Enovis Corp (ENOV) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Colfax Corp.'s second-quarter 2010 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, today's conference call is being recorded. I'd now like to turn the conference over to your host, Ms. Mitzi Reynolds. Please go ahead.

Thanks, Ally. Good morning, everyone, and thanks for joining us today. My name is Mitzi Reynolds and I'm the VP of Investor Relations. On our call today we have Clay Kiefaber, our President and CEO, and Scott Faison, our Chief Financial Officer.

Our earnings release is available on the investor section of our website, ColfaxCorp.com. We'll also be using a slide presentation to supplement today's call which can also be found on the investor section of our website. Both the audio of this call and the slide presentation will be archived on the website later today and will be available until the next quarterly call.

During this call we'll be making some forward-looking statements about our beliefs and estimates regarding future events and results. These forward-looking statements are subject to risks and uncertainties including those set forth in our SEC filings. Actual results might differ materially from any forward-looking statement that we might make today. The forward-looking statements speak only as of today and we do not assume any obligation or intend to update them except as required by law.

With respect to any non-GAAP financial measures during the call today, the accompanying information required by SEC Regulation G relating to those measures can also be found in our earnings press release under the investor section of the Colfax website. Now I'd like to turn it over to Clay.

Thanks, Mitzi. Good morning, everyone. I'll begin with an overview of the business and then I'll follow with a discussion of our results and guidance, then I'll update you on the strategic priorities and we'll open it up for questions.

I'm pleased to report that the business climate is improving and we're seeing accelerating strength in our end markets. For the quarter orders were up 31% organically over last year. The growth was broad-based across most of our end markets and geographies. Our book to bill was 1.3, the highest it's been since the beginning of 2008.

Our sequential results also showed improvement with organic sales up 8% driven by an increase in oil and gas deliveries. Orders on an organic basis were up 35% with growth in all of our end markets with particular strength in oil and gas, power generation and defense. We grew backlog to $297 million at the end of the quarter, a 12% sequential increase excluding the impact of currency. This is the first time we've built backlog on an organic basis since the third quarter of 2008.

So with that backdrop let me move to the details of the quarter. Sales for the second quarter were $123 million, down 3% on an organic basis from the prior year which excludes the impact of currency and acquisitions and were down 5% in total. Our organic sales comparisons have been down double digits since the second quarter of last year, so we're very pleased with the progress we've made in this quarter.

The decline in sales for the quarter was primarily due to lower sales in our oil and gas, power generation and commercial marine businesses which were partially offset by growth in our defense and general industrial businesses. These recovery trends are consistent with those of a late cycle industrial business.

While sales were down as expected, we improved our gross profit margin by about 0.5% primarily related to restructuring efforts. Adjusted operating income was $13 million, a 9% decline from the second quarter of 2009. Adjusted net income was $7.6 million or $0.18 per share, a 10% decline compared to the second quarter of 2009.

Now moving on to the market. All changes in sales and orders referenced are on an organic basis, so please see the slides for additional details. In commercial marine sales were down for the quarter and year to date over the prior year due to the decline in orders in 2009. Orders more than doubled for the quarter and were up significantly year to date over the prior year.

While activity is improved in this market since the first half of 2009, we remain realistic on our outlook. We have a solid backlog but we're continuing to experience cancellations, $3 million in the second quarter compared to $9 million in the second quarter of 2009.

On a year-to-date basis cancellations have declined from $18 million for the first half of 2009 to $6 million for the first half of 2010. Customers also continue to request delivery date extensions. For the year we expect sales to be down modestly and orders to be up significantly in this market compared to 2009 levels.

In oil and gas sales were down for the quarter and year to date over last year due to low bookings in 2009 as many projects were put on hold. However, orders began to show traction in the second quarter and were up from 2009 second quarter and up over 100% from the first quarter of 2009.

We're encouraged by the quoting activity which continues to be strong. We're seeing projects in Latin America, Canada, the Middle East and Asia for a variety of applications including pipelines, storage tanks and new refineries. The national oil companies in particular have increased spending.

On the refinery side we're beginning to see capital investment again and new refinery capacity and maintenance enhancements in the US, Middle East and India. Based on current activity levels we expect to see continued improvement in orders as the year progresses which will position us well for 2011 in this market. We expect orders to be up significantly for the year and sales to be down versus 2009.

Turning now to power generation, sales were down for the quarter and year to date compared to 2009 while orders were up for the same periods. Sequential order growth was also strong as demand continues to be driven by new infrastructure projects in Asia and the Middle East. We currently have a solid backlog of projects for this year and are actively working on new opportunities for 2011. We expect sales in 2010 to be at similar levels to down modestly and we expect orders to be down modestly.

Our next end market is defense where we're seeing very positive trends in the US and the rest of the world. Defense now represents about 10% of our total business. Sales were up for the quarter and year to date over 2009. However, orders were down for the quarter and year to date period due to a difficult comparison to the first half of 2009 when we booked $32 million in orders related to the Virginia class submarine program.

Robust sequential order growth was driven by bookings related to this submarine program and the DDG-1000 Zumwalt destroyer program as well as a submarine program for the French Navy. We continue to leverage our SMART technology within the US Navy. We expect sales to be up quarters to be down and defense for 2010, but the long-term outlook is one of sustained and steady sales growth.

Now for a look at our general industrial end market. Sales were up for the quarter but down slightly for the first half of 2010 compared to 2009. Orders were up significantly for the quarter and the year-to-date period; sequential orders were also up nicely marking four quarters of sequential improvement in this end market.

Because of the diversity in this market and the typically shorter cycle nature of general industrial we view it as a bellwether of the overall positive direction of the market. We've seen particular strength in the chemical, diesel engine and machinery support submarkets as well as in distribution compared to last year. General industrial demand has picked up in the US and Europe as well as in China. We expect significant growth in orders in 2010 and we expect sales to be at similar levels to modestly up compared to 2009.

Turning to a geographic look at our sales for the quarter, about 45% were shipped to Europe, 30% to the Americas and 25% to Asia and the Middle East. As a reminder, these numbers do not include the final destination of our product shipped to OEMs. We believe our business is probably more evenly distributed between Europe, the Americas and Asia/Middle East about one-third each.

On a sequential basis sales grew in Europe, the US and Korea. Orders were also up in these geographies as well as in India and South America. This broad-based growth reflects the improvement we're seeing in our markets.

Our aftermarket sales continue to be about 25% of our overall sales. Our aftermarket sales were up 5% for the quarter while orders grew 16% over last year's second quarter. We believe we're beginning to see our customers spend maintenance dollars that had been deferred.

Growing our aftermarket is a major focus area for us and we've implemented a number of initiatives to leverage our install base. These initiatives include expanding our commercial marine Navy waterfront service capabilities, adding SMART monitoring capabilities to existing pumps and systems, providing products that address environmental regulation such as OptiLine as well as offering kits. Our aftermarket margins are about 20% higher than [before] market margins.

Moving on to the balance sheet, our financial condition remains strong. At the end of the quarter we had net debt of $25 million including cash of $63 million with $136 million available under our revolver. Our net debt to total capitalization was 9% at the end of the quarter.

We continue to focus on improving working capital efficiency. Our working capital to sales ratio declined to 19% from 25% and was driven by reductions in inventory and receivables. Our Radolfzell plant continues to make progress as well with another $3 million -- or EUR3 million inventory reduction this quarter. As we improve our on-time complete delivery this will also reduce the need for distribution center inventory as well. Actively applying our CBS tools is helping us to attack root cause issues for receivables as well.

As mentioned earlier, we were pleased with our gross profit margin of 35% as we're benefiting from our restructuring and continuous improvement actions. SG&A expense was essentially flat for the quarter and year to date periods compared to last year. We're starting to identify opportunities in this area as well, as we believe we can lean the front and back office processes and reinvest in the right feet on the street. Free cash flow was $22 million for the first six months of the year, an increase of $10 million from last year.

Regarding asbestos, the lawsuits against our insurers are continuing. We expect to have a resolution on one trial this year and we hope to have resolution on the other matter within the next six to 12 months. We've increased our litigation expense estimate for the year primarily related to higher-than-expected costs associated with the cases due to a number of matters including settlement discussions.

In summary, our markets are showing signs of solid recovery. We're encouraged by the strength we've seen and are adjusting our guidance accordingly. We now expect organic sales to decline 2% to 5% from 2009 versus our previous guidance of a 5% to 9% decline. We're expecting organic sales to grow as much as 6% in the back half of the year.

We've narrowed our adjusted EPS range for the year to $0.70 to $0.77 from our previous guidance of $0.67 to $0.77, and this includes covering about a $0.03 negative currency headwind. The Euro Spot rate at the end of the quarter was $1.23. For details on our other assumptions, please see the slides.

As a reminder, we expect the year to follow our historical seasonal pattern, excluding 2009 which was disrupted by the economic downturn. We expect the second and third quarters to be similar with the third quarter possibly slightly lower given the European summer holiday. We expect the fourth quarter will continue to be the strongest.

On our last quarterly call I shared my observations from my first 100 days; we have since established our strategic priorities and I'd like to review those with you today to help you understand how we will grow this business profitably.

Our strategic planning process helped us identify our opportunities by end market and these strategic parameters will serve to direct our organizational focus for organic and acquisitive growth. The priorities for our organization are as follows.

Our first priority is to utilize the voice of the customer process to drive differentiated product development. This is a process that involves three different levels of focus, at the base of the fundamentals like on-time delivery, quality and customer responsiveness we have to perform consistently on a daily basis.

The next tier involves an objective interactive customer satisfaction process that provides pure feedback so that we can improve our processes and ultimately the customer experience.

At the top level the process will be much more proactive in nature, really focusing on future customer needs. Throughout this process we'll be looking for promising technologies, technologies that could really change the industry and provide Colfax with a sustained differentiation.

All three tiers are being addressed. This comprehensive process is the starting point for the Colfax business system.

Our next priority is to grow Asia. I just returned from a trip to China where I was able to see the opportunity firsthand. We have all the elements like Tushaco, the Wuxi plant, global customers that have moved there and strong market growth, but we need to develop and execute a comprehensive strategy to ensure our success. We'll start with a VOC by end market to really understand the local market needs. We'll put the right organizational structure and talent in place and we'll establish the right supply chain and intensify the execution of the plant.

Our next priority is to align into a global functional organization structure. Since we announced our global organization realignment our leadership has been working to initiate many of the enhancements that we believe will improve our performance.

Global sourcing has been busy rationalizing our supply base and consolidating our buys, global product development has been focusing on rationalizing our product development priorities and ensuring that our priority projects are resourced appropriately.

Our oil and gas and global commercial marine teams are focused on segmenting the respective markets, determining the right resources and pursuing the opportunities with the greatest potential across the globe. Our leadership continues to identify opportunities for front and back office consolidation and operation consolidation as well.

And our final priority is to intensify the applications of CBS tools with a significant focus on Europe and the Middle East and Asia. We've completed and initiated the rollout of our top level policy deployment throughout Colfax. This will ensure the proper strategic and implementation of alignment throughout Colfax and it will facilitate the drive to behave as one united global entity focused on our customers.

Our new leadership in Radolfzell continues to make progress through the application of policy deployment and the rest of the CBS toolbox, most notably, kaizen. As I mentioned in the last call, we've had years of chronic on-time delivery issues that have created a need for a higher overhead structure. During my last visit our team shared an extensive value stream map that helped everyone understand the complexity of the current process and the opportunities for improvement.

The team is working diligently on the implementation of the 2B state for a more permanent and productive solution. We are focusing our product development resources on the product rationalization process for the three screw product line and the centrifugal line in an effort to simplify the cost structure as well.

In other parts of the organization kaizen continues to gain in intensity. I just returned from a visit to our Columbia, Kentucky facility where Earl Milby and his team shared the results of their continuous improvement efforts. They just achieved double-digit inventory turns and they're setting their sights on higher levels of working capital efficiency.

Over the last couple of months I've also been able to visit several of our customers around the world to get a very clear understanding of their particular needs as well as what they value from us. At the Three Gorges Dam in China, the director showed me our solution in action. It's a hydraulic application of our Allweiler three screw pumps that opens and closes the gates that regulate the flow of water to the turbines. And it's a key ingredient in providing 4% of China's electricity. We displaced a competitor that wasn't a reliable -- that wasn't able to provide a reliable solution.

I also visited a pipeline application for heavy crude and listened to our customer describe how our solution will improve the energy efficiency and reduce the total cost of ownership by $15 million over the life of the project versus the competitive alternative. He thought our solution was too expensive at first until our team showed him the energy savings that could be achieved. These are the kinds of applications where we excel and we do that by understanding the true voice of the customer.

In summary, we're encouraged by the accelerating strength of our broad-based end market order activity and I'm excited about the progress related to our strategy and the accompanying priorities. And with that I'll open it up for questions.

(Operator Instructions). Jeff Hammond, KeyBanc.

Hi, good morning. Hey, just wanted -- you gave us some good detail on the Allweiler situation. And you had commented in an 8-K around margin performance in that business. And I just wanted to get a better sense of what structurally you see as challenges, is the long-term goal to get that to parity. What's kind of a more interim goal as far as margin improvement within that business and some of the key steps to achieve that?

The goal is that -- I think you're referencing probably the 800 to 900 basis point difference that we pointed out, is that accurate?

Yes, exactly, yes.

Right. Yes, and the way I view that is -- I view that as opportunity, frankly. And so let me tell you a little bit about what we're doing and I think that will give you a sense for some of the timing and the improvements and that sort of thing.

As I mentioned in the last call, this business, when you take a look at the on-time delivery issues that we've had over the years and what we need to solve in terms of root cause, a lot of it gets back to complexity of the business, especially starting with the complexity of the product.

So in a lot of cases the solution has been designed more as a one-off kind of thing instead of really trying to standardize some of the approaches. So one of the projects that we're most actively working on in terms of absolute root cause is that of product rationalization where we're going back and we're really taking a hard look at the cost drivers of the business and we have a relatively good idea for what those are. And then we're going back and taking a hard look at some of the parts and the products that we have to support that.

For example, if you analyze some of the parts, some have higher scrap rates than others, some have higher setups, those kinds of things. It's that kind of level of detail that we're getting into to try to design some of the cost of it. Because if you take a look at the pitch of some of the idlers, they're just so minute in terms of their differences it's absolutely a candidate for product rationalization.

So, just by doing that that's going to help simplify that process. That is not a short-term -- what I call a very short-term fix. We're going to make progress by the end of the year for probably -- I think the last estimate was somewhere around 20% of that for a particular product line.

But then, as you know, it's going to take time to actually have that rollout and flow all the way through the manufacturing operation, those kinds of things. That's the project we're working on basically for three screw as well as the centrifugal product line. And by the way, we're looking at that across the three screw offerings that we have for our different brands. So that's going to be critical.

And then in addition to that, I mentioned the value stream app for the process itself. I mean, it was so clear when we were going through and reviewing that that we have a lot of opportunity for improvement to really change that process. That's something that it's getting a very intense focus over the next four to six months in particular and we look for that to have a very favorable impact on the on-time delivery.

Things like global sourcing, some of those are shorter term than others, but to really get down to a consolidated supplier base that's focused on leveraging our buys as well as providing us with consignment opportunities from an inventory standpoint to improve our working capital -- again, some of those are more intermediate term solutions than others but that's -- we're getting some of the benefit this year, but most of that is going to go into next year and the year after that. So they're a little bit longer term solutions.

I want to emphasize, we're going to be very methodical when going after that opportunity because we're also working on the pricing process on the other side of that, if you will, because that's one of the opportunities we see as a company to not just come up with a pricing process, but it's got to lead to a pricing strategy by end market and we believe we have some opportunity there as well.

So we're going to build this thing for the long-term. And then along that path we're also going to see some of the benefits in the short and intermediate term.

Okay, great. And then shifting gear, I mean you seen pretty encouraged by the order trends, and it seems like the quoting activity feels a lot better into the second half. I'm just trying to get a better I guess picture on what starts to ship into the second half versus what end markets are maybe setting the table for 2011?

Yes, would it help to run through each one of those end markets briefly?

Yes, I mean, that would be helpful.

Okay, let's do that. Let's start with commercial marine. Like I said in the script, we're being realistic about that. The orders have definitely been up, as you can tell from the slides that you've got on a sequential basis. Commercial marine was up about 3% certainly over last year, it was up about 66%. So, we're sort of guarded but realistic in that sense.

We've seen that the idle fleet has come down a little bit from last quarter; I think it was around 10%, we think it's a little lower than that based on the information that we're getting. But we feel we can grow the aftermarket in that particular space, not just in the next half a year but moving forward. We feel we can leverage the global structure that we've got in place there.

And the other thing that we're going to do here is leverage what we view as our highly profitable model and transition more towards that over the next year or two. And it's one that's based more on speed and responsiveness as well as accurate documentation. But I'd say out of all of them that's the one that we're really monitoring closely to ensure that we don't get any mixed signals from the markets.

The one concern that we have that I didn't point out is that there's an awful lot of capacity there, there's 10,000 [ships] on order, it's going to add another 35%, so ultimately you've got to have (technical difficulty) demand that's going to make -- that's going to utilize that fleet.

Oil and gas, you can tell from the numbers when you take a look at the 103% increase in orders sequentially over the first quarter we're finally starting to see some things break free there. So we're pretty optimistic about that; the long-term trend for growth, especially the shift in more highly viscous oil that's projected. We've got considerable opportunities we feel in Latin America, the Middle East, Canada, Asia.

The other thing to note here is the refinery projects are starting to break free a little bit. We've noticed that with our LSC business unit where we're starting to see some orders there. So, we feel pretty good about that. We think there's an opportunity to expand our SMART technology applications in that market as well and really drive -- go after the energy efficient solutions like the one I mentioned in the script. So we're pretty optimistic about oil and gas.

Defense just again, we feel good about this particular end market. Tough comps mask the strength of it a bit based on that order for Virginia class subs last year. Automation continues to play a role here where our SMART technology is an application that really plays to our strength, we'll continue to expand that service network and we do believe that we have opportunity in the rest of the world. So, the one to keep an eye on there is the orders are very lumpy, but overall again, consistent strength and we feel good about that moving forward.

Power gen, growth in the Middle East, India, China -- saw a lot of this when I was in China with the hydroelectric solution that I mentioned earlier, worldwide demand for electricity, you all know what the demand for that is going to be. But we view that we have opportunity in China, India as well as the Middle East there.

General industrial, this is frankly a market that I'm pretty excited about. I mean, I think here's a market where we actually need to embrace the application diversity that exists there and this really plays to our strength from an application engineering standpoint. But we've had four sequential quarters of order growth. We're seeing that in chemical, machinery and diesel; it's across the board in terms of Europe, the US and Asia. And again, we see opportunities to expand in Asia, especially as we understand voice of the customer and come up with solutions that are creative in this particular space.

After market, we feel that the cannibalization is fairly complete at this point in time. Again, we're seeing strength across the globe in aftermarket. We're very focused in terms of our installed base monitor program that we have in place, as well as some of the other processes to really get after this. So, that sort of gives you an understanding for our view here, not just for the next half of the year, but looking forward a little more long term.

That's good color. Is it fair to say that most of the organic growth you see in the back half though is kind of your shorter cycle general industrial and power gen and oil and gas start to ship more meaningfully in 2011, or are we getting pretty good translation from order to shipment?

No, I think that's a great point. And that's the way I would put it. The thing with regard to end markets like oil and gas, it's all a matter of what can you ship in that period of time. So while we've seen the increase in orders we think what this does is really sets us up well for 2011. And you're absolutely right on in terms of your interpretation of general industrial. Some of that is shorter cycle than others, so some will be in the second half and then others will go into 2011.

Great, thanks.

Mike Halloran, Robert W. Baird.

Good morning. On the margin side could you talk a little bit about the decremental margins in the quarter -- and it seemed like they improved certainly versus the first quarter -- and some of the factors that drove that?

Yes, the decremental margin for the quarter, when you look at this -- and it's important to understand the impact of currency. But for the quarter it was about 33%, year to date it's about 34%, and then sequentially it's somewhere about 38%. So it's in that range that we have talked about of 35% -- or to 30%. But it's important to go back and understand the impact of currency.

Yes, there's really nothing noteworthy there when you adjust for currency.

Okay, sounds good. And then when you take into account the restructuring initiatives that you guys have put into place, as well as a lot of these lean oriented initiatives you're driving through the organization, maybe you could talk about what peak margins or margin targets would look like Q3 long-term. Or maybe a better way to put it, when you get back to peak revenue do you think you can eclipse that 16% or so target that you had last time?

I'm sorry, eclipse what?

When you get to the peak revenue for this cycle --

Right.

And you look back at your peak margin profile of around 16% -- you've talked in the past about how some of these restructuring initiatives were temporary in nature, but you are driving a lot of these lean oriented things through the organization. Maybe you could just talk about how the margin profile might or might not structurally change.

The long-term goal is really 40% gross profit. And there are a lot of things that are going to go into that. Obviously the work that we do on lean will drive a lot of that as well as some of the pricing initiatives that I talked about earlier. In addition to that, just understanding voice of the customer, what we're going to try to do with regard to new products as well, because our strategy is one of differentiation where we believe that we ought to be able to capture the value that we provide for our customers.

So there's an awful lot of things that will go into that. It's not just going to be lean, it will be that in combination with innovative products as well as our pricing strategy.

But I guess the question is -- I mean, with all of these changes do you think that on a comparable revenue base this time around you should be driving higher margins?

Sure, yes.

And then I guess lastly, thinking about the really nice order trend in this quarter, a recent question just kind of -- your commentary about pushing some of those lead times and helping out your 2011 estimates, strong book to bill here. Is it a similar -- would it be out of line to think that from a revenue growth standpoint you're seeing a lot of similar trends from an 2007 to 2008 time frame? Would that be a pretty representative period to think about how the revenue growth might look 2010 to 2011?

Yes, I obviously wasn't around really in the business at that point. But I mean, it's early for that kind of a comparison, I think. But like I said as we went through the end market, we feel good overall about the energy and certainly the order activity that we see right now. And we think that that's going to help us get off to a great start in 2011.

Sounds good.

Kevin Maczka, BB&T Capital Markets.

Good morning.

Hi, Kevin.

Clay, I guess all the color on the end markets was great, I just have one question going back to commercial marine. It wasn't obvious to me why we would have such a strong 100% plus order growth this quarter. Can you just give a little more color there? Is this a function of the easy comps, is this just a function of lumpiness or is this really the aftermarket focus that you have kind of kicking in? If you can parse out what was aftermarket versus OEM I think that would be helpful too.

Yes, I'll provide my perspective on that and then actually Scott has been interacting with a particular industry group so he can add some more color to it. But certainly the comp is one of the issues. But in addition to that what we're seeing from an order perspective is that as the prices drop in the market the ship owners are going after -- going after and essentially ordering new ships as they go through it just based on what's happening from a pricing perspective.

With regard to the aftermarket, we have seen some growth in that that's pretty significant, probably somewhere in the 22% to 23% range in terms of growth from a sequential standpoint. So that has been a part of it as well.

Kevin, there's one thing I think that would be helpful for you to understand the commercial marine order rate. There are a lot of -- the lumpiness of the cancellations has an impact. If you go back and re-state the quarters and the year-to-date numbers without the cancellations the order rate is still up substantially, but it would be 11% in the first quarter versus the prior year quarter, and it would be 42% in the second quarter -- 41%, and 23% year-to-date. So, the cancellations are having a big impact in that number.

Right.

Okay, that's helpful. Thank you.

Jim Lucas, Janney Montgomery Scott.

Thanks and good morning. First question, on the working capital side, you've talked a little bit about some of the progress you're having. But as you've gone around and you're doing the root cause, there have been some good sequential gains. As you look at that root cause, besides on-time delivery, is there any one or two particular items that you found present the biggest opportunities for you on the inventory side? And could you equally talk a little bit about what you're finding on the receivable side?

Sure, on the inventory side, the on-time complete, at least from a European standpoint, Radolfzell in particular, that is the most significant thing that we can go after. As we're working on that it really frees up the opportunity to eliminate a lot of the inventory that we have in that supply chain.

So if you can imagine how they manufacture, when you're not shipping on time you've got to have some waste in that supply chain to try to help out. So we're really attacking that process, things like process flow demand pool, certainly starting with that. And then linking up processes and that in turn is going to allow us to take some of the inventory out.

Scheduling, frankly, is one of the issues we're really working on where you can substitute information for inventory, for example, to help lean up the supply chain and that certainly is going to play out as we take a look at some of the inventory that we have in the CDCs that are out there. So, that's really where we have some opportunity there.

In addition to that, working with our suppliers. Typically -- what's interesting about this industry to me is that sometimes there's -- it's just sort of the accepted way to really accept longer lead times and greater inventories from our suppliers.

So as we work on the supplier consolidation, one of the critical areas that we're talking with them about in addition to quality and on-time delivery is consignment of inventory as well as reducing the lead times to be able to supply us. As we consolidate with suppliers we're more important to them and so we think that that's going to provide us with some opportunities for improvement as well.

In terms of the days sales outstanding, the receivables, again just attacking that as a process, I think we've reduced the DSO by about four days from the end of the year. And again, applying CBS tool kaizen, getting after root cause, what causes it, is it an inaccurate order, if it is why, what are we doing about it -- those kinds of activities.

So just being very methodical in understanding what the inventory and what the receivable is and what actually is driving it and get after it with kaizen events.

Okay, that's very helpful. And switching gears, on the general industrial strength that you're seeing out there. Could you give us a little bit more color in terms of what you're seeing geographically? You talked about some of the end markets that are driving the improvement in the orders, but geographically what are you seeing there?

Yes, we really have strength across the US, most certainly Europe, as well as Asia. So the European strength, a lot of that is Germany. For example, we don't deal a lot with southern Europe, so we're not really not feeling any of the effects of some of the things that have been happening in Greece and those kinds of countries. But it's been strong in Asia in particular, we're seeing a lot of growth there. So, pretty broad-based and, frankly, we feel good about the opportunity that we see in Asia in particular from a growth perspective.

Okay. And finally on the aftermarket side, clearly this is a longer-term opportunity. You've made several references to implementing SMART technology. And as you're going and looking at those aftermarket opportunities, how do you approach the market in terms of getting the SMART technology implemented?

SMART is -- and by the way, this is one of the things that we are really excited about and ties into our strategy of differentiation really through being more responsive as well as being VOC aligned with SMART solutions for the most critical applications. We're finding out there, and certainly a lot of the recent events point out the need for detection, for example, in a lot of cases for understanding what's going on to optimize the subsystem, those kinds of things.

So when we go back it's something that we're introducing in the summer, for example, I know with the Imo brand. But it's something where we're going to go after them, we're going to solve a particular problem. So they may have a pump that operates very efficient -- or that operates right now, but it really is selling them peace of mind in terms of being able to detect things like cavitation most certainly, elevated temperatures for bearings, leaks from a seal perspective, those kinds of things.

So we're excited about that opportunity and we see that again as an opportunity to leverage something that we really acquired with Fairmount which focuses more on the defense side and leverage that from a commercial standpoint to go out and provide peace of mind for our customers and that's becoming more and more important to them.

Okay, thanks.

(Operator Instructions). Jason Feldman, UBS.

Good morning.

Hi, Jason.

I was hoping you could comment a little bit more on the M&A environment, whether you're seeing interesting opportunities at reasonable prices and whether you're comfortable, Clay, given that you've been here now about two quarters or so pursuing deals at this point in time?

Yes, just to reinforce, this is going to continue to be an important part of our growth strategy. And we're absolutely ready to deploy capital for the right opportunities. We have been actively working our pipeline just as we have all along and that's going to continue. So, in terms of multiples and those sorts of things, I think we've been pretty consistent -- the multiples in the six to eight range right now. The activity level is good vis-a-vis previous periods I think and you know --.

Okay. And also price cost dynamics, have there been any particular areas where you're seeing pricing pressure and in particular relative to any change in commodity costs? Has that been a headwind, a tailwind or something we should think about in terms of how margins might be affected going forward?

Are you talking about material costs?

Yes, I'm sorry, pricing for your products relative to underlying material costs.

Yes, there obviously -- I'm sure you're privy to some of the material cost pressure that's been out there. We've been able to absorb most of that as we look at how we've improved our operations and those kinds of things. We actually have implemented some surcharges, which is helping in that particular case as well.

Just one comment I'd like to make. I think there's been a change over the last couple of months where I think we've been actually able to go out and start trying to get price back again. And the pressure is still -- the overall pressure in commercial marine; with some of the other markets we're actually able to push price a little.

Okay. Thank you very much.

I'm showing no further questions at this time.

Thank you very much.

Ladies and gentlemen, that does conclude today's conference. You may all disconnect and have a wonderful day.