Enovis Corp (ENOV) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Colfax Third Quarter 2017 Earnings Conference Call. (Operator Instructions)

I would now like to introduce your host for today's conference, Mr. Terry Ross, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Christie. Good morning, everyone, and thank you for joining us. My name is Terry Ross. I'm Colfax's Vice President of Investor Relations. With me on the call today are 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 Investors section of our website, colfaxcorp.com. We'll 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'll be making some forward-looking statements about our beliefs and estimates regarding future events and results. These forward-looking statements are subject to risks and uncertainties, including those set forth in our SEC 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'd like to turn it over to Matt, who will start on Slide 3.

Thanks, Terry. Good morning, and thank you for joining us today. We're pleased to report another step forward in operating results in the third quarter. Revenue growth improved, our cost-reduction efforts remain on track and we again increased segment adjusted operating profit margins. This was also an important quarter in shaping Colfax for the future. We announced the sale of the Fluid Handling business in September. As the original platform of Colfax, it has played an important role in our company's history, but this move provides a unique opportunity to create value for Colfax shareholders. It strengthens our balance sheet and provides more flexibility to execute our growth strategy, which will include acquiring attractive new business platforms.

We also had another strong quarter of acquisitions that build on our FABTECH and Air and Gas Handling platforms. We closed the Siemens Turbomachinery Equipment acquisition in early October, and we announced agreements to acquire 3 new bolt-on acquisitions to advance our growth initiatives in data-driven technology and alloyed silver metals. The orders picture in Air and Gas Handling did change in the quarter, which I'll discuss in a few minutes.

On Slide 4, I want to share a bit more about our momentum in Fabrication Technology. Our markets continue to improve. Industrial volume is now solidly growing across most regions, with only the Middle East not yet returning to recovery. I'm particularly encouraged by the seasonally adjusted sequential improvement we saw in several regions, led by our performance in North America, where filler metal and standard equipment volumes picked up nicely. We also saw our price realization come into balance with material inflation as we moved through the quarter. This was a headwind in Q2 but much less so in the third quarter, and we exited September well positioned to protect fourth quarter margins from still rising steel costs.

Innovation defines our future as one of our core values and is increasingly being demonstrated every day at ESAB. We had a very successful show at Essen in Germany, the industry's largest trade show. A number of customers, channel partners and industry observers commented on the dramatic change in the ESAB product line and the pace of innovation since the previous show 4 years ago. I look forward to seeing many of you this week at the FABTECH show in Chicago and later this month at our Colfax Investor Day, where we will highlight our innovation process and progress in ESAB.

We continue to expand the Rebel family and introduce important technology advances in filler metal, cutting and automation. Our recent acquisitions are also enabling new products. Leveraging HKS technology, we were able to rapidly develop a new solution to capture and communicate performance data from legacy and competitive machines to extend our WeldCloud solution.

Turning to Slide 5. I want to discuss the dynamics we're seeing in Air and Gas Handling. We came into the third quarter recognizing a very tough comp from the previous year. Through the summer, we saw faster-than-expected implementation of the China power investment pause and some project delays that pushed oil and gas awards out of the quarter. This resulted in lower-than-expected orders. We comment on most calls about the timing impact of large projects to the segment, so I want to be clear in communicating the difference between project timing and our view of the underlying markets. The largest shift in projects was in oil and gas. We still view oil and gas, which, for us, is heavily weighted to refining and petrochemical, as fundamentally improving. Our sales funnels are increasing, oil prices have been stable to positive and customer sentiment remains generally favorable. Power is a different situation. In early 2016, we announced that we expect -- what we expected to be a few years' slowdown in new build power activity as China balanced overcapacity in the system. In the third quarter, China took actions to achieve their goals more quickly. This resulted in lower orders and a lower order outlook for the next several quarters. Power orders will likely stabilize at Q3 levels until global activity increases or China begins to invest again. This will put some pressure on our order growth picture in the second half of 2017 and the first half of 2018, with growth in general industrial and mining likely to be about offset by reductions in power and the timing of large projects determining whether we grow or not in any given quarter. By the second half of 2018, we should lap the power drop and be back to consistent order growth.

The backlog impact of this change is a reality that we are dealing with swiftly and proactively through restructuring and other actions that will continue to strengthen Howden for the future and ensure a path to profit growth and margin expansion in 2018, even if we see a temporary step-back in our organic revenue in this business.

Our growth initiatives this year in Howden have been largely focused on industrial applications, and we continue to see strong progress on these efforts and a broad-based improvement in the general industrial market. Over the last 5 years, general industrial orders have grown from 18% to over 35% of our Air and Gas Handling mix. Our recent growth has been fueled by successes in China, India and Southeast Asia, where we've been investing to build local teams and channel to reach industrial customers. We've seen 5 quarters of double-digit industrial growth, and our outlook remains strong.

Slide 6 highlights our success, identifying and cultivating bolt-on acquisitions that accelerate our growth initiatives. Since September, we've announced 7 acquisitions, adding about $300 million of annualized revenue. Each acquisition strengthens the core business, supports organic growth strategies and benefits from our CBS operating system and the leverage of Colfax's global scale. In October, we closed the STE acquisition, now called Howden Turbo. The acquisition expands our industrial compression offering, especially in wastewater and metals processing. It also adds a small turbine product category that complements our compressor offering in industrial waste heat recovery applications and serves the biomass and small distributed power market. I'm already seeing great collaboration between the new Howden Turbo team and the broader Howden organization.

Since our last call, we announced 3 new acquisitions. Ventsim is the world-recognized leader in mine ventilation design and simulation software, and it is a tremendous fit with Howden Simsmart control and optimization technology. We continue to build our capability to deliver customer value in a more connected industrial world through acquisitions like Simsmart, HKS and now Ventsim, combined with internal investments and external partnerships.

In welding, alloyed and specialty metals are attractive segments, growing at almost twice the pace of standard silver metals. EWAC is the leading welding repair and maintenance product and service provider in India. This product range is often called hardfacing and expands ESAB's aftermarket reach in diversified industries such as cement, steel, mining, rail, power and sugar. As we complete the EWAC acquisition, ESAB will have a very strong leadership position in India that sets us up well for the exciting growth ahead as the country continues to industrialize and build out infrastructure.

Sandvik's welding business has been an innovator in high-alloy filler metals used in welding and critical applications. The acquisition enhances ESAB's range of stainless steel and nickel filler metals. This business has great technologies, and with our scale and business model, we can improve the profitability significantly.

As customer designs require higher-performance materials, alloy filler metals are an important area of development and investment for us. After the acquisition, ESAB and Sandvik material technology will continue a relationship for future R&D of new alloys and the supply of high-quality raw materials.

We're making strong progress. So far this year, we've committed over $400 million to thoughtful bolt-on acquisitions that support our growth and diversify our market exposure. We're creating a stronger balance sheet with flexibility to future shape our portfolio. And we have strengthened the businesses, reducing our cost structure and gaining traction on our growth initiatives.

I'll turn it over to Chris to discuss the financial results.

Thanks, Matt. Slide 7 starts with an overview of third quarter results for continuing operations. As a reminder, the results of our Fluid Handling business will be reported as a discontinued operation through the completion of the divestiture. In accordance with U.S. GAAP, this means Fluid Handling results only show in the total EPS figures and not in our typical discussion of business results.

As a result of the announced divestiture, our Gas and Fluid Handling segment is now our Air and Gas Handling segment and consists of Howden and related brands. To assist investors, later this week, we will publish a schedule that shows our historic quarterly results recast for the continuing operations of Colfax and the new Air and Gas Handling segment.

Heading into Q3, we expected lower year-over-year orders because, as previously discussed, the prior year quarter included a few very large orders. As Matt discussed earlier, the benefit from higher expected industrial orders in the quarter was more than offset by downstream oil and gas order delays and a decline in power markets.

Total company sales came in just ahead of our expectations with 6% organic growth, driven by continued improvement in FABTECH and the conversion of strong orders from the prior 4 quarters in Air and Gas Handling. We picked up another 2% of growth from acquisitions and 2% from foreign exchange translation.

Gross margins were up slightly in the quarter. In Air and Gas Handling, a volume benefit was offset by lower new build margins, reflecting both mix and price pressures on larger projects. At ESAB, customer price realization to offset steel cost inflation came into better balance as we moved through the quarter. Total adjusted operating profit margins expanded 40 basis points, with progress in segment margins reduced by higher corporate spending on M&A, as we increase the pace of bolt-on acquisitions and expand efforts to secure a new platform.

Below the line and looking ahead, I expect the tax rate to be a bit lower than where we started the year because of the changing mix of earnings due to Fluid Handling no longer being reported as part of our results.

So for the quarter, we achieved $0.42 of adjusted EPS, in line with our expectations and higher than the prior year.

Please turn to Slide 8 for the discussion of Fabrication Technology business results. Segment sales of $482 million were up 3% organically in the quarter, with acquisitions adding another 3%. We saw progress in almost every region. Sequential results were particularly encouraging in North America, and we had a solid start to the fourth quarter, with healthy October results. As we expected, price realization improved as we moved through the third quarter to counter steel inflation. With metals prices still moving up, we will maintain our focus on price management. Adjusted operating margin of 11.7% represents an 80 basis point improvement and is attributed to higher sales, restructuring savings and other spending improvements.

On Slide 9, we turn to our Air and Gas Handling segment. Sales were up 10% organically as the 4 previous quarters of growth converted to revenue. Although revenue tends to be smoother than orders in the segment, large projects still make quarterly comparisons challenging. The adjusted operating margin increase of 100 basis points showed the benefit of volume and restructuring despite project margins being a headwind.

Matt commented earlier on our ongoing effort to improve the cost structure of the Howden business, including additional actions we expect to take transitioning into next year. It's important to recognize that our results also include investments to grow the business. You can see that over half of Howden's revenues are in emerging markets, and we continue to build our teams and infrastructure to leverage our global product technology into those regions. This investment has been a major driver of our success growing the general industrial part of Howden.

Slide 10 is our standard orders and backlog comparison. We've already discussed the market puts and takes in last year's prior quarter that included almost $100 million from 3 megaprojects, so let's turn to Slide 11.

We are reaffirming our 2017 full year guidance of $1.65 to $1.75 of adjusted net income per share. For the benefit of consistency, our outlook includes the Fluid Handling business as a discontinued operation. For reference, we estimate the Fluid Handling business will generate $0.25 to $0.28 of adjusted EPS for the full year. Our outlook does not include the material gain expected on the close of the transaction. This outlook excludes transaction costs related to the divestiture, some of which were incurred in the first half of the year. The recently closed STE acquisition is not expected to contribute to this year's adjusted EPS due to purchase accounting and integration costs, and it should add about $0.10 of accretion in 2018.

I'll wrap up our prepared remarks on Slide 12. We continue to move ahead in our Fabrication Technology business. Markets have steadily improved this year, and we expect this trend to continue through the fourth quarter.

In Air and Gas Handling, our orders environment is less clear. New build power, which is now less than 7% of total Colfax, is down, but most of our company is moving in a positive direction. In the still choppy market environment, we will drive the cost actions necessary to protect profit and strengthen the business.

Overall, we continue to deliver the expectations we shared coming into this year. The company is growing, and we are executing on opportunities to improve the cost structure and flexibility of our business. We have made meaningful progress this year on our path to mid-teens segment margins.

And finally, we have been actively shaping Colfax for tomorrow by building a stronger, more flexible balance sheet, deploying capital on thoughtful bolt-on acquisitions that accelerate our growth strategies and developing our pipeline of potential platform acquisitions.

With that, I'd like to open the call to questions.

(Operator Instructions) Our first question is from the line of Ronnie Weiss of Crédit Suisse.

You talked about expanding the restructuring in certain areas. I was just wondering if you could size how big this could be, what actions are being taken and what the size of the potential benefits could possibly be from this incremental action.

Yes. We're continuing to develop those actions. What I would suggest is that it'll be meaningful enough for us to counter any market weakness that we see and make sure that we maintain a path to growing to profitability of the business for next year. And when I say the business, I mean specifically Air and Gas Handling. With the momentum that we have within ESAB overall and with the restructuring actions that we can effect within Howden, we would expect, of course, to have meaningful earnings growth for all of Colfax for next year.

Okay, got it. And then what's the long-term commitment to the power business? I mean, with that outlook being so weak and the company wanting to get involved in other platforms, is that something that could be divested here in the next coming years?

Yes. The power business is an integral part of the Howden business. But as Chris mentioned, it's becoming a much smaller and smaller piece of the pie. Actually, in the back half of the year, it'll probably be on the order of 20% of our new build projects. And as Chris said, it becomes a quite small part of our overall business. So we don't anticipate divesting from the power business, but the Howden business has been, for a number of years, focused on the growth initiatives in the industrial area and in some of the areas of oil and gas that are going to have the best growth going forward. And even as we brought in the STE business, the STE business focuses in some areas of power that are not the areas that are having the less attractive future.

Our next question is from Joe Ritchie of Goldman Sachs.

Maybe just focusing on oil and gas for a second. We've had several companies report pretty weak order trends this quarter in both midstream and downstream. And I'm just wondering, like, how much of this is just -- is oil and gas projects getting pushed out versus, really, like kind of weak-ish underlying demand? And I guess, what gives you the confidence in the pipeline over the next 12 months?

Yes. What I'd say is that we see a better environment than back in 2015. Our funnels are up from them, and we continue to see projects being created and companies seeing the price level where things are as stable enough price level to be moving forward projects. But I think what's happened in the last 6 to 12 months is some choppiness. There've been some larger projects that came in clear through and then it's been a little slower to have projects recreated on the back side of those. And certainly, in a business like ours where these are larger projects, that's certainly created some quarter-to-quarter choppiness and some uncertainty that we talked about in our comments. But the sentiment that we get from the broad industry is that the mid and downstream is still an area that there's going to be an increase over time of investment versus -- not a rebound but an increase over time versus a decrease.

Okay. And are there any specific regions right now, when you take a look at the pipeline, that is potentially driving that, where you could see an uptick in orders next year?

In oil and gas?

Yes.

Yes. I mean, the regions where there is the most activity in the pipeline tend to be the emerging regions, the Middle East, parts of Asia, China. Those are the areas where there are the -- there's the most potential for projects. And it's really just a question of project formation, project advancement, project clearing as to how much of a -- how much order flow we'll see in the coming quarters.

Okay. And then maybe one last question, just M&A. I know you guys talked about STE being about $0.10 accretive next year. But you've done other acquisitions as well. Are you guys expecting any accretion from the other acquisitions that have closed already?

For the acquisitions that have closed, those have been pretty small. And so there's $0.01 or $0.02 here or there that you might get. STE is the first one of magnitude that we've done in a little while. And that's why we call out specifically the accretion on that.

Our next question is from Nathan Jones of Stifel.

Just following up on Joe's question there on the oil and gas projects. We've heard from other companies that they are expecting those projects to be let in the first half of '18. Is that European on these projects as well?

Well, what I said in my comments was that in the coming quarters, coming handful of quarters, whether we grow or not in any particular quarter is likely going to be whether those larger projects are let or not. There certainly are some projects that are making their way towards the finish line, but we're trying to be careful that we don't count on those projects finishing quickly. We position ourselves to win the projects, and we're conservative about the rate at which we think they're going to close. So I think some will close in the next quarters, but I'm not ready to say that many of them will close.

Okay. You talked about the funnel growing. Have you seen any change in the velocity of these projects moving through the funnel? Are they going faster, slower, same?

Yes. We saw some firming of the velocity going back a handful of quarters. Late last year into the early part of this year, we saw some firming of the velocity, and I think we voiced that sentiment at that time. I would say now we're seeing that this velocity has slowed down a little bit, and we're trying to voice that sentiment. In both cases, trying to not overstate it, but trying to be transparent about what we see happening.

Okay. I just got one on Simsmart and Ventsim. I recall from your last Analyst Day that Simsmart project offering looking like a very compelling value proposition to the mining companies. Can you talk about what Ventsim brings to that, how it expands that, how that adds value to the customer?

Yes, sure. So if you're costing the Simsmart solution, when we engage a customer around our Simsmart mine productivity solution, really, the discussion starts with a 3D model of the mine, and sometimes, that's something that the customer already has. Often, it's something the customer already has. And sometimes, it's something that our Simsmart team would create. Ventsim is, by far, the leader in that area of 3D software for modeling mines. The vast majority of all mines use their software. And so there's really a hand-in-glove fit between the 2 businesses in that now we've got direct access to folks that are designing mine all over the world and ability to more efficiently engage them around the Simsmart productivity solution as well as around Howden fan opportunities in those mines as they look to do retrofits and expansions. And so we're really excited. It's a small business, but I would say a very powerful technology that relates to our overall solution for mining around the world.

Our next question is from Andrew Kaplowitz of Citi.

Matt and Chris, you gave some good color on how weakness in power orders could be offset by strength in industrial mining in the first half of '18. I know it's early, but how should we think about '18 organic growth for oil and gas handling? Is the swing factor really whether you can book new large oil and gas projects over the next few quarters for how we think about growth for '18 or something else going on?

Yes, I'll comment a little. Chris might add a little bit. We're certainly not prepared to give an outlook for '18, but I certainly said in my comments that we're taking a proactive cost action to make sure that we can grow earnings even if we do see some downdraft in that segment in '18. We're clearing this quarter with a year-over-year backlog drop that is significant. We expect that to improve in the fourth quarter and that we'll have a year-over-year backlog drop that might be in the $50 million to $60 million range. And we've shown in the past few years that with our aftermarket progress and with some of the traction and progress in industrial, that we can offset a decent amount of that backlog drop in the following year through faster cycle things that we can get done. And so that gives you a kind of the order of magnitude of how much revenue might be down, but clearly, what we're going to be focused on is getting as much traction as possible on our growth initiatives and trying to win more than our fair share of the large projects. And if we can -- if the projects come through, we're pulling more than our fair share, then we can stay in a positive order growth range, which then certainly improves the revenue picture.

Yes. I just want to accentuate the point there that as the business has been transformed from longer cycle strictly oil and gas and heavy power into more of these industrial applications and aftermarket, as Matt mentioned, the reliance on backlog for a long period of time is decoupling a bit. And so that we still have an opportunity next year to recover some of the shortfalls in power and with the faster growth in industrial, perhaps faster growth in mining. And then, to your point, oil and gas becomes a bit of a swing factor, depending on the timing of when those projects come in earlier versus mid-part of the year.

Okay, that's helpful, guys. And then let me ask you sort of a follow-up to that, then on margin in Air and Gas Handling. So it looks like year-over-year, incremental margin of the business was about 20%. I know you had talked about a target for the company of around 30%. And in the slide presentation, you talked about lower margin on new build projects. So how do we think about incremental margin going forward in the business? Obviously, it now does not have Fluid Handling in it. So how do we think about the Air and Gas business moving forward here?

So generally, I would still support the idea of a 30% incremental margin in the business. But there is a little bit of a disruption here as we're processing through the change in the backlog with some of the lower-margin large projects. As we've talked about from time to time throughout 2017, some of the large projects that came into the backlog late in '16 and earlier in this year were hotly contested and did come in with lower margins. And our objective was to ensure that we could drive margin growth despite that. And so we've taken advantage of the restructuring benefits that we've had. Certainly, this quarter, we've had the volume growth to help to drive that. As we transition into the fourth quarter of this year, where we expect to have a little bit less of that volume activity, we do expect to see a little bit more of that new build margin pressure emerge but still with some offset from the restructuring benefits that we've been generating.

Great. And then just one quick one for you, Chris. Like, have you looked -- I'm sure you've looked at the House's current tax reform bill proposal. I know you don't have a ton of U.S. sales. You're more focused internationally. But your tax rate overall for the company is relatively high. So how much of a benefit should this bill be for the tax rate on the company from your preliminary view?

Well, first, let me highlight that we do expect our tax rate to come down a little bit given the new complexion of the company with the divestiture of the Fluid Handling business. So we do expect to see a bit of improvement there. Second off, I would say that we would welcome a lower tax rate as would any U.S. multinational company. And third, I would just suggest that given the serpentine path that this has to go through in the political process, it's difficult for us to assess exactly what provisions will likely survive other than the lower overall rate. So I think we're all in favor of tax reform. We'll stay tuned and see how it ultimately develops.

Our next question is from Jeff Hammond of KeyBanc Capital Markets.

So just kind of going back to this power weakness and change in China. Is there a way to quantify how big of a hole that creates?

Yes, sure. We had talked about it potentially being a $20 million, $30 million revenue impact this year as kind of the first part of that came through. And I would say we've seen an impact in that range with the -- some of the sharp changes in the last quarter or 2. The revenue impact this year has been more like in the upper end of that range. And we expect that as the other piece of it comes through, the order impact that we're seeing now and that we'll see early next year, as they come through, we'd expect another sort of $20 million to $30 million of net revenue pressure in China now. The in-China effect's a little higher than that, but we get some growth in other regions of the world out of our business in China and so the -- with boilermakers in China. And so the net effect is going to be about in that same amount.

Okay, great. And then the purchase price on these 3 deals, it looks like there's $85 million in rev. I think that's mostly the welding businesses if I looked at the news items. Can you just talk about what you paid for the 3 deals? What kind of multiple range? Were they kind of auctions, private negotiations?

Yes. So what I would say is that the transactions that we've done are largely privately negotiated transactions. As you know, we have a pretty robust strategic process that identifies targets that would be attractive to our portfolio to have. And then we tend to pursue these over some point in time. The total consideration that we paid for this combination of transactions is a bit over $100 million. And we suspect that given the highly synergistic nature of the transactions that we should be able to achieve our return parameters. We generally want to get there within kind of 3 to 5 years. And in this case, I think, if you look at these collectively, we're thinking more like 2 to 3 years.

Yes. And just -- I can just comment a little bit more. I mentioned that the Sandvik transaction, you have some great technologies that's coming in there, and we'll be able to improve the profitability quite significantly. So certainly, the revenue multiple that we paid there for that business was a quite attractive one. The EWAC technology in India will bring us a tremendous position and growth future there. And we think we paid a very fair multiple of EBITDA there as well. And HKS was -- or sorry, Ventsim is more of a technology acquisition, and it is a small, profitable software business. And some of you paid a little heavier multiple there. So the EWAC one would be more at the lower end of what we typically pay, whereas the Ventsim one would be more at the higher end based on the fact that we're buying technology.

Okay. And then just last, if I could fit one more in. Can you give us a little more granularity on regional trends in FABTECH? I think you said most regions up, but just a little more color, and I think you mentioned North America specifically.

Yes. From a regional trend standpoint, yes, we see -- we've seen North America continuing to improve. Europe has stayed in a positive range. South America has been moving into a more favorable range. Asia has turned to growth, but Asia is a region where there can be larger projects in any given quarter that can create a lot more growth for a lot less. But if we look at the flow business underneath that, that's also in a solid positive range. And both India and Russia continue to be very good places for us. The markets are okay in those regions with exciting futures. Our teams do extremely well in those markets and are healthy growth engines for us as well.

Our next question is from Josh Pokrzywinski of Wolfe Research.

Just a question on STE since it's been a while since we've gotten an update from the initial announcement. How has that been trending? Any sense on the backlog there in terms of how much that's up or order patterns there? Anything you'd like to share, given that the LTM number when you initially announced the deal was basically a year ago now?

Yes. I would say that we're taking over the business with exactly the same kind of backlog and trend that we would count on to be able to deliver the first year of our plan for that business. Within that, the industrial business in the business is clearly in a healthier trend based on the broader industrial improvements that are going on there. But the overall picture is right in line with what we expected. And we've had really some great collaboration with that team as we've been getting ready for the close. I've gotten to meet a number of members. I was at the wastewater trade show here in Chicago a few weeks back. The day that we closed the transaction, I got a chance to meet the North American team there, got to see them side-by-side with our Roots folks and with our other Howden folks and see the teams really talking together about the opportunity in wastewater together from our joint technologies, from innovation that we plan to do beyond that, from their collective channel and positions around the world. And I got to say, it was really exciting to see how much the teams have already formed and gotten excited about the opportunities that we'll have together.

I guess, specifically, was -- so you're saying it's in line with expectation. Was the expectation for that to grow in the interim year here? Or given that it's a longer-cycle business, flat to down? Just trying to bring sense how the last, I guess, 3 to 6 months have gone.

Yes. It's a business that's in a gradually growing profile right now. We see the wastewater business, which is a meaningful portion of that business, as ultimately having a very healthy growth profile. But the -- while the lower end of wastewater is in a smaller project in wastewater and healthy growth change, some of the larger projects in wastewater have been a little bit sticky, both from our view of them and from STE's feel of them as we work through this year. And so that comes out at more of a kind of gradual growth initially, and then acceleration of that growth over time is what we expect from that business.

Got you, that's helpful. And then just one last one, on the equipment side of FABTECH. Clearly, you guys have made some big pushes there. Any comment on how those are going? Any sense of share gain or kind of trends relative to the market there?

Yes. As we talked -- as we brought the Rebel product into North America, we took some meaningful share quickly with that product. We've been able to hold that position. We've talked about how it's a small piece of the equipment market, and we've now got other variations starting to make our way into the market and we think that'll get us some additional share gain. Also, as we've taken Rebel around the world, we've been encouraged that there's been a better reception to it than we might have hoped and that's resulted in some nice penetration as well. But then we really have a number of more products coming through this year, as you'll see if you go to the industry trade show, other versions of our Rebel product as well as products in cutting and gas control and filler metals. And we believe that that'll enable us to keep strengthening our position with this broad offering into the channel around the world. We think that continuing to increase our vitality is going to help us get stronger and stronger over time.

Our next question is from Matt Trusz of Gabelli & Company.

I was wondering if you could discuss the trends you're seeing for Air and Gas Handling in China, specifically with respect to industrial. Could you elaborate on the underlying strength of the market compared to your outgrowth from the initiatives that you have going on there?

We see the China industrial market in a -- it's been in a positive growth zone. And we've also had significant focus on our initiatives over there. And so we're quite confident that we're meaningfully outgrowing that industrial market.

Okay. And then to follow up on fabrication. Was there any meaningful difference in growth in the consumables versus equipment in the quarter, either in aggregate or in a specific region or vertical?

Yes. The equipment growth was a little bit healthier than consumables. Yes, on a global basis, the equipment growth was healthier than consumables growth in the quarter, but both were in a pretty healthy range on a global basis. And as I commented earlier, I think that the area that there is the most significant acceleration is in the Americas, Americas zone. And we see some good positive progress in equipments and consumables in our North American business that has us feeling good about our trajectory into the fourth quarter.

Our next question is from Joe Giordano of Cowen.

Just a question strategically on the filler metal acquisition. Can you kind of reconcile that? My impression was that the overall strategy to kind of move that mix a bit more towards equipment versus consumables. So can you kind of just frame the acquisition in light of your strategy there overall?

Yes. I'd say our overall strategy has been to strengthen our equipment position so that we can bring a full solution to our channel and to end users more than it's been to shift the mix to equipment, at least in the time since I've been here. And so yes, we are putting quite a bit of energy into innovation and the equipment business. And the TBi torches acquisition is the equipment accessory that strengthens our position there in equipment and in terms of going after the automation opportunities in equipment. But at the same time, filler metal is really the core of the business and, of course, strength of the business historically. ESAB has been really a leading filler metal player around the world with very strong technology and market position. And we plan to continue to strengthen that position, but with an eye towards the parts of filler metal that are the most attractive. And the 2 areas that we're talking about today are attractive areas where there's opportunity to differentiate and create -- capture attractive margins and where there's going to be healthy growth over time. And EWAC, it's across a diversified set of end-use segments that are going to have very healthy growth in India. And in Sandvik, it's within some higher technology application areas that are going to be attractive places to be in the industry over time.

Okay. And then in fabrication, just curious, the growth you're seeing in price, I know some of the last couple of quarters, some of that has been kind of price -- just general inflation in the markets there. So can you kind of break that out a little bit?

Yes. In Fabrication Technology, we've been, as we work through the year, working hard to get price through to cover the inflation that's come in our metals. And in the third quarter, as we work through the quarter, we got to a place where we're covering the metals inflation. Metals are expected...

I meant more on the currency side. So like is a lot of that price just currently like some like emerging market currency inflation?

No, no. We've had -- certainly had that in the past, times where there's significant emerging market currency inflation. There's less of that this year than there was last year. And the vast majority of the price is covering metals inflation.

Okay, great. And then last for me, I could probably do the math on the side, but if fluid was included in gas and fluid this quarter, how would margins have looked there?

Yes. We don't -- I don't have the calculation how it all came together. What I would say is that the Fluid Handling business continued to grow in the third quarter, and it continued to have higher margins than the Air and Gas Handling segment as it's now constituted.

Our next question is from Seth Weber of RBC Capital Markets.

Could you -- is there any color on the FABTECH business for oil and gas? Could you share any trends that you're seeing on the oil and gas side for FABTECH?

Yes. I think, certainly, part of the improvements in North America are related to the oil and gas industry and some of the step-up of activity there in the North American oil and gas industry. And the Middle East and some parts of Asia are still in more of a down place based on less oil and gas activity. I'd say those are the 2 areas that are probably worth mentioning.

Okay. And then I'm just trying to comment about lower margin on the new build projects in the Air and Gas business. Kind of given current order levels, is it fair to assume that new projects that you're booking today are still under those -- under that margin pressure? Or is that really just on what was in the prior backlog? Just trying to square that up.

Well, there's 2 things that we've been doing since those projects. One is we've been working on creating as much productivity on our supply chains as possible to give us a little bit more room to work with as we look at new projects. And then the second is, for sure, as each project passes, trying to do significant amount of value selling, doing as much work as possible with the end user and EPCs on specifications and trying to make sure that we can win the deals but also win them at better margins than before. And certainly, the deals that we've won, since some of the large ones where we talked about lower margins, we've been winning deals that are at better margins than those deals.

Okay. So the competitive pricing environment is not taking -- has not gotten worse even though the volumes, industry volumes, have come in. Is that a fair characterization?

Yes, yes. I would say that the competitive price environment got pretty acute down the back half of last year, and it's still certainly competitive for any large project. But it seems like it's diminished a little bit versus where it was late last year.

Our next question is from Andrew Obin of Bank of America.

Calling from China. So I'm going to ask you a China-related question in relation to coal power. So there is a chatter that Chinese EPC is actually quite active in the Southeast Asia with coal project. And also in the U.S., what's coming out of Trump administration, maybe slows down some coal retirement. Is any of that in your forecast? Or are you just sort of seeing a near-term deceleration in activity and that's all it is?

Yes. When we've talked about the impact of the China changes, we've tried to consistently say that we're talking about a net number because for sure, as activity decreases for in-China plants, the customers there in China get more active outside of China and our China business benefits through that -- from that instead of other parts of our business that might have won those orders. And so when we talk about the impacts, what I would say is the impacts we're talking about include some of the normal Asian activity that is expected. They do not include a U.S.-based uptick. And that would be terrific if it comes, but we're not counting on that at this point in time.

Got you. And just a follow-up question. We get a lot of questions about Colfax as a company with a lot of emerging markets exposure. Post all the deals, what is your emerging markets exposure? And maybe, I know you did it for FABTECH, but maybe you could just give us a top-down view what you're seeing in key emerging markets, just broader trends by market, to bring it all together.

Yes, sure. Yes, so post the divestiture of Fluid Handling, we'll have just over 50% emerging markets. I continue to believe that this is a real strength of our company. Any data set you find projects that the industrial parts of emerging markets are going to have about 2x the future growth of the industrial parts of developed markets. And so this is a great opportunity for us. I've also found that as we've started to do quite a bit of new platform work, often we'll look at new platform opportunities that might have opportunities to globalize faster and get into certain emerging markets faster. And we see that as a benefit that we can bring to those businesses. Not a direct business synergy with our other businesses, but that our presence and our infrastructure in some of these markets can be a way that we can accelerate the path of new platform that we might acquire into those markets. As far as the specifics of the market, China's been in a positive zone in terms of improving their -- industrially, obviously, there is the power situation there. But power consumption in China has been on a pretty nice growth path. And I think the key to China getting -- China is going to get -- ramp back up their power investment when they need to. And if the power consumption stays at a healthy level, then that's going to mean that sooner rather than later, China will need to kind of move back up the amount of coal firepower that they invest in. But we see China industrial as an attractive place for the long haul. We're glad to have a significant position there. We see India as a very attractive market for the long haul. It's going through a lot of service growth now. Not all that much industrial growth, but there's a lot of infrastructure steps pulling up. And we really think that that's going to be an attractive place for us over the long haul. The South American markets are each gradually moving towards a better place. Some of them have gotten to a better place. And others, I know, is with our Brazil leader the other day, and he was talking about Brazil getting better. And then as they get through the election cycle, expecting to get really into recovery mode there. And then finally, Southeast Asia. Again, oil and gas has taken the wind out of the sails of Southeast Asia for a quick minute here. But that's a market that's going to have a lot of growth across the board over time. So we've got healthy positions in all of those markets, and we're excited to have them. We think they're going to be good things for our shareholders over time. And we think they're going to be good things to complement the things that we do in new platforms.

Our next question is from Walter Liptak of Seaport Global.

I just wanted to do a follow-up on the margin in FABTECH. And it sounds like there's a couple of things that are impacting the price cost. You said getting neutral but still maybe a little bit of an overhang in some of the purchase accounting. Are you kind of suggesting that you'll be able to get a little bit more operating leverage in the fourth quarter as your pricing improves?

Yes, that's right. As pricing improves, we generally get a little bit better economic performance just as we're matching up price against cost. And then in terms of operating leverage, if the business were to grow sequentially, then we'd expect to see some benefit from that as well.

Okay. Were there some onetime purchase accounting integration that were left in the adjusted operating income number? I wonder if you can quantify those.

Sorry, could you ask that question again?

Well, just you called out purchase accounting integration costs. Were those pulled out of the adjusted number? Or were those left in the adjusted number? And how much were those?

Those are left in. Those are left in, and it was maybe 10 to 20 basis points of margin impact.

Yes, there was a question earlier -- sorry, go ahead.

Okay. Sorry, just a question. Those are cleared through after this quarter, so you won't have that purchase accounting integration costs fourth quarter.

No, there'll be a little bit more that'll flow into the fourth quarter. And of course, we'll have the Siemens technology deal and its related costs that'll come through. That's why we commented that we wouldn't expect to get much accretion -- sorry, any accretion out of STE in the fourth quarter.

I just want to comment on top of that. There was a question earlier about the accretion from the deals that we've completed. As you commented, we do work through some purchase accounting initially on the back side of them. And as far as some of the deals that we're talking about here today, there's some improvement work to do, like in the Sandvik business, as we work our way through next year. So we'll talk a little bit later in the year about the picture for next year. But the real -- besides STE, the significant benefits of the some of the acquisitions we're talking about now will come the following year as we get into '19, when we pass the purchase accounting, we've driven some improvements in these businesses, we get some inflection in the growth, the smaller businesses, but they'll have a meaningful contribution once we get out to '19.

And that does conclude our Q&A session for today. I'd like to turn the call back over to Mr. Terry Ross for any closing remarks.

Thank you again for joining us today. And we look forward to seeing you at our Investor Day at the end of November. If you have any questions on that, please contact me. And we look forward to updating you on our next call. Thank you.

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