Enovis Corp (ENOV) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Colfax first quarter earnings call.

(Operator Instructions)

I would now like to introduce your host for today's conference, Mr. Terry Ross, Vice President of Investor Relations. Sir, you may begin.

Thank you, Chelsea. 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 Investors section of our website, colfaxcorp.com. We will also be using a slide presentation to supplement today's call, which can also be found on the Investors section of the Colfax website. Both the audio of this call and the slide presentation will be archived on the website later today, and will be available until the next quarterly call.

During this call, we will be making some forward-looking statements about our beliefs and estimates regarding future events and results. These forward-looking statements are subject to risks and uncertainties, including those set forth in our SEC filings. Actual results might differ materially from any forward-looking statements that we might make today. The forward-looking statements speak only as of today, and we do not assume any obligation or intend to update them, except as required by law.

With respect to any non-GAAP financial measures during the call today, the accompanying information required by SEC Regulation G relating to those measures can be found in our earnings press release and supplemental slide presentation under the Investors section of the Colfax website. Now, I would like to turn it over to Matt.

Thanks, Terry. Good morning and thank you for joining us today. We are pleased to report results this morning that are in line with the expectations we discussed in December and on our previous earnings call. We continue to make good progress on our cost reduction efforts, but our progress on growth initiatives has been offset by the end market environment, which remains choppy with a mix of positives and negative indicators and no clear sign of recovery in the near-term. Our operational progress in ESAB continues to build momentum.

Net sales for the quarter were $877 million. The organic revenue decline of 0.3% represents what we believe to be solid competitive performance in a weak end market environment. But it also reflects a low volume first quarter last year for the gas and fluid handling segment, related most to the timing of large projects. Overall, we see end market revenue trends generally consistent with our planning assumptions, which is allowing our leadership team to focus on execution.

Our previously announced cost reduction activities are on track to deliver $50 million of incremental cost savings this year. As we have discussed, the majority of these savings will be from SG&A, and we expect the read through to improve in the second quarter. Our plant consolidations and other cost savings projects will add to the quarterly savings as we move through the year.

As we begin to discuss fabrication technology, let me start by sharing how pleased I am that Shyam Kambeyanda will be joining us as the President of ESAB. Shyam brings a tremendous global perspective to our team having lived and led businesses on three continents. His commercial and operational experiences in multiple markets and regions allow him terrific insight on how to drive growth and performance improvement in both developed and emerging markets, which matches very well to Colfax's unique position in the fabrication technology market.

Now, taking a closer look at our fabrication technology business. Organic sales declined 1.9% for the first quarter, a smaller rate of decline than our expectation. We made encouraging progress on our growth initiatives.

But I must point out a few items that favorably impact this metric. First, Q1 did have three more business days than the prior year, which is meaningful in a short cycle business. Second, the growth in South America was a result of inflation driven price increases, while the underlying volume was down.

The strength of our global footprint is benefiting us as regional trends were consistent with the fourth quarter. North America was down high single-digits, and Europe and South America were flat to slightly down on volume but had inflation driven price read through in Russia and Brazil, swinging both into low single-digit growth. In total, we see the regional market trends as stabilizing, but no region has yet made the turn to real growth.

Focusing on our internal performance, I'm pleased that our execution and result to key initiatives continues to improve. Customers are experiencing much stronger service level performance. And some visits I've found they comment on the improvement and in others, it just doesn't come up.

Delivery performance for Victor products is the best in the past five years. Across the entire ESAB system, past dues were down almost 60% with shorter lead times and on-time delivery improved to the low 90% from the mid-80% a year ago.

Interest in Rebel continues to exceed our expectations. Most of the top distributors in North America are now supporting the launch. We'll double the production rate in the second quarter to meet the reorder demand. Rebel is on track to launch in Europe this summer, and we have several breakthrough products moving through our new product development process.

Finally, our focus on improving our support to growth for growth efforts with our distributors is gaining ground. Distributors are telling me that we've made meaningful progress and they look forward to working more closely with us going forward.

A terrific example of using CBS to improve our operating performance in ESAB has been the work done by the North American filler metal team. The implementation of a rapid electronic replenishment stocking process is complete across all sites and on time delivery to customer request date has reached 96% in March, with past due shipments totaling less than a quarter of a day's volume. The teams are continuing their pursuit of exceptional customer satisfaction and improving the process by applying CBS tools of total productive maintenance, setup reduction and rapid con von replenishment.

Turning to the gas and fluid handling segment, orders for the first quarter were $408 million, down 9.3% organically. We had a somewhat weaker than expected start to the year on new builds especially in oil and gas and marine with several project decisions pushing to Q2 and Q3. On the positive side, we had a good start on our initiative to improve aftermarket sales, achieving the low single-digit growth we were targeting.

For power generation, revenues for the quarter decreased by 2% organically, while orders increased 12% organically. New build orders in China got the year off to a strong start, but some of this is timing.

We saw solid aftermarket globally, including signs that South Africa may be recovering. While we remain confident that power will be a modest growth market in 2016, there are changes in the China power market that may impact 2017 and beyond.

The high number of new coal fired power plant permit approvals in 2015, combined with the slowing pace of the industrial economy, has the Chinese Government increasingly concerned about overcapacity for electricity generation. In response, China has announced the delay or reconsideration of certain power projects in several provinces, which may reduce order rates this year and new build activity next year.

On a related positive development, China has set more aggressive interim goals to lower air pollution, which may accelerate the pace of retrofits and pull forward revenue originally forecast for late in this cycle. Power companies in China are still revising their project plans and we should have better visibility by our next call.

Oil and gas sales were up 25% organically in the first quarter due to the timing of large orders in the backlog, but orders decreased 38% organically. We are comparing to a very strong bookings quarter in the prior-year, but we also had the award decisions for several projects pushed to later quarters.

We see increased risk for converting project quotes to orders within the year as customers across several regions have delayed investment decisions. While our overall aftermarket revenue is growing, the maintenance turnaround activity in Latin America, a key region for our reliability services business in fluid handling, is expected to be down further this year.

Turning to marine, which is primarily served by fluid handling, revenues were down 6% and orders down 16% organically. Early 2015 still included meaningful OSV activity, which fell off sharply through the course of the year. However, after a few months of leveling trends, new contract awards to commercial shipyards took another step down in the first quarter.

Our defense business continues to perform well. Despite the low start, we still expect orders for the year to be down high single-digits, which is consistent with the outlook we provided in our Investor Day comments.

For general industrial end markets, sales and order both declined 1% organically. Lower steel capital spending was again, the largest driver, although the rate of decline is significantly less than we saw in the second half of last year. We remain cautious about our outlook in general industrial and need to see the sequential performance continue to improve before we can make a more confident statement about the outlook.

Across our end markets, after market growth is a strategic initiative for our gas and fluid handling platform and I want to highlight how the teams are using CBS to improve our service capability and enable organic growth. A key focus has been to increase our performance in the US air pre-heater aftermarket where Howden has a smaller share of the install base. The key to success was to extend our expertise and turnkey project management on new builds to the aftermarket.

To move at the speed of the aftermarket, the team ran standard work events to define and improve the processes in sales, proposals, project management, engineering and field operations. For example, the team implemented process improvements to reduce quote cycle times from five days to one day. Using our daily management toolkit, they improved the timeliness of engineering deliverables from 75% to over 95%. As a result of these and many other CBS efforts, the team is on track to triple the business in this application from our 2014 jumping off point. And now, I'll turn it over to Scott to discuss the financial results.

Thanks, Matt. This morning we reported our first quarter results. Adjusted earnings per share were $0.30 per share, which was in line with our operational expectations and also benefited from lower than expected interest expense.

Net sales were $877 million, a decrease of 3.8% from the same period last year. This consists of 0.3% organic decline, and a negative 5.9% impact from foreign exchange, partially offset by 2.4% growth from the Roots and Simsmart acquisitions. Gross profit margin was down modestly as improved gross margin in our welding business was offset by lower gross margin in gas and fluid handling, largely due to sales mix and some dilution from the Roots and Simsmart acquisitions.

SG&A expenses were flat for the quarter, as the savings from the programs Matt discussed earlier and the impact of exchange rates were offset by the cost from the acquired businesses, including integration costs, as well as a $2 million impairment charge and elevated levels of bad debt and legal expense. Adjusted operating income was $66 million and adjusted operating margin was 7.5%, down from 8.9% in the prior-year quarter. Excluded from our adjusted results are $18 million of restructuring costs incurred in connection with our previously announced cost reduction projects.

Gas and fluid handling net sales for the first quarter were $433 million, with a 1.7% organic revenue growth, 4% negative foreign exchange impacts and a 5% increase from the Roots acquisition. Adjusted operating margin for this segment was 7.8%, down 75 basis points from the prior-year, due to mix, Roots and Simsmart and lower volume in fluid handling reliability services business.

For fabrication and technology, revenue was $444 million, down 1.9% organically and 7% from foreign exchange. Adjusted operating margin was 10.3%, up sequentially from the fourth quarter by 118 basis points with higher gross margins from favorable raw material cost and production facility cost savings offsetting the impact of seasonally lower volume.

Margin was down 140 basis points from the prior-year, primarily due to geographic mix, higher bad debt, R&D and legal expenses and the impairment charge discussed previously. Price was favorable in the quarter, but was roughly flat outside of the inflation area markets.

Corporate and other costs of approximately $14 million met expectations. Interest expense was $9.1 million for the quarter, which includes approximately $1 million of non-cash amortization of debt discount and deferred issuance costs, as well as facility fees and the cost of bank guarantees and letters of credit. This was approximately $1 million lower than our expectation due to better than expected cash flow over the last two quarters and some new lower cost short-term borrowing lines.

Our effective tax rate for adjusted net income and adjusted net income per share was 29% in line with our guidance. We acquired 1 million shares of our common stock in January, and we still have $50 million of authorization remaining for further share repurchases in 2016.

We continue to build on our working capital management momentum from the fourth quarter. While the first quarter seasonally adds working capital, the increase was smaller than last year's first quarter.

Finally, backlog in our gas and fluid handling segment was $1.1 billion at quarter-end, reflecting a 5% decrease from a year ago due to foreign exchange, a 4% increase from Roots and Simsmart and a 14% organic decline. As Matt said, although our markets remain choppy, we affirm our revenue and adjusted EPS guidance for 2016.

We see a fairly balanced revenue picture with FABTECH trending slightly favorable to our original guidance. Gas and fluid handling after market initiatives on track, but increasing caution for the gas and fluid handling floor market projects, as Matt discussed. Our operating and cost reduction programs are proceeding well, and we continue to expect favorable metrics compared to our original guidance for both interest expense and share count. Now, I'll turn it back to Matt.

Thanks, Scott. We delivered another solid quarter despite ongoing market headwinds. I'm encouraged by the pace of our operational and cost improvements, and our team is delivering more robust execution, even as we manage restructuring projects in almost every part of the corporation.

We should build momentum in the pace of our margin improvement as we move through the year. As Scott discussed, we remain committed to delivering the 2016 financial guidance that we shared in December and on our previous earnings call.

Our challenge now is to begin gauging the environment looking forward to 2017. While FABTECH trends have been to the favorable side of our expectations early this year, we will continue to monitor project activity and order rates in our major end markets over the next two quarters to get a better picture of 2017.

We're prepared to take additional cost reduction actions if the data points to another year of declining volume. We're committed to improving operating profit, even in a tough market environment and I look forward to updating you on our outlook during our next quarterly call.

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

(Operator Instructions)

Our first question comes from the line of Joe Ritchie with Goldman Sachs. Your line is now open.

Thanks. Good morning, everyone. So my first question is maybe you can just touch on the just extra days just from a clarification standpoint? So three extra days in the quarter, did they occur in any particular month? Clearly we had a leap year, so I would expect one at least in February.

And then secondly, what kind of impact did it have to your organic growth? Is it right to think about it as a 2 point to 3 point impact, or how should we think about that piece?

The answer to the first part of your question, Joe, is we are on a 4-4-5 reporting period. You'll note our quarter ended this time on April 1, rather than March 31. So we do have different days occasionally in the first and fourth quarter, and compared to last year we had three additional days. The leap year obviously is one of them. But it really has to do with the 4-4-5 reporting more than any other reason.

And I can confirm your second comment. That is the impact as to how much further reduced or further increased the organic decline would be if you factored in those extra days.

Okay. Great. Thanks, Scott. And then maybe just focusing for a second on FABTECH, the growth there was encouraging this quarter. It was much better than peers.

I guess what do you attribute to the performance to? I think last quarter you had said that you thought you might be gaining share. Is that starting to come through now, and how should we think about the sustainability of it?

Yes. Yes, we are encouraged by the progress in FABTECH. I think a few things there. First, is that in North America in the back half of last year, I think we really stabilized our operational performance and we got through to the other side of the channel integration there. And I think that's enabled us to gain back some share in that market and get to a more stabilized position there. In addition, we're seeing the global growth in the industry as outside the US as healthier than it had been, and we're getting some benefit from that based on our strong positions around the world.

Okay. Alright, great. And then maybe one last follow-up there. Matt, maybe just comment a little bit on the commentary that you mentioned in your prepared comments. The progress that you're making with the channel and with distributors specifically. Maybe a little bit of color there would be helpful.

Yes. In North America in particular, we've had a significant focus on strengthening our position with the channel. And we did some important work last year on our operational performance in order to bring them the kind of service levels that they expected.

And then we've also been working on our -- the way that we manage them and the marketing programs that we do with them. And also on our end-use marketing programs, as we brought the Rebel out, we'll put some significant effort into end-use marketing that has brought leads into the channel. And I think the product being a great product alongside of the marketing that we've done has had the channel go from a little more heads in on that product to pretty excited about it and really pulling for it.

Okay. Thanks, guys. I'll get back in the queue.

Thank you and our next question comes from the line of Nathan Jones with Stifel. Your line is now open.

Good morning, everyone. Just to follow-up on Joe's question there. I know part of this strategy was going to be getting Rebel carried at the two distributors who are largely LECO and Miller distributors. Have you made progress getting Rebel distributed through those specific channels?

I'm not going to comment on specific distributors. What I will say is that we've got a number of large distributors that have taken initial orders for the Rebel, and we've had some reorders come in as well.

We're still in the early days here. The product came out in terms of shipping in the first quarter. But I would say that the energy for the product and the channel has significantly exceeded my expectations.

Okay. That's helpful. The next question is on the expected delays in some of these projects that you were looking for. Can you give us a little bit more color on the specific markets that those projects are in? I think you also said that they've slipped out to Q2 and Q3. Your confidence level that they actually go in Q2 and Q3 and don't continue slipping to the right.

Yes. So first, the main segment where we've seen the slippage is in oil and gas. And in particular, in oil and gas in countries where there's been the effect of the lower oil price has significantly affected the economy in either state-owned oil companies or public oil companies that are feeling quite a bit of pressure. And these are good projects that really there's a good case for them to move forward, but there's a degree of caution there that I think has people dragging their heels.

You know, we've seen projects pushed from Q1 to Q2. Some others pushed from Q2 to Q3. It remains to be seen whether they'll get traction in Q2 to Q3 and those projects will go through to fruition or whether they're going to continue to push back. That's going to be a critical thing we'll be watching here in the second and third quarter.

Okay. I guess last one, you noted, and I saw it in the slide deck there and even outside the inflationary countries, pricing in welding was basically flat and it had been quite negative through 2015. Are you seeing continued stability there? Do you expect that to maintain itself at flat going through the rest of the year? Do you see any other pricing headwinds in the future? Just any color you can give on the pricing environment there?

Yes. So first, we've been doing a lot of hard work. One on value pricing in our business and training our sales folks around the world and giving them the tools to value price.

Second, we did a lot of work late last year on what I call dynamic pricing in terms of having clear visibility to some of these dynamic impacts like currency effect on our raw materials and inflation and making sure that the teams have clear visibility of those coming at us and have clear accountability for drive and appropriate price in the face of those. So I think those are two things that have helped us to move in a positive direction in terms of price realization.

And at the same time, last year, there was some -- a little bit of downward pressure from some of the metals movements. This year, we're seeing metals start to move upward. That's going to create some upward pressure on price. And we're going to be -- certainly be proactive to be sure that we can maintain margin in an increasing metals price environment, while at the same time, keeping a sharp eye on making sure that we hold on to our share.

And you're confident you can push the metals price increase through?

Yes. I think we have every expectation that we ought to be able to maintain our margins as the metals come back.

Okay. Thanks very much.

Thank you. And our next question comes from the line of Andrew Obin with Bank of America Merrill Lynch. Your line is now open.

Hi, guys. Good morning. Just a question on these one-time charges. Those were not part your outlook. So this $0.03, $0.04 of SG&A charges in fabrication, that's just on top of whatever you were guiding, right?

That's correct.

Okay. And we don't expect more of those?

We do not.

Okay. Just a question within fabrication, what's your framework for steel's demand outlook in North America and Europe specifically, because there has been some conflicting data. Some people are more positive. Some people are more negative. What's your macro framework for steel demand?

Yes. I'll comment on welding demand, which should have some close link to steel demand. In North America, we're still -- things stabilized but are still on the negative side and we have not seen anything that indicates a change there yet this year. Whereas, around the world, and particularly Europe, I think things have more stabilized where, as I said in my comments, our volume is a little bit negative but we're on the positive side given some price changes. And I think I'd say that the steel demand in Europe seems in a more favorable place than it does in North America.

And finally I'll say in China in March, there was a small light of recovery on the steel demand for up front, and I'm not really sure how that's going to play out between the efforts there to curtail production and drive some improvements in steel prices versus in March, an increase in steel demand. So it remains to be seen kind of how that's going to play out.

And just the last question, could you talk about the cadence for organic performance in gas and fluid handling second quarter versus the second half of 2016, as backlog is coming down and orders remain sluggish?

Well, the outlook for the second quarter is for continued volume decline. So we will see -- we will see a lower revenue number than what we saw in the back half of 2015.

And second half?

Second half we will also see a decline in volume. We did guide to I think 2% to 5% down for the year. We were marginally up in the first quarter. So that -- we're trending towards the lower end of that guidance in gas and fluid handling, as Matt mentioned. That would imply continued down volume for all of the quarters in the balance of the year.

Okay. I'll follow up off line. Thank you very much.

Thank you. And our next question comes from the line of Joe Giordano with Cowen and Company. Your line is now open.

Hey, guys. Thanks for taking my questions. Just curious since you gave your initial guidance, how much cushion do you think you have now in terms of FX moves that you see, particularly in some of the -- in Russia and Brazil? How much support does that give you in the back half?

Well, I'll give you a two-part answer to that question. FX actually was slightly negative to our guidance for the first quarter on a weighted average basis, as early in the first half of the first quarter some of the emerging market currencies in Brazil, in particular, were way down. They've subsequently recovered significantly.

So we were at less than 1% of a negative to guidance in the first quarter. As of yesterday, we're at the plus a little over 1% for the balance of the year. So blending that out, the FX is maybe a 1% tailwind for the year in total.

Tailwind versus your initial guidance?

Correct. It's still going to be down relative to the prior year, but relative to guidance, it's a tailwind.

Okay. That makes sense. I'm curious what we're seeing in terms of severe moves in things like iron ore price in China. I know the outlook is down for mining broadly. Are you seeing anything different in those markets based on where pricing has gone over the last couple of months?

On the CapEx side are you asking?

Yes. I mean, have things become -- has sentiment improved, do you feel, in where you're playing in those mining industries, albeit at a lower level? You're seeing the metal recover at least.

No, at this point, we have not seen any meaningful change. However, if metals prices continue to recover, that will be a good thing in terms of the timing of the mining segment recovery. I've seen a wide range of points of view on when and how fast the metal segment will recover. But we're going to be monitoring that pretty closely through this year.

Okay. And then maybe lastly for me, in terms of orders on gas and fluid, I know it's tough to look at some of these things that are choppy on a one quarter basis. But what's your feeling and how comfortable are you on normalized order pattern? Do you feel like for the most part you've stabilized at a lower level and you see a minus 38% here on oil and gas. What's your view on where markets have found a stable level?

Well, I think we tried to address that in the prepared comments. I don't think we can confidently say that the orders have stabilized. We do have continued potential risk in oil and gas, although we do have some potential significant opportunities there as well.

And as Matt said in his remarks, exactly how the regulatory comments in China are going to affect the immediate order book, which will be somewhat offset by the acceleration of some of the particulate control regulatory steps, that leaves a bit of uncertainty in the market. So I think it's too early to call a stable situation. There's some positive things and some negative things, and we're going to monitor them carefully and I think we'll have something a little more definitive to say by next quarter.

The only thing I'd add there is that we went through our Investor Day segment by segment, a logic and analysis for why the growth would come back in each of those segments. And I think that analysis still holds true, and the real question mark for us is what's the timing going to be and is it going to be in the back half of this year or is it going to be pushed back a little bit? And as I said in my comment, if we conclude it will be pushed back, we intend to take more proactive cost action to make sure we can get earnings moving back in a positive direction.

Thank you.

Thank you. And our next question comes from the line of John Inch with Deutsche Bank. Your line is now open.

Thank you. Good morning, everyone. Can we just start with the Rebel? How much did that financially benefit you in the first quarter? Which was always part of the expectation and I think, Scott, you said it's going to -- you've got it improving or accelerating in shipments as opposed to the second quarter. What are you thinking for the second quarter?

We haven't disclosed specific numbers for that product and we're not intending to, John.

Scott, based on historical product launches, what represents a run rate of sales that you might expect over time? And how soon does it get to -- how soon does it take to get there, if you maybe frame it in that way?

I guess what I'll say is the segment that we sell into there, the full segment that we could address with multiple variations is a couple hundred million dollar segment. And I think our early performance suggests that as we had targeted, that we'll be able to take a significant share position. Let's say double-digit share position in that segment.

And so that would say as we get through not only the initial variation, but the subsequent ones. That gives you a little bit of an idea of the size in North America, and then this summer, we'll go through our European launch. And we've had some positive reaction from some of the early showing that we've done in the market there as well.

So definitely a product that will contribute to growth at the global level in the basis point level. But it's also one of a number of segments in the market, and we'll need to have multiple products over time to move the needle in a big way.

Yes. That makes sense. Can I ask you about these China power market regulatory directives? Just to be clear, is this new that transpired in the first quarter, or was this always the framework? And if I understand this correctly, you're expecting power order outlook weakness is going to be related to new build in China, not particulate regulations? Is that correct? And do you expect particulate regulation benefit in terms of new orders in China for you this year?

Yes. So, first of all, the fact that the Government was evaluating the supply demand issues in power is not something new. The specific decisions that they took in the first quarter, which were pretty significant in terms of wanting to get the supply demand back in balance and an acknowledgment of an overbuild that they had coming through the pipe and specific actions to get supply and demand back into balance. That was a new news in the quarter. So that's the answer to the first.

And what that will mean is that best indication we have is that they'll push through with a number of the products that have already gotten pretty far down the path. But that the new ones coming through the pipe are going to be stalled for a while.

At the same time on the particulate front, in the same meeting they kind of reinforced and strengthened what they want to do on the particulate front. So that has some positive effect, as Scott commented, in accelerating the pace at which the environmental projects come through related to that particulate regulation.

But it sounds like net, this is a headwind. Is that the way to think about it with respect to China and the power overall?

Yes. I think it still remains to be seen. But we will be a headwind on the new build front for sure. It will be a little more positive news on the environmental front. And in the coming quarters, we'll be able to get clarity of the extent to which it will be more neutral or a meaningful headwind.

For this year, John, it mostly affects the order rate analysis, as opposed to what we expect for revenue for the year.

No. That seems clear. One last one, oil has obviously bounced a lot. How do you think of your business product offering on the pump side and oil up $45? Is it enough to begin to stimulate, do you think, demand again for oil and gas applications or do you almost need it a little bit higher?

You made it clear that you probably should be able to offset raw material cost increases. So I don't think that's a concern. It's really the question -- the $64,000 question is, has oil gone up enough to actually get infrastructure tied to this stuff beginning to move in the right direction, or does it actually need to go a little higher? What do you think?

A couple of thoughts on that. First, we've got some specific technologies and applications, and we shared some at the Investor Day about some of those that we've been driving that have value to customers at $45 barrel of oil because they're enabling them to extract more efficiently in existing reserves. So we do see opportunity for those technologies at the current oil level.

And then, secondly, certainly over time as there is more demand, there will be some investment in the oil and gas area even at the $45 level. And I know there's been some news of some North Sea investments and things that are moving forward. But it would take something higher than $45 to drive a real upswing here in terms of the investment that would drive pumps demand.

And some of it is similar to the mining question, John. Some of it is the capital expense budget of our customers. And they may need to see this for a little bit more sustained period of time before they're comfortable increasing their capital expense budget. So to Matt's point, it's definitely coming. It's just a question of the timing.

It's a good first step. Appreciate it. Okay. Thanks, Matt and Scott.

Thank you. And our next question comes from the line of Chase Jacobson with William Blair. Your line is now open.

Hi. Good morning. Can you talk a little bit about -- I apologize if I missed this. Can you talk about the margin performance in the gas and fluid handling business? Because the revenue is up. I'm assuming it was price. But can you give any color on how price or mix impacted the margin there and how it should play out throughout the rest of the year?

Well, this business is largely project business, and there isn't a precise price metric, although the pricing in the four market business was in line with our typical results. The principal reasons that the overall market didn't improve was the acquired businesses did not contribute to the margin in this particular quarter. The base business outside of this and we had a bit of a downturn in the reliability services business which, again, relates to the spending budgets of the oil and gas companies that Matt talked about.

If you exclude those two things, the base Howden business and the equipment business on pumps, the margin was actually slightly better. But it was the overall margin for the segment was diluted by the acquired entities and the falloff in the higher margin reliability services business.

Okay. And then, Matt, I don't think you talked much about capital allocation. Any change there, or is the focus really on internal now and acquisitions later? And maybe any general commentary about the M&A environment? Thanks.

Yes, sure. So as we said on previous calls, we've taken the opportunity to buy back some shares. We've spent half of the $100 million that was authorized by the Board. We continue to see that as an option if we find that to be the attractive option going forward.

But our primary focus on the capital allocation front is around the acquisition pipeline. We've been driving a pipeline of more bolt-on acquisitions and if we can find the right ones to do there, we'll be moving forward with bolt-on acquisitions.

It is a bit of a tough environment right now with the choppy markets, in terms of buyers and sellers being able to come together and find a meeting of the minds on price. But that continues to be our intent. And as I've said in previous calls, as we move into next year, we will be moving attention back to the question of where would it make sense to have the next platform acquisition that could accelerate our growth and strengthen our portfolio.

Okay. Thank you.

Thank you. And our next question comes from the line of Jeff Hammond with KeyBanc Capital Markets. Your line is now open.

Hey, good morning, guys. You made the comment about choppy orders and that gives you some question over next year in gas and fluid. Has it really come down to the moving pieces within power gen and whether some of this oil and gas drops? What are kind of the keys on whether you see the visibility for growth in the next year?

I think it's fair to say that the two biggest factors there is whether the large projects in oil and gas get traction. And a number of those are more downstream projects in oil and gas. So as I said before, they're projects that should be attractive projects even in today's environment. But the capital is just being withheld from them.

One is whether these large projects get some traction and as you said, how the pieces come together on the power front. Those are definitely the two largest factors.

Jeff, we feel pretty good about the stabilizing of general industry. That's in the flattish range. The mining and marine markets are much smaller than the other two. So I think you did hit the nail on the head. It does come down to the power and oil and gas orders, which will determine whether 2017 can return to growth or not.

Yes. And the other thing I'll mention is we're really working hard to drive as much aftermarket growth and strength in our aftermarket capability as much as possible. And to realign resources to be going more to where the growth is and taking into our own hands a little bit in terms of trying to drive as much growth as we can in a tough market environment.

Okay. And then just on the guidance, maybe Scott, can you give us a new share count in interest expense? And then just in the segment growth rates, are we still in the bands that you originally had laid out, the down 5% to 7% for FABTECH, down 3% to 6% for Howden, flat to down 3% for fluid handling?

I'll start with the last part of the question. I would say they were at the edge of the band on both. So we would expect FABTECH to be near the better end of the band. Maybe a little bit better than that. But that's kind of the zone we're in when you adjust for the extra days.

And we would expect gas and fluid to be at the lower end of their band or maybe just a tad outside of it. But as I said in the prepared remarks, when you balance it together, we're comfortable with the revenue guidance affirming what we gave in December.

As far as interest goes, I'll leave some of this to you. Our interest expense, which I have commented on in the past, as most of you know, is almost entirely variable rate borrowing. We assume four fed increases in our guidance. I'd say it's pretty clear that there's going to be something less than that. So I'm not going to call how many fed increases there's going to be. But that will result in some very significant savings.

And I would say that our new lower cost borrowing facilities are worth $2 million to $3 million of reduction to the original guidance. And then the rest of the reduction would be based on factoring in when and how often you think the fed is going to increase. And I'll leave that to you.

Thank you. And our next question comes from the line of Schon Williams with BB&T Capital Markets. Your line is now open.

Hi. Good morning. I just wanted to clarify exactly how much are we talking about in SG&A that you're calling out as a bit unusual but not necessarily backing out? Did I hear $2 million to $3 million? Is that the right number?

It's a little more than that. There's a $2 million impairment charge, and then there's $4 million or $5 million of bad debt and legal expense.

And why exactly the bad debt? Can you talk a little bit about that? It sounded like you were insinuating that some of that would not repeat. I don't know. Why do you have confidence that may not be (technical difficulty)?

There was a large customer in the African region that accounted for most of the bad debt, and we don't have any further exposure to that customer.

Okay. And then just so I'm crystal clear again on the SG&A, from a year-over-year basis, this was a Q1 an easy comp. I'm just trying to get a sense of are you talking about moving forward Q1 actually being the high watermark for SG&A this year, or are you talking about more about year-over-year improvement versus where you were in 2015?

Well, there's a certain seasonality and a portion of particularly the selling component is variable, and this is our lowest quarter for sales. So I don't think it would be accurate to say as an absolute dollars that this is our high watermark. Certainly as a percentage of sales, this is going to be by far our high watermark on cost of sales -- I mean on selling, general and administrative expenses.

So I think you can look for continued improvement in the percentage of SG&A to total sales and you'll certainly see in the next couple of quarters of movement in the absolute value. We have a very strong fourth quarter, so I think that it's highly likely that SG&A in the fourth quarter would be higher than the first, even after the cost savings.

That's helpful. And then one more, if I may. Share repurchase has been $20 million, $21 million the last two quarters, is that a good pace going forward? Or could that actually accelerate if some of the M&A timing is more variable, could we actually see that pace pick up as we go through the year?

Well, there's a $100 million governor on the whole thing, so we're not going to see anything higher than that. That is the maximum Board authorization that we have. I think Matt's comments attempted to address this. I'll restate them.

It's a dynamic management issue here. We see what's the best use of capital for our shareholders. If we have a directive acquisition opportunities, we would certainly give them a high weighting. Obviously, what our stock is trading at is part of that equation. So we have to look at what provides the best return to shareholders over the course of the year, and we'll allocate our capital that way. But we're not going to do more than another $50 million, because that's our maximum Board authorization.

Alright, that's helpful, guys. I'll get back in the queue.

Thank you. And our next question comes from the line of Andrew Kaplowitz with Citigroup. Your line is now open.

Hey, good morning, guys. Scott, can you quantify how much impact the recent acquisitions you had in your gas and fluid handling business had on your margin? Was it 50 basis points to 100 basis points? Does that impact change over the next couple of quarters and do you still think you can have higher margin in 2016 than in 2015 in gas and fluid handling?

Okay. The first question I'll let you do the math. But I think I've given you enough information to do it. We disclosed the exact amount of revenue from the acquired entities, which I believe is in the $23 million or $24 million range. But the exact amount is in the materials. And the business was only marginally profitable for the quarter. So if you factor that in, you can calculate the precise dilution that was caused by that.

Second question is we do expect these acquisitions to return to a more normalized range as we discussed in our -- when we originally acquired these businesses, the circa high single-digits 10% type of return. We do expect to see that in the future quarter. So we definitely expect these acquisitions to contribute going forward. In terms of overall margin for the year, we do expect a better margin in gas and fluid handling for the full-year than what we had in 2015.

Okay. That's helpful, Scott. And then being that marine orders seem to trim back down a little bit here in gas and fluid handling. You were pretty optimistic about the growth there and last quarter, I mentioned a good pipeline of activity. You talk about deferrals here on this call. What are you seeing in that market and talk about the outlook a little bit more for that particular market?

Well, the order rate for new ships, not just Colfax's business, but the order rate for new ships was pretty dismal in the first quarter. Whether that's going to be a continuing trend or whether that was a blip is hard to tell.

There's been a slight bounce back in the OSV business. We've actually taken a few orders there. I think in Matt's comments, we indicated we expect a high single-digit decline in order rates for the balance of the year. Not quite as large as the first quarter where just the whole new ship orders were weak for the entire industry.

Okay. And then just one quick clarification. Restructuring expense was a little lower than we saw in the quarter but right at your annual pace of $70 million that you guys have guided to.

I would have thought that maybe in the that kind of environment it could be a little bit more front loaded restructuring, but it doesn't seem that way. So should we just expect pretty consistent levels of restructuring expense here over the next two quarters?

Well, the reason it takes a little longer is outside of North America, it takes longer than you might hope to get these restructuring projects to a point where you've done enough things to actually record the chart. So it isn't any indication that we weren't working at the pace that we expected.

So the projects are moving at the original planned pace. There isn't any slowdown in the pace. It's just the criteria that have to be met before you can record an accounting charge.

Toi your second question, I think we will see a little higher cost in the second quarter. And then a more normalized pro rata type of level over quarters three and four. But we will see a little higher restructuring cost in the second quarter.

Thank you.

Thank you. And our next question comes from the line of Brian Konigsberg with Vertical Research Partners. Your line is now open.

Thanks, good morning. Just following up on Andy's question just with the restructuring. How much of the savings did you realize in the first quarter and maybe can you talk about the cadence of the savings through the rest of the year by quarter?

Well, we affirmed the $50 million expectation for the full-year. Less than one quarter of that was realized in the first quarter, but not significantly less than that. And we would expect it to improve by a couple million a quarter. So it's a little bit back end weighted, but not massively back end weighted.

All right. Thank you. And actually, Scott, I'm not quite sure you said what the contribution was for the three extra days. I apologize if you said and I missed it. So the organic contribution from those three days was what in the quarter?

Between 2% and 3%.

2% to 3%. Got it. And just lastly on the applications for downstream within the oil and gas, is it primarily refining or is it other applications within petrochemical? Can you just give us a little bit of a breakdown of the downstream exposure you do have?

Well, it's all of the above. But certainly refining is the most significant from a dollar basis.

And then it spans across pet chem and would you through L&G in that as well?

Yes, it does. L&G is an area that there's been some nice growth projects. Pet chem is an area that we've seen some more activity and we're seeing in more. But that refinery part of downstream has had some challenges.

It's very broad-based. So it does cover all of those areas. But certainly refining is the largest single from a dollar value of sales.

If I could just one last real quick one. Just on kind of compression, can you just give us an update. You were making some good progress in the Middle East. How is that -- and that was, I think, share gains for the most part. Just can you give us an update? Is that when you talk about delays, is that kind of part of the equation?

Yes. Definitely some of the large compressor orders are part of what's -- part of the delays that we're seeing in Q2 and Q3 that we commented on.

So from a revenue standpoint, you see a very strong quarter, which is the production of the large order -- those are large percentage of completion jobs that the jobs are being constructed now so you're seeing a very good revenue base. The declining orders are as Matt commented, those are the one, that comp was very difficult against last year and, two, there's some orders that have been deferred.

And we're quite encouraged as we've looked at projects more in the mid speck range, including for example, some of the opportunity to take Roots to other places in the world where they had not been as focused. We see a lot of good pipeline opportunity that gives us good optimism about where we can go over time in that compressor business. But there is a short-term challenge around some of the larger orders in places like the Middle East, as you mentioned.

Got it. Thank you.

Thank you. And our last question comes from the line of Matt McConnell with RBC Capital Markets. Your line is now open.

Thank you. Good morning. Just a couple of cleanups on the guidance. I think between FX getting slightly better and share count slightly lower in interest, would I be right to size that around maybe a $0.10 incremental buffer versus your prior outlook? Does that sound about right?

I think that sounds a little bit high. Obviously, interest expense is something that is -- could be variable by a few cents depending on your outlook for fed hiking. But I think $0.10 is a little high.

Okay. Alright, thank you. And then switching to oil and gas within gas and fluid handling, how much backlog is there now? Because your organic revenue has been up 25% the past couple quarters. What's the status of the backlog there? Orders obviously have been different from that. What kind of growth would you expect out of that vertical in the next quarter or so?

Not quite sure I understood the question, Matt. The backlog is disclosed and it is clearly down and we did comment on that. Help me understand the question.

So your organic sales growth in oil and gas has been up 25% for the past two quarters. When would you expect that to moderate consistent with what you've seen in organic orders for that vertical recently?

We expect it to moderate over the balance of the year. But we expect the oil and gas revenue to actually be positive for the year because of completing the large projects in the backlog. Whereas, the order rate we expect to be in decline for the factors we just discussed.

Okay. Thanks. That's helpful. That's what I was looking for. I appreciate it.

Thank you. And I'm showing no further questions at this time. I would now like to turn the call back to Mr. Terry Ross, for closing remarks.

Terrific. Thank you, Chelsea. Thank you, again, for joining us today. We look forward to updating you next quarter. Take care.

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