Enovis Corp (ENOV) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Colfax Corporation second-quarter 2012 earnings 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, Mr. Scott Brannan, Chief Financial Officer. Please go ahead.

Thanks, Allie. And good morning, everybody, and thanks for joining us. My name is Scott Brannan and I am the Chief Financial Officer of Colfax. With me on the call today is Steve Simms, our President and CEO.

Our earnings release is available in 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 in the Investors section of the website. Both the audio of the 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 enumerated in our SEC filings. Actual results might differ materially from any forward-looking statements we might make today. The forward-looking statements speak only as of today, and we do not assume any obligation or intention to update them, except as required by law.

With respect to any non-GAAP financial measures used during the call today, the accompanying information required by SEC Reg G relating to those measures can be found in our earnings press release and in the supplemental slide presentation. Again, that's in the Investors section of the Colfax website.

As a reminder of the comments from the last call, it is important to note that while we are able to report pro forma sales, including Howden and ESAB for 2011, we do not have pro forma adjusted operating income, adjusted net income, or adjusted net income per share available for 2011. As such, we are not able to make comparison of results other than sales on a pro forma basis.

Finally, the strengthening of the US dollar had a material impact on this quarter's results relative to the assumptions in our previous guidance. This resulted in approximately $15 million less in sales and $0.01 per share less in adjusted EPS.

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

Good morning, everyone. Today, we're going to cover three topics -- our second-quarter results; thoughts on the most recent economic trends and how they're impacting our business; and finally, our updated earnings guidance for 2012. I'll handle the first two, and Scott will provide more detail on the financials and the updated 2012 guidance. And then we'll open it up for Q&A.

As we announced in our press release this morning, we're pleased with our second-quarter results, given the current economic environment. Our longer-cycle business continues to perform well, with sales in Gas and Fluid Handling segment up 8% from the pro forma 2011 quarter. Our Fabrication Technologies segment also turned in a solid performance, with sales in line with expectations and margins improving as anticipated.

As Scott mentioned, results in both segments were negatively impacted by the strengthening of the US dollar against most currencies. We continue to progress as planned on our current cost reduction initiatives, and our backlog remains solid at $1.4 billion in sales -- or bookings.

Now for a look at the specific results. Adjusted EPS for the 2012 quarter were $0.35 per share, 21% higher than the $0.29 per share reported for the 2011 second quarter. Other than adjusted EPS, there's very little comparable between 2012 and 2011, due to the size of the acquired ESAB and Howden businesses. Net sales for the 2012 second quarter were $1.50 billion, an increase of 9.5% organically compared to the $1.20 billion pro forma sales for 2011 second quarter.

Turning now to our business segments. For Gas and Fluid Handling, net sales for the second quarter were $497 million, which represents an increase of 13% organically, compared to $461 million pro forma revenues in last second quarter. With respect to our end markets, please refer to the slides for specific growth rates. As you review that data, you'll note that currency had a negative 7% drag on sales and a negative 6% decrease in orders for the period of the 2011 second-quarter.

In reviewing end markets for the Gas and Fluid Handling segment, I'll begin by focusing on our largest sector, power generation, where our main products include axial and centrifugal fans, lubrication pumps, and rotary heat exchangers. For the 2012 second quarter, sales increased 15% organically.

Sales were particularly strong in China and South Africa. And, as mentioned in our last comments or our comments in the last quarter, growth in China benefited from compliance with aggressive environmental regulations. And a series of maintenance projects has provided growth in South Africa. As expected, orders for the platform surged 49% organically, with contributions from newbuild activity in Southeast Asia, and our higher margin aftermarket business.

While newbuild activity for coal stations in China has slowed somewhat, strong demand for environmental upgrades and maintenance work, and continued growth in natural gas-fired stations is offsetting the areas of lagging demand. Accordingly, we expect strong demand for the balance of the year.

Next, oil, gas, and petrochemicals is the second-largest market for Gas and Fluid Handling, and our key products for this sector are screw and piston compressors, multiphase booster systems, pipeline and terminal pumps, as well as our growing lubrication services business. Sales for the 2012 second quarter increased 7% organically, while orders decreased 12% organically. Our revenue growth was driven by Howden. However, these gains were offset by a modest decrease in fluid handling.

Demand in upstream and midstream applications were impacted by the significant drop in crude oil prices. We've also seen a slowdown in refinery projects from the multinational oil companies. However, the national oil companies in Latin America and Russia continue to aggressively expand production and refinery capacity. In Russia, for example, the Energy Ministry has made commitments to upgrade refineries for low sulfur fuels, and invest $34 billion through 2020 to modernize existing refineries and add over 50 new ones.

Based on all of this, we continue to expect robust order rates at Howden, which primarily addresses downstream applications. However, we are more cautious with expectations for orders in fluid handling, which is more focused on upstream and midstream applications. This should result in organic growth over the balance of the year, though this will likely be below the double-digit rate we've previously expected.

Turning now to the marine market, this end market is comprised of both commercial marine and defense customers, and is served primarily by fluid handling. As you may remember, marine has a challenging sector for the past several years, given the sharp declines in new vessel deliveries. Sales for the 2012 second quarter were down 9% organically versus the pro forma 2011 quarter. However, bookings strengthened for the quarter, as orders for specialty vessels for offshore oil applications and certain OEMs more than offset the declining orders from Asian shipbuilders.

Defense is a now a very small part of our overall business, and no significant orders are expected now before the election in the fall. We continue to expect this overall market to be relatively flat for the balance of the year.

Now let's turn to the mining end market. Our primary products for this market are centrifugal fans and axial fans for mine ventilation. Sales for the 2012 second quarter increased 52% and 61% organically, while orders decreased 22% and 14% organically.

Despite the record levels of revenues, speculation concerning reduced capital expenditures and lower Chinese demand appeared to have dampened the order rate for the quarter. We do not anticipate that this trend will continue, as demand for resources in developing nations will continue to drive projects for mine resources, including coal, iron ore, copper, gold, rare earth, and nickel.

Major mine expansions in North and South America will also continue to drive demand for our products over the next several years. Howden continues to focus on this market, as these demand factors provide strong growth opportunities over the balance of this year and mid-term horizon.

Finally, I'd like to touch upon the general industrial end market, which encompasses a wide variety of products and applications such as industrial fans, tunnel ventilation fans, refrigeration compressors, pumps serving various industrial needs such as elevators, wastewater, diesel engines, and chemical processing. From the second quarter of 2012, sales increased 14% organically and orders were up 1% organically. Industrial fans and compressors enjoyed a double-digit organic increase in sales, reflecting business, both last year when capital goods spending increased substantially.

Sales were modestly down in fluid handling, in line with general economic conditions. Orders were flat in this market, primarily due to the economic environment in Europe. And we expect this end market to be flat to slightly up for the balance of the year.

From a profitability standpoint, margins for the Gas and Fluid Handling segment improved significantly from 9.7% in the first quarter to 12.6% in the second, due primarily to higher volumes. In addition, we've also begun to feel the impact of restructuring activities begun in 2011, along with the positive effect of our Colfax business system activity. For example, kaizen events at Howden's Mexico City fan plant resulted in a 4% reduction in cost of production, a 60% reduction in work-in-process inventory, as well as freeing up 22% of the floorspace supporting this production activity.

Our fluid handling team has accelerated CBS efforts as well. For example, as a materials movement kaizen at our Columbia, Kentucky pump factory implementing basic CBS tools like demand pull, purchase part supermarket, and fixed sequence optimized scheduling, resulted in a $360,000 reduction in inventory, a reduction in throughput time from 12 days to 8 days, and labor cost savings of $135,000.

The process has proven to be robust as our Monroe facility has implemented the same process, and has experienced similar results in less than three months. Inventory turns have increased from 22.3 to 26.7, and gross margin has increased from 38.9% to 41.7%. We've begun implementation in our fluid handling European facilities during June, and will begin implementation in Howden during the third quarter. We'll continue to turn up the CBS intensity with these businesses by concentrating efforts on strengthening quality, improving customer deliveries, and driving out waste and working capital in our overall supply chain.

Now let's turn to ESAB's results and the status of our profit improvement initiatives. Second-quarter sales were $549 million, up 7% organically versus last year. This increase was largely driven by consumables, while equipment growth was more modest. Regionally, we saw robust performance virtually everywhere, aside from Europe, which was flat. However, our European business exceeded internal expectations as we focused our efforts on improving on-time delivery and responsiveness.

Adjusted operating income for the quarter was $45.4 million or 8.3%, a 90 basis point improvement over the first quarter. As Scott mentioned earlier, this margin percentage is not directly comparable to last year, with notable differences being the inclusion of research and development, pension, and amortization expenses, as well as joint venture earnings.

ESAP profitability was modestly ahead of internal expectations, driven by aggressive SG&A restructuring, global sourcing, plant consolidations, and improved pricing. We also benefited from volume increases in many regions. This was partly offset by the startup of a new consumables plant in North America.

As we communicated in our April release, the change program at ESAB remains on track. By year-end, the team will have implemented a streamlined, global, functional organizational structure, eliminated five high-cost manufacturing locations, rationalized corporate overhead as well as overall SG&A, reduced finished goods SKUs by 25%, and established the foundation for a CBS culture.

Additionally, in line with our first core value, "The best team wins," we've been focused on strengthening ESAB's leadership. Since closing the Charter acquisition, we've rebuilt the team with leaders passionate about creating a great business. Now that we have this core group in place, we're working diligently on succession and development plans in conjunction with our strategic plans to ensure that we have the right talent to deploy for long-term success.

Finally, we've been actively applying CBS tools throughout the organization. We started with KPI's, worked in the policy deployment, and we're now actively running kaizen events focused on improving customer responsiveness, quality, safety, profitability, and working on -- working capital improvement.

To summarize, despite these generally positive results in both business segments, the $0.35 in adjusted EPS that we achieved was actually slightly below our internal target. This [slightness] was due to several nonoperating items in this quarter which included the following.

First, as Scott mentioned earlier, a stronger US dollar compared to our guidance assumptions reduced adjusted EPS by approximately a penny a share. Second, corporate costs above expectations further reduced adjusted EPS by another penny per share. Approximately $1 million of these costs were associated with the announced Soldexa acquisition, and the balance was mainly higher legal and personnel costs. And finally, our share count increased during the quarter, primarily from the issuance of 9 million shares of common stock in the latter half of the first quarter.

And now I will turn it over to Scott to provide more details on the financials, and to outline our updated 2012 guidance. After Scott's discussion, I'll provide a bit more color on where we are versus expectations with Charter. Scott?

Thanks, Steve. For the second quarter, sales were $1.05 billion, up 10% organically compared to the pro forma 2011 second-quarter sales. Adjusted operating income was $97 million, which represents an operating margin of 9.3%. Fabrication Technology adjusted operating margins were 8.3%. Gas and Fluid Handling adjusted operating margins were at 12.6%.

The Gas and Fluid Handling margins were significantly higher than in the first quarter, and in line with external with internal expectations. The significantly higher revenue levels at Howden are also in line with typical seasonal patterns, and given Howden's high fixed engineering costs, resulted in substantial improvements in margins for the segment compared to the first quarter. Fluid Handling's margins were improved over the 2011 second-quarter, primarily as a result of restructuring cost savings and lower amortization expense.

As Steve discussed, ESAB made solid progress in achieving adjusted operating margins this quarter, as margins increased from 28.3% from 7.4% in the first quarter. This performance is significantly better than the second quarter of 2011.

Corporate and other costs reduced margins by 1%. Excluded from our adjusted operating income are restructuring costs of $19 million; $14 million of significant year-one fair value adjustments related to inventory and contract backlog; and $3 million of costs associated with their asbestos insurance coverage litigation.

For the quarter, interest expense was $26 million. And that includes approximately $4 million of non-cash amortization of debt discount and deferred issuance costs, as well as facility fees and the cost of bank guarantees and letters of credit. We made $28.5 million of debt principal paydowns during the second quarter. Our effective tax rate on adjusted income was 31% for the quarter. We expect a 30% effective tax rate on adjusted income for the balance of 2012.

Operating cash flow was much improved in the second quarter and totaled $77 million. Inventory balances decreased $25 million in the second quarter, and working capital as a percentage of sales decreased.

As you may recall, we have higher-than-expected working capital build in the first quarter. At that time, we stated that reversing that trend was a top priority for the balance of the year, with an overall goal of having no growth in working capital for the full year. In the second quarter, we achieved our targeted working capital levels, and despite higher sales, resulted in a $19 million reduction in working capital. Working capital turnover increased in both of our business segments.

Finally, backlog in our Gas and Fluid Handling segment was $1.4 billion at quarter-end. Our book-to-bill ratio for the second quarter was [1.08-to-1], which reflects strong bookings in the Gas Handling business, offset by the weakness in Fluid Handling, that Steve discussed earlier.

Turning now to the 2012 full-year guidance. In short, operating profit expectations that we outlined in February are essentially unchanged, although we have raised the lower end of our operating profit range since we have completed half the year and can narrow the range of likely outcomes. However, our EPS is impacted by two main nonoperating factors.

First, as I mentioned in the opening remarks, the dollar has strengthened significantly against most currencies since mid-May, and we are adjusting our foreign exchange assumptions accordingly for the balance of the year. The updated exchange rates are expected to reduce adjusted EPS by $0.05. These rates and the softness in fluid handling have reduced expected revenues for 2012 by approximately $100 million. About three-fourths of that relates to the change in FX rate assumption. Specific assumptions are presented in the slide deck.

Secondly, as Steve mentioned, until the Soldexa acquisition is closed, which we expect to occur later this year, we will experience dilution from the 9 million shares of common stock issued in anticipation of this transaction. These are partially offset by strong performance at Howden's majority-owned businesses in China and South Africa, which increases the net income attributable to noncontrolling interest by approximately $3 million for the year.

We expect a 30% tax rate on adjusted earnings for the balance of the year. The end result is that we are now expecting adjusted EPS for 2012 to fall in a range between $1.35 and $1.45 per share. Any contribution to operating profit from acquisitions would represent an upside to this revised guidance. We are also updating certain other assumptions in our 2012 outlook, which are listed in the appendix to the slide deck.

As is our practice, we are not giving specific quarterly guidance. However, given that there is no historical quarterly data on ESAB and Howden, we believe some direction on seasonality would be helpful for investors. On the last two calls, we have stated that the second and third quarter typically produce similar earnings. Given the strengthening of the US dollar, we now expect the third quarter adjusted EPS to be several cents less than the second quarter. As is the seasonal pattern, the fourth quarter is expected to be significantly stronger.

Now I'll turn it back to Steve.

Thanks, Scott. As Scott mentioned, like many companies, the impact of FX represents a near-term headwind. However, this in no way alters our long-term view regarding the attractiveness of our businesses or their ability to perform in the near-term.

Our cost reduction and restructuring activities are tracking well to initial plans, and our organic growth of 10% suggests our businesses are performing well in their respective end markets. Furthermore, with over 60% of our revenues now in high-growth regions, and strong positions in attractive end markets such as power, energy and mining, we remain optimistic about the prospects for long-term growth.

We've just completed the strategic planning at two of our three key businesses, and I'm encouraged by the strength of our brands, our technical capabilities, and our outstanding team of leaders. These factors, plus the power of the Colfax business system, give me confidence that we'll deliver the margin and cash flow that we've spoken about in past calls.

This means profit for ESAB in the low teens. Howden improved to mid-teens, and Fluid Handling in the high-teens by the end of our strategic planning period. And we expect our cash flow to eventually exceed net earnings, driven by process improvement activities, like the examples shared earlier today. Net-net, we remain positive regarding the potential of our business and the balance of the year.

With that, I'll open it up for Q&A.

(Operator Instructions) Nathan Jones, Stifel Nicolaus.

Can you talk about the progression of orders through the quarter, specifically in your shorter cycle businesses?

I think we've basically achieved what we sort of expected to achieve. In the Gas and Fluid Handling segment that the general industrial is the best indicator of the short cycle business. And as you can see, it achieved an order rate of a 1% organic increase. So, I think that is essentially in line with what we were expecting. Most of the other end markets in that segment are more longer cycle.

The ESAB business, as you can see, has been performing probably slightly better than expected, as we've commented on the last couple of calls. Europe continues to be in line with our expectations. It has performed steadily over the first six months at essentially a -- on a local currency basis at a flat rate. So, we are not seeing any significant change in the short cycle business from what we expected.

You know, to that, I'd add that, as Scott pointed out, our consumables trend was quite positive globally, and actually quite positive in Europe as well. But I think you'd also look at our aftermarket and service business to track that. And they were quite strong throughout the quarter as well. And we expect that to continue through the second half.

And if I could just follow-up, I think a number of other industrial companies have talked about Europe being weaker than they had expected. Can you talk about maybe why it's not coming through as weak for you as it is for some others? Whether you're gaining share there? Or why you think Europe is maybe not as weak for you as it is for some other companies?

Well, I couldn't begin to comment for other companies, but I can say that, for our business -- and I may have mentioned that in the comments -- on the ESAB side, Europe was -- it sort of is in the zone of what we had anticipated. We were not anticipating tremendous growth as an economy there, and I think we planned accordingly. And I think that would be true through the entire business. I think Europe is about where we had anticipated when we put the overall plans together.

Internally, just to make sure I'm clear, is that we did see some slowness on our Fluid Handling business in the Oil and Gas sector. And so, we do feel that some of that is tracing to the softness in the European economy as well. So we've seen some softness in parts of our business, but generally, we've been able to hang in there reasonably well.

Okay, thank you.

Jason Feldman, UBS.

So a couple of clarifications, I guess, on guidance here. I guess I'm a little confused. I thought when we saw the guidance slides from last quarter in May, that they already included the new shares. Yet it looks like that's now a $0.07 headwind relative to what you were previously expecting?

That's correct. At the time of last quarter, we had anticipated that we would be able to generate additional operating profit to offset the effect of the initial shares, either through various actions such as accelerated cost savings. We were seeing slightly positive growth trends at that time, greater than what was in our initial guidance. In revisiting the operating profit assumptions for the balance of the year, without factoring in any acquisition activity, we feel the operating profit expectations that we put out in February are more consistent with where we are today.

Okay. And so, just to clarify, Soldexa is not included in the guidance, and when do you expect that to close? And so, could that essentially generate some accretion later this year?

The answer is that it could. It's obviously subject to the regulatory clearance, so it's impossible for us to predict exactly when it's going to close. We do expect it to close in the near-term, and we certainly expect it to close this year. And it should be accretive. But given that the date is completely within the control of an outside agency, we just don't feel comfortable putting that in the guidance.

Okay, fair enough. But -- now, you also said, though, I think a minute ago, that one of the things that you'd contemplated to offset the dilution from the incremental shares was accelerated restructuring. I noticed that your restructuring costs this year are up by $13 million relative to your prior guidance. Has that restructuring actually been accelerated? Or is that something that won't benefit really until 2013?

Well, there's some of both. I mean, there's some accelerated -- there's definitely accelerated restructuring. So, if you can see that clearly in the numbers. Some of the accelerated restructuring will benefit 2012. Most of it, the vast majority of it will benefit 2013. The benefit from the accelerated restructuring has been offset by some other small market negatives, so that net-net, we feel like we're comfortable with the operating profit level guidance that we gave in February.

Okay. And then just lastly, when we think about the impact of FX -- I mean, from a translation perspective, I think it's pretty straightforward. But to what degree does it affect the adjusted operating margins? So when we see the kind of improvement that we saw from first quarter to second quarter, is that going to have a clean comparison? Or did the currency move that up or down maturity-wise?

That has a clean comparison. We are pretty well-hedged, either naturally through natural cost revenue matching or through forward contracts. So we have very -- there's essentially no noise from transactional FX in there. So, it's clearly proportional. So from a margin percentage basis, there's really no effect from FX.

Great. That's very helpful. Thank you.

Thank you.

Kevin Maczka, BB&T Capital Markets.

Scott, I'm going to beat a dead horse here, I think, on the guidance, but one more clarification. You said there's no change, no material change in your EBIT guidance, but you're taking the midpoint of EPS down $0.15, and $0.05 of that is easily understandable. That's currency. So you've got $0.10, but so -- but no change in EBIT guidance. But you did comment on Howden growth expectations no longer double digits. That's looking a bit worse than it did before. And I think you were pointing primarily to the oil and gas markets there. Can you just kind of square those things for us again?

Yes, the oil and gas orders are essentially going to affect 2013's revenue. They're going to have -- most of those projects are very large projects and they're going to have minimal impact on 2012. So, the revenue guidance is pretty much consistent with where we've had it, with a small adjustment down for some of the shorter cycle Fluid Handling business. But the vast majority of the revenue adjustment is fully related to the currency.

The order book adjustment, as Steve highlighted, the order book is very strong overall. And the only area -- the only end market where we're seeing a level of weakness is in oil and gas. And we don't see that having a significant effect on 2012.

So, when you look at the organic growth expectations you laid out previously by segment, do those still hold? Is the 2% to 4% in ESAB and the 4% to 8% in legacy Colfax still hold, but just the 10% to 15% in Howden does not?

No, I think the -- I think at this point, we prefer to give the guidance by segment as opposed to by the three groupings. But I think the -- at this point, Howden is tracking towards -- right towards the range that you quoted. The Fluid Handling is tracking slightly below the range that you quoted. And as you've noted, ESAB has been at 5% and 7%. So ESAB has been tracking slightly above the range. So I think for the full-year, we would probably tweak ESAB up slightly. We would tweak Gas and Fluid Handling weighted down slightly, but the overall weighted revenue -- the forecast is pretty much right on target with the exception of the FX rates.

Right. And again, just to be clear on the remaining $0.10 of the $0.15 guide down, $0.05 is currency; the remaining, $0.10. How much of that again are you pointing to share count versus other below-the-line things?

Oh, there is a specific reconciliation in the slide deck, but $0.07 of it is related to the effect of the shares. The other two nonoperational factors, a couple cents each, are additional earnings attributable to noncontrolling interests in our majority-owned entities that I spoke about in the script. And then a couple cents for a slightly higher tax rate.

Okay, I'll get back in queue. Thank you.

Yes, thank you.

Jeff Hammond, KeyBanc Capital Markets.

Can you give -- how are you thinking about free cash flow for the year? And what do you think the likely uses of that free cash flow generation are, as we look forward? Maybe just comment on pipeline and appetite.

I'll take the first half of the question and then I'll let Steve comment on pipeline and appetite.

As we've said at the equity raise, where we raised approximately $300 million, if we were successful, we would spend most of that on acquisitions. Obviously, the announced Soldexa acquisition takes about two-thirds of that to the -- obviously, we haven't announced any other acquisitions, but we're -- we are still working a pipeline that could use something in that neighborhood for the balance of the year.

All that being said, we'll still, as you saw this quarter, we started to generate the level of cash flow that we know we can from this business. We should have -- we have sufficient cash on-hand to take care of that entire acquisition appetite there. So, the cash flow we generate from operations, we should be able to do some level of debt paydown towards the end of the year. But, obviously, we're being patient here and seeing how the pipeline works out.

And with that, I'll let Steve comment on the other half.

Hey, good morning, Jeff. The acquisition pipeline is robust, and we're going to continue to focus on transactions that are going to meet our financial hurdles and also represent a good strategic fit.

You know, and in line with that, I just want to comment again on Soldexa. While we're waiting for our antitrust clearance here, this is an outstanding acquisition for us, because it reinforces our market strength in South America, and it's also going to increase our emerging market exposure.

I think we're also going to see a stronger service-based marketing model here for our portfolio that we can actually replicate around the world. So, the Soldexa acquisition is going to be a great addition to the team.

I think we'd also say -- one thing that I failed to update in my comments is that we -- during the quarter, we also purchased the remaining 84% of a small Russian manufacturer of welding consumables. We previously had a minority interest here. This is going to significantly improve our capability and our responsiveness in the eastern Russian market.

So, our overall pipeline for acquisitions is quite robust and we'll continue to be aggressive on that front. And we're excited about we -- we're very close to with Soldexa and several others right behind it.

Okay. And then the Soldexa regulatory issues, is that what you anticipated? Or are you having some hiccoughs there?

No -- no hiccoughs. Pretty much as anticipated. Just taking a little longer. No significant issues at all, Jeff.

Okay. And then just on the Fluid Handling kind of downtick in expectations -- that seems to be isolated to oil and gas. Are there any other spots of weakness?

That really is the significant -- the issue for us at Fluid Handling. You know, as I spoke to you in the script, the way it cuts, Jeff, is that for Fluid Handling, we're more involved in the -- in one way is more involved in the upstream and midstream application side of the business. And that's where we've seen a little bit of a softening in investment. You may have seen that from some of the other companies around the world.

I think at the end of the day, as heavier oils become more prevalent, and as we look at some of the older oil refineries, I think we're ideally positioned in this sector. So even though we've seen a little bit of slowdown here, we think it's an outstanding place to be. So what we've tried to do is to moderate our growth expectations since our last call, but we're still expecting solid growth in performance here. That's the one area I think of consequence there that sort of is an outlier in terms of period-to-period growth in orders.

Okay, perfect. Thanks, guys.

(Operator Instructions) Mike Worley, Janney Capital Markets.

I was just wondering if you could talk a little bit more about the restructuring in ESAB? Did you say that those five high-cost manufacturing locations and the SKU reduction was going to be complete by the end of the year?

I did. They're either complete or well underway. Yes.

And how much of that -- I heard the overall comments on the restructuring benefits. But how much of that restructuring or those two actions are going to impact 2012?

Very little.

Yes, for the most part, as we said before, we really don't break it out by specific event or activities. What we can say is, relatively little of that will hit the P&L this year.

I'll go back maybe to confirm what we said on prior calls, and that is that, if you think about that $100 million target that we've established for ourselves, the way we think about it is somewhere between $55 million to $65 million will hit the P&L next year. And then in the following years, we'll get the difference.

And so, we feel very good or comfortable with our ability to deliver that $55 million to $65 million, which is ahead of us in 2013. Of course, comfortable with the back-end of that as well. But we get to that level of comfort by looking at the different components in that restructuring, which, as you point out, five different facilities in Europe. One here in North America. One in China as well.

So, we feel pretty good about the restructuring part of the equation. We also have taken a very hard look at a number of cost reduction opportunities. I alluded to that in terms of SG&A; corporate overhead and so forth. That's tracking well. When you really boil it down, we feel pretty positive about our ability to deliver on the cost reductions and the timing we've talked about before. And certainly, the overall result on the bottom-line sort of a low-teens type of op income for ESAB.

Yes, I mean, just to expand on that, Mike, on these facility closings, when we're doing the closing -- and we've just recently completed the one in North America -- you typically have a time where you're transferring activities over. You're running two operations at the same time. So, we're not -- because of that we're not seeing a significant benefit from these plant closings in the 2012 operations.

But as Steve said, when they're fully closed at the end of the year, we don't have to be running two things at once. We're not incurring the transition costs. We expect the real benefit of those things to kick in in 2013.

Okay, thanks a lot. And then, the other question I had was just on your internal improvement efforts with the CBS. I was just -- you talked about some new leaders in place in the ESAB, and I was just wondering, are you adding it to your capabilities in your lean efforts as well, so that you can ramp up those CBS initiatives?

You bet. In the early phase, probably CBS was probably our highest area in terms of additional talent that we brought in. And so, in the last -- if we look at that over the last five months, that was probably our number one area and probably the area quickest to move.

So we are in a very strong position there from a CBS standpoint. And that's not just at the sort of the corporate level, but it's really each business or each operation adding the appropriate level of resource within their operations. So we track that on a weekly basis and we're making good progress.

And I'll broaden your question a little bit. Not only CBS, but just overall. You know, when we began the mission here and the integration, we put together a pretty aggressive strategy of where we needed to add resource and changes in organization. And if we looked at that overall plan, and we do track that weekly and monthly, we're about 70% of where we need to be for the full-year goal.

So, I'd say, if anything, that guys like Clay Kiefaber and Ian Brander and Bill Roller, the team, they're actually running ahead of plan in terms of where I thought we'd realistically be in terms of the talent additions. I'd say that in terms of numbers. But I think, importantly, in terms of the quality and fit of those resources, to your good point, not only in terms of CBS but commercially, operationally, just across the board. We've been very fortunate in terms of the folks that have been able to -- we've been able to convince to join the Company.

Okay. Thanks very much.

Joe Mondillo, Sidoti & Company.

First question. Just going back to the sort of the cost cuts and sort of your expectations, given the accelerated restructuring, does that -- should that not improve or increase sort of the outlook of the $55 million to $65 million of benefits in 2013?

No. We had -- the accelerated activity had been anticipated at the time we made the -- during the last call. So, as I try to answer on the previous questions, a lot of the activities are -- although if you've measured them individually, they generate savings. But there's also costs that are going against those items, that sort of make them only a small contributor to overall profitability for 2012.

Once we have the new 100% in place and the old 100% shutdown, I think that's when you'll see the true readthrough of the savings on a net basis. And you know, there's a small element of that in 2012, but the majority of it's in 2013.

Okay. And then in terms of -- what was the corporate expense line, aside from the two segments?

It's -- it is specifically disclosed in the slide deck. I believe it's close to -- it's $11 million.

Okay. And you said that was higher than your expectations due to the Soldexa acquisition and maybe a couple of other items? (multiple speakers) Is that correct?

Yes, it was (multiple speakers) -- that's correct. It was slightly -- it was about -- a little over $1 million higher than we expected. As we said on the last call, we expect that the corporate expense to have dropped a little bit from the first quarter level, due to some headcount reductions that we've made between the redundancies, between both Colfax and Charter's corporate headquarters. And we'd expected that the -- we did make those reductions, so we achieved the lower-cost. But then we had some additional costs on top of that, that we hadn't planned, which was some personnel costs as well as the primary item being the costs related to the Soldexa acquisition.

Okay, so going forward, starting in the third quarter, are we looking at sort of a $10 million run rate?

I think that'd be fair.

Okay. And then in terms of the fabrication business, the volume, you saw a pretty decent acceleration on a sequential basis from the first quarter. I sort of missed your commentary on that. Could you just talk about was that surprising to you guys? And sort of where you're seeing the strength, whether it's end markets or geographic-wise?

Let me make one -- I'll make one comment on seasonality and I'll let Steve talk to the market. The second quarter is typically, on the welding side itself, is typically better than the first quarter because of the weather, because of less holidays. So, there is a -- it's not a huge swing in seasonality, like we have between the first and the fourth and the longer cycle businesses. But some of it -- we try not to do revenue comparisons on a sequential basis because there is a seasonality factor in there.

But even compared to last year on a pro forma revenue basis, we -- as you noted, we did have -- our organic growth rate was significantly better than our guidance assumptions. So, we are seeing some strength in the welding market. And I'll let Steve go through the details of that.

You know, I think at the end of the day, we had an outstanding performance in consumables. I haven't seen where our competition is yet, but I think the consumable growth was just exceptional. And I'd say on the equipment side is pretty much what we expected. And we had good growth there but more modest by comparison to consumables.

And I think the key thing here is -- and you'll see in some of our future reviews -- the major focus that we have from a product development standpoint is more intensely focused on the equipment side. And we're continuing to develop and progress on consumables, but we're returning the focus to the equipment part of our business.

From a geographic standpoint, I wouldn't go into a ton of detail. What I can tell you there is that, as I mentioned in the script, in Europe, it was sort of flat, which is about what we expected; maybe just a little bit better than that. In Europe, we're really focusing on a number of things relative to deliveries in terms of also SG&A sizing.

So, overall, we were very pleased with what we saw in Europe, both from a top and bottom line. The rest of the world was very strong. We had -- very strong performance, probably led in North America and the Middle East with very high growth.

Okay. And then just a last question. Just regarding volume growth and your expectations in the back half of the year, whether it's concerning both segments, could you just address expectations in the back half, in terms of Europe and any exposure that you have in China?

Well, I think in the back half, with the current forecast, we have Europe with more modest performance, sort of in line with what we've experienced to date. In China, we expect performance sort of in line with what we've seen as well. I don't think we have particularly aggressive expectations; certainly not in Europe. And in China, our expectations haven't been that great. So I think that the performance we're seeing, which is very solid, is what we expect to continue into the second half.

Yes. And I'd say, Joe, we feel pretty confident about China. Why I think we're probably outperforming the macro in China is because of the environmental projects that are being done in the coal-fired stations using Howden equipment. And we have a backlog of those projects. So I think we can speak reasonably confidently that we're not expecting a drop-off in China for the balance of the year.

Okay, so just to clarify, and going back to just your European exposure and your sort of outlook, are we expecting, like you saw in the second quarter, fabrication to be sort of flattish on the year-over-year perspective? Or because of the comps (multiple speakers) --?

It's essentially -- it's very much in line with what we've seen in the first half.

Okay. Okay, thank you.

John Moore, CL King.

Just to follow-up on some of the restructuring questions regarding ESAB. And I apologize if I didn't get this before. But last quarter, you laid out basically $30 million in savings you expected to realize this year. So that number is still good, is that right?

That's correct. Yes, that's absolutely unchanged. That's essentially projects that are completed. The largest ones having to do with the corporate headquarters thing that I addressed a few minutes ago. And then a couple of facility changes, the largest one being in North America that Charter started before we owned the business. Those projects are essentially complete.

So, yes, I think that $30 million is a solid number. We can affirm it again today for this year. And, as I said, in answer to a number of questions, there's been a significant amount of restructuring spending done this year, but most of the benefits of that are going to come through in 2013.

Got it. Okay. So I guess do you have an estimate as to what the -- what you've realized in the first half of this year? I think last quarter, you laid out you had realized at least $10 million from the consolidation of the corporate headquarters?

That's a full-year number, so -- I mean, we're -- we've realized less than half of the 30 because we didn't get all of the projects completed on day one. I mean, we're certainly right on track. We've probably recognized at least $10 million of that $30 million in the profit and loss accounts through the first half of the year, and we'll recognize the other $20 million in the third and fourth quarter. But as I said, those projects are essentially done, so I don't think there's a whole lot of risk to us achieving those results.

Okay. Maybe just slicing it a different way here, the operating margins at ESAB are 7.4% in the first quarter, 8.3% this quarter. I guess if I use that $30 million, it seems like you could exit the year at something around 9%, assuming no volume growth. I mean, is that the right way to think about it? Or do you think you can still get some volumes with the growth in the emerging regions to put you above that number in the fourth quarter?

I mean, I don't really want to comment on margins by segment by quarter; that's a little more granular than we give. But I'd say directionally, you're certainly headed in the right direction. We expect -- as I think we've laid out clearly on the other calls, we expect margin improvement over the year for ESAB. The third quarter is a bit of a pause. It's more similar to the second quarter, but we do expect a tickup again in the fourth quarter. So, given that we're at 8.3%, it's not an unreasonable assumption to assume we could do 9% in the fourth quarter.

Okay, great. Then, here just one last question. I guess I have to say I am pleasantly surprised to hear that Europe is still flat for ESAB, just given how dire the situation sounds to be getting over there. You know, if you do start seeing more significant deterioration in that region, you know, do you have, I guess, some kind of secondary plan as to how you accelerate restructuring in that business? And what might that look like? And that's all I've got. Thanks.

I think, overall, we've got a pretty aggressive plan from restructuring standpoint already in place. We have the ability to probably move some of that ahead. But realistically, I think we have enough opportunity elsewhere around the world, that we'll probably be able to offset if we do see a significant drop-off or a further drop-off in our business in Europe.

Great, thanks, guys.

Thank you.

Mike Halloran, Robert W. Baird.

So just following up on the Europe side there, any way that you guys can parse the difference between what you're seeing from an end market standpoint, and then the benefits that you're seeing there in Europe, specifically related to re-engaging the customer and getting more in front of them with the changes in more consistent operations that you're putting in place?

Well, I don't think we're going to split out end markets in a region at this point.

I was thinking more qualitatively as opposed to quantitatively.

I mean, most of the -- general industrial is the business that's got the largest proportion in Europe. I mean, obviously, mining is not a very big European business. Marine is mostly an Asian business. Oil and gas and power -- most of the activity there is not in Europe.

So of the longer cycle businesses, the general industrial is really the only end market that provides much of an insight into the European economy. And as I think we've tried to make clear in the comments, ESAB is reasonably flat, but the Gas and Fluid Handling businesses is modestly up in Europe, down in southern Europe, stronger in Northern and Eastern Europe.

So, we've seen -- I think you can sort of see it in the revenue is very strong for the quarter, which largely reflects bookings taken in earlier periods. The order rate is flattening out; it's been -- you know, it's up 1% this quarter. It was down a little bit in the first quarter. So I think as far as looking at the end market analysis for our longer cycle business, the general industrial market sort of confirms that Europe is just marginally up with a flattening order rate.

And I think we've given a lot of commentary on ESAB. I mean, we've -- particularly since mid-May with all the attention that's been on Europe, we have a very aggressive internal tracking process day by day, to see if anything seems to be falling out a bit in Europe. And as we said, Europe is not a growth market, but it's been flat all year long. And we continue to monitor it and none of us can predict what will happen next week. b But, so far, Europe has been tracking at a very, very steady flat rate over the entire period.

I think one other thing that's important to keep in mind is that if you add Europe and North America together, it's still south of 40% of our total. And Europe is an important part of our business, but it's not the dominant part of the business that you might think for an ESAB and Howden, which are sort of headquartered or based there. It's not the overwhelming factor that you might anticipate.

I understand. And perhaps I worded the question poorly. What I was trying to drive at is, when you think about welding market or fabrication market growth in Europe, from an industry perspective, versus what you guys are seeing in a marketplace which includes this re-engagement of the customer experience, is there any real differentiation -- are you seeing benefits from that come through? Or is most of the flattish type trends you're seeing in the European business driven more by market dynamics at this point?

I would say that it's -- to be honest, I'd say it's as much market dynamic as it is our own effort. I will say that Clay and the guys have done a wonderful job of refocusing the selling effort and the marketing effort in Europe. And we're starting to get that positive feedback in interviews and work that we're doing in and around the industry with users in the trade.

So I think we're seeing a list on that, but I don't know that it's as large or as significant as we fully intend it to be over the next 12 months. But we're certainly seeing some traction being gained and success there. But it's probably a combination of both factors.

Okay, thanks for the time.

I'm showing no further questions at this time, and I'd like to turn the conference back over to Scott Brannan for any closing remarks.

Thank you very much. And thank everyone for attending, and we look forward to speaking with you again next quarter. Thank you.

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