Spx Flow Inc (FLOW) Q3 2021 Earnings Call Transcript

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Spx Flow Inc (FLOW)
Q3 2021 Earnings Call
Nov 10, 2021, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the SPX FLOW Third 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 -- Vice President of Investor Relations and Strategic Insights

Thanks, Betsy, and good morning, everyone. Thanks for joining us for a discussion of our third quarter 2021 financial results. This morning, we issued a news release detailing our financial performance for the three months ending October 2, 2021. The news release along with the presentation to be used during today's webcast can be accessed on our website at spxflow.com. 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. Following their prepared remarks, we'll open the call for questions.

Before we begin, a brief reminder of the 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 it over to Marc.

Marc Michael -- President and Chief Executive Officer

Thanks, Scott, for the introduction. Good morning, everyone, and thank you for joining us on the call. Third quarter performance improved as markets continue to recover and our strategic plans based on 80/20 principles accelerate. Organic orders were up 9% with continued momentum in demand for our short cycle product categories. We also see a trend in better demand for our original equipment capex related businesses where pipeline activity is accelerating. Organic revenue was up 3% as we executed well in a challenging environment on higher shippable backlog to start the quarter and on short cycle book and turn orders. During the quarter, our operations team effectively managed supply chain disruption. We anticipate input material deliveries may be inconsistent in Q4 as supply chains recover and our teams actively manage in this changing environment. Operating margins reached a record 12.9% in the quarter and improved significantly by 160 basis points. The expansion in margins was the result of effectively leveraging structural cost reduction, positive price cost coming from a combination of our pricing and supply chain savings initiatives and a higher quality of revenue.

We continue to meaningfully increase our organic investments as part of our balanced capital allocation philosophy. Capex is up 35% year-to-date with an emphasis on increased productivity to support current and future growth. And R&D spending year-to-date is up about 30% with disproportionate investment in our high growth and high margin product categories. So far in 2021, we have launched 11 new products in these key areas, which represent almost $35 million of future potential revenue. Our programmatic M&A process is a leading to a robust pipeline of opportunities with more than 10 targets currently under review. We have -- we've identified M&A opportunities using a disciplined approach with an objective of high returns aligned to our strategic priorities. 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.

Third quarter organic revenue was up 3%, led by significant growth in North America in both the Nutrition & Health and Precision Solutions segments. Our Nutrition & Health business continue to see broad-based geographic growth. Business in North America remained strong with revenue up over 20% in the quarter. Global growth was led by an increase in systems revenue and resilient equipment shipments. Precision Solutions achieved significant growth in North America, driven by strong short cycle product demand and higher shipments of original equipment capex related products. Customer capex spend for long cycle Precision Solutions product categories in EMEA and Asia-Pacific were depressed exiting 2020 and slow to develop at the beginning of 2021. As a result, backlogs were down at the start of Q3 in these regions and as expected, revenues were lower. Encouragingly, order demand for long cycle product lines in both regions is accelerating, leading to improving backlog that supports future revenue growth.

As we've been highlighting throughout this year, 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. In the first nine months of 2021, we've made significant progress in shifting the mix of our revenues to our highest growth in margin product categories, evidenced by a 17% increase in our grow category product lines. Of note, our highest quality revenue streams represented in the grow category have increased to 40% of revenue from 36% at the start of the year, propelled by our organic initiatives in two completed acquisitions in Mixers. The create category was up 16% of revenue and largely comprises our systems business with key accounts. This growth creates significant future aftermarket and service opportunities. As we continue to leverage 80/20 principles, we fully expect to generate a higher quality mix of orders to support both top line growth and margin expansion.

Looking at orders, we continue to see recovery in demand and the benefits of our efforts to win with key customers. In the quarter, orders were mostly in line with expectations, supporting our outlook for continued improvement in the fourth quarter. The sequential decline was primarily related to normal seasonal trends and the impact of customer timing. In the Precision Solutions segment, we've seen steady sequential improvement in market trends over the course of this year. OE project pipelines tied to customer capex remain active with accelerating development in opportunities converting to orders. The sequential decline in Precision Solutions orders was primarily due to seasonal trends consistent with prior years in EMEA and timing related to capex projects for mixers in North America. We believe longer cycle industrial related capex projects are still in a recovery stage and anticipate demand will continue to develop.

Orders in our Nutrition & Health business have been resilient, resulting in a strong first half of the year. The sequential moderation in orders was primarily due to seasonal trends consistent with prior years in EMEA and customer timing for equipment orders. We see an attractive pipeline of opportunities in our Nutrition & Health equipment and remain excited about this part of the business. Demand in Nutrition & Health Systems business remained healthy and orders were up modestly versus the second quarter, and we have a strong pipeline of opportunities with key accounts. Jaime will provide an assessment of Q3 year-over-year orders during his prepared remarks.

Through the first nine months of the year, we've significantly surpassed performance expectations that we established at the beginning of 2021. We now anticipate full year revenue to grow high single-digits organically versus our original expectations of low-to-mid single digit growth based on the continued economic recovery and improving order intake during the year. Earnings continue to improve, supported by both our 80/20 initiatives, emphasizing high quality revenue streams and our productivity programs which are progressing to expectations. Full-year operating margins is now anticipated to be approximately 12.5%, up 350 basis points versus 2020 and more than halfway to our original 2023 objective of mid-teens margins, and the business continues to generate strong free cash flow supporting investments for future growth and high returns.

Following a meaningful increase in operating margins in the third quarter, we anticipate continued acceleration in operating results in the fourth quarter. These improvements will be driven by favorable mix, price realization and leveraging our structural cost reduction. We expect operating margins to increase approximately 450 basis points year-over-year to about 14.5%, setting a strong foundation for objective to significantly expand operating margins.

In the fourth quarter, organic revenue is expected to be modestly lower versus prior year due to certain specific items that we highlighted in previous updates, which consists of timing concentrated in Nutrition & Health systems and selectivity in certain categories in the Precision Solutions segment, emphasizing higher margin opportunities. Other than these two areas, low single-digit organic growth is expected for the remainder of the business. Also of note, there are six fewer shipping days year-over-year due to our calendar convention, which will impact our book and ship revenue in the quarter. Completed acquisitions are expected to add 5% to top line in Q4.

And with that, I'll turn it over to Jaime to cover the financial review of the third quarter.

Jaime Easley -- Vice President and Chief Financial Officer

Thanks, Marc, and good morning, everyone. I will begin with a brief recap of Q3. Our third quarter results are highlighted by significant operating leverage, strong price cost realization and improved mix of revenues. Organic orders were up 9% with meaningful outperformance across our industrial portfolios and short cycle Nutrition & Health offerings. Organic revenue was up 3% with growth across both segments. Higher shippable backlog entering the quarter along with continued momentum in our short cycle book and turn products contributed to the growth.

Adjusted operating income margin continue to show meaningful year-over-year improvement and came in at 12.9%, up 160 basis points. Our margin expansion was the result of structural cost reductions, improved mix, operating leverage on higher volumes and disciplined management of the cost price equation. We generated $7 million of adjusted free cash flow in the quarter, which is below our anticipated conversion rate. This includes a conscious decision to reinvest in working capital to support future growth, as well as the timing effects of working capital related to our Nutrition & Health systems business.

Looking at the segments, beginning with Precision Solutions. Organic orders were up an impressive 19% year-over-year, driven by broad-based growth in our short cycle products along with increased demand for our capex offerings, as pipelines in these categories began converting into orders. Organic revenue increased 2%, driven by an elevated level of short cycle book and turn business, offset partially by project selectivity and timing of revenue conversion. Segment margins benefited from the mix of organic growth and higher margin offerings and strong price realization relative to input cost.

Moving on to Nutrition & Health. Orders were relatively flat year-over-year as strong demand for our components offering was offset by lower systems awards, primarily related to timing. Revenue was up 5% organically as shipments for our components were up in the quarter and to a lesser extent we recognized a higher level of revenue from systems projects in the period. Segment margins were down approximately 60 basis points as transitory supply chain conditions offset the leverage we experienced on our structural cost reduction programs and organic growth.

And with that, I will turn it back over to Marc for some closing remarks.

Marc Michael -- President and Chief Executive Officer

As 2021 draws to close, we've made significant progress with our strategic plan which has led to an inflection in operating results. We believe we are now on pace to exceed the three year targets we outlined at the beginning of the year. The deployment of 80/20 provides a framework for focus and clarity on how and where we plan to grow profitably. We have successfully begun the process of evolving our portfolio mix, increasing our higher quality revenue streams from 36% of revenue in 2020 to 40% of revenues in 2021. Of note, we expect gross margins to be up approximately 450 basis points in Q4 versus prior year.

Our value-based pricing strategy will put us firmly in a positive price cost position in 2021, as we expect approximately 100 basis points of benefit. We anticipate that we can leverage the strength of our brands and technologies to generate future margin improvements through pricing programs. Our supply chain excellence initiatives have been largely successful this year, but were more than offset by recent inflationary pressure. We anticipate future net benefits of approximately $7 million to $8 million annually once the transitory impact of inflation is behind us. Also, our factory productivity programs are gaining traction, but benefits were not fully realized due to the temporary effects of labor inefficiencies as we brought on new team members in the first half of the year to support higher levels of revenue. We've now fully staffed our key facilities and I've seen efficiency rates improve. We expect to generate approximately $5 million to $6 million of annual net savings from these programs when fully realized, which include lean capex investments and footprint efficiencies.

The successful combination of our intentional mix shift, pricing strategies, supply chain initiatives and productivity programs all support our objective to achieve our three-year plan of gross margins above 40%. Additionally, we are seeing the benefits from our structural SG&A savings programs. The meaningful reduction in reallocation of SG&A spend in 2021 is expected to result in cost savings of $30 million this year or 250 basis points of improvement, creating significant operating leverage. We anticipate this cost reduction will provide a foundation for added benefits in 2022 with an expected 100 points of additional improvement.

We're also implementing strategies and capabilities to increase top line growth at a pace we anticipate will be ahead of projected market growth within our target sectors. We are focused on over serving our key accounts with an identified addressable spend of about $1.5 billion, where we plan to grow our core business by a share gain of approximately 400 basis points through targeted initiatives. We've also made investments in our facilities, customer service capabilities, sales strategies and inventory position to improve the customer experience in aftermarket services. We expect these improvements to provide an increased capture of repeatable business with an objective of achieving $35 million in incremental growth over the three-year planning period, and we've increased our R&D spend by over 20% with a purpose to improve the performance of our products and technologies to help our customers meet their goals. Thus far in 2021, we have launched 11 new products which are anticipated to generate $35 million of cumulative incremental revenue through 2025. The progress we made has put us on track to surpass our expectations in year one of our three-year plan, giving us confidence our strategy is working and then it will generate significant long-term value for our shareholders.

And with that we'll open it up for your questions.

Scott Gaffner -- Vice President of Investor Relations and Strategic Insights

Thanks, Marc. Betsy, before we turn them over to the Q&A, I did want to touch on our ongoing strategic alternatives review process. During the quarter, our Board of Directors initiated a formal review of strategic alternatives, including a possible sale merger with the continued execution of our stand-alone strategy. This robust review is progressing as planned. Until completed or until the Board of Directors deems 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 today's earnings announcement. Thanks in advance for the cooperation and I'll turn it over for Q&A. Thanks.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Nathan Jones with Stifel. Please go ahead.

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

Good morning, everyone.

Marc Michael -- President and Chief Executive Officer

Good morning, Nathan.

Jaime Easley -- Vice President and Chief Financial Officer

Good morning, Nathan.

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

I wanted to start with the 2023 targets. Marc, you said you're on pace to exceed those targets. The walk that you put out earlier in the year had price mix, productivity, supply chain, SG&A leverage in SG&A reductions in it. Clearly there has been some headwinds to achieving those with supply chain disruptions and inflation and things like that. So, obviously you guys have done a pretty good job of more than offsetting those in the plans [Phonetic] Can you talk about where you found additional opportunities? How you've overcome some of those headwinds to still be on track to meet or exceed that mid-teens operating margin in '23 target?

Marc Michael -- President and Chief Executive Officer

Yes, sure, you bet. So, you're spot on and as we mentioned in the prepared remarks, I would first start with our supply chain and our productivity programs in our factories are making good progress and we did have some headwinds associated with inflation in the supply chains that really more than offset our original start of the year plans, but our supply chain teams did a great job on executing in what they had in their slight to achieve improvements, but again inflation just more than offset that. Productivity was also somewhat impacted through our lean initiatives and some of our investments we made in the factories because we had a pretty significant ramp up in the first part of the year as volumes were increasing, we were increasing labor in the factories and it took us a little time to get that new team up and running well. But as we've gone into the second half of the year through Q3 and here into Q4, all that's really moderated and we've got those teams well trained and running well. So as we look at those two areas, we did see some headwinds from the original plan of where we started the year.

The two big areas that we've been able to make progress on -- we've got a tiger team that we've talked about that comes together monthly to look at what's happening with inflation in the market, how we need to be thinking about pricing. So we've put more pricing opportunity into the market. This has got a bit of a look forward to as well as what we see ongoing with inflation in our expectations. And then the other area that I would point out is this mix shift. So mix has started to shift in the business to our higher quality revenue streams as a result of what we're doing with 80/20, in those highest margin product categories, those categories that have margins above company average have gone from 36% of revenues to 40% of revenues this year. So really good performance and ability to get price cost to a positive point of about 100 basis points we believe exiting this year, good mix improvement us developing through our 80/20 initiatives. So we expect those to continue to be favorable as we look to the future as we continue to shift the mix even further and leverage value-based pricing. And then as these transitory inflationary cost kind of reside, our supply chain teams have again good plans and they're already looking forward into 2022 and developing those. We expect to see benefits to come from those as the transitory impact of inflation. We would expect starts to moderate. And then the same thing I would say with our productivity programs. They are well on track and we just had this dynamic in the first half of this year where we had these new team members coming in that are now up fully running and we're feeling the improvements as we've gone through Q3 and we expect to continue to feel from those productivity improvements. So a lot of good things happening to support our margin profile as we look to the future.

Jaime Easley -- Vice President and Chief Financial Officer

The one thing I'd add to that, Nathan, is around SG&A. I believe about this time last year on this call you were asking us about where we were in relative SG&A margin. So we closed last year out at about 25.5% SG&A. This year, we expect it will come down to around 23% for the full year and then as Marc's talked about some of the programs that we are running this year to reduce structural SG&A, will give us some -- some benefit as we move into the future years as well. So we have seen opportunities arise around SG&A, that's really the other offset as you think about really given us the opportunity in the operating profit margin line.

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

That's really helpful. Thanks. My follow-up question, I wanted to actually ask on pricing. You guys had planned on pulling price as a lever from a value-based strategic perspective. Inflation has probably given you the opportunity to push more price than you otherwise would have in 2021. Is the fact that you were planning on that and you're catching these to customers as a value-based pricing potentially give you the opportunity to hold on to more of that pricing when raw materials prices normalize?

Marc Michael -- President and Chief Executive Officer

Yeah, I think that opportunity exists, Nathan. And that's part of our value-based pricing strategy as we look at what's happening in the markets where we can really realize that. We'll always look to be competitive in the right spots, but we want to be able to get a good a good price for the value that we bring. And again, frankly our customers look at it from a perspective of we're bringing things to them that help support their success and we're typically able to navigate that pretty well.

Jaime Easley -- Vice President and Chief Financial Officer

No, I'd just add to that. So far, Nathan, as we've put a couple of price increases into the market this year, we've not seen that particularly impact our volume and teams watch this very closely and making sure that we understand the implications of the price that we do put and make sure to Marc's point that we remain competitive there. But the other piece to it is, our teams have to be able to continue to meet market lead times and meet customer expectations on deliveries, which we consistently hear is one of the most significant buying decisions for our products. And so as we think about what our key factories are working on to improve on-time delivery as we think about our stocking programs for inventory and making sure that we've got the right inventory available for the right customers, it all is -- is a part of the story around how do we -- how do we allow price to stick and how do we allow that continue to benefit the P&L and it's more than just strategic pricing, it's the holistic deliver the business to improve the outcomes for our customers.

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

Very helpful. Thanks for taking my questions.

Marc Michael -- President and Chief Executive Officer

Thanks, Nathan. Have a good day.

Operator

The next question comes from Deane Dray with RBC Capital Markets. Please go ahead.

Deane Dray -- RBC Capital Markets -- Analyst

Thank you. Good morning, everyone.

Marc Michael -- President and Chief Executive Officer

Hey, good morning.

Jaime Easley -- Vice President and Chief Financial Officer

Hey, Deane.

Deane Dray -- RBC Capital Markets -- Analyst

Could we start with cash flow. Look, we've seen pressures throughout the sector on working capital in this environment, building buffer inventory and so forth. And I fully understood the first part of the explanation on the cash flow shortfall. But what were the timing effects in Nutrition & Health related to working capital? Could you just walk us through that please.

Jaime Easley -- Vice President and Chief Financial Officer

Yeah, sure, you got, Deane. Thanks for the question. One, I'll just start by saying, nothing has changed in our long-term view of the cash generating ability of our business. If you remember last year, I think we ended up converting against net income about 200% on the free cash flow line and year-to-date where we see through Q3 is about 50% of net income. And two things that we called out in the prepared remarks. The first would be roughly a $10 million investment in inventory. So we'll see book-to-bills above one this year in three out of our four quarters. So building backlogs, building demand, increasing opportunity for future volume, so the investment there and inventory is to support that future growth.

The second part, which is more specific to your question is around the systems business. So the systems business as as it works on a cash basis as we tend to get upfront payments when systems are booked and then as the project works down, the teams have the objective of making sure that those projects are working capital cash flow positive over the course of those projects. So as you look at the order profiles that, that we've had over the course of the year, we talked about in that $50 million range over the course of this year we have the expectation that there is some systems orders coming in Q4 and that would be implied in the order outlook and the revenue outlook that we're talking about. But as we get into Q4 and we book those systems projects as expected, we do expect that that systems line will flip around and that will help drive the 90% to 100% conversion for the full year.

Deane Dray -- RBC Capital Markets -- Analyst

Okay. That's exactly the explanation I was looking for. So I appreciate that. All right. And then the follow-up question is when you talked about the 10 deals in the funnel, it just struck me as I would think, things -- the M&A decisions, larger scale M&A decisions would essentially be on hold while you're in the strategic review. I'm not asking about the strategic review, but the consequence, and you brought it up and you've got these deals in the funnel, but how would you pursue M&A when there is some question marks on the horizon? Thank you.

Marc Michael -- President and Chief Executive Officer

Yeah, sure, Deane. I mean, we're continuing to run our playbook holistically and part of what we've done over the course of the last several years here is about these opportunities aligned with our strategic objectives as a starting point of our strategy and how we're running the company in the markets we want to participate in, those specific product categories that we see great opportunity to achieve good outcomes for our shareholders from an investor capital perspective and so we're continuing to run that playbook and stay engaged in the processes. And again keep in mind, when we talk about these opportunities and size of them, we've been very consistent in looking at orders that fit -- or I'm sorry -- opportunities that fit well for us from a size standpoint. So there are things that we want to continue to progress with in any situation because it's about deploying capital to get great returns for our shareholders and these are opportunities that we believe would do that.

Deane Dray -- RBC Capital Markets -- Analyst

Great. Just last one. This is not a question just an observation. It's really interesting you all have arrived at your earnings report today without excuses. There has been just a whole epidemic of companies that have had noticeable shortfalls because of supply chain issues and inflation and it looks as though you guys have got the submit control, so congrats. Thank you.

Marc Michael -- President and Chief Executive Officer

Well, we appreciate that, Deane. Thank you. Everybody has been working very hard to get those outcomes.

Jaime Easley -- Vice President and Chief Financial Officer

Thanks, Deane.

Operator

Next question comes from Julian Mitchell with Barclays. Please go ahead.

Matthew Shafer -- Barclays -- Analyst

Hi. How's it going, guys. You have Matthew Shafer from Julian Mitchell's team.

Marc Michael -- President and Chief Executive Officer

Good morning, Matthew.

Matthew Shafer -- Barclays -- Analyst

Good morning. One question for us on China. Looking back to Q1, China revenues nearly doubled the Nutrition & Health and more than doubled the Precision Solutions, both of which slowed to mid-to-high single digits in Q2. I was hoping you guys could talk a little bit about what China did in Q3 and how you assess the growth -- the growth outlook from here?

Marc Michael -- President and Chief Executive Officer

Yeah, I mean, our business in China remains healthy overall. Nutrition & Health has been a strong point for us in China for years now as they continue to build out their infrastructure needs for our type of equipment in the fresh dairy space as well as we're seeing some interest now also in plant based. So we're still really excited about the opportunities within China for our Nutrition & Health business, for our systems business, and that obviously does lead to longer-term high quality revenue streams associated with aftermarket and services, which is really the playbook we run in Nutrition & Health when we think about our systems business generating those long-term annuity streams. And so we believe that China will continue to be a good market for us, and again the pipeline that Jaime referred to and that we've mentioned in the prepared remarks, a lot of that does continue to come out of Asia-Pacific, and specifically China. So again, overall we see good opportunity as we look to the future in China in Nutrition & Health.

Precision Solutions, we've really seen really good business in Precision Solutions and our mix of business with customers there in the chemical space. We've continued to do dehydration business there and I would say some of the things in our heat exchanger business or some areas for heat exchanger business, we've mentioned in the past, we've made some decisions that weren't achieving what we wanted to from an 80/20 lens of high quality revenue and getting the levels of margins that we would expect, we've started to step away from. So there's some implications of certain areas from an 80/20 lens that we've stepped away from. And again, not just in China but some other areas too, but China historically has been a good market for us for heat exchangers. But overall in Precision Solutions and the industrial markets there for where we are focused in our -- in our key product lines and key product categories, we see really good opportunities and remain positive on the outlook for China.

Jaime Easley -- Vice President and Chief Financial Officer

Yeah, Matthew, maybe one other observation I'll make is, in China a lot of our business there, I will start with Nutrition & Health is in the systems business, so right. China is one of our largest markets for Nutrition & Health systems business. So revenues quarter-to-quarter can be lumpy as you think about China. And then to Marc's point, as you look at our Precision Solutions segment, China also drives a lot of demand for our longer cycle product offerings that Marc mentioned mixers, some of the larger dehydration offerings as well as [Indecipherable] So quarter-to-quarter, revenues can move around a bit. But to Marc's point, China continues to be a market of focus for us. We see a lot of demand there. We spent some time in the last couple of weeks with our commercial leadership in Asia Pacific, really see pipelines continuing to build and opportunities are there. There is no dynamic shifts or changes that we're seeing in China other than continued opportunities for us to sell these products that I mentioned, but focused. Again, there tends to be a focus around the longer cycle offerings in that country.

Matthew Shafer -- Barclays -- Analyst

Great, and then just my follow-up. Capex is up about 35% year-to-date. How much of this reflects productivity investments versus normal run rate capex and should we expect these current levels to be the forward run rate from here? Thank you.

Jaime Easley -- Vice President and Chief Financial Officer

Yeah, I'll grab that one. So all of the increase that you're seeing is related to opportunities for us to create capacity in our facilities and/or expand margins. So we've talked about this now since we laid out our three-year strategic plans is an important part of that framework is that we will reinvest back into our businesses to make sure our teams have the equipment they need, make sure we've got the capacity for growth with our key customers and that's driving all of the increase in capex that you see. We've talked about a spend rate on an annual basis over 2021, 2022, and 2023 of roughly $40 million, will probably come in closer to $35 million this year, to your point, that's still significantly up from the prior year. But for us, we are focused on putting capital back into our businesses for all those reasons that we -- we laid out and expect that that's an important part of our margin expansion program.

Marc Michael -- President and Chief Executive Officer

Yeah, I'll just add one point to that, Matthew. Those increases in capex are disproportionately targeted to what again we call our grow category product line. So 40% of our revenues now. And those are the product categories that have above average company margins. So the areas that we're looking to accelerate growth and our emphasis in the greatest way and so the investments are going to those -- to those particular product lines and factories that produce those products. I'd also just emphasize on more of the expense side, but the investments for R&D that we're making follow that same philosophy. So the increases that we're doing in R&D also go more to a disproportionate level with -- to those grow category product lines. So that's all part of our ability to continue to shift the mix. So we're pretty excited about that.

Matthew Shafer -- Barclays -- Analyst

Great, thank you.

Marc Michael -- President and Chief Executive Officer

You bet.

Operator

[Operator Instructions] The next question comes from Andrew Obin with Bank of America. Please go ahead.

David Ridley-Lane -- Bank of America Merrill Lynch -- Analyst

Good morning. This is David Ridley-Lane on for Andrew Obin.

Marc Michael -- President and Chief Executive Officer

Good morning, David.

David Ridley-Lane -- Bank of America Merrill Lynch -- Analyst

Good morning. The sequential improvement in margins in your fourth quarter guidance is pretty sizable. Can you bridge how much of that is kind of mix versus -- we're seeing a lot of structural cost reductions, just wondering with the key drivers there are looking sequentially?

Jaime Easley -- Vice President and Chief Financial Officer

Yeah, I'll take down David. It's a couple of different things. One, I'll say that our expectations for Q4 are supported by the backlog that we see opening up the quarter and then the order performance that we've already seen year -- our quarter-to-date here in December, I'm sorry, here in the fourth quarter in October. We've seen nice short cycle orders come in. There was some backlog that was in the shipment plans for Q3 that has moved to Q4, really nice margin stuff to that should support Q4. But really the biggest impact that we're going to see year-over-year and both sequentially will be continued price realization. So we mentioned earlier that we've -- we've put a couple of different price increases in the market this year. Those do hit the order book, of course, initially and then translate to revenue over time. So we're expecting price realization benefits in Q4.

The mix is also better as you think about the grow categories that Marc just described and the relative relationship between that grow balance and create category. And then we've talked also a bit here on the call about SG&A margin. So we'll see SG&A margins improve sequentially modestly, probably around 30 basis points or so. So it's a combination of all the things that we've mentioned a number of times on this call, but really starts with making sure our teams are oriented to booking better mix and that's in the shippable backlog as I mentioned and then making sure that we see price realization stick, managing cost, and then continue to see the structural benefits of the SG&A programs.

David Ridley-Lane -- Bank of America Merrill Lynch -- Analyst

Got it, understood. And then just -- just to be crystal clear. Are you expecting the supply chain headwinds you saw in the third quarter to be the same, better or worse in the fourth? Thank you.

Jaime Easley -- Vice President and Chief Financial Officer

Yeah, we've forecasted those to be roughly similar to what we saw in the third quarter.

David Ridley-Lane -- Bank of America Merrill Lynch -- Analyst

Thank you very much.

Jaime Easley -- Vice President and Chief Financial Officer

You bet.

Scott Gaffner -- Vice President of Investor Relations and Strategic Insights

Thanks, everyone, for joining us today. Appreciate your interest in SPX FLOW. I'll be around all day if you have any questions. Thanks.

Operator

[Operator Closing Remarks]

Duration: 41 minutes

Call participants:

Scott Gaffner -- Vice President of Investor Relations and Strategic Insights

Marc Michael -- President and Chief Executive Officer

Jaime Easley -- Vice President and Chief Financial Officer

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

Deane Dray -- RBC Capital Markets -- Analyst

Matthew Shafer -- Barclays -- Analyst

David Ridley-Lane -- Bank of America Merrill Lynch -- Analyst

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