SPX FLOW, Inc. (FLOW) CEO Marc Michael on Q2 2018 Results - Earnings Call Transcript

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About: SPX FLOW, Inc. (FLOW)
by: SA Transcripts

SPX FLOW, Inc. (NASDAQ:FLOW) Q2 2018 Results Earnings Conference Call August 1, 2018 8:30 AM ET

Executives

Ryan Taylor - VP, Communications and IR

Marc Michael - President and CEO

Jeremy Smeltser - CFO

Analysts

Nathan Jones - Stifel

Michael Halloran - Robert W. Baird

Bhupender Bohra - Wolfe Research

Walter Liptak - Seaport Global

Ronald Weiss - Barclays

Deane Gray - RBC Capital

Walter Liptak - Seaport Global

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2018 SPX FLOW Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Ryan Taylor, Vice President of Investor Relations. Sir, you may begin.

Ryan Taylor

Thanks, Jimmy, and good morning, everyone. Thanks for joining us. With me on the call this morning are Marc Michael, President and CEO; and Jeremy Smeltser, our Chief Financial Officer.

Our Q2 2018 earnings release was issued this morning and can be found on our website, spxflow.com. This call is also being webcast with a presentation located in the Investors section of our website. I encourage you to follow, along with the presentation, during our prepared remarks. A replay of this webcast will be available on our website later today.

As a reminder, 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 supplemental information, reconciliations for all non-GAAP measures presented.

And with that, I'll turn the call over time Marc.

Marc Michael

Thanks, Ryan, and good morning, everyone. Thanks for joining us on the call. I'll begin this morning with an overview of the quarter. Jeremy will then take you through a detailed review of our financial results and guidance.

Overall, I'm pleased with the progress we made on many fronts during Q2. We delivered a solid quarter and took a positive step forward on our journey to become a high-performing enterprise with a customer-focused culture rooted in continuous improvement. We continue to grow our highest-value product lines and aftermarket business while emphasizing crisp execution across our operations.

As we move forward, there remain ample opportunities for improvement, and our global team is engaged and committed to achieving a higher standard of performance, greater customer satisfaction and, in turn, more value for shareholders.

Looking at the financial highlights for Q2. We made good progress from both a sequential and year-over-year perspective. Revenue was $531 million, up 8% sequentially and 7% year-over-year, including 2.5% organic growth.

Operating margins were 9.1%, up 230 points from Q1 and 190 points over the prior year. And we generated $62 million of the EBITDA, up 41% sequentially and 23% as compared to adjusted EBITDA in Q2 2017.

We continued to proactively reduce debt, making a $20 million voluntary prepayment on our term loan, and net leverage declined to 2.6x, down more than a full turn from a year ago. Q2 EPS was $0.54, up 64% from the adjusted EPS reported in Q2 2017.

Orders grew 14% to $575 million. This included 12% organic growth, which was broad-based across all 3 segments. On the strength of our orders, backlog remained flat sequentially at just over $1 billion despite currency headwinds.

For the full year, we reaffirmed our guidance on stronger organic revenue growth and a lower benefit from currency. We now expect 2018 organic revenue growth in the mid-single digits, up from our prior guide, which assumed low single-digit growth.

Taking a closer look at the year-over-year revenue growth and margin improvement. Organic revenue grew 2.5% led by 8% growth in the Industrial segment. Segment income was $62 million, up 29%; and margins were 11.5%, up 200 points. All 3 segments delivered improved profitability, with each benefiting from cost savings, higher productivity and a richer margin revenue mix.

The favorable revenue mix reflects our strategic focus on growing our high-value components and aftermarket business while staying disciplined and selective in areas where enhancing performance is the primary goal.

As compared to our guidance, revenue and segment income exceeded our expectations on strong backlog execution and momentum on short-cycle and aftermarket business. The higher level of execution more than offset the currency headwind of $15 million to the top line.

Moving on to orders. In Q2, orders grew 14% year-over-year to $575 million. This marks the highest level of orders since Q1 2015. Organic order the growth was 12% and broad-based across all 3 segments, led by a sharp double-digit growth in medium-sized capital orders for Food and Beverage systems and North American midstream valves.

We also delivered high single-digit growth across our key Food and Beverage and Industrial product lines for the second consecutive quarter. Aftermarket orders grew 6% year-over-year and were study sequentially.

In total, on a sequential basis, orders increased 13%, including 16% organic growth, partially offset by 3 points of currency. The sequential growth was largely driven by a pickup in medium-sized project-related activity.

Our order development through the first 6 months was consistent with the growth strategy we described at our investor presentation earlier this year. On an organic basis, we've grown orders in our aggressive investment category by high single digits year-over-year with growth across all 6 product lines, led by Food and Beverage pumps and valves and Industrial mixers.

Orders in the opportunistic invest category were up low single digits. And in the 3 product lines where we're enhancing performance, orders were down in the high single digits, reflecting our selectivity and discipline. In this category, we're seeing improvement in our backlog execution and in the quality of new orders. As a result, the quality of our backlog has improved, setting us up for continued growth and margin expansion as the year progresses.

We ended Q2 with backlog just over $1 billion, up 13% year-over-year and flat sequentially as 5% or $48 million of organic growth was offset by currency. On a year-over-year basis, backlog is up $119 million and is comprised of a richer mix of component and aftermarket orders.

With a healthy backlog and a positive macroeconomic environment, we are well positioned to deliver mid-single-digit organic revenue growth and continued margin improvement throughout the second half.

At this time, I'll turn the call over to Jeremy for a detailed review of our financial results.

Jeremy Smeltser

Thanks, Marc. Good morning, everyone. I'll begin with earnings per share.

Q2 EPS was $0.54, up 125% year-over-year, as reported, and up 64% as compared to Q2 2017 adjusted EPS. We exceeded the high end of our guidance range through stronger backlog execution and continued momentum in our short-cycle component and aftermarket business.

The incremental volume versus our expectations drove a higher level of productivity across several of our manufacturing facilities.

The higher level of executions enabled us to absorb headwinds from currency and taxes in the period. The strengthening of the U.S. dollar resulted in about a $15 million headwind to revenue and a $0.02 impact to EPS. And taxes were $0.03 higher than anticipated.

Our effective tax rate for the quarter was 34% as compared to the 29% to 30% range assumed in our guide. The higher tax rate was related primarily to revisions to our U.S. transition tax provision, specifically a reduction in previously recorded foreign tax credits. Overall, a very solid operational performance versus our expectations.

Moving on to the segment results, beginning with Food and Beverage. Q2 revenue was $188 million, up 6% from the prior year. Modest organic growth was driven by a mid-single-digit increase in component and aftermarket sales, which was largely offset by a lower volume of system revenue.

Segment income was $20 million, up 16% year-over-year; and margins expanded 90 points to 10.7%. The increased profitability was driven by a higher-margin revenue mix, savings from cost initiatives and improved operating execution, particularly in Poland where we continue to see increased productivity.

On the order front, Q2 orders grew 21% to $199 million driven by sharp organic growth in systems and mid-single-digit organic growth in components. We are increasingly disciplined and selective on system orders.

The orders secured in Q2 were concentrated in liquid dairy applications where we have leading technology offerings. Liquid dairy systems pulled through a healthy level of components from our factories and create an attractive service and aftermarket opportunity.

We continue to enhance our value proposition to customers through the life cycle of the system by partnering with them to maximize efficiency and uptime while reducing the overall cost of ownership. Overall, the market trends in Food and Beverage are healthy, and Dwight and his team are executing well across all 3 areas of the business.

Taking a look at Power and Energy. Q2 revenue was $152 million, up 5% from the prior year and down 2% on an organic basis. The organic decline was primarily due to lower filtration shipments, partially offset by an increase in valve shipments supporting our North American midstream customers. Aftermarket sales grew low single digits.

Segment income was $15 million, up 45% year-over-year; and margins expanded 270 points to 9.6%. The increase in profitability was driven by savings from cost initiatives, a higher-margin revenue mix and improved productivity.

Orders totaled $170 million, up 15% organically, driven by strong demand from midstream pipeline valves in North America. Notably, we were awarded 2 stocking orders totaling $21 million.

Shipments for these orders will begin late this year with the majority scheduled for delivery in 2019. This is a key strategic win for us that underscores our commercial efforts to expand our relationship with key distributors.

In the aftermarket, orders grew low double digits on increased activity for replacement pumps in upstream oil and nuclear safety applications. We are encouraged by the elevated level of aftermarket activity both year-over-year and sequentially, and we'll remain disciplined on the OE side of the business.

Wrapping up the Q2 segment results with Industrial. Revenue grew 9% to $192 million. Organic growth was 8% driven by increased aftermarket sales and shipments across our key product lines, including dehydration equipment, pumps, mixers and hydraulic tools.

Segment income was $28 million, up 32% year-over-year; and margins expanded 250 points to 14.3%. The improved profitability was driven by the organic growth, savings from cost initiatives and improved operating performance.

Q2 orders were $206 million, up 6% on an organic basis versus the prior year. The organic growth was led by double-digit increases in hydraulic tools and heat exchangers, followed by mid-single-digit growth in mixers and pumps. Sequentially, organic orders grew nearly 10% and were broad-based across end markets and regionally strong in North America and Asia Pacific.

We were encouraged with improved financial performance across our Industrial segment in Q2. We're seeing positive trends broadly across our Industrial markets, and we expect to deliver strong organic revenue growth and margin improvement in the second half.

Moving on to guidance, beginning with Q3. We are targeting revenue to be between $510 million and $530 million. At the midpoint, we are assuming approximately 6% organic growth and a modest currency benefit versus the prior year period. We expect organic growth to be concentrated in the Industrial and Food and Beverage end markets.

Segment income is expected to be between $61 million and $68 million with margins between 12% and 13%. Our Q3 EPS guidance range is $0.56 to $0.68 and assumes a tax rate between 28% and 29%. And we expect to generate approximately $64 million of EBITDA at the midpoint, representing about 15% growth year-over-year.

Looking ahead, we anticipate the fourth quarter will be our highest revenue and margin quarter this year, driven largely by the timing of our backlog phasing and seasonal strength in our aftermarket business.

As Marc mentioned earlier, we reaffirmed our full year guidance this morning. Our underlying assumptions for revenue have been updated to reflect the order development in Q2 and the strengthening of the U.S. dollar.

Based on these items, as compared to the previous guidance, we increased our organic growth target 3 percentage points to a range of 3% to 6%. And currency translation is now expected to be a 1% benefit, down 3 percentage points from the previous guide. We have good visibility to the second half revenue target with approximately 70% in backlog at the end of Q2. At the same time last year, we had 65% of the second half revenue in backlog.

Operating income is expected to be about $200 million or 9.6% of revenue, representing 250 points of improvement over the adjusted operating margin reported in 2017. We expect EBITDA to be between $240 million and $260 million, representing 25% year-over-year growth at the midpoint.

Our EPS guidance is $2.21 to $2.56 per share and assumes a full year tax rate between 27% and 29%, which is based on our first half results and our current estimate for the geographic mix of earnings in the second half.

As we continue to assess the guidance from the U.S. Treasury and work to finalize our tax provision on the new regulations, there may be volatility in the tax rate.

And for free cash flow, we are targeting 100% to 120% conversion of net income with free cash flow in the range of $105 million to $125 million.

Taking a brief look now with our financial position. We ended the quarter with $205 million of cash on hand and $840 million of total debt, down 6% from year-end. Free cash flow for the quarter was a net investment of $4 million, including $7 million of CapEx and $6 million of restructuring payments.

Net working capital investment was driven primarily by cash outflows on large projects for which we previously received downpayments. Consistent with our historical seasonality, we expect strong free cash flow conversion in the second half.

I'll wrap up with an update on debt reduction. In Q2, we made a $20 million voluntary prepayment on our term loan. The principal balance is now down to $210 million. We ended the quarter with net leverage at 2.6x. Over the past 18 months, we have now reduced net debt by $259 million or approximately 30%. In conjunction with EBITDA growth, net leverage has been reduced by 1.4 turns of EBITDA since the end of 2016, a significant accomplishment.

Over the balance of this year, we plan to concentrate capital allocation on debt reduction and organic investments. By year-end, we anticipate net leverage will be down to approximately 2x and provide us more flexibility as we evaluate capital allocation in 2019.

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

Marc Michael

Thanks Jeremy.

In summary, our first half results were highlighted by 3.5% organic revenue growth, 210 points of operating margin expansion and 27% EBITDA growth. Orders were healthy, with growth concentrated in our high-value product lines and aftermarket business. For the full year, we are targeting organic growth in the mid-single digits and 250 points of margin expansion. Overall, I'm pleased with our progress and trajectory for this year.

Looking beyond this year, we remain excited about our potential and believe we are still in the early stages of our journey to transform SPX FLOW into a high-performing operating enterprise. To achieve high performance, we must deliver higher customer satisfaction. To do so, we are investing in our people, products and processes.

On the people side, we are elevating our talent throughout the enterprise and have added some key members to our team this year to help lead our growth and continuous improvement efforts.

From a product perspective, we have defined growth strategies for each product line. In Food and Beverage, we are aggressively growing our pump and value -- excuse me, growing our pump and valve product lines and our aftermarket service capabilities. In Industrial, we're aggressively growing in our highest-value product lines in the aftermarket. And in Power and Energy, we are growing our aftermarket business while being selective on OE opportunities.

And in terms of process, we have multiple work streams moving in parallel to implement best practices and lean principles to drive continuous improvement, increased throughput and reduce lead times.

Through crisp execution of our 2020 plan, we believe we can grow our top line 1 to 2 percentage points above global GDP, improve our margin performance and increase the velocity of our working capital cycle.

In addition, over the 3-year period, we anticipate having about $650 million of available capital to deploy while maintaining a prudent net leverage position. As we continue our journey to high performance, I'm encouraged by the energy, enthusiasm and great pride of our team members across the enterprise.

In closing, we remain firmly committed to achieving excellence across all phases of our business, and I'm confident in our ability to continue to drive higher customer satisfaction, improved financial performance and greater shareholder value.

This concludes our prepared remarks. And at this time, we'll be happy to take your questions.

Question-and-Answer Session

Operator

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

Nathan Jones

I'd like to just focus a little bit on some of the order strength here in the quarter. First of all, on the North American oil pipeline valves, it sounds like you picked up some distributors who placed some stocking orders. So maybe if you could give us some color on the opportunities to continue that order growth here. Are they kind of some discrete orders to fill their inventory? It should be a pretty strong market here. There's concerns about takeaway capacity out of the Permian, so just any color you can give us on the sustainability and the path to continued growth in that part of the business.

Marc Michael

Yes. Sure, Nathan. José and his team have been working really hard on how we can create a better customer experience, and a lot of channel works has been taking place to do that. And the opportunities remain good in the frontlog, and we expect to continue to see a steady rhythm from our valve business in the midstream.

And so those orders can have some timing implications to them when -- on the OE side. But with our distribution base that José has been working on and the rest of the team, we expect to see a good rhythm for the valve business as we go through the rest of the year.

Nathan Jones

And then on the Food and Bev system orders, I mean, you called the growth there sharp. Is that -- have you seen a change in the demand outlook from a market perspective? Are they better execution from you guys allowing you to gain share? How would you characterize that? And how does the frontlog look there?

Marc Michael

Yes. Systems business remains steady also. We've seen a good frontlog stay pretty consistent. We are having a higher shift to the liquid orders where our emphasis has been in the frontlog. And we expect, again, the same thing for systems as we do for valves, is that we'll see a steady rhythm of order intake as we go through the second half of the year, pretty consistent, I would say, with what we've seen in the first half.

And that's, again, a focus on liquid orders that really carry the high-value components with them that create a good value proposition for our customers. So we're encouraged there. Dwight and his team have done a really nice job in dialing in our focus on what type of business we want to be taking into the backlog to give a better profile as well as better execution and better long-term aftermarket annuity.

Nathan Jones

Yes. You've been pretty clear on the strategy there. It's good to see you executing against that. And then just on the last one that you called out on the order strength, high-value Food and Bev and Industrial product lines up high single digit, can you maybe talk about - I know you've been investing aggressively to try and grow those. What do you think is market there versus what you think is share gain from those kind of investments that you've made in those product lines?

Marc Michael

Yes. It's probably a combination of the 2, Nathan, both -- some more robustness in the market as well as some share gain. A number of points to consider there, I think. First of all, it's still a fragmented market with a lot of opportunity to grow those product lines across the board. And what we've been doing to help support that investment in our facilities, again, the facility we built in Poland, help support that position.

Importantly, too, what we're looking at across not only all our factories but the enterprises what we're doing with lean and improving our execution to really create a great customer experience with better lead times, better on-time delivery, higher quality, that's a big goal of ours for the next several years that we've been working on. And as we implement continuous improvement and Global Process Excellence across the company, we expect to be able to continue to grow those high-value product lines.

Operator

And our next question comes from Michael Halloran with Robert W. Baird. Your line is now open.

Michael Halloran

So obviously, pretty strong momentum underneath here. You're starting to see good execution on the initiatives going into the back half of the year. Margins are tracking as you would hope. So maybe help -- help me understand the cadence as we work in the 3Q then in the 4Q. It feels like 2Q a little bigger, 3Q a little less, 4Q maybe a little bit bigger of a ramp than I would have expected all else equal.

So maybe help -- help me understand the cadence to the orders and how they translate and how -- and why that swing through the year. Or maybe I'm wrong, and the sequentials are actually pretty normal that you're laying out there, but just would like some context on that flow to the rest of the year.

Jeremy Smeltser

I mean, I think our expectations for Q3 are fairly consistent with Q2's performance on the top line with a bit of a ramp in profitability as we see our price increases taking hold. In addition, I would say that the timing of orders in Q2 was a bit back-end loaded within the quarter.

So a lot of those orders came in June, and so the delivery just naturally pushed out to Q4, higher than Q3. And so that's driving around a $20 million sequential improvement expectation from Q3 to Q4 on the top line.

Michael Halloran

I figured some on the orders side. So then on the cash flow side, we keep moving a few quarters forward. Cash flow is getting better. Guidance isn't changing. So how are you guys thinking about the internal -- the external deployment at this point? There's still some debt paydown that you did this quarter. When do you think that can start flipping towards more something more external? And how's the development been on that side? And what do the capabilities look like internally to go after those opportunities?

Marc Michael

Mike, it's Marc. Again, as Jeremy mentioned in the prepared remarks, our focus for the rest of the year is going to be -- continue to be on reducing our debt and organic investment. And that organic investment, we've got some new products we're working on, and we've rolled out a couple recently. We'll continue to invest in key areas to improve our productivity in our factories, so we can serve customers better. And we'll continue that through the rest of the year.

One thing, too, that you may recall, we brought on a new personnel for strategy, Vusa Mlingo. And he's been working closely with our product managers to assess some of the key trends in the market that we think we can address as we get into the out-years and where we could deploy capitally -- capital differently externally. So that would be potentially on the M&A front.

Obviously, there's also some other things we can consider capital deployment externally, depending on what the situation is at the time. But I'd say right now, our main focus is continuing to reduce the debt, do really good targeted organic investment to improve our capability to serve customers better, and then we'll be developing that external deployment strategy and really talking more about that as we get into '19 and '20.

Operator

And our next question comes from Nigel Coe with Wolfe Research. Your line is now open.

Bhupender Bohra

This is Bhupender here, sitting for Nigel. So I just wanted to talk about -- I mean, these are pretty nice quarter in terms of orders, double digit here. Just wanted to get a sense of what are you hearing from your customers in terms of capital spending overall. As we look at the tariff environment and talks about trade issues and all those things, are we -- going into July, have we seen any changes? It doesn't look like from the orders, but if you can give some color on that.

Marc Michael

This is Marc. A couple of things I would mention. In Q2, we did see a sequential pickup in these medium-sized capital orders, both in F&B in the liquid area, North American midstream valves. Also in North America, we did see some uptick in our Power and Energy pump business as well as aftermarket. So it's a good trend. It's nice to see some of the capital coming back into the market. And for us, too, it's not just a North American story. We saw good progress in our business in some medium-sized capital orders outside of North America. So it's a good balance.

And again, as I mentioned, the frontlog remains healthy and active in our more capital-intensive-type project business, and we expect to -- again, to see a steady rhythm continue as we move through the second half of the year. Again, there could be some lumpiness to it just as normal just based on timing on when those capital orders happen.

Bhupender Bohra

And the - when you look at your F&B business, you've got some system orders here. Can you talk about like some color on the geographically like how it looked, North America, Europe and Asia Pac?

Marc Michael

We saw good order intake in China, specifically, again, good liquid orders in the midsized liquid orders. Again, important to emphasize, as always, these orders align well with our capabilities. They provide a really great value to our customers. They create a lot of pull-through of componentry from our factories and create a good value stream going forward for aftermarket business. So really pleased with that. And again, China was an important contributor to Q2.

Bhupender Bohra

Lastly, Marc, on - when I look at the organic growth, pretty strong expectation in the second half year, and if I look at the margin expectations, I mean, you guys did actually 330 bps on the margin variance here for the quarter. What's the cadence of that like productivity, pricing and all those thing going into the second half when I look at the organic growth for the second half?

Marc Michael

It's a few items. In the organic growth and the top line, we've seen really good order intake in our high-value components, again, up high single digits for 2 consecutive quarters on a quarter-over-quarter basis. Quarter-over-quarter being versus 2017 really kind of flat sequentially, but good growth, high single digits, so some better mix in the backlog.

So again, our ability to convert those orders, because they're shorter-cycle, creates and helps support the second half. We're also seeing better execution on our project business in Food and Beverage systems, which is supporting the margin profile. Factory utilization is improving, again, that also helps support our margins. And then we expect to see some modest cost price in the second half.

So it's really kind of those 4 areas: better mix, better execution on projects, better factory utilization and some modest cost price improvement.

Bhupender Bohra

You would say any of those buckets would be pretty heavy-handed, like productivity would be much higher than the other stuff or?

Marc Michael

No, we're not looking that there's a stretch there in regards to what we're expecting in terms of what would be flowing through the factories in the second half. As we look forward, we expect to get better there, and that's part of our lean initiatives, but not what we're considering for the second half.

Operator

And our next question comes from Walter Liptak with Seaport Global. Your line is now open.

Walter Liptak

So just to follow on from that last question on price cost. I wonder if you can just characterize for us specifically the price cost. Where do you think you are? Are you capturing all the price? Or do you have more price increases for the back half of the year? Just some color on where we are with material inflation pricing.

Marc Michael

We've got a really good process in place for evaluating cost price. So Barry McGinley and our supply chain organization that works for Ty Jeffers has put in place an assessment that we can look at and refresh really, real-time, to understand our changes in our cost base due to inflation or tariffs. So we look at that once a month. The cost base gets refreshed for our top product lines, so well, really, 30 different product lines. And then we'll make adjustments what we need to on the price front accordingly with our product managers.

And if you consider our run rate business, making those adjustments is a fairly easy thing to do since it's list price-based, so that's the important piece of the -- our run rate business and our high-value product lines. When you get more into the project-based business, we quote those projects based on current cost, and there's a time limitation to the bids. So we protect ourselves if we win the order by placing the POs on the suppliers right away just to lock in that cost basis.

So we got a really good process in place to manage cost price. As we see different inflationary elements happening, we will adjust accordingly. And that's why we think we're ahead of the curve to be modestly positive as we move through the second half of the year.

Walter Liptak

So presumably, the risk is maybe on the projects side, but the projects will be out shipping in the back half of the year...

Marc Michael

No, just to clarify, there's not risk on the project side related to cost because what we do when we bid a project, we use current costing, and we lock those projects in if we receive the order. So we don't have risk associated with cost. We put that in place many years ago. And we really, if we look back through time, we haven't experienced issues with cost escalation in our projects, not from a material perspective, anyway.

Walter Liptak

Thanks for clarifying that. That sounds great. Just going in to P&E and just the pipeline valves, those 2 stocking orders that you called out, were those tied to specific projects? Or were those distributors adding to inventory levels because of expectations about the future?

Marc Michael

That's a great question. Glad you asked that. Again, José and his team have been really working and thinking about our customers to assess and understand how we can give them a better experience and serve their needs. So his team has been working on expanding our distribution base with some key distributors, and that's a reflection -- those orders are a reflection of those distributors putting some stock in place to support customer needs.

Walter Liptak

And how are we able to do on pricing with -- on some of these new initiatives?

Marc Michael

Pricing has been -- we've been maintaining pricing into the market.

Operator

And our next question comes from Julian Mitchell with Barclays. Your line is now open.

Ronald Weiss

This is Ronnie Weiss, on for Julian. On the P&E margin, specifically, you guys took that guide down about of 70 basis points to the point of the year. First half seemed pretty strong, stronger at least than we were expecting. I guess, what was the kind of change in thinking there for the second half pulling that margin down?

Jeremy Smeltser

Yes. I mean, that would just really be a reflection of the margin in backlog at the end of the quarter versus 90 days ago. Not a material change in price anywhere, but just the mix of products that came in from an order perspective in the quarter.

Ronald Weiss

And then on the Industrial business, top line came in much stronger than we were expecting. Any sense of any kind of pull-forward that might have happen in Q2 ahead of any tariff scares or anything like that, that made it look a little bit higher than initially was planned?

Jeremy Smeltser

Yes. We haven't identified anything significant in terms of pull-forwards.

Operator

And our next question comes from Deane Gray with RBC Capital. Your line is now open.

Deane Dray

I'd like to go back to price cost because this has been such a topic for every industrial call this earnings season. I just want to put a finer point on this on the 2 dynamics. Can you quantify, you can go by segment or the total for the company, which ever you have, on how much price did you get in the quarter? What was the material input cost? And are you net positive? Can you give it to us in basis points? Just want to know what level of precision you can provide.

Jeremy Smeltser

Yes. I mean, we're not going to dive in by segment in great detail on that, particularly on customer sensitivities. But as Marc mentioned earlier, we track very specifically by product line what we're seeing from a surcharge, a tariff and then cost inflation perspective. And as you know, historically, the markets that we play in, specific products we're in, the market typically absorbed those fluctuations, and that's what we're seeing now.

And so on a net basis in the quarter, it's a slight positive, but we are seeing additional inflation coming down the pipeline here for the second half. And so we've implemented further price increases in many of the product lines here at the end of Q2 that we expect will offset that inflation. And that's the approach we'll continue to take.

Deane Dray

That's what I was looking for. And then, can you quantify your exposure on tariffs as they've been announced so far? Any nuances, company specifics that we should know about?

Jeremy Smeltser

Yes. I mean, we -- I would say, the less than $10 million based on what we've seen put in place so far, that's the expectation on a full year basis, so not terribly large. As you know, we have a strategy to manufacture predominantly in region where we sell, and so the exposures aren't large for us either on raw or on componentry.

Deane Dray

And then the perspective on the Food and Beverage, the liquid dairy orders, does that reflect -- are these one-off orders? Are they capacity adds? How does that stand with respect to what the industry, the dairy industry is going through?

Marc Michael

Yes. So the cadence we're seeing around the liquid dairy orders has been pretty consistent. Even if we go back over the last several quarters that these medium-sized upgrades and capacity to produce new products have -- has continued. Again -- timing, again, can be somewhat lumpy.

But the industry is adding capacity for new products as they're needed and they're them out into the market. So that's been the nice part about this. Usually, there with existing customers, they'll be in brownfield-type sites where customers are doing an upgrade or looking to produce a new product.

Deane Dray

And then last question is, really interested in hearing about the backlog and the whole selectivity progress. Can you quantify what the embedded margin is today versus it was, let's say, a year ago? Any kind of precision to that would be helpful, especially on this mix shift and your focus away from the big, large systems that had some execution risk and back into your sweet spot.

Jeremy Smeltser

Yes. We're not going to get into reporting margins in backlog specifically. But what I can say is, if you look at the margin expectations we have in the second half, which you'll see in the model as you plug in our Q3 guidance and what that, that's out for Q4, that, that'll be reflective of the year-over-year improvement in backlog margin, particularly in my earlier comments where I said that 70% of the revenue for the second half is already in the backlog.

Operator

And we have a follow-up question from Walter Liptak with Seaport Global. Your line is now open.

Walter Liptak

I want to ask about foreign currency. You shifted around the revenue a little bit. And based on the discussions, I think this is all accounting translation. But any competitive issues with the FX change? And what assumption are you using for your U.S. dollar for the back half?

Jeremy Smeltser

Yes. So we're assuming the June month-end rates, which are consistent with where we're at today across the board for our currencies. And as it relates to the impact in the quarter and to the year for guidance for the year, in total, including the Q2 impact, there's about $65 million or so, and that's all translation.

But as I mentioned earlier, we do have the strategy, and have had it for a long time, to manufacture in region. And so we don't see any real competitive shifts as it relates to the currency fluctuations, just simply translation of those foreign currency revenues and profits into U.S. dollars.

Walter Liptak

And then just as a follow-on again on the dairy order. Just to clarify, was that a China order? Or where those China liquid orders that you got or -- that are going to be manufactured in Europe? And if that's right, how is the U.S. market looking?

Jeremy Smeltser

Yes. So it was -- we had -- we've got dairy orders in liquid systems coming in across the globe. The real driver of Q2 was China. There were some nice orders. And it wasn't just one order. It was several, again, medium-sized orders that supported the Q2 order intake.

Similar with what we do from a production standpoint, we typically design and support project management engineering, our project within the regions where we're doing the work. And that'll be the same case for the orders in China that we took in. So there'll be some componentry coming out of Europe but not a significant amount.

Again, we have a factory in China that produces all the componentry we need to support projects in that region. The U.S. market is a bit of a different market than Europe and Asia. It's a market where we do less systems work. There's a larger integrator-type base where there are customers, and we're selling a lot in the componentry in the North America. So North America doesn't make up a big part of our systems business.

Ryan Taylor

This is Ryan Taylor again. There's no more question in the queue, so we're going to go ahead and conclude the call at this time. We thank everybody for their participation. And for those analysts and investors that want to have follow-up questions throughout the day, Stewart and I will be available for the usual. Thanks again for joining us, and we'll talk to you next quarter.

Operator

Ladies and gentlemen, this does conclude your program, and you may all disconnect. Everyone, have a great day.