Enovis Corp (ENOV) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Colfax Corporation Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later after our prepared remarks we will conduct a question and answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this call is being recorded. I'd now like to the conference over to Scott Brannan. Please, go ahead.

Thank you, Pablo. Good morning, everyone. And thanks for joining us. My name is Scott Brannan. I'm Colfax's Chief Financial Officer. With me today is Steve Simms, our President and CEO. Additionally we have Farand Pawlak on the call today who is our new Director of Investor Relations. We recently announced his appointment to the role so you will become more familiar with Farand in the coming months.

Our earnings release was issued this morning and is available in the investor section of our website, ColfaxCorp.com. Additionally, we will be using a slide presentation to supplement today's call which can also be found in 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 the call we will be making some forward-looking statements about our beliefs and estimates regarding future events and results. These forward-looking statements are subject to risks and uncertainties as set forth in our SEC filings. Actual results may differ materially from any forward-looking statements we make today. The forward-looking statements speak only as of today and we do not assume any obligation or intent to update them except as required by law.

With respect to any non-GAAP financial measures used during the call today, the accompanying information required by SEC Reg G related to those measures can be found in our earnings press release and supplemental slide presentation again in the investor section of our website.

Now I'd like to turn it over to Steve.

Thanks, Scott. Good morning, everyone. And thank you for joining us today.

We're very pleased to report a strong quarter operationally, particularly given the subdued economic environment. Adjusted operating margin for the second quarter increased 160 basis points over the 2012 second quarter to 10.9%. As expected, both working capital and cash flow improved nicely on both a sequential and year on year basis. These gains in profitability and cash flow reflect the positive impact of our CBS efforts and the organization's intense focus on targeted cost reduction and the execution of our restructuring plans that we've discussed in the past. Our cost reduction efforts continue to perform slightly ahead of our internal goal and we remain confident of delivering our longer-term commitments despite what we feel will continue to be a sluggish economic environment.

We had two significant non-operational events in the second quarter. The issuance of 7.5 million shares of common stock in May and BDT dropping their participation rights in any dividends made with respect to common stock after April 23. Scott will address the impact of these events in more detail particularly as it relates to our updated guidance. He'll also provide more detail on the financials and then we'll open it up for questions.

Now for a look at specific results, adjusted EPS for the 2013 second quarter was $0.56 per share which represents a 60% increase versus the $0.35 per share reported last year. Included in this quarter's results is a $0.02 per share gain related to the resolution of an uncertain tax position within the period. Scott will touch upon this during his comments.

Net sales of $1.70 billion (sic - see press release) were up 2.7% versus the prior year. This consists of a 3.6% growth from acquisitions, a negative foreign exchange impact of 60 basis points which results in an organic decline of 30 basis points for the period.

Turning now to our business segments, for gas and food handling net sales for the second quarter were $516.8 million, an organic increase of 4% compared to $496.5 million in last year's second quarter. Orders for the second quarter were $478.2 million, an organic decrease of 10%. With respect to our end markets, please refer to the slides for specific growth rates.

As in previous quarters there is significant variation across sectors. This is caused by two things -- first, the timing of large project orders which can distort comparisons of specific quarters and second, certain trends specific to our individual sectors which I will discuss in detail in a moment.

But in summary, subdued activity in mining and the continued deferral of oil and gas projects are expected to offset the strong order growth we anticipate in the power generation end market. Accordingly, based on existing backlog and performance to date, we remain confident in previous guidance for this segment which targets mid-single organic revenue growth in 2013 and we now expect bookings for 2013 to be approximately flat with last year.

Focusing first on our largest gas and fluid handling end market, power generation, for the 2013 second quarter revenues increased by a robust 40% organically. Sales continued to benefit from the strong backlog built in 2012 and the environmental upgrade projects in China and the United States that we have discussed on earlier calls. Results also include solid growth and pump sales to natural gas combined cycle power stations as well as record levels of maintenance work in South Africa.

The power generation sector continues to exhibit significant strength as shown in the year to date 8% organic growth rate in orders and the outlook remains positive. Quoting for environmental projects in the US are proceeding as anticipated and new build demand in Southeast Asia as well as environmental project activity in China remains solid. The Chinese government has also announced further investment in pollution control for waste water and air quality as well as projects for the reduction of sulfur in fuels.

However, as noted above, orders within this platform can be rather lumpy and despite these strong market tailwinds, orders in the second quarter decreased 1% organically. As discussed above we do not believe this is representative of the market direction but rather a reflection of timing of large orders. As an example, we received several large project awards for this end market just after quarter end, including one for $27 million. Accordingly, we expect continued strong 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 second quarter decreased 9.5% organically while orders decreased 22% organically. As you know, we principally serve applications in the midstream with large screw pumps and downstream with compressors. The decrease in revenues this quarter is tied to subdued order activity we saw in the midstream sector during most of 2012 and the delayed start of some large compressor projects.

While quoting activity remains strong across all major served geographies, driven by transportation, low-sulfur fuels, and Middle Eastern capacity increases, project award dates in particular for compressors continued to be deferred. This has been experienced across all significant regions including Russian, Brazil, and the Middle East. As a result it's unlikely that orders for 2013 will exceed the record orders for 2012. 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 second quarter were up 2.4% organically versus the prior year while orders were up 2.5% organically driven largely by strength in vessels serving the offshore oil and gas industry. Despite a challenging end market, this is our fifth consecutive quarter of bookings growth in the commercial marine sector.

During the quarter we introduced an important new product, the new CM1000 featuring smart technology. This product which is part of the ship's cooling system provides ship owners with a substantial energy savings by varying pump activity to meet actual cooling demand. Given the tangible benefit it delivers, we've seen substantial interest and bookings to date. For the end market overall we expect modest growth in revenue and bookings for 2013.

Next, let's turn to mining which as you might expect is the weakest end market that we serve. Sales for the 2013 second quarter decreased 55% organically while orders decreased 35% organically. The overall market environment in capital equipment for mining applications remains quite subdued though there have been some bright spots such as a $20 million order booked in early July for a project in Mongolia. While we expect orders to decline in 2013, based on the current backlog we expect to realize modest revenue growth in the second half.

Finally, the general industrial end market, for the second quarter of 2013, sales increased 1.2% organically and orders decreased by 3% organically. General industrial activity remains somewhat depressed in Europe. Bookings were down significantly in the chemical processing sector due to soft market conditions. 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 13.5% in the second quarter of 2013 versus 12.6% in the comparable year ago period. Margin improvements are tied to the volume gains noted above, strength in cost control and continued success of our CBS efforts.

An example of how the tools of CBS are being used to drive continuous improvement took place in April at fluid handling's Monroe, North Carolina plant. A group of 34 leaders from fluid handling, Howden, ESAB, along with me and my corporate team came together for the week long Kaizen. We were given the objective of cutting lead times to the customer, improving overall service levels and increasing productivity while reducing work in process inventory.

We split our group into three teams and each was challenged to use the CBS tools of standard work, single-piece flow, or the single-minute exchange of dies to achieve these challenging goals. Through the leadership of guys like Brian Bill, Mark Bowie, Chris Johnson, [Marvin Matthew], and [Larry Leak], we achieved results that illustrate the power of what can happen when leaders understand and use the tools of CBS. In this instance lead times were reduced from 11 to three days, on-time delivery improved from 85% to 95%, work in process inventory was reduced by 50%, and productivity increased from 83% to 128%. Having visited the site two weeks ago, the local team is now focused on sustaining these gains to ensure they become an ongoing part of the business going forward.

Now let's turn to results for fabrication technology. Second quarter sales for fabrication technology were $557 million, down 3.8% organically versus the second quarter of 2012. Economic conditions continued to be subdued across the world and we experienced softness in Europe, Asia, and North America. On the positive side, however, revenues versus the previous year were up solidly in both South America and Russia. Despite this top line softness, the ESAB team continued to meet or exceed expectations as operating margins for the period reached 10.7% which represents a 240 basis point increase over last year and a 220 basis point improvement versus the last quarter. These margins were slightly above our internal expectations, reflecting better than planned executive of the cost reduction program as well as strong cost controls in all aspects of the business.

During the second quarter, ESAB experienced a 180 basis point year on year improvement in gross margin while SG&A as a percentage of sales dropped by 60 basis points. The combination of aggressive SG&A restructuring, global sourcing, the benefits of our 2012 plant consolidations, and our 2012 pricing actions appear to be having a very positive impact on the bottom line.

Let me update you specifically on the status of the Charter cost reduction program which focused largely on ESAB. In 2012 we saved over $20 million at ESAB and approximately $10 million in Colfax corporate overhead costs. As I mentioned previously we are tracking ahead of schedule against our 2013 cost savings goals of $55 million to $65 million. While we're not changing the goal, our confidence in meeting it increases each quarter. Although there have been puts and takes from the original plan, we are achieving our targets with substantial contributions from our 2012 factory consolidations, reduction in SG&A costs across all regions, and savings of our global sourcing initiatives. In addition to the seven manufacturing sites eliminated in 2012, nine distribution centers have now been closed in the first six months of this year.

Going forward we expect to reduce costs by a further $70 million over 2014 and 2015. This is likely to be achieved evenly over the two year period. Like the gas and fluid handling business, ESAB is building momentum in its use of the tools of CBS. As previewed in last quarter's earning call, our ESAB plant in Opole, Poland, is a critical facility for the business as production is shifted here as we close other higher cost facilities. Opole is also one of the key sites manufacturing our new Warrior product line.

The most recent step in Opole's journey toward lean manufacturing occurred during the week of April 8 when the head of the business, Clay Kiefaber, led a team of 60 participants from across Colfax in a week-long Kaizen event. The objective of this effort was to move Opole one step closer to a make to order environment by leveraging tools from standard work, cellular manufacturing, demand pull, and level scheduling. By leveraging these tools and the work done in previous Kaizens, this site has now been transformed.

More specifically, on-time delivery has improved from less than 30% to 85%. Past-due which was previously measured in months has now been eliminated and more importantly time on standard product orders has been reduced from 22 days to 72 hours. As a result of this new flexibility, Opole now manufactures to an actual customer order, making exactly what the customer needs when he needs it. In most cases his order will ship from the plant direct to the customer without going into inventory or a warehouse. The 85% service level I mentioned above is against this three day lead time requirement. This work in Opole, Poland is a great example of how continuous improvement using the tools of CBS can dramatically improve customer satisfaction and ultimately create competitive advantage.

While we're pleased with the progress of CBS on the manufacturing floor, we believe we're beginning to see the benefits of CBS on the commercial side of the business. As mentioned before, the Warrior product line has been successful in the Americas and the Middle East and it will now be launched in Europe as this year's Essen show in September. Given the strength of the ESAB brand and European distribution base, early customer feedback as expected has been encouraging. In addition, the ESAB team has begun to record a number of major customer wins tied to the implementation of the CBS tool value selling.

In a most recent example, our ESAB sales team in North America won a $7 million order from a very large truck manufacturer who was planning to retool his production facility. The key to this win was a sales approach which provided a complete solution to the end user by combining our business units together with an offer that no competitor could match. Included in this order was a hybrid laser welding system, cutting tables, automatic TIG seamer equipment, high-end Arista power sources, and 100 Warriors. We will help this same manufacturer set up two more plants in the next year.

Now I'll turn it over to Scott to provide more details on the financials.

Thanks, Steve.

As Steve mentioned earlier, sales for the second quarter were at $1.074 billion, flat organically compared to the 2012 second quarter. Adjusted operating income was $117 million representing an adjusted operating margin of 10.9%. Fabrication technologies adjusted operating margins were 10.7%, gas and fluid handling's adjusted margins were 13.5%.

Corporate and other costs were above expectations at $13 million for the quarter. Most of the higher spending is attributable to costs associated with the merger and acquisition activities conducted this quarter. Excluded from adjusted operating income are restructuring costs of $7.5 million incurred in connection with the cost reduction projects Steve discussed earlier and $0.5 million of costs associated with asbestos insurance coverage litigation.

Interest expense was $18 million for the quarter and that includes approximately $4 million of non-cash amortization of debt discount and deferred issuance costs as well as facility fees, the cost of bank guarantees and letters of credit. We made $14 million of debt principle repayments this quarter.

Our effective tax rate for adjusted net income and adjusted net income per share for the quarter was lower than expected as a result of the resolution of an uncertain tax position for less than the accrual previously provided. This increased our earnings per share by $0.02 for the quarter. We continue to expect an effective tax rate of approximately 29% to 30% on the adjusted earnings for 2013. Operating cash flow was strong for the second quarter at $86 million. Inventory balances decreased $37 million and working capital as a percentage of sales decreased to 17% at quarter end.

In the first quarter we had higher than expected working capital build and we stated that reversing that trend was a top priority with an overall goal of achieving a 1% reduction in working capital as a percentage of sales for the full year. We're on a clear path to achieving that and working capital turnover increased in both segments this quarter. Finally, backlog in gas and fluid handling segment was $1.39 billion at year end. Our book to bill for the second quarter was 0.93 to one, weaker than typical, reflecting the subdued bookings Steve spoke about earlier.

Earnings per share and adjusted earnings per share were impacted by two significant events that occurred in the second quarter. As we discussed on last quarter's call, BDT capital agreed to forgo their participation rights in any potential dividends in respect of our common stock effective April 23. In addition we issued 7.5 million new shares of common stock on May 10. Also, since our 2013 guidance was issued in early February we completed a refinancing of our principle credit facility. The principle elements of the refinancing were discussed in detail on last quarter's call and in our form 10Q.

Our revised guidance, which is laid out in detail on the slide deck, calls for adjusted EPS of $1.95 to $2.10 for 2013 which is principally determined as follows.

The adjusted operating profit range originally presented in early February has been narrowed. The bottom end of the range has been increased by $7 million to $432 million while the top end of the range has been reaffirmed at $456 million.

Interest expense for 2013 has been reduced to an estimated $78 million for the year, reflecting the savings achieved in the refinancing offset by the costs and write-offs taken in the first quarter in connection with its completion.

Expected weighted average common and equivalent shares as well as the expected total shares including the effect of the preferred shares under the if converted method have been recomputed, taking the May share issuance into account and some minor changes were made to other guidance inputs which are shown on the slide deck.

Since BDT dropped their participation rights, earnings per share is determined under the if converted method. Full year 2013 will be determined on a discreet basis under that method. However, since the first quarter was determined under the two class participating securities method, the sum of the four quarters will yield a different number than the year calculated as a discreet period will provide.

As you know, Colfax does not provide quarterly guidance. However, to illustrate the impact of the change in earnings per share calculations during the year, the slide deck shows the EPS impact using recent analyst consensus estimates for the third and fourth quarter as of July 23. You will note that the full year earnings per share is $0.05 higher than the sum of the quarters due to the method change that I just discussed.

While there is a reasonable possibility that some acquisitions may close in the second half of 2013, we have not included any acquisition impact in this guidance.

Now I'll turn it back to Steve.

Thanks, Scott. As I mentioned at the beginning of the session, we're very pleased with our second quarter results and remain confident in our ability to deliver the long-term operating goals that we've communicated in the past. An important enabler in reaching these goals is the continued development of internal talent and selectively recruiting from the outside when necessary.

In line with this I'm happy to say we continue to build out the organizations with outstanding talent. We've completed ahead of schedule the staffing goals associated with the charter acquisition and are now aggressively focused on the development of our internal talent pool to help drive the performance of our core business and to be prepared for the integration of future bolt-on acquisitions. As Scott mentioned in his earlier comments, we've chosen not to include the impact of these acquisitions in our second half guidance. However, I would reinforce that we've been extremely busy on several fronts and our pipeline remains robust for each of our businesses and we remain optimistic these efforts will bear fruit later this year.

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

Thank you. (Operator Instructions) John Inch, Deutsche Bank.

How was Europe in the quarter? Europe seems to be getting better for a lot of industrials. Is there a way to just kind of contrast Europe's performance maybe with the two segments versus the first quarter?

I would say that overall Europe for us has been on a similar pattern or similar trend to what we saw into the previous first quarter. That would generally be true across both platforms. We do see a few signs of perhaps some improvement. As an example, perhaps that improvement in the rail and truck and energy and construction for Europe particularly in the Southeast portion of Europe. But overall not a significant change that would impact how we think about the balance of 2013.

There's nothing, Steve, on the industrial side that say maybe suggests that maybe the short cycle trends in welding are improving a little bit in Europe?

Nothing that we've seen and certainly nothing -- I would put it this way, nothing that we've seen which would encourage us to alter our outlook for the balance of the year. You know, John, as we've said before, we've assumed it's a fairly difficult operating climate and in that operating climate, as difficult as it may be, we will deliver the operating income commitments that we've described in the past.

How does pricing look in the backlog and obviously with the backlog's decline, is that more of a 2014 impact? Or does some of that hit you in the second half of '13?

For us, as you know, John, the backlog is going to be most significant on our gas and fluid handling side of the business. As we look at the quality of that backlog we would say that those margins and the pricing associated with the backlog is in line with our expectations and within the margin experience to date and consistent with where we need to take the business in 2014 from a margin perspective. So, no concern from a pricing standpoint in our backlog.

And your other question as to the impact of the backlog on '13 versus '14, I think we're in good shape for delivering the organic revenue increase in that segment. We have the backlog in place to do that for 2013.

One of the things I think our team in particular at Howden does a great job with is that as they quote the different contracts, the opportunities, whether it's in compressors or in the fan -- heavy-duty fan business, they have an outstanding program from a procurement and productivity standpoint to not only meet those cost commitments but ideally to beat those commitments. Those are key objectives that we drive in policy deployment on a month to month basis to make sure we not only achieve the top line but make or beat the bottom line. They've done a very good of that on a consistent basis.

Agreed. And then just lastly, ESAB. You guys are executing on the cost saves. Do you still think you can get to up 0% to 2% for the year? I mean, it's down sort of 4% in the first half. And if so, why would that be the case?

I believe that there are two key factors and probably one that's more significant. As you remember, we had a reasonably strong first half in 2012, which we're comparing against this year. As we get into the third and fourth quarter, those comparisons become a little bit easier to make. So I think we'll see growth and I think we'll be sort of in the zone that we've described in the past. And I would also say that we are seeing momentum on the new products and the receptivity of the Warrior product line. And importantly, the example I used a few minutes ago, what Ken Konopa, together with Clay and his team, are driving from a value selling standpoint is starting to rebuild in North America some of the volume that we lost in 2012.

As you know we've some difficulties in the startup of our Midway plant. Those issues are well behind us now. So, we're able to go out and pursue aggressive growth in all regions. That example that I noted before with the large truck manufacturer is a great example of how by bundling all our companies together we're able to take advantage of a system or process sell that perhaps some of our competitors don't do today.

So, that's the kind of activity, plus the year on year comparisons that give us optimism about being able to grow the top line in the back half of 2013. Growth, on top of the great cost reductions we've seen will give us even more confidence about reaching 13% operating income for this particular business.

Jason Feldman, UBS.

On acquisitions, certainly heard the commentary about what the pipeline looks like for the second half but I think you've been pretty clear that you're not looking at adding another platform or leg to the business for I heard about two years or so. How do you think about capacity both from a financial perspective -- you've got almost $600 million in cash, almost $500 million on your revolver -- but also from an organizational perspective? Is thinking about something like $1 billion over the next year or so plausible?

I'll take the capacity question. We certainly have the capacity. We certainly have the capacity to do, as you mentioned, we have over $500 million in cash on the balance sheet and a $500 million revolver. We certainly have the capacity to do significant acquisitions and that would range should the opportunity be available but we don't set specific targets because it's always impossible to know when transactions are going to close. But we do have the benefit of the operating cash flow and the cash rates through the equity offering. We do have plenty of capacity to do transactions.

Jason, I'll take the second part of that question. Obviously I agree with Scott on the first. From a talent standpoint, I think as we've shared in some of our one on one meetings, we believe that smart bolt-on acquisitions are an integral part of our overall strategy. The first step is to make sure we're laying and putting in place the foundation stones to grow each of our businesses from an organic standpoint. We're not walking away or we don't avoid the fact that we've got to build strong organic growth on a consistent basis on the core.

In addition though we think acquisitions from a bolt-on standpoint will make outstanding sense for our business. So, for the last -- it's almost been 18 months -- we've not only been developing internal talent but we've also been able to hire talent from the outside that has experience in acquisition integration. So, we've added the capacity both in skills and focus to be able to integrate these acquisitions in each of the three businesses that we have at the Company.

So, we feel optimistic and confident about the talent we've assembled on the team in the last 18 months to meet the goals. When we set our talent objectives at the beginning of the year and drive that from two major reviews each year, we not only have targeted growth objectives organically but we're making sure that we're adding skills and expertise to integrate acquisitions on all three businesses.

So, the drive behind acquisition activity is something that we've planned in our strategic planning activities. It's something we're driving in our talent reviews with every one of our companies.

That's helpful. Just lastly, I think you basically commented on the organic growth expectations similarly this quarter to what you have in the past. But in the guidance in the slides there's no explicit sales guidance the way that there was two quarters ago. Is there anything to be read into that or is that really just you don't need to provide that level of detail on every line item at this point?

I think what you can read into that is that the guidance is unchanged from what we put out previously relative to sales. I would say that we're headed towards the lower end of the range based on the first six months. We still expect revenue to fall within the range we put out in February.

I just wanted to come back on the talent question, just to give you an idea of the size of the talent add. Since the Charter acquisition we've added 84 people to the Company and many of those individuals that we've added would be very much involved in some of the bolt-on acquisitions that we've described in the past.

The other interesting statistic is on a year to date basis we've promoted almost 50 people around the Company and about 45% of those promotions have been through the promotion of internal talent. We're excited about that because that also is an indication that our talent development plans are raising the kind of leaders for the future that will not only be able to grow our core business but to take an active role in acquisitions.

So, significant addition of resources from the outside, over 80 people. Secondly, the progress of our talent development plans that we drive on a very consistent basis. Those too things, a couple statistics just to help you frame out what we're doing from a talent standpoint.

Kevin Maczka, BB&T Capital Markets.

First, a clarification and then a question. The clarification, did you say that gas and fluid handling bookings you expect to be flattish in '13?

Yes.

Then piggy-backing on the earlier question about 2014, I know it's early for you to comment specifically about that, but that's your big backlog business. I'm just wondering just conceptually if your orders are flat this year and your backlog's relatively flat, is that just directionally the way we ought to start thinking about revenues for next year?

I would not come to that conclusion. The backlog relative to where it was in the end of the second quarter last year is up a few percent. The backlog is a bit higher and as Steve commented in his remarks there were a couple of very substantial orders that a day or two might've moved that trend a little bit differently. So, we wouldn't necessarily conclude that we're not building the foundation for reasonable revenue growth in the segment for 2014. But as you said and as we carefully say, we have not made any guidance commentary on 2014 revenues. We're in the middle of our strategic planning process now and it will probably be a little early to make those comments.

I think part of the optimism and our confidence about delivering next year, it is early but one of the things that has been a struggle for us through most of 2012 was our fluid handling business. I wouldn't go through all the details but I would say by through a lot of work by the team on a global basis, Carl Pickard, Kevin Olsen, and a number of leaders, we're seeing that business begin to bounce back in terms of its order rate. We think the combination of what's happening in fluid handling and what we believe will happen and continue to happen at Howden will give us every opportunity to make the kind of top line trends we've described in the past.

Again, I would say that we've tried to take a conservative posture on the top line and make sure in that conservative environment that we are still delivering the operating income performance we've talked about from day one. What that means for Howden is that we're going to take that business from the high single digits to at least 15% by the plan period. As I've said before, we'll take a business like ESAB with Clay's leadership from 5% to 13% and we'll move our fluid handling back into the high teens.

So, we'd like to have more sales growth. We feel confident of what we've described in the past but we will continue to drive the operating income margins in line with what we've described in the past and commit it.

If I could ask one more, switching gears over to ESAB, the volume pressures there are pretty understandable. My question is on pricing which was I think plus four this quarter and negative one now. I'm wondering on the consumable side given the sluggish demand and the reasonable input costs, what's the outlook for any further pricing action on that side of the business?

We still have favorable price cost trends in that business. So, there isn't any planned pricing action relative to consumables at the current time although we do monitor that very regularly.

Nathan Jones, Stifel Nicolaus.

I'd just like to say after Kevin's question there on the guidance of flat bookings in gas and fluid for 2013, you're down probably seven, maybe a little over seven in the first half. I understand a couple big orders in power generation in the third quarter's going to help there. But it doesn't seem like the comps are getting a lot here in the second half on the orders side. Where do you expect the strength to come from to get that? Probably you're going to need up high single digits in the second half.

I think the strength is coming from two areas. The power generation area that Steve talked about, the activity both in the US and China and frankly the new build activity as well continues to be quite strong. So, we expect the activity to be the greatest driver of the improved orders.

We do see some improvement in oil and gas as well as Steve mentioned in the comments. We did have a particularly outstanding year in 2012 which is part of the reason we're behind through the first six months. But there's a lot of activity in quoting there. The fluid handling side of oil and gas is bouncing back very strongly so although we're not bullish to the same extent we are with power generation, we feel much better about oil and gas for the second half of the year than what the first six months has shown and we have solid results in commercial marine even though it's small but mining is reasonably small so it's not going to effect the overall results. I think those are the primary reasons we feel confident of having better order performance in the second half in order to bring the full year up to a flattish type of level.

I would just add to the good comments there from Scott that one of the ways that we look at each of our businesses is also the opportunity funnel or the quoting funnel. If we look at that across each of our businesses then they're very much in line with what we expected slightly ahead which is not that far out of line with the prior year.

So, we know that the quality of the funnel and we judge that based on our ability to meet the needs of the customer. We judge it based on how many competitors are competing for that particular bid or quote. And as we progress through the funnel of course the percentage of the odds or probability of reaching or achieving that order increases significantly. As we look at the three to five different levels of those funnels, the quality of what's in the mid to lower area -- those are high probability targets -- continues to fit what we would hope for and meet our expectations.

So, we think for the most part it's just a timing issue as we've outlined before. So, that would be the best fact-based analysis that we go through to give us confidence about the back half of 2013 which gives us a leg up for the next year.

That's a great commentary. Thanks. On the fluid handling bouncing back strongly and your expectations maybe in the back half of the year, I know Keystone a major opportunity for you and there's a couple other similar projects around the world. Have you seen any movement in Keystone or another of those other major projects that sort have given you confidence that that business is close to booking some large business?

Not on any of those specific pipeline projects but the other areas of oil and gas have been quite strong but not those specific projects.

Nathan, I don't like to think a lot about fluid handling. Last year we had a tough year where it was consistently down. But what I can tell you without going into exact numbers, our oil and gas in fluid handling is up dramatically in terms of where we think we are in terms of bookings and forecast as we go through the back half. We believe the quality of the funnel and what we're starting to see as momentum will pick up dramatically, quite confident of what's happening there again with Carl Pickard, Brad Sterner, and his team. Very nice turnaround in fluid handling. And frankly in four of the key channels that that business serves we're seeing order rates that look very attractive for us.

Great. I'll just slip one more in. Can you talk about where you are in -- I know you're looking at the way you go to market in China at ESAB and looking to improve the profitability there. Can you talk about any progress made there or any plans?

What I can say is two things. Most importantly, Ken Konopa and Clay and our new leader there, they really are right in the midst of their strategic planning right now. We review their plan in the second week of August. One of the significant themes is how do we think through it. And I've mentioned this before on other calls. How do we think through not only the role and importance of China but how do we compete there effectively?

Our focus has been on two key things -- three I should say. One is to think through how we compete in that market and how can we create competitive advantage? That's something that we are hopefully bringing to a close here in this year's strategic plan which as I said Scott and I will review in mid-August.

The second thing that the team has done is to do an outstanding job of building the talent base there. As a result we feel certainly the turnaround that we've seen in China year to date is a nice one. As you know this has historically been an area what has been a drain from a profitability standpoint and the team there has actually been able to turn this around from losing money to breakeven to now making money in the quarter. From that standpoint there's three things we're trying to do to really think about the long-term strategy and how we compete there and when to put in place the team that will allow us to win and importantly position the business to not only grow but to make money in doing so.

So, I think this is coming together. I hope to give you a better answer than that in the fall when we've completed our strategic plan.

Jeff Hammond, KeyBanc Capital.

Steve, you gave some great color on ESAB and some of the progress on operational improvements but in terms of exceeding your expectations and driving better results this year, are you pulling forward actions? Are you getting more traction? What's driving the upside in your mind versus what you thought?

I guess what we would say is that the quality of execution has certainly met what we would've hoped for and maybe a bit more. I'd say it's the quality of execution on those projects that we've identified. I think as we said in the comments and, Jeff, you know this well, when you do something as significant as what Clay and the guys are tackling, there are lots of puts and takes but what I would say is that in general the projects that we identified are yielding the kinds of benefits that we had hoped for and the execution around those in total have been pretty good.

You get those problems, it was very disappointing to see what happened with our Midway transition. Now that was a transition that started before we acquired the business but at this point we own it. And that cost us a lot on the top line and bottom line in North America and in the last month I've visited with a number of customers in the Midwest that were hurt by the issues coming out of our Midway facility.

I would say that Midway is probably the one that's been most disappointing but I could point to a dozen other things that the team has successfully executed that not only met expectations but managed to offset issues like Midway. And as I alluded here in the comments, Ian Morris and Clay and the guys have taken out nine distribution centers on a year to date basis and the key in that, Jeff, is we can do that because we also think that the manufacturing flexibility and responsiveness as I outlined in Poland gives us the ability of gradually wean ourselves off of the need for as many distribution centers in general and specifically to increasingly ship direct from our manufacturing site right to the customer.

And doing that allows us to drop inventory down and improves our service level because we're making to order within 72 hours as opposed to producing to a forecast that's built two to three months ahead of time. All of those things are allowing us to operate in a more flexible environment and give us greater flexibility when we execute these cost reduction programs that I know you know a lot about. That's how I'd say it. A good job of execution of programs that are generally meeting what we had hoped for.

Great. And then just a kind of longer-term question on Howden. I think there's been some discussion about more stringent emissions that may drive some of these utilities to not upgrade or there are mentions of requirements on some of their cold fired power plants. What are you thinking on that? How does that affect your view of the growth profile in that business on this kind of emission retrofits domestically?

I don't think -- I would say we haven't seen anything that would alter our opinion of how we look at the compliance-driven part of legislation for the Howden business. What we said before, as you know, Jeff, in China it's probably met or exceeded frankly what we could've hoped for a year ago and we're probably right at its peak.

But the other thing that's encouraging for us and we had hoped it would come through but the reality is it seems to be falling in line and that's the activity here in North America. It certainly seems to be lining up with what we had hoped for. We base our takeaway on that not necessarily by the orders we have in hand today but based on the quality of the opportunity funnel which means plants across North America are very active in aggressively drawing Howden into the quoting or bidding process so that we can get online to complete that order. The quality of those funnels, the number of opportunities in those funnels, and where we stand relative to competition continue to give us confidence that we have got the right outlook for Howden in not only the balance of this year but over the next few years again as we've outlined in some of the past commentary on Howden.

Liam Burke, Janney Capital.

Scott, you mentioned earlier in the discussion on the pricing on ESAB, on pricing on consumables even though it was down you're seeing a favorable price cost trend. Are you seeing the same thing in your systems business as well?

Yes. There's a favorable cost price trend across the entire fab tech space.

You mentioned in two regions -- South America and Russia -- you saw some growth. Are there any particular verticals or markets that are doing better or is it similar to the trends we've been seeing in the previous quarters?

I think when we talk about Russia and Latin America, a couple of things that are happening. In Latin America it's the combination of offshore as well as the yellow goods side of the business, construction. In Russia, the continuation, for us it's the cutting of automation. We're just seeing tremendous growth in Russia and also South Africa as it relates to cutting up well into double digits, automation as well. Very nice growth. So, I would say that a combination of offshore, heavy duty construction in those regions are helping to fuel our growth to date.

The challenge for us is obviously not only continuing growth there but obviously we're not excited about where we are in North America. We've seen some improvements in Europe which are very encouraging and you know part of what we see in Europe is as we fix some of the historic quality issues that have existed for so long at ESAB, our sales force is getting more confident in their ability to go into the customer and sell the product. They have more time to focus on what they do best. And that's value selling. And with this improvement in deliveries and resolution of some of the quality issues, our customers are more confident on what ESAB can do.

So, when you talk to our sales force in a region like Europe, we still are seeing some declines. We think they're in line with the overall market but importantly we think we're seeing a turnaround in how the customer and how our own organization thinks about our internal capability to meet what we say we're going to do. That's very important when driving organic growth. As a sales guy, if you can't count on your plants and your supply chain delivering what the customer's ordered on time and according to quality specs, it's tough to go in and be aggressive. I think we're starting to see a break through there.

Part of that is good work in manufacturing and Ralph, one of our key leaders in Europe, I think is doing a good job of motivating his team and bringing those guys along. The same thing here in North America. As we've fixed issues like Midway I think Mark and his team are more prone to rally around the opportunities. As I've alluded to before, I think responding to one of the questions from Jeff, in visiting with a couple of customers last month, what I heard is certainly disappointment with ESAB but given the kind of investments we're putting in place, they were very open to our team coming back in there to recover the business.

So, we're optimistic about that. It's disappointing to ever disappoint a customer the way we did and importantly we're doing what's necessary to recover that relationship and starting to come back to those customers and we're winning as I shared with the truck manufacturer as well. A long way to go to gain share in that market, a very competitive market, a great leader in that market and so we're just trying to grab on a little bit of growth there and recover from some problems at Midway.

With that I'm showing no further questions in queue. I'd like to turn it back to Steve Simms for any further comments.

Thank you very much. I appreciate everybody joining us today and we look forward to talking to you again next quarter. Thank you.

Thank you, ladies and gentlemen, for your participation in today's conference. You may now disconnect. Have a great day.