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Spx Flow Inc (NYSE:FLOW)
Q2 2021 Earnings Call
Aug 4, 2021, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the SPX FLOW Second Quarter Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Scott Gaffner, Vice President of Investor Relations and Strategic Insights. Please go ahead.

Scott Gaffner -- VP of IR & Strategic Insights & Strategic Insights

Thanks, Carey. Good morning, and thank you for joining us for a discussion of our second quarter 2021 financial results. This morning, we issued a news release detailing our financial performance for the three months ending July 3, 2021. The news release, along with the presentation to be used today, will -- can be accessed on our website at spxflow.com. A replay will also be available on our website later today. As you might have seen in this morning's press release, we have changed the name of our Industrial segment to Precision Solutions. This change was made to better reflect the diverse end markets the segment serves and better describes the capabilities that we provide to our customers. Joining me on the call today are Marc Michael, President and CEO; and Jaime Easley, Vice President and Chief Financial Officer. Following their prepared remarks, we'll open the call for questions. Before we begin, a brief reminder that elements of this presentation contain forward-looking statements that are based on our current view of our business and markets. Those elements are subject to change, and we ask that you view them in that light. Principal risk factors that may impact our performance are identified in our most recent SEC filings. In the appendix of today's presentation, we have provided reconciliations for all non-GAAP and adjusted measures presented. And with that, I'll turn the call over to Marc.

Marcus G. Michael -- President, Chief Executive Officer & Director

Thanks for the introduction, Scott. Good morning, everyone, and thank you for joining us on the call. Second quarter performance improved as markets continue to recover and our internal initiatives based on 80/20 principles gain momentum. Organic orders were up 16% with growth ahead of expectations based on continued momentum in our short-cycle business and encouragingly, an increase in OE orders coming from frontlog related to customer capex projects. The absolute level of demand is important, but we're also creating an improved mix of business with outperformance in our higher-margin grow and balance categories. Organic revenue was up 14% as we executed on increased shippable backlog to start the quarter, along with growth in short-cycle book and turn business. In addition, our 80/20 segmentation is driving higher revenue with key customers as we began to differentiate service levels and responsiveness through our Green Ribbon program. Operating income margins improved significantly by 260 basis points, supported by effective management of price cost, a positive impact from our SG&A cost programs, lower corporate expenses and a higher quality of revenue. We're on track to nearly double our capital spending with emphasis on investments which generates increased productivity and an improved customer experience. And during the quarter, we increased R&D spending by more than 25% to support our new product development with disproportionate investment in our high-growth and high-margin product categories. Our programmatic M&A process is building momentum with an attractive pipeline of opportunities. We've identified M&A targets using a disciplined approach with an objective of both high returns and alignment to our strategic priorities. This resulted in the acquisition of Philadelphia Mixing in the quarter. I'm also pleased that we've been able to return excess cash to our shareholders in the form of a dividend and share repurchases. We paid our first ever quarterly dividend during the second quarter and repurchased approximately $25 million of stock. The economic and end market recovery that we experienced in the second quarter was broad-based geographically, supporting our 14% organic revenue growth rate. As anticipated, the revenue growth was most significant in North America and EMEA. China remained positive in the second quarter with organic growth up mid-single digits. And in the rest of Asia Pacific, revenue was up high single digits. Jamie will provide an assessment of year-over-year orders during his prepared remarks. As we highlighted at our Investor Day, the deployment of 80/20 provides a framework to create focus on an outstanding customer experience and provides clarity on how and where we want to grow profitably. Throughout last year, we built cross-functional growth teams that are empowered to own and execute our strategy to deliver profitable growth. In the first half of the year, orders for our grow product lines were up by 26%, and our balanced category increased by 19%.

The strong order performance in the first half of 2021 supports our expected growth rates for the second half of the year with expectations for continued improvement in margins resulting from a higher quality mix of revenue. Looking at sequential orders by segment. We continue to see momentum in demand and the benefits of our efforts to win with key customers. Precision Solutions orders were up 14% sequentially with continued increase in demand for our short-cycle product categories, particularly in North America. OE project pipelines tied to customer capex remained active in the second quarter with frontlogs continuing to convert into orders. Demand was solid in both North America and Asia Pacific. Demand in our Nutrition & Health segment remained robust and was consistent with the first quarter. Sequential system orders were similar to order levels in the first quarter with significant gains in EMEA. Short-cycle orders were also sequentially resilient with notable growth in demand for components and aftermarket in North America and Asia Pacific. The first half of the year is off to a great start, and we are surpassing the expectations we outlined at the beginning of the year. The level of organic growth and margin expansion that we now expect to achieve in 2021 is ahead of plan relative to the 3-year model we outlined at our March Investor Day, and we're projecting to be on track to our internal objectives for the year. The economic outlook, combined with our strategy to generate higher quality of revenue and improve our cost structure, gives us confidence in achieving profitable growth in 2021 and beyond. Based on the solid revenue performance during the first half of the year and the outlook for the second half, we expect organic revenue will grow at mid-single-digit rates during 2021. Also, our productivity initiatives are progressing to expectations, which supports continued earnings improvement. And with that, I'll turn the call over to Jamie to cover the financial review of the quarter.

Jaime Manson Easley -- Vice President & Chief Financial Officer

Thanks, Marc, and good morning, everyone. I'll begin with a brief recap of Q2. Our second quarter results are highlighted by significantly higher volumes, strong price realization and SG&A productivity. Organic orders were up 16% with meaningful outperformance in the end markets of our Precision Solutions and Nutrition & Health segments. As noted earlier, we continue to drive mix improvement evidenced by outsized growth in orders from our grow and balance categories, which drive higher margin profiles. Organic revenue was up 14%, driven primarily by $35 million of higher shippable backlog to start the period. The broad-based short-cycle improvement in both segments also drove a higher revenue profile in the quarter. Adjusted operating margin continued to show meaningful year-over-year improvement and came in at 11.2%, up 260 basis points with strong price realization and structural SG&A cost savings driving the majority of margin expansion. Lastly, our focus on cash conversion cycles continues to drive results. We generated $31 million of adjusted free cash flow in the quarter, which is a conversion rate greater than 100% of net income. Looking at the segments, beginning with Precision Solutions. Organic orders were up an impressive 23% year-over-year, driven by broad-based growth in our short-cycle products along with increased project demand as frontlogs in these categories begin converting into orders. Organic revenue increased 17%, driven by the higher shippable backlog to start the quarter as we previously noted and an elevated level of short-cycle book and turn business. Segment margins benefited from strong price realization to start the year, along with SG&A cost reductions, which have been actioning over the last year. The benefits of these items were offset by increased period cost to meet customer lead times and investments to support current and future growth. Specifically, we incurred higher freight expense in the quarter driven by both shipping inflation and mode shifts to countermeasure supply chain delays we were experiencing. Our 80/20 toolbox has been deployed to drive freight efficiency in the third quarter and into the future, while continuing to overserve our key customers. Also, we made meaningful investments in our direct labor force in the second quarter to deliver on higher volumes seen across many of our product lines. We expect improved labor productivity in the second half of the year and into 2022. As a reminder, our direct labor force is comprised of highly skilled laborers, including welders, fabricators and assemblers. Moving on to Nutrition & Health. We generated meaningful increases in orders, revenue and segment profitability. Orders increased over 7%, driven by a mid-teens increase in our short cycle components and aftermarket business. Systems awards were also up year-over-year, as Marc showed on an earlier slide. Revenue was up 11% organically, attributable to higher shippable backlog entering the quarter and elevated short-cycle book and turn business. Segment margins were up an impressive 230 basis points to 16.6%, driven by an improved mix of business, strong price realization and the effects of our structural SG&A cost reduction programs. Looking at the third quarter, we anticipate organic revenue momentum to continue, driven by a low single-digit increase in shippable backlog year-over-year. Currency translation and completed acquisitions are expected to add a combined 6.5% to the top line in Q3.

Following a stable level of margins sequentially in the second quarter, we anticipate a sequential increase in the third quarter. These improvements will be driven by the favorable mix, I previously mentioned, price realization and improved operating leverage. As you may have seen yesterday afternoon, we have taken a meaningful step forward with regards to our capital structure. We announced a debt refinancing that supports our long-term organic and inorganic growth strategies and increases the flexibility of our funding mechanisms, lowers our annual cash interest by $10 million, and now we have no significant maturities until 2026. Specifically, we entered into agreements that provide us with approximately $1 billion of committed senior secured financing. We are utilizing a new $375 million Term Loan A to fund the redemption of our current senior notes and to refinance our existing $100 million term loan. I would like to thank our treasury team and banking partners for their support of this process and driving such a favorable outcome. I'm excited to highlight that during the quarter, we issued our inaugural environmental, social and governance report titled Solutions that Matter. A copy of the report can be found on our home page, and I would encourage you all to have a look. The report is an important step forward in showcasing how we are committed to leading by example to make our world safer, healthier and more sustainable. The report showcases specific areas that we are focused on to help our customers reach their sustainability goals. It also describes the actions we are taking to reduce our own environmental footprint through the ways we operate our facilities and oversee our supply chain. Our ESG report also underscores our safety record, commitment to community service and culture of belonging. Our purpose is to improve the world through innovative and sustainable solutions, and we're proud of our long history of making meaningful change. That concludes my prepared remarks. I'll turn the call back over to Marc for his closing comments.

Marcus G. Michael -- President, Chief Executive Officer & Director

Our mission and strategic objectives are clear. With 80/20 as the foundation, the level of organic growth and margin expansion that we now expect to achieve in 2021 is ahead of plan relative to the 3-year model we outlined at our March Investor Day, and we're on track to our internal objectives. Our strategy is supported by four foundational pillars: people and culture; improving customer experiences; generating profitable growth while expanding margins; and making high-return investments. While only six months into the 3-year strategic plan presented at our March Investor Day, the company is surpassing year one expectations for our initial 2021 framework. In 2021, we now expect organic revenue growth to be more than 200 points higher than the framework with an improved quality of revenue coming from a better mix of orders. Our 80/20 initiatives are deepening customer relationships with key accounts by providing unmatched service, and we expect this to deliver long-term growth. Over the past two years, we've improved our pricing strategy, utilizing value-based methodologies, and we're tracking ahead of plan on price realization. We've also implemented additional midyear price increases to cover the impact of escalating costs. We're also building a culture of productivity. The team is tracking ahead on our SG&A reduction program and now projects that will be 150 basis points lower for the year than the original 2021 framework. We are, therefore, raising our annualized 2022 savings target from $25 million to $30 million. The significant outperformance in these critical areas puts the company on track to exceed operating income margins for 2021 as compared to the framework. We expect to exit the year halfway between our 2020 results of 9.1% and our 2023 framework of mid-teens operating income margins. Improving operating returns is a top priority for our team. And when we combine strong returns with smart capital investments, we create the opportunity to deliver great outcomes for our customers and shareholders. We continue to reinvest in the business organically and also through our programmatic M&A playbook. So far in 2021, we have closed two transactions in our Mixer business with total revenues of $70 million and our pipeline of opportunities across the portfolio remains robust. I want to thank our team members for the impressive results earned in the first half of the year. Your efforts are creating a more consistent and higher-quality revenue and earnings stream, which is leading to value creation for our customers and our shareholders. And that concludes our prepared remarks.

Scott Gaffner -- VP of IR & Strategic Insights & Strategic Insights

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

Questions and Answers:

Operator

Thank you [Operator Instructions] The first question will be from Mike Halloran of Baird. Please go ahead.

Michael Patrick Halloran -- Robert W. Baird & Co. Incorporated -- Analyst

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

Jaime Manson Easley -- Vice President & Chief Financial Officer

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

Marcus G. Michael -- President, Chief Executive Officer & Director

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

Michael Patrick Halloran -- Robert W. Baird & Co. Incorporated -- Analyst

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

Marcus G. Michael -- President, Chief Executive Officer & Director

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

Michael Patrick Halloran -- Robert W. Baird & Co. Incorporated -- Analyst

Great appreciate it thank you

Operator

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

Nathan Hardie Jones -- Stifel, Nicolaus & Company, Incorporated -- Analyst

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

Marcus G. Michael -- President, Chief Executive Officer & Director

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

Jaime Manson Easley -- Vice President & Chief Financial Officer

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

Nathan Hardie Jones -- Stifel, Nicolaus & Company, Incorporated -- Analyst

Thanks for that. My follow-up question on the structural SG&A reductions. You took the targeted savings in $22 million from $25 million to $30 million. Can you comment on whether this is just an increase in the pace of a realizing these savings? Or if as you're going along, you're finding opportunities to increase the total savings targeted by '23?

Jaime Manson Easley -- Vice President & Chief Financial Officer

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

Nathan Hardie Jones -- Stifel, Nicolaus & Company, Incorporated -- Analyst

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

Marcus G. Michael -- President, Chief Executive Officer & Director

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

Nathan Hardie Jones -- Stifel, Nicolaus & Company, Incorporated -- Analyst

Thanks for taking my questions.

Operator

The next question will be from Deane Dray of RBC Capital Markets.

Please go ahead.

Deane Michael Dray -- RBC Capital Markets -- Analyst

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

Marcus G. Michael -- President, Chief Executive Officer & Director

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

Jaime Manson Easley -- Vice President & Chief Financial Officer

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

Deane Michael Dray -- RBC Capital Markets -- Analyst

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

Marcus G. Michael -- President, Chief Executive Officer & Director

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

Deane Michael Dray -- RBC Capital Markets -- Analyst

Thats really helpful, thank you!

Operator

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

Patricia Smart Gorman -- Barclays Bank PLC -- Analyst

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

Jaime Manson Easley -- Vice President & Chief Financial Officer

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

Patricia Smart Gorman -- Barclays Bank PLC -- Analyst

Thank you so much [Indecipherable]

Marcus G. Michael -- President, Chief Executive Officer & Director

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

Patricia Smart Gorman -- Barclays Bank PLC -- Analyst

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

Jaime Manson Easley -- Vice President & Chief Financial Officer

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

Patricia Smart Gorman -- Barclays Bank PLC -- Analyst

Got it, thanks guys.

Operator

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

Walter Scott Liptak -- Seaport Research Partners -- Analyst

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

Marcus G. Michael -- President, Chief Executive Officer & Director

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

Walter Scott Liptak -- Seaport Research Partners -- Analyst

Ok, ok very nice thank you!

Operator

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

Scott Gaffner -- VP of IR & Strategic Insights & Strategic Insights

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

Duration: 47 minutes

Call participants:

Scott Gaffner -- VP of IR & Strategic Insights & Strategic Insights

Marcus G. Michael -- President, Chief Executive Officer & Director

Jaime Manson Easley -- Vice President & Chief Financial Officer

Michael Patrick Halloran -- Robert W. Baird & Co. Incorporated -- Analyst

Nathan Hardie Jones -- Stifel, Nicolaus & Company, Incorporated -- Analyst

Deane Michael Dray -- RBC Capital Markets -- Analyst

Patricia Smart Gorman -- Barclays Bank PLC -- Analyst

Walter Scott Liptak -- Seaport Research Partners -- Analyst

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