Colfax Corporation
Q3 2018 Earnings Call Transcript

Published: 25 Oct 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Colfax Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Kevin Johnson. Sir, you may begin.

[Kevin Johnson:]

Thank you, Emani. Good morning, everyone, and thank you for joining us. My name is Kevin Johnson and I am Vice President of Finance at Colfax. Joining 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 will be using a slide presentation to walk you through today's call, which can also be found on our website. Both the audio and the slide presentation of this call will be archived on the website later today and will be available until the next quarterly earnings 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 make today. The forward-looking statements speak only as of today, and we do not assume any obligation or intent to update them except, as required by law. With respect to any non-GAAP financial measures made 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.

[Matthew L. Trerotola:]

Thanks, Kevin. We're pleased to report third quarter results. We had another good quarter and are on track to deliver significant earnings growth in 2018. Air & Gas Handling orders returned to organic growth in the quarter and its operating margin expanded sequentially from the second quarter, as expected, due to cost actions and improved project pricing. We had another very strong quarter of industrial growth as we execute our strategy to move aggressively into less cyclical industrial applications. Fabrication Technology organic sales growth accelerated for the seventh quarter in a row and we're driving additional price actions to cover the short-term impact of some additional currency and inflation that was beyond the price that we realized within the quarter. We completed three acquisitions including the GCE acquisition that introduced on the Q2 earnings call. I spent a day with the GCE leaders recently, really excellent talent additions and we're off to a great start together. In a few moments, I'll share more detail on the other acquisitions. On slide 4, you can see ESAB's continued growth trajectory. During the quarter, we achieved another growth step-up, posting double-digit core growth numbers. We continue to see constructive markets throughout the world with core growth in all regions and all product groups. We had another strong performance from our ESAB Automation business, our recent acquisitions are on track, and we continue to bring a full range of new products and technologies to the market. We look forward to showcasing these at the upcoming FABTECH 2018 trade show in Atlanta. During the quarter, we also had some transitional currency headwinds from the strengthening U.S. dollar and most of this was in our Argentinian, Brazilian, and Russian businesses. On slide 5 you can see ESAB's year-to-date in current quarter year-over-year adjusted operating profit performance. In 2018, we've continued to see multiple sources of cost escalation and the team has repeatedly increased price to offset this pressure. Year-to-date pricing actions have delivered nearly 4.5 points of price to offset material and other inflation pressures. Because these price actions are only covering inflation, the business' margin rates are being compressed by approximately 50 basis points. We had a similar impact in the quarter, but we also incurred about $5 million of short-term pressure from inflation and currency, mostly in our businesses in South America that went beyond the 6% global price increase in the quarter. Our team is driving additional price actions to cover these and any other increases in Q4 and beyond. I expect the business margins to take a healthy step forward in Q4, supported by pricing actions and continued operational improvements, and exit next the year solidly on our path to mid-teens segment margins. On slide 6, I want to share with you an example of how ESAB is delivering world-class technology to our customers. We recently completed a project with the second largest industrial aluminum extrusion manufacturer in the world. This Chinese project included the installation of our friction stir welding technology that was supplied by a joint team from our Sweden and China organizations. The customer chose our system for performance and productivity benefits. Compared with conventional arc welding, they've increased their welding speed by 5 times with even better mechanical properties and fatigue performance, and this technology supports significant order growth for the customer in railway and shipbuilding end markets, key areas that China has been investing. Recently, the President of China visited this customer and in the photo on the slide you can see the company proudly showcasing the improvements they've made with our friction stir welding technology. Slide 7 shows our continued progress reshaping the Air & Gas Handling business for less cyclical, more profitable growth. In the third quarter, the business had 16% core order growth plus another 15% from the STE acquisition. Orders were in the range we expected, and we continue to achieve strong growth in our strategic industrial applications even during the seasonally low third quarter. Industrial orders grew 34% organically over 2017, and we're almost 2 times our 2016 average quarterly rate. Oil and gas orders returned to organic growth, and the profitability of new orders in oil and gas has improved. Our mining project funnel continues to strengthen, including many smaller projects as well as some very large ones that look promising. Mining is a segment where large orders have historically had healthy profitability. And, finally, our power markets remain stable and orders are projected to step up modestly in the fourth quarter. On slide 8, the Air & Gas Handling segment sales were in the range expected with declines offset by the STE acquisition. Howden margins improved sequentially 250 basis points to 9.8%, and we see a clear path to continued sequential improvement in the fourth quarter. Part of this improvement came from clearing low-margin projects from our backlog and the rest is coming from price improvement, productivity, and the impact from restructuring actions. The Howden team has done a really nice job recovering from the challenges that hit the business in late 2017, and getting the business back on a healthy path. The business remains on target to deliver 2018 profit growth with benefits in the fourth quarter from higher volume and restructuring. On slide 9, we introduce the ACI and the ACH acquisitions. These small acquisitions will contribute directly to Howden's strategy for profitable growth in mining and are expected to generate strong returns. ACI is the leading global provider of heaters for cold-weather mines, extending the reach and value of Simsmart's dynamic control and uniquely positioning Howden as a full-line solution provider for the growing cold-weather segment. ACH is the leading servicer of ventilation systems in the Chilean mining industry and increases Howden's local aftermarket presence. I recently visited a mine in Chile and heard from our customer how local service presence would create opportunities for valuable service contracts, and also enhance our competitiveness on upcoming large projects. Slide 10 provides an overview of our progress in 2018. We expect a strong performance in the fourth quarter, led by continued fabrication technology business growth and sequential margin improvement; expanded Air & Gas Handling margins and further benefits from our restructuring actions. We continue to invest in and attract the best talent in 2018. We've hired key leaders to strengthen and deepen the team, and every year we all become more proficient in applying CBS for value in our businesses. We also keep a close eye on retention and engagement of our existing talent. Our retention KPIs have remained in a healthy range for the past few years. We also annually assess associate engagement through an anonymous survey by a third party. The survey identifies issues that matter most to our associates, and then we drive action plans to address these. I'm encouraged that despite significant changes to the business in the past few years to ensure our long-term success, the scores have improved each year. We continue to shape our portfolio through attractive acquisitions and are successfully delivering the expected performance from these acquisitions. We have an active pipeline of bolt-on opportunities which will strengthen our businesses and accelerate their growth, and we remain focused on adding a new platform to our company. In summary, we're strengthening and diversifying our company for long-term profitable growth. We have an improved outlook for 2018 to deliver 26% adjusted earnings growth per share. And now, I'll turn it over to Chris to discuss the financial results.

[Christopher M. Hix:]

Thanks, Matt. I'll start my comments on slide 11. Total company sales grew 4% in the third quarter to $875 million, reflecting 1% organic growth and 7% from acquisitions. We also experienced a 4% currency translation headwind from a stronger U.S. dollar, mostly compared with the Argentinian peso, Brazilian real, and Russian ruble. We are well positioned for very strong organic sales growth in Q4. Gross profit grew $7 million in the quarter due to acquisitions reduced by FX pressures and lower core results in our Air & Gas Handling business. As a result, and including the price and inflation dynamic in our FabTech business, we posted a 20-basis-point reduction in gross margins year-over-year. Operating profit decreased $6 million, or $2 million excluding amortization from acquisitions, and margins dropped 1 point to 8.7%. We expect year-over-year margin improvements in the fourth quarter from improved pricing, restructuring benefits, and seasonally stronger fourth quarter volumes. Below the line continued focus from our tax team contributed to this quarter's results as we drove the rate down to 21%. In summary, Q3 operating performance was in line with our expectations, and FX pressures were offset by a lower than projected tax rate, delivering $0.54 of adjusted EPS. Slide 12 shows our progress on cash flow performance. Third quarter operating cash flow was $67 million versus $16 million last year, with the improvement coming from improved DSO and from higher milestone payments on new housing projects. Year-to-date cash flow is $14 million lower than the prior year, but last year included $34 million generated in the Fluid Handling business that we've divested in December of 2017. Excluding that, cash flow improved over the prior year due to lower uses for working capital, partly offset by higher outflows for restructuring spending and U.S. pension funding. The fourth quarter is typically one of our strongest for cash flow and, for the full year, we expect to generate free cash flow of approximately $150 million, with the swing factors being the working capital needed for our fast-growing FabTech business and the pace of our restructuring programs. I'll finish my remarks on slide 13 with our updated outlook. We started the year with an expectation of significant earnings growth, and our view has improved each quarter. But following our third quarter performance, we are tightening our adjusted EPS forecast from $2.15 to $2.30, to $2.20 to $2.30. This represents year-over-year growth of at least 26%. Embedded in this forecast is FabTech full-year organic growth of 7% to 9%, including price to offset inflation. As Matt mentioned, the business continues to pursue pricing to recover additional inflation and currency pressures from Q3. Air & Gas Handling expects a strong finish to the year with sequentially higher Q4 adjusted operating margins resulting from seasonally high volumes and further restructuring benefits. A few other housekeeping items

[Operator:]

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

[Jeffrey D. Hammond:]

Hey. Good morning, guys.

[Matthew L. Trerotola:]

Good morning, Jeff.

[Jeffrey D. Hammond:]

So just on the welding margins, I mean, can you just – I mean, what really surprised you because it seems like you guys are doing a pretty good job on price cost and I just want to understand if it's FX nuance or if something else spiked? And then just give us a sense of where you see the margin shaking out in 4Q and how to think about kind of a jumping off point into 2019? Thanks.

[Matthew L. Trerotola:]

Yeah, Jeff. Thanks. Our team has been working very hard all year long as number different inflationary support sources have hit the business and has been doing a nice job continue to stay out in front of that. Here in the third quarter, we continued to have metals inflation; also had some FX shifts in specific countries where we are buying dollars and sell in local currency, and some of those were quite sharp. And then we also had the tariffs coming in the market and while we saw this coming there were some final changes in terms of what they apply to and what they did, and so – and also some freight escalations. So, a number of those things we saw coming at us; the FX in particular was the one that was sharp and unexpected in the quarter. Our team has done a – knows that they're accountable for this. They've done a nice job in the past when there's been these short-term squeezes in some of these high-growth markets. They've done nice job quickly pricing through to the other side of it, and so we expect to see our margins step up here in the fourth quarter and in a range – on a full-year basis, be in a range where our margins were last year in that business; and that includes the 50-plus basis points of compression that comes to the rate from the pass-through of all this inflation.

[Jeffrey D. Hammond:]

Okay, great. And then just on Air & Gas, sounds like you got some visibility on orders into 4Q. Just, as you see kind of the industrial strength and now oil and gas kind of ticking up, just give us a sense of, kind of, confidence that we start to see growth into 2019 in Air & Gas? Thanks.

[Matthew L. Trerotola:]

Yeah. We are seeing some positive progress there and in particular in the strategic industrial segment and in the specific areas of oil and gas where we're focused. We expect to be able to have some good orders growth here in the back half of the year, and how that rolls over into next year is going to depend a little bit on how the markets continue to play out here. We're really focused in that business on making sure that we can have strong earnings growth next year, and we've got a real clear path to that in the business even based on some of the order reduction we've had in the first half of this year.

[Jeffrey D. Hammond:]

Thanks a lot, guys.

[Matthew L. Trerotola:]

Yeah.

[Christopher M. Hix:]

Thanks, Jeff.

[Operator:]

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

[Nathan Hardie Jones:]

Good morning, everyone.

[Matthew L. Trerotola:]

Hi, Nathan.

[Christopher M. Hix:]

Good morning, Nathan.

[Nathan Hardie Jones:]

Just on the Air & Gas Handling order rates, you guys have talked earlier in the year about expecting some larger oil and gas projects to hit the order book in the back half of the year. Doesn't look like they really hit in the third quarter. Do you still expect some of those to come through in the fourth quarter? Have they pushed further to the right again; have they been let out and you didn't win them; just anything that's going on with the pipeline there?

[Matthew L. Trerotola:]

Yeah. Yeah, I think more recently in the year we've talked about the larger oil and gas orders are less of a strategic focus to us. Those are some of the areas that we had some of the margin problems earlier this year from the amount of competitiveness that has come into those large oil and gas orders. And we're continuing to see those large orders in a range of pricing competitiveness that really doesn't make sense. So we've focused our energy on reshaping our supply chain for our oil gas businesses, so that we have a very healthy business without those large orders. And we're focusing on the aftermarket, the retrofits, and the smaller orders; and we're on a good healthy path there. We had an oil and gas order growth in the quarter and also are above the $50 million level there. So we expect to see more of a steady long-term growth in our oil and gas business based on the long-term, long cycle recovery here versus any sharp recovery from oil and gas orders. We do have some large mining orders coming through the funnels. And those have been areas where we've been able to have a healthy profitability throughout the years in mining orders that are large, and we see some healthy ones there that are quite possible for the coming quarters.

[Nathan Hardie Jones:]

Okay. So, those projects have unattractive margins and not very interested in them, then.

[Matthew L. Trerotola:]

Yes. Correct.

[Nathan Hardie Jones:]

You obviously had some low-priced margin projects flowing through the first half of 2018. Margin's close to double-digit in the third quarter; you're expecting to see them up in the fourth quarter. So you're going to be nicely above double-digit level there in the second half of the year. You've talked about improving margin profile in the backlog. You've talked about additional restructuring benefits and looking for potentially higher margins mining projects coming through. How should we think about the potential for margin expansion in 2019? Clearly, it would be up because you're going to have pretty easy comps in the first half. Should we be thinking about the run rate in the second half as a good starting point for 2019? How much would you expect margins to be up or a range of margin expansion in 2019 for Air & Gas Handling?

[Matthew L. Trerotola:]

Yeah. So first, we definitely have executed to a better place on margins here in the back half of the year, and it's a sustainable better place. Now, Q4 is always a heavier revenue quarter in that business and that leads to a heavier Q4 for margins. So we'll have a step up in Q4 and some of that is just for more revenue. So I wouldn't use Q4 as a rolling-over point for next year. But that kind of 10% range that we got in the range here in Q3 I think is the right kind of a rolling-over point for next year. And then next year we'll have some of the normal seasonality through it with Q1 small, Q4 large. But on a year-over-year basis next year, you're right, we should be able to drive healthy margin expansion based on having gotten past the low margin projects, the value pricing that our teams have been doing, aftermarket price improvements that our teams have been doing, and restructuring and other productivity efforts. And those are continuing in line with our commitment to keep driving towards 15% in that business. And we'll certainly share an update at our Investor Day when we gave our guidance as to how we see next year, but definitely, we see it as a year of healthy margin expansion, up against what will still be a challenging revenue environment based on the orders this year.

[Nathan Hardie Jones:]

Okay. Thanks very much. I'll pass it on.

[Operator:]

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

[Joseph Giordano:]

Hey, guys. Good morning.

[Matthew L. Trerotola:]

Good morning.

[Joseph Giordano:]

Was there a particular piece within orders at Air & Gas that was surprising in terms of what came in or what got maybe pushed over the line into the next quarter? And just in terms of the sequential pattern, I think you guys were talking about probably up year-on-year – sorry, up sequentially from 2Q, so how did that play it out for you guys?

[Matthew L. Trerotola:]

I would say, in any quarter, there are some quarters that slip back. I would say two things that I could think of in the quarter

[Joseph Giordano:]

And what markets were those for medium-size projects?

[Matthew L. Trerotola:]

We had some good oil and gas and mining projects fly to the right and we had one oil and gas project that we consciously decided not to participate in.

[Joseph Giordano:]

And on the cash flow side, I think there was a mention of pension in the release, how much of an impact was that to the quarter's free cash flow?

[Christopher M. Hix:]

Yeah. For the full year, we expect that to be in the range of $7 million to $9 million and, in the quarter, it was I believe about $6 million.

[Joseph Giordano:]

Okay. What are you guys thinking now for full year conversion?

[Christopher M. Hix:]

Well, I think we've commented that we expect the free cash flow of about $150 million. And so I think that gives you the pieces you need for conversion.

[Joseph Giordano:]

$150 million. Okay. Thank you.

[Operator:]

Thank you. And your next question comes from Walter Liptak with Seaport Global. Your line is now open

[Walter Scott Liptak:]

Hi, thanks. Good morning.

[Matthew L. Trerotola:]

Good morning.

[Walter Scott Liptak:]

Hi. So just going back to Jeff's question about FabTech, I wonder if you can just provide us with a little bit more clarity on FabTech margin in the fourth quarter. I wasn't sure if you said that it should be up 50 basis points because of the price cost recoup or in line with the annual number for 2017?

[Matthew L. Trerotola:]

Yeah. We said two things

[Walter Scott Liptak:]

Okay. So, you'll leave any acquisition-related cost in the P&L for the fourth quarter?

[Matthew L. Trerotola:]

Yeah, we do. In our AOP, we do. And so, that will be a little bit of a drag.

[Walter Scott Liptak:]

Okay. Switching over to Air & Gas Handling, the profit improvement from supply chain and restructuring and things, if revenue is flat year-over-year in 2019, what's the delta to profit because of those actions?

[Christopher M. Hix:]

If I understand the question, it's basically in a flat revenue environment what kind of profit can the company produce?

[Walter Scott Liptak:]

Yeah. Exactly.

[Christopher M. Hix:]

And I think we'll have a more precise guidance for that when we do our Investor Day, but clearly, the amount of restructuring that we've done and the run rate that we have would suggest that we've got carryover benefits of, I'd say, of at least $15 million to $20 million. And so, you certainly have that benefit. You've got the benefit of not having the low-margin projects that we had in the first half of the year repeating into next year. So I think those two pieces give you at least an early indication of partly what's possible there. Now, we're continuing to work on cost actions, and so we'll have a refreshed view for that for 2019. I would expect there to be more than just year-over-year flow-through benefits from restructuring.

[Walter Scott Liptak:]

Okay, great. All right. I appreciate the help on that. And then, last one, with calling out FSW in that application in China, is this something that we should be watching? Is there a market opportunity for it, and what's the timing of it? What's the size of it?

[Matthew L. Trerotola:]

Well, FSW is one – friction stir welding is one of a couple key emerging technology in the welding industry that have good, strong opportunities, but in specific niche areas. And so, within our Automation business, it's a significant technology that is an important piece of how we're driving growth in Automation. It's also a part of what gives us a reputation with customers around the world for having a strong set of technologies, because it's really an innovative technology. So, we see it as something that is both a reputation builder as well as something that is helping to drive the healthy order growth in our Automation business.

[Walter Scott Liptak:]

Okay. All right. Thank you.

[Operator:]

Thank you. And our next question comes from Julian Mitchell with Barclays. Your line is now open.

[Ronnie Weiss:]

Hey. Good morning, guys. It's Ronnie on for Julian.

[Matthew L. Trerotola:]

Good morning.

[Ronnie Weiss:]

So back on the growth, Chris, I heard you give a guide for the FabTech business for the year. I was wondering if you could give a range for the Air & Gas Handling business as well. And I just want to be clear; you guys are assuming Q4 volume should increase year-on-year in that business?

[Christopher M. Hix:]

We're still projecting for that business to – for the revenue to be flat to down 2%. And that's been our consistent expectation since we announced our original guidance for the year.

[Ronnie Weiss:]

Yeah. Okay. And then, a little more broadly on the M& A front, I mean, you guys are continuing to do small acquisitions here, seem to be integrating them pretty well, and you've done buyback now for second quarter in a row. I guess, kind of strategically, why isn't this the best way to move forward? And kind of what keeps you guys committed to the third platform instead of just continuing with this, just bolt-ons and the purchase?

[Matthew L. Trerotola:]

Yeah. So, first of all, we think that strategic bolt-ons to our business is part of the best way to move forward. We intend to continue to drive bolt-ons in our businesses that make them stronger and help them to grow faster. But we've also – we've got an aggressive strategy for how we want to grow our company, and we are confident we can create value by adding additional platforms and by driving both CBS-based continuous improvement in those businesses and driving bolt-on pipelines in those businesses. And we're constantly committed to not only doing that, but doing that in areas that have less cyclicality than the existing businesses and have healthy long-term growth drivers and innovation opportunities. So, while we're improving our existing businesses, we can shape our corporate portfolio in a more and more positive direction over time that creates value for our shareholders.

[Ronnie Weiss:]

Understood. And just one more quick one; with FX becoming a bigger headwind here, I guess, could you isolate what the impact was to profit for the quarter? And going forward, what should we be thinking about as kind of a drop-through margin on the translation for FX?

[Christopher M. Hix:]

So I'll just answer the second question first. Generally, the translation impact comes through at sort of company average margin. It just depends on where it comes from, but you can think about it that way. In terms of the quarter itself, what I would say is that we had somewhere in the low- to mid-single digit million impact on the profit from FX. And in my prepared remarks I commented that the benefit we got on the tax that really matched up nicely with the FX pressure, not completely but pretty nicely; and then it was some of the other business overdrive that helped us to achieve the $0.54.

[Ronnie Weiss:]

Understood. Thanks, guys.

[Matthew L. Trerotola:]

Yeah.

[Operator:]

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

[Andrew Kaplowitz:]

Hey. Good morning, guys.

[Matthew L. Trerotola:]

Good morning, Andrew.

[Andrew Kaplowitz:]

Matt or Chris, can you talk about the visibility and sustainability of your industrial Air & Gas Handling orders? Obviously, you've had strong growth there, some of it's coming from China. Do you have good visibility into that growth continuing? And maybe if you can give us a little more color to what's driving that industrial orders growth at this point; I know you've talked about it in the past, but maybe an update there?

[Matthew L. Trerotola:]

Yeah. Yeah, so first, I'd say we've got pretty good visibility in terms of pipelines of project and active things that we're working, on and it is across a broad range of applications versus just one or two. Some of those applications are environmentally-driven. There's been a wave of environmental investments in steel plants in China, and we've been very successful in addressing those as our China team has been always very successful at identifying and then pursuing those kinds of opportunities. And so, that's where the part of the growth has s coming from. That's an area that Chinese Government seems quite committed to continue to drive through those environmental improvements. And then there are also some – a next wave of opportunities in that industry that we see on the back side of that, that we see as an opportunity to continue significant growth over time. We've also got some key orders in areas like tunnels and wastewater; they're a little more related to infrastructure buildout around the world. And those are – they're kind of less specific, it is more of broad spreads. Some of them you can see very specifically the pipeline coming; some of them the visibility is a little bit shorter. And then within that industrial business, we've got some government-related business that's got some very good visibility and solidness to it, as well as very kind of broad diversified general industrial that is diversified which is good but it's not something I'd say there's a long-term visibility to.

[Andrew Kaplowitz:]

And, Matt, do your team feel that they have a pretty good handle on the Chinese tariff situation. I think last quarter you said that the max impact was just a couple of million dollars, is that sort of still the case from what you see from what's out there?

[Matthew L. Trerotola:]

Yeah. I'd say we continue to have a strong handle on it, but the situation does kind of change over time in terms of what's in what's out. And so we've generally had multiple irons in the fire in terms of how we are going to address these and sometimes address them with price, sometimes address them with supply chain shifts. And I think the team has done a nice job on that. But there's definitely a little bit of pressure from that in terms of a couple million, as you said, from places that we've got tariff pressure and couldn't pass it through quite as fast as we could have based on the market environment. That's a piece of that Q3 pressure that we talked about.

[Andrew Kaplowitz:]

Chris, I just want to follow up on one thing you just said. You reiterated the organic guide for Air & Gas. If I'm not mistaken, that means something like $100 million or more sequential increase in revenue in Q4. I know it's your strongest quarter, but are there are just big projects that are letting out in the quarter? I mean, the visibility into the burn in Q4. Maybe if you can talk about that.

[Christopher M. Hix:]

Yeah. So typically in the fourth quarter for the Air & Gas Handling business is its strongest performance. That's been true for quite some time. So, it's not a surprise to us that we had a substantial amount of revenue in the quarter. And I think your math is in line with our view that we would have very strong organic growth in the fourth quarter in that business. So, we are aligned with you on that point.

[Matthew L. Trerotola:]

And I'll just add that, yeah, a lot of that is already in our backlog. Obviously, the new build stuff is – most of it's in our backlog at this point. There's also a lot of parts business that is coming through in the fourth quarter that a lot of that's in the backlog as well. And so, our team has been very, very focused on making sure that we're getting stuff shipped out as early as possible in the quarter to avoid too much of a crunch as we come down the stretch. And as of right now, we're confident in our ability to drive through and deliver that significant revenue step-up in the fourth quarter.

[Andrew Kaplowitz:]

Thanks, guys.

[Matthew L. Trerotola:]

Yeah.

[Operator:]

Thank you. Our next question comes from Nicole DeBlase with the Deutsche Bank. Your line is now open.

[Nicole DeBlase:]

Yeah. Thanks. Good morning guys.

[Matthew L. Trerotola:]

Hey, Nicole.

[Nicole DeBlase:]

Hey, so I guess maybe just a couple of questions on power. I think you said in the slides that you expect power orders to turn positive year-over-year in the fourth quarter. Just curious what gives you conviction to say that? Is it predominately around the comps getting weaker, or are you seeing an improving order pipeline?

[Matthew L. Trerotola:]

Yeah. So, it's mostly the former not the latter, just to be completely transparent. We said last year – when the orders dropped down the back half of last year and we got a chance to digest that, we said first half of the year was going to be a big shirk. We're kind of stabilized in the kind of range where we were in the first part of the year. There was going to be big shrink first half of the year, because we were against kind of more normal comps, and we're now at the sort of the new reality level. And then the third quarter would still be down because the comp's still a little tougher. And by the time we get to the fourth quarter, the comp is kind of more in the range of the new reality, and so we should be more in a flattish kind of range in that business. So, we expect to be sequentially up a little, closer to flattish on a year-over-year basis. And the funnel and order pipeline supports that view. There's been different views. I've certainly seen and heard folks that believe that there'll actually start to be some recovery sometime here in the next year or so in China, and actually growth uplift. But at this point, we continue to remain of a view that we're at a stabilized level and we're likely to stay at that stabilized level, and we're focused on the growth of the rest of the portfolio.

[Nicole DeBlase:]

Thanks, Matt. And just maybe as a follow-up; can you just talk a little bit about how power aftermarket performed during the quarter, and maybe what you're seeing from an order perspective there?

[Matthew L. Trerotola:]

Yeah. We don't comment on specific in-quarter aftermarket, but the consistent theme in the aftermarket in power over time has been that there's some pressure on the developed markets, and there's growth in the emerging markets because there's a lot of capacity to win into those in the past years. And that's – on a year-to-date basis, that's the kind of trend that we've continued to see there. So when we look forward in our power business, again, we tend to see the new build being in the flattish range, and the aftermarket also being able to about in that flattish range as there's still plenty of aftermarket growth opportunity in the high-growth markets from the buildout that took place; and the developed markets are under pressure. But even as they're retiring things, there's opportunity to sell productivity into those developed markets. And so we do retrofit that bring productivity to customers that are looking for any kind of efficiency they can get. And so we're able to only have a modest decline in that developed market's aftermarket.

[Nicole DeBlase:]

Thanks, Matt. I'll pass it on.

[Matthew L. Trerotola:]

Yeah.

[Operator:]

Thank you. And our next question comes from Bryan Blair with Oppenheimer. Your line is now open.

[Bryan F. Blair:]

Hi. Good morning, guys. Thanks for taking my question.

[Christopher M. Hix:]

Hey, good morning.

[Matthew L. Trerotola:]

Good morning.

[Bryan F. Blair:]

With GCE now closed and the two smaller bolt-ons in AGH, I was just hoping you could provide a little more color on expected financials there, the current growth rates, margin profile and, looking to 2019, what kind of accretion we should expect from those deals.

[Christopher M. Hix:]

Yes. So, if you look at these deals collectively, what you'd find is that they follow the strategic vector that we've communicated, which is businesses with more differentiation, with a little bit better margin profile than what you'd expect to see. We've got to work through some of the integration and purchase accounting and all that in the fourth quarter and a little bit in early next year. But collectively, we think that those three acquisitions for next year could contribute anywhere from a high single-digit EPS to maybe $0.10 or more. So, we do expect those to have a healthy contribution to our results for next year.

[Bryan F. Blair:]

All right. Thank you very much.

[Matthew L. Trerotola:]

Yeah.

[Operator:]

Thank you. And our next question comes from Matthew Trusz with G.research. Your line is now open.

[Matthew Trusz:]

Good morning. Thank you for taking my questions.

[Christopher M. Hix:]

Hey.

[Matthew L. Trerotola:]

Good morning, Matt.

[Matthew Trusz:]

Can you talk a little bit about the trends in growth you're seeing out of China? What about any potential impact of China slowing in your business or end markets, and the risks that you're seeing today?

[Matthew L. Trerotola:]

Yeah. So first, I'd say China has been pretty healthy on a year-to-date basis, but I'll also say that we're seeing the same things that others are seeing and talking about in terms of some parts – some different sectors in China slowing down, GDP in China slowing down. We play across a broad of range of things in China, but we have quite a bit of business in China that's related to infrastructure and environmental and things of that nature and, to-date, we haven't seen a pullback on those. And in the past, when the China Government has tried to pull the economy back up, sometimes those have been areas that they lean into. So for us, yeah, we're seeing the short-term questions that are being raised. We're not sure, yet, how that'll impact our business. If the short-term slowdown continues, there'd be some negatives, but if the government steps in to do more infrastructure, that could be a positive. And so, at this point, we haven't seen any change in our business. In addition, our high-growth markets profile, which is half our company, is quite diverse, and China is a much smaller part of it than it is for many industrial companies. And so, we feel good about the diversification that we've got in our high-growth markets that, if China does come across a rough patch, we've got a lot of other possibilities for where to go for growth.

[Matthew Trusz:]

Interesting. Thank you. And then, just with respect to the oil and gas project environment, does the current geopolitical climate in the Middle East pose any risks to your pipeline? How much of the pipeline or project environment, overall, would you say is Mid-East-centric at this point anyway?

[Matthew L. Trerotola:]

Yeah. So, we've got a global pipeline in oil and gas; Middle East is, of course, a meaningful part, but it's not the majority of the pipeline, is what I would say. And the stuff that we do in the Middle East is across a range of countries in the Middle East. And so, I wouldn't say that we've seen any meaningful geopolitical impacts on the pipeline. But I would say that, for the past few years, the oil and gas recovery has been a viscous recovery; the project come into the pipeline, some of them move, some of them don't. And I think the good news is that there's plenty of long cycle recovery potential there, because there's still a whole lot of projects that people have been talking about that haven't happened, yet. But at the same time, in any given quarter or couple of quarters, sometimes more of them move and sometimes more of them don't for a whole range of reasons.

[Matthew Trusz:]

Great. Thank you, Matt.

[Matthew L. Trerotola:]

Yeah.

[Operator:]

Thank you. And our next question comes from Chris Dankert with Longbow Research. Your line is now open.

[Chris Dankert:]

Hey. Morning, guys. Thanks for taking my question here.

[Matthew L. Trerotola:]

Good morning.

[Christopher M. Hix:]

Good morning.

[Chris Dankert:]

Obviously, we've had some pretty meaningful restructuring this year. I'm sure you'll comment more at the Investor Day, but is the goal of CBS this point to just kind of offset the inflation that keeps coming through, or is there still a more meaningful restructuring that could be done here as we move into 2019 and beyond?

[Matthew L. Trerotola:]

Yeah. I've said before that, in fact, the restructuring – as we've moved through the past few years, the restructuring has moved from what you have to do reactively when orders and revenue drop to what you get to do over time as you have a little more time and can be more strategic about where you focus your restructuring. And today, much more of our restructuring investment is what I would call strategic realignment of the business; in the Howden business, doing the realignment of the value chains for some of the important decisions we've made about where we're going to participate aggressively and where we're deemphasizing; realigning value chains and consolidating businesses in ESAB and Howden in order to have more streamlined cost structures; and some of the restructuring you could do when you do back-office process optimization and you've got more automation and you've got shared services and you're able to then work through the fixed cost changes. So definitely more strategic versus reactive and offsetting inflation at this point. And I think we've still got some room to run on that as we move into next year as part of how we get these businesses to mid-teens.

[Chris Dankert:]

Got it. Got it. Thanks. And then just one quick kind of housekeeping thing; as we look at tax rates – nice work managing that this year – as we look into 2019 and a more normalized tax-affected (47

[Christopher M. Hix:]

Yeah. The tax team, I think, has done a great job of taking advantage of the opportunities that we have in front of us given the new business we have following the divestiture of Fluid Handling, with some of the acquisitions that we've done, and taking advantage of U.S. tax reform. A lot of it's been very tactical, and as we transition into next year, the scope of projects that we'll be looking at are really geared toward making that a more sustainable rate what you've seen this year, rather than taking advantage of more discrete benefits that are in front of us. So, our target is to get the rate down into structurally and sustainably into the low-20s, and we'll have more to say about that when we get into the Investor Day.

[Chris Dankert:]

Understood. Thanks, guys.

[Matthew L. Trerotola:]

Yeah.

[Operator:]

Thank you. This concludes today's Q&A session. I would now like to turn the call back over to Mr. Kevin Johnson for closing remarks.

[Kevin Johnson:]

Thank you, again, for joining us today. We look forward to updating you on our next call.

[Operator:]

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