SPX FLOW's (FLOW) CEO Marc Michael on Q4 2015 Results - Earnings Call Transcript

| About: SPX FLOW, (FLOW)

SPX FLOW, Inc. (NASDAQ:FLOW)

Q4 2015 Earnings Conference Call

February 10, 2016 08:30 AM ET

Executives

Ryan Taylor - VP of Communications and Finance

Marc Michael - President and CEO

Jeremy Smeltser - CFO

Analysts

Nathan Jones - Stifel

Brian Gibbons - Credit Suisse

Brian Konigsberg - Vertical Research Partners

Robert Barry - Susquehanna

Deane Dray - RBC

Operator

Good day, ladies and gentlemen, and welcome to the SPX FLOW Q4 2015 results and 2016 financial guidance. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I would like to introduce your host for today’s conference, Mr. Ryan Taylor, VP of Communications and Finance. Sir, you may begin.

Ryan Taylor

Thank you, Terrea and good morning, everyone. Thank you for joining us this morning. With me on the call are Marc Michael, President and CEO of SPX FLOW and Jeremy Smeltser, our Chief Financial Officer. Our Q4 earnings press release was issued this morning and can be found on our website spxflow.com. This call is also being webcast with a slide presentation located in the Investors section of our website. I encourage you to follow along with the slide presentation during our prepared remarks this morning. A replay of this webcast will also be available on our website later today.

Portions of our presentation and comments are forward-looking and subject to Safe Harbor provisions. Please also note the risk factors in our most recent SEC filings. In the appendix of today's presentation, we have provided reconciliations for all non-GAAP financial measures presented and we have also provided a few additional segment overview slides in the appendix that includes supplemental information to our prepared remarks.

At the end of 2015, as previously announced, Chris Kearney retired as our President and CEO. Chris still serves as our Chairman of our Board. And on January 1st, Marc Michael assumed the role of President and CEO. He is also a member of our Board. Marc joined SPX in 2003 and has served in various operational roles during his tenure at the company. Most recently, he served as President of our Food and Beverage segment.

Under Marc's leadership, our Food and Beverage segment significantly improved its customer relationships, market position and operational performance. This improvement is underscored by 270 points of margin expansion over the past two years. Marc also served as President of FLOW’s EMEA region for two years and he has a strong understanding of all SPX FLOW products and key end markets. During his career, it’s also notable that he lived in Europe for nearly six years as a business leader which has provided him valuable experience running global operations. And prior to joining SPX, Marc held commercial positions with General Electric and TDK.

And with that, I’ll run the call over to Marc.

Marc Michael

Thanks Ryan, good morning everyone. I'm honored to succeed Chris as CEO and excited to lead SPX FLOW into the next phase of our development. That said, given the global macro uncertainty and cyclical downturn in our key markets we are not without challenges in the near term. Taking a look at our current situation, our 2015 results and 2016 guidance reflect the challenging economic environment and our key end markets and the impact of the stronger US dollar. In particular, reduced prices for oil and dairy commodities have significantly impacted our customers operating and capital spending decisions. We do not anticipate any meaningful recovery in these markets this year.

On a positive note, orders in the fourth quarter were stable sequentially and we generated $143 million of free cash flow giving us sufficient financial flexibility to invest in our business. Notwithstanding the challenging economic environment, I’m driving a high-level of accountability and a sense of urgency throughout the organization. And I firmly believe we will create significant value over the next 12 to 24 months by growing our bottom line. This year and next we will be taking steps to improve our competitive position, reduce our cost structure and establish a foundation for long-term success.

He began this process last year with our initiative to expand our manufacturing presence in Poland and relocate certain Western European sites into the new facility. As part of this objective, we're taking quick and urgent action across the enterprise with the goal of reducing our total cost structure by $110 million as we exit 2017. Our senior team is leading these initiatives with the support of our experienced Board of Directors. Our executive team is strong and well balanced with an average tenure of 12 years with our organization.

The only open role on my staff is President of Food and Beverage segment. The team in food and beverage is solid and operating well and we expect to fill this position in the first half of the year. We are recruiting external candidates with a strong operational and commercial background who will complement our current team and add to our bench strength. Looking at the rest of the team I'm very confident in each of them. At the outset of this year, we've been working together closely analyzing our organization from top down.

We spend significant time looking at our organization from an enterprise perspective to assess our strength and weaknesses and ultimately establish strategic initiatives to drive a higher level of sustainable performance over the long term. As we move forward, I'm driving cross functional teams to take quick and urgent action to reduce our cost structure to improve productivity. I'll talk about these initiatives in a moment. First, I want to provide a brief overview of our Company and describe how it was built, who we are today and where we’re heading in the future. I'll then go into details on how we’re planning to drive value in the near-term through our realignment program. Jeremy will then review our Q4 financial results and 2016 financial guidance. I will wrap up with closing remarks.

Looking at our historical development, SPX FLOW was built over the past 10 to 15 years through a series of acquisitions. These acquisitions strategically expanded the breadth of our product offering into market sectors that require highly engineered original equipment and related aftermarket parts and services. We acquired several strong brands that are among the leading technology providers within their respective markets including two transformational acquisitions. APV which provided full-line processing capabilities, critical mass and a global reach for our food and beverage segment. And ClydeUnion Pumps which significantly enhanced our product portfolio and global reach in the power and energy segment.

As our business grew, we continued to evolve our operating structure. In 2010m, we realigned our business by geographic to localize capabilities and drive regional growth. In 2013, we realigned our business by end market to focus our strategy within each vertical and expand our customer relationships. Throughout these transitions, we’ve consistently demonstrated the ability to further integrate our business, adapt to change and drive margin improvement. Today, we are a leading global supplier of highly engineered flow components, process equipment and turnkey systems along with the related aftermarket parts and services. We engineer, design and manufacture broad array of flow control systems integral to our customers’ ability to process, blend, transport, filter various types of fluids, gases and powders. We serve a diversified global customer base ranging from large multinationals to regional and local companies and we are recognized by our customers for world-class engineering, quality manufacturing and commitment.

We report our business in three broad end market categories, food and beverage at 37% of last year’s sales, industrial at 32% of sales and power and energy at 31%. We strategically positioned our business in these three broad industries because we believe long-term investment in these secular end markets will be driven by increased demand for food, energy and industrial processing. Population growth, the expanding middle class and increasing regulatory requirements are expected to be key demand drivers for us.

We have a talented workforce totaling approximately 8,000 employees worldwide with operations in over 35 countries. I want to give credit to all our employees who collectively have helped us build SPX FLOW. Together we have worked extremely hard to improve our business in recent years. Following our spinoff from SPX Corporation, I believe we can create significant value for customers and investors by fully integrating our business and capitalizing on synergies within our organization.

As a result of the way we were built through acquisitions, there are still residual areas of inefficiency and how we operate and serve our customers. These inefficiencies are evident when I asses our margin profile versus peer companies. I see gaps in both our gross margin and total SG&A as a percent of sales. These gaps also represent significant opportunities for us to drive value for our customers and investors. Part of the strategic rationale to spinoff off FLOW into business was to enable us to streamline and simplify our organization to integrate with ourselves and truly run as one operating company. That is my vision and goal and I have committed to achieving it.

To achieve this goal, we've outlined strategic enterprise initiatives that are designed to reduce our cost structure by $110 million which represents 5% of our sales. We are placing an emphasis on three enterprise initiatives; seeing the world through our customers’ eyes, executing better than anyone else, and creating a great place to work. And we've designed five work streams to support these initiatives.

Priority one is building intimate and long-term partnerships with our customers. I believe this is key to creating sustainable success. We want to grow our market share even through the down cycle. We continue to see investments to gain share with the highest return investments focused on expanding our aftermarket capabilities. We also continue to invest in new products development across all three segments.

From an execution perspective, our underlying theme is simplification. We're focused on reducing complexity across every aspect of conducting business. We have already initiated actions to realign our global footprint with the first major action being the expansion of our manufacturing footprint in Poland. This project is going well. The new facility should be completed by the end of the quarter and we plan to move manufacturing from Denmark in Germany into Poland later this year.

In addition to the Poland expansion, we're in the planning stages of other significant actions that will further simplify our manufacturing footprint. At an enterprise level, we're also in the early stages of executing a project called Focus. The objective of Focus is to streamline and enable a consistent business process across the organization so that we can do business faster and easier. The project involves redesigning some of our core business procedures. It also incorporates the rollout of a common version of SAP to run our operations and report our financial results.

We are intensifying our lean continuous improvement programs with emphasis across the organization. Team members across every facility and function are engaged in projects that are aimed at improving delivery time, providing better quality and reducing the cost of producing products.

Internally, we are engaging with our talented employee base to properly motivate, incentive and line our people around these initiatives. We're moving to one management bonus program across the entire organization. It will be focused on two metrics, operating income margin and free cash flow conversion, you will notice an emphasis on operating income in our 2016 financial guidance. This underscores our focus on driving bottom line results and running our business as one operating unit from top to bottom. As we execute on our strategic enterprise initiatives, we expect to see incremental financial benefits quarter-to-quarter as the year progresses and into next year. Ultimately, we expect to reduce our cost structure by $110 million or 5% of sales, and in so doing, drive a higher more sustainable return across our business. I am committed to this goal and confident in our ability to execute.

Moving on now to our revenue profile, we have a diversified end market profile with our highest revenue concentration in oil and dairy applications at 21% and 18% respectively in 2015. Given the significant decline in prices for these two commodities, I'll give you a little more color on what we’re seeing in these markets. Digging into oil exposure, last year, oil related sales were just over $500 million, with about 55% of OE sales and 45% aftermarket sales. Our upstream exposure is mostly related to pumps that are used in the production process to extract and transfer oil.

This business declined significantly last year with OE sales in upstream declining to approximately $100 million. OE sales into the midstream and downstream sector totaled about $175 million. In the midstream, we have a very strong position as a leading supplier of pipeline valves. The market held up for us fairly well in 2015. Entering this year, we have a decent backlog and are still seeing a fair amount of order activity for pipeline projects in North America, however, we are anticipating revenue in the midstream to be down year-over-year in 2016.

Power sales were about 7% of revenue last year. We have a very attractive niche position in nuclear safety pumps and valves. Although it's a small percentage of our revenue today, we’re seeing very positive developments from nuclear investment in the UK, India and China with potential for orders to develop later this year.

Moving to food and beverage, last year, 18% of sales were into dairy applications and 17% of sales related to non-dairy applications such as soy and almond milk. In dairy and dairy derivative applications, we have very strong process technologies and we expect this part of our business to grow over time. In the near term, however, increased global supply of milk and dry powder has pressured dairy prices resulting in deferrals of capital investments by many end customers in the dairy sector.

From a geographic perspective, our revenue is fairly balanced across major regions with 36% of revenue from sales in to North America, 35% in to EMEA and 26% into Asia-Pacific. In 2015, our sales into China were about 10% of total revenue or approximately $230 million. Despite the slowing growth in China, we believe it still represents a significant opportunity for growth in our business. As such, we continue to take action to improve our competitive position in China.

To summarize this, while we feel good about our global capabilities and believe we serve attractive end markets that will grow above GDP over the medium to long-term, we are obviously in the midst of a cyclical downturn in our key end markets. The combination of lower oil and dairy prices, slowing growth in China and the strengthening US dollar had a significant impact on our 2015 results as well as our 2016 expectations.

In 2015, our revenue declined 14% year-over-year to just under $2.4 billion. Currency had an 8% or $212 million impact. On a consolidated basis, organic revenue declined 6% and by segment, excluding currency impacts, power and energy revenue declined 19%, food and beverage revenue grew 1% and our industrial revenue was flat year-over-year. Segment income was $302 million or 12.6% of revenue, down $89 million from the prior year, reflecting a sharp decline in power and energy revenue and profitability. This decline was partially offset by an 8% increase in segment income at our food and beverage segment where margins improved 190 points over the prior year.

Looking at backlog, our year-end backlog was $907 million, down 23% or $264 million from the prior year. On a sequential basis, backlog has declined for three consecutive quarters including a decline of $121 million from Q3 to Q4. The backlog decline reflects our very low levels of order activity for long cycle capital projects. Over the second half of last year, we saw very few capital projects come to bit as customers across the board deferred large investments given the uncertainty in the macroeconomic landscape.

At the outset of this year, we continue to see customers defer order placement on large capital projects. This is particularly notable in oil and dairy market where prices for both commodities have remained depressed for an extended period of time causing producers to tighten both our operating and capital budgets. In contrast to the backlog trend, orders were flat sequentially from Q3 to Q4 last year. And January orders were in line with our expectations. This is primarily a reflection of steady short-cycle orders.

So although the backlog declined is a challenge for us in 2016, we are encouraged by the stabilization in our order rates during the second half of 2015. Given the level of backlog entering this year and with the expectation for another year of slow global economic growth, we are not planning for recovery in 2016. We expect revenue to decline 8% to 12% year over year to between $2.1 billion and $2.2 billion. In light of the current economic environment and to support our strategic enterprise initiatives, we have about $60 million of realignment expense planned for 2016.

Our EPS guidance is $0.75 to $1.05 per share. This includes $0.80 or $50 million of realignment expense above what we consider a run-rate level of annual restructuring expense at around $10 million. Our cash flow guidance is $50 million to $70 million; this includes $105 million of investment supporting our realignment program. Jeremy will take you through our Q4 results and 2016 guidance in detail.

At this time, I’ll turn the call over to him.

Jeremy Smeltser

Thanks Marc, good morning everyone. I’ll begin with our Q4 results. Revenue in the fourth quarter was $613 million, down 15% year over year. Currency had a 6.5% or $47 million impact on revenue. Organic revenue declined 9% year over year, primarily due to lower power and energy sales reflecting the continued impact of low and volatile oil prices on our customer's operational and capital spending. During the quarter, we also experienced a high level of customer driven shipping delays within our power and energy segment.

In total, approximately $40 million of revenue was delayed, primarily due to unexpected customer timing changes. As a result, both revenue and profitability in our power and energy segment were lower than we anticipated. In total, segment income was $73 million and margins were 11.8%. Moving on to the segments beginning with food and beverage, revenue for the fourth quarter was $222 million, down 10% versus the prior year. Currency had a 9% or $21 million impact. Organic revenue was down 1%, due primarily to lower sales of components, particularly in North America, partially offset by increased systems revenue. On a year over year basis, we continue to see weakness in components sales as customers tighten their operating and maintenance revenues.

That said, on a sequential basis, we were encouraged by an uptick in both sales and orders for components and aftermarket parts and services. Segment income was $27 million or 12% of revenue. As compared to last year, the decline in profitability was due to currency and the increased mix of lower margin system revenue. In our power and energy segment, revenue was $190 million, down 26% versus the prior year. Currency had a 5% or $13 million impact.

Organic revenue decreased 21% due mostly to lower volumes in both OE and aftermarket sales and to a lesser extent lower pricing. Segment income was $19 million or 9.8% of revenue. The strong decline in profitability versus the prior year was due largely to the organic revenue decline. At this low [ph] revenue, margins were also impacted by low utilization rates at certain European manufacturing facilities. We initiated restructuring actions at these facilities last year and expect to see savings from these actions benefit our 2016 results.

And at our Industrial segment, Q4 revenue was $201 million, down 8% versus the prior year. Currency had a 6% or $13 million impact. Organic revenue declined 2% due to lower sales of Hydraulic Technologies which were impacted by a decline in repair and maintenance activity by oil producers. Segment income was $27 million and margins were at 13.5%. Margins contracted 80 points due to the organic revenue decline in our Hydraulic Technologies business.

Moving on now to our 2016 financial guidance, beginning in 2016, we're making two adjustments to our financial reporting to better align with how we are managing the business. At the segment level, we are further aligning product sales to our end market reporting. Previously, certain locations that serve multiple end markets were reported in one segment. All of China, for example, was previously reported in our food and beverage segment. The investments we are making in conjunction with the Focus program to move us to a standardized SAP template and financial reporting system will give us the ability to report the results at locations such as China across each segment.

The second change we're making is to allocate stock compensation to the segments into corporate expense. The impact of these changes is not significant to the historical segment results. However, for comparability purposes, we will recast the historical results on a go-forward basis beginning today with 2015 actuals. Our 2016 guidance was in the new reporting methodology and we are using the recast 2015 actuals as the basis for comparison.

The year-end backlog for 2014 and '15 are shown here as presented in the new end market reporting. Total backlog was $907 million at the end of 2015, down 23% or $264 million year-over-year. The year-end backlog at each segment declined by double digits. On an encouraging note, as Mark mentioned, orders were stable from Q3 to Q4, primarily reflecting steady run rates in our book-and-turn businesses.

As we look to 2016, about 90% of our opening backlog is expected to ship this year. Given the opening backlog positions and our current assumptions for book-and-turn sales this year, we expect total revenue to decline 8% to 12%. We are modeling a 2% currency headwind based on recent exchange rates.

Organic revenue is expected to be down 6% to 10% and we expect segment margins to be in the range of 11% to 12%. Note that this includes about $8 million of stock compensation expense. Using the recast 2015 results as the base, we expect organic revenue at both power and energy and food and beverage to decline about 10% year-over-year with segment income margins at around 10%. And for the industrial segment, we are modeling organic revenue to be down 1% to 5% with margins in the 13% to 14% range.

From a quarterly perspective, we expect Q1 to be our lowest revenue period with a modest sequential increase in revenue as the year progresses. In contrast, we expect segment income to increase sharply on a sequential basis due primarily to the timing of cost savings from our realignment actions.

As Mark mentioned in his opening remarks, we are aggressively moving forward on plans to optimize our global footprint, streamline our business processes, and reduce SG&A. We have taken an enterprise view to our realignment program, looking across the entire organization for opportunities, including corporate and global functions.

In 2016, we have about $60 million of actions planned and we anticipate an additional $40 million of actions in 2017. From a savings perspective, we expect about $40 million to be realized in 2016 with about two-thirds coming in the second half of the year. And we're targeting incremental savings of approximately $50 million in 2017 and $10 million in 2018 for total savings of approximately $110 million at a total cost of about $140 million.

Moving on to corporate expense, on our Q3 call, we provided an estimate of $60 million as a modeling target for 2016. Based on the realignment program, we have identified actions to reduce 2016 corporate expense by about $8 million or 13%. Including the allocation of approximately $14 million of stock compensation expense related to corporate employees, our revised target for 2016 corporate expense is $66 million. We expect to record about $20 million of corporate expense in Q1. This includes about $5 million of stock compensation or roughly 40% of the full-year stock compensation expense. As we exit Q1, we expect to begin realizing savings from the corporate realignment actions. In the subsequent quarters, we expect corporate expense to decline to about $15 million per quarter.

Looking at our guidance for the first quarter on a consolidated basis, we are targeting revenue to be between $500 million and $525 million, down about 10% year-over-year. We're targeting operating income at 3% of revenue before giving consideration to realignment expense. We anticipate recording $35 million to $40 million of realignment expense in Q1. All in, we expect an operating loss of between $15 million and $25 million. And from an EPS perspective, we expect a loss of $0.60 to $0.70 in the first quarter.

For the full year, we are targeting $2.1 billion to $2.2 billion of revenue with operating income at approximately 8% before realignment expense and about 5%, including the realignment. Our earnings per share guidance range is $0.75 to $1.05 per share on a GAAP basis. Excluding $0.80 of realignment expense, our base EPS target is $1.55 to $1.85 per share.

Looking at free cash flow, note that our guidance excludes about $40 million of net pension funding. The majority of that funding will occur in the third quarter. On an adjusted basis, our free cash flow guidance is $50 million to $70 million. This includes $105 million of cash outflows for the realignment program, of which about 30 million was accrued in 2015 for realignment actions that are being funded in 2016, 50 million is related to our 2016 realignment plans and 25 million is CapEx associated with our global footprint initiative, primarily the Poland expansion.

From an EBITDA perspective, we are targeting basic EBITDA of approximately $185 million. Excluding $50 million of realignment expense, our EBITDA target is $235 million. For our lenders, we have included reconciliations to bank EBITDA for 2015 and ‘16 in the appendix. With a lot of moving pieces in 2016, we thought it would be helpful to analysts to provide our midpoint EPS model. This is on a GAAP basis and unadjusted. Revenue is at $2.15 billion and segment income margins are 11.4%. Corporate expense is at $66 million. We’re targeting approximately $60 million of realignment expense with a majority expected to be recorded in the first half of the year.

Pension expense is modeled at $4 million for the year, primarily related to service costs. This puts our midpoint target for operating income at $118 million. Net interest expense is expected to be about $59 million and our model assumes a 33% tax rate and 41.5 million diluted shares outstanding. Based on these assumptions, our full-year midpoint EPS guidance is $0.90 per share.

Looking now at our financial position, we had $296 million of cash on hand and just over $1 million of total debt at year-end. Our gross leverage is at 3.2 times and net leverage is at 2.5. This was higher leverage than we anticipated due to the sharp decline in EBITDA in 2015. The decline in EBITDA was almost entirely caused by $26 million of currency headwinds and 70 million of profit decline in our power and energy segment. That said, we had strong cash flow in Q4 at $143 million, which puts us in solid position to fund the initiatives we've outlined today. However, given those investments in our legacy pension payments, we expect free cash flow in 2016 will be lower than typical.

Given this, we have decided to postpone our plan to initiate a dividend in 2016 and we do not expect any meaningful acquisitions or share buybacks. Instead, we will focus on our internal initiatives in achieving the $110 million cost reduction target. That represents nearly half a turn of EBITDA from where we are today and we’ll greatly improve cash flow in the future. This is all consistent with the capital allocation methodology, which we have included in the appendix if you’d like to review it in detail.

Our debt structure includes $600 million of bonds at 6.875% that mature in Q3 2017. These bonds have make-whole provisions that require us to prepay the interest on the notes, if we prepay the principle. In addition to the bonds, we have a $1.35 billion credit facility that includes $400 million term loan. The current interest rate on the term loan is approximately 2%. We also have access to $450 million of revolver capacity and a $500 million foreign credit instrument that we can utilize for commercial performance bonds. As you can see, we don't have any significant required maturities this year.

That concludes my prepared remarks. And at this time, I’ll turn the call back over to Marc.

Marc Michael

Thanks Jeremy. In summary, reduced prices for oil and dairy commodities have significantly impacted our customer spending decisions. We believe 2015 and 2016 represent cyclical downturn in our key end markets. And we’re not anticipating any meaningful recovery this year. Notwithstanding the challenging economic environment, I’m driving a high level of accountability and a sense of urgency throughout the organization. We’re taking action to improve our competitive position, reduce our cost structure and establish a foundation for long-term success.

And I firmly believe we will create significant value over the next 12 to 24 months by growing our bottom line. To illustrate the value proposition of our realignment plan, we provided a bridge from 2016 midpoint guidance for EPS and EBITDA to an illustrated estimate in 2018. Assuming flat revenue and the successful execution of our realignment plan, we believe we can triple EPS and grow EBITDA by 60% by 2018. In closing, we are committed to this plan and we are confident that we can execute.

That concludes our prepared remarks. And at this time, we’ll open it up to questions.

Question-and-Answer Session

Operator

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

Nathan Jones

Hi, Marc, if I could just – could I start off on the new management bonus system where you’re looking at two main components that EBITDA margin and free cash flow conversion. There is nothing in there on growth either organic or inorganic. Does that imply that your primary focus at the moment is really internal and getting those margins back up to or up to more acceptable PA kind of level?

Marc Michael

That's the implication for what we're trying to accomplish again. A big part of our efforts are focused on improving the EBITDA margin performance, long term exiting 2017 as well as the overall operating margin performance of the business. I will say for our growth initiatives and things that we’re expecting out of the commercial organization, we do have individual plans to flow down to that organization, to expand our opportunities geographically and so forth. But really the emphasis that we have this year is improving upon the performance overall of the business and getting ourselves more in line with our peers.

Nathan Jones

Okay, and then on this focus program that you have – you’re talking about streamlining business process, a full SAP [ph] rollout across the organization. Can you give us some more details on timing and expected benefits from that? And there is obviously some costs that come along with that is that included in the $60 million of realignment that you’ve called out or is there some additional cost that you’re observing?

Marc Michael

That’s included in our planned expenditures and really it's focused on improving our overall ability to reduce transactional cost and expenses throughout the business and it gives us a chance to consolidate a lot of the operations in a different way especially in the back-end processes. So it really supports in many ways what we're doing in the factories as well as in the backend part of the business to get to a more simplified approach to how we run the business. So we expect we'll see cost reduction as a result of that.

Jeremy Smeltser

And also to say, Nathan, in our CapEx, there is about $10 million to $12 million related to that SAP implement for this upcoming calendar year which is part of the run rate CapEx. We didn’t exclude that in the realignment column of the guidance charts.

Nathan Jones

Okay. And then I guess I will let everybody else on the segments, on the corporate line, once you’ve reallocated this .com to the segments into corporate, you are still looking at about 3.1% of sales in incorporate in 2016 which is certainly you wouldn’t call that world class. Do you have a longer term target for where that corporate expense line should settle down?

Jeremy Smeltser

I mean, as we look at the peer group and I'll let Marc comment after I kind of talk about the lay of the land. It's really more around 2% and you see some folks even below that. I think the reality is there is some apples and oranges in the comparability as I talk to my peers frankly in the peer group about what's left in corporate and what’s allocated out. That being said, everything is on the table for us as it relates to expense reduction and being more efficient in the organization. So we will continue to look for additional opportunities. And Marc can talk about the initiatives that he has already put in place for this year.

Marc Michael

Yes, so I would just mention that we're really approaching this looking at ourselves as an operating company now at an enterprise level and looking across the spectrum, so while it includes corporate cost, there is - as Jeremy was mentioning there's cost that’s allocated out to that we expect from a functional standpoint we would hopefully see reductions there as we go through time. But what we’ve done at the beginning of this year and January, assemble the officers together and we worked on identifying specific areas where we believe we can achieve this $110 million going through the exit of 2017.

We’ve put together committees and focus teams around this and they’ve already started working on it. And what I would expect, this is the starting point. There will be additional opportunities that will be identified and they are commissioned with doing that. So we're off to the right start in terms of what we’ve identified, but I would expect more opportunities to come forth as we go through the coming months. And as those develop, we will obviously share those with you.

Nathan Jones

Okay, that's helpful. I'll jump back in the queue.

Marc Michael

Thanks, Nathan.

Operator

Thank you. Our next question comes from Julian Mitchell of Credit Suisse. Your line is now open.

Brian Gibbons

Hi, this is Brian Gibbons for Julian this morning. I was just wondering if you could dig a little bit into the backlog dynamics in the food and bev and industrial. You touched on power and energy already, but I was just wondering if there is anything beyond theory that was may be a highlight for food and bev and then into industrial across those end markets as well, if you could just tell a bit more color on that.

Marc Michael

Sure. On food and beverage, I will start a bit with the markets, so milk supply still remains really high across the globe and that milk gets converted into powders and as you look at what's happened with powder pricing in the market, it's really been depressed now for going on year and a half or more. And lot of that’s due to just pure raw milk supply as well as powder build up that happened in china. So we expect dairy prices to remain fairly depressed through 2016. Now, this has been really good for consumers, but it’s really put pressure on producer margins and so they've started tightening their belts and it’s hit their maintenance budgets as well as some of their typical upgrades they would do, but most importantly when they look at their capital allocation, they’ve gotten really tight with spending especially in the dry areas.

So dry-powder is where we've seen the biggest fall off in our front log activity. And that's really what we haven't seen come into the backlog as we moved through the second half of 2015. It was a big drop off in the number of projects that were available in the dried area space. On the flip side, nutritional dairy has remained very active. We see alternative dairy products remaining very active and this is a nice area for us in the business that we expect to continue to see opportunities with what our customers are looking for us to deliver and the technologies that we provide. So a lot of the backlog impact has been a result of lower demand in the market space for dry dairy projects. Components in aftermarket through the second half of 2015, if we look sequentially on Q3 to Q4, we saw a steadying there, in the first half, it was a little tougher, but we did see that sort of to firm up as we exited 2015 for our components and aftermarket in the food and beverage space.

So in summary, dry dairy has been tough, nutritional liquid dairy and alternative dairy stays very active for us and the impact to the backlog there has been again primarily associated with that dry space.

Jeremy Smeltser

And on the industrial side, Brian, so we’re down about 12%, 13% year-over-year. Half of that is currency and what I’d say for the rest of it, the organic part of it, it's really about just larger capital projects across the board, particularly Asia-Pacific in mining, I would say. So it being down a lot less than the other two segments, that kind of drives our guide in that area to flattish to down 5%.

Brian Gibbons

Got it. Thanks. That's helpful. And then I guess just following up on -- you made a comment on FX, I was wondering if you could remind us, if you have FX hedging program in place, and if we continue to see -- and if not, if we continue to see currencies sort of gain on the dollar here, if that's an incremental tailwind to your guide?

Jeremy Smeltser

So, yes, as currencies gain on the dollar, particularly the pound and the euro, that should help us from a translation perspective. We don't have any hedging program in place as it relates to purely translation of our non-US dollar-denominated revenue. We do have hedging programs in place, where we have revenues and costs in different currencies. So we protect the net profitability.

Brian Gibbons

Great, thanks.

Operator

Thank you. Our next question comes from Brian Konigsberg of Vertical Research Partners. Your line is now open.

Brian Konigsberg

Yes, good morning. Just coming back to backlog within the segments, maybe just starting with the power and energy business, so you are down 30%, actually maybe about 25% at year-end, you’re guiding for the year at 8% to 12% organically lower, 10% to 14% reported. So can you maybe just touch on the things in the guide or the guidance firm up through the year and what would that be specifically, if you could give color, that would be helpful?

Jeremy Smeltser

Yeah. At the midpoint, we basically are assuming the exact same run rate of orders that we experienced in Q3 and Q4. I would say, on the downside, the lower end of the guidance range for P&E, we’re assuming a slight slowdown in orders and at the high end, I would say we have a slight improvement in the second half of 2016 embedded. So that's kind of how the range plays out.

Brian Konigsberg

Okay. And if you could touch on pricing in that business, I think you said it was a fairly moderate impact in the quarter, can you give us some detail how much pressure you saw during the quarter, and what you are assuming for the year and is it specific to OE or is it into service and aftermarket as well on power and energy?

Marc Michael

Yes. I mean we haven't really seen it much in the aftermarket, it's been primarily on the upstream side in the early part of 2015, and I think it's bled into the midstream as the year progressed. All-in and the backlog, it’s probably down, pricing little over 5% year-over-year. So certainly not as significant as the volume, but it is a concern.

Brian Konigsberg

Got you. I’m sorry.

Jeremy Smeltser

The one thing I was going to add to that, too, the thing that we mentioned overall on our gross margin line that has been encouraging, the work that our teams have done to improve efficiency, keep our cost of sales down, our supply chain initiatives have really helped us out a lot, even as we've seen these pricing pressures. So that's a good development for us as we've looked over the last really year-and-a-half in terms of where our gross margins have been able to hold up.

Brian Konigsberg

Understood. If I could just sneak one more in, can you just comment on the debt positioning, so 600 million of debt coming due in late -- or mid-2017, it doesn't look like you're going to have the cash to retire that completely. With the performance in the backdrop of the markets, I think that's becoming increasing concern, maybe, can you address your thoughts around how you’re going to manage that over the course of ‘16 and ‘17?

Jeremy Smeltser

Sure. Yeah. I mean, we will continue to monitor the debt markets, both in the bank markets and the high yield market. I think conditions are okay right now, they’ve improved a little bit sequentially here in February from January. With the make-whole, economically it doesn't make sense right now to refinance those bonds but I would think about it like this at some point between now and you know the middle of next year, we will choose to refinance those bonds may be not completely in their entirety but the vast majority of that $600 million and we'll do it the most favorable debt markets that are open at the time.

It is higher than where we'd like to be but we also to the point of I think all of our prepared remarks where we are at from a cyclical downturn perspective in our two largest markets, it kind of is what it is right now. In our history, as we built the company, we've been levered higher than this at times and I think we know how to operate in this environment, we have programs focused on working capital takedowns and I think our Q4 cash flow reflects our ability to get working capital out of the system. We’ll continue to do that as 2016 progresses. And also I would say while in 2016, the cash flow guidance is low, it’s really driven lower by all the realignment costs and we would expect those to moderate in 2017, so we’ll have better cash flow next year.

Operator

Thank you. Our next question comes from Robert Barry of Susquehanna. Your line is now open.

Robert Barry

Thank you for the very thorough presentation. I just want to actually follow up on the comments from the last question about power and energy. I mean it looks like the revenue growth outlook for all the segments reflects much better growth than the year-over-year decline in backlog might imply. So, is that order stability common kind of relevant across the segments and are you assuming that stability is continuing as you kind of set the outlook for all the segments?

Marc Michael

It is. I think Robert one of the things that kind of skews that analysis for everybody right now is that as you look back in the last year’s end year backlog there was more backlog in there that was not shippable in the coming year. So as the long cycle orders have come down more – a higher percentage of the backlog is actually shippable this year. So that 90% that I mentioned that’s a higher percentage than it would have been a year ago and I think that really represents the difference when you're doing the math there.

Jeremy Smeltser

And we looked at short-cycle side of the business in exiting 2015. That’s really what we took into account and what we can typically do is book in term business on those type of borders. So we kept that consistent as we looked at 2016, again not anticipating any appreciable improvement when we looked at the midpoint model.

Robert Barry

I mean maybe to those points just a broader question about how you’re thinking about setting the guidance I know in some ways it makes sense just to look at what you can see now versus trying to anticipate but it seems like a lot of the customers are still in the process of kind of reworking budgets for kind of the new whale reality of global macro et cetera. It just strikes me as perhaps may be a little bit ambitious to assume that the stability in 4Q continues, any thoughts on those – that the outlook?

Marc Michael

I think the biggest impacts we seen in the oil space is more on the upstream and downstream and as we mentioned that was around $100 million of our business in 2015. So, our shorter cycle business that is in mid-stream and upstream, or I’m sorry in aftermarket really is stay free stable through the last couple of quarters. So we would anticipate again that the aftermarket business continues to hold up. And then in the mainstream space as we also mentioned there is opportunities out there, we continuously bidding in opportunities but we did take into account that there could be some headwinds to develop in 2016 with the midstream market.

Jeremy Smeltser

And I also think underlying I remember there is a pretty big power component now with oil and gas side coming down as much as it has. And so in power actually we’re seeing a somewhat positive trend. And actually I would say the same thing on downstream refining. We actually are seeing a bit of a pickup and so that may be is offsetting a year-over-year decline in the top line that we’re assuming for upstream and midstream.

Marc Michael

And I guess that on power, really our product lines in power both in conventional and nuclear are quite strong are quite strong. Our Copes-Vulcan product line for turbine bypass valves, we saw good activity there in the conventional space. And then we have a good product portfolio in [indiscernible] and otherwise for pumps and valves, safety pumps and valves in nuclear.

Robert Barry

Great. That's helpful. Just the refining piece, I think that’s very small for you guys, but does that - are you seeing some signs that the maintenance activity is starting to come back?

Marc Michael

We've actually seen demand kind of pick up across the market as it relates specifically to refining. So for us that's ball valves, it is small, that’s true, but it does help offset the continued decline in the upstream.

Robert Barry

Got it. Maybe just last one on the restructuring, I appreciate the disclosure, very clear, but was wondering if you could give us some sense as how the $40 million incremental kind of breaks down between the segments?

Jeremy Smeltser

Sure. So first I think you start on the cost side, the $60 million that we have out there. That is spread relatively evenly across the three segments in corporate related global functions. And so I would expect the savings to flow through fairly similar. I think it's a little bit higher on the power and energy side given the higher level of activities that we had last year as well and just the overall revenue decline, but it is coming in across the board. And then with the corporate being a quarter of it, just to I think Marc’s comments earlier remember that some of those savings from corporate related action actually will flow-through in the charges and allocations into the segments, but relatively evenly with a little bit higher emphasis on P&E is the short answer.

Robert Barry

Great. Thank you. Very helpful.

Operator

Thank you. Our next question comes from Deane Dray of RBC. Your line is now open.

Deane Dray

Thank you. Good morning, everyone. I had a question to go back to your 2016 guidance and if we think about the midpoint assumptions, you’ve been very helpful on this call giving your assumptions and descriptions of your business across upstream, midstream, downstream. But at the midpoint of 2016 guidance, what you are assuming your customer CapEx declines might be for upstream, midstream downstream? So we're seeing estimates just for expectations in the down 30% to 35% on upstream. Just wanted to take – have you take us through your assumptions please.

Jeremy Smeltser

Well, there could be a little difficultly into go through assumptions customer-by-customer, but we’ve seen relatively similar declines in CapEx year-over-year from what you’ve said. We’ve seen as high as 50% frankly left on the midstream side for the pipeline work that we are doing, but clearly CapEx spending is going to be down and we're anticipating that.

Deane Dray

All right. And then on pricing, I might have I missed this, but we’ve heard reports of more pricing pressure on after market. So can you describe pricing in your shorter cycle, the aftermarket and maybe the midstream business as well?

Jeremy Smeltser

Deane, we've been able hold up our pricing fairly well in that particular area of the market. We haven't seen as much pressure on our aftermarket. Again, I would go back to what we’ve done in terms of being able to take on good supply chain initiatives that have helped us keep our gross margins up even if there is pricing pressures that come in. But if we look at aftermarket overall, we haven't seen as much there so far.

Deane Dray

Great. Just last question from me. Where might we see contingency that’s built into your 2016 guidance? Is it top line, is it the ability to do hold margins, but how would you describe your contingency assumptions?

Jeremy Smeltser

I would say, we always have cost reduction from restructuring and from a sourcing savings perspective that we don't necessarily put into the model and typically as it relates to, I would say, cost inflation that typically protects us. On the top side, I think we've been pretty clear on the call that we have assumed the current run rates and the shippable backlogs that we already have. So if we saw a sequential downturn in our global markets, there would be risk, though. As I said earlier, we did assume a slight level of reduction in orders at the low end of our segments ranges.

Deane Dray

Understood. Thank you.

Marc Michael

Thanks, Deane.

Operator

Thank you. Our next question comes from Nathan Jones of Stifel. Your line is now open.

Nathan Jones

Hey, guys. You talked about 40 million of delayed revenues in power and energy in the fourth quarter. When do you expect that to ship and are you seeing continued delays in customers accepting shipment going into the first quarter, do you expect this to be a repetitive kind of thing in 2016?

Jeremy Smeltser

I mean, we've really taken that into consideration, as we had a delay in Q4 that rolled out into this year, we also took into consideration that there could be additional delays that happened in Q1 as we move through the year. So when we looked at how we built up the revenue models, we took a lot into consideration and again, considering that, we could see further delays, but that's kind of a rolling impact that could take place.

Nathan Jones

What have you seen thus far in terms of any cancellations and do you have an expectation of any in 2016?

Marc Michael

We've seen very limited cancellations and when we have, they’ve been relatively small. Based on everything we know now, with what's left in backlog, we don't see that increasing, certainly could change if the markets turned worse, but at the current levels, it's not what we’re expecting.

Nathan Jones

I think that's pretty typical of the place you guys are in the supply chain there. On the food and beverage side, you talked about a sequential uptick in short cycle orders in the fourth quarter, is that seasonally typical for you or is that better than you would have expected it to be?

Jeremy Smeltser

Yes. We, typically in Q4, see our customers looking to release some of those maintenance budgets and we’ll see additional orders and those are typically shorter cycle, quick turn orders that we can execute on more quickly that helps both our orders and revenue profile as we move through Q4. So I would say there is again some, as you described, there is some seasonality to what we see in our short cycle orders in the latter part of the year, especially in Q4.

Nathan Jones

So would you say that sequential uptick was better, worse or the same as the normal seasonal pattern?

Marc Michael

Yeah. I think it's probably similar, we are always looking at programs to help with our distributor base, but overall I would say it was somewhat normal again, taking into consideration that we are responding to market conditions, all the time and we are working with our distributors to make sure that we are staying in the right spot of what the market is expecting.

Nathan Jones

All right. Thanks very much.

Ryan Taylor

Thanks, Nathan. This is Ryan again. This concludes the time for our call today. We appreciate everybody calling and listening in. As usual, Alex and I will be available throughout the rest of the day to answer any further questions you might have. Thanks for joining us and we will talk to you next time.

Marc Michael

Thanks everyone.

Operator

Ladies and gentlemen, thank you for your participation on today's conference. This concludes your program. You may now disconnect. Everyone have a good day.

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