Enovis Corp (ENOV) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Colfax Corporation First Quarter Earnings Conference Call. (Operator Instructions) I would now like to turn the conference over to Scott Brannan, Chief Financial Officer. Please go ahead.

Thanks, [Barlow] and good morning, everyone, and thanks for joining us. I'm Scott Brannan, the Chief Financial Officer, and 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. 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 the risks and uncertainty, including those set forth 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 intent to update them, except as provided--required by law. With respect to any non-GAAP financial measures during the call today, the accompanying information required by SEC Reg G relating to those measures can be found in the earnings press release and in the supplemental slide presentation, also in the Investor section of the Colfax website.

And as a reminder, we acquired the ESAB and Howden businesses on January 13, 2012, so sales for the 12-day period are excluded from organic growth and they are reflected in the acquisitions line in the slide presentation.

And now, I'd like to turn it over to Steve.

Good morning, everyone, and thank you for joining us. Given the relatively soft economic environment, we are pleased to report a quarter which operationally exceeded expectations. While sales were slightly below forecast, operating performance was substantially better than our guidance. There were two non-operational events that impacted the quarter and were not contemplated in the original guidance. First was the currency devaluation in Venezuela. The impact of this was a $3 million loss in the first quarter. The second development occurring after our initial guidance was issued, which is very positive for the Company, is the refinancing of our principal credit facility. Scott will discuss this in more detail later. In short, the refinancing negatively impacted the first quarter, as approximately $3 million of costs were written off at the closing. Going forward, however, we will see a significant reduction in our interest costs.

Excluding the Venezuelan write-off, adjusted operating profit was better than our internal expectations. Profitability in both gas and food handling exceeded all forecasts despite lower overall revenue, while fabrication technology, excluding Venezuela, was in line with expectations. Interest costs, excluding the write-offs associated with the refinancing, were approximately $2 million lower than expected due to the lower rates post-refinancing.

Now for a look at the specific results. Adjusted EPS for the 2013 first quarter was $0.26 per share. This includes $0.04 per share from the write-offs discussed earlier related to Venezuela and the debt refinancing. Net sales of $947 million were up 7% versus the prior year period. This consists of 12% growth from acquisitions and the 12 additional days of ESAB and Howden activity, partially offset by 2% negative foreign exchange, and a 3% organic decline.

Turning now to our business segments. For gas and fluid handling orders for the first quarter were $502 million, an organic decrease of 4%. Net sales for the first quarter were $500--$425.1 million, an organic decrease of 2%, compared to revenues of $425.3 million in last year's first quarter. With respect to our end markets, please refer to the slides for specific growth rates. As you review the data, you'll see significant variation across sectors. This is caused by two things - first, certain trends specific to the individual sectors, which I'll discuss in a moment. Second, the timing of large project orders, which can distort underlying trends over a short period of time.

Despite the quarter-on-quarter decline in orders, we believe the underlying market drivers remain positive and will result in bookings and revenue growth in 2013. Focusing first on our largest end market and the gas and fluid handling segment power generation, for the 2013 first quarter, sales increased by 20% organically. Sales continue to benefit from the strong backlog created by 2012 bookings. Growth was again led by environmental upgrade projects in China that we've discussed on earlier calls. In addition, the quarter includes significant revenue from environmental upgrades in the U.S., as well as robust growth in pump sales to natural gas combined cycle power stations.

The power generation sector continues to exhibit significant growth as shown in the 18% growth rate in orders, and the outlook remains positive. We're seeing numerous market opportunities for new--numerous market opportunities for new coal-fired power stations in southeast Asia, and quoting on SCR retrofit projects in China further increased during the quarter. In addition, Chinese power plants are now operating more profitably due to the decline in coal prices, which has released previously suppressed demand, and environmental projects in the U.S. are finally proceeding as anticipated. As such, we expect continued robust growth in both sales and orders in the power generation sector for the balance of 2013.

Next, oil, gas, and petrochemicals, which is the second largest market for gas and fluid handling. Sales for the 2013 first quarter decreased 19% organically, while orders decreased a more modest 4% organically. This end market is one where the timing of large projects is clearly distorting the underlying trends. We principally serve applications in the midstream with large screw pumps and the downstream applications with compressor products. The significant decrease in revenues this quarter is due to the subdued order activity we saw in the midstream sector during most of 2012, and the decline in bookings was mostly caused by two large orders for low sulfur refining equipment that didn't repeat this year.

However, orders in absolute dollars are up substantially from the fourth quarter, including a significant improvement in the fluid handling business. In addition, quoting activity remains strong across all major served geographies led by transportation, low sulfur fuels, the increasing use of sour crudes, and Middle Eastern capacity increases. Nonetheless, it's unlikely that orders for 2013 will exceed the record orders of 2012, which reflected peak investment in refining capacity. We expect a modest decrease in orders for the balance of 2013 in oil, gas, and petrochem, but a strengthening of revenues into solid organic increases for the remainder of the year.

Turning now to marine, which is primarily served by fluid handling, sales for the 2013 first quarter were flat organically versus the prior year period, while orders were up 5% organically, driven largely by strength in vessels serving the offshore oil and gas industry. Given the continued decline in overall shipbuilding activity, we are pleased that our orders for our marine sector increased for the fourth consecutive quarter. We expect continued modest growth in orders and bookings in 2013, despite the challenging market environment.

Next, let's turn to mining. Sales for the 2013 first quarter increased 15% organically, while orders decreased 59% organically. The overall market environment in capital equipment for mining application remains subdued, particularly in Australia. While we expect orders to decline in this end market in 2013, based on expected production of items in the current backlog, we anticipate modest revenue growth in future quarters.

Finally, the general industrial end market. For the first quarter of 2013, sales decreased 15% organically and orders decreased by 22% organically. Notable submarkets with significant revenue declines include steel, wastewater, and the European distribution market. General industrial activity remained somewhat depressed in Europe and slowed noticeably at the end of the quarter. Bookings were down significantly in the steel sector, partially due to soft market additions and partially due to timing as two large steel orders were taken in the fourth quarter. Orders were also somewhat weaker in the transportation sector across all geographies. While we expect both sales and orders to strengthen somewhat in the coming quarters, overall we expect general industrial sales and orders to be flat in 2013.

Turning to profitability, adjusted operating margins for the gas and fluid handling segment increased as expected to 10.4% in the 2013 first quarter, from 9.1% in the first quarter of 2012, primarily due to improved cost control and the implementation of the CBS tools.

CBS tools in this segment include activities at the Howden Thomassen compressor business in Rheden, The Netherlands, which has been actively implementing the CBS tools of commodity category management and transactional process improvement. The team has conducted three Kaizen events in the first quarter to improve the supply chain lead time, engineering design time, and the cost position of critical components. The team has been able to reduce lead time of two critical components by 44% and 67%. Engineering design time has been reduced by over 1,000 hours annually and cost reductions of over $1 million per year have been implemented through improved sourcing and value analysis and value engineering events.

Fluid handling's pump plant in Radolfzell, Germany, has begun the implementation of the CBS demand pull process flow tool that has been implemented successfully in North America and Asia. The team has been supported with CBS resources from numerous sites and has conducted three Kaizen events in supplier pull systems, internal pull systems, and machining optimization. Inventory has already been reduced by $300--$600,000 since the end of January. Most importantly, on time delivery to our customer has improved by 10 percentage points.

Now let's turn to results for fabrication technology. First quarter sales for fabrication technology were $522 million, down 4% organically versus the first quarter of 2012. While economic conditions were tepid across the world, we experienced revenue declines in Europe, India, and North America. After discussions with our large distributors, we believe our performance was in line with regional activity.

On the positive side, revenues versus the previous were high--were up high single digits in South America and Russia. We have made substantial progress addressing the issues discussed on previous calls in our newly commissioned solid wire plant in the U.S. We now expect to meet 2013 customer demand. Adjusted operating income for the quarter increased 31% to $44.5 million versus the previous year's first quarter. Soldexa contributed approximately $3 million of operating income after absorbing a $3 million charge for the Venezuelan currency revaluation. Excluding Soldexa, ESAB's adjusted operating margin for the quarter was 8.5%, a sequential margin improvement of 130 basis points and a 110 basis point increase over the 2012 first quarter despite significantly lower volumes.

This improvement was largely driven by two factors. First, despite a 4% organic decline in sales and decline in production levels in the 2013 first quarter compared to 2012, gross margin actually increased a full percentage point. This represents the positive impact of the seven manufacturing sites closed in 2012 with most of those closings occurring in the second half of the year. These generated sufficient savings to more than offset the impact of the lower production volumes.

Secondly, SG&A costs as a percentage of sales were reduced by 50 basis points in 2013, compared to the 2012 first quarter. These cost reductions clearly demonstrate that our restructuring program at ESAB is delivering the expected results. We are clearly on track to deliver in the $55 million to $65 million in incremental cost savings included in our full year guidance. Our aggressive regional SG&A programs and supply chain activities are significantly lowering costs across the business.

In addition, our CBS activities are gaining significant momentum. These tools are repeatable and teachable and will benefit the entire organization over time. As an example, the ESAB team in Opole, Poland has conducted 12 Kaizen events during the first quarter alone. This site has been supported with a cross platform team of CBS leaders, supply chain experts, and product engineering specialists. Most recently, Clay Kiefaber, the leader of our fabrication technology platform, personally led a week of Kaizen activity at Opole. The event brought together our most senior leaders in ESAB along with the team in Opole to implement significant improvements through three simultaneous Kaizen events. The teams targeted lead time and inventory improvements of 50% and productivity improvements of 20% in three critical areas of the facility.

Utilizing the CBS tools of cellular manufacturing, standard work, and pull systems, the teams were able to achieve improvements in the wire feeder, wire harness, and printed circuit board, or PCB assembly cells.

In the wire feeder assembly cell, the team reduced raw material inventory by $381,000--that's an 86% improvement, improved manufacturing lead time from 1.3 days to 4.5 hours, and they increased productivity by 28%. In the wire harness assembly cell, the team reduced inventory by 35% and also reduced material handling by 42%. Finally, in the printed circuit board assembly cell, the team reduced printed circuit board assemblies by $84,000, which is about an 83% improvement, and they increased productivity by 29%. While this is only one site, it's important to remember that we are running events like these in virtually every facility on a regular basis.

The second key takeaway is the fact that all of our business leaders are personally involved in driving the culture of continuous improvement. In line with this, we are all personally leading at least one Kaizen event like that run in Opole during the first quarter of 2013.

And now, I'll turn it over to Scott to provide more details on the financials. Scott?

Thanks, Steve. As Steve mentioned earlier, sales for the first quarter were $947 million, down 3% organically, compared to the 2012 first quarter. Adjusted operating income was $78.2 million, representing an adjusted operating margin of 8.3%. Fabrication technology's adjusted margins were 8.5%. Gas and fluid handling's adjusted margins were 10.4%. Corporate and other costs were in line with expectations at $10 million for the quarter.

Excluded from our adjusted operating income are restructuring costs of $4 million incurred in connection with the cost saving projects discussed earlier, and $1.7 million of costs associated with our asbestos insurance coverage litigation.

Interest expense was $23.3 million for the quarter. We closed a complete repricing of our primary credit facility on February 22, which will result in significantly lower interest costs in future periods. Components of interest costs in the first quarter include normal recurring interest of $20.3 million, which 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, and approximately $3 million of costs associated with the refinancing itself.

A summary of the refinancing, along with the amended credit agreement, were filed with the SEC in February. The principal elements of the refinancing were $200 million of term loans were paid down with cash-on-hand, available revolving credit lines were increased by $200 million, making total lines of $500 million available, all of which were undrawn at the quarter end, additional U.S. dollar and euro-denominated term loans in the bank market replaced some institutional loans, and in summary, our overall weighted average interest cost decreased by approximately 1% per annum.

Our effective tax rate for adjusted net income and adjusted net income per share for the quarter was 30.5%, in line with expectations.

As we have discussed previously, we typically build a modest amount of working capital in the first quarter for seasonal reasons. Inventory balances increased $11 million in the first quarter and net working capital increased $59 million from the fourth quarter end.

Our backlog in gas and fluid handling was $1.4 billion at quarter end. Our book to bill ratio for the first quarter was 1.18 to one, which is stronger than typical, reflecting solid bookings in both our gas handling and fluid handling businesses.

We are affirming the guidance range of $207 million to $230 million of adjusted net income before preferred stock dividends for 2013. Interest savings, net of the write-offs taken at the refinancing date, is certainly a positive development this quarter. This is counteracted to some degree by the charges associated with the Venezuelan currency devaluation and the sluggish economic environment. On balance, we remain comfortable with the existing guidance as to our adjusted net income.

We do have a very positive development to report as to our adjusted earnings per share guidance. As there is no current intention of Colfax declaring a common stock dividend, BDT Capital, the sole holder of the issued and outstanding shares of our Series A convertible preferred stock, has agreed to drop their rights to share proportionately in any dividends or distributions made in respect of our common stock effective April 23, 2013. BDT dropping their participation rights in any dividends or distribution made in respect of common stock impacts our earnings per share. Up through April 23, earnings must be allocated to the preferred stock, which effectively lowered our reported earnings per share. Beginning April 24, diluted earnings per share will be determined on the if-converted basis.

Based on our existing guidance for net income, which we just affirmed, this will increase our adjusted EPS range by $0.17 to $0.20 for the full year of 2013. There is no cash impact, as Colfax has not declared any common stock dividend since the charter acquisition and has no current intention of declaring one.

And now, I'll turn it back to Steve.

Thanks, Scott. It's now been just over a year since the acquisition of Howden and ESAB, and we remain ever confident in our ability to reach the operating goals established for 2013 and beyond. Since the completion of this acquisition, we have consistently stated that our programs ensure a satisfactory return to shareholders, was based on the potential for cash flow and margin enhancement through aggressive restructuring and process improvement without reliance on growth and sales volume. This remains a top priority and the results are generally hitting the bottom line. Our cost reduction programs are working in all three businesses, most notably in ESAB.

While we'd certainly prefer a more robust economic environment, this quarter demonstrates that we can deliver solid results even with sluggish demand. Having said that, however, we are not satisfied with our lack of organic growth in this quarter. We recognize that organic growth needs to be an essential element of our shareholder value creation. To this end, in addition to the efforts we're taking to implement CBS on the manufacturing floor, we're also beginning to leverage CBS on the commercial side of the business.

As mentioned on our last call, we're very pleased with the market's acceptance of ESAB's new Warrior product line, which made heavy use of the CBS accelerated product development and voice of the customer, or VOC, tools. The ESAB team is now working aggressively using these same tools to expand the Warrior product range with step-up features, and they also have a number of other new products, which are designed to hit the market in the next 12 months to 18 months.

Earlier this week, our fluid handling organization announced the introduction of the CM-1000 seawater cooling pump for marine vessels. And the VOC tool was critical in defining its features, functions, and value proposition. The product utilizes Colfax's smart pump technology to intelligently vary its speed on operating conditions, which deliver ship operators a 40% to 80% energy savings, depending on specific vessel design.

Importantly for our customers and Colfax, the pump can be applied to either new vessel construction or a retrofit solution for existing systems. In addition to the steps being taken to drive organic growth, we remain very optimistic with our prospects for acquisitions. While it is always difficult to project exactly when deals will come to fruition, we have a very strong pipeline for literally each of our businesses that will hopefully bear fruit later this year.

In summary, we believe that we're continuing to position the business for long term profitable growth. Our cost reduction programs are having a positive impact. The restructuring of our financing and the BDT agreement, highlighted by Scott, increases our operating flexibility and reduces cost. And the CBS tools will continue to build process capability in both manufacturing and the growth side of our business. While there's still much to be done, we remain cautiously optimistic about the future.

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

Thank you. (Operator Instructions) Our first question is from John Inch of Deutsche Bank. Please go ahead.

Good morning, everyone.

Good morning, John.

Good morning, guys. So I think maybe, Scott, you could confirm this. The refinancing of the debt adds like what, about $15 million of benefit annually? Is that about the right number?

That is correct, John. But I would caution everybody - that would have to be reduced by the $3 million charge-off we took at the refinancing date. But that's the run rate savings, correct.

Well, all else equal, does that suggest because you didn't change--I recognize the refinancing charges which are in your numbers. But all else equal, that's still--does that sort of push your range of the guide toward the higher end, or at least slightly move all else equal to the right? I'm assuming it would.

We're affirming our guidance as we stated. As I said in the remarks, the Venezuelan thing was not anticipated in our guidance, and the overall macro environment is--continues to be sluggish. So we're going to reaffirm our income guidance that we put out originally.

And then, Scott, getting rid of two class--the annual EPS impact, I'm just sort of thinking about 17--what did you say, $0.17 to $0.20 for eight remaining months it would be roughly. Does that suggest the annual impact is over $0.25?

No, it doesn't.

Okay.

Because of the seasonality of our earnings.

Okay.

The--essentially, it eliminates a 12% allocation to the preferred shares. But since our income is not earned proportionately over the years--over the year, and the first quarter is seasonally our lowest, you can't proportionately adjust it like that. But it would be slightly higher for the full year, but not nearly those numbers you quoted.

The other complication--and I don't want to bore everybody with accounting details--is when you get to a certain level then you have to go through the further if-converted calculation. So the full year number would be slightly higher than $0.17 to $0.20, but not that much.

All right, but somewhere in the $0.20 zone.

Correct.

Could I just ask one more then fundamental question? ITW as part of its release disclosed its Miller Welding business segment margins were 26% and 28% last year. And I recognize there are mix and geographic differences. But as you guys execute on your global plans, is there some reason that your perhaps very long term margins can't meaningfully trend higher than these sort of low teen targets that you've thrown out initially, particularly given all the progress that Clay has made and everything you've seen? And I'm just kind of looking at margins up over a point with significantly down organic growth, assuming markets normalize. What are your thoughts there, or is it still a little too early?

Well, actually, I'd like to invite you to our next budget review with Clay. You could help us to move that up. But--.

--I assume he's listening, so--.

--He might be. But I'm sure we'll make sure of that. I think you put your finger on it on both points. One, ITW has a very different mix of products. With over three quarters of the business in equipment, which tends to be higher margin, it results in a much more significant impact on the bottom line. But our target remains to get the business from low single digits when we acquired ESAB to the 13% range over the first three years having acquired the business. As I've said before, like all of the turnarounds, I think as we get deeper into the turnaround, we continue to learn more about the business. It's my hope that we'll find ways to move beyond that. But right now, we're confirming where we are. It's only been a year. If Clay were here, I think he'd certainly confirm that for you. But we're going to stay committed with where we are.

Just lastly, ESAB price realization, I think it was about 3%. Was that all Warrior, Steve? I mean, it's way better than Lincoln. Lincoln was flat. What was accounting for your superior price performance in that segment?

Most of our price increases last year were put in in the second quarter, so it's essentially the full year effect of actions we took last year. And they were not overly weighted to equipment. They were across the board - equipment and consumables price increases. They really relate to the timing they were put in last year.

Got it. Thank you.

You're welcome.

Thank you. Our next question is from Kevin Maczka of BB&T Capital Markets. Your line is open. Please go ahead.

Hi. Good morning.

Good morning.

Can I just piggyback on that last question on pricing at ESAB? So the increases you saw this quarter, despite the softer top line volume, those are coming from previously announced or enacted price increases. What's the outlook for further increases there?

Well, I don't know that we'll see the same level of price increase in 2013 given the trend in commodities. But we will be moving further in pricing later this year.

Okay. And Steve, you mentioned that ESAB had performed in line with sea--or with regional trend. Can you just give a little more color there? Maybe specifically, what are you seeing in Europe and South America?

Well, we--in looking at our business, we saw that Europe as the next--what I really stated was that the businesses performed essentially in line with economic trends. And what we saw is a continued softening or sluggishness in Europe. We saw the same kind of trend in North America. And it was very different, however. We saw very slow start in January. It picked up nicely in February, continued reasonably strong in March. So the quarter overall was soft, softer than we anticipated, and got started very slow with Europe being sort of one of the slower markets. We'd also say that we experienced softness in North America. Our other areas, however, were quite strong, or many of our other areas were quite strong. We saw very good performance in Latin America, as an example. We saw an increase in China as well. But the two markets of Europe and North America were soft.

Okay. But was that a statement for the segment as a whole, that January was slower and maybe later in the quarter, February, March, things were improving a bit, or was that specific to Europe?

I think those statements were specific to ESAB on a global basis and I think they may be somewhat consistent for the industry in general.

Got it. Okay, great. And then, just finally from me, on the nice ESAB margin lift. I guess we're always trying to get a sense for is this, the action that you've laid out, kind of progressing as you had planned or some pull forward there, and maybe in response to the softer top line. Can you just comment on that, please?

Could you elaborate on the pull forward? What do you mean by that?

Well, we're always interested. You've laid out $55 million to $65 million as a target for the year. And are you pulling something forward either into this year from out years or pulling it forward in the year?

Got it. Generally speaking, the ESAB cost reduction is on track. There wasn't an acceleration of movement one way or the other. We seem to--we feel that we're pretty much on track with the combination of both restructuring, as well as smart moves that we've taken in pricing, mix management, and negotiations with our vendor base.

Okay, got it. Thank you.

Thank you. Our next question is from Nathan Jones of Stifel. Your line is open. Please go ahead.

Morning, Steve and Scott.

Good morning.

If I could just go over to the mine segment, it's my understanding that a lot of that is aftermarket and replacement and more dependent on currently operating mines than new project opportunities. Can you kind of break down the decline in terms of what the decline came from replacement versus the new project opportunities?

I guess what I would point out to you, Nathan, is that the mining segment is only--the mining end market is only 6% of the segment, so these are not real large numbers. I can't give you specific percentages, but the--particularly on the order book side, the new order decline is essentially most of the decline. We're not experiencing a decline in the aftermarket business. But the new order business is very slow in that segment.

Would you be--I'm going to put my Australian hat on here for a minute--expecting the environment over there to improve in the second half of the year with the extremely likely change of government over there in September?

We have low expectations for Australia for this year. Not for any political reasons, but more for just our sense of the market in the primary mining companies.

Nathan, just--.

--Go ahead.

I would just add is that we--when we structured the plan for 2013, we felt like we took a pretty conservative posture on most of the key markets and verticals, reflecting what we thought would be a tough economic environment. So we tried to plan conservatively. I think overall it's difficult to say on any one country, but generally the trends are in line with what we anticipated or a bit softer. So from that standpoint, we certainly aren't expecting any improvement as we go through the back half of the year.

And just a clarification on the guidance. The $0.17 to $0.20 improvement, the lack of BDT participation, that all hit your reported APS, right? So you guys are strictly going up $0.17 to $0.20?

Yes, that's what I was attempting to communicate. And it will go up beginning the 24th of April, so there'll be four months under the old method, and then the--essentially the EPS will go up 12% because of not allocating income to the participating securities any longer from the 24th of April forward. So it will be a little complicated calculation for the second quarter, but then it will be clean for the third and fourth quarter.

Got it. And just one more from me. Can you talk about how the demand environment progressed in China through the first quarter and into the second quarter?

Well, I'll take the gas and fluid handling side and I'll let Steve kind of on the welding. China was very strong in gas and fluid handling. As Steve said in his remarks, the Chinese business, if anything, is strengthening. The activity in the SCR quoting is--we think it's probably nearing a peak at this point, but it was very strong in the quarter. And then, some of the other activity that was sort of held back because of the price of coal seems to have come through in the first quarter order book as well. So on gas and fluid handling, China was very strong for us.

And in terms of the fabrication side of the business, it's a relatively small part of our business in general. Overall, we--I guess maybe two quarters, maybe six months ago, we hired a new leader for our China business, Stanley Chu. He's done a great job of really helping us to think through the role of China in the portfolio and realigning priorities. And we've seen a little bit of a bump in sales and an improvement in profitability. I wouldn't say that it's anything that we've seen that's going to turn that around to a dramatic increase in the near term, but we think we are getting better positioned for 2014. So not a significant lift in our business. Certainly the best improvement we've seen in over a year. We're getting positioned for the longer term market for China.

And China is profitable for (inaudible)?

I'm sorry?

China is profitable for (inaudible)?

Yes, it is. Sorry.

Thanks, guys. Nice quarter.

Thanks.

Thank you. Our next question is from Jason Feldman of UBS. Your line is open.

It's going well in China for gas and fluid handling. But have you seen any change or increase in competition from local Chinese competitors particularly at Howden?

We've seen a continuation. I don't know that it's increased. As you probably know, we have a very strong manufacturing presence in China, so we feel we can compete effectively in those segments that we are focused on. So that's not a new phenomena and we haven't seen it increase. I think, as Scott highlighted, however, the activity in China is certainly reaching a peak. It was very strong in January and February, and then really took another step up in the month of March. So the competition remains as it has been and the market continues to be very strong. And we see it remaining that way for several more years.

Okay. The M&A pipeline, Steve, you touched on this--.

--Yes--.

--Earlier in the call, said you have a number of opportunities throughout the various businesses. When we think about the potential size range of near term deals, meaning this year or early next year, should we be thinking about Soldexa size deals or Covent Fan size deals, or something in between those two? What's kind of the sweet spot that you see in the near term for M&A size?

I'd say that range between Covent and Soldexa is generally what we're focused on. There may be on occasion an opportunity a little larger than that. But generally speaking, when we think about bolt-ons, and that's our primary focus right now is in that zone, as we've described before, we will eventually add a third platform, but that will be years--several years down the road. But as I mentioned before, the pipeline is very strong right now. A number of smart, strategic bolt-ons that we think provide a great fit for our Company. That's a pretty good target. It could be a little larger than that, but generally speaking, I think that's our planning range.

Okay. And then, lastly, you've now had Charter for a little bit over a year. There's been a lot of restructuring, plant closures, you had the issues last quarter, which you have talked about, with the startup in the United States, and a lot of change and--which can create--potentially create disruption. Based on the ESAB growth rates and your commentary, it certainly doesn't seem like you're losing share. But have there been--how's the reaction been from your sales force, from your customers? Are they seeing improvements in service quality and potentially share gains? Is it kind of neutral and they're just playing wait and see, or have there been issues that you kind of are still addressing?

Jason, there's a lot in your question there. And just to be completely clear, I believe we lost share in North America in 2012. And I think, as we've shared on previous calls, we had a tough time in the start of the Midway plant, which was a plant--a new plant that was begun by Charter. That plant is now up and running. Deliveries are very strong now and the quality is where it needs to be. So I think that certainly that particular startup did not go well, so I just want to be clear about that.

The other facilities--I think Clay and his team have closed nearly seven in total. Most of those closures have gone as planned. We've gone to great lengths to make sure that above all else--while we want to get a cost improvement and the benefit from the restructuring, above all else we're trying to shelter the customer from those moves. Hopefully, the customer sees no disruption to service, quality, or any responsiveness from ESAB. And we feel that for the most part we've been able to deliver on those expectations.

We've done work with our customer base, particularly in North America, to determine their views on our service, our quality, and so forth. And we think that we are continuing to progress and make improvements. But I don't think the customer would experience any disruption to quality or delivery. Part of that though, as I made reference to that, through the CBS work we used the example of both Thomassen compressors and also at ESAB, part of that in the demand pull process improvement with CBS. The primary focus is responsiveness and shortening lead times. If we can keep those lead times shorter, it obviously gives us a chance to respond to customers' demand on a real time basis. It allows us to shrink our inventory level, which is certainly we are focused on. And it also means an improvement to quality. So a lot of those things that we're doing in CBS enable us to not only close those plants, but hopefully, close those plants, get the cost improvement we want, and continue strong delivers--deliveries to our customer.

Great. Thank you.

Thank you.

Thank you. Our next question is from Jeff Hammond of KeyBanc Capital Markets. Your line is open.

Good morning, guys.

Good morning, Jeff.

Hi, Jeff.

Hey, just back to the guidance, I mean, I understand the demand is weak. But it just seems like if this quarter is any trend, you're kind of making that up on the cost side. So why shouldn't the trend of kind of weaker demand and better continuous improvement, margin improvement, be an offset and kind of allow the interest expense savings to flow through the guidance?

Well, we have about a $30 million pre-tax range in the guidance. And given the uncertainty of the economic environment, it just seemed prudent to leave the guidance where it was at the current time. I think as we get through next quarter, if the environment is stronger, we'll certainly consider narrowing it or something along those lines. But given the reasonable spread that already exists and, as I said in my prepared remarks, the positives from the interest offset against the currency devaluation and the soft macro, we felt most comfortable leaving the guidance where it is.

Okay, that's helpful. And then, just how is your ship build--or your commercial marine business so resilient? Do you think there are share gains within there, or is it the oil and gas vessels, or what's the dynamic versus what seems to be a pretty ugly market on the welding side in shipbuilding?

I think we're probably gaining share in that market. And I made reference to a new product that comes out later this--well, actually, it was launched the beginning of the week. So I think we're taking share and we'll continue to see a little bit of a share capture there.

Okay, great. And then, just final question. Is there a way to kind of spike out or give us a sense of what the run rate is of Covent and Soldexa, kind of ex the ESAB or the Charter stub?

Well, I think in the materials themselves we give you specific information on Soldexa. Their sales were a bit over $30 million and their profit was discussed in the prepared remarks of being $3 million after absorbing a $3 million currency revaluation. Soldexa has been integrated into Howden's industrial fan business and it would be--it's a much smaller acquisition and it would be difficult to specifically break that out given its integration into the Howden industrial fan business.

But it's fair to say those are kind of running in line with your expectations?

Yes.

Yes.

Yes, they are.

Thanks, guys.

And we've been very pleased as well, Jeff, with the way that the two organizations have come together, particularly with Covent and the industrial business that we had or have with Howden. The leverage that we're getting commercially is certainly in line with what we'd hoped. Looks very promising. We feel very good about that.

Thanks, guys.

Thanks.

Thank you. Our next question is from John Moore of CL King. Your line is open.

Good morning, guys.

Good morning.

We talked a bit about the guidance on the net income line, but I was wondering if you could address your revenue ranges provided at the end of last year on the last call by division. Down four to flat for fluid, four to six for Howden, and zero to two for fabrication technology. Is it--do you feel like the lower end of those ranges is more reasonable now?

Let me address it segment by segment. I think we're very comfortable with gas and fluid handling. There was no surprise in there. But there's a lot of very large projects in those segments. We feel very comfortable with the revenue guidance there. We see the majority of it's already in the backlog and there is no indication to either side of the range. We're very comfortable with that range exactly as we stated it. I think on a fabrication technology side, the first quarter was a little light of expectations. The general macro indicators, including comments from distribution and what not are that the second half may be a little stronger. So zero to two is I think a range we're still reasonably comfortable with. It's a little--given it's only a 2% range, it's a little early in the year to be narrowing that. So there is obviously less visibility and less certainty on the fabrication technology side, but we're certainly very comfortable with the gas and fluid handling revenue ranges.

Okay, that's helpful. And then, the gas and fluid handling margins this quarter were pretty strong. I think you're actually looking forward to be about flat with the prior year. I guess can you just give us a little more detail as to what drove that? Did you happen to have some more after market work in the quarter or anything that was unique?

I think a couple of things. I think after market was particularly strong, particularly at Howden. But the team has done a very good job of managing expenses and leveraging CBS to get margins up, both from an SG&A standpoint, as well as on the gross margin line.

Great. All right. Thanks, guys.

Sometimes, John, I think we tend to forget that we have just as large a challenge to improve margins at Howden as we do at ESAB. They are a little higher to begin with, but we've targeted mid-teens operating income for that business, and we feel that the first quarter is an excellent start led by Ian Brander and James Brown, the guys at Howden. They're well on the way to achieving that, as we've seen with ESAB. So we feel good about both areas.

Excellent. Congratulations, guys.

Thanks.

Thank you.

Thank you. Our next question in queue is from Jim Krapfel of Morningstar. Your line is open.

Good morning.

Hi, Jim.

Morning.

It looks as though your general industrial end market suffered a larger than expected decline in revenue and orders. Can you explain a bit more what drove that weakness and what gives you the confidence that you'll see some strengthening in revenue and orders for the rest of the year?

Well, the--it is a very broad based segment that's sort of an amalgamation of many submarkets. A lot of the significant decline relates to some large projects, particularly in the steel industry, that we had in the 2012 first quarter that didn't repeat in the 2013 quarter. So there is an element of lumpiness in there. And based on the feedback we're getting from our sales [customer] base, we don't expect that kind of downdraft for the balance of the year. It seems to be--the market was down slightly, but the big number is largely related to lumpiness of just a single three-month period.

And the other end markets of industrial then are holding up pretty well?

No. I mean, they're modestly down, so I wouldn't say they're holding up great. But the large decrease was mainly related to some large project items.

Okay. And then, to what extent does the weaker than expected demand environment affect your ability to reach your low teen, mid teen, high teen margin goals for the next three years?

As we've said before, we've built those objectives and our game plan around an assumption that is not really relying on growth. We believe we can deliver, as an example, in 2013, the operating income targets that we've established by business, the $55 million to $65 million in cost takeout that we continue to talk about for ESAB. We can identify or reach that without significant volume growth. So it does not have a significant impact on our long term views.

Okay, thank you.

Thanks.

Thank you. And with that, I'm showing no further questions in queue. I'd like to turn it back to Mr. Scott Brannan for any further remarks.

Thank you very much and thank everyone for joining us today. And we look forward to speaking with you again next quarter.

Thank you. Again, thank you, ladies and gentlemen, for joining today's conference. You may now disconnect. Have a great day.