Enovis Corp (ENOV) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Colfax Corporation second quarter earnings conference call. At this time, all participants are in a listen-only mode.

Later we will conduct a question and answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Terry Ross, Vice President of Investor Relations. You May begin.

Thank you, Kat. Good morning, everyone, and thank you for joining us. My name is Terry Ross; I'm Colfax's Vice President of Investor Relations.

With me on the call today are Steve Simms, Matt Trerotola and Scott Brennan. Our earnings release was issued this morning and is available in the Investor section of our website, colfaxcorp.com. We will be using a slide presentation to supplement today's call which can be 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 able until the next quarterly call.

During this call, we'll 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 filing. 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 press release and supplemental slide presentation under the Investors section of the Colfax website.

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

Good morning, everyone. And thank you for joining us today. Before I discuss our results for the second quarter, I would first like to address today's other news about my intention to return to retirement and the appointment of Matt Trerotola as CEO and member of our board. Matt, who was most recently an Executive Vice President at DuPont is an outstanding addition to our already strong leadership team. Mitch Rales and I have known Matt since his days of the Danaher Corporation and we are thrilled to have landed someone with a proven track record for delivering results and who has an in-depth knowledge of the Colfax business system. While we recognize the headwinds and most of our industrial markets, we believe this is an excellent time for Matt to take over the reins for Colfax given the strong foundation that we've built. And for my part now is the right time for me focus on my family and transition back into retirement.

Importantly, while I'm retiring as CEO, I will support Matt who is transitioning and continue with Colfax as a member of the Board of Directors. Matt is with us today and will make a few comments later and he's looking forward to meeting with you in the coming weeks and months.

But now let's focus on today's earnings announcement. Adjusted EPS was $0.50 per share, which represents a 4% increase from the $0.48 per share reported last year. The increase was driven by continued margin improvement in our gas and fluid handling segment, non-repeating one-time expenses experienced in the prior year and lower interest expense, which were largely offset by continued volume weakness in our net markets. Net sales were $1.025 billion for the second quarter, a decrease of 15% over the same period last year. This consists of 5% organic volume decline and a negative 12% impact from foreign exchange, partially offset by 2% growth from acquisitions.

At gas and fluid handling segment performed as expected down less than 1% organically but we continue to see a very difficult market in our fabrication technology business, which finished the second quarter with an 8% organic drop in sales. Given the continued weak market environment, we no longer expect a strong enough second half to deliver flat organic performance for the year in our fabrication technology segment. Scott will discuss our revised guidance later in the call.

Turning to our business segments, gas and fluid handling net sales for the second quarter were $505 million with a 1% organic revenue decline, and a 10% foreign exchange impact. Adjusted operating margin for the segment continues to show strong improvement at 12.7% in the second quarter. The teams continued to execute well on productivity, restructuring and cost control actions.

Last year's second quarter segment adjusted operating profit of 8% was impacted by several one-time events that we noted in our announcement but did not adjust out of operating profit. However, even after factoring last year's one-time negatives, adjusted operating margins improved 150 basis points demonstrating substantial improvement across the business. I would especially like to highlight execution in the fluid handling business, where the team has made sustained improvement to delivery and project management performance.

Orders for the second quarter were $502 million, down 5% organically. This was in line with our expectations reflecting the non-repeating 2,014 SCR orders which largely concluded in the third quarter of last year. Overall, we saw another solid quarter for bookings in oil and gas, and an uptick in power generation orders offset by a weakening or remarket. As in previous periods, I'll note the timing of large project orders makes comparisons across sectors and quarters difficult. We will discuss market trends in more detail starting with gas and fluid handlings largest end market, power generation.

Revenues for the quarter increased by 1% organically, while orders increased by 11% organically. The new build activity in China offset the last of the SCR retrofit projects in this geography. We also saw solid after-market bookings in North America, and continued to achieve encouraging growth on a year-to-date basis with this important initiative. We also continue to make progress in Southeast and East Asia where as we've discussed in previous calls is a key area.

During the period, we also achieved an important award from an Asian EPC for a large project in North America -- I'm sorry, North Africa. While we continue to expect our full-year orders and revenue to be down in power due to the gap between regulatory cycles, the outlook for new power construction is stable, and we will expect the next regulatory driven cycle, particularly a reduction in China, to result in orders later this year with revenue by 2016.

Our second-largest market for gas and fluid handling is oil, gas and petrochemicals. Sales were up 3 percent organically in the second quarter as expected due to the timing of large orders and backlog and orders increased 31% organically. The growth in orders was led by Howden's compression division, which was awarded an approximately $40 million contract to supply compressor systems to Queensland Curtis coal bed methane project in Australia.

This win was made possible by the Howden's previously success with the customer. Because of Howden's outstanding delivery, excellence in product performance and project management, Howden was asked by this customer to take on a significantly broader scope of supply than we would have previously provided to this type of application. This expansion of scope is one of the growth initiatives we shared with you at our December Investor Day. Although we've been able to offset the well documented macro headwinds with success in geographic and application development initiatives over the last three quarters, we've also benefited from the timing of large orders. With these recent wins, we now expect revenues and orders for the full year to be roughly flat to the prior year.

Turning to marine, which is primarily served by fluid handling, revenues were up 9% organically, while orders were off 51% organically both driven primarily by the multi-year $30 million defense contract we were awarded in the second quarter of 2014.

However, we also saw a sharp fall off in commercial ship building activity. The steepest decrease was in spending on offshore support vessels for the oil and gas sector. But the merchant marine demand was also down. Even in the down market which is likely to continue to decline through 2015, we're positioning to expand our opportunities in some growing ship classes and technology trends.

Earlier this year, we delivered a new high volume centrifugal pump designed for water services on the largest vessels. This product launch opens a new segment of the commercial marine market to Colfax. Our initiative to increase aftermarket share is also achieving our target and we had double-digit aftermarket growth in the quarter. Overall, we expect generally flat revenue in the market for 2015 but a decrease in orders due to lower commercial marine new ship contracts and the non-repeating defense awards.

Looking at the mining market, organic sales increased by 12% while orders for the quarter posted a 23% organic drop. Globally, mining capital spending remains very low but we're focused on winning targeted projects. We expect a challenging environment in mining to persist throughout the year.

General industrial and market sales were off 10% organically and orders also fell by 10% as well. These declines were almost entirely driven by very low capital spending in steel, compared to strong spending in steel customers in 2014.

With the exception of steel, several sectors of the general industrial market are seeing modest growth. Looking forward, we expects steel to continue to be week for the balance of the year, which will largely offset modest growth in other end markets.

Despite the lower short-term CapEx cycle in several of our end markets one of the key growth initiatives is to capture higher aftermarket content from our growing install base and we seen encouraging traction in several areas of our business. Applying the Colfax business system tools has been a key enabler for us and is a good example of how power of CBS beyond manufacturing. Using value selling standard work and daily management tools, teams were able to reduce quote -- response time, improve targeting and lead conversion effectiveness and standardizing offerings in value propositions. In one example the team reduced quote response time from nine days to two. In other efforts to reduce quote response time from days to hours led to process automation and the development of a mobile application that allows immediate response to the maintenance person at a customer's location.

In another part of the business, improvements in the targeting and funnel management process led to a doubling of North America power turn around project wins. Before we leave gas and fluid handling, I want to publicly welcome the Roots Blowers & Compressors team to Colfax. We announced the acquisition in May and closed the transition -- transaction on June 30th. The business unit will now be known as Howden Roots and we celebrated with kick-off meetings at the Howden Roots facility in Connorsville, Indiana.

Now let's turn to the results for fabrication technology. Fabrication technology performance was again below our expectations. Revenue for the segment was $521 million, down 8% organically. Similar to the first quarter, our biggest headwind was the approximately 30% drop in oil and gas spending. In addition, we saw weak demand in certain key geographies such as Australia and the Pacific region, as well as double-digit drop in market activity for larger capital projects especially in Asia. Unfortunately, we also experienced softness in our North American distribution channel. This was in large part caused by the supply chain issues that affected us in the first quarter.

However, our root cause analysis also identified several areas of improvement such as distributor program support, which we're now addressing. On a more positive note for the past several quarters we've discussed our improvements in segmentation, in the user focus and value selling and highlighted several examples of customer conversions. This continues to be a bright spot for us and we saw overall modest growth in the direct serve part of our business. Distribution remains a critical channel for us, and we've discussed in previous calls Victor acquisition is significantly broadening the product bundle we offered to our distributors.

Earlier this year, our North America distribution sales team recently completed the realignment necessitated by the integration of ESAB and Victor. This combined team now provides our distributors consistent account management and a solid foundation from which to move forward, and we're also beginning to see traction from channel programs launched with our distributor partners.

Fab tech adjusted operating margin was 10.4%, below our expectation and driven largely by the weak volume. Price continued to be slightly positive. However this was offset by a negative mix resulting from weakness in oil and gas products, as well as equipment. We're committed to improving margins through this period of weak end marks and lower than expected volume performance.

To achieve this, we recently announced several major restructuring projects including the consolidation of our manufacturing footprint in the US, Brazil, and India. We've also taken additional G&A cost redirect actions in the quarter.

As in gas and fluid handling, our CBS culture is central to the improvement activities taking place. The ESAB platform conducted their 2015 [president] Kaizen Week in the Denton, Texas plant which came with Victor Technologies acquisition. Four teams comprised of executives at Denton Associates completed activities to simplify customer pricing and terms, implement demand internally and with suppliers and reduce set up time on critical equipment. These Kaizen activities help free up these [four space] and machine capacity required for the transfer of product from Florence, South Carolina. I continue to be pleased with the talent and performance of over the Victor team as they learn and embrace CBS.

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

Thanks, Steve. Sales for the second quarter were $1.025 billion, down 5% organically, compared to the 2014 second quarter sales. Foreign currency declines across the board but most significantly in Europe, Russia and Brazil, were a 12% drag on reported revenue performance. Adjusted operating income was $105 million, representing an adjusted operating margin of 10.3%, up from 9.1% in the prior year, but as Steve discussed 2014 second quarter included several non-repeating one-time costs. Excluded from the adjusted results are $8.8 million of restructuring costs incurred in connection with our cost reduction projects.

Corporate and other costs of $12.7 million were in line with expectations. Adjusted interest expense was $9.5 million for the quarter, which includes approximately $2 million of noncash amortization of debt discount and deferred issuance cost, as well as facility fees and the cost of bank guarantees and letters of credit. This was slightly better than expectations as both debt levels and the short-term LIBOR rates remained lower than anticipated.

Excluded from our adjusted interest is $4.7 million of noncash write offs, of previous debt discount and deferred debt issuance cost, associated with our refinancing completed in June. As previously disclosed, this refinancing extended maturities of our bank facility to five-years, and provided a covenant structure commensurate with our improved credit ratings and financial position. Our effective tax rate for adjusted net income and adjusted net income per share of 28.3% for the quarter was in line with expectations.

Finally, backlog in the gas and fluid handling segment was $1.4 billion at quarter end. The book-to-bill ratio was seasonally in line in the second quarter at 0.99 to 1.

Turning now to guidance for the balance of the year. Given the weak end market demand, particularly in welding, and the impact of the Roots acquisition which closed in the first week of the third quarter, we are adjusting our guidance as follows;

Roots will add anticipated revenues of approximately $60 million, with a loss of approximately $5 million to $6 million at the adjusted operating profit line.

This represents normal operating profit at a low single-digit level, which is lower than normal due to integration and shared service transition cost. These numbers are further reduced by transaction costs, and significant year one accounting items, including backlog amortization and the impact of inventory step up, which was largely reversed in the first six months of our ownership. We expect Roots to be accretive in the first quarter of 2016.

The guidance adjusts the foreign currency rates to the current levels for the balance of the year, which results in a $60 million reduction in revenues and a $7 million reduction in expected adjusted operating profit.

To further reflect current market conditions, we are adjusting our organic revenue expectations to a decline of 5% to 6% which is expected to be the same in both segments.

Finally, as Steve mentioned, we are taking significant cost reduction action, some of which will benefit the second half, some of which will largely benefit 2016, which will mitigate some of the detrimental margin impact of these lower sales.

In the slide deck, you will notice some modest adjustments to items below the adjusted operating profit line, which reflect our new bank credit facility, the impact of Roots on our borrowing levels and tax rate, and territories where income is expected to be generated. As such, we have revised the range of expected revenue to now be $4.035 billion to $4.11 billion, the range of expected adjusted operating profit from $405 million to $423 million, and the range of expected adjusted earnings per share of $1.83 to $1.93.

Based on the seasonality of our gas and fluid handling backlog, we expect the adjusted earnings per share for the balance of the year to spread approximately 40% in the third quarter and 60% in the fourth quarter.

And now, I'll turn it back to Steve.

Thanks, Scott. While we've not changed our perspective on the long-term growth of our serve markets, we expect the weakness we are seeing to continue for the near-term. As a result, we've taken steps to size our business appropriately for the current level of demand. Last fall, we began accelerating our cost reduction and restructuring actions in response to the volume softness we began seeing. In the second quarter, we took additional actions across all business units to assure profitability through the cycle. At the same time, we remain committed to organic growth in a preserved key growth investment including new product development, channel programs, and targeted sales resources.

In line with our ongoing plan to strengthen each of our platforms, we're deeply committed to our strategy of bolt-on acquisitions and remain confident in the strength of our M&A pipeline, especially in the gas and fluid handling space. Roots is a terrific example of the quality of opportunities we see, and we're working on other attractive deals that align with our financial discipline, match our organizational capacity to execute and could be announced later this year. From a broader longer term perspective, I believe that Colfax has made exceptional progress against nearly all of our strategic priorities. We've grown our leadership talent pool, effectively integrated the Charter acquisition, and added multiple strong brands to our portfolio to create a truly unified global business. We've also enhanced our position and attractive vertical and geographic markets, expanded our long-term organic growth on way and identified opportunities for further operational improvement.

With this strong competitive foundation in place for most of our businesses, I felt that now is a good time for a new leader to take Colfax forward into its next phase of growth. In line with that, I'd like to share a bit more about Matt, and then he'll say a few words before we open our session for Q&A.

I first met Matt when he joined the Videojet team at Danaher in 2007. I was asked by Larry Culp to help mentor this high potential executive and support Matt as he had adapted to our culture at Danaher. As you get to know Matt, you'll learn as we did at Danaher, that he's an extremely talented executive. Matt has spent most of his career at DuPont, Danaher and McKinsey.

At DuPont, he started in sales and marketing and held a number of management positions. He was most recently an Executive Vice President responsible for the $6.3 billion safety and protection in electronics and communications segments. He also managed the Asia Pacific region while serving in the office of the Chief Executive Officer. While at DuPont, Matt was responsible for applying innovative -- innovation to improve margins and accelerate growth in global businesses. At Danaher, where he was employed from 2007 through 2013, Matt was the President of Videojet and then Group Executive of product ID. In these roles, he accelerated organic growth and made acquisitions that both strengthened and redefined the group.

In his last role at Danaher, he was the Group Executive of life sciences. While at Danaher, he developed detailed -- a deep understanding and appreciation for the Danaher business system, the core value and philosophies that we share here at Colfax. In addition, he brings us strong set of leadership and management skills, a track record of delivering organic growth, significant expertise in global manufacturing and engineering businesses, and a deep international experience. The combination of Matt's experience and passion for continuous improvement is why we selected Matt to be our next leader.

I'd like to hand it over to Matt to say a few words.

Thank you for those nice words, Steve. Let me start by saying that I'm excited and honored to be joining Colfax as CEO. As Steve mentioned I've known him and Colfax for some time. I also know Mitch Rales Needless to say, I've been extremely impressed by what I know about the company including its talented management team and dedicated employees.

Steve and the whole team here at Colfax have done an exceptional job positioning the company for the future. And with this strong foundation in place, I believe there is significant opportunities to further develop the Company's international footprint and continue to deliver significant growth, strong performance, and shareholder value well into the future. I will work to build upon the foundation that Steve and his team have established to take Colfax forward into its next phase of growth. I know I'll be speaking with and meeting with many of you in the companying weeks and months and I look forward to that opportunity and to leading future earnings call.

Steve, I'll turn it back to you.

Thanks, Matt. At this point, I'd like to open the session up for Q&A around our earnings and we could also take a question or two from Matt.

Thank you. Ladies and gentlemen, in the interest of time, we do ask that you limit yourself to one question and one follow up question.

(Operator Instructions) And our first question comes from the line of Mark Douglass with Longbow Research. Your line is open.

Hi, good morning, everybody.

Good morning, Mark.

And congratulations on your second retirement, Steve.

Thank you.

Looking to the balance of 2015, on the margin side, do we expect GSH to hold at this 13% level and fab tech at the 10%-ish level or with some of the cost actions you think that actually gets maybe a little bit better in the back half?

I think on this fab tech side, we would expect to see the flattish type of margins as you outlined there. On the gas and fluid handling side, if we exclude Roots, which is largely dilutive because of the, yes, the first year of accounting items, excluding that I think we'll see an improvement in the margins in the gas and fluid handling segment.

Okay. And then on restructuring costs in the slide deck, you're still showing $15 million of anticipated restructuring costs. It sounded like you accelerated restructuring. What's going on there and then also what kind of savings are you anticipating this year and then next year?

Well, we've essentially come up with some savings in the existing programs that we're using to fund the new programs that Steve mentioned today. So we think in totality that we'll still spend about the same amount of money as we originally projected.

Most of the savings on the fab tech projects are going to be realized in 2016 which is consistent with the margin comments I made. In gas and fluid handling, some of the restructuring savings will be realized some in the third and more in the fourth quarter and it's something in the $5 million to $10 million type of dollar range.

Okay. Thanks for taking my questions and welcome aboard, Matt.

Thank you.

Thank you. Our next question comes from the line of Kevin Maczka with BB&T Capital Markets. Your line is open.

Thanks. Good morning.

Good morning.

So starting on fab tech, if we go back to Q1 in the negative 6 organic then I thought one of the takeaways was we felt like we had underperformed the underlying market a bit and there were some internal issue you were working on that would be corrected and that would help us get back to more of a flat type of an outlook for the year.

So I'm just wondering, it sounds like Steve from your comment about the North American distribution, maybe there's still some of those issues. I guess I'm wondering how much of this is the market further softening from what you saw then versus maybe some of the internal issues not being corrected on the time you thought?

That's a good -- thank you, Kevin. That's a good question. As we look at it, I think that we have seen an industry which is softened further beyond what we anticipate in the quarter one and we see that softening occurring really on a global basis.

The softening that we have seen is driven by really two factors. One, virtually any end market that's tied to oil gas so oil pipeline work offshore oil wells, OSV. We've seen significant further deterioration in those trends and accelerated into the second quarter.

The other key part of the industry that I think is depressed is that those industries are products or services associated with major CapEx investments. So we've seen a major drop off in the industry, as well, and our business as we said in the remarks is largely followed those trends.

Coming specifically back to your comments, Kevin, around the trends in North America, we in fact -- you're exactly right, in the first quarter, we experienced a couple of issues related to both the port strike on the West Coast, as well as a manufacturing challenge in our Mexico Hamersville facility. We talked about putting in place the appropriate counter measures to clear up those issues.

The fact is we are now at one of our strongest levels of on-time delivery from Mexico that they have realized in their history. The fact, though, is that it took us a little longer into the second quarter to fully correct the past situation we encountered, so that is well under control at this point. The business is performing well, and so we don't feel that we have the service or delivery issues holding us back as we had in quarter one, but we certainly took a little longer in quarter two to correct those problems.

And then I would add we don't see the pickup in demand in the second half that we had in our original guidance, so we've adjusted our guidance down, as Steve mentioned, the impact from the oil and gas segment, as well as the capital equipment segment, as well as standard equipment, to some degree, we don't see the pick up at this point that we expected earlier in the year.

Yes. What I would add, Kevin, the growth areas that we have seen, and I think these are true on a global basis, but we certainly see them in our largest market. Our largest markets are obviously Europe, both East and West, as well as Latin America and then third would be North America. But we would look at three key drivers of organic growth inside of the industry. It's the rail car industry. It's pipe mills that are in support of the distribution of natural gas, and then finally transportation. Transportation is less a factor for us here in the US, a little bit more of a factor in Europe and that's been positive. So those are the three drivers of any growth within the industry that we see. I think we would all say that.

And then secondly, the factors that Scott and I noted before in terms of those issues that are depressing overall industry growth for fab tech.

Okay, got it. Very helpful. If I can just ask one follow up. On price mix, I think the negative [39] was the softest reading there we'd seen since you had that business, but sounds like the price component was still positive. Can you talk about your outlook there with such a tepid demand environment? Do you expect that to remain positive going forward?

We do. We don't see any exceptional pricing pressures in the market, so that positive we expect to be able to maintain.

Unfortunately the negative mix that you pointed out, which is exactly related to the comments Steve and I just made, that the areas of the industry that are depressed use higher value, higher margin products. As Steve said we don't expect any real change in the segments that are strong versus the segments that are weak. So that negative mix element we do expect to continue to the balance of the year.

Okay. Got it. Thank you.

Thank you.

Thank you. Our next question comes from the line of Joe Ritchie with Goldman Sachs. Your line is open.

)) Thank you and congratulations to both Steve and Matt. Just quick question I guess just clarifying a little bit that Mexico manufacturing issue that you saw this quarter. Can you help quantify the magnitude that affected your margins? And also, Scott, maybe if you can just give us a little bit more color on the flattish margin that you're expecting on a year-over-year basis in fab tech? I guess it's a bit of a surprise to us because we started to see the midway issues in 3Q last year so I was expecting margins to maybe get a little bit better as the second half progressed.

I'll comment on Mexico, and then Scott will talk about the mix issue. In Mexico, it certainly was a significant issue but it'd be difficult to pull out one plant and tie in to the overall variance in the quarter.

What I can say is that we often look at a plant in terms of the size of its past due, and what's the oldest order. And so now we're within literally days instead of weeks in the prior situation so customers are being serviced on a real-time basis and so we should be well into the mid-90s, if not higher, within the next few weeks for Mexico.

And your comments are spot on there, Joe, that we also expected higher margins originally in the second half. Unfortunately the guidance no longer contemplates them essentially for the two reasons we've already discussed. We're still expecting organic growth to be in the negative mid-single digits. The detrimental margin effect of that, it will be shown in the new guidance. And then the mix issue that we've just discussed as we said, we don't see that changing. We have taken some steps to reduce costs. You will see lower SG&A spending in the welding segment, and we've initiated some new restructuring projects, but as I mentioned earlier the benefit of those are largely going to be seen next year.

Okay. That's helpful color. Maybe just a follow up there on, Scott, since you mentioned the organic growth. You know it still implies -- your guidance still implies an improvement in the second half of the year, just given where you are year-to-date. And I recognize that that business is short cycle, but some of your larger competitors are starting to see trends deteriorate in the welding market. I'm trying to get a sense for what kind of confidence do you have? Or is there anything that you're seeing in the underlying trends that lead you to believe you can see an improvement in the second half?

Yes, there are. I think we've discussed it's great length in the investor meetings and some of the earlier earnings calls, and Steve [already] mentioned just briefly today, that the direct service portion of the business is improving.

The other significant improvement area, some of the regions that were particularly weak last year, the Pacific region of South America comes to mind, but the comps are much easier there, and the Latin-American market seems to have stabilized, still not in a positive position but it's an improving position.

So those are the major factors that would attribute to what I would have to describe as a relatively modest improvement in the second half versus the first half for welding.

And what I'd say, Joe, is it's tied to two or three variables beneath below the detail that Scott provided. In Latin America, the team under Clay's leadership took some very aggressive actions to realign its distributor strategy particularly in Brazil. We're now past that, and that strategy is working for us pretty effectively. So Brazil is going to -- is starting to show solid performance for the first time in nearly a year. The team was also very successful in the Pacific Coast region in redirecting their investment and resources away from the mining sector into other key parts of industrial, which are growing. And so in Latin America we're seeing some of the strongest performance that we've seen really since we've owned the company. So very strong performance there.

It's a different issue here in North America. We're seeing positive trends in the early parts this new quarter but it's way too early to say that that's a trend, I guess. But in North America, one of the issues we've been dealing with is the realignment of our sales organization. While ultimately, we have more feet on the street, more sales, more marketing people than we've ever had in this region as we combine forces with Victor, the reality is that guys are now selling some of the products that they're less familiar with.

And so there is a start up or learning curve that we've come through, and we believe we're starting to see traction in the effectiveness of our sales and marketing programs. And that feedback along those lines we're receiving that feedback from our distributor advisory committees that we have around the country. And so Clay and [Kim Canopa], [Andrew Vonem], the teams that are driving the business on a global basis and certainly have this as their top priority in North America have been aggressively working with distribution to correct those issues and fine tune our programming for the back half of the year, and we're receiving very positive feedback. So I think that explains our optimism for a slight improvement in the rate going into the back half of the year.

That's helpful, guys. Thank you. I'll get back in queue.

Thank you.

Thank you. Our next question comes from the line of Nathan Jones with Stifel. Your line is open. Please go ahead.

Good morning, Steve, Scott, Terry and welcome, Matt.

Hi, Nathan.

Thank you.

Thanks.

Just starting off on the -- Steve, your commenting in your prepared remarks that you're expecting orders later this year on the next round of pollution control stuff in China. Do you have any indication? I understand that there's a big difference on the potential revenue there based on what technology they choose to go with? Do you have any more information on what's likely to happen there and what the size of the opportunity for you might be?

Not really, Nathan. What we are confident is that the legislation is moving along at a fairly quick pace. We know that as a result of the probing we've received from boilermakers that this activity is starting to come forward and we expect orders later this year, but the mix -- it doesn't look like there's going to be a prescribed solution here. It looks like it's going to be a mix of both the back filtered technology, as well as electrostatic, and so it makes it a little bit more difficult to put a clear number on that. We still feel that we've got a very significant opportunity here in China, and that in combination with the other gap fillers, Nathan, that we've talked about before, we feel that we'll be able to offset that SCR order level that we've seen in the past. So it's still difficult to nail down, but we are certainly seeing activity heating up at an accelerated pace.

Okay. You also mentioned an order that you received with an Asian EPC for a project in North Africa. Is there any difference on the pricing there? I know Asian EPC tends to be more price sensitive when it comes to that kind of stuff. Are you bidding and winning those projects at a similar margin to what you have been in other places globally?

The quick answer is yes, and the reason for that, of course, has been the strength in our technology and design that we capture here within Howden and that's given us an advantage so the margins are comparable, if not better.

Okay. And one last question. You also talked about traction in the aftermarket in gas and fluid handling. Can you maybe give us a little bit more color about the progress that you're making there and what if any differential areas in margin in the aftermarket relative to OEM work?

Well, the progress that we're realizing is a function of the realignment of our sales and marketing resources and the ads that we've put inside the business both on our gas, as well as fluid handling with the team down in Mayhorn. So the margins obviously are significantly better than our OEM business. And we're seeing that, as you look at some of the margins here, this is a strategy we really began you pushing almost two-years ago and we're seeing that growth rate, depending on the business, up in the mid-to-high single digit overall.

And what's the current mix of OE versus aftermarket and what's a kind of target level you would look for in those businesses?

When the gas and fluid handling in the slide deck it's at 35% now, we're certainly trying to move it north of 40%, but that is a multi-year project. That's not something you're going to see immediately happen.

Okay. Thanks very much, guys.

Thank you.

Thank you. Our next question comes from the line of Brian Konigsberg with Vertical Research Partners. Your line is open. Please go ahead.

Yes. Hi. Good morning.

Good morning.

Congrats, Steve and welcome, Matt. Just a couple of questions -- more on the gas and fluid handling side.

So in the oil and gas business, it seems like you're bucking the trend quite a bit versus a lot of peers and how it got a nice order. Maybe just talk about the pipeline work that you're talking about thinking you could actually hold orders flat for the rest of the year. What gives you confidence that you're not going to see the same type of push outs and cancellations while a lot of others are reporting? Maybe you can start there.

Well, you know, I think what we've said before is that most of our businesses as a corporation is in the mid-and downstream sector of oil and gas, and so we've seen less of an impact on our business in those markets relative to the upstream side and some of the activities that we're seeing in our welding business.

However, to be sure, couple of things. First of all, Brian, the size of our opportunity funnel is up dramatically double-digits. Our win rate in the opportunity funnel has increased dramatically. Again remembering that this was one of our top three gap, as we talked about ways of filling in for the SCR loss. What we would also say is many of the orders that we are competing for are moving to the right. So we've seen a slowdown in actual awards coming through. We've seen some delays.

So overall, we've seen some of the same activity that others have, but between the size of the funnel that we've been able to achieve or the increase, and our conversion rate, we're seeing a more positive impact or result here.

Remember, in this particular time frame, we had an extraordinary order that we received nearly $40 million, $34 million from Queensland, Curtis, which is a very sizeable order. We don't always believe we can achieve that on a quarter-to-quarter basis. So as I've said before orders particularly in this space can be very lumpy but if we look over the longer term, we believe that our gap fillers are working, the size of the funnel has increased, our conversion rate is up and it may move a quarter one way or the other. But overall, these strategies are online and starting to deliver against the longer term commitments and goals.

Yes, I would add that on a revenue basis, we're very confident in the comments that Steve made as to the business being marginally up for the year. We essentially have the projects in hand and most of them are already started. So we're highly confident of that.

On the order side, we did comment that it was going to be marginally up for the year in total. We don't expect the fourth quarter to be up, because we had that very large Middle East order. Hopefully we'll continue our trend of large orders, but the specific commentary was for the full year, not the balance of the year. So we do have a very tough comp in the orders for the fourth quarter but on revenue we're very confident we have the business in hand. There's little risk of that being pushed out.

Okay. And on the orders that you are realizing today, is the margin profile similar to what you're recognizing in revenue or is there some -- ?

Yes, yes.

It is? Yes.

Yes.

Okay. And then just moving on there to Russia, just generally maybe you could comment. I know you probably comment on more difficult comps in the second half given early last year you were -- a lot of your competitors were shut out of the market. Maybe just talk about trends you're seeing in that market across both of the businesses, and can you continue to grow in the second half, just with the backdrop of the market being fairly weak?

So, I think in our forecast we've assumed that our businesses began to slow in Russia. In fact, get into negative territory -- to be honest, we've actually seen that on probably our largest competitor there -- our largest piece of business, which is ESOP. Year-on-year, we're now down about mid-single digits. We believe that market by the way is down in the mid-teens. So we, as I said before, are certainly taking share in this marketplace, given our local strength. And so we built into a forecast an assumption that we're in a negative region here on both businesses, but the most significant one we have is ESAB.

I would point out that Russia is only about 5% --

Yes.

Of the total sale, so while it is an important market, there hasn't been massive movement in the trends relative to the whole company.

Yes.

Great. Understood. Thank you very much.

Thank you. Our next question comes from the line of Jeff Hammond with KeyBanc Capital. Your line is open. Please go ahead.

Hey, guys. Good morning. Steve, congrats and, Matt, welcome aboard.

Thanks.

Thank you.

Hey. So I mean, a lot of moving pieces within gas and fluid but I think you had been saying core down 2 to 4 and now down 5 to 6. Can you just go through the components of what you think is worse? Because it seems like power gen okay, oil and gas orders okay. So what's getting worse here?

But it's largely general industry. So if you look at our slide deck, you'll see the decline in general industry is a little bit steeper than we expected at the beginning of the year. We don't see that trend changing, which is why we took the guidance down.

I will point out that despite the lower revenue guidance, we expect to continue to make the absolute profit that we were expecting to make there, i.e., we'll have improved margins in the business.

So while the revenue will be down a little bit in that shorter cycle, general industrial area, the overall performance for the segment at the profit line will continue to be just as strong as we expected.

Okay. And then where is the incremental FX headwind coming from? What currencies have gotten --

We haven't changed the ever FX since the end of January, so if you'll recall we didn't make any adjustment at the first quarter call because the currency has moved only 3% or 4% and we didn't want to get into a position of adjusting the guidance every quarter. So since the January the euro has certainly moved down to some degree, and then a lot of the emerging currencies of Brazil being the most significant one for us has deteriorated quite a bit since the January last update.

Okay. Great. And then just finally, can you update us on pipeline? I think there was another similar size deal of Roots that was maybe in the pipeline, and then maybe how do you see the CEO change impacting? How aggressive or nonaggressive you want to on M&A?

I'll comment on the first part, not to obligate Matt to something to [heat] beyond it. So Jeff, the pipeline is still pretty rich, as I tried to highlight in my comments.

There were two or three comments that I think were important to focus on. One is we want to make sure we size the opportunity, of course, relative to the capital we have available but it's also a function of where our business is and where the management team and their capacity is to deliver against the integration and synergies that we carve out in the white papers. So we have opportunities throughout the business.

Probably the strongest and those that are probably to be highest -- most probable or likely this year are going to be in the gas and fluid handling areas. So we have a number of different deals that we are very excited about. We believe we may be in a position to announce another in the back half of the year and we're very excited both sides of our business, but in that time frame you asked the question would be in gas and fluid handling. And the profile would be not unlike what you've seen from us before sort of in the same zone in term of the same attractiveness. I think very complimentary from a geographic and footprint standpoint, great margin upside, appears to be a pretty strong management team in place with all three areas. So I believe that they would look very much like what we've done before in the gas and fluid handling sector.

I don't know Matt if you have -- it's a little early for Matt on the --

Yes.

On the what I -- I believe that -- and Matt and I and Mitch and, of course, the full board in talking with Matt, and obviously Matt's very comfortable with acquisition given the background at Danaher, but I think he'll need time to get comfortable with that but I believe that's one of the attractive areas that drew Matt to the company, the opportunity for both organic as well as inorganic growth.

Yes. Well said, Steve. I mean as Steve and Scott have described some short-term headwinds that the team is proactively managing but going forward the focus is on organic growth and also on acquisition-based growth. And I'm really excited about the runway these business have and the great opportunities, and so for sure we'll be active there.

Okay. Thanks a lot.

Thanks, Jeff.

Thank you. Our next question comes from the line of Chase Jacobson with William Blair. Your line is open. Please go ahead.

Hi, good morning. Welcome, Matt. Congratulations, Steve. So first question, I just have one on -- another one on the gas and fluid margin. It's obviously very strong and you expected to stay pretty strong in the quarter -- I'm sorry, throughout the year.

You had some issues last year in fluid handling. Can you maybe just talk a little bit about the margin mix between the two? I mean, is most -- is there improvement in the gas handling side or is it all coming in fluid? Any color you could give there would be great.

We have seen solid margin improvement on both sides of the business. Chase, I think you're talking about -- in fact it was a year ago that we went through a pretty significant write off and followed up with restructuring and fluid handling. And so Darryl Mayhorn and his team have done a really nice job of -- resized the business. I believe we were moved -- the downsized 3% or 4% reduction in head count, consolidated a manufacturing and assembly site, have really strengthened our supply chain. They've done a wonderful job of getting the cost aligned to fit the size of the business and so we're now seeing the real return on that investment we made a year ago come through the numbers.

I would also say that if it's -- and certainly in the early part of 2016, we will likely see bookings growth on our fluid handling business based on the size of the funnel that they've developed for us at this point so very nice trends there. But the same thing is true for the team under Howden and Ian Brander's leadership. You know this is an area where because of the SCR fall-off chase, we put together with Scott a very significant restructuring program at the end of 2015, or I should say about mid-2015, and 2014 and have been executing that throughout and so we're beginning to see some of those restructuring programs and initiatives [re-grew] in the business.

So Ian and James Brown and his team there have done a wonderful job of leveraging the cost and getting that down to the size of the business. And at the same time as I tried to highlight in the remarks, we've tried to really preserve the investments that we're making in the growth initiatives, not only in fluid handling but clearly here with Ian and his team and Howden, as well and you see some of that paying off in some of the big orders that we've won in the Middle East with [Jim Ferber] and the guys on compressors, and other opportunities. So I think we've got the right balance there, and we'll see strong margin and hopefully solid top line growth in 2016 because of the investments.

Okay. And then, Matt, if you don't mind, if I could ask you a question. You know you obviously know the management and the board here at Colfax, and you have some familiarity with the business. Just wondering if you can make general comments on your view on pursuing growth versus improving returns and maybe just some sense of what your expectation is of timing around your initial review of the business once you officially take the position tomorrow?

Okay. Well, I think I'll say what was exciting to me about Colfax was these are attractive global businesses with great teams and this great team here at corporate as well as in the businesses. And the business system culture is one that I believe in, and I've got a chance to follow a great leader like Steve, who has built a great foundation here.

So I think clearly we're going to continue to drive aggressively on improving the business, supplying the Colfax business system and lean tools to keep improving and strengthening the cash flows of the businesses. That will be a never-ending quest. But at the same time, we're going to put more and more emphasis on the organic growth of the businesses, and I know there's a lot of opportunity there. There's some good progress, but still plenty of opportunities.

And then finally, we'll be aggressively working the acquisition pipeline and I think those are the priorities, and I'm excited to dive in. I've already started to learn and meet a lot of folks. I'm just really excited to get going.

Okay. Look forward to working with you.

You, as well.

Thank you. Our next question comes from the line of Joe Giordano with Cowen & Company. Your line is open.

Hey, guys. Thanks for taking my questions here. I know we spoke a bit about fabrication but I just want to get back to the margins a little bit. On a sequential basis versus 1Q, revenues up mid-single digits, you mentioned price not really being a headwind so obviously mix offsetting both price and the benefits of some leverage there. So can you maybe dig in a little bit as to what is driving that mix? I know it's end market based but like what specifically on the product side is kind of pushing margins there?

The end market really is the explanation here and which products are driven through the trend markets. So specific products are the large capital projects, which as Steve mentioned in the prepared remarks, are down from 2014. The standard equipment is down, and as you know the welding industry, the equipment margins are better than the consumable margins. And then the mix of consumables, the field consumables, the electrodes and things of that nature, are down where as the businesses that are -- the end market Steve mentioned that are up tend, on average, to use lower value consumables.

So that is the full explanation -- is the combination of those end markets that are strong versus weak and this mix of products that they use. That's the -- does explain the entire margin issue.

Okay. Fair enough. And maybe you could touch on some of the details on the restructuring that you're going to be taking in the second half, like what types of projects you're going to be putting through.

Well, the new projects are largely -- the more immediate right sizing of the business and the staffing levels for the current projects. The very significant projects, the ones that are going to have the most impact for 2016, are projects that we've announced earlier. The most significant ones being the facility consolidation projects within welding, which is the three plants in North America being consolidated into two, with the further consolidation of a distribution center, a consolidation of facilities in South America, consolidation in India, as well.

So those projects are well underway, but they will not be completed until towards the end of the year and the benefit of those projects will largely be in next year's results.

Great. Thank you, guys.

Thank you.

Thank you. Our next question comes from the line of Walter Liptak with Global Hunter. Your line is open. Please go ahead.

Hi, thank you. I don't want to beat a dead horse on the fab tech business but I understand that oil and gas is weak, and the mix there, but is there something else going on like in North America or in Europe where you're seeing slowing like what sectors, construction, markets should be picking up in the US, for example, and just seems like there's a disconnect between kind of the growth rates in welding and kind of general industrial.

Those applications which are most welding intensive and most intensive on (inaudible), we believe are some of the sectors that are probably not experiencing the same levels of growth that we see in many of the industrial markets and that's how we've seen the industry. And as we look at areas like marine that are shifting out the pipeline work which are so intensive for us as an industry, we've seen a real slow down in those vertical markets, and as a result we think that's what's softening the overall demand profile for the welding industry.

Okay. In the description we can get in the US during the quarter versus, say, Europe or Asia in terms of the fab tech trends?

For us specifically, sure.

Yes.

I thought I -- sorry if I didn't cover that. In North America, we're down comparable to what we have seen in the first quarter. The key drivers in that, as we've shared before, has to do with -- one, a number of service level issues we experienced as a result of our manufacturing in Mexico, or in our manufacturing facility in Mexico. We talked about -- it's sort of a drop off in service level that continued through the early part of the second quarter, which is now seemed to have been corrected. We talked about as well the fact that we've realigned our sales marketing and product management organizations as we integrate Victor and ESAB in North America and certainly have seen a slowdown in the momentum that we've had previous to this so we think we're seeing that start to gain in traction now. We also talked a bit about the programming, particularly with our distributor network which was not as competitive as it needed to be and we've made corrections with that. So I think it would revolve around both service level, organization restructuring and programming, keeping in mind that I think, as Scott mentioned and I had in the prepared remarks, we have another very important part in our business in North America, which is that business where we go direct to the user, which is up nicely in the mid-single digits. So the issue that we've seen is largely around the distributor side of our business.

We now have access to data for many of our distributors looking at their sell through. And what we can say for a couple of our largest distributors, our sell through has been stronger than the reorder rates. And so we believe and hope that we'll see that order rate pick up, particularly since our service levels have popped back and the programming seems to be more on target so that inventory adjustment I hope is behind us at this point in time.

Okay. Great.

I guess you also had a question on -- did you want to have feedback on Europe, as well?

Yes. Yes, please. Thank you.

Okay. Then very quickly here, just to put it into context, we talked in the first quarter where we were at this same point whether or not we had lost share there because we experienced a drop in Europe that was also in that mid-single digit range, and in Europe what we believe is the industry is actually off in that range so this is the one region of the world, where as an industry, we actually have data or panel data that tells us what market share is, and how it moves quarter-to-quarter. It's just one quarter behind our earnings release, unfortunately.

So what we saw in the first quarter is that we actually held share, despite that mid-single digit fall off in business. And so we know we're holding share in that marketplace. I believe that despite the fact that we're down mid-single digits this quarter, we'll see that again it's a period where we held share.

I think that as I highlighted the opening part of my comments if you look at the end markets that are driving that soft market in Europe, it's true with what we see globally, and that oil and gas is down, which will be a root cause behind our oil pipeline business, our offshore oil well work is down and OSV work and marine is down, major CapEx spending down significantly, and that in terms of capital goods and how that affected our capital goods business and automation has certainly been negative so those are the variables that are affecting the industry. That's what's happening to our share and, overall, we think we're holding that position.

But let me remind you that when we acquired the business -- this was a business where share had been consistently dropping over time and the team under Clay's leadership has actually stable iced that and clearly we're not happy with our growth or where the share is but we've stabilized the share declines and have managed to overtime improve that and of course, during the same time improve the operating margins from the 5 to 10.5 or so that we're at today so a lot more work to be done here but we believe we're on the right track.

Okay. Great. Appreciate that color. One other one. I wanted to ask about, China. You mentioned that those projects are on track for maybe the back half or late in the year. You know, we've heard about slowing in China, and I wonder what that timing looks like? Could it push out to the right? What are you hearing, I guess, from your China customers?

Yes. I think that's a fair point and observation for most geographies but I'm not sure that holds true for China. When legislation is passed, it tends to move with a real sense of urgency. That's what we've seen in the past. And as I tried to share before, three of the largest boilermakers in China that will have the greatest position in driving for the new compliance have begun to approach Howden as we work through the technical specifications and also the design for the upcoming solutions so that legislation will be approved formality within the next few months. It's been out for comment for quite a while and there have been no changes to the legislation during that period.

But also say that as you've probably seen, there are real teeth in that legislation which empower the government and local counties to really go aggressively after those sites that are out of compliance with the new form of or the new regulations. So there are real teeth that have been added. China has a history of being very aggressive in implementation, and with no questions asked or -- and excuses accepted. So we believe the combination of those variables and the order inquiries we're receiving we'd say we should start seeing orders to the (inaudible) very end of this year, early next year, and we may see actual shipments or revenue as a result in the latter half of the second half of 2016.

Okay.

All right.

Okay. Thanks very -- thank you very much.

Thank you. And that does conclude today's Q&A portion. I would like to turn the call over to Steve Simms for any closing remarks.

Thank you. Before closing today, I'd like to express my thanks to the associates throughout Colfax for the tremendous support they have provided me over the last three-years and also recognize this team for the great work that they've done in turning around each of their businesses and I'd also like to say thank you to all our investors and analysts. I've always enjoyed our interactions or most of them and I want to thank you for your continued interest and support of Colfax going forward. Thank you guys and have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.