Enovis Corp (ENOV) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Colfax Corporation's first-quarter earnings conference call.

(Operator Instructions)

As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Farand Pawlak, Director of Investor Relations. You may begin.

Thanks, Ashley. Good morning, everyone, and thanks for joining us. My name is Farand Pawlak, and I am Colfax's Director of Investor Relations. With me on the call today are Steve Sims, President and CEO, and Scott Brannan, our Chief Financial Officer. Our earnings release was issued this morning, and is available in the investor section of her website at colfaxcorp.com. We also 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 this call, and the slide presentation, will be archived on the website later today, and will be available until the next quarterly call.

During this call, we 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 may differ materially from any forward-looking statements that we might make today. The forward-looking statements speak only as of today, and we do not assume any obligation or intent to update them except as required by law.

With respect to any non-GAAP financial measures during the call today, the Company information required by SEC Regulation G related to those measures can be found in the earnings press release and supplemental slide presentation under the investor section of the Colfax website. In the interest of getting to everyone during the Q&A session, we would ask that you limit yourself to one question and then one follow-up before re-entering the queue. Now, with that, I would like to turn over to Steve.

Good morning, everyone, and thank you for all for joining us today. Earlier this morning, we reported net sales of $1.054 billion for the first quarter of 2014, an increase of 11% over the previous year. This consists of 6% organic growth, 9% growth from acquisitions, offset by 4% negative impact from foreign exchange. Gas and fluid handling continued to deliver strong organic growth, while fabrication technology sales were down slightly, for reasons I will discuss later. The acquisitions made in 2013 on the gas and fluid handling side of the business performed in line with expectations. And as you know, we closed the Victor Technologies acquisitions early last week.

With respect to profitability, overall margins increased to 8.9% in the first quarter, as compared to 8.3% in the prior year, a 60 basis point increase. Fabrication technology performance continued to improve, with margins up 270 basis points versus previous year. However, gas and fluid handling margins fell below expectations, while our Howden business continued to show margin gains, and acquisitions performance was in line with guidance. Our pump business failed to meet growth and margin targets. More specifically, revenue growth was predominately in for-market products for both Howden and fluid handling, which are lower than our after-market products.

Similarly, our very short cycle lubrication service business, which has the segment's highest gross margins, experienced a decline in sales for the quarter. While the acquired businesses and gas and fluid handling will continue to dilute operating margins in the second quarter, bookings have improved in lubrication services since February, and steps have been taken to reduce costs in those areas not meeting growth expectations. Given the mix of projects forecast in the second half of 2014, we expect to return to a more normalized balance between our for-market and highly profitable after-market businesses.

Adjusted EPS was a first-quarter record of $0.43 per share, as compared to $0.26 last year. This includes $0.01 of dilution from the equity offering completed in February, which Scott will discuss in more detail later. Now turning to our business segments. Gas and fluid handling net sales for the first quarter were $573.9 million, an organic increase of 16%, compared to $425.1 million in last year's first quarter. Revenue from our acquired businesses was in line with expectations for the quarter, with Howden achieving significant organic growth, and fluid handling experiencing a modest decline.

As expected, revenue was up organically across all end markets except mining. Orders for the first quarter were $583 million, up 16% compared to the prior year, with 14% coming from acquisitions and 2% from organic growth. This resulted in a record $1.6 billion in backlog at the end of the quarter. Year on year, we experienced organic growth in all end markets, with the exception of oil, gas and petrochemicals, and were particularly pleased to see strength in end markets that were down last year. However, as always, I will note that the timing of large orders makes comparisons across sectors and periods a little difficult.

Now let's focus on our largest gas and fluid handling end market, power generation. For the 2014 first quarter, revenues increased 32% organically. Sales continue to benefit from a healthy backlog, particularly related to environmental upgrade projects in China and maintenance work in South Africa. Order intake also remains strong, with year on year organic growth of 14%, and the outlook continues to be positive, with numerous opportunities in Asia, the Middle East, Turkey and North Africa. On the last call, we mentioned increased quotation in order activity in Saudi Arabia, where oil is used for power generation.

This quarter, we were pleased to book a significant order totaling roughly $30 million, involving both our Howden and fluid handling businesses. Fluid handling will provide a recently patented three-screw pump that is ideally suited for these applications, as well as two-screw progressive cavity and gear pumps. Howden will supply forced draft and induced draft fans for four supercritical boilers. Overall, we continue to expect power generation sales and orders to grow throughout 2014. Next is our second largest market for gas and fluid handling, oil, gas and petrochemicals.

Sales were up 10% organically, as expected, while orders decreased 42% organically in the first quarter. This decline is largely related to continuing delays in project awards, principally for compressors. However, quoting activity is strong in our midstream and downstream business, led by the Middle East, Southeast Asia -- and Southeast Asia, where we've invested in local selling and technical resources. Additionally, in fluid handling, we are seeing an increasing interest across various regions in our upstream capabilities, which are primarily served by multi-phase systems.

Despite seeing year-on-year declines in oil, gas and petrochem orders for the quarter, we expect modest order growth for 2014 as delayed projects are released, as well as moderate revenue growth as we work through our existing backlog. Turning now to marine, which as you know, is primarily served by fluid handling. Marine performance is in line with expectations, with orders and revenue growing at 6% and 3% organically, as we continue to build on the success of that CM-1000. Market conditions remain relatively unchanged. We continue to see strength in vessels serving offshore oil and gas industry, with continued pricing pressure in general ship building.

We've addressed this pricing environment by focusing on new, value-added products that deliver demonstrated efficiency and returns to the customer, most notably the CM-1000. During the quarter, we received our first retrofit CM-1000 order, in which our controls will be installed on existing vessel with competitive pumps. This greatly expands the potential market for the CM-1000, and reaffirms our outlook for the marine segment. We expect to see solid growth in revenue and bookings continue through 2014. Switching to mining, an end market which faced subdued spending all last year.

Revenue was down 20% for the quarter, with a 42% organic decline, which was partially offset by the Alphair acquisition we closed last November. During the period, orders increased 59% organically versus a low base in the first quarter of 2013. Although mining remains a depressed market, we've seen some bright spots the last several quarters ago. For example, a significant $5 million coal mine order in Australia, and various orders related to copper and gold mine projects in South America. However, given the overall state of the mining sector, we expect to see organic declines in sales and a challenging environment for orders throughout 2014, partially moderated by the Alphair acquisition.

Finally, the general industrial end market. For the first quarter of 2014, sales increased 17% organically and orders increased 25% organically, though as I mentioned before, quarter-to-quarter comparisons can be quite difficult due to the timing of large orders. As you may remember, on the last call, we discussed the fan retrofit opportunity in the Chinese cement sector, and we secured number of those orders in this quarter. In addition, we received a large steel order for Howden, which is part of a continuing trend of plant upgrades and replacements. These opportunities in our base business, as well as the addition of TLT-Babcock and Flakt Woods will continue boosting our sales and orders in the general industrial market during 2014.

Moving to profitability. As discussed earlier, adjusted operating margins for the gas and fluid handling segment were 9.8% in the first quarter of 2014, down 60 basis points from the -- I'm sorry, from the 10.4% level achieved the same period last year. We expect this business to recover in the balance of the year, due to the cost reductions we've implemented, as well as the improvement in service bookings that began in March, and has now continued into the second quarter. We continue to passionately apply CBS across all our businesses, with the objective of improving quality, delivery cost and driving growth.

As an example, earlier this month, we assembled a cross-platform team of 40 of our most experienced leaders in Radolfzell, Germany, our largest fluid-handling production side. The objective of that team was twofold. First, these leaders were given the goal of creating a new manufacturing strategy, designed to deliver a 50% reduction and lead times on our highest velocity products, while also improving inventory turns by 50% and reducing site cost by 20%. Second, the team was given the task of implementing the first step toward achieving this vision by running a week-long Kaizen event.

During this first week, the team successfully implemented two single piece flow manufacturing cells, changed the plant scheduling process, and significantly streamlined our front end processes from receipt of order to manufacturing build. As result of these changes, lead times were reduced for several -- from several days to a few hours. 1,500 parts were eliminated, resulting in a $150,000 inventory reduction, and the number of operators in each cell will be reduced by 43%. We're optimistic about and confident of hitting our overall objectives this year. And since these are the first of 10 single piece flow cells to be created, each producing similar results for our customer base.

Now let's turn to the results of fabrication technology. ESAB continues to perform well operationally, despite a continued end-market choppiness. Sales for fabrication technologies were $480.4 million, down 2.5% organically versus the prior year. This decline was mostly driven by North America and the Middle East, with a large portion of the North American declines tied to weather-related delays in January and February. Europe and Asia were both relatively flat year on year, while both Russia and China experienced solid single-digit growth.

From an operating income perspective, ESAB continued its dramatic profit turnaround, as margins ended the quarter at 11.2%, an increase of 270 basis points versus the first quarter of 2013. These significant improvements were driven by the continued execution of our cost reduction programs, and focus on more profitable consumables. The latter remains a key strategic priority, and the acquisition of Victor supports it well. Not only does Victor complement ESAB's existing regional presence, but it also adds various attractive high margin product categories to our range.

In addition, it brings a talented group of associates with a demonstrated track record of success, and we are delighted to welcome the team to Colfax. With that said, we believe there still an opportunity for improvement in every one of our businesses, including Victor. Similar to previous acquisitions, we've quickly started to work with Victor Associates in the deployment of CBS. Clay Kiefaber, the CEO of ESAB, recently led a President's Kaizen week in Belo Horizonte, Brazil. The week included the most senior leaders within ESAB, along with several key leaders from Victor.

The executives from both ESAB and Victor worked hands-on with our manufacturing associates to implement the basic CBS principles of Lean Manufacturing. The rapid deployment of CBS into each of our acquisitions affords us the opportunity to reinforce our culture of continuous improvement with all of our new associates, while also accelerating the speed and effectiveness of integrating these new organizations. And now, I will turn it over to Scott to provide more details on the financials.

Thanks, Steve. As Steve mentioned earlier, sales for the first quarter were $1.054 billion, up 6% organically compared to 2013 first-quarter sales. Sales were up 11% in total, reflecting the impact of the acquisitions for gas and fluid handling closed in the fourth quarter of 2013. Adjusted operating income was $94.1 million, representing an adjusted operating margin of 9.8%. Fabrication technologies adjusted operating margins were 11.2%. Gas and fluid handling's adjusted margins were 9.8%. Corporate and other costs were above expectations, at $15.8 million for the quarter.

Most of the higher spending is attributable to costs associated with the legal and diligence activities surrounding the Victor acquisition. Excluded from adjusted operating income are a restructuring cost of $6.3 million incurred in connection with the cost reduction projects discussed on previous calls. Interest expense was $12.3 million for the quarter, which includes approximately $2 million of non-cash amortization of debt discounts and deferred issuance costs, as well as facility fees and the cost of bank guarantees and letters of credit. While we paid our revolving credit facilities down to zero with the proceeds of the equity offering, we drew approximately $800 million on April 14 to fund the Victor acquisition.

We anticipate revolving credit borrowings near this level for most of the second quarter. Our effective tax rate for adjusted net income and adjusted net income per share for the first quarter was lower than expectations. This is a result of the mix of expected income by territory being more favorable than our original guidance estimate. I will discuss the expectations for the balance of 2014 when discussing the revised guidance incorporating Victor's operations. Operating cash outflow for the first quarter was $67 million. Although we do seasonally build working capital in the first quarter, we had a higher than expected working capital build in this first quarter.

This was largely caused by a reduction in payables from high levels at year end, and most significantly, a larger than expected increase in cost over billings on long-term contracts. This is a temporary increase, which will largely be mitigated by the end of the second quarter. Reversing this trend is a top priority for the balance of the year, with our overall goal of achieving a $50 million reduction in working capital for the full year. We are very confident we will be able to achieve that target. The backlog in our gas and fluid handling segment was $1.6 billion at quarter end.

Our book-to-bill ratio for the first quarter was 1.02 to 1, which is slightly weaker than a typical first quarter, reflecting subdued bookings in the oil and gas end market. As Steve mentioned, we issued 9.2 million shares on February 20. The proceeds from these shares provided a significant portion of the funding for the Victor acquisition. The net impact of this was, for adjusted EPS purposes, to raise the fully diluted share count to 120 million shares for the first quarter. We expect to have 124 million fully diluted shares for the 2014 full year, and approximately 125 million fully diluted shares for each of the second, third and fourth quarters.

In addition to the additional equity raised and the revolving credit borrowings discussed previously, BDT Capital's preferred shares were converted to common stock in February. These -- if converted shares were already reflected in the share count provided in our 2014 guidance. At the time of the conversion, we paid BDT the dividend accrued through the conversion date, plus an inducement payment of $19.6 million, in exchange for conversion of these shares before the time the Company could force conversion. This inducement payment, which does have a significant impact on GAAP earnings per share, has been excluded from our adjusted earnings per share.

Turning now to guidance for the balance of the year. First, we are making no changes to the guidance issued in December, other than the direct impact of the Victor acquisition. Please refer to our slide deck for precise numbers. As you know, the Victor transaction closed on April 14, and their operations will be included in our results from that date on. Specific changes to the guidance include, revenue was increased by range of $350 million to $365 million, reflecting Victor's expected sales for the period April 14 to December 31 of 2014.

Operating profit before amortization was increased for the same period by $64 million to $68 million. Amortization and transaction costs for the Victor acquisition are expected to be $25 million in 2014. $12 million of that amount will not repeat in future periods. Interest expense will be approximately $5 million higher for the balance of the year, as we finance the approximately $350 million of the Victor transaction price under our revolving credit facility. The remainder of the acquisition was financed through the equity offering discussed earlier.

Our effective tax rate will be slightly higher, due to Victor's earnings being largely in the USA and Australia, where the statutory rates are higher. However, the increase in cash payments for taxes will be significantly less than the increase in the book tax expense, due to the large net operating loss carry-forwards we have available to reduce cash tax payments in the USA. Importantly, we expect to recognize a significant tax benefit in the second quarter, as some of our net operating losses, which are not currently reflected as assets in our accounts, will be added to our balance sheet and a corresponding tax benefit will be recorded. This is largely due to the significant additional US-based income from the Victor business.

We have not completed our analysis of this gain yet, but we expect that it will be significant. We will, however, exclude this gain from adjusted profit and adjusted earnings per share. Finally, expected restructuring costs have been increased by $10 million to $60 million for 2014, which reflects the estimated cost of severance agreements inherited at the Victor acquisition date, and other 2014 restructuring actions anticipated in connection with the Victor acquisition. The net result of adding Victor's operations beginning April 14, and the additional debt and interest costs, and additional shares from the equity offerings, is to increase both the high and low end of our adjusted EPS range by $0.05 per share for 2014.

While we do not provide specific quarterly guidance, there are certain items that would impact expected seasonality. Specifically, revenue and profit before the nonrecurring items that I will discuss in a minute are expected to increase sequentially each quarter based on the rollout of our existing backlog. The second quarter will be adversely impacted by the following: after transaction costs and the reversal of some of the fair-value step-up of the acquired inventory, Victor's operations will be dilutive to adjusted EPS by approximately $0.02 for the quarter. Victor will be accretive for the third and fourth quarter, and for the full year. The specifics are in the slide deck.

Secondly, we exited a small business line in our fluid handling operations in April, which generated a pretax $3.8 million non-cash loss on disposition, further reducing expected second-quarter earnings per share by approximately $0.02 additional. And now, with that, I will turn it back to Steve.

Thanks, Scott. With the close of the first quarter, we are now entering our third year following the acquisition of Charter. Having reached this bid point, I believe it is useful to place the team's performance in context versus our longer-term objectives. First, from a sales and profitability standpoint, we've dramatically improved operating margins despite a sluggish economic environment. And remain confident in achieving both our 2014 targets and our longer-term operating profit goals of 13% for ESAB, 17% for fluid handling, and 15% for Howden business, including the acquired entities.

As we've highlighted in the past, we are excited about the strength of our brands in the industries in which we compete. In line with this, we remain confident of delivering solid organic growth over the longer term, while continuing to aggressively pursue smart bolt-on acquisitions. Over the last 27 months, we've completed 11 deals representing over $1 billion in annualized revenues, and feel that we are just scratching the surface of the opportunities we see. Most importantly, we continue to build a culture of continuous improvement while dramatically adding talent from both in and outside the Corporation.

In just the last quarter, we've made two more additions to our leadership group. Andrew Bonham has joined ESAB as Senior Vice President of the Americas. Andrew will have responsibility for the ESAB and Victor sales organizations in North and South America. Andrew has wonderful background in industrial products from General Electric, Allied Signal and most recently, WR Grace, where he was Vice President and President of their construction products division.

Also joining our team as President and CEO of our fluid handling business and Senior Vice President of Colfax Corporation, is Chris Metz. Chris most recently was a managing partner with Sun Capital, where he led a $5 billion portfolio of consumer durables and industrial products. Prior to Sun, Chris was President of Black & Decker's Home Hardware Group. The focus on recruiting and developing talent positions us well to both continue our acquisition strategy and drive further internal improvements. Last week, we spent two days in Prague conducting a 100-day strategic plan review of the acquisitions Howden consummated late last year.

Not only are performance and integration in line with expectations, but the review also reinforced to me the opportunities that remain in our core business for dramatic top and bottom line growth. Our possible pipeline of additional acquisitions remains healthy, and I anticipate additional announcements in the balance of 2014. In closing, I continue to feel confident in our team and our ability to deliver upon the longer-term commitments established with the acquisition of Charter. With that, like to open it up for Q&A.

(Operator Instructions)

Jeff Hammond, KeyBanc Capital Markets.

Good morning, guys.

Good morning, Jeff.

Just on the guidance, can you maybe talk about how you're thinking about the segment organic growth rates the same or differently? It looks like fab tech may be a little more of a drag, and Howden a little bit stronger. Just how are you thinking about those?

I think we are clearly affirming our guidance. We don't see any real change for the full year. The welding group is expected to be in the down one to positive two for the year. We didn't see anything in the first quarter that would cause us to change that. The Victor revenue is projected in accordance with that same growth expectation.

The expectation for gas and fluid handling continues to be two to four for fluid handling and four to six for the air and gas handling segment. The increase in the first quarter was mainly due to the timing of the rollout of backlog, which caused the Howden group to be a little higher than the full-year guidance. But despite that, we don't have any expected change in our full-year revenue guidance.

Okay. And can you talk -- is there a way to quantify the weather impact that hit fab tech in the first quarter? And what do you see, from a catch up standpoint, along those lines?

It really would be difficult to quantify the impact of weather. What we can say is this, is that January and February started off very slow. March was much better, and we've seen that trend continue into the April timeframe. So it -- we believe that the overall performance, and that would include both Howden as well as fluid handling and fab tech, that we believe that that performance will certainly deliver what we need on a full-year top line.

Okay. Thanks, guys.

Thanks.

Nathan Jones, Stifel.

Good morning, Steve, Scott, Farand.

Hello, Nathan.

If I just could start with the oil and gas end market. Significant decline in orders, but you are still talking about expecting orders to be up at least a little bit this year. Can you talk about what gives you the confidence? You're going to need to do, I guess, 15% growth, nearly, in the remaining three quarters of the year to make that number.

I think that we'd first look at, what were the causes of the delay? And again, we would stress that, in this area in particular, large orders can significantly distort performance quarter to quarter. I'd remind you -- Nathan, you probably remember this, that in the first quarter of last year, as an example, we had a very large $10 million order from Brightoil, as I recall. And so that certainly set up a very large comparison. But overall, the root cause issues that we've seen could really be grouped into two areas, either cost overruns on existing projects or resources to execute the project at the customer level.

A third component that we've seen, which is unique to fluid handling, is that we can identify four or five different orders that shifted from quarter one to the latter part of quarter two, early quarter three, that were tied to changes in specification from the customer. In other words, they were driving the design to provide greater capacity than originally identified. So those are the three variables that we identified as root cause issues. When we look at the size and quality of the opportunity funnel, it continues to grow. And the opportunity funnel captures every competitive situation that we are involved in.

And as we progress that funnel, we can identify or associate a level of probability of winning each one of those targeted opportunities. And what we've seen is, the size of the funnel has increased the number of opportunities and the dollar volumes that are moving through the funnel, which are associated with a higher probability, continue to grow. And in no case have we lost an order to a competitive Company. In every situation, we've been able to hold onto the business. Then, as we've seen at fluid handling, we've actually seen an increase in the original order size. So because of that, we continue to feel optimistic about delivering the oil and gas growth on a full-year basis.

Makes sense. I've heard similar things from other companies. You mentioned in your prepared remarks about receiving some orders from the cement industry in China. I think that's fairly new, and is just beginning for you. Is there a way to size the potential of that market, and possibly the duration of that cycle?

I would answer that question this way. What we've talked about in China, to [scut] back, is that we've certainly benefited from the compliance driven activity in that region. And we are still certainly working through a very healthy backlog created 18 to 24 months ago. We see that part of our business, and that order rate, starting to moderate, but we see opportunities like the cement industry. And also the retrofit opportunities that were identified as growing in overall (technical difficulty).

Another component that we are starting to take advantage of is with the new systems that have been installed to comply with the environmental regulations. They have now uncovered other issues further downstream in the process, which opens the door to our after-market business in China. So the combination of retro-fits, cement opportunities and expanded service capabilities in China are indicative of what we hope will be a strategy to not only offset what we've seen in China, but allow us to continue to grow as that part of the business tapers down.

What I'd also add to that point that's important to keep in mind is that the US has been behind China in the enforcement of the EPA-driven regulations. And what we've seen is a continuation of the building that we've talked about in prior calls here in US. So we hope and believe that the combination of the US, the cement opportunity, the retrofit opportunities that exist in China, and now the expanded service opportunities, will help to offset a significant drop-off as that environmental compliance gets behind us.

So is it fair to say that you see the opportunity in China in those kind of markets as being bigger now than you did, say, maybe a year ago?

Yes, I think that's an accurate statement. We are, because of the pollution situation there, we are seeing the remediation extended to additional industries. So I would say that's -- it is hard to quantify it to a precise amounts. But because of the situation in China, and from a pollution standpoint, we are seeing this opportunity expand.

Great (multiple speakers) Thanks very much.

I will add to Scott's point. What's really interesting -- Scott and I were working with our team at Howden in an operating review, and the team has started to identify major, major opportunities in other areas of the compliance that we hadn't originally anticipated, to your point, Nathan. It's -- we are finding equipment that is out of spec, out of standard, and so it gives us an opportunity to bring in the Howden line, or to bring in our services to get the performance of the equipment up to an acceptable standard. So we hadn't anticipated that all, and it is a very attractive part of the business, with high margin and significant volume potential.

Great. Thanks very much.

Mark Douglass, Longbow Research.

Good morning, gentlemen.

Good morning.

Interesting, you said that China grew for you single digits in welding? Do you think that's share gains, particular end markets or new products? Can you discuss that a little bit?

It is difficult -- of course, it is a little difficult to say for sure. And again, you have to remember, Mark, that we have a relatively small base, and our strategy initially in China was to really stabilize the business. To fine tune, really drive and create a much stronger strategic plan, and to change the leadership organization in place in China. And that's a strategy that Clay Kiefaber, and also Ken Konopa, have been driving aggressively as we've -- so there have really been three or four things that have helped to improve the trends there.

One, we have a revised strategic plan that really has segmented the market far more effectively than we have in the past. So we think we are competing in a sector which is both stronger margin potential, and growth that we can capture, and as result, probably take some market share. Secondly, as we mentioned, we've been very successful in adding in new leader in China. Stanley Chew has now been with us just over year. He's done a wonderful job of coaching, mentoring and upgrading the caliber of our team in China. So it is both people, end market focus to the higher end of the business.

And then, as you probably remember, Mark we -- Clay and his team executed a major restructuring effort, not only in SG&A, but also in manufacturing. So they consolidated out of Weihai into a second facility. And so we are leveraging more volume through an existing facility, and hopefully improving our overall cost base. We know that our margins have improved dramatically there. Again, it is a small business in relative terms, but it has improved dramatically. We seem to be taking share of the high end, and importantly, we have the right team in place. We think the right strategy, better manufacturing cost basin, are now starting to achieve the kind of margins that you would expect for us to post.

Okay, and this is mostly consumables in China?

It is really a combination of consumables and our [effort] in automation as well.

Okay. And then speaking of margin, very strong in metal fabrication on an organic decline. The 12% seem pretty reasonable. Would it be pretty feasible, even if there is some persistent weakness in welding?

Yes, I think if you look at our full-year guidance, and factor in the cost savings that we specifically identified for the fabrication technology, you would arrive at those margin levels.

Okay. Thank you.

You're welcome.

Andrew Obin, Bank of America.

Yes, good morning. Just a question on fabrication. You commented on Brazil and Russia, and the question in Brazil, do you have any concerns about Brazilian industrial production. And the question on Russia, any impact from Ukraine?

Two very good questions. From -- in Brazil, our business, we think that we are probably continuing to take share in that marketplace. We believe the market is flat to slightly down, and that market reflects a shift in the mining market. Because the markets have slowed, we've seen a slowdown in a number of areas. Heavy moving equipment, as a result, it's impacting our hard facing business and the work around both the buckets and shuttle cars that are key in serving the mining markets. So we believe that's what's happened in South America. Our business, in terms of market share, is holding in, maybe expanding, but the market has been sluggish.

In Russia, as we talked about, fabrication technologies, you probably know Clay and his team manufacture virtually all of their product locally. That business has been very, very strong throughout the entire first quarter, continues that way into the second quarter. The Ukraine has been a pocket of weakness for us, but it is a very small part of the total. So if we were to talk about Russia, perhaps in a broader context of Russia and the former Soviet Union, our business has been quite healthy in terms of overall order rate, even though it is been down in the Ukraine. From a margin standpoint, business has performed very, very well under Constantine's leadership.

Our Manufacturing strategies have been very effective. You will hear more about that in calls to come, but our business has performed well, and we continue to believe that Russia is a key market for us over the long term. The strength that we've seen in the marketplace has really been through pipeline construction and plant production in that region. And based on our order book and the outlook on the horizon, we feel pretty comparable with where we sit for the balance of year.

So no near-term impact on Russia that you can tell?

No, actually our fabrication business is up in Russia for the quarter, so clearly no near-term impact.

And the second question, just the treatment of preferred, has that changed? Have we changed how we include it in the guidance? Because it is not in your explicit guidance. Before, you have preferreds in the guidance, and now you have it in reconciliation from GAAP to non-GAAP. How should I think about that?

The preferred has been converted, which is the reason for the different presentation. So the comments I made in the prepared remarks give you the expected share count after the equity offering. The conversion doesn't really affect it, because it was -- the adjusted EPS was calculated on its converted method, anyway.

Got you. Thank you.

You're welcome.

I'm not showing any further questions in queue. I would like to call back over to Farand Pawlak for any further remarks.

All right. If there's no further questions, then we would like to thank everyone for joining us today, and we look forward to updating you next quarter.

Thank you.

Ladies and gentlemen, thanks for participating in today's conference. This concludes today's program. You may now disconnect. Everyone have a great day.