Enovis Corporation (ENOV) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Colfax Corporation Fourth Quarter Earnings 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, today’s call is being recorded. I’d now like to turn the conference over to Terry Ross, Vice President of Investor Relations. Sir, you may begin.

Thanks, Janna. 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, President and CEO; and Scott Brannan, our Chief Financial Officer. Our earnings release was issued this morning and is available in the Investors section of our Web site colfaxcorp.com. We’ll also be using a slide presentation to supplement today’s call, which can also be found on the investor section of the Colfax Web site. Both the audio of this call and the slide presentation will be archived on the Web site 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 Web site. Now, I’d like to turn it over to Steve.

Good morning and thank you all for joining us today. This morning we reported net sales of just over $1.2 billion for the fourth quarter, an increase of 3% over the same period last year. This consists of 13% growth from acquisitions offset by a negative 7% impact from foreign exchange and a 3% organic decline in revenues. Adjusted EPS for the 2014 fourth quarter was $0.72 per share which represents an 18% increase versus the $0.61 per share reported last year. Operationally these results are in line with the update Scott gave at our December Investor Day. There are some non-recurring items below operating profit, which in total increase adjusted EPS which Scott will discuss in his remarks. On a full-year basis, adjusted EPS was $2.20 as compared to $2.04 per share in 2013. Now let’s take a look at our business segments. For gas and fluid handling, net sales for the fourth quarter were $622.1 million, an organic decrease of 5% compared to $650.8 million in last year’s fourth quarter. Adjusted operating margins for the segment were quite strong at 13.7% compared to 12% in the fourth quarter of 2013. Revenue and margins on a local currency basis were as expected and in line with my comments in our last several calls where we signaled that the fourth quarter would be a very strong period for gas and fluid handling. I’m particularly pleased to note that the margin improvement came from both businesses in the segment. Under Darryl Mayhorn’s leadership the fluid handling business is returning to more traditional margin levels despite the tepid demand conditions. Orders for the fourth quarter were $570.2 million, up 2% organically. As in previous periods, we saw significant variations across sectors due mostly to the timing of large project orders, which can distort comparisons of specific quarters and to certain end market factors which I will discuss in detail momentarily. Overall, we saw continued growth in the general industrial market and strong bookings in oil and gas and petrochemicals, offset as we expected, by weakness in power generation. Now let’s focus our -- on our largest gas and fluid handling end market, power generation. As expected, revenues for the quarter decreased by 10% organically, while orders were off by 16% organically. As we’ve discussed over the last several calls, this softness in power-gen bookings and sales is not a surprise and is primarily due to the tailing off of SCR related business in China and the deferrals caused by potential new CO2 regulations in the U.S., partially offset by power plant construction in Southeast Asia and aftermarket sales growth. We continue to see many drivers of medium and long-term growth for our power-gen business including Chinese particulate emissions regulations, investment in Southeast Asia, upgrades to existing facilities to improve performance and growing aftermarket needs. These opportunities have been discussed on earlier calls and in particular I refer you to Ian Brander’s Investor Day presentation where they are explored in depth. It is noteworthy that we saw the highest level of aftermarket power sales in Howden’s history in the quarter, and greater than 50% growth in Southeast Asia bookings in 2014, which gives me comfort that our long-term growth strategy is sound. During the quarter we also secured two significant orders from Japanese boilermakers as well as our first air preheater order for the domestic Japanese market which may become a significant new opportunity for us. Nonetheless, the 2015 outlook for both sales and orders in this market is for continued declines until later in the year when regulatory issues will be crystallized. Next up is our second largest market for gas and fluid handling, oil and gas and petrochemicals. As you know we principally serve applications in the midstream with large screw pumps and the downstream with compressors. Sales were down 14% organically in the fourth quarter as expected, while orders increased 41% organically. As discussed in previous calls, conditions in our served segment have been challenging over a year. To date we’ve seen little, if any, incremental impact from the drop in oil prices. Despite the macro headwinds, we achieved a number of very important wins during the quarter. First, we landed the single largest order the compressor division has ever won with a value in excess of $30 million, which provides a crucial reference in our strategy to grow in the Middle East. an add-on order for centrifugal blowers at the site: The timing here is excellent, since the Kuwait Natural Petroleum Company has announced plans to spend $40 billion through the year 2022 on various projects including a new refinery and expansion and modernization of two others, and we have products ideally positioned for these applications. Our second notable win was an order for boil-off gas compressors which is our first major booking for this application. Boil-off gas compressors are used to recompress gas boiling off from liquefied natural gas when it’s stored. This is a key target application for Howden as we build our presence in the growing LNG market. During the quarter, we also booked a significant order in Russia, from Gazprom's Omsk refinery. While we hope to continue to capitalize on orders like these this year, given an external market conditions, we expect modest declines in both revenues and orders in 2015. Turning now to marine, which is primarily served by fluid handling and encompasses our Navy and commercial marine business. Revenues were down 7% organically while orders declined at 14% rate organically. However, excluding defense, which can see quarter-to-quarter lumpiness, we saw a growth in the fourth quarter revenues for our commercial marine business. Revenues were boosted by significant CM-1000 commissioning activities as ship owners retrofitted our energy-saving system while their vessels were docked for other maintenance. There was also significant commissioning of new ship builds. In addition, we're seeing increased interest in products that address the remediation necessary to meet the low sulfur, low viscosity regulations that came into effect last month. These positive trends should be sufficient to generate modest revenue growth in our commercial business this year. However, we expect continued decline in overall order rates in 2015 due to our Navy business, which had an excellent order year in 2014 from the Block IV programs that we’ve discussed on previous calls. Now let's look at the mining market, which has been subdued all year. Orders for the fourth quarter posted an organic decline of 3% due to a very weak capital equipment spending environment. We continue to work our way through our remaining backlog and due to some deliveries in the fourth quarter; we saw an organic sales increase of 14%. We remain focused on the key, but limited opportunities for targeted projects. We enjoyed some modest successes in the fourth quarter, including follow-on orders from copper mining in Australia as well as ventilation systems for copper and gold mines in North and South America. However, given the overall state of the mining sector, we expect to see organic declines in sales and a challenging environment for orders, in 2015. Finally, the general industrial end market for the fourth quarter of 2014, sales increased 7% organically and orders increased by 4% organically. As mentioned, while quarter-to-quarter comparisons can be quite volatile due to the timing of large shipments and orders, this end market has been strong over the past year. We’ve mentioned environmental investments in China as an opportunity in this end market. Although steel demand has dropped, major producers continue to invest in replacing older capacity with modern larger facilities, as well as upgrading existing facilities for environmental remediation requirements. We also received significant orders for blowers in the wastewater market in China and the Middle East, as well as a sizeable order from the locomotive sector this quarter. On the pump side, we continue to expand into new areas like LNG compressor pumps, and propeller pump applications in the chemical process industry. We remain optimistic that this end market will continue to show modest growth in both sales and orders in 2015. As I mentioned earlier, margins at 13.7% were very strong this quarter, driven by our culture of continuous improvement. This call I want to highlight the fluid handling site in Radolfzell, Germany, which saw a good sustained improvement and on-time delivery and the reduction of past due orders and inventory levels through the effective application of daily management. On-time delivery improved in 11 of 12 months in 2014 and ended December at 88% versus 51% last December. Inventory decreased 12% year-over-year and past due orders reached a three-year low. The Howden Compressor Division continued their excellent progress in strategic sourcing and procurement utilizing the CBS tools of category profile management, e-auction and value engineering. The team held their first value engineering Kaizen Week in November. Working directly with engineering, sales, operations and suppliers, the team was able to use alternative materials and designs to improve our customers with an improved performance and reduce costs on certain components by over 35%. The compressor supply chain team has realized nearly $10 million and annualized direct material purchase price savings in the past year and established a robust process to continue leveraging the CBS supply chain tools in 2015. Now let's turn to the results for fabrication technologies. Sales for fabrication technology were $584 million, up 12% versus the fourth quarter of 2013. Victor Technology sales of $118 million provided a 23% increase offset by declines of 9% related to foreign exchange and a 1% organic decline. Adjusted operating margins for the segment were 10.7%, while revenues in December were stronger than earlier in the quarter, margins are in line with the update Scott gave at the Investor Day. These margins which are 50 basis points below those reported in 2013 fourth quarter, primarily from product and geographic mix, as well as lower sales and production volumes. This is further exacerbated by the significant strengthening of the dollar in the most profitable regions, as well as soft conditions in the mining industry which impacted our high margin Soldex business. Margins were also adversely impacted by facility closings around the December holidays and by the significant reduction in inventories by over $50 million in the quarter, which resulted in lower fixed cost absorption. While revenues excluding Victor, was the lowest of any quarter in 2014 and continued to be down organically year-on-year. The decline is less than previous quarter's. This improved trend reflects a moderation of sales declines in Latin America, while shipments in Europe were essentially flat on a year-over-year basis. These trends were partially offset by a solid mid single-digit growth in North America where I am pleased to say that we are now participating in North American growth. As we increasingly put our midway start-up issues behind us and continue to regain lost business through differentiated products and applications. Clay outlined some of his progress at our Investor Day and we continue to build on that. In addition, our R&D investments in both equipment and advanced consumables are gaining momentum. Our new product pipeline is improving and significant new equipment will be introduced later this year. But we're not satisfied with our performance in welding this quarter, the organization; culture, processes and market conditions are in place for improvements in 2015. The key to our operational improvements is tied to the use of our CBS tools. This quarter we achieved significant inventory reduction and improved on-time delivery performance across our fabrication technology platform. Inventory has been reduced by $35 million at our Victor site since the acquisition. The Victor team has embraced CBS and has driven the results by applying tools such as demand flow and [indiscernible]. A good example was the Kaizen conducted in our Hermosillo, Mexico site to implement a sub-assembly pull system with our Roanoke, Texas facility. The old process required $786,000 of inventory to support the forecasted five-day demand schedule. By implementing pull production using [indiscernible] cards, the team was able to replenish the actual demand which lowered inventory by over 25% and reduce the replenishment time to three days. Last month I had the opportunity to visit one of our European filler metal plants, which is a great example of the power of our CBS culture and tools. After a series of Kaizens over the past several years and rigorous follow-up, the team has reduced lead times to under 24 hours, with 98% on-time delivery, and has increased inventory turns to the high teens. But what's even more exciting to me, is that they’re still not happy with this. They're going after the next ground of improvements with the goal of getting even better in terms of quality, delivery, and value to our customers. And now, I'll turn it over to Scott, to provide more details on the financials.

Thanks, Steve. As Steve mentioned earlier, sales for the fourth quarter were $1.2 billion, down 3% organically compared to the 2013 fourth quarter sales. Foreign currency declines across the board, but most significantly in emerging markets in the fourth quarter were a 7% drag on reported revenue performance. Adjusted operating income was $136.7 million represented -- representing an adjusted operating margin of 11.3% for the 2014 fourth quarter, up 70 basis points from 10.6% in 2013. Fabrication technologies adjusted margins were 10.7%, down 50 basis points from the 11.2% in the 2013 fourth quarter. While Victor’s performance increased margins for the segment, this was more than offset by the detrimental impact of product and geographic mix, foreign exchange, and lower sales and production volumes. There were no notable non-recurring items in this quarter. As Steve mentioned, adjusted operating margins in gas and fluid handling were up a strong 170 basis points from the 2013 fourth quarter at 13.7%. Corporate and other costs of approximately $11 million were less than typical reflecting reduced incentive compensation. Excluded from adjusted results are restructuring costs of $29 million incurred in connection with cost reduction projects. Interest expense was $10.4 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. A large non-recurring item, reduced reported interest expense by approximately $3.1 million as interest expense was adjusted downward as the expected payout on the mandatorily redeemable preferred stock of a subsidiary issued in connection with the Sicelub acquisition is now expected to be less than originally provided. Our effective tax rate for adjusted net income and adjusted net income per share of 24.5% for the quarter was also lower than expectations primarily as a result of the enactment in the fourth quarter of the U.S tax extenders package related in our case to the taxation of certain foreign income in the U.S. We do not exclude this from our adjusted net income as it is proper to reflect this and the full-year results. The catch up portion related to the first nine months resulted in a decrease in our fourth quarter effective tax rate of 4.6 percentage points. Operating cash flow of $185 million in the fourth quarter was our best quarter this year. In total, we were able to [technical difficulty] working capital by $100 million during the fourth quarter. We had a strong performance in working capital this quarter across the entire Company, but particularly in fabrication technology. The continued focus on the CBS tools and reducing customer lead time drove inventory down over $50 million for the year. Accounts receivable and accounts payable resulted in a $75 million working capital build this year, which offset the inventor improvement. These numbers are adjusted for the working capital added in the Victor acquisition. We finish 2014 with a much stronger balance sheet as we continue to improve our credit profile. Finally, backlog in gas and fluid handling segment was down to 1.4 billion at quarter end largely due to foreign exchange. Our book-to-bill ratio for the fourth quarter was 0.92 to 1. While the fourth quarter tends to be stronger for sales and orders, this significant drop in the book-to-bill principally reflects the lack of new orders for environmental remediation in the power generation end market. Our fourth quarter performance in total was precisely in line with the update provided at the Investor Day, at the adjusted operating profit line, with lower than expected earnings attributable to the non-controlling interest as well as lower interest and taxes as I just discussed. Orders were slightly better than expectations. Our expectations for 2015 on the local currency basis remain unchanged from the guidance provided in December. However, the U.S dollar has strengthened significantly against most currencies since that guidance, particularly against the euro and other European currencies. We were adjusting that guidance solely for the FX changes from those used in our original guidance. Revenues are now expected to be $4.25 billion to $4.4 billion with adjusted earnings per share at $2.03 to $2.23. Please refer to the slide deck for the specific elements of that guidance. As to expectations for the first quarter, given the atypical allocation of revenue across quarters this year, we are expecting adjusted EPS of $0.31 to $0.34 in the first quarter of 2015. Revenue guidance on a percentage basis by quarter was provided previously at the Investor Day and first quarter revenues are expected to be in line with that guidance at approximately 22% of the full-year total. We do not intend to regularly provide quarterly guidance except in atypical circumstances. And with that, I'd like to turn it back to Steve.

Thanks, Scott. While the fourth quarter results included excellent execution and working capital management and strong margins in gas and fluid handling, we were again hampered by a sluggish demand environment resulting in an organic revenue decline for the full-year of 2014. Despite the revenue decline, we improved overall margins after adjusting for the non-cash charges taken in 2014. As we guided in December, given the choppy macroeconomic environment, we expect 2015 to be another year without revenue growth, but with continued margin improvement. Obviously, our internal expectations are higher than this. As we outlined in our Investor Day, over our three to five-year planning period, we expect more robust organic growth of 1 to 2 percentage points above GDP, accelerating via both on acquisitions and with core operating margins in the mid-teens are better. 2015 is an important transition year as we began to see results from the R&D investments we’ve made towards this growth. Overall, I believe the culture and processes are in place to deliver our performance goals. We continue to strengthen our team through internal talent development and external hires and our acquisition pipeline remains quite strong. In light of a more challenging global economy, we stepped up the intensity of our M&A related market research and due diligence which has caused our transaction timelines to extend. However, we expect to announce a number of strategically compelling and financially attractive situations in the late second quarter or early third quarter of 2015. In summary, I believe we are better positioned in terms of our teams, businesses, and resources to consistently meet expectations going forward into 2015. With that, I'd like to open up the session up for Q&A.

Thank you. [Operator Instructions] Our first question is from Joe Ritchie of Goldman Sachs. You may begin.

Thank you and good morning, everyone.

Good morning, Joe.

Good morning.

So my first question is on oil and gas, clearly the environment been characterized by some caution on the part of your customers, but you book your single largest compressor order in the Middle East and you also stated that you're seeing little, if any impact on coating activity, and so can you just give us a little bit more clarity on what you're hearing from your customers there?

I think as we have said in past communication, our primary focus is in the mid and downstream portion of the industry. The upstream portion of the industry is a relatively small part of our total business mix. In that sector, we have experienced declines and we’d continue to see declines occurring through the balance of the year. We have also seen some moderation in our order rate outside of that. However, our guidance is based on what we currently have on hand in terms of our backlog. As you know we have excellent view on both our fluid handling as well as Howden in terms of the backlog that serves the oil and gas market. And so, we are fairly confident of what we see and expect for 2015 in our current forecast.

Okay.

There will be some impact on the welding sector as obviously we saw significant products there. But as Steve said, that is factored into our forecast.

Okay. And then, maybe on that compressor order, Steve is this the first of a kind type order or is it just the largest order you’ve ever booked before? And the real [ph] question I have is really around pricing and how the environment is today for those large types of orders as well as how are you thinking about the risk in taking on -- an order of that magnitude?

Interesting question. It's not the first orders that we’ve won and its part of the strategy that we outlined 24 months ago. We’ve been aggressively working in the Middle East to expand our presence there and this represents our breakthrough in that strategy and that's what I was trying to reference in the prepared comments and that is why we feel more and more confident about our ability to eventually offset the sales declines that we’ve experienced in China as a result of the SCR compliance driven activity tailing off. So this is exactly -- the sweet spot of where we’ve been focused from a product management, product development standpoint. And also Joe, it also fits with the manufacturing strategy that we’ve outlined before and what I try to outline in the notes where we’ve aggressively worked on reducing our costs to strengthen our margin in this particular part of the business and strengthening our operating teams to deliver this kind of products. So we’re not only excited, we're thrilled, because its paying off the breakthrough of the policy deployed that we have established around this quite a while ago. So it's an excellent job by Ian Brander and Jim Fairbairn and all the guys that are working around our compressor business and positions us well against that $40 billion opportunity that we think exist for us over the next four, five years.

Okay, great. Guys, maybe one last question on -- Steve you mentioned strategic opportunities towards the end of the second quarter or early third quarter. Is it fair to assume that your capacity at this point around the $500 million that we discussed in December or do you have increased capacity at this point to do further deals? Any color there would be great. Thank you.

No, that’s -- we're in the same position, we discussed in December. We do have that type of availability on our existing credit facility, so there is no change to the commentary there.

Okay. Thanks, guys.

Thank you. Our next question is from Nathan Jones of Stifel. You may begin.

Good morning Steve, Scott, Terry.

Hi, Nathan.

Hi, good morning.

Steve, in your prepared remarks you commented on the highest level of aftermarket for Howden ever. Is there something that’s coming down as the SCR stuff in China goes into service in need? So what’s driving the aftermarket level for Howden and is there a significant margin differential in the aftermarket for Howden?

There is really -- there are two or three part to that question. First of all, Nathan that the comment I made referred to the power part of our aftermarket business and we have seen that business continue to building momentum. So that comment related to power only. And so, the second part of the comment though, I would broaden it to say what's been driving the success that we’ve experienced in the aftermarket over the last three to five years, it's really been our increased commitment and resources focused on this globally. It is also been aided by the acquisitions that we’ve recently accomplished around the Howden business. So it is both an increase in resources. It's a larger target market and it's become one of our highest priorities because to your second point the margins on an average are much higher than our core business. The aftermarket is far more attractive than what you might expect. So from that standpoint, it's a top priority and we’ve invested, and in fact, in the last 24 months dedicated more and more resources globally to pull that strategy off.

Okay, thanks. And then, jumping over to ESAB, have you at this point seeing any destocking in the channel on the consumable side and what are your expectations there going forward?

We have not seen any significant destocking around the business, certainly not in North America. Maybe you're referring to in Latin America where we had a change in distributor strategy at the beginning of 2014 that strategy is now complete and we believe we’re through that migration. So we don’t anticipate and have not seen any major change in inventory levels if I read your question correctly at the distributor level. In fact, nowhere on a global basis am I aware of something like that occurring.

Is that kind of adjusting timing inventory management where your distributors are running pretty lean inventories anyway?

That just in time strategy is being driven by our internal goal of providing outstanding service while improving working capital. Actually in that particular instance it's one of our facilities out of the Czech Republic, most of that product is actually going direct to the end user. We supply a number of manufacturers in the transportation industry and as a result of our strategy they’ve been able to lower their inventory cost -- lower their inventory level by 30%. Our service levels into that particular customer are close to 100% as well. So that's a strategy that we’ve talked about many times on our calls and that's really demand pull sort of build to order ship direct. And so we are on track to implement that not only for distributors, but for our larger customers as well and we are trying to do that on a global basis. That particular site along with two others have become really our global benchmark or a role models for the rest of the organization as we think about the rapid implementation of demand pull ship direct. And that’s the key part of our CBS mindset and culture.

Thanks and just one more on ESAB. You talked about a moderation of the declines in Latin America. What’s your expectation for that geography in 2015?

We continue to feel that in Latin America while those declines have moderated, we expect it will continue to be sort of down in the low single-digits. The big issue that we’re working with there Nathan is both in Brazil, but largely also in Peru where the reinforcement of government driven legislation around strip-mining has reduced our sales at this point of time. So redirecting our efforts into other end markets to improve that, but in that interim period I would expect we will continue to see modest declines throughout Latin America.

Thanks very much.

Thank you.

Thank you. Our next question is from John Inch of Deutsche Bank. You may begin.

Yes, thank you. Good morning, everyone.

Good morning.

Hey Steve, if you look at the gas and fluid handling projects that comprise your backlog, is there a way you could kind of -- so realize you have a lot of visibility into this, what is the risk -- I have been trying to get out the notion of the risk of cancellation and obviously companies that have started larger projects they probably remiss to stop them. On the other hand, if there is smaller, maybe they can get deferred or I don’t know like is there anyway you could kind of put a little bit of a finer point around what -- these projects are for and why? You sounds like you have pretty high confidence they're going to go through, certainly through the rest of 2015, given obviously the energy backdrop.

What we have done with our Howden team it goes back to the early days of the Charter acquisition. We examine the history around the backlog and the quality of the bookings in the past and what we’ve seen is that this business in particular probably has the strongest delivery rate against orders that we’ve in that backlog. So our history and track record says the debooking is something that's pretty infrequent. So we think the probability of delivering what's on hand at this point, as you said John, what's on hand at this point we relate that as a very high probability and feel quite confident of that forecast as we look at 2015. And that's based on the historical analysis that we’ve done and in fact we focus on a number of the recessionary periods and found the same to be true.

Would you as if you look to those recessionary periods, Steve, I mean obviously ’15 is -- so proportionally it sounds like ’15 is kind of baked in the cake for those businesses, right. But guess one of the questions or concerns would be the lag impact associated with the environment. So companies today are -- nothing is really changed much, it's the concern about what happens at the end of the year or heading into ’16. I mean, is there a risk that there is a cliff and if there is how do you and sort of CBS respond to it? Like do you prune [ph] your costs later in the year or do you try and supplement it with M&A or I mean what’s -- I'm just trying to understand the playbook a little bit?

Well, if I understand your question correctly, you're saying if -- in a business that Colfax, if we run into a period where we see an unexpected drop and confirm that that drop is going to be with us for an extended period, at that point of time we would go through a pretty aggressive process of reforecasting the top line, that would be driven by hopefully a very strong level of interaction and engagement with our customer base. And once we paid that top line, we will set the mission to size the business accordingly. Once we have established what that looks like, with the objective of maintaining customer service, but delivering our operating margins despite the scenario you’ve outlined where there is a anticipated drop in volume, we will begin to restructure the business both in terms of its headcount, manufacturing, and logistics profile and layout. At that point, we will have to do is to use the tools of CBS largely around standard work and also again demand pull to really downsize the business according to the kind of demand that we would anticipate at that point of time. That would be what we would typically do and I would have to say that that's largely what was executed around fluid handling in the middle of the third quarter now in the fourth quarter by Darryl Mayhorn and his team. As they examine the order book and the outlook over the next 12 months, they felt that the business needed to be restructured in terms of its size and cost. And as we announced a few months ago, we took an overhead reduction or headcount reduction of nearly 4% or 5%. We closed a couple of facilities and we believe we will generate over $10 million in overall improvement and we will see an improvement in operating margin even though those sales are less and that's what happened in the fourth quarter. It was a down period year-on-year, but our operating margins improved dramatically and our deliveries to the customer improved as well. And I think that's why we chose to use Radolfzell, in Germany as an example where we’ve restructured in a number of ways and the customer seen an improved level of performance from Colfax in that example the full handling team.

Actually that sort of where I was going, Steve. I think if you look at your working capital performance, it's really strong right in light of the backdrop. And so, if you think of Colfax’s last three quarters, you put up negative organic growth and this is sort of where I was going. I mean, most people will define that environment as a recession, at least pretending to a company. Now you guys have been able to trying to understand things were to get worse are you able to -- you're obviously already using CBS tools right to put up really good performance for working capital and other office managements. The margins at the gas and fluid handling business, I just want to make sure there is a lot more you could do to kind of preserve your profits is in fact as you say there was an unforeseen sort of turn down further from what the trend is already been. That's all I'm trying to understand.

I got you. What I would say is I'll come back to Radolfzell, which you probably know the site, that's one of our longest standing facilities in the world here in Colfax. I think it was acquired in the late 90s and there was a facility which has been able to demonstrate tremendous improvements in performance as a result of the leveraging the tools of CBS. And we often talk about companies on either end of the continuum, we will often talk about our best facility in Colombia and Kentucky [indiscernible] year after year continues to find ways to improve working capital, to improve costs, and more importantly quality and delivery to the customers. Continuous improvement as it says never stops and so good companies are able to do that. We are not in that category yet. We are still expanding and growing in terms of our capability, but there are other companies that we’re able to benchmark entire with that, clearly are able to do this in facilities that they have owned for decades, and so we can drive productivity. But more importantly John, what we’re trying to do, is to grow the business. See, we’re not in the recessionary environment. We then believe that we’re competing in attractive markets which have good opportunities for long-term growth. So, what we’ve tried to do is to make significant investments in R&D. I think you’ve seen that as you look at our R&D investments in the ESAB business. A little more difficult to track because of how the reporting works at Howden, our fluid handling business. We’ve made significant investments in R&D, significant investments in feet on the street of our sales organization. While trimming the back office side, our customer facing resources have been untouched as we have gone through these restructuring, if anything we’ve doubled down to make sure that we find ways to grow organically. We are not happy with the level of organic growth that we have failed to achieve, but we believe that we’re putting in place the resources to get us there. I believe that what we’re seeing on the side of Howden is an example of that. When you see what's happening in Japan, when we see what's happening in the Middle East, when we see our ability to drive the aftermarket. We believe that over the long-term each of these three markets are capable of generating or supporting organic growth a point or two above GDP. We haven’t gotten there yet, but we believe that we’re making the investment and we’re spending the time and energy to train and develop our people to be able to deliver, and we need to prove that we can do that, but that’s the game plan. We are not in a recessionary environment, and we’re not in markets that are incapable of supporting good growth.

No, I got it. Cool. Thank you very much, Steve. I appreciate it.

Yes.

Thank you. Our next question comes from Brian Konigsberg of Vertical Research. You may begin.

Yes. Hi, good morning.

Good morning.

Maybe you could touch more on fab technology. So, actually it looks like U.S. came in with pretty good growth. I know it’s an area you’ve been focusing, gaining some more traction. Maybe just give us a little bit more color on how you see that progressing through ’15? And actually maybe also just touch on kind of the price dynamics maybe in that region and overall, I saw price mix for the segment, it was flat in the quarter down from growth year-to-date. Can you start there?

Overall taking the second part of your question first; and I believe Scott may have commented on that. Our pricing has continued to stick in the range of about 2%. It’s stronger in some regions, a little less than others. But that’s been about the average. I think mix has washed out of portion of that as I think we talk about or described in our comments. So, our pricing that we’ve seen is in that neighborhood. We believe that the industry in general its sort of operating in that zone and the other part of your question I’m sure the comment, the outlook for 2015 we would anticipate another round of increases at least in that ballpark. There were some regions obviously where we’ll be more aggressive in our pricing. With Clay, Ken Konopa and his guys have done a wonderful of job of putting in place a pretty good pricing process even in tough to price markets like Argentina. So, we believe that pricing is in the ballpark of 2% this year. It will be in the same neighborhood for 2015. As we think about the growth prospects for ESAB in 2015, our guidance that Scott offered in December says that at ESAB over the full year we’ll grow in a range of between 0 to 2%. We’ve described in the first quarter a slow start to the year, that’s what we talked about in the fourth quarter, that’s what we described in December, that’s what we’re anticipating this quarter as well. So, while we’re starting to see an improvement in some of the key markets, we don’t believe that we’ll see a significant improvement in order rates for ESAB until the end of the second quarter, the early fall. That coincides with a number of major account wins that we’ve accomplished in a number of the larger regions to include the U.S. It also coincides with a very active product development stream that Ken Konopa and guys like Steve Argo have driven inside of the business, and what Clay is pushing with his team. So, it will be sort of mid-year as we begin to see a real uptick in our order rate. Regionally, the other part of your question as we look at 2014, our stronger markets were in Europe in total. Another question I’m sure you have, Russia has been reasonably strong for us throughout the entire year. That growth is moderating. We anticipate that Russia could turn negative in 2015, and that’s the assumption that we built there. Our business in China has grown solidly double digits reflecting the success of our automation strategy. As we think about the key businesses in North America, we’ve described before that, we had major quality issues, we had major start up issues with the Midway plant that we inherited from Charter. That start up is behind us. Now in North America we experienced a solid growth in the fourth quarter, and certainly as we described in Latin America we saw a moderation of those trends. As we think through our distributor strategy and effectively implement that strategy and also filling in a number of product gaps on the equipment side, particularly in Brazil which will help us to stabilize the business there. So, solid growth as we think about in this past year. Solid growth in North America, very good growth in markets like Africa and importantly India, China outstanding, flat trends overall for Europe and certainly struggling a bit in the Middle East, South America and the other parts of Asia when you take out India and China.

And actually just on the pricing comp I saw 2%, is that across the board, just curious North America specifically is there any deviation from the, I guess the global plan?

No, it’s not across the board. That’s a weighted 2% on a global basis. As I mentioned it will be stronger in some markets, and for a variety of different issues based on inflation and cost of materials, with manufacturing cost and so forth, and then it will be a little less than others. So, it varies by market.

Is North America huge -- North America would be one of the softer ones, is that fair to say?

I wouldn’t get into that level of detail, but we don’t see any need to think about North America differently than we do some of other core businesses areas.

Okay. And if I could just sneak one last in, you touched on Russia, maybe if you could just give us a little bit more color. So, you’re saying you expect that to go negative in ’15. How soon do you think that could be, and what kind of mitigating I guess, tools can be used to maybe offset that decline?

Overall what we’ve said is that, and I think we’ve shared before that we’ve seen certainly a real slowdown around Howden and also our fluid handling business that ships into Russia. Our ESAB business has been the real grower in that region and continues to grow even through the fourth quarter. We believe we are being prudent to anticipate that, that’s the market that will be down in 2015. However one of the great things that we’ve seen here is that, because of our local presence we really are a Russian company in that region. We’ve been able to capture a surprisingly large share grab in a number of key markets for both our consumables as well as our equipment. The sanctions have had an impact on many of our competitors and their ability to ship into Russia where as a local manufacturer for many, but not all of our products, we’ve been able to use this as an opportunity to expand share. Our leader in the business Clay Kiefaber literally just returned from a trip to Russia on Monday and had spent two days with our Russian sales and marketing organization reinforcing the tools of CBS value selling. And reinforcing a major thrust in our policy deployment which really says, at the end of the day this is an opportunity that takes share in this marketplace because the markets opened up given the difficulty for international companies to export or import into the Russian market. So, it’s created an opportunity. From a budgeting standpoint we’re anticipating downtrends, but from a policy deployed at how we’re driving our organization we’re aggressively going to exploit this situation and drive it and turn it into a positive. By the way, Russia is actually one of our stronger markets from a profitability standpoint as well.

Got it. Thanks.

Okay.

Thank you. Our next question is from Jeff Hammond of KeyBanc Capital Markets. You may begin.

Hi. Good morning, guys.

Hi, Jeff.

Hey, just on the power-gen, can you just talk about timing for your clarity on some of this U.S. and China regulation? And what should we be kind of paying attention to from a news flow standpoint there?

We don’t really have an update from the comments we made in December, that there’s been no real new information. In the U.S. the rule promulgation has been delegated to the States. I suspect it will be next year before we’ll see anything in that area, and the expected timeframe in China is the end of this year. But there is really no new commentary from what we gave in December.

And Jeff, I think that our strategy has been, I mean, this will be, and I think, I assume that’s what you’re poking at. This will be a huge windfall for us when this finally comes though the government, because we’ll pick up both SCR and also CO2, we’re well positioned against both opportunities. However in the midterm we’ve redirected resources elsewhere in the world to find a way to offset these issues. That’s why you’ll see the success that we’re experiencing in the Middle East. On the last call we talked about mechanical vapor compression and what we were doing in the NVC to pickup the business there. We’ve talked about the investment in aftermarket resources and also going aggressively after major opportunities in China where that region will come through with new legislations regarding particular removal. As Scott, mentioned that will happen in the fall or towards the end of the year. That’s a major opportunity for Howden to exploit the business there given our very strong presence. So, while we’re excited about what will eventually happen in the U.S. who knows when that will happen or when it will be announced. What we’ve done is to move those resources to other regions in the world to rapidly go after growth opportunities. So, it’s more of an execution of dynamic resource allocation, its part of CBS that gets us to move those resources to where we think there are better opportunities.

Okay, and then, just a little clarity on this 1Q guiding and some of the seasonality comments. So, you’re expecting a slow start in both segments?

That’s correct. I think Steve, gave a very clear commentary of the expected seasonality of welding. On gas and fluid handling, we are having particularly in the Howden side of the business; the first quarter revenue outlook as we said in December is lower than normal, that’s typically a reflection of customer demand. There isn’t anything out of the ordinary going on in terms of cancellations or anything like that. It’s purely just the normal customer demand flow of products and it’s precisely inline with the percentages we gave in December and not a surprise at all.

Okay. Good color. Thank you, guys.

You are welcome.

Thank you. Our next question is from Mark Douglass of Longbow Research. You may begin.

Hi. Good morning, gentlemen.

Hi, Mark.

Good morning.

Looking at the fourth quarter restructuring, and then full year for 2014, it seemed like it was a little higher than expected. I think initially you were thinking $58 million -- or $50 million and it came in at $58 million. Did you accelerate some restructuring and if so, did that impact your 2015 guidance at all?

Well, the average in the restructuring is the two components that are about equally -- one was a small acceleration of restructuring. We kind of give the restructuring guidance to the closest $10 million. So, this $3 million or $4 million restructuring acceleration didn’t really affect the expectations for 2015. And then the rest of it was we did, from some of our earlier restructurings we did take some non-cash write-downs of some properties we still hold. So, those are the real two items that caused the restructuring to be a little bit higher than our initial guidance.

Okay. Thank you. And then, looking at welding in the fabrication segment, you were thinking mid single-digit decline in December, and then you indicated that you had a strong finish to the quarter, some late quarter wins. Where were the wins? And can you talk about what kind of products they were? Was it new product introductions or was it just your sales team going out and really trying to deliver a good -- a better end of the year than you expected.

It was a better end of the year. Let me step back from your question on two levels. First, for us as we think about the market in total, we see the market generally in line with what we’ve experienced and what we’ve seen through most of 2014. For us, we don’t believe we’ll see a sustained level of organic growth until we get into the middle of the year or so from that standpoint. So, just to put my comments in context, so what drove the growth and where was it? As I tried to highlight a few minutes ago, in the improvements that we realized really happened in a number of areas but probably the most encouraging for us is the mid-to-high single-digit growth in North America. In that particular instance the internal issues that we’ve addressed that we think better position us are around what we have done in manufacturing by leveraging our tools with CBS. Our quality levels have improved dramatically, service levels, our lead times all have improved. And where we’re finding success are obviously customers that we lost, and we were able to win back. The end markets where we’re seeing the big success around pipe mills, we’re also seeing a big return on our efforts in the railcar industry as we support driven legislation there. We actually had a very good period in terms of the pipe mills are in support of natural gas. We don’t know whether that will last over the longer term, but we’ve seen success across a variety of end markets and we’ve been able to win customers back serving those end markets based on our operational improvement. So, that’s what's happened in North America. A key growth for us as well certainly happened in China as an example. In the China market as we’ve talked about this before, it’s our automation strategy that has been so successful. Its high margin fast growth portion of our business where we are up in the mid-teens and what's happening to China. It’s a part of the strategy that we described on the ESAB Investor Day. We’ve also seen good growth in India, or we returned a growth in India, South Africa. Russia, I highlighted before has been a key mover for us and will continue to be so in the fourth quarter. So, those are the growth markets and the underlying trends were largely taking share in those key areas on the back of customer wins. We do see success from some of the new products that we have introduced probably most pronounced, and Russia is an example on both the warrior product line as well as our consumables. So, it’s a combination of taking share a little less so from the new products. The new products are hitting, we have seen increase in our vitality index, but the bulk of the new products will hit mid-year of 2015.

Okay. That’s helpful, and good to hear you’re getting some of those customers back. And then just lastly, what was R&D as a percentage of sales in ’14, and actually what was it in ’13?

Well, the reason we don’t provide that precise number is that Steve said in gas and fluid handling, the R&D is largely in application engineering. So, we do a lot of R&D in the development of customized products for our customer base. So, I think if I were to give a number like that it would be misleading. So, I will not do that.

Okay. Thank you.

You are welcome.

Thank you. Our next question is from Matt McConnelll of RBC Capital Markets. You may begin.

Thank you. Good morning.

Hi, Matt.

Just a quick follow-up on the 1Q outlook, and I definitely understand the revenue headwinds. But what margin headwinds would there be, and would margins be down in one or both segments year-over-year?

Well there is a simple answer to your question. The only margin headwind is volume. I mean, obviously at this level of volume there is going to be decremental margins, and if you run the math at our standard decremental margins you’ll get this exact result that the guidance provided. So, the net result of that is that, margins will be significantly down in gas and fluid handling because that’s where the biggest margin decline is, and I would expect that margins will not be down in the welding sector.

Okay, good. That’s helpful. And then, I guess on the fluid handling margin improvement for this quarter, how much of that is moving past some of the specific large projects or maybe versus earlier returns from some of the restructuring you’ve been doing there. Can you just give us a sense what contributed to that year-over-year increase in 4Q?

Well, it’s really none of the above because we didn’t have -- most of the effect of the restructuring we’ll see in 2015, there may have been a small impact, but frankly relatively minimal within the fourth quarter. We didn’t have any shipments of low volume products in either Q4 of ’14 or ’13, so that wouldn’t be the issue either. I think essentially we’re right at the ship on the two items we called out in Q1 and Q2. Our reliability services business performed much better back at more typical levels and we closed or essentially closed down one of our two project businesses in Europe, and the one remained is operating quite productively here in the fourth quarter. So, it’s really more of that than either the things you sited.

Okay, great. Thank you very much.

You are welcome.

Thank you. Our next question is from Walter Liptak of Global Hunter. You may begin.

Hi. Thanks guys. Just a quick one, with the compressor order in the Middle East it sounds like this is sort of the tip of the iceberg or the beginning of your efforts out there. You mentioned the $40 billion refinery and other opportunities. What is the opportunity for your products for the compressors or other?

The opportunity funnel currently rests at $80 million for the compressor team. That’s a target that they are shooting for and believe could flow over a 24 to 36 month timeframe. On top there’s another $100 million which would be not over that four to five year timeframe.

Okay.

$180 in total.

Okay, good. Are you -- are there other products that you’re entering that market with?

There could be other tagalong or follow along products, but the primary focus in what we’ve spend so much time concentrating on over the last 24 to 36 months is really along the compressor business.

And -- yes, I guess, how are you finding that market? What are margins looking like on these project, is it a highly competitive market? Can you characterize it for us?

It’s certainly a competitive market, whether we’re in Russia winning or we’re in Kuwait. I think what's happened for us is the success of the CKD strategy that we implemented with the acquisition in the fourth quarter, and how Jim Fairbairn and Ian Brander and Dan Pryor were critical in helping us to put that together. But what's really happened is they’ve taken advantage of a very strong team in the Czech Republic that now has the manufacturing or together with the rest of the team has responsibility for driving our manufacturing supply chain, and also our innovation on some of the new products. And so, as a result of that acquisition we’re seeing a huge improvement in overall cost profile strong enough to give us a very competitive position in the marketplace as well as a significant improvement in overall margin. So, we really as we’ve shared on other calls, we’ve placed a ton of resources in CKD to drive operating efficiencies to enable us to go after opportunities like these on a global basis. Our other manufacturing sites in support of our compressor business have been quite strong and focused on CBS as well, so it’s the collection of all our sites working together and the strategy plan the team crested several years ago that’s enabled us to compete very effectively in this competitive market place, and to do so profitably that’s been the key. There is a big aftermarket component of this which is very attractive for us as well. But obviously what we’re describing right now are major, major wins in the four markets.

Okay. Thank you very much for the color.

Thank you. I would now like to turn the conference back over to Terry Ross for closing remarks. End of Q&A

Thank you. So, thanks again for joining us today. We look forward to updating you next quarter. Take care.