Enovis Corp (ENOV) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Colfax Corporation's fourth quarter 2013 earnings conference call.

At this time, all participants are in a listen only mode. Later we will conduct a question-and-answer session and instructions will be given at that time.

(Operator Instructions)

As a reminder, today's conference call may be recorded. It is now my pleasure to turn the floor over to Farand Pawlak, Farand, the floor is yours.

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

Earnings release was issued this morning and is available in the investor section of our website at www.colfaxcorp.com. We also are using a slide presentation to supplement today's call which can also be found on the investor section of the Colfax website. Both the audio of this call and a 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 looking statements are subject to risks and uncertainties, including those set forth in our SEC filings. Actual results might differ materially from any forward-looking statements that we may make today. The forward looking statements speak only as of today, and we do not assume any obligation or intend to update them as except as required by law.

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

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

Good morning and thank you all for joining us today. This morning we reported net sales of $1.171 billion for the fourth quarter, an increase of 14% over the same period last year. This consists of 10% organic growth, 7% growth from acquisitions, and a negative 3% impact from foreign exchange.

Top-line growth exceeded expectations in both gas and fluid handling, as well as our fabrication technology business. It's important to note, this was the first quarter in 2013 that fabrication technology saw year-over-year organic growth. In addition to increasing sales year-over-year, we experienced a record backlog of $1.6 billion on our gas and fluid handling business, which was driven largely by recent acquisitions.

Fourth quarter operating performance was in line with expectations. Fabrication technology delivered higher profitability on year-on-year basis with relatively slow growth on the top-line. Given the impact of holidays and the significant reduction in their inventory, we were particularly pleased with his team's performance during the period. From a total Company perspective, margins increased to 10.6% in the fourth quarter, as compared to 8.7% in the prior year, a 190 basis point increase.

In addition to the strong margin growth, both segments did an outstanding job of driving working capital and operating cash flow in the fourth quarter. These improvements are directly linked to the continued adoption and deployment of CBS across the organization. As our Associates become more proficient in the use of CBS, we're seeing an acceleration and improvements for our customers and reductions in working capital similar to those realized in the fourth quarter.

Adjusted EPS for the 2013 fourth quarter was $0.61 per share, which exceeded our expectations, primarily due to a lower tax rate. Full-year adjusted EPS was $2.04 as it compared to $1.34 per share in 2012. We had two large non-cash accounting items excluded from our adjusted results this quarter, which Scott will discuss in more detail. Now let's take a look at our business segments. For gas and fluid handling, net sales for the fourth quarter where $650.8 million, an organic increase of 18% compared to $514.4 million in last year's fourth quarter.

Organic revenue growth was as expected, strong across all end markets, except [marine]. The organic increase significantly exceeded expectations largely due work progressing further than anticipated on several large projects. Acquisitions also contributed more revenue than anticipated, as the fluid-handling purchase of Sicelub, was completed subsequent to that guidance. As anticipated, entities added in the fourth quarter had no significant impact on operating profit after consideration of transaction costs and fair value accounting items.

Orders for the fourth quarter where $548 million, up 5% due to acquisitions. As in previous periods, we saw significant variation 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 momentarily. Overall, we saw continued strength in power generation orders as well as growth in marine, driven by the recently introduced CM-1000. This was offset in other sectors as particular mining --in particular mining, resulting in an organic decline of about 3%. As expected for 2013, bookings finished the year above 2012 levels, providing us with the necessary backlog to achieve our stated revenue guidance for 2014.

Now let's focus on our largest gas and fluid handling end market, power generation. For the 2013 fourth quarter, revenues increased 32% organically. Sales continue to benefit from the healthy backlog which was driven by further environmental upgrade projects in China, and the strength and maintenance work in South Africa. Orders remained strong with year-on-year organic growth of 11%, and the outlook continues to be positive. Additionally, we are seeing increased quotations and order activity in Saudi Arabia, where oil is used for power generation. Our newly patented, three-screw pump is ideally suited to this application and is helping to win orders. We expect power generation to grow in both sales and orders throughout 2014.

Next, is our second largest market for gas and fluid handling, oil, gas and petrochemicals. Sales were up 20% organically as expected, while orders decreased 5% organically in the fourth quarter. This decrease was largely related to several project awards that were delayed into 2014. Looking forward, we are most optimistic about our midstream business. We're seeing strong quotation activity, particularly in the Middle East and Southeast Asia, where we've invested in local selling and technical resources.

Additionally, on our last call we highlighted our continued investment in voice of customer new products. This quarter we began shipping an important new product, the largest three-screw pumping system in the world, targeted at oil pipelines in Latin America and North America. This system is capable of handling up to 85,000 barrels a day at pressures to 2000 psi which enables our customers to move product more efficiently and reliability than competitive alternatives. So in short, while oil, gas, and petro-chem orders fell short of expectations in the quarter, we expect modest revenue and order growth in this end market during 2014.

Turning now to marine, which is primarily served by fluid handling. While revenue this quarter was relatively flat year-on-year, marine delivered orders at an organic growth rate of 38%. We continue to see strength in vessels serving the offshore oil and gas industry, and roughly $4 million of CM-1000 orders in the fourth quarter. We talked about the CM-1000 on the last earnings call, and the orders we're now seeing really started to move the needle in the fourth quarter.

What we are also finding is that the CM-1000 is an excellent door opener at new customers. Many accounts that we struggled to penetrate in the past are now interested in value our CM-1000 solution provides. As a result, we're now being exposed to major opportunities for the CM-1000 along with other core fluid-handling products and services. Our view of this end market remains unchanged, we expect to see solid growth in revenue and bookings through 2014.

Now let's look at the mining market, which has been subdued all year. Orders for the fourth quarter posted an organic decline of 60% due to a very weak capital equipment spending market. We continue to work our way through our remaining backlog, and due to some deliveries in the fourth quarter, we saw an organic sales increase of 10%.

As discussed at our Investor Day, we've seen a bright spot, such as a sizable order for copper projects in Chile. However given the overall state of the mining sector, we expect to see organic declines in sales and a challenging environment for orders in 2014. The Alphair acquisition, which broadens our product portfolio and strengthens our channel in North America, will help moderate this decline.

Finally, the general industrial end market. For the fourth quarter of 2013, sales increased 7% organically, and orders decreased 7% organically. As mentioned, while quarter-to-quarter comparisons can be quite volatile due to the timing of large orders, this end market has been relatively flat over the past year.

We've mentioned environmental investments in China as an opportunity for this end market. New policy released by (technical difficulty) government indicates that energy consumption will be a key performance indicator for local provincial governments. This is good news for our Howden retrofit business, that we highlighted at our Investor Day. Especially the cement industry, where the energy efficiency of most original fans installed is 8% to 15% lower than what can be achieved with a Howden fan. The combination of this policy, and the addition of TLT-Babcock, and the additions of Flakt Woods' GII, we'll significantly boost our sales and orders in this market in 2014.

Moving now to profitability. Adjusted operating margins for the gas and fluid handling segment remain relatively flat year-on-year, 12% in the fourth quarter of 2013, compared to 12.1% in the same period last year. It is worth noting, however, that overall margins were diluted by acquired entities, which had minimal profit contributions on $57 million in sales, due to the factors previously discussed. Excluding acquisitions, operating margins improved by 80 basis points in the quarter. While the acquisitions were dilutive to margins this quarter, they are being quickly integrated into our culture of continuous improvement. In fact, in several of the transactions, we began to apply CBS even before closing.

I want to highlight our sourcing tools this quarter, but more specifically, how rapidly we integrated our sourcing tools into the acquisition of Flakt Woods. During the quarter of 2013 our newly created strategic sourcing team was able to implement a world class spend analytic system, which now provides visibility into100% of our spend at each of our businesses. This includes all of our supply chain and SG&A as well. With this new system, we are now able to classify and analyze our spend data across 150 different sites, in over 50 countries, with over 30 languages and currencies with each of our vendors. This has been an enabler in our ability to apply our CBS strategic sourcing, Kaizen methodology, to optimize our global spend areas like motors, castings, steel, travel, and energy.

As previously announced, the Flakt Woods acquisition was completed on November 29, 2013. Immediately after that acquisition, our sourcing and IT organizations were able to apply the tools contained in our CBS acquisitions integration module to extract the spend data from Flakt Woods systems. This data was in our system, classified and ready for use within three weeks of close. We were then able to leverage the existing Colfax agreements in travel, as well as maintenance and all MRO items through our strategic sourcing Kaizen process to achieve synergistic savings in these areas, resulting in better service, at a lower overall cost.

As a result of the rapid system integration, this week members from Flakt Woods have now joined the global Colfax team with representatives from all three of our businesses to conduct a CBS strategic sourcing Kaizen. The objective of this Kaizen is to consolidate our freight providers in North and South America by 70%, and to produce a cost reduction of over $3 million, while shortening lead times to the customer by 5%. While we won't know the impact of this Kaizen for several days, this provides you with a solid example of how we are leveraging the tools of CBS to rapidly on-board new acquisitions to ensure we deliver targeted improvements to product quality, delivery and cost.

Now let's turn to the results for fabrication technology. When we acquired Charter, we saw in ESAB of strong brand in an attractive market, with mediocre operating performance, but many opportunities for improvement. I'm pleased to report that our team continued to deliver these opportunities in the fourth quarter. Sales for fabrication technology were $520.6 million, up 2.5% organically, versus the fourth quarter of 2012. This was better than our expectations, and this marks the first quarter in 2013 that fabrication technology saw year-on-year organic growth.

Regionally, Russia and the Middle East performed best, with most other regions reporting relatively flat sales. We believe growth was enhanced by continued improvements in equipment delivery, the result of our CBS efforts around build-to-order and direct shipment. As encouraging as the organic growth is in the quarter, it is worth pointing out that Europe remained flat on a year-on-year basis and we continue to face a relatively sluggish global economy.

Fabrication technology also delivered --continued to deliver on its operational turnaround, achieving operating margins of 11.2% for the quarter. As expected, margins were slightly lower than the 11.4% in the third quarter, which is a seasonal high for this business and the industry. However, the business experienced a 460 base improvement, versus last year's fourth quarter. What makes this even more noteworthy is that this was done in a slow growth environment, with holiday related plant shutdowns and a substantial decrease in inventory balances.

Working capital performance was also strong. As I've mentioned on previous calls, and Clay highlighted at our Investor Day, since the Charter acquisition two years ago, the new management team has been relentless in its deployment of the CBS tools across that organization. This quarter, we really see the impact of the team's focus on demand pull, build-to-order, direct shipments, and improved supplier terms.

Over the last several quarters, we've discussed the increased focus we're putting on organic growth. While we continue to emphasize operational improvement, targeted investments in new product development, and introduction of CBS tools to improve the commercial processes, and the realignment and top-grading of our global sales and marketing organizations, are just a few of the steps the team is taking. While we maintain a cautious outlook, I'm pleased that our investments appear to be bearing fruit. We believe fabrication technology exits the year well-positioned to continue to delivering operational improvement throughout 2014, as well as realizing improved organic growth.

While we have a long way to go before reaching the low teens operating income we've committed to for ESAB, the team continues to deliver on its restructuring plans as 20 distribution centers were exited from the business in 2013, in addition to the seven plant closures in 2012. The benefits from these actions have helped to improve operating margins, fuel the growth programs noted above, and support the critical resources which have been added throughout the year.

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

Thanks, Steve. As Steve mentioned earlier, sales for the fourth quarter of $1.17 billion were up 10% organically compared to the 2012 fourth quarter. Our 2013 acquisitions, nearly all of which occurred in the fourth quarter, contributed $57 million in additional revenue. Foreign currency declines, primarily those in emerging markets, were a drag on reported revenue performance. Adjusted operating income was $124 million for the quarter, representing an adjusted operating margin of 10.6%. Fabrication technologies adjusted operating margins were 11.2%, gas and fluid handling adjusted operating margins were 12%.

As Steve just discussed, restructuring savings in our ESAB business met our 2013 goals. While the 2013 acquisitions did increase sales for the quarter, their contribution to operating profit was minimal after the fair-value accounting adjustments and transaction cost, and this was in line with our guidance and with management's expectations. Corporate and other costs were slightly lower than typical, as transaction costs recorded at corporate at earlier quarters were allocated to the gas and fluid handling segment, as the deals closed in the fourth quarter. Excluded from adjusted results are restructuring costs of $18 million, incurred in connection with the cost reduction programs discussed earlier, roughly $500,000 of cost associated with our asbestos insurance coverage litigation, and two large non-cash items that Steve mentioned in his earlier comments.

First, in connection with the third amendment to our primary credit agreement in November, the Company incurred a non-cash charge of approximately $27 million. This non-cash charge is primarily due to the write-off of the original issued discount and the deferred costs associated with the complete repayment of our term loan B facility. This non-cash charge has been excluded from adjusted net income and adjusted earnings per share. At current debt levels, the refinancing is expected to save, annually, approximately $10 million in cash-interest and approximately $5 million in non-cash interest due to the write-off. I would note that we filed a Form 8-K in November, which provides additional details on this transaction.

Also in the fourth quarter, the Company acquired the remaining 56% of its investment in Sicelub, which is part of our fluid-handling business. In accordance with the required accounting rules, the original 44% investment has been marked to fair value at the transaction date, which resulted in a non-cash gain of approximately $14 million. This non-cash gain has also been excluded from adjusted net income and adjusted earnings per share.

Interest expense, excluding the $27 million write-down that I just discussed, was $17.9 million for the quarter. Interest expense includes approximately $3 million of non-cash amortization of the debt discount and deferred issuance costs, it includes $700,000 of cash costs associated with refinancing, as well as the typical 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 of 27.6%, was lower than expectations, primarily as a result of the reduction in an accrual previously provided for an uncertain tax position. This resulted in a decrease in our effective tax rate of 2.3 percentage points and increased our adjusted EPS by $0.02 for the quarter.

Operating cash flow of $175 million in the fourth quarter was our best quarter ever. As Steve mentioned, we had very strong performance in working capital across the Company, particularly in fabrication technology.

Continued focus on CBS in reducing customer lead times helped drive inventory down $80 million this year. Accounts receivable and payables resulted in an additional $30 million of working capital reduction for the year. These numbers are adjusted for the working capital added by the entities acquired in the fourth quarter. In total, we are able to reduce working capital $155 million in the fourth quarter.

Finally, backlog in our gas and fluid handling segment, as Steve mentioned, was a record $1.6 billion at quarter end. Our book-to-bill ratio for the quarter was a weak 0.84 to one. While the fourth quarter tends to be stronger for sales and orders, this significant drop in the book-to-bill ratio reflects the significant progress made on large projects in the quarter. Orders were in-line with expectations.

Our fourth quarter performance on the whole was in line with expectations at the adjusted operating profit line with lower than expected taxes as just discussed. Given that the lower tax rate resulted from discrete items related solely to the fourth quarter, we are reaffirming our previously stated 2014 guidance provided on December 17 at our Investor Day. I would refer you to the slides from our Investor Day for more details on the financial guidance, which is available on our website.

Now I will turn back to Steve.

Thanks, Scott. Overall we are pleased by the quarter. We grew organically, improved margins, reduced working capital, closed five acquisitions, and continue to see our culture of continuous improvement gain traction in both existing, as well as our newly acquired, companies. While it's unlikely future quarters will have as much M&A activity as this one, acquisitions remain an integral part of our growth strategy and our funnel of potential deals has never been stronger. As I've shared before, our talent pool is essential to successfully executing our strategy of integrating smart, bolt-on acquisitions, while driving strong, sustained growth on our core business.

In line with this, we've made good progress in strengthening our bench in 2013. As I mentioned at our Investor Day, we hired and promoted a total of 56 individuals into our senior leadership positions during 2013. We continue to add talent to the organization with a number of senior associates joining us in early 2014. Many of these senior leaders are from Fortune 500 companies and other top-tier industrial manufacturers. These leaders share our passion for continuous improvement and have quickly added value in areas such as procurement, acquisition integration, and driving organic growth.

Additionally, we sharpened our focus on early talent recruitment from a number of graduate and undergraduate schools across the globe, and introduced Colfax Pathways. Colfax Pathways is a program focused on developing early talent, who we believe has general management potential. We are recruiting students from top-tier schools such as, the Kellogg School of Management at Northwestern, MIT, the London School of Business, and, [NCEED]. We're pleased to have our second wave of Colfax Pathways Associates starting this summer, and expect this to be a great source of future leaders to continue to grow our business.

With that, I'd like to open up the session for Q&A.

(Operator Instructions).

Our first question in the phone queue will come from the line of John Inch, with Deutsche Bank. Please go ahead, your line is open.

Thank you. Good morning, everyone.

Morning, John.

Morning, guys. Can I ask you about gas and fluids handling margins, Steve I realize that there was dilution associated with recent acquisitions, but they're still a little weaker than we thought, were there project mix issues in the quarter? And how do you see the margins? Is there any guidance you can give us with respect to segment margins for the year in terms of your thoughts or range?

Sure, John, that's a good question. Overall, there were two factors impacting margin as we outlined. The one was acquisition, and as you correctly pointed out, we had experienced a negative mix here in the gas and fluid handling inside of the quarter. However, this is one of the businesses where we have great visibility to the year because of the strong backlog, and what I would say is that, based on the quality of the backlog, and the mix of that backlog, we feel that we will be very much on target with the operating commitments that we've made for the entire portfolio. Or the platform, I should say.

So do you have a range, or thought process of a range, Steve, in terms of how much margins could be up this year? [To save some] backlog?

I think we gave a reasonable indication of that in the guidance material that was provided in December. We give expected contribution margin from the increase in sales, in that business and if you add that to where we finish this year, you'll be able to calculate the precise margins that we expect for next year. But I would note they are clearly better next year as we continue our stair-step progression in gas and fluid handling toward our mid-teens operating margin target.

Yes, Scott, I was a trying to understand if the fourth-quarter results somehow modified -- I recognize your conversion, I was just wondering if modified your outlook. It sounds like it did a little bit, just because the contribution and you basing the outlook off of this year, right? But probably not materially.

How did Warrior do? You launched Warrior in Europe. Is there any quantitative statistics you can share with us in terms of the progression to launch, or maybe how it affected ESAB's results?

Overall, the new products for ESAB are continuing to perform well, relative to expectation. You're talking about the Warrior, the 460-volt industrial welding machine that we added in the fourth quarter, and the receptivity has been quite strong. Not only in Europe, but also in the Middle East, and South America. In fact, it was South America and the US where we launched it first, so we have more data. It continues to sell quite well, and it is taken off very nicely in Europe as well, so we feel very comfortable with the performance of Warrior.

We're also quite comfortable with our performance from a Manufacturing standpoint and our responsiveness. This comes out, John, of one of our plants where demand pull has been mostly effective, and so our shipping times, and ultimately our deliveries here will be, we think, will be quite improved and we think that's also behind an improvement in our operating performance, is what's behind the growth for fabrication technology in the fourth quarter. So new product, the Warrior line, and Europe's done well, but most importantly, continues to do well in Latin America, North America, where it was launched first.

Steve, and Scott, you guys are the most international of the companies we cover, could you share with us maybe your, obviously emerging markets are a hot button right now, what are you seeing specifically in Latin America, is there any real change to the cadence of business, kind of on a core basis, or any of the other emerging markets, and maybe just give us a sense of your updated thoughts towards FOREX or currency as 2004 is expected to play out?

I'll talk a little bit about what we are seeing in terms of the order, and the trend in some of these emerging markets, and Scott, maybe you will talk a little bit about the FX side of it.

Sure.

It is a key question, John. We've gone through and what we've actually seen is that, while the macro-level issues that you've pointed to are certainly in place. As we look at our business, we feel that we continue to see very positive trends. We saw that in the fourth quarter, and we don't look -- we don't reveal a lot of data on a month-by-month basis, but I'd say that on a quarter-to-date basis, we continue to feel quite positive about the trends that we're seeing in each of our businesses, and, in general, and specifically in Latin America.

So overall, we think what we're really seeing inside of our business, is the fact that, one, we are really focused on core, end-markets that remain a top priority in virtually all of these key geographies. And when we talk about power, energy, or environmentally driven activity, these businesses that we have, and the focus that we've provided, those are the key end-markets that we are driving, so we believe that's why, despite some of the slowness that you've heard about around the world, our business continues to perform well in the fourth quarter, and the outlook remains positive here for quarter one and the full year. So overall, we've seen that in general, we've seen that Latin America.

More recently, just this week, we actually asked all of our leaders to go back and take a look at the forecast for the first quarter, and as best we can the outlook for the full year, in light of the tapering in all the issues that we've heard, and our team remains positive and bullish on our ability to deliver. And we just haven't seen it impact what we are doing as a business.

Again, I think that's a function of the end-markets that we are focused on, and when you think about power, energy, the environmentally driven activity that we've talked about in China, and also in US, we've taken a look at our order rates over the last six years in fact. And a business like Howden, we find that they virtually are rarely, if ever canceled. So we might see a delay by one month to another month, but generally we feel quite positive about the quality of our backlog in those businesses where we can see and have that kind of depth, but also on the shorter cycle businesses like ESAB, we continue see very solid trends.

We remain optimistic about the quarter and the year.

So, in other words, Argentina and Venezuela are not sufficiently disruptive, is what you're saying?

They aren't, John, and at the end of the day, keep in mind, that we have such a broad geographic footprint that we're able to balance our way through many of these issues over time and, frankly, when we talk about Venezuela, Argentina, Greece, Thailand, they're relatively small in the scheme of things, and that plus the end-markets, I think, gives us the ability, or ballast to make our way through these tough economies.

Yes, just to add to that, Argentina and Venezuela are less than 1% of net assets, and less than 2% are revenues. So, we aren't talking extremely material items. And, as Steve said, we haven't -- on a local currency basis, we haven't really seen much deterioration in those markets anyway.

On the other portion of your question, John, FX relative to our guidance, some of the emerging FX rates have come down, but the European rates are actually stronger than what was in our original guidance. The Euro' s [sterling] in the northern European rates, so on balance we are comfortable with our guidance. There really hasn't been a material change in the aggregate in our FX [assumptions].

Perfect, thanks very much.

Thank you. Our next question will come from Nathan Jones with Stifel. Please go ahead, your line is open.

Good morning, Steve, Scott, Farand.

Morning, Nathan.

Just on the gas and fluid progress you made on large projects, was that more a result of good execution on your behalf, or pull forward from your customer?

Good execution.

Simple answer. Does that change the outlook at all for 2014, seeing it sounds like you pulled forward revenues from 2014 into the fourth quarter of 2013, or is there sufficient orders to backfill that?

Again, we've just gone through the process there Nathan, and if you look at it, we feel we are spot on relative to where we thought we would be what we created the budget, and then the follow-on guidance, so we feel quite confident.

Okay. Obviously significant working capital reductions in 2013. Do you have a target you can share with us for 2014? And maybe a percent of sales, longer-term, that you are targeting?

Our target is 1% of sales, which is roughly $45 million of working capital contribution to cash flow. So even with increasing sales, we expect working capital to come down by 1% of sales to positively contribute to cash flow. We believe we can sustain that for a period of years, I don't want to give an exact number of years, but into the foreseeable future, that's our target for each of the years.

Nathan, I would just add, as Scott explained, everybody in our organization is tied to working capital improvement. Not only in terms of dropping that dollar level and improving free cash flow, but importantly, shortening the lead time it takes to get our products to our customer at exceptional delivery levels. So we're using CBS to generate more flexibility in our manufacturing process so that we can provide outstanding service, and drive this working capital in the ways that we have tied up in inventory out of the business.

We are making progress, and we feel quite positive about it, but at the end of the day, we are all tied to that, it is tracked on a weekly, monthly basis, and ultimately, a lot of what we realize at the end of year is driven by our performance on working capital and free cash flow.

And just one more for me on the power generation side of the business, can you give us a little bit more color on how that's breaking down geographically, maybe where we are in the environmental upgrade cycle in China, what you're seeing in that same cycle coming in the US?

I think as we've mentioned on previous calls and maybe at the Investor Day, we really had peaked in China. Those orders will start to moderate here over the next year, and at this point, we are working through that backlog. As China's coming down, and it's been an outstanding period for us, that is partially being offset by some of the opportunities I noted around our industrial business.

The Chinese government has increased its focus on power consumption, and is now monitoring that on a monthly basis at the local prevention level, and that's great news for us, because the Howden product, which, by the way, is manufactured there in China, and so it both has great margins, but we can compete pretty effectively. We now see other environmentally driven opportunities beginning to pop up on the horizon that hopefully will help to balance that environmental activity that's starting to come down, in terms of overall growth.

However, the significant addition on the other side of it, of course, as we've talked before, is here in the US. We have the same environmentally driven requirement here in North America, that part of the business is continuing to come in, and we are doing very well in competing for that business, and we are seeing a very nice increase in our order rate as a result of the US coming online with its compliance. Hopefully that gives you a sense as to where we are with that portion.

Yes, very helpful, thank you.

Thank you.

Thank you. Our next question will come from Kevin Maczka with BB&T. Please go ahead, your line is now open.

A couple questions on ESAB. I guess. First is, with the organic growth turning positive 2.5% in Q4, I know you're not changing your guidance there, but, and we don't have great visibility and it's short cycle, I realize. But as we look forward to 2014, especially with the easier comps that we have in Q1, shouldn't we take away that, that at least the low end of that, is starting to look pretty conservative here?

I think I would take away what we shared at the Investor Day, in that we continue to feel that the gain for us, that ESAB, is outstanding execution, and whether we get top-line growth or not, we have to get to the13% level of operating income that we've committed to in the past, and increasingly, [Clay] and the guys are creating a vision of maybe going beyond that. So that's our priority one, but as you've observed here, and stated, Kevin, we are, and have been making, even though we've been focused on execution, we have been making smart rifle shot investments in those areas that areas designed to drive organic growth over the long-term.

We are optimistic, but we are probably a little more cautious than you are. We just don't see any significant change in the market conditions around the world, so we see it as a sluggish environment. We think we've stopped the market share declines that we saw when ESAB was owned by Charter. And the first few months of our ownership, we think we have certainly stopped those share declines.

But we don't see a significant change in the economy or our end markets beyond what we had included in our guidance for 2014. If we do see stronger organic growth, then we would expect to see it flow-through at the stated VCM's that we've talked about in the past. But make no mistake about it, we are making those investments and, as the economy starts to improve, we hope that the organic growth will be with us over the long term.

Got it. And, Steve, can you comment on the price component that you experienced in Q4? That was positive this time after being negative the prior couple of quarters. Can you just comment on the price dynamic that you are seeing?

Yes, this is Scott, Kevin, I'll will take that one. Most of that is actually mix in this quarter, there weren't any significant pricing actions in the fourth quarter. We don't have the ability to differentiate price from mix, so I would attribute most of that to increase to mix rather than pricing actions.

Okay, then just finally on ESAB, can you just give us a reminder, where did 2013 shakeout in terms of the geographic mix? And if you can comment, I know you touched on the emerging markets for the business generally, but Steve, I think you said Europe was flat, if you could maybe comment on Asia and North America there?

Sure. If you think about the fourth quarter, we had three pockets of solid growth, Russia, the Middle East, and also Asia. Europe was essentially flat in the fourth quarter, and North America was down slightly. So overall, I think that sort of trend has sort of been what we've observed before. I think if there was a change quarter to quarter, probably increasingly momentum in Russia, would have been a change there, but overall that would be the split.

And South America has been generally, marginally, up for the year, and as Steve mentioned earlier, there's been no noticeable change in that trend.

Okay, great, thank you.

Thank you, next question will come from Liam Burke with Janney. Please go ahead, your line is open.

Thank you, good morning, Steve.

Good morning.

On air and fluid handling, how much has the growth and after-market sales contributed to the margin improvement? I know you had some offsets this quarter with the acquisitions, but how has after-market trended?

After-market trends, the business is up, I think the overall mix relative to the total is about the same. (multiple speakers) Pardon me, go ahead.

I'm sorry, it was running at a low double-digit rate in the past, is that trend continuing?

Yes.

Okay, and on the margin side, you saw, you're anticipating on the ESAB side, how much has the currency fluctuations in Latin America affected your reported operating margins, and how do you look at that in anticipation to 2014?

I think most of that 3% currency decline that we show in the reported change in revenue, does relate to the emerging markets, and the largest of which, for the welding business, is Latin America. It basically has the proportional effect. We do hedge all of our transactional FX, but the translation effects, sort of, go through the financial statements at that effect, so it would have a 3% effect on an overall ESAB results for the quarter.

So far in the first quarter, we've seen, probably, something along a similar level, as we mentioned earlier, much stronger devaluation in Argentina, but not as significant a change in India and Brazil, which were obviously much larger markets for us. So something along those lines is sort of the early indication.

As Steve said, we did go through a full review to look at order rates, and other things, and the European exchange rates are actually higher. So after all that, we are very comfortable with the revenue and profit guidance we've given for 2014.

Great., thank you, Steve. Thank you, Scott.

Thank you.

Thank you, sir. Presenters at this time, I'm showing no additional questioners in the queue. I would like to turn the program back over to management for any additional or closing remarks.

All right, well if we have no additional questions, I'd just like to thank you all again for joining us today, and we'll speak with you next time. Look forward to updating you then.

Thank you.

Thank you, gentlemen, and thank you ladies and gentlemen. Again, this does conclude today's call. Thank you for your participation and have a wonderful day.

Attendees, you may now all disconnect.