Enovis Corp (ENOV) 2011 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the Colfax Corporation fourth-quarter earnings conference call. At this time, all participant lines 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, this conference is being recorded.

I would now like to turn the conference over to Mr. Scott Brannan. Please go ahead.

Well, thanks Tanisha and good morning to everyone and thanks for joining us. My name is Scott Brannan. I am Colfax's Chief Financial Officer. With me on the call today is Clay Kiefaber, our President and CEO.

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

During this call we will 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 statements that we might make today. The forward-looking statements speak only as of today and we do not assume any obligation or intent 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 Reg G relating to those measures can be found in our press release and in the supplemental slide presentation in the investor section of the Colfax website.

Further, projected adjusted net income per share reflects our revised definition beginning in 2012. Please refer to the supplemental slide presentation for a comparison to our 2011 adjusted net income and adjusted net income per share under the revised definition. I will be speaking about this in more detail later in the call.

And now I would like to turn it over to Clay.

Thanks, Scott. Good morning everyone. This morning we're going to cover four topics -- our fourth-quarter results, our 2011 results along with a recap of the year's progress, our initial thoughts regarding the acquisition of Charter International, and finally our earnings guidance for 2012.

I'll handle the first three and then I will turn it over to Scott for the more detailed financials and the 2012 guidance, and then we will open it up for questions.

We're pleased to announce strong results for the full year 2011 and a solid fourth quarter. Adjusted EPS for 2011 was $1.31, a 42% increase over 2010, driven by strong shipments and a continued improvement in productivity, slightly tempered by lower margin marine shipments. Operating margins for our existing businesses expanded by approximately 160 basis points while we continue to restructure the operations.

Net sales for the year were $693 million, an increase of 28% and 9% organically, while bookings were $683 million, an increase of 28% or 12% organically. We continue to make progress with working capital as well, with a reduction from 19% of sales to 17% of sales at year-end. For the fourth quarter, adjusted net income was $17.6 million or $0.40 a share, an increase of 4%, while net sales for the quarter were $178 million, an increase of 7%.

Sales were strong in Power Generation, Oil and Gas, and General Industrial; relatively flat in Commercial Marine and down in Defense. The overall increase was largely due to a 9% increase from the Rosscor and COT-PURITECH acquisitions, partially offset by a 2% organic decrease.

Orders for the quarter were $153 million, an organic increase of 9%, while growth in all end markets -- with growth in all end markets except General Industrial. All of these results met our internal expectations.

Now for an abridged update on our five end markets, and please refer to the slides for the specific growth rates. Currency rates resulted in a 4% increase in sales for the full year, but didn't have a significant impact on sales for the quarter.

Oil and gas remains a very robust market fueled by higher crude oil prices and deferred capital projects, most notably in heavy crude transfer, storage and refinery, and lubrication systems. Western Canada, Latin America and Asia were particularly strong. Projects are now larger in scope, have longer sales cycles and have more volatile order patterns.

For example, a pipeline order of $10 million was shipped in the fourth quarter of 2010 distorting the quarterly comparison. As a result, net sales increased 24%, organic sales declined -- and organic sales declined 12%. Orders increased 10%, 6% organically, and quotations in multi-phase pipeline and refinery applications remain extremely high.

Now for a look at the General Industrial end market, both orders and sales increased for the quarter and the year. While we continue to experience broad-based strength, the rate of order increase has slowed recently especially in certain European segments.

For the quarter order intake was strong in the diesel engine and chemical processing submarkets, while slowing most notably through distribution. As a result of some new leadership, orders have improved in the Chinese market.

Turning to power generation, sales and orders were up for both the quarter and the year, ascribed to new infrastructure projects in Asia and the Middle East. The long-term prospects for this end market remain strong given the fundamental undersupply of electricity globally. Our OEM partners continued to forecast robust activity and we continue to provide more complete systems to regions outside of North America.

In Defense, shipments decreased for both the quarter and the year as expected. The order patterns continue to follow timing of specific ship programs and will remain volatile by quarter.

In Commercial Marine, sales were relatively flat for the quarter. Orders increased significantly as this end market continue to exceed our internal expectations. For the year sales and orders were up significantly.

Cancellations were $1 million in the fourth quarter compared to $6 million in the fourth quarter of 2010. On a year-over-year basis, cancellations have declined from $16 million to $6 million.

And now I would like to review our progress as it relates to our strategic priorities. First, we accelerated our restructuring efforts with the rationalization of our European CDCs, the closure of our Gottmadingen systems facility in Germany, the rationalization of the foundry in the Radolfzell, and the consolidation of the Portland facility into one. The results of these actions will help drive improved margins and working capital performance in 2012.

Next, the rollout of our global organizational structure facilitated the implementation of our strategy as our global sales and marketing teams were better able to focus on our customers and to leverage our applications expertise in driving increased sales. A recent $10 million Power Generation order was booked because of that structure change.

Working as a team, we determined the customer need and then provided a solution that incorporated IMO, Warren and Allweiler products. That simply would not have happened with the past business unit structure.

Third, we strengthened our CBS capability with the addition of Steve Wittig to our team. He continues to raise the standard of excellence for our Kaizen and policy deployment processes, increased the organizational intensity and add talent to our CBS teams.

Our lean efforts in Radolfzell are continuing to gain traction with the addition of some talented lean leadership, as evidenced by our 10% inventory decline in Q4. We're starting to see the application of demand pull and process flow on the shop floor, and while it resulted in a lack of absorption for the quarter, it will provide sustained lean processes that will benefit us now as well as in the future.

Fourth, we accelerated the growth of our lubrication services business with the acquisition of COT-PURITECH, a leading national supplier of oil flushing and remediation services to power plants, refinery and petrochemical plants. The additional expertise gained will help us accelerate our total lubrication management business growth and we welcome Kip, Pat and the COT team to Colfax.

Fifth and most importantly, we continue to add to our talent pool with the addition of several highly talented associates who believe in lean and CBS, and are passionate about building a great company for the long term.

As most of you know, on January 13 of this year, we completed the acquisition of Charter International. It's comprised of two distinctly different businesses. Howden, a $1 billion global manufacturer of air and gas handling equipment, and ESAB, a $2 billion manufacturer of welding and cutting equipment and consumables.

These companies provide additional exposure to attractive markets, improve our position in the emerging markets, increase our recurring and aftermarket revenue stream, and create a better balance of short and long-cycle businesses. Let me give you a brief account of our approach and actions thus far.

First, well before we closed the deal we started recruiting for key leaders who would accelerate the required transformational change. Ken Konopa, a former executive at Danaher and a degreed chemist, has joined us as the Vice President of Global Marketing for ESAB. Ken brings to ESAB a deep understanding and strong background in industrial marketing.

Several of his accomplishments include growing gross margins in consumables business and implementing a growth strategy in South America. Ken is focused on developing the overall strategic plan, as well as building a highly talented and productive product development and product management team that will provide VOC-based regional solutions for both equipment and consumables. Alignment and speed to market will be critical success factors.

Vince Northfield, a former executive at Teleflex, has joined us as Vice President of Global Operations for ESAB. At Teleflex he focused on working capital margin enhancement and led the global implementation of operational excellence and standardization programs.

Vince is focused on the development of a responsive, rationalized and competitive supply chain that focuses intensely on our customers. He has an exceptional background in lean and will be leading the application of those principles throughout the organization.

Finally, Gary Hoover will be joining ESAB as Vice President of CBS on February 20. He comes to us from TBM Consulting where he was a partner and led their European and Indian consulting practice, a practice that specializes in lean and policy deployment. He has access to an extensive network of lean expertise and will be pursuing the best to add to our teams.

He'll also be responsible for strengthening our lean capabilities and driving tangible results within ESAB, something that has been lacking in their past lean programs. He will also be responsible for coordinating and training the organizational policy deployment along with Ken, Vince and me.

Second, we met with the worldwide senior leadership team of ESAB on January 11 to the 13 to review the business and develop additional plans for improving its performance. Interestingly, this is the first time the top-level leadership of ESAB had ever met as a team. The dialogue was open and candid, and we're now in the process of developing an organizational structure that will enable a more value-added approach to our customers globally.

We also identified significant opportunities to improve our cost structure. We focused the group on answering the question -- if we were starting a welding and cutting business today, how would we structure it? I want to emphasize that we're in this to compete for the long-term, and that will be reflected in our structure moving forward.

Additionally, we've already rationalized the Charter corporate headquarters, as well as implemented a leaner global corporate structure. Also I've conducted approximately 15 site visits to engage with and listen to those both ESAB and Howden Associates.

Third, we needed to establish a higher level of urgency and momentum for results at ESAB, so we introduced the weekly KPI report-out process. We focus on understanding where were off track, what the root cause of the problem is, and what we're doing to implement countermeasures to get back on track. It's a habit that we're going to develop, and that will lead to the development of our top-level policy deployment matrix and action plans.

We'll take approximately the next 90 to 100 days to dig into the details of the business and build that into our PD process.

We're going to be very active with our restructuring this year at ESAB, as we're anxious to use the new structure to compete aggressively in our respective markets where we're going to focus on service excellence as well as effective resource deployment.

Shifting to Howden, as I have stated consistently, this is a very sound business, but one that we believe to be capable of higher levels of performance. I, along with Steve Wittig, visited Glasgow prior to Christmas to train the top-level executive team in policy deployment.

This was a great session, by the way, with Ian and his team. They were very, very receptive and we're really pleased with it. But they've completed their top-level matrix and action plans and are actively executing those plans right now.

While we'll be assessing both Howden and ESAB over the next 90 to 100 days as well as formulating our policy deployment plans, the following are some critical areas of focus where you can expect to see improvements. At Howden we'll be focused on deploying CBS, intensifying the application of lean, simplifying the organizational structure, leveraging existing best practice models especially on the sales end, and then improving our value-added sales capability.

At ESAB we'll be focused on building the best team, aligning the organization strategically as well as structurally, providing VOC-based products and services to our regional end markets, and that is both for equipment and consumables, by the way. Also leveraging resources globally and then providing great customer service and deploying CBS.

We believe we can generate in excess of $100 million of savings from these businesses over the next three to four years, as this organization is operating significantly below its collective capability. And we're going to change that. As we complete our assessment of Howden and ESAB over the next few months, we will be better able to refine this estimate and determine the timeframe in which these cost savings will be realized.

These are still the early days and we're being careful not to initiate more cost reduction projects than we can comfortably assimilate. Based on my site visits with ESAB and Howden, I'm even more excited about the opportunities for improvement. These are high-quality businesses in growth markets with many talented associates.

In short, our view of the potential of these businesses has increased based on what I have seen thus far. We continue to expect significant accretion and double-digit return on invested capital within three to five years.

At Colfax Fluid Handling, we'll focus on realizing the benefits of our restructuring while doing a bit more, driving global sourcing, growing lubrication services, defining and deploying world-class customer service, implementing demand pull and process flow as a standard across all plants, as well as intensifying the application of CBS.

Looking out three to four years, we believe the following operating margins are achievable. In Fluid Handling, 20% or greater; Howden, the middle teens; ESAB the low teens; and we'll report back on our progress of this in future calls.

This year we said we were going to improve the operating performance of the business and we did that. We said we would recruit the best team and we continue to accomplish that. Both of these results put us in a position to make a transformational acquisition like Charter and that in turn accelerated our journey to multiplatform status, and I would like to thank our team for all of their efforts.

In closing, we're excited about the opportunities that we've discovered with the Charter acquisition, along with the continued improvements in our Fluid Handling business. And we're committed to continuing to live our values in building a very special enterprise for the long-term.

And with that, I will turn it over to Scott for detail on the financials and the outline for our 2012 guidance.

Thanks, Clay. For the fourth quarter sales were $178 million, up 7% but down 2% on an organic basis. The gross profit margin of 34.6% was down slightly from the fourth quarter of 2010, primarily as a result of the lower gross margin associated with the Rosscor acquisition.

Expenses of $25.3 million associated with the Charter transaction for the quarter and $31.1 million year to date are not included in adjusted net income, as this acquisition is transformative and not part of our recurring business development efforts.

SG&A expense, excluding the Charter costs I just mentioned, were up by approximately $2 million for the quarter. But this was primarily due to the additional operations cost of Rosscor and COT-PURITECH.

As a percentage of sales, SG&A expenses excluding the Charter costs -- Charter acquisition-related costs, remain consistent with the fourth quarter of 2010 at 19%. All of these factors resulted in adjusted net income of $17.6 million or $0.40 a share, improving modestly compared to a very strong fourth quarter in 2010.

On a full-year basis, sales were up 28%, 9% on an organic basis. Adjusted operating income was up 36%. Excluding the impact of the acquired businesses, margin on a full-year basis was up 160 basis points. These strong incremental margins are a result of the productivity improvement initiative and the positive leverage of fixed costs at higher sales levels.

For the quarter, operating profit margins held relatively flat despite a 2% organic sales decrease. This again reflects the productivity improvements achieved over the year and a favorable mix of products by end market. This is particularly noteworthy in that there was significantly less fixed cost leverage in the 2011 quarter, as inventories were reduced $22 million in the quarter.

Below adjusted operating income we're reporting $4.6 million in the fourth quarter of 2011 of asbestos liability and defense costs, which are 24% higher than reported in the 2010 fourth quarter. Estimated future liabilities for certain jurisdictions were revalued due to higher cost trends, resulting in increased liabilities of $22.8 million, increased recoverable assets of $20.3 million and a net pretax charge of $2.5 million. Asbestos coverage litigation costs of $2.2 million were relatively consistent with the 2010 fourth quarter.

In previous calls we discussed expectations that the coverage litigation trials for both our subsidiaries would conclude in 2011. While one trial has, the other has been rescheduled to the fourth quarter of 2012. As such, we expect coverage litigation cost to decrease in 2012, but not to the extent previously anticipated.

Restructuring costs in the fourth quarter related to the initiatives Clay discussed in detail on the third quarter earnings call were $2.2 million and were in line with internal expectations.

Operating cash flow for the fourth quarter was $15.5 million, driven mainly by the $22 million reduction in inventory in the fourth quarter. For the full year, operating cash flow was $57.2 million and working capital as a percent of sales reduced to 17% from 19% at the 2010 year end. We expect to continue to improve these metrics in 2012 as we vigorously apply the Colfax business system.

Finally, backlog was $347 million at year end. As is our standard seasonal pattern, shipments exceeded orders in the fourth quarter despite very strong order growth.

Turning now to Charter, the acquisition became effective on January 13. The equity and debt financing closed uneventfully as anticipated. Due to favorable management of the foreign exchange component, the US dollar cost of the acquisition was approximately $50 million less than estimated at the September level.

In addition, the ESAB working capital reduction program is running well ahead of schedule and has nearly achieved the 19% goal they had set. The end result of both of these positive actions is that we have significant liquidity available now if needed. Specifically, we have over $300 million of cash on the balance sheet after funding the acquisition, and we have a $300 million undrawn revolving credit facility.

Charter completed 2011 broadly in line with expectations. As Charter's year-end end accounts are still undergoing audit, we are not able to report operating results for 2011. Furthermore, since Charter will not be producing financial results in accordance with US GAAP, we won't be able to release the full 2011 results at any time.

We can report, though, that ESAB sales were $517 million in the 2011 fourth quarter, up 6% from the $487 million in the 2010 fourth quarter. Sales were strong in Russia, the Middle East, North America and the Nordics. Sales and outlook remain subdued for Southern Europe. For 2011, ESAB's sales were $2.1 billion, up 18% from the $1.79 billion reported in 2010.

The fourth quarter was very strong for Howden in both sales and orders. Sales for the 2011 fourth quarter were $353 million, up 46% from $242 million in the 2010 fourth quarter. For the full year, Howden sales were $1.07 billion, up 23% from $872 million reported for 2010.

Howden's backlog at December 31, 2011 was $922 million, roughly the same as at September 30, 2011.

As I mentioned, we cannot provide detailed information for either ESAB or Howden at the operating profit level. Howden's margins in the fourth quarter were sequentially higher than earlier quarters, as is their normal seasonal pattern. ESAB's margins in the fourth quarter were roughly comparable to previously reported 2011 results.

Turning now to the 2012 guidance, first, we're making some changes to our definition of adjusted net income beginning in 2012. The changes are as follows. The asbestos liability and defense costs will now be included in adjusted net income as a reduction to adjusted net income, as they are recurring and cash payment items. The asbestos coverage litigation costs will continue to be excluded, as it is expected to wind down in the next year or so.

The major ESAB restructuring program, both those previously outlined by Charter in their public communications, as well as additional structural changes identified by us, will be excluded.

Transaction costs related to the Charter deal will be excluded, as this acquisition is transformative and not part of our normal business development efforts. Costs for smaller bolt-on acquisitions, however, will be included as a reduction to adjusted net income.

And finally, significant year one fair value adjustments to the acquisition-related inventory and backlog will be excluded from adjusted net income. These items are non-recurring and non-cash.

We have included in the slide presentation, in the appendix, 2011's quarterly adjusted net income and earnings per share under the new definitions.

Revenue growth expectations on a local currency basis is expected to range as follows for our three groups. For the Fluid Handling group, we anticipate sales increase of 4% to 8%, for Howden 10% to 15%, for ESAB 2% to 4%. The effect of the strengthening dollar -- and our business now trades in over 100 countries, so it's not possible to give an exhaustive list of current phase. But for example, with the euro at 1.30 this will reduce revenue by approximately 3%.

Total revenue is expected to range from $4 billion to $4.1 billion. And the major contributors to the change in earnings before taxes are listed in the appendix. Of particular note are the benefits of the ESAB restructuring program, offset by higher pension costs. Other significant assumptions are outlined in the slide deck.

We currently expect adjusted earnings per share to range from $1.45 to $1.65 per share, representing a 29% to 47% increase from 2011 results under the same definitions. The earnings per share number is significantly impacted by the newly issued preferred stock. Preferred stock cannot be comforted to common stock by the Company for at least three years.

While the preferred stock is outstanding, it will be paid in an annual cash dividend of 6% that will reduce earnings available for common shareholders. In 2012 this dividend will be $20 million. In addition, because the preferred stock is participating preferred stock, US GAAP requires the Company to allocate earnings after the 6% cash coupon between the common and preferred shareholders on a pro rata basis. This will further reduce in 2012 earnings available to common shareholders by $20 million to $20.8 million at the top and bottom of our guidance level.

The combined results of both of these treatments are projected to be earnings per share available to common shareholders $0.20 lower than they would have been had the preferred stock been converted to common shares. This has been factored into the Company's guidance. Again, this treatment will cease to apply when and if the preferred stock is converted to common shares.

In addition, there is incremental intangible asset amortization from the Charter acquisition of $0.16 per share, which is included in the adjusted net income per share. And as Clay discussed, we have only begun identifying our profit improvement opportunities, and we remain confident that we will continue to improve margins over each of the coming years.

As is our normal practice, we will not be giving quarterly guidance. However, given that there is no historical quarterly data on ESAB and Howden, we believe that some direction on seasonality would be helpful to investors. In broad terms, the first quarter is historically weakest for sales, the second and the third are comparable, and the fourth quarter is the strongest.

Based on current backlog and expectations, the first-quarter 2012 earnings per share are expected to be slightly lower than the first quarter of 2011.

And with that, I will turn it back to Clay.

Thanks, Scott. And now we will open the floor up to questions.

(Operator instructions) Kevin Maczka, BB&T Capital Markets.

Thanks, good morning. I guess -- I appreciate all the color on the 2012 guidance, but I'm still a bit confused. Maybe you can help me. You did $1.31 in 2011. Under the new definition you are proposing, what were the earnings under that definition? And I'm trying to get a handle for how much growth you're anticipating from the old core Colfax, and what the initial accretion is from the Charter.

Okay, let's take them. There's several questions involved there.

In the slide deck is a calculation of 2011 under the revised definition. Essentially the asbestos liability and defense cost is no longer being adjusted out. So, leaving that in, 2011 would result in $1.12 per share as the 2011 comparable amount.

In the slide deck there is a slide that gives a roll forward from the 2011 actual. It's labeled the 2012 roll forward. That identifies the significant improvements in the Colfax base business which includes the impact of this 2011 acquisitions, which is the COT-PURITECH acquisition as well as the reduced amortization related to the Rosscor acquisition, as well as the benefit from the restructuring programs that Clay touched on very briefly today, but that he has talked about at length in the earlier conference calls earlier in the year.

As far as Charter goes or ESAB and Howden, as we prefer to refer to it, the expectations there are laid out on the roll forward slide. As I've said before, unfortunately, we're not allowed to lay out the 2011 actuals because the audit is not completed and we don't have it in US GAAP. But I think I can say broadly that there is a significant improvement in the baseline Charter acquisition compared to where the ESAB and Howden businesses will finish out 2011. And I think if you look at information that is out there on previous guidance, you can see the level of improvement that is included in those numbers.

As to accretion, the accretion -- at the higher end of our range, the accretion will be reasonably important to the contribution. The Colfax Fluid Handling business on its own would be near the lower end of the range.

Okay, got it. On the $100 million that you're expecting to take out on the cost side over the next few years, and I know some of your plans of course are not fully laid out and in place yet, but can you just give a little more color on that? Would that be heavily front end loaded, because there's lots of low hanging fruit in your opinion? Or would it be back end loaded because you would really need time to have some plans kind of kick in over the next few years before you ultimately achieve that?

Yeah, Kevin. It's going to be a combination of those things, frankly. And let me just give you a little bit of a better idea in terms of -- especially as I've gone around and looked at things where we see an opportunity there.

First of all, fundamentally with -- and I'm going to focus on ESAB right now, because that is where most of the opportunity is. But ESAB -- one of the things that jumps out is the organizational structure. It's just starting with a lack of alignment overall for the organization.

And that's something we're spending a lot of time with the leadership team on right now, because it's been a very complex structure, one that is set up more based on a tax basis, and if you can imagine, almost by country. So that dictates a lot of the functions that they have and some of the functional complexity. In addition to that, we found that it is an organizational structure that basically inhibits things from getting executed.

So, that is one of the areas, just to simplify it as well as change that structure to more of a global functional structure, if you will, which you should be a little bit familiar with in terms of what we did with Fluid Handling. So that is one of the areas that we can actually reduce some costs, but also improve significantly the decision-making and execution of the organization.

In addition to that, fundamentally within ESAB there's just too much capacity, and it's in the wrong places in some cases. So we're doing a lot of work on that right now. Vince is very, very focused on that and we see opportunity there.

Global sourcing is another area that has really never taken hold. They had a global sourcing organization as well as a global supply chain organization. It turns out that they weren't coordinated.

We consolidated that this week. We made an announcement on that. So not just -- it doesn't just help reduce the cost, but it's going to improve the decision-making and actually drive the results that we want to see out of something like global sourcing.

Continue to see opportunity, the lean efforts within this business, specifically talking about ESAB again. It's just not been really active and it hasn't produced results. We see opportunities with freight as well as standardizing products and the materials mix across things, again trying to get them to look across the organization and get out of this just looking at it within a specific region of the world.

And then in addition to that, we view that there's some opportunity with pricing where basically they haven't had a process for pricing, let alone a strategy, so a lot of different things have been going on out in the field and we view there as opportunity there as well.

One of the areas that we are really going to focus on is alignment of the overall organization. So just -- it's going to start with the customer, which is something that has been lacking within ESAB. So we're really going to focus on that, and then put together more of a global structure which takes the strengths and really consolidates those.

But we're going organize that in such a way that it is really extremely responsive to the regions throughout the world, especially from a new product development standpoint for the target markets that we've got. So it is much more coordinated, and much more effective in terms of driving the results.

Okay, just one more from me. I appreciate that color.

Strategically on ESAB, we know that some of your major competitors are still investing in growth and plan to do that. You talked about competing aggressively with them. But should we view this as, at least near-term, a retrenchment in a way, as you try to fix some of these organizational issues before you maybe can pursue more topline growth?

We're going to focus -- like I've said consistently leading up to this, we're going to get the model right, Kevin. And we've got some very talented people that are focused on that right now.

And it's not -- we certainly aren't going to take our eye off the growth. We have a very good understanding for the markets that we want to focus on and providing some priorities to those. But we're going to get the model right this year.

We will be very aggressive on the restructuring side so that we hit the ground running, especially as we move into 2013 and beyond, because we know that we can put together a model that is going to compete effectively out there. So--

Okay, thank you.

John Inch, BofA Merrill Lynch.

Thanks. Good morning everyone. Just want to focus on the core Colfax results. Sort of big picture, I think just based on the strength in various verticals, the down 2% was a little disappointing. I got the data obviously, as we all did, on the organic order trend.

But what really happened in the quarter versus the trajectory? And I realize there were tough compares, but were there other things that perhaps you could call out? Were there perhaps distraction costs associated with Charter that perhaps the core business hadn't been as focused, or was December particularly weak? Just a little color would be helpful.

The businesses themselves, the end markets, John, when you take a look at those with the exception of what I'd talk about with defense, is actually very, very strong when you look across the board. Let me just go through each one of those.

Commercial Marine continues to exceed our expectations in terms of what is out there. We certainly have improved the on-time delivered and those kind of thing, so we expect that that will bode well for the future for us as well as some other things we're working on there.

Oil and gas is one, when you take a look at the sales were down organically 12%, but I mean overall they were up 24% basically driven by Rosscor. But that's one where I wouldn't let that organic number fool you. There was a $10 million order in the fourth quarter last year.

We continue to see very, very robust patterns in terms of the kinds of projects we're working on and the quoting that is going on out there, and again, the feedback from the field as it continues to be extremely strong. And we continue to expand Rosscor outside of their traditional market. So oil and gas continues to be very robust.

Power Generation was a very pleasant surprise. Last year would make up about $18 million from exiting the Middle East business. We view that with continued strength, as I commented on in the script, that our OEM partners continued to see very, very strong business there as well. And just one of the orders that I referenced is proof of that.

General Industrial, to give a little more of a flavor on that, we saw some slowing in Europe which we mentioned again. But it is interesting. As I was taking a look at some of the data yesterday, the progressive cavity in Europe, specifically those pumps that we offer and everything, we're running significantly ahead of last year.

And that feeds wastewater applications, which is general industrial. And so we're really excited about that particular trend. And by the way that is before market as well as aftermarket.

And then China was up for us as we put some different leadership in place there and we're starting to drive that. And a lot of that actually goes back to the Allweiler product line, so we like the impact that that has.

We certainly are watching what is going on in Europe right now. But like I said, we have seen a little bit of a slowing prior to the holidays. But right now it's about flat as I take a look at it with last year.

Specifically December was a very solid month and we did not see any falloff in the last month.

In terms of the -- some additional -- there wasn't anything in terms of diversion with the leadership and the resources we have focused on that business, John. I will tell you that we had some of the costs associated with, for example, the closing of Gottmadingen and DCDs and some of the restructuring, along with the absorption that I mentioned in Radolfzell, as we really were able to implement more of the finer elements of lean on the floor.

But those are gone now in terms of Gottmadingen has shut down the DCDs we talked about, so we had some of those drags in the quarter, if you will. But we don't have those moving forward.

No, thanks for that color. So, Clay or Scott, what did continental Europe do kind of on a constant currency basis or on an organic basis in the quarter versus last year, or sequentially, however you want to characterize it?

Well, we don't actually have it across all the end markets and probably General Industrial is the only one that is short cycle and would give some read through to current activity, and that was actually up in Europe.

Again, not by as high a percentage as it has been in earlier quarters, but the sales are still up and the orders are flattish for the quarter. But they're actually improving in the here in the first quarter. So we don't see in the Fluid Handling business a particularly sharp downturn in the European business.

And again, our focus in Fluid Handling, as we have emphasized in the past, more in those northern European countries. Plus in the case of Germany, remember they ship to China in a lot of cases and that certainly is some of what we have seen of late.

Okay, so just to be clear, the softness in Europe based on your order pattern and the trajectory in the quarter, and I guess what you have seen to date, you don't expect further deterioration necessarily sequentially in the first half of this year. It just sounds like things are softening a little bit, but they are kind of in a holding pattern. Is that fair?

Yes, I think that is a fair assessment.

Clay or Scott, what is your sort of trajectory as you are thinking about for debt paydown? You historically articulated that you wanted to be relatively aggressively deleveraging here. How should we think about that in so far as to say the 2012, how much cash are you going to be diverting to debt pay down as part of the guide or just over the coming couple of years?

Well, I think it's easier to answer the second question. Over the coming few years, our stated goal is to get down to an investment-grade credit profile which would require that a significant portion of our free cash flow be used to pay down debt.

We are sitting on a lot of cash right now. We're going to be cautious with that, and to the extent that we don't need it over the course of the year, we would probably make a significant paydown at the end of the year. But we are being cautious for 2012.

I think we can certainly say, looking out a little longer than that, our goal is to aggressively pay the debt down, deleverage the balance sheet with a target of being in an investment grade type of credit profile.

While continuing to do some bolt-on acquisitions. The thing I would say about 2012 is, John, we're going to go as fast as we can in terms of a lot of the opportunities for improvement we have, especially in working capital. But remember we're going to be very aggressive on the restructuring front as well. So we want to get that behind us as fast as possible.

Yes, and it's not like the debt is that expensive. Just to be clear, the '12 guidance, Scott, does not include significant debt pay down which could be an option. But right now you're planning to do that more toward the end of '12, is that correct?

That's correct. The guidance assumes it will be paid down at the end of the year.

Okay, so that makes sense. Just lastly I guess on the guide, you're sort of assuming a 20% to 22% fall-through from the change, your delta in organic sales. Is there some reason why that's not higher? Is that because of the high consumable component of ESAB, or are you just being conservative there?

No, I don't think we're being conservative. I think it's the first -- both ESAB and Howden have a more significant material component to their cost of sales than the Fluid Handling business does, so the 30% kind of flow through we have on the Fluid Handling business we can't achieve that level at ESAB and Howden because of the significant material component of cost of sales. So that's the reason the guide is lower than what we've seen in the Fluid Handling business.

If I could just squeak one more in, ITW had very strong welding results. And it sort of sounds like, based on your comments for ESAB, not nearly as robust. Obviously they're not comparable but it's still a data point.

Is ITW and prospectively Lincoln, have they just been taking that much share from ESAB? Or how would you characterize the ESAB welding position today? I realize you called out you called out strength in emerging markets, but ITW had very good European results as well. Is there anything you could say on that?

Well, ITW is a very, very different business. They have a much larger proportion of the business that is equipment-related versus consumables. So probably the better comparison would be Lincoln.

But in terms of share, we would have to go by market to really understand what is going on, and those are some of the elements that we're getting into as we dig deeper, John, into the organization. It's not something we can just say Europe or even South America. We need to understand almost by country what is going on. But those are the things that we'll be getting into over the next 90 to 100 days.

Understood. Thanks very much guys.

Thank you.

And if I could ask everybody to limit themselves to one question so we can give everybody an opportunity here. I would appreciate that. Thanks.

Jeff Hammond, KeyBanc Capital Markets.

Hi, good morning guys. Can you give us -- it doesn't look like you're counting on any year one cost savings in the guidance. And can you walk us through just how you are getting to the $98 million in interest expense, because that is a higher number than I have been thinking about. Is there some non-cash or deferred financing costs or anything in there?

I'll take that one. There's three main components to our interest expense. One is the cash interest expense, which is a LIBOR-based expense and would only calculate out to something in the low 70s.

The major element is the deferred costs. The underwriting fee, the OIG on the both the Term A and the Term B as well as the legal expense that adds about 1% to the interest rate on the effective interest method. So there's roughly another $18 million of expense that relates to the amortization of those costs.

And then lastly, across the whole business, although the Howden business is the largest user of it, we have in excess of $300 million of performance bonds and bank guarantees for pre-payment that don't show up as funded debt, but that do carry an interest charge. And the three of those components together make up the amount in the guidance.

Okay. And what year one cost savings are we counting on from restructuring on Charter? And maybe just along those lines, speak to what benefits you're baking in or counting on from all the restructuring that Charter had been doing pre-deal closing?

The programs that Charter had initiated that you probably read about last year, those were expected to produce about $20 million in margin improvement in 2012 and another $30 million I think in 2013. So we built in about $50 million in restriction costs related to projects in our guidance. So, that is what is built into the current projections.

We've also built in some additional things that we were able to identify as we got together. But in addition to that, Jeff, what we're doing again to emphasize, going back to within the next 90 to 100 days, we will be able to provide a lot more clarity in terms of what some of those areas are as well as the benefits for them.

The thing I will continue to point out, though, is we're going to take 2012 and get very, very aggressive about restructuring and set this up so the run rate at the end of the year and going into 2013, and the business model itself, puts us in a position to compete for the long-term.

Okay, so it sounds like your $100 million is mostly a '13, '14 dynamic.

I think that is a fair assessment.

Okay. I'll get back in queue.

Jason Feldman, UBS.

I think I heard earlier that you said Charter had made substantial working capital progress prior to the closing of the deal, that they got close to the 19% target. How much more capital opportunity do you see going forward? Is that going to be a material source of cash over the course of the next couple of years?

Yes. There is a significant opportunity for improvement there. And that is something that again we'll have more meaningful guidance on that within the next 90 to 100 days.

But just to sort of point out how we look at things differently, with regard to ESAB, the entire model has been set up really based on finished goods inventory. And the response, frankly, to the customer base hasn't been all that good. We knew that when we did the diligence.

So, look, our motto is going to be more about starting with the customer, understanding exactly what that requirement is, and then putting in the best value added process in terms of being able to respond to that. Sometimes that may involve just a little bit of inventory with a very quick response from a manufacturing and supply chain standpoint. Sometimes it may require that -- or it may not require that kind of inventory.

So those are the kinds of things that we're going through as we evaluate this process and the model that is in place there. But I see significant opportunity for improvement of working capital there. Plus we have some opportunity at Howden as well.

And from a longer-term perspective as well. I understand you said certainly it has challenges in the near term. I think Charter had identified organic revenue targets across the cycle of 10% for ESAB and 10% plus for Howden. Are those numbers based on what you know today that you see as feasible? It's just (multiple speakers)

What number did you say, organic what?

Organic revenue growth CAGRs I think across the cycle, they targeted I think 10% for ESAB and 10% plus for Howden.

The Howden numbers that we put out there I think are representative of what we think right now. Remember that's a very long cycle business, but certainly a significant pickup last year we continue to see opportunity with the end markets there. And I think once we get the model right for ESAB that you can expect us to compete very effectively in the market and grow the business at higher levels than what we have projected in there right now.

ESAB was up 18% last year, a very strong year. So we certainly think given the different market that they're exposed to that something along those lines should be achievable. There's not been a specific study to validate that Charter assertion, but it certainly seems reasonable based on what we know.

Great, thank you.

Michael Halloran, Robert W. Baird

Just -- in the interest of time, I just want to make sure I understand the guidance and the assumptions. And Scott, I think you said earlier that if it's just Fluid you're at the low end of the guidance and then the rest of the guidance basically makes up the accretion from the Charter deal. Is that the way to think about it at this point? Or did I mishear that?

No, you heard it correctly.

Great. That's all I needed guys, appreciate it.

Cliff Ransome, Ransome Research.

Thank you very much. First of all, congratulations on some of these talent additions. I've known Vince and Gary for a very long time and they are actually first rate. You didn't need to hear that from me, but I wanted to say thank you.

Can you kind of go back to 35,000 feet and tell us what is going to be different about CBS, both under the new management team of a couple of years ago, I guess the beginning of last year, and with the addition of the ESAB and Howden assets than it was in previous decade under equity group and rails ownership? Can you just give us a sense what the major differences will be?

Sure, Cliff. It starts with expectation of that's the way we are going to run the business and that's what we're going to go to, versus more of a budget kind of mentality.

So, I think Howden is a great example. We were able to go up and do the training prior to Christmas. It was a wonderful reception.

Here was a very sound business, just very methodical in their approach, and then we introduced the concept of breakthrough thinking and then how you actually deploy that throughout the organization. And as a result of that, they've done the top level X-matrix? They have their action plans in place.

And then in addition to that, consistent with what I've said over the last couple of months, in terms of segmenting these businesses, we put them in touch with a retired Danaher executive who was able to work with them and help them establish the meaning cadence and those kind of things, and how to actually deploy it. So we're going to do nothing but strengthen it -- or not just strengthen it, obviously introduce it there but then make it stronger and stronger.

The whole team up there, they are all engineers so they get that. They really understand that and how to deploy it down to a point of impact action plan where obviously if you get off track, you have to deal with countermeasures and problem solving and those kinds of things. So I'm really excited about the reception that we have there.

Obviously with ESAB I'm going to personally drive that. Ken and Vince both have, Ken, Vince and Gary all have expertise and experience in terms of driving that. So we're really going to turbocharge that effort throughout the organization, teach it but deploy it effectively, so that again, we start with breakthrough thinking and then specifically how are we going to drive that.

What are we working on? Are we deploying our resources in the right way? And then again if we are off track, the key is come up with countermeasures and getting back on track.

And then even within Fluid Handling, we feel we can take it to a higher level. While we've improved the margins and we've improved that business certainly with some additions from an acquisition standpoint, we believe that we can get them even more disciplined in terms of driving CBS throughout the organization.

So we're setting higher standards and expectation levels all the way down to the detail of Kaizen events, for example. What should they drive in cost reduction, what should they drive in terms of working capital improvement. And if we're going to deploy resources on that, ensuring that we get those kind of results.

Should I assume that your efforts to attack this, what I call the transactional side of the lean world, (inaudible) new product development, will those be big influences in 2012? Or will they more likely wait till later periods?

No, we can't wait, Cliff. We've got significant opportunity, especially ESAB. Ken is finding all sorts of opportunity there. And we know that we are out of sync in some of the target markets on product development.

A great example is they used to have product development down in Brazil or in South America. They took it out of that, centralized it. It's not that I would have an issue with that where you can consolidate resources and come up with it.

But what they forgot about was continuing to understand what the customers in that marketplace needed from an equipment standpoint, and making sure that they understood that voice and they actually provided those products. So you can look for us to get very, very aggressive in terms of understanding the regional market needs and then being able to respond in a much quicker fashion.

I thought it was interesting that one of the sessions, the review sessions with some of the engineers in product development in Sweden, they were talking about a specific project and showing it as green, for example, and yet it has been late. It's supposed to be due in 2008. And you know, they talked about how it takes a significant amount of years -- basically three or four years to execute something. That is just not the way that we're going to do things.

And Ken sets a much higher expectation in terms of making this happen. We ought to be able to introduce product in 9 to 12 months to respond to the market, for example. So it's definitely going to require the application of lean and CBS to make those kind of things happen.

Thank you very much.

Jeff Hammond, KeyBanc Capital Markets.

Hey guys. Just to follow-up here, on the guidance, are you using -- it seems like your double-dinging yourself for the preferreds. Is that fair, because you're including the preferreds in the share count and you're including the dividend?

That's correct. That's the requirement of US GAAP.

Okay. And then, just on the segment reporting, are we looking at three segments? Or are we combining Fluid and Howden?

We're planning on having two reporting segments in the first quarter.

And is it fair to say it is your base Colfax plus Howden and then ESAB?

I think that is fair to say, yes.

Okay, thanks.

I'm showing no further questions in queue at this time. I would now like to turn the call back over to Mr. Brannan for any further remarks.

Well, thank everyone for joining us today and we certainly look forward to speaking to you again soon at the next quarter. Thank you.

Ladies and gentlemen, thank you for your participation. That concludes the presentation. You may disconnect and have a wonderful day.