CECO Environmental Corp

NASDAQ:CECO

Earnings Call Transcript 2018-Q2

[Operator]

Good morning, and welcome to the CECO Environmental Conference Call. [Operator Instructions] Please note that this event is being recorded.

I would now like to turn the conference over to Matt Eckl. Please go ahead.

[Matt Eckl, Chief Financial Officer]

Thank you for the joining us on the CECO Environmental Second Quarter 2018 Conference Call. On the call today is Dennis Sadlowski, Chief Executive Officer; and myself Matt Eckl, Chief Financial Officer.

Before we begin, I'd like to note that we have provided a slide presentation to help guide our discussion. The call will be webcast along with our earnings presentation on our website at cecoenviro.com. The presentation materials can be accessed through the Investor Relations section of the website.

I'd also like to caution investors regarding forward-looking statements. Any statements made in today's presentation that are not based on historical facts are forward-looking statements. Such statements are based on certain estimates and expectations and are subject to a number of risks and uncertainties. Actual future results may vary materially from those expressed or implied by the forward-looking statements. We encourage you to read the risks described in our SEC filings on Form 10-K for the year ended December 31, 2017. Except to the extent required by applicable securities laws, we undertake no obligation to update or publicly revise any of the forward-looking statements that we make here today, whether as a result of new information, future events or otherwise.

Today's presentation will also include references to certain non-GAAP financial measures. We have reconciled the comparable GAAP and non-GAAP numbers in today's press release as well as the supplemental tables in the back of the slide deck.

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

[Dennis Sadlowski, Chief Executive Officer and President]

Good morning, and thank you for joining us. Now from time to time I'm told that I don't want my passion and enthusiasm on my sleep. And I need to let it out better. Well I intend to do so today, because I’m legitimately thrilled about our growing momentum and pleased with the results that we believe was a strong second quarter across CECO Environmental.

The customer wins in the quarter and share gain led by our Energy Solutions team, in conjunction with a return to sequential revenue increases confirms that we're on a good track. We’ve divided the call into several parts this morning.

I'll first cover our second quarter highlight and how we see our strategy gaining traction in the market. Matt will next discuss the financial details and outline the targets we set for ourselves looking out three years. And then, I will review our end market outlook before we open the call up to your questions.

So let's get started with Slide 3. Our 4-3-3 operating strategy is designed to deliver significant benefits for our customers that translate to market wins and growing market share. It's our formula for strong financial results and long-term value creation for our share holders. New orders in the second quarter topped $100 million, demonstrating that our team is actively winning in the market, rigorously executing our 4-3-3 operating strategy and accelerating our turnaround momentum.

We achieved solid results across the company. Most notable is that our triple-digit new orders were led by our Energy Solutions segment in spite of the distressed power generation marketplace. The combination of our brand strength, demonstration of our technical prowess and highly engaged sales team not only delivered on behalf of customers, but also to work from our competitors.

Orders at just about $100 million we're up 24% year-on-year and 11% sequentially. This is the third consecutive quarter of both booking sequential growth and a book-to-bill ratio well above one. The entire company is quite frankly induced by this and they should be. Noteworthy, is that we had a close to $60 million to the backlog over the last three quarters which represent a harbinger for future revenue increases. Our gross margins were a healthy 33.5%, an indication that our solutions have value in the market and our execution capability remains strong.

Likewise, our sequential non-GAAP operating income and adjusted EBITDA improved 30% and 23% respectively, demonstrating leverage on a modest sequential revenue growth to $81.1 million. And we're proving that we can be a cash generating engine by achieving second quarter free cash flow of $8.4 million and a free cash flow to EBITDA conversion of 122%.

On the negative side, our industrial segment was below our potential in the quarter with orders down sequentially. I’ll also guide that this was predominantly due to several orders being slow to close. Additionally, our China business remains sluggish. But this is no surprise because it’s very much weighted towards a coal-fired power generation which continues to be a distressed marketplace, both domestically and overseas.

Our asset-light business model, active attention to working capital and customer payment terms would demonstrate the strength of our offering all contribute favorably in the quarter. Matt will get into the details. So I'll just summarize by saying I'm very encouraged and like where we're heading.

Moving to Slide 4. I'd like to once again reiterate that clarity of purpose around which we are transforming CECO Environmental. We’re about growth and specifically enabling our industrial customers to grow and we do so with clean, safe, and more efficient solutions, that protect our shared environment. The positive financial and operating results that I just summarized are reflection of the entire team's growing passion and commitment to this defining purpose for our company.

Turning to Slide 5, our 4-3-3 operating strategy is all about developing leadership solutions, in air quality, and fluid handling. An offensive mind in 4-3-3 strategy worked well for several top national teams during the soccer's recent World Cup competition and it’s also working for CECO Environmental.

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

We've chosen three compelling markets to operate in: clean energy, industrial air pollution, and fluid handling. There’s a winnable and sizable spaces in each of these end-markets, and more aggressively and more successfully competing in each of them.

Finally, we have three growth platforms that we're building out. Investments in each are gaining traction and contributing to our solid results.

Engineered equipment is our largest and most global platform with blue chip customers and superior products we're delivering applications that address the cleaning production and movement of fossil fuels.

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

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

Slide 6, summarizes some of the investments and actions we've undertaken implementing and executing our strategy. It's becoming obvious that the clarity of our purpose and strategy are contributing to sharper execution across the company. Individually and collectively, our investments and actions are paying off.

I think it's worth taking a few minutes to emphasize some of the key highlights that are contributing to our improving business performance. We know that we have much work ahead and our priority remains to execute the plan with an aggressive and comprehensive effort. We've taken several decisive steps to generate leverage from our value creation enablers.

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

Further, we successfully transitioned the leadership of our Energy Solutions segment and created and filled the new position of Chief Technology Officer. The CTO role reflects the importance of and our commitment to innovation. We’ve also added valuable resources to our board with a good balance of strategic insights, industrial market an operating depth, solid governance, and financial acumen. We've got an excellent leadership team and Board actively guiding the success of the company.

We're continuing to drive out organizational complexity. As I mentioned in previous calls, our biggest target is to reduce the legal entities in ERP systems within CECO, which are not only inefficient, but also a barrier to productive interactions with our customers. This past quarter we closed our additional two legal entities and one ERP. Complexity drains in our organization and we have to do more here.

We remain committed to an asset-light business model as a means of turning earnings into cash. And we previously reported on the sale of two none-core business units in Q1 as we’ve reshaped our portfolio to sharpen our focus on air quality improvement and fluid handling in the industrial and energy end-markets.

We're also taking advantage of the $5 billion installed base of the equipment we produced over the years. We’ve made a commitment to generating consistent recurring revenues by capturing the aftermarket of replacements, spares and upgrades that keep customers operating at the highest levels of efficiency.

Just as importantly, we’re aggressively pursuing what we term the Brownfield market, which represents more significant project opportunities to update and upgrade our aging equipment or change out and upgrade our competitor’s install base.

Within our three core growth platforms we've been undertaking a range of actions that may individually seem small, but are collectively advancing our ability to win in the market. Let me cover just a few. We continue to push out complexity in the corresponding G&A cost. And as we do so we've redeployed G&A into selling resource additions. And we've realigned our sales incentives to drive value and growth.

In specialty pumps and air quality, we've approved $3 million in capital investments to make long overdue upgrades to our production equipment. The payoff will be an increased output and shorter lead times for our customers, ultimately to gain share and create value.

We’ve also been investing in our people because our people are critical asset in transforming the company. Over the past several quarters we've broken down our organizational silos, blended external hires with promotions from within and invested in learning and development. All of this foster team work, which makes us both more agile in capturing opportunities and resilient in facing competitive challenges. And it shows everyone that CECO is a great place to build a career.

Finally, we are priming the innovation pipeline so that it will yield a steady supply of new products and services to fuel grow into the future. And as I mentioned earlier, we've created and filled the position of Chief Technology Officer. And I'm personally devoting time to this important driver of the company's growth.

Before I turn the call over to Matt for the financial details, I want to take a few minutes to cover some of our key wins that we closed in the second quarter. I do this because they validate the breadth and depth of our success in the quarter and support my confidence that we're on the right track driving forward.

Turning to Slide 7, I’ll highlight six key wins worth over a combined $20 million in new bookings. They are the turbochargers of our 4-3-3 operating strategy. Individually and collectively, they demonstrate the value CEOC Environmental brings to the market. Each clearly demonstrates our growing ability to differentiate our capabilities and the strength of our franchise can deliver share gains across our platforms, products, and technologies. Moreover, they underscore our global presence across North America, the European Union, the Middle East and Asia.

There's no doubt that the entire organization is proud of these wins motivating us to build on the success. But we all know we can do even better, and we will. I'm super excited about this not only because I can see the progress in our result, but also I can sense the momentum within the organization.

I believe it's an extraordinary, powerful and competitive force when an organization believes in its mission and in each other. We won a multimillion dollar order for our scrubber oxidizer package after assisting a metals recycling customer through the permitting process with engineering support to address off-gassing concerns, a great win for the Industrial Solutions team.

In energy, our Emtrol-Buell team put a key win on the books by solving for several complex operating issues at a Louisiana refinery that post highest operating velocities in the world.

Our leadership team in Dubai won an oil and water separation system from new first time EPC customer on the strength of the brand and the relationships with the end user. And just because the power gen market remains in distress does not mean that we can't still gain market share.

The CECO Peerless team won a major retrofit award to change out a competitor system. The retrofit address NOx emissions issues that have been playing in this gas power plant for years a big time Brownfield win.

Further, we’re demonstrating that our account management approach and focus is paying dividends. Our Account Manager, Michael Szczachor has turned a series of losses into a string of wins by clearly identifying that critical success factors for compressor and metering stations for one of the nation's largest pipeline operators.

Not to be outdone, the fluid handling team is also demonstrating the benefits of our application-focused product that on a large aquarium win. Our fiber product application fit and end-user relationships help the team prevent a contractor from supplying cheaper metal pumps that would likely corrode in the salt water application. And these are just a few representative wins that contributed to our second quarter orders.

So I’ll wrap up by saying what I said at the beginning. I'm really thrilled about our growing momentum and delighted with the result of a strong second quarter across CECO Environmental. And I know I speak for the entire organization, when I say that we know we can do even better and that we're going forward with confidence in our 4-3-3 operating strategy and our passion to relentlessly compete and win.

With that, I'll turn it over to Matt Eckl, who will discuss the financial results in the quarter. I'll be back with you to close out the call with a few comments on our served markets before we take your questions. Matt?

[Matt Eckl, Chief Financial Officer]

Thanks Dennis. Kicking off with Slide 9, I want to start by congratulating the CECO team on a successful quarter. I share in Dennis comments that the confidence building within the team can be felt. It’s certainly nice to see positive momentum. As a quick point of reference, like-to-like comparisons have been provided to exclude the impact of divestitures in prior periods, comparable on a reported basis are available on our 10-Q.

With that, our orders grew $110 million which was up 24% year-over-year, excluding divestitures as our refinery business continue to return the historical averages and our energy team delivered an outstanding quarter. On a sequential basis, bookings grew 10.5% versus Q1.

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

Compared to this year’s first quarter our top line increased 17% on a like-to-like basis

Cash flow from operations in the quarter was $6.6 million, which included $1.8 million of earn outs paid. Excluding the accounting convention, our CFOA was the standout $8.4 million in Q2.

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

Q2 non-GAAP operating margin at 6.4% is still well below our potential, but points to the inflection I noted in last quarter's earnings call. What I would call your attention to is the operating leverage evident in CECO’s operating model. Sequentially, operating margins are up 220 basis points and operating income is up 78%.

On a year-to-date basis, our tax rate is 53% due to the gain on divestitures and one time deferred tax charges associated with the U.S. Tax and Jobs Act, however, on a normalized basis, our effective tax rate was 24.7%.

Concluding the headline of financials our non–GAAP diluted earnings per share was $0.05, which was up $0.02 in the prior quarter.

Moving forward to Slide 10, our orders and sales trend by segment are displayed. We can see in the breakout results associated with our divested business units, and our Emtrol-Buell refinery business for transparency purposes. As you can see, our refinery end markets have sustainably returned to circle averages and our funnel is still robust.

Within the Energy Solutions the commercial team delivered on the best quarters in size in CECO, despite some challenging power generation market conditions. As I sit through our regular commercial deal reviews with the energy sales teams, they are undaunted by the market and its pediment in the results.

In particular, I want to highlight David Barker, as our peers to buy office and his team. It's clear they have embraced the 4-3-3 strategy as their passion to serve customers help us to secure the oily water separation win that Dennis shared, and why our midstream business is up double digits year-over-year.

Looking at our Fluid Handling segment, on an organic basis we grew orders 11% year-over-year and 7% sequentially. This is slightly ahead of most other recently announced pump company growth rates and another indicator that we're growing market share. Industrial Solutions $90 million of orders in Q2, continues to lag our expectations.

The team still sees a lot of activity in the funnel, but as of late, large CapEx positions we expect to be made and bets placed in Q2 have pushed to the right. This quarter is clearly at the low-end of our typical $19 million to $22 million per quarter average in an area we're working aggressively to improve.

Touching on Slide 11, we outline CECO’s backlog, orders and revenue. I'm excited to report a third consecutive quarter of growing backlog and a book-to-bill ratio eclipsing 1.2 in the quarter. The last time CECO’s backlog of $200 million was in Q4 2015, directly after the Peerless acquisition. The focus on growth is gaining momentum.

Slide 12 shows the trend of our gross profit, operating income, and adjusted EBITDA. All of which have improved sequentially with the increase in volume, coupled with the benefits of our Q4 2017 restructuring actions.

Gross margins at 33.5% are in line with total year 2017 and still very healthy. We are keeping a careful eye on our input cost as the product tariffs and inflation rises. The team is ensuring we’re adequately pricing our projects to cover inflationary risk and actively measuring our manufacturing input cost to ensure we protect our margins. Thus far we’ve seen minimal impact but remain diligent and managing our [indiscernible] caused by ratcheting up of trade protectionism.

Sequentially, non-GAAP operating income and EBITDA were up 78% and 54% respectively. And in the second half with continued momentum, we would expect our year-over-year comps to improve. The benefits of Q4’s restructuring actions had yielded $2 million of SG&A benefit year-to-date and complimented with the volume increase are driving operating leverage. In addition, we can see our SG&A mix change as admin reductions are paying for sales investments in line with our 4-3-3 operating strategy.

On Slide 13, we expand our quarter in terms of free cash flow conversion with all segments playing an active role. Most notably, with Energy Solutions that is executed on favorable contract terms that drove early project collections in the period. In addition, our Industrial Solutions segment reduced working capital as a percentage of sales by three points, and Fluid Handling continues drive the inventory down through the lean journey.

To the right you can see that our projects we have, as a percentage of sales, is moving in the right direction, back towards the route. I think the point I want to highlight, within CECO’s asset intensity is a leader amongst industrial peers and will continue to get better.

On Page 14, I'm pleased to report our improved balance sheet as we pay down an incremental $4 million of debt in Q2. To the right you will see that we’re able to keep our bank-defined leverage ratio, relatively flat sequentially, despite not having the benefit of Keystone and Strobic in our quarterly results.

From an investor perspective, our net debt-to-EBITDA has declined to two consecutive quarters to 1.6x. With our growing backlog and continued focus on debt reduction, we believe we will continue to delever in the second half.

Turning to Slide 15, I want to shift gears from reporting our second quarter performance to announcing our three-year financial targets which we promise to provide late last year. These targets are both aggressive and achievable and our clear sign that we're striving for top tier returns. I outlined the targets within the framework while CECO is striving for top tier returns, outgrowing the markets, commitment and accountability and a unique business model. We believe we can organically outgrow our market 2x over time. In fact, we're already substantially outgrowing the market in bookings and have done so sequentially over the past three quarters. The bookings will translate into increased revenue, which has sequentially grown over the past two quarters.

Organically growing revenue at double the rate of our certain markets is supported by three factors that Dennis has discussed earlier when he highlighted some of our market wins: first, is highly engaged salesforce across our niche end markets and our geographic footprint supported within outside-in leadership culture. Second, is the depth of application expertise that differentiates CECO where they're selling original equipment or aftermarket services. I put our team on marketing and sales of Dorian Drake and Paul Hoeller in engineering [indiscernible] any of our competitors in solving our customers’ problems. It's what they live for.

And third, our investment to produce a pipeline of innovative products and services, which as Dennis noted, were highly committed to with our recent CTO appointment. Together, they contribute to our wellness focus to take profitable market share. CECO’s commitment accountability to aggressive target is highlighted by the expansion of our EBITDA margins to 12% to 14% over the next few years. This is a substantial increase over our current EBITDA margin of 8%.

Our EBITDA target is inclusive of balance reinvestment designed to propel ongoing future growth. A 33.5% of gross margins showed our solutions of value and our capability to execute it strong. With growth, our business reached the benefit of operating leverage, and as mentioned earlier, we remain committed to reducing the complexity within our organization, making us more efficient. By announcing these targets we're committing to transparency in reporting our progress which is the best form of accountability.

Finally, we have a unique business model that differentiates the CECO from its industrial peers, the fact that we are asset-light. We believe our business model commands a top tier return on tangible capital and converts earnings-to-cash quickly. While our private business’ cash flow can be lumpy, as exemplified in the last three quarters, over time we're confident in our cash conversion capability. We're aiming to continually convert cash at a rate of 65% to 85% of EBITDA, and strong cash generation obviously provides us flexibility for capital allocations.

In addition, return on tangible capital measures management’s effectiveness at generating operational return on capital and most applicable to our business model. We intend to achieve north of 50%, which is substantially above the already impressive 26% for trailing our twelve months. We will deliver on these targets with a dual push: first, by remaining asset-light with an aggressive focus on working capital; and the second, is to maintain and improve our gross margins as we grow.

In sum, these four targets are aggressive and achievable. As you can see, we're already heading down the pathway to the delivery and making real progress towards top tier returns. As an organization we’re excited and committed to these targets. I look forward to reporting our progress quarterly.

I will turn things back over to Dennis.

[Dennis Sadlowski, Chief Executive Officer and President]

Thanks Matt. The implementation and execution of our 4-3-3 operating strategy is fully underway, gaining more and more traction and producing positive results and momentum. Again, we're very pleased with the quarter’s results, but certainly not content. We can and will do even better.

Before moving to your questions I wanted to share some quick thoughts on the outlook of our end markets. Slide 17 shows it with the exception of power generation, all our served markets are trending up, representing modest and positive tailwind.

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

Let me offer some color beginning with our Energy Solutions end-market. Starting at the top, in the refinery segment, we were ready for the market recovery that started in the latter part of 2017. So when the customers in this area began to move on new investments, our team responded with strongly wins in all regions of the world. We’ve been pleased at the pace of the bounce back in early 2018. And given the slightly higher price of crude oil, we expect this market segment to stabilize at historical demand levels.

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

Power generation is still distressed and likely to remain so throughout 2018. So no change here from what we've seen over the past year or so. And I will add that in recent year the third quarter has historically been the weakest in terms of project awards, so we expect that to continue this year as well. However, we are still aggressively pursuing significant opportunities to gain share in the Brownfield and aftermarket areas.

Our restructured sales force is taking advantage of CECO’s reputation, capabilities and staying power. As mentioned earlier, one of our key wins in this space was a complete change out in retrofit of a competitor's failing NOx emissions management equipment. Our activity in coal power gen is focused exclusively on servicing our large installed base with aftermarket support. So this will become a smaller slice of the revenue mix going forward.

Moving around the wheel, the fluid handling, it’s a growing market that we’re well positioned in. Activity appears to be solid and we're investing in capability to better support our growth targets. And coming up to close the circle is our Industrial Solutions market.

In here there’s need for improved air quality, we will continue to offer solid potential for our Industrials Solutions segment and the outlook remain positive both domestically and internationally. Air quality is a global issue which was reinforced by me just yesterday by my Uber driver in Chicago. I was fortunate to ride with a sharp young lady on her summer break from her master’s study Cornell University. She is originally from Mongolia and avidly discussed the air pollution issues back in her home country. In fact, it was a central reason for her decision to pursue an urban planning degree to become part of the solution. And she was certainly interested in what CECO was doing it has to offer. I know we can do good and be good in this space.

In summary, our target markets are offering us compelling opportunities and we intend to be active and creative in seizing them. And I also want to mention three external variables that are in play and can influence the trajectory of our markets: U.S. tax policy, domestic inflation and the administration's actions on trade tariffs.

The U.S. tax policy reforms that were passed by Congress and signed into law by the President late last year are very positive for our domestic and industrial customers and in turn should be a positive force in our end-markets. We've seen the tax reforms increasing confidence in implementing factory investment decisions in favor of the United States. Our tax policy does not alone create demand it does influence decisions at the margin and that in turn gives our markets a small boost.

Increasing tariffs and the so called trade wars tend to have multiple direct and indirect effects on our market and supply chain. For example, we saw significant price increases announced on steel, aluminum and related products almost immediately following the recent tariff announcements. And while our business model tends to offset such increases in the stock market with simultaneous price increases on most of our offerings, the combined effect can alter end-market demand and confidence.

Fortunately, we have broad industry exposure so we don't have to worry much about picking the winners and losers. Overall, I see this as more of a headwind risk than anything else. Like many other companies, we’re watching how this plays out, and we are all on the same boat.

Now turning to Slide 18, I want to reemphasize our collective commitment to our purpose and the initial success of 4-3-3 operating strategy. Our strong quarter was a big step, but there are many more steps ahead as we build our momentum with further share gains that deliver solid value.

And now, we'd like to welcome your questions Operator?

[Operator]

Thank you. We will now being the question-and-answer session. [Operator Instructions] The first question will come from Sean Hannan with Needham and Company. Please go ahead.

[Sean Hannan, Needham and Company]

Yes good morning. Can you hear me?

[Dennis Sadlowski, Chief Executive Officer and President]

Yes, good morning Sean.

[Matt Eckl, Chief Financial Officer]

Hey Sean.

[Sean Hannan, Needham and Company]

Good morning folks, congratulations. Really, I think obvious some takes, but not a whole really a lot of impressive commentary here this morning in terms of wins, backlog and some other execution. So want to congratulate on that.

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

So just try to understand if you can specifically call out what you're using as the page for comparison, is that that the run rate from June or is it 2017? And then also can you talk about a little bit more specifically the assumptions for end-markets here, and what would be assumed to say from a power generation recovery over a three-year horizon versus finding? And any viewpoints of one versus another over that three-year period would be with the helpful?

[Dennis Sadlowski, Chief Executive Officer and President]

And thanks Sean and I appreciate the question. So your first question was about our growth target. Our that we communicated earlier that we stick by is we want to outgrow the market at least 2x, and that means we need to be out active in the market demonstrating our value and gaining share that’s the only way to deliver above market growth rate.

When we look at the aggregate mix of our market we probably tracked a global GDP over the long-term. And that’s where we see 2% to 3.5% or so global GDP. Now currently we’re weighted towards the North American markets and weighted towards the energy market, and to some degree those are having, offsetting end-market effects. So as we look ahead and made ourselves and report quarterly, we’ll report against both the mid-term expectation, like I've tried to do today, as well as offer what color we do see around market and mixed conditions.

At the end of the day, we think if we are able to drive that range of growth in that mid-single-digit to a guided operating leverage and generate kind of top tier returns that people expect. I think you had an added question and specifics around power gen and what was the other?

[Sean Hannan, Needham and Company]

Yes, it’s really more a matter of where are we assuming in these forecasts. As you think about recovery in power gen on the three-year horizon, there could artificially just through mass, coming off to really core level of demand today, being able to provide some pretty good growth for say in one to two years you went just kind of a very moderate temperature change within that market just small numbers. So trying to understand how does power generation factor into? Are you factoring anything on a three-year horizon for them? What are you thinking about on the refining front? Just trying to get some perspective around how you’re thinking about your markets in a differentiated manner one versus the other as you consider that three-year growth horizon?

[Dennis Sadlowski, Chief Executive Officer and President]

Yes, so I think I’d start by saying we like the markets we are in. We think that they have reasons to be growing over the mid-term there, the three-year to five-year term. And then over the more near-term, we went through a period in the refinery segment where customers settled on their money, they continue to operate their refineries at full scale and we saw very little you heard all about that last year.

In power gen, what we're seeing is a market that remains in a very challenged environment for the remainder of the year at least, the outlook from the biggest customers in the OE side of that are pretty well-known Siemens, GE. They're talk is that will continue into early next year.

Our goal is, however, to gain share in that market, being active, being visible, having the application expertise and building on our reputation and staying power. So like in this quarter we think there's going to be opportunities for us to continue to generate good wins. Albeit we’re not going to have any benefits I don't think in terms of tailwind from power gen over the next foreseeable future, I guess.

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

[Sean Hannan, Needham and Company]

Okay. And then the next question here and it's also top line focused. Is change that based on the progress momentum that you're having thus far this year, not on the execution on a revenue line, but in these bookings and new wins, it would seem that you folks would be kind of getting back to following the typical revenue progression that you would have in calendar years of quarter-on-quarter sequential progress. Should we assume that we’ll have incrementally higher Q3 over Q2, as well as Q4 over Q3? Are we trending in that direction or is there anything that I'm ignoring that would otherwise detract from that?

[Matthew Eckl]

No that's right Sean. If you heard some of my prepared remarks, you’d hear that we do believe that the second half has obviously been better than the first half and I always talk about thing sequential and that’s why on Page 9 of the slide deck that was prepared you'll see a comparison to Q1. And the thing I'd really point out is the fact that we grew backlog close to $60 million. So that’s a good indicator of what we see the second half doing.

[Sean Hannan, Needham and Company]

And it also I would assume lines up very well for at least a strong start to 2019. I don't think – I mean how much do you think is going to be realized out of that order backlog the back-end of the year versus what will rise into 2019?

[Dennis Sadlowski, Chief Executive Officer and President]

Yes, I think as you know we don't get the backlog following during one month, 30 days later and most of our orders are over let’s say nine to fifteen months or so depending on the size, complexity and customer timetables. So that increase in backlog in the last three running quarters of close to $20 million per quarter over the last three quarters is an important harbinger as I mentioned for our revenue growth, but it will be gradual. And then it will be up to us as what can we generate from new wins out of the market conditions that we see. And that's where we continue to keep our focus, keep our energy and look to executing better than the competition.

[Sean Hannan, Needham and Company]

Okay. So as you start – and this is all conceptual, but if you were to think about as you start off 2019 is there a potential that instead of your typical quarter-on-quarter decline as you start off in the calendar year that you could be even something closer to flattish on a sequential basis given this strong consistent uptick you’ve been seeing within your backlog? Or is that you mean you’re getting ahead of myself?

[Dennis Sadlowski, Chief Executive Officer and President]

No, I'm going to let Matt offer a little bit. But I don't think that we have necessarily on revenues any kind of typical, call it, seasonality in the quarters. It has a lot to do with win or some of the project orders book and what is the customer timetable for execution therein. So in the fact that we've grown over the last few quarters means we expect in bookings and backlog does indicate that we're expecting revenue to start to catch up. And as I said, then we have to continue to execute against the market conditions we see and do well to continue to generate wins, generate share gain.

I don’t know if Matt wanted offer anything more precise that that.

[Matthew Eckl]

I think you got on all the key points. The only thing I'd highlight is if you look back of the trend we put that out on the page, we are pretty much revenue follows orders by a quarter lag. And so that's a good indicator. You saw that when we went down through the cycle and as we go up, as we take market share. And so I think that’s probably the best way to model it on a average basis Sean.

[Sean Hannan, Needham and Company]

Hey, that’s great. Great indication here. Thanks so much for the color folks.

[Matthew Eckl]

Thank you, Sean.

[Dennis Sadlowski, Chief Executive Officer and President]

Thank you.

[Operator]

The next question will be from Gerry Sweeney with Roth Capital. Please go ahead.

[Gerry Sweeney, Roth Capital]

Hey, good morning Dennis and Matt. And congratulations on a nice clean quarter.

[Dennis Sadlowski, Chief Executive Officer and President]

Thanks Gerry.

[Gerry Sweeney, Roth Capital]

I wanted to take a step back and just follow-up a little bit on what Sean was asking and on your longer-term target of 4% to 7%. As you look at your products and portfolio, do you have everything in place to hit that 4% to 7% or do you need to add to it, or is it just a function of continuing this 4-3-3 strategy getting more engrained in the design process, aftermarket sales, et cetera?

[Dennis Sadlowski, Chief Executive Officer and President]

Yes, I think, it's more on the 4-3-3 strategy. Obviously, we do have industrial markets growing. I think, Sean, hit on the point that counterbalance in our energy markets is power gen in the foreseeable future that there could be some challenges there, but it’s about our 4-3-3 operating strategy.

[Gerry Sweeney, Roth Capital]

Okay, sorry…

[Dennis Sadlowski, Chief Executive Officer and President]

That I hear you asked a question is our outlook for that all organic and if so I will say – I will say yes. We’re all about just trying to build that growth engine, demonstrate in front of customer, the value of our applications and our people and do that in a way that gain share picks up, builds installed base and then really leverages the installed base for aftermarket and brownfield wins. So it’s armed with that against this aggregate, GDP backdrop over the longer-term that we think our targets are the ones that we’re after and those that we will report against going forward as well.

[Gerry Sweeney, Roth Capital]

And then, I think, you said in the commentary the industrial side of the business still a little bit slow, orders being pushed out. What gets this going? Is this more outside your control just tariffs adding a little bit of uncertainty, curious just to how this develops?

[Dennis Sadlowski, Chief Executive Officer and President]

Yeah, so I will say that it’s been a little disappointing because we do see a lot of good activity in the market and at the same time we’ve been hovering in that $18 million to $22 million in revenue for the past two quarters, which is less than what I would consider acceptable. And the pipeline does suggest we should be doing better, but there is lots of movement from time to time and what customer timing in putting through their investments. Those – a lot of our investments are growth related in the ways that there are variety of other factors in terms of new capacity, demand and things like that and they're planned in a reasonable timetable, but then they tend to move out from quarter to quarter depending on what's happening in other parts of the facility – construction or facility relocations and things like that.

So a part of this is up to us to continue to have better access to the market, why we're adding some salespeople, why we're making sure that our salespeople in this area can represents the total company’s offerings and we need to recommit ourselves to being visible out there in the market because they do believe that we have a great – great offering, great solutions. We've demonstrated over and over again. And so I think we can do a better.

[Gerry Sweeney, Roth Capital]

Got it. Anything around pricing and you sort of maybe set margin levels or is that not applicable?

[Dennis Sadlowski, Chief Executive Officer and President]

Well, pricing, I'm not sure exactly what the question is. But we – if your question is, are we seeing significant differences in pricing or the like? I know that we see pricing pressure largely in our energy segment coming through the later half of last year. And that hasn't gone away. At the same time, our team works hard to demonstrate value. So that customers can see what our offering is and generate benefits there. And I think in the quarter, we did a good job of that. And that's why from a margin point of view, we believe that the blended margins will continue to hold up commensurate with the quarter we just completed. As far as you know if you’re specifically referring to industrial…

[Gerry Sweeney, Roth Capital]

Yes, I was. Just curious that was…

[Dennis Sadlowski, Chief Executive Officer and President]

One of the things that I noted and we have seen is there is pressure coming from within on certain material inflation and the like that is absolutely driving some movements in the pricing. We're able to capture most of that in the spot market in terms of not being in the middle of a margin squeeze, but some of that upward pressure is causing customers to have to rethink what they do, and take at least one more round of review before they release capital on projects that are usually around expansions, upgrades and the like. There is a little bit of an impact right now on that that if nothing else it's creating some delays.

[Gerry Sweeney, Roth Capital]

Got it. And then just more out of curiosity what cash the $36 million, I guess you mentioned 40% of it I guess domestic and 60% is overseas. Is that the rationale just that there's less here in U.S. that it's a little bit higher than maybe $36 million on the balance sheet with $80 plus million in debt, but I want to take down a little bit more or is that ratio the cause for that higher level cash?

[Dennis Sadlowski, Chief Executive Officer and President]

Sure, so I would say we – with the new tax reform, the ability to bring cash a lot easier. We've already started to do that that will be in our Q. We will talk about, but we’ll continue to take those actions here because of our tangled web of legal entities out there and makes a little tough sometimes to move cash back. So it's more of an internal obstacle as opposed to external or economic reality on bringing that outside of China. I would say that pretty much to bring cash back at a very low barrier, Gary. So, we will continue to do that. We like paying down debt and we’ll continue to do so as long as it remains economic.

[Gerry Sweeney, Roth Capital]

Got it, that's helpful. I appreciate it. I’ll jump back in line. Thank you.

[Dennis Sadlowski, Chief Executive Officer and President]

Thanks, Gerry.

[Matt Eckl, Chief Financial Officer]

Thanks, Gerry.

[Operator]

[Operator Instructions] The next question will be from Bill Baldwin with Baldwin Anthony Securities. Please go ahead.

[Bill Baldwin, Baldwin Anthony Securities]

Yeah, good morning, Dennis and Matt. And…

[Dennis Sadlowski, Chief Executive Officer and President]

Hey, Bill. Good morning.

[Bill Baldwin, Baldwin Anthony Securities]

Good job with your group there.

[Dennis Sadlowski, Chief Executive Officer and President]

Thank you.

[Bill Baldwin, Baldwin Anthony Securities]

You’re really bringing some traction to bear. I just wanted to get your feel on the progress that you feel like you're making as you move more towards account managers. Can you kind of indicate where you are in that process there Dennis and Matt I guess based on your three growth platforms? Are you where you want to be? Or do you have more to do in terms of getting effective account managers into the equation – into your team there, into your sales effort?

[Dennis Sadlowski, Chief Executive Officer and President]

Yeah, Bill, thank you. And I think that's a good question because we believe that an account management approach we had certain of our larger end market customers makes absolute sense. And so we've begun moving in that direction with account managers in clear account plans that also connect up relationships at different levels between us and our customer base. I would tell you that we have begun – we have a robust beginning in terms of the account management. One of the wins I mentioned, I would say it's directly related to a much better account planning process, a much better understanding of what the customer needs are and our ability to translate that into project wins. It's gaining some momentum.

And I say we're at the beginning because we wanted to start with a focused group of customers to make sure that the process is good that that the momentum is generated that we can then redeploy that in other areas. So we've started to move in that direction as well in the industrial and so it's largely around our industrial segment and energy segment were deploying an account management approach. In addition to a field group that covers the aftermarket and the end user installed base in addition to more that specialty technology people that back them up and handling customers on a transactional basis. So we're starting to get some good wins. It's showing up in the numbers. It's a part of the momentum that you're seeing. And I think why we think we had a decent quarter, but we still can do better.

[Bill Baldwin, Baldwin Anthony Securities]

Dennis, do you feel like that most of the folks that you think – I mean most positions for account managers can be filled entirely or is this a situation where you might have to go outside to find some effective account managers?

[Dennis Sadlowski, Chief Executive Officer and President]

I think that we are going to be able to evolve people into roles like that into key account management from internal where they have – where we align their specific expertise around product and technology with the largest part of the demand from key customers. So we've already begun a bit of that as I mentioned. And I see that as the larger path going forward. As we continue to look at add, we’re trying to add people who have that blend of application knowledge in front of customers and have that hunger that close business and really the passion to win in the market. We don't want to be here just playing the game so to speak. It's all about wins and generating benefits for customers that translate the value for shareholders.

[Bill Baldwin, Baldwin Anthony Securities]

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

[Dennis Sadlowski, Chief Executive Officer and President]

Absolutely. I think our momentum is demonstrating that it's a good place to be and I think that’s even picked up in terms of what kind of candidates we can see from the market at this point.

[Bill Baldwin, Baldwin Anthony Securities]

Very good. With that I know you don't want to give a lot of competitive information, but can you indicate at least among your growth platforms? Who are you think the most pressing issues are on product innovation where your major focus is going to be there initially with your product innovation initiatives?

[Dennis Sadlowski, Chief Executive Officer and President]

Yeah, well, I probably don't want to say too much here and it’s probably too early, Bill. But in the industrial air quality area is where we see some opportunities to both refresh and put forth some ideas that that may be don't exist quite yet in the market. It’s an area that we've been far to underinvested in. And so, we’ve reinitiated some development areas that will takes some time to gain traction before they really generate meaningful and material successes for the company, but we have absolutely begun to commit the resources and do the work required to make sure that not only next quarter's numbers can continue to improve, but they were looking out into the future to make sure that we can support that long-term growth rate that we're after.

[Bill Baldwin, Baldwin Anthony Securities]

Dennis, are your engineers currently on board that you’ll be utilizing for this product innovation or do you have some personnel’s decision there also or personnel additions?

[Dennis Sadlowski, Chief Executive Officer and President]

Yeah well some of that growth investments that we have outlined will be in the engineering and development area in support of some of the priorities that I just mentioned. So that will be some add. I mentioned already that we have created the position of Chief Technical Officer that will also be an important leadership driver in this area over the long-term.

[Bill Baldwin, Baldwin Anthony Securities]

Okay, well, it's great to see the momentum building and the confidence building. So congratulations.

[Dennis Sadlowski, Chief Executive Officer and President]

Yeah, thank you. I do like the momentum that we've been able to generate over the last few quarters. It's good to see the results starting to take shape as well. So we’re pleased, but I think we’re far from anything that we would say satisfied or going to relax about. There's a lot still to do in front of us and that's what we're all about.

[Operator]

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over Dennis Sadlowski for any closing remarks.

[Dennis Sadlowski, Chief Executive Officer and President]

Okay, well thank you all and thanks for spending some time with us this morning. And I’ll just close out by saying we feel good about the progress across the company. The quarter’s results that reflect that the 4-3-3 strategy is gaining traction and we're building momentum going forward as I mentioned. I'm really excited and energized by the advancements of the team. And with further focus and effort, we know we can generate top-tier returns for our shareholders. Thanks again.

[Operator]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.