Enovis Corporation (ENOV) Q3 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Colfax Corporation Third 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, this conference call is being recorded. I would now like to introduce your host for today’s conference, Mr. Terry Ross. Sir, you may begin.

Thank you, Kelly. Good morning everyone, and thank you for joining us. My name is Terry Ross. I’m Colfax’s Vice President of Investor Relations. With me on the call today are Matt Trerotola, 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 website, colfaxcorp.com. We will also be using a slide presentation to supplement today’s call, which can be found on the Investors 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 statements speak only as of today, and we do not assume any obligation or intent to update them except as required by law. With respect to any non-GAAP financial measures 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 Matt.

Thanks, Terry. Good morning and thank you for joining us today. Before we discuss our third quarter results, I want to share some thoughts from my first few months leading Colfax. I have spent much of my time learning and listening to our customers and associates but I’ve also been assessing our culture and talent and supporting our leaders as we focus on improving our relative performance through some very challenging end market conditions. I’ve been very pleased to see the level of commitment to our values and business system. These are the cornerstones of a strong operational foundation. I’m also encouraged by the amount of opportunity I see to improve and grow our current businesses. Our challenge is to focus our efforts very judiciously in the face of market headwinds. We must be more aggressive at managing our cost structure in the short-term as we work through the down cycles in several of our important end markets, especially oil and gas, and marine. Through our strategic planning process, we believe these downturns are cyclical, not structural but the timing of recovery in these markets is uncertain and may not be seen before 2017. Therefore, we’ve identified additional cost structure actions that we can take without limiting our operational capacity to accelerate growth. These actions are broad based across all three of our businesses and address manufacturing, operating and corporate expenses. While we’ve taken significant actions this year already, we now have specific plan which will accelerate and extend the reduction of our cost structure. Specifically, we have accelerated restructuring program as much as possible. This will result in an increase in our planned restructuring cost to $66 million for 2015 and approximately $50 million more specifically identified for 2016. Second, we’ve continued the resizing of our workforce. These programs result in a workforce at the end of 2016 that is approximately 1,500 less than where we began this year. Third, restructuring programs are expected to save in excess of $100 million compared to the cost base with which we entered the year, when they’re fully implemented. But less than half of that realized in 2015 and not all of the balance in 2016; we’ll provide more specific guidance later in the year as the phasing of these savings. Finally on a constant currency basis, after these restructuring programs and other cost reduction actions are implemented, our selling and administrative costs will be reduced by approximately $80 million when comparing 2016 to 2014 with about a third of this as incremental 2016 savings. We’re equally focused on improving our growth through target initiatives and on expanding our margins through value pricing and sourcing efforts, so we can outperform the competition through this cycle. I’ve been working closely with each of the business units as they’ve developed their strategic plans and budgets. And I’m excited about our opportunities and committed to accelerate the pace. Now, I’ll discuss our business segments. First, our fabrication technology business continues to experience significant organic sales decline, down 4% for the third quarter. We see several of the most welding intensive industries oil and gas, marine and heavy mobile equipment down sharply. Similar to previous quarters, our biggest headwind was the decline in oil and gas spending of approximately 30%. This continues to impact both volume and mix in all major regions. While third quarter results include some charges that Scott will discuss later, even excluding these charges, our profitability for the segment was well below our expectations. We’ve discussed the causes of this profit erosion in past earnings calls, volume decreases; strengthening U.S. dollar, product geographic mix and customer services issues. Today I want to describe what we’re doing to reverse these trends and return to more acceptable performance levels. First, we’re reducing cost in this segment in line with the current revenue level and trajectory. Operating costs will be reduced by approximately 60 million compared to 2014 on a constant currency basis, with headcount down by over 1,000. Second, we’re focusing on better meeting customer needs by improving delivery levels, aligning our best commercial resources with customers and having dedicated specialists for key product line. I have met with a number of customers in the past weeks and confirmed that they are seeing improvement. Third, we’re intensifying our value pricing and sourcing efforts to offset the gross margin headwinds we experienced this year. Finally, we have some exciting new products launching in the coming quarters that should accelerate our equipment growth. It’s a difficult situation and we’ll not resolve it overnight. As you can imagine, I planned to focus a significant amount of my time here helping plan the team in the short-term. I believe we understand most of the issues and are treating them with appropriate urgency. I’m confident that we’ll make steady progress by applying our CBS tools and will reemerge as a strong leader in this industry. Turning now to gas- and fluid-handling segment: Orders for the third quarter were down 13% organically. This was below our expectations due to the timing of some large projects orders and the push out of refining and petrochemical maintenance in our shorter cycle reliability services business. Customers are striving to maximize production and reduce spending during a period of high refining margins that will likely be followed by some tough times. Overall, we saw another solid quarter for bookings in power generation offset by the weakening marine market. As in previous periods, the timing of large project orders made comparisons across sectors and quarters difficult. Let me share some additional market trends, starting with the largest end market, power generation. As expected, revenues for the quarter decreased by 9% organically while orders increased 6% organically. New build activity in China continued to be steady which was offset by the expected environmental regulatory retrofit program decreases in China revenues. On the order growth side, we had an important environmental upgrade project win in the Western U.S. in which we were selected to supply air heaters. We also received an order for a full turnkey air heater retrofit in the U.S. converting a competitor’s installed base to our new double ceiling design. This will be a very important reference site for the heater retrofit strategy. Also impacting order activity, we experienced lower aftermarket bookings in North America after a strong second quarter, reflecting normal quarterly fluctuations. While we continue to expect our full year orders and revenue to be down in power due to the non-repeating prior year SCR retrofit activity in China, the outlook for new power construction and aftermarket products remains stable. Turning to oil, gas and petrochemicals: Sales were up 2% organically in the third quarter as expected due to the timing of large orders in the backlog but orders decreased 14% organically. Order here to-date remained up despite a clearly down end market but the timing of large project orders always made quarterly comparisons in this market difficult. We continue to make progress on our strategy to expand our addressable market for oil and gas application. In the quarter, we booked our first project wins incorporating our new high efficiency centrifugal design. This new design allows us to compete in a wider of set of applications and geographies than was previously serviceable for Howden CKD. Although we’ve been able to offset the well documented macro headwinds with success on geographic and application development initiatives, we’ve also benefited for the timing of large orders and will face a difficult large project comparison in the fourth quarter. With our recent performance, we now expect revenues and orders for the full year to be roughly flat to prior year in a market that is estimated to be down double-digits. Turning to marine, which is primarily service by fluid-handling. Revenues were down 8% organically and orders declined by 31% organically. This was driven by a sharp reduction in new commercial ship construction contracts especially in the offshore support vessel category, which primarily serves oil production. In addition, orders for the third quarter of 2014 [ph] included an $18 million portion of the multiyear contract award in our defense segment in 2014. Similar to oil and gas, we’re making progress increasing our served market in commercial marine. Earlier this year, we expanded into a larger ship size segment. This quarter, we achieved a new specification approval at a major Korean shipyard and booked our first order to include this broader solution set. Our initiative to increase aftermarket share continues to make strong progress. Overall, we expect generally flat revenue in this 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 decreased by 36% while orders for the third quarter posted a 17% organic decline. Globally mining capital spending remains very low but we’re focused on winning targeted projects. We expect the challenging environment in mining to persist throughout the year but still see this as an important segment that will grow again in the future. General industrial end market sales declined 10% organically while orders posted a 23% organic decline. While heavy industry activity continues to be off sharply, we did book a large environmental retrofit project in China for a steel mill customer. It’s worth noting that China’s new air pollution reduction target will require upgrades by most steel, cement and other heavy industry customers. But we expect many of these customers to delay their investments until later in the five-year compliance window. Looking forward, we see a mixed outlook for the broad range of applications that make up our general industrial market. And now I’ll turn it over to Scott to discuss the financial results.

Thanks Matt. This morning we reported our third quarter results. Adjusted earnings per share were $0.24 which is significantly below our expectations for the quarter. Included within these results are bad debt allowances, intangible asset impairments and adjustments to accruals for net asbestos liabilities which total to $20 million. Bad debt allowances of $9 million in our fluid-handling business are primarily related to distressed South American customers with another $2 million within the fabrication technology segment. Intangible asset impairments of $3 million in fluid-handling are primarily related to the Clarus reliability services business and another $2 million of impairment in the fabrication technology segment is principally due to lower sales levels in the 2012 business acquired in Colombia. Net sales for the company were $969 million for the third quarter, a decrease of 17% from the same period last year. This consists of a 7% organic decline and a negative 12% impact from foreign exchange, partially offset by 2% growth from the Roots acquisition. We experienced project timing and short cycle demand issues in both segments and we continued to see a very difficult market in our fabrication technology business which finished the quarter with a 4.4% organic decline. Adjusted operating income was $59 million, representing an adjusted operating margin of 6%, down from 11% in the prior year. 200 basis points of this decline relates to the bad debt allowances, intangible asset impairments and the net asbestos liability adjustment I just discussed. Excluded from these results are $13 million of restructuring cost incurred in connection with the cost reduction project. Gas- and fluid-handling net sales for the quarter were $482 million with a 9% organic revenue decline, a 10% negative foreign exchange impact and a 4% increase from the Roots acquisition. Adjusted operating margin for this segment of 5.5% includes 450 basis points of decline related to the bad debt intangible asset impairment and the adjustment to the accruals for net asbestos liability which was $4 million and $6 million of acquisition accounting cost and the transaction expenses related to the Roots acquisition. Adjusted margins were 11.9% in this segment in the 2014 third quarter. Howden continues to execute well on productivity and cost control actions. Fluid-handling margins excluding the charges however did drop to the high single digits, reflecting the sharp drop off in our shorter cycle reliability services business. Now, let’s turn to fabrication technology. Net sales were $487 million for the third quarter, a decrease of 19%, consisting of a 4.4% organic decline and a negative 14.4% foreign exchange impact. In North America, revenue was down 7% organically. It is too soon to see the full read through of our efforts to stem the share loss we had with distribution in the first half, but we have seen positive distributor feedback through our new programming and joint sales efforts. Markets are down a similar amount in Europe and South America. Fab tech adjusted operating margin was 8.7%, well below our expectations, driven largely by the weak volume and further depressed margins in emerging markets. 70 basis points of this decline relates to the bad debts and impairments discussed previously. Price was neutral in the quarter, holding steady in North America, down slightly in Europe and up the counter inflation and currency fluctuations in South America. We continue to experience the negative mix impact from lower sales of oil and gas products as well as equipment. As Matt discussed earlier, significant cost reduction actions have been accelerated. These savings will phase in over the next several months but net of implementation costs will not provide a significant benefit in the fourth quarter. Corporate and other costs of approximately $10.4 million were lower than expectations, primarily due to lower accruals for incentive compensation. Interest expense was $10.9 million for the quarter and that includes approximately $2 million of non-cash amortization of debt discount and deferred issuance costs, as well as bank facility fees and the cost of bank guarantees and letters of credit. Our effective tax rate for adjusted net income of 27.5% for the quarter was in line with expectations. Finally, backlog in the gas- and fluid-handing segment was $1.3 billion at quarter end; the book to bill ratio for the third quarter was 0.92 to 1. Taking into cost the weaker demand in the short cycle areas and our expected geographic sales mix, we now expect adjusted earnings per share for 2015 to be in the range of $1.52 to $1.56. As Matt mentioned, restructuring costs will be approximately $66 million, a $16 million increase from the previous guidance. Additional details on the guidance are included in the slide presentation. And now, I’ll turn it back to Matt.

Thanks, Scott. Market headwinds will continue for some time but we’re committed to improving our relative performance in tough markets on both the top and the bottom line. We’re taking aggressive actions to reduce our cost structure to align to the softer market while maintaining our operational ability to respond when the markets return to growth. We’re also focusing our growth investments to make sure we protect our ability to grow in the near-term and position ourselves to outperform our markets on the upturn. Finally, the board has taken action to initiate a stock repurchase program of upto $100 million, which speaks to our confidence in the outlook for long-term profitability as well as our strong commitment to shareholder return. We also expect to continue to pursue M&A opportunities and have several active deals in the pipeline. Earlier this month, we closed a small deal of less than $20 million transaction value which is an exciting technology business, complementary to the Howden heavy fan business. It is not expected to materially impact operations this year. With that, I’d like to open up the session for Q&A.

[Operator Instructions] Our first question comes from the line of John Inch with Deutsche Bank. Your line is open.

Matt, you made some commentary around you don’t expect to see recovery until 2017. Is the context of that meaning you don’t respect -- you don’t expect any possible recovery until 2017 or you expect a recovery in 2017? Because in terms of my questions, you have had negative organic growth since 2012, so we’re going on four to five years now of quarters or years where you’ve had negative organic growth. So, what is that as you’ve come into the job that leads you perhaps to conclusion that things are finally beginning to break or there is light at the end of the tunnel or however you want to characterize it?

Yes. My comment -- thanks for the question. Comment was a market comment that we’re seeing tough trends in the market and we think we need to presume that 2017 would be the earliest market base recovery. We’re going to be working hard also on our relative performance in those markets and trying to make sure that we perform as strongly as possible against that market backdrop.

That’s a fair comment. Can I ask you, this $1.54 sort of adjusted EPS now guidance for this year; I mean you’re excluding fairly substantial outsized restructuring charges. What restructuring benefit is actually in the $1.54 that you would have -- that you’d be accruing or realizing from prior year restructurings and even restructuring taken throughout 2015, the first three quarters?

Yes. We do track that very diligently and very crisply and make sure that we have a very clean number there. And it is about $45 million in structural cost savings in the 2015 results. And as Matt said, the run rate for these additional actions would be up to another $55 million or $60 million more. All of that may not be fully in place, all of that will not be fully in place for 2016 but that’s the magnitude of the savings from these actions.

Have you guys gone through your backlog just to -- given obviously what’s going on around the world and in China, have you gone through your backlog at any level of incremental detail Matt, since you have been there to -- I guess, just to make sure that there aren’t more cancellations or push outs or whatever. I mean the context of push outs, you never really know what that means from our side of the table is that mean, we’re not cancelling it but don’t expect this to ever happen or I mean, I don’t know, how do you feel about your backlog because obviously the organic side of it doesn’t look that great right now?

What I can say is we’ve certainly turned significantly up the intensity with which we assessed the backlog and the backlog conversion and the order run rates, and how that results in what we can presume on a forward-looking basis about our revenues and as we’re doing that, certainly the teams are testing hard the different projects in the backlog. In the kind of environment we’re in I think it still is inevitable that at times some things in the backlog either fallout or slip into future quarters. But we’re trying hard to have as much as possible direct dialogue with customers and then dialogue internally about those projects to make sure we’re making the right assumptions about the future. We don’t have a history of significant cancellations and most of the delays are usually not indeterminate delays, they are generally defined delays within a period of up to a year sometimes. We really only have one significant order in the mining sector that has been deferred for sort of a longer period than that. We definitely don’t have a history of cancellations within the order book. But to Matt’s point, we do take a careful look at it monthly.

Just last, I mean oil and gas, people talk about the oil and gas industry is facing another round of step-down in CapEx, but I realize you’re not a -- you don’t supply a lot of heavy equipment to the industry. I mean do you think that’s true or do you think this down 30% run rate impact is worse as it gets. So is there something else that’s possibly looming maybe less for Colfax but more for the industries in which you serve for say call it 2016?

I guess what I can see there is that recently we’ve seen some more challenging trends that are on the oil and gas front. And so we’re trying to -- that’s one of the number of things that have taken some of the proactive cost actions to make sure they we’re prepared for whatever might be coming in the future. But I can’t say more than that in terms of where things might go in that sector.

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

My first question is really around the capital allocation strategy. It seems like there has been a little bit of a shift with the share authorization. So, I just want to get a sense for how long you’ve been thinking about it; how you’re thinking about funding potential buybacks? And then any incremental color that you have on your deal pipeline, because I think we were tracking to roughly $500 million on capacity for 2015?

Maybe I’ll make a few comments and Scott I’m sure will jump in as well. I think what has not changed is that we intend to grow the company through acquisition over time and that we’re looking to deploy our cash in a way that’s the most valuable for our shareholders. What you’re seeing in today’s announcement of the buyback authorization is basically that -- we want to make sure that we’ve got the agility in order to be able to deploy capital in the way that’s most valuable for our shareholders. And so that’s really what you’re seeing there. And as far as the acquisition pipeline, we continue to have an active acquisition pipeline. As I mentioned, we did a small one recently. We have some others in the pipeline as well. And the rate at which we complete any of those will be related to the deal processes but also will be connected to our ability to be comfortable with the value in light of the current dynamic situation in the economy.

And to take the capacity question, the $500 million number really hasn’t changed. We’ve spent $200 million of it on the Roots and the small acquisition Matt mentioned in his comment. We still have available borrowing capacity for the other $300 million that has to be allocated as Matt said between M&A and share buybacks. That is the capacity that we have.

Got it. So, if you don’t see anything, is it fair to say and I don’t want to put words in your mouth, but is it fair to say that if you don’t see accretive deals that are interesting to your portfolio in call it let’s say over the next three months to six months that you’re likely to start allocating capital towards buyback?

I think it’s fair to say that we’re going to deploy our capital in the way that we think is more valuable to the shareholder, and we’re going to continue to have a proactive effort to drive attractive acquisitions that grow the company in a valuable way.

I have a question on the restructuring program and prior to today I think the focus for this year was going to be -- and the magnitude was going to be roughly about $50 million in restructuring. I think year-to-date, correct me if I’m wrong, you’ve taken about $26 million and with an additional -- a big uptick in 4Q. I guess I’m just curious like how come given that organic growth has been pretty negative, why haven’t those actions been accelerated up until this point, and how do you feel confident that you’ve done enough and set aside enough for 2016?

I will take the first half of the question. The phasing of it really has a lot to do with the accounting rules. You can’t reflect restructuring charges until the workforces have been notified, the facilities have been departed from. So, we’ve been doing a whole lot of work on these projects. The accounting numbers don’t reflect the proportion of work that’s been done on these projects. So the best response I can give you to why the fourth quarter is so heavily weighted is there certainly is some accelerated stuff we’re going to do next year but most of it is just a reflection of the accounting rules.

And then as far as the question about whether we think that we’re doing enough. I think what I can say there is that in my time here I’ve been really working with the teams to try to make sure that we’re taking a view into the future that is as grounded as possible and that for the most conservative end of that view that we -- we’re getting our cost structure sized in order to be able to deliver strong performance. And that’s what is driven us to the -- some of the numbers that we need to achieve. At long side of that we’ve had to really understand what the opportunities and possibilities are and to make sure that we’ve got projects and initiatives that we can execute while still sustaining our ability to serve customers well and grow. So that’s how we’ve kind of gotten to where we are. And at the same time we’ll be closely monitoring the markets to make sure that if we see a significant -- another significant step down coming that we’re being proactive as well.

And let me have one follow-up there Matt just, and I’ll get back in queue. What is your planning assumption then for 2016 given the cost actions that you’re contemplating?

Yes. I can’t comment on that at this point. I think we’ll give some guidance a little bit later in the year.

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

Yes. Hi, good morning. And apologies if you mentioned this but just on the pricing front, can you talk about specifically in the fluid-handling portion of the business and are you seeing any customers approach you about re-pricing backlog that’s already been booked?

No.

Okay. Can you comment just generally on fluid-handling pricing?

Pricing is holding up pretty well in fluid-handling. It’s generally not a list price type of sale; these are generally application engineered sales. There is a degree of pressure in the commercial marine for market which is commensurate with a lower volume activity. But overall there’s not a significant headwind on pricing in fluid-handling.

And then just on the other side of that, are you able to get cost benefits or are you hedged on the inputs there or can you realize some of that maybe more immediately?

The answer is we certainly do hedge some of the inputs when we have firm contracts in place. The Howden contracts tend to be longer duration to completion than most of the pump business. So to answer your question, it’s a little bit of both. Some of it is hedged but we do still have the ability particularly in fluid-handling to benefit from the -- there are drops in commodity prices.

And then just secondly on power, so you made the comment that environmental orders on the industrial side, you expect you’d push that to a later part of the five-year plan, I guess maybe I misunderstood before. But I was thinking that you were expecting more another cycle on the utility front as well which you thought would kick in late this year. If you could just clarify which part of the business you’re expecting to address and what is driving people to kind of push out their orders on that front?

Well I think the answer to the last question is easy. What’s driving them to push the orders out is that business conditions are very slow, so compliance spending is obviously not at the top of people’s list of things to do. But the particular reduction regulations have a bigger impact in power than they do in heavy industry but they certainly affect both. We expect the power side to go in a more traditional. There’s obviously a phase up period that -- but we would expect a more typical phase up period on the power side of the environmental regulations whereas the customer feedback we’re getting on steel and cement is that we may see more of a waiting till the end of the period. But again that’s based on customer feedback. We don’t have specific factual information on that. But the power is the larger of the opportunities and that we expect to go in a more typical pattern.

And I can just add to that. I was over in China a few times earlier this year and there’s a significant amount of tension there right now between a real commitment from the government to make substantial progress quickly on the environmental front or at least a commitment from that portion of the government, at the same time as they’re having the industrial growth challenges and have other parts of the government wanting and needing to work very proactively on those. And so, our challenge is how do we figure out a way to work with customers to get these investments, further up the priority scheme and ideally maybe make them not just about environmental but have some productivity benefits, things like that in order to pull forward some of that investment versus the past that said okay. And certainly that’s what our team’s working on. But what I was sharing in my comments was kind of our current best view of how things are going to play out in light of that tension there.

So, is your expectation you’re still going to get power orders by the end of the year or is that being pushed into ‘16 or later?

Should be the same as we’ve been announcing and discussing; there is really no specific change that we would expect orders in the fourth quarter and revenue next year with the revenue ramping up to a peak in the middle of the five-year period.

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

I wondered if we could just talk a little bit about the bad debt charge in the quarter. Can you talk about what drove that; where it came from; I guess what I’m trying to get at is what’s the risk that we’re going to see anymore of this?

The risk of anything is pretty minimal. We don’t have any significant balances with any individual customers of the nature of what made up the majority of this charge-off. So, I think the risks of this repeating are very low. In this specific instance we have made every conceivable effort to collect this account and we’re still going to attempt to collect it but not saying a short-term path to cash realization. We thought it was appropriate to provide an allowance for it.

So, this is a single customer?

The majority of it is a single customer; it’s not entirely. Obviously we prefer not to discuss specific customers.

One of the comments in your prepared remarks was push out of refining and pet-chem turnaround season. Can you give us a little bit more color on what’s driving that? I know crack spreads have come off, so I would have thought that would potentially even be a little bit of catch-up from the maintenance deferred in the first half of the year. Can you talk about what’s driving the continued push out there?

We haven’t seen -- the catch up you are referring to, we haven’t seen in any significant way yet. So, best indications we have is that by and large folks have been still trying to run. And so we have seen some push-outs there.

Matt, I wonder if I could just get your perspective on this. We’ve been talking about service levels and issues there, particularly on a fab-tech side for some time now at Colfax. And I know you’ve mentioned it again in your prepared remarks. In your first couple, three months on the job here, what is it that you’re seeing that is most responsible for those kinds of things and what kind of countermeasures are you looking to deploy?

Yes, as far as some of the fab-tech specific challenges around service levels, there is a couple of different things that we understand. I think we’ve shared some of those before but I’ll reiterate based on my experience. I think it’s clear now that a number of factors came together to create some challenges there for us. There were some external issues related to port strikes and our ability to get long lead raw materials; there were some external issues related to demand surge from a customer moving out of a product line. And then there were some internal issues in terms of our inventory levels and our staffing levels versus those issues as well as some planned consolidations and things we had underway. I think that those are the operational set of things that came together in handful of our plants to create the challenges. At the same time we had with a integration of Victor, we had made some changes to our coverage and our channel that perhaps made it a little harder for us to manage through those at the level of the customer interface. And so, again my best understanding at this point of those service issues is sort of that combination and how it came together, I have been able to spend a good bit of a time with the team as well as at some of the sites involved and understand how would because the issues, the efforts that we got underway, some more containment types of issues in order to make sure that we can improved quickly but also some of the more structural and sustainment types of issues that we’re dealing. And it’s clear to me that we’ve made progress. I’ve gotten direct feedbacks from some customers that they’ve seen improvements and we can see it in some of the key metrics but it’s also clear that we still have more work to do here and we’ve got to keep improving our operational capabilities with certain customers as well as our sales engagement with our customers.

In your opinion, is the plan to improve those service levels sufficient? Or do you need to take another look at the plans there?

I would say that it’s clear that we’re doing a lot of the right things that we need to do to improve our service levels but I’m going to be working very closely with the team in the coming months to be sure that we’re doing all the things that we need to do and that there aren’t remaining things that we need to be focused on.

Our next question comes from the line of Eli Lustgarten with Longbow Securities. Your line is now open.

Bear with me because I just want to make sure I understand something. The 450 basis-point bad debt charge is -- $0.24 includes that and it’s in the 5.5% margin for gas and fluid -- power and fluid-handling?

The 450 basis-point includes more than just a bad debt charge, but all those things to press the margin are included within the 5.5. So if you exclude it, then we have a much higher margin.

And then $0.24. Now you reported in the welding business a 4% negative price mix, is that mostly a shift away less equipment and going towards consumables or is that a pricing pressure going on in the business or what’s happening in that part of the business that’s causing 4% pricing negative?

The pricing is neutral which I tried to address in the prepared comments and I gave a little regional recap, the rest is mix. Equipment is definitely a big component of it but some of it is mix within the consumables product line as well. We really don’t have the data to give you a precise breakout of that. I can’t confirm that equipment is a big piece of it, but some of it comes from consumables mix as well.

If you take just that part of the business and actually probably true on both sides; the second half of 2015 is clearly weaker than the first half that we’re getting on, you have a tough fourth quarter, but with what’s going on in oil and gas really just going through, what’s happening in the second half of 2015 is going to continue through the first half of 2016 which is very hard to change those dynamics at this point in short term. One, are you preparing for the fact that you’ve got stepped out in business coming if you look over the next several quarters? And two, I guess to come back to same question and doing enough for the restructuring is there more that you really have to take a look at because it’s not one quarter of weakness but probably several quarters of weakness that you’ve got to go through before things begin to maybe stabilize and improve?

What we’ve done is tried to take a hard look at not just our current performance but hard look at trajectory and make sure that the actions that we’re taking are to prepare ourselves for the trajectory that we’re on.

So, is it fair to say that I mean as you go into ‘16 you’re looking at -- it’s hard to see conditions changing very much in the first half than where you’re today?

As I said before, we think that the market challenges are likely to persist through 2016. Obviously, you’d have to go through each of our operational challenges to some of them will lapse, some of them we’ve driven improvements on; some of them may persist. And in our planning, we will work through all of that and make sure we’ve got the strongest possible plan for 2016. But at this point what we’ve been trying to do is really make sure that our cost structure is prepared for the growth in order trajectory that we’re on.

The negative book to bill that you’re running in gas- and fluid-handling also suggests that you’ve got much tougher environment coming as you go over the next couple of quarters. Can profitability begin to stabilize or are we still looking that steps have to be taken to stabilize the profitability in that part of the business?

I think profitability has been pretty stable in that segment. We’ve had a little fall off this quarter for the reliability service issue that we talked about in the remarks. The backlog doesn’t roll out in a perfect proportion quarter-by-quarter; we actually -- in the guidance is a reasonably better fourth quarter for the segment than the most recent quarters. But to your point, the order trends do infer that the early part of 2016 will not be an up kind of period in gas- and fluid-handling and that’s the business where the backlog does give us a little bit of visibility; we don’t have equivalent visibility on the welding side.

Our next question comes from the line of Mike Halloran with Robert W. Baird. Your line is now open.

What did trends track likely through the quarter for both divisions; was this some signs of stability or do you see worsening as you went through the quarter?

No, we didn’t really see any worsening through the quarter. I would say it was -- it’s a difficult quarter because of the European vacation season. So, it makes it -- but looking at it certainly relative to prior third quarters, we didn’t see any significant weakening in the month of September.

What I could say is that there were -- we had some possibilities in terms of things that we were hoping we might be able to make happen in September that in the end based on some of trends that we’ve talked about were not possible, would be just an additional comment there.

And then as you guys contemplated your full year guidance range, was the assumption that you’d see some stability at these low run rates from here or was there an expectation for some of the oil and gas softening that you mentioned in some of these others pressuring numbers or pressuring your thought process, maybe a little bit more than normal sequentials would imply?

We did factor some of those things into the fourth quarter estimates that we do expect the welding decline rate to be more in line with the year-to-date numbers than what the slightly better numbers that we had here in the third quarter. And in gas- and fluid-handling, we expect a very, very good fourth quarter last year as we expect a modest decline there but a reasonably good fourth quarter in that segment. So yes, we factored all these trends into the guidance.

Our next question comes from the line of Matt McConnell with RBC Capital Markets. Your line is open.

I’d like to follow on the fab tech margin decline, and you gave some good buckets on what drove that and talked a lot about the customer service issues and how much of it would you say is within your control, so things like the customer service issues first, currency and geographic mix, and is there anything that you can do to offset some of those pressures which are probably also having a meaningful impact on the margin?

Yes, let me go back to that and maybe talk about both growth and margin because they wind up tying together, right. So I mean it’s clear that in fab tech we’ve got some significant external issues. And let me just kind of clear those first. And those are -- there’s a macroeconomic challenge just related to industrial production, in particular in some of the high growth markets and that’s a challenge on the growth front and one that we’re a little bit more exposed to than others. And then in addition, there’s a cyclical challenge in hands, few of the highest users have welding having some significant cyclical downturn, the oil and gas and marine being two of the key ones there. And so that combination of factors on the external and the currency challenges really stacks up to be a significant portion of our challenges this year. At the same time, we’ve got some significant challenges in terms of our performance in context. And part of that comes from our exposure but then the rest comes to some of our executional challenges in terms of our customer service, operational as well as in the channel is key area that we’ve been focused on. And we’ve also got some aggressive efforts to drive a stronger equipment portfolio and equipment growth that can come with that. So, I can’t take you to the exact division of the issues but I can say that I think both our growth and profitability issues are significantly from each of those versus largely weighted to one or the other.

And maybe just following up on the share buyback authorization issue, you mentioned that improves your agility. But more specifically, do you intend to start buying back shares after the third quarter blackout period ends; so would you intend to buy back shares within the next few days?

We can’t answer that question any more specifically than I’ve answered in that; we’ve gotten the authorization, have the agility and will be making decisions in line with what we think is going to be the highest value use of capital for our shareholders. I think that’s as specific as we can get on this call.

Our next question comes from the line of Andrew Obin with Bank of America Merrill Lynch. Your line is now open.

Just couple of questions. First, looking at your working capital and looking at inventories, last time we had a pick up, inventories were source of cash in last third quarter and it’s a deterioration versus a year ago. Just trying to understand is this related to the accounting, is it related to write-offs we’re taking or sort of are we changing terms in the channel in terms of how we interact with customers?

There’s no change in terms of the channel, it’s largely that the higher inventory levels are largely related to the facility relocation program from our one ESAB North American facility into the Texas and Mexico facilities; we have been building some inventory to protect the customers during that transaction.

And so that should snap back once you’re done?

That’s correct.

And then a question on complication, actually as bad as it was, I mean sequential growth did improve versus the second quarter and we were positively surprised by the fact it was [ph] flat organic volume and what a tough market. So are you starting to regain market share or what’s going on there?

Yes, I think it’d be early to say that we’re regaining market share but we’re certainly glad to see that the sequential trend be in the positive direction. But as Scott indicated in his comments, we’re still planning that the fourth quarter’s more like year to date number. So we know we’ve made improvements there but at this point we think it’s premature to declare victory.

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

Hi guys, this is James [ph] filling in for Jeff. Just a quick question regarding Roots. You guys were -- prior to the quarter, you guys were talking about Roots contributing roughly $60 million in sales and you had $25 million in the quarter. How should we think about that for the full year here?

Maybe I’ll make a comment on Roots and then Scott maybe follow up with what we can say about the numbers. Our integration effort at Roots is on track. I think we’re excited about the strategic opportunities there. I think we feel very, very good about the acquisition in terms of the opportunity this going to drive over time. We have seen some softening in the orders in Roots, particularly in the transportation market. And that is something that is having some impact but we still see the acquisition as being very positive from a strategic standpoint.

I think the fourth quarter is likely to look similar to the third, so we probably will not achieve that original $60 million for the reasons that Matt just outlined.

And then just to piggyback on a prior question regarding Victor and the servicing that you guys are -- the customer service initiatives that you have underway for fab tech. Last quarter you talked about a learning curve for Victor distributors, just can you provide some additional color, so what exactly you’re trying to do there and in terms of ramping both the ESAB and Victor distribution channels to get those products familiarized?

What I’ve been able to learn so far is that idea here was I think a very good one in terms of bringing two great brands and put the products together and having the efficiency and growth benefits, put it through the same -- to our same channel. And I think that that strategy from what I’ve been able to learn so far makes lot of sense and I’m confident that over time that will be something that really strengthens our growth and our efficiency and the quality of our service to customers. What we have learned that in the transition that we had some challenges. I think it’s always challenges when you make that kind of integration, there is some risk around attrition; there is some risk around some of the changes you make at distributors; and there is some risk around the extent to which the sales team will be able to sale the full range of technologies and support them. And I think we ran into some those; we’ve adopted. I think we’ve got strong model now with sales folks that cover the line but that are well supported with specialists that are able to go deeper in any of the technologies. And I think we’ve been getting better feedback from our distributors on that model. And so I think we’re headed in the right direction on that one. And certainly what I’ve heard directly from the distributor is that they’re looking for it. They see ESAB and Victor as very, very important parts of the future here in North America as a critical and important player that they want us to have a significant role in their business. And so, I think we’ve got every opportunity there and we just got to keep on and improving our ability to execute.

Thank you. And our next question comes from the line of Chase Jacobson with William Blair. Your line is open.

One clarification; did you give the organic growth by segment, the new outlook?

We didn’t specifically give it in the slide deck but the comments that I did make in response to an earlier question was that the organic growth for welding will look more likely year to date number than the third quarter and that the outlook for gas- and fluid-handling would be of a modest decrease compared to a very strong fourth quarter last year.

Thank you. And I’m showing no further questions at this time. I’d like to turn the call back to Mr. Ross for closing remarks.

Thank you again for joining us today. We look forward to updating you next quarter.