Enovis Corp (ENOV) 2014 Q3 法說會逐字稿

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

(Operator Instructions)

As a reminder, this conference is being recorded. I will now turn the call over to your host, Scott Brannan. Please go ahead.

Thank you, Stephanie, and good morning, everyone. Thanks for joining us. I'm Scott Brannan, Colfax's Chief Financial Officer. And with me on the call today is Steve Simms, our President and CEO.

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

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

With respect to non-GAAP financial measures during the call today, the accompanying information required by SEC Reg G related to those measures can be found in our earnings press release and in the supplemental slide presentation, again, in the Investor section of the Colfax website. And now, I'd like to turn it over to Steve.

Good morning, and thank you all for joining us today. While many of the actions we discussed on last quarter's call are progressing as expected, overall results for the third quarter were short of expectation. Demand remains soft in both segments, and margins were below expectations in fabrication technology. Scott and I will discuss the root cause issues behind these results and, importantly, the countermeasures being taken to address these key issues as we move forward.

As stated in our release this morning, we reported net sales of $1.160 billion, an increase of 15% over the same period last year. This consists of 20% growth from acquisitions, a negative 1% impact from foreign exchange, resulting in an organic decline of 4%. Adjusted EPS for the 2014 third quarter, $0.57 per share, which represents a 2% increase, versus a $0.56 per share reported last year. Given that revenues are trending to the low end of the revised guidance we provided on last quarter's call, Scott will provide a further update to guidance in his remarks.

Now, let's look at our business segment. For gas and fluid handling, net sales for the third quarter were $565 million, an organic decrease of 5% compared to $511 million in last year's third quarter. Orders for the third quarter were $539 million, an organic decrease of 8%.

With respect to end markets, please refer to the slides for specific growth rates. As in previous quarters, I would again reinforce that 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'll discuss in a moment.

Focusing specifically on fluid handling, as expected, sales were down organically by 4%, reflecting the trends in the power and oil and gas markets discussed last quarter. While we continue to see strong project quotation activity, actual bookings continue to be deferred. Accordingly, we do not expect our revenue trajectory in these end markets to change materially over the near term. Similarly, Howden's revenue for the quarter was, as expected, down 6% organically. As discussed on the last call, project timing will result in a strong fourth quarter for this business.

Turning now to a review of gas- and fluid-handling end markets, beginning with power generation. As expected, revenues during the quarter decreased by 8% organically, while orders declined by 13% organically. As we discussed last quarter, softness in power generation bookings and sales largely results from the tailing off of the SCR-related businesses and the deferrals caused by potential new CO2 regulations in the US. These trends were partially offset by continued strong investment levels and new capacity in Southeast Asia. While these factors have had the expected short-term impact, the medium- and longer-term outlook at Howden's power business remains strong.

For example, the Chinese Government's next major environmental focus is reducing the visible haze in many cities caused by particulate emission. To address this, the Huaneng Power Group, the largest power generation company in China, recently announced that it will invest $1.7 billion this year to upgrade dust removal equipment in their coal-fired plant. [Guodian], another of the six Chinese power investment companies, will spend a similar amount for the same purpose. This will result in upgrades of the flue-gas desulfurization plants, electrostatic precipitators, and other dust-collection equipment. Our product line is well situated to support these initiatives, both booster fans and low-temperature heaters, which increase the efficiency of the electrostatic precipitators. Nonetheless, we expect this end market to remain sluggish for the balance of 2014.

Next, oil, gas, and petrochemicals, which is the second largest market for gas and fluid handling. Orders decreased 8% organically in the third quarter, while sales levels were down 12% organically, compared to the same period for the prior year. As you know, we principally serve applications in the midstream with large screw pumps and downstream with compressors. While we continue to see strong order inquiries and project quotations, actual bookings continue to be deferred. These project delays are broad based across the industry and core geographic region.

Revenues were down, as expected, due to the weak order rates over the past year. However, a significant development for this and future quarters was a $20-million order for the turbo fans to be used for a mechanical vapor compression in a Canadian oil sands project. Mechanical vapor compression is used to greatly increase the efficiency of the evaporation process in the treatment of polluted water.

This is a product end application expertise which we acquired as part of the Flakt Woods GII acquisition. Although this project is unusually large, we are seeing many MVC opportunities across a number of regions and industries, driven by customers' needs to reduce energy costs, and also certain applications, water usage, and required compliance with liquid discharge standard.

Turning now to marine, which is primarily served by fluid handling. As you know, this includes both our commercial marine and defense businesses. As expected, orders were up solid, 13% organically, led by defense. Received the balance of the Block IV pump orders we discussed last quarter. Revenues grew 1% organically, again led by the demand for vessels serving the offshore oil and gas segment, and our CM-1000 energy-saving solution. Our view of this end market remains unchanged. We expect to see modest growth in revenue and bookings for the balance of 2014.

Next, the mining market. This market continues to face subdued spending, as we've described over the past four quarters. However, there remain pockets of opportunity. Revenue grew 71% organically in the quarter, and orders declined 62%. Looking forward, in addition to the projects we've discussed previously in Chile and Canada, expansion in the hard-rock mining in China has been a focus. This quarter, we signed the technical contract to supply fans to the [Chinzu] Gold Mine. This is our first order of hard-rock mining in China. However, as we've previously discussed, given the overall state of the mining sector, we expect to see declines in sales and orders for 2014 in this segment.

Finally, the general industrial end market. For the third quarter of 2014, sales decreased 8% organically, while orders increased 6% organically. While quarter-to-quarter comparisons can be quite volatile due to the lumpiness of large orders, this end market has been relatively strong over the past year, and we expect this to continue in the fourth quarter. Looking toward next year, a significant opportunity for us will be driven by the particulate-reduction initiatives I discussed earlier, particularly within the heavy industry sector for China.

Turning to profitability, adjusted operating margins for the gas- and fluid-handling segment decreased 11.9% from the 2014 third quarter, 13.3% in the third quarter of 2013. Within the segment, our fluid-handling business was down slightly versus last year, but up versus the previous quarter, reflecting the early benefits of the programs that we communicated last quarter. Howden's margins declined versus year ago due to the lower volume levels and the inclusion of lower-margin acquired businesses. In response to top-line softness, we're taking additional steps to restructure the business to ensure we deliver margin improvements, despite these near-term headwinds.

A major component of achieving these cost and productivity goals is leveraging the tools of CBS. In line with this, during the month of August, our fluid-handling site in Bottrop, Germany, hosted a general managers' Kaizen with our lean manufacturing partners from Japan, [Shinujitsu]. The teams worked on improving labor productivity, work and process inventory levels, lead time, and past due reduction for project orders from order receipt to shipping. The teams applied the tools of single-piece flow, cellular manufacturing, standard work, and kanban to reduce labor cost by $135,000, improved on-time delivery from 87% to 95%, and lowered work-in-process inventory by $155,000.

Now, let's turn to results for the fabrication technology group. Third-quarter sales for fabrication technology were $600 million, down 2% organically versus the third quarter of 2013. While we continue to see strong trends for ESAB and Russia, China, and Africa, these positive trends continue to be offset by sluggishness in both Europe and the Americas. Within the core business, begun to see a moderation of these declines in both North and South America, though Europe continues to be down in the low-single digits. This reflects a continuation of the 2014 top-line trend and is in line with our modified guidance presented on the previous quarter's call. Overall, we believe we outperformed the market internationally in the quarter but underperformed in the US, due in large part to the residual impact of our Midway plant startup nearly a year ago. However, this plant is now performing well, and we've leveraged this performance to recapture a number of those lost customers.

Fabrication technology achieved operating margins of 12% for the quarter, which was below expectations for the segment. Victor continues to exceed expectations, both revenue growth and margins slightly above our guidance. The integration of ESAB and Victor is progressing very well, with a primary focus on our customers. Sales efforts are now aligned with figures from both ESAB and Victor in key positions, and we're excited about our unified product offering.

By listening to the voice of the customer and delivering a strong value proposition, we expect the combined business to positively impact revenue growth in future quarters. However, Victor's outperform more than offset by ESAB, which was short of margin expectations due largely to non-recurring costs that Scott will discuss. We expect to return to more normalized margin improvement in the fourth quarter.

Helping to offset a portion of these operational cost increases were substantial savings from our CBS initiatives, particularly within the US filler-metals business. ESAB continues to make excellent progress in improving customer satisfaction and cash flow through the implementation of build to order, ship direct. Our filler-metal site in [Moore], Hungary, has reduced manufacturing lead time from over 10 days to less than 1, enabling us to receive, manufacture, and ship orders to customers in Europe in a single day. By leveraging this level of manufacturing flexibility, service levels have improved from 78% to 96%, and inventory levels have been greatly reduced for both the customer and ESAB.

In addition, one week after our Pennsylvania Investor Conference in Hanover, Pennsylvania, that facility conducted a series of six simultaneous Kaizen. These events were led by local organization, and importantly included representatives from the leadership team and members of our UAW workforce. The objective for the week was to continue this plant's transformation to a build-to-order, ship-direct manufacturing model.

To achieve these improvements associated with this goal, the local team was joined by CBS and operations experts from across the world of ESAB to focus their attention on reducing manufacturing lead time and inventory levels in our flux-cored, wire, and stick electrode products. The teams used the CBS tools of value-stream mapping, set-up reduction, kanban, and level scheduling to reduce lot sizes and implement rapid replenishment full cycles. The impact from the week resulted in inventory levels being reduced by $1 million and manufacturing lead times reduced by 33%. The impact of these changes will ultimately lead to vastly improved deliveries to our customers and improved levels of working capital.

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 $1.164 billion, down 4% organically compared to the 2013 third-quarter sales. Adjusted operating income was $128 million, representing an adjusted operating margin of 11%. Fabrication technologies' adjusted operating margins were 12%. Gas and fluid handling's adjusted operating margins were 11.9%. Corporate and other costs were in line with expectations at $12 million for the quarter. And, excluded from our adjusted operating income are restructuring costs of $9 million incurred in connection with our cost-reduction projects.

Interest expense was $15 million for the quarter, which includes $2 million of non-cash amortization of debt discount and deferred issuance cost, as well as facility fees and the cost of bank guaranties and letters of credit. Our effective tax rate for adjusted net income was 29.8%, which was in line with expectations. We expect an effective rate between 29% and 30% for adjusted earnings for the 2014 fourth quarter.

Operating cash flow for the quarter was $162 million. Inventory balances decreased $25 million in the third quarter. And working capital in total decreased $18 million this quarter. Finally, backlog in our gas- and fluid-handling segment was $1.5 billion at year end. Our book-to-bill ratio for the third quarter was 0.96 to 1, which is lower than typical for the third quarter, as a result of the lower bookings, particularly in the power generation end market, which Steve discussed earlier.

As Steve mentioned, while operating margins in fabrication technology rose to 12% from 11.4% in the 2013 third quarter, excluding Victor, margins decreased in the year-over-year comparison. Operating results for the third quarter were adversely impacted by negative price cost trends within the South American operations. We believe we have now made adequate increases in product pricing such that this phenomenon will not impact fourth quarter. Adverse price and operational variances, due to this factor as well as lower volumes, negatively impacted third-quarter profitability by approximately $2 million in the South America region.

In North America, performance was adversely impacted by the transition in new ERP system. This caused some delays in filling customer orders, as well as additional costs incurred to compensate for difficulties in the transition. We believe these transition issues are largely remediated and will be complete by year end. Nonetheless, this system implementation negatively impacted revenues by up to $5 million and operating profits by approximately $3 million.

In addition, some quality issues adversely impacted the operating profit in the third quarter. These were isolated instances, and the most significant one was solved by replacing a third-party component, one manufactured by Victor. However, these quality matters adversely impacted operating profits by approximately $2 million in the third quarter. And then, lastly, research and development spending, higher than typical as we finalize equipment products for launch in the next few months.

Turning to guidance, since revenue appears likely to fall in the lower end of the guidance range that we issued on last quarter's call and the US dollar has strengthened significantly recently, as Steve mentioned, we are adjusting our guidance range for 2014. We now expect full-year revenue to be between $4.675 billion and $4.725 billion, and adjusted EPS to fall in a range from $2.11 to $2.18. Other metrics for the full year are expected to be substantially unchanged from the estimates provided on the last quarter's call, and they are provided again in the slide deck.

Now, I'll turn it back to Steve.

Thanks, Scott. While we're not satisfied with our third-quarter performance, we remain confident of the mid- and longer-term potential of our Company. Our new fluid handling management team has executed the restructuring program that we reviewed on our last call, and we're very pleased that the order rate at our high-margin services business has continued to strengthen. Accordingly, we're confident that fluid handling will return to historical margin levels in 2015, even in the face market weakness.

At Howden, our team continues to successfully complete the integration of Flakt Woods GII and CKD, and the issues which have hampered ESAB this quarter are largely non-recurring and will not repeat. Having said that, however, each of our businesses will be reducing 2015 cost in response to the current demand environment. These actions are currently in various stages of development for implementation and will be of sufficient size to ensure that margins are improved even if volume continues to decline. The fluid-handling program I discussed is expected to deliver $10 million of cost savings. We'll be in a position to provide more specifics relative to our other businesses at our investor day in December.

While we will aggressively reduce costs in each of our businesses, I'd like to reinforce that we clearly understand the importance of also investing in and driving organic growth. To this end, we are protecting customer-facing resources and other growth-related investments in our cost-reduction strategy. We're optimistic about the new product releases planned for the fourth quarter and the next year, though we continue to take a conservative stance in our projections given the overall macro environment.

Finally, we continue to aggressively pursue strategic acquisitions. Our M&A pipeline is extremely robust, with numerous active projects as well as many strong prospects for 2015. In summary, while the overall results for the third quarter were disappointing, given the actions we have under way, I remain confident in the outlook for continued growth and profits and with upside provided by accretive acquisition.

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

Thank you.

(Operator Instructions)

Our first question comes from Brian Konigsberg with Vertical Research. Your line is open.

Maybe we could start on some of the restructuring. It sounds like are implementing new plans, particularly in Fluid and Gas Handling. You took the restructuring number down for the full year by $10 million, though, to $50 million from $60 million. Maybe could you just talk about the moving pieces there and how we should be thinking about it?

Essentially, the reduction in the expected restructuring spending largely has to do with some items related to the Victor acquisition that we either are not going to need to spend or we will be spending next year, and then a portion of items related to the Flakt Woods GII acquisition where the actions will be taken in 2015 rather than 2014. So there is no change in the overall plan, simply the timing of this plan.

I think, Brian, you asked a question about the little of the detail around the Fluid Handling, is that right?

Yes, that's right.

That program was communicated at the beginning of the quarter. It involved approximately a 5% reduction in headcount on a global basis. What we were able to do is to realign the sales and marketing efforts both regionally, and also focus more specifically on some of the key vertical markets that we think are going to be the highest growers over the next 24 months, so a realignment of our sales and marketing resources in conjunction with the 5% reduction in headcount. I think I mentioned in the comments, the annualized value of that is approximately $10 million.

Got it. And maybe just comment on some of the markets in Gas and Fluid Handling, specifically just oil and gas. Maybe you just give us a little more detail as far as the delays. Are we talking about primarily in the US? What gives you confidence that these delays don't continue and potentially turn into cancellations? And any change of behavior with the recent down draft in oil prices in the customer base?

I think what we've seen, Brian, is it's a continuation of the trend that we've seen largely through the balance of the year. We don't think that it's going to worsen. I think that element which gives us probably the greatest level of optimism is that we did secure a significant order this period from gas problems in Russia for our compressor business. We have a lot of additional activity in our funnels for quoting. So we feel optimistic that it's slowed, and we don't anticipate major cancellation. It's just slowed.

We haven't seen -- we looked at the quality of the funnel. We looked at the progress through the funnel. And we haven't seen any significant change in the funnel over the year. It certainly hasn't performed the way we'd have hoped. We'd hoped that we'd see a little bit of an improvement. That hasn't occurred. But we don't see it worsening.

I don't think that gas -- the oil price decline has had any current effect on us.

If I just may sneak one last in, just generally in Russia, are you seeing any changes in behavior there? It sounds like you noted Russia was still a strong market for you. Are you anticipating that gets impacted by the recent sanctions that were implemented, or are you going to be able to skirt around that?

Brian, as you might imagine, we focus on eastern Europe in general, and certainly Russia, very intensely on a regular basis, and we've not seen any change to the course or trajectory of business. In fact, what I'd say is that in Russia, our core welding business has accelerated in its rate of growth. If we look at our other parts of Colfax, on the welding side, remember that we're essentially a local manufacturer, and because of that presence, it's probably contributing to our success and momentum that's building. On the rest of our business, if we look at compressors, we look at our fan business, which would have the greatest presence, we have not seen an improvement in the trends within Russia, but we haven't seen any worsening. We're not anticipating any worsening in any of the businesses over the balance of the year or certainly into 2015 at this point.

I'll pass it along. Thank you very much.

Thank you.

Our next question comes from Jeff Hammond with KeyBanc Capital Markets. Your line is open.

Hey, good morning, guys.

Hi, Jeff.

So maybe just to isolate on power gen, it sounds like there's some short-term issues but you're optimistic on the medium term. When do you think things start to normalize there, and what's the visibility on that business into 2015?

Well, the power generation, in terms of the overall order rate and what we've seen here, the root cause issues we're dealing with is certainly the complete trailing off of the SCR activity in China, and that combined, as I mentioned in comments, the CO2 activity that slowed here in the US. We believe that that's going to continue with us. We believe in the midterm, we'll start to see an improvement, and what will drive the improvement as we move forward will be, really, in three or four critical areas of the business. What we've targeted to offset that gap in business is both the investments that continue in Southeast Asia in coal-fired plants, capacity expansion, it's roughly 10 gigawatt a year.

The next key area for us in terms of potential or improvement really focuses around our MVC opportunities that we highlighted within the context also today. And then the third key part of the business that we think in addition to the after market, which is an important part, are the evolving environmental regulations affecting the power industry that are coming forward now in China, which are very significant. And collectively, we believe those are the kinds of opportunities that will eventually allow us to offset that gap in the SCR order rate.

Okay. And the just moving over to M&A, can you talk about your appetite? You've got a number of balls up in the air internally. Maybe just touch on your management capacity, what the pipeline looks like. I know we've heard a lot about expensive deals. Maybe just touch on what you're seeing there.

Jeff, that's a fair -- that's a good question. The first one is let me speak to management capacity. If we look at where we are, we feel that, first of all, each of our businesses are well positioned in their key markets. We've seen a couple of issues that we think are non-recurring and issues that we will -- and are beyond.

From that standpoint, we think both strategically and from an execution standpoint that the businesses are on track to deliver the kind of performance that we've committed to in margin. And we believe that we're making the right investments that will eventually yield top-line growth. So from a strategic perspective and also execution capability, we believe that we're able to move forward and are going to pursue acquisitions aggressively as we stated before.

Our pipelines are very, very solid at this point. We have a number of deals that are very active in discussion. And I would say that we continue to be very optimistic about good strategic acquisitions that represent solid bolt-ons in the space that we compete in today we compete in today. And we'd like to think that in 2015, we'll have opportunities for acquisition that will assist us both on organic growth and long-term profitability. So continue to be very bullish about the opportunities to consolidate the space.

I would also reinforce, to the last part of your question, as we think about and look at the cost or the multiples associated with deals in the space, we continue to exercise the strategies that you and I have talked about before. We believe that there are very attractive opportunities in the zone that we've described. And if we can't complete a deal along the line of the multiples we've described, we've demonstrated that we will move on to the next opportunity. But right now, we believe it's a very rich environment and in line with the financial strategies and business strategies that we've been striving for.

Thanks, guys.

Thank you.

Our next question comes from Marcus Halloran with Robert W. Baird. Your line is open.

Hey, guys. Mike here.

Hey, Mike.

So quick question, a couple quick questions. First, it sounds like you're relatively confident that the FAB Tech one-off issues, call it the $7 million-odd OpEx impact this quarter, rolls away if you start hitting the fourth quarter. Is it fair to think, then, that a north of 13% margin run rate, which is what you would have seen this quarter without those, is how you're thinking of the right run rate on a forward basis from here?

That's correct.

Okay. And then from a guidance perspective, just how do you think about the puts and the takes there from a magnitude perspective? Specifically, how much of this is FX, how much of this is demand, or at least generally or directionally?

Well, the guidance change can really be isolated into three single issues, so it's really pretty simple. The first is, if you take the guidance last time, and you essentially focus solely on the bottom half of the revenue portion. So as we discussed at length in the prepared remarks, the revenue trends are towards the bottom half of the guidance.

So if you take that and the associated EPS impact, and then you make two further adjustments to that, you make the FX adjustment, which is worth about $0.03. A small portion of that hits the September results; the majority of that is in the fourth quarter. And then you subtract the operational issues you just outlined there that I discussed that are not expected to repeat, but we won't be recovering them in the fourth quarter, and that essentially walks you directly to the new guidance range.

That makes sense. And then last one from me, when you think about the welding trends you're seeing, and not just for you, but more broadly from an industry perspective, there continues to be that lag relative to what a global IP number would look like. And just looking for some updated thoughts and why you think that lag verse IP exists as it stands today, and what it will take to get to a little bit more normalized levels on a global basis.

I can -- let me try to answer the question, Mike. If I -- I'll give you a sense of where we see and where we are from a regional perspective and try to highlight what's driving our business on the plus side and some of the things that we believe are challenges. And I think the challenges will help to explain what gets us on track with some of the broader macroeconomic trends.

If we look at our business in Europe, we think about Europe in two pieces. First of all, if we look at it in total, there is the one region where there's a regularly provided data that highlights growth trends within the sector and also market share. And so we know that across all of Europe, that for some time now, we've been either recovering share or holding on to market share. So we know that within Europe, we are performing in line with the market, and in some of the geographies, outperforming.

If we split Europe into two pieces, we see two very different trends underway there. If we look at, say, the more developed countries, the West, the welding industry, we believe, is down in the low single digits, and we believe that it's slowly improving. The level of decline has moderated sequentially throughout the course of 2014, and we think that it continues to moderate over the balance of this year and into 2015. But we don't see significant growth as an industry there in the near term. And we think that the strength of the business that we do see in that region is really around production associated with both ship building as well as pressure vessels.

If we look at eastern Europe, it's been a very different story altogether. In that region, we've seen some of the key markets growing as an industry, and we have as well, in the high single digits. Others are in the low single digits. But certainly, it's been solid growth as a welding industry. And in those key places, we believe that it's really being driven by some of the investments around oil and gas and pipe construction, pressure vessels, which are used in a variety of different applications, and also the chemicals industry.

So from that standpoint, the more developing countries are showing reasonable growth. Developed Europe is still slow and slightly down. We see that down trend moderating over time.

North America, we, as I mentioned in the comments, we have not performed well here. That's clear to you, I know. At the end of the day, my guess is that North America as an industry probably seeing growth in the mid single digits based on what we've seen from distributors and one of our key competitors here already with their earnings release. So my guess is that they're seeing growth solidly in the mid single digits.

I would also say that, that makes sense from our standpoint because in the last six months, because of some of the improvements we've made in manufacturing, we've been very successful bringing back to ESAB a number of major customers who have also shown growth. So we believe that in North America, it's a market that, in fact, has already started to demonstrate solid single digits. And we think we're a little bit behind the curve and have lost share because of the issues I've highlighted.

If we look at the Americas, we know that in that region, we've seen a slow economic -- or a slow industry trend. And they're to some degree a bit different. If we think about South America Atlantic, we've seen a slow down on that side of the business, which is in the low single digits. We think it's a result of some of the more stringent restrictions that have been enacted in the strip mining area. It certainly affected our industry. We think it's also affecting some of the overall economic growth.

In the South America Pacific, we've seen trends also down in that low-single-digit range, and we see that or we tie that to a slow down in mining and ship building. So the Americas, different story. South America, let's say wait that out at low-single-digit declines. North America, probably growing solidly mid single digits.

And then the last key area for us that I could comment on would be in China. China for us has been a very solid market and a great growth market for us. It is on a small base, as you know. And there, what we're seeing is what's driving that for us is really around our automation strategy, and we're focused really around high-pressure vessels again, heavy equipment, and the wind tower sector as well. Combination of those three verticals have been very lucrative for us for both profitability and also in terms of top-line growth. And it's part of the segmentation strategy that we outlined for you guys over in Hanover a couple of months ago.

So that's how we've performed regionally, and that would be my take on what's going on with our industry and how it might fit with some of the broader economic trends. That's the best overview I could give you. And I know it's from a narrow view for Colfax, but that's my best shot.

That was great color. I appreciate the time, as always.

Our next question comes from John Inch with Deutsche Bank. Your line is open.

Thanks. Good morning, everyone.

Hi, John.

Steve, did the pump issues, the negative margin shipments that you called out last quarter, did that get resolved this quarter?

It's not completely over. As we mentioned on the second-quarter call, we had two additional shipments to go. One went in the third quarter, and the final low-margin job will go in the fourth quarter. So it's not completely over, but it will be over in the fourth quarter.

I would like for it to be over, John. (laughter) It is in our forecast, and we think we've remedied that root cause issue.

So the issues -- again, I wasn't entirely clear last quarter even what caused some of this. I think you had tried to bid on more complicated business, but it turned out to be more you just ran into cost overruns. Was that the issue again? The question is, is there a respite, perhaps this might repeat in a future quarter?

No, no, it will not repeat.

It was larger diameter pumps than we had ever produced before. So we've changed our bidding, both our procedures and our specifications, and there is no risk of that happening again.

Yes. That makes sense. I wanted to ask you as you -- so we lowered the restructuring by about $10 million for some specific reasons, right? And as we think ahead to next year, and Scott, I know we've talked about this before, but what are your thoughts toward inclusion of restructuring charges versus excluding? Because it sounds like, clearly, you're taking a fairly focused consorted effort to try and continue to drive margins higher. But then it just begs the question, you have pretty high charges that are being excluded, and Charter is pretty far into the past at this point.

So are you thinking of perhaps offsets to restructuring? Some companies run gains through their numbers if they have an opportunity to do so, or sell a business here and there. I'm just curious what your thoughts are at this point.

Well, I think I'll give you two -- the long-term and the short-term response to that. Long term, we absolutely concur with you, and that is certainly our objective to include restructuring within the reported results. The reason we haven't done it, and I would say it's unlikely that we'll do it for next year, is that as we continue to do these significant acquisitions. Although the series we did for the Howden business in the fourth quarter of last year and Victor are not together the size of Charter, they came with significant restructuring requirements in order to meet our return hurdles. And we believe that investors are best served by separately identifying those large items that are disproportionate to the overall results. Once we get through that period, we will certainly go to an all-inclusive approach, and that is absolutely our objective.

Okay. And then maybe just lastly, Steve and Scott, do you have any color on -- within welding, how did the filler metal or consumable business do versus the equipment? Was there any discernable -- we obviously see the total. But was there any trend that you would identify in either of these?

No, not at this point, John. Both businesses performing about the same. Hopefully, you'll have a chance to visit our guys at Fabrication Technologies, you'll start to see just the early start of some of the new products. And they really begin to pick up momentum really on both sides of the business going into the first half of 2015 with equipment being featured a little more prominently. But year to date and in the quarter, pretty much the same set of trends.

On the slide, Steve, price mix was up over 3%. Would that be true for both sides as well, consumable and --?

I'd say -- yes, I'd say overall, the pricing worked out on both equipment and consumables in the same ballpark.

Got it. Okay. Thank you.

Our next question comes from Joe Ritchie with Goldman Sachs. Your line is open.

Thanks. Good morning, everyone.

Good morning.

So it seems like we -- last quarter, we had some one-time issues that affected the Fluid Handling side or some one-time issues that affected FAB Tech. And so Steve, maybe you can just comment, like, what's happening? What's causing these issues to arise, in your best estimate?

Well, in the last quarter, what we experienced were a number of projects that had been initiated sometime earlier. And the projects that we were involved in were new areas of expansion for us, both in terms of the scope and size of the project, and I think Scott mentioned a few minutes ago, literally, the size of the pump, which was a new one for us. And then in the midst of that, it was also transferred to a secondary production site. So a new item, new design, a new location.

And then the cost of production certainly escalated well beyond what we had anticipated. So that was one of the key root cause issues in last quarter's performance, and also, as you know, we took the charge on [VeriKon] in terms of impairment. So those were related to a part of the business that we have begun to deemphasize and really reposition in our portfolio. And so that was the core issue in the second quarter.

In the third quarter, around ESAB, I think probably the most significant issue is really their implementation of SAPs that has been a challenge, and we think we have that behind us at this point. If you look at the business since we've acquired it, whether it's Howden or our ESAB business, over the last 2.5 years, we've had relatively few executional issues. If you look at Howden, the Team there, led by Ian Brander, has taken the business from high single digits to nearly mid teens operating margins. We continue to believe we're going to deliver that. In fact, we might be there a little early.

If we look at our ESAB business, when we acquired the business, it was operating in the low single digits or mid single digit adjusted operating income margins. And today, we're really close to 13%. And so we believe that operationally, we've had a couple of issues around the business, but nothing that's endemic, and certainly not consistent with the way we want to run our business. This is not the way we expect to run the business over the long term.

That's really helpful color. I wanted to follow up on a point that you made earlier about your North America business and losing share, and clearly, it seems like there was some issues with the Midway plant and this SAP transition. Can you give us any color on what you guys grew organically this quarter in North America? And -- because you mentioned earlier, one of your competitors I think posted a 10% organic growth number. And the real question is, I'm just trying to get an understanding for what point do you start to see the same type of growth and fully recognizing that your business is slightly different. But you also made this big Victor acquisition to help you gain traction in North America. So I'm just trying to get a better sense for when you start to see the same type of growth, or at least similar type of growth.

Joe, I may have misspoken, or maybe -- you mentioned -- I think you mentioned in your question that you thought we may have experienced growth in North America. We did not experience growth in North America. We were down low single digits. That decline has moderated relative to what we saw in quarter one, quarter two, and now in quarter three, so it's slowly improved.

I was able to listen to one of our competitors in their call, and they described growth about 10%. And I believe that growth is driven -- you know that as well as I do -- I believe the growth is driven by a number of new products that they recently launched. But even if you script that out, I think they're solidly in mid-single-digit growth range. I know if we look at Praxair, air gases, pretty good barometers for what's going on in the market. We're seeing low- to mid-single-digit growth.

So we're not on par with that. We recognize that. And if we were to look at the root cause issue behind it, it would -- one of most important points in [Esperado] would be the quality issues associated with one of our key facilities. This is the Midway site that we acquired along with Charter. And what happened through that process of startup is the quality of supply, and honestly, the delivery rate, as you would anticipate, was well below acceptable levels for the customer. So we were essentially put in the penalty box for the better part of the last year.

However, because of the historical reputation that we do have for performance in those products, we've been able to go back to those customers and have recovered three or four of those customers just in the last quarter. So we believe we'll start to see a positive impact sometime in 2015.

Now, whether or not the momentum shifts entirely to get into the positive area, we'll see. We're in the midst of our budget planning process right now, so we'll have a better handle when we visit with you guys at our Investor Day in December.

Okay. That's helpful. And maybe one last question dove tailing what you just said on growth. You take a look at your order rate on Gas and Fluid Handling, you're about flattish year to date. And clearly, there's been some issues on the growth side on the welding side. What's your -- do you think as we head into 2015, do you expect the Company to grow organically based on what we know today?

What I would say is that we're right in the middle of our budget planning now. And I think coming out of that, we'll have a much better handle on growth and where we are as a Company. What I can say is that we are certainly making the right kind of investments in long-term growth opportunities. I think you'll see that at FAB Tech, from Ken Konopa and his guys. And if not, in this first and second quarter of the early part of 2015, certainly by mid year, I think you'll see significant new products from our Team there.

I believe that we are capable of growing in North America just as we're showing in a market like Russia where we're up, like I said, very high single digits year to date, maybe a little higher than that in the third quarter. If we look at other markets in, eastern Europe, again, great success. If we look at China, a good growth business. If we look at India, South Africa, good market potential, and we're growing well in those markets.

So overall, if we look at ESAB, our great strength to date is in the international markets. However, the combination of Victor and certainly our ESAB business in North America should yield growth for us over the long term. I'm not at that point where we can say that that's certainly in front of us here in the early part of 2015, but we are certainly investing to grow in that market.

Okay. Thanks for taking my questions.

Our next question comes from Mark Douglass with Longbow Research. Your line is open.

Hi. Good morning, gentlemen. Thanks for taking my questions.

Good morning.

You walked through a lot of the regions in welding. Can you discuss India and Australia? I think India is probably larger than China for you, isn't it?

India is larger than China, yes. And India is also growing, yes.

Okay. When you discussed the particular reduction opportunities in China, any way to frame the potential size and benefit of that over the next year, or at least how long is the tail once that gets going?

It is a five-year -- in typical Chinese planning, it is a five-year plan. So the opportunity would be spread over a five-year period. It may be a little early to quantify this exact opportunity for us because there are a number of technologies that can be used to address it. Some of them can be used together. And until we have a little more clarity as to what the engineering application is going to be, I'm afraid that it would be too big of a range to be very useful to you.

Would that clarity come in 2015, do you think?

It could. We're waiting for pronouncements essentially from the Chinese Government. I think it's likely to be in 2015.

Yes. I think you're right, yes.

Okay. And with your orders, I realize they're volatile quarter to quarter, on an organic basis, is there a way to look at that, say, rolling trends over two or three quarters to maybe smooth that out? And are the trends favorable, or are they declining?

In welding, specifically, I don't think there's any great changes in the trends. The region Steve discussed that are up this quarter have been solid all year long, and the regions where we've had revenue declines are the same this quarter as they have been all year.

And, Mark, was your question only on the --

Gas and Fluid Handling.

FAB Tech side? Gas and Fluid Handling.

Yes.

If you look -- in the presentation that you have, I think it will give you a pretty good slide which will break out our overall order rate total and I believe organically by end market. So I think you'll see that in there. If we look at it year to date, our order rate is about flat -- flattish at this point in time for oil -- I'm sorry -- Gas and Fluid Handling.

Okay. My question is, if you look at maybe it on a rolling -- yes, that gives you year to date. But if you took it from last year maybe over two quarters, another two -- see what I'm asking? Just to look at the broader trend over (multiple speakers) longer period.

Well, I would say if you were to -- (multiple speakers) Well, of course, the year-to-date we've got nine months captured in there. I think that if I were looking at it from your perspective, I think what I'd focus on are some of the comments we've already offered. And that is, clearly the order rate has slowed here, as it was particularly in the power gen areas as a result of what we've already highlight in SCR. And so for that order rate to turn around, it's going to require really a hit on those three or four areas of topics that I've already touched on. Again, it would come down to, we've highlighted before in Southeast Asia, and that's a run rate that we are familiar with, where there is a significant investment to upgrade the coal fire capacity.

Beyond that, there are the three other broad buckets. It's the MVC opportunity, which we highlighted an example of a $20 million order we won this quarter. That's probably a little on the large side. But there are also multiple opportunities that are beginning to materialize on a global basis.

The third area is that we've talked about in the past and we've accelerated the level in investment we've been making in our after market in Gas and Fluid Handling is a significant contributor to improving that order rate and offsetting the negative SCR issues. And then it's the area that you and Scott were just talking about. That's both the environmental efficiency in China power, where clearly, the Chinese Government are establishing new requirements that will have a tremendous impact on particulate removal.

And as it does, it plays well to our strong suit in China. We're a local manufacturer. We certainly have an extremely well-positioned product line, as you've seen with SCR, and the success we've experienced there. We think we're ideally positioned to take advantage of the opportunities as the new requirements or laws become more clear. I think China, even more so than the US, was very aggressive in setting the standards for SCR controls. They were very aggressive in reinforcement, and the demands were that they were done in a fairly short period of time. So I think once the requirements are established, it will be a very ripe field for us to plow and to harvest.

We've got a great product line. We're well positioned. We're a local manufacturer. We're well regarded. And we provide the technical capability for both before and after market service. We're truly a partner for most of these decision makers. So I think the upside is solid for us.

Thank you.

Our next question comes from Walter Liptak with Global Hunter. Your line is open. Your line is open, Walter.

Hi. Thank you. I just wanted to ask a quick follow on about the Southeast Asia coal plants. And thanks for the color that you just gave. But can you talk about 2015, and is the magnitude of the order something that we can start to see orders turning in the first half? And what's the lead time on these if we do start to see orders turn? How long does it take for this to turn into revenue?

Well, the average lead time for these type of large jobs is typically anywhere between 6 and 18 months, depending on whether it's just an add on to an existing facility as opposed to a new facility. Most of the environmental jobs tend to be on the shorter end of that range, but there's a reasonable degree of variability. Relative to your first question, we do believe that the order rate good trend positively -- sometime later next year after these regulations are in place, and then there will be that lag before we see the associated revenue. So that's the best way I can answer that question.

Okay. Thanks. Sounds good. And then switching over to the guidance on FAB Tech, you didn't give what the organic volume growth or decline was reduced to. I wonder if we can get that number?

It's roughly in the same range that it was reported for this quarter and the earlier quarters. We didn't really change any of the organic revenue assumptions from the last guidance update where we said that the welding group would be down in the low single digits. The small reduction in the bottom end of the range is purely FX. There's no further change to any of the organic growth assumptions.

Okay. Thanks for the help.

You're welcome.

Our next question comes from Andrew Obin with Bank of America Merrill Lynch.

Good morning, guys.

Good morning.

Just a question on Gas and Fluid Handling. Given where the orders are year to date, is there a scenario under which the business can fall organically next year? Because the orders book looks quite weak, particularly, third quarter is not helping. I'm just wondering, should we get ready for another year of organic revenue declines there?

Steve said earlier, I think before we start putting numbers out for 2015, we would like to completely finish our internal processes and have a good understanding of where we think the revenue range will be for next year. I think the Gas and Fluid Handling Group will finish -- under the current guidance will finish the year with some small revenue growth. I think it's unlikely they will do any better than that next year, given the order book trend. But I don't think we want to put out a 2015 revenue estimate at this time.

That's a fair comment. And the other thing, based to your comments on the call, is it fair to think that meaningful M&A is unlikely in the fourth quarter? Because that's how I interpreted it. Is that fair to have this interpretation, that we need to wait until next year?

Yes. To have a deal closed and contributing revenue, it's probably pretty unlikely. But as Steve said, we do have things that are reasonably far down the pipeline. But to have some -- it's unlikely there's anything significant that would affect the fourth-quarter results.

Terrific. Thank you.

Our next question comes from Walter Liptak with Global Hunter. Your line is open.

Hi. One other quick one. You mentioned that $10 million of cost out, and I think it started at the beginning of the quarter. When are those costs done, and when do you start getting benefits from it?

You begin to see some of those -- I think we began to see some of those very early benefits, literally, this quarter, this third quarter. And I'm sorry, it definitely will appear in the fourth quarter, largely in the 2015, but we began to see some benefit here in the fourth quarter for Fluid Handling. Those benefits that were as quick as that were largely here in the US. We have other costs that were taken out in the international market. And those benefits we'll see more accrue in 2015.

Okay. Great. Thank you.

Thank you. That concludes the Q&A session. I will now turn the call back over to Scott Brannan for closing remarks.

I'd like to thank everybody for joining us today, and we look forward to speaking again next quarter. Thank you.

Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect, and everyone have a great day.