Enovis Corp (ENOV) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Colfax Corporation Fourth-Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time.

(Operator Instructions)

As a reminder, today's call is being recorded. I would now like to turn the conference over to Terry Ross, Vice President of Investor Relations. Sir, you may begin

Thanks, Janet. Good morning, everyone. Thank you for joining us. My name is Terry Ross, and I'm Colfax's Vice President of Investor Relations. With me today on the call are Steve Simms, 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 our website, Colfaxcorp.com. We'll also be using a slide presentation to supplement today's call, which can also be found on the Investor section of the Colfax website. Both the audio of this call and 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 any non-GAAP financial measures during the call today, the accompanying information required by SEC Regulation G relating to those measures can be found in our earnings press release and supplemental slide presentation under the Investor section of the Colfax website. Now I'd like to turn it over to Steve.

Good morning, and thank you all for joining us today. This morning we reported net sales of just over $1.2 billion for the fourth quarter, an increase of 3% over the same period last year. This consists of 13% growth from acquisitions, offset by a negative 7% impact from foreign exchange, and a 3% organic decline in revenues.

Adjusted EPS for the 2014 fourth quarter was $0.72 per share, which represents an 18% increase, versus the $0.61 per share reported last year. Operationally, these results are in line with the update Scott gave at our December Investor Day. There are some non-recurring items below operating profit which in total increased adjusted EPS, which Scott will discuss in his remarks.

On a full-year basis, adjusted EPS was $2.20, as compared to $2.04 per share in 2013. Now let's take a look at our business segments. For gas and fluid handling, net sales for the fourth quarter were $622.1 million, an organic decrease of 5%, compared to $650.8 million in last year's fourth quarter. Adjusted operating margins for the segment were quite strong at 13.7%, compared to 12% in the fourth quarter of 2013.

Revenue and margins on a local currency basis were as expected, and in line with my comments in our last several calls, where we signaled that the fourth quarter would be a very strong period for gas and fluid handling. I'm particularly pleased to note that the margin improvement came from both businesses in the segment. Under Darryl Mahorn's leadership, the fluid handling business is returning to more traditional margin levels despite the tepid demand conditions.

Orders for the fourth quarter were $570.2 million, up 2% organically. As in previous periods, we saw significant variation across sectors, due mostly to the timing of large project orders, which can distort comparisons of specific quarters into certain end market factors, which I'll discuss in detail momentarily. Overall, we saw continued growth in the general industrial market, and strong bookings in oil, gas, and petrochemicals, offset as we expected, by weakness in power generation.

Now let's focus on our largest gas and fluid handling end market, power generation. As expected, revenues for the quarter decreased by 10% organically, while orders were off by 16% organically. As we've discussed over the last several calls, this softness in power-gen bookings and sales is not a surprise, and is primarily due to the tailing off of SCR-related business in China, and the deferrals caused by potential new CO2 regulations in the US, partially offset by power plant construction in southeast Asia, and after-market sales growth.

We continue to see many drivers of medium- and long-term growth for our power-gen business, including Chinese particulate emissions regulations, investment in southeast Asia, upgrades to existing facilities to improve performance, and growing after-market needs. These opportunities have been discussed on earlier calls, and in particular I refer you to Ian Brander's Investor Day presentation, where they are explored in depth.

It is noteworthy that we saw the highest level of after-market power sales in Howden's history in the quarter, and greater than 50% growth in southeast Asia bookings in 2014, which gives me comfort that our long-term growth strategy is sound.

During the quarter, we also secured two significant orders from Japanese boilermakers, as well as our first air pre-heater order for the domestic Japanese market, which may become a significant new opportunity for us. Nonetheless, the 2015 outlook for both sales and orders in this market is for continued declines until later in the year when regulatory issues will be crystallized.

Next up is our second-largest market for gas and fluid handling, oil and gas and petrochemicals. As you know, we principally serve applications in the mid-stream with large screw pumps, and the downstream was compressors. Sales were down 14% organically in the fourth quarter, as expected, while orders increased 41% organically. As discussed in previous calls, conditions in our served segments have been challenging over a year. To date we've seen little, if any, incremental impact from the drop in oil prices.

Despite the macro head winds, we achieved a number of very important wins during the quarter. First, we landed the single-largest order the compressor division has ever won, with a value in excess of $30 million, which provides a crucial reference in our strategy to grow in the Middle East.

Howden has worked intensively over the last two years to meet customers specs with a product and scope of supply that provides lower life-cycle costs than the competition. We followed this up with an add-on order for centrifugal floors at the site. The CBS tools of value selling was the key to winning this business, through clear quantification of our lower operating and maintenance cost.

The timing here is excellent, since the Kuwait National Petroleum Company has announced plans to spend $40 billion through the year 2022 on various projects, including a new refinery, and expansion and modernization of two others. We have products ideally positioned for these applications.

Our second notable win was an order for boil-off gas compressors, which is our first major booking for this application. Boil-off gas compressors are used to re-compress gas boiling off from liquefied natural gas when it's stored. This is a key target application for Howden as we build our presence in the growing LNG market.

During the quarter, we also booked a significant order in Russia from Gazprom's Omsk refinery. While we hope to continue to capitalize on orders like these this year, given external market conditions, we expect modest declines in both revenues and orders in 2015.

Turning now to marine, which is primarily served by fluid handling and encompasses our navy and commercial marine business. Revenues were down 7% organically, while orders declined at a 14% rate organically. However, excluding defense, which can see quarter-to-quarter lumpiness, we saw growth in the fourth-quarter revenues for our commercial marine business.

Revenues were boosted by significant CM-1000 commissioning activities, as ship owners retrofitted our energy-saving system while their vessels were docked for other maintenance. There was also significant commissioning of new ship builds.

In addition, we are seeing increased interest in products that address the remediation necessary to meet the low sulfur, low viscosity regulations that came into effect last month. These positive trends should be sufficient to generate modest revenue growth in our commercial business this year. However, we expect continued decline in overall order rates in 2015 due to our navy business, which had an excellent order year in 2014 from the Block IV programs that we've discussed on previous calls.

Next, let's look at the mining market, which has been subdued all year. Orders for the fourth quarter posted an organic decline of 3% due to a very weak capital equipment spending environment. We continue to work our way through our remaining backlog, and due to some deliveries in the fourth quarter, we saw organic sales increase of 14%.

We remain focused on the key but limited opportunities for targeted projects. We enjoyed some modest successes in the fourth quarter, including follow-on orders from copper mining in Australia, as well as ventilation systems for copper and gold mines in North and 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 in 2015.

Finally, the general industrial end market for the fourth quarter of 2014, sales increased 7% organically, and orders increased by 4% organically. As mentioned, while quarter-to-quarter comparisons can be quite volatile due to the timing of large shipments and orders, this end market has been strong over the past year. We've mentioned environmental investments in China as an opportunity in this end market.

Although steel demand has dropped, major producers continue to invest in replacing older capacity with modern larger facilities, as well as upgrading existing facilities for environmental remediation requirements. We also received significant orders for blowers in the wastewater market in China and the Middle East, as well as a sizeable order from the locomotive sector this quarter.

On the pump side, we continue to expand into new areas like LNG compressor pumps, and propeller pump applications in the chemical process industry. We remain optimistic that this end market will continue to show modest growth in both sales and orders in 2015.

As I mentioned earlier, margins at 13.7% were very strong this quarter, driven by our culture of continuous improvement. This call I want to highlight the fluid handling site in [Ratizel] Germany, which saw good sustained improvement in on-time delivery, and the reduction of past due orders and inventory levels through the effective application of daily management. On-time delivery improved in 11 of 12 months in 2014 and ended December at 88%, versus 51% last December. Inventory decreased 12% year over year, and past due orders reached a three-year low.

The Howden Compressor division continued their excellent progress in strategic sourcing and procurement utilizing the CBS tools of category profile management, e-auction and value engineering. The team held their first value engineering Kaizen Week in November.

Working directly with engineering, sales, operations, and suppliers, the team was able to use alternative materials and designs to improve our customers with an improved performance and reduce costs on certain components by over 35%. The compressor supply chain team has realized nearly $10 million in annualized direct material purchase price savings in the past year, and have established a robust process to continue leveraging the CBS supply chain tools in 2015.

Now let's turn to the results for fabrication technologies. Sales for fabrication technology were $584 million, up 12% versus the fourth quarter of 2013. Victor Technology sales of $118 million provided a 23% increase, offset by declines of 9% related to foreign exchange, and a 1% organic decline.

Adjusted operating margins for this segment were 10.7%. While revenues in December were stronger than earlier in the quarter, margins are in line with the update Scott gave at the Investor Day. These margins, which are 50 basis points below those reported in 2013 fourth quarter, primarily from product and geographic mix, as well as lower sales and production volumes.

This is further exacerbated by the significant strengthening of the dollar in the most profitable regions, as well as soft conditions in the mining industry, which impacted our high-margin [sodexa] business. Margins were also adversely impacted by facility closings around the December holidays, and by the significant reduction in inventories by over $50 million in the quarter, which resulted in lower fixed cost absorption.

While revenues, excluding Victor, were the lowest of any quarter of 2014 and continue to be down organically year on year, the decline is less than previous quarters. This improved trend reflects a moderation of sales declines in Latin America, while shipments in Europe were essentially flat on a year-over-year basis.

These trends were partially offset by a solid mid-single-digit growth in North America, where I'm pleased to say that we're now participating in North American growth, as we increasingly put our Midway start-up issues behind us, and continue to re-gain lost business through differentiated products and applications. Clay outlined some of his progress at our Investor Day, and we continue to build on that.

In addition, our R&D investments in both equipment and advanced consumables are gaining momentum. Our new product pipeline is improving, and significant new equipment will be introduced later this year. While we're not satisfied with our performance in welding this quarter, the organization, culture, processes, and market conditions are in place for improvements in 2015.

The key to our operational improvements is tied to the use of our CBS tools. This quarter, we achieved significant inventory reduction and improved on-time delivery performance across our fabrication technology platform. Inventory has been reduced by $35 million at our Victor site since the acquisition. Their Victor team has embraced CBS, and has driven their results by applying tools such as demand flow and combine.

A good example was a Kaizen conducted in our Hermosillo, Mexico, site to implement a sub-assembly pull system with our Roanoke, Texas, facility. The old process required $786,000 of inventory to support the forecasted five-day demand schedule. By implementing pull production using [combond] cards, the team was able to replenish to actual demand, which lowered inventory by over 25%, and reduced the replenishment time to three days.

Last month I had the opportunity to visit one of our European filler metal plants, which is a great example of the power of our CBS culture and tools. After a series of Kaizens over the past several years and rigorous follow-up, the team has reduced lead times to under 24 hours, with 98% on-time delivery, and has increased inventory turns to the high teens.

What's even more exciting to me is that they're still not happy with this. They're going after the next round of improvements with the goal of getting even better in terms of quality, delivery, and value to our customers.

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

Thanks, Steve. As Steve mentioned earlier, sales for the fourth quarter were $1.2 billion, down 3% organically compared to the 2013 fourth-quarter sales. Foreign currency declines across the board, but most significantly in emerging markets in the fourth quarter, were a 7% drag on reported revenue performance. Adjusted operating income was $136.7 million, representing an adjusted operating margin of 11.3% for the 2014 fourth quarter, up 70 basis points from 10.6% in 2013.

Fabrication Technologies adjusted margins were 10.7%, down 50 basis points from the 11.2% in the 2013 fourth quarter. While Victor's performance increased margins for the segment, this was more than offset by the decremental impact of product and geographic mix, foreign exchange, and lower sales and production volumes. There were no notable non-recurring items in this quarter.

As Steve mentioned, adjusted operating margins in gas and fluid handling were up a strong 170 basis points from the 2013 fourth quarter, at 13.7%. Corporate and other costs of approximately $11 million were less than typical, reflecting reduced incentive compensation. Excluded from adjusted results are restructuring costs of $29 million incurred in connection with cost-reduction projects.

Interest expense was $10.4 million for the quarter, which includes approximately $2 million of non-cash amortization of debt discount and deferred issuance costs, as well as facility fees and the cost of bank guarantees and letters of credit. A large non-recurring item reduced reported interest expense by approximately $3.1 million, as interest expense was adjusted downward as the expected pay-out on the mandatorily redeemable preferred stock of a subsidiary issued in connection with the Swisslube acquisition is now expected to be less than originally provided.

Our effective tax rate for adjusted net income and adjusted net income per share of 24.5% for the quarter was also lower than expectations, primarily as a result of the enactment in the fourth quarter of the US tax extenders package, related in our case to the taxation of certain foreign income in the US. We do not exclude this from our adjusted net income, as it is proper to reflect this in the full-year results. The catch-up portion related to the first nine months resulted in a decrease in our fourth-quarter effective tax rate of 4.6 percentage points.

Operating cash flow of $185 million in the fourth quarter was our best quarter this year. In total, we were able to (inaudible - technical difficulty) working capital by $100 million during the fourth quarter. We had a strong performance in working capital this quarter across the entire Company, but particularly in fabrication technology. A continued focus on the CBS tools and reducing customer lead time drove inventory down over $50 million for the year.

Accounts receivable and accounts payable resulted in $75-million working capital build this year, which offset the inventory improvement. These numbers are adjusted for the working capital added in the Victor acquisition. We finished 2014 with a much stronger balance sheet, as we continue to improve our credit profile.

Finally, backlog and gas and fluid handling segment was down to $1.4 billion at quarter end, largely due to foreign exchange. Our booked-to-bill ratio for the fourth quarter was 0.92 to 1. While the fourth quarter tends to be stronger for sales and orders, this significant drop in the booked-to-bill principally reflects the lack of new orders for environmental remediation in the power generation end market.

Our fourth-quarter performance in total was precisely in line with the update provided at the Investor Day at the adjusted operating profit line, with lower than expected earnings attributable to the non-controlling interest, as well as lower interest in taxes, as I just discussed. Orders were slightly better than expectations.

Our expectations for 2015 on the local currency basis remain unchanged from the guidance provided in December. However, the US dollar has strengthened significantly against most currencies since that guidance, particularly against the euro and other European currencies. We are adjusting that guidance solely for the FX changes from those used in our original guidance. Revenues are now expected to be $4.25 to $4.4 billion, with adjusted earnings per share at $2.03 to $2.23. Please refer to slide deck for the specific elements of that guidance.

As to expectations for the first quarter, given the atypical allocation of revenue across quarters this year, we are expecting adjusted EPS of $0.31 to $0.34 in the first quarter of 2015. Revenue guidance on a percentage basis by quarter was provided previously at the Investor Day, and first-quarter revenues are expected to be in line with that guidance at approximately 22% of the full-year total. We do not intend to regularly provide quarterly guidance except in atypical circumstances.

With that, I'd like to turn it back to Steve

Thanks, Scott. While the fourth-quarter results included excellent execution in working capital management and strong margins in gas and fluid handling, we were again hampered by a sluggish demand environment, resulting in an organic revenue decline for the full year of 2014.

Despite the revenue decline, we improved overall margins after adjusting for the non-cash charges taken in 2014. As we guided in December, given the choppy macroeconomic environment, we expect 2015 to be another year without revenue growth, but with continued margin improvement. Obviously, our internal expectations are higher than this.

As we outlined in our Investor Day, over our three- to five-year planning period we expect more robust organic growth of 1 to 2 percentage points above GDP, accelerating the bolt-on acquisitions, and with core operating margins in the mid-teens or better. 2015 is an important transition year, as we begin to see results from the R&D investments we've made toward this growth.

Overall I believe the culture and processes are in place to deliver our performance goals. We continue to strengthen our team through internal talent development and external hires, and our acquisition pipeline remains quite strong.

In light of a more challenging global economy, we've stepped up the intensity of our M&A-related market research and due diligence, which has caused our transaction timelines to extend. However, we expect to announce a number of strategically compelling and financially attractive situations in the late second quarter or early third quarter 2015.

In summary, I believe we're better positioned in terms of our teams, businesses, and resources to consistently meet expectations going forward into 2015. With that, I'd like to open the session up for Q&A.

Thank you.

(Operator Instructions)

Joe Ritchie, Goldman Sachs.

My first question's on oil and gas. Clearly, the environment's been characterized by some caution on the part of your customers, but you booked your single-largest compressor order in the Middle East. You also stated that you're seeing little, if any, impact on quoting activity. Can you give us a little more clarity on what you're hearing from your customers there?

I think as we've said in past communications, our primary focus is in the mid and downstream portion of the industry. The upstream portion of the industry is a relatively small part of our total business mix. In that sector we have experienced declines, and would continue to see declines occurring through the balance of the year.

We've also seen some moderation in our order rate outside of that. However, our guidance is based on what we currently have on hand in terms of our backlog. As you know, we have excellent view on both our fluid handling as well as Howden, in terms of the backlog that serves the oil and gas market. We're fairly confident of what we see and expect for 2015 in our current forecast.

Yes, there will be some impact on the welding sector, as obviously we sell significant products there. But as Steve said, that is factored into our forecast

Okay. Maybe on that compressor order, Steve is this the first of a kind type order, or is it just the largest order you've ever booked before. The real question I have is really around pricing and how the environment is today for those large types of orders, as well as how you're thinking about the risk in taking on an order of that magnitude?

Interesting question. It's not the first order that we've won, and it's part of the strategy we outlined 24 months ago. We've been aggressively working in the Middle East to expand our presence there, and this represents our breakthrough in that strategy. That's what I was trying to reference in the prepared comments.

That is why we feel more and more confident about our ability to eventually offset the sales declines that we've experienced in China as a result of the SCR compliance-driven activity tailing off. This is exactly in the sweet spot of where we've been focused from a product management and product development standpoint.

Also, Joe, it also fits with the manufacturing strategy that we've outlined before, and what I tried to outline in the notes, where we've aggressively worked on reducing our cost to strengthen our margin in this particular part of the business, and strengthen our operating teams to deliver this kind of product. We're not only excited, we're thrilled because it's paying off the breakthrough of the policy deployed that we established around this quite a while ago.

It's an excellent job Ian Brander and Jim [Farbaren], and all the guys that are working around our compressor business. And positions us well against that $40-billion opportunity that we think exists for us over the next four years, five years.

Okay, great. Guys, maybe one last question. Steve, you mentioned strategic opportunities towards the end the second quarter, early third quarter. Is it fair to assume -- is it your capacity at this point around the $500 million we discussed in December, or do you have increased capacity at this point to do further deals? Any color there would be great, thank you.

No, that's -- we are in the same position we discussed in December. We do have that type of availability on our existing credit facility, so there's no change to the commentary there.

Okay. Thanks, guys.

Nathan Jones, Stifel.

Steve, in your prepared remarks you commented on the highest level of after-market for Howden ever. Is there something that's coming down as the SCR stuff in China goes into service and needs those? What's driving the after-market level for Howden? Is there a significant margin differential in the after-market for Howden?

There's really -- there are two or three parts to the question. First of all, Nathan, the comment I made referred to the power part of our after-market business, and we've see that business continue to build in momentum. That comment related to power only.

The second part of the comment, though, I would broaden it to say what's been driving the success we've experienced in the after-market over the last three years to five years has really been our increased commitment and resources focused on this globally. It's also been aided by the acquisitions that we've recently accomplished around the Howden business.

It is both an increase in resources -- it's a larger target market -- and it's become one of our highest priorities, because to your second point, the margins on average are much higher than our core business. The after-market's just far more attractive than what you might expect. From that standpoint it's a top priority, and we've invested, in fact in the last 24 months, dedicated more and more resources globally to pull that strategy off.

Okay, thanks. Jumping over to ESAB, have you at this point seen any de-stocking in the channel on the consumable side? What are your expectations there going forward?

We've not seen any significant de-stocking around the business, certainly not in North America. Maybe you're referring to in Latin America, where we had a change in distributor strategy at the beginning of 2014. That strategy is now complete, and we believe we're through that migration.

We don't anticipate, and have not seen any major change in inventory levels, if I read your question correctly, at the distributor level. In fact, nowhere on a global basis am I aware of something like that occurring.

Is that kind of adjusting time inventory management, where your distributors are running pretty lean inventories anyway?

That just-in-time strategy is being driven by our internal goal of providing outstanding service while improving working capital. Actually, in that particular instance it's one of our facilities out of the Czech Republic. Most of that product is actually going direct to the end user.

We supply a number of manufacturers in the transportation industry. As a result of our strategy, they've been able to lower inventory levels by 30%. Our service levels into that particular customer are close to 100%, as well.

That's a strategy that we've talked about many times on our calls. That's really demand pull, build to order, ship direct. We are on a track to implement that not only for distributors, but for our larger customers as well. We're trying to do that on a global basis.

That particular site, along with two others, have become really our global benchmarks or role models for the rest of the organization as we think about the rapid implementation of demand pull, ship direct. That's a key part of our CBS mindset and culture.

Thanks, and one more on ESAB. You talked about a moderation of the declines in Latin America. What's your expectation for that geography in 2015?

We continue to feel that in Latin America while those declines have moderated, we expect it will continue to be down in the low single digits. The big issue that we're working with there Nathan, is both in Brazil, but largely also in Peru, where the reinforcement of government-driven legislation around strip mining has reduced our sales at this point in time. We're re-directing our efforts into other end markets to improve that. But in that interim period, I would expect we'll continue to see modest declines throughout Latin America.

All right. Thanks very much

Thank you.

John Inch, Deutsche Bank.

Steve, if you look at the gas and fluid handling projects that comprise your backlog, is there a way you could -- I realize you have a lot of visibility into this. What is the risk -- I've been trying to get at the notion of the risk of cancellation. Obviously, companies that have started larger projects, they're probably remiss to stop them.

On the other hand, if they're smaller maybe they can get deferred or --I don't know. Is there any way you can put a little bit of a finer point around what these projects are for? And why -- it sounds like you have pretty high confidence they're going to go through, certainly through the rest of 2015, given obviously the energy backdrop?

What we've done with our Howden team -- and it goes back to the early days of the Charter acquisition -- we examined the history around the backlog and the quality of the bookings in the past. What we've seen is that this business in particular probably has the strongest delivery rate against orders that we have in that backlog. Our history and track record says that de-booking is something that's pretty infrequent.

We think the probability of delivering what's on hand at this point -- as you said, John, what's on hand at this point -- we relate that as a very high probability, and feel quite confident of that forecast as we look at 2015. That's based on the historical analysis that we've done. In fact, we focused on a number of the recessionary periods and found the same to be true.

Would you -- as you've looked at those recessionary periods, Steve, obviously 2015 is -- proportionally it sounds like 2015's baked in the cake for those businesses, right? One of the questions or concerns would be the lag impact associated with the environment.

Companies today, nothing's really changed much. It's the concern about what happens at the end of the year or heading into 2016. Is there a risk that there's a cliff? If there is, how do you and CBS respond to it?

Do you prune your costs later in the year, or do you try and supplement it with M&A? I'm just trying to understand the play book a little bit.

Well, if I understand your question correctly, you're saying if in a business at Colfax, if we run into a period where we see an unexpected drop, and confirm that drop is going to be with us for an extended period, at that point in time we go through a pretty aggressive process of re-forecasting the top line. That would be driven by hopefully a very strong level of interaction and engagement with our customer base. Once we've pegged that top line, we'll set the mission to size the business accordingly.

Once we establish what that looks like with the objective of maintaining customer service but delivery our operating margins despite the scenario you've outlined, where there's an anticipated drop in volume, we'll begin to restructure the business both in terms of its head count, manufacturing, and logistics profile and layout. At that point, what we'll have to do is to use the tools of CBS largely around standard work, and also again demand pull, to really down-sized the business according to the kind of demand that we would anticipate at that point in time. That would be what we would typically do.

I would have to say that's largely what was executed around fluid handling in the middle of the third quarter, now in the fourth quarter, by Darryl Mayhorn and his team. As they examined the order book and the outlook over the next 12 months, they felt that the business needed to be restructured in terms of its size and cost. As we announced a few months ago, we took an overhead reduction, or a head count reduction of nearly 4% or 5%. We closed a couple of facilities. We believe we'll generate over $10 million in overall improvement, and we will see an improvement in operating margin, even though those sales are less.

That's what happened in the fourth quarter. It was a down period year-on-year, but our operating margins improved dramatically, and our deliveries to the customer improved, as well. I think that's why we chose to use Radolfzell in Germany as an example where we've restructured in a number of ways, and the customer has seen an improved level of performance from Colfax, and in that example, the fluid handling team.

That's where I was going, Steve. If you look at your working capital performance, it's really strong, right, in light of the backdrop? If you think of Colfax's last three quarters, you've put up negative organic growth. This is where I was going.

Most people would define that environment as a recession, at least pertaining to a Company. Now you guys have been able to -- I'm trying to understand, if things were to get worse, are you able to -- you're obviously already using CBS tools, right, to put up really good performance for working capital and other ops management, and the margins at the gas and fluid handling business.

I just want to make sure there's a lot more you could do to preserve your profits, if in fact as you say there was an unforeseen turn-down further from what the trend's already been. That's all I'm trying to understand here.

I've got you. What I would say is -- then I'll come back to Radolfzell, which you probably know the site. That's one of our longest-standing facilities in the world here in Colfax. I think it was acquired in the late 1990s.

There is a facility which has been able to demonstrate tremendous improvements in performance as a result of leveraging the tools of CBS. We often talk about companies on either end of the continuum. We'll often talk about our best facility in Colombia, Kentucky, who year after year continues to find ways to improve working capital, to improve cost, and more importantly quality and delivery to the customers.

Continuous improvement, as it says, never stops. Good companies are able to do that. We're not in that category yet. We're still expanding and growing in terms of our capability, but there are other companies that we are able to benchmark and tie in with that clearly are able to do this in facilities they've owned for decades, so we can guide productivity.

But more importantly John, what we're trying to do is to grow the business. We're not in a recessionary environment. We believe that we're competing in attractive markets which have good opportunities for long-term growth.

What we've tried to do is to make significant investments in R&D. I think you've seen that as you look at our R&D investments in the ESAB business. A little more difficult to track because how the reporting works at Howden and our fluid handling business.

We've made significant investments in R&D, significant investments in feet on the street of our sales organizations, while trimming the back-office side. Our customer-facing resources have been untouched as we've gone through these restructuring. If anything, we've doubled down to make sure that we find ways to grow organically.

We're not happy with the level of organic growth that we have failed to achieve. But we believe that we're putting in place the resources to get us there. I believe that what we're seeing on the side of Howden is an example of that, when you see what's happening in Japan, when we see what's happening in the Middle East, when we see our ability to drive the after-market.

We believe that over the long term, each of these three markets are capable of generating or supporting organic growth a point or two above GDP. We haven't gotten there yet, but we believe that we are making the investments, and we're spending the time and energy to train and develop our people to be able to deliver. We need to prove that we can do that, but that's the game plan. We are not in a recessionary environment, and we're not in markets that are incapable of supporting good growth.

No, I got it. Cool. Thank you very much, Steve. I appreciate it.

Brian Konigsberg, Vertical Research Partners.

Hi, good morning. Maybe you could touch more on fab tech? Actually, it looks like US came in with pretty good growth.

I know it's an area you've been focusing on, gaining some more traction. Maybe give us a little more color on how you see that progressing through 2015?

Actually, maybe also touch on the price dynamics, maybe in that region and overall. I saw price mix for the segment was flat in the quarter, down from growth year-to-date. Maybe start there?

Overall, taking the second part of your question first -- and I believe Scott may have commented on that. Our pricing has continued to stick in the range of about 2%. It's stronger in some regions, a little less in others, but that's been about the average. I think mix has washed out a portion of that, as I think we talked about or described in our comments. Our pricing that we've seen in the neighborhood, we believe that the industry in general is operating in that zone.

The other part of your question I'm sure to come is the outlook for 2015. We would anticipate another round of increases at least in that ball park. There are some regions, obviously, where we'll be more aggressive in our pricing.

We've -- Clay, Ken Konopa and his guys have done a wonderful job of putting in place a pretty good pricing process, even in tough-to-price markets like Argentina. We believe that pricing's in the ballpark of 2% this year. It will be in the same neighborhood for 2015.

As we think about the growth prospects for ESAB in 2015, our guidance that Scott offered in December says that ESAB over the full year will grow at a range of between zero to 2%. We've described in the first quarter a slow start to the year. That's what we talked about in the fourth quarter. That's what we described in December. That's what we're anticipating this quarter, as well.

While we're starting to see an improvement in some of the key markets, we don't believe that we'll see a significant improvement in order rates for ESAB until the end of the second quarter, the early fall. That coincides with a number of major account wins that we've accomplished in a number of the larger regions to include the US. It also coincides with a very active product development that Ken Konopa and guys like Steve Arco have driven inside of the business, and what Clay's pushing with his team. It will be mid-year as we begin to see a real up-tick in our order rate.

Regionally, the other part of your question as we look at 2014, our stronger markets were in Europe in total. Another question I'm sure you have, Russia has been reasonably strong for us throughout the entire year. That growth is moderating. We anticipate that Russia could turn negative in 2015, and that's the assumption that we've built there.

Our business in China has grown solidly, double digits, reflecting the success of our automation strategy. As we think about the key businesses in North America, we've described before that we had major quality issues. We had major start-up issues with the Midway plant that we inherited from Charter. That start-up is behind us, so in North America we experienced a solid growth in the fourth quarter.

Certainly as we described in Latin America, we saw a moderation of those trends as we think through our distributor strategy and effectively implement that strategy. And also fill in a number of product gaps on the equipment side, particularly in Brazil, which will help us to stabilize the business there.

Solid growth as we think about in this past year. Solid growth in North America. Very good growth in markets like Africa, and importantly India, China outstanding. Flat trends overall for Europe, and certainly struggling a bit in the Middle East, South America, and the other parts of Asia when you take out India and China.

Actually, just on the pricing comments, so 2%, is that across the board? I'm just curious, North America specifically, is there any deviation from the global plan?

No, it's not across the board. That's a weighted 2% on a global basis. As I mentioned, it will be stronger in some markets for a variety of different issues based on inflation and costs of materials, manufacturing costs, and so forth. Then it will be a little less in others. It varies by market.

North America would be one of the softer ones, is that fair to say?

I wouldn't get into that level of detail, but we don't see any need to think about North America differently than we do some of our other core businesses' areas.

Okay. If I could sneak one last in. You touched on Russia.

Maybe you could give us a little bit more color. You're saying you expect that to go negative in 2015. How severe do you think that could be? What kind of mitigating tools can you use to maybe offset that decline?

Overall, what we've said is that -- and I think we've shared before that we've seen certainly a real slow-down around Howden, and also our fluid handling business that ships into Russia. Our ESAB business has been the real grower in that region, and continues to grow even through the fourth quarter. We believe we are being prudent to anticipate that's a market that will be down in 2015.

However, one of the great things that we've seen here is that because of our local presence, we are really a Russian Company in that region, we've been able to capture a surprisingly large share grab in a number of key markets for both our consumables as well as our equipment. The sanctions have had an impact on many of our competitors and their ability to ship into Russia, where as a local manufacturer for many, but not all of our products, we've been able to use this as an opportunity to expand share.

Our leader in the business, Clay Kiefaber, literally just returned from a trip to Russia on Monday, and had spent two days with our Russian sales and marketing organization reinforcing the tools of CBS, value selling. And reinforcing a major thrust in our policy deployment, which really says at the end of the day this is an opportunity to take share in this market place, because the markets opened up given the difficulty for international companies to export or import into the Russian market. It's created an opportunity.

From a budgeting standpoint were anticipating down trends, but from a policy deployed and how we're driving our organization, we're aggressively growing to exploit this situation and drive it and turn it into a positive. By the way, Russia's actually one of our stronger markets from a profitability standpoint, as well.

Got it, thanks.

Jeff Hammond, KeyBanc Capital Markets.

On the power gen, can you talk about timing for your clarity on some of this US and China regulation? What should we be paying attention to from a news flow standpoint there?

We don't really have an update from the comments we made in December. There's been no real new information.

In the US, the rule promulgation's been delegated to the states. I suspect it will be next year before we'll see anything in that area. The expected time frame in China is the end of this year. But there's really no new commentary from what we gave in December.

Jeff, I think you know that our strategy has been -- this will be, and I assume that's what you're poking at -- this will be a huge windfall for us when this finally comes through the government, because we'll pick up both SCR and also CO2. We're well-positioned against both opportunities. However in the mid-term, we've redirected resources elsewhere in the world to find a way to offset these issues.

That's why you'll see the success that we're experiencing in the Middle East. On the last call we talked about mechanical vapor compression and what we were doing in NVC to pick up the business there. We've talked about the investment and after-market resources, and also going aggressively after major opportunities in China, where that region will come through with new legislations regarding particulate removal. As Scott mentioned, that will happen in the fall or toward the end of the year. That's a major opportunity for Howden to exploit the business there, given our very strong presence.

While we're excited about what will eventually happen in US, who knows when that will happen, or when it will be announced. What we've done is to move those resources to other regions in the world to rapidly go after growth opportunities. It's more of an execution of dynamic resource allocation as part of CBS that gets us to move those resources to where we think there are better opportunities.

Okay. Then a little clarity on this 1Q guide and some of the seasonality comments. You're expecting a slow start in both segments?

That's correct. I think Steve gave a very clear commentary of the expected seasonality of welding.

On gas and fluid handling, we are having -- particularly in the Howden side of the business -- the first-quarter revenue outlook, as we said in December, is lower than normal. That's typically a reflection of customer demand. There isn't anything out of the ordinary going on in terms of cancellations or anything like that. It's purely just the normal customer demand flow of products, and it's precisely in line with the percentages we gave in December, and not a surprise at all.

Okay, good color. Thanks, guys.

You're welcome.

Mark Douglass, Longbow Research.

Looking at the fourth-quarter restructuring and then full year for 2014, it seemed like it was a little higher than expected. I think initially you were thinking $58 million -- or $50 million and it came in at $58 million. Did you accelerate some restructuring? If so, did that impact you 2015 guidance at all?

The overage in the restructuring is the two components that are about equally -- one was a small acceleration of restructuring. We give the restructuring guidance to the closest $10 million. This $3 million or $4 million restructuring acceleration didn't really affect the expectations for 2015.

The rest of it was we did from some of our early restructurings, we did take some non-cash write-downs of some properties we still hold. Those are the real two items that caused the restructuring to be a little bit higher than our initial guidance.

Okay, thank you. Looking at welding in the fabrication segment, you were thinking mid-single-digit decline in December. Then you indicated you had a strong finish to the quarter, some late-quarter wins.

Where were the wins? Can you talk about what kind of products they were? Was it new product introductions, or was it your sales team going out and really trying to deliver a good -- a better end of the year than you expected?

It was a better end of the year. Let me step back from your question on two levels.

First, for us as we think about the market in total, we see the market generally in line with what we've experienced and what we've seen through most of 2014. For us, we don't believe we'll see a sustained level of organic growth until we get into the middle of the year or so from that standpoint.

Just to put my comments in context, what drove the growth is where was it? As I tried to highlight a few minutes ago, the improvements that we realized really happened in a number of areas, but probably the most encouraging for us is the mid- to high-single-digit growth in North America. In that particular instance, the internal issues that we've addressed that we think better position us are around what we've done in manufacturing by leveraging our tools of CBS. Our quality levels have improved dramatically. Service levels, our lead times all have improved.

Where we're finding success are obviously customers that we lost and we were able to win back. The end markets where we're seeing the big success are around pipe mills. We're also seeing a big return on of our efforts in the rail car industry as we support driven legislation there.

We actually had a very good period in terms of the pipe mills that are in support of natural gas. We don't know whether that will last over the longer term, but we've seen success across of a variety of end markets. We've been able to win customers back, serving those end markets based on our operational improvement. That's what happened in North America.

A key growth for us, as well, certainly happened in China, as an example. In the China market, as we've talked about this before, it's our automation strategy that has been so successful. It's a high-margin, fast-growth portion of our business where we are up in the mid-teens in what's happened in China. It's a part of the strategy that we described on the ESAB Investor Day.

We've also seen good growth in India, or return to growth in India, South Africa. Russia -- I highlighted before has been a key mover for us and will continue to be so in the fourth quarter. Those are the growth markets. The underlying trends were largely taking share in those key areas on the back of customer wins.

We do see success from some of the new products that we have introduced -- probably most pronounced in Russia, as an example, on both the Warrior product line as well as our consumables. It's a combination of taking share a little less so from the new products. The new products are hitting. We've seen an increase in our vitality index, but the bulk of the new products will hit mid-year of 2015.

Okay, that's helpful. Good to hear you're getting some of those customers back. Lastly, what was R&D as a percentage of sales in 2014, and actually, what was it in 2013?

Well, the reason we don't provide that precise number is as Steve said, in gas and fluid handling the R&D is largely in application engineering. We do a lot of R&D in the development of customized products for our customer base. I think if I were to give a number like that it would be misleading, so I will not do that.

Okay, thank you.

You're welcome.

Matt McConnell, RBC Capital Markets.

Just a quick follow-up on the 1Q outlook. I definitely understand the revenue head winds, but what margin head winds would there be? Would margins be down in one or both segments year-over-year?

Well, there's a simple answer to your question. The only margin head wind is volume. Obviously at this level of volume there's going to be decremental margins.

If you run the math at our standard decremental margins, you'll get this exact result that the guidance provided. The net result of that is that margins will be significantly down in gas and fluid handling, because that's where the biggest margin decline is. I would expect that margins will not be down in the welding sector.

Okay. Great, that's helpful.

On the fluid handling margin improvement for this quarter, how much of that is moving past some of the specific large projects? Or maybe versus early returns from some of the restructuring you've been doing there? Can you give us a sense what contributed to that year-over-year increase in 4Q?

It's really none of the above, because we didn't have -- most of the effect of the restructuring we'll see in 2015. There may have been a small impact, but frankly relatively minimal within the fourth quarter. We didn't have any shipments of low-volume products in either Q4 of 2014 or 2013, so that wouldn't be the issue, either.

Essentially we've righted the ship on the two items we called out in Q1 and Q2. Our reliability services business performed much better, back at more typical levels.

We closed, or essentially closed down one of our two project businesses in Europe. The one that remained is operating quite productively here in the fourth quarter. It's really more of that than either of the things you cited.

Okay, great. Thanks very much.

You're welcome.

Walter Liptak, Global Hunter.

Thanks guys, just a quick one. With the compressor order in the Middle East, it sounds like this is the tip of the iceberg, or the beginning of your efforts out there. You mentioned the $40-billion refinery and other opportunities. What is the opportunity for your products, whether compressors or other?

The opportunity funnel currently rests at $80 million for the compressor team. That's a target that they are shooting for, and believe could flow over a 24- to 36-month time frame. On top of that's another $100 million which would be out over that four- to five-year time frame.

Okay.

$180 million total.

Okay, good. Are you -- are there other products that you're entering that market with?

The could be other tag-along or follow-along products, but the primary focus and what we've spent so much time concentrating on over the last 24 months to 36 months really all on the compressor business.

How are you finding that market? What are margins looking like on these projects? Is it a highly competitive market? Can you characterize it for us?

It's certainly a competitive market, whether we're in Russia winning or we're in Kuwait. I think what's happened for us is the success of the CKD strategy that we implemented with the acquisition in the fourth quarter; and how Jim Farbaren and Ian Brander and Dan Pryor was critical in helping us to put that together.

What's really happened is they've taken advantage of a very strong team in the Czech Republic that now has the manufacturing -- or together with the rest of the team, has responsibility for driving our manufacturing supply chain, and also our innovation on some of the new products. As a result of that acquisition, we're seeing a huge improvement in our overall cost profile, strong enough to give us a very competitive position in the market place, as well as a significant improvement in overall margin. We've really, as we've shared on other calls, we've placed a ton of resources in CKD to drive operating efficiencies to enable us to go after opportunities like these on a global basis.

Our other manufacturing sites in support of our compressor business have been quite strong and focused on CBS as well. It's the collection of all of our sites working together in the strategic plan the team created several years ago that's enabled us to compete very effectively in this competitive market place, and to do so profitably. That's been the key.

There's a big after-market component of this which is very attractive for us, as well. But obviously what we're describing right now are major wins in the floor market.

Okay. Thank you very much for the color.

Thank you. I'd now like to turn the conference back over to Terry Ross for closing remarks.

Great, thank you. Thanks again for joining us today. We look forward to updating you next quarter. Take care.

Ladies and gentlemen, this concludes today's conference. Thank you for participation, and have a wonderful day.