格南登福 (IR) 2017 Q4 法說會逐字稿

Good morning, and welcome to the Gardner Denver 2017 Fourth Quarter Earnings Conference Call.

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

I would now like to turn the conference over to Vik Kini, Gardner Denver's Investor Relations leader.

Please go ahead.

Thank you, and welcome to the Gardner Denver 2017 Fourth Quarter Earnings Call.

I am Vik Kini, Gardner Denver's Investor Relations leader, and with me today are Vicente Reynal, Chief Executive Officer; and Todd Herndon, Chief Financial Officer.

Our earnings release which was issued yesterday and a supplemental presentation which will be referenced during the call are both available on the Investor Relations section of our website, gardnerdenver.com.

In addition, a replay of this morning's conference call will be available later today.

The replay number as well as access code can be found on Slide 2 of the presentation.

Before we get started, I would like to remind everyone that certain of the statements on this call are forward-looking in nature and are subject to the risks and uncertainties discussed in our previous SEC filings, which you should read in conjunction with the information provided on this call.

Our full disclosure regarding forward-looking statements is included on Slide 3 of the presentation.

Turning to Slide 4. On today's call, Vicente and Todd will review our fourth quarter and total year highlights and financial performance as well as our segment results and 2018 guidance.

In addition, we'll provide a brief update on strategy.

We will conclude today's call with a Q&A session.

(Operator Instructions)

At this time, I will now turn it over to Vicente Reynal, Chief Executive Officer.

Thank you, Vik, and good morning to everyone.

Turning to Slide 5. I would like to start with a brief overview of the fourth quarter.

In Q4 '17, we demonstrated strong execution and an improving leverage profile.

We continue to see solid demand and healthy fundamentals across our segments that give us optimism as we look ahead in 2018.

On the Industrials side, the demand for core air compression technology as well as blowers and vacuum remains strong, as we delivered 20% orders growth excluding FX, with double-digit growth across all 3 regions.

Revenue growth lagged orders growth as our supply chain caught up with the market, primarily in Europe, a situation that we see being resolved in the early part of 2018.

Energy continues to see an improving demand environment, roughly led by the upstream Energy business, which had nearly 100% top line growth and even stronger orders growth, in excess of 150%.

The Medical business is experiencing a nice inflection point in its growth trajectory as we achieved a solid 23% orders growth excluding FX.

This marks the second consecutive quarter of double-digit orders growth in a row.

Consolidated revenues for the fourth quarter were $665 million, up 15% versus prior year and up 11% excluding FX.

With the strong revenue performance and the continued execution of our operational efficiency initiatives, we were able to deliver adjusted EBITDA of $172.6 million, a 16% improvement versus prior year.

While margin growth year-over-year was modest at 30 basis points, we see this more as a reflection of underlying mix and the tough comps of Q4 2016.

We continue to see meaningful runway for margin improvement in Gardner Denver, including in 2018.

Given our current positive view of the demand environment, with over 20% orders growth in each of our 3 segments and our expectation for continued solid execution, we're expecting 2018 full year adjusted EBITDA in the range of $650 million to $670 million, representing an 18% increase versus 2017 at its midpoint.

We will provide a more detailed framework for our 2018 outlook later in the call.

Before I turn the call over to Todd to discuss the financials, I would like to take a moment to reflect on 2017 as it was a landmark year for our company.

Starting first with our IPO back in May and the launch of our multiyear employee engagement initiative, we're building a performance-driven culture here at Gardner Denver.

We see the tremendous value of investing in our people to drive future results.

We made all of our employees at Gardner Denver shareholders at the time of the IPO, and we can see the increased level of engagement as they are delivering on their commitments.

The results are evident in our financial performance as well as we have seen growth in profitability that has outpaced the market.

This performance continues to demonstrate that Gardner Denver is emerging as a premier industrial company with multiple levers for success going forward.

I will now turn the call over to Todd to take us through the fourth quarter and total year financials in more detail.

Thanks, Vicente, and good morning to everyone.

If you turn to Slide 7, I will review the financial performance of the company.

As Vicente noted earlier, fourth quarter revenue was $665 million, up 15% compared to 2016 and up 11% when excluding FX, driven by broad-based performance across the portfolio and the relative health of the underlying end markets we serve.

In fact, total orders of $667.2 million were up 39% on a reported basis and 34% when excluding the impact of FX.

Each of our segments saw strong order growth in excess of 20% versus prior year, providing further momentum as we enter 2018.

Our fourth quarter adjusted EBITDA was $172.6 million, up 16% compared to the same period in 2016.

EBITDA flow-through in the quarter was slightly more subdued versus what we have seen in previous quarters, mostly due to: first, the tough Q4 '16 comparisons that Vicente previously mentioned.

Specifically, our Industrials segment saw nearly 800 basis points of margin growth in Q4 '16, our downstream Energy business saw the majority of the 2016 revenue from their highly profitable projects in the last quarter of 2016 and our Medical business, which recognized a large price surcharge in Q4 '16 due to the previously disclosed dual-sourcing customer transition; and second, product mix in the Industrials segment as the majority of our growth came on the equipment side, which generally has lower margins than aftermarket parts and services.

On the inflation front, we did see some pressure on raw material costs in the fourth quarter on materials like steel and copper.

However, we were able to largely offset cost increases through the efforts of our procurement team, VAVE and cost management.

On a GAAP basis, we reported fourth quarter net income of $143.8 million or $0.69 per share on a diluted share count of 209.3 million.

Fourth quarter GAAP net income included $28.2 million of pretax expenses for stock-based compensation and $1.4 million of expenses related to our public stock offering and public company financial reporting compliance as well as a $90.1 million tax benefit for the reevaluation of the company's U.S. deferred tax liability from a rate of 35% to 21%, resulting from the new U.S. tax law.

I will discuss the impact of tax reform in greater detail in a moment.

We delivered adjusted net income of $100.1 million and adjusted diluted earnings per share of $0.48.

This marks a 9% improvement over the year -- prior year of $0.44 per share on 151.9 million shares.

Moving to Slide 8. Let me spend a few minutes on our cash generation and leverage position.

Starting first with working capital.

We saw the fourth quarter level of working capital as a percentage of LTM revenues decrease 180 basis points to 29.7% as compared to 31.5% in the prior year.

While encouraging to see working capital as a percent of revenues fall below 30%, this is just the first step for our company as we have the full efforts of the team and the focal point of our employee engagement initiatives on working capital improvement.

We expect to see continued improvement in 2018.

Free cash flow for Q4 was $96.2 million, an improvement of 213% versus prior year, comprised of $116.6 million of cash provided by operating activities plus $20.4 million of CapEx spend.

At the end of Q4, our leverage profile improved to 2.9x, representing an improvement of 0.3 turns versus the prior quarter and a 1.3 turn improvement since our May 2017 IPO.

This now brings us within our target leverage range of 2.5 to 3x that we identified as part of our IPO and shows the ability of Gardner Denver to generate earnings and cash flow to delever.

Excluding any potential future M&A, our net debt leverage ratio should move to the 2.1 to 2.3x range by the end of 2018.

We ended Q4 with $393.3 million of cash and $812.7 million of total available liquidity.

Moving to Slide 9. Gardner Denver delivered very strong financial performance in 2017.

Revenues of $2.375 billion increased 22% versus the prior year, primarily as a result of strong growth in Industrial and Energy.

Adjusted EBITDA followed a similar trend and was $561.5 million or 40% higher versus 2016.

In addition, the record 23.6% adjusted EBITDA margins in 2017 represented a 290 basis point improvement year-over-year.

Adjusted diluted earnings per share finished at $1.32 or a 50% improvement over 2016, and we delivered free cash flow of $143.7 million or a 58% increase over prior year.

Turning to the impact of the U.S. tax reform on Slide 10.

Based on the reduction of the U.S. corporate tax rate from 35% to 21% and our expected geographic earnings mix, we expect our total year 2018 tax rate will improve 200 to 400 basis points to a range of 26% to 28% compared to an effective tax rate of approximately 30% in 2017.

This forecast is subject to change as clarity on the new law and potential guidance by the U.S. Treasury is issued throughout 2018.

On the cash tax side, we carried NOL of $62 million into 2018 in the U.S., which we expect will be exhausted by the end of the first half of 2018.

In addition, we recorded a provisional repatriation tax of approximately $63 million at year-end 2017, which we expect will be paid over the next 8 years.

In total, we believe that cash taxes for 2018 will be in the range of $85 million to $95 million.

I will now turn the call back over to Vicente to provide more color on performance of our segments.

Thank you, Todd.

Moving to Slide 12.

I will start with Industrials segment, where fourth quarter performance continued to see positive global momentum on an orders and revenue basis and was the eighth consecutive quarter of year-over-year margin improvement.

The Industrials segment fourth quarter order intake was very strong at $319.2 million, up 25% as reported or up 20% excluding FX.

Revenues in the quarter were $311.7 million, up 12% as reported or 7% excluding FX and yielding a book-to-bill ratio of 1.02.

In terms of the product lines, all 3 compression technologies saw revenue improvement in the quarter, with low double-digit growth in core oil-lubricated compressors and vacuum technology and very strong growth in excess of 20% in blowers.

In the Americas and Europe, we saw continued solid performance as revenues were up low double digits and order intake was up mid-teens.

In Asia Pacific, while revenues were down in the fourth quarter, the majority of the change came from large non-repeating projects from our Korea business, which tend to be quite lumpy in nature.

The balance of the Asia Pacific region was much more stable on revenues, and order intake was very encouraging as we saw strong double-digit increases specifically in China.

We believe that we have started to see the beginnings of an inflection point for our Asia Pacific business as this now marks the second quarter in a row of healthy order intake, and we do expect the region to return to profitable growth in 2018.

Moving to adjusted EBITDA.

Industrials delivered $69 million in the quarter, up 6% excluding FX.

Fourth quarter adjusted EBITDA margin was 22.1%, 10 basis points better than the same period in 2016.

The year-over-year margin improvement was due, most notably, to mix, driven by higher proportion of revenue growth from whole goods, including new products like the Ultima oil-free compressor.

It is worth noting that the aftermarket did grow 3% as compared to the prior quarter and saw low single-digit growth on a year-on-year basis.

Aftermarket as a percentage of sales finished the year at 34% of total Industrials, and we expect that percentage to grow moving into 2018.

One big growth driver will be the iConn remote connectivity air analytics platform that is highlighted on the right side of the slide.

The deployment of the platform into the field began in the fourth quarter, and as of January, we ended with over 2,100 field units deployed, with significant ramp expected in early 2018 as the product has been very well received by customers.

Moving next to the Energy segment on Slide 13.

We had a strong quarter as solid execution across the 3 underlying businesses led to robust orders, revenue and adjusted EBITDA growth despite the challenging comparison from last year's Q4-weighted project shipments in the downstream side.

The Energy segment fourth quarter order intake was a solid $281.2 million, up 58% excluding FX, with the mid and downstream businesses having their highest order intake quarter of the year and the upstream business matching high order levels seen in the second quarter.

Revenues in the quarter were $295.1 million, up 18% excluding FX, while aftermarket was up 54% year-over-year.

Aftermarket now comprises 58% of the Energy annualized revenues, which is approximately 1,100 basis points higher from the end of 2016.

In terms of sequential revenue growth, the Energy segment was slightly down by 2%.

We don't view this as a significant concern as projects in our mid and downstream business as well as original equipment pumps in our upstream business can be somewhat lumpy from quarter to quarter.

In addition, we had book-to-bill ratio of 1.03 in the upstream business within the quarter, and the consumables portion of our upstream Energy's aftermarket portfolio was up mid-single digits sequentially.

This is very important to note as consumables are the components of the pump and fluid end that must be changed on a daily or weekly basis to keep the pumping operation ongoing and cannot be delayed or deferred like large pump and fluid end expenditures.

As we look specifically to the upstream business, activity levels continue to remain robust as revenues were up 99% as compared to prior year and order intake increased over 150%.

Most important, order intake did not slow down in the quarter as we are now booking, on average, slightly over $50 million of orders per month, and we did see a sequential increase versus the third quarter.

Looking ahead to 2018, we are optimistic on the growth profile of the upstream business.

Our business is highly correlated to activity and intensity drivers like hydraulic horsepower utilization, lateral lengths, frac stages and proppant usage, all of which are forecasted to continue to grow in 2018.

In addition, drilled but uncompleted well count continues to rise, finishing nearly at 7,500 wells at the end of the year, and we have seen a significant amount of commentary from the [large] pressure pumpers who are actively talking about adding horsepower into the market in 2018 in the form of newbuilds as well as activations.

Most recent third-party estimates are putting these incremental build in excess of 3 million horsepower, which we view as positive for our pump business as well as complementary aftermarket parts and services.

The area we continue to feel most optimistic about is our consumables line, which you will remember was largely brought to the market over the past 18 to 24 months, and we have innovated to differentiate our solution.

One of these offerings is our newly introduced Redline Packing, which you can see on the right side of the slide.

Packing is a critical field that sits within the fluid end, and after months of field testing, our packing has shown the ability to outlast the competitors' offering by nearly 2x.

It has also reduced maintenance time by over 50% and has shown to be extremely reliable during field testing.

Redline Packing's performance has led to capturing the business of a Tier 1 pressure pumper whom we previously did not serve on the aftermarket side.

These positive trends on both whole goods and aftermarket should lead to a continued market penetration of our products in 2018.

On the mid and downstream side, orders were collectively up mid-single digits on an FX-adjusted basis.

We did see strong execution in the quarter, but the year-over-year comparisons were challenging as Q4 '16 had an unusually high amount of project shipments due to the delays from earlier in the year.

The Energy segment delivered adjusted EBITDA of $96.9 million in the fourth quarter, up 28% excluding FX.

As a percentage of revenues, fourth quarter adjusted EBITDA was 32.8%, up 250 basis points despite the challenging downstream project comparison.

Moving next to the Medical segment on Slide 14.

Order intake was very strong at $66.8 million, up 23% excluding FX versus prior year.

The orders performance was largely driven by wins in the core gas pump market.

Revenues in the quarter were $58.2 million, down 1% excluding FX.

It is worth noting that the dual-sourcing customer transition that we have previously mentioned negatively impacted the growth rate in the quarter.

If that impact is excluded, FX-neutral revenue growth in the quarter was 5%.

We're very encouraged by the progress we're seeing from our differentiated offering of gas and liquid pumps as well as specialized liquid-handling devices.

One example of our strengths in the core gas pump market can be seen on the right side of the slide with the WOB-L gas pump.

We recently launched a miniaturized version of the pump, providing value-added features to better integrate with mobile medical devices and available for shipment in 2018.

Medical adjusted EBITDA performance for the quarter was $15.5 million, down 14% excluding FX.

This decline was primarily due to a price surcharge that was recognized in Q4 '16 as part of the dual-sourcing customer transition.

Now turning to Slide 16.

I want to spend some time on our strategy, specifically developing and deploying talent as it is core to our culture and driving performance.

As you may have seen earlier this week, we announced the addition of John Humphrey to our Board of Directors.

John recently retired from Roper Technologies, where he enjoyed a very successful 12 years as CFO, helping to lead the company to increase its market cap by nearly 5x and serving as a chief architect in the numerous acquisitions that the company made to transform itself into a leading software and engineer product provider.

I'm very excited about John joining the board as he has a proven track record of success and can help in advancing our strategy at Gardner Denver.

It also shows that we will continue to build our talent at the company at each and every level.

In regards to our capital allocation strategy, we will remain disciplined.

Gardner Denver is an asset-light company that generates strong cash flow.

While we continue to invest in our core operations to drive internal growth, we will also pursue value-enhancing M&A opportunities.

On that note, on Slide 17, I am very excited to discuss our recent acquisition of Runtech Systems that we announced earlier this week.

Runtech is a Finland-based manufacturer of turbo blowers and vacuum systems for use in a variety of process-related industrial applications.

The company's suite of products with over 60 patents are highly differentiated in their respective applications as they provide upwards of 30% to 70% energy savings versus traditional technologies.

Runtech operates globally with 2 manufacturing sites in Finland and sales offices in the U.S., China and Finland.

Due to the synergies we expect to see between Runtech's turbo blower technology and our core expertise in blower and vacuum technology, Runtech will be included in our Industrials segment.

As far as deal economics, we acquired Runtech for approximately $93 million, funded by cash on hand.

In terms of multiples, we paid a high single-digit multiple pre-synergies based on Runtech's LTM EBITDA.

We're excited about the opportunities that Runtech brings to Gardner Denver as it fits our M&A criteria and provides a strong platform for future growth.

I would like to personally welcome the Runtech team to the Gardner Denver family.

Moving to Slide 18.

I would like to discuss our 2018 outlook.

Driven by the health of our key end markets and the strong orders performance we saw in Q4, we are introducing guidance for total year adjusted EBITDA of $650 million to $670 million, which includes the impact of the Runtech acquisition.

Our outlook includes an expectation of corporate costs of approximately $10 million per quarter.

Our expectations for capital expenditures for growth and value-creation initiatives are to be in the range of $65 million to $75 million or approximately 3% of revenue.

Also, we expect our average diluted shares outstanding for the year to be 209.3 million shares using share count and share price as of end of year.

Moving to the bottom of the slide.

We wanted to provide a framework for our top line growth in 2018.

As a reminder, we think about our business as having 2 distinct growth trajectories: a GDP-plus growth in our Industrials, mid and down Energy and Medical businesses and the higher-torque growth evidenced in our upstream business as it relates on activity and intensity drivers based on onshore unconventional oil and gas.

Given the strong Q4 orders performance and the healthy backlog entering the year as well as the Runtech acquisition, we're expecting Industrials top line growth of mid- to high single digits.

We expect that half of this growth will come from legacy Industrial businesses and half will come from Runtech.

As a reminder, the Industrials business tends to operate more like a book-and-ship business, so visibility to the second half of the year tends to be somewhat limited.

However, we're currently optimistic given the demand environment and order patterns we have seen through January.

In Medical, we're expecting mid-single-digit growth from total segment.

The core gas pump business, which still comprises 80% plus of the business, should grow at mid-single digits, and the liquids side should grow in the high single digits.

On the Energy side, starting first with the mid and downstream activity, quoting activity remains positive, and the base business continues to see strong activity, much like Industrials.

A key challenge that this business faces is the size of the projects for 2018 are not as large as those which shipped in 2016 and 2017.

As a result, we expect total revenue growth to be in the mid-single digits.

On upstream, we're forecasting mid-teens growth given the positive impact of incremental horsepower built in 2018 as well as the continued penetration of aftermarket parts and services, given strong fundamentals.

As far as mix, we expect that 95% of revenues will continue to be on the frac side, with 5% on the drilling side, largely coming from aftermarket and potentially some opportunistic pump orders.

To wrap up before Q&A and moving to Page 19, we're very pleased with our performance in 2017 and the strong execution we have shown across our 4 strategic themes.

We have executed across all 3 business segments and established a strong foundation for future growth as we look ahead to 2018 and beyond.

With that, we will turn the call back over to the operator and open it for Q&A.

(Operator Instructions) The first question comes from Andrew Kaplowitz of Citi.

Vicente, can you give us a little more color regarding your assumptions for Energy revenue growth in '18?

I know you want to be conservative and you do have more difficult comparisons, but your order growth for overall Energy actually accelerated in Q4, as you talked about.

If you look at your upstream business, it seems like you're assuming still modest OE-related growth and/or aftermarket growth below 20%.

So would you say this estimate is really based on it being early in the year and you could get upside if OE demand especially continues to come back?

That's a good way to think about it, Andy.

Yes, that's right.

I mean, obviously, we're making assumptions based on what we see today.

And as we see what the -- expectations of new horsepower additions come to fruition, then potentially there's some upside there.

Okay, easy enough.

Maybe if I shift to Industrial.

You mentioned Industrial incremental margin slowed a bit in Q4.

I think you said that -- you talked about supply chain at the beginning of the conversation, but you also talked about price versus cost.

And you talked about project mix.

So how do you think about sort of the core incremental margins in the business in 2018 and beyond?

I know you had sort of a mid-turn -- midterm target of 25%.

Does it take a little longer to get there with the project mix the way it is?

Or should we see incrementals kind of like what we saw for the year in 2017 versus the quarter?

Yes, Andy.

So think about it that Industrials, we saw for the full year 140 basis points.

We still see the line of sight to the mid-20s, as we've said in the past.

Q4, it was mainly driven -- I mean, when you look at it by region in Industrials side, Americas and Europe had very good, solid expansion, and as we have indicated in the past, Asia Pacific was kind of doing a transitionary year.

And also, in the fourth quarter, we saw, from a revenue perspective, double-digit decline due to this onetime Korea project, and that basically drove some of the margin expansion, on a year-on-year basis, decline in the fourth quarter.

It's also good to note -- I mentioned on the prepared remarks that we saw very good, solid momentum on whole goods.

Not to say that -- aftermarket saw also year-on-year and sequential growth, but the growth on whole goods was actually faster, in the double-digit range.

And obviously, as we said in the past, whole goods brings slightly less flow-through margin than aftermarket.

The good news there is that long term, seeding more units in the field will accelerate the aftermarket.

And also, we're excited that a lot of new products that we have launched are seeing some very good momentum.

So as we look into 2018, we continue to see -- you can think about it still in that triple-digit margin expansion as we kind of delivered here in 2017.

And then, sorry, just one more follow-up on that.

Is there any way to sort of call out what may be the onetime headwind was from Asia or any of those other stuff in the quarter, if you were to think about that?

Yes.

The way to think about it, maybe you can think about 50 basis -- 50 to 60 basis points.

The next question comes from Mike Halloran of Baird.

So let's just stick on the margin side.

Could you just talk about price/cost not just for the Industrials side but also how you're seeing pricing track and how price/cost is tracking on the Energy side as well?

Yes.

So we -- on the price/cost, we're definitely seeing net positive on that perspective.

We talked a lot about how our sourcing activities and as well, as Todd mentioned, our VAVE are good ways on how we are tapering down the inflation that we're seeing.

So from a -- we definitely see net positive purchase price variance, as we call it, PPV, and we're generating 1 point or so on price overall as a company.

So we're continuing to see good, solid momentum there.

And then on the Industrial orders, obviously, in the prepared remarks, you reminded us that orders tend to be a little bit more book and ship.

Visibility is a little hard as you get to the back half of the year.

That was a pretty robust number, up 20% on the Industrials side.

How do we think about how that cadences in?

It sounds like you feel really good about the momentum going into next year.

What are the levels of conservatism embedded in that lower to mid-single-digit type organic number, if you exclude the recent acquisition?

And anything -- any new product cycles that you're particularly happy about as you go through this year other than what you already mentioned?

Yes, Mike.

So we definitely see stronger first half revenue performance based on the order momentum that we saw in the fourth quarter.

We have less visibility to the second half, but we're optimistic that our new products and commercial execution will continue with good momentum.

So as -- if we said that revenue outlook mid to high single digits, think about it much faster than that in the first half and slightly lower in the second half, but, obviously, just based on the visibility that we have at this point.

So the new products side, Vicente, what I meant to ask there was essentially, do you see accelerating benefit from new products this year versus last year?

Yes, definitely.

The next question comes from Julian Mitchell of Barclays.

I guess the first question, really on the balance sheet.

And congratulations on John Humphrey joining and the Runtech deal.

I just wondered how you thought about your overall available capital to deploy over the balance of this year.

You've delevered at a very rapid pace.

And also, maybe give a little bit of color on the free cash flow outlook.

That was obviously uneven last year with all the onetimers, but what sort of conversion or free cash flow margin should we expect in 2018?

Let me -- Julian, it's Todd.

Let me start with your question on free cash flow.

I think if you guys take the growth rates that Vicente's kind of referenced and model that out, the way you should be thinking about '18 cash flow is you're going to see roughly about $100 million cash interest, $70 million roughly of CapEx on an average basis, cash taxes around $90 million.

We're going to suggest that -- we're going to target a couple hundred basis points improvement roughly of working capital, which you'll model through at about $20 million or $30 million of cash drain, and then maybe some $25 million to $30 million of onetime costs.

That's going to put you well north of $300 million in cash generation for next year.

So I think you can work backwards into the conversion.

And we'd expect to see greater than 100%, for sure, conversion on that ratio going forward.

In terms of powder, I guess, for M&A, you can see that we have over $800 million of liquidity today.

We've done some modeling, looking out with growth and other assumptions, and we see our way to maybe $1.3 billion of available powder for M&A should the right deals come our way.

And we think that, that would take us potentially into the low 3s again, if we were to execute all of that, depending on our -- assumptions you use.

And I think the fact that we've delevered 1.3 turns since the IPO and improving margins of the business suggest that we have some confidence in our level of ability to take 0.5 turn to 1 turn out of our net debt ratios annually.

Just a quick, more narrow question, I guess.

Circling back to Industrial, the commentary around the, obviously, stronger first half for organic sales versus the second.

Anything interesting you'd call out sort of by region when you're thinking about what region should lead that first half growth?

Or do you think it will be fairly consistent as you get through the Asia -- or Korean-specific issues?

No, we think it will be fairly consistent, broad-based, Julian.

The next question comes from Damian Karas of UBS.

Just a little bit of a follow-up question here on Industrial margins.

What are your expectations kind of going into 2018 for price versus material inflation?

And thinking about some of these restructuring actions you've been taking, it sounds like you're still getting some benefits there.

Should we think of this as you're kind of closer to the tail end of those already executed actions sort of showing up in margins?

Or is there still some runway there as well?

Damian, on the price, we expect to generate, clearly, 1 point of price or so, 1.5 points, so we continue to see price.

And from an inflation, our expectation to the teams is that we're going to offset the inflation, as we've said, based on the sourcing -- global sourcing activities that we have going on as well as the VAVE, or value analysis and value engineering, activities that we see.

And from a restructuring savings, I mean, we're really at the tail end of the savings based on some of these legacy projects that we have.

Okay, makes sense.

And so on M&A, focus has been on Industrials, clearly, this past year.

Just wondering how you guys are thinking about -- going forward, do you think you can continue to deliver more M&A growth in the portfolio in this current environment?

And what are you viewing as the most important strategic criteria?

And does the impact on your own cyclicality across Gardner Denver factor in on the attractiveness of the targets as you're evaluating them?

Yes.

So we definitely have a robust funnel that we continue to look at.

I mean, you can see that we're being very diligent based on the multiples that we even paid for Runtech.

And for us, the characteristics that we look for is mission-critical technologies where there's low cost relative to the overall system or the application.

We're looking for companies that have aftermarket or service potential.

We also look for differentiated technology, and we look for attractiveness on the end markets of applications that those technologies could be applicable.

I'll tell you that we're really segment-agnostic, so the funnel that we have, it goes across all 3 segments.

The next question comes from Brian Drab of William Blair.

I just have a couple of questions.

I'll just start with the Energy segment, I guess, or maybe just stick with the Energy segment.

Cadence and progression of revenue, as we move through the quarters and the year, there's obviously been material seasonality in the first quarter in the past.

Are you -- should we expect that and model that this year?

And then attached to that, can you give us -- I think this was asked to some extent earlier, but can you give us any better sense for what incremental EBITDA margin should be in Energy in 2018?

I'll start, and Vicente can add.

You're right, there is some seasonality in this business, and our first quarter is generally our lightest quarter in terms of top line and revenue.

And a lot of that's driven by the, honestly, the downstream segment of the business, where, if you recall, we have a large component of project business which tends, historically, to have booked in the first half of the year and then shipped in the second half of the year, and that's been the case for the last several years.

That'll change a little bit this year in that we do have a new rev rec standard that's been implemented, and you'll see that smooth a little bit more in having common more shipments in terms of smoothing in Q2, 3 and 4 for that part of the business.

In terms of the EBITDA improvement initiatives, we like our ability across all of our segments to continue to improve our EBITDA margins.

You saw a nice margin in the Energy segment in the fourth quarter.

I wouldn't expect to see that in the first quarter given the seasonality, but we do think on the long haul -- long-cycle part of the year that we have the ability to, again, continue to expand the overall Energy margin in '18.

The other thing I'd like to add, Brian, is that on the mid and down, you can think about incrementals of 30% to 35% while upstream will be mid to high 30s.

Okay, that's all very helpful.

And then, maybe just to put a finer point on that seasonality.

Last year, first quarter '17 was down 27% sequentially.

Based on what you're seeing here in the first 6 weeks of 2018 and what you just said, Todd, do you think that the sequential decline is less than that 27%?

I think that will be slightly -- maybe slightly less than that for Q1.

Okay.

And then just last question maybe for Vicente.

Is 2019 still the year when, based on what you're seeing in the field and hearing from customers, that we'll see this demand for drill pumps and components maybe tick back up?

Or has the view on that changed in any way?

I think it's still a bit too early to tell on the drill pumps specifically, but as you definitely see on all the data points, the rig count seems to be kind of flattish to slightly up.

But those rigs are working harder, and they're drilling kind of more holes.

And that's why you see the drilled but uncompleted wells also continue to grow.

So we'll see what might happen in '19, but we're optimistic that there might be something.

We'll see.

The next question comes from John Inch of Deutsche Bank.

So Industrial orders, up 20%.

I guess I just didn't really perceive or I don't think many did that Gardner Denver was actually that cyclical in terms of the underlying trajectory.

I think you talked about blower strength, and I realized there's been anomalies with Korea.

I think, Vicente, you talked about that.

What actually is -- what's actually going on again?

Like what's -- how does this -- if you just take a step back, how does a company that makes stationary compressors and vacuums and stuff like that, how do you see up 20% given your global footprint?

Maybe just a little more color inside.

And is this a kind of an anomaly?

Or what do you think is happening?

Yes.

So I'll say, John -- so think about Industrials as not only the stationary compressors, but we have stationary compressors, we have vacuum technologies as well as blowers technologies.

So we like to say that, I mean, clearly, we have one of the broadest range in compression that is out there in the industry when you include all 3 compression technologies.

I definitely think that maybe not expecting 20% type rates going forward.

We're clearly seeing very good momentum based on total global growth as well as the launch of the new products that are seeing some good momentum here.

But do you think there's a channel fill in some manner?

Or is there some other disruption perhaps?

Like it's sort of -- it seems to appear that you're taking market share, so maybe...

Yes.

Why is that?

There's definitely no -- we don't view it as being a channel fill.

If you think about the total Industrials, even our channel dynamic is less than 40% total distribution sales.

And we feel we're taking share, yes, based on -- you can see maybe some of the other reporting companies that are there in the field.

But we feel, in some of the categories where we have some strength, that we're -- we'd potentially be taking some share, yes.

Yes.

And then Asia, in terms of Industrials, how big is that again?

And what's your expectations for growth in that segment?

And I know you've been putting in resources there.

I mean, has that -- can you -- is there anything you can say about that in terms of your spending plans, et cetera?

Yes.

So Asia is about 15% -- or total APAC is 15% of total revenue for Industrials.

As you can see, we're very underpenetrated.

So yes, we placed some resources with new leadership team about 18 months ago, and that kind of led to a lot of the reboot from a strategy perspective.

We now are making products in China for China while, in the past, we were not doing that.

And that's kind of what we see as the acceleration momentum in the Asia Pacific, driven by China as well as better execution in our Southeast Asia commercial activities.

Just one last one for me.

On the Energy side, I mean, you can certainly drill in, pun intended, to all the different subsegments, mud pump this, aftermarket that.

I mean, what do guys think is really going on here in the big picture with respect to the cycle?

Meaning almost -- it begs the question, cyclically, based on your experience, what inning is this?

And it seems like growth is surprising to the upside.

Is that pulling forward, do you think, demand from future years or periods?

Or is it just not really apparent?

No, I don't think it's pulling forward.

And the way I like to think about it, John, is that still it's 95% frac in our business staying.

And when you look at that 95%, it continues to still be maybe 70% aftermarket, so it just continues to have a high level of intensity out in the field.

And in terms of one other question that someone asked about the OE cycle or new pumps, that is something that is still yet to come in a big way, whether there's a little bit of trickle in here in '18, that's great; and as we move forward, might be more coming through, as we continue to move forward.

But I'll say that the OE cycle is definitely at the very early stages.

Yes.

That -- I think that's fair.

Just maybe one last, last one.

I mean, I think, technically, it seems apparent the price of oil could perhaps tick lower.

And I guess the $64,000 question, if oil were to move back and take kind of a $50 -- low-$50 zone, does that have any bearing necessarily on the cadence, do you think, of your business, probably not in the short run but over the course of, say, a 12-month period?

I'll say probably, in the short take -- short run, as you said, definitely, we don't see that happening, I think.

Keep in mind that in the fracking side, you also frac for natural gas, so you need to have both points kind of inflecting at the same time, so oil and natural gas.

So we're -- we still have a good portion of our business generating momentum because of natural gas frac.

The next question comes from Josh Pokrzywinski of Wolfe Research.

Just to follow up on some of the Energy questions.

Vicente, I think we've had a few of the frac guys out there, in the fourth quarter and, prospectively, in 1Q, talk about harsh weather or a rough winter kind of delaying some completion activity.

Is that something that showed up at all?

I mean, obviously, trends are very good, both on sales and orders, but is that a slight irritant that has shown up in the business at all?

Yes.

We could see some of it.

I think a good data point in terms of what we just mentioned there is that kind of a good indicator that we like to see is consumables, and you saw, sequentially, consumables improve in Q4 against Q3.

And even as we now look into January, consumables actually saw an uptick, January compared to December.

Now -- in part due because of our innovation.

And I think that's what we're proud of, is that as we continue to launch new solutions and new products, we'll see ways on how we can continue to accelerate growth and share.

Got you.

But there was no -- you didn't really feel yourself being hung up in the short term by any of those market comments?

Maybe there's a backlog timing issue or something else that's masking that, but...

Yes.

Maybe there's a little bit of an -- maybe a little bit of an air pocket, but I wouldn't be too concerned at this point in time, I mean.

So everyone talks about January.

To your point, January is having a lot of weather issues, the pressure pumping guys.

But as I mentioned, our consumable rates continue to go up, and we expect here to continue seeing good momentum in the first quarter.

Got you.

That's helpful.

And then just on the power end cycle, I don't know if you really flushed out how much you expect the OE pump business to necessarily grow in 2018.

I know in the slide it says that's more of an on-the-come dynamics of maybe up a little bit, but I'll -- we can give the benefit of rounding there.

I guess, more conceptually, that seems like it's a sub-$200 million business today.

If I were to look back to the last peak and kind of what we would be replacing, how large is that business?

So kind of how far off peak are we?

And I know that market share is also probably tilted in your favor since that time as well.

Yes, that's right.

So one way to think about it is that if you think about workable capacity in '17, there was roughly about 17 million horsepower.

We like to remember every horsepower -- every pump has 2,500 horsepower.

And when you look at back in 2010, '11 and '12, there was roughly 8 million to 9 million horsepower -- new horsepower added into the market, and so that's basically half of the workable capacity that was available in '17.

That -- and the life of that horsepower is typically 5 years.

Now obviously, there's been a slowdown of the workable, of then kind of the amount of work that those horsepower -- the pumps are going based on the decline in the market in the past couple of years.

But now as everything is getting ramped up, these units are getting worked harder than in the past.

So I mean, the question is obviously when does that 8 million to 10 million horsepower will come through.

There's market expectations that there'll be about 3 million horsepower coming in, in '18.

And I guess, we'll see, as the year goes by, whether that's higher or whether that will come through in -- or more will come in through '19.

So does that mean the business can double from here to get back to prior peak?

I'm just trying to give the -- get the order of magnitude of how far off we are on your revenue base.

I -- obviously, here, we're talking about new horsepower, and there's a little bit of a difference between this maybe new peak coming versus last peak, if you want to think about it.

Remember, back in 2014, as we said in the past, there was a little bit of frac but also big on drill pumps, and now we're basically 95% frac.

So it's kind of difficult to compare last, 2014 peak to this kind of new wave coming through.

But maybe later on the one-on-ones, we can kind of go into more detail with you and kind of brief you and explain to you in a little bit more detail how we see it.

The next question comes from Nathan Jones of Stifel.

I just got a follow-up on the power end cycle there.

I mean, I understand how you're getting to the expectation of this power end cycle.

A new power end cycle is going to materialize.

How much visibility do you actually have into that?

When do customers start letting you know that they're going to be ordering those things?

When will your expectations of that cycle -- beginning late in '18 or into '19, when would we actually have hard evidence that, that is coming down the pipe?

We're having, definitely, conversations today, as we speak, and we had some, call it, at the end of Q4.

So it's active.

Yes, it's very active.

Okay.

So this is more than just the pumps are more than 5 years old, therefore, they're going to have to be replaced?

You're actually having conversations with customers about this kind of cycle?

Yes, definitely.

I mean, these pumps we are using really, really harsh today, longer laterals as well as more proppant.

It's a high usage.

That's helpful, okay.

Then I'd like to talk a little bit about the consumables business.

I don't think that's got enough attention, given that you've grown that business from 0 to a run rate of $100 million or so over the last 1.5 years.

Can you talk about the things that you've done over that time, the investments that you've made?

What kind of growth profile you think that business can have over the next couple of years?

And what kind of peak revenue you think you can get to in that business?

Yes.

So we have -- as we said in the past, we definitely made a lot of investments on our service network footprint to be able to be very close to our end users.

When you think about the consumables, we have low double-digit share -- market share.

When you think about where that should be, we think it should be in the 30s or higher.

So that tells you roughly how much we should be able to still capture from a market perspective.

And obviously, the way to do that is just not by doing me-too products, right?

We have to do new innovation.

And clearly, with this packing that we launched, we feel we're creating high differentiation in the market where customers will be asking for that type of product.

So we're proud of what the team has been able to accomplish there.

Is it -- is there any kind of time frame that you could give us where you think you'll be able to get to that kind of 30% share?

I think you can say medium term, 2, 3 years.

This concludes our question-and-answer session.

I would like to turn the conference back over to the company for any closing remarks.

Thank you, everyone.

We're really proud of the year we had.

And most important, we want to thank our employees around the world, but also we want to thank all of you who spent time with us to learn more of our business.

And as we have done consistently over the past few quarters, as you saw, we wanted to provide a great degree of transparency and color as we are committed to best-in-class Investor Relations and helping the financial community understand our company.

You can see that we're very laser-focused on consistent execution of our simple and straightforward strategy.

So for that, thank you for joining the call today and your continued interest in Gardner Denver.

Thank you.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.