Enovis Corp (ENOV) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Colfax Corporation third quarter 2012 earnings call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Scott Brannan. Sir, you may begin.

Thanks, Shannon, and good morning, everybody, and thanks for joining us. My name is Scott Brannan, and I'm Colfax's Chief Financial Officer. With me on the call today is Steve Simms, 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 the call, which can also be found on the investor section of the Colfax website. The audio of this call and the slide presentation will be archived on the website later today and will be available until next quarterly call.

During this call we will make 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 may 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 intent to update them, except as required by law.

With respect to non-GAAP financial measures, the accompanying information required by SEC Reg G relating to these measures can be found in our press release and in the supplemental slide presentation, again in the investors section of the Colfax website.

And as a final reminder, it is important to note we are able to report pro forma sales, including Howden and ESAB, for 2011. But, as in prior quarters, we do not have pro forma adjusted operating income, adjusted net income or adjusted net earnings per share for 2011 on a pro forma basis. As such, we are unable to make comparisons of results other than sales on a pro forma basis.

And with that, I'll turn it over to Steve.

Thanks, Scott. Good morning, everyone. Today I will provide a review of our third quarter results followed by a brief operational update, and then Scott will provide more detail on the financials and our updated guidance for the year, after which we will open it up for questions.

We are pleased with the third quarter results, especially given the economic environment. The benefits of our global footprint and balanced portfolio were particularly evident with strength in various regions and product lines offsetting weaknesses elsewhere. For example, while fluid handling continues to experience the softness in oil and gas demand that we highlighted in the last quarter, this was more than offset by solid performance at Howden, which realized organic increases in both sales and orders, while profit margins were in line with expectations.

In addition, the quarter underscores our team's commitment to delivering the margins we believe are appropriate and possible for this business. For example, while Fabrication Technologies sales volume fell below forecast, profit margins actually exceeded expectations, driven the aggressive SG&A restructuring, global sourcing, plant consolidations and improved pricing.

In terms of the macro environment, the slowing we saw in the quarter was fairly broad-based across all geographies with no single region standing out. Order rates continued to decline in our fluid handling business in line with the trend we have experienced all year. However, the gas handling order rate remained strong and in fact would have been similar to quarter two, but for a few large orders which were expected in September but booked in early October. In addition, areas of strength discussed on previous calls, such as FCR remediation projects in China and maintenance programs in South Africa, continue to deliver, and demand across both business segments in Russia continued to contribute significantly to our revenues.

Now for a look at specific results -- adjusted EPS for the 2012 third quarter was $0.33 per share, which includes $0.03 per share related to a non-cash adjustment to deferred tax balances. This compares to $0.30 per share reported for the 2011 third quarter. Other than adjusted EPS, there is very little comparable between 2012 and 2011, due to the size of the acquired ESAB and Howden businesses. The stronger US dollar in the third quarter of 2012 resulted in a 7.4% year-on-year reduction in revenues. On an organic basis, that is, excluding FX and acquisitions, net sales for the 2012 third quarter were $954 million, an increase of 5.1% compared to $972 million of pro forma sales for the 2011 third quarter.

Turning now to our business segments, for Gas and Fluid Handling, net sales during the third quarter were $465 million, which represents an increase of 15% organically compared to $423 million of pro forma revenues in last year's third 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 currently had a 6% drag on sales and 7% on orders for the period compared to the 2011 third quarter.

In reviewing end markets for Gas and Fluid Handling segment, I will begin by focusing on our largest sector, Power Generation. For the 2012 third quarter, sales increased by 23% organically. As in the first two quarters, sales were particularly strong in China and South Africa. The growth in China continues to benefit 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 by 11% organically with contributions from new build activity in Taiwan and other parts of Southeast Asia and growth of our higher-margin aftermarket business. We expect double-digit growth in revenue and orders to continue in the fourth quarter as we have already booked significant orders in the US during the month of October.

Next on the oil, gas and petrochemicals, which is the second-largest market for Gas and Fluid Handling -- sales for the 2012 third quarter increased 15% organically while orders decreased 10% organically. Our revenue growth was driven by Howden where we benefited from industry's investment in downstream upgrades. However, these gains were partially offset by continued declines in fluid handling, whose primary focus is on upstream applications. In line with these recent trends, we project our total volume growth in this segment to slow in the fourth quarter, driven by fluid handling, which now expects a more significant decrease in this end market versus previous assumptions.

While gas handling continues to enjoy strong bookings in certain geographies such as Russia, this is not sufficient to offset the overall market trends and total orders have continued to decline from 2011 levels, driven by largely by reduced oil consumption, excess refining capacity in the developed world. We expect orders to continue declining for the next several quarters, though this should reverse in the medium term as refining capacity is added in Brazil and Russia and new pipelines in North and South America begin construction.

Turning now to marine, this end market includes both Commercial Marine and Defense customers and is served primarily by fluid handling. Marine, which is a very long cycle market, has been a challenging sector for the past several years due to sharp decline in new vessel deliveries. Sales for the 2012 third quarter were down 11% organically versus pro forma 2011 third quarter. This is consistent with our expectations and performance in the first half as our backlog and marine projects was depleted in 2012. However, we are pleased with the order rates in this segment are up for the second quarter -- sorry. However, we are pleased that order rates in this segment are up the second consecutive quarter, driven in part by strength in vessels serving oil and gas industries.

We expect these trends of declining revenue and modestly higher order rates to continue in the fourth quarter. Despite the challenging near-term dynamics, this is a sector we like over the long-term, given the overall increase in global trade and the impact our products have on customer economics.

Next, let's turn to the mining end sector. Sales for the 2012 third quarter increased 46% organically, while orders increased 24% organically. Strong revenue growth was anticipated based on the strong orders received in 2012 and should continue into the fourth quarter. Overall order activity remained somewhat subdued in South America and certain other regions, although a very large order booked in North America contributed to the robust growth in total orders this quarter. While many raw material prices have declined in recent months, we remain cautiously optimistic about the prospects for bookings over the next several quarters, given project activity and certain strategies Howden is implemented.

Finally, I would like to touch upon the general industrial end market, which encompasses a wide variety of products and applications for both Gas and Fluid Handling. From the third quarter of 2012, sales increased 9% organically and orders increased by 6% organically. While our performance in this market was better than expected overall, overall results contain submarkets which are in the state of growth or decline modes. For both sales and orders, growth was strong in Gas Handling, particularly fans for the steel industry.

In Fluid Handling, both sales and orders declined in the mid-single-digit range. This is a slightly higher rate of decline than prior quarters with European distributors and municipal markets particularly slow. We currently expect a similar decline in Fluid Handling revenues in the fourth quarter. While we expect continued growth in both sales and orders from Gas Handling, the rates are expected to slow modestly.

From a profitability standpoint, adjusted operating margins for the Gas and Fluid Handling segment decreased 1.5 points from the second quarter to the third, primarily due to lower volumes. However, this sequential trend is in line with seasonal patterns for this segment and is in line with our expectations. We continue to passionately apply the CBS system across our entire organization, resulting in benefits for our customers and shareholders. Our CBS materials process, emphasizing demand pull and process flow, is an example of the successful standardized approach we are deploying across all of our global businesses. The power of CBS, specifically the CBS materials process, can be seen through the deployment at two very different sites within Colfax.

As we discussed in last quarter's earnings call, our Howden Mexico facility was introduced to CBS in April. Since then, follow-up kaizen activities driven by local leadership have dramatically improved results. Since the introduction of CBS, the team has reduced inventory by $700,000, decreased total operating costs by $1.5 million per year and opened up 9000 square feet of additional manufacturing floor space for business expansion. We are also able to drive continuous improvement in our more mature, high performing operations such as our Fluid Handling Monroe, North Carolina facility. This plant has been one of our top performing sites for years in lead time, inventory and customer delivery. Since April, using the same CBS tools at Howden Mexico, they have compressed lead time by 33%, reduced inventory by 23% and increased on-time delivery to our customer by 3 full percentage points over the period.

With that, I would like to turn our attention at this point to ESAB's results and the status of our profit improvement initiatives. Third-quarter sales for ESAB were $490 million, down 2% organically versus last year. Despite the lower-than-expected sales, adjusted operating margins improved by 70 basis points during the third quarter in comparison to the second. Despite the softness in top-line sales, this margin rate was higher than expected as costs were tightly controlled and price increases largely held. As I mentioned in my introductory comments, the revenue shortfall was broad-based and generally in line with the overall slowing of the worldwide economy. The welding market is largely a short cycle one, and sales are tightly correlated to underlying economic conditions. This is evident in the sequential and third-quarter patterns we see in our daily consumables revenues, which are largely in line with regional economic activity with the exception of North America.

In the US, which accounts for less than 20% of ESAB's revenues, we encountered some start-up issues at our newly commissioned solid water plant, which contributed to flat North American revenues for the quarter. We are currently implementing countermeasures but expect that this will adversely affect North American residents in the fourth quarter as well. For the segment as a whole, we expect revenue trends for the fourth quarter to be similar to the third as several customers have indicated they expect extended shutdowns in December.

Adjusted operating income for the quarter was $43.9 million, or 9%. As Scott mentioned earlier, this margin percentage is not comparable to last year with notable differences being the inclusion of research and development, pension and amortization expenses as well as joint venture earnings. As noted above, despite softness in top-line demand, ESAB profitability improved versus the second quarter and was ahead of our internal expectations. While we expected flat margins with the second quarter, we were actually able to achieve a 70-basis-point improvement. SG&A expense associated with central operations was down significantly as cost savings actions taken early in the year were fully realized in the third quarter.

Another significant contributor to the improved margins was our Indian operation, which increased margins significantly despite a challenging economic environment. To ensure that we continue to realize these kinds of improvements on a sustainable basis, the ESAB team is aggressively driving the implementation of the Colfax business system. As an example, by implementing the demand pull process which we first piloted at Fluid Handling, the ESAB team has experienced similar results. Several weeks ago, Clay Kiefaber, the leader of our Fabrication Technology program, together with a team of associates at our solid were manufacturing site in the Czech Republic launched demand pull in the Magwire cell. The objective of the kaizen event was to reduce the reliance on multi-week forecasts, cut levels of the materials and work-in-process inventories and produce to actual customer demand. While much is left to do at that site, the customer delivery from this cell is now at 99%. Inventories have been cut by 57% and we now build to actual customer demand as opposed to a multi-week forecast. While cost take-out was not the objective of this event, we also garnered $120,000 annual cost action through the elimination of outside rental warehouse space.

As communicated in our July release and as noted in these results, the ESAB cost and restructuring program remains on track and we continue to be confident with our plans to deliver margins in the low teens within three years of acquisition. While we will not offset the full impact of reduced fourth-quarter volumes on our manufacturing facilities, we do expect margins near those of the third quarter through the period. And, in light of the reduced volumes, our team is aggressively reevaluating our manufacturing footprint and examining additional cost reduction opportunities aimed at ensuring that we deliver 2013 levels of profitability.

And now I'll turn it over to Scott to provide more details on the financials. After Scott's discussion, I'll provide a bit more color on merger and acquisition activity. Scott?

Thanks, Steve. If third-quarter sales were $954.4 million, up 5.1% organically compared to pro forma 2011 third-quarter sales. Operating income -- adjusted operating income was $85.3 million, representing an adjusted operating margin of 8.9%. Fabrication Technologies' adjusted operating margins were 9%. Gas and Fluid Handling's adjusted operating margins were 11.1%.

Fluid Handling margins were similar to the 2011 third quarter, primarily as a result of restructuring savings and lower amortization expense, which offset the loss margin on lower sales. ESAB continues to make solid progress in its adjusted margins, as Steve discussed, and margins increased 70 basis points from the second quarter. This performance is significantly better than the third quarter of 2011.

Corporate and other costs reduced margins by 1%. Excluded from the adjusted operating income are restructuring costs of $15.9 million incurred in connection with the cost reduction projects Steve discussed a few minutes ago, $14.5 million of significant year one fair value adjustments related to acquisition-related inventory step-up and contract backlog, and $3.3 million of costs associated with our asbestos insurance coverage litigation.

Interest expense for the quarter was $23.6 million, which includes approximately $4 million of non-cash amortization of discounts and deferred issuance costs as well as facilities, fees and costs of the bank guarantees and letters of credit. We made $2.25 million of debt principal repayments this quarter.

Our effective tax rate for adjusted income for the quarter was 25.3%. This was reduced by 4.7 percentage points by the impact of a 2-percentage-point reduction in the corporate tax rate in the United Kingdom, which was enacted into law in July.

As Steve mentioned earlier, this is a non-cash benefit, as it is simply a lower rate being applied to our net deferred tax liabilities in the United Kingdom. There is no impact on taxes expected to be paid, and for the fourth quarter we expect the effective tax rate to be approximately 30% on adjusted earnings.

Operating cash flow for the third quarter was $33 million. Inventory balances decreased $11 million in the quarter and net working capital decreased $9 million from the second quarter end. As you may recall, last quarter we began reducing working capital and made it a top priority for the balance of the year with an overall goal of having no growth in working capital for the full year. Working capital improvement was limited this quarter as top-line softness left us with more inventory on hand than anticipated. We expect to make a much more substantial reduction in working capital in the fourth quarter.

Finally, our backlog in the Gas and Fluid Handling segment was $1.4 billion again this quarter. Our book to bill ratio for the third quarter was 0.95 to 1, reflecting strong bookings in our Gas Handling business offset by weakness in Fluid Handling.

Turning now to our guidance for the balance of the year, as Steve discussed, we are experiencing reduced demand in our Fluid Handling and our Fabrication Technology businesses relative to our previous expectations. While Fluid Handling typically experiences a seasonally higher sales level in the fourth quarter, we no longer expect that for the 2012 fourth quarter. Demand does, however, remain as expected in the Gas Handling unit.

This top-line softness will reduce our 2012 expected revenues to a range of $3.9 billion to $3.95 billion. The reduced revenue limits any material improvement to our expected margins in the Fabrication Technologies segment. We have therefore expecting margins for this segment in the fourth quarter at or slightly below the 9% margins earned in the third quarter. This lost margin on the lower sales level and certain unabsorbed fixed costs we will not be able to eliminate within the fourth quarter will lower expect adjusted operating profit from our previous guidance amounts.

Further reducing adjusted operating profit will be the newly acquired entities Steve will discuss shortly. Due to investment banking fees and significant non-cash charges, from an inventory step-up and one-time amortization, the net effect of these acquisitions is to reduce adjusted operating profit by $0.01 in the fourth quarter. The costs associated with bolt-on acquisitions like these two are included within our adjusted earnings, and the costs themselves have a negative $0.03 impact on our fourth-quarter adjusted earnings-per-share guidance.

Both of these entities are expected to be accretive for all quarters in 2013. The end result of the lost profits associated with lower volume and the charges related to the recent acquisitions is the revised adjusted earnings per share guidance of $0.37 to $0.41 per share for the fourth quarter and $1.29 to $1.33 per share for the full year 2012.

Other nonoperational metrics are included in the appendix to the slide deck. Any metrics not addressed in the slide deck are materially in line with our earlier guidance.

And with that, I'll turn it back to Steve for the closing remarks.

Thanks, Scott. As Scott noted, like many companies in our industrial universe, we have experienced a weakening in our top line during the third quarter of 2012 and have assumed this will continue into the fourth quarter as well. Having said that, we remain confident of and committed to delivering the results which we have previously discussed. This means operating margins for ESAB, Howden and Fluid Handling the low, mid and high teens, respectively, within three years. It also means driving increasing levels of working capital productivity well beyond the figures we shared here today and eventually reaching a position where free cash flow exceeds net earnings on a sustained basis.

Finally, an update on acquisition activities -- we recently received antitrust clearance for the previously announced acquisition of Soldex and expect to close this transaction next week. To refresh your memory, Soldex is the leading provider of welding products along South America's fast-growing Pacific Coast. The acquisition makes ESAB the clear leader in South America with a strong presence across the entire continent. We look forward to working with Soldex's talented management team to continue growing their business and leveraging their strength throughout ESAB.

This quarter, we also close to smaller acquisition, COVENT Fans. Based in Montreal, COVENT is one of the leading industrial fan manufacturers in North America and is expected to contribute between $18 million and $20 million in annual sales. We are excited about the potential to leverage COVENT's well-regarded collect through Howden's global channels. The purchase price for this transaction was $32 million. Overall, our acquisition pipeline remains robust throughout each of our business segments and we continue to focus on transactions that meet our financial hurdles and offer good strategic fit.

With that, I will open the floor up for questions and answers.

(Operator instructions) Nathan Jones, Stifel Nicolaus.

If I could just focus in on your guidance for a minute, you reduced the full-year revenue guidance only by about $25 million, and the third quarter came in about $20 million below where consensus was. So that implies a pretty big sequential revenue increase in the fourth quarter, but I think the implied guidance for margin is flat to maybe down slightly. And I guess, even when you include the $0.03 from those acquisitions, maybe only up slightly. Can you just provide a little more color on the fourth-quarter margins?

Let me make one observation about the fourth-quarter sales. There is -- and it's on page 32 of our slide deck -- the new sales does include $20 million to $24 million from the acquired entities, so perhaps the reduction relative to the base business might be a little higher than the number you have quoted in your introductory comments.

Okay, that makes perfect sense.

And as far as the margin side goes, it's largely a reflection of the mix of the business. As we mentioned, we are not going to have the large fourth quarter in Fluid Handling that we were expecting. As you know, Fluid Handling is our highest-margin business, so that will reduce the overall profit margins for the business as a whole. And simply that, and then the loss margin on the lower volumes pretty much attributes for the entire decline in margins.

Great, that makes perfect sense, thanks. And I think also, based on the updated guidance there, it looks like you've increased your target for restructuring expense this year. Can you talk about where that's going?

Well, there's a modest increase of about $8 million in our restructuring target. As we mentioned on the last call, we are in the process of closing -- well, we have completed some of them. But there are six facilities that we've scheduled for consolidation, and we have moved the final two up a little bit and have refined the cost estimates associated with that, as well as some additional reductions in SG&A. So it's not really a change to the overall program, it's just we are taking some of the actions a little quicker and we will do that to ensure that we meet our targets in 2013. There is not expected to be any material benefits in the fourth quarter.

(multiple speakers) Nathan, I just wanted to add to what Scott has indicated there. I think it's consistent with -- that we recognize the markets have softened a bit. So we are trying to aggressively look for opportunities to make sure we deliver the margin that we've committed to. So we feel confident about our execution. We've talked before in our past calls about six different plants. I think on our last call, we identified specifically four that were underway. We also mentioned two additional. At this point, four have been closed, the remaining two have been announced and are well underway in terms of closure.

So we're making good progress against those things that we can control in terms of cost take-out, SG&A controls and a number of other areas, which -- maybe this is a good place to highlight that for you. As a part of the ESAB strategy of cost reduction, we've talked about a number of different things beyond those six plants, to include significant headcount reductions, which are tracking very much the plan. We've also talked about improving the efficiency and effectiveness of that European distribution strategy that was implemented a number of years ago and making good progress with that. We are well ahead of where we had anticipated. And I guess there's another area that we talk about in a very general way, but the overall indirect spend, which includes marketing, HR IT, professional services -- all the things that you would typically associate with that -- travel, utilities -- we're doing very well in that category as well. So we've seen a little bit of an increase in restructuring. We're trying to move some of those projects up as we can. We are committed to offsetting as best we can the top-line softness that the economy is throwing at us.

But we believe we are going to be able to deliver the kind of margins that we've talked about in the past. So I just wanted to add that to Scott's comments.

Great, thanks. And it sounds like you are making very good progress on the cost reductions. Is there any update on your targets for 2013, 2014, 2015, in terms of cost out?

Not really. I think our last call, Nathan, we talked about a range next year of between $55 million and $65 million in sales -- I'm sorry -- of costs. And we also talked at that time that the balance would be split between the next two years. And we are still in that zone. We feel confident about our commitment for next year.

Okay, great, thanks, I'll get back in the queue.

Mike Wherley, Janney Capital Markets.

I was just wondering if you could talk a little bit about ESAB. In this current environment, are you competing more on price there, or is brand more important to that business?

As I think I mentioned, Mike, in the comments earlier, we feel that our pricing is holding in reasonably well, which is, I think, a little bit of a breakthrough for ESAB versus its historical performance. So our pricing is holding in. We will be, by the way, introducing a number of new products at ESAB, at SEMA and FAB Tech later this month, early November. So I think it's a very competitive game that we are involved in here, but our pricing is holding. Some of the activity that we have been trying to push with Clay and the team over at fabrication, and Ken Konopa, the accelerated product development process we have been working on our -- you will see some of those fruits start to come to fruition here with the big show at SEMA and FAB Tech. So brand is important.

New products are going to be even more important. We're going to try to hold onto this price as best we can. We will promote on a selective basis to make sure we are driving volume appropriately, but right now we're trying to focus on some areas to grow the business while taking out costs.

Okay, and does the Soldex brand have -- will you keep that brand or will you roll that into the ESAB brand?

Well, we are still working through that, but that brand is very, very well known throughout the Pacific Coast where -- Latin America. It's one of the great things that we acquire with that business. So it will continue to play a role inside of the business. But I think, Mike, one of the most powerful things that we get with Soldex, in addition to the very strong position in Peru, Colombia and growing position in Venezuela, what we really get is an outstanding team of associates. Their work with the end user, their work with the end markets throughout Latin America is fantastic and, frankly, is an area that we have been benchmarking here at ESAB. So we think, not only do we get a great brand, but we have a very strong team that will help us from an end-user standpoint not only in Latin America. I think, as I mentioned in our previous call, there are a number of things that they do in Peru, and particularly Colombia, that we hope to roll out into other regions around the world for ESAB. So that's a great acquisition for us.

Great. And then just a little bit more on the COVENT Fans. What end market does that primarily address?

Industrial. As I mentioned, it's really a major focus in the industrial fan market. Their forte obviously has been largely North America. We believe that the combination of the product range that they have, the very strong competitive cost base they have, combined with our distribution network globally will give us a chance to do some very good things here in terms of growth while improving profitability of our own business, so a very nice acquisition. I think it's a classic definition of a bolt-on. We will be able to integrate our industrial business with theirs, leverage our existing distribution and leverage their brand name in a couple of key markets, but obviously take advantage of Howden as well.

Okay, thanks so much, guys.

John Inch, Deutsche Bank.

So can I start with Power Generation's order growth rate? What is the duration or lead time for that? Because if you exclude it, your total -- obviously, Power Gen is the biggest segment. Right? You exclude it, and your overall organic growth in terms of orders is significantly reduced. So when do you expect to begin to book those types of orders?

Particularly on the Howden side, that particular time period between order and shipment is a year or slightly more than a year. But as you have noted, we have had very strong order trends in that segment all year long. So we are well -- in that particular segment, we are situated for strong revenue growth in 2013. And some of this business that we booked this quarter and then a couple of real large orders we booked in October will affect 2013 and 2014.

Remind me, Scott -- was it October you said was -- you also had booked some other incremental orders? But where was that segment, and what roughly is the magnitude?

The segment is really in a couple of different areas, but for the most part, they were within our coal-fired plants and they were largely at Howden. The magnitude -- these are relatively large orders which fortunately did come -- we had hoped, of course, that they would be there in September, but they came in the first couple weeks of October. They range anywhere from a little over $11 million to $21 million. And they will ship, as Scott just mentioned, somewhere between late 2013, early 2014.

They were a little bit balanced, John. I'd say probably a little more than half were here in North America, and the balance, a very large order in the mining sector, was in Australia.

Do you think these order trends in Power Gen, based on your customer discussions, are sustainable? I don't mean the absolute values of order growth rates, but I mean the overall outperformance in terms of robust activity because it's obviously pretty important to your mix.

Right, it is. Remember, John, when we were together, the key thing about what we are experiencing now is not only the growth that -- the natural growth that underlies the Power Generation market, but we're also the beneficiary of a long-term environmental push to upgrade compliance at a number of facilities, not only in North America but, very importantly, in China. So in addition to the normal or existing underlying trend within Power Generation, the environmental push is significant. That has been a big, big push on the overall line or big pressure on the volume. And we see that as a trend that we, as best we can see, will probably be with us for the next 5 to 7 years.

And just switching to margins, I want to start with the third quarter Gas and Fluid. Why, again, were the margins down sequentially and down pretty meaningfully year-over-year? I think, Steve, you said that there were in line with expectations, but they weren't really in line with our expectations. What's really going on there?

Well, if you will recall, the best way I can answer that question is to give you an illustration of the first quarter versus the second quarter. The Howden overall margins are very, very sensitive to volume because of the significant level of fixed engineering costs that they have. So the Howden margins do move around, based on the level of sales. The sales were higher in the second quarter, therefore they generated a higher margin in the second quarter. As Steve mentioned, we were spot on our internal expectations. It's simply a timing of orders, and you will see the margin in that segment increase in the fourth quarter as we have higher volumes.

Right. But didn't you say, Scott, that fourth quarter is sequentially kind of comparable? You're sort of intimating that the fourth quarter is the big quarter for Howden. You're not going to see the big margin quarter, I'm presuming, because of volume. I'm just trying to square all this up. And then Howden is doing really well with its PowerGen orders. So what's --

No, that's not -- what I said, John, was that we are not going to see the big fourth quarter in Fluid Handling.

I'm sorry. Okay.

We are going to see a big fourth quarter in the Howden business, as expected. I believe the comments were -- for Howden, there's no real change in the underlying expectations there. That is a longer cycle business. The orders are pretty much in hand at this point in the year. So we are highly confident that Howden will be delivering the larger fourth quarter, as in the original guidance.

The two segments that have the stress on the top line are the Fluid Handling business. There's a couple of large orders that were pushed out, and we haven't seen to recurring book and ship type of demand. It has been somewhat weak call year. And then the welding business, which is much more in line with the general economic conditions. But no, there's no expectation of not meeting the volumes for Howden.

It's all in the Fluid side? Okay, thanks very much.

Kevin Maczka, BB&T Capital Markets.

Steve, can I just follow up on the pricing question? You touched on it. You said that it was improved in ESAB; it actually contributed to the margin improvement there. You are doing a little bit better, maybe, than what you would normally expect out of ESAB. Can you just review; why is that? And do you expect to see some price pressure there as we go forward, given the sluggish order rates?

Sure, Kevin. Historically, I think ESAB has struggled to implement pricing. I believe we talked about that on one of the other calls. So the team under Clay and Ken Konopa put together a very disciplined strategy of executing pricing in virtually every market around the world and really recreated and implemented an entire pricing process which didn't exist before. So I think one of the reasons we have been able to get the pricing in is because we had stronger process in place. Too, we have been much more clear about what our expectation is for our own organization to execute price. Historically, that has been a little bit of a debate, apparently, and it has also been something which could be challenged. And there were a lot of regional decisions made whether they were going to implement the recommended price increase or not from the center.

So what Clay and Ken have done is to do a pretty thorough analysis of the global market, and a by -- on market-by-market basis put together pricing that we think makes sense and make sure that we track that price increase on a week-to-week basis and make sure that it gets implemented. Any deviation to that pricing has to come back to the center to get any kind of approval at all, which, again, is a difference in the past. In the past, local operations had the flexibility to discount as they chose. And so it was difficult, as you might imagine, to hold onto those price increases where they were limited. So it's a complete overhaul of the pricing strategy that was there when we inherited the business.

As I mentioned before, we certainly will be aggressive in promoting particularly our new products, our value-added products, areas where we think we have an advantage. We hope to hold onto the price increase; we hope to hold on to the pricing work that we've done. The key for us is to continue to drive productivity in our manufacturing sites. We're doing a much better job on procurement. We haven't talked a lot about that, but, again, this was an opportunity area that we are working on, which is looking at opportunities to reduce our procurement costs across commonly shared materials, across the entire Company, whether it's corrugated or -- we found in motors a number of different product areas where they are -- had been negotiated with suppliers on an independent basis. We're now doing that as a corporation.

So we're looking for a number of ways to improve our cost. We hope that the pricing is an area that will remain solid. We will improve our margins through manufacturing productivity and positive purchase price variance.

Much of that, Steve, I'm sure applies to the Gas and Fluid Handling side as well. Can you just talk about what your expectations there are for price -- again, not seeing the big Q4 on the Fluid Handling side, a little bit softer orders? Same type of question as it relates to price.

Well, I think there, what we're trying to do is continue to drive our overall margins, particularly through manufacturing productivity and procurement. We are seeing an improvement in overall margins on a year-on-year basis for Fluid Handling. I should say, essentially flat year on year, slight improvement. We'll see how that pans out, but sort of flat on a year-to-year basis. So we're going to drive that through mix management, we'll drive it through manufacturing productivity and improvement.

It's largely a project business, so we don't have as aggressive a pricing comparison metric as we do on the ESAB business. But, as Steve said, our primary goal is to continue to improve our margins, largely through things within our own control.

Okay, one more from me. Can we go back to the Oil & Gas segment? It sounds like that's a big part of your lowered outlook here, expecting lower volumes in Q4. I think, Steve, you said that will probably persist for several quarters. Can you just talk about what has changed there? Is this something project specific or something just more simply tied to a softer macro environment?

I'd say it's mostly tied to the softer macro environment, Kevin. It's not specific projects. There's a number of pipeline projects in North and South America that have been under discussion for quite some time and have still not been -- an order has not been given to anyone. There has been a little bit of softness on the refining side, although not as significant. And the overall secular trends for this business, both in heavier oil, which benefits our pump business, as well as the expanded refining capacity in places like Russia and Brazil, we expect this business to bounce back. But based on orders we have in hand, we can't at this point confidently state that we're probably going to have some pressure on revenue for the next few quarters.

Okay, thank you.

Jeff Hammond, KeyBanc Capital Markets.

So it sounds like, to close the loop on 4Q, it's just general softness in Fluid Handling and Fabrication Technology. Are you seeing anything within Fluid Handling, like deferrals or cancellations that's impacting it, or it's just the softer demand trend?

We have seen no cancellations at this point. We've seen things push out, but no cancellations.

Okay. And then you mentioned extended shutdowns. You mentioned the weakness being broad, but you also mentioned into 4Q extended shutdowns. Where are you seeing extended shutdowns, either geographically or by market over both?

I could look at it on two ways. The reductions that we flagged and have noted here in the script is really around our ESAB business and what we see in welding, and largely in Europe, where we have seen a number of automotive manufacturers already announce a longer intended shutdown in the December time frame.

What we saw, Jeff, in coming up is that the July and August time frame was a little slow for our ESAB business, slower than anticipated. September was late coming around, but what it did, the order rates were quite good but not enough to really offset some of the earlier declines that we experienced in the quarter. And we saw was that a number of facilities, particularly in the automotive area, were slow in coming up from summer improvements. And we've also seen announcements that that will be a continuation of December, when they experience their normal shutdown.

Okay, that's helpful. And then you seemed pretty happy with pricing on ESAB, but I think in the presentation you mentioned price mix is negative, so maybe mix is the culprit there. Can you just help me understand what's going on with mix?

Yes, that's primarily mix. It's the overall ratio between electrodes, solid wire and equipment. The unit pricing is actually a positive contribution in the quarter.

Okay, and then can you quantify -- I don't know if you pulled this out in any of the one-time items, but can you quantify what the consumable plant start-up disruption cost was?

It's probably a couple of million dollars in cost and would be $5 million or $6 million in revenue, something in that range.

And that's pretty much behind us?

Well, no, I think it's going to continue to challenge us into the fourth quarter. Obviously, our highest commitment is to fixing this and getting our customer service level back up. As Steve mentioned in his comments, we are fixing it at the moment. It's not completely fixed at this point, so it is going to have a similar effect on the fourth-quarter expectations as well.

And that was included in your reported results; that was not a one-timer that you had pulled out.

That's correct.

That's correct -- included in the results, and it's also factored into the guidance.

Okay, great, I appreciate it, guys.

Jason Feldman, UBS.

Going back to the Gas and Fluid margin dynamics again, it's tricky when we don't have a lot of historical data for the segments. I just want to make sure I understand looking forward what the main elements we should about when trying to think about where the margins are going to be moving. I think what you have identified is that the Fluid business is a structurally higher-margin business than Howden. Howden, though, is more sensitive to volume, given the operating leverage. And then, obviously, there's restructuring and cost-saving activity. Are there anything else in terms of mix between end markets or other factors that we should think about?

No, I think that was a very nice summary of it. That is the main things that are necessary for modeling. Fortunately, once we get past next quarter, then will be more historical levels below sales that we will be able to talk about. But I think you've hit on all the key ones.

Okay, and you have now talked for a couple of quarters about the low-, mid-, high-teens targets for the respective businesses. When we think out, given all the macro uncertainty, how confident are you on those numbers? I guess the question is, in a 3- to 4-year period, what kind of underlying macro growth or sales growth do you need to be able to hit those? Or, is that really primarily driven by the cost savings project you have identified?

I think what we've focused on for the most part are those projects that we can control; that area that we can control and deliver. So much of the margin improvement that we have described in our commitments is focused on taking out costs and the restructuring along of the areas that we have outlined for our ESAB business. There are opportunities in Howden, and certainly those are also available to us at Fluid Handling as well.

And in terms of how we did the projections, we obviously took account of the backlog we have. So in the Gas and Fluid Handling, you will have higher growth rates than GDP next year, similar to what we've shown this year. But outside of what's in the backlog, we assumed a very modest growth rate in coming up with those targets.

Okay, thank you very much.

Joe Mondillo, Sidoti.

In terms of the restructuring, I was wondering if you could just talk about what more you need to do to get to that $55 million to $65 million, if anything, next year. You talked about the four plants already closed, two plants expected to be closed. But if you could talk about what more you need to do to get to that sort of expectation, that would be helpful.

Well, we do have quite a bit more to do that -- we are not completed there. There are additional consolidations as well as additional SG&A reductions. And we plan to have a more complete discussion of that on the next call when we introduce more specific guidance for 2013. But we do have a very precise plan as to how we're going to get that. It does address all the particular areas, and it does require more than just a carryover of the things we've done this year.

So you would rather just wait until next call to go into detail there?

Correct, yes. When we give guidance for 2013, we will give a lot more clarity on the specific components of the restructuring.

Okay, and then the Power Generation, the orders an absolute basis were down three quarters -- or two quarters in a row. You mentioned that you still think that that business is very solid. Should we expect orders to bounce back in the fourth quarter? What are your expectations?

Was that oil and gas, Joe? Just to make sure we are --

Power generation.

Power Generation orders are up.

Yes. I don't know if -- maybe I was less than clear. But it should also be in your deck. I think you will see that Power Generation is up organically and in total.

Right. On an absolute basis, though, I believe it declined from the first quarter to the second quarter to the third? I believe it was $182 million in the first, $164 million in the second, $146 million in the third. Is that correct?

I would have to take that question off-line. We typically don't track this stuff sequentially, due to the significant seasonalities of the ordering pattern. We've seen very strong order patterns greater than expectation in that particular segment. So no, I don't believe we are expecting any decrement in that order. As Steve said, the environmental projects continue to be very strong. We are beginning to see much more activity in the US than we had seen earlier in the year. So I think our outlook for Power Generation continues to be pretty bullish.

Okay, good enough. Lastly, I know Commercial Marine is a smaller part of your business, but I believe ESAB has some exposure too. Just wondering sort of what you're seeing in ESAB with Commercial Marine versus Fluid Handling. Fluid Handling seems to be doing really well, but I know it's a much more -- longer lead time business. Are you seeing a significant slowdown in ESAB? And if that's so, are the end users potentially slowing down, given economic weakness? And could we maybe eventually see that in Fluid Handling?

I think, as far as ESAB goes, one, we don't -- because we sell significantly through distribution and we serve the shipbuilding market, a substantial portion through a joint venture that we have in Korea, we don't have the precise percentage type of information that we have elsewhere. But I think generally, from a macro standpoint, what you said is correct, that the welding business that's going into shipbuilding is definitely down. I just can't give you a specific percentage. We've already seen that in the third quarter.

Does Fluid Handling generally lag, just in terms of the scheduling on when they sell those types of pumps to the ships versus the welding?

It's difficult to answer that question because of the very difference in customers and market composition. The welding business pretty much serves the entire shipbuilding industry across the board, across the geographies. On the pump business, we are much more concentrated in certain segments, including certain geographic shipyard segments. So there's not a direct comparison between what's happening in welding and what's happening in the pump business.

Generally speaking, we'd see the pump business as essentially flattening out this year. We've seen two consecutive quarters of orders actually picking up. The conversion period from orders to sales is typically 6 to 15 months in the Marine side. So we actually think there might be a little bit of a bounce-back on the pump side from the higher order rate we've seen. The welding side is much more immediate with the economic conditions, and we did see a drop off in the third quarter and have factor that into our fourth-quarter guidance. So we don't have much visibility beyond that.

Okay, thanks a lot.

John Moore, CL King.

Scott, I was hoping you could provide the EPS contribution or an operating income contribution from the acquisition in the fourth quarter.

Well, I think we've probably given you roughly enough information to get close to that. There's $0.03 a share in costs and there's $0.02 per share in margin contribution for a negative $0.01 after costs. So I think with that, you can get a pretty rough estimate of what the profit contribution would be.

Okay, and then it's been a little while since we talked about Soldex. I'm just curious how that business is performing since you talked about the deal in the spring. Have they seen a material slowdown?

I wouldn't describe it as a material slowdown. I think they are close to budget on top line, holding the bottom line. So they have not experienced the kind of softness that we've seen in other markets for ESAB.

And correct if I'm wrong, but the Soldex business has been growing double digits, and the margins, if I remember, are quite a bit higher than the -- well, quite a bit higher than ESAB and, I think, the Company as a whole. Is that right?

Margins have been higher than ESAB, stronger presence -- yes, stronger presence in consumables.

And your growth rate numbers are correct; they are slightly down from 2011, but they are significantly better than -- even than ESAB's year-to-date numbers.

Rate of growth.

The rate of growth is significantly better, but not quite as high as 2011.

Okay, okay, great. And then ESAB during the quarter -- I know you guys monitored this business on a weekly basis. I'm just curious, when you started to see things turn down, and if you could give us an update as to what you are seeing today and if things are still declining or if you think it has stabilized at this point, that would be helpful.

I think, John -- I may have mentioned that earlier, is that during the summer is when we actually saw the business slowdown a little bit. And it was slow in coming out of the summer months. We expected a bigger ramp up in September. We did get a nice bump in sales, but it occurred later than we anticipated. I'd say the trends that we saw in quarter three are the trends that we are starting to see and expect in the fourth quarter.

Okay.

And we expect a continuation of that.

And then, just lastly on the Oil and Gas business and Fluid Handling -- and I apologize if I'm asking a repeat question here; I'm trying to digest a lot this morning. It sounds like the weakness there is still primarily contained to the upstream side of the business. And is the downstream business still holding in?

Well, you know, it -- and it's an interesting one that we talked about before. But for Fluid Handling, their focus is so much of the business is on the upstream and midstream projects that it's a totally different picture than what we see on Howden where almost 90% of their business is focused on the downstream side, particularly in terms of where investments have gone for capacity expansion, desulphurization -- all those things are a great fit for Howden and Thomason. So what we've seen on the Fluid Handling side is a general slowdown in investment on the upstream and midstream side of things. And I think that's probably consistent with what you are seeing throughout the industry.

Okay, that's perfect. And then final question -- Howden, I know, has been benefiting from this retrofit of power plants in China. I'm just curious -- I know that's a multi-year opportunity you guys are working on there. But does that start to fade at all in 2013? Or do you expect --

No, no, John. I tried to reference that earlier, I think in response to one of John's questions earlier. That has a very long tail on it. It goes well beyond 5 to 7 years, in our early forecast. And it's not unique to China. China, surprisingly, is probably one of the most aggressive in the world right now, but North America is right behind them.

I got it. Okay, good to hear. All right, thanks a lot, guys.

James Krapfel, Morningstar.

I'm curious to hear your thoughts on your acquisition plans. Would you consider making another transformational acquisition, say, sometime in the next 12 months? And what are your long-term views on expanding to more platforms beyond your current two platforms?

I think, as we've indicated before, we certainly, as you can see from the last quarter's activity, we are very aggressive in pursuing smart bolt-on acquisitions. I don't think we will see a transformational acquisition in the near-term. We have wonderful opportunities to expand within the space that we are in today, whether it's fabrication or Gas and Fluid Handling. It's a major, major opportunity -- smart bolt-on opportunities that give us good growth and tremendous synergies from a cost and profitability standpoint. So that's really our focus. And that's where we believe we will get some great benefits here over the next year.

Okay, and I believe you mentioned $9 million higher restructuring than you had had in the second quarter slide deck assumptions for 2012 guidance. Were there any other changes?

There's no other significant changes in the non-operational metrics. The operational metrics are laid out in detail on page 32 of the slide deck.

Okay, great, thank you.

I am showing no further questions at this time. I would now like to turn the call back over to Scott Brannan for closing remarks.

Well, thank everyone for joining us today, and we look forward to speaking to you again with our year-end results. Again, thanks for joining the call. Goodbye.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.