Gardner Denver Holdings (GDI) CEO Vicente Reynal on Q2 2018 Results - Earnings Call Transcript

Gardner Denver Holdings (NYSE:GDI) Q2 2018 Earnings Conference Call August 2, 2018 8:00 AM ET

Executives

Vik Kini - Investor Relations

Vicente Reynal - Chief Executive Officer

Todd Herndon - Chief Financial Officer

Analysts

Andrew Kaplowitz - Citi

Joe Ritchie - Goldman Sachs

Bill Herbert - Simmons

Brian Drab - William Blair

Mike Halloran - Baird

Nathan Jones - Stifel

Julian Mitchell - Barclays

Damian Karas - UBS

Nicole DeBlase - Deutsche Bank

Operator

Good day and welcome to the Gardner Denver Second Quarter 2018 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Vik Kini, Gardner Denver Investor Relations. Please go ahead.

Vik Kini

Thank you and welcome to the Gardner Denver 2018 second quarter earnings call. I am Vik Kini, Gardner Denver’s Investor Relations Leader and with me today are Vicente Reynal, Chief Executive Officer and Todd Herndon, Chief Financial Officer.

Our earnings release, which was issued yesterday and a supplemental presentation, which will be referenced during the call are both available on the Investor Relations section of our website, gardnerdenver.com. In addition, a replay of this morning’s conference call will be available later today. The replay number as well as access code can be found on Slide 2 of the presentation.

Before we get started, I would like to remind everyone that certain of the statements on this call are forward-looking in nature and are subject to the risks and uncertainties discussed in our previous SEC filings, which you should read in conjunction with the information provided on this call. Our full disclosure regarding forward-looking statements is included on Slide 3 of the presentation.

Turning to Slide 4, on today’s call, Vicente and Todd will review our second quarter financial performance and segment results as well as our 2018 guidance. We will conclude today’s call with a Q&A session. As a reminder, we would ask that each caller keep to one question and one follow-up to allow for enough time for other participants.

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

Vicente Reynal

Thank you, Vik and good morning to everyone on the call. I am very excited to review our second quarter results as our team delivered another solid quarter of double-digit orders and revenue growth as well as margin expansion. We also delivered one of our strongest quarters of free cash flow generation since the IPO last year. All three of our segments saw strong orders and revenue performance driving consolidated revenue growth of 15% versus prior year and up 12% on an FX adjusted basis. In addition, adjusted EBITDA grew 22% and margins expanded 140 basis points to 24.2% in the quarter. From a commercial perspective, our core markets remained healthy and we continue to see and show the ability to outpace the market growth as a result of our strategic initiatives around innovation and commercial investments such as demand generation and emerging markets growth.

In the industrials segment, we saw strong broad-based performance across compressors, blowers and vacuums and positive organic growth across all major regions. The growth continues to be largely driven by original equipment as we are seeing solid market penetration with many of our new recent product innovations such as the all-demand oil-free compressor. In the second quarter, we saw our oil-free product line delivering more than 20% growth. We are encouraged by this increase in demand for original equipment as we see this an opportunity for strong aftermarket growth as we look ahead. The energy segment continues to see a healthy demand environment and continued strength in upstream energy and improving funnel for larger projects in the mid and downstream businesses.

On the upstream side, revenues were up 17% as customers continue to see strong activity levels and remain quite optimistic on the forward-looking outlook. As a reminder, this solid 17% growth in upstream was on top of the 380% growth we saw in Q2 of 2017. Collectively, the mid and downstream businesses are seeing a very nice inflection point on orders trajectory as we are seeing quoting activity increase around a broad base of process flow applications, particularly in wastewater treatment and pulp and paper as well as harsh chemical processing expansion. This led to a strong double-digit orders increase for the mid and downstream businesses, but as a group has given us increased confidence as we look ahead to 2019 given the 12 to 18 month lead time of many of these projects.

The medical segment continues to see strong growth as orders grew 22% on an FX adjusted basis, marking the fourth consecutive quarter of healthy double-digit orders increase. The growing backlog we have seen in the medical segment translated to 12% organic revenue growth in the quarter, which is the strongest quarter we have seen since 2011. The medical team continues to win share with new products and design wins in core customer applications and we believe this will set the segment up for continued strong performance for the balance of the year.

Given our strong second quarter performance and positive view of the overall demand environment, we are increasing our 2018 full year adjusted EBITDA guidance to a range of $690 million to $705 million from the previously stated guidance of $685 million to $705 million. Increasing the bottom end of our EBITDA range reflects the belief in our team’s ability to operationally execute as well as the continued momentum we expect as a result of positive business trends. As a reminder, the midpoint of our revised EBITDA guidance range now stands at 24% above prior year levels and 6% above the midpoint of the range provided at the beginning of the year.

Before I provide a brief update on strategy, I also want to highlight the progress made on cash generation and the flexibility this is affording us as we evaluate capital allocation and returning value to our shareholders. The second quarter saw the strongest quarter of cash generation since our IPO led by solid profitability and disciplined working capital management. Our businesses have shown the ability to drive improved working capital performance and the results were evident with a 530 basis point improvement in working capital as a percentage of sales. This allowed us to focus on our priority around paying debt, with $105 million debt repayment within the quarter. We continue to be committed to reducing our leverage and expect to make a similar size debt repayment in the third quarter of 2018.

As you also saw in our release, our board approved a $250 million share repurchase program. While M&A and debt repayment will remain our top priorities, we view the share repurchase program as an opportunistic tool that provides ongoing flexibility as we weigh the best uses of cash and returning value to shareholders. More importantly, this share repurchase program reflects the confidence we have in our outlook and our confidence in our ability to generate significant cash flow moving forward given our confidence in earnings potential and focus on the balance sheet.

Moving to Slide 6, I would like to provide a brief update on talent, as we continue to develop a strong culture of engagement and performance at Gardner Denver. As a reminder, last May, we awarded employees with equity worth approximately $110 million, which equated to 40% of annual base salaries and we did this to create a sense of ownership and for employees to think and act like owners. This equity is now valued at approximately $150 million. At the same time, we launched a multiyear engagement initiative, including a survey to quantifiably measure our employee engagement scores across each of our businesses and functions. In April of this year, we launched our year two survey across the entire organization and we recently received the results. I got to say that I am very pleased to report that we saw an increase of nearly 210 basis points on our overall Gardner Denver engagement score, which not only surpassed our internal 2018 goal but nearly reached our original 2019 engagement score target.

Our participation rate was more than 90% across the entire organization, which is quite high given that we have over 6,700 employees across nearly 40 countries. Most important, we saw year-over-year improvements in the engagement scores in each of our businesses, but our total company improvement surpassed industry benchmarks. I strongly believe these results show the ongoing cultural transformation that is happening at Gardner Denver as we strive to make this a great place to work tied to a performance-driven culture. In addition, the increased level of engagement is visible in our financial results as the single biggest initiative we have tied to employee engagement and the equity grant that was provided at the time of the IPO has been improving our working capital performance. The 500 basis points improvement we saw in the second quarter will not only have been possible without each of our employees taking a more active ownership in the cash management process. I look forward to the ongoing progress we can continue to make.

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

Todd Herndon

Thanks Vicente and good morning to everyone. If you turn to Slide 8, I will review the company’s financial performance. Second quarter revenue was $668.2 million, up 15% compared to 2017, including a 3% impact for FX as we continue to see strong performance across all of our segments. Total orders of $712.3 million were up 18% and 14% when excluding the impact of FX. Each of our segments saw double digit order growth on an FX adjusted basis, which provides increasing visibility to the second half of 2018 and gives us increasing confidence in delivering our guidance. Our second quarter adjusted EBITDA was $161.6 million, up 22% compared to the same period in 2017. EBITDA flow-through for Gardner Denver in the quarter was quite healthy at 33%.

Switching to the topic of inflation and tariffs, as we have noted in previous quarters, we did see some inflation on an isolated components such as motors and castings as well as logistics costs coming into the year and those costs have been included in our guidance thus far for 2018. In terms of the more recent tariff announcements, based on what has been implemented to-date, we expect the impact to be at approximately $5 million on an annualized basis, with the majority of the impact in our Industrials segment. We expect to offset this impact through ongoing productivity, sourcing actions and pricing actions within the business. We feel that our manufacturing and commercial strategy of in the region, for the region, positioned us uniquely to support our customer base under the current geopolitical situation.

Given the fluid nature of the tariff situation, we continue to monitor very closely and to the degree the impact becomes larger than what we currently see we will react accordingly with both operational and pricing actions as required. We reported second quarter GAAP net income of $60.3 million or $0.29 per share on a diluted share count of 209.6 million. We delivered adjusted net income of $92.4 million and adjusted diluted earnings per share of $0.44 on a share count of 209.6 million, an 83% improvement from the $0.24 per share on 182.2 million shares in the prior year.

Moving to Slide 9 let me spend a few minutes discussing our cash generation and leverage position. As Vicente indicated earlier, working capital as a percentage of last 12 months revenues improved 530 basis points to 25.1% as compared to 30.4% in the prior year. The second quarter performance was also a sequential improvement of 410 basis points compared to 29.2% in the first quarter of 2018. Improvements were most notable in accounts receivable and accounts payable as we continue to see benefits from the continuous process improvement initiatives we have been implementing. Inventory was relatively flat on a sequential basis as we continue to position the company for the expected top line growth typically seen in the second half of the year. The progress seen in the second quarter was quite significant and we would expect to remain around current levels for the balance of the year in terms of working capital as a percentage of LTM sales.

Free cash flow for the second quarter was $123.5 million compared to free cash flow of $12.2 million in the prior year and included $134.3 million of cash provided by operating activities, less $10.8 million of CapEx. Given our strong cash generation in the quarter, combined with improving profitability, our net debt leverage profile improved to 2.4x at the end of the second quarter, representing an improvement of 0.4 turns from the prior quarter and a 1.8 turn improvement since our May 2017 IPO. We ended the second quarter with $337.8 million of cash and $773 million of total available liquidity.

As we have discussed over the past few quarters, we are committed to a balanced capital allocation strategy focused on strategic M&A and prudent debt repayment. In the second quarter, you saw us execute on both. First, we made a small bolt-on acquisition in late 2Q with the acquisition of PMI Pump Parts. This is the strategic acquisition that serves us as an alternative to internal investments in plunger capacity and development that we were planning to make in the coming years. This strategic investment will help enhance our positioning within our aftermarket consumables business and upstream energy, which we believe has excellent long-term growth potential and is more resilient to market volatility.

The business was purchased for approximately $21 million via cash on hand and the deal was executed for a mid single-digit multiple pre-synergies on a trailing 12-month EBITDA basis. And on a post synergy basis, we believe we can achieve a low single-digit multiple, making this a significant value buy. Second, we repaid $105 million on our term debt within the quarter. We viewed this as a use of excess cash on hand to prudently lower our outstanding gross debt level. We remain committed to reducing debt and sustainably improving our leverage profile as promised and demonstrated over the past 12 months. Third, earlier this week, our recently approved share repurchase plan will allow for opportunistic return of cash to shareholders as we evaluate the best value creation opportunities for Gardner Denver and our shareholder base.

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

Vicente Reynal

Thank you, Todd. Moving to Slide 11, I will start with the Industrials segment, where we continued to see strong orders and revenue growth in the second quarter across all three geographies. Industrials segment second quarter order intake was very strong at $336.2 million, up 20% as reported or up 15% excluding FX. Revenues in the quarter were $328.7 million, up 16% as reported or up 12% excluding FX where organic growth and M&A contributed about the same percentage. All three air compression technologies continued to see revenue improvement in the quarter, with solid double-digit growth in core oil lubricated compressors and mid single-digit growth in blowers and vacuums. Overall growth continues to be paced by gains on original equipment side, which was up strong double-digits as our focus on new product introductions and demand generation initiatives are demonstrating great results.

We view this as a positive leading indicator for future aftermarket revenue growth, which improved low single-digits in the quarter. An example of a new product that we are seeing strong growth opportunities for this is the oil free scroll compressor. The scroll is another expansion of our oil free compressor technology that provides 100% contamination free air that typically is used in medical, lab and life sciences type applications. A recent win for the Americas team was for a sea life exhibit at the Texas based zoo, where contamination and ozone free air was critical for the proper care of the animal life. This is another example of the growing product portfolio we have in the oil free product category, which showed 20% growth in the second quarter.

From a geographic perspective, we are pleased with our performance across all three regions. The America continued to see strong end demand with double digit order increases. Both Europe and Asia Pacific saw low to mid single-digit order growth and slightly higher revenue growth as we leverage backlog that has been built over the past quarters. The fastest growing area of both EMEA and Asia Pacific continued to be emerging markets like the Middle East, India and Southeast Asia, which is reflective of recent investments in those markets in both sales personnel and new channel partners. The Runtech business also continues to operate very well as both orders and revenue saw solid sequential increases meeting our second quarter expectations.

Moving to adjusted EBITDA, Industrials delivered $71.1 million in the quarter, up 12% and up 7% excluding FX. Second quarter adjusted EBITDA margin was 21.6%, which is 80 basis points down compared to the same period in 2017 and up 50 basis points versus the first quarter of 2018. The year-over-year margin decline was driven approximately one-third by the slightly diluted impact of the Runtech business. And as a reminder, Runtech is approximately more than 400 basis points lower EBITDA margins than the industrial average, but is one where we see continued sequential improvements. The remainder of the margin decline came from revenue mix and the impact of internal reinvestments for growth. We remain committed to achieve our mid 20s EBITDA margin target in the next 2 to 3 years and we expect the second half to demonstrate positive margin expansion getting to our expected full year margin expansion.

Moving next to the energy segment on Slide 12, overall, we had a strong quarter as balanced execution between the upstream and downstream businesses combined with healthy order inflow led to 29.2% EBITDA margin. The energy segment second quarter order intake was a solid $303.7 million, up 12% excluding FX. Revenues in the quarter were $273.1 million, up 12% excluding FX, leading to a book-to-bill ratio of 1.11. In fact, as of the end of the second quarter, we exit with the highest backlog that we have seen in the past 3 years, which provides ongoing confidence for the second half of the year. Aftermarket also continues to track well as it was up 11% for the total segment and comprises now of 57% of LTM sales.

Let me dive into some of the pieces, starting first with the upstream business. The market remains robust as revenue was up 17% in the quarter despite more meaningful comps from 2017. Over the course of the past few months, there has been a lot of talk about the Permian Basin and growing concern about takeaway capacity and the implications of this for our business. Let me start by saying that we have not seen material customer pullback or comparable reaction at this time and the majority of our customer base remains optimistic on expectations for the back half of the year and also 2019.

Our option business in the Permian has seen healthy growth this year driven primarily by continued activity and intensity-based drivers led most notably by consumables growth, which is up nearly 200% in the second quarter and our expectations for 2018 remain unchanged for the upstream business. It is also worth noting that the Permian Basin currently represents only about 10% of our total energy segment revenue base and more importantly less than 5% of total company revenues. With a network of service locations and storefronts in all major basins, we remain confident in our ability to service our customers in all of North America shale plays, particularly if we do see some temporary shifts in fleets away from the Permian over the next few quarters. In terms of orders for the upstream energy, we delivered $150 million, which was down 7% due most notably by the timing of original equipment frac pumps. And as a reminder, frac pump order tends to be the lumpiest piece of the upstream energy portfolio and we do not attempt to influence the timing of when those orders are placed by our customers on a quarter-to-quarter basis. If you remember in the first quarter, we saw extremely strong original equipment order activity leading to a total quarter orders in excess of $190 million. In fact, on a total first half basis, total orders now stand up 7% and original equipment frac pumps are up nearly 35%.

As we have mentioned in the past, what we can see there a good indicator of activity is parts, service and consumables within our aftermarket offerings. And in the second quarter both orders and revenues for our consumable portfolio in the upstream was up in excess of 100% versus prior year and up approximately 30% sequentially versus the first quarter of 2018 as we continue to see penetration of new product offerings like Redline Packing. We are also very excited by the acquisition of PMI Pump Parts, which is a strategic bolt-on within the consumable portfolio, specifically positioned to increase our market share and technology position within the plunger side of the business that is now part of the consumable offering. Plungers have historically been the smallest component of our consumable offering behind valves and seats and packing and we believe this acquisition will accelerate our share position and future growth in this product category. As we look ahead for upstream energy, we remain confident on the outlook as customers remain quite bullish and market conditions are still very conducive for growth.

For the third quarter, we expect that both orders and revenue will show double-digit growth with good momentum across the entire product portfolio. But in fact, through the first 3 weeks of July, orders were up 27% versus prior year. On the mid and downstream side, book-to-bill ratio was very strong at 1.38. Orders were collectively up strong double-digits on an FX adjusted basis, while revenue was up mid single-digits on an FX-adjusted basis. The increase in orders momentum is most notably being driven by the downstream side of the business, where we are seeing capital money for process-related applications starting to free up.

We expect this will lead to continue healthy order inflow as we build backlog for 2019. One such product that is driving current performance is the GARO series of liquid ring compressors as seen on the bottom of the page. GARO compressors are the market leading in their space. One of the unique applications is the patented Washing Amine Integrated System that can effectively condense and scrub hydrocarbons in one application, reducing or eliminating the need for separate gas-treating units. The result is a very safe, sustainable and flexible system that reduces consumption and cost. The energy segment delivered adjusted EBITDA of $79.7 million in the second quarter, up 26%, excluding FX. As a percentage of revenues, second quarter adjusted EBITDA was 29.2%, up 320 basis points, with strong contributions from volume flow-through as well as operational efficiencies.

Moving next to the medical segment on Slide 13, order intake continues to be very strong at $72.5 million, up 22%, excluding FX versus the prior year. The orders performance continues to be driven by design wins in the core gas pump side of the business supplemented by increasing penetration on the liquids side of the business. Revenues in the quarter were $66.4 million, up 12% excluding FX, making the strongest quarter of organic growth we have seen since 2011. We remain extremely encouraged by the progress we are seeing in the medical segment as we have seen growth accelerate over the past few quarters and fully expect to see double-digit revenue growth over the second half of 2018 as well.

In terms of new products, we continue to build out our platform on the liquid handling side. Recently, we had a large win with a leading life sciences company in the U.S. for a full automation of their R&D labs for use in sample handling and micro pipetting. Medical adjusted EBITDA was $18 million in the second quarter, which was up 11% excluding FX. Margins remained relatively flat in the quarter due in large by targeted investments that we made in the quarter. Given the expectation for ongoing growth in the second half of the year as well as ongoing productivity initiatives, we do expect to show solid margin expansions for the balance of the year.

Moving now to Slide 15, I would like to discuss our 2018 outlook. Given our second quarter performance and continued confidence in the demand environment, we are raising our total 2018 adjusted EBITDA guidance to $690 million to $705 million. Raising the bottom end of our guidance range reflects our second quarter performance and the expectation for solid execution for the balance of 2018, along with the largely offsetting impact of accretion from stronger results from our upstream energy aftermarket consumables business and the recent FX headwinds, which are mainly impacting industrials. Our expectations for capital expenditures for growth and value creation initiatives is slightly revised down to $60 million to $70 million for the year versus prior guidance or approximately 3% of revenue. In addition, we expect the tax rate to remain in the range of 26% to 28% for the year.

As we communicated before, we continue to work on ways to optimize our tax rate. In terms of leverage, we expect net debt to be approximately 2x by end of the year, which is an improvement from the prior guidance range of 2.1x to 2.3x. The improvement on leverage is most importantly driven by improving free cash flow generation and as we noted earlier, we will continue to be prudent in exploring the best uses of cash in the second half of the year, with a bias towards M&A and debt repayment and opportunistically utilizing our newly announced share repurchase program. Specifically, with regards to M&A, the funnel remains very healthy and is weighted to industrials, medical and downstream energy-oriented deals. Also we expect our average diluted shares outstanding for the year to be approximately 210 million shares using share recount and share price as of June 30. This does not include any potential impact from future share purchase activities.

Moving to Slide 16, we are very pleased with our performance in the second quarter as the team continues to execute on our strategy while delivering strong growth across the entire portfolio. We continue to remain confident in ongoing top line and orders growth as we look to the second half of the year and we expect to deliver on our margin expansion goals across each of our segments.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question today will come from Andrew Kaplowitz of Citi. Please go ahead.

Andrew Kaplowitz

Hey, good morning guys. Nice quarter.

Vicente Reynal

Thank you, Andy. Good morning.

Andrew Kaplowitz

Vicente, so you mentioned obviously the upstream energy orders of 7% for the first half of the year, I think you said orders up 27% in the first 3 weeks of July. Even though that the concerns are not going to go away regarding Permian takeaway capacity, so maybe you can give us more perspective on your visibility in the segment. The recent orders that you are getting, are they skewed at all away from the Permian and are they more focused on consumables? So when you step back you see good likelihood of at least repeating your first half order performance, which I think in total was $340 million given the growth in consumables and maybe some continued growth from the new Thunder pump?

Vicente Reynal

Yes, thank you, Andy. So as we said, I think the orders in the upstream side, as we view them in the second quarter, they are not concerning to us. We view that as just purely timing of pump orders. And as you said and a reminder in the first half, total upstream orders continues to be up and some other things that we have said in the past is that we will continue to be very confident on the investments that we have done on the aftermarket and consumables side. And as you recall, we have said a couple of times that the upstream side of the business, 80% is aftermarket, consumables, service, parts and repairs and we see that continued momentum very strong sequentially and year-over-year. And as the level of intensity continues to be around all the basins in North America and even also outside in international locations where we have now good exposure to it as well, we feel confident on talking about that double-digit orders and growth as we go into the second half.

Andrew Kaplowitz

And Vicente, just to be clear, double-digit orders on upstream or is it a whole energy enterprise?

Vicente Reynal

Well, as I said that I was referring here to the upstream side.

Andrew Kaplowitz

Yes, got it. Okay. And then Todd, just I want to ask you about the working capital improvement in the sense that 530 basis points in Q2 was obviously way up from Q1 and 130, I know you mentioned you think you could sustain that level of working capital improvement, but it does seem like the enterprise really just stepped up the focus here over the last several months. So what’s stopping the businesses from maybe continuing to improve to the point where you end up recording 400 or even 500 basis points of working capital improvement for the year versus the original guidance I think it was 200 basis points?

Todd Herndon

Yes. I think that we are very pleased with our progress in this area. And as you recall, we started this employee engagement initiatives really towards the end of September this past year and it takes a little bit of time to work your processes and make those sustainable changes in the business and we saw in particular improvements in the accounts receivable profile where we were very effective in improving our aging buckets over the second quarter on items we have been working for a while that started in Q1 and Q4. And we also have been working really hard on items like AP in terms of our vendor terms and implementing things like P-cards and also continuing just to work disciplines in our shared service centers in common and harmonizing processes across the U.S. and Europe. So, we see the opportunity to sustain that and I think it’s just really an outcome of the focus – the efforts that we have been talking about for a couple of quarters.

Vicente Reynal

And Andy, I think as we alluded on the preliminary remarks, I mean we continue to see continuous improvement, that’s our culture of continuous improvement. So, we will definitely – and our teams are highly engaged on this initiative and we are pretty excited with the momentum that we are building now and expect to continue to see great progress.

Andrew Kaplowitz

Thanks, guys. Appreciate it.

Vicente Reynal

Thank you, Andy.

Operator

Our next question will come from Joe Ritchie of Goldman Sachs. Please go ahead.

Joe Ritchie

Thank you. Good morning, guys.

Vicente Reynal

Good morning, Joe.

Joe Ritchie

So going back to energy for a second, you guys sound really good about the prospects for the second half of the year, can you maybe try to parse out a little bit, how much of that is a function of the investments that you have made potentially gaining share in, let’s say places like the Permian on the upstream side versus like what your expectation is for completions in the second half of the year, so more of like a growth versus share question?

Vicente Reynal

Joe, we have made – we feel that the outgrowth that we are going to see is due to share gains. Keep in mind that we are launching new innovations such as the Redline Packing and that is seeing some tremendous momentum. As you saw, we are expanding now our plunger, which is another consumable that we have. And so from the aftermarket, we feel that we continue to take share. And as we go into the second half, we have a very strong backlog of oil pumps, particularly based on the order rates that we saw here, particularly mainly in the first quarter. And so we feel that again based on the investments that we have done on product and the footprint, we feel that our service footprint is just unmatched by anyone and as our fleets get moved from one basin to another, we can service our customers regardless of the location.

Joe Ritchie

That’s helpful, Vicente. And as I think about obviously the mix of your business being very much skewed towards after-marketing consumables, can you just touch on what you are seeing from a pricing dynamic in the market at this point?

Vicente Reynal

Yes. Joe, we feel that because we can add value to the customer in terms of total cost of ownership. I mean, I will give you an example here with the packing line, the packing last 2x to 3x the nearest competitor. So, that allows us for generating an increase and commanding a price premium on that product. So, pricing is very stable. And as we have some products that can command total cost of ownership improvements then we will definitely be prudent on ensuring that we are commanding price as well.

Joe Ritchie

Okay, thanks, guys. I will get back in queue.

Vicente Reynal

Thank you, Joe.

Operator

Our next question will come from Bill Herbert of Simmons. Please go ahead.

Bill Herbert

Thanks. Good morning. Do you think with regard to the, I think you said upstream orders for the first 3 weeks of July were up 27%, is that correct?

Vicente Reynal

Yes, correct.

Bill Herbert

Okay. And most of that is aftermarket and consumables or is a decent chunk of that OEM?

Vicente Reynal

It’s actually a very fairly good blend, Bill.

Bill Herbert

Okay. The question I have is with regard to the OEM product, where are those pumps being shipped to?

Vicente Reynal

Where are they? So I mean, I think if you think about replacement pumps, it would then be shipped to – in many cases to our oilfield service customers. So it could be – and let me ask you a bit, I think it will then vary broad-based by basin. So, it could be that we may ship based on where our customer will put the pump in the Permian Basin, but it could be also the Marcellus basin. So, that is from a replacement perspective. And in terms of new pumps, then we will be shipping that to the packagers whether it will be the Kirbys or SMS of the worlds or energy.

Bill Herbert

Okay, that’s helpful. Thank you. And when we think about the second half map, if you will, you guys have elevated guidance for the second half of the year on the bottom end. Can you just roughly describe the expected margin pathway for each of your three segments for the second half of the year?

Vicente Reynal

Yes, sure. So I can tell you from an industrial perspective, we see the margin to be in kind of the 22ish EBITDA range. On the energy side, we see in the third quarter to be in the low 30s. As we go into the fourth quarter, we will be more like 34ish, that’s primarily driven by some of the downstream shipments that happened this year are going to happen in the fourth quarter. And on the medical side, we expect to be in the very high 20s. So again, we talked about good improvement in the second half compared to the first.

Bill Herbert

Super helpful. Thank you.

Vicente Reynal

Sure, Bill.

Operator

Our next question will come from Brian Drab of William Blair. Please go ahead.

Brian Drab

Hey, good morning. Congratulations on the quarter and thanks for taking the questions. Just a couple of questions. On the acquisition, am I correct in guessing that the annual revenue run-rate for this recent acquisition being like the $20 million to $25 million range?

Vicente Reynal

It’s really more kind of in the 10ish range, I mean, Brian.

Brian Drab

Yes, okay. And so you bought it for $20 million, it has mid single-digits on EBITDA multiples, so $4 million in EBITDA and $10 million in revenue, is that how to think about it thereabout?

Vicente Reynal

Over the entire year, yes, that’s right and that multiple obviously pre-synergies.

Brian Drab

Okay, that’s a great EBITDA margin on that business better than I was assuming in my initial guess and what date exactly did that acquisition close?

Vicente Reynal

It was basically end of May.

Brian Drab

Okay, perfect. And then not a lot of questions on the medical market yet, so can I just ask on the liquid pump market, if we look back to the spring of 2017, I think that you estimated that your share there on the liquids side was about 3%. How is that going? Are you gaining traction there and any update on where you think your share might be and where it’s going?

Vicente Reynal

Yes, Brian. I think we feel we continue to see improvement. I think it takes time. What we like to refer to is design wins and we are really excited about the design wins. Design wins is basically when the project we win it and then it goes into production with our customers. So, it takes a little bit of time, but we think we might be now, maybe it could be twice that 3%, but it’s just – we are definitely seeing an improvement there, Brian. We are excited about it.

Brian Drab

Okay, great. And then just one last quick one on the energy segment, can you give us a breakdown within upstream of how revenue broke down between original equipment, the fluid ends and then the consumables, other consumables, just a rough...

Vicente Reynal

Yes, Brian. We like to say that, that’s right. So we like to say as you hear us said before that aftermarket is about 80% of the upstream business, OE is 20% and then when you take that 80% of the aftermarket, half of that is roughly fluid ends and then the other half is basically consumables service and repair.

Brian Drab

Okay. So that held true in the second quarter, right?

Vicente Reynal

Yes, pretty much.

Brian Drab

Okay, thank you. Thanks.

Vicente Reynal

Thank you, Brian.

Operator

Our next question will come from Mike Halloran of Baird. Please go ahead.

Mike Halloran

Hey, good morning guys.

Vicente Reynal

Good morning, Mike.

Mike Halloran

So, let’s start on the mid and downstream side, obviously, a lot of confidence in the trajectory of the orders and the book of business there. Maybe you could just talk about how that’s progressed over the last 3, 6 months. The pipeline seems to be building. The opportunity set seems to be building, maybe just a little bit more color on that side and what that could look like over the next 12 to 18 months?

Vicente Reynal

Yes, Mike. It’s definitely progressing – has been progressing very well. We have launched quite a few commercial initiatives and better processes on the mid and downstream side of the business. We also in some of those businesses we even have some new leaders and we are really excited with kind of the optic in momentum that we are seeing across those businesses. So, we feel confident based on what I have said in the remarks that we are building very good backlog for 2019 and also here in the second half of the year.

Mike Halloran

So, on the industrial margins obviously good color earlier from a separate question on 22% EBITDA margin is the target this year. When you think about the sequentials from this quarter, could you help on what the swing factors look like? Obviously, Runtech dilution to the margin doesn’t change a heck of a lot, I am guessing. Is it mix, is it internal initiatives starting to come through? How do we think about what that progression can look like in the drivers?

Vicente Reynal

And Mike, are you referring to basically for the second half what are we going to...

Mike Halloran

Yes, into the second half of the year to get up year-over-year in some contract terms.

Vicente Reynal

Sure, sure. Okay, yes. So we definitely see continued momentum on Runtech. I mean, it’s obviously a newly acquired business. We are very excited. We are working on a lot of our kind of strategic initiatives around sourcing and so on. So we will see some improvement sequentially on the Runtech business, but I think as you look into the second half, it’s going to be really mainly driven by higher penetration of the initiatives on I2V, for example, that we mentioned and we have talked about here at the beginning of the year also better price momentum that we see as here in the second half and targeted cost actions that we are taking in the business as we continue to optimize the industrial business to a higher performance industrial segment.

Mike Halloran

Great. Appreciate the color.

Vicente Reynal

Thank you, Mike.

Operator

Our next question will come from Nathan Jones of Stifel. Please go ahead.

Nathan Jones

Good morning, everyone.

Vicente Reynal

Good morning, Nathan.

Nathan Jones

I am going to ask you a question about something other than energy. The industrials business, you talked about low single-digit aftermarket growth, which I think implies that you had some pretty strong high single-digit kind of OEM growth on that side. Probably, the last couple of quarters have been heavily weighted to OEM growth as well and you talked about that being a leading indicator for aftermarket growth in the future. Can you talk about how long these products take after going out into service to start generating aftermarket, if there is a meaningful margin difference between aftermarket and OE and if that would be expected to reaching the mix maybe as we go forward here?

Vicente Reynal

Yes, Nathan, good question there. Yes, I can tell you that we are very excited about the OE and I can tell you that it’s been in kind of the double-digit run-rate here for the past couple of quarters. So we are very excited with the innovation as well as the demand generation efforts that we have launched that are really accelerating our penetration of a lot of our products. From an aftermarket perspective, we expect that definitely start seeing some aftermarket from those products in the range of 1 to 2 years. So clearly, this is very exciting for us as we look ahead and more important is that this aftermarket is roughly about 500 basis points higher today. And clearly, we are doing a lot of work in terms of whether I2V or other initiatives to continue to improve that. So we are very excited because a lot of these OE products operates in the field as you know for more than 10 years. So we are seeding growth for the installed base, which is very critical for accelerating that aftermarket.

Nathan Jones

Is there any numbers you can put around kind of what the mix has been, is now, I assume it’s more heavily – pretty significantly more heavily weighted towards the OE side and industrials at the moment than it was a year ago, 2 years ago. Is there anyway you can quantify that for us, because obviously that’s having some drag on the margin profile here at the moment?

Vicente Reynal

Yes. So, OE is roughly 65% of – more than 65% of the revenue. And if you remember, I think aftermarket whereas before we were talking about being in the mid 30s, this could be now being in the low 30s. So, you can see that at least 200 to 300 basis point of differentiation in terms of the mix.

Nathan Jones

Okay. And then I just want to follow-up on Andy’s question earlier about working capital, when you were going through the IPO process, if I remember correctly, the target for working capital at that point was 26%, which you have got to in a little bit over a year after going public, which is obviously extremely good. Is there a target now that you would move to a longer term target? I mean, you have said it looks relatively stable for the back half of the year, but maybe as we go out to ‘19 or ‘20, where you think the business should operate in terms of working capital in the longer term?

Vicente Reynal

Yes, Nathan, we always said that we want to be targeting low 20s over the medium-term. I think we are seeing as you saw very strong momentum and we are really excited that the teams are learning and really applying a lot about cash, the cash discipline and cash conversion cycle management. So, we think that that low 20s in the medium-term is where we are heading next.

Nathan Jones

Yes, it’s obviously made great progress on that. Thanks very much for taking my questions.

Vicente Reynal

Thanks, Nathan.

Operator

Our next question will come from Julian Mitchell of Barclays. Please go ahead.

Julian Mitchell

Thanks. Good morning. My first question just around pricing in energy, which I don’t think has been touched on at all yet. Halliburton obviously spooked people with their comments on a market share grab, one of your pressure pumping peers yesterday talked about competitors bidding meaningful discounts to the spot market. So, I just wondered what are you seeing in your pricing right now in upstream energy and if you do see the pricing environment change materially in the second half, what sort of measures or what reactions would you put in place?

Vicente Reynal

Yes, Julian. We are seeing the pricing market to be very stable at least from our side on being an OEM of these products whether pumps or consumables in aftermarket. I can tell you that we have not dropped our prices at this point in time and the flow-through that we are seeing in that business is just fantastic, which obviously is more indicator that we are not dropping prices. And like I said before, we are really focused on this total cost of ownership and the fact that we are launching innovative products and solutions that provide longer reliability and longer kind of timing of product in the market, which allows us to command a better price momentum on those products that provide a better value to the customers. So, that has been our focus on the aftermarket. And the last point, Julian, I will say that it is not insignificant, but it’s actually a very strong competitive advantage for us, which is unique that we are in pretty much every basin across North America and what that allows is to get product to our customer very fast, very quick, whether it is on the repair or whether it is on consumables that they need to utilize themselves.

Julian Mitchell

Thank you for the color. And my second question would just be around the overall adjusted EBITDA guidance for the year. Obviously, at the first quarter results, you raised the bottom and the top end of that guidance. This time, you have kept top end the same even with the addition of a business, which has positive EBITDA in terms of your acquisition at the end of May. So, just wondered what has kept a lid on that top end moving up? Is it currency is it that margin, short-term headwind in the industrial business, maybe just any detail on that and what your updated currency assumptions are?

Vicente Reynal

Sure, Julian. It is really mainly some of the FX headwinds, which are roughly offsetting some of the PMI accretion and I think that’s kind of really the main one, the euro being at 1.17 kind of roughly that’s what we put here in these assumptions, but obviously, keep in mind, we are pretty excited that the midpoint still is up more than 20% versus last year.

Julian Mitchell

Right. And then lastly, just the CapEx guidance, what’s the change thereabout?

Vicente Reynal

The CapEx guidance is something that it ties back to our focus on return on invested capital and one that we are very conscious now by the factory level, we are able to track ROIC from a perspective of are we going to get that high return on investments and we are prioritizing the investments as a global company. And I think it’s just been more prudent and be sureful of some of these kinds of investments that we are going to make with the capital. And in addition to that, due to the PMI acquisition, we can take CapEx slightly down, because we saw the PMI acquisition really as a place where we were going to make some capital investments in our plunger business internally, but obviously as you saw this is a smart way of really utilizing cash with a great return and that allows us to accelerate and penetrate our share in the plunger business.

Julian Mitchell

Thank you very much.

Vicente Reynal

Sure.

Operator

Our next question will come from Damian Karas of UBS. Please go ahead.

Damian Karas

Hey, good morning everyone.

Vicente Reynal

Hey, Damian.

Damian Karas

Thanks for fitting me in here. We have obviously covered a lot of ground, but I did want to get some color on your thinking about capital allocation. Leverage ratio could change fairly quickly. I know it’s not what you are expecting, but if you were to see a reversal in the energy trajectory, particularly in the upstream, how are you thinking about balancing the debt pay-down versus buyback now that you have the $250 million program in place?

Vicente Reynal

Yes, Damian, our capital allocation continues to be – we are very mindful on debt pay-down. You saw an accelerated repayment that we did in the second quarter and committing to another payment in equal amount or a similar size in the third quarter. Even with that, because of the great cash flow that we generated, we were able to also add on these kind of small tuck-ins. So, I can say that, that will be our second priority. And our third priority really is really around this share buyback as we may see intrinsic value of shares that are basically at a level that we may not – that we think is a great opportunity obviously. And I can tell with you as well, Damian, from an M&A perspective, our funnel continues to be very healthy on the industrials and the medical and even with these debt repayment priority that we have, we will be surprised if we don’t close a couple of deals, one or two deals here before the end of the year.

Damian Karas

Okay, thanks. That’s helpful. And I guess I will throw you a little bit of curveball and ask you about medical, obviously, still fairly small today, but could you give us a sense where margins would be coming in if you stripped out the current growth investments and now that you are starting to gain some traction on some of our strategic initiatives, what kind of run-rate would you expect on the business, are we talking mid singles, high single-digits, perhaps double-digits like we saw in the second quarter? Thanks.

Vicente Reynal

Yes. We definitely see between 100, 200 – 150 basis point improvement from what you saw.

Damian Karas

Okay, thank you.

Vicente Reynal

Sure.

Operator

Our next question will come from Nicole DeBlase of Deutsche Bank. Please go ahead.

Nicole DeBlase

Thanks. Good morning. Thanks for fitting me in.

Vicente Reynal

Good morning, Nicole.

Nicole DeBlase

Good morning. So I guess just starting with industrial, I am not sure if I missed this. I know we talked about kind of second half growth expectations for the other two businesses, but if you could talk a little bit about the path for organic growth in the second half, since the comp gets a little bit tougher, but obviously order trends remain very robust?

Vicente Reynal

Yes, sure. So we expect to be in organic growth momentum in the third quarter, roughly in the high single-digits and M&A will be in the third quarter kind of roughly mid single-digits with an FX headwind of roughly 1 point negative headwind. And as we go into the fourth quarter, we expect organic to be roughly mid single-digits with an M&A again mid single and FX once again that negative 1 roughly.

Nicole DeBlase

Okay, thanks. That’s really helpful. And I am just following up the comments that you guys made on tariffs and your view is well, that was really helpful, but maybe if you could talk a little bit about what you are seeing from a price cost perspective and I guess, is that completely neutral to margins. Has it been neutral to margins year-to-date and what’s the expectation for the second half?

Vicente Reynal

Yes, price cost, I mean, it has been relatively neutral to actually maybe slightly even positive based on the initiatives our teams have been doing on resourcing and other activities like that. And then on top of that, on those productivity initiatives or sourcing initiatives on top of that, obviously we get the prize kind of come through the P&L.

Nicole DeBlase

Got it. Thank you.

Operator

Ladies and gentlemen, this will conclude our question-and-answer session. At this time, I would like to turn the conference back over to Mr. Reynal for closing remarks.

Vicente Reynal

Thank you and thanks again for your interest in Gardner Denver. I want to first thank our teams that our shareholders of Gardner Denver continue to deliver outstanding performance for long-term value creation. And as we said in the past, we are committed to best-in-class Investor Relations and helping the financial community to better understand our company. We are very laser focused on consistent execution of our simple and straightforward strategy. Thank you for joining the call today and look forward to talking to you soon. Thank you.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.