a core basis. So that's what's reflected. And then as Jaime was mentioning, the progression through the year on the revenue line is going to predominantly come from these higher margin product categories, as well as a category we've got dubbed as balanced where we look at growing it but also expanding margins. And if you look at that revenue growth, we would expect probably somewhere in the neighborhood of 60% to 70% of the revenue to be coming from those higher margin product lines. So think again above company average. So those are the ones to get into that 40% to 50% category of margin profiles. And then the balanced category or -- is probably going to be 30% to 40% of the revenue that has margin profiles that are more kind of consistent with company average. So as we look at how the year progresses, you know, the encouraging part I think is as we exited 2020, we did see good order progression and the catalyst behind our short cycle business is going to be the initiatives that we have ongoing as well as a continued recovery in the economies and that's primarily in the Industrial space, because Industrial last year was really the area that was impacted the most. And -- but continued to -- picked up as we exited the year which was really encouraging. So we want to see the Industrial business, industrial markets continue to gain momentum. Gross GDP and PMI will reflect that we would hopefully continue to see that happen. And then I'm just really proud of our Food and Beverage business, because if you look at how we performed last year in Food and Beverage, we exited the year in Food and Beverage with really around mid teens to margins on the segment income line, as Jamie mentioned we expanded gross margins around 300 basis points. So as we look at our Food and Beverage business, the short-cycle business there was pretty good throughout last year, but we expect that to really continue to improve also. So I'm really pleased and excited about where we are in the journey. And as we kind of enter this year, our goal will be to execute on these key high margin product lines across both categories, which will provide margin opportunities in terms of being accretive to a year-over-year basis. As well as some of these other points that Jaime was mentioning around productivity in our factories and we're going to manage cost price really well. So really I think we're in a really great spot coming into the year. And again two, I'll just -- I'll keep coming back to I'm just really excited about where our balance sheet is so that we'll be able to really deploy capital in a much different way that's going to help on all fronts organically and inorganically.

Michael Halloran -- Baird -- Analyst

So, thanks for that. Just clarifying, I think what I was trying to get at too was twofold, one, it sounds like the industrial piece you're expecting to outpace, maybe the growth profile of Food and Beverage but then secondarily, are you assuming anything above normal sequentials from here or some sort of acceleration from an underlying fundamental perspective in any of those markets beyond something more normalized? Just trying to get some context around those two pieces.

Marcus Michael -- President, Chief Executive Officer & Director

Yeah, I mean, there'll be -- with Food and Beverage, I would say there is a backlog coming into the year that's going to support from a systems standpoint a continuation of revenue into the first half of the year. The bigger piece then will be how does the short-cycle business hold up in Food and Beverage. And again it has held up well and we think our initiatives will continue to support progress there. The bigger piece is Industrial, I mean that's where the headwinds were in 2020. Right? I mean, we had $80 million, so a roughly of revenue down in 2020. A majority of that, call it 70% or so being short-cycle business. And if you step back from that and think about industrial markets are really been challenged, and so good indicators for our Industrial business, our PMI and GDP, as I was mentioning, we saw that acceleration coming -- exiting 2020. And as we look to 2021 with stronger economy starting to open up, stronger PMI, stronger GDP, we would expect acceleration to outpace in our short cycle business as we go through 2021.

Michael Halloran -- Baird -- Analyst

So, second question then just on the kind of the customer inventory supply chain pricing side, maybe some update on how you guys are thinking about that? Any -- what's channel inventory look like, are you seeing any constraints in your own supply chain and how you are managing some of the inflation pressures?

Marcus Michael -- President, Chief Executive Officer & Director

Yeah, no constraints in supply chain, we've been fine there. We've got really good global supply chain base across all regions. We've talked to that -- about that before, we purchased the majority of our materials in the regions where we do business, as well as produce the products in the regions where we do business. So supply chains are in good shape, watching cost price closely as everyone is. Some indicators of inflation or out there, but we feel good about where we are with what we've done on the price front already coming into the year, so that we're going to be in a position where we're managing cost price well is our plan. So expecting to be neutral on cost price as we move through the year. So really pleased. We made tremendous progress there on cost price in the last couple of years. The supply chain team does a really great job and give us insights, so what they're seeing with inflation, and our commercial teams are getting well out in front of any inflationary trends early in the year and in the process. So I think we'll be in a good spot. I appreciate that, Marc, Jaime. Thank you. Thanks, Mike.

Jaime Easley -- Vice President and Chief Financial Officer

Thanks, Mike.

Operator

And your next question comes from the line of Julian Mitchell with Barclays.

Julian Mitchell -- Barclays -- Analyst

Hey, good morning. This is Triss on for Julian. So, maybe just looking at the margins a little bit more, I know you guys said kind of sequential margin improvement through '21 and you talked a lot about mix, but can you talk more about kind of temporary cost reversals. It seems like incentive comp maybe already started to come back in Q4. What portion of the $35 million was that? And then how should we expect those $10 million of productivity savings to come through in the second half maybe by segment?

Jaime Easley -- Vice President and Chief Financial Officer

Yes, so on incentive comp, kind of two pieces. As we think about long-term incentive comp, we did have discreet reversal at the end of last year. We just see in the corporate line which really related to prior Performance Awards 2018 and 2019 Performance Awards, which just won't invest [Phonetic] as a product of COVID. We expect that will be a headwind that will come back. On the kind of annual incentive, we are pretty close to what we would kind of deem to be a run rate going forward. So there'll be a little bit of headwind going into the next year, but not a meaningful level. And then on your question around SG&A in the second half of the year, it'll be pretty evenly spread across the segments. We mentioned in the prepared remarks that we would expect about $10 million in the second half. Some of that will end up in the corporate line. Some of that will end up in the segments. But the carryover of $15 million into 2022 is also an important piece as you think about kind of where SG&A goes over the longer term. The 2021 piece again, as Marc said, and I also said, will be keeping those levels flat.

Julian Mitchell -- Barclays -- Analyst

Got it. That's very helpful. Thank you. And then just maybe one more follow-up back on that seasonality, it sounds like in terms of revenue seasonality sequentially, you guys are expecting things to be rather normal. And so just wondering if that implies kind of some sort of slowdown in the second half or as maybe it's a little bit better than normal seasonality in Q1 from a topline perspective?

Marcus Michael -- President, Chief Executive Officer & Director

Yeah, I think if this mark ups, Q1 is going to be supported by a better entering backlog and from an order profile perspective, we would anticipate that orders maybe are similar to what we saw in Q1 last year. So if you think about Q1, what that would translate to is that additional backlog position that we mentioned of about $40 million better, you would see in Q1. And then think of order profiles being similar to Q1 last year from a planning standpoint, and conversion rates at a similar level also. So as we go through the year we have prudently planned that the second half we're going to watch and see how things develop in that two to three -- low to mid-single digit revenue stream and see how things kind of progress through the year. So the goal and hope I would say is that, as I was mentioning to Mike's question is that the industrial markets as they pick up, we should see that flowing through in our orders and revenue. We were significantly down in 2020, again about $80 million overall in Industrial revenues, of which 70% to 80% of that was in our short cycle business. So that hasn't recovered yet. It was picking up, recovering as we exited 2020 which was great to see during the second half, but we're really looking for that recovery to gain legs as we move through 2021 and if that picks up, those would be good important catalyst to our revenue streams as we move through the entire year.

Julian Mitchell -- Barclays -- Analyst

Got it. Thank you.

Operator

Your next question comes from the line of Brett Linzey with Vertical Research.

Brett Linzey -- Vertical Research -- Analyst

Hi, good morning everyone.

Marcus Michael -- President, Chief Executive Officer & Director

Good morning.

Jaime Easley -- Vice President and Chief Financial Officer

Hi, Brett.

Brett Linzey -- Vertical Research -- Analyst

Hey, I just want to come back to the incremental margins, the 40 to 50 in Industrial and something less in F&B makes sense, you indicated that for most of 2020. Is that the framework for the base level and then this new $10 million -- 25% in total but $10 million this year, SG&A program would be in addition to that framework?

Marcus Michael -- President, Chief Executive Officer & Director

Hey, Brett. Just a point of clarification on your -- the first part of your question about the margins, or your lead in there? I want to make sure I understood that.

Brett Linzey -- Vertical Research -- Analyst

I was talking about -- so you've previously indicated incremental margins in Industrial would be in that 40% to 50% level for 2021 and for F&B something less. I'm just curious if that's still the base level thinking, and then this new SG&A program something on top of that?

Marcus Michael -- President, Chief Executive Officer & Director

Yeah, so just to clarify, if you think about the revenue increases or for what we're out looking for revenue in the low to mid single digits, as you look at the margin profiles of that revenue and how we planned for it, somewhere in the neighborhood of 70% of those revenues would be coming from those higher margin product lines. So that's the -- again that we've indicated in the 40% to 50% margin range. Again from a planning standpoint, again, you're spot on that those would be coming more from the Industrial products overall as the industrial environment improves. The other piece, the other kind of 30% let's call it, would be from product lines that are more in line with company margins. So that's the way to kind of think about that, in that low to mid single digit overall revenue growth again being more weighted toward our industrial products.

Brett Linzey -- Vertical Research -- Analyst

Okay, got it. And then just a question on China, you mentioned as a driver of results in the prepared remarks, but specifically in F&B, could you maybe just give a little color what you're seeing in the China region, how did it perform in Q4 and into January and what are your expectations there for the year?

Marcus Michael -- President, Chief Executive Officer & Director

Yeah, I mean it's good. I mean China continues to be a strong market for us. Our systems business there is very well respected, a lot of fermented dairy programs and projects are done in China. There is -- tends to be some lumpiness within that systems business as we know well that some quarters can be up significantly and then we can have just some timing elements in other quarters. But we still see healthy opportunities coming out of China as we look into 2021, and our components and aftermarket business in Food & Beverage continues to perform well there too. So as we exit the year, again, Food and Beverage just hit it out of the park. The on-down revenue, we had the margin expansion of 300 basis points on the gross line and over 100 basis point on the segment income line on a year-over-year basis. And that's driven by a bit getting out of this dry dairy systems business, but that's really starting to trail behind us a bit also. The other thing that really was exciting in our Food & Beverage business that great project execution, the team is doing a fantastic job with project execution. And again, good cost price management overall. So really strong cost price management within that segment. So really excited about where Food and Beverage is. The China market is a good market for us. Really across all regions, our Food & Beverage business is a strong business for us. Nuances you know region to region on where we do systems versus components, but really a cornerstone for us.

Brett Linzey -- Vertical Research -- Analyst

Okay, great. I'll leave it there and pass it along. Thanks guys.

Marcus Michael -- President, Chief Executive Officer & Director

Thank you.

Operator

Your next question comes from the line of Walter Liptak with Seaport.

Walter Liptak -- Seaport Global Securities -- Analyst

Hey, thanks, good morning everyone. Great quarter.

Marcus Michael -- President, Chief Executive Officer & Director

Yeah, hi. Walter, thank you.

Walter Liptak -- Seaport Global Securities -- Analyst

I wanted to circle back on Industrial, and it's nice to see orders up getting close to that $200 million per quarter level again.

Marcus Michael -- President, Chief Executive Officer & Director

Yeah, really good.

Walter Liptak -- Seaport Global Securities -- Analyst

And yeah, I wondered if there is anything in the quarter. Like, you know, if pricing was going up, if -- how the channel reacted and what the order activity is looking like in the early part of 2021?

Marcus Michael -- President, Chief Executive Officer & Director

Yeah, I mean, I think going through the quarter in Q4, what I would say is orders continue to edge up as we move through the quarter in Industrial. Through our channel partners, we have great relationships and we've been able to work with them and maintain good cost price position as we've executed on our industrial opportunities through the quarter and through the second half of the year for that matter. So as we saw business coming back, we didn't really see any pressure from pricing. And then as we're coming into 2021 here, I would say we're pacing as we would have expected coming into the year, as I was indicating. We're not looking for is quite a stronger follow through here starting the first part of the year as we saw in December, but we're looking for it to be a good quarter and is online and in track -- in line and on track with what we anticipated thus far.

Walter Liptak -- Seaport Global Securities -- Analyst

Okay, great. And then on the 80/20, I wanted to ask about the activity levels of it. Have you rolled it out now to all your divisions and employees, or is this kind of a pace rollout that you're doing?

Marcus Michael -- President, Chief Executive Officer & Director

Yeah, great question. Well, I'm glad you came back to it. It's just such an important part of what we're doing because it just gives us the focus and the framework around the right products, the right markets, the right customers that we want to do business with and grow with, with good high-margin, high quality of revenue streams. So yeah, we did this in phases, in waves. So we started with the product lines that we want to have the biggest growth in and they provide us with our best opportunity for market growth as well as the margin profiles. So that was the first wave. The second wave was what we would -- so those are the growth products what we define as our balanced group. So in the balanced group, that emphasis is around a bit of growth. So make sure you grow into what the market is growing, as well as over achieving in your aftermarket, focus on your key accounts. But we also want you to work on profitability. So we want you to expand the margin. So again, that group is -- it has margins that are more in line with company margins. So, we want them to push their margin profiles up also as we go through the year.

Third group is where we want to enhance margins more. It's a smaller cross section, it includes our systems business. And so we've been doing this actually for the last couple of years already. So smaller group there that has a couple of product lines in it that we're working on with right now to get it fully rolled out, but they've all been educated in 80/20 and the implementation is taking deeper group in that final group as we move through the first quarter here. So, I'm pleased with where we are so far with the rollout and the journey creating maturity around what the teams are focused on to get that profitable growth. Importantly too, as we look at where that growth is coming from, we're looking for productivity opportunities that will develop in areas that we're not going to place as much emphasis on, that will be part of the cost opportunities that we'll have in the business as well as reallocating resources to those areas that we want to overachieve in. So, well on the journey, Walt, and I expect as we move through the first half of this year it will be well entrenched and well ingrained.

Walter Liptak -- Seaport Global Securities -- Analyst

Okay, got it. Thank you. And then the last one from me is just on UTG mixing. Jamie, I think you mentioned that the gross margins are nice on that business. I wonder what kind of level are you looking at or what was UTG at? And then is that sort of the profile that you're looking for a higher gross margin M&A targets?

Jaime Easley -- Vice President and Chief Financial Officer

Hi Walter, thanks. Good question. So the UTG margins are going to be 40% to 45% gross margins and it's absolutely our expectation as we do M&A that we find high quality revenue businesses and those are going to be accretive on the gross margin line. Some of our businesses that we'll acquire may have different products and different margin profiles. But it's absolutely part of our screen is to look for businesses that have margins that -- gross margins that are greater than our own.

Marcus Michael -- President, Chief Executive Officer & Director

Yeah, and hey, Walter, I'd just add to that, again, just to reemphasize on our capital deployment and that M&A piece. It aligned well with our strategy in these markets that we want to play in around nutrition and health, especially industrial. These key product lines that we keep referencing back to that are in this growth category that have margins that get into that 40% to 50% gross margin range and that's where our emphasis is. And it's the first screen that we do, it's got to pass those hurdles first and then we double click into where the value creation opportunities in being able to expand the products both directions into the channels and key accounts as well as any -- is the cost synergies. So we're really excited about the first couple of steps we've taken here. And as I mentioned, we've got an active funnel that will be bearing some more fruits as we move through 2021. So capital deployment and our strength of our balance sheet is really important to us and M&A is an important part of that as well as the organic piece and the investing back in the company that was talked about in capex, new technologies, R&D, and then we're going to return to shareholders as we move through the year too.

Walter Liptak -- Seaport Global Securities -- Analyst

Okay, great. All right, thank you.

Marcus Michael -- President, Chief Executive Officer & Director

Thanks Walter.

Operator

Your next question comes from the line of Nigel Coe from Wolfe Research.

Nigel Coe -- Wolfe Research -- Analyst

Hey, good morning guys. This is Brandon on for Nigel.

Marcus Michael -- President, Chief Executive Officer & Director

Good morning.

Jaime Easley -- Vice President and Chief Financial Officer

Good morning.

Nigel Coe -- Wolfe Research -- Analyst

So you guys talked about capital project release in North America for industrial. How has larger project activity and orders trended? I know you guys talked about your orders a little bit, but just specifically on the larger project activity. And maybe a second part of question is, is this just some pent-up demand that's carrying through or can this sort of produce a bit of an air pocket at some point in the future? Just kind of wondering a little bit more about that activity.

Marcus Michael -- President, Chief Executive Officer & Director

Yeah, hey, I'm glad you asked that question because I mentioned the Industrial business a couple of times here during the call, and 2020 was a challenging year in our industrial business. And there was a lot of headwinds from the pandemic. I'll just reference the points again about 70% of our order reduction in revenues associated with that came from our short cycle business, and about 30% from project-based business. So that translates quickly into revenue when we talk about the short-cycle business. And so that's where you saw the revenue declines too. So the project-based business, what we saw happen throughout the course of most of last year was really not a lot of a project releases happening in Q2 and Q3, and we did see some projects being released in Q4, primarily concentrated in North America, which is very encouraging. What I would share with you is that pent-up demand piece, we do believe that is developing. Not in air pocket because we saw some orders coming through in Q4. Still pent-up demand is out there as we look across the regions for some of our key product lines in the Industrial space. And as we've done that assessment coming into the year, that's an encouraging point and that's what we want to see how that develops in our Industrial Product line as economies open back up more, as we get past this kind of winter months of the pandemic. Front logs are looking good and hopefully then the follow through also happens with our short cycle business, which we would expect with a higher growth rate economies and PMIs being stronger. So industrial is set up we believe for a rebound as things get stronger moving through not only 2021 but as we look to the future in 2022 even. Do we lose you there?

Nigel Coe -- Wolfe Research -- Analyst

I'm sorry. Yeah, thank you for the question. And then maybe just a second, if it's OK.

Marcus Michael -- President, Chief Executive Officer & Director

Sure.

Nigel Coe -- Wolfe Research -- Analyst

Is there any sort of meaningful sort of M&A targets that you guys are seeking? I know you guys mentioned some of the enhancements you guys are looking to do digitally, and you also mentioned like healthcare markets, nutrition, and Industrial as high growth categories, but just thinking about the pipeline and how it's trending. Have the constituents that you guys are targeting increased? Are you sort of now getting to a point where you are isolating a few that you really like?

Marcus Michael -- President, Chief Executive Officer & Director

Yeah. As I previously mentioned, our first screen that we look at is the key markets that we want to play in because they have really great growth profiles and they have an attractive value proposition for customers. That's the whole strategy behind our process solutions business. The next click into that is which product lines do we participate in in that part of the market, where can we look for acquisitions to add to those capabilities. So either through new technologies or new channel access, those are the important things that we're looking at. So we've had a very robust process in place for the last couple of years where we do those screens to look at the markets, to look at the products, and to look at the channel opportunities that can be created as a result of that. So again, our emphasis on the product side is these higher growth, higher margin product lines in both our Food and Beverage and our industrial businesses. So think about mixing, think about pumping, we've mentioned this before. Think about our high temperature processing capabilities in Food and Beverage. These are interesting areas that we think that we can do well in in the market and as well as looking at a few adjacencies too.

Nigel Coe -- Wolfe Research -- Analyst

Thanks so much.

Marcus Michael -- President, Chief Executive Officer & Director

You bet.

Operator

And your final question comes from the line of Dean Dray with RBC Capital.

Deane Dray -- RBC Capital -- Analyst

Yeah, good morning everyone.

Jaime Easley -- Vice President and Chief Financial Officer

Good morning.

Deane Dray -- RBC Capital -- Analyst

Hey, maybe just pick up right where we left off here, and Marc, I'm glad you mentioned adjacencies. Does that open the door potentially to any new platforms?

Marcus Michael -- President, Chief Executive Officer & Director

They were not going that far at this stage of the game. We are -- we've done a lot of work to get ourselves to this position and the adjacencies more would be around technologies where we already do some level of business. We may be though doing some level of outsourcing of certain elements of those pieces of componentry that we provide for example. But as we look at Food and Beverage, for example, the systems that we provide within Food and Beverage, we don't provide all that equipment in many cases. So we may have to go out and source some of that. So we're looking again at our technologies in the markets that we're playing in and saying where do we have gaps? Not inconsistent with what I was describing. If it's a technology and a mix or a pump business, if we've got a gap, we want to add to -- in the technology or market access, we want to add to that. If we look at other areas of the business, if we've got a gap in a product that we are outsourcing, we want to maybe to potentially [Phonetic] look at bringing that into the portfolio.

Deane Dray -- RBC Capital -- Analyst

That's real helpful. Does that mean just based upon the gross margin thresholds as you look at these candidates that you're going to steer away from fixed [Indecipherable]?

Marcus Michael -- President, Chief Executive Officer & Director

Well, I think there is two sides of that coin, right? We like the idea of -- and we are focused on better gross margin businesses. But as we look at 80/20 and what we're doing with 80/20, that applies to not only our core business, but as we do an acquisition, we'll apply 80/20 to that acquisition, which we expect will create opportunities for improvement to expand margins further, that has to be the outcome to create value. So we'll use that as a platform to look at how we navigate to the highest-margin revenue streams within any acquisition using 80/20, as well as look at areas where there may be lower margin revenue streams where we can reduce that and again grow the higher margin at a greater pace as well as again get productivity and cost out. So I think we'll apply, you know, an opportunity here to do -- to acquire high margins as well as expand those margins through growing the highest value revenue streams while creating productivity. So that's the exciting part. We've got a platform and a framework to do that with now, not only in identifying the opportunity, but also executing well on integration once we do that -- once the business becomes part of SPX FLOW to create long-term value.

Deane Dray -- RBC Capital -- Analyst

Great. That's a nice lead into my second question, and I think it's just a great move -- strategic move for you all to be embracing 80/20. Just if you look at all the successful industrial companies, they all have some unifying business system, whether it's DBS, the Toyota Production model. And for 80/20 it's been ITW I think wrote the original book and IDEXX certainly has expanded on it.

Marcus Michael -- President, Chief Executive Officer & Director

That's right.

Deane Dray -- RBC Capital -- Analyst

So that's a path to success. And I love hearing how you're doing it at your existing business lines, you are using it for your M&A opportunities. How about in this SG&A productivity initiative? How was 80/20 going to be employed there?

Marcus Michael -- President, Chief Executive Officer & Director

Yeah, it's the backdrop for the assessment we did throughout the course of 2020 as we were rolling out 80/20. And so it's a product of that effort. And that's just on the SG&A line that we're carving out and mentioning. We also look at it across our operations and again how we apply resources to the higher quality revenue streams, which will -- as well as investment, which will drive higher gross margins. So, yeah, definitely a backdrop Dean to what we did in the course of 2020 as we were rolling out 80/20 to identify areas where we could gain productivity.

Deane Dray -- RBC Capital -- Analyst

Great. And just last question from me is for Jamie. Just really impressive work on improving working capital. But when I look at free cash flow in the quarter, it is so outsized. I mean it's -- I don't want to say there is too much of a good thing, but do you want to level set. Are you able to level set cash flow more consistently throughout the year rather than a hockey stick at year-end? We see the number of companies, GE is making a big focus on this now. So -- but just take us through what that opportunity might be.

Jaime Easley -- Vice President and Chief Financial Officer

Yeah, great observation, Deane. And I'll start with, we're very proud of what we did in Q4, just herculean effort by the team. We focused on it all year. We knew that there was a risk in a COVID-19 year that you had some drift on accounts receivable. We also knew that there was a chance that you ended up with too much inventory in the wrong places. And I can tell you that Marc and I and our leadership team spent a lot of time working on detailed plans to make sure we're getting working capital in place. So, very comfortable with what the outcomes of what we did, and where we're starting out 2021. But you lead into a great point, which is also what we're focused on, it has got to be level loaded, and it's also got to support at least on the inventory side, where we expect to grow the business. So do we have the right levels of inventory in the right places to support our key customers and the growth initiatives with them? So as we move into 2021, our objective is to absolutely have a more balanced approach to the movements in our working capital and I expect as the world begins to straighten out a little bit that it will be easier to do so. But it's top of mind certainly for all of our teams.

Marcus Michael -- President, Chief Executive Officer & Director

Hey, I'd just -- Deane, I'd mention just one additional point on the inventory part. We put in a great process called SIOP and put a team around that about a year and a half ago. And as with every team it takes them a little time to gain traction and we saw that happening as we moved through the second half of the year. So that was a big contributor to the success in the SIOP program that we put in place. And then as Jamie mentioned, the effort that we had on just overall accounts receivables and the team placing additional emphasis on closing out projects that were lingering for various reasons that needed to be addressed in our systems business. For example, some of those projects, take a bit of time to close out based on just finalizing everything. And so I mentioned in the prepared remarks and in the questions, our systems business has just made such incredible strides over the last two years. We brought in a great person, Isabelle Balmir, that's running that team. And not only the execution is outstanding, their attention to the details and closing out projects to make sure that we get the cash in at the end has also made incredible strides forward. So as I mentioned, I'm coming back to Food and Beverage a bit, but I just really can't be prouder of that business and where we've gone with margins, overall performance and what the future holds. And so, as our business in process solutions that we've said we would expect over time is a very -- a much more consistent working capital cycle overall, it's much more short cycle. We have good systems execution. All that should make the working capital cycles much more consistent as we go through time.

Deane Dray -- RBC Capital -- Analyst

Thank you and congrats on all the progress.

Marcus Michael -- President, Chief Executive Officer & Director

Appreciate, Deane. Thank you. Thank you everyone.

Operator

There are no further audio questions. I'm sorry.

Jaime Easley -- Vice President and Chief Financial Officer

That's OK. Thanks for joining us on the call and we'll be around all day if you have any questions. Thank you.

Operator

[Operator Closing Remarks]

Duration: 66 minutes

Call participants:

Scott Gaffner -- Vice President Investor Relations and Strategic Insights

Marcus Michael -- President, Chief Executive Officer & Director

Jaime Easley -- Vice President and Chief Financial Officer

Nathan Jones -- Stifel -- Analyst

Michael Halloran -- Baird -- Analyst

Julian Mitchell -- Barclays -- Analyst

Brett Linzey -- Vertical Research -- Analyst

Walter Liptak -- Seaport Global Securities -- Analyst

Nigel Coe -- Wolfe Research -- Analyst

Deane Dray -- RBC Capital -- Analyst

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