Enovis Corp (ENOV) 2015 Q3 法說會逐字稿

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

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Terry Ross. Sir, you may begin.

Thank you, Kaylee. Good morning, everyone, and thank you for joining us. My name is Terry Ross, and I am Colfax's Vice President of Investor Relations. With me on the call today are Matt Trerotola, President and CEO, and Scott Brannan, our Chief Financial Officer.

Our earnings release was issued this morning and is available in the Investor's section of our website, ColfaxCorp.com. We will also be using a slide presentation to supplement today's call, which can be found on the Investor's 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 supplement slide presentation under the Investor section of the Colfax website.

Now, I'd like to turn it over to Matt.

Thanks, Terry. Good morning, and thank you for joining us today. Before we discuss our third-quarter results, I want to share some thoughts from my first few months leading Colfax.

I've spent much of my time learning and listening to our customers and associates, but I've also been assessing our culture and talent, and supporting our leaders as we focus on improving our relative performance through some very challenging end-market conditions. I've been very pleased to see the level of commitment to our values and business systems. These are the cornerstones of a strong operational foundation.

I'm also encouraged by the amount of opportunity I see to improve and grow our current businesses. Our challenge is to focus our efforts very judiciously in the face of market headwinds. We must be more aggressive in managing our cost structure in the short term, as we work through the down cycles in several of our important end markets, especially oil and gas and marine.

Through our strategic planning process, we believe that these downturns are cyclical, not structural, but the timing of the recovery in these markets is uncertain and may not be seen before 2017. Therefore, we've identified additional cost structure actions that we can take without limiting our operational capacity to accelerate growth. These actions are broad-based across all three of our businesses and address manufacturing, operating, and corporate expenses.

While we've taken significant actions this year already, we now have specific plans which will accelerate and extend the reduction of our cost structure. Specifically, we have accelerated restructuring programs as much as possible. This will result in an increase in our planned restructuring cost to $66 million for 2015 and approximately $50 million, more specifically, identified for 2016.

Second, we've continued the resizing of our workforce. These programs result in a workforce at the end of 2016 that is approximately 1,500 less than where we began this year.

Third, restructuring programs are expected to save in excess of $100 million compared to the cost base with which we entered the year, when they are fully implemented. With less than half of that realized in 2015, and not all of the balance in 2016, we'll provide more specific guidance later in the year as to the phasing of these savings.

Finally, on a constant-currency basis, after these restructuring programs and other cost reduction actions are implemented, our selling and administrative costs will be reduced by approximately $80 million when comparing 2016 to 2014, with about a third of this as incremental 2016 savings.

We are equally focused on improving our growth through target initiatives and on expanding our margins through value pricing and sourcing efforts, so we can outperform the competition through this cycle. I've been working closely with each of the business units as they've developed their strategic plans and budgets, and I'm excited about our opportunities and committed to accelerate the pace.

Now, I'll discuss our business segments. First, our fabrication technology business continues to experience significant organic sales declines, down 4% for the third quarter. We see several of the most welding-intensive industries, oil and gas, marine, and heavy mobile equipment, down sharply. Similar to previous quarters, our biggest headwind was the decline in oil and gas spending of approximately 30%. This continues to impact both volume and mix in all major regions.

While third-quarter results include some charges that Scott will discuss later, even excluding these charges, our profitability for this segment was well below our expectations. We have discussed the causes of this profit erosion in past earnings calls: volume decreases, strengthening US dollar, product and geographic mix, and customer service issues. Today, I want to describe what we are doing to reverse these trends and return to more acceptable performance levels.

First, we're reducing costs in this segment, in line with the current revenue level and trajectory. Operating costs will be reduced by approximately $60 million compared to 2014, on a constant currency basis, with headcount down by over 1,000. Second, we're focusing on better meeting customer needs by improving delivery levels, aligning our best commercial resources with customers, and having dedicated specialists for key product lines. I have met with a number of customers in the past week and confirmed that they're seeing improvement.

Third, we're intensifying our value pricing and sourcing efforts to offset the gross margin headwinds we experienced this year. Finally, we have some exciting new products launching in the coming quarters that should accelerate our equipment growth.

It is a difficult situation, and we will not resolve it overnight. As you can imagine, I plan to focus a significant amount of my time here helping plan the team in the short term. I believe we understand most of the issues and are treating them with appropriate urgency. I'm confident that we will make steady progress by applying our CBS tools and will reemerge as a strong leader in this industry.

Turning now to gas and fluid handling segment, orders for the third quarter were down 13% organically. This was below our expectations due to the timing of some large project orders and the push out of refining and petrochemical maintenance in our shorter-cycle reliability services business. Customers are striving to maximize production and reduce spending during a period of high refining margins, that will likely be followed by some tough times.

Overall, we saw another solid quarter for bookings in power generation, offset by the weakening marine market. As in previous periods, the timing of large product orders made comparisons across sectors and quarters difficult.

Let me share some additional market trends, starting with the largest end market, power generation. As expected, revenues for the quarter decreased by 9% organically, while orders increased 6% organically. New build activity in China continued to be steady, which was offset by the expected environmental regulatory retrofit program decreases in China revenues.

On the order growth side, we had an important environmental upgrade project win in the Western US, in which we were selected to supply air heaters. We also received an order for a full turnkey air heater retrofit in the US, converting a competitor's install base to our new double-ceiling design. This will be a very important reference site for the heater retrofit strategy.

Also impacting order activity, we experienced lower aftermarket bookings in North America after a strong second quarter, reflecting normal quarterly fluctuations. While we continue to expect our full-year orders and revenue to be down in power, due to the non-repeating, prior-year SCR retrofit activity in China, the outlook for new power construction and aftermarket products remains stable.

Turning to oil, gas and petrochemicals, sales were up 2% organically in the third quarter, as expected, due to timing of large orders in the backlog, but orders decreased 14% organically. Orders year to date remain up, despite a clearly down end market, but the timing of large project orders always make quarterly comparisons in this market difficult. We continue to make progress on our strategy to expand our addressable market for oil and gas applications.

In the quarter, we booked our first project wins incorporating our new high-efficiency centrifugal design. This new design allows us to compete in a wider set of applications and geographies than what was previously serviceable for Howden CKD.

Although we've been able to offset the well-documented macro headwinds with success on geographic and application development initiatives, we've also benefited from the timing of large orders and will face a difficult large project comparison in the fourth quarter. With our recent performance, we now expect revenues and orders for the full year to be roughly flat to prior year in a market that is estimated to be down double digits.

Turning to marine, which is primarily serviced by fluid handling, revenues were down 8% organically and orders declined by 31% organically. This was driven by a sharp reduction in new commercial ship construction contracts, especially in the offshore support vessel category, which primarily serves oil production. In addition, orders for the third quarter of 2014 included an $18 million portion of the multi-year contract award in our defense segment in 2014.

Similar to oil and gas, we are making progress increasing our served market in commercial marine. Earlier this year we expanded into a larger ship size segment. This quarter, we achieved a new specification approval at a major Korean shipyard and booked our first order to include this broader solution set. Our new initiative to increase aftermarket share continues to make strong progress. Overall, we expect generally flat revenue in this 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 decreased by 36%, while orders for the third quarter posted a 17% organic decline. Globally, mining capital spending remains very low, but we're focused on winning targeted projects. We expect the challenging environment in mining to persist throughout the year, but still see this as an important segment that will grow again in the future.

General industrial end market sales declined 10% organically, while orders posted a 23% organic decline. While heavy industry activity continues to be off sharply, we did book a large environmental retrofit project in China for a steel mill customer. It's worth noting that China's new air pollution reduction targets will require upgrades by most steel, cement and other heavy industry customers, but we expect many of these customers to delay their investments until later in the five-year compliance window.

Looking forward, we see a mixed outlook for the broad range of applications that make up our general industrial market.

Now, I'll turn it over to Scott to discuss the financial results.

Thanks, Matt. This morning, we reported our third-quarter results. Adjusted earnings per share were $0.24, which is significantly below our expectations for the quarter.

Included within these results are bad debt allowances, intangible asset impairments and adjustments to accruals for net asbestos liabilities, which totaled to $20 million. Bad debt allowances of $9 million in our fluid handling business are primarily related to distressed South American customers, with another $2 million within the fabrication technology segment. Intangible asset impairments of $3 million in fluid handling are primarily related to the Clarus Reliability Services business, and another $2 million of impairment in the fabrication technology segment is principally due to lower sales levels in the 2012 business acquired in Colombia.

Net sales for the Company were $969 million for the third quarter, a decrease of 17% from the same period last year. This consists of a 7% organic decline and a negative 12% impact from foreign exchange, partially offset by 2% growth from the Roots acquisition. We experienced project timing and short cycle demand issues in both segments, and we continue to see a very difficult market in our fabrication technology business, which finished the quarter with a 4.4% organic decline.

Adjusted operating income was $59 million, representing an adjusted operating margin of 6%, down from 11% in the prior year. 200 basis points of this decline relates to the bad debt allowances, intangible asset impairments and the net asbestos liability adjustment I just discussed. Excluded from these results are $13 million of restructuring costs incurred in connection with the cost reduction project.

Gas and fluid handling net sales for the quarter were $482 million, with a 9% organic revenue decline, a 10% negative foreign-exchange impact and a 4% increase from the Roots acquisition. Adjusted operating margin for this segment of 5.5% includes 450 basis points of decline related to the bad debts, intangible asset impairments, and the adjustment to the accruals for net asbestos liability, which was $4 million, and $6 million of acquisition accounting costs and the transaction expenses related to the Roots acquisition. Adjusted margins were 11.9% in this segment in the 2014 third quarter.

Howden continues to execute well on productivity and cost control actions. Fluid handling margins, excluding the charges, however, did drop to the high single digits, reflecting the sharp drop-off in our shorter-cycle reliability services business.

Now let's turn to fabrication technology. Net sales were $487 million for the third quarter, a decrease of 19%, consisting of a 4.4% organic decline and a negative 14.4% foreign exchange impact. In North America, revenue was down 7% organically. It is too soon to see the full read-through of our efforts to stem the share loss we had with distribution in the first half, but we have seen positive distributor feedback to our new programming and joint sales efforts. Markets are down a similar amount in Europe and South America.

FAB Tech adjusted operating margin was 8.7%, well below our expectations, driven largely by the weak volumes and further depressed margins in emerging markets. 70 basis points of this decline relates to the bad debts and impairments discussed previously. Price was neutral in the quarter, holding steady in North America, down slightly in Europe and up the counter inflation and currency fluctuations in South America.

We continue to experience the negative mix impact from lower sales of oil and gas products, as well as equipment. As Matt discussed earlier, significant cost reduction actions have been accelerated. These savings will phase in over the next several months, but net of implementation costs will not provided significant benefit in the fourth quarter.

Corporate and other costs of approximately $10.4 million were lower than expectations, primarily due to lower accruals for incentive compensation. Interest expense was $10.9 million for the quarter, and that includes approximately $2 million of non-cash amortization of debt discount and deferred issuance costs, as well as bank facility fees and the cost of bank guarantees and letters of credit. Our effective tax rate for adjusted net income of 27.5% for the quarter was in line with expectations.

Finally, backlog in gas and fluid handling segment was $1.3 million at quarter end. The book to bill ratio for the third quarter was 0.92 to 1.

Taking into account the weaker demand in the short-cycle areas and our expected geographic sales mix, we now expect adjusted earnings per share for 2015 to be in the range of $1.52 to $1.56. As Matt mentioned, restructuring costs will be approximately $66 million, a $16 million increase from the previous guidance. Additional details on the guidance are included in the slide presentation.

And now I'll turn it back to Matt.

Thanks, Scott. Market headwinds will continue for some time, but we're committed to improving our relative performance in tough markets on both the top and the bottom line. We are taking aggressive actions to reduce our cost structure to align to the softer markets, while maintaining our operational ability to respond when the markets return to growth. We are also focusing our growth investments to make sure we protect our ability to grow in the near term and position ourselves to outperform our markets on the upturn.

Finally, the Board has taken action to initiate a stock repurchase program of up to $100 million, which speaks to our confidence in the outlook for long-term profitability, as well as our strong commitment to shareholder returns. We also expect to continue to pursue M&A opportunities and have several active deals in the pipeline. Earlier this month, we closed a small deal of less than $20 million transaction value, which is an exciting technology business, complementary to the Howden heavy fan business. It is not expected to materially impact operations this year.

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

(Operator Instructions)

John Inch, Deutsche Bank.

Matt, you made some commentary around, you don't expect to see recovery until 2017. Is the context of that meaning you don't expect any possible recovery until 2017 or you expect a recovery in 2017? Because the gist of my question is you have had negative organic growth since 2012, so we're going on four or five years now of quarters or years where you have had negative organic growth. So what is that, as you come into the job, that leads you perhaps to a conclusion that things are finally beginning to break or there's light at the end of the tunnel, or however you want to characterize it?

Thanks for the question. The comment was a market comment, that we're seeing tough trends in the market, and we think we need to presume that 2017 would be the earliest market base recovery. We are going to be working hard also on our relative performance in those markets and trying to make sure we performed as strongly as possible against that market backdrop.

That's a fair comment. Can I ask you, this $1.54 adjusted EPS, now, guidance for this year -- you're excluding a fairly substantial outsized restructuring charges. What restructuring benefit is actually in the $1.54 that you would be accruing or realizing from prior-year restructurings and even restructuring taken throughout, the call it, 2015, the first three quarters?

We do track that very diligently and very crisply, and make sure that we have a very clean number there, and it is about $45 million in structural cost savings in the 2015 results. And as Matt said, the run rate for the additional actions would be up to another $55 million or $60 million more. All of that may not be fully in place -- all of that will not be fully in place for 2016, but that's the magnitude of the savings from these actions.

Have you gone through your backlog, just to -- given obviously, what is going around the world and in China. Have you gone through your backlog in any level of incremental detail, Matt, since you've been there, to I guess -- just to make sure there aren't more cancellations or push-outs or whatever? The context of push-outs, you never really know what that means from our side of the table. Does that mean we are not canceling it, but we don't expect this to ever happen? I don't know, how do you feel about your backlog? Because obviously, the organic side of it doesn't look that great right now.

What I can say is we've certainly turned significantly up the intensity with which we assess the backlog and the backlog conversion and the order run rates and how that results in what we can presume on a forward-looking basis about our revenues. As we're doing that, certainly the teams are testing hard, the different projects in the backlog.

In the kind of environment we are in, I think it is still inevitable that at times some things in the backlog either fall out or slip into future quarters. But we are trying hard to have, as much as possible, direct dialogue with customers, and then dialogue internally about those projects, to make sure we are making the right assumptions about the future.

We don't have a history of significant cancellations, and most of the delays are usually not indeterminate delays. They're generally defined delays within a period of up to a year, sometimes. We really only have one significant order in the mining sector that has been deferred for a longer period than that. We definitely don't have a history of cancellations within the order book. But to Matt's point, we do take a careful look at it monthly.

That's true. Then just last, oil and gas, do you -- people talk about the oil and gas industry as facing another round of step down in CapEx, but I realize you're not a -- you don't supply a lot of heavy equipment to the industry. Do you think that's true, or do you think this down 30% run rate impact is as worse as it gets? Or is there something else that's possibly looming, maybe less for Colfax, but more for the industries in which you serve for say, call it, 2016?

What I can see there is that recently we've seen some more challenging trends there in the oil and gas front, and so we are trying to -- that is one of a number of things that have us taking some of the proactive costs actions to make sure that we are prepared for whatever might be coming in the future. But I can't say more than that in terms of where things might go in that sector.

Thank you very much.

Joe Ritchie, Goldman Sachs.

My first question is really around the capital allocation strategy. It seems like there has been a little bit of a shift with the share authorizations. I just want to get a sense of how long you've been thinking about it? How you're thinking about funding potential buybacks? Then any incremental color that you have on your deal pipeline, because I think we were tracking to roughly $500 million in capacity for 2015.

Maybe I will make a few comments, and Scott, I am sure, will jump in as well. I think what has not changed is that we intend to grow the Company through acquisition over time and that we are looking to deploy our cash in a way that is the most valuable for our shareholders. What you are seeing in today's announcement of the buyback authorization is basically that we want to make sure that we have got the agility, in order to be able to deploy capital in the way that's the most valuable for our shareholders. So that's really what you are seeing there.

As far as the acquisition pipeline, we continue to have an active acquisition pipeline. As I mentioned, we did a small one recently. We have some others in the pipeline as well. The rate at which we complete any of those will be related to the deal processes, but also will be connected to our ability to be comfortable with the value, in light of the current dynamic situation in the economy.

And to take the capacity question, the $500 million number really hasn't changed. We spent $200 million of it on the Roots and the small acquisition Matt mentioned in his comments. We still have available borrowing capacity for the other $300 million. That has to be allocated, as Matt said, between M&A and share buyback. That is the capacity that we have.

Got it. So if you don't see anything, is fair to say -- and I don't want to put words in your mouth, but is it fair to say that if you don't see accretive deals that are interesting to your portfolio, in call it, let's say, over the next three to six months, that you are likely to start allocating capital towards buyback?

I think it's fair to say that we're going to deploy our capital in the way that we think is most valuable to the shareholder, and we're going to continue to have a proactive effort to drive attractive acquisitions that grow the Company in a valuable way.

Okay. Fair enough. I have a question on the restructuring program. And prior to today, I think the focus for this year was going to be and the magnitude was going to be roughly about $50 million in restructuring. I think year to date, correct me if I'm wrong, you've taken about $26 million with an additional big uptick in 4Q. I guess I'm just curious, how come, given that organic growth has been pretty negative, why haven't those actions been accelerated up until this point? And how do you feel confident that you have done enough and you've set aside enough for 2016?

I will take the first half of the question. The phasing of it really has a lot to do with the accounting rules. You can't reflect restructuring charges until the workforces have been notified, the facilities have been departed from. So we have been doing a lot of work on these projects. The accounting numbers don't reflect the proportion of work that has been done on these projects.

So the best response I can give you to why the fourth quarter is so heavily weighted is, there certainly is some acceleration of stuff we were going to do next year, but most of it is just a reflection of the accounting rules.

As far as the question about whether we think that we are doing enough, I think what I can say there is that in my time here I have been really working with the teams to try to make sure that we're taking a view into the future that is as grounded as possible. And that for the most conservative end of that view, that we are getting our cost structure sized in order to be able to deliver strong performance. That's what has driven us to some of the numbers that we need to achieve.

Alongside of that, we've had to really understand what the opportunities and possibilities are, and had to make sure that we have got projects and initiatives that we can execute, while still sustaining our ability to serve customers well and grow. So, that's how we have gotten to where we are. At the same time, we will be closely monitoring the markets to make sure that if we see another significant step down coming, that we are being proactive as well.

Okay, great. Maybe just one follow-up there, Matt, and then I'll get back in queue. What is your planning assumption then for 2016, given the cost actions that you are contemplating?

I can't comment on that at this point. I think we will give some guidance a little bit later in the year.

Thank you.

Brian Konigsberg, Vertical Research Partners.

I apologize if you mentioned this, but just on the pricing front, can you just talk about it specifically in the fluid handling portion of the business? And are you seeing any customers approach you about a repricing backlog that has already been booked?

No.

Okay, can you comment just generally on fluid handling pricing?

Pricing is holding up pretty well in fluid handling. It is generally not a list price type of sale. These are generally application engineered sales. There is a degree of pressure in the commercial marine floor market, which is commensurate with the lower volume activity. But overall, there is not a significant headwind on pricing in fluid handling.

Then just on the other side of it, are you able to get cost benefits, or are you hedged on the inputs there, or can you realize some of that maybe more immediately?

The answer is, we certainly do hedge some of the inputs when we have firm contracts in place. The Howden contracts tend to be longer duration to completion than most of the pump business. So to answer your question, it is a little bit of both. Some of it is hedged, but we do still have the ability, particularly in fluid handling, to benefit if there are drops in commodity prices.

Okay. Secondly on power, you made the comment that environmental orders on the industrial side, you expect to get pushed out to the later part of the five-year plan. I guess maybe I misunderstood before, but I was thinking that you were expecting another cycle on the utility front as well, which you thought would kick in late this year. Maybe you could just clarify which part of the business you were expecting to address and what is driving people to push out their orders on the front?

I think the answer to the last question is easy. What is driving them to push the orders out is that business conditions are very slow, so compliance spending is obviously not at the top of people's lists of things to do. The particular reduction regulations have a bigger impact in power than they do in heavy industry, but they certainly affect both.

We expect the power side to go in a more traditional -- there is obviously a phase-up period, but we would expect a more typical phase-up period on the power side of the environmental regulations, whereas the customer feedback we're getting on steel and cement is that we may see more of a waiting until the end of the period. Again, that is based on customer feedback. We don't have specific factual information on that. But the power is the larger of the opportunities, and that we expect to go in a more typical pattern.

I can just add to that. I was over in China a few times earlier this year, and there is a significant amount of tension there right now between a real commitment from the government to make substantial progress quickly on the environmental front, or at least a commitment from that portion of the government, at the same time as they're having the industrial growth challenges and have other parts of the government wanting and needing to work very proactively on those.

Our challenge is how do we figure out a way to work with customers to get these investments further up the priority scheme and ideally maybe make them not just about environmental but have some productivity benefits? Things like that, in order to pull forward some of that investment versus the past that it will take. And certainly that is what our team is working on. But what I was sharing in my comments was our current best view of how things are going to play out in light of that tension there.

So is the expectation you are still going to get power orders by the end of the year, or has that been pushed into 2016 or later?

Should be the same as we've been announcing and discussing. There's really no specific change there. We would expect orders in the fourth quarter and revenue next year, with the revenue ramping up to a peak in the middle of the five-year period.

Understood, thank you.

Nathan Jones, Stifel.

Good morning, Matt, Scott, Terry. I wonder if we could just talk a little bit about the bad debt charge in the quarter? Can you talk about what drove that, where it came from? I guess what I'm trying to get at is what is the risk that we are going to see any more of this?

The risk of anything at this -- is pretty minimal. We don't have any significant balances with any individual customers of the nature of what made up the majority of this charge-off, so I think the risks of this repeating are very low. In this specific instance, we have made every conceivable effort to collect this account. And we are still going to attempt to collect it, but I'm not seeing any short-term path to cash realization. We thought it was appropriate to provide an allowance for it.

This is a single customer?

The majority of it is a single customer; it's not entirely. Obviously, we'd prefer not to discuss specific customers.

Yes, okay. One of the comments in your prepared remarks was a push-out of refining and pet chem turnaround season. Can you give us a little more color on what is driving that? I know crack spreads have come off, so I would have thought there would potentially even be a little bit of a catch-up from the maintenance deferred in the first half of the year. Can you talk about what's driving the continued push-outs there?

Like I said, we haven't seen -- the catch-up you are referring to, we haven't seen in any significant way yet. Best indications we have is that, by and large, folks have been still trying to run, and so we have seen some push-outs there.

Matt, I wonder if I could get your perspective on this? We've been talking about service levels and issues there, particularly on the FAB Tech side, for some time now at Colfax. I know you mentioned it again your prepared remarks. In your first couple, three months on the job here, what is that you are seeing that is most responsible for those kinds of things, and what kind of countermeasures are you looking to deploy?

As far as the some of the FAB Tech-specific challenges about service levels, there's a couple of different things that we understand. I think we've shared some of those before, but I will reiterate based on my experience. I think it's clear now that a number of factors came together to create some challenges there for us.

There were some external issues related to port strike and our ability to get long-lead raw materials. There was some external issues related to a demand surge from a customer moving out of a product line. And then there were some internal issues in terms of our inventory levels and our staffing levels versus those issues, as well as some plant consolidations and things we had underway. Those are the operational set of things that came together in a handful of our plants to create the challenges.

At the same time, we had, with the integration of Victor, we had made some changes to our coverage and our channel that perhaps made it a little harder for us to manage through those at the level of the customer interface. And so again, my best understanding at this point of those service issues is that combination and how it came together.

I have been able to spend a good bit of the time with the team, as well as at some of the sites involved, and understand how we've root caused the issues, the efforts we have got underway, some more containment types of issues, in order to make sure that we can improve quickly, but also some of the more structural and sustainment types of issues that we are doing.

And it's clear to me that we've made progress. I've gotten direct feedback from some customers that they've seen improvements, and we can see it in some of the key metrics. But it is also clear that we still have more work to do here and we've got to keep improving our operational capability to serve customers, as well as our sales engagement with our customers.

In your opinion is the plan to improve those service levels sufficient, or do you need to take another look at the plans there?

I would say that it's clear that we're doing a lot of the right things that we need to do to improve our service levels, but I'm going to be working very closely with the team in the coming months to be sure that we're doing all the things that we need to do and that there aren't remaining things that we need to be focused on.

Thanks very much for your time.

Eli Lustgarten, Longbow Securities.

Bear with me, I just want to make sure I understand something. The 450 basis point bad debt charge is in the -- $0.24 includes that and it's in the 5.5% margin for gas and fluid handling?

The 450 basis includes more than just the bad debt charge. But all of those sort of things that depressed the margin are included within the 5.5%, so if you excluded them, you would have a much higher margin.

And the $0.24. Now, you reported in the welding business a 4% negative price mix. Is that mostly a shift away, less equipment and going towards consumables, or is that pricing pressure going on in the business, or what's happening in that part of the business that's causing 4% pricing negative?

Now, the pricing is neutral, which I tried to address in the prepared comments, and I gave a little regional recap. The rest is mix. Equipment is definitely a big component of it, but some of it is mix within the consumables product line, as well. We really don't have the data to give you a precise break out of that. I can confirm that equipment is a big piece of it, but some of it comes from consumables mix, as well.

If you take that part of the business, and actually probably true on both sides, the second half of 2015 is clearly weaker than the first half that we're getting on. You have a tough fourth quarter. But with what's going on in oil and gas really just flowing through, what's happening in the second half of 2015 is going to continue through the first half of 2016, which is very hard to change this dynamics at this point in the short-term. One, are you preparing for the fact that you have got a step down in business coming, as you look over the next several quarters? And two, I guess to come back to the same question, in doing enough of the restructuring, is there more that really you have to take a look at? Because it's not one quarter of weakness but probably several quarters of weakness that you have got to go through, before things maybe begin to stabilize and improve.

Yes. What we've done is try to take a hard look at not just our current performance, but hard look at trajectory, and make sure that the actions we're we are taking are to prepare ourselves for the trajectory that we are on.

Is it fair to say that -- as you go into 2016, you're looking at -- it is hard to see conditions changing very much in the first half than where you are today?

As I said before, we think that the market challenges are likely to persist through 2016. Obviously, you would have to go through each of our operational challenges to -- some of them will lapse. Some of them, we have driven improvements on, and some of them may persist. In our planning, we will work through all of that and make sure we have got the strongest possible plan for 2016. But at this point, what we have been trying to do is really make sure that our cost structure is prepared for the growth and order trajectory that we are on.

And the negative book to bill that you're running in gas and fluid handling also suggests that you have got much tougher environment coming, as you go over the next couple of quarters. Can the profitability begin to stabilize, or are we still looking at steps that have to be taken to stabilize the profitability in that part of the business?

I think profitability has been pretty stable in that segment. We have had a little fall off this quarter for the Reliability Service issue that we talked about in the remarks. The backlog doesn't roll out in a perfect proportion, quarter by quarter. We actually, in the guidance is a reasonably better fourth quarter for the segment than the most recent quarters.

But to your point, the order trends do infer that the early part of 2016 will not be an up kind of period in gas and fluid handling. That's the business where the backlog does give us a little bit of visibility. We don't have equivalent visibility on the welding side.

Great. Thank you very much.

Mike Halloran, Robert W. Baird.

What did trends track like through the quarter for both divisions? Was there some signs of stability, or do you see worsening as you went through the quarter?

No, we didn't really see any worsening through the quarter. I'd say, it's a difficult quarter because of the European vacation season, so it makes it -- but looking at it certainly relative to prior third quarters, we didn't see any significant weakening in the month of September.

I think what I can say is that we had some possibilities in terms of things that we were hoping we might be able to make happen in September, that in the end, based on some of the trends that we've talked about, were not possible, would be just an additional comment there.

That makes sense. As you guys contemplated your full-year guidance range, was the assumption that you'd see some stability at these low run rates from here, or was there an expectation for some of the oil and gas softening that you mentioned and some of these others pressuring numbers or pressuring your thought process maybe a little bit more than normal sequentials would imply?

We did factor some of those things into the fourth-quarter estimates. We do expect the welding decline rate to be more in line with the year-to-date numbers than with the slightly better numbers that we had here in the third quarter. In gas and fluid handling, we expect a -- we had a very, very good fourth quarter last year, so we expect a modest decline there, but a reasonably good fourth quarter in that segment. So we factored all of those trends into the guidance.

Appreciate it, guys. Take care.

Matt McConnell, RBC Capital Markets.

I'd like to follow-up on the FAB Tech margin decline, and you gave some good buckets on what drove that and talked a lot about the customer service issues. How much of it would you say is within your control?\ So things like the customer service issues verse currency and geographic mix, and is there anything you can do to offset some of those pressures, which are probably also having a meaningful impact on the margin?

Let me go back to that and maybe talk about both growth and margin, because they wind up tying together. It's clear that in FAB Tech we've got some significant external issues, and we just clear those first. Those are -- there is a macroeconomic challenge just related to industrial production, in particular in some of the high-growth markets. And that's a challenge on the growth front, and one that we are a little more exposed to than others.

In addition, there is a cyclical challenge, and a few of the highest users of welding are having some significant cyclical downturns, oil and gas and marine being two of the key ones there. So that combination of factors on the external and the currency challenges really stacks up to be a significant portion of our challenges this year.

At the same time, we've got some significant challenges in terms of our performance in context. And part of that comes from our exposure, but then the rest come to some of our executional challenges in terms of our customer service, operational, as well as in the channel, is a key area that we've been focused on. And we've also got some aggressive efforts to drive a stronger equipment portfolio and equipment growth that can come with that.

I can't take you to the exact division of the issues, but I can say that I think both our growth and profitability issues are significantly from each of those versus largely weighted to one or the other.

Okay, great. Thank you, that's helpful. Maybe just following up on the share buyback authorization issue. You mentioned it improves your agility. But more specifically, do you intend to start buying back shares after the third-quarter blackout period ends? Would you intend to buy back shares within the next few days?

We can't answer that question any more specifically then I've answered, in that we've gotten the authorization and have the agility, and we will be making decisions in line with what we think is going to be the highest value use of capital for our shareholders. I think that is as specific as we can get on this call.

Okay, thank you.

Andrew Obin, Bank of America Merrill Lynch.

A couple of questions. First, looking at your working capital and looking at inventories, last time we had a pick up, inventories were a source of cash in the last third quarter, and it's a deterioration versus a year ago. I'm just trying to understand, is this related to the accounting, is it related to a write off we are taking? Or, are we changing terms in the channel in terms of how we interact with customers?

There is no change in the terms in the channel. It's largely -- the higher inventory levels are largely related to the facility relocation program from our one ESAB North American facility into the Texas and Mexico facilities. We have been building some inventory to protect the customers during that transition.

So that should snap back once you're done?

That's correct.

Then a question on fabrication, actually, as bad as it was -- sequential growth did improve versus the second quarter, and we were positively surprised by effectively flat organic volume and what a tough market. So are you starting to regain market share, or what's going on there?

I think it would be early to say that we are regaining market share, but we're certainly glad to see the sequential trend be in the positive direction. But as Scott indicated in his comments, we are still planning that the fourth quarter is more like the year-to-date number. We know we've made improvements there, but at this point, we think it's premature to declare victory.

Thanks a lot, guys.

Jeff Hammond, KeyBanc.

This is James filling in for Jeff. Just a quick question regarding Roots. Prior to the quarter, you guys were talking about Roots as contributing roughly $60 million in sales, and you had $25 million in the quarter. How should we think about that for the full year here?

I'll make a comment on Roots, but then Scott can maybe follow-up with what we can say about the numbers. Our integration effort at Roots is on track. I think we are excited about the strategic opportunities there. We feel very, very good about the acquisition in terms of the opportunities it's going to drive over time. We have seen some softening in the orders in Roots, particularly in the transportation market, and that is something that is having some impact. But we still see the acquisition as being very positive from a strategic standpoint.

I think the fourth quarter is likely to look similar to the third, so we probably will not achieve that original $60 million as for the reasons that Matt just outlined.

Got it. To piggyback on a prior question regarding Victor and the servicing that you guys are -- the customer servicing initiatives that you have underway for FAB Tech. The last quarter you talked about a learning curve for Victor distributors. Can you provide some additional color as to what exactly you are trying to do there, in terms of ramping both the ESAB and Victor distribution channels to get those products familiarized?

What I've been able to learn so far is that the idea here was, I think, a very good one, in terms of bringing two great brands and fit the products together and having the efficiency and growth benefits of putting through our same channel. I think that that strategy, from what I've been able to learn so far, makes a lot of sense. And I'm confident that over time, that will be something that really strengthens our growth and our efficiency and the quality of our service to customers.

What we have learned that -- in the transition that we had some challenges. I think it's always challenges when you make that kind of an integration. There's some risks around attrition and there's some risks around some of the changes you make at distributors. And there's some risks around the extent to which the sales team will be able to sell the full range of technologies and support them, and I think we ran into some of those.

We've adapted. I think we've got a strong model now, with sales folks that cover the line but that are well supported with specialists that are able to go deeper in any of the technologies. I think we've been getting better feedback from our distributors on that model, and so I think we are headed in the right direction on that one.

Certainly, what I've heard directly from the distributors, is that they are rooting for us. They see ESAB and Victor as very, very important parts of the future here in North America, as a critical and important player that they want us to have a significant role in their business. I think we have got every opportunity there, and we've just got to keep on improving our ability to execute.

Chase Jacobson, William Blair.

Just want a clarification, did you give the organic growth by segment, the new outlook?

We didn't specifically give it in the slide deck, but the comments that I did make in response to an earlier question was that the organic growth for welding will look more like the year-to-date number than the third quarter and that the outlook for gas and fluid handling would be a modest decrease compared to a very strong fourth quarter last year.

Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Mr. Ross for closing remarks.

Thank you again for joining us today. We look forward to updating you next quarter.

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