Enovis Corporation (ENOV) Q4 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Colfax Corporation fourth quarter earnings conference call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Scott Brannan, please go ahead.

Thanks, and good morning to everyone, and thanks for joining us. My name is Scott Brannan, I’m Colfax’s Chief Financial Officer. With me on the call today is Clay Kiefaber, our President and CEO. Our earnings release is available on the Investor section of our website www.ColfaxCorp.com. We will also be using a slide presentation to supplement today’s call, which can also be found on the investor’s 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 risk and uncertainty, including those set forth in our SEC filings. Actual results might differ materially from any forward-looking statements that we might make today. The forward-looking statements speak only as of today, and we do not assume any obligation or intend to update them except as required by law. With respect to any non-GAAP financial measures during the call today, the accompanying information required by SEC Reg G relating to those measures can be found in our press release, and in the supplemental slide presentation, in the investor’s section of the Colfax website. Further, projected adjusted net income per share reflects our revised definition beginning in 2012. Please refer to the supplemental slide presentation for a comparison to our 2011 adjusted net income and adjusted net income per share under the revised definition. I will be speaking about this in more detail later in the call. Now I’d like to turn it over to Clay.

Thanks, Scott. Good morning, everyone. This morning we’re going to cover 4 topics. Our fourth quarter results, our 2011 results, along with a recap of the year’s progress, our initial thoughts regarding the acquisition of Charter International, and finally our earnings guidance for 2012. I’ll handle the first 3, and then I’ll turn it over to Scott for the more detailed financials and the 2012 guidance, and then we’ll open it up for questions. We’re pleased to announce strong results for the full-year 2011 and a solid fourth quarter. Adjusted EPS for 2011 was $1.31, a 42% increase over 2010, driven by strong shipments and a continued improvement in productivity, slightly tempered by lower margin Marine shipments. Operating margins for our existing businesses expanded by approximately 160 basis points while we continue to restructure the operations. Net sales for the year were $693 million, an increase of 28% and 9% organically, while bookings were $683 million, an increase of 28% or 12% organically. We continue to make progress with working capital as well with the reduction from 19% of sales to 17% of sales at year end. For the fourth quarter, adjusted net income was $17.6 million or $0.40 a share, an increase of 4%, while net sales for the quarter were $178 million, an increase of 7%. Sales were strong in Power Generation, Oil and Gas, and General Industrial, relatively flat in Commercial Marine, and down in Defense. The overall increase was largely due to a 9% from the Roscoe and COT-Puritech acquisitions, partially offset by a 2% organic decrease. Orders for the quarter were $153 million, an organic increase of 9%, with growth in all end markets except general industrial. All of these results met our internal expectations. Now for an abridged update on our 5 end markets, and please refer to the slides for the specific growth rates. Currency rates resulted in the 4% increase in sales for the full year, but didn’t have a significant impact on sales for the quarter. Oil and Gas remains a very robust market fueled by higher crude oil prices and deferred capital projects, most notably in heavy crude transfer, storage and refinery, and lubrication systems. Western Canada, Latin America and Asia were particularly strong. Projects are now larger in scope, have longer sales cycle and have more volatile order patterns. For example, a pipeline order of $10 million shipped in the fourth quarter of 2010 distorting the quarterly comparison. As a result, net sales increase 24%, and organic sales declined 12%. Orders increased 10%, 6% organically, and quotations in a multiphase pipeline or refinery applications remain extremely high. Now for a look at the General Industrial end market. Both orders in sales increased for the quarter and the year. While we continue to experience broad based strength, the rate of order increases slowed recently, especially in certain European segments. For the quarter, order intake was strong in the diesel engine and chemical processing submarkets, while slowing most notably through distribution. As a result of some new leadership, orders have improved in the Chinese market. Turning to Power Generation, sales and orders were up for both the quarter and the year, described a new infrastructure projects in Asia and the Middle East. The long-term prospects for this end market remains strong given the fundamental under supply of electricity globally. Our OEM partners continue to forecast robust activity, and we continue to provide more complete systems to regions outside of North America. In Defense, shipments decreased for both the quarter and the year as expected. The order patterns continue to follow the timing of specific ship programs and will remain volatile by quarter. In Commercial Marines, sales were relatively flat for the quarter. Orders increased significantly as this end market continues to exceed our internal expectations. For the year, sales and orders were up significantly. Cancelations were $1 million in the fourth quarter, compared to $6 million in the fourth quarter of 2010. On a year-over-year basis, cancelations have declined from $16 million to $6 million. And now I’d like to review our progress as it relates to our strategic priorities. First, we accelerated our restructuring efforts with the rationalization of our European CDCs, the closure of our [indiscernible] Ghana system facility in Germany, the rationalization of the foundry in Radolfzell and the consolidation of the Portland facility in to one. The results of these actions will help drive improved margins and working capital performance in 2012. Next, the rollout of our global organizational structure facilitated the implementation of our strategy as our global sales and marketing teams were better able to focus on our customers, and leverage our applications expertise in driving increased sales. A recent $10 million power generation order was booked because of that structure change. Working as a team, we determine the customer need and then provided a solution that incorporated IMO, Warren, and Allweiler products. That simply would not have happened with the past business unit structure. Third, we strengthened our CBS capability with the addition of Steve Wittig to our team. He continues to raise the standard of excellence for our Kaizen and policy deployment processes, increase the organizational intensity, and add talent to our CBS teams. Our lean efforts in Radolfzell are continuing to gain traction with the addition of some talented lean leadership as evidence by our 10% inventory decline in Q4. We’re starting to see the application of demand pull and process flow on the shop floor, and while resulted in a lack of absorption for the quarter, it will provide sustained lean processes that will benefit us now as well as in the future. Fourth, we accelerated the growth of our lubrication services business with the acquisition of COT-Puritech, a leading national supplier of oil flushing and remediation services, to power plants, refinery, and petrochemical plants. The additional expertise gained will help us accelerate our total lubrication management business growth, and we welcome Chip, Pat, and the COT team to Colfax. Fifth, and most importantly, we continue to add to our talent pool with the addition of several highly talented associates who believe in lean and CBS and are passionate about building a great company for the long-term. As most of you know, on January 13, of this year, we completed the acquisition of Charter International. It’s comprised of 2 distinctly different businesses. Howden, a $1 billion global manufacturer of Air and Gas Handling Equipment, and ESAB, a $2 billion manufacturer of welding and cutting equipment and consumables. These companies provide additional exposure to attractive markets, improve our position in emerging markets, increase our recurring and aftermarket revenue stream, and create a better balance of short and long cycle businesses. Let me give you a brief account of our approach and actions thus far. First, well before we closed the deal we started recruiting for key leaders who would accelerate the required transformational change. Ken Konpa, a former executive at Danaher and a degreed chemist, has joined us as the Vice President of Global Marketing for ESAB. Ken brings to ESAB a deep understanding and strong background in industrial marketing. Several of his accomplishments include growing gross margins in consumables business, and implementing a growth strategy in South America. Ken is focused on developing the overall strategic plan, as well as building a highly talented and productive product development and product management team, that will provide VOC-based regional solutions for both equipment and consumables. Alignment and speed to market will be critical success factors. Vince Northfield, a former executive at Teleflex, has joined us as Vice President of Global Operations for ESAB. At Teleflex, he focused on working capital and margin enhancement, and lead the global implementation of operational excellence and standardization programs. Vince is focused on the development of a responsive, rationalized and competitive supply chain that focuses intensely on our customers. He has an exceptional background in lean, and will be leading the application of those principals throughout the organization. Finally, Gary Hoover will be joining ESAB as Vice President of CBS on February 20. He comes to us from TBM Consulting where he was a partner and led their European and Indian consulting practice, a practice that specializes in lean and policy deployment. He has access to an extensive network of lean expertise, and we’ll be pursuing the best to add to our teams. He’ll also be responsible for strengthening our lean capabilities and driving tangible results within ESAB, something that has been lacking in their past lean programs. He will also be responsible for coordinating and training the organization on policy deployment, along with Ken, Vince, and me. Second, we met with the worldwide senior leadership team of ESAB, on January 13 -- 11th to the 13th, to review the business and to develop additional plans for improving its performance. Interestingly, this was the first time that top level leadership of ESAB had ever met as a team. The dialog was open and candid, and we’re now in the process of developing an organizational structure that will enable a more value-added approach to our customers, globally. We also identified significant opportunities to improve our cost structure. We focused the group on answering the question; if we were starting a welding and cutting business today, how would we structure it. I want to emphasize that we’re in this to compete for the long-term, and that will be reflected on our structure moving forward. Additionally, we’ve already rationalized the Charter corporate headquarters, as well as implemented leaner global structure. Also, I’ve conducted approximately 15 side visits to engage with and listen to both ESAB and Howden Associates. Third, we needed to establish a higher level of urgency and momentum for results at ESAB, so we introduced a weekly KPI report-out process. We focus on understanding where we’re off-track, what the root cause of the problem is, and what we’re doing to implement counter measures to get back on track. It’s a habit that we’re going to develop and that will lead to the development of our top level policy deployment metrics and action plans. We’ll take approximately the next 90 to 100 days to dig in to the details of the business, and build that in to our PD process. We are going to be very active with our restructuring this year at ESAB as we’re anxious to use the next structure to compete aggressively in our respective markets where we’re going to focus on service excellence as well as effective resource deployment. Shipping to Howden, as I’ve stated consistently, this is a very sound business, but one that we believe to be capable of higher levels of performance. I, along with Steve Wittig, visited Glasgow, prior to Christmas, to train the top level executive team and policy deployment. This was a great session by the way with Ian and his team. They were very, very receptive and we’re real pleased with it, but they’ve completed their top level matrix and action plans, and are actively executing those plans right now. While we’ll be accessing both Howden and ESAB over the next 90 to 100 days, as well as formulating our policy deployment plans, the following are some critical areas of focus where you can expect to see improvements. At Howden, we’ll be focused on deploying CBS, intensifying the application of lean, simplifying the organizational structure, leveraging existing best practice models, especially on the sales end, and then improving our value-added sales capability. At ESAB, we’ll be focused on building the best team, aligning the organization strategically as well as structurally, providing VOC based product and services to our regional end markets, and that’s both for equipment and consumables by the way. Also, leveraging resources globally, and then providing great customer service and deploying CBS. We believe we can generate in excess $100 million of savings from these businesses over the next 3 to 4 years as this organization is operating significantly below its collective capability, and we’re going to change that. As we complete our assessment of Howden and ESAB over the next few months, we’ll be better able to refine this estimate and determine the timeframe in which these cost savings will be realized. These are still the early days and we’re being careful not to initiate more cost reduction projects than we can comfortably assimilate. Based on my site visits with ESAB and Howden, I’m even more excited about the opportunities for improvement; these are high quality businesses in growth markets with many talented associated. In short, our view of the potential of these businesses has increased, based on what I’ve seen thus far. We continue to expect significant accretion and double-digit return on invested capital within 3 to 5 years. At Colfax Fluid Handling, we’ll focus on realizing the benefits of our restructuring while doing a bit more, driving global sourcing, growing lubrication services, defining and deploying world class customer service, implementing demand pull, and process flow as a standard across all plants, as well as intensifying the application of CBS. Looking out 3 to 4 years, we believe the following operating margins are achievable. In fluid handling, 20% or greater, Howden the middle teens, ESAB the low teens, and we’ll report back on the progress of those in future calls. This year we said we were going to improve the operating performance of the business and we did that. We said we would recruit the best team, and we continue to accomplish that. Both of these results put us in a position to make a transformational acquisition like Charter, and that in turn, accelerated our journey to multi-platform status, and I’d like to thank our team for all their efforts. In closing, we’re excited about the opportunities that we’ve discovered with the Charter acquisition, along with the continued improvements in our fluid handling business, and we’re committed to continuing to live our values, building a very special enterprise for the long term. And with that, I’ll turn it over to Scott, for the details on the financials and the outline of our 2012 guidance.

Thanks, Clay. For the fourth quarter sales were $178 million up 7%, but down 2% on an organic basis. The gross profit margin of 34.6% was down slightly from the fourth quarter of 2010, primarily as a result of lower gross margin associated with the Rochor acquisition. Expenses of $25.3 million associated with the Charter transaction for the quarter, and $31.1 million year-to-date are not included in adjusted net income, as this acquisition is transformative and not part of our recurring business development efforts. SG&A expense, excluding the Charter cost I just mentioned, were up by approximately $2 million for the quarter, but this was primarily due to the additional operations cost of Rochor and COT-Puritech. As a percentage of sales, SG&A expenses, excluding in the Charter cost -- Charter acquisition related cost remains consistent with the fourth quarter of 2010 at 19%. All of these factors resulted in adjusted net income of $17.6 million or $0.40 a share, improving modestly compared to a very strong fourth quarter in 2010. On a full-year basis, sales were up 28%, 9% on an organic basis. Adjusted operating income was up 36%. Excluding the impact of the acquired businesses, margin on a full-year basis was up 160 basis points. These strong incremental margins are the result of the productivity improvement initiatives and the positive leverage of fixed cost at higher sales level. For the quarter, operating profit margins held relatively flat, despite a 2% organic sales decrease. This again reflects the productivity improvement achieved over the year and a favorable mix of products by end market. This is particularly noteworthy in that there were significantly less fixed cost leverage in the 2011 quarter as inventories were reduced $22 billion in the quarter. Although adjusted operating income were reporting 4.6 million in the fourth quarter of 2011 of asbestos liability and defense cost, which are 24% higher than reported in the 2010 fourth quarter. Estimate future liabilities for certain jurisdictions were revalued due to higher cost trends, resulting in increased liabilities of 22.8 million, increased recoverable assets of 20.3 million, and a net pre-tax charge of 2.5 million. Asbestos coverage litigation cost of 2.2 million were relatively consistent with the 2010 fourth quarter. In previous calls, we discussed expectations that the coverage litigation trials for both our subsidiaries would conclude in 2011. While one trial has, the other has been reschedule for the fourth quarter of 2012. As such, we expect coverage litigation cost to decrease in 2012, but not to the extent previously anticipated. Restructuring cost in the fourth quarter related to the initiatives Clay discussed in detail on the third quarter earnings call were 2.2 million and were in line with internal expectations. Operating cash flow for the fourth quarter was 15.5 million driven mainly by the $22 million reduction in inventory in the fourth quarter. For the full-year, operating cash flow was 57.2 million and working capital as a percent of sales reduced to 17% from 19% at the 2010 year-end. We expect to continue to improve these metrics in 2012 as we vigorously apply the Colfax business system. Finally, backlog was 347 million at year-end as is our standard seasonal pattern, shipments exceeded orders in the fourth quarter despite very strong order growth. Turning now to Charter, the acquisition became effective on January 13. The equity and debt financing closed uneventfully as anticipated. Due to favorable management of the foreign exchange component, the U.S. dollar cost of the acquisition was approximately $50 million less than estimated at the September level. In addition to ESAB's working capital reduction program is running well ahead of schedule and has nearly achieved the 19% goal they had set. The end result of both of these positive actions is that we have significant liquidity available now if needed. Specifically, we have over $300 million of cash on the balance sheet after funding the acquisition and we have $300 million undrawn revolving credit facility. Charter completed 2011 broadly in line with expectations. As Charters year-end accounts are still ongoing audits, we are not able to report operating results for 2011. Furthermore, since Charter will not be producing financial results in accordance with U.S. GAAP, we will not be able to release the full 2011 results at any time. We can report though that ESAB sales were $517 million in the 2011 fourth quarter, up 6% from the $487 million in the 2010 fourth quarter. Sales were strong in Russia, the Middle East, North America and the Nordics. Sales and outlook remain subdued for Southern Europe. For 2011, ESABs sales were 2.1 billion, up 18% from the 1.79 billion reported in 2010. The fourth quarter was very strong for Howden in both sales and order. Sales for the 2011 fourth quarter were $353 million up 46% from $242 million in the 2010 fourth quarter. For the full year Howden sales were $1.07 billion, up 23% from $872 million reported for 2010. Howden’s backlog at December 31, 2011, was $922 million, roughly the same as at September 30, 2011. As I mentioned, we cannot provide detailed information for either ESAB or Howden at the operating profit level. Howden’s margins in the fourth quarter were sequentially higher than earlier quarters as is their normal seasonal patterns. ESAB’s margins in the fourth quarter were roughly comparable to previously reported 2011 results. Turning now to the 2012 guidance. First we’re making some changes to our definition of adjusted net income beginning in 2012. The changes are as followed: the asbestos liability and defense cost will now be included in adjusted net income as a reduction to adjusted net income as they are recurring in cash payment items; the asbestos coverage litigation cost will continue to be excluded as it’s expected to wind down in the next year or so; the major ESAB restructuring program, both those previously outlined by Charter in their public communications, as well as additional structural changes identified by us will be excluded; transaction cost related to the Charter deal will be excluded as this acquisition is transformative and not part of our normal business development effort. Cost for smaller bolt-on acquisitions however, will be included as a reduction to adjusted net income. And finally, significant year one fair value adjusted to the acquisition related inventory and backlog will be excluded from adjusted net income. These items are nonrecurring and noncash. We have included in the slide presentation, in the appendix, 2011 quarterly adjusted net income and earnings per-share under the new definitions. Revenue growth, the expectations on a local currency basis is expected to range as follows for our 3 groups. For the fluid handling group, we anticipate sales increase of 4 to 8%. For Howden 10 to 15%, for ESAB 2 to 4%. The effect of the strengthening dollar and our business now trades in over 100 countries, so it’s not possible to give a solid list of currencies, but for example with the euro at 1.30, this will reduce revenue by approximately 3%. Total revenue is expected to range from $4 billion to $4.1 billion and the major contributors to the change in earnings before taxes are listed in the appendix, a particular note are the benefits of the ESAB restructuring program, offset by higher pension cost. Other significant assumptions are outlined in the slide deck. We currently expect adjusted earnings per-share to range from $1.45 to $1.65 per-share, representing a 29% to 47% increase from 2011 results under the same definitions. The earnings per-share number is significantly impacted by the newly issued preferred stock. Preferred stock cannot be converted to common stock by the company for at least 3 years. While the preferred stock is outstanding, it will be paid in annual cash dividend of 6% that will reduce earnings available for common shareholders. In 2012, this dividend will be $20 million. In addition, because the preferred stock is participating preferred stock, U.S. GAAP requires the company to allocate earnings after the 6% cash coupon, between the common and preferred shareholders on a pro-rata basis. This will further reduce in 2012, earnings available to common shareholders by 20 to 20.8 million at the top and bottom of our guidance level. The combined result of both of these treatments, are projected to be earnings per-share available to common shareholders $0.20 lower than they would have been had the preferred stock been converted to common share. This has been factored in to the company’s guidance. Again, this treatment will cease to apply when and if the preferred stock is converted to common shares. In addition, there is incremental intangible asset amortization from the Charter acquisition of $0.16 per-share, which is included in the adjusted net income per-share. And as Clay discussed, we’ve only begun identifying our profit improvement opportunities, and we remain confident that we will continue to improve margins over each of the coming year. As is our normal practice, we will not be giving quarterly guidance. However, given that there is no historical quarterly data on ESAB and Howden, we believe that some direction on seasonality would be helpful to investors. In broad terms, the first quarter is historically weakest for sales, the second and the third are comparable, and the fourth quarter is the strongest. Based on current backlog and expectations, the first quarter of 2012 earnings per share are expected to be slightly lower than the first quarter of 2011. And with that, I’ll turn it back to Clay.

Thanks Scott, and now we’ll open the floor up to questions.

[Operator Instructions] Our first question comes from Kevin Maczka of BB&T Capital Markets.

I guess I appreciate all the color on the 2012 guidance, but I’m still a bit confused; maybe you can help me. You did $1.31 in 2011, under the new definition you’re proposing, what were the earnings under that definition, and I’m trying to get the handle for how much growth you’re anticipating from the old core of Colfax and what the initial accretion is from the Charter?

Okay, let’s take them -- there’s several questions involved there. In the slide deck is a calculation of 2011 under the revised definition. Essentially, asbestos liability and defense cost is no long being adjusted out, so leaving that in 2011 would result in $1.12 per share as the 2011 comparable amount. In the slide deck, there’s a slide that gives a roll forward from the 2011 actuals, it’s labeled the 2012 Roll Forward. That identifies the significant improvements in the Colfax base business, which includes the impact of the 2011 acquisitions which is the COT-Puritech acquisition as well as the reduced amortization related to the [indiscernible] acquisition as well as the benefit from the restructuring programs that Clay touched on very briefly today, but that he’s talked about at length in the earlier conference calls earlier in the year. As far as Charter goes, or ESAB and Howden, as we prefer to refer to it, the expectations there are laid out on the roll forward slide. As I said before, unfortunately, we’re not all out to lay out the 2011 actual because the audit is not completed and we don’t have it in U.S. GAAP, but I think I can say broadly that there’s a -- it is a significant improvement in the baseline Charter acquisition compared to where the ESAB and Howden businesses will finish out in 2011. And I think if you look at information that’s out there on previous guidance, you can see the level of improvement that’s included in those numbers. As to accretion, the accretion will likely -- it’s at the higher end of our range, the accretion will be reasonably important to the contribution. The Colfax Fluid Handling business on its own would be near the lower end of the range.

Okay, got it. On the 100 million that you’re expecting to take out on the cost side over the next few years, I know some of your planned of course are not fully laid out and in place yet, but can you just give a little more color on that? Would that be heavily front-end loaded because there’s lots of low-hanging fruit in your opinion or would it be backend loaded because you really need time to have some plans kind of kick in over the next few years before you ultimately achieve that?

Kevin, it’s going to be a combination of those things, frankly. And let me just give you a little bit of better idea in terms of, especially as I’ve gone around and looked at things where we see the opportunities there. First of all, fundamentally with -- and I’m going to focus on ESAB right now because that’s where most of the opportunity is, but ESAB, one of the things that jumps out is the organizational structure. I mean, just starting with the lack of alignment overall for the organization and that’s something we’re spending a lot of time with the leadership team on right now because it’s been a very complex structure, one that’s set up more based on a tax basis and if you can imagine, almost by country, so that dictates a lot of functions that they have and some of the functional complexity. In addition to that, we found that it’s an organizational structure that basically inhibits things from getting executed. So that’s one of the areas just to simplify it as well as change that structure to move of a global functional structure if you will, which you know, you should be a bit familiar with in terms of what we do with fluid handling. So that’s one of the areas that we can actually reduce some costs, but also improve significantly the decision making and execution of the organization. In addition to that, fundamentally with ESAB, it’s just too much capacity and it’s in the wrong places in some cases. So we’re doing a lot of work on that right now. Vince is very, very focused on that and we see opportunity there. Global sourcing is another area that has really never taken hold. They had a global sourcing organization as well as the global supply change organization. It turns out that they weren’t coordinated. We consolidated that this week. We made an announcement on that, so it doesn’t just help reduce the cost, but it’s going to improve the decision making and actually drive the results that we want to see out of something like global sourcing. We continue to see opportunity, the lean efforts within this business, specifically talking about ESAB again. It’s just not been really active and it hasn’t produced results. We see opportunity with freight as well as standardizing product and the materials mix across things. Again, trying to get them to look across the organization and get out of this just looking at it within a specific region of the world. And then in addition to that, we view that there’s some opportunity with pricing, where basically they haven’t had a process for pricing let alone a strategy. So a lot of different things have been going on out in the field. We view there’s opportunity there as well. One of the areas that we’re really going to focus on is alignment of the overall organization. So just -- it’s going to start with the customer, which is something that has been lacking within ESAB and so we’re really going to focus on that. And then put together more of a global structure which takes the strengths and really consolidates those, but we’re going to organize that in such a way that it’s extremely responsive to the regions of the world. And then in addition to that, we view that there’s some opportunity with pricing where basically they haven’t had a process for pricing, let alone a strategy, so a lot of different things have been going on out in the field. We view there’s opportunity there as well. One of the areas that we’re really going to focus on is alignment of the overall organization. So just -- it’s going to start with the customer, which is something that has been lacking within ESAB and so we’re really going to focus on that. And then put together more of a global structure, which takes the strength and really consolidates those, but we’re going to organize that in such a way that it’s extremely responsive to the regions throughout the world, especially from a new product development standpoint for the target markets that we’ve got. So it’s much more coordinated and much more effective in terms of driving the results.

Okay, just one more for me, Clay. I appreciate that color. Strategically on ESAB, we know that some of your major competitors are still investing in growth and plan to do that. You talked about competing aggressively with them. But should we view this as a -- at least near-term a retrenchment in a way as you try to fix some of these organizational issues before you maybe can pursue more topline growth?

Yes, we’re going to focus, like I said, consistently leading up to this, we’re going to get the model right, Kevin, and we’ve got some very talented people that are focused on that right now and it’s not that, you know, we certainly aren’t going to take our eye off the growth. We have a very good understanding for the markets that we want to focus on, and providing some priorities to those. But we’re going to get the model right this year. We will be very aggressive on the restructuring side so that we hit the ground running, especially as we move into 2013 and beyond because you know, we know that we can put together a model that’s going to compete effectively out there.

Our next question is from John Inch of Bank of America.

I just want to focus on the core Colfax results, sort of big picture, I think just based on the strength in various verticals. Down 2% was a little disappointing. You know, I got the data, obviously, as we all did on the organic order trend, but what really happened in the quarter versus the trajectory? I realize there were tough compares, but you know, were there other things that perhaps you could call out? Were there, perhaps, for instance, distraction costs associated with Charter that just the core business hasn't been as focused or was December particularly weak, or just a little color would be helpful.

Yes, the businesses themselves, the end markets, John, when you take a look at those with the exception of what I talked about with the [indiscernible] is actually very, very strong when you look across the board. Let me just go through each one of those. I mean, commercial lean continues to exceed our expectations in terms of what’s out there. We certainly have improved the on time delivered and those kinds of things, so we expect that that will, you know, will bode well for the future for us as well as some other things that we’re working on there. Oil and gas is the one, we take a look at the sales that were down organically 12%, but I mean, overall, they’re up 24 basically driven by [ Orozco ]. But that’s one where I wouldn’t let that organic number fool you. I mean, there was a $10 million order in the fourth quarter of last year. We continue to see very, very robust patterns in terms of the kinds of projects that we’re working on and the reporting what’s going on out there. And again, the feedback from the field is -- it continues to be extremely strong and we continue to expand [ Orzo ] outside of their traditional markets. Oil and gas continues to be very, very robust. Power generation was a very pleasant surprise last year, we had to make up about $18 million from exiting the Middle East business. We do that with continued strength, as I commented on in the script that our OEM partners continue to see very, very strong business there as well, and just one of the orders that I referenced is proof of that. General industrial, to give a little bit more of a flavor on that, we saw some slowing in Europe, which we mentioned again. But it’s interesting, as I was taking a look at some of the data yesterday, the progressive cavity in Europe specifically those pumps that we offer and everything are running significantly ahead of last year and that feeds wastewater applications, which is general industrial and so we’re really excited about that particular tend. And by the way, that’s before market as well as aftermarket. And then China was, you know, was up for us as we put some different leadership in place there and we’re starting to drive that. And a lot of that actually goes back to the Allweiler product lines. So we like the impact that that has. We certainly are watching what’s going on in Europe right now, but like I said, we have seen a little bit of a slowing prior to the holidays but you know, right now, it’s about flat as I take a look at it with last year.

Specifically, December was a very solid month and we did not see any falloff in the last month.

In terms of the -- some additional -- there wasn’t anything in terms of diversion with the leadership and the resources that we had focused on that business, John. But I will tell you that we had -- we had some of the costs associated with, for example, the closing of [indiscernible] and the DCDs and some of the restructuring, along with the absorption that I mentioned and Rodale as we really were able to implement more of the finer elements of lean on the floor. But those are gone now in terms of [indiscernible] is shut down, the DCDs, we talked about. So we had some of those drags in the quarter if you will, but we don’t have those moving forward.

So Clay or Scott, what did Continental Europe do kind of on a constant currency basis or on an organic basis in the quarter versus last year or sequentially; however you want to characterize it?

We don’t actually have it across all the end markets and probably general industrial is the only one that’s short cycle and would give some read through to current activity. And that was actually up in Europe, but again not by as high of percentage as it has been in the earlier quarters, but the sales are still up and the orders are flattish for the quarter but they’re actually improving in the first quarter. So we don’t see, in the Fluid Handling business, a particularly sharp downturn in the European business.

And again, our focus in Fluid Handling is, we’ve emphasized in the past more on those Northern European countries, plus in the case of Germany, remember, they shipped to China in a lot of cases and that’s certainly some of what we’ve seen of late.

Okay, so just to be clear, the softness in Europe, based on your order pattern and trajectory in the quarter, and I guess what you’ve seen today, you don’t expect further deterioration necessarily sequentially in the first half of this year, it just sounds like things are softening a little bit but they’re kind of in a holding pattern, is that fair?

I think that’s a fair assessment.

Clay or Scott, what’s your sort of trajectory as you were thinking about for debt pay down? You historically articulated that you wanted to be relatively aggressively deleveraging here. How should we think about that in so far as say the 2012, you know, how much cash are we diverting to debt pay down as part of the guide or just over the coming couple of years?

Well, I think it’s easier to answer the second question. Over the coming few years, our stated goal is to get down to an investment grade credit profile, which would require that -- a significant portion of our free cash flow be used to pay down debt. We are sitting on a lot of cash right now. We’re going to be cautious with that and to the extent that we don’t need it over the course of the year. We would probably make a significant pay down at the end of the year. But we are being cautious for 2012. I think we can certainly say that looking out a little longer than that that our goal is to aggressively pay the debt down, de-leverage the balance sheet with a target of being an investment-grade type of credit.

Right, while continuing to do some bolt-on acquisitions. The thing I’d say about 2012 is, John, we’re going to go as fast as we can in terms of a lot of the opportunities for improvement they have, especially in working capital. But remember, we’re going to be very aggressive on the restructuring front as well. So we want to get that behind us as fast as possible.

Yes, and it’s not like the debt is that expensive. So just to be clear, the ‘12 guidance, Scott, does not include significant debt pay down, which could be an option, but right now you’re planning to do that more towards the end of ‘12, is that…

That’s correct. There’s a guidance, the guidance assumes it will be paid down at the end of the year.

Okay, so that makes -- that makes sense. Just last, I guess, on the guide, you’re sort of assuming a 20% to 22% fall through from the change of delta in organic sales. Is there some reason why that’s not higher? Is that because of the high consumable component of ESAB or are you just being conservative there?

I don’t think we’re being conservative. I think the first -- both ESAB and Howden have a more significant material component to their cost of sales than the Fluid Handling business does. So that the 30% kind of flow through we have on the Fluid Handling business, we can’t achieve that level at ESAB and Howden because of the significant material component of cost of sales. So that’s the reason that the guide is lower than what we see in the Fluid Handling business.

If I could just squeeze one more in. ITW had very strong welding results and it sort of sounds like, Scott, in your comments for ESAB, not nearly as robust. Obviously, it’s not, they’re not completely comparable, but it’s still a data point. I mean, is ITW and perceptively linking them, have they just been taking that much share from ESAB or you know, how would you characterize ESAB’s Wilding’s sort of position today? I realize you called out strengths in emerging markets, ITW has very good European results as well. Is there anything you could say on that?

Well, ITW’s a very, very different business. They have a much larger proportion of business that’s equipment related versus consumables. So you know probably the better comparison would be Lincoln. But in terms of share, we’d have to go by markets to really understand what’s going on. And those are some of the elements that we’re getting into as we dig deeper, John, into the organization. It’s not something where we can just say Europe or even South America. I mean, we need to understand almost by country what’s going on. But those, you know, those are the things that we’ll be getting into over the next 90 to 100 days.

Our next question is from Jeff Hammond of KeyBanc Capital Markets.

Can you give us -- it doesn’t look like you’re counting on any year 1 cost savings in the guidance. Can you walk us through just how you are getting to the $98 million interest expense, because that is a higher number than I had been thinking about? Is there some non-cash or deferred financing cost or anything in there?

I’ll take that one. There are 3 main components to our interest expense. One is the cash interest expense, which is a LIBOR-based expense, which would only calculate out to something in the low 70s. The major element is the deferred cost. The underwriting fee, the OID on both the Term A and the Term B, as well as the legal expense; that adds about a percent to the interest rate on the effective interest method. So, there is roughly another $18 million of expense that relates to the amortization of those costs. And then lastly, across the whole business, although the Howden business is the largest user of it, we have an excess of $300 million in performance bonds and bank guarantees for pre-payment that don’t show up as funded debt, but do carry an interest charge. The 3 of those components together make up the amount in the guidance.

Okay, and then what year 1 cost savings are we counting on from restructuring on Charter? And maybe just along those lines, speak to what benefits you are baking in or counting on from all of the restructuring that Charter had been doing pre-deal closing?

The programs that Charter initiated that you probably read about last year, those were expected to produce about $20 million of margin improvement in 2012 and another $30 million, I think, in 2013, so, we built in about $50 million in restructuring costs for the projects in our guidance.

So, that's what is built in to the current projections. We have also built in some additional things that we were able to identify as we got together. But in addition to that, Jeff, what we are doing, again, to emphasize going back to within the next 90-100 days, we will be able to provide a lot more clarity in terms of what some of those areas are and as well as the benefits for them. The thing I will continue to point out, though, is we are going to take 2012 and get very, very aggressive about restructuring and set this up so the run rate at the end of the year and going into 2013 and the business model itself, puts us in a position to compete for the long-term.

Okay, so it sounds like your $100 million is a ‘13-‘14 dynamic.

Yes, mostly -- I think that's a fair assessment.

Our next question is from Jason Feldman of UBS.

I think I heard earlier that you said Charter had made substantial work in capital progress prior to the closing of the deal, that they got close to the 19% target. How much working capital opportunity do you see going forward? Is that going to be a material source of cash over the next couple of years?

Yes. There is a significant opportunity for improvement there, and that's something that, again, we will have more meaningful guidance on that within the next 90-100 days. But just to sort of point out how we look at things differently, with regard with ESAB, the entire model has been set up really based on finished goods’ inventory, and the response frankly, to the customer base really hasn’t been all that good and we knew that when we did the diligence. So, our model is going to be more about starting with the customer, understanding exactly what that requirement is, and then putting in the best value-added process in terms of being able to respond to that. Sometimes, that may involve just a little bit of inventory with a very quick response from a manufacturing and supply chain standpoint, sometimes it may require that we -- it may not require that kind of inventory. So those are the kinds of things that we are going through as we evaluate this process and the model that is in place there. But I see significant opportunity for improvement and working capital there. Plus, we have some opportunity at Howden as well.

Okay, and from a longer-term prospective as well, I understand, ESAB certainly has challenges in the near term; I think Charter identified organic revenue targets across the cycle of 10% for ESAB and 10% plus for Howden. Are those numbers, based on what you know today that you see today, as feasible?

Again, what number did you say -- organic, what?

Organic revenue growth CAGRs across the cycle -- I think 10% for ESAB and 10% plus for Howden.

Yes, the Howden numbers that we put out there, I think are representative of what we think right now. Remember, that is a very long-cycled business, but certainly a significant pick up last year and we continue to see opportunity with the end markets there. I think once we get the model right for ESAB that you can expect us to compete very effectively in the market and grow the business at higher levels than what we have projected in there right now.

Yes, ESAB was up to 18% last year; it was a very strong year. So we certainly think given the different markets that they are exposed to, that something along those lines will be achievable. We have not done a specific study yet to validate that Charter assertion, but it certainly seems reasonable based on what we know.

Our next question is from Michael Halloran with Robert W. Baird.

Just in the interest of time, I just want to make sure I understand the guidance and assumption. Scott, I think you said earlier that if it is just fluid you are at the low end of the guidance and then the rest of the guidance basically makes up the accretion from the Charter deal. Is that the way to think about it at this point or did I mishear that?

No, you heard correctly.

All right, great. That’s all I needed guys, appreciate it.

Our next question is from Cliff Ransom of Ransom Research.

First of all, congratulations on some of these talent additions. I’ve known Vince and Jerry for a very long time and they’re absolutely first rate. You did not need to hear that from me, but I wanted to say thank you. Can you kind of go back to 35,000 ft and tell us what is going to be different about CBS, both under the new management team of a couple of years ago, I guess the beginning of last year, and with the addition of the ESAB and Howden assets than it was in the previous decade under equity groups and rails ownership. Can you just give us a sense what the major differences will be?

Sure, Cliff. It starts with the expectation that, that is the way we are going to run the business, and that is what we are going to go to versus more of a budget kind of mentality. I think Howden is a great example. We are able to go up and do the training prior to Christmas and it was a wonderful reception. Here is a very sound business, very methodical in their approach and then we introduced the concept of breakthrough thinking and how you actually deploy that throughout the organization. And as a result to that, they have done a top level X matrix, they have their action plans in place. And then in addition to that, consistent with what I’ve said in the last couple of months in terms of segmenting these businesses, we put them in touch with a retired Danaher executive who was able to work with them and help them establish the meeting cadence and those kinds of things and how to actually deploy it. So we are going to do nothing but strengthen it -- not just strengthen it, obviously introduce it there, but then make it stronger and stronger. The whole team up there, they are all engineers so they get that. They really understand how to deploy it down to the point of input action plan where obviously, if you get off track you got to deal with the counter measures and problem solving and those kinds of things. So I am really excited about the reception that we have there. Obviously, with ESAB, I am going to personally drive that. Ken and Vince and Gary obviously all have expertise and experience in terms of driving that, so we really are going to turbo charge that effort throughout the organization. Teach it, but deploy it effectively so that again, we start with breakthrough thinking then specifically, how are we going to drive that? What are we working on and are we deploying our resources in the right way? Then, again, if we are off track, coming up with counter measures and then getting back on track. Then, even within fluid handling, we feel we can take it to a higher level. While we have improved the margins and we have improved that business certainly with some additions from an acquisition standpoint, we believe that we can get even more disciplined in terms of driving CBS throughout the organization. So we are setting higher standards and expectation levels all the way down to the detail of Kaizen events, for example. What should they drive in cost production? What should they drive in terms of working capital improvement? If we are going to deploy resources on that, ensuring that we get those kinds of results.

Should I assume that your efforts to attack what I call the transactional side of the lean world; FI and OP, new product development. will those be big influences in 2012, or will they more likely wait until a later period?

No, we cannot wait, Cliff. We have got significant opportunities, especially ESAB. Ken is finding all sorts of opportunity there, and we know that we are out of sync in some of the target markets on product development. A great example is they used to have product development down in Brazil or in South America. They took it out of that, centralized it. It's not that I would have an issue with that where you can consolidate resources and come up with it, but what they forgot about was continuing to understand what the customers in that market place needed from an equipment standpoint and making sure that they understood that voice and they actually provided those products. So, you can look for us to get very, very aggressive in terms of understanding the regional market needs, and then being able to respond in a much quicker fashion. I thought it was interesting that one of the sessions, the review sessions with some of the engineers in product development in Sweden, they were talking about a specific project and showing it as green, for example, and yet it has been late. It was supposed to be due in 2008, and they talked about how it takes a significant amount of years, basically -- 3 to 4 years, to execute something. That is just not the way that we are going to do things. Ken sets a much higher expectation in terms of making it happen. We ought to be able to introduce products in 9 to 12 months to respond to the market, for example. So it is definitely going to require the application of Lean and CBS to make those kinds of things happen.

Our next question is from Jeff Hammond of KeyBanc Capital Market.

Just a follow up, here. So on the guidance, are you using -- it seems like you are double [ daying ] yourself for the preferreds, is that fair? You are including the preferreds in your share count, and you are including the dividend?

That is correct. That is the requirement at U.S. GAAP.

Okay. And just on the segment reporting, are we looking at 3 segments or are we combining fluid and Howden?

We are planning on having 2 reporting segments in the first quarter.

And is it fair to say it is your base Colfax plus Howden and then ESAB?

I think that is fair to say, yes.

I am showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Brannan for any further remarks.

Thanks, everyone for joining us today and we certainly look forward to speaking to you again soon at the next quarter. Thank you.

Ladies and Gentlemen, thank you for your participation. This concludes the presentation. You may disconnect, and have a wonderful day.