CECO Environmental Corp (CECO) 2018 Q2 法說會逐字稿

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  • Operator

  • Good morning, and welcome to the CECO Environmental Conference Call.

  • (Operator Instructions) Please note, this event is being recorded.

  • I would now like to turn the conference over to Matt Eckl.

  • Please go ahead.

  • Matthew Eckl - CFO & Secretary

  • Thank you for joining us on the CECO Environmental Second Quarter 2018 Conference Call.

  • On the call today is Dennis Sadlowski, Chief Executive Officer; and myself, Matt Eckl, Chief Financial Officer.

  • Before we begin, I'd like to note that we have provided a slide presentation to help guide our discussion.

  • The call will be webcast, along with our earnings presentation, on our website at cecoenviro.com.

  • The presentation material can be accessed through the Investor Relations section of the website.

  • I'd also like to caution investors regarding forward-looking statements.

  • Any statements made in today's presentation that are not based on historical fact are forward-looking statements.

  • Such statements are based on certain estimates and expectations and are subject to a number of risks and uncertainties.

  • Actual future results may vary from those expressed or implied by the forward-looking statements.

  • We encourage you to read the risks described in our SEC filings or our Form 10-K for the year ended December 31, 2017.

  • Except to the extent required by applicable securities laws, we undertake no obligation to update or publicly revise any of the forward-looking statements that we make here today, whether as the result of new information, future events or otherwise.

  • Today's presentation will also include references to certain non-GAAP financial measures.

  • We have reconciled the comparable GAAP and non-GAAP numbers in today's press release as well as the supplemental tables in the back of the slide deck.

  • And now I'll turn the call over to Dennis.

  • Dennis Sadlowski - CEO, President & Director

  • Good morning, and thank you for joining us.

  • Well, from time to time, I'm told that I don't wear my passion and enthusiasm on my sleeve, and I need to let it out better.

  • Well, I intend to do so today because I'm legitimately thrilled about our growing momentum and pleased with the results that we believe was a strong second quarter across CECO Environmental.

  • The customer wins in the quarter and share gain led by our Energy Solutions team, in conjunction with the return to sequential revenue increases, confirmed that we're on a good track.

  • We've divided the call into several parts this morning.

  • I'll first cover our second quarter highlights and how we see our strategy gaining traction in the market.

  • Matt will next discuss the financial details and outline the targets we set for ourselves looking out 3 years.

  • And then I'll review our end market outlook before we open the call up to your questions.

  • So let's get started with Slide 3. Our 4-3-3 operating strategy is designed to deliver significant benefits for our customers that translate to market wins and growing market share.

  • It's our formula for strong financial results and long-term value creation for our shareholders.

  • New orders in the second quarter topped $100 million, demonstrating that our team is actively winning in the market, rigorously executing our 4-3-3 operating strategy and accelerating our turnaround momentum.

  • We achieved solid results across the company.

  • Most notable is that our triple-digit new orders were led by our Energy Solutions segment in spite of the distressed power generation marketplace.

  • The combination of our brand strength, demonstration of our technical prowess and highly engaged sales team, not only delivered on behalf of customers, but also took work from our competitors.

  • Orders at just above $100 million were up 24% year-on-year and 11% sequentially.

  • This is the third consecutive quarter of both booking sequential growth and a book-to-bill ratio well above 1. The entire company is quite frankly juiced by this, and they should be.

  • Noteworthy is that we added close to $60 million to the backlog over the last 3 quarters, which represents a harbinger for future revenue increases.

  • Our gross margins were a healthy 33.5%, an indication that our solutions have value in the market, and our execution capability remained strong.

  • Likewise, our sequential non-GAAP operating income and adjusted EBITDA improved 30% and 23%, respectively, demonstrating leverage on a modest sequential revenue growth to $81.1 million.

  • And we're proving that we can be a cash-generating engine by achieving second quarter free cash flow of $8.4 million and a free cash flow to EBITDA conversion of 122%.

  • On the negative side, our Industrial segment was below our potential in the quarter, with orders down sequentially.

  • I'll emphasize that this was predominantly due to several orders being slow to close.

  • Additionally, our China business remains sluggish.

  • But this is no surprise because it is very much weighted towards the coal-fired power generation, which continues to be a distressed marketplace, both domestically and overseas.

  • Our asset-light business model, active attention to working capital and customer payment terms that demonstrate the strength of our offerings all contribute favorably in the quarter.

  • Matt will get into the details, so I'll just summarize by saying I'm very encouraged and like where we're heading.

  • Moving to Slide 4. I'd like to, once again, reiterate the clarity of purpose around which we are transforming CECO Environmental.

  • We're about growth and specifically, enabling our industrial customers to grow.

  • And we do so with clean, safe and more efficient solutions that protect our shared environment.

  • The positive financial and operating results that I just summarized are a reflection of the entire team's growing passion and commitment to this defining purpose for our company.

  • Turning to Slide 5. Our 4-3-3 operating strategy is all about developing leadership solutions in air quality and fluid handling.

  • An offensive minded 4-3-3 strategy worked well for several top national teams during the soccer's recent World Cup competition, and it's also working for CECO Environmental.

  • Our 4-3-3 strategy is based on the implementation of 4 value creation enablers: outside-in leadership; portfolio management; simplification; and innovation.

  • We've chosen 3 compelling markets to operate in: clean energy; industrial air pollution and fluid handling.

  • There's winnable and sizable spaces in each of these end markets, and we're aggressively and more successfully competing in each of them.

  • Finally, we have 3 growth platforms that we're building out.

  • Investments in each are gaining traction and contributing to our solid results.

  • Engineered equipment is our largest and most global platform.

  • With blue-chip customers and superior products, we're delivering applications that address the cleaning production and movement of fossil fuels.

  • In air quality improvement, we have a best-in-class portfolio of solutions, exceptional expertise in customer service that meet our industrial customers need for safety and sustainability.

  • And finally, in specialty pumps, we have a niche in mission-critical equipment that's focused on providing the highest plant availability for our customers.

  • Slide 6 summarizes some of the investments and actions we've undertaken in implementing and executing our strategy.

  • It's becoming obvious that the clarity of our purpose and strategy are contributing to sharper execution across the company.

  • Individually and collectively, our investments and actions are paying off.

  • I think it's worth taking a few minutes to emphasize some of the key highlights that are contributing to our improving business performance.

  • We know that we have much work ahead, and our priority remains to execute the plan with an aggressive and comprehensive effort.

  • We've taken several decisive steps to generate leverage from our value creation enablers.

  • Our leadership team has been substantially overhauled over the last year, with 3 market-oriented executives recruited in 2018, including a new General Counsel and a new Head of Human Resources.

  • Further, we have successfully transitioned the leadership of our Energy Solutions segment and created and filled the new position of Chief Technology Officer.

  • The CTO role reflects the importance of and our commitment to innovation.

  • We've also added valuable resources to our board, with a good balance of strategic insights, industrial market and operating depth, solid governance and financial acumen.

  • We've got an excellent leadership team onboard actively guiding the success of the company.

  • We're continuing to drive out organizational complexity.

  • As I mentioned in previous calls, our biggest target is to reduce the legal entities in ERP systems within CECO, which are not only inefficient, but also a barrier to productive interactions with our customers.

  • This past quarter, we closed out an additional 2 legal entities and 1 ERP.

  • Complexity drains an organization, and we have to do more here.

  • We remain committed to an asset-light business model as a means of turning earnings into cash.

  • And we previously reported on the sale of 2 noncore business units in Q1 as we've reshaped our portfolio to sharpen our focus on air quality improvement and fluid handling in the industrial and energy end markets.

  • We're also taking advantage of the $5 billion installed base of equipment we've produced over the years.

  • We've made a commitment to generating consistent recurring revenues by capturing the aftermarket of replacements, spares and upgrades that keep customers operating at the highest levels of efficiency.

  • Just as importantly, we're aggressively pursuing, what we term, the brownfield market, which represents more significant project opportunities to update and upgrade our aging equipment or changing out and upgrade our competitors' installed base.

  • Within our 3 core growth platforms, we've been undertaking a range of actions that may individually seem small but are collectively advancing our ability to win in the market.

  • Let me cover just a few.

  • We continue to push out complexity in the corresponding G&A cost.

  • And as we do so, we've redeployed G&A into selling resource additions, and we've realigned our sales incentives to drive value and growth.

  • In specialty pumps and air quality, we've approved $3 million in capital investments to make long-overdue upgrades to our production equipment.

  • The payoffs will be an increased output and shorter lead times for our customers, ultimately, to gain share and create value.

  • We've also been investing in our people because our people are a critical asset in transforming the company.

  • Over the past several quarters, we've broken down organizational silos, blended external hires with promotions from within and invested in learning and development.

  • All of this fosters teamwork, which makes us both more agile in capturing opportunities and resilient in facing competitive challenges.

  • And it shows everyone that CECO is a great place to build a career.

  • Finally, we're priming the innovation pipeline so that we'll yield a steady supply of new products and services to fuel growth into the future.

  • And as I mentioned earlier, we've created and filled the position of Chief Technology Officer, and I'm personally devoting time to this important driver of the company's growth.

  • But before I turn the call over to Matt for the financial details, I want to take a few minutes to cover some of our key wins that we closed in the second quarter.

  • I do this because they validate the breadth and depth of our success in the quarter and support my confidence that we're on the right track driving forward.

  • Turning to Slide 7, I'll highlight 6 key wins worth over a combined $20 million in new bookings.

  • They're the turbochargers of our 4-3-3 operating strategy.

  • Individually and collectively, they demonstrate the value CECO Environmental brings to the market.

  • Each clearly demonstrates how our growing ability to differentiate our capabilities and the strength of our franchise can deliver share gains across our platforms, products and technologies.

  • Moreover, they underscore our global presence across North America, the European Union, the Middle East and Asia.

  • There's no doubt that the entire organization is proud of these wins, motivating us to build on this success.

  • But we all know we can do even better, and we will.

  • I'm super excited about this, not only because I can see the progress in our results, but also I can sense the momentum within the organization.

  • I believe it's an extraordinary powerful and competitive force when an organization believes in its mission and in each other.

  • We won a multimillion-dollar order for a scrubber oxidizer package after assisting a metals recycling customer through the permitting process with engineering support to address off-gassing concerns, a great win for the Industrial Solutions team.

  • In Energy, our Emtrol-Buell team put a key win on the books by solving for several complex operating issues at a Louisiana refinery, and it boasts the highest operating velocities in the world.

  • Our leadership team in Dubai won an oily water separation system from the new first-time EPC customer on the strength of the brand and the relationships with the end user.

  • And just because the power gen market remains in some distress does not mean that we can't still gain market share.

  • The CECO Peerless team won a major retrofit award to change out a competitor's system.

  • The retrofit addresses NOx emissions issues that have been playing this gas power plant for years; a big-time brownfield win.

  • Further, we're demonstrating that our account management approach and focus is paying dividends.

  • Our Account Manager, Michael Szczachor, has turned a series of losses into a string of wins by clearly identifying the critical success factors for compressor and metering stations for one of the nation's largest pipeline operators.

  • Not to be outdone, the Fluid Handling team is also demonstrating the benefits of our application-focused product set on a large aquarium win.

  • Our 5 product application set and end-user relationships helped the team prevent a contractor from supplying cheaper metal pumps that would likely corrode in the saltwater application.

  • And these are just a few representative wins that contributed to our second quarter orders.

  • So I'll wrap up by saying what I said at the beginning, I'm really thrilled about our growing momentum and delighted with the results of the strong second quarter across CECO Environmental.

  • And I know I speak for the entire organization when I say that we know we can do even better, and that we're going forward with confidence in our 4-3-3 operating strategy and our passion to relentlessly compete and win.

  • With that, I'll turn it over to Matt Eckl, who will discuss the financial results in the quarter.

  • I'll be back with you to close out the call with a few comments on our served markets before we take your questions.

  • Matt?

  • Matthew Eckl - CFO & Secretary

  • Thanks, Dennis.

  • Kicking off with Slide 9. I want to start by congratulating the CECO team on a successful quarter.

  • I share in Dennis' comments that the confidence building within the team can be felt.

  • It's certainly nice to see positive momentum.

  • As a quick point of reference, like-for-like comparisons have been provided to exclude the impact of divestitures in prior periods.

  • Comparables on a reported basis are available on our 10-Q.

  • With that, our orders were $100 million, which is up 24% year-over-year, excluding divestitures, as the refinery business continue to return to historical averages, and our energy team delivered an outstanding quarter.

  • On a sequential basis, bookings grew 10.5% versus Q1.

  • Revenue at $81.1 million was down 8.5% year-over-year, primarily due to declines in our Industrial Solutions segment and China region.

  • Compared to this year's first quarter, our top line increased 17% on a like-for-like basis.

  • Cash flow from operations in the quarter was $6.6 million, which included $1.8 million of earnouts paid.

  • Excluding this accounting convention, our CFOA was a standout $8.4 million in Q2.

  • Gross margins at 33.5% were still strong in the quarter and in line with last year's average.

  • Q2 non-GAAP operating margin at 6.4% is still well below our potential, but it points to the inflection I noted in last quarter's earnings call.

  • What I will call your attention to is the operating leverage evident in CECO's operating model.

  • Sequentially, operating margins are up 220 basis points, and operating income is up 78%.

  • On a year-to-date basis, our tax rate is 53%, due to the gain on divestitures and onetime in deferred tax charges associated with U.S. Tax and Jobs Act.

  • However, on a normalized basis, our effective tax rate was 24.7%.

  • Concluding the headline in financials, our non-GAAP diluted earnings per share was $0.05, which is up $0.02 from the prior quarter.

  • Moving forward to Slide 10, our orders and sales trends by segment are displayed.

  • We continue to break out results associated with our divested business units and our Emtrol-Buell refinery business for transparency purposes.

  • As you can see, our refinery end markets have sustainably returned to historical averages, and our funnel is still robust.

  • Within the rest of Energy Solutions, the commercial team delivered on the best quarter since I've been at CECO despite some challenging power generation market conditions.

  • As I sit through our regular commercial deal reviews with the Energy sales team, they're undaunted by the market, and it's adamant in the results.

  • In particular, I want to highlight David Barker at our Peerless Dubai office and his team.

  • It's clear they have embraced the 4-3-3 strategy as their passion to serve customers helped us to secure the oily water separation win that Dennis shared and why our midstream businesses is up double digits year-over-year.

  • Looking at our Fluid Handling segment.

  • On an organic basis, we grew orders 11% year-over-year and 7% sequentially.

  • This is slightly ahead of most other recently announced pump company growth rates and another indicator that we're growing market share.

  • Industrial Solutions at $19 million of orders in Q2 continues to lag our expectations.

  • The team still sees a lot of activity in the funnel, but as of late, large CAPEX decisions we had expected to be made and bets placed in Q2 have pushed to the right.

  • This quarter is clearly at the low end of our typical $19 million to $22 million per quarter average and an area we are working aggressively to improve.

  • Touching on Slide 11, we outlined CECO's backlog orders and revenue.

  • I'm excited to report a third consecutive quarter of growing backlog and a book-to-bill ratio eclipsing 1.2 in the quarter.

  • The last time CECO's backlog hit $200 million was in Q4 of '15 directly after the Peerless acquisition.

  • The focus on growth is gaining momentum.

  • Slide 12 shows the trends of our gross profit, operating income and adjusted EBITDA, all of which have improved sequentially with the increase in volume, coupled with the benefits of our Q4 '17 restructuring actions.

  • Gross margins at 33.5% are in line with total year '17 and still very healthy.

  • We're keeping a careful eye on our input costs as the threat of tariffs and inflation rises.

  • The team is ensuring we're adequately pricing our projects to cover inflationary risks and actively measuring our manufacturing input costs to ensure we protect our margins.

  • Thus far, we're seeing minimal impacts while we remain diligent in managing around the moves, caused by ratching up of trade protectionism.

  • Sequentially, non-GAAP operating income and EBITDA are up 78% and 54%, respectively.

  • And in the second half, with continued momentum, we would expect our year-over-year comps to improve.

  • The benefits of Q4's restructuring actions have yielded $2 million of SG&A benefit year-to-date and complemented with the volume increase, are driving operating leverage.

  • In addition, we can see our SG&A mix change as admin reductions are paying for sales investment in line with our 4-3-3 operating strategy.

  • On Slide 13, we have a standout quarter in terms of free cash flow conversion, with all segments playing an active role.

  • Most notably, was Energy Solutions that has executed on favorable contract terms that drove early project collections in the period.

  • In addition, our Industrial Solutions segment reduced working capital as a percentage of sales by 3 points.

  • And Fluid Handling continues driving inventory down through their lean journey.

  • To the right, you can see that our project WIP, as a percentage of sales, is moving in the right direction, back toward 0. I think the point I want to highlight is that CECO's asset intensity is a leader amongst industrial peers, and we'll continue to get better.

  • On Page 14, I'm pleased to report our improved balance sheet as we have paid down an incremental $4 million of debt in Q2.

  • To the right, you will see that we were able to keep our bank-defined leverage ratio relatively flat sequentially despite not having the benefit of Keystone and Strobic in our quarterly results.

  • From an investor perspective, our net debt to EBITDA has declined 2 consecutive quarters to 1.6x.

  • With our growing backlog and continued focus on debt reduction, we believe we will continue to delever in the second half.

  • Turning to Slide 15, I want to shift gears from reporting our second quarter performance to announcing our 3-year financial targets, which we'd promised to provide late last year.

  • These targets are both aggressive and achievable and are clear signs that we're striving for top-tier returns.

  • I'll outline the target within the framework of how CECO is striving for top-tier returns, outgrowing the market, commitment and accountability and a unique business model.

  • We believe we can organically outgrow our market 2x over time.

  • In fact, we're already substantially outgrowing the market in bookings and have done so sequentially over the past 3 quarters.

  • The bookings will translate into increased revenue, which has sequentially grown over the past 2 quarters.

  • Organically growing revenue at double the rate of our served market is supported by 3 factors that Dennis discussed earlier when he highlighted some of our market wins.

  • First is a highly engaged sales force across our niche end markets and our geographic footprints, supported with an outside-in leadership culture.

  • Second is the depth of application expertise that differentiates CECO whether selling original equipment or aftermarket services.

  • I'd put our team of Vaughn Watson in sales, or [Brian Dwight] and Paul Hoeller in engineering toe-to-toe with any of our competitors in solving our customers' problems.

  • It's what they live for.

  • And third, our investment to produce a pipeline of innovative products and services, which as Dennis noted, we're highly committed to with our recent CTO appointment.

  • Together, they contribute to a relentless focus to take profitable market share.

  • CECO's commitment accountability to aggressive targets is highlighted by the expansion of our EBITDA margin to 12% to 14% over the next few years.

  • This is a substantial increase over our current EBITDA margin of 8%.

  • Our EBITDA targets is inclusive of balanced reinvestment designed to propel ongoing future growth.

  • At 33.5%, our gross margins show that our solutions have value, and our capability to execute is strong.

  • With growth, our business reaps the benefit of operating leverage.

  • And as mentioned earlier, we remain committed to reducing the complexity within our organization, making us more efficient.

  • By announcing these targets, we're committing to transparency in reporting our progress, which is the best form of accountability.

  • Finally, we have a unique business model that differentiate CECO from its industrial peers, the fact that we are asset light.

  • We believe our business model commands a top-tier return on tangible capital and converts earnings to cash quickly.

  • While a project business's cash flow can be lumpy as exemplified in the last 3 quarters, over time, we're confident in our cash conversion capability.

  • We're aiming to consistently convert cash at a rate of 65% to 85% of EBITDA.

  • And strong cash generation obviously provides us flexibility for capital allocation.

  • In addition, return on tangible capital measures management's effectiveness at generating operational return on capital and most applicable to our business model.

  • We intend to achieve north of 50%, which is substantially above the already impressive 26% for our trailing 12 months.

  • We will deliver on these targets with a dual push, first, by remaining asset light with an aggressive focus on working capital, and the second is to maintaining and improve our gross margins as we grow.

  • In sum, these 4 targets are aggressive and achievable.

  • As you can see, we're already heading down the pathway to their delivery and making real progress towards top-tier returns.

  • As an organization, we're excited and committed to these targets.

  • I look forward to reporting our progress quarterly.

  • I'll now turn things back over to Dennis.

  • Dennis Sadlowski - CEO, President & Director

  • Thanks, Matt.

  • The implementation and execution of our 4-3-3 operating strategy is fully underway, gaining more and more traction and producing positive results and momentum.

  • Again, we're very pleased with the quarter's results, but certainly not content.

  • We can and will do even better.

  • Before moving to your questions, I wanted to share some quick thoughts on the outlook of our end markets.

  • Slide 17 shows that with the exception of power generation, all of our served markets are trending up, representing modest and positive tailwinds.

  • As I mentioned earlier, we've had key wins in all of our end market segments.

  • But let me offer some color, beginning with our Energy Solutions end markets.

  • Starting at the top, in the refinery segment, we were ready for the market recovery that started in the latter part of 2017.

  • So when the customers in this area began to move on new investments, our team responded with strong wins in all regions of the world.

  • We've been pleased at the pace of the bounce back in early 2018.

  • And given the slightly higher price of crude oil, we expect this market segment to stabilize at historical demand levels.

  • The midstream oil and gas market segment also continues to be positive, with good activity in the Middle East and the U.S., although project activity remains inherently lumpy.

  • Power generation is still distressed and likely to remain so throughout 2018.

  • So no change here from what we've seen over the past year or so.

  • And I'll add that in recent years, the third quarter has historically been the weakest in terms of project awards, so we expect that to continue this year as well.

  • However, we are still aggressively pursuing significant opportunities to gain share in the brownfield and aftermarket areas.

  • Our restructured sales force is taking advantage of CECO's reputation, capabilities and staying power.

  • As mentioned earlier, one of our key wins in this space was the complete change out and retrofit for the competitors failing NOx emissions management equipment.

  • Our activity in coal power gen is focused exclusively on servicing our large installed base with aftermarket support.

  • So this will become a smaller slice of the revenue mix going forward.

  • Moving around the wheel to Fluid Handling.

  • It's a growing market that we're well positioned in.

  • Activity appears to be solid, and we're investing in capability to better support our growth targets.

  • And coming up to close the circle is our Industrial Solutions markets.

  • In here, it need for improved air quality.

  • We'll continue to offer solid potential for our Industrial Solutions segment, and the outlook remains positive, both domestically and internationally.

  • Air quality is a global issue, which was reinforced by me, just yesterday, by my Uber driver in Chicago.

  • I was fortunate to ride with a sharp young lady on a summer break from her Master's studies at Cornell University.

  • She is originally from Mongolia and avidly discussed the air pollution issues back in her home country.

  • In fact, it was the central reason for her decision to pursue an urban planning degree to become part of the solution.

  • And she was certainly interested in what CECO was doing and has to offer.

  • I know we can do good and be good in this space.

  • In summary, our target markets are offering us compelling opportunities, and we intend to be active and creative in seizing them.

  • I'll also want to mention 3 external variables that are in play and can influence the trajectory of our markets: U.S. tax policy, domestic inflation and the administration's actions on trade tariffs.

  • The U.S. tax policy reforms that were passed by Congress and signed into law by the President late last year are very positive for our domestic industrial customers and, in turn, should be a positive force in our end markets.

  • We've seen the tax reform's increasing confidence in influencing factory investment decisions in favor of the United States.

  • While tax policy does not alone create demand, it does influence decisions at the margin, and that, in turn, gives our markets a small boost.

  • Increasing tariffs and the so-called trade wars tend to have multiple direct and indirect effects on our markets and supply chain.

  • For example, we saw significant price increases announced on steel, aluminum and related products, almost immediately following the recent tariff announcements.

  • And while our business model tends to offset such increases in the spot markets with simultaneous price increases on most of our offerings, the combined effect can alter end market demand and confidence.

  • Fortunately, we have broad industry exposure, so we don't have to worry much about picking the winners and losers.

  • Overall, I see this as more of a headwind risk than anything else.

  • Like many other companies, we're watching how this plays out, and we're all on the same boat.

  • Now turning to Slide 18, I want to reemphasize our collective commitment to our purpose in the initial success of 4-3-3 operating strategy.

  • Our strong quarter was a big step, but there are many more steps ahead as we build on our momentum with further share gains that deliver solid value.

  • And now we'd like to welcome your questions.

  • Operator?

  • Operator

  • (Operator Instructions) The first question will come from Sean Hannan with Needham & Company.

  • Sean Kilian Flanagan Hannan - Senior Analyst of Smart Grid, Electronic Mfg Svcs, IT Components & Electronic Components

  • Congratulations.

  • It really -- I think -- obviously, some phased, but on a whole, really a lot of impressive commentary here this morning in terms of wins, backlog and some other executions.

  • So I want to congratulate you on that.

  • First, my question here just focus on is as you folks think about some of these targets you have through 2021 and specifically the 4% to 7% organic growth, that can be really impressive for you folks, especially when we think about it, we've historically really had a struggle with being able to execute on organic growth and consistently as well.

  • So just trying to understand if you can specifically call out what you're using as the base for comparison.

  • Is that the run rate from June, or is it '17?

  • And then also, can you talk about a little bit more specifically the assumptions for end markets here?

  • And what would be assumed, say, from -- on power generation recovery over a 3-year horizon versus refining?

  • And any viewpoints of one versus another over that 3-year period would be helpful.

  • Dennis Sadlowski - CEO, President & Director

  • Yes.

  • Thanks, Sean, and appreciate the question.

  • So first question was about our growth target.

  • And our target that we communicated earlier, that we stick by is we want outgrow the market at least 2x.

  • And that means we need to be out active in the market demonstrating our value and gaining share.

  • It's the only way to deliver above-market growth rates.

  • When we look at the aggregate mix of our markets, we probably tracked a global GDP over the long term, and that's where we see 2% to 3.5% or so of global GDP.

  • Now currently, we're weighted towards the North American market and weighted towards the energy market.

  • And to some degree, those are having offsetting end market effects.

  • So as we look ahead and measure ourselves and report quarterly, we'll report against both the mid-term expectation, like I've tried to do today, as well as offer what color we do see around market and mix conditions.

  • At the end of the day, we think if we are able to drive that range of growth in that mid-single digits, we'll drive operating leverage and generate the kind of top-tier returns that people expect.

  • I think you had an added question on specifics around power gen and -- what was the other?

  • Sean Kilian Flanagan Hannan - Senior Analyst of Smart Grid, Electronic Mfg Svcs, IT Components & Electronic Components

  • Yes.

  • It's really more a matter of, what are we assuming in these forecasts as you think about recovery in power gen on a 3-year horizon?

  • There could, artificially, just through math coming off a really poor level of demand today, being able provide some pretty good growth support, say, in 1 to 2 years.

  • You want just kind of a very moderate temperature change within that market, just a lot of small numbers.

  • So trying to understand how does power generation factor into?

  • Are you factoring anything on a 3-year horizon for them?

  • What are you thinking about on the refining front?

  • Just trying to get some perspective around how you're thinking about your markets in a differentiated manner one versus the other as you consider that 3-year growth horizon?

  • Dennis Sadlowski - CEO, President & Director

  • Yes.

  • So I think I'd start by saying we like the markets we're in.

  • We think that they have reasons to be growing over the midterm there, the 3- to 5-year term.

  • And then over the more near term, we went through a period in the refinery segment where customers sat on their money.

  • They continued to operate their refineries at full tilt, and we saw very little.

  • You heard all about that last year.

  • In power gen, what we're seeing is a market that remains in a very challenged environment for the remainder of the year at least.

  • The outlook from the biggest customers in the OE side of that are pretty well known, Siemens, GE.

  • Their talk is that, that will continue into early next year.

  • Our goal is, however, to gain share in that market, being active, being visible, having the application expertise and building on our reputation and staying power.

  • So like in this quarter, we think there is going to be opportunities for us to continue to generate good wins, albeit, we're not going to have any benefits, I don't think, in terms of tailwind from power gen over the next foreseeable future, I guess.

  • So I don't know that I need a big tailwind to generate the kind of targets and bookings that we're looking at there in terms of growth rate.

  • Sean Kilian Flanagan Hannan - Senior Analyst of Smart Grid, Electronic Mfg Svcs, IT Components & Electronic Components

  • Okay.

  • And then next question here, and it's also top line-focused.

  • It seems that based on the progress momentum that you're having thus far this year, not only in the execution on the revenue line, but in these bookings and new wins, it would seem that you folks would be kind of getting back to following the typical revenue progression that you would have in calendar years of quarter-on-quarter sequential progress.

  • Should we assume that we'll have incrementally higher Q3 over Q2 as well Q4 over Q3?

  • Are we trending in that direction?

  • Or is there anything that I'm ignoring that would otherwise detract from that?

  • Matthew Eckl - CFO & Secretary

  • No.

  • That's right, Sean.

  • If you heard some of my prepared remarks, you'd hear that we do believe that the second half is obviously being better than the first half.

  • And I always talk about things sequential.

  • And that's why on Page 9 of the slide deck that was prepared, you'll see a comparison to Q1.

  • And the thing I'd really point out is the fact that we grew backlog close to $60 million, so that's a good indicator of what we see the second half doing.

  • Sean Kilian Flanagan Hannan - Senior Analyst of Smart Grid, Electronic Mfg Svcs, IT Components & Electronic Components

  • And it also, I would assume, winds up very well for at least a strong start to '19.

  • I don't think -- I mean, how much do you think is going to be realized out of that order backlog at the back end of the year versus what drives into '19?

  • Dennis Sadlowski - CEO, President & Director

  • Yes.

  • I think, as you know, we don't get the backlog flowing through in 1 month, 30 days later, and most of our orders are worked over, let's say, 9 to 15 months or so, depending on the size, complexity and customer timetables.

  • So that increase in backlog in the last 3 running quarters of close to $20 million per quarter over the last 3 quarters is an important harbinger, as I mentioned, for revenue growth, but it will be gradual.

  • And then it will be up to us as to what can we generate from new wins out of the market conditions that we see, and that's where we continue to keep our focus, keep our energy and look to executing better than the competition.

  • Sean Kilian Flanagan Hannan - Senior Analyst of Smart Grid, Electronic Mfg Svcs, IT Components & Electronic Components

  • Okay.

  • So as you start -- and this is all conceptual.

  • But if you were to think about as you start off '19, is there a potential then instead of your typical quarter-on-quarter decline as you start off a new calendar year that you could be even something closer to flattish on a sequential basis given this strong consistent uptick you've been seeing within your backlog?

  • Or is that me getting ahead of myself?

  • Dennis Sadlowski - CEO, President & Director

  • So I'm going to let Matt offer a little bit, but I don't think that we have necessarily on revenues any kind of typical, call it, seasonality in the quarters.

  • It has a lot to do with when are some of the project orders booked and what is the customer timetable for execution therein.

  • So -- and the fact that we've grown over the last few quarters means yes, we expect -- in bookings and backlog does indicate we're expecting revenue to start to catch up.

  • And as I've said, then we have to continue to execute against the market conditions we see and do well to continue to generate wins, generate share gain.

  • I don't know if Matt wanted to offer anything more precise than that.

  • Matthew Eckl - CFO & Secretary

  • I think you hit on all the key points.

  • The only thing I'd highlight is that if you look back at the trend that we put there out on the page, yes, we've pretty much -- revenue follows orders by a quarter lag.

  • And so that's a good indicator.

  • You saw that when we went down through the cycle and as we go up, as we take market share.

  • And so I think that's probably the best way to model it on an average basis, Sean.

  • Operator

  • The next question will be from Gerry Sweeney with Roth Capital.

  • Gerard J. Sweeney - MD & Senior Research Analyst

  • I wanted to take a step back and just follow up a little bit what Sean was asking on your longer-term target of 4% to 7%.

  • As you look at your products and portfolio, I mean, do you have everything in place to hit that 4% to 7%?

  • Or do you need to add to it?

  • Or is it just a function of continuing this 4-3-3 strategy, getting more ingrained in the design process and aftermarket sales, et cetera?

  • Matthew Eckl - CFO & Secretary

  • Yes.

  • I think it's more around the 4-3-3 strategy.

  • Obviously, we do have industrial markets growing.

  • I think Sean hit on the point that a counterbalanced in our energy markets hits power gen, and in the foreseeable future that there could be some challenges there.

  • But it's about our 4-3-3 operating strategy.

  • Dennis Sadlowski - CEO, President & Director

  • Did I hear you ask a question, is our outlook for that all organic?

  • And if so, I'll say, yes.

  • You know, what we're all about is trying to build growth engine, demonstrate in front of customers the value of our applications and our people and do that in a way that gains share, picks up and builds installed base and then really leverages the installed base for aftermarket and brownfield wins.

  • So it's armed with that against this aggregate GDP backdrop over the longer term that we think our targets are the ones that we're after and those that will report against going forward as well.

  • Gerard J. Sweeney - MD & Senior Research Analyst

  • And then I think you said in a commentary the industrial side of the business still a little bit slow, orders being pushed out.

  • What gets this going?

  • Is this more outside your control, just tariffs adding a little bit of uncertainty?

  • Curious as to how this develops.

  • Dennis Sadlowski - CEO, President & Director

  • Yes.

  • So I will say that's been a little disappointing because we do see a lot of good activity in the market.

  • And at the same time, we've been hovering in that $18 million to $22 million in revenue for the past 2 quarters, which is less than what I would consider acceptable.

  • The pipeline does suggest we should be doing better, but there's lots of movement from time to time in what customer timing and putting through their investments.

  • Those -- a lot of our investments are growth-related in the ways that there are a variety of other factors in terms of new capacity, demand and things like that, and they're planned reasonable timetable.

  • But then they tend move out a little from quarter-to-quarter depending on what's happening in other parts of the facility, construction or facility relocations and things like that.

  • So a part of this is up to us to continue to have better access to market.

  • That's why we're adding some salespeople.

  • It's why we're making sure that our salespeople in this area can represent the total company's offerings.

  • And we need to recommit ourselves to being visible out there in the market because I do believe that we have great offering, great solutions.

  • We've demonstrated it over and over again.

  • And so I think we can do better.

  • Gerard J. Sweeney - MD & Senior Research Analyst

  • Got it.

  • Anything around pricing on your sort of maybe set marginal levels?

  • Or is that not applicable?

  • Dennis Sadlowski - CEO, President & Director

  • Well, pricing, I'm not sure exactly what the question is.

  • But we -- if your question is are we seeing significant differences in pricing or the like, I know that we see pricing pressure largely in our Energy segment coming through the latter half of last year, and that hasn't gone away.

  • At the same time, our team worked hard to demonstrate value so that the customers can see what our offering is and generate benefits there.

  • I think in the quarter, we did a good job of that.

  • Now that's why from a margin point of view, we believe that the blended margins will continue to hold up, commensurate with this quarter we just completed.

  • As far as -- if you're specifically referring to industrial...

  • Gerard J. Sweeney - MD & Senior Research Analyst

  • Yes, I was.

  • Just this -- just curious what that was.

  • Dennis Sadlowski - CEO, President & Director

  • One of the things that I noted and we have seen is there is pressure coming from within on certain material inflation and the like that is absolutely driving some movement in the pricing.

  • We were able to capture most of that in the spot market in terms of not being in the middle of a margin squeeze.

  • But some of that upward pressure is causing customers to have to rethink what they do and take at least one more round of review before they release capital on projects that are usually around expansions, upgrades and the like.

  • So there's a little bit of an impact right now on that, if nothing else, is creating some delay.

  • Gerard J. Sweeney - MD & Senior Research Analyst

  • Got it.

  • And then just more out of curiosity about cash, the $36 million.

  • I guess, you mentioned 40% of it is, I guess, domestic and 60% is overseas.

  • Is that the rationale just that there's less here in the U.S. that it's a little bit higher than -- I mean, the $36 million on the balance sheet with $80-plus million in debt, why not pay it down a little bit more?

  • Or is that ratio the -- that calls for the higher level of cash?

  • Matthew Eckl - CFO & Secretary

  • Sure.

  • So I would say we -- with the new tax reform, the ability to bring cash home is a lot easier.

  • We've already started to do that.

  • That'll be in our Q. We talk about that some.

  • We'll continue to take those actions there.

  • Because of our tangled web of legal entities out there, it makes it a little tough sometimes to move cash back.

  • So it's more of an internal obstacle as opposed to external or economic reality of bringing that on.

  • Outside of China, I would say we pretty much can bring cash back at a very low barrier, Gerry.

  • So we will continue to do that.

  • We like paying down debt, and we'll continue to do so as long as it remains economic.

  • Operator

  • (Operator Instructions) The next question will be from Bill Baldwin with Baldwin Anthony Securities.

  • William Lewis Baldwin - Principal and Co-founder

  • Good job with your group there.

  • You're really bringing some traction to bear.

  • I just wanted to get your feel on the progress that you feel like you're making as you move more towards account managers.

  • Can you kind of indicate where you are in that process there, Dennis and Matt?

  • I guess based on your 3 growth platforms, are you where you want to be?

  • Or do you have more to do in terms of getting effective account managers into the equation -- into your team there, into your sales effort?

  • Dennis Sadlowski - CEO, President & Director

  • Yes, Bill, thank you.

  • And I think that's a good question because we believe that an account management approach with certain of our larger end market customers makes absolute sense.

  • And so we've begun moving in that direction with account managers and clear account plans that also connect up relationships with different levels between us and our customer base.

  • I would tell you that we have begun, we have robust beginning in terms of the account management.

  • One of the wins I mentioned, I would say, is directly related to a much better account planning process, a much better understanding of what the customer needs are and our ability to translate that into project wins that's gaining some momentum.

  • And I say we're at the beginning because we wanted to start with a focused group of customers to make sure that the process is good, that the momentum is generated, that we can then redeploy that into other areas.

  • So we've started to move in that direction as well in the Industrial.

  • And so it's largely around our Industrial segment and Energy segment where we're deploying an account management approach, in addition to a field group that covers the aftermarket and the end user installed base, in addition to more of the specialty technology people that back them up and handling customers on a transactional basis.

  • So we're starting to get some good wins.

  • It's showing up in the numbers.

  • It's a part of the momentum that you're seeing, and I think why we think we had a decent quarter, but we still can do better.

  • William Lewis Baldwin - Principal and Co-founder

  • Dennis, do you feel like that most of the folks that you think -- I mean, most of the position for account managers can be filled internally?

  • Or is this a situation where you might have to go outside to find some effective account managers?

  • Dennis Sadlowski - CEO, President & Director

  • I think that we are going to be able to evolve people into roles like that, into key account management from internal, where they have -- where we align their specific expertise around product and technology with the largest part of the demand from key customers.

  • So we've already done a bit of that, as I mentioned, and I see that as a larger path going forward.

  • As we continue to look at adds, what we're trying to add people who have that blend of application knowledge in front customers and have that hunger to close business and really the passion to win in the market.

  • We don't want to be here just playing the game, so to speak.

  • It's all about wins and generating benefits for customers that translate to value for shareholders.

  • William Lewis Baldwin - Principal and Co-founder

  • Are you seeing some pretty qualified candidates as you interview for these jobs?

  • Dennis Sadlowski - CEO, President & Director

  • Absolutely.

  • I think our momentum is demonstrating that it's a good place to be.

  • And I think that's even picked up in terms of what kind of candidates we can see from the market at this point.

  • William Lewis Baldwin - Principal and Co-founder

  • Very good.

  • With that, I know you don't want to give out a lot of competitive information, but can you indicate, at least among your growth platforms, where you think the most pressing issues are on product innovation?

  • Where your major focus is going to be there initially with your product innovation initiatives?

  • Dennis Sadlowski - CEO, President & Director

  • Yes.

  • Well, I probably don't want to say too much here.

  • And to -- it's probably too early, Bill.

  • But in the Industrial air quality area is where we see some opportunities to both refresh and put forth some ideas that maybe don't exist quite yet in the market.

  • It's an area that we've been far too underinvested in, so we've reinitiated some development areas.

  • It'll take some time to gain traction before they really generate meaningful and material successes for the company, but we have absolutely begun to commit the resources and do the work required to make sure that not only next quarter's numbers can continue to improve, but that we are looking out into the future to make sure that we can support that long-term growth rate that we're after.

  • William Lewis Baldwin - Principal and Co-founder

  • Dennis, are your engineers currently on board that you'll be utilizing for this product innovation?

  • Or do you have some personnels decisions there also -- personnel additions?

  • Dennis Sadlowski - CEO, President & Director

  • Yes.

  • Well, some of the growth investments that we have outlined will be in the engineering and development area in support of some of the priorities that I just mentioned.

  • So there will be some adds.

  • I mentioned already that we have created the position of Chief Technical Officer.

  • That will also be an important leadership driver in this area over the long term.

  • William Lewis Baldwin - Principal and Co-founder

  • Okay.

  • Well, it's great to see the momentum building and the confidence building, so congratulations.

  • Dennis Sadlowski - CEO, President & Director

  • Yes.

  • Thank you.

  • I do like that the momentum that we've been able to generate over the last few quarters.

  • It's good to see the results starting to take shape as well, so we're pleased.

  • But I think we're far from anything that we would say satisfied or going to relax about.

  • There's a lot still to do in front of us, and that's what we're all about.

  • Operator

  • Ladies and gentlemen, this concludes our question-and-answer session.

  • I would like to turn the conference back over to Dennis Sadlowski for any closing remarks.

  • Dennis Sadlowski - CEO, President & Director

  • Okay.

  • Well, thank you all, and thanks for spending some time with us this morning.

  • I'll just close out by saying we feel good about the progress across the company.

  • The quarter's results that reflect that the 4-3-3 strategy is gaining traction and we're building momentum going forward, as I mentioned.

  • I'm really excited and energized by the advancements

  • from the team.

  • And with further focus and effort, we know we can generate top-tier returns for our shareholders.

  • Thanks again.

  • Operator

  • The conference has now concluded.

  • Thank you for attending today's presentation.

  • You may now disconnect.