格南登福 (IR) 2018 Q1 法說會逐字稿

Good day, and welcome to the Gardner Denver First Quarter 2018 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 2018 First 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 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 first quarter financial performance and segment results as well as our 2018 guidance.

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 on the call.

We're off to a great start in 2018, with outstanding execution from our team and broad-based growth across each of our segments.

All 3 of our segments saw strong orders and revenue performance, driving consolidated revenue growth of 29% versus prior year; and up 22%, excluding FX.

We continue to focus on operational efficiency, as evidenced by the 61% adjusted EBITDA growth and margin expansion of 480 basis points, delivering margins of 23.9% in the quarter.

Turning to the commercial performance of the business, we continue to see healthy fundamentals in our key markets as each segment delivered double-digit order growth on an FX-adjusted basis versus prior year.

In the Industrials segment, we saw strong broad-based performance across compressors, blowers and vacuum; as well as our key regions, in part driven by our innovation and demand generation efforts.

The Energy segment continues to see a healthy demand environment, led by the upstream Energy business, which had over 50% revenue growth and over 20% order growth despite facing more meaningful comps from first quarter 2017.

The mid and downstream Energy businesses also started the year well, with high single-digit FX-adjusted order rates as a group.

And the Medical segment continues to see a nice inflection point in its growth trajectory, as it saw double-digit orders growth and positive FX-adjusted revenue growth for the first time in a year.

The Medical team's effort over the past 18 months to reinvigorate the new product pipeline and partner with our customer base are materializing in the financial results, and we believe this momentum will continue through the balance of 2018.

Given our current positive view of the demand environment across the businesses, along with our expectation for continued solid execution, we are increasing our 2018 full year adjusted EBITDA guidance to a range of $685 million to $705 million from previously stated guidance of $650 million to $670 million.

The increased 2018 full year adjusted EBITDA range represents a year-over-year growth rate between 22% and 26%.

Moving to Slide 6, I want to provide an update on a couple of our strategic initiatives that are driving good momentum, starting first with talent.

I'm a firm believer that the best team wins.

And to cultivate a winning team, you must build a strong culture of engagement and talent development.

To help manage and measure our progress in engagement, last May, we launched a multiyear company-wide process to quantifiably measure our employee engagement score across each of our businesses and functions.

These results gave us a baseline to better understand what is working well and areas for improvement within the organization.

At the end of 2017, we also surveyed 10% of our employee base to see what progress we had made during the year.

I was pleased to see that our results improved for total Gardner Denver.

I believe our improved employee engagement results are starting to reflect in the performance of the organization in terms of growth, profitability and cash generation.

This month, our year-2 engagement survey across the entire company has been launched, and we're excited to see the results as we aim to make Gardner Denver a great place to work and an environment that drives best-in-class performance for our shareholders.

We feel that our actionable engagement priorities, combined with the equity we awarded to all employees, which have seen strong appreciation since the IPO, are accelerating the cultural transformation of Gardner Denver.

I also want to provide an update on how we continue to improve and evolve our operational initiatives.

You have heard me discuss our VAVE initiative over the past year and our focus on reducing direct material cost.

We have seen a number of successes in the past year with VAVE.

But as we thought about how to ensure margin expansion for years to come, we decided to launch a new program that had a common structure, measurement and rigor across the entire organization.

As a result, I am excited to announce that we launched our Innovate 2 Value program, or I2V.

The I2V initiative embraces many of the same principles of value engineering that VAVE drove but will follow a more disciplined structure, including defined ways of product redesign across the entire organization, cross-functional engagement, common metrics and measurements, and most important, voice-of-the-customer feedback.

We feel this initiative is meaningful, and while we're still in the early stages, we currently see line of sight to approximately $35 million in run rate savings in 2 to 3 years.

With a disciplined approach to pricing and driving value for our mission-critical products, along with this enhanced I2V approach, we strongly believe we will be able to drive sustainable margin expansion across the business for years to come.

As we reflect on the multiple initiatives that we're driving across the business, it is important to note that based on employee stock purchases and the equity we have granted to employees since 2013, we estimate that employees in total own or have rights to own approximately 7% of Gardner Denver today on a fully diluted basis.

Compare that to right before KKR took Gardner Denver private in 2013, at which time we believe that percentage was less than 2% on a fully diluted basis.

So we have dramatically changed how employees participate in the upside, and we believe it has helped to meaningfully change our culture.

I will now turn over the call to Todd to take us through the first quarter financials in more detail.

Todd?

Thanks, Vicente, and good morning to everyone.

If you turn to Slide 8, I will review the company's financial performance.

First quarter revenue was $619.6 million, up 29% compared to 2017 and up 22% excluding FX, driven by broad-based performance across the portfolio and the relative health of underlying end markets.

Total orders of $703.8 million were up 19% on a reported basis and 12% when excluding the impact of FX.

Each of our segments saw double-digit order growth on an FX-adjusted basis, providing strong momentum as we enter the second quarter.

Our first quarter adjusted EBITDA was $148.2 million, up 61% compared to the same period in 2017.

EBITDA flow-through in the quarter was quite healthy, as we saw solid revenue increases and continued execution of our operational excellence initiatives across the majority of our businesses.

On the inflation front, we have seen some of the industry-wide pressures on commodities, like steel and copper, as well as on freight cost.

However, as reflected in our first quarter margin performance, we continue to believe our productivity efforts can largely offset the known inflationary pressures and should not prevent us from reaching our profitability goals.

In the first quarter, like Q4 of 2017, we were slightly positive on the cost equation for direct materials.

We reported first quarter GAAP net income of $42.4 million or $0.20 per share on a diluted share count of 209.9 million.

First quarter net income included stock-based compensation-related expenses of $2.7 million and $2.2 million of expenses related to our public stock offerings and public company financial reporting compliance, as well as a $5.6 million benefit due to an insurance recovery of previously expensed legal defense fees and a $4.5 million benefit from an insurance recovery associated with the shareholder lawsuit settlement paid in 2014.

We delivered adjusted net income of $80.7 million and adjusted diluted earnings per share of $0.38 on share count of 209.9 million, a 192% improvement from the $0.13 per share on 150.6 million shares in the previous year.

Moving to Slide 9, let me spend a few minutes discussing our cash generation and leverage position.

Working capital as a percent of last 12 months revenues, improved 150 basis points to 29.2% as compared to 30.7% in the prior year.

The first quarter performance was also a sequential improvement of 50 basis points compared to 29.7% in the fourth quarter of 2017.

While we are making progress on working capital performance, we see significant opportunity for improvement in 2018 and beyond.

Free cash flow for the first quarter was $50.1 million compared to free cash outflow of $19 million in the prior year and included $60.2 million of cash provided by operating activities, less $10.1 million of CapEx.

Our leverage profile improved to 2.8x at the end of the first quarter, representing an improvement of 0.1 turns from the prior quarter and 140 basis point improvement since our May 2017 IPO.

Our first quarter acquisition of Runtech Systems for approximately $95 million from available cash slightly diluted our leverage ratio.

Excluding that transaction, our leverage would have been approximately 2.6x.

However, given our adjusted EBITDA and cash generation expectations, including Runtech, we continue to expect that leverage will be between 2.1x and 2.3x by year-end 2018, excluding potential future M&A.

We ended the first quarter with $354 million of cash and $779 million of total available liquidity.

I am pleased to report that given our continuously improving financial profile, Moody's recently upgraded the corporate family credit rating on our debt from B2 to B1.

With that, I'll now turn the call back over to Vicente to provide some more color on the performance of our segments.

Thank you, Todd.

Before I discuss the segment performance, I want to stress the importance of improving our cash generation performance, and specifically net working capital.

During our last call, we indicated that we were targeting approximately 200 basis points of improvement for net working capital as a percentage of LTM sales in 2018.

We're actually tasking our teams to a much more aggressive improvement as we see working capital efficiency as one of the main levers to drive cash generation higher.

Let me move to Slide 11, and I will start with the Industrials segment, where we continue to see strong orders and revenue growth in the first quarter across all 3 geographies, and was the 9th consecutive quarter of year-over-year adjusted EBITDA margin improvement.

The Industrials segment first quarter order intake was very strong at $337.8 million, up 18% as reported or up 10% excluding FX.

Revenues in the quarter were $316.9 million, up 28% as reported or up 19% excluding FX, and yielding a book-to-bill ratio of 1.07.

All 3 air compression technologies continued to see revenue improvement in the quarter, with solid double-digit growth in core oil-lubricated compressors and blowers, and strong growth in excess of 20% in vacuum.

The growth continues to be paid by gains on the original equipment side, as many of our new product introductions and growth in emerging markets are providing good opportunities for new compressors, blowers and vacuum installations.

We view this as very positive for the future of aftermarket revenue growth, which improved mid-single digits in the quarter.

One such new product that we're extremely excited about is the new CycloBlower VHX series.

This is the world's first commercially available blower that utilizes a patent-pending variable helix screw profile that results in significant improved levels of performance and efficiency in industrial applications like pneumatic conveying and wastewater treatment.

This is another example of the great work that our product management and engineering teams are doing to take voice-of-the-customer feedback and combine it with innovation to deliver value for the market.

From a geographic perspective, we are pleased with our performance across all 3 regions.

The Americas continue to see strong end-market demand with revenue and order increases both in excess of 20%.

Europe saw low double-digit revenue growth, and we're particularly excited about the progress we are seeing in emerging markets.

Asia Pacific continues to be very promising as we saw both revenue and orders turn solidly positive for the first quarter in nearly 2 years.

This marks the third quarter of healthy order intake for our Asia Pacific business and speaks to the improvements that we have being made in the commercial go-to-market structure and underlying management for the region.

Our acquisition of Runtech in February has been integrated into the Gardner Denver and Industrials' infrastructure very well.

Runtech's performance since the acquisition date is included in the first quarter financials and had a low single-digit percentage contribution to both orders and revenue.

Moving to adjusted EBITDA.

Industrials delivered $66.8 million in the quarter, up 30% excluding FX.

First quarter adjusted EBITDA margin was 21.1%, 210 basis points better than the same period in 2017.

The year-over-year margin improvement was driven by continued progress around operational efficiencies as well as positive volume contribution from each of our geographies.

Moving next to the Energy segment on Slide 12.

We had a strong quarter as healthy order inflow and strong execution led to 650 basis points of year-over-year EBITDA margin expansion.

This represents the sixth consecutive quarter of year-over-year triple-digit basis point margin expansion.

The Energy segment's first quarter order intake was a solid $291 million, up 16% excluding FX, with the upstream business recording its highest order-intake quarter since 2014 and the mid- and downstream business up high single-digit percentage points on an FX-excluded basis.

Revenues in the quarter were $242.2 million, up 33% excluding FX, leading to a book-to-bill ratio of 1.2.

Aftermarket also continues to track well as it was up 19% for the total segment and now comprises 57% of LTM sales.

In the upstream business, activity levels remain robust, with revenue up in excess of 50% and orders up 21%.

We are pleased with the orders performance as we are starting to now comp on the meaningful order levels we saw in 2017, where we averaged slightly in excess of $150 million of orders per quarter.

And in fact, order intake in the first quarter of 2018 was in excess of $190 million.

Given the first quarter performance and the implications for 2018, we remain optimistic on the growth profile moving forward.

Turning first to the market.

Activity levels, such as utilization, frac stages and lateral lengths, continue to trend well, and we also saw drilled-but-uncompleted wells increase from their year-end levels to nearly 7,600 wells at the end of the first quarter.

In terms of the major revenue and orders performance drivers, original equipment frac pumps saw strong performance, consistent with commentary from our customers as they look to deploy more horsepower in 2018.

And we have now built solid pump backlog that we will ship over the coming quarters in line with customer delivery requirements.

Similarly, aftermarket consumables continue to see both year-over-year and sequential improvements as we see further penetration of products like valves and seats and packing.

In fact, both order and revenue levels more than doubled year-over-year and increased double digits on a percentage basis sequentially versus the fourth quarter of 2017, indicating rising activity levels and acceptance rates of our products.

On the mid- and downstream side, book-to-bill was also solid at 1.27.

Orders were collectively up high single digits on an FX-adjusted basis, while revenue was up mid-single digits on an FX-adjusted basis.

We view this as the normal cadence for our mid- and downstream businesses as we're currently taking orders for some of the longer-cycle engineering systems that we expect will ship over the balance of 2018.

As we look at the innovation cycle in the businesses, we are excited about some of the new products that are coming to the market to drive environmentally-friendly and energy-efficient solutions.

One such new product is the NASH series of DRY-PRO vacuum pumps, which provide a waterless alternative for use in a variety of industrial processes and chemical-oriented end markets.

The Energy segment delivered adjusted EBITDA of $68 million in the first quarter, up 75% excluding FX.

As a percentage of revenues, first quarter adjusted EBITDA was 28.1%, up 650 basis points, with strong contributions from upstream energy volume flow-through as well as operational efficiencies from our capital investments in areas of lean and productivity.

Moving next to the Medical segment on Slide 13.

Order intake continues to be very strong at $75 million, up 11% excluding FX versus the prior year.

The orders performance continues to be driven by wins in core gas pump, much like what we saw in the fourth quarter, as well as further penetration on our newer liquid pump offerings.

Revenues in the quarter were $60.5 million, up 1% excluding FX.

This is very encouraging as this is the first quarter of positive organic growth in over a year, which is a testament to the Medical team effort to drive new products and better commercial efficiency to translate leads into wins.

We remain 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 is our new platform of liquid handling pumps for use in in-vitro diagnostics.

This is a new product leveraging our recent movement into liquid pumps that is focused on a higher-growth and higher-margin segment of the general lab and life science market.

Medical adjusted EBITDA was $15.9 million in the first quarter, which was relatively flat excluding FX.

We expect the Medical segment to continue its positive revenue trajectory for the balance of 2018 and profitability to follow accordingly.

Moving now to Slide 15.

I would like to discuss our 2018 outlook.

In light of our first quarter performance as well as continued confidence in the demand environment, we are raising our total year 2018 adjusted EBITDA guidance to $685 million to $705 million.

At the midpoint, this represents a $35 million increase from the midpoint of our previous guidance of $650 million to $670 million.

This revised guidance largely reflects an improved outlook for Industrials, where we expect to see solid double-digit percentage point growth year-over-year, inclusive of core organic growth as well as the Runtech acquisition and the positive impact of FX.

Our guidance assumes Energy and Medical growth rates remain largely in line with those given during our last call, with a slight movement toward the top end of the range.

We also expect corporate expenses to be approximately $10 million per quarter for the balance of the year.

Our expectations for CapEx for growth and value-creation initiatives remain unchanged and in the range of $65 million to $75 million for the year or approximately 3% of revenue.

In addition, we expect tax rate to remain in the range of 26% to 28% for the year.

In terms of leverage, we expect to be in the range of 2.1 to 2.3x by year-end, consistent with prior guidance.

This range includes the recently announced Runtech acquisition in terms of the cash utilized for the deal and the expected EBITDA contributions for 2018.

Also, we expect our average diluted shares outstanding for the year to be approximately 210 million shares using the share count and share price as of March 31.

Moving to Slide 16.

We're very pleased with our performance in the first quarter as it is a reflection of the strong commercial and operational execution from our team, and the commitment to our 4-point strategy of deploying talent, accelerating growth, expanding margins and allocating capital effectively.

We believe this provides a solid foundation for total year 2018 and position us well for continued profitable growth moving forward.

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

(Operator Instructions) The first question comes from Joe Ritchie of Goldman Sachs.

So it's interesting, we're about a year removed from the IPO, and I remember one of the big concerns back then was your ability to get growth out of Industrial.

And then, look, the numbers that you're putting up this quarter at 19% growth are really, really just great.

So just a comment from that perspective.

The question I have though, it seems like this type of growth clearly outpacing the market right now.

Can you maybe just talk a little bit about where you're seeing the growth from an end-market perspective?

And then also, it seems like there's got to be some share gain that is embedded in this number, so maybe talk a little bit about what you're seeing from a competitive dynamic as well.

Joe, yes, so we're obviously pretty excited about the growth momentum we're seeing in the Industrials side.

And I think it's consistent to the initiative that we said that we were executing back even a year ago, that we spoke a lot about the innovation that we're driving in our business and as well as a better commercial and the initiative that we put out that we called Demand Generation, which is how do we get closer to end users and generate better-qualified leads.

So we definitely feel that and strongly believe that we're outpacing the market from that perspective based on the initiatives that we're launching organically.

From a regional perspective, as you heard, it's really broad-based.

I mean, we're seeing really strong momentum in the Americas, Europe and Asia Pacific.

And from an end market, it is -- there's not really a single end market that I will say I would call out as being stronger than others.

It's just a really great, good solid execution from the team, but really driven by the solid momentum on the initiatives that we're doing.

We spoke last couple of calls about the oil-free compressor that we launched.

That's doing very well.

You can see here, today, we talked about blower that we're launching.

I mean, this is just one product line within the blower portfolio that we have.

Whereas, we also launched some new blower technology in the previous quarter.

So I think the pace of the innovation and how our products are uniquely differentiated, it's really helping us be closer to the customers.

That's certainly helpful and obviously showing in results, Vicente.

Maybe switching gears a little bit to just margins, because there's a -- the industrial complex this quarter, there's been a lot of concern around commodity inflation.

And how should we be thinking about the incremental margins both in your Industrial and Energy business?

And maybe talk about the price/cost dynamic as we progress through the year.

Yes, let me first answer the price/cost because I know it's top of mind to everyone.

And it's -- again, it's been also consistent to what we said in the past, that from an inflation perspective, we're able to net that out with productivity improvements.

So any inflationary cost that we see on raw material, our team has been able to find ways to reduce the direct material costs to create a net positive aspect from that cost equation.

And then on top of that because, obviously, we have mission-critical technologies, and we've been able to increase prices and see that price rip through the P&L in a consistent way in the same time that we're actually growing the business.

So from the second -- from the first question that you had, Joe, in terms of incremental margins, I think we still see Industrials to be in the 30s from an incremental margin perspective.

And Medical as well as the mid and the down to also be in the 30%, with maybe the upstream being kind of the mid-30s perspective.

So net-net, as a company, we'll continue to see that kind of low 30s incremental margin.

The next question comes from Andrew Kaplowitz of Citi.

Vicente, if you look at order growth in Energy, obviously, it slowed down a little, as you talked about in the prepared remarks, with the more difficult comparisons.

You did allude to consumables penetration.

We know there's more wear and tear on your pumps.

Can aftermarket order growth stay in the teens?

And would you say that the OE replacement cycle is actually occurring faster than you thought or generally as expected?

Yes.

Thanks, Andy.

So let me go to the first question.

If you remember, last year, we were saying -- and even in the first quarter last year, we were talking about $150 million order rates in the upstream side on a per-quarter basis.

You saw that this quarter, $190 million on a quarter basis.

So what we're talking about is when you think about Q1 of last year, we were seeing triple-digit order growth.

So the fact that we're seeing still good 50% order growth, it's actually pretty exciting based on that meaningful comp that we had against last year.

As well as book-to-bill in the upstream side, it was greater than 1.2.

So obviously, good momentum there.

In terms of your question for the aftermarket, we saw very good momentum.

We saw double-digit growth in the aftermarket year-on-year, and also we saw sequential growth momentum in the aftermarket.

So we're excited with the momentum that we're seeing there, again, particularly based on some of the innovation that we're launching.

We spoke about, last quarter, about the new packing solution that we launched.

That has gained very good momentum in the field.

It is proven technology now that outlast the average life of any other product out there in the market.

And then also fluid end technology that we're -- that we have launched over the past couple of quarters, that is really helping us see some momentum.

And last but not least, from a pump perspective, we spoke about the frac, and you mentioned that question there, Andy, is that we were seeing our Thunder pump really gain some good momentum in terms of orders, and we feel that the orders that we receive are really driven by this new technology that we're launching from -- even from a pump perspective.

Okay.

That's helpful, Vicente.

And then maybe going back to Industrial because the growth was impressive this quarter.

Last quarter, you'd mentioned I think some supplier constraints, and you seem to have turned around Asia pretty significantly this quarter, which you spoke that you expected to do.

So how much of these changes did help growth this quarter?

And how much of these changes are happening to propel the guidance to double-digit growth here?

So definitely, some of that helped.

But again, if you -- if I point to the book-to-bill, book-to-bill was almost 1.1.

So even though we were able to fix some of the supply chains that we had in Europe and obviously deliver consistently, still the order rate momentum that we saw in Industrials, we're very pleased to see that.

And I think what we mentioned about the Asia Pacific is that now we have seen 3 consecutive quarters of good order momentum.

And in Asia Pacific, the majority of the business is really more short cycle, so those channels are more in the book to ship, so to speak, within the same quarter.

So I think it's -- yes.

So hopefully, that gives you a good perspective there, Andy.

The next question comes from Mike Halloran of Baird.

So a couple Energy ones here.

First, could you just update on your expectations for what the OE frac pump onboarding looks like this year from an industry perspective?

I think before you were thinking kind of 3 million to 3.5 million horsepower.

But what's the updated thought process here?

That is still is -- we haven't seen any new numbers.

We've been diligently seeing the releases from all of our customers, and there's nothing to indicate, at this point in time, that that's increasing, and definitely not decreasing.

And then along the same lines, I suppose, could you talk about some of the constraints that we're seeing in the upstream field and how those are impacting your business, if at all?

You know what, what I heard from some of the calls from some of our customers and noncustomers is that most of the -- whether train or logistics, are kind of getting better, at least much better than what they saw back in the beginning of the first quarter.

I'll tell you, from our perspective, we're not seeing the slowdown, so to speak.

That's why I mentioned that the aftermarket, and particularly consumables, which is a really good correlation to the activity, it is seeing continued momentum on a year-on-year basis and as well on an even sequential basis.

So even though some of -- some people back in the early January days called out to be a slowdown due to weather, we haven't seen that yet.

So your view basically is that $190 million per quarter that you mentioned in the first quarter here, that's a pretty good stable run rate from where you sit today?

No, no.

The one thing to add to that, Mike, is that, that obviously includes pumps.

So if you think about it, the pumps are large orders, typically $250,000 -- or between $200,000 to $215,000 per pump.

So we see that the pump orders are not linear, so to speak, right, so we'll see a little bit of a spottiness on those orders.

But again, even if you exclude that, what I pointed out to the aftermarket, that is up in the double-digit run rate.

It's proven to be a good way to think about the rest of the year.

The next question comes from Julian Mitchell of Barclays.

Maybe just a question, firstly, around pricing trends.

I didn't see the 10-Q out yet, so I just wondered what your thoughts were on the price impact overall for 2018 that you're expecting and maybe what pricing did in your sales line in Q1.

I think last year, price was about a 90 bps tailwind for the enterprise overall.

Should we expect that to move up this year because of the inflationary environment?

Yes, so you'll see in the P&L about 1% to 2% of price in Industrials, with slightly higher than that in the upstream side.

So netting out to, definitely, that positive 1% to 2% price on the overall P&L.

Understood.

And then I noted your comments around the working capital improvement, but I guess inventories were a $43 million outflow, so a decent step-up in the cash out in Q1 year-on-year.

Just wondered if anything was driving that specifically in Q1 that you think should reverse quickly in the next few months.

And also, any update on the free cash flow expectations for the year?

Yes, so the -- on the inventory, Julian, I mean, that's really mainly to support the demand growth momentum that we have seen here.

If you think about Industrials with double-digit momentum order rates over the past 3 consecutive quarters, we just basically have been ramping up the supply chain to sustain some momentum there, as well as the incremental need in some cases for inventory on new product launches.

And having said that, I mean, the team is incredibly focused on this because we do have a great opportunity to improve not only the inventory, but just the entire net working capital activities that we have.

And we're pretty excited with maybe some of the momentum that we're going to start seeing here on the coming quarters.

On the free cash flow, Todd?

Yes, sure.

In Q1, our free cash flow was $50 million roughly.

Working capital as a percent of last-12-month sales improved roughly 150 basis points year-on-year, have been 50 basis points sequentially.

Last call, we had -- I think we suggested that if you did the walk from kind of the current outlook and guidance, you have roughly now $695 million of EBITDA generation; our CapEx, around $70 million; cash interest around $100 million; and cash taxes, probably slightly higher now than we had, given the earnings uptick that we just now stated, so probably $105 million, $110 million; and then some onetime cash costs of $40 million, you're going to get numbers that are pretty close to that free cash flow for the year.

The next question comes from Bill Herbert of Simmons.

A question on Energy incrementals.

I think, Vicente, you said you reaffirmed guidance, at least the high end of the range, for 35% for this year, yet Q1 came in a lot stronger than that.

Why the deceleration as the year unfolds?

And then secondly, Todd, if you could talk about the 650 basis points worth of margin improvement year-over-year, what was the breakdown between operating leverage, mix and price in that margin improvement year-over-year?

Yes.

Thanks, Bill.

I mean, I think the -- back to the first question on the incremental margins, I mean, it had to do in some cases with the -- some of the mix that we've been seeing here in the second quarter and -- but also, moving forward, in the second half.

I mean, nothing that really is kind of concerning to us.

On the margin expansion, the [600] basis point improvement, as you clearly pointed out, I mean, some very good solid momentum on the incrementals.

You can attribute on the upstream side that we saw at least 3 kind of mid-single digits of -- or low to mid-single digits of price.

Whereas on the mid and down, we saw maybe 1 or 2. But the more important thing is that we're seeing strong operational volume leverage based on the investments that we have made in the business that -- we spoke a lot about that over the past few years, especially during the downturn, that we accelerated some of the capital investments in the business.

And clearly, we're seeing that solid momentum now that we're able to read through the benefits into the P&L.

And one last one from me.

If you could just talk about the breadth of your OEM inbound?

Is it -- are you seeing strong uptake from a broad swath of customers?

Or is it confined to a few that are in strong expansionary mode?

No, this is the exciting piece that we're definitely -- as we have invested more broadly into our feet on the street and commercial teams to really get closer to the multiple accounts, we're seeing it's more of a broad segment of customers.

So it's not particularly 1 or 2, it's broader.

The next question comes from Damian Karas of UBS.

So just a quick follow-up on upstream.

You've alluded to some of the share gains that are helping drive your outsized market growth.

But specifically on the consumables side, as you assess the market today and where you think you -- where do you think you currently are in terms of market penetration on consumables?

And how much runway do you still see here?

Yes, Damian; the consumables, it kind of varies on a product line by product line basis.

As we alluded, for example, on packing, we have spoken that packing, we were just not a player.

So maybe you could say that packing -- that is maybe roughly a $200 million market; in the North America market, we have been in the low single digits, sort of low to mid-single digits.

We're seeing some solid momentum on the packing based on the new product that we launched.

On the fluid end side, we feel the share has been kind of constant there, but we expect that as the new OE of pump cycle comes in, we might see a better acceleration there.

And you can say that from the other consumables side, like valves and seats and even the service and repair, we're a pretty good player on that market.

So I think when we think about the potential incremental in share gains that we see, it's all about, in some cases, the packing, other consumables like plungers, and also continued momentum on the fluid end.

So there's definitely room to improve for us on taking more share in this market.

Okay.

That's helpful.

And Vicente, you talked a little bit about this $30 million to $35 million in incremental savings you expect the new I2V program to generate over the next, I think it was 2 to 3 years.

Could you maybe elaborate a little bit on what exactly is going to drive that incremental improvement beyond the existing VAVE program you have today?

Yes, good question, Damian.

This is really a more in-depth kind of review process that we're doing on some of our product lines and portfolio.

And I can tell you that a few weeks ago, I was just in Sedalia, Missouri, with the team doing a teardown of some of our products.

And basically, we do a very detailed competitive analysis and a very detailed customer focus, and it's all about how do we maximize the value of our products, whether in some cases it is having to redesign some componentry, but in other cases, how do we sell better some of the features that we have.

So it's not a pure cost-down game, but it's also -- that's why we call it Innovate 2 Value, because we're finding ways on how we can accelerate the value of our products by attacking both variables of the formula, increasing price and leveraging our features and benefits, while at the same take the cost down where the feature is really not needed.

The next question comes from Brian Drab of William Blair.

I just want to talk about the revenue guide and make sure I'm understanding where we are with that.

You gave revenue guidance for the segments that built up to -- on the last call, you gave revenue guidance that built up to maybe high single digit or 10% growth for the company overall for the year.

Now we started the year at almost 30% revenue growth, and you have double-digit order growth in every segment.

I don't know if I missed it, but I thought that you said that you're expecting to get to the high end of the previously stated ranges, but even that would suggest revenue growth down materially in every segment for the balance of the year.

I was wondering if you could just help reconcile that.

Yes, Brian, let me take a stab at that.

So -- and I do it by each of the segments and components.

So beginning with Industrials, last time, last quarter call, we said high single digits.

And now, what we see with the momentum, it's kind of in the low mid-teens, and that's really a big portion, largely, as we communicated, of the guidance improvement.

On the mid- and downstream side, last time we said mid-single digits.

We continue to see that into mid-single digits, maybe a little bit more on the higher side of that.

On the Medical side, last quarter, we talked about mid-single digits.

We're calling that out to be now more into mid- to high single digits.

And then last, the upstream side, again, last time we were talking about mid-teens, and now we're calling that out to be kind of mid- to high teens.

So hopefully that gives you a quick breakdown of all the pieces comparable to how we communicated that in the past.

Okay, great.

And I'm sorry if you already went through that and I missed it, but that's helpful.

And then the -- what are you modeling for FX impact for the year overall at this point?

I think we tend to model the current rate and use that as we go forward out.

So if we use a euro of $1.22 or $1.23, that's the predominant currency that dominates our financials.

And I think that's the right way to think about currency from our perspective.

And also, Brian, maybe also think about the impact kind of mid-single in the first half and then low single in the second half.

The next question comes from Nathan Jones of Stifel.

Just going back to the upstream frac pump business, I know we've been expecting an OEM replacement cycle here.

It sounds like the demand at the moment is more addition of horsepower rather than replacement of horsepower.

Is there any way you can give us any color on what you think is addition versus replacement and how you think that replacement cycle is going to play out over the next 12 to 18 months?

Yes, Nathan, I -- I'll try to do my best here.

But I think it's something a little bit difficult to know whether it is replacement or whether it is for new fracs.

In some cases, we know and our customers try to keep that on a confidentiality kind of manner or perspective.

But I think the best is to assume that the majority that we have seen or maybe you can say 60% have been for additions versus 40% for replacement.

I mean, that will be a very good way to view it.

But that's -- at this point in time, I think it's kind of difficult to say.

What we're obviously excited about is that the momentum that we're seeing, it is driven in part as well by our new pump, the Thunder pump.

So obviously, it's the pump of choice.

And when you think about how that pump is priced, I mean, it's priced at a very hefty premium compared to other available pumps that we had in the past.

And again, customers are choosing that because of the high level of reliability and quality that we have.

So again, it's part of why we continue to drive innovation in our business and innovation that is meaningful for our customers to be able to increase the utilization and uptime of our customers.

I certainly get that it's difficult to tell what's an addition and what's a replacement, given that's basically the same thing.

Your conversations with your customers, did they indicate that, that replacement cycle is going to strengthen as we go forward?

Is it going to be a relatively linear, flat kind of replacement cycle?

Just how -- any help you can give us on how to think about that over the coming quarters.

Yes, I think maybe 1 more quarter, we will -- probably can have better data to kind of give you a better perspective of trend, because I think as we have seen now, kind of 1 quarter is difficult to point out as a big trend, so to speak, in terms of how that wave of replacements will come.

But also, if you listen to some of the other customers that have reported some earnings, I mean, they speak about the things that we said in the past, which is these pumps are working really, really hard, are working really hard because of longer laterals, because of their utilization.

I mean, they're running 24/7.

So there is definitely a lot -- and also the available capacity.

I mean, there hasn't been that major expansion in fleets, which obviously we like because it helps our consumable business.

So I think we will see continued momentum on new pumps, but some of those will go because the pumps are definitely dying out in the field.

And as some customers really put out that incremental of 3 million horsepower that has been kind of communicated, we expect to see also momentum from that perspective.

But...

Okay.

And then you did see, I think, an acceleration here in the mid- and downstream orders.

Can you maybe give us a little bit of color on what's driving that and what your outlook there is going forward?

Yes.

Good question, Nathan.

I mean, something that we sometimes don't talk a lot about is how we have such a very good niche businesses or in niche markets.

And in the midstream, I think a lot of people are aware about kind of our loading arms.

But we have also a very good solid transportation business that plays in what we call fuel systems, which helps spill prevention; and connectors for transporting hydrocarbon fluids.

And that business is kind of more of a book and turn.

And once again, I mean, based on some of the commercial things that we have been driving as well as the innovative tweak that we're making into our products, it is seeing some very good momentum and saw some solid momentum here in the first quarter.

The next question comes from Brett Kearney of Gabelli & Company.

I just want to ask, I guess, on the M&A pipeline at this point, how that's looking and any areas of focus for that area going forward.

Yes, Brett, I'll say that it's -- our pipeline is very active.

And I would say that the majority, just based on -- if you look at our company, so $2.5 billion -- roughly $2.5 billion run rate revenue and we play in a $25 billion market.

Out of that $25 billion market, the Industrial segment plays in a $17 billion market.

So the amount -- I mean, super very highly fragmented.

So the amount of funnel that -- and volume of potential companies like the ones that we have purchased over the past few months, Runtech as well as LeROI, are playing in exactly the markets that we like.

They're industrial companies with mission-critical technologies that have some aftermarket, that we see a profile in their financial perspective similar to maybe what Gardner Denver looked in the past.

And we can put them into our processes and operating systems and be able to gain that momentum similar to what we're seeing today.

So I would say it's kind of agnostic to the segments, but obviously very focused on the Industrial and the Medical segment as we are seeing some good pipeline and potential companies in those 2.

This concludes our question-and-answer session.

I would like to turn the conference back over to Vicente Reynal, Chief Executive Officer, for any closing remarks.

Thank you, Andrew.

So as we close, I want to first thank you -- thank all of our employees for a great start in 2018.

I'm very proud of all of you.

I'm very proud of what we're all creating together.

As you can see, we're very laser-focused on consistent execution of our simple and straightforward strategy to deliver long-term value for our shareholders.

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

Thanks a lot.

The conference has now concluded.

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