Colfax Corporation
Q2 2015 Earnings Call Transcript

Published: 24 Jul 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Colfax Corporation Second 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. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today’s conference Terry Ross, Vice President of Investor Relations. You may begin.

[Terry Ross:]

Thank you, Kat. 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 today on the call are Steve Simms, Matt Trerotola; and Scott Brannan. Our earnings release was issued this morning and is available in the Investors section of our website colfaxcorp.com. We will also be using a slide presentation to supplement today's call, which can also be found on the investor section of the Colfax 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 statement 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 during the call today, the accompanying information required by SEC Regulation G relating to those measures can be found in our earnings press release and supplemental slide presentation under the Investors section of the Colfax website. Now, I'd like to turn it over to Steve.

[Steve Simms:]

Good morning and thank you for joining us today. Before I discuss our results for the second quarter, I would first like to address today’s other news about my intention to return to retirement and the appointment of Matt Trerotola as CEO and member of our Board. Matt who was most recently an Executive Vice President at DuPont is an outstanding addition to our already leadership. Mitch Rales and I have known Matt since his days at the Danaher Corporation, and we are thrilled to have landed someone with a proven track record for delivering results, and who has an in-depth knowledge of the Colfax business system. While we recognize the headwinds in most of our industrial markets, we believe this is an excellent time for Matt to take over the reigns for Colfax given the strong foundation that we’ve built. And from my part, now is the right time for me to focus on family and transition back in to retirement. Importantly, while I am retiring as CEO, I will support Matt through his transition and continue on with Colfax as a member of the Board of Directors. Matt is with us today and will make a few comments later. And he’s looking forward to meeting with you in the coming weeks and months. But now let’s focus on today’s earnings announcement. Adjusted EPS was $0.50 per share, which represents a 4% increase from the $0.48 per share reported last year. The increase was driven by continued margin improvement in our gas and fluid-handling segment, non-repeating one-time expenses experienced in the prior year, and lower interest expense which were largely offset by continued volume weakness in our end markets. Net sales were 1.25 billion for the second quarter, a decrease of 15% over the same period last year. This consists of 5% organic volume decline and a negative 12% impact from foreign exchange, partially offset by 2% growth from acquisitions. Our gas and fluid-handling segment performed as expected, down less than 1% organically. But we continue to see a very difficult market in our fabrication technology business, which finished the second quarter with an 8% organic drop in sales. Given the continued the weak market environment, we no longer expect a strong enough second half to deliver flat organic performance for the year in our fabrication technology segment. Scott will discuss our revised guidance later in the call. Turning our business segment, gas and fluid-handling net sales for the second quarter were $505 million with a 1% organic revenue decline and a 10% foreign exchange impact. Adjusted operating margin for the segment continues to show strong improvement at 12.7% in the second quarter. The teams continue to execute well on productivity, restructuring and cost control actions. Last year’s second quarter segment adjusted operating profit of 8% was impacted by several one-time events that we noted in our announcement but did not adjust out of operating profit. However, even after factoring last year’s one-time negatives, adjusted operating margins improved 150 basis points demonstrating substantial improvement across the business. I would especially like to highlight execution in the fluid handling business, where the team has made sustained improvement to delivery and project management performance. Orders for the second quarter were $502 million, down 5% organically. This was in line with our expectations reflecting a non-repeating 2014 SCR orders which largely concluded in the third quarter of last year. Overall, we saw another solid quarter for bookings in oil and gas and an uptick in power generation orders offset by a weakening marine market. As in previous periods, I will note that the timing of large project orders makes comparisons across sectors and quarter difficult. We will discuss market trends in more detail starting with gas and fluid-handling largest end market, power generation. Revenues for the quarter increase by 1% organically, while orders increased by 11% organically. The new build activity in China offset the last of the SCR retrofit project in this geography. We also saw solid aftermarket booking in North America and continue to achieve encouraging growth on a year-to-date basis with this important initiative. We also continue to make progress in Southeast and East Asia, where as we’ve discussed in previous calls is a key area. During the period, we also achieved an important award from an Asian [EPC] for a large project in North Africa. While we continue to expect our full year orders and revenue to be down in power due to the gap between regulatory cycles, the outlook for new power construction is stable and we will expect the next regulatory driven cycle articulate reduction in China to result an order later this year, with revenue by 2016. Our second largest market for gas and fluid-handling is oil, gas and petrochemicals. Sales were up 3% organically in the second quarter, as expected due to the timing of large orders and backlog and orders increased 31% organically. The growth in orders was led by Howden’s compressor division which was awarded an approximately $40 million contract to supply compressor systems to a Queensland Curtis coal bed methane project in Australia. This win was made possible by the Howden’s previous success with this customer. Because of Howden’s outstanding delivery, excellence in product performance and project management, Howden was asked by this customer to take on a significantly broader scope of supply than we would have previously provided to this type of application. This expansion of scope is one of the growth initiatives we shared with you at our December investor day. Although we’ve been able to offset the well documented macro headwinds with success in geographic and application development initiatives over the last three quarters, we’ve also benefited from the timing of large orders. With these recent wins, we now expect revenues and orders for the full year to be roughly flat for the prior year. Turning to Marine, which is primarily served by fluid-handling; revenues were up 9% organically, while orders were off 51% organically. Both driven primarily by the multi-year $30 million defense contract we were awarded in the second quarter of 2014. However, we also saw a sharp fall-off in commercial ship building activity. The steepest decrease was in spending on offshore support vessels for the oil and gas sector. But merchant marine demand was also down. Even in the down market which is likely to continue to decline through 2016, we are positioning to expand our opportunities in some growing ship classes in technology trends Earlier this year, we delivered a new high volume centrifugal pump designed for water services on the largest vessel. This product launch opens a new segment of the commercial marine market to Colfax. Our initiative to increase aftermarket share is also achieving our target, and we had double-digit aftermarket growth in the quarter. Overall, we expect generally flat revenue in the market for 2015, but a decrease in orders due to lower commercial marine new ship contracts and the non-repeating defense awards. Looking at the mining market, organic sales increased by 12% while orders for the quarter posted a 23% organic drop. Globally, mining capital spending remains very low, but we are focused on wining targeted projects. We expect a challenging environment in mining to persist throughout the year. General industrial end market sales were off 10% organically and orders also fell by 10% as well. These declines were almost entirely driven by very little capital spending in steel compared to strong spending in steel customers in 2014. With the exception of steel, several sectors of the general and industrial market have seen modest growth. Looking forward we expect steel to continue to be weak for the balance of the year, which will largely offset modest growth in other end markets. Despite the lower short-term CapEx cycle in several of our end markets, one of our key growth initiatives is to capture higher aftermarket content from our growing installed base. And we’ve seen encouraging traction in several areas of our business. Applying the Colfax business system tools has been a key enabler for us, and is a good example of how power of CBS beyond manufacturing. Using value selling standard work and daily management tools, teams were able to reduce [quote] response time, improve targeting and lead conversion effectiveness and standardizing offerings and value proposition. In one example the team reduced [quote] response time from and other efforts to reduce quote response time from days to hours led to process automation in the development of a mobile application that allows immediate response to the maintenance person at a customers’ location. In another part of the business, improvements in the targeting and funnel management process led to a doubling of North America power turnaround project wins. Before we leave gas and fluid-handling I want to publicly welcome the Roots explorer and compressor team to Colfax. We announced this acquisition in May and closed the transition, set transactions on June 30. The business unit will now be known as Howden-Roots, and we celebrated with kick-off meetings at the Howden-Roots facility in Connersville, Indiana. Now let’s turn to the results for fabrication technology. Fabrication technology performance was again below our expectations. Revenue for this segment was $521 million down 8% organically. Similar to the first quarter, our biggest headwind was the approximately 30% drop in oil and gas spending. In addition weak demand in certain key geographies such as Australia, in the Pacific region of South America as well as double-digit drop in market activity for large capital projects especially in Asia. Unfortunately, we also experienced softness in our North American distribution channel. This was in large part caused by the supply chain issues that affected us in the first quarter. However, our Root cause analysis also identified several areas of improvement such as distributor program support which we are now addressing. On a more positive note, for the past several quarters, we’ve discussed our improvements in segmentation, in user focus and value selling and highlighted several examples of customer conversions. This continues to be a bright spot for us, and we saw overall modest growth in the direct serve part of our business. Distribution remains a critical challenge for us and we’ve discussed in previous calls that Victor acquisition is significantly broadening the product bundle we offer to our distributors. Earlier this year, our North American distribution sales team recently completed the realignment necessitated by the integration of ESAB and Victor. This combined team now provides our distributors consistent account management and a solid foundation from which to move forward. And we’re also beginning to see traction from channel programs launched with our distributor partners. Fab tech adjusted operating margin was 10.4%, below our expectation and driven largely by the weak volume. Price continued to be slightly positive, however this was offset by a negative mix resulting from weakness in oil and gas products as well as equipment. We are committed to improving margins through this period of weakened markets, and lower than expected volume performance. To achieve this we recently announced several major restructuring projects including the consolidation of our manufacturing footprint in the US, Brazil and India. We’ve also taken additional G&A cost reduction actions in the quarter. As in gas and fluid-handling, our CBS culture is essential to the improvement activities taking place. The ESAB platform conducted their 2015 President Kaizen week in the Denton, Texas plant which came with our Victor Technologies acquisitions. Four teams comprised of executives and Denton associates completed activities to simplify customer pricing and terms, implement demand internally and with suppliers and reduce setup time on critical equipment. These Kaizen activities help free up the four space and machine capacity required for the transfer of products from Florida and South Carolina. I continue to be pleased with the talent and performance of the Victor team, as they learned and embraced CBS. And now I will turn it over to Scott to provide more details on the financials.

[Scott Brannan:]

Thanks Steve. Sales for the second quarter were 1.025 billion down 5% organically compared to the 2014 second quarter sales. Foreign currency declines across the board but most significantly in Europe, Russia and Brazil were a 12% drag on reported revenue performance. Adjusted operating income was a 105 million, representing an adjusted operating margin of 10.3% up from 9.1% in the prior year. But as Steve discussed, 2014 second quarter included several non-repeating one-time costs. Excluded from the adjusted results are $8.8 million of restructuring cost incurred in connection with our cost reduction projects. Corporate and other costs of $12.7 million were in line with expectations. Adjusted interest expense was 9.5 million for the quarter, which includes approximately $2 million of non-cash amortization of debt discount and deferred issuance cost, as well as facility fees and the cost of bank guarantees and letters of credit. This was slightly better than expectations, as both debt levels and the short-term LIBOR rates remained lower than anticipated. Excluded from our adjusted interest is $4.7 million of non-cash write-offs of previous debt discounts and deferred debt issuance costs associated with our refinancing completed in June. As previously disclosed these refinancing extended maturities over bank facility to five years and provided a covenant structure commensurate with our improved credit ratings and financial position. Our effective tax rate or adjusted net income and adjusted net income per share of 28.3% for the quarter was in line with expectations. Finally, backlog in the gas and fluid-handling segment was 1.4 billion at quarter end, the book to bill ratio was seasonally in line in the second quarter at 0.99 to 1. Turning now to guidance for the balance of the year; given the weak end market demand, particularly in welding and the impact of the Roots acquisitions, which closed in the first week of the third quarter, we are adjusting our guidance as follows

[Steve Simms:]

Thanks Scott. While we’ve not changed our perspective on the long term growth of our served markets, we expect a weakness we are seeing to continue for the near term. As a result, we’ve taken steps to size our business appropriately for the current level of demand. Last fall we began accelerating our cost reduction and restructuring actions in response to the volume softness we began seeing. In the second quarter, we took additional actions across all business units to ensure profitability through the cycle. At the same time, we remain committed to organic growth and the preserved key growth investments including new product development, channel programs and targeted sales resources. In line with our ongoing plans to strengthen each of our platforms, we are deeply committed to our strategy of Bolton acquisitions and remain confident in the strength of our M&A pipeline, especially in the gas and fluid-handling space. Roots is a terrific example of the quality of opportunities we see and we are working on other attractive deals that align with our financial discipline, match our organizational capacity to execute, and could be announced later this year. From a broader, longer term perspective, I believe that Colfax has made exceptional progress against nearly all of our strategic priorities. We’ve grown our leadership talent pool, effectively integrated the Charter acquisition, and added multiple strong brands to our portfolio to create a truly unified global business. We’ve also enhanced our position in attractive vertical in geographic markets, expanded our long term organic growth runway and identified opportunity for further operational improvement. With this strong competitive foundation in place for most of our businesses, I felt that now is a good time for a new leader to take Colfax forward in to its next phase of growth. In line with, I’d like to share a bit more about Matt, and then he’ll say a few words before we open our session for Q&A. I first met Matt when he joined the Videojet team at Danaher in 2007. I was asked by Larry Cop to help mentor this high potential executive and support Matt as he had adapted to our culture at Danaher. As we get to know Matt, you’ll learn, as we did at Danaher, that he is an extremely talented executive. Matt has spent most of his career at DuPont, Danaher and McKenzie. At DuPont, he started in sales and marketing and held a number of management positions. He was most recently an Executive Vice President responsible for the $6.3 billion safety and protection in electronics and communications segment. He also managed the Asia Pacific region, while serving in the office of the Chief Executive Officer. While at DuPont, Matt was responsible for applying innovation to improve margins and accelerate growth in global businesses. At Danaher, where he was employed from 2007 through 2013, Matt was the President of Videojet and Group Executive of Product IT. In these roles he accelerated organic growth and made acquisitions that both strengthened and redefined the group. In his last role at Danaher, he was the Group Executive of Life Sciences. While at Danaher, he developed a deep understanding and appreciation for the Danaher business system, the core values and philosophies that we share here at Colfax. In addition, he brings a strong set of leadership and management skills, a track record of delivering organic growth, significant expertise in global manufacturing and engineering businesses and a deep international experience. The combination of Matt’s experience and passion for continuous improvement is why we selected Matt to be our next leader. I’d like to hand it over to Matt to say a few words.

[Matt Trerotola:]

Thank you for those nice words Steve. Let me start by saying that I am excited and honored to be joining Colfax as CEO. As Steve mentioned I have known him and Colfax for some time. I also know Mitch Rales. Needless to say, I’ve been extremely impressed by what I know about the company, including its talented management team and dedicated employees. Steve and the whole team here at Colfax have done an exceptional job positioning the company for the future. And with this strong foundation in place, I believe there’s significant opportunities to further develop the company’s international footprint and continue to deliver a significant growth, strong performance and shareholder value well into the future. I will work to build upon the foundation that Steve and his team have established to take Colfax forward in to its next phase of growth. I know I’ll been speaking with in the meeting with many of you in the coming weeks and months and I’ll look forward to that opportunity and the leading future earnings calls. Steve, I will turn it back to you.

[Steve Simms:]

Thanks Matt. At this point, I’d like to open the session up for Q&A around our earnings, and we could also take a question or two for Matt.

[Operator:]

[Operator Instructions] And our first question comes from the line of Mark Douglass with Longbow Research. Your line is open.

[Mark Douglass:]

Hi, good morning everybody and congratulations on your second retirement Steve. Looking to the balance of 2015, do we expect and on the margin side do you expect GFH to kind of hold at this 13 level and fab tech at the 10%ish level or with similar cost actions do you think it actually can be a little bit better in the back half.

[Scott Brannan:]

I think on the fab tech side, we would expect to see flattish type of margins as you outlined there. On the gas and fluid-handling side, if we exclude Roots which is largely dilutive because of the first year accounting items. Excluding that I think we’ll see an improvement on the margins in the gas and fluid-handling segment.

[Mark Douglass:]

And the on restructuring costs in the slide deck, you are still showing 15 million of anticipated restructuring cost. But it sounds like you accelerated restructuring, what’s going on there and also what kind of savings are you anticipating this year and then next year.

[Scott Brannan:]

Well we’ve essentially come up with some savings in the existing programs that we are using to fund the new program that Steve mentioned today. So we think in totality that we will still spend about the same amount of money as we originally projected. Most of the savings on the fab tech projects are going to be realized in 2016, which is consistent with the margin comments I made. In gas and fluid-handling some of the restructuring savings will be realized in the some in the third and more on the fourth quarter, and it’s something in the $5 million to $10 million type of range.

[Operator:]

Thank you. Our next question comes from the line of Kevin Maczka with BB&T Capital Markets. Your line is open.

[Kevin Maczka:]

So starting on fab tech, if we go back to Q1 in the negative 6 organic then, I thought one of the takeaways was we felt like we had underperformed the underlying market a bit and there were some internal issues you were working on that would be corrected and that would help us get back to more of a flat type of an outlook for the year. So I am just wondering, and it sounds like Steve from your comment about the North American distribution, may be there’s still some of those issues. I guess I am wondering how much of this is the market further softening from what you saw then versus may be some of the internal issues not been corrected on the time you thought.

[Steve Simms:]

That’s a good question. As we look at it, I think that we have seen an industry which has softened further beyond what we anticipated in quarter one and we see that softening occurring really on a global basis. The softening that we have seen is driven by really two factors, one, virtually any end market that’s tied to oil and gas, the oil pipeline work, offshore oil wells, OSV, we’ve seen significant further deterioration in those trends and accelerated in to second quarter. The other key part of the industry that I think is depressed is that those industries or product or services associated major [cap] investments, so we’ve seen a major drop off in the industry as well, and our business as we said in the remarks has largely followed those trends. Coming specifically back to your comments, Kevin around the trends in North America, we in fact, you are exactly right in the first quarter we experienced a couple of issues related to both the port strikes on the west coast as well as a manufacturing challenge in our Mexico hammer steel facility. We talked about putting in place the appropriate counter measures to clear up those issues. The fact is, we are now at one of our strongest levels of on-time delivery from Mexico that they have realized in their short history. The fact though is that it took us a little longer in to the second quarter to fully correct the [past due] situation we encountered. So that is well under control to this point, business is performing well and so we don’t feel that we have the service or delivery issues holding us back as we had in quarter one. But we certainly took a little longer in to the quarter two to correct those problems.

[Scott Brannan:]

And then I would add that we don’t see the pickup in demand in the second half that we had in our original guidance, so we’ve adjusted our guidance down the, as Steve mentioned the impact from the oil and gas segment as well as the capital equipment segment as well as standard equipment to some degree. We don’t see the pickup at this point that we expected earlier in the year.

[Steve Simms:]

What I would add Kevin is, the growth areas that we have seen and I think these are true on a global basis, but we certainly see them in our largest market. Our largest markets are obviously Europe East and West as well as Latin America and then third would be North America. But we would look three key drivers organic growth inside of the industry, it’s the rail car industry, its pipe mills that are in support of the distribution of natural gas and then finally transportation. Transportation is less a factor for us here in the US, a little more of a factor in Europe and that’s been positive. So those are the three drivers of any growth within the industry that we see. I think we would all say that. And then secondly the factors that Scott and I noted before in terms of those issues that are depressing overall industry growth or for fab tech.

[Kevin Maczka:]

Got it. Very helpful, and if I can just ask one follow-up on price mix, I think the negative 3,9 was the softest reading there we’ve seen since you’ve had that business. But you sounded like the price component was still positive. Can you talk about your outlook there with such a [tapping] demand environment, do you expect that to remain positive going forward.

[Scott Brannan:]

We do. We don’t see any exceptional pricing pressures in the market. So that’s positive we expect to be able to maintain. Unfortunately the negative mix that you’ve pointed out which is exactly related to this comment Steve and I just made that the areas of the industry that are depressed use a higher value, a higher margin products. As Steve said, we don’t expect any real change in the segments that are strong versus the segments that are weak. So that negative mix element we do expect to continue to the balance of the year.

[Operator:]

Our next question comes from the line of Joe Richie with Goldman Sachs. Your line is open.

[Joe Richie:]

Just quick question, just clarifying a little bit that Mexico manufacturing issues that you saw this quarter, can you help quantify the magnitude that affected your margins, and also Scott, may be if you could just give us a little more color on the flattish margins that you are expecting on a year-over-year basis in fab tech. I guess that’s a bit of a surprise to us because we started to see the mid-way issues in 3Q last year, so was expecting margin to be maybe get a little bit better as the second half progressed.

[Steve Simms:]

I’ll comment on Mexico and then I think Scott will talk the mix issues. In Mexico it certainly was a significant issue but it’d be difficult to pull out one plant and tie in to the overall variants in the quarter. What I can say is that, you know we often look at our plants in terms of its both the size of its past due and what’s the oldest order, and so now we are within literally days instead of weeks in the prior situation. So customers are being serviced on a real time basis and so we should well in to the mid-90s if not higher within the next few weeks for Mexico.

[Scott Brannan:]

And your comments are spot on there, Joe that we also expected higher margins originally in the second half. Unfortunately no longer contemplates them essentially for the two regions we’ve already discussed. But we are still expecting organic growth to be in the negative mid-single digit. The decremental margin effect of that, it will be shown in the new guidance and then this mix issued that we just discussed. As we said we don’t see that changing. We have taken some steps to reduce costs. You will see lower SG&A spending in the welding segment and we’ve initiated some new restructuring projects, but as I mentioned earlier, the benefits of those are largely going to be seen next year.

[Joe Richie:]

Okay, that’s helpful color. May be just a follow-up there, and Scott since you mentioned the organic growth, it still implies, your guidance still implies an improvement in the second half of the year just given where you are year-to-date. And I recognized that that business is short cycled, but some of your larger competitors are starting to see trends deteriorate in the welding. I am just trying to get a sense for what kind of confidence do you have or is there anything that you are seeing in the underlying trends that leads you to believe that you can see an improvement in the second half.

[Scott Brannan:]

Yeah, there are. I think we’ve discussed at great length in the investor meeting and some of the earlier earnings calls, and Steve I think mentioned it briefly today that the direct service portion of the business is improving. The other significant improvement areas some of the regions that were particularly week last year, the Pacific region of South America comes to mind. The comps there are much easier there and the Latin American market seems to have stabilized. It’s still not in a positive position, but it’s in an improving position. So those are the major factors that we would attribute to what I would have to describe, it’s a relatively modest improvement in the second half versus the first half for welding.

[Steve Simms:]

And what I’d say Joe is it’s tied to two or three variables beneath what, sort of, lot of the details that Scott provided. In Latin America the team under Clay’s leadership took some very aggressive actions to realign its distributor strategy particularly in Brazil. We are now pass that and that strategy is working for us pretty affectively. So Brazil is starting to show solid performance for the first time in nearly a year. The team was also very successful in the Pacific coast region in redirecting their investment and resources away from the mining sector in to other key parts of industry which are growing. So in Latin America we are seeing some of the strongest performance that we’ve seen really since we’ve owned the company; so very strong performance there. It’s a different issue here in North American, we are seeing positive trends in the early part of this new quarter, but it’s way too early to say that that’s the trend I guess. But in North American one of the issues we’ve been dealing with is the realignment of our sales organization. While ultimately we have more feet on the street, more sales, more marketing people than we’ve ever had in this region as we combine forces with Victor. The reality is that guys are now selling some of the products that they are less familiar with and so there is a startup for a learning curve that we’ve come through and we believe we are starting to see traction in the effectiveness of our sales and marketing programs. And that feedback along those lines, we are receiving that feedback from our distributor advisory that we have around the country, and so Clay and Ken Konopa, Andrew [Bann] on the teams that are driving the business on a global basis and certainly have this as our top priority, and North America have been aggressively working with distribution to correct those issues and fine tune our programing for the back half of the year and we are receiving very positive feedback. So I think that explains our optimism for a slight improvement in the rate going in to the back half of the year.

[Operator:]

Our next question comes from the line of Nathan Jones with Stiefel. Your line is open please go ahead.

[Nathan Jones:]

Just starting off on Steve your comment in your prepared remarks that you are expecting orders later this year on the next round of pollution control stuff in China. Do you have any indication, I understand that there’s a big difference on the potential revenue there based on what technology they choose to go with. Do you have any more information on what’s likely to happen there, and what the size of the opportunity for you might be?

[Steve Simms:]

Not really Nathan, what we are confident is that the legislation is moving along at a fairly quick pace. We know that as a result of the probing we’ve received from boiler makers that this activity is starting to come forward and we expect orders later this year. But the mix, it doesn’t look like there’s going to be a prescribed solution here. It looks like it’s going to be a mix of both the bag filtered technology as well as the electrostatic, and so it makes it a little bit more difficult to put a clear number on that. We still feel that we’ve got a very significant opportunity here in China, and that in combination with the other gap fillers Nathan that we’ve talked about before, we feel that we’ll be able to offset that SCR order that we’ve seen in that past. So it’s still difficult to nail them, but we are certainly seeing activity heating up at an accelerated pace.

[Nathan Jones:]

Okay, you also mentioned an order that you received with Asian EPC for a project in North Africa. Is there any difference on the pricing there. I know Asian EPCs tend to be more price sensitive when it comes to that kind of stuff. Are you bidding and wining those projects at a similar margin to what you have been in other places globally.

[Steve Simms:]

The quick answer is yes, and the reason for that of course has been the strength in our technology and design that we capture here with in-house and that’s given us an advantage. So the margins are comparable if not better.

[Nathan Jones:]

And last question, you also talked about traction in the aftermarket, and because it does include handling. Can you may be give us a little bit more color about the progress that you are making there and what if any differential there is in margin in the aftermath relative to OEM works.

[Steve Simms:]

Well the progress that we are realizing is a function of the realignment of our sales and marketing resource and the ad that we put inside of the business, both on our gas and as well as fluid-handling with the team down with Darryl Mayhorn. So the margins obviously are significantly better than our OEM business and we are seeing that as you look at some of the margins here. This is a strategy we really began pushing almost two years ago and we’re seeing that growth rate depending on the business up in the mid to high-single digits overall.

[Nathan Jones:]

What’s the current mix of OE versus aftermarket and what’s the kind of tug level you would look for in those businesses.

[Scott Brannan:]

Gas and fluid-handling in the slide deck it’s at 35% now. We are certainly trying to move it north of 40, but that’s a multi-year project, that’s nothing you are going to see immediately happening.

[Operator:]

Our next question comes from the line of Brian Konigsberg with Vertical Research Partners. Your line is open, please go ahead.

[Brian Konigsberg:]

Just a couple of questions more on the gas and fluid-handling side, so in the oil and gas business it seems like you are buck in the trend quite a bit versus a lot of the peers and [help them] get a nice order. Do we just talk about the pipeline of work that you are talking about thinking you could actually hold orders flat for the rest of the year? What gives you the confidence that you are not going to see the same type push-outs and cancellations that a lot of others are reporting? May be you could start there.

[Steve Simms:]

Well I think what we’ve said before is that most of our businesses as a corporation is in the mid and downstream sector of oil and gas and so we’ve seen less of an impact on our business in those market relative to the upstream side, and some of the activities that we are seeing in our welding business. However, to be sure, a couple of things, first of all Brian the size of our opportunity funnel is up dramatically double-digits. Our win rate in the opportunity funnel has increased dramatically again remembering that this was one of our top three [gas] as we talk about ways of filling in for the SCR loss. But what we’d also say is that, many of the orders that we are competing for are moving to the right. So we’ve seen a slowdown in actual awards coming through, we’ve seen some delays. So overall we’ve seen some of the same activity that others have but between the size of the funnel that we’ve been able to achieve or the increase and our conversion rate we are seeing a more positive impact to results here. Remember in this particular timeframe we had an extraordinary order that we received nearly $40 million, $34 million from Queensland Curtis which is a very sizeable order. We don’t always believe we can achieve that on a quarter-to-quarter basis. So as I’ve said before, orders particularly in this space can be very lumpy. But we if we look over the longer term, we believe that our gap fillers are working, the sizes of funnel has increased, our conversion rate is up and it may move a quarter one way or the other. But overall these strategies are online and starting to deliver against the longer term commitments and goals.

[Scott Brannan:]

I would add that on a revenue basis we are very confident and in the comments that Steve made that the business being marginally up for the year, we essentially have the projects in hand and most of them are already started. So we are highly confident of that. On the order side we did comment that it was going to be marginally up for the year in total. We don’t expect the fourth quarter to be up because we have that very large Middle East order. Hopefully we’ll continue our trend of large orders, but this specific commentary was for the full year and not for the balance of the year. So we do have a very tough comp on the orders for the fourth quarter, but on revenue we are very confident we have the business in hand, there’s little risk of that being pushed out.

[Brian Konigsberg:]

And on the orders that you are realizing today, is the margin profile similar to what you recognize in revenue or is there some --.

[Scott Brannan:]

Yeah.

[Brian Konigsberg:]

It is. Okay. And then just moving on there to Russia, just generally may be if you could comment, I know you probably commented on more difficult comps in the second half, given early last you were - a lot of your competitors were shut out of the market. May be just talk about the trends you are seeing in that market across both of the businesses and can you continue to grow in the second half just with the backdrop of the market being fairly weak.

[Steve Simms:]

I think in our forecast we’ve assumed that our businesses began to slow in Russia in fact get into the negative territory. To be honest we’ve actually seen that on probably our largest competitors, they are our largest piece of business which is ESAB. Year-on-year we are now down about mid-single digits. We believe that market by the way is down in the mid-teens. So we as I’ve said before are certainly taking share in this market place given our local strength. And so we’ve built into a forecast, an assumption that we are in a negative [reach] in here on both businesses. But the most significant one we have of course is ESAB.

[Scott Brannan:]

And I would point out that Russia is only about 5% of total sales. So while it is an important market, there hasn’t been massive movement in the trends relative to the whole company.

[Operator:]

Our next question comes from the line of Jeff Hammond with KeyBanc Capital. Your line is open please go ahead.

[Jeff Hammond:]

I mean a lot of moving pieces within gas and fluids, but I think you had been saying, core down 2 to 4 and now down 5 to 6. Can you just go through the components of what you think is worse, because it seems like power gen, you know, okay, oil and gas order is okay. So what’s getting worse here?

[Scott Brannan:]

Well its largely general industry, so if you look at our slide deck you will see the decline in general industry is a little bit steeper than we expected at the beginning of the year. We don’t see that trend changing which is why we took the guidance down. I will point out that despite the lower revenue guidance we expect to continue to make the absolute that we were expecting to make there i.e. will have improved the margins in the business. So while the revenue will be down a little bit in that shorter cycle, general industrial areas, the overall performance for the segment at the profit line will continue to be just as strong as we expected.

[Jeff Hammond:]

Where’s the incremental FX headwind coming from, what currencies have gotten --.

[Scott Brannan:]

We haven’t changed the FX since the end of January, so if you will recall we didn’t make any adjustment at the first quarter call because the currency has moved only 3% or 4%, and we didn’t want to get in to a position of adjusting the guidance every quarter. So since January the Euro has certainly moved down to some degree, and then all out of the emerging currencies Brazil being the most significant, one for us has deteriorated quite a bit since the January last update.

[Jeff Hammond:]

And then just finally can you update us on pipeline, I think there was another similar sized deal with Roots that was may be in the pipeline and then may be how do you see the CEO change impacting how aggressive or non-aggressive you want to be on the M&A.

[Steve Simms:]

I’ll comment on the first part not to obligate Matt, if something he will be on that. But Jeff the pipeline is still pretty rich as I’d tried to highlight in my comments. There were two or three comments and that I think are very important to focus on. One is, we want to make sure that we size the opportunity of course relative to the capital we have available, but it’s also a function of where a business is and where the management in their capacity is to deliver against the integration and synergies that we carve out as a white paper. So we have opportunity throughout the business, probably the strongest and those that are probably they’d be most probable or likely this year are going to be in the gas and fluid-handling areas. So we have a number of different deals that we are very excited about. We believe we may be in a position to announce another in the back half of the year, and we are very excited of both sides of our business. But in that timeframe you’ve asked the question probably be in gas and fluid-handling. And the profile would be not unlike what you have seen from us before, and sort of in the same zone in terms of the same attractiveness. I think very complimentary from a geographic and footprint standpoint, great margin upside; appears to be a pretty strong management team in place for all the three areas. So I believe that they would look very much like what we’ve done before in the gas and fluid-handling sector. I don’t know Matt if you have - it’s a little early for Matt. I believe that Matt and I and Mitch and of course the full Board in talking with Matt and obviously Matt’s very comfortable with acquisitions given the background at Danaher, but I think he’ll need some time to get comfortable with that. But I believe that’s one of the attractive variants that drew Matt to the company, the opportunity for both organic as well inorganic growth.

[Matt Trerotola:]

Well said Steve. I mean as Steve and Scott have described some short term headwinds that the team is proactively managing but going forward the focus is on growth, on organic growth and also on acquisition based growth. And I am really excited about the runway these businesses have and the great opportunities, and so for sure we’ll be active there.

[Operator:]

Our next question comes from the line of Chase Jacobson with William Blair. Your line is open. Please go ahead.

[Chase Jacobson:]

I just have one another one on the gas and fluid margin. It was obviously a very strong and you are expected to say pretty strong in the quarter, I am sorry throughout the year. You had some issues last year in fluid handling. Can you may be just talk a little bit about the margin mix between the two. Is there improvement in the gas handling side or is it all coming in fluids. Any color you could give there would be great.

[Steve Simms:]

We’ve seen solid margin improvement on both sides of the business. Chase I think you are talking about, in fact it was a year ago that we went through a pretty significant write-off and then all of it was restructuring and fluid-handling, and so Darryl Mayhorn and his team have done a really nice job of resizing the business. I believe we downsized 3% or 4% reduction in headcount, consolidated manufacturing and assembly site and have really strengthened our supply chain. They’ve done a wonderful job of getting the cost aligned to fit the size of the business and so we are now seeing the real return on that investment we made a year ago come through the numbers. I would also say that if it’s certainly in the early part of 2016, we will likely see booking growth on our fluid-handling business based on the size of the funnel that they’ve sort of developed for us at this point. So very nice trends there, but the same thing is true for the team under Howden in Ian Branders’ leadership. This is an area where because of the SCR fall off Chase we put together Scott a very significant restructuring program at the end of 2015 or I should say about mid-2015 and ’14 and have been executing that throughout, and so we are beginning to see some of those restructuring programs that initiatives regrew on the business. So Ian and James Brown and his team they’ve done a wonderful job of leveraging the cost and getting that down to the size of the business. And at the same time as I tried to highlight in the remarks, we’ve tried to really preserve the investments that we are making in the growth initiatives, not only in fluid-handling but clearly here with Ian and his team in Howden as well. And you see some of that paying off in some of the big orders that we’ve won in the Middle East with Jim Fairbairn and the guys on compressors and other opportunity. So I think we’ve got the right balance there, and we’ll see strong margin and hopefully sell a topline growth in 2016 because of the investments.

[Chase Jacobson:]

And the Matt if you don’t mind, if I could ask you a question. You obviously know the management and Board here at Colfax and you have some familiarity with the business. I was just wondering if you can make some general comments on your view on pursuing growth versus improving returns, and may be just some sense of what your expectation is of timing around your kind of initial review of the business once you officially take the position tomorrow.

[Matt Trerotola:]

Well I think I’ll say, what was exciting to me about Colfax was these are attractive global businesses with great teams and there’s a great team here at Corporate as well as in the businesses. And the businesses (inaudible) one that I believe in and I’ve got a chance to follow a great leader like Steve who’s built a great foundation here. So I think clearly we are going to drive aggressively on improving the businesses, applying the Colfax business system and the lean tools to keep improving and strengthening the cash flows of the businesses. That will be a never ending quest, but at the same time we are going to put more and more emphasis on the organic growth of the businesses and I know there’s a lot opportunity there, there’s some good progress, but still plenty of opportunities, and then finally we’ll be aggressively working in the acquisitions pipeline and I think those are the priorities and I am excited to dive in. I’ve already started to learn and meet a lot of folks and I am just real excited to get going.

[Chase Jacobson:]

Okay, look forward to working with you.

[Matt Trerotola:]

And you as well.

[Operator:]

Our next question comes from the line of Joe Giordano with Cowen and Company. Your line is open.

[Joe Giordano:]

I know we’ve spoken a bit about fabrication, but I just want to get back to the margins there a little bit. On a sequential basis versus 1Q your revenue is up mid-single digits and you mentioned price not really being a headwind. So, obviously mix offsetting both price and the benefits of some leverage there. So can you may be dig in a little bit as to what’s driving that mix, and I know its end market based, but like what specifically on the product side is kind of pushing margins there.

[Scott Brannan:]

The end market really is the explanation here and which products are driven through the end markets, the specific products are the large capital projects which as Steve mentioned in the prepared remarks are down from 2014. The standard equipment is down, and as you know the welding industry the equipment margins are better than the consumable margins. And then the mix of consumables, the field consumables, the electrodes and things of that nature are down, whereas the businesses that are - the end market that Steve mentioned that are up tend on average to use lower value consumables. So that is the full explanation, it’s a combination of those end markets that are strong versus weak and the mix of products that they us. That does explain the entire margin issue.

[Joe Giordano:]

Okay, fair enough, and may be you could touch on some details around the restructuring that you are going to be taking in the second half like what types of projects you are going to be putting through.

[Scott Brannan:]

Well the new projects are largely the more immediate right-sizing of the business and the staffing levels for the current projects. The very significant projects are the ones that are going have the most impact for 2016 are projects that we’ve announced earlier. The most significant ones being the facility consolidation project within welding which is the three plants in North America are being consolidated in to two with the further consolidation of the distribution center, consolidation of facilities in South America, and a consolidation in India as well. So those projects are well under way, but they will not be completed till of course the end of the year and the benefit of those projects will largely be in next years’ results.

[Operator:]

Our next question comes from the line of Walter Liptak with Global Hunter. Your line is open. Please go ahead.

[Walter Liptak:]

I don’t want to beat a dead horse on the fab tech business, but I understand that oil and gas is weak and the mix there. But is there something else going on like in North America or in Europe, where you’re seeing slowing like what sectors, construction market should be picking up and you asked for example and just seems like there is disconnect between kind of the growth rates in wielding and kind of general in industrial.

[Scott Brannan:]

Those applications which are most welding intensive and most intensive one fill (inaudible) we believe are some of the sectors that are probably not experiencing the same level of growth that we see in many of the industrial markets, and that’s how we’ve seen the industry. And as we look at areas like marine that are shifting out the pipeline work which are so intensive for us as an industry, we’ve seen a real slow down in those vertical markets, and as a result we think that’s what’s softening the overall demand profile for the welding industry.

[Walter Liptak:]

Okay. Any description we can get in the US during the quarter versus say Europe or Asia in terms of the fab tech trends.

[Steve Simms:]

For us specifically sure, I thought I - sorry I didn’t cover that. In North America we are down comparable to what we had seen in the first quarter, the key drivers in that as we’ve shared before has to do with one, a number of service level issues we experienced as a results of our manufacturing in Mexico or in our manufacturing facility in Mexico. We talked about sort of a drop off in service level that continued through the early part of the second quarter which is not seems to have been corrected. We talked about as well the fact that we’ve realigned our sales marketing and product management organizations as we integrate Victor, and ESAB in North America and have seen a slowdown in the momentum that we’d had previous to this. So we think we are seeing that start to gain in traction now. We also talked a bit about the programing particularly with our distributor network, which was not as competitive as it needed to be and we’ve made corrections to that. So I think it would revolve around both service level our organization restructuring and our programing, keeping in mind that, I think as Scott mentioned and I had in the prepared remarks, we have another very important part of our business in North America, which is that business where we go direct to the user, which is up nicely in sort of the mid-single digit. So the issue that we’ve seen is largely around the distributor side of our business. We now have access to data for many of our distributors looking at their sell-through, and what we can say for a couple of our largest distributors, our sell-through has been stronger than the reorder rates. And so we believe and hope that we’ll see that order rate pick up particularly since our service levels have popped back and programing seems to be more on target. So that inventory adjustment I hope is behind us at this point in time. I guess you also had a question on - did you want a feedback on Europe as well.

[Walter Liptak:]

Yeah please, thank you.

[Steve Simms:]

Then very quickly just to put it in the context, we talked in the first quarter where we were - at this same point whether or not we had lost here or there because we experienced a drop in Europe that was also in that mid-single digit range, and in Europe what we believe is the industry is actually off in that range. This is the one region of the world where as an industry, we actually have data or panel data that tells us what market share is and how it moves quarter-to-quarter. It’s just one quarter behind our earnings release unfortunately. And so what we saws in the first quarter is that we actually held share despite that sort of mid-single digit fall off in business, and so we know we are holding share in that market place. I believe that despite the fact that we are down mid-single digits, this quarter we’ll see that again as a period where we held share. I think that as I highlighted the opening part of comments, if you look at the end markets sort of driving that soft market in Europe its true with what we see globally, and that oil and gas is down which will be a root cause behind our oil pipeline business plus our offshore oil well work is down and OSV work in marine is down, major CapEx spending down significantly in that in terms of capital goods and how that’s affected our capital good business and automation has certainly been negative. So those are the variables that are affecting the industry, that’s what’s happening to our share and overall we think we are upholding that position. But let me remind you that when we acquired the business, this was a business where share had been consistently dropping over a time and the team under Clay’s leadership has actually stabilized that and clearly we are not happy with our growth or where the share is, but we’ve stabilized those share declines and have managed to overtime improve that and of course during the same time improve the operating margins from the 5 to 10.5 or so that we are today. So a lot more work to be done here, but we believe we are on the right track.

[Walter Liptak:]

Great, appreciate that color. One other that I want to ask about is China you mentioned that those projects are on track for may be the back half or late in the year. We’ve heard about slowing in China and I wonder what that timing looks like, could it push up to the right? What are you hearing I guess from your China customers.

[Steve Simms:]

I think that’s a fair point and observation for most geographies, but I am not sure that holds true for China. When legislation is passed it tends to move with a real sense of urgency. That’s what we’ve seen in the past, and as I tried to share before, three of the largest boiler makers in China that will have the greatest position in thriving for the new compliance have begun to approach Howden, as we work through the technical specifications and also the design for the upcoming solutions. So that legislation will be approved formally within the next few months. It’s been out for [commensurate] for quite a while and there have been no changes to the legislation during that period, that also say that as you’ve probably seen there are real piece in that legislation which empower the government and local counties to really go aggressively after those sites that are out of compliance with the new form of or the new regulations. So there are real piece that have been added. China has a history of being very aggressive in implementation with no questions asked and excuses accepted. So believe the combination of those variables and the order enquiries we are receiving which say we should start seeing orders to the very end of this year early next year and we may see actual shipments or revenues as a result in the latter half or the second half of 2016.

[Operator:]

And that does conclude today’s Q&A portion. I would like to turn the call over to Steve Simms for any closing remarks.

[Steve Simms:]

Before closing today, I would like to express my thanks to the associates throughout Colfax for the tremendous support they have provided me over the last three years, and also recognize this team for the great work that they’ve done in turning around each of their businesses. I’d also like to say thank you to our overall investors and analysts. I’ve always enjoyed our interactions or most of them, and I want to thank you for your continued interest and support of Colfax going forward. Thank you guys and have a great day.

[Operator:]

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