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Gardner Denver Holdings, Inc.  (NYSE:GDI)
Q4 2018 Earnings Conference Call
Feb. 19, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Gardner Denver 2018 Fourth Quarter Earnings Conference Call. All participants will be in a listen-only mode. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Vik Kini, Head of Investor Relations. Please go ahead.

Vikram Kini -- Head of Investor Relations

Thank you, and welcome to the Gardner Denver 2018 Fourth Quarter Earnings Call. I am Vik Kini, Gardner Denver's Investor Relations Leader, and with me today are Vicente Reynal, Chief Executive Officer; and Neil Snyder, Chief Financial Officer. Our earnings release, which was issued this morning, 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 Neil will review our fourth quarter and total year highlights and financial performance, as well as our segment results and 2019 guidance. We will conclude today's call with a Q&A session. (Operator Instructions)

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

Vicente Reynal -- Chief Executive Officer

Thank you, Vik, and good morning to everyone. Turning to Slide 5, I would like to start with a brief overview of the fourth quarter. Overall, the fourth quarter was strong and balanced, demonstrating our teams' excellent execution and delivery on our strategic objectives. We delivered positive year-over-year orders and revenue growth, excluding FX, strong margin expansion and solid free cash flow generation. Despite a choppier macro environment in the fourth quarter, all of our segments continued to drive strong commercial and operational execution, resulting in orders growth of 1% and revenue growth of 10%, excluding FX. This comes on top of extremely strong prior year growth of 34% and 11% for orders and revenue, respectively, as our teams are successfully leveraging the commercial strategies we have previously highlighted, such as demand generation and innovation to drive above-market growth.

In the quarter, adjusted EBITDA grew 10% to $190 million and margins expanded 60 basis points to 26.6%, despite significant headwinds from FX and tariffs. Our businesses continued to deliver solid margin expansion, mainly due to our margin enhancement initiatives, such as restructuring and I2V, while continuing to invest in new product development and commercial execution.

I'm particularly pleased with the strong cash generation we saw in the quarter, which speaks to our disciplined cash and working capital management. Free cash flow in the quarter was $126 million, up 31% over prior year and in excess of 100% conversion as compared to adjusted net income. In addition, net operating working capital as a percent of sales was a record low at 24%, a nearly 570 basis points of improvement versus last year.

The strong cash and adjusted EBITDA performance led to net leverage of 2.1 times and 2 times on net pro forma basis, excluding our Q4 acquisitions. Our strong cash generation allowed for continued execution of our capital deployment priorities in the quarter. We made a $75 million debt repayment in the quarter, bringing our total year debt repayment to $338 million.

We also deployed over $70 million on strategic and accretive M&A with the acquisitions of DV Systems and MP Pumps in our Industrial segment. And we also returned $24 million to shareholders through share repurchases within the quarter.

As I reflect on the total year, 2018 was a landmark year, as we continued to build a performance-driven culture here at Gardner Denver. We strongly believe that we can build on 2018's financial performance in the coming years, and we remain confident in our ability to grow and expand our business. In 2018, we achieved approximately $2.7 billion of revenues with 13% growth and double-digit increases across all three segments. In addition, adjusted EBITDA grew 21% with 170 basis points of margin expansion. This performance resulted in nearly $400 million of free cash flow generation and over $600 million in balanced capital deployment across debt repayment, strategic M&A, share repurchase and high-return reinvestment for CapEx.

Turning to Slide 6, we firmly believe that the strong financial performance of the Company and all of the statistics you see on the page are due to the consistent execution of our four-point strategy. As we have said many times, it starts with talent and investing in our people to drive strong sense of engagement, ownership and culture of continuous improvement. I'm very pleased to see that in our most recent poll survey of the employee base, our engagement score has continued to improve, and this demonstrates that we're building a great place to work and that we are aspiring our employees to deliver for our customers and shareholders.

Moving to Slide 7, I will provide more color on the operating performance of our segments. I will start with the Industrial segment where we continue to see good momentum on many of our commercial and operational initiatives, achieving another solid year of adjusted EBITDA and margin expansion.

The Industrial segment's fourth quarter order intake was $323 million, up 4%, excluding FX. Revenues in the quarter were $338 million, up 11%, excluding FX, with M&A contributing approximately 6%. This resulted in a book to bill of 0.96, which is fairly typical for the fourth quarter, given the year-end seasonality seen in the business.

In terms of the product lines, all three air compression technologies saw solid revenue performance in the quarter with high single-digit growth in core oil lubricated compressors and solid contributions from our blower, vacuum and Runtech products. One of the keys to our resilient performance in Industrials is the demand we see from niche end-markets, where as we have said in the past, we have solid leadership positions.

To highlight two specific areas of strengths, I will start with the bottom of the page where you will see our TXO2 Hydrovane transit compressor, which is a one of its kind rotary vane compressor technology. This technology is specifically designed for the emerging electric and hybrid commercial vehicle markets, which requires reduced weight, small footprint and noise reduction, along with higher efficiency to drive many of the air-driven applications on buses, trains and trucks.

Our newly introduced compressor was recently specified on a large Canadian transit project, as well as being chosen as part of the ECOCHAMPS initiative to partner with leading OEMs in Europe to meet the growing demands for a hybrid powertrain technology and reduce emissions. We also continue to see positive momentum on our platform of high pressure compressors, which was up strong double digits in the quarter and are used for niche applications like PET bottle blowing.

From a regional perspective, the Americas continues to be the strongest region with double-digit growth on both revenue and orders in the quarter. Europe continues to be relatively stable with low-single digit revenue growth, excluding FX, due in large part to the strength of tailor products serving niche applications and end markets, like the transport and high pressure examples previously mentioned, as well as strong contributions from vacuum products and marine compressors.

In Asia-Pacific, revenues, excluding FX, were positive and orders continued to be negative, driven mainly by continued headwinds in China, due to trade tensions and tariffs. This is largely consistent with what we saw in the third quarter and given China is only about 5% of our total Industrials' revenue base, we would expect to be able to offset this impact in other regions moving forward. Finally, all recent acquisitions continue to see strong momentum as integration efforts are progressing very well.

Moving to adjusted EBITDA, Industrials delivered $78 million in the quarter, up 16% excluding FX. Fourth quarter adjusted EBITDA margin was 23.2%, up 110 basis points versus prior year and up 70 basis points sequentially. The year-over-year margin increase was driven by improved flow through, due to the pricing, aftermarket growth, the initial impact of the I2V initiative, offsetting the known headwinds of tariffs, FX and the slightly dilutive margin impacts of in-year M&A. We remain committed to achieving our mid-20s EBITDA margin target in the next few years, and our close to 2018 puts us well on our way there.

Moving next to the Energy segment on Slide 8. Overall, we saw a solid quarter, led by balanced execution across all three underlying businesses. The Energy segment's fourth quarter order intake was a solid $269 million, down 3%, excluding FX, due entirely to the large midstream project order that we received in the fourth quarter of 2017. In fact, the downstream business saw positive orders growth, excluding FX, and the upstream business was up 2%, despite the significant noise in the market toward the end of the year and also extremely strong comps from prior year.

Revenues in the quarter were $307 million, up 6%, excluding FX, as we saw the expected increase in project shipments from the mid and downstream business, as well as solid execution in the upstream business. The book-to-bill in the Energy segment was 0.88, and this is in line with our expectation and normal seasonality, given the strong year-end project shipments in the mid and downstream business. More important, the upstream business finished the quarter at a book to bill of 1.04, which we view as very positive, given the market dynamics in oil and gas during the fourth quarter. The positive book-to-bill continues to demonstrate the resiliency of our upstream business and provide us with a good foundation for 2019.

Diving now into the components of the energy, let me start first with the upstream. As previously mentioned, even with the considerable noise in the general oil and gas market and typical year-end slowdowns due to the holidays, orders were up 2% and revenue was up 1%, both excluding FX. In fact, orders were nearly flat to the levels we saw in the previous quarter and revenue was above the $150 million level per quarter, that was generally the average for much of 2017. We attribute our resilient performance to the continued demand for activity-based aftermarket parts and services. In particular, our consumable offering showed strong momentum with orders and revenue growth both in excess of 25%. And as a reminder, this is on top of consumable growth well in excess of 100% in the fourth quarter of 2017. Once again, this shows our ability to drive differentiated above-market growth with innovation and market penetration as the market is clearly not growing at these types of levels.

As we head into 2019, we continue to believe that this will be somewhat of a transitional year. We see a flattening of the completions cadence as we have indicated in the past. We expect that completions activity will bottom out in the first quarter and sequentially trend upward through the year as the Permian pipeline constraints start to alleviate and our customers deploy their capital budgets.

This will no doubt lead to lower newbuild activity for frac pumps and more of a shift to activity-based aftermarket needs, such as fluid ends, service and repair and consumables, which bodes very well for our business. We view very positive for our business the continued build of the drilled but uncompleted well count, also known as DUC, which reached nearly 8,600 wells at the end of 2018. This clearly shows an expectation from the market that we're in a bit of an air pocket right now that will alleviate over time.

In terms of how to expect this to translate to our upstream business, market reports are now pointing to a total year 2019 completions activity to be down low-single digits, with a weaker first half of the year and stronger second half. We would expect a similar dynamic within our business with first half down low double digits, largely as a result of declines in frac original equipment, with partial offsets from the aftermarket. We expect mid- to high single-digit growth sequentially from the first half of the year, as the incremental pipeline capacity starts to come online. As a reminder, the pipeline capacity is expected to double from approximately 4 million barrels per day to approximately 8 million barrels per day by the end of 2020 with nearly half of that expansion by the end of 2019.

On the mid and downstream side, revenue was collectively up 8%, orders were collectively down low double digits, driven by the previously mentioned large midstream project taken in prior year. Overall, the market continues to trend well, as the project funnel remains quite healthy, and we continue to see increasing demand for both industrial-like process equipment, as well as projects tailored toward environmental applications and regulatory emissions. One such project is highlighted on the bottom of the page for a Garo multi-stage liquid ring compressor. This is an application that removes impurities from hydrocarbons to meet the growing international demand for clean fuel. We continue to see a strong funnel for similar projects aimed at flare gas recovery system, wastewater treatment facilities, LNG terminals and other chemical applications.

The Energy segment delivered adjusted EBITDA of $95 million in the fourth quarter, which was relatively flat to prior year, excluding FX. As a percentage of revenue, fourth quarter adjusted EBITDA was 31%, down 180 basis points from prior year, due mainly to the mix of lower margin midstream project shipments and higher original equipment pump shipments in the upstream business.

Moving next to the Medical segment on Slide 9. Order intake was solid at $66 million, up 1%, excluding FX. And it's worth noting that this is on top of 23% growth we saw in the prior year. As we have mentioned previously, prior quarters in 2018 had benefited from large design wins, which we did not expect to repeat to the same degree in the fourth quarter.

Revenues in the quarter were $68 million, up 19%, excluding FX. This marked the third consecutive quarter of double-digit organic growth, as the business executed well on the healthy backlog levels entering the quarter and continued to see good core demand for both gas and liquid technology. One such win on the liquid handling side of the business was a multi-channel syringe pump that was recently specified on a leading Asian manufacturer's next generation gene-sequencing machine.

The expansion into a market like genomics is a key example of the high growth end-market applications that many of our newly introduced liquid pumps and liquid handling technologies are designed for and why we're very excited about the future prospects for this business. Medical adjusted EBITDA performance for the quarter was $21 million, up 36%, excluding FX, and margins were 30.2%, up 360 basis points versus prior year and up 110 basis points sequentially. The strong margin performance can be attributed to strong flow-through from the volume increases, continued operational efficiency in the plants and prudent cost controls across the business.

I will now turn the call over to Neil to take us through the fourth quarter and total year financials in more detail as well as guidance for 2019.

Neil Snyder -- Chief Financial Officer

Thank you, Vicente, and good morning. Before I begin, I'd like to take a moment and thank our Board of Directors and Vicente for the recent appointment to CFO. I very much look forward to partnering with Vicente and our leadership team to continue to drive profitable growth, solid cash generation and disciplined capital allocation for long-term shareholder value. I'm confident in our team and our ability to continue the successful track record you've seen over the past few years.

Now, turning to Slide 10, let's review our financial performance. Fourth quarter revenue was $713 million, up 7% compared to prior year and up 10% excluding the impact of FX. Total orders were $658 million, up 1% excluding FX and up 2% sequentially from the third quarter.

Book-to-bill for the quarter was 0.92, in line with expectation and consistent with historical seasonality. Excluding the mid and downstream business, which have large projects, book-to-bill was approximately 1. Our fourth quarter adjusted EBITDA was $190 million, up 10% compared to prior year. EBITDA flow-through in the quarter was a healthy 36%, resulting in an adjusted EBITDA margin of 26.6% or up 60 basis points compared to prior year.

We reported fourth quarter GAAP net income of $95 million or $0.45 per share on a diluted share count of 207.7 million. We delivered adjusted net income of $119 million and adjusted diluted earnings per share of $0.57 on a share count of 207.7 million. That's a 19% improvement compared to prior year.

Turning to Slide 11, Gardner Denver delivered a strong and balanced full year 2018. Revenues of $2.7 billion were up 13% and up 12% excluding FX compared to prior year. And all three segments delivered double-digit growth. Similar to revenue, we delivered solid adjusted EBITDA of $682 million, up 21% compared to prior year. Our 2018 adjusted EBITDA margins, up 25.3%, represented a 170 basis point improvement over 2017 and adjusted diluted earnings per share finished at $1.89 or up 43%.

Turning to Slide 12, I'd like to spend a few minutes on our cash generation and leverage position. As Vicente previously mentioned, working capital as a percent of LTM revenues decreased 570 basis points to 24% as compared to 29.7% in 2017. While accounts payable and accounts receivable drove the majority of our 2018 improvement, we were also pleased with our inventory performance in Q4, which decreased more than $25 million on a sequential basis, including the impact of incremental inventory growth associated with the late Q4 acquisitions of both DV Systems and MP Pumps.

Free cash flow for 2018 was $392 million, up $249 million over prior year. In addition, free cash flow to adjusted net income conversion was 99% for 2018. Our leverage profile improved to 2.1 times and 2 times on a pro forma basis, excluding our Q4 acquisitions. This represents an improvement of 0.8 turns over prior year and 2.1 turns improvement since our May 2017 initial public offering.

In addition, 2018 ROIC was approximately 50%, up nearly 1,100 basis points over 2017. ROIC is measured as earnings, defined as LTM adjusted EBITDA, minus CapEx, divided by our total invested capital, which we define as gross plant, property and equipment, plus net working capital. As Vicente indicated earlier, due to strong, stable and resilient cash flow generation, plus efficient cash repatriation in 2018, we've been able to put our cash to work for our shareholders. We deployed $605 million through our disciplined and balanced capital allocation strategy.

In 2018, we repaid $338 million in debt, closed four strategic acquisitions for $186 million, reinvested $52 million in the business as capital investment to fuel future growth and returned $29 million to our shareholders by repurchasing 1.2 million shares.

As you know, we have closed five transactions since our May 2017 IPO. We continue to see fragmentation in the marketplace and believe bolt-on strategic M&A will remain a key lever in 2019 and beyond. Our funnel remains active and is comprised of targets similar to the profile of our recent deals and over-weighted toward industrial and medical end markets.

Now turning to Slide 13, let's move on to our 2019 outlook. We'll start with our revenue growth expectations in 2019. As a reminder, we view our business as having two distinct growth trajectories. First, GDP plus growth in our Industrial segment, Medical segment and our mid and downstream energy businesses, which account for approximately three quarters of our revenue. Second, more activity and intensity based growth tied to the unconventional oil and gas market in our upstream business. These end-markets account for approximately a quarter of our revenue. We expect total Gardner Denver revenue to be up low to mid-single digits excluding FX. FX is expected to be a low-single digit headwind on a total year basis with the majority of the headwind in the first half of 2019.

On an as reported basis, we are guiding total revenue for Gardner Denver to be up low single digits, with the first half flattish and the second half up low to mid-single digits. In addition, the first quarter, we expect revenue to be up low single digits, excluding FX, and down low single digits on a reported basis, largely attributed to FX headwinds, seasonality and the known upstream energy market dynamics.

Now, moving onto our segments. We expect Industrials' revenue growth of mid-single digits excluding FX. The anticipated impact of FX within our Industrials segment will be more pronounced in Q1 with roughly 5% headwind as compared to prior year, and we expect the impact to sequentially improve as we move through the year. In Medical, we expect mid-single-digit growth for the total segment. And regarding the product portfolio, we expect mid-single digit growth in gas and slightly higher in liquids.

Moving to the Energy segment and starting with mid and downstream energy, quoting activity remains healthy and comprised largely of small to medium-sized projects, much like 2018. As a result, we expect total revenue growth to be in the mid-single digits.

Moving to upstream, we're forecasting low double-digit to high single-digit declines in 2019, given the expectation of limited newbuilds for frac original equipment. As a reminder, original equipment in 2018 was approximately 25% of our upstream business and nearly half of the 25% in 2018 was related to newbuilds. However, we do see opportunities for growth, such as continued market penetration for our expanded aftermarket portfolio, most notably consumables. In terms of mix, we expect frac and drilling revenue to remain consistent with 2018, with frac representing greater than 90%.

Based on the revenue assumptions provided, we're introducing guidance for total year adjusted EBITDA of $680 million to $710 million. This range of $680 million to $710 million includes headwinds for both FX, which is approximately $10 million, largely in the first half of the year, and certain corporate expenses that I'll discuss in a moment.

Excluding the anticipated FX and certain corporate expense headwinds, adjusted EBITDA for the business is up mid-to-high single digits with a flow-through of 1.5 to 2 times, which is in line with our expectation. The corporate expense headwinds are largely attributed to three items: first, key strategic investments, such as expanding our demand generation efforts and IoT platform; second, gains on legal settlements in 2018, in line with our expectations, for which the original expenses were charged to adjusted EBITDA in earlier periods; and third, increased variable incentive compensation expense in 2019 as bonus expense is reset to target levels.

As you know, we at Gardner Denver have a performance-driven culture and despite our strong 2018 performance, we did fall short of our annual incentive targets. Including these three items, we expect corporate costs to be approximately $10 million per quarter. In addition, we expect to generate in excess of $400 million of free cash flow and deliver approximately 100% free cash flow to adjusted net income conversion.

Moving to Slide 14, our expectation for capital expenditure is $50 million to $60 million or approximately 2% of revenue, consistent with prior years, and we expect our tax rate to be in the range of 24% to 26%. We expect net debt leverage to be in the range of 1.5 times to 1.7 times and our average diluted shares outstanding for the year to be approximately 208 million shares, using the share count and share price as of 2018 year-end.

Now, I'll turn it back over to Vincente for some closing remarks.

Vicente Reynal -- Chief Executive Officer

Thank you, Neil. We're very pleased with our performance in 2018 and the strong execution to finish the year despite the noise in the macro environment. Our GDP-sensitive businesses, which account for approximately 75% of revenue, are well positioned to gain share and further expand their margins. Our upstream business will face difficult comps, but Gardner Denver is better equipped than ever to compete, and we'll do well relative to the market. We believe Gardner Denver has never been a fitted (ph) Company, and we do look forward to our future.

I would like to thank the entire Gardner Denver team for their performance and contributions to a terrific year in 2018. I'm confident in our ability to execute on our strategy to deliver above-market growth and profitability as we look ahead to 2019.

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

Questions and Answers:

Operator

Thank you. (Operator Instructions) The first question will come from Joe Ritchie with Goldman Sachs. Please go ahead.

Joe Ritchie -- Goldman Sachs -- Analyst

Hi. Good morning, guys, and welcome to the call, Neil.

Neil Snyder -- Chief Financial Officer

Thank you. Good morning.

Joe Ritchie -- Goldman Sachs -- Analyst

So my first question, maybe just starting out on upstream energy and trying to parse that out a little bit further, the guidance for the year, down (ph) double to high-single. I'd be curious to know like how much of the -- on the OE side, what are you baking in for newbuild in 2019 and what are kind of the expectations also for the aftermarket business?

Vicente Reynal -- Chief Executive Officer

Yes. Joe, Vicente here. So, as you know and you kind of heard some of the comments that we made on the remarks, we categorize the upstream business as 25% OE and 75% reoccurring in aftermarket, as you know. Also in 2018, half of that OE was basically newbuilds, and we are expecting limited newbuild in 2019. The other half of the OE, which we call replacement, we're expecting to be -- in our model to be fairly consistent and stable. The aftermarket, we expect that to go and grow kind of low single digits, based on share take. So, as you can see, we're kind of putting our model, a very prudent view of the market, we're not viewing a V-shaped recovery at all. And kind of when you think about the first half versus the second half, we even talked about as Q1 being the lowest point. And then as we move into the second half, we see a sequential growth of kind of, call it, mid to -- mid-single digits roughly.

Joe Ritchie -- Goldman Sachs -- Analyst

Vicente, that's helpful. And maybe just following on there, a lot of conversations that we have with investors, there is a concern that as activity in the region slows down, you're going to see a slowdown in aftermarket as well. You didn't see it in your order book, it's not like you're expecting it, I guess, for '19 as well. So maybe touch on some of the conversations you're having with your customers and the activity you're seeing in aftermarket specifically.

Vicente Reynal -- Chief Executive Officer

Yes. Joe, I think the best testament of that is definitely our Q4 performance in the upstream side of the business, where we still deliver positive orders and revenue growth, despite a lot of macro noise and headwinds that the oil and gas markets saw in the fourth quarter. The conversations with our customers continue to still be fairly positive in terms of the pipeline capacity takeaway expansion. As you know, everyone is kind of thinking that by 2020, that's when things will start getting open up. Some people are predicting that second half, more in kind of later Q3 and beginning of Q4, that's when you start seeing the ramp-up, and obviously that's going to drive the intensity of what might be coming in the field.

Our customers are definitely getting ready. I mean, some of them, the ones that we consider to be, are being smart about getting their fleets ready, and that's the conversations that we're having with many of them. It's ensuring that when the market opens up that they just -- can just go and do their work, and that's what we're getting ready for.

Joe Ritchie -- Goldman Sachs -- Analyst

Okay. Thanks, guys. I'll get back in queue.

Vicente Reynal -- Chief Executive Officer

Okay. Thank you, Joe.

Operator

The next question will be from Andrew Kaplowitz with Citi. Please go ahead.

Vladimir Bystricky -- Citigroup -- Analyst

Good morning, guys. This is Vlad Bystricky on for Andy.

Vicente Reynal -- Chief Executive Officer

Hey, good morning.

Neil Snyder -- Chief Financial Officer

Good morning.

Vladimir Bystricky -- Citigroup -- Analyst

So thanks for all the color on Energy, it's helpful. Can you give -- you talked about the OE versus upstream. Within -- or OE versus aftermarket. Within the 75% that's aftermarket and upstream, give us some color on how you're thinking about the growth potential of consumables and and services and parts given the strong order growth in Q4, and then also how you're thinking about your fluid end business into 2019?

Vicente Reynal -- Chief Executive Officer

Yes. So we see the consumables higher, particularly, you kind of may see -- I mean, I think you can think about consumables being high single to double-digit positive. Again, this has to do, based on the innovation that we launch with the packing (ph), plungers and many of them new in the market since 2018. The fluid end and the service, we'll see that relatively stable, and that's basically call it -- you could call that flattish to slightly positive. And that's kind of basically a good breakdown on how you can think about the aftermarket.

Vladimir Bystricky -- Citigroup -- Analyst

Okay. Thanks. And then just on margin in Energy. Obviously, margin in the business is still very strong, but it has been down a little year-over-year the past couple of quarters. So I know you mentioned mix, but can you talk about whether you're seeing any movement on pricing, have you seen any increase in pricing competition in your main (ph) energy businesses?

Vicente Reynal -- Chief Executive Officer

Well, let me start first with the mid and the downstream, definitely not, not an issue on price at all. I think maybe you might be referring to the upstream side of the business. I mean, obviously we still see some very healthy margin in the business. And again, if I break it between the different components of the upstream side of the business, the consumables, not an issue at all. We don't see -- I mean, again, we launched new innovation, and this new innovation is lasting longer and helping our customers increase utilization and performance. So we're able to command a premium price on that.

Fluid ends, it will be the one that creates maybe a little bit of noise, but once again, we don't compete on price, we compete on reliability and longevity. We even launched a new fluid end called the Gardner Denver next generation fluid end in kind of second half of 2018 and the price point was higher than the blended average that you can see in the market, and again, that took on pretty well and consistent. And from the pumps, we always spoke about Thunder pump and Thunder pump is actually roughly 40% to 50% higher ASP than any of the other pumps. So again, price, we don't compete on price, we compete based on total cost of ownership. And as long as we provide that good solution to our customers and customers' willing to pay for it, we're going to be -- continue to be resilient on that.

Vladimir Bystricky -- Citigroup -- Analyst

Yes. It's very helpful, guys. I'll get back in the queue. Thanks.

Operator

The next question comes from Josh Pokrzywinski with Morgan Stanley. Please go ahead.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Hi. Good morning, guys.

Vicente Reynal -- Chief Executive Officer

Morning, Josh.

Neil Snyder -- Chief Financial Officer

Good morning.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

So just first off, taking a step back from upstream, Vicente, mid and downstream, we've heard a lot of conversations about projects getting let, or going FID on LNG liquefaction trains. Can you just remind us in the loading arm business, what like a content per train would look like or if you've seen any kind of pickup in activity? I mean it seems like there are some big projects out there and historically not a lot of attention gets put on that part of portfolio.

Vicente Reynal -- Chief Executive Officer

Yes, Josh. And just to categorize, our midstream business is roughly, we always said about $100 million and it gets exposed to the LNG, particularly on loading arms. And then we have two types of loading arms, and loading arms are basically highly engineered arms to transport the hydrocarbon fluids from one point to the other. We have what we call marine loading arms, these are large and sizable. And there -- at the most recent trade show in Gastech in Barcelona, we launched our new LNG solution. We're definitely seeing some good increase in quotation activity and people really doing a lot of conversation around our marine loading arm for the LNG market. And then we have something that we call the land loading arms, and those are basically what we call for the last mile, and these are the connecting points between the train or the truck and the land. And again, great -- good quotation, increased momentum, and that's a business that saw some good solid momentum in 2018, and we expect that to continue here in '19.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Got it. And then just on upstream energy, can we talk a little bit about seasonality? If I look at the pace of activity in the fourth quarter, I know that it basically implies in your full year guidance a big step down in the first quarter, which I don't know if we have enough history with new Gardner Denver and the new environment to know what that should look like. Just in order of magnitude on what that revenue drop should look like 4Q to 1Q as kind of a starting point, so we know how to phase in the progression from there.

Vicente Reynal -- Chief Executive Officer

Yes. You can think about maybe the -- maybe even I can step back. I mean, typically in the fourth quarter, you see like about a 10% decline between Q3 and Q4, because again Thanksgiving holidays and a lot of the Christmas holidays. And then as we go from our Q4 to Q1, you see another kind of sequential slowdown. Again, it typically is because of the slow start of the year and particularly as we think in this kind of Q1, some of the cold weather that created a bit of a slow start. What we called out and we talked about is that Q1 is the bottom and then we see a slightly gradual step up from there. And something that I mentioned before is that we'll see about mid-single digit increase if you compare second half to the first half. So think about Q1 as being low double-digit from a revenue perspective and then kind of stepping up from there.

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Got it. That's helpful. Thanks.

Operator

The next question comes from Michael Halloran with Baird. Please go ahead.

Michael Halloran -- Robert W. Baird -- Analyst

Hey. Morning, everyone.

Vicente Reynal -- Chief Executive Officer

Morning, Mike.

Neil Snyder -- Chief Financial Officer

Good morning, Mike.

Michael Halloran -- Robert W. Baird -- Analyst

So the cost takeout side, what are the assumptions embedded in the guidance range for cost takeout this year, both the I2V initiative, how that layers in this year, as well as any of the other things that you're working on and what the core assumptions are?

Vicente Reynal -- Chief Executive Officer

Yes, Mike. So from an I2V perspective, I mean, we thought about that being gradually, couple of times -- last year we talked about $45 million in year three, think about being about $10 million to begin with in 2019 and then kind of continues to step up as we progress the years. Restructuring, think about mid- to single kind of digit EBITDA improvement. You saw some of the restructuring actions that we took in the fourth quarter, and we typically see two to three-year expected return from that.

Michael Halloran -- Robert W. Baird -- Analyst

Thanks for that. And then on the Industrial side, maybe just talk a little bit about the underlying trends. In the context to that, obviously, stability in the fourth quarter seems to be the message. Has that been the case so far to start the year? And then also maybe a little bit more granularity about what you're seeing in the European and the North American regions?

Vicente Reynal -- Chief Executive Officer

Sure. Mike, for '19, we're expecting, as kind of Neil called -- said, mid-single digit growth, organic, and then you get M&A and FX kind of offsetting each other. And I think consistent to what we saw in the fourth quarter, I mean, 2019, we expect that to be high single-digit growth in Americas, stable performance in EMEA, in kind of mid-single digits, primarily due to the niche market demand. We highlighted a couple of different product lines here in the earnings call, but the European team has done a really great job of finding some niche markets and combining some kind of good leadership position. And Asia Pacific, moderate growth, due to China.

Michael Halloran -- Robert W. Baird -- Analyst

Thank you gentlemen.

Vicente Reynal -- Chief Executive Officer

Thank you, Mike.

Operator

Our next question comes from Nathan Jones with Stifel. Please go ahead.

Nathan Jones -- Stifel -- Analyst

Good morning, everyone.

Vicente Reynal -- Chief Executive Officer

Good morning, Nathan.

Neil Snyder -- Chief Financial Officer

Good morning.

Nathan Jones -- Stifel -- Analyst

I'd like to start on the cash flow side. Obviously much improved cash flow in '18 over '17, much improved working capital performance. Specifically, on inventory, I would have thought that during 2018, you would have had some headwinds there. You clearly had higher raw material costs, which should drive up inventory, maybe some pre-buying to beat some of that inflation, to protect yourself from anything that could have happened with tariffs or anything like that. And also you tend to see I think some inefficiencies creep in when you had the kind of growth that you had in 2018. With some of that waning with growth slowing down in 2019, is inventory an area where you think you can continue to drive improvement there, maybe meaningful improvement in 2019 that should help cash flow?

Vicente Reynal -- Chief Executive Officer

Absolutely. Nathan. I think you hit the nail on the head, and that's exactly the way we think about it. We're still at the early stages of the -- of our inventory. When you look at the inventory numbers, think also that here in the fourth quarter, even though you can see that we lower inventory sequentially, we actually even also added inventory, because of the M&A that that we -- the company that we acquired and we brought to our portfolio. So if you think about it, think that inventory was kind of flat to slightly down ex-M&A with the businesses. So yes, for '19, that's an area of focus and where we expect to unlock some cash.

Nathan Jones -- Stifel -- Analyst

Okay. So inventory is a source of cash in '19?

Neil Snyder -- Chief Financial Officer

Yes.

Nathan Jones -- Stifel -- Analyst

Okay. My follow-up question is on the drill pump side here. We have been, over the last few quarters, talking about when this drill pump replacement cycle might hit. It looks like from your guidance that you are not expecting that to come in 2019. Can you talk about if you are expecting that to come in 2020 or just what your expectations is that -- of that replacement cycle are at the moment?

Vicente Reynal -- Chief Executive Officer

Yes, that's correct, Nathan. I think what we dd in our guidance, we took the prudent look of accounting the drill pumps in 2019. Obviously, we talked to a lot of our customers and read the reports. We see that some of the drill operators are increasing -- or drill makers are increasing CapEx year-on-year. Could that be utilized some for pumps or some other things like -- will be helpful for us potentially, but at this point in time, we decided to keep it as basically same as 2018, which is very minimal.

Nathan Jones -- Stifel -- Analyst

Okay. So possible upside from that in 2019? Do you have any expectations that you might see a more meaningful drill pump replacement cycle in 2020?

Vicente Reynal -- Chief Executive Officer

Potentially, yes. I mean, as we talked about, the super specs are like 98% capacity or utilized right now. And so as more super spec needs to come to the market, enough cannibalization has happened already, that the math will tell you that new pumps will need to be purchased.

Nathan Jones -- Stifel -- Analyst

Okay. That's helpful. Thank you. I'll pass it on.

Operator

The next question comes from Julian Mitchell with Barclays. Please go ahead.

Julian Mitchell -- Barclays -- Analyst

Hi. Good morning.

Vicente Reynal -- Chief Executive Officer

Good morning, Julian.

Julian Mitchell -- Barclays -- Analyst

Maybe -- good morning. Maybe just the first question around sort of how you think about guidance overall. If I look at last year, you took up the guide at Q1, then kept it flat and then ended up missing the bottom end of the guide. So as we think about sort of 2019, depending on what plays out in upstream energy or other businesses, is there a chance that we could see the same, in the sense that if you do think you're missing the low end of the guide, you tend to just keep it as well for consistency or something?

Vicente Reynal -- Chief Executive Officer

Yes. I mean, if you think about last year, I mean, we took the guidance up a couple of times as compared to where we started the year, and we talked a lot about early last year that kind of being more prudent view. As you go into the fourth quarter, we kept the guidance, as you stated. We kind of said that it might be more into the lower side of the guidance, and clearly, naturally, the market kind of dislocated in a few places, particularly in the oil and gas. When you look at Industrials, Medical, Mid and Down, they'll hit as we expected pretty nicely.

Julian Mitchell -- Barclays -- Analyst

I see. But has your approach in terms of, I guess, degree of maybe, call it, conservatism perhaps, has that changed as you set the guide for 2019 or the approach is broadly similar to 12 months ago?

Vicente Reynal -- Chief Executive Officer

The approach is broadly similar, prudent view to the market and then as we continue to go through 2019, then increase or change as we see fit.

Julian Mitchell -- Barclays -- Analyst

Thank you. And then my second topic would be around the EBITDA guide. I think it's up about $20 million, $25 million at the midpoint, stripping out currency for 2019. Could you help us understand how much of that step-up is coming from acquisitions, what the inorganic contribution from M&A to EBITDA growth in 2019 is, please?

Vicente Reynal -- Chief Executive Officer

It's roughly less than half.

Julian Mitchell -- Barclays -- Analyst

Perfect. Thank you very much.

Vicente Reynal -- Chief Executive Officer

Yes, absolutely.

Operator

Our next question is from Bill Herbert with Simmons & Company. Please go ahead.

William Herbert -- Simmons & Company -- Analyst

Thanks. Good morning. Vicente, you may have covered this, I didn't see it, so forgive me for asking it if you did. And that is do you have just rough margin ranges with regard to expectations for 2019 by segment?

Vicente Reynal -- Chief Executive Officer

By segment?

William Herbert -- Simmons & Company -- Analyst

Yes.

Vicente Reynal -- Chief Executive Officer

Yes, sure. I mean, I didn't give it up, but I can kind of roughly give you expectations. I mean, we have Industrial segment to be kind of about 100 basis points up from margin full year, Energy roughly to be flattish, Medical to be about 100 basis points. And so kind of total GDI, including the corporate and the FX headwind that Neil explained, roughly flat to slightly up.

William Herbert -- Simmons & Company -- Analyst

Okay. And if overall energy revenues are down year-over-year, how are margins flat? Are you taking costs out of the system or what?

Vicente Reynal -- Chief Executive Officer

Two things. Our mid and down business is still growing nicely in terms of kind of mid-single digit, and then we're definitely doing some cost adjustments. And when you think about the upstream side of the business, what we don't have in '19 is the OE frac pumps, which tend to be lower margin than consumables, and the consumables are actually growing in '19.

William Herbert -- Simmons & Company -- Analyst

Okay. Good point. And then the last one for me. You called out China in terms of being 5% of industrial revenues, so not that consequential. But Europe, if memory serves, is a much higher percentage and the economic data out, Europe is frankly just terror (ph), and I'm just curious as to what impacts you're seeing on your business there.

Vicente Reynal -- Chief Executive Officer

Yes. I think with -- what we saw in the fourth quarter is actually fairly stable business from the perspective of what we're doing. And again, it has to do, because we would like to say that we tend to grow faster rate than the GDP. So even though there is a slowdown in Europe, there's still actually positive growth and the fact that we're actually growing higher than that is the benefit, and the benefit is we highlighted a couple of niche end-markets that we have some good leadership position that we're able to continue more better.

William Herbert -- Simmons & Company -- Analyst

Okay, thank you.

Operator

Next question is from Damian Karas with UBS. Please go ahead.

Damian Karas -- UBS -- Analyst

Hi. Good morning, everyone.

Vicente Reynal -- Chief Executive Officer

Good morning, Damian.

Damian Karas -- UBS -- Analyst

I had a follow-up question for you on the upstream side of the business. Vicente, you alluded earlier to further share take in the aftermarket. Just curious what percentage of market share do you think you're currently winning in the aftermarket, consumables and service side? And just thinking about your guidance for this year, I mean, how much market share do you think there remains to be taken?

Vicente Reynal -- Chief Executive Officer

Yes. I mean, I think it varies by product line, Damian. I mean, obviously, we talk about taking some share, particularly because when you see the consumables growing at 25%, you're not seeing the market growing at that level. So obviously, I think that the higher level of opportunity continues to be in the consumables at that rate. The consumables share still is in the kind of, you could call it, kind of 20s-ish, which is lower than the fluid ends, and the fluid ends is lower than the pumps, as we have said in the past. So that's why we continue to see some opportunities for us to take some share.

Damian Karas -- UBS -- Analyst

Okay. That's helpful. And just thinking about capital allocation, you highlighted sort of the balanced approach that you took this past year, although a bit more skewed toward debt paydown, but still very active on the M&A front. Just wondering how you're thinking about M&A in terms of timing. Obviously, you've got a little bit more subdued outlook now with some of these upstream risks, particularly in the first half. Do you plan to keep the pace of M&A going as is, or do you feel the need to maybe take a little bit more wait-and-see approach for the time being?

Neil Snyder -- Chief Financial Officer

This is Neil. I think for our approach, deals of similar size and profile, assuming that we can find good strategic fits for us, we'll continue to look to make acquisitions, and we feel comfortable we can make them and still maintain our leverage.

Damian Karas -- UBS -- Analyst

Okay. Great. Thanks, guys.

Neil Snyder -- Chief Financial Officer

We don't see any slowing.

Damian Karas -- UBS -- Analyst

Got it. Thank you.

Operator

The next question will be from Nicole DeBlase with Deutsche Bank. Please go ahead.

Nicole DeBlase -- Deutsche Bank -- Analyst

Yes. Thanks. Good morning, guys.

Vicente Reynal -- Chief Executive Officer

Hi, Nicole.

Neil Snyder -- Chief Financial Officer

Good morning.

Nicole DeBlase -- Deutsche Bank -- Analyst

So I guess maybe starting with upstream energy. Just -- if you could kind of go through the level of confidence in your expectation for completions to improve in 2Q and beyond, and I guess maybe what you're seeing in January and February and if that kind of stacks up with 1Q taking a pretty considerable step-down versus the 4Q trend?

Vicente Reynal -- Chief Executive Officer

Yes. Nicole, that's kind of what the market is expecting in terms of that completion to really start picking up. And you also see that -- I mean, we mentioned that the DUCs, the drilled but uncompleted wells are at record level of 8,600 or so. So in conversations with our customers and what we see kind of from CapEx coming through from some of the end users, there's definitely expectations that the completions will continue to gradually move up, and that's kind of how we're viewing the year. In terms of kind of what we saw here in January, it was definitely very in line with our expectations, and thus far, we continue to -- conversations with our customers, basically qualitative conversations, are saying that they expect to see that gradual movement through the year.

Nicole DeBlase -- Deutsche Bank -- Analyst

Okay. Thanks. That's helpful. And then just as a follow-up, if you could just talk about the level of conservatism that you've baked into margins for Medical and Industrial? It just seems like 100 basis points, you could potentially do better than that based on the margin performance that we've seen over the past year and the past few quarters.

Vicente Reynal -- Chief Executive Officer

Yes. We still think that we're well on our path to kind of the mid-20s EBITDA margin in the Industrials and kind of low-30s in the Medical. Yes, you saw that Q4, already the Medical hit the 30% kind of hit ratio (ph) market. And can we outperform, and we always strive to outperform. But I think we want to make sure that we're also making the prudent investments back into the business to continue the growth momentum that we're seeing on these businesses.

Nicole DeBlase -- Deutsche Bank -- Analyst

Okay. Understood. Thank you.

Vicente Reynal -- Chief Executive Officer

Yes. Thank you.

Operator

The next question will be from Brian Drab with William Blair. Please go ahead.

Brian Drab -- William Blair -- Analyst

Hey. Good morning.

Vicente Reynal -- Chief Executive Officer

Good morning, Brian.

Brian Drab -- William Blair -- Analyst

Most of my -- Morning. Most of my more important questions I think have been asked, but just maybe a one small one here for Neil, on these acquisitions, DV and MP. I heard Vincente say that FX should roughly be offset by M&A, so I'm thinking, if I use 2% for FX, just to keep the math simple, that maybe M&A is $50 million or so for the year. I mean, is that in the ballpark? And I already had $10 million in my model from the carryover from previously completed acquisitions before these two. So I'm getting to maybe like -- these are like $20 million in revenue each, DV and MP. Is any of that in the ballpark?

Neil Snyder -- Chief Financial Officer

Yes. No, you're spot on.

Brian Drab -- William Blair -- Analyst

Okay. That was quick. And then can you just speak a little bit more about Europe? Someone asked a couple of questions ago, you touched on Europe. And I'm just wondering if you could elaborate a little bit on what you've seen in the first seven weeks of the year? Do you have aggregated data out of Europe that you're -- that you can point to and say that you're seeing that continued stability? And what do you have in your industrial segment forecast for Europe for 2019? Thanks.

Vicente Reynal -- Chief Executive Officer

Sure. Brian, so absolutely, we're seeing definitely consistent here as we thought of the year, consistently -- consistent to what we saw in the fourth quarter. And for us, again, based on the noise that we hear, it seems to be actually quite good. And what we have for 2019 is that we expect EMEA or Europe to be -- continue to be stable performance, and again we -- I called out mid-single digits, but primarily due to this kind of niche market demand that we have and we highlighted a couple of those kind of niche end markets in the call during our remarks.

Brian Drab -- William Blair -- Analyst

Okay. Thanks very much.

Vicente Reynal -- Chief Executive Officer

Thank you, Brian.

Operator

Next question comes from Igor Levi with BTIG. Please go ahead.

Igor Levi -- BTIG -- Analyst

Good morning, guys.

Vicente Reynal -- Chief Executive Officer

Good morning, Igor.

Igor Levi -- BTIG -- Analyst

As you look at M&A, just a follow-up, for 2019, how does the bid-ask spread in that market look compared to what you've seen in 2018?

Neil Snyder -- Chief Financial Officer

I'd say at least from our perspective, they're probably holding, maybe, slightly down in certain categories. I mean, we tend to source deals looking more strategically at things that fit our business. We've been successful at buying things in the 8-to-9-ish range, we probably see that continuing into 2019.

Igor Levi -- BTIG -- Analyst

Okay. Great. And what type of end markets within Industrial and Medical do you see the best prospects -- having the best prospects for M&A this year compared to where you see room in your portfolio?

Vicente Reynal -- Chief Executive Officer

In Industrials, I think we'll continue down the same path, buying in white space or technology gaps. And similarly on the Medical, it's really going to be about technology expansion and less about acquisition of channel or scale.

Igor Levi -- BTIG -- Analyst

Great. Thank you. That's all from me.

Vicente Reynal -- Chief Executive Officer

Thank you. Igor.

Operator

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

Vicente Reynal -- Chief Executive Officer

Well, thank you, everyone, for your interest in the Gardner Denver. And as always, we like to provide a lot of transparency to the investor community. I look forward to seeing many of you over the next few weeks. And thank you again for joining.

Operator

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

Duration: 63 minutes

Call participants:

Vikram Kini -- Head of Investor Relations

Vicente Reynal -- Chief Executive Officer

Neil Snyder -- Chief Financial Officer

Joe Ritchie -- Goldman Sachs -- Analyst

Vladimir Bystricky -- Citigroup -- Analyst

Josh Pokrzywinski -- Morgan Stanley -- Analyst

Michael Halloran -- Robert W. Baird -- Analyst

Nathan Jones -- Stifel -- Analyst

Nathan Jones -- Stifel -- Analyst

Julian Mitchell -- Barclays -- Analyst

William Herbert -- Simmons & Company -- Analyst

Damian Karas -- UBS -- Analyst

Nicole DeBlase -- Deutsche Bank -- Analyst

Brian Drab -- William Blair -- Analyst

Igor Levi -- BTIG -- Analyst

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