Enovis Corp (ENOV) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Colfax third quarter earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions).

As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Mr. Terry Ross, Vice President of Investor Relations. You may begin.

Thank you, Catherine. Good morning, everyone and thank you for joining us. My name is Terry Ross, I am Colfax's Vice President of Investor Relations. With me on the call today are Matt Trerotola, President and CEO; and Chris Hix, Senior Vice President and CFO.

Our earnings release was issued this morning and is available in the Investor section of our website, Colfaxcorp.com. We will also be using a slide presentation to walk you through today's call which can also be found on our 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 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 reconciliation information relating to those measures can be found in our earnings press release and today's slide presentation. Now I would like to turn it over to Matt, who will start on slide three.

Thanks, Terry. Good morning and thank you for joining us today. We are pleased to report third quarter operating results that continue to track to the expectations we communicated last December and on our previous quarterly calls. We made substantial progress this quarter on our permanent cost reductions to get us back on track for our mid-teen segment margin goals.

Although our end markets have not improved, the impact of CBS and our strategic growth initiatives are positioning us to outperform. This was demonstrated by several large project winds and asset handling this quarter, and by our Fabrication Technologies Teams' growth in emerging markets. We also announced a very favorable court ruling that is expected to add to our cash flow. Chris will provide more details on this later in the call.

Turning to slide four, many of were you able to join us a few weeks ago at our annual Investor Day, where we discussed our path to drive segment operating margins to mid-teens over the next three to five years. The improvements will come primarily from CBS productivity efforts and additional structural cost-out opportunities that we have identified in the businesses. The first step toward that target is the $50 million of restructuring savings that we committed to deliver in 2016.

In our Q3 results, you can see that these actions are starting to read through the financial results despite lower revenues. This is most evident in the year-over-year reduction in SG&A expenses. Even after eliminating the prior year one-time charges that we detailed at the time, you can see $13 million of savings from structural cost reductions.

Our gross margins also show positive impact. Although the path is different for each of our operating units, all of our businesses are delivering these improvements; and we expect this benefit to step up again in Q4. Combined with a reduction in manufacturing facilities, we are on track to deliver beyond the $50 million in savings. The impact is best seen in the improvement in our FABTECH margins over the last few quarters.

Despite lower volume, segment adjusted operating margin was significantly better than the prior year. In addition to the restructuring savings, the team delivered improvements in plant productivity, freight, and quality performance.

Moving toward mid-teen margins in our current market environment means that we have to find additional ways to reduce the cost structure of the businesses, and I am very pleased with how our teams have embraced this challenge with openness and creativity. We understand we are building a stronger Company; one better able to compete and invest going forward.

A good example of this is the transformation of our housing structure that Ian Brander discussed at the recent Investor Day. After streamlining the European product business structure at the beginning of the year, the management team determined that there were additional opportunities to simplify the structure and reduce the number of sites in Europe. This should improve competitiveness, improve technical support to accelerate growth in our emerging markets, and reduce our administrative costs.

Please turn to slide five. At Investor Day, we also shared our initiatives to outperform our markets and get back to growing revenue as soon as possible. In the quarter, we won several large project awards to deliver 9% organic growth in our gas and fluid handling orders. This positions us for second half orders growth in the segment, but we do not yet interpret this positive result as a broad improvement in our end markets.

Instead, I see these orders as emblematic of the powerful combination of CBS, strong brand, and technology leadership. Our reciprocating compressor win in Kuwait showcases this combination.

Applying CBS to improve project management, engineering, and supply chain processes at Howden over the last few years was instrumental to meet CNBC's aggressive project timeline on a previous order. Value selling, a CBS tool that our teams use to help customers better understand and value our differentiated solutions, was critical to our success.

The team's monetization of the maintenance and energy benefits of our design carry the day in a highly competitive bid environment. We also saw large mining projects come to fruition in the quarter; including a major award in Mexico, and a new project in Africa for our Smart Exec Technology, which came to us from last year's Simsmart acquisition.

Combining Simsmart interesting solutions with Howden's equipment and global reach, we have seen the sales funnel for Smart Exec grow by six times in the past year. Interest this solution is increasing as metal mining firms understand the powerful savings and productivity improvement that total system delivers.

In our fabrication technology segment, we saw emerging markets led by India, Russia, and parts of South America significantly outperform the developed countries. Again, CBS played an important role.

Over the last few months, I have been able to visit many of our filler metal plants around the world. I have been impressed by the level of improvement in quality, delivery, and productivity that every one of these plants is driving; even delivering labor productivity improvements in some markets with declining volumes, which is a tough challenge. This operational improvement combined with value selling and some exceptional commercial teams supports new capacity investments we are making in our filler metal operations in Eastern Europe and Russia.

At our Investor Day, we also discussed the importance of inorganic growth to our value creation model. I am encouraged by what I see as an improving M&A environment and a stronger pipeline of complimentary businesses. Although I cannot update you on any specific transactions, you can be certain M&A remains a core part of our strategy.

Finally, turning to slide six, I would like to share a few additional thoughts about our progress building a value-based CBS culture. CBS not only delivers cost savings and working capital performance, it enables growth. Those of who you joined us last month at our Howden facility in Medina, Ohio, got to see CBS transformation in action.

We are now winning orders in that after-market focus business because of lead time performance. I was especially pleased to hear many of you comment on the level of engagement and energy of the team at that site. When done right, CBS is an empowering force that increases the pace of improvement and the engagement of our associates.

You can also see the strong progress in our North America filler metal delivery performance. As I mentioned earlier, I have seen the same type of improvement whether I am in Pennsylvania, Mexico, Korea, China, or the Czech Republic. And now I will turn it over to Chris to discuss the financial results.

Thanks, Matt. I will start my comments on slide seven. As expected, net sales came in lighter than the prior year third quarter. Included in the 9.3% decline were 2.6 points from foreign exchange translation. Against that backdrop of lower sales, the Company actually increased gross margins by 80 basis points; reflecting in part our successful restructuring efforts, cost controls, and the on-going productivity contributions from CBS.

Restructuring benefits are also reading through to the SG&A line, further contributing to profit improvement. In the quarter, we realized about $13 million of SG&A restructuring savings. Adjusted operating income was $78.3 million and adjusted operating margin was 8.9%, up from 6% in the prior year. Even after normalizing for the $26 million of incremental costs discussed in last year's third quarter, which included bad debt charges, asset impairments, acquisition transaction costs, and other items, margins expanded by about 50 basis points.

Restructuring benefits are dropping to the bottom line. Corporate costs in the third quarter were slightly better than expectations due to the seasonality and timing of expenses. We generated $0.39 cents of adjusted earnings per share in the quarter, reflecting our expected operating performance, a lower tax rate, and lower interest expense.

This quarter's interest expense included over $1 million of favorable benefits that are not forecasted to repeat. Our effective tax rate for adjusted net income per share improved to 29.1% for the full year, and we recorded a benefit in the third quarter to true up to this new rate.

During the quarter, we received a favorable ruling from the Delaware Supreme Court that confirms our rights to excess insurance coverage for our asbestos liability. This ruling should pave the way for our collection of $88 million in costs that we paid over the years and recorded as a long-term receivable, and it also means that future annual cash outlays should decrease by $10 to $20 million once we begin receiving reimbursements.

We cannot be certain when we will begin receiving the cash benefits resulting from the court decision, but these are additional funds we expect to have available to support our strategic growth. Because the ruling also resulted in an adjustment to the long-term expected recovery rate, we recorded an $8.2 million noncash charge which was excluded from our adjusted earnings.

Also excluded from adjusted results are $17 million of restructuring costs incurred in connection with on-going projects to improve profitability and our competitive position and $2.4 million associated with our addition to de-consolidate our mostly inactive Venezuelan subsidiaries.

Let us turn to slide eight and go a little deeper on the business segments. In our Fabrication Technology business, home of the (inaudible) and other market-leading brands, revenue was $446 million this quarter, down 5.8% organically and 2.6% from foreign exchange. We continue to outpace the global market, driven by our performance in emerging markets which was led by India, Russia, and South America.

Europe softened slightly from Q2. North America, as we commented our Investor Day last month, took a step down at the beginning of the third quarter; but sequential order rates strengthened September and we have held to this point in October.

The adjusted operating margin was about 11% this quarter, up 220 basis points from the prior year despite the lower volume. Restructuring savings and other productivity gains drove most of the improvement, but there was some one-time pressures in the prior-year quarter that also contributed about 60 basis points to this favorable year-over-year change. The business continues to execute its cost actions and we expect to see additional benefits next quarter and next year.

Our gas and fluid handling segment on slide nine, which includes our global Howden and Colfax fluid handling brands, achieved $433 million of net sales in the third quarter; 10% lower than last year's comparable quarter including 2.6 points of fx translation headwind. Despite the lower sales, adjusted operating margin for the segment was 9.1%.

The prior year included significant one-time costs that distort the picture a bit, but even after normalizing for these, we held detrimental margins in the mid-teens primarily as a result of restructuring savings. As with our FABTECH business, we expect to see financial benefits from restructuring grow in the fourth quarter and into next year.

Slide ten includes a look at the orders and backlog for our gas and fluid handling segment. Orders of $477 million in the quarter position us to have orders growth for the full second half of this year, and included several large project awards that all fell in the same period. These orders solidify the gas and fluid handling backlog at $1.1 billion.

Particularly strong in the quarter were oil and gas orders with project awards bringing the year-to-date decline in oil and gas to about 10%, a result that we believe is outpacing the rate of CapEx spend in the market. Mining benefited from the large Cadelco order but benefited from increased activity in other metal mining projects, especially in the Americas.

We have seen the sales funnel improve, which may indicate a turning point for parts of the mining market. In power, the lower orders in the quarter were primarily the result of new project -- new build project timing and to a lesser degree, reflect the expected impact of lower China new build activity, and lower plant utilization in North America.

I will wrap up my prepared remarks with an outlook for the full year on slide eleven. Although our end markets are not yet turning, we are confident in the pace of our restructuring actions and our global team's performance heading into the fourth quarter.

As we pointed out in our first quarter call in May, we will have three fewer selling days in the third quarter of this year, as compared to last year, which provides a little comp headwind for our FABTECH business in the quarter but has no impact on the year. Considering all factors, we are raising the lower end of our previously-issued adjusted EPS range by $0.05 and now expect $1.50 to $1.55 for full-year 2016.

Thanks, Chris. In closing, we delivered another solid quarter. I am encouraged by the uptick in orders, and our team's execution of productivity and structural cost reduction actions. We continue to view our end markets as the near the end of the cycle and are increasing our focus on key growth initiatives. We are making very tangible progress on initiatives that make us a stronger Company.

We have initiated several new actions to reduce our long-term cost structure, and these will allow us to create value through this trough of the cycle and stay on path to mid-teen segment margins. Our progress on after-market, new products, and expanding the adjustable markets is helping us to get back to growth in advance of the cyclical -- helping us to outperform in many of our markets, and should enable us to get back to markets in advance of the cyclical investment recovery.

I am also pleased to see Shyam's impact, where he's bringing focus and energy to our business, cost alignment, customer service improvement, and top-line growth initiatives in that business. There is still important work to be done there but I feel like we passed the baton without losing the global momentum we built in the recent quarters. Overall, our improved execution and new leadership team lets us increase focus on a growing pipeline of acquisition opportunities.

We are committed to improving shareholder value even in a tough market environment, and we see plenty of opportunity to grow in the future. With that, I would like to open the session up for questions

Thank you. (Operator Instructions). Our first question goes to Joe Ritchie with Goldman Sachs. Your line is open.

Good morning. This is actually Evelyn Chow for Joe. You know, you noted that order growth resulted from timing and team performance but not from an end market recovery. I guess can you just help give us the framework or a little more context on what are the signals you actually need to see to conclude that the markets are coming back, as opposed to orders just reflecting your own controllable execution?

Thanks, Evelyn. Well, you know, what I would say is we have been talking for a few quarters back about some large orders that had been in the funnel, had been active, but had stalled. The positive thing that happened here in the third quarter, not just on these projects but some others as well, is that some things in oil and gas started to move again.

These are some downstream orders actually kind of drove to fruition, but we also saw upstream orders actually get active again and start moving forward with the customers re-engaging and moving those projects forward. So we see that as a good start, but when we look behind that at the flow and movement of the larger set of possibilities, we do not see enough strength building to call a turn at this point versus to say this is a good initial signal; and we feel great that the team stepped up and won these big orders and you know, we will keep working hard to move things forward from here.

Thanks, Matt. That was helpful. And I guess maybe you know, I was encouraged by the second guide raise you had this year but wanted to dive a little deeper into the bridge from Q3 to Q4. I think what your guide implies is it is lighter in contribution to slow your EPS than you typically see, but cost out benefits are stepping up even more in Q4. So I guess I want to understand what the offsets are that inform your expectations.

This is Chris, Evelyn. I want to make sure I understand the question. You are just looking for essentially the dynamics as we drive from Q3 to Q4 and sort of what we expect to see there, if I understand the question right. What I would tell you is that above the line, we think about it operationally, Q4 is generally our strongest quarter. We are well-positioned with a combination of what is in our backlog and daily order rates and other things that we see to overdrive the sales in Q4 relative to Q3.

As a result of that, you would expect as a sequential walk-through to deliver better operating profit and as we mentioned, we are getting additional restructuring benefits. So we do expect to see sequentially, that improvement in our operating profit as we step from Q3 to Q4. Below the line we had some benefits in the tax and the interest area that we do not expect to necessarily repeat, so I would expect to not see the same kind of below the line benefit we got in Q3 as we step into Q4.

So net/net, we expect -- that is why we are able to raise the lower end of the guidance range and have that confidence to finish up the year pretty strong.

Thanks, Chris. I will get back in queue.

Thank you. Our next question comes from Mike Halloran with Robert Baird.

Good morning, guys. On the order side, obviously backlog tracked up sequentially which is positive; still down year-over-year. You have got the dichotomy between the controllable on your side, still tough markets beneath. What does that mean if you track into next year? When do some of the orders start turning into revenue? What does the pipeline mean for next year, and maybe some early thoughts on that?

We are going to -- I cannot say a lot on next year. We are going to give guidance at a later point. At that time, we will certainly talk about the market environment for next year, about our revenue expectations for next year, and our performance against that including the extra cost measures that will execute to have strong performance.

And you know, what I can say is the orders that we captured in the quarter, you know, they were held up for a while, so they are things that the customers are eager to get moving on. So we will be starting to convert these orders into revenue pretty quickly, in some cases, next year, some will flow into the following year. These will start to convert revenue quickly.

And then our teams are really focused on continuing to win the big orders, but also working hard on the after-market and our diversification efforts that really kind of keep strengthening and growing the base under (inaudible), and we think that combination is going to allow us to outperform and get us to growth as fast as is possible as the markets unfold.

So some moving pieces geographically on the welding side; I appreciate the commentary that seemed to get a little better through the quarter. Are we at the point where you start to see normal sequential patterns in that welding business, in other words some stability versus a normal pattern?

Yes, I would say we are certainly more stable in that business than we were a handful of quarters back. And our performance in the last handful of quarters is stronger than it was last year. But I would say that we are still not confident in how the sequentials will play out.

I think there is been too many things over the past handful of quarters that were not in line with historical sequentials that we are definitely taking it quarter by quarter, and continuing to take a conservative view there and make sure our costs are aligned for a conservative view. And then as we see things unfold, we will be ready to get more aggressive if and when the market really turns in a positive direction.

Appreciate it.

Thank you. Our next question comes from Nathan Jones with Stifel. Your line is open.

Good morning, Matt, Chris, Terry.

Good morning.

I wonder if we could talk a little bit more about the new cost out actions that you are looking at, understanding that you cannot talk specifically about things that have not been announced internally. You have talked about $50 million of cost out this year. You are going to have should carryover benefits to next year. When you layer in these new actions, are you thinking of a similar kind of number for cost out next year? More? Less?

I will talk about philosophy maybe and then Chris can comment on what we can say about numbers. A few quarters back, I shared that we were not seeing orders develop this year the way that we had planned for based on the market environment. And we are going to take things into our own hands and make sure we got moving on additional cost efforts to make sure we could have strong performance next year even if the markets stayed tough.

And so we, at that point in time, and since that point in time, have worked with the teams to have very clear view of what a very conservative view of next year is, and then use that view to define the amount of costs that we needed to get out of the businesses to make sure we are prepared for strong performance and to have the right base moving forward from there.

And then work with the team on projects; and I have found that as I have seen in other businesses, despite some aggressive things that we had already done, once you get through those and you get to the other side of those and things settle, you can find additional things that are attractive to do and strengthen the business. Some realignment things, things related to outsourcing transactional administrative costs, simplifying structures, and you know, realigning sales investments in some of the places where there has been sharp drops, realigning our sales investments so we can afford to invest more in the places where the growth is going to be.

That is the kind of philosophy we have been using. Maybe Chris can say a thing or two about it.

What I would say is as Matt suggested, we are going through a very rigorous and complex planning process for 2017 that does consider a lot of factors. I know that we previously communicated we expected to see $20 million to $25 million of additional benefits. I think we updated that comment maybe suggesting it could be higher than that as we get into 2017.

But rather than provide just sort of a sprinkling of additional information, I think what we would like to do is get through the planning cycle, have the full view of our business teams and give investors a really good informed view and we have got that solidified.

Okay, so it is $20 million to $25 million carryover from actions this year, plus whatever you do next year.

Actually, I think we may have updated that $20 million to $25 million in our last call and suggested there could be even another $5 million or $10 million beyond that. We will continue to pursue that. There is a chance we could expand upon that. But again, we would like to get through our full internal process before we give yet another update on that number.

Okay. Then Matt, on M&A, you are talking a little bit more constructively about that in terms of market pricing and your ability to maybe get some deals done. What kind of capacity do you think you would have to be comfortable with where the leverage would get you on the balance sheet?

Yes. Again, I will make a comment that Chris may want to back up. We think about capacity in terms of being able to pay for the deals. We also think about bandwidth in order to be able to do them well. I think we see a number of attractive options coming through the pipeline that we feel like we could afford within the cash flows that we will be generating.

And we feel like with the work that we have done to drive through our cost realignment efforts with Shyam now in place leading ESAB and me able to focus a little more in this area; and I think with our businesses broadly, moving in a good, positive direction, we feel like we have got the organizational capacity as well. So that is kind of my comment about us leaning into this is based on those things. Chris may want to comment a little bit as well.

I think the Company's demonstrated over the last four to five years that, you know, it is able to think about fund-raising for M&A in a very flexible sort of way. So we have got certainly access to funds in a lot of different direction that can support the Company's strategic direction.

I think it is more important to think about as Matt said, really the organizational capabilities we have to take on that greater -- the greater opportunities in M&A as they come along. We certainly have the capability to take on additional leverage. I think we have communicated in the past that we are comfortable with leverage as high as the threes and making sure we have a good path to leverage our high cash flows to drive that down. But we will remain flexible in our thinking on this and make sure we drive for greatest shareholder creation.

Okay. Thanks, guys.

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

Hey, good morning, guys.

Good morning, Jeff.

Hey, so FABTECH, I think last quarter, you had said Europe had moved positive. It looks like it back slid here. Maybe just talk about what you are seeing there and what you see from a trajectory standpoint for that important geography.

Yes, I think that is an accurate comment. I think we do not see that as a significant turn of any sort. We were encouraged to see it moving positive but we did not presume it would stay positive versus that it might bounce around a little bit. And you know, we have seen kind of a little bit in the opposite direction here in the second quarter or third quarter as it came out of the summer.

We kind of view that -- you put the two quarters together, Europe is flat. That is a good thing versus where it was. We feel like that is a good way to think about it going forward as flat and with a good opportunity to turn to positive. As we move forward.

Okay. And then just maybe a question for Chris. Working capital, you know, looks continue to be a drag here on free cash flow despite kind of lower sales. One do, we make up a lot of that in Q4 and maybe just bigger picture, your initial thoughts on kind of opportunities to really improve working capital metrics.

Yes, thanks, Jeff. What I would tell you is that even though the sales numbers are coming down, that generally unleashes some working capital. We also have that same dynamic with the orders generally in the backlog. And that has generated significant cash flow pressure as we go forward into 2017, I would expect to see that normalize a bit and take some pressure out of the system.

So that is not something that is readily apparent when you look at the working capital figures, but it is important to consider. We do have continued opportunity to apply CBS around the enterprise to drive improvements. I would say principally in inventory and a little bit on the receivables side as well. You will see us make a step forward in the fourth quarter. That is typical for us.

So I would expect to see some nice strides. I would say that just generally speaking, I think we have done a terrific job of deploying CBS around the organization. But there do remain these selected opportunities to drive CBS for impact and it is those pockets of opportunity that we will continue to focus on to drive some improvements over the next couple of quarters.

So net/net expect to see improvement in the fourth quarter, expect to see us continue to drive CBS for longer term benefits, and expect to see us drive for impact for shorter term benefits.

Okay. Then if I could sneak one more in on these big orders, Matt, just to be clear, nothing is really going to ship in 2016. It is really most of it in 2017 and then maybe some leak over into the following year?

That is correct.

Okay. Thanks, guys.

Thank you. (Operator Instructions). Our next question comes from Andrew Kaplowitz with Citigroup. Your line is open.

Good morning, guys.

Good morning.

Good morning.

Matt, can you give us a little more color on what is going on in your power markets within gas and fluid handling? Power gen orders, there may be little worse than they have been, but you did tell us that Chinese new builds we missed was going to start impacting the business. Is that what this is? I think you mentioned US power plant utilization moving down a little bit. What is the outlook for the power markets here as we move forward?

Matt, I think we have continued to -- we have continued to say that the power is, over time, going to be about a flat market that, there are places in the world like India, southeast Asia where there is quite a bit of activity and there is going to be growth driven in a positive direction at a time when China is going to pull back a little bit. So those I think will tend to kind of balance things off.

So we see -- looking forward, we see power in a flattish range. We have got a lot of focus on the growth -- where the growth is in power, and also on after-market and participating in more value on the after-market. What you are seeing this year is really more about timing of large orders and a little bit of starting to see some of the effects of the China pullback, but not much of that yet.

Got it. Thank you, for that. So Matt or Chris, how should we think about margin capability at this time in FABTECH? I mean it looks like you did have some higher steel costs flow through the business and effect price versus mix but also the business as you have said, it has become a little more difficult in the us and maybe Europe. You talked about holding 11% margin or above this business. You are close here in Q3. Can you talk about FABTECH's ability to hold margin going forward and the environment you are now in?

I think, as I said before, we feel like we have made improvements in the business where we are going to move up from 11%, up, going forward here. That is going to come initially from more flow through of our cost efforts as we go through the coming quarters. It is going to come from productivity efforts as well. And then you know, the remainder of that to get to that kind of mid-teens range is going to come from when the growth comes back and getting a couple of years of GDP-like growth.

We still think that formula very much holds for the business and we think we have demonstrated in the last few quarters that even in a very difficult time period, we can have margins in the range where we are and we think that creates strong opportunity to move up from here.

Okay. That is helpful. Just maybe one more clarifying on ESAB. With Europe maybe being more flat, and North America still being tough, your original range this year was sort of that negative 5 to negative 7. You talked about more like negative 4. Where are we at on that? Is it still trending toward that range? I see where we are at in the quarter. How do we think about this moving forward versus the original guidance?

Yes, we do not see any change in our commentary that we would be at the better end of the original guidance in any sovereign in FABTECH. We are still in that same kind of range. As I commented earlier, the emerging markets part of the business grew in the quarter and yes, Europe turned a little to the downside but it is flat across the last few quarters.

So you put those together and that is a large part of the business that is kind of poised to turn to growth at some point here in the coming quarters. And then we just need to keep an eye on North America as things play out from here. But as you can see in our global growth numbers, we are in a stronger range on those and I think we compare nice and favorably on that part on the business overall.

Thanks, guys.

Thank you. Our next question comes from Andrew Obin with Bank of America Merrill Lynch. Your line is open.

Hello? Can you hear me? Hey, how are you? Just a question. In terms of Q4 orders, do you guys have a sense of what kind of book-to-bill you might get in Q4? And maybe more color by segment.

Yes, I am just trying to get to the numbers quickly, Andrew. So it is going to be -- should be pretty -- we should be pretty solid from that standpoint. We think the orders trajectory here continues to support what we talked about, second half earnings growth, but Q4 is our largest ship quarter of the year.

So I need to go see the numbers specifically to give you the right steer, but we think orders are going to continue to be a solid story for us to close out this year on gas and fluid handling.

It a common trend for us to work the backlog down a little bit in the fourth quarter.

Yes. We built it up a little in Q3. We will bring it back a little in the fourth quarter.

Okay. I will follow up on that. And just another question. In terms of effects move, are you guys -- what was the transaction impact in the quarter; you know, given Mexican peso is, given where the Russian ruble is, can you talk about if you have had any tailwind from transaction benefit?

Well really there was a little bit of transaction benefit that we spoke to with respect to, you know, the interest but sort of below the line there. That is really the primary impact that we had, that and the translation impact which was two to three points for both the revenue and the op line. So I would not call those tailwinds. Those are a little bit more headwinds in the quarter.

Okay. I will follow up on that. Thank you very much.

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

Thank you. Good morning, everyone.

Hey, John.

Hey, guys. So the SB oil and gas orders, wonder if you can give a little bit more color. If I recall, I think it is a composite of a compressor and maybe some upstream pumps. I am curious, if you could talk to the position of the orders and you mentioned, I think, Matt, that this was part of a project that had been deferred or these were projects that had been deferred. Are there other things in your backlog that had been deferred that look like they are kind of coming to fruition?

Yes so first as far as the orders, one of the large orders was a compressor, Howden compressor order in downstream oil and gas, the large mining order is more a fans order. And then we also had a nice Simsmart technology order that we talked about. So we cut across a number of different Howden product technologies.

And you know, for sure, there are, you know, projects in the backlog that have been there a long time. But I would not say that there is a large stack behind these that are coming through, otherwise we would be making more positive comments about the turn. We are encouraged to see a few cut loose.

For sure, there are other projects out there but we think the recovery is going to be more fueled by progress and after-market, progress in the broad diversification of the business. And you know, when these big projects come along, we have to make sure we win more than our fair share. We are happy that we did that in the quarter.

Within gas and fluids handling, do you have comments on the general industrial piece of that business? Maybe remind us what tends to kind of move that business? It still seems to be pretty much the same trajectory, but I am wondering if under the hood you see any other sort of moving parts.

Good question. We actually -- the industrial that we report includes general industrial, which is a broadly diversified general industrial, but it includes things like steel. And if you get underneath that, the trends in the general industrial which we have got both in the fluid handling pumps business as well as in Howden, we have got significant chunks of general industrial business where the market trends and our trends are in a positive place going through this year. But the heavier part of the industrial steel in particular is going through a bit of a tougher investment place right now. Although there are indications on a go-forward basis that steel is going to move in a more positive direction.

Like if for instance -- I think you make pumps and stuff for elevator applications and other things --

Yes.

I know that there is very choppy indicators in nonresidential construction markets. I realize you are not a non-res company but are you seeing some of that reflected in what is happening either pro or more or less favorable? It is just trying to understand what could be under -- in terms of vertical but comprise the general industrial segment.

Get into our general industrial business and whether it is things like some of the things related to construction or residential or commercial; but also we are involved in things like fans for tunnels, and then you get into a whole broader set of applications that are related to more kind of medium industry kinds of investments and improvements. We see the trends as -- in a modestly positive direction as we are working through this, through this year.

In line with what you have been hearing externally about the general industrial parts of the global economy and the US economy being in a positive zone and a little bit better zone than where things were last year.

And as we shared our Investor Day, in our strategies, we put more focus into that industrial area and also into diversification into some of the areas that are going to grow more within places like oil and gas and so we see that as creating an opportunity for us as we execute those initiatives to drive ourselves back to growth in advance of any large investment in recovery in the oil and gas patch, based on the fact that at this point we are two-thirds after market and industrial.

Maybe one last one for Chris. You know, I realize you guys are trying -- you actually are making a lot of progress in terms of the realignment initiatives and the simplification initiatives, but there still is this fairly wide disconnect between your GAAP results and your adjusted results. Chris, does this just naturally converge over time as you do less restructuring because you have already executed all of the projects ,or how are you thinking about this as a CFO and your prior experience? Are you going to grow out of it or do you actually have initiatives to close the gap between GAAP?

I guess what I would say, John, is first and foremost, we want to make sure we put enough information out there so that people, I think, have a pretty good handle on the underlying progress that we are making and then they can make their own assessment about that. I would say that is the most important part of our reporting.

I think over time, what you will see is that we are going through this restructuring phase in the business. I think it is natural, it is healthy and it is helping to drive a lot of results and demonstrate the power of CBS in a down market environment. I think you will see us, at some point, we will stabilize that. We will be focusing and talking more on growth and a combination of end markets and self-help that we are working on throughout the enterprise.

So I think you will see that moderate a little bit. The question as always is you do acquisitions and you apply CBS to that and that generally takes a fair bit of investment. It helpful to investors that we continue to call that out so we can understand the work we are doing to create the future value and returns on those investments. So that is just the way I think about it over time and hopefully that is helpful to you, John.

And you are being transparent. I very much appreciate it. Thank you so much.

Thanks.

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

Hey, guys, how you doing?

Good morning, Joe.

Question in fabrication. When do the emerging market -- developing emerging markets is 50/50. Clearly this quarter, developing markets weakness in strength. But when do those kind of calms start balancing out and when can that start moving the other direction given comments about Russia, India, South America moving higher here?

Yes, hard to say -- hard to answer the question when. What I will say -- I have said from the start that I feel like our global footprint in this business is a real strength and having 50% of the business in emerging markets is going to be a real strength and an asset over time.

And the reality is that is a very diverse footprint. I have been in other businesses where the emerging market footprint is China a little bit and the reality is we have got a very diverse emerging market footprint. And at this point, we have been going through a patch where some parts of it are more healthy than others and from a market standpoint, and frankly there is some parts of it where we really execute exceptionally well and do very well up against the market environment.

We are able to have those -- there is not a lot -- large amount of growth on in the emerging markets right now, and yet we are able to get positive growth in emerging markets because of a combination of our footprint and our exposure. I think over time, you know, every indication is the emerging markets are going to grow multiple times. The GDP of the developed markets.

And so over time as more of those line up on the positive side and our execution layers on top of that, I think that is going to be a real positive growth enabler for our Fabrication Technology business; and then if we get the US even just flattened out, you put that alongside of acceleration of growth in emerging markets. At that point in time, we will have nice, healthy growth in this business.

But the difficult part, two difficult parts of that to call. When are the emerging markets going to have most of them settle in a positive place based on sort of political, economical forces; and second, when is the US going to turn and flatten out at least? And there is a lot of opinions on that.

We are watching it really week by week, quarter by quarter and keeping a close eye on indicators like what is going to happen with steel, what is going to happen with some of the oil and gas investments, what is going to happen with the investments in other parts of the economy and trying to make sure we are prepared to have strong performance.

Great. Appreciate that. There used to be -- before you came on board, I guess, there used to be a lot of talk about -- within Fabrication, moving that mix more toward like 75 consumable now, maybe toward 2/3 consumable, 1/3 equipment. Is that a shift in strategy to streamline the operations given the current mix or is there still a push to structure that differently going forward as part of how you get to like a 15% margin in that segment.

I think what we have talked about is with the current mix we have, we believe we can get to the mid-teen margin level but to get beyond that mid-teens margin level, we would have to be driving our mix to a different place; because if you look at the peers out there, to have that higher margin performance, you tend to have a more significant chunk of the business in the equipment area and particularly in the general equipment area.

So our execution has been focused on with a portfolio we have got, let us drive to mid-teens based on cost realignment, productivity, and executing on the growth front. Our strategy has been around over time, shaping that mix to a little heavier amount in equipment, both on the general equipment side and through our automation growth efforts and also our acquisition of Victor and the focus that we will have on the growth of those products.

Strategically, we will be looking to drive the mix over time. It is not something you can change overnight. It takes product development, innovation, driving those products into the marketplace as we have done with Rebel but then it takes another product, another product, another product and really doing the hard work, so it is going to take some time. As we do that, we do expect that to both support our ability to get to mid-teens margins and then as we reach mid-teens margins, have us be able to think about how do we strategically drive beyond that.

Maybe if I can just sneak in one quick one here. Clearly executing on your cost programs, you talk about maybe more spillover into 2018 above what you initially said. Where would you say you are lagging if you had to take a close look at overall execution on these projects, is there any particular piece that you are not satisfied right now and you can drive a little harder?

Yes, I would not say -- I would not point to lagging. What I would say is some of these projects tend to -- you tend to have a rate you would like to do them versus a rate that you can do that. Certainly, some of the European projects had taken longer than I would like to get from concept to execution based on the things you need to work through in those countries, as you execute those kinds of projects. So that is an area that we are continuing to try to find ways to accelerate our momentum.

And then another area we have got real focus is where we are doing supply chain realignment projects, we are trying to make sure the ones we are doing now and the ones we do in the future, that we do take a little extra time in the planning phase and make sure that we really think things through carefully to make sure we can execute them with kind of invisible impact to our customers. And that is something that certainly makes it take a little bit longer to execute the project, but it is a critical step to make sure that they are executed with excellence.

Great. Thanks, guys. Good job.

Thank you. Our next question comes from Chase Jacobson with William Blair. Your line is open.

Hi, good morning.

Hey, Chase.

I wanted to follow up on the price mix in FABTECH. It has moved around a little bit this year, off relatively easy comps from last year. Can you give us some more color on what the drivers are within that price mix? Because I think you were slightly favorable on equipment versus consumables this quarter but that is still a negative number so is it incentives? Is it geography? Try to get a sense of how it trends into next year.

Yes, I will make a quick comment. On the price part of that, there are a couple of different elements, one is kind of -- the more straightforward pricing our products, value pricing, competitive environment, et cetera. There is a piece in the price area of how we price in relation to what is going on with movements in steel, movements in currency, inflationary impacts in high-growth markets. And I think that area is an area that we have really taken some ground this year.

Something I commented I think late last year about it as being a bit of a headwind for us, and it is something we have put some good, positive process in place that has helped us to take some ground. And then there are the more traditional mix effects of which products we are selling, which regions we are selling into them. And as we said right now, the kind of overall price is about as we expected through the year. We have been able to eliminate that headwind from last year of that second bucket of kind of price versus fx and inflation.

And quarter by quarter, the mix effects are what they are. We keep driving that to a positive direction but in some cases, that will change a bit quarter to quarter.

Okay. And then on the -- on that favorable court ruling, I know you do not know the exact timing, but can you help us frame it at all? Is it something that is expected in the next 12 months? Is it 24 months? And does that reduction in the annual outlay, does that only occur once the collection is made?

So as we begin to collect from the past receivable amount, the $88 million, that is when we will also begin to recognize the benefit of the future cash outlays. I would expect that we will begin to see some of that benefit at some time here over the next 120 days to 180 days. We might end up with a substantial amount of that benefit in 2017. We are going to have to update you as we see that cash moving in.

Okay. So it sounds like it comes in pieces, not all at once.

No, that is correct. We are working with multiple parties and each party is making their own decision about how to participate. So it is not -- so there are many moving parts here.

Got you. Thank you.

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

So, thank you. Thank you for joining us today. This ends our discussion. We look forward to updating you on our next call.

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