Colfax Corporation
Q4 2018 Earnings Call Transcript

Published: 13 Feb 2019

[Operator:]

Good day, ladies and gentlemen, and welcome to the Colfax Fourth Quarter Earnings Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will have a question-and-answer session, and the instructions be given at that time. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. It is now my pleasure to turn the conference over to your host, Mr. Kevin Johnson, Vice President of Finance. Please proceed.

[Kevin Johnson:]

Thank you, Kelly. 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.

[Matt Trerotola:]

Thanks, Kevin and good morning. 2018 has been a transformational year for Colfax during which we reshaped our company and established an even stronger foundation for our future. First, we finished the year with strong financial results including earnings growth of 33% placing us well ahead of the commitment we made in December of 2017. ESAB achieved strong and accelerating sales growth across all regions, including strong contributions from new products and the team has done a great job of protecting margins in a year of notable cost escalation. Our Howden business recovered from the market challenges of late 2017 and the team has gotten the business firmly back on a path to mid-teens segment margins. They've successfully grown sales in the faster growing industrial applications, which are now half of the business and Howden exits 2018 with strong momentum on both order growth and margins and as well placed for a strong performance in 2019. We have successfully driven restructuring actions within both of our businesses and delivered $37 million of restructuring cost savings. Our progress improving the vitality of both businesses shows the power of CBS and supports our margin and gross improvement. We completed the monetization of our fluid handling business at an attractive multiple of over 13 times EBITDA and completed four new bolt [sp] on acquisitions that strengthen and diversify our ESAB and handling businesses. We also announced that Colfax has entered into a definitive agreement to acquire DJO, a leading Global Orthopedic Solutions Company. This acquisition is consistent with our strategy to create a higher margin, faster growing and less cyclical company. To support our deleveraging plans and future growth investments, we're exploring strategic options for our Air & Gas handling business, including a potential sale. We believe this will be a very attractive asset to potential acquirers given all the progress made to strengthen and diversify the business. Moving to Slide 4, you can see the highlights from our fourth quarter results. Our operating performance within line with expectations and tax benefits contributed to our performance. Fabrication Technology if the strong sales growth from continued healthy market demand as well as new product launches and pricing actions completed throughout the year. Air & Gas Handling drove another quarter of double-digit order growth with industrial remaining very strong aftermarket accelerating and most end-use markets moving in a positive direction. We increased this business' margins through restructuring actions and a deeper application of our business system to improve operational execution. This month, we successfully completed the DJO acquisition financing that started in the fourth quarter. DJO is a global leader in the attractive growing orthopedic solutions market and we're excited about the potential to apply our business system to further improve the business' growth and profitability. On Slide 5, you can see ESAB's continued growth and continued growth trajectory. This was the eighth quarter in a row of core growth at ESAB side and we continue to show double-digit growth, both overall end core. While healthy margins around the world had been a positive factor in our growth, we also launched 11 new products in 2018, increased automation backlog and funnel and added some great acquisitions, Sandvik and GCE that are performing well. I was in Europe recently with the GCE team for our standard hundred-day review process. We already have a fast start there softly integrating our businesses in the welding market and identifying some exciting gas control growth plans in med tech and life sciences. During the quarter we had some translational currency headwinds from the strengthening USD predominantly in our Argentinian, Brazilian, and Russian businesses. On Slide 6 you can see ESAB's year-to-date and current quarter, year-over-year adjusted operating profit performance. The performance was in line with what I communicated on our outlook call in December. Margins of 11.6% excluding the October 2018 GCE acquisition finished the year in line with 2017. Now, as I've talked about on several calls now we had multiple sources of cost escalation during 2018 year do the pricing actions have delivered nearly five points of price to offset material and other inflation pressures. And as these price actions are only covering inflation, the businesses margin rates are being compressed by about 50 basis points both year-to-date and in the fourth quarter. As is this pressure, we would have had another year of solid margin expansion in this business. When we exclude the GCE acquisition from Q4 underlying adjusted operating margins were 11.2%. This is a solid step forward from Q3 and our team continues to execute price and productivity actions in Q4 to enter 2019 firmly on the right side of the 2018 price cost improvement curve. ESAB's margins are expected to take a step forward in 2019 as additional price in productivity actions flow through and the business has a clear path back to greater than 12% operating margins in the first half of 2019. The healthy margin expansion in our 2019 guidance is consistent with our path to mid-teens for this business. Slide 7 shows our continued progress reshaping the Air & Gas Handling business for a less cyclical, more profitable growth. In the fourth quarter, the business had 13% quarter order growth plus another couple of points from the recent ACI and ACH acquisitions. We continued to achieve strong growth in our strategic industrial applications as core industrial orders grew 18% in the quarter. Oil and gas orders grew sequentially and the profitability of new orders continues to improve. Mining orders grew organically 141% as we secured our large order in the quarter at good margin levels. Finally, our power markets remain stable and orders, as expected, stepped up sequentially in the fourth quarter. On Slide 8, the Air & Gas Handling segment core sales grew 11% in the quarter, supported by strong growth in industrial applications, and as expected, Howden performed strongly on margins in the fourth quarter which improved 230 basis points sequentially and 440 basis points year-over-year to 12.1%. This improvement came from price, productivity, restructuring, and strategic choices that we've made in oil and gas to focus on higher margin projects. Backlog end of the year is stronger than expected and both backlog size and margin levels support the guidance provided on our December outlook call. On Slide 9 I want to share with you how the Colfax business system helped us to drive margin improvement in Howden. Lead process improvement is often thought of as synonymous with manufacturing, but CBS is a holistic business system that helps us to continuously improve across all business activities. Policy deployment in the core tool in the CBS toolkit and arguably are our most powerful tool. Its purpose is to drive breakthrough change within our businesses to advance our strategies. A great example of the impact of policy deployment can be found in the improvements in Howden project management during 2018. In 2017 the Howden leadership team had identified the opportunity to drive improvements in project execution on large new build projects, which involved complex engineering solutions and teams around the world. Using policy deployment, the Howden team re-engineered their end and project management processes and build a stronger foundation for project execution. This resulted in 2018 improvements in milestone delivery, our margins and better working capital. These changes are now sustained standard work in the business. It's a great example of how our teams use CBS to deliver improved service to customers and improve financial results. On Slide 10 we provide an update on our strategic initiatives. The company recently completed the financing to support the acquisition of DJO and refinance existing bank loans. Of course, the teams did a great job of getting this completed quickly and at attractive terms. The DJO acquisition is progressing as expected. We completed regulatory filings and continue to target a Q1 close. Our experienced integration team is fully engaged and we're all working closely with the DJO team to ensure a smooth transition. I was with a senior DJO team in Dallas recently for their initial CBS training and both sides are excited about the opportunities ahead. The review of our Air & Gas Handling strategic options is well underway, Goldman Sachs and Barclay's are leading the efforts and we're moving with speed. Before I hand over to Chris, I want to comment on our strategic progress. We strengthen our ESAB and Howden businesses getting them on the solid paths to growth and mid-teens segment margins. The recent DJO new platform acquisition is entirely consistent with our strategic commitment to diversify and strengthen our portfolio. We also see exciting opportunities to further expand in med tech. In summary, we made a lot of strategic and operational progress in 2018 and I expect a very successful year for Colfax in 2019. Now, I'd like to hand it over to Chris who will discuss the financial results.

[Chris Hix:]

Thank you, Matt. On Slide 11 you can see company’s sales grew 13% of the third quarter to $985 million reflecting 11% organic growth and 7% from acquisitions, mostly GCE that was acquired in October of 2018 but also Sandbag that was acquired earlier in the year. We also faced the 5% currency translation headwind in the quarter from a stronger U.S. dollar, mostly compared with the Argentine peso, Brazilian real and the Russian ruble. We grew gross profit by $36 million in the quarter and gross margin by 20 basis points due to continued growth at our Fab Tech business and very strong Air & Gas Handling operating performance. As Matt mentioned earlier, some of our margin progress has been obscured by the effect of using price to effectively offset inflation which grows the ESAB's revenue and cost of goods sold and compressed it's reported operating margins by 50 basis points in 20 basis points for Colfax overall. Besides year-over-year FX translation pressure of nearly $5 million operating profit increase $23 million or $27 million excluding $4 million of one-time transaction costs and inventory step-up charges from the recent GCE acquisition. Adjusted margins increased 150 basis points to 9.4% or 180 basis points to 9.7% before one-time transaction costs and inventory step-up charges. During the quarter we sold an old ESAB facility as part of an ongoing Colfax wide program that has included six facilities over the past four years for total cumulative proceeds of about $43 million. Applying CBS drives productivity improvements that frees up capacity and enables footprint rationalization and higher efficiencies. The net benefit of $11 million we've recognized in the quarter from the facility's sale was offset by non-routine charges resulting from Argentina hyperinflation, receivable reserves for a distributor and the impact of strengthening inventory standard work and processes. Below the line, continued focus from our tax team contributed to this quarter's results as we drove the rate down to 17%. Overall, Q4 operating performance was in line with our expectations and lowering the projected tax rate contributed to the 53% increase in EPS in and the quarter. Slide 12 shows our progress on cash flow performance. Fourth quarter operating cash flow was $126 million versus $104 million last year with the improvement coming mostly from higher profitability. This higher cash flow was delivered despite the significant growth at ESAB that required working capital investment. The $7 million year-over-year increase in full-year operating cash flow to $226 million does not tell the whole story. The prior year results included $69 million of cash flow generated in the fluid handling business that we divested in December 2017. So the rule of program was $76 million on a consistent basis and we expect to make another healthy step forward in 2019. I'll finish my remarks in Slide 13 by reaffirming the outlook we provided in December. We started the New Year with January results that were consistent with our expectations. For the full year, we continue to expect our fabrication technology business to grow high single-digits including a full-year contribution from the GCE business. We are forecasting stable material costs and the price increases over the past several quarters are expected to last. Core growth is forecasted to be mid-single-digits, about half price and half volume with operating margins exceeding 12% on the strength of restructuring and pricing actions including the roll-over benefit from initiatives completed in 2018 and further productivity savings. Oil and gas handling business is expected to grow orders this year mid to high-single digits, led by continued growth in industrial applications and strengthening mining markets. We continue to expect core growth to be flat plus or minus with continued margin growth for restructuring, improved customer project execution, and after-market initiatives. After the DJO acquisition is completed, we will provide an update for our expectations for this year. We continue to expect a strong year of profit growth in our existing businesses with adjusted operating profit growth of 20% or more. That concludes our prepared remarks. Please open up the call for questions.

[Operator:]

[Operator Instructions] Our first question comes from Mike Halloran [ph] of Baird. Your line is now open.

[Unidentified Analyst:]

Good morning everyone. Could you just talk a little bit about the underlying trends you're seeing on the Fab-tech side? It certainly sounds like some consistency still despite all the headline noise globally, but maybe a few more thoughts on the trajectory to the quarter into the first quarter so far. Any regional variances, anything by product category that's interesting or showing particular strength or particular weaknesses, you walk to the quarter.

[Matt Trerotola:]

Yes, sure, Mike. The back half of last year was good and strong that's kind of half and half growth between price and volume growth. And some of the stronger sparks a down the stretch last year were North America as well as growth in automation in the business. As we roll over into this year, you can see in our guidance that we're still a forecasting to have a healthy growth in the business, but lower than that double-digit second half more of a mid-single-digits a year this year. We're still seeing growth -- broad-based growth. But we do see -- expect to see the North America growth come down a little from that higher spot that it went to last year and different places in the world a little to and from here in the different emerging markets in the world.

[Unidentified Analyst:]

Out of curiosity, are you seeing actual weakness on that growth or are you just more or less referring to normal sequential patterns from what we're seeing here cumulatively and comparisons is getting a little harder to drive you to this strong ratio?

[Matt Trerotola:]

Yes, we're seeing what we expect to see here in the fourth quarter in terms of some type of comps kind of a normal sequential pattern consistent with the guidance that we've given.

[Unidentified Analyst:]

Okay, sounds good there. And then just a question on the price cost side, as you work through the year Fabtech thing. Maybe just talk about the price cost curve in the fourth and how you expect that to cadence through the year with the moving parts, with your pricing gains and as well as the commodity swings we've seen.

[Matt Trerotola:]

Yes, sure. Well, as I said in my remarks, we've got through almost $100 million of price last year that 5%, a little over $100 million, that that 5% a number. And that was throughout the year. We cleared the air on the right side of the equation there versus steel, but definitely down the stretch in the year there were a broader set of inflationary pressures that had us having to continue to drive price there in the third quarter, in the fourth quarter, even beyond just the steel impact. And so as we rolled over into the first half of this year, we expect to be able to see nice sequential margin improvement in the business as those price actions continue to flow through and the productivity actions continue to flow through. We see the steel environment has stabilized and so that provides an opportunity to limit the price actions to the other inflationary pressures in the business and to use some of the muscle that was created last year to get some net price and some of the key parts of the product line where there is a value-based opportunity to drive net price improvement of the business.

[Operator:]

Thank you. Our next question comes from Jeffrey Hammond of KeyBanc Capital Markets. Your line is now open.

[Jeffrey Hammond:]

Good morning, gentlemen. So, this to follow-on on the price cost but the 50-basis point headwind is that -- how do you like has it been in Q1 and just kind of cadence through the year. Is that all the GCE acquisition or is kind of behind you?

[Matt Trerotola:]

So, the kind of mathematical price pressure of passing through price kind of increased throughout last year but was consistent through most of last year. And so, I think we'll start to -- we'll have a little bit of it in the first quarter as we move through the price absent more steel. We'll start to lap that mathematical impact of the price. I think in terms of the earnings impact of the price class, we're entering Q1 on the right side of that and expect to not have a price cost, earnings drag and as we move through the year to have a little bit of a benefit there. And then GCE, certainly the biggest effect from the GCE acquisition was in the fourth quarter based on when it came in and some of the early things that we do in acquisitions, and we'll have still a little bit of a drag from some of those early charges and things in the first and second quarter here but it'll be much smaller than in the fourth quarter.

[Jeffrey Hammond:]

Okay, great. And then, Matt, you said you're moving with speed in the oil gas process. Can you just talk about interest levels at this point and what you think best I guess on timeliness?

[Matt Trerotola:]

Yes, we're really not going to comment on a specific to the process. We've done all the right things to move into that process with speed and excellence and we've got the business on a good healthy, improving pass and so we feel confident in our ability to drive to good outcome there. But we're going to share information at the point that we think is appropriate to share it.

[Jeffrey Hammond:]

Okay. And then just one housekeeping. How should we think about tax rate for '19 with and without DJO?

[Chris Hix:]

I'll speak to the tax rate without DJO. And then, of course, we'll provide a bigger update once we've closed the DJO acquisition and we'll come back to folks with a different sort of an outlook. Without DJO, we're continuing to believe that the go-forward sustainable tax rate for 2019 will be in the low -- the sort of low 20s. If you look back over time, you can see that we've driven the right from that kind of low 30 to high 20 down into the low 20s. And we've also taken advantage of other initiatives to drive the rate tactically down below 20. But on a sustainable basis. Right now, we believe low 20s is the way to think about it.

[Operator:]

Thank you. Our next question comes from Andrew Kaplowitz of Citi. Your line is now open.

[Andrew Kaplowitz:]

So, in Fabtech you noted the new product is it contributed growth data and you've obviously been very focused on reinvigorating the product portfolio there over the past couple of years. Can you give us some color maybe on how much the new products contributed to growth in 2019 and how you're thinking about new product as a contributor growth in '19 and beyond?

[Matt Trerotola:]

Yes, we definitely have made a lot of progress on that business on vitality and the amount of revenue coming from new products, and that's up in our growth. It's in our brand and it is at this point, broad-based across the portfolio. A few years back it was more concentrated in our equipment product line and we've now got it more broad-based across the portfolio. You know, our view is that the past, the strong growth performance over time. And I think that industry fresh products, new products, can get a couple of points of growth that you wouldn't have if he didn't have fresh and newer products. And so that's kind of how we view the past to consistently driving industry plus growth is to have those fresh and new products. Obviously, the revenue contribution from them as larger than that but in terms of how much it differentiates your growth in any given point in time, we think it's in that kind of a range.

[Andrew Kaplowitz:]

Okay. That's great. And then maybe just shifting to Air & Gas Handling you had nice year-over-year growth in general industrial odors in the business, really every quarter this year. And we know that's been a big focus area for you. Can you talk about your visibility to staining continued momentum in general industrial growth within Air & Gas Handling?

[Matt Trerotola:]

Yes, we've sustained a momentum there for quite some time now and we still have a healthy funnels and ongoing initiatives across a broad set of industrial segments. So, we think the market environment supports ongoing industrial growth. We see the momentum of our initiatives supporting a continued growth there. You know, there's no question that like the rest of the business, there's parts of it that are more project-based. In any given point in time you might have a little more or a little less based on kind of which projects are coming when. But between the broad-based natures of the growth there in the external environment as well as our initiative-based momentum, we see the potential to continue that industrial growth in the business.

[Operator:]

Thank you. Our next question comes from [indiscernible]. Your line is now open.

[Unidentified Analyst:]

So, on your oil and gas orders, I know the last couple quarters, Matt you mentioned that there's been a lot of business out there and you've kind of made a conscious decision to not pursue it because of the margins inherent there. So, you're seeing a little bit of sequential expansion in the order book there. Has the market strength in there? Has there been any change or is it kind of an opportunistic project? How would you categorize that kind of progress?

[Matt Trerotola:]

We see the oil and gas market has been gradually moving in a positive direction overall. If I start from our aftermarket presence in that market, which is more with refineries and then anything else, that's been on a good improving path there and both the ongoing aftermarket and even some of the retrofit kind of projects there have been coming through. And then second the part that we are strategically focused on now and going forward in terms of a kind of small to medium-sized new project-based opportunity there. There are healthy funnels, there's been some decent project flow, yeah, has it been in the past few years, it still continues to be a little kind of start-stop versus kind of strong, an increasing trend, but it's moving in the right direction and the funnels continue to build there in that business.

[Unidentified Analyst:]

Okay. And then maybe last for me, I feel like there's a lot of investor talk about DJO and just familiarity with you guys and that type of business. Can you maybe discuss at a high-level, I mean, I'm going to get the detail yet, but how does that business -- like what's the management structure? How does that roll up to you? Can you talk about how your past experiences with similar businesses give you comfort and how you guys can run that business effectively?

[Matt Trerotola:]

Yes, sure. I would say strategically we see that as a great add to our company that really moves this forward in a terrific way and that will be able to apply our compounding strategy into. As it comes in, Brady Shirly [ph] will lead the business. He's got over 20 years in that orthopedic solutions industry. He’s has been in the business for about four years, led the implants business for a few years and did a great job getting out on a strong growth path. And then he's led the overall business. And he'll come in and the team will come in, it'll be a separate platform reporting in to me and having the appropriate connections to our different functional pieces and being supported as they bring CBS into the business. We've already done, as I said in my comments, we've already done the first round of CBS training with the leadership team and with some of the key folks in the operational team there. And so, we feel very good about that. We get a ton of experience with that team, which is very, very important. But we've also got a fair amount of Meditech experience in my leadership team and in our board room that it helps us to have a perspective to bring to the table there as well.

[Operator:]

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

[Nathan Jones:]

Just back to the air and gas orders for a minute. It looks like you had a really good quarter in the mining business there. Can you talk about the sustainability of those kinds of orders where there some large project orders in that segment during the fourth quarter that maybe won't repeat?

[Matt Trerotola:]

Yes. So, first of all, the broad view of mining is quite positive. You know, the all indications are that the industry is headed into good, healthy multi-year period of investment that has started and is very much expected to continue. And all the external indicators suggest that as well as our customer funnels and our customer dialogue. There's no question that that business, as they say, a smaller part of our overall revenue and that the projects can come in lumps, it is a business that quarter-to-quarter can have a degree of lumpiness to it. And that enormous growth rate in the fourth quarter is due to a larger project that came in. Now, that large project to the mining business was a significant outlier. At the Howden level, it's not maybe half of the growth that we had or something like that. So even without that large project, we were in a pretty healthy growth range there in Howden. And the last thing I should say about mining is that the large project in mining tend to be direct with the mine or if they are through other parties there's a very strong direct link with the mind. And based on that, we've been able to own the recent project as well as others over time, been able to value sell and get margins for those large projects that make them attractive recently and, on a go-forward basis.

[Nathan Jones:]

Okay. So it sounds like there was some large project in there but the anticipation is that there may be more coming in the future and we also locked them from a margin perspective.

[Matt Trerotola:]

Yes, that's correct. We expect multiple years of growth. In any given quarter or a year, there could be some one-off impacts.

[Nathan Jones:]

Okay. Fair enough. On Fabtech, you guys have had this mid-teens margin target out there. I think 12 months ago it was three to four years. And we're 12 months further along now though we have had some fairly significant changes, 50 basis points of margin drag from price cost with the big steel inflation. Is that target still in that timeframe, two to three years from now you should be at that 15% target of the things that have happened that changed the outlook on that business at least from a timing perspective? Or any color you can give us on when you would anticipate being able to get to that mid-teens target now.

[Matt Trerotola:]

Yes, sure. So, we still remain very committed to that target and don't see it as some theoretical future target versus one that we'll be closing in on here in the next couple of years. If you look at the last handful of years, we've shown 50 plus basis points of improvement a year and last year, the underlying improvement was there. It just got consumed by this pass through. If you look at our guidance, we guided the more than 50 basis points of improvement for 2019 which would get us well into the 12. And so, whether the path from '19 forward is a couple years they get to 2015 or something slightly different than that, I think that's something we'll continue to communicate very transparently, especially as we get into our investor day later this year. But we see good opportunity to keep expanding margins there between some net price; continue to drive productivity, some ongoing strategic structural moves in the supply chain in the business. The positive impact of the innovation that we've done in the business there. And then getting some leverage from growth as we get and stay in more of a volume growth environment here for a bit, getting some leverage out of that growth. We still see a clear path to that 15% operating margins.

[Nathan Jones:]

Thanks. Just one quick one for Chris on the cash flow. You talked about $69 million from fluid handling last year. That wasn't in the cash flow number this year. Do you have a number handy on what the acquisitions that you've made this year contributed to that cash flow?

[Chris Hix:]

Nathan, I don't have those numbers at hand. You can see that the acquisitions weren't significant in the overall scheme of Colfax, but each of those should have brought contributing cash flow to the company. But I don't have that number handy.

[Operator:]

Thank you. Our next question comes from Julian Mitchell of Barclays. Your line is now open.

[Julian Mitchell:]

Good morning, maybe just another question on the free cash flow. Conversion to adjusted net income was I think in the 50s percentage wise in 2018, so very low level. You talked on the last call about maybe some restructuring charges falling in '19 that helps the conversion step up. Now that the fall 2018 numbers are out there, maybe help us a little bit more with a bridge on how the free cash flows steps up and what kind of conversion rate we should expect this year. And also then when you're thinking about pro forma Colfax, x oil and gas, including DJO, what level of free cash conversion should investors expect at that point?

[Chris Hix:]

So, let me give you a couple of points of reference there. And then again, I think what I'll suggest is that we'll come back to you after we closed the DJO acquisition and we'll talk more about that particular business and the expectations it has our 2019 performance, which should be very additive from a cash flow perspective. What we've commented on is going from 2018 to 2019; we do expect significantly lower restructuring spending. So, year-over-year, that's a $20 million to $30-million benefit. And then we've also talked about lower pension funding as well by $20 million to $30 million. So those are two pieces in and of themselves it should be additive to free cash flow as you pivot it from 2018 to 2019. Although I'm not prepared to go into detail on the DJO until we actually close and own the business and therefore can speak to the timing, specific time within the year of its contributions, it does have a very attractive free cash flow generation and it comes with the NLOs is that mean that we should not really be a U.S. taxpayer in 2019 and for several years beyond. So those are a couple of pieces there that should help us to continue to drive free cash flow conversion higher and get us to a significant growth on our operating cash flow.

[Julian Mitchell:]

Got it. So the free cash flow this year in '19 x DJO, we should expect that to be closer to what? 80% plus? Is that the right sort of level?

[Chris Hix:]

Yes, I think that for us it's probably healthy to think about that number, and -- as before DJO and all the financing impacts and everything, on a legacy basis, I think we're just over $150 million and our expectation is we can take that up closer to $200 million, plus or minus.

[Julian Mitchell:]

Thank you very much. And then my follow-up. Second question would really be around -- you've mentioned productivity as a profit driver several times in both businesses. Maybe just help us understand what was the total productivity savings tailwind to your EBIT in 2018? And what do you think that will be in 2019? And any color on the FabTech, specifically in that regard?

[Chris Hix:]

Okay. So productivity for us is a combination of the ongoing day to day actions that we drive with continuous improvement in CBS. And then I would contrast that with restructuring actions that we've taken, which are more episodic and more structural in nature. We've identified for next year is, 2019, -- I should say this year, is the $20 million of benefits from restructuring in the Fabrication Technology business and $25 million in the Air and Gas Handling business. So we do have the structural improvements that will continue into 2019 for these businesses. But then in all of our businesses, we drive the day to day productivity with an objective that we at least cover inflation or drive beyond inflation and that comes from just hundreds or thousands of actions going on across the business and as we continuously improve the operations.

[Julian Mitchell:]

Thanks. And what was the realized restructuring benefit in 2018?

[Matt Trerotola:]

About 40 -- $37 million, I think.

[Operator:]

Thank you. Our next question comes from Walter Liptak of Seaport Global. Your line is now open.

[Walter Liptak:]

Hi, thanks, good morning. Just wanted to ask you a couple of follow-ons on the FabTech business and just to clarifying things. The restructuring benefits, are those done in 2019, or is that what I heard you say or is there some more restructuring benefits that come through in 2020 that help you get to that 15% margin goal?

[Chris Hix:]

Beyond 2019, yes. So we shared that 2019. I think there is a little bit of ongoing restructuring opportunity in that business. Part of it is just the legacy supply chain that we've got and the opportunity to keep making that more strategic. But also as we bring in new acquisitions as we have, sometimes those bring some new opportunities and we drive the synergy opportunities there. And so our view is that that business -- likely we will have -- continue to have a little bit of ongoing restructuring on into '20 and even '21, that is just smaller, but just the appropriate ongoing strategic step to be doing in that business.

[Walter Liptak:]

Okay. And then just sticking with FabTech. The EU exposure for you guys -- considering auto in industrial, I wonder if you can talk about maybe a mid-single-digit growth number and first half growth assumptions versus second half or should we just think about mid-single digits for the full year?

[Matt Trerotola:]

Yes, to your question about Europe, I mean, there's no question. The last few years Europe has hung around, been a little in the positive from a volume standpoint, higher on a revenue standpoint at times, but it's not been -- it's been different countries and different quarters and depending on what's going on in the different industries over there and other things. And we expect Europe to stay in that range of being a little bit in the positive from a volume standpoint, a little higher than that from a revenue standpoint, given some of the price. And certainly some markets like auto in Germany feeling a little bit of pressure, but some markets, like some of the oil and gas stuff starting to wake up a little bit more and so there is an offsetting effect there. As far as the growth through the year, we definitely -- as we said, the second half of last year was quite strong there and part of that was a very strong price impact on top of the volume and there was some real strength in our automation business there down the stretch of last year in terms of specific projects flowing through. And so, as we roll over into '18 that mid-single digits is a good indicator from a core growth standpoint as to how we expect to grow the business. And certainly, the extra growth from automation and some of the price impacts will subside a little bit as we move into the first and second quarter, but we still should be solidly in that mid-single digit range.

[Walter Liptak:]

Okay. Great. And then, just a last one. On corporate expense, without DJO, what are you thinking about for that and should we expect extra expenses related to transactions et cetera?

[Chris Hix:]

So we would expect corporate expenses to be roughly in line with 2018 levels as you go into 2019. There'll be some puts and takes, as you suggest, as we're integrating DJO and some of the cost related to the potential divestiture of the Howden business and so forth. But largely, I'd say, largely in line.

[Operator:]

Thank you. Our next question comes from Seth Weber of RBC Capital Markets.

[Seth Weber:]

I actually wanted to also ask about the -- I wanted to ask about the automation business specifically. You kind of just touched on it, but as it sounds like you may be decelerating here, or the comps are maybe just getting harder. I mean, can you just comment -- is that -- do you feel like customers are more reluctant to do bigger ticket projects as this or make bigger ticket investments at this point? Or is it just you feel like you saw some big growth there and comps are just more difficult, and that's why you don't think automation momentum will continue next year? Thanks.

[Matt Trerotola:]

Yes, I want to be clear. We still see healthy growth in automation, based on the drive to productivity, the need for productivity solutions in the industry. And we see a healthy funnel there and a healthy backlog, it's really more that -- it is -- there is a little more project-based nature to that business and so in some quarters it's a bigger contributor than others and down the stretch last year, we got some extra boost there and we expect it to continue to -- to contribute to growth nicely here in 2019, as well. We're just don't necessarily seeing that extra boost as we enter the year.

[Seth Weber:]

Okay. So you don't feel like customer tone toward bigger ticket CapEx has changed, is what I'm trying to figure out?

[Matt Trerotola:]

No. We have not seen any meaningful change in customer tone to bigger ticket CapEx at this point.

[Seth Weber:]

And then I just wanted to clarify the puts and takes around this facility sale. I think you said $11 million benefit, and was that essentially fully offset by these non-routine items? And can you just give us some granularity on what -- I think, there were three buckets there. Can you give us any numbers around those three buckets?

[Chris Hix:]

Sure. Yes, the $11 million net benefit that we referred to was completely offset by the items that we mentioned, the largest of which was a bit over a half came from the -- some of the work that we've done on inventory. As you can see, we've been continuing to drive working capital turns up and installing CBS at greater levels throughout the organization. And as you dig deeper and deeper, you find things that you want to make hard decisions on and reduce Muda [ph] and drive efficiency. And that certainly drove us to make some decisions in the quarter and move on and clean up some things from a process perspective. I'd say the other pieces are roughly half and half between a distributor, large distributor that we had in emerging market region that we felt it was prudent to take a reserve against some of the receivables as we work through financial issues with that distributor and continue to keep the momentum that we have in the marketplace there. And then lastly, the hyperinflation that we've had with Argentina, that has largely wrapped up now and behind us. So those are the principal pieces.

[Operator:]

Thank you. Our next question comes from Andrew Ben [ph] of Bank of America, Merrill Lynch. Your line is now open.

[Unidentified Analyst:]

Just a question on pricing for Fabtech. How should we think about it for '19? Would you have to give any of it back with commodity prices heading down?

[Matt Trerotola:]

Yes. Well, certainly what has happened in this market in the past is that when commodity prices go down, some of that is passed through automatically, contractually and the rest tends to pass through over a little bit of time. And historically, the producers have been able to hold on a little bit of that just like on the way up, you have to play a little catch up on the way down. Maybe you get a little bit of the benefit, but it doesn't sustain And so we're not planning on any significant margin contribution from a steel dropping. We are counting on some net price just from using that muscle that we've got to continue to drive thoughtful value-based price improvements in the business.

[Unidentified Analyst:]

And just a follow-up question, you guys have unique insight into emerging markets just because you have more exposure than others. Could you give us a more detailed view on sort of China, Russia, Brazil, would greatly appreciate it? Thank you.

[Matt Trerotola:]

Yes, sure. So let me start with China, which is we certainly have seen some of the industrial slowing that's been talked about quite a bit, but both of our businesses actually are kind of balanced across stuff that has kind of pure industrial, and things that are a little more infrastructure-related, and whether it's a direct infrastructure like investments in rail or tunnel by the government or kind of indirect infrastructure spending where the government is driving environmental programs that then require companies to invest. And so, what we're seeing is a little bit of a shift to infrastructure as a driver and more than just industrial growth as a driver, but still, the growth holding up in China. And even industrial growth is going to be at a lower level over there, but all indications are that there's still be a pretty decent amount of industrial growth. If we moved to Russia, that's an area where we've had a lot of success over time in our businesses. We've got very strong positions. There's no question that that's a country that last year things got challenging with the sanctions environment over there and that affected the Russian market and continues to have an impact on the Russian market. Then we felt a lot of that last year. And so that's going to continue this year and we think at some point turning in the right direction, but that's a market that we see kind of going sideways at this point in time. Ad in Brazil, we're feeling quite good about. We think the election over there and some of the trends that the local belief is that as we work through 2019 here, that Brazil is going to move in a good, healthy, positive direction and we'll see what the timing of that is. And we're doing some good proactive things in the country to make sure that we're set up to take advantage of that.

[Operator:]

Our next question comes from Matt [ph] of G.Research. Your line is now open.

[Unidentified Analyst:]

Good morning. Thank you for taking my question. So, a follow-up question on Fabtech. When we think about the equipment versus consumables makes, we just continued to grind higher for about two years now. I'm wondering, how do you interpret this? Is it reflecting you think increased equipment market share, the benefit of accelerated depreciation and changing customer behavior? Or is it something else going on or just natural mix out of demand. Thanks.

[Matt Trerotola:]

For us, if I just think about the equipment versus consumables growth rates, I would say the consumables growth rates have tended to be a little higher based on the price that's being passed through. The volume growth in consumables, it's probably the same or lower than the equipment, but the price impact it the most there. On the equipment side, the automation growth comes on that side and certainly is pulling the growth up there and leading to more growth and more of a piece on equipment. And then certainly, some of the acquisitions that we've done, we've acquired more business on the equipment front than we have on the consumables front. And so that's had an impact on our business as well.

[Unidentified Analyst:]

Thank you. And then just on Air & Gas, did the structural changes you're making as you pivoted general industrial open up any past and maybe exceeding mid-high-teens even or I guess mid-teens if it is especially given what some appears to achieve or do you view that more as a tool to achieve that initial mid-teens target? Thank you.

[Matt Trerotola:]

Surely, currently with both of our businesses, our view has been for a number of years, we have a strategic goal getting to that mid-teens target and we've got execution plans for how to get there and we're executing them. And I think that's the case in both businesses that we've got credible execution plans to how to get the rest of the way from where we are now to mid-teens. We have also in both businesses been strategically thinking about and working on, okay, once you get there, how do you go forward? And certainly, the structural improvements to the Air & Gas Handling business with the industrial acquisition as we brought there as well as some of the stuff we've done organically, create a more credible path to get not only to that 15% but to be thinking about how to get beyond that. But we're going to focus on getting their first, and meanwhile, we'll work on the plans for how we get further.

[Operator:]

Thank you, and at this time, there are no further questions. I would like to hand the call back over to Kevin Johnson for any closing remarks.

[Kevin Johnson:]

Thanks, Kelly. Thanks, everyone for joining us today. Look forward to speaking to you on the next call.

[Operator:]

Ladies and gentlemen, this does conclude today's conference. You may now disconnect and have a great day.