Global Power Equipment Group's (GLPW) CEO Luis Ramírez on Q2 2014 Results - Earnings Call Transcript

Aug. 1.14 | About: GLOBAL PWR (GLPW)

Global Power Equipment Group (NASDAQ:GLPW)

Q2 2014 Earnings Call

August 01, 2014 10:00 am ET

Executives

Shawn Severson -

Luis Manuel Ramírez - Chief Executive Officer, President, Acting President of the Services Division and Director

Raymond K. Guba - Chief Financial Officer and Senior Vice President

Analysts

Robert Labick - CJS Securities, Inc.

Chase Jacobson - William Blair & Company L.L.C., Research Division

Joseph Mondillo - Sidoti & Company, LLC

Martin W. Malloy - Johnson Rice & Company, L.L.C., Research Division

Jonathan P. Braatz - Kansas City Capital Associates

Doug Dyer - Heartland Advisors, Inc.

Operator

Greetings, and welcome to the Global Power Equipment Group Second Quarter 2014 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to Shawn Severson, Investor Relations for Global Power Equipment Group. Thank you, you may begin.

Shawn Severson

Thank you, Brenda, and good morning, everyone. We certainly appreciate your time today for our second quarter 2014 results conference call. And with me here today, Luis Manuel Ramírez, President and CEO; and Randy Guba, our Chief Financial Officer. Luis and Randy will be reviewing the results of the quarter and will also provide a review of the company strategy and outlook. If you do not have the slides that accompany our discussion, they can be found along with our earnings release on the company's website at www.globalpower.com. The Safe Harbor statement is noted in full on Slide 2.

As you may be aware, we make some forward-looking statements during this discussion, as well as during the Q&A. These statements apply to future events and are subject to risks and uncertainties, as well as other factors which could cause the actual results to differ materially from what was stated here today. These risks and uncertainties and other factors are provided in the earnings release, as well as on other documents filed by the company with the SEC. These documents can be found at the company's website or at sec.gov.

So with that, let me turn it over to Luis to begin. Go ahead, Luis.

Luis Manuel Ramírez

Thanks very much, Shawn, and thank you all of you for joining our call today. Second quarter 2014 scorecard on Page 4, I'd like to go over some of the highlights of the quarter. As we noted in our press release yesterday, orders and backlog are at record levels for the company, with the record quarterly orders at $166.1 million. It's our second-highest backlog at $434.6 million. That's mostly attributed to the growth that we're seeing in all of our businesses as they surround the natural gas trend.

Revenue for the quarter was flat to last year, and subject to Nuclear Services decline on outage timing, as well as some other delays related to customer delays with completed products. Product Solutions and Energy Services continue to see a very high growth trend, and we'll talk about that more in a couple of pages.

On the gross profit margin, we also include -- increased our profit margin and improved by 150 basis points, mostly as a result of better performance in our manufacturing and Lean activities that we've started last year and went into this year. So were going to continue to focus on margin growth, as we said at the beginning of the year, and continue to try to drive profitability as we grow our top line.

Our EBITDA, adjusted, was also strong and up versus last year, and certainly an improvement over the last couple of years as we've been improving the overall growth strategy of the business. We've been trying to focus also on higher-margin business as we grow.

Our commercialization activity are really picking up some steam. Over the last couple of quarters, we've noted that we've had higher rates of proposal, higher win rates, and we're starting to see that as you see in the performance of the backlog for the year. So we're very confident that we still have a great momentum going into the second half of the year, which is why we've also committed to the guidance that we'll talk about later for the year.

Lean process improvements and progress are on plan as expected, and we continue to see good performance there as well. So as we think about the rest of the year, in the second half, we're really excited about what we see coming into the second 2 quarters of the year.

On Page 5, second quarter results, you'll see consolidated revenues were also flat to last year at $114.7 million. Products Solutions delivered 65% growth, despite the fact that we had about $10 million of customer-driven shipment delays. These were products that were already completed and just have to be shipped, and are going to be shipped now in the coming quarter.

Energy Services also benefited from a full quarter of Hetsco. And as you'll see from the Energy Services order rates, we're also seeing great performance there, which bodes well for the second half of the year. And again, strong adjusted EBITDA earnings are reflecting expansion for mix, productivity and some of the cost disciplines that we've started back in 2012.

So now I'd like to hand it over to Randy, so he can talk you more about the financial results.

Raymond K. Guba

Thank you, Luis, and good morning, everyone. Please turn to Slide 7, where you can see Products Solutions' second quarter results. Revenue was up about 65% over last year's second quarter on growth realized by both of our product lines in this segment. As economic growth seems to return to Europe, that region drove growth in our auxiliary product sales, despite some customer-related shipment delays.

Our Electrical Solutions product line revenue improved on the added capacity and additional sales associated with the IBI acquisition, which was completed in July of last year. The pie chart shown here depicts second quarter revenue broken out by quarter. As you could see, the product generation market continues to be the largest revenue source for this segment. Gross profit increased by $3 million on a higher revenue. The gross margin as a percentage of sales was down due to changes in product mix and the intercompany reclassification that had an offsetting impact on our Energy Services segment.

Turning to Slide 8, you can see the Energy Services' revenue was up $0.5 million this year, benefited from a full quarter contribution of our Hetsco acquisition, which was completed on April 30 of last year. Our organic revenue in the segment was down a bit due to timing of projects. Gross profit improved by $1 million on a strong gross margin, reflecting the higher margin profile that were performed by Hetsco during the quarter, as well as a benefit of an intercompany reclassification that I mentioned a few moments ago.

The pie chart in the top-right quadrant, with revenue by markets served, illustrates the diversification of revenue sources for Energy Services. The most notable item on that chart is the 21% from oil and gas end markets, which contributed almost no revenue in the Energy Services segment in the trailing first quarter. This is the result of our integrated and commercial sales approach across segments.

Turning to Slide 9, Nuclear Services revenue was down due to timing of the U.S. nuclear power plant outages as last year's second quarter included an outage that doesn't occur annually, at a large customers plant. The project mix chart in the upper right corner depicts the structure of our contracts, currently. As you can see, cost plus contracts continue to account for the majority of the work performed. However, in accordance with our strategic plan, we are working to increase the percentage of work that is performed under the lucrative fixed price contracts, capitalizing on our execution capabilities. Our improved gross margins as a percentage of sales during this quarter was the result of our solid execution of these types of contracts.

On Slide 10, we have a summary of our consolidated results for the second quarter compared to the prior year. Improved gross profit and margin despite lower revenue was a result of a favorable mix of products and services along with solid execution, when compared to the prior year. Incremental expenses from the 2 acquisitions of $2.2 million, including depreciation and amortization, drove the increased operating expenses during the year. Our earnings per share for the quarter were up $0.02 from the prior year's second quarter to $0.06 per share.

Turning to Slide 11. We see several metrics demonstrating the strength of our balance sheet. At the end of June, we had nearly $16 million of cash and long-term debt of $31 million, representing 10% of total capitalization. As required by normal working capital fluctuations, we borrowed $18 million and repaid $12 million within the quarter. We used $3.4 million of cash for operating activities in the quarter. We paid $1.5 million back to our shareholders as dividends.

Our stockholders equity was essentially flat at $278 million. Capital expenditures were $400,000 for the quarter. However, we still anticipate 2014 to be in the range of about $10 million as we invest in our own growing growth and margin expansion opportunities.

On Slide 12, we are reiterating our 2014 full year guidance for revenue between $525 million and $550 million. We continue to see stronger demand in the power generation and oil and gas markets, which when combined for the fully revenue from the IBI acquisition, drive our expectation of improvement of Product Solutions revenue in 2014. The full year contributed from Hetsco is expected to lead to improved Energy Services' revenue, and the Nuclear Services business is expected to be impacted by fewer outages in 2014. Driving our expectation, net revenue will be down modestly in that segment year-over-year.

We are expecting moderate improvement in our gross margin between 20 to 30 basis points when compared with our 2013 gross margin of 17.6%. Operating expenses as a percentage of revenue are expected to decline by roughly 30 to 40 basis points from 15.1% in 2013.

And with that, I'll turn it back to Luis.

Luis Manuel Ramírez

Thank you, Randy. As we mentioned on Page 14, you can see our backlog for the year for the performance in the quarter. Consolidated backlog is up across all 3 segments as you can see. It's our second-highest backlog in company history. As we mentioned at the beginning of the year, we're going to be focusing a lot on commercialization activities across the businesses, and those are starting to pay off. We've got a combined $255 million of backlog already scheduled for delivery in 2014 for the second half. That's probably one of the best positions that we've been in a long time.

We also have strong confidence from the Energy Services and Auxiliary Products businesses. One of the new notes to talk about here is that with all of the increased infrastructure spend that we're seeing throughout the oil and gas segment in the Gulf of Mexico and throughout the United States, one of the challenges that we're seeing from the OEM side is that they're starting to become more challenged in terms of their supply chain and ability to deliver some of the equipment that's required for some of those e-houses, so we're going to keep our pulse on that. That doesn't seem -- that doesn't create an issue for us right now, but I think industry-wide, it could create some delays as we think about the high growth rates that we've experienced there over the last couple of years.

The Nuclear Services business also has a remaining go-get in the second half of about $20 million in backlog. Now that's significant for me and for this team because, typically, we have been more in the range of $40 million to $50 million of get-go at this point in the year. So that means we made a big improvement there. As you can also see in the 2014 Fixed 130 number, that the backlog for Nuclear Services also -- is up from this time last year. So again, performance is going much better, and we see that progress is being made along the commercial front.

As you go to Page 15, our strategy remains the same. We continue to focus on the commercial strategy, make sure that we're collaborating across the addressable markets and winning across the businesses that impact that infrastructure and natural gas growth trend, and still focusing on productivity. As we said earlier in the year, we had put some capital projects together for the year that will yield some fantastic returns on investment as we go into 2015 and beyond, and those things are going to continue to be a part of our priority as we make the business much more profitable as we grow.

On 2016, our priorities are still the same. Again, execution for me in the second half will be key, continue the commercial execution that we started the year with, and also make sure that we make customer execution the top priority as we get through the end of the year. As you know, our end of the year usually tends to be quite busy with a lot of activities, especially as we get into the fourth quarter, so were going to keep a close pulse on that. And that's why we feel confident that we can still deliver the year with a backlog and the performance that we've come to have here this year.

That's it for us right now. I'd like to open it up now, Shawn, for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Bob Labick with CJS Securities.

Robert Labick - CJS Securities, Inc.

I wanted to start out in the Products division. Obviously, you have very strong results, strong sales there. And given the backlog and expectations you've laid out, you're anticipating a fair amount of go-gets, in your words, for the second half. Can you talk a little bit about what kind of work goes into that for them? And the composition of the Products' revenues going forward, will it be more backlog-focused? Will it be go-get focused? Just give us -- can you expand on that, please?

Luis Manuel Ramírez

Actually, for the Products business, actually, the process is less about go-get and more just about execution in the fourth quarter. As you know, in typical years, our highest quarter sales number for the Products business tends to be in that quarter. It simply aligns with the way the OEMs are also shipping their products. So we feel pretty confident on that one. There's not a lot of focus on go-get there as much is there is in the second half of the year, as you know, especially in the old -- in businesses that deal with power gen segment and so on, we tend to also focus now mostly on '15, so a lot of the '14 backlog for the Product businesses will be in place by now. What also happens is we also have a flow business in the parts side and also in some of the aftermarket services business. And those projects don't -- they tend to be more a 30-day to 90-day turnarounds in terms of when somebody wants the contract and actually get the work done. So there is a flow components to the number. And we don't know -- we're not always going to get 100% of our backlog, so when we refer to go-get, for example, in the Nuclear business, $20 million to go there, that really refers to the kind of a shorter-term activities that we typically see in the second half of the year. So from a product perspective, we still -- we feel pretty confident that we've got most of the backlog that we need to go get there already in place. And as we do the flow business component of that, that could be another $10 million to $20 million, depending on where the business is. Right now we feel pretty good that, that flow business is coming in. In fact, as I mentioned in the last quarter call, we had a really good success as we started to go after some of the aftermarket business with a pretty good quarter, monthly order rates, and we continue to see that here in the second quarter there, too. So I feel pretty good that, that piece of it will come in very strong.

Raymond K. Guba

The other point of view I'd give you is that we have about a 32% increase in the value of open bids year-over-year. [indiscernible] called it, with the investment that we've been making in the commercial team, we've been seeing a much stronger value of open bids. So that should help us as well.

Robert Labick - CJS Securities, Inc.

Great. That's -- you have very helpful color there. Shifting over to the nuclear side. Obviously, it seems like the sales decline in the quarter was timing related. And with the -- [indiscernible] you've laid out, the back half looks very strong. Could you give us or give us a sense of the visibility you have in terms of the back half of the year? Is it evenly split? Is it more weighted fourth quarter as well? Or how should we think about that?

Luis Manuel Ramírez

Yes. That's a good question. We thought when we started the year that we probably would be a little bit more balanced between the third quarter and the fourth quarter, based on when the orders are coming in. At this point, I think it's going to, probably, look more similar to what we saw last year with the fourth quarter, probably, being the strongest quarter of the year, typical year end kind of activity for our business.

Robert Labick - CJS Securities, Inc.

Okay. Great. That's helpful in modeling going forward. And then one of the highlights in the investor day, and you alluded to it earlier in the script today, too, was the cross-selling opportunities among your divisions. Maybe you could just summarize that a little bit and expand on it and tell us where you stand and the opportunities that are coming from them.

Luis Manuel Ramírez

Yes. I think, to date, we've probably have closed almost around $50 million of orders between Energy Services, the Auxiliary Products business and even a little piece of the Electrical business that we have. And those primarily tend to be -- they're contracts on infrastructure and product. Recently, there are a couple of press releases that we did recently back in June. There were a couple of examples there that were part of that number that I just gave you, where we are doing other products related to -- in the chilling opportunities with some of the utility customers, we're pulling in our Energy Services team, we're pulling in our former Braden team from auxiliary products. And they're doing joint combined work with another party to do those projects. So those are some examples that we've done here. When I started that journey with our team last year, we've probably thought that we would get maybe 10% of our sales going forward, and a good year would be a good target for that. But I suspect after what we've seen this year, it's, probably, going to be higher than that as we go forward, because what we're seeing is that a lot of the opportunities that we win like that, tend to be with customers that want someone to coordinate the pieces and to make sure that all of it kind of fits together at the end. And that the performance that we need to guarantee here is also part of one purchase order. So I think that's going pretty strong right now. I'm pretty bullish about continuing to focus in that area as we grow our infrastructure business.

Operator

And our next question comes from the line of Chase Jacobson with William Blair.

Chase Jacobson - William Blair & Company L.L.C., Research Division

Randy, it's just the -- first, kind of a housekeeping. Can you just explain this intercompany reclassification?

Raymond K. Guba

Yes. We had -- in the first quarter, we had an intercompany transaction that was booked between Energy Services and Product Solutions, and it was -- the elimination entry was done incorrectly with $900,000 impacts, so we made that correction in the second quarter. If you look at the gross margin, we reported a 19.6%, Product Solutions margin. When you adjust for that, that normalizes it to 21.2%. Commensurately in Energy Services, the 20.8% gross profit number would go to 14.2%. So it was an elimination entry, intercompany transaction that was corrected in the second quarter.

Chase Jacobson - William Blair & Company L.L.C., Research Division

Okay. All right. That's helpful. And then, Luis, on the customer delays, you mentioned in your prepared remarks, we've seen different types of delays for different reasons across a bunch of our companies this quarter. Do you think what's going on here is just a coincidence and it's project-specific or is there something else going on in the market? And then is this -- are project delays, I know you've been working on trying to reduce the risk of it, but is it just something that we're going to have to deal with in your business on a quarter-to-quarter basis going forward?

Luis Manuel Ramírez

The way we would -- on most of our product business, the way it works, is we depend on the OEM to either transport or pick up the equipment. And they usually consolidate that shipment with their other equipment shipments that they're going to do for a particular project. So that can happen in any quarter. Any quarter that, for some reason, the OEM has decided to delay because there's a -- they're waiting for something on their end. Or it could be their end customer saying, we're not ready for the equipment to be received until next month or whatever it is. I typically see that every quarter to some degree. It wasn't unusual this quarter. But what I did see this quarter was that we were probably more -- it was more related to some of the work that's outside the U.S., which makes sense if you think about how things get shipped over to those countries. So I haven't seen anything that would concern me about customers canceling or any customer postponing a project. I haven't seen anything like that from our team, really just typical delays. I would say that for our businesses associated with power gen, especially, or anything that's associated with kind of electoral delivery, you'll see that every quarter at some degree. So we try to offset it when we can by working with customers to change the timing on other projects that they can take delivery on sooner, things like that. We do that all quarter long, but sometimes it happens that way. The good news for us, though, is that the shipments are happening. In some of the cases, they've already happened in the new quarter, so we'll just keep tracking it that way. But I would say you're going to see some of that every quarter. Particularly, we are in between second and third quarter, for some reason -- I don't know summer? Maybe Ramadan in the Middle East, all these other factors that kind of play into the timing of a shipment can cause a delay of a couple of weeks.

Chase Jacobson - William Blair & Company L.L.C., Research Division

Okay. And a, I guess, a follow-up to that which, I guess, speak to the strength in the market. But can you expand on some of these supply chain issues, I mean, where -- what [indiscernible]...

Luis Manuel Ramírez

Yes. If you guys recall about 5 or 6 years ago, right after -- I think, around 2009, 2010, at that time I was running a different electrical business. And when we get a ramp-up of a lot of projects at the same time, you start to see a lot of pressure, especially with the companies that make the switch gear because they've limited and managed well their capacity over the last few years, so they wouldn't be sitting with an over capacity situation. So I think, as you see, there's a lot of projects going on. It's actually good news. But the bad news of that is that when you start putting a lot more stress on the OEM supply chain, it gets harder to get that switchgear in on time. So we have seen some project delays, work that we haven't even started yet because they can't get the switchgear in sooner. And that's certainly an issue for the OEMs. They've communicated that to me and to the teams, and they're working on it. But it's good to note because it tells you how hot the market is for the equipment. And when that happened the last time, we got to a point, 5 years ago, that things like transformers and switchgear were sitting on a 18- to 24-month cycle, which is a huge -- it's a long cycle for that kind of equipment. Typically, you're talking 6 months or 8 months. So I think that the OEMs are working on it. But I think it was a good footnote for us to talk about here because, obviously, it could have some impact in the future as we're watching this.

Operator

Our next question comes from the line of Joe Mondillo with Sidoti & Company.

Joseph Mondillo - Sidoti & Company, LLC

First question just in terms of the gross margin at Products. So I was wondering if you could give any sense of what sort of the mix in the backlog, for the back half sort of looks like versus what we saw in the first half?

Raymond K. Guba

Yes. We're...

Joseph Mondillo - Sidoti & Company, LLC

Because I know mix, mix is a big sort of play in terms of where that gross margin comes in, right?

Raymond K. Guba

Yes. No, that's correct. We're kind of expecting the kind of low-20% gross profit levels for the remaining half of the year.

Joseph Mondillo - Sidoti & Company, LLC

Okay. In terms of, I guess, the rest of the backlog, or what you're seeing in orders, could you just give us an idea coming off -- so prior to this quarter, you saw -- you're pretty much averaging around 24% gross margins. Is that margin coming down to the low-20s, is that primarily related to cost that you're taking on related to the Lean manufacturing and such. Is it a product mix issue just give us a sense of why that's coming down in the back half? And should that start to rebound in 2015?

Raymond K. Guba

Yes. I would say that from some of the Lean initiatives that we've been doing, we're still in the process of making modifications to plants to be able to realize some of the benefits of some of the Lean initiatives. And in some cases, we've got some investments to make to be able to get there. So we expect the bulk of the improvements to be seen next year. We're still targeting, so given guidance, the previous guidance we've given in terms of the kind of the 17.8% to 17.9% gross margin range, which is kind of, obviously, a small pickup from where we are for the second quarter, will remain -- the benefits that we're starting -- we're seeing from the Lean will be mostly a 2015 event.

Luis Manuel Ramírez

So Joe, one of the things we've approved to do, we talked earlier about the work that we were doing. And one of our plant in Chattanooga that we could -- actually, make another unit per week if we did some of the modifications. We've recently approved some CapEx for that. That's going to that place here between the third quarter and the fourth quarter. So that investment actually goes in. And that -- once it's complete by the end of the year, you'll start to see that performance number improve in 2015. We've also just, also, recently approved a consolidation activity for Hetsco. Our Hetsco facilities that were in Indianapolis, were scattered between 4 or 5 different buildings in a couple of locations. And we've approved to go to a new building. That will be complete, here, by the end of the year as well. That will also help consolidate a bunch of things and give us some better performance there, and some capacity that we've been needing to help, actually, grow that business. So the investments are being made this year, that's part of the plan. And we do see that these ROIs and these investments are doing a pretty good turnaround for us, in terms of how we think they're going to perform. So that's one of the things that we are focusing on. And I think the other thing, too, it -- mix is a big deal for us. It's -- just in our Product businesses, Auxiliary Products in particular, they've got products there that range from a 35% type of a margin to a 20% type of a margin. And it can go down sometimes below that in a case of a larger project, like a megaprojects.

Raymond K. Guba

Yes. Some of the filter houses are low-teens.

Luis Manuel Ramírez

So we're doing a lot of work right now trying to complete some new design improvements. And the way we do the work, manufacturing the product itself which, again, will be done by within the year. And those things will also start to creep up. So the big focus for us is margin expansion as we go up in sales and that -- those are all parts of the things that we're driving.

Joseph Mondillo - Sidoti & Company, LLC

Okay. How about pricing on that side of the business? Has that been stable or have we started to see improvement? Or how is that affecting?

Luis Manuel Ramírez

I think it's been stable. I think the market out there is still -- in terms of the power gen market it's still very competitive. There aren't -- the projects are not -- there's not a ton of projects that come in every quarter, every month. And so that one remains competitive, I think. I think on the other parts of our business, like as we think about the Electrical Solutions business and a few others, we have opportunity to do more as we think -- if we think capacity and constraints in capacity in terms of some of the supply chain and things like that are going to come through here. That could also help us increase pricing there, too. But one of the key things I'm trying to do is deliver more value for our customers. When we do the larger projects that we do with 2 or 3 of our businesses, that's when we can really show value. And that can also help in terms of margin expansion as we think about pricing. So we are working on that. I think it's something that we're going to keep hitting hard. And we'll keep you guys informed on that, because that's an important metric for me, personally, to get through here in the business.

Joseph Mondillo - Sidoti & Company, LLC

All right. And in terms of that value -- just sort of hopping on that comment. You mentioned in the Investor Day the sort of after-market penetration, which we haven't really seen historically within the company, but you pointed out that there's upwards of $200 million a year of opportunity there that could be a new revenue stream. Could you update us on that and sort of what is the timing on possibly seeing that new revenue stream?

Luis Manuel Ramírez

Yes. Since we met the last time at the investor meeting, we actually spent a lot of time with our internal resources, kind of realigning a few things to be able to go after that market. We've actually aligned some commercial resources to this. And we're also probably going to maybe even create a little business unit out of it, which we're working on until the end of the year here. So I think that the, the way that I look at that business right now is that, that has a great opportunity for us. If I think of '15 and '16, I think a lot of the organic opportunities that I see right now happen in that aftermarket. One of the things I'm doing with the team is that we went -- we spent some time in the Middle East last month, getting ready to set up a local presence there with some partners that we've had history with in the past. And as we do that, I see that as another part of that aftermarket strategy. So you'll see some, maybe a press release or 2 here come out soon on that. And we're trying to target something here in the third quarter to talk about that strategy, but all of that is going to be a part of that aftermarket strategy. And I hope to have something more, kind of, or maybe page on that for you the next time we meet.

Joseph Mondillo - Sidoti & Company, LLC

Okay. And I guess moving to the Energy Services business. So first, it looked like it was a really good quarter in terms of the margin. The last 4 quarters you went 18%, 20%, 18%. And it looked like it was 20% -- another 20% type of a quarter. But I guess if you exclude that sort of intercompany reclassification, we're looking at 14%. So in that case, sequentially, it seems like a fold [ph] off for the quarter. Could you give us an idea in sort of what the expectation is for margin at that segment in the near term? And maybe what the potential is in the long term?

Raymond K. Guba

Yes. That thing you've got to look at in the second quarter is that, obviously, you have to take out that intercompany thing, which brings it to the 14.2% level. But the other thing that you'll see in the Q is that we had a project loss that we recorded. It was a onetime event in a project that we operated in that business, which impacted the gross profit as well. We highlighted -- that's about a $1.1 million loss. That project is essentially complete at this point in time, and we have a number of lessons learned that we put some fixes and improvements and processes in place to be able to make sure that we don't have a repeat of that. So if you look at the Energy Services business for the quarter without that, it's about a 22.2% gross profit margin, which is obviously up from the first half -- or the first quarter.

Joseph Mondillo - Sidoti & Company, LLC

Okay. Great. That's good to hear. So is this sort of 20%-ish type of a gross margin? Is that -- I know it's, probably, is going to fluctuate from quarter-to-quarter, but give us an idea sort of where you sort of see that, maybe, in the back half of the year, long term or whatever?

Raymond K. Guba

Yes. I mean, obviously, that business is going to fluctuate, but towards the back end I'm expecting kind of more of a high-teens level as we go forward. But we do have mix issues there. Obviously, we've got the Hetsco acquisition that's in there, which has got some good margins. So as that business grows, we'll get some nice pickup from them.

Joseph Mondillo - Sidoti & Company, LLC

Okay. And then just lastly going back to the sort of the Lean manufacturing or CapEx work. I was under the understanding that a lot of it was sort of occurring in the first half. And I know you have been doing stuff, but I'm just going by the CapEx budget. A lot it, the CapEx budget, is hitting in the second half. So where are we in terms of, I guess, the expenses associated with Lean manufacturing and restructuring of operations in that whole process? And why is the CapEx sort of back-end weighted?

Raymond K. Guba

Yes. The CapEx is back-end weighted, really, just because of timing. And we are making some investments, as Luis mentioned, for example, in the Chattanooga facility, which we just had approval reached from our board to be able to do. And that will be something that we'll complete -- we'll actually be -- the most of the production fixes will be completed by the year end, with some additional office improvements kind of going into next year. A lot of the Lean events are just buried in operating expenses because we basically take staff that's on hand, and we basically take some time out and kind of go through the Lean events. So it's just, basically, absorbed in operating expense in terms of the event. So when we talk about, for example, that Chattanooga initiative, that was an initiative that happened some time ago, but it takes some time to be able to reconfigure the factory and then make the investments and have the CapEx spend put in place and so forth. So that's why it sounds like it's taking a little longer, perhaps, than maybe you would have expected.

Joseph Mondillo - Sidoti & Company, LLC

Okay. Makes sense. Is there anything other than -- is there anything else that's like a major sort of productivity improvement type of initiatives aside from Chattanooga's? You've highlighted that, that sounds like somewhat of a large...

Raymond K. Guba

I would say our Mexico facility had a pretty significant Lean initiative that went through and had identified a number of production efficiencies, which we expect to benefit us by the tune of about $1 million to -- kind of a $1 million to $2 million range, annualized. The other piece that Luis mentioned is the Hetsco operation, which, as we're doing manufacturing of cold boxes and the volume that we were looking to do in conjunction with our assumptions for that acquisition, we anticipated the need to be able to expand the footprint. That facility will be completed in -- we're kind of targeting the first quarter of next year. And that will allow us to be able to complete and manufacture larger boxes that we currently can't do in our current facility, because we just don't have the big enough space. So a lot of the volume that we're expecting at Hetsco and some of the profitability that we're anticipating was contingent upon that investment. And again, we just received board approval to be able to do that and we've selected a site and we already have a facility that has a prebuilt shell that we're going to be going into, which we're pretty excited about.

Operator

And our next question comes from the line of Martin Malloy with Johnson Rice.

Martin W. Malloy - Johnson Rice & Company, L.L.C., Research Division

Could you maybe talk a little bit about what your current outlook is for when we might start seeing a pickup in terms of orders for natural gas-fired power plants here in North America? And particularly as it relates to replacing some of the coal-fired generations that's expected to come online in the next few years -- come offline in the next few years. When do you expect to see, perhaps, orders pickup related to that?

Luis Manuel Ramírez

We have seen, this year -- I think it's in the Q as well, but there's been -- we're seeing more projects in North America than we saw, probably, in the last couple of years. And we have been getting more requests for information to do some projects that were on the docket here for a few years that didn't get moved, and they're starting to move now. I think that, that process is ramping up slowly. At this point, I haven't seen anything other than the reports that I've seen from a couple of the OEMs that -- when they talk about gas turbine orders, they're probably not just talking about the large power-fired projects, they're talking about maybe also the distributed power as well. So I think we see a lot of movement that's starting to feel like there's activity out there, but I -- and I've seen some projects go through. And we've won a few, as you still note, but I'm not sure yet if that's a trend that I can count on for '15. I think that the bigger trend for '15, that I see right now, is that we're doing a lot more projects as it relates to the natural gas and infrastructure side of the house. And outside the U.S., they tend to be -- the power projects tend to be more of the megaprojects or the larger unit sale projects. So we're still seeing good volume there, and we have seen a pickup, overall, from last year in that part of our business. Last year was probably one of the lower points that we were at in terms of sales in that part of our business. This year, the sales were up and we're feeling good overall that, that trend is going in the right direction. I still don't see a major pickup yet for '15. A lot of people that I talked to tell me that they're looking at '16 and '17 for some of that to occur. And that's been pretty consistent for the last 6 months, I keep hearing that. But it's something that we're going to pay attention to a lot. We are using that same part of our business to do some of the aftermarket chiller work and other things. So even though we may not be doing new power project builds, we are seeing a lot more pickup in the aftermarket piece where we're doing more retrofits for energy companies that need better performance from their current asset base. So that's something that we are seeing a lot of requests for. And that actually feels pretty good, too. So if you put that together with some of the other things we are reading about what might happen with the rest of the market, I still think that, that means that we see some nice growth there compared to what we had experienced the last couple of years.

Martin W. Malloy - Johnson Rice & Company, L.L.C., Research Division

And then, Randy, when you spoke about the 32% year-over-year increase in open bids, are there any products or services that you could maybe highlight as being drivers there?

Raymond K. Guba

This is Auxiliary Products and I guess, I would say that it's kind of across the gamut. We end up getting a lot of activity in all elements, really, of the Auxiliary Products business. So from the filter houses, to the exhaust systems, the scrubbers, et cetera. So I wouldn't say that there is a, particularly, single driver of that. It really tends to go across the mix of the product line.

Operator

Our next question comes from the line of Jon Braatz with Kansas City.

Jonathan P. Braatz - Kansas City Capital Associates

There was an article in the Wall Street Journal the other day about utilities and electricity generation -- I mean, electricity demand and how soft it is. And -- not that that's anything new. But I guess my question is, when you look at the upcoming outages how much is -- of the outages, it might be variable, I know as the outage approaches, does the -- can the utility company maybe back off a little bit on what they might spend on, be spending on? How certain are you, exactly, what things will be done during the outages?

Luis Manuel Ramírez

Well, most of the outages have a preset set of activities based on the number of hours of performance of the unit. So if the unit -- they usually do it in intervals. But that's only part of the story. The bigger part of the story is when they open up that the unit, they'll find what we used to call in the business sunshine parts, right. And they find other things that need to be repaired or replaced or whatever it is. And so that's more of the variable piece of it. I like to call that the extra work that comes out of the outage. So for example, in our parts business, and I'll give you a good example of that one. In our parts business recently, during the spring outage season, we started to see a couple of months of pretty good orders performance. As they were getting into the outage they found, okay, we need these machine parts. And they need to be turned around pretty quickly because we only have a 30- or 40-day outage window, so we could do the actual repair work. So that will happen in every outage. But the major work, the major inspections, they're all pretty set in a schedule, and they get in there. Now sometimes when they want to do a retrofit or a modification to existing equipment on the site, that can pose another set of challenges as well. And that's where you might get into more of a extra work situation, depending on how hard it is to get to the equipment, and all those other factors and the timing get it done. So -- but in terms of a normal process, it's kind of difficult to -- when you do a major outage or inspection outage, you typically have to follow your guidebook on that. And then everything else that you do on top of it is related to what I just mentioned earlier. So in our case -- that's why I've said in our business right now, and from Marty's question, there seems to be more of an aftermarket focus right now in terms of making modifications in some of the equipment. And while we may not be providing all the added services for that, we are providing equipment and we're providing field services to help install that equipment when it happens. And that's something that's happening, and we're getting more requests for that all over the country. So that feels pretty good to me if that continues. And we start to see the other modifications to improve output in some of these plants. That's a big deal, as you know. That's the cheapest way to increase power generation is to improve the output performance of the unit. And by chilling it and doing other things to it, you can actually get better performance. And so I think, utilities, for the first time in a long time, I think that's the -- I'm hearing that a lot. And that's something that is good for the industry because that means that they're getting to the point now where they're modifying, improving their existing fleets. And from then on, it's hard to get any more out of the existing fleet until you add something new. So that's -- I think that's a good trend. And based on the article that you read, I think, that's kind of the other messages. At some point, you are going to have to add more. And you're seeing that. You're seeing that in Florida. You're seeing that in the Southeast. They are adding more assets down there and there is some improvement in demand. And certainly seeing that -- I think, you're going to see that more in the Gulf region, as well.

Martin W. Malloy - Johnson Rice & Company, L.L.C., Research Division

Okay. So Luis, just maybe as a reminder, when you look at this year compared to maybe next year, what are -- what sort of the level of outages or number of outages we might see?

Luis Manuel Ramírez

I think on the nuclear side, there is an increase in outages. This year there's a lull in a couple of places, but we will see some bigger outages with some of our customers out in the Northwestern part of the country. And also in some new contracts that we've recently announced, that we're going to do outages over the next couple of years there as well, for '15 and '16. So I think we will see some outages go up there in that part of our business. And on the Energy Services side, where we do work in the aftermarket and also in some of the fossil side, I think we're also expecting an increase there as well for next year.

Operator

Our next question comes from the line of Doug Dyer with Heartland Advisors.

Doug Dyer - Heartland Advisors, Inc.

Just one more follow-up to the discussion about open bids. Is that becoming a larger part of business as a percentage of revenue relative to last year?

Raymond K. Guba

I'm sorry, can you restate your question?

Doug Dyer - Heartland Advisors, Inc.

Yes. Just following up on the -- some of the open bids commentary. Is that becoming a higher percentage of your revenue this year versus last year?

Raymond K. Guba

Well, yes. I would say that the open bids, the value of our open bids across the business has grown dramatically as a result of the investment that we've made in the commercial side of the house. And we're seeing good strong double digit, if not, in some cases, larger, activity and value of the open bids. So that, I think, is consistent with the messages that -- message that we've been saying previously, that the business had not really invested in commercial assets to be able to go out and really drive growth, drive organic growth in the business. And that was one of the key strategies that Luis brought, and has been driving across the business. So we look at it in terms of -- we always think about things, you get what you measure. And so we start measuring the value of the open bids, the opportunities that we're tracking. And then we'd sit down every other week with the commercial team and the operating team, and look at the opportunities that we're working to be able to make sure that we're driving them across the finish line. And that's a very active activity that didn't exist before in this business. So I take a look at backlog and I take a look at convertibility and then I take a look at how much activity we've got in terms of open bids. And we also look at success rates. And we've been seeing in our hit rate on open bids, in some of the businesses, is improving as we've gotten smarter in terms of targeting kind of the open bids and the opportunities. So all of those metrics, I think, are positive for -- from my perspective, and we'll continue to manage that process as we continue to try to drive the organic growth in the business.

Doug Dyer - Heartland Advisors, Inc.

And when you look at that -- at those proposals, when it comes to the size, obviously, the size is getting bigger, but do you think that's more a result of offering a bundled service or the cross-selling or are you getting in on larger projects?

Luis Manuel Ramírez

I think it's a mix. Some of them are going to be more of a -- of offering more. And in other cases it may just be a larger project where we spend more time at the site with more and more service and product offerings at the site. So it's probably in that direction. I think, when I look at -- when I came to the business a couple of years ago, one of the things that concerned me the most was the fact that there was no focus on orders or backlog, the same that I was used to. In this industry, it's all about backlog. If you don't have backlog, you don't survive. And so -- and we have different cycles. Part of our business is 8-month to 12-month cycle. Another part is more 30 days. Another part is maybe more like 3-month cycle, on the electrical side. So we're balancing that piece as well. But I think, for me, it was important to have a real vision around that. And we started measuring, our sales team, to bookings, orders and of course, driving the backlog. So as we look at the open bid process, which is kind of the next up into that. Once you start tracking orders and backlog, you go down one step. You do open orders and everything else, and that's kind of been the way we've been running the play. But it's certainly -- to answer your question, I think for next year, it is part of our plan for the next year, and it will be part of what we continue to go after. One thing that we also learned in the last couple of years is you can't say yes to every project. That's something that we -- you got to go after the stuff that you know how to do and the stuff that you have capability for. And that -- and the risk mitigation and all of those things that you need to have to run it. So those are some of the things that we think about as we look at that part of the market.

Operator

And the last question comes from the line of Chase Jacobson with William Blair.

Chase Jacobson - William Blair & Company L.L.C., Research Division

Just one more question. The operating expense guidance assumes a pretty good improvement in terms of -- as it relates to the operating expenses as a percent of sales in the back half the year. Is that purely due to the higher revenue level? Or I mean, is this kind of like the new rate that we should be thinking of Global Power -- about Global Power as a 13% to 14% SG&A business, rather than a 16% to 17%? Or even like the 15% that you're going to do this year?

Raymond K. Guba

I would say that the operating expense, first of all, is reflecting the increased costs that are coming in from the acquisitions. And the levels that we're seeing this year, obviously, are improving as a percentage of revenue. We're looking as we grow the business towards the levels that we're talking about in the next couple of years to be the billion dollar revenue and the $100 billion EBITDA business. We're looking to be able to manage the cost of growth over time so that we can have a modest cost growth, while being able to realize a very significant top line growth. And we're going to do that through the investments in some of the infrastructure that we're doing, being able to consolidate acquisitions that we do in the future and to be able to hold costs down from that perspective.

Luis Manuel Ramírez

But Chase, I've put a lot of pressure on the team that -- and I'm looking at benchmark data for other companies our size and what we want to be. And what I can tell you is that I'm focused right now in the second half of this year, of making some more structural decisions around how we do back office stuff. Randy and the team are working on that as well. And my intent is to reduce that percent over the next 1.5 years. That's my intent. My intent is also to make sure that we've got less of a burden coming from our corporate centers and more of a real work happening in the P&Ls as we go forward. So even as -- in the last 6 months, as we've restructured corporate finance and all the other parts of the back office here, it's clear that we're trending down in terms of our cost spending here. And it's also clear that we're keeping that cost -- that focus on trending down the overall overhead cost in the factories and in the P&Ls as well, as we go forward. So my goal is to be lower as a percent of sales over the next 18 months than we had been in the past. Some of that may be related to higher volume leverage and that's what we expect when we get to that level of volume. But it's also not adding resources or things that don't impact customers or don't impact our direct manufacturing performance. So those are some of the things that we're focusing on. As we get to the end of the year, when we start talking more about next year, you'll hear more color around that, too.

Operator

And our next question comes from the line of Joe Mondillo with Sidoti & Company.

Joseph Mondillo - Sidoti & Company, LLC

I just had a quick follow-up question. Haven't really talked about it a whole lot on the call. Earlier this year it seemed like, given sort of trailing off on this whole reorganization and getting everything established there, that potentially, the balance sheet could be starting to be used again in terms of acquisitions at the back half the year. Just wondering if you can update us on that?

Raymond K. Guba

Sure. Joe, it's an excellent question. Look, I'd say we're on track to start looking at stuff again. We, probably, have -- I mean, we have a short list of stuff that's on the table right now that we're looking at. And all of it is looking like it could be accretive to earnings in the short term, and that's what we're kind of focusing on right now. And we're focusing on, as we've said earlier, more expansion in our Energy Services play because we see those margins creeping up and more products and services there can help us. And also, maybe continue with some of the product investments that we made last year and a couple of the P&Ls this year. So that's actually moving forward. So the second half of the year, we'll -- we are working on stuff and continue to look at opportunities that could help make us more accretive and provide more customer products and services and more shareholder value. So those are the things that we're looking at right now, and more to come on that.

Operator

And it seems that we have no further questions at this time. I'd like to turn the floor back to management for closing remarks.

Luis Manuel Ramírez

Well, thank you very much for joining us today. As we've said earlier in the call, we're excited about the fact that we kind of reached a new milestone in terms of our backlog performance and our ability to deliver in the second half of the year as we gave you in our guidance. We're committed to that. We're also committed to continuing to focus on margin expansion as we go forward. And as we get to the second half here of the year, we're excited about what we can do to help deliver more growth, in '15 as well. So a lot of things going on, but we're excited. It's an exciting time for our team. We've been in place now almost a year and are really starting to see some great momentum across the organization, which should translate to better performance as we go forward and certainly better shareholder value creation.

So thank you very much for joining us today, and we look forward to seeing you soon.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.

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