Enovis Corp (ENOV) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Colfax Corporation third quarter earnings call.

(Operator Instructions)

As a reminder, today's conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Farand Pawlack, Director of Investor Relations. Mr. Pawlack, please begin.

Thanks, Janine. Good morning everyone thanks for joining us. My name is Farand Pawlack and I am Colfax's Director of Investor Relations. With me on the call today is Steve Sims, President and CEO, Scott Brannan our Chief Financial Officer.

Our earnings release was issued this morning and is available on the Investor section of our website at colfaxcorp.com. We will also be using a slide presentation to supplement today's call which can also be found on the Investor section of the Colfax website. The audio of this call of the slide presentation will be archived on the website later today and will be available until the next quarterly call.

During this call, we will be making some forward-looking statements about our beliefs and estimates regarding future events and results. These forward statements are subject to risk and uncertainties included though set forth in our SEC filings. Actual results may differ materially from a forward-looking statement that we might make today. Forward-looking statements speak only as of today and we do not assume any obligation or intent to update them except as required by law.

With respect to any non-GAAP financial measures, during the call today, the accompanying information required by the SEC regulation G related to those measures can be found on our earnings press release and supplemental slide presentation under the investor section of the Colfax website. Now, you like to turn it over to Steve.

Good morning and thank you all for joining us today. This morning, we released our third-quarter results with reported net sales of $1.015 billion. An increase of 6% over the same period last year. This consists of 4% growth from acquisitions and a negative 1% impact from foreign exchange, resulting an organic increase of 3%.

In addition to increasing sales year-over-year, we continue to see strength in our gas and fluid-handling order book with double-digit order growth in the third quarter. We had a strong quarter operationally in both segments, with overall margins expanding from 10.9% in the second quarter, to 11.1% in the third quarter and a year-over-year improvement of 220 basis points.

I'm particularly impressed with ESAB's ability to deliver increased profitability in the absence of top line. Well fabrication technology volumes fell short of our expectations, segment operating profit margin's for the quarter continue to expand both sequentially and on a year-to-year basis, up to 11.4%. This increased profitability is a direct result of the CBS tools and the traction they have gained. Our continued improvement in working capital and operating cash flow is sequential and year-on-year basis is further evidenced of the impact our CBS tools are having across the organization.

Our restructuring activity remain slightly ahead of plan, and with only one quarter remaining, we feel confident in our ability to deliver the goal for 2013. Adjusted EPS for the 2013 third-quarter, was $0.56 per share which includes $0.04 per share related to a non-cash adjustment to deferred tax balances. This represents a 70% increase versus the $0.33 per share reported last year.

Now, let's take a look at our business segments. For gas and fluid-handling, net sales for the third quarter were $511 million and organic increase of 8% compared to $465 million in last year's third quarter. Orders for the third quarter were $533 million and organic increase of 16%. With respect to our end markets, please refer to the slides for specific growth rates. As in previous quarters, I'd like to again reinforce the significant variation can occur across sectors due in large part to two key factors.

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, during this quarter, we saw order activity accelerate across all end markets except Marine. Third-quarter bookings were helped by large orders in the power and mining end markets as result, we remain confident that bookings were 2013 will exceed 2012 levels, and feel even more comfortable that we will achieve the previously guided mid-single-digit organic growth in 2013 for this segment.

Focusing first on our largest gas and fluid handling end market, power generation. For the 2013 third-quarter, revenues increased by a robust 29% 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've discussed on earlier calls. Results also include solid growth in 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 29% organic growth rate in orders for this quarter. The outlook remains positive and 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. Orders increased 17% organically of the third quarter. While sales levels were relatively flat compared to the same period from the prior year. As you know, we principally serve applications in the midstream with large screw pumps in the downstream with compressors. We continue to see strong projects quotations of order placement in the midstream.

Order activity was also robust in the Middle East and Southeast Asia as downstream refining capacity continues to increase. We are benefiting from our previous investments in the local presence in the Middle East, where are selling and technical resources are starting to drive gains. In addition to selling the technical resources, we continue to invest in new products that address our oil and gas customers needs. This quarter, which reduced our new MR 400, which enables end-users to provide higher and more efficient flow in difficult to execute mixed oil applications.

We see these opportunities growing in emerging regions and are reallocating resources to provide stronger local service in partnering. We still expect a modest increase in sales and orders for the 2013 fourth-quarter versus last year.

Turning now to Marine, which is primarily served by fluid handling. We saw orders remained roughly flat compared to the prior year. Sales increased organically year-on-year by 16% in the third quarter of 2013, driven largely by continued strength in vessels serving the offshore oil and gas industry. Our view of this end market remains unchanged. We expect to see modest growth in revenue and bookings for the balance of the year.

Next, I'm pleased to report a strong quarter for mining orders. We mentioned on the last call the receipt of a $20 million order booked in early July for a project in Mongolia. As a result, our orders increased organically by 25% in the third quarter of 2013 and what otherwise remained a subdued capital equipment market. However, low backlog coming into the quarter resulted in organic sales decline of 70% compared to the prior year. As we previously discussed, even the -- excuse me -- given the overall state of the mining sector, we expect to see declines in sales and orders for 2013 in this segment.

Finally, the general industrial end market. For the third quarter 2013, sales increased 17% and orders increased 9% organically. While quarter to quarter comparisons can be quite volatile due to the lumpiness of the large orders, this end market has been relatively flat over the past year and we expect this to continue in the fourth quarter.

However, looking forward, next year is a significant opportunity for us will be driven by environmental investments at steel plants, particularly in China. Over 100 Chinese steel plants need to be fitted with fluid gas desulfurization capabilities, which require fans and large gas, gas heaters. Recent enforcement efforts in China made this and near-term opportunity.

Turning to profitability, adjusted our braiding margin for the gas and fluid handling segment increased as expected to 13.3% in the 2013 third quarter, from 11.1% in the third quarter of 2012, a 220 basis point increase. Margin improvements are again the results of volume gains noted above, strength in cost control and the continued success of our CBS efforts. We continue to passionately apply CBS across our entire organization, resulting in benefits for our customers and shareholders. Our CBS culture and tools are repeatable and teachable across all of our global businesses. I want to focus my discussion this quarter on the President's Kaizen conducted by Howden in July.

Our Howden plant in Weihai China hosted a President's Kaizen the week of July 1, led by Ian Brander. Three Kaizen events were conducted with the global team of 43 participants from multiple Howden business units as well as Associates from other Colfax companies. The teams utilized the CBS tools of standard work, cellar manufacturing demand pull and scheduling to reduce customer lead time, inventory levels and improved productivity in three of the critical product lines. All of the results generated have been sustained.

The first team focused their Kaizen efforts on reducing customer lead time and inventory of our wastewater blower packages. Utilizing the tools of level scheduling, standard work, daily management and demand pull, the team reduced lead time from 80 days to 35 days, which is a 56% improvement. At inventory by $2.6 million, that the 72% improvement. The team apply these tools to both manufacturing and the procurement process, as well.

The second team focused their Kaizen efforts on reducing work in process inventory of our large cooling fans. The team successfully applied the CBS tool of single piece flow and standard work, to achieve an inventory reduction of 52%. The product line has been recently transferred to our new Weihai facility and the team is continuing Kaizen efforts to further improve productivity and reduced lead times.

The third team apply the CBS tool of single piece flow and standard work to the transportation fans area. Their efforts successfully improved productivity by 15% and reduced work in process inventory by another 53%. What's particularly notable, is that we've conducted multiple Kaizens in this area over the past year and the team is still able to make significant improvements.

Now, let's turn to results for fabrication technology. Third-quarter sales for fabrication technology were $503 million, down 1.2% organically, versus the third quarter of 2012. While this reflects the moderation of ESAB's revenue declines, this top line performance was slightly below the expectations due, in large part to continued global economic [sluggishness] that we cited in previous calls. Despite this top line shortfall, fabrication technologies continued to make progress on its operational turnaround, achieving operating margins of 11.4% for the quarter.

These third-quarter achievement is actually in line with our internal expectations, and represents a year-on-year improvement of 240 basis points in a sequential improvement of 70 basis points. It is worth pointing out that nearly two thirds of the year on year change came from gross margin expansion, driven by plant closures, operational improvements, sourcing actions and pricing enhancements, with the balance coming from SG&A. In fact, the reductions in SG&A have been greater than what you see the results.

The ESAB team as we interested a portion of these SG&A reductions in to strategic growth incentives and capabilities which will eventually lead to an expansion of share and acceleration of organic growth. Expanding on this still further, while improving our cost structure and driving cash flow remains our top priority, the ESAB team has over the last several quarters begin to increase its focus on organic growth through targeted investments in new product development, CBS tools to drive commercial capabilities and the realignment and top grading of its global sales and marketing organization.

For example, three significant products were launched in the third quarter. The European version of Warrior, the pulse 4004, a high-end welding power source, and a new model of our popular Heliarc TIG power source. In addition, we continue to train our sales associate in the CBS value selling tool and are seeing impressive results such as a $2 million customer order that ESAB took from its competition by providing a product that offers 50% improvement in productivity through faster deposition and better weld quality.

At the same time, the North American version of Warrior has continued to perform well as sales have doubled sequentially in this region and just last month, we were able to deliver the Warrior story to a wide variety of customers at the Essen show in Germany as well as through various targeted promotional activities, such as the equipment days we've been sponsoring in China.

From a commercialization standpoint, ESAB as in the last six months added new talent and product marketing, application engineering, product management and incremental resources and regional sales. On the product of development side we've focused on bringing in talent that can more effectively utilize outside generators and third parties to accelerate product development. These changes are an addition to the top grading, which has occurred at the staff level of ESAB, where we now have a new VP of Finance, Manufacturing and Supply chain, as well as Human Resources.

In summary, the fabrication technologies team continues to deliver targeted improvements to operating income and cash flow, despite a sluggish global environment. These improvements, plus the selected investments noted above the new product development and sales and marketing, will yield substantial benefits of these investments begin to take hold. And now, I'll turn it over to Scott to provide more details on the financials.

Thanks, Steve. As Steve mentioned earlier, sales for the third quarter were $1.015 billion, up 3% organically compared to the 2012 third quarter. Adjusted operating income was $112 million, representing an adjusted operating margin of 11.1%. Fabrication technologies adjusted margins were 11.4%, gas and fluid-handling adjusted operating margins were 13.3%. Corporate and other costs were above expectations at $13.5 million for the quarter. Most of this higher spending is attributable to cost associated with the merger and acquisition activities conducted during the quarter.

Excluded from adjusted operating income are restructuring costs of $8.7 million, incurred in connection with the cost reduction projects discussed earlier, and $600,000 of cost associated with asbestos insurance coverage litigation. Interest expense was $17.5 million for the quarter, which includes approximately $4 million of non-cash amortization of debt discount and deferred issuance cost, as well as facility fees and the cost of bank guarantees and letters of credit.

Our effective tax rate for adjusted net income and adjusted net income per share, includes approximately $5 million related to the impact of corporate tax rate reductions enacted in the quarter. This is a non-cash benefit, at the lower rates are applied to our net deferred tax liabilities. There is no impact on taxes expected to be paid. This reduced our effective rate by 5.4 percentage points, to 21.75% for the quarter. We expect an effective rate of 28% to 29% for adjusted earnings for the 2013 fourth quarter.

Operating cash flow for the third quarter was $101 million, inventory balances decreased $18 million in the third quarter and working capital, in total, finish flat with where it started the quarter. Finally, backlog in gas and fluid-handling was $1.45 billion at quarter end. Our book-to-bill ratio for the third quarter was 1.04 to 1, stronger than typical for the third quarter, reflecting the exceptionally strong quarter for gas and fluid-handling quarters.

Turning now to guidance for the balance of the year. As discussed earlier, revenue in the fabrication technologies segment remains below 2012 levels on an organic basis. There are no indicators that this trend will change in the fourth quarter. As such, we are lowering our revenue expectations for the balance of the year, and correspondingly, decreasing expected adjusted operating profit and adjusted earnings per share.

Some of the key points, which are highlighted more detail in the slide deck include, acquisitions closing of the fourth quarter are expected to add approximately $40 million in additional revenue. While they will be profitable on an operating basis, after non-cash fair value accounting adjustments and transaction cost, they're not expected to have a significant impact on profit.

Organic revenue growth in the fourth quarter should be up mid-to single -- mid-to high- single digits in gas and fluid-handling, while revenue is expected to be flat to close slightly down organically and fabrication technologies on a year-over-year basis. Adjusted margins for gas and fluid-handling should be slightly better than the third quarter, while margins and fabrication technologies should be at or slightly below the percentages earned in the third quarter. Those segments are expected to realize significantly better operating margin percentages and those achieved in the 2012 fourth quarter.

While the ESAB cost reduction programs are expected to deliver their anticipated savings in the fourth quarter, this will likely be offset by unabsorbed fix cost associated with lower production volumes and anticipated holiday plant closures. The net result of the expectations discussed is a revised adjusted EPS guidance range for the fourth quarter of $0.56 to $0.60 per share, as laid out in more detail in the slide deck. Any metrics that are not addressed in the slide deck are materially in-line with earlier guidance. And now, I will turn it back to Steve.

Last quarter I commented on how busy we were on the M&A front in of those efforts have yielded results. First, in early September, we announced a binding offer to acquire the global infrastructure and industry business of the Flakt Woods Group. This transaction is a great complement to our fans business as a significantly expands our presence in India, which we'll significant power investment over the coming decade. It also strengthens our presence in industrial fans, particularly in the configured fan sector. It expands our install base and we can address with our after market offerings and of course it provides cost synergy opportunities.

In addition, just after the end of the quarter, we announced the acquisition of CKD Kompresory. Just as the global infrastructure and industry acquisition complements our fans business, CKD strengthens our compressor business by expanding Howden's product line to include multi stage, centrifugal compressors, which broadens our presence in the important Russian market and adds a little cost production facility in the Czech Republic.

You should not read anything into the fact that our acquisition activity has been focused on the gas and fluid handling segment. However, these deals clearly illustrate many of the things we like about this part of our business. Specifically, solid long-term secular growth drivers in particular demand for power, oil and gas, and natural resources, the ability to differentiate through product technology application expertise and service, and significant opportunity to grow after market sales, just to name a few.

In addition, there good examples of our acquisition strategy. Not only will the transactions be attractive financially, both companies are ones we proactively identified as strategic complements to our existing operations. We expect to close both deals in the fourth quarter. While the timing of future acquisitions it's hard to predict, I'd like to reinforce that our acquisition pipelines remain robust and we are excited about a number of additional opportunities that would provide us strong complement to our core business.

In summary, with the acquisition of Charter now 18 months behind us, we are executing well on our restructuring activities and remain slightly ahead of plan. I continue to be pleased with the performance of our Associates in each segment, and their ability to execute regardless of market conditions. As highlighted above, by leveraging tools of CBS, we are consistently driving product activity in both working capital and our fundamental cost structure. As a result, we've experienced significant gains in profitability, despite a sluggish global economy.

At the same time, these productivity gains have also begun to free up cash that we are now reinvesting in each business to drive long-term sustained organic growth. New products like the MR 400 and the Smart pump at fluid-handling, the numerous new products that we are now beginning to see from ESAB and the many contract wins by Howden are illustrative of the growth investments we have planned for the future.

Finally, and perhaps most importantly, we continue to build our talent pool by aggressively developing our internal team while selectively recruiting new team members from the outside. The combination of this two-pronged approach has enabled us to successfully drive the integration of Charter while also integrating a number of critical bolt-on acquisitions. We are excited about where we are in the journey, but clearly recognize that we have much to do. With that, I'd like to open it up for questions and answers.

(Operator Instructions). Jeff Hammond of KeyBanc Capital Markets.

Just on the welding weakness. Can you just talk about where, specifically, you are seeing? I think one of your competitors talk about softening in consumables. Maybe just address the negative price mix and how that played out?

From a top line stand point, I wouldn't go into the kind of detail. I'd say that overall what we see in the trends generally improving, compared to what we've historically seen in Europe. North America continued to be soft. By that, I say in the low single digits. South America, sort of flat to slightly down. Asia, sort of the same. I think those are the key. (multiple speakers).

From a mix standpoint, we did see some shift in mix. From a pricing standpoint two comments I'd make. We implemented pricing in the second quarter of last year, so we've actually lapped that period. We have not seen additional pricing at any significant level. We also have not seen anything of the content deterioration in pricing at this point. So, the changes that you see there are largely from mix.

Okay. Then, just on the order momentum. You mentioned some lumpiness. Should we look at order growth -- as you look at maybe quoting activity, what does that suggest? More of kind of the flattish orders that you've seen for the year? Or, more of this acceleration that you saw in the third quarter?

I think were the fourth quarter, we expect to see continued growth in orders, perhaps not quite as strong as the third quarter as we did have a couple of very large orders in the third quarter. But, consistent with what we said last quarter, we do expect to see the orders strengthening over our performance in the first half of the year.

Jeff, we focused on gas and fluid-handling, I assume? Or are you still --? (multiple speakers).

Gas and fluid, right. I will jump back in queue. Thanks, guys.

The only thing I would add, and we talked about this on previous calls, what we do start to see is, if I look at the quality of the opportunity funnels in gas and fluid-handling, particularly and fluid-handling, we think that we will start to see the Marine market start to improve a little bit here as we see the full impact of our new product, the Smart Pump. The high level of interest that we are seeing there would suggest we will see a nice build on orders and an improvement on shipments into 2014.

John Inch of Deutsche Bank.

Could you also talk about, Steve, China and welding? I realize it's not a big business, but were there any discernible trends? And did your China business -- with the other segments as well?

China, for us, first on the fabrication side of the business, overall, trends are slightly down on the top line. Overall, what I would say, is that China is a continuation of what you heard from us over the first half of the year. Continued soft trends for us on the top line. Continued significant improvements in profitability. As you know, Jeff, or John, we talked about repositioning that business to set ourselves up for better long-term growth. So, from a top line continued softness in FAB Tech, but improvements in overall margin.

The trends on the gas and fluid handling side, and largely there we're talking about Howden and the compliance driven activity. That has been, as you can see in the numbers, been outstanding. We continue to see strong order trends, continued high quoting activity and our hit rate continues to remain quite high, as well. So, very, very strong on the Howden side of the business. Not as significant a factor for us in fluid-handling or our Colfax business, as you know. So, a continuation of what we've seen on the year-to-date basis.

Just remind us. Shipbuilding for ITW in China was really weak. You guys don't have a lot of exposure there, is that correct? On the ESAB side?

We do have some, John. We service primarily through a joint venture operation. So, that doesn't show up in the revenue line.

Okay. You took restructuring, I saw up by about $10 million, so I'm just wondering, you are obviously making with the margin performance and the weaker ESAB results, you are making a lot of progress. Where are you spending the extra money? I'm just curious, Steve and Scott, what your thoughts are toward at some point you are going to exclude restructuring the presentation of earnings because of Charter. You point out Charter was 18 months ago. What are your thoughts toward including restructuring charges that obviously kind of recurred here going forward in your presentation of numbers?

Taking those two separate questions, the ESAB restructuring spending is not in any area that's different than what we've discussed on earlier calls. We did do a significant restructuring of our distribution capabilities. As the accounting work, as people continue to work the charges get taken over time. They're not all reflected in the third quarter. We did have some personnel reductions of reasonable significance in the fourth quarter across a number of global geographies.

In terms of the accounting presentation, we take your point that the Charter transaction was so significant relative to us that the earnings would be -- would not make a whole lot of sense if we didn't exclude the restructuring. We are considering our presentation for next year and we are not quite ready to make a commitment one way or the other today, but we are considering when the appropriate time to no longer exclude that would be. We are trying to make a transparent and meaningful presentation to investors. At some point, we will definitely do that and we will probably have more to say about that in December at our Investor Day.

That's totally fair. Just last, Steve, you made a comment about acquisitions in gas and fluid and I think you said something, don't expect though that this will be the primary focus for acquisitions. Does that imply that you prospectively would consider acquisitions in the welding business? I'm not sure what actually the implication is that what you are trying to --

Sorry. John, I want to clarify. The comment was really one, we love what's going on in fluid handling -- gas and fluid handling. I think the acquisitions we executed are a great example of what we see in future acquisitions in that space and it just again reinforces how attractive that space is in terms of the growth, the kind of margin that we can get and the synergies that will come along.

My comment was that even though timing has been where the first few deals we have done this year have been largely around gas and fluid-handling, we are equally excited about fabrication technology and have a pipeline of opportunity that's comparable to fluid-handling and we will see that materialize, I believe, over the next six to nine months.

Okay. That make sense. Got it. Thank you very much.

Kevin Maczka of BB&T Capital Markets.

I'm wondering if you could say little bit more about the gas and fluid margin outlook for Q4. I think you said it would be up slightly. But, I'm just wondering why it might not be up more than that, given the usual seasonal uptick that we always saw in the legacy business and the order momentum in the product gains that you are always pursuing.

The clear answer to that one, Kevin, is the mix of sales. While sales will be up, as I said, mid to high single digits, it will essentially be all additional for market project revenue. As you know, the for market margin is less than the after market. So, it really is a mix issue that causes the margins to only uptick slightly. The project margin on for market and after market is not deteriorating, it's purely a mix issue. (multiple speakers).

What I would say, Kevin, is that we are pretty pleased, as you might imagine, with the great work that our gas and fluid-handling team have done in building those margins. Our goal there, particularly for Howden, is to achieve the 15% as we've committed in the past. We feel completely comfortable. I should say Ian Brander and his team feel completely comfortable that they can deliver 15% in the timeframe we've committed and maybe at some point we will have an opportunity to go beyond that.

There'll be a little movement from quarter to quarter, but generally the trend line is very much in line with the 15% [bogey] we talked about before. Just to hit it off, I will also say the same for ESAB. I know Clay and his guys are equally confident in their ability to reach the 13% operating profit numbers that we committed to and I think are increasingly confidence is that something that's in sight.

Okay. Shifting over to ESAB, one more from me. You touched on price in the negative price mix we saw here in the quarter. I'm just wondering if you can touch on price cost. Is the cost side of that relatively stable as well? Like prices? Would you expect that to see a little bit more pressure in Q4? Is that part of the reason, other than just the volume sluggishness that's causing you to think margins there will be down a bit sequentially, even though, again, you are making such gains in your operations?

Yes. That is a fair observation. As we've discussed on earlier calls, price cost has generally been favorable over the year. We are seeing some reversal of that trend, although not significantly, but some small reversal of that trend and that is factored that into the fourth quarter guidance.

Okay. Great. Thank you.

Nathan Jones of Stifel.

Steve, your prepared comments, you were talking about the environmental investments required in the steel facilities in China as an opportunity in 2014. Just hoping you could provide some more color on that potential timing and potential size of that opportunity?

It's difficult to provide dimensions just yet. We are just being pulled into a number of opportunities there and they are just beginning to firm up. So, it's not completely clear. I hope by the time we have our Investor Day in New York, that we will have a bit more clarity. Certainly in conjunction with budgets. It's just not clear. It appears to be a significant opportunity. I would probably say it's not on the order of magnitude of what we've seen and our SCR remediation, but certainly attractive.

What we are excited about, is the Chinese government is still firming up their requirements and beginning to think through the timetable. So, we don't have that answer. What we like about it, is the gas gas heater configuration that is critical to the STD scrubbing process is something that's uniquely provided from Howden. So, we think we are well-positioned to comply -- assist in the compliance with that driven legislation, once it takes hold. So, about to give you a better answer than that and better dimension, but we can't, just yet.

Does that imply, does having a better idea by December imply that you think that the meeting in China in November is going to firm up those plans?

We are hopeful. It may push beyond that, given the magnitude, but we are hopeful that we will know sooner than later.

Okay. Fair enough. In Asia, obviously, the margin progression there is pretty good. Obviously, some more cost to take out there. It looks like you are attacking the equipment side of the business, which is obviously higher margin. So, potentially a better mix going forward there. You just also said Clay is confident of getting to the 13%. Is there any idea that maybe we can get past that 13% fairly quickly?

I think I've commented on that before. I believe 13% is a fair objective for the team and I think, as we've talked before, anytime you are in a turnaround of that magnitude, you go through a period of time where the first phase is one of, certainly, it can be quite intimidating. Remember, when we acquired the business, it's tough to compare, because of the changes in accounting. When we acquired the business, it was a 5% or 6% operating income business.

Clay and his team at 11.4% have done a very nice job of really turning the business around. So, in the early days, it's probably a bit intimidating as you think about going from to 5% to 13%. As a get closer to that figure and your programs start to gain traction and the culture starts to shift, which we've seen at ESAB, the confidence level grows significantly. I think that's sort of the phase we are in that you go through in a turnaround and I think increasingly we're confident of that number and I think we'll start to see a way clear to maybe go a little bit beyond that. I think it would be premature to change that goal, given that we are only -- the year and a half into this. But, clearly, our strategic plan and budgeting activity led by Clay and his team will look for ways of going even beyond that.

You, rightfully so, Nathan, pointed out that by focusing on the equipment side, one, is that we are leveraging strength that we already have, particularly in a number of items that we just launched. We think we see outstanding margins there, but we are not taking the pressure or the attention off of our consumables. The key CBS is to drive productivity on a consistent basis. Productivity net of any volume gain are net of any material cost increase. We like to think we can do better on consumables as well as the equipment side. As you know, in the historically Charter didn't make investments to speak of in the equipment business. You can see, from the Essen show, what Clay and Ken Konopa and Steve Argo are starting to do on the equipment side.

Yes, it seems those investments are starting to bear fruit. One more for me. On the approach to the market from Asia and in China, as I'm talking to Scott, that you guys are going to look at how you are approaching that market strategically? I think the plan was to do that in the second half of this year. Is there any progress on that? Or, is that something you might rather share with us at Investor Day in December?

I think would probably like to defer that until the Investor Day. We are going to our budgeting process here in the next few weeks and we will have a better -- be able to give you a more thorough response at that time.

Okay. Thanks, guys.

Jason Feldman of UBS.

So, M&A accretion, I think you noted that for the fourth quarter it's going to be pretty much neutral, given some of the costs. Can you commented on the accretion from recent M&A for next year? Or is that also a December topic?

It's going to be a December topic. We did disclose the historical EBITDA of the acquired businesses in the press releases. We are still finalizing the fair value accounting adjustments and rather than give an estimate and then change it later, I think we will do for that one to December, as well. We will have much more clarity than.

Okay. Fair enough. Steve, I think you mentioned that when you are going through geographically the trends for ESAB, you mentioned that Europe was improving. Do have a sense, is that actual underlying and market conditions getting better? Or is that perhaps getting a little more traction with some of your growth initiatives and whatnot?

It's a modest improvement. I would say we are probably recovering a bit of share on two fronts. As I mentioned in the commentary, here, what we've been able to do, particularly Clay has led this, is to really redeploy some of the cost reductions that we've implemented and restructuring to drive growth. Europe is a core market, clearly, for us. So, we have significantly strengthened the team there, both on training of team members that are in the organization already, we have selectively recruited from the outside, commercially, to build there. We didn't highlight CBS on the operational side for ESAB this quarter, but in the communication, but the guys are continuing to do outstanding work in their plants, particularly those that serve the European markets. So, our service levels are up, our quality level continues to improve. Our responsiveness has improved dramatically.

So, the combination of a stronger organization in terms of development and recruiting, the new products that are now starting to come through, the restoration a very good service levels and quality levels across the board, really trying to turn our sales organization loose to recover perhaps lost market share that they've experienced over the last five years. So, I don't think the market has improved much as we are gaining back what we lost over the last five years or so.

Okay. Last, kind of on a similar topic. It's nice to hear, as you are saying earlier in the call, that you are able to redeploy some of the savings, the cost savings into growth initiatives in various other types of initiatives. Do you feel that you have the latitude to do what you want to do there? Or, do you feel confined by kind of the margin promises that have been made? Did that kind of influence or -- kind of reluctance to talk beyond the 13% until you get a sense of what investment opportunities there may be within fabrication technology?

I don't think we feel hamstrung by the challenge that we have established for ourselves. I think we, the team at ESAB, Howden and of course fluid-handling, we go all go through a pretty thorough strategic planning process. We all feel comfortable that we can deliver our commitment and make the right, smart targeted investment like you are seeing here. I think it's a pretty good example of the team being able to deliver a pretty good quarter. We would love to see more organic growth. We think if we could really leverage at that point, but we delivered a pretty good quarter in terms of driving operating margins.

I think as both Scott and I highlighted, we were able to not only improve it by over 240 basis points in the quarter, we also reinvested in growth programs. You see three or four new products launched in Germany. I think we have the right balance. I believe we can achieve 13% and I think we can accelerate the volume of new productivity. Remembering again, that Charter had not invested in the equipment business in nearly five years. So, I think what you are seeing in fairly short order from Ken Konopa, Argo and those guys in the ESAB businesses really getting after it and not only taking out cost, but investing in growth.

Great. Thank you very much.

Liam Burke of Janney Capital.

Steve, you mentioned the traction you are getting with Warrior. Then, a couple of new product introductions on the ESAB side of the business. Where are you in terms of --are you satisfied in terms of new product introduction pipeline? Then, the mix of new products vis-a-vis existing ESAB products?

That's a good question. That's a good question. I'm excited about the volume of new products that are starting to come through the pipeline. We're excited about what we believe the target that we've established. I think the guys have done a wonderful job of segmenting the global market, prioritizing the geographies that are critical to winning, and have really started to align resources to execute.

The other key component is, I think, that they are doing on out standing job of improving the product development process. The key is being able to increase the speed and the velocity in our capacity in the product development process. So, that's coming. I would say that where we are, we've made significant strides, but it's not where we want to be and I'm sure the team would say this is hardly acceptable, given the vision that we've established. This is just a small trickle in what we think will become a higher velocity flow here within the next 12 months or so.

We have invested significantly in training of our organization, acquiring talent from the outside of guys that we've known over the years that are very, very skilled in product management and we've tapped resources around the world that can help to double our capacity, or I would say significantly increase our capacity, where we can leverage open innovation and relationships that had not been created or developed in the past by ESAB. I think it's still early days. We like what we are seeing. It's just an early snapshot of velocity that would like to see from a product development process.

Great. Then, on the gas and fluid-handling, you mentioned the China project and the industrial -- general industrial end market. Are there other geographies or end markets that are showing any kind of strength?

Well, it depends a bit on which part of the business that we are focused on. What I'm encouraged by is that we are seeing a resurgence in our fluid handling business. I think through much of last year, we described the fact that we had seen a depletion of our deferred or our backlog. We saw ourselves losing business and share in a number of markets, certainly in a couple of cases. We've really seen a restoration of the order book in our fluid handling side of the business. So, we've seen strength in particularly oil and gas.

As I mentioned in the comments, we've made a major commitment in the Middle East and as a result, have seen a stronger partnership with one of the key players in Saudi Arabia. We've also had great success here in North America working with GE and Siemens. So, we are starting to see that fill out in terms of expansion.

Great. Thank you, Steve.

Jim Krapfel of Morningstar.

It sounds as though you're confident about closing on acquisitions in the fabrication technologies segment. Do current market valuations give you any pause?

I think we were indicating that over a six to nine month horizon, we thought it would be likely that things in the pipeline could come to fruition. So, I wouldn't want anybody to think that we were implying anything real near term. But, there certainly are fabrication technology opportunities in the M&A pipeline. And the things we are looking at are at multiples where we can make our required return hurdle similar to the multiples that were on the last two disclosed deals.

Okay. Then, is $35 million of cost cuts still in the cards for each of the next two years?

Yes.

Okay. Thanks.

Follow-up from Jeff Hammond of KeyBanc.

My follow-up has been answered. Thanks, guys.

Thanks, Jeff.

I am showing no further questions in the queue and would like to turn back to Mr. Pawlak for any final remarks.

All right. Excuse me. If there's no other questions, I'd like to thank you again for joining us today. We look forward to updating you next quarter.

Ladies and gentlemen, thank you for participating in today's presentation.