Colfax Corporation
Q2 2017 Earnings Call Transcript

Published: 28 Jul 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to Colfax Second Quarter 2017 Earnings Conference Call. I would now like to turn the call over to Mr. Terry Ross, Vice President of Investor Relations. Please go ahead, sir.

[Terry Ross:]

Thank you, Christy. Good morning, everyone, and thank you for joining us. My name is Terry Ross and I'm Colfax's Vice President of Investor Relations. With me on the call today are Matt Trerotola, President and CEO; and Chris Hix, Senior Vice President and CFO. Our earnings release was issued this morning and is available in the Investors section of our website, colfaxcorp.com. We'll also be using a slide presentation to walk you through today's call, which can also be found on our website. Both the audio of this call and the slide presentation will be archived on the website later today and will be available until the next quarterly call. During this call we'll be making some forward-looking statements about our beliefs and estimates regarding future events and results. These forward-looking statements are subject to risks and uncertainties, including those set forth in our SEC filings. Actual results might differ materially from any forward-looking statements that we might make today. The forward-looking statements speak only as of today and we do not assume any obligation or intend to update them, except as required by law. With respect to any non-GAAP financial measures during the call today, the accompanying reconciliation information relating to those measures can be found in our earnings press release and today's slide presentation. Now, I'd like to turn it over to Matt, who will start on slide 3.

[Matthew L. Trerotola:]

Thanks, Terry. Good morning and thank you for joining us today. We are pleased to report another step forward in operating results in the second quarter. We turned the page to growth and with four straight quarters of Gas and Fluid Handling performance and improving welding markets in North and South America, we're positioned to deliver strong organic revenue growth in the second half and build momentum into 2018. Our cost reduction efforts remain on track and we again increased operating margins despite material cost and project mix headwinds. We also completed two exciting technology additions to our ESAB business that I'll share with you and we're working a very active pipeline of bolt-on opportunities to strengthen our businesses. Turning to slide four, I'm happy to say that we returned to revenue growth in the second quarter. The end market environment continues to improve, the broader general industrial market, which accounts for approximately 40% of our revenue, continues to strengthen in most regions. Oil and gas spending is also starting to flow. We now see healthy growth in the welding markets in North and South America. We've averaged almost 9% organic orders growth for the past four quarters in Gas and Fluid Handling that will drive revenue growth in the segment in Q3. We've mentioned on previous calls that we expect a tough Q3 orders comparison due to the three large project wins we announced last year, but even with the difficult comp we expect to see a strong Q4 and solid orders growth for the second half of the year. With our three largest Fab Tech regions back to growth and the long lead time Gas and Fluid Handling projects converting to revenue, we expect organic growth rates to steadily build as we move through the rest of the year. On slide five I want to share with you another example of our traction on growth initiatives as we lean into the improving macro environment. In this case, traction also refers to traction motor blowers, the largest category of cooling fans for rail transportation systems. Last fall at our investor conference, Ian Brander shared Howden's efforts to expand our addressable market by leveraging successful technology from one region across our global footprint. In transportation, Howden is a leading supplier of cooling and ventilation and in Europe and the U.S. to major OEMs such as Alstom, GM and Bombardier. However Howden had not translated this success to emerging markets where local sales support, technical service and manufacturing are necessary to win in these applications. Investing in regional capability in India, China and across Southeast Asia, Howden is on track to almost double its share in this $200 million market. The team took a big step forward in the first half of this year, winning position on a new high-speed rail program in India by combining Howden's proven track record in Europe, commercial leadership in India and local manufacturing capability. This is one of many success stories that are contributing to our very strong industrial orders growth. Turing to slide six, we continue to see the read-through of our CBS productivity and structural cost reduction efforts. Despite lower revenue, we drove solid improvements in operating margin over the prior year. Our first half results demonstrate meaningful year-over-year improvement in segment adjusted operating profit, up 130 basis points in Fab Tech and up 60 basis points in Gas and Fluid Handling where our revenue is just beginning to turn. We remain on pace to realize an incremental $50 million of structural cost savings in the year. For sure, we are starting to reinvest a bit more into business and corporate growth initiatives but we still have our eyes clearly on the path to mid-teen segment margins and our results show that we are fully on track. As we complete our major restructuring programs, we are turning even more organizational effort to process improvement across the enterprise. Our efforts in dynamic pricing and operational productivity in ESAB, value analysis and value engineering in Fluid Handling, and supply chain at Howden, are key priorities to finish managing through today's project mix and material inflation pressures. To give you some texture here, I'd like to share our progress on a breakthrough objective to reduce our processing cost on filler metals in Fab Tech. This is one of our CBS policy deployment objectives. We have long had a strong reputation for high-quality filler metal production. Last year, we discussed the breakthrough we made in filler metal on-time delivery performance in Europe and the U.S., taking OTD from the 80%s in 2014, to above 95% by the middle of 2016. Following the CBS mantra of safety, quality, delivery, cost in that order, the leadership team next turned their attention to driving a breakthrough in filler metal production cost. At our largest and most efficient filler metal plant in Europe, the team focused on process technology development to increase the speed of drawing lines. Through June, average line speed is up over 6%, resulting in additional capacity for very little investment. In the U.S., the teams focused on benchmarking, best practice sharing and traditional lean process improvements to bring down production costs, and they're delivering results. Although steel costs are up, conversion cost per ton is down 7% from the prior year. Our team in Hanover, PA recently shared with me several examples of team projects to reduce the cost of specific products while retaining a high quality that we're known for. On my recent trip to South America, the ESAB teams in Argentina and Colombia showed me war rooms that they are now using to identify and drive funnels of CBS productivity projects. This is a great example of how CBS technology development and thoughtful CapEx investment work together to drive terrific improvements in the business. What's important here is not so much the current year impact but rather the muscle and culture that we're strengthening that will support year in, year out productivity improvements in our plants around the world. On slide seven, I'm very excited to talk to you about two new additions to our Fabrication Technology segment. TBi is a leader in robotic torch technology and has a very strong manual torch position in Europe and China. European users prefer a different style manual torch than in North America where our Tweco line holds the market-leading position. The torch is crucial to welding productivity, and we see this becoming more so over time. This is especially true in robotic welding where we see an exciting technology roadmap of how system components can work better together to increase customer productivity and quality. TBi is a great business with strong growth and healthy margins. It's also a great strategic addition, strengthening our leadership in manual torches and accelerating our progress in the high-growth robotic segment. HKS is a small technology business that adds advanced process analytics and sensors to ESAB. They have decades of experience and demonstrated success driving productivity and quality in large welding customers through advanced analytics. We see a terrific future incorporating HKS technology into ESAB's equipment and WeldCloud platforms. These two acquisitions show how Colfax uses bolt-on M&A to accelerate the growth strategies of our businesses. Acquisitions are not just about adding mass. They're about creating stronger businesses with more exciting futures. Like our Simsmart and AMI acquisitions, these two add innovative new technologies that can create value across our global market-leading platforms. They also bring great talent that are excited to be a part of a global leader like ESAB and a great company like Colfax. It's an exciting time for us. Our markets have turned and we're making good progress on organic and inorganic growth while delivering margin improvement and continuing to strengthen and diversify our company. I'll turn it over to Chris to discuss the financial results.

[Christopher M. Hix:]

Thanks, Matt. Slide eight starts with an overview of second quarter results. Q2 results included the achievement of our fourth consecutive quarter of order growth in Gas and Fluid Handling. Because of the long lead times in that business, we are just now seeing those orders meaningfully convert to revenue and we expect to see healthy levels of organic revenue growth in the third and fourth quarters. Total company sales came in just ahead of expectations with a half point of year-on-year organic growth. Fab Tech growth more than offset the expected volume decline in Gas and Fluid Handling. We also picked up another 1% of growth from acquisitions, and we experienced a small foreign exchange translation headwind. Gross margins were slightly down in the quarter due primarily to Gas and Fluid Handling project margin mix, and Fab Tech timing of steel cost and customer pricing. We expect sequential improvement in gross margins in the third quarter with price increases continuing to read through, and we have a line of sight on an improved mix of projects. Total adjusted operating profit margins expanded 50 basis points because of restructuring actions taken in 2016 and 2017. That progress was made after growth investments that we continue to make in each of our businesses. There was not much excitement below the operating profit line this quarter. Interest expense of $8.4 million was a bit lighter than expected due to FX benefits, but the effective tax rate for adjusted net income per share of 29.9% was a bit heavier. In total, we generated $0.43 of adjusted earnings per share in the quarter. This matched the GAAP figure of $0.43 because our restructuring expense was offset by a $12 million gain from selling a facility in Europe that we closed back in 2016. This gain reduces our previous estimates of $40 million to $50 million of restructuring cost but does not change the expected restructuring benefits this year. The gain on the facility sale provides another example of the benefits available from restructuring, freed up assets that can be monetized to fund our growth. Please turn to slide nine for the discussion of the Fabrication Technology business results. Segment sales of $495 million were up 2% organically in the quarter with acquisitions adding another 2%. Since the end of the first quarter, we saw improved customer demand and organic growth in the Americas. We also had continued strong performance in Russia and India. The Middle East has not yet rebounded back to growth. The price increases we introduced earlier this year began reading through in the second quarter with price of almost 2%. This is helping to offset steel cost that increased earlier this year, and we expect additional benefits in the third quarter. We also expect the third quarter to reflect improved productivity from the capacity we added in Europe in June. Keep in mind that the second quarter of 2016 was the lowest point for steel cost moving through the business and represents the toughest margin comp for the year. Adjusted operating margin of 12.3% represents an 80-basis-point improvement and is attributed to restructuring savings and other productivity gains. As shown on slide 10, our Gas and Fluid Handling segment achieved another quarter of strong order growth, finishing up 7.5% organically. Now, of course, we expect a tougher orders comp in Q3 due to last year's mega orders but the order growth over the past four quarters is creating the revenue growth we expect in the second half of this year. The underlying mining and general industrial markets are still improving. Oil and gas was strong in the second quarter but is very lumpy and we expect this market sector to be flat for the year but with the expanded project funnel that we discussed in our last call. We also see early signs of stabilization in marine, which is a positive sign pointing to potential sector order growth in 2018. Turning to slide 11, the Gas and Fluid Handling segment reported net sales of $471 million in the second quarter, about 1% lower organically than last year's comparable quarter. We also had a point of FX translation headwind. Despite the slightly lower sales, the adjusted operating margin for the segment was 9.8%, a 50 basis point improvement to the prior year quarter. Structural cost and supply chain savings along with manufacturing productivity offset the project margin mix effects. I'll wrap up our prepared remarks on slide 12 with our updated outlook for the year. We have Gas and Fluid Handling orders turning to revenue growth in Q3 along with anticipated further improvement in our Fab Tech business, we expect a strong return to organic growth in the second half of this year. This is consistent with our expectations as originally communicated in December and affirmed on our first quarter call. This growth, in concert with our productivity and cost reduction initiatives should enable us to take another meaningful step toward our mid-teen segment margin goal this year. Based on our performance to-date and with the markets improving in line with our previous outlook, we raised the bottom end of our guidance for adjusted earnings per share from the previously communicated $1.60 to $1.75 to our new forecast of $1.65 to $1.75. The two acquisitions completed in the second quarter do not meaningfully affect 2017 adjusted EPS. This outlook does not reflect any impact from the expected fourth quarter closing of the STE acquisition or any other acquisitions that may be completed from our active pipeline. With that, Christy, we'd like to open the call to questions.

[Operator:]

Thank you. Our first question is from the line of Ronnie Weiss of Credit Suisse. Your line is open. Ronnie Weiss - Credit Suisse Securities (USA) LLC Hey. Good morning, guys.

[Matthew L. Trerotola:]

Good morning.

[Christopher M. Hix:]

Good morning. Ronnie Weiss - Credit Suisse Securities (USA) LLC We've heard multiple companies talk the last couple of weeks about a softer outlook in the power gen market. Was wondering if you could talk about what you're seeing in that market, specifically on the aftermarket side, how it trends in the near term. And then if you're seeing any pressure from some of the bigger OEMs kind of squeezing price through the supply chain?

[Matthew L. Trerotola:]

Yeah. Sure, Ronnie. We have continued to talk about power market as a market of ours that is under pressure, and part of that comes from some of the Chinese pressure that we've been open about. And also part of it comes on the aftermarket side. So, we have felt that pressure. But we don't feel any change versus what we've been seeing in the past few quarters in the power market and our outlook and trajectory to turn over to revenue growth in that segment is consistent with that. Ronnie Weiss - Credit Suisse Securities (USA) LLC Okay. And then on the material cost increases, could you quantify how big that headwind was in the quarter? Kind of how that differs from what was initially expected and then what's kind of baked into the guidance for the rest of the year?

[Matthew L. Trerotola:]

Yeah. Ronnie, we don't quantify the amount of material cost pressure that we feel at any given point in time. But certainly, in the quarter was a low watermark for steel last year for us and it's likely to be the high watermark on steel for us. And so, it's a meaningful factor in the ESAB gross margin pressure that we're feeling there but we expect the material price to stay flat or potentially taper off a little bit through the back half of the year. And we've been working proactively on price that you can see reading through that's going to have us getting fully on the right side of that. And so, between the different quarterly comps as well as progress on the top line price, we expect to have this not be a headwind in coming quarters. Ronnie Weiss - Credit Suisse Securities (USA) LLC Great. Thanks, guys.

[Operator:]

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

[Andrew B. Obin:]

Hi, guys. Good morning.

[Christopher M. Hix:]

Good morning, Andrew.

[Matthew L. Trerotola:]

Morning, Andrew.

[Andrew B. Obin:]

Just a question on Fabrication. I know you did highlight some growth rates that you saw by region, but one of the comments we're getting is that people expecting more organic growth acceleration given what we're seeing from peers and other industrial names. Also European fundamentals look up. So any end market or region that was a headwind and did you have any impact from the timing of the holidays in Europe?

[Matthew L. Trerotola:]

Yeah, Andrew. Thanks for the question. I think if you look across the past couple of quarters, our sequential acceleration is quite healthy and compares favorably. And we do see the potential to continue to accelerate sequentially that we think will put us in a quite competitive spot. That said, certainly, there's some parts of Asia where there's still some pressure. Southeast Asia, some of the back end of the oil and gas pressure there. The Middle East, there's some pressure again, some of the back end of the oil and gas pressure as well. Those are some of the key areas that we're still feeling that. And you mentioned Europe. Sure, there was a little bit of a holiday effect in the quarter in Europe for sure. We'd not rather focus on that, but it is a reality.

[Andrew B. Obin:]

And just – I have to ask, how do you think about your portfolio given some of the recent headlines on potential divestitures and also update on the timing of Siemens acquisition? I think you highlighted Q4 but anything more specific would be great. Thank you.

[Matthew L. Trerotola:]

Yeah. Maybe first, to speak to Siemens, we're right on track to have that acquisition join us in Q4. We cleared the regulatory hurdles in the quarter and are working closely with them on the carve out. I actually got to visit with the team there in the past months and was really excited about what I saw, a team that is very excited to be joining Colfax, very good work going on on the pre-integration planning and on getting prepared to capture the synergies between those businesses both on the market and technology side. So, I'm excited about the path there, and that's going to be a good, positive improvement to our Howden business. As far as your question about the larger portfolio issues, I think you understand we can't respond to rumors in the marketplace. What I've talked about many times is that we're focused on strengthening and diversifying our portfolio over time. That includes bolt-ons like Siemens and adjacencies to our businesses and also working to find the right next platform to grow our company.

[Andrew B. Obin:]

Well, you know, we always have to try to ask. Thanks a lot, guys.

[Operator:]

Thank you. Our next question is from Josh Pokrzywinski of Wolfe Research. Your line is open.

[Josh Pokrzywinski:]

Hi. Good morning, guys.

[Matthew L. Trerotola:]

Good morning.

[Christopher M. Hix:]

Good morning, Josh.

[Josh Pokrzywinski:]

Just maybe pulling that thread a little bit more on the – on what might make the criteria for a new platform, Matt. How closely do you think it needs to be aligned to kind of process in heavy industries and the rest of the portfolio today, if you can you can conceptualize what might be next given maybe some bumpier outlooks on the power market if we go more renewables or oil closer pegged to $50 longer term? Does it change the way you think about deploying capital in process maybe versus wider manufacturing type verticals?

[Matthew L. Trerotola:]

Yeah. Thanks for the question, Josh. As we've done the strategy work starting the back half of last year looking at different possibilities for the next platform for our company, it's really been a broad scan of the industrial landscape with a focus on industries with the right secular growth drivers, the right structure, places where brand matters, and there's value for brand, there's opportunity to get value for innovation and areas that we can envision an entry point, and we can envision that we can add value through CBS. And so it's – and certainly I would say most of the places we've been looking at would be market diversification from some of the major markets that we're in here now. And so that's kind of how we've looked at and thought about it. And it's much less about a specific type of manufacturing process and more about the fundamental attractiveness of the industry because I think we found that CBS can be applied across a full range of manufacturing processes and project-based businesses. And so we think that we can drive improvements with CBS in a range of industries.

[Josh Pokrzywinski:]

Got you. That's helpful. And then just as a follow up, on the new orders that you're booking today, how would you characterize backlog margins? Have you seen any, I guess, degradation maybe off the bottom, people are still pretty competitive out there in the more project space. I guess it's more of a Fluid Handling question than anything else, but as it applies to the rest of the portfolio I guess, it'll still be wherever you want to run with the answer.

[Matthew L. Trerotola:]

Yeah. Josh, I think we've been open through the back half of last year that things got pretty competitive for big projects and certainly what you're seeing in our quarterly results is a quarter with a little bit more content from some of those large projects that were more competitively won last year. And I'd say as the markets have gotten more constructive, there has been a little less of that super competitive intensity. But, it's still a fairly competitive environment for large orders. And so, we continue to work very hard on improving our cost base, our supply chain, the effectiveness of our project management to be sure that we can have strong margins. And as we look at our backlog development and the progress in our initiatives, we definitely can see stronger project margin performance in the back half of the year.

[Josh Pokrzywinski:]

Got you. But it does sound like backlog margins have maybe picked up over the past six months.

[Terry Ross:]

No. I guess I don't know if we're trying to imply that they're ticking up. I think you just had a little bit of a timing issue going on in Q2. I think that's what we're trying to suggest in our prepared comments there. Just some of the projects that had a little bit more – a different margin profile we ended up getting in Q2. As we look at Q3, we see it sort of snapping back to a better place. I think the overall profile of the backlog hasn't really changed demonstrably over the last six months.

[Josh Pokrzywinski:]

Okay. Great. Thanks for the color, guys.

[Operator:]

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

[Jeffrey Hammond:]

Hey. Good morning, guys.

[Matthew L. Trerotola:]

Good morning.

[Matthew L. Trerotola:]

Good morning, Jeff.

[Jeffrey Hammond:]

Hey. So, just back on Gas and Fluid, maybe just give us a little more granularity on how you think the core growth rates look as you ship some of this backlog. And then at what point do you start – you've had four quarters kind of 5% to 10% order growth. Like, when do we start to see that or I guess the sales line catch up?

[Christopher M. Hix:]

So, Jeff, the way that we're – the way that we think about this is, and we've been positioning it this way though since our December call is, as we look at the way the backlog – what we had in backlog, the order development that we expected to see, that we would end up with sort of a sharp transition to growth in the second half of this year. We're still making that same call. The way the orders come in and go out, as you know, that tends to be pretty lumpy there. And we know we'll end up with a tougher comp in Q3. So, it's hard to draw a real tight correlation between what's going on in orders in any particular quarter and the revenue side. But we know we're set up well for the second half of this year, and the order trajectory that we've got should take us through the back half of the year very nicely.

[Jeffrey Hammond:]

Okay. And then the two acquisitions, looks like per the Q, you spent about $50 million. What's kind of the revenue run rate of the two deals on an annual basis?

[Matthew L. Trerotola:]

I think we mentioned in a previous setting that it's about $30 million of revenue between the two deals and that's – we're also buying some really great technology, particularly in the HKS deal.

[Jeffrey Hammond:]

And the returns in those businesses kind of line up with Fab Tech today or...?

[Christopher M. Hix:]

Yeah. We'd expect those to achieve our objective as we communicate of getting to that 10% within the kind of three- to five-year timeframe. So, they're attractive returns. We've got to grind our way through the purchase accounting in the first couple of quarters. So, you may not see a lot of contribution right out of the gate, but it'll come right on the heels of that.

[Jeffrey Hammond:]

Okay. Thanks, guys.

[Operator:]

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

[Nathan H. Jones:]

Good morning, everyone.

[Matthew L. Trerotola:]

Good morning.

[Christopher M. Hix:]

Good morning.

[Nathan H. Jones:]

I know we talked about the raw material impact potentially on the Fab Tech business. Gas and Fluid Handling's a little bit more of a bid business. So, I'm wondering if you could talk about what the raw material exposure is there. How much hedging you do on, say, some of those projects that were booked in the second half of last year, and if there's any impact on the bid margins from the changes in steel prices?

[Matthew L. Trerotola:]

Yeah, we've got a pretty rigorous approach to making sure that we manage the risk between what we buy and what we sell on projects and match that up. And so, the raw material impact to Gas and Fluid Handling is fairly limited. What for sure we've been doing through the back half of the year and into this year is getting more and more aggressive in terms of how we drive reductions in those inputs to those projects based on the competitiveness that there was down in the back half of last year and into the early part of this year.

[Nathan H. Jones:]

So, you guys have talked about a sharp recovery to growth in the Gas and Fluid Handling business. You've had 9% average growth there over a four quarter period. There is some sequencing of backlog questions there. Is there any granularity you can give us to how we should think about that backlog sequencing out over the next, say, three or four quarters?

[Christopher M. Hix:]

I would expect that we would have a similar profile to what we've seen where we tend to build a backlog and then as we get in the back half, especially in the fourth quarter where we tend to pull some of the backlog in and convert that over. That's a fairly standard profile that we've had over time.

[Matthew L. Trerotola:]

And the only thing I'd add to that is that we know that we need to keep – we'll have a tough comp in Q3. But setting aside the comp in Q3, on an ongoing basis, we'll have to keep growing our revenues in order to make sure that we can stay in a healthy, positive – or keep on our orders in order to stay in a healthy, positive revenue growth range, and we've got the funnels that support ongoing order growth except for the tough comp in Q3.

[Nathan H. Jones:]

Okay. Thanks very much.

[Operator:]

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

[Andrew Kaplowitz:]

Hey, guys. Good morning.

[Matthew L. Trerotola:]

Good morning.

[Andrew Kaplowitz:]

Matt or Chris, did you see any difference in the strength of your consumables business for your equipment business within Fab Tech? We did hear a little bit more weakness from some of your competitors in their welding consumables business mostly related to oil and gas. It doesn't seem like you saw it and you have a large consumables business, but maybe differences between the two businesses within Fab Tech would be helpful.

[Matthew L. Trerotola:]

Yeah. I can say we saw a little bit healthier equipment business than consumables, but I wouldn't say that we're seeing a dramatic difference there.

[Andrew Kaplowitz:]

Okay. And then, Matt, last quarter you suggested you could grow backlog in Gas and Fluid Handling throughout the year. You did a nice job of that in Q2. You obviously have talked about the tough order comps in 3Q. As you look at sort of recent oil price weakness, I just want to clarify something. I think you had said last quarter that oil and gas would be relatively flattish, and now you're saying it could be down a little bit. Do you still think you can grow overall backlog by the end of the year versus where you are today?

[Matthew L. Trerotola:]

I think in our prepared comments, we talked about oil and gas expectations being relatively flat for the full year. And I think that's the commentary that we had. So, that's consistent with our previous comments.

[Andrew Kaplowitz:]

Okay. That's helpful. And, Chris, maybe one more thing. Currency guidance for the rest of the year. Did you – clearly, the dollar here has weakened a bit, so, does that factor into the EPS raise at all?

[Christopher M. Hix:]

Yeah. Currency for us has been a little – I mean, it's just a couple of pennies here and there of a bit of a tailwind. So, the assumption that we have is the rates that we saw in June are pretty much a jumping off point for the rest of the year. And so we may pick up a couple of pennies here or there but there's not much there.

[Andrew Kaplowitz:]

Okay. Thank you, guys.

[Operator:]

Thank you. Our next question is from Joe Ritchie of Goldman Sachs. Your line is open.

[Evelyn Chow:]

Good morning, guys. This is Evelyn Chow on for Joe.

[Matthew L. Trerotola:]

Hey, Evelyn.

[Evelyn Chow:]

Maybe just sticking with Gas and Fluid Handling for a second and the back half outlook in particular. If I kind of put together your comments, you mentioned a sharp transition back to positive growth. Mix is getting better. I think cost outs appear to be a little more back-half weighted. So, I guess I'm just wondering, is there a scope for sequential improvement in both growth and margins for this segment through the rest of the year?

[Matthew L. Trerotola:]

Yeah. I think the answer is yes. And certainly we'll be making some choices based on how the growth comes out. We'll be making some choices about what kind of reinvestment we do in the business. But our forecast has improvements in both growth and margin in that business in the back half of the year.

[Evelyn Chow:]

Got it. And then maybe turning to free cash flow for a second, very strong performance so far in year-to-date. Maybe could you give us an update on your expectations for working capital potentially being a source of cash and maybe any implications for conversion for the year?

[Christopher M. Hix:]

Yeah. Sure. We entered the year with a budget that essentially showed us generating cash from working capital here. And as we've seen a little bit stronger growth, that's put a little bit of a challenge on that. But the teams have done really well. And as a result of that, as you've seen, we've generated almost twice as much operating cash this year year-to-date as what we had last year. So, there's still more opportunity out there. And I think the question will just come down ultimately to how does the growth especially in Q4 look? Stronger growth will maybe challenge that a little bit, but the working capital turns are expected to continue to improve throughout the rest of the year.

[Evelyn Chow:]

Thanks a lot, guys.

[Matthew L. Trerotola:]

Thanks, Evelyn.

[Operator:]

Thank you. Our next question is from Joe Giordano of Cowen. Your line is open.

[Joseph Giordano:]

Hi, guys. Good morning.

[Matthew L. Trerotola:]

Hey, Joe.

[Christopher M. Hix:]

Morning, Joe.

[Joseph Giordano:]

Just want to talk a bit about, like, revenue conversion expectations for the rest of the year. And relative to revenues coming in a little bit better here than people probably expected, margin conversion on that probably a little bit lighter. How much of that $50 million in savings are you reinvesting and how should we think about conversion going for the rest of the year as the orders kind of deliver?

[Christopher M. Hix:]

So, what I would say is that we went into the year, I think, with a clear plan that said that we would capture the $50 million of savings. We also had a plan that we discussed about reinvesting some of that for growth. We're right on track with that, and our earlier comments, I think, supported that. As we look forward there, we're going to continue to be investing in the growth side of things. And in terms of conversion, our usual rule of thumb that we talk about, which is sort of 30%, we think that's still the right number to look at. As you go sequentially from Q2 to Q3, some of these other impacts we talked about will also come into play. So you may see sequentially it be slightly better than that which would contribute to a little bit higher gross margin performance in Q3 versus Q2.

[Joseph Giordano:]

Okay. And apologies if I missed this in the very beginning of the call, what's your current full-year organic expectation for the business?

[Christopher M. Hix:]

We went into the year talking about sort of flat to down 2%.

[Joseph Giordano:]

Right.

[Christopher M. Hix:]

And as we experienced slightly higher growth in the first quarter and a little bit more in the second quarter than what we expected. I think in the first quarter we sort of steered people up to kind of a plus 1%, minus 1% and you can probably bracket that with another 1% in either direction.

[Joseph Giordano:]

Okay. That's fair. And just last, are you hearing anything like on a conversion in terms of like customers delaying order delivery and pushing back on that. Is that something you guys have come across at all this quarter?

[Matthew L. Trerotola:]

We haven't had any significant issues with that. In every quarter there are some of the normal challenges of projects that you think are going to deliver in the quarter and don't and projects that do deliver a little bit faster. And again, I think that's some of what affected our project mix in the quarter was what actually was delivered this quarter versus might have come in a later quarter. And beyond that we're not seeing anything extraordinary there.

[Joseph Giordano:]

Great. Thanks, guys.

[Operator:]

Thank you. Our next question is from Seth Weber of RBC Capital Markets. Your line is open.

[Seth Weber:]

Hey. Good morning, everybody.

[Christopher M. Hix:]

Seth.

[Matthew L. Trerotola:]

Good morning, Seth.

[Seth Weber:]

I just wanted to go back to Fab Tech for a second. So I think on the last call you talked about a price increase late in the first quarter and pricing was actually pretty good here for the second quarter, 2%. I just wanted to clarify, was there another price increase that's gone into effect here in the second quarter? And is that on both equipment and consumables? Or should pricing continue to get better from here, I guess, is my question.

[Christopher M. Hix:]

Yeah. So, first, we've got a very global business, and so there's a lot of different countries where the pricing decisions are being made month-by-month, quarter-by-quarter. But that said, there's no question that we made some price moves in the first and second quarters that you're starting to see in that price result. The very tough kind of high water mark versus low water mark on steel is making that a little harder to see in the gross margin line. As we move through the year, we do have some additional price increases to make sure that we get fully on the right side of this. And the steel will – steel comp will get more favorable. And so we'll no longer have the gross margin pressure that we saw in Q2.

[Seth Weber:]

Okay. And just to be clear, are you putting the increases through on both consumables and equipment, or primarily just consumables at this point?

[Matthew L. Trerotola:]

Well, every year, we have decisions that are made related to equipment price, and there's no question there's been some equipment price moves. But this specific focus is significant on the consumable prices that will offset the effects that we've seen of rising steel, and that's certainly the vast majority of the price moves that we're making. And you asked what will happen through the year. As we move through the year, we expect to get more price through to the market, but we'll also get into an environment where we're comparing to quarters last year where we started to move price through as consumables move up. And so you may not see that total reported price go up, but you'll see our gross margins improve.

[Seth Weber:]

Right. That makes sense. Thanks. And just one other clarification, was Europe up for Fab Tech? I just wanted to kind of make sure I understand what's going on in Europe.

[Matthew L. Trerotola:]

Yeah. Europe has turned over last year and has stayed in a positive growth zone, some quarters better than others. And as was – I think there was a question earlier about the Easter comps and things. And there's no question there's a little pressure on Europe in the quarter from those kinds of issues, but Europe was in a positive zone, and we expect to continue to stay in a positive zone.

[Seth Weber:]

Perfect. Thanks very much, guys. Appreciate it.

[Operator:]

Thank you. Our next question is from Matthew Trusz of Gabelli & Company. Your line is open.

[Matthew Trusz:]

Good morning. Thank you for taking the question.

[Matthew L. Trerotola:]

Good morning.

[Matthew Trusz:]

Matt, given what you're seeing in oil, given what you're seeing in China, how would you compare your business confidence and overall industrial outlook today to that that you gave us at the end of the first quarter?

[Matthew L. Trerotola:]

I would say that the view today is similar to the end of the first quarter. I think I was clear at the end of the first quarter that I felt like we were in a different zone. I'd been pretty cautious as we worked through last year from what I was seeing and hearing, and in the first quarter we started to see a number of things turn over. And I'd say in terms of – the broad view, the only real change here at the end of the second quarter is some of the kind of firmed up acceleration in North and South America in welding and what that says about what can happen in the global welding growth in the back half of the year. But I think as far as segments like oil and gas and power, we're in a similar zone now as one quarter ago from my vantage point.

[Matthew Trusz:]

Great. Thank you. And then, just – with the additional welding technology acquisitions you continue to make, what's your assessment of how your welding automation and technology portfolio stacks up against your major competitors, especially in North America?

[Matthew L. Trerotola:]

We've got some great technologies in welding. We've got some specific technology areas that we have our strategic focus on and in those areas I think we've got some strong positions. We've got some things that we're doing to continue to build and strengthen them. And so, on the projects that we compete for, we compete very favorably and I think win our fair share of the projects. But there are some parts of welding technology that have not been a focus area for us and that we are – either don't participate or participate more on a specific regional basis.

[Matthew Trusz:]

Great. Thank you.

[Operator:]

Thank you. Our next question is from Joe Giordano of Cowen. Your line is open.

[Joseph Giordano:]

Hey, guys. Thanks for letting me do the quick follow up here. Just related to what you kind of just talked about, when I look at your guidance year, so raised to the low end with organic kind of ratcheting up each quarter in your view for the last two. Like do you feel like your guide at the high end is like incrementally more conservative now than it was before? Like how did you think about wanting to maybe not nudge that up and remain balanced? How have those kind of internal discussions progressed?

[Christopher M. Hix:]

As we've gained additional growth and confidence in the year. We've chosen to reflect that by taking up the bottom end of the range there. So, we've tightened it up. That's on the heels of the first quarter shifting the whole guidance range up a nickel. So I think we've demonstrated that sort of continued confidence and strengthening in the business throughout the year.

[Terry Ross:]

Yeah. I'd also add other than the sequential improvement coming a little sooner in Fab Tech in Q1. We came in to the year with an expectation of these markets on an improvement path and I think they've been generally in line with our expectations at this point.

[Joseph Giordano:]

Thanks, guys.

[Operator:]

Thank you. And that concludes our Q&A session for today. I'd like to turn the call back over to Mr. Terry Ross for any further remarks.

[Terry Ross:]

Thank you, Christy. And thank you, everyone, for joining us today. We look forward to updating you on our next quarterly call. Thank you. Take care.

[Operator:]

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