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Colfax Corporation (NYSE:CFX)

F3Q08 Earnings Call

November 05, 2008 at 8:00 am ET

Executives

Mitzi Reynolds - Vice President, Investor Relations

John A. Young - President, Chief Executive Officer, Director 0x08 graphic

G. Scott Faison - Chief Financial Officer, Senior Vice President - Finance

Analysts

John Inch - Merrill Lynch

Shannon O'Callahan - Barclays Capital

Jeffrey Hammond - KeyBanc Capital Markets

Jason Feldman - UBS

Michael Schneider - Robert W. Baird & Company

Operator

Good morning everyone to Colfax Corporation Third Quarter Earnings Conference Call. Today’s call is being recorded. With us today is John Young, President and CEO, G. Scott Faison, Senior Vice President and CFO and Mitzi Reynolds, Vice President of Investment Relations. At this time I would like to turn the call over to Mitzi Reynolds. Please go ahead, ma’am.

Mitzi Reynolds

Thanks Tina. Good morning everyone and thanks for joining us. I would like to point out that our earning’s release in 10Q are available in the investor’s section of our website www.colfaxcorp.com. We will also be using a slide presentation for supplement for today’s call which can also be found on the inventor’s section of the Colfax website plus 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. In addition, a replay of this call will be available for approximately 2 weeks. The replay number is 877-440-5807 or 719-325-4906 for international participants. The access code is 934 3586, the information is listed in the press release.

I would like also to note that in order to help you understand the Company’s direction, we will be making some forward-looking statements during the call, including statements regarding events and development that we believe or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties including those set forth in our SEC filing. It is possible that actual results might differ materially from any forward-looking statements that we might make today. These forward-looking statements speak only as of the day that they were made and we do not assume any obligations or intend to update any forward-looking statements except as required by law.

During the presentation we will describe certain of the more significant factors that affected our year-over-year performance. Please refer to the accompanying slide presentation and the MD&A portion of our third quarter form 10 Q filed this morning, for details regarding additional factors that impacted the year-over-year performance.

With respect to any non-GAAP and financial measures during this call today, the accompanying information required by SEC regulations relating to these measures can be found in our earning’s press release under the investor’s section of the Colfax website. Now, I would like to turn it over to John.

John A. Young

Thank you, Mitzi. Good morning everyone. Before I get into the third quarter results I would like to take a few minutes to give you our thoughts in today’s economic uncertainties and what it means to Colfax. These are certainly unprecedented and challenging economic conditions in the world today; however, we had a strong quarter. We expect the fourth quarter to be even better and the trends entering 2009 remains positive. We are confident with our business because with the broad portfolio of products serving diverse in markets on a global basis. Our performance and critical application are unmatched, that does not mean that we are immune to the global economic crisis but it does mean we believe that we are well-positioned. The fundamental global drivers in our in markets remain positive including increasing demand for energy and the advancing of the world’s developing economies.

We are also very fortunate to be in the strong financial position. At quarter end, our debt to adjusted EBITDA was just under one. As a result of our successful IPO in May we were able to significantly reduce our overall debt level. We also entered into a new current agreement in May which expires in 2013. We had significant availability under our revolver about a $130 million approximately $50 million in cash today. We want to maintain our conservative balance sheets that are constantly evaluating our cash flow alternatives.

Our main priorities are to reinvest in our businesses and to pursue acquisitions. Acquisitions continue to be a key component of our growth strategy and our flexible balance sheet allows us to take advantage of these opportunities. We also announced today that our board has approved the $20 million stock repurchase program. We believe that we have the sufficient cash and credit availability to fund our growth initiative as well as the stock buy back program. This action reflects our commitment to improve in the investment value of the Company’s stock while also growing the Company.

We are closely monitoring the impact of these economic conditions on our businesses and we will adjust accordingly. We believe that we can react quickly as demand changes and our Colfax business system gives us a distinct competitive advantage especially during unsettled market conditions.

In summary, we are confident that our long term strategy and solid financial condition is well positioned to perform in a challenging economic environment. Now, for a more detailed look at our results, first, I will cover some of the third quarter’s more significant highlights and some of the key performance measures that we achieved. I will follow that with the review of our strategic end markets and our current outlook. Finally I will review the financial result and we will open it up for the question-and-answer session.

As we announced in the press release issued this morning, Colfax had a strong third quarter. Adjusted net income was $12.1 million or $0.28 per share, a 34% increase over the last year’s third quarter. Our net sales for the quarter were $153.5 million, an increase of 23% including organic growth of 14%. We had organic growth in all end markets and most notably in commercial marine, global navy and power generation, each of which were up 19%.

Adjusted operating income increased 22% to $24.3 million while the margin remained flat. Adjusted EBITDA increased 19% to $24 million and the margin decreased 50 basis points. These margins were negatively impacted by higher professional and other costs associated with becoming a public company and unrealized losses on raw materials.

Turning now to a brief look at year-to-date numbers, for the first 9 months adjusted net income was $36.2 million or $0.82 per share, an increase of 41% over the first 9 months of 2007. Net sales for the 9 months were up 23% to $445.5 million. Organic sales grew about 12%. Adjusted operating income increased 30% to $62.2 million while adjusted EBITDA increased 24% to $73.5 million.

We continue to see strong growth in our order rates and backlog during the quarter. Order rates have grown steadily on an organic basis over the past several years until the first 9 months of 2008. Year-to-date orders are up 28% with organic growth of 16%. Orders were $174 million for the quarter, an increase of 13% with organic growth of 6%. Backlog was $383.1 million at the end of the third quarter.

Colfax participates in five strategic and diverse end markets which are commercial marine, power generation, oil and gas, global navy, and general industrial. The commercial marine market is our largest single end market and represented 29% of our third quarter sales and 25% of our sales year-to-date. Organic sales grew 23% for the quarter and 11% year-to-date. Organic orders declined 4% for the quarter but are up 22% for the year-to-date period.

New ship orders generally have long lead times with some projected deliveries even out as far as 2011. This year strong sales and order growth has been driven by growth in international trade, changing environmental regulations and demand for oil and other commodities. We believe these factors will continue to drive demand for container ships, tankers, bulkers, supply vessels, and FBSO’s. We are also seeing an increase in after market sales due to the increase number of vessels on the water running on Colfax Corporation.

We do anticipate a decline in new orders in commercial marine but we expect sales to continue to grow as existing orders and backlog are delivered. Given the current global financial crisis some orders maybe delayed or cancelled due to our customer’s inability to obtained financing. During the third quarter we received cancellations totaling about $1 million for this reason. We are continuing to monitor our backlog in this market closely. In October we saw an additional $5 million in cancellations primarily related to lack of funding. Note that reported orders are net of cancellations and are adjusted for changes in the foreign exchange rates in our backlog at quarter end.

We are focusing on growing our after market sales and service in our commercial marine market as well as introducing new products such as the IMO ACE and ACG OptiLine and the Allwieler AG Product Lines.

Moving on to oil and gas, sales in this end market were 13% of our total sales for the quarter and 12% of our sales year-to-date. While sales were up 3% for the quarter, they were flat on an organic basis and down 8% organically year-to-date due to an unusually large project shipped in 2007. On an organic basis orders were up 37% for the quarter and 23% year-to-date. We expect the activity in the oil and gas market to remain favorable as capacity constraints and global demand drive development of heavy oil fields. We also believe that demand will increase for our highly efficient products as customer’s focus on total cost of ownership.

Our products in the oil and gas market are used for crude oil gathering, pipeline services unloading and loading, rotating equipment lubrication and lube oil purification. Our backlog in this market is mainly related to heavy oil exploration. Our customers include multinational oil companies as well as national oil companies. National oil companies which are restricted by their boundaries continue to explore their resources as oil prices change. Booking activities remain steady at current oil prices. In the power generation market, we expect the activity in Asia and the Middle East to continue to remain strong as economic growth and fundamental undersupply continues to drive significant investment in the energy infrastructure projects.

In the developed economies we expect efficiency improvements to drive demand. For the third quarter, sales into the power generation market were 11% of our sales and 17% of our orders. On an organic basis sales were up to 19% for the quarter and 38% year-to-date. Similarly organic orders worth 5% for the quarter compared to a very strong third quarter in the orders in 2007 and organic orders were up 11% year-to-date. Our power generation business is very OEM centric and we have not seen any signs of softening, recent order activity remained solid.

Finally, sales into the global navy market for the quarter were 5% of our total sales and orders were 6% of our total orders. Organic sales and orders increased 19% and 12% respectively for the third quarter, primarily related to the US Navy’s new ship construction program. While organic sales are down 19% year-to-date, organic orders are up 17%.

The outlook for new naval ship construction remains positive. Recently, the US Navy recommended that Congress approve funding for 8 new DDG 51 class destroyers to be built in 2010 to 2015 in addition to the 3 scheduled DDG 1000. Fairmount Automation which we acquired a year ago has shown strong organic growth as well. This business develops innovative control systems for mission and safety critical processes and machinery in harsh environment and is principally sold into the global navy market.

We also believe that demand will increase for the integrated food handling systems such as our smart valve systems that reduce operating costs and improve efficiency. In addition, we expect nations outside the United States to carefully expand their fleet to address national security concerns.

We believe continued infrastructure development throughout the world will drive capital expenditures and our sales in the general industrial market. General industrial sales were 42% of our sales in the third quarter and were 39% of our orders. On an organic basis, sales increased 14% for the quarter and 17% year-to-date while orders increased about 1% and 11% for the same periods.

The growth in sales in this end market for the quarter was broad-based across several sub-markets with distribution in machinery support being particularly strong. The General industrial market includes distribution, chemical processing, building products, machinery support, waste water and heat transfer to name a few sub segments.

Trying to our geographic look at our sales for the quarter, about 50% of our sales came from Europe, 28% from the Americas and 19% from Asia and the Middle East. The increase in sales was primarily driven by our European OEM business. We also had strong organic sales increases in China, the United States, and Latin America.

Gross profit margin for the quarter was flat when compared to the prior year due to the margin improvement in our European operations offset by a heavier mix of higher margin pipeline projects from the third quarter of 2007.

The gross margin is up 90 basis points year-to-date primarily due to a more favorable pricing, cost control in Europe’s commercial marine segment. Increase to after market sales also improved margin. Selling, general and administrative expense increased $6.5 million during the quarter including $1.8 million related to the impact of the foreign exchange rates, $1.3 million related to higher public company costs and $900,000 related to unrealized losses on raw material features and foreign currency contracts for which we did not elect hedge accounting.

For the year-to-date period SG&A expenses were up $22.2 million primarily due to the following items: $6.9 million related to foreign exchange rates, $4.1 million related to reserved increase for legacy legal matter, $2.0 million of public company offering operating cost, $1.8 million related to the acquisition of ThermoJet and LSC excluding the affect of $4.1 million reserved adjustment and $0.6 million of due diligence cost on adjusted basis, SG&A expenses percentage of sales was 20.8%.

Subsequent to quarter end the US Dollar appreciated sharply against both the Euro and Swedish Krona. This is expected to have a negative affect on our sales and order growth resulting from currency translation in the fourth quarter of 2008. The average dollar, Euro exchange rate was 1.52 to the third quarter compared to the 1.39 for October. The average dollar Swedish Krona rate was 6.23 for the third quarter and 7.03 for October.

We made some modest improvement in our inventory position in the third quarter. Inventory is down at about $2 million on the currency adjusted basis since the end of the second quarter but it is still out about $17 million year-to-date. While the overall inventory number is still high we believe the current level is appropriate given the anticipated large projects scheduled to ship on the fourth quarter.

Net cash flow from operations were $31 million for the first 9 months, one time cash outlays related to the IPO of $42.4 million. Turning to our asbestos related liability, we have several favorable developments to report. First, we received $20.6 million in reimbursement of past costs from our insurers during the third quarter. These payments reduced outstanding insurance receivable from $54.6 million at the end of the second quarter to $45.2 million at the end of the third quarter. In addition, we received an $11.5 million on October 15 which further reduced insurance receivables.

The majority of these funds are the direct result of a carriage emplaced agreement with our largest access carrier formalizing access to approximately $450 million of coverage. We have also reached an agreement with one of our primary end access carriers which provide us with $7.0 million of additional solid coverage. The additional coverage was recorded as a gain in the quarter. The liability and legal defense costs before insurance asset adjustments were $1.6 million for the quarter.

In summary we had a very strong third quarter from a booking sales and profit perspective. We continue to see order growth across our end strategic market and across each of our geographic regions. The fourth quarter is historically our strongest quarter with many customers seeking yearend deliveries. As a result we expect to achieve our targeted low double-digit organic sales growth for the year.

With that I will open up the floor for question-and-answers.

Question-and-Answer Session

Operator

(Operator Instruction) Your first question comes from the line of John Inch - Merrill Lynch.

John Inch – Merrill Lynch

Thank you. Good morning. So first question, I guess the collapse of AIG and this whole financial institution’s melt down, what do you believe are the risks if any to future receipts for asbestos? I mean how should we think about that?

John A. Young

If you look at the collapse of AIG clearly with the holding company level not at the insurance company level and in fact AIG is one of our carriers and certainly paying on its responsibilities related to our asbestos liabilities so our view is there are certainly risks out there but we feel pretty confident in our ability to collect from those not only on the current receivables but also on future claims.

John Inch – Merrill Lynch

Do you have the sense, John, that the timing of the receipt based on perhaps one or two insurance companies start going a little bad, does that get pushed out? Of course your expectations are just not really that concerned.

John A. Young

Yes I know were not concerned at this point and I do not think our view on collecting asbestos as a result of the financial crisis have changed at all right now. We built this outlook with our insurance brokers, with our legal counsels and some specialists in the area as well so we are quite comfortable.

John Inch – Merrill Lynch

Okay, then just for follow up and what you mentioned in the press release that you are closely monitoring the impact of the economy. All companies are saying that, I guess based on your experience with prior global slowing. How much should we really anticipate that your backlogs and book of businesses prospectively at risks? I heard your commentary but as we look out, how would you put this down turn it into the context of prior downturns and how should we be thinking about your operations and perhaps really, I think, risks of cancellation or backlog as what most of the other companies are all concerned about?

John A. Young

Sure, yes I understand, historically when we have gone through downturns, our order book has remained solid, I mean we are a very specialized supplier and therefore our orders tend to be project driven, very specific applications, sometimes with deposits with them. So our history of order cancellations is very minor. We did have a couple of cancellations on commercial marine that we identified. That was more of a cleaning of the book, so to speak, from some of the ultimate customers on their new ship construction outlook. That trend seems to have certainly slowed down as we have gone the whole month of November but we really monitor it everyday. So I think if you look at our non commercial marine business we had no cancellation so far and if you look at past downturns that have been a very minor issue for us historically.

John Inch – Merrill Lynch

The prospect of restructuring action probably is off the table, is that a fair statement?

John A. Young

I think we will continue to monitor, we do not have a very strong backlog and if that for whatever reason changes, we can be nimble. I think we certainly have a history of restructuring at the appropriate time and if the appropriate time begins to show itself, we know we are prepared to take actions.

Operator

Your next question comes from the line of Shannon O’Callahan - Barclay Capital

Shannon O'Callahan - Barclays Capital

Good morning guys!

John A. Young

Good morning Shannon, how are you?

Shannon O'Callahan - Barclays Capital

Good, you gave some of the flavor in the commercial marine on October and I wonder if you can comment on the rest of the business you have been following up in this monitoring conditions point. You had things full through the quarter, how did things turn in October? You said there is no cancellation. What have you been hearing from your customers in terms of the behavior most recently?

John A. Young

I think many customers are certainly taking a wait and see approach on things. I think our activity level remains very strong. We built back log in the third quarter. October was a solid month from both sales and order perspective. So I think obviously folks are working at the economic maelstrom going on around them and making some decisions, but I do not think our customer base is panicking. I think there some wait and see approach maybe a delay here or there in terms of making final decisions, but the activity level remains strong.

Shannon O'Callahan - Barclays Capital

And could you further add to that, you said you expected things to remain positive in 2009. What do you mean by that? What are your expectations at this point?

John A. Young

I think as we get closer to the end of the year we will start communicating our official guidance for 2009, but right now, based on our backlog and tour view on potential cancellations being a fairly minor event, we certainly anticipate that 2009 may not continue at a very strong organic growth rates that we have seen over the last several years, it is still going to be a positive year for Colfax.

Shannon O'Callahan - Barclays Capital

Okay. You mentioned about some of the raw materials headers but broadly around pricings and raw material costs. Where do you stand on that? Are you seeing any pressure to pull back your prices and when do you expect to get some benefit from the lower raws?

John A. Young

I think on pricing, pricings remain stable and I certainly have not seen any pull back as of yet from our side nor frankly do we anticipate it. I think on a commodity basis we did get hit with some hedged difference particularly on copper and nickel. Well we did some poor hedging and there was a very strong drop in prices in terms of those commodities. So we should see some moderate pick up from commodity price reductions in the fourth quarter and into the first quarter of 2009.

Operator

Your next question comes from the line of Jeffrey Hammond with KeyBanc Capital Markets

Jeffrey Hammond - KeyBanc Capital Markets

Hi, good morning! I just want to dig in a little bit more on general industrial; just the order growth was exceptional in the second quarter and slowed. I just wanted to understand, what you see is changing, maybe a little bit more granularity on just order trends within maybe some of sub verticals within general industrial?

John A. Young

I think overall, the overall activity level in the third quarter on the general industrial was pretty solid. We did have a couple of larger project orders last year that skewed the numbers a little bit, made it a tougher comp particularly on chemical jobs where we do larger project business. That particular vertical continues to remain pretty active for us, so we see continued strength in that market going forward. I think overall, general industrial is going to be a solid market for us. I do not think you are going to see any major swings upward or downward on general industrial, because we do cover so many different markets within that segment. Some of which are again, trending pretty positively, others are moderately slowing as the economy slows. So I think it will continue to be a fairly stable market for us going forward.

Jeffrey Hammond - KeyBanc Capital Markets

Good, so the order deceleration was more a function of the tough compare than any kind of material slowing in the latter part of the quarter?

John A. Young

No, in fact if you look within that vertical there are a couple of sub segments that are, what I would call the more leading indicator business, our building products, our elevator pump business and our diesel engine business. Those held pretty strong in the third quarter, they tend to be more leading indicators for us and we have not seen any dramatic change in either of those markets as of today.

Jeffrey Hammond - KeyBanc Capital Markets

Okay great and then moving over to oil and gas. Certainly that business has been lumpy and you this slow down in the sales rate and now reacceleration on the order side. Can you just talk, just as we have seen a dramatic drop off in oil and gas prices more recently? Have you seen taking out some of the lumpiness? Have you seen any change in… what are the customers telling you there in the near term basis?

John A. Young

Our order activity level has been very strong in the oil and gas segment. We did have a very large project that shipped last year. They skewed numbers are a little bit from the revenue perspective; I think you will see that turned around a little bit in the fourth quarter based on our anticipated oil and gas shipments in the fourth quarter. I think again as I said earlier, there are some wait and see aspect in some of our customers. We had discussions where the projects that we thought may book in the fourth quarter will probably book in the first quarter now. That has been a fairly minimal type of movement. We continue to view opportunities around the world and this market is very strong. We are investing in a new sales office in the Middle East to continue to grow our business presence there. So again, the price of oil is back where it was a year ago. We had a major price spike upwards, I think our customers were certainly were not using $140 a barrel to justify their projects, I think they are probably using the price course to where we are today. So the activity level that we saw throughout the first half of the year has certainly not changed significantly in the back half of the year.

Operator

Your next question comes from the line of Jason Feldman with UBS.

Jason Feldman - UBS

Good morning. If you could give us a little bit of color perhaps on what is going on in the acquisition environment? I saw there was that due diligence expense here that you are obviously looking at something, but whether the environment is suddenly more attractive. And also how do you think about that relative to repurchases?

John A. Young

Sure! Well I think the acquisition environment is still out there, we are continually looking at transactions and you will get a number of things in “hopper” so to speak, I would say nothing that is of any tremendous magnitude at this point. I think like many customers out there, there is a little bit wait and see from an acquisition perspective as well. We did have one transaction that we did some substantial work on in the third quarter that did not come to a successful completion and we had to write those costs off, but I think that again in line with our pricey acquisitions. I think it needs to be the right fit at the right price and when those two do not come together we will walk away from the deal.

Jason Feldman - UBS

Okay, I guess I was just a little bit surprised to see the repurchase announcement in this environment. I mean, you certainly have a pretty good liquidity situation. You have the rolling credit line there to complete an acquisition, but if the economy continues to deteriorate, it seems like there would be good deals out there. What is the reason for going in to repurchase shares?

John A. Young

I think we just look at the overall level of stock and we decided that if you look on our return on the debt to capital basis at the levels we have seen here recently, it is a pretty good investment in Colfax down at that level. If you look at the cash we have on hand plus the credit availability that we have without having to go out and raise any additional capital with the existing facilities. We can do some pretty significant acquisitions while at the same time continuing to move forward on the buyback program. I do not think it is a neither/or situation. We will certainly be able to accommodate both to our internal cash generation, the cash we have on hand and sort of anticipated receivable collection going forward.

Jason Feldman - UBS

And then the last thing is there any update on, not the ongoing asbestos litigation in terms of resolving claims, but you had some litigation with some of the insurers dating back several years. Has that been resolved or was it settled?

John A. Young

It is still in process Jason; we are still in pre-trial hearings right now. We anticipate that, that will actually go to the jury trial sometime during the fourth quarter. The pre trial hearings have certainly dragged on for a while at this point, but we are hopeful that the jury will sit here in a not too distant future.

Operator

Your next question comes from the line of Michael Schneider with Robert W. Baird &

Company

Michael Schneider - Robert W. Baird & Company

Good morning, I wonder if you could just go back to the oil and gas market. There have been numerous reports now of project delays for example in the [tarzans] area and then presumably with [truth] coming down that there could be delays in some of the South American pipelines. Can you give us a description just of… I know you did not have any order cancellations but you have projects and courting delays sort of emerged to end those related projects?

John A. Young

On that particular part of the business, we have not Mike. On the pipeline piece, the one moved out on an order that we had been actually a downstream application not a midstream or upstream pipeline project. Our business in both Canada and Latin America is pretty robust right now. As of today I can not say that we had any project dates moved-out on us. Certainly we are talking to our customers on our phone on a daily basis in both of these markets and it is both very good markets for us, but we certainly have not seen any movement at this point.

Michael Schneider - Robert W. Baird & Company

Okay and then focusing on margins, when I looked at my model, the disappointment was not really on revenue because currency obviously swung significantly but it is the margin flows during the quarter. Can you focus for a minute on adjusted EBITDA margins, a year ago you reported 16.2 and I am looking at your reconciliation table here, then this year you have 15.7 and I guess on the base of 14% organic growth. Can you walk through what are the “puts” and “takes” spend year over year to explain why on 14% growth margins are down 50 basis points?

John A. Young

Sure. The decline is all at the SG&A line which primarily is related to the additional costs we have taken on as a public company. And that was fairly detailed in the queue and also in the discussion we had earlier today. From the GP perspective, really in the quarter the biggest factor, quiet frankly we had a very strong third quarter last year based on the mix of particularly pipeline projects with very heavy in the third quarter last year. We did not have that thing mixed this quarter, so we lost some margin based on that. If you look at the margin progress year to date, it has been basically dead on where we had anticipated in terms of reading through some of the pricing increases and also the productivity increases particularly in our European facilities as well as the sales growths that we have in our active market business has kept up with the pace of sales growths in the after market business. I think from a margin perspective we are pretty much where we thought we would be for the quarter and certainly for the year as a whole.

Michael Schneider - Robert W. Baird & Company

Okay and on the after market business you made it clear on your strategy as you increase the mix of that business and focus yourselves that would spare. What was the after market mix in Q3 and then can you give us your analysis of your success in driving after market business at this point and maybe what is in store for 2009 based on your current momentum?

John A. Young

The mix was about the same as it has been historically; we certainly have been having some very strong four market growth as well, Our aftermarket growth kept up with our four market growth this year so the mix really is fairly stable. I think that, that as we go into to 2009 it certainly depends on what weight the four market growth continues in, because I think the trajectory on the aftermarket is very favorable and we certainly hope that, that would continue next year based on the programs that we have in place perhaps some of the new product introductions that we have that are specifically geared towards aftermarket replacements.

Operator

(Operator Instruction) We will now go to a follow up question from Jeff Hammond with KeyBanc Capital Market.

Jeffrey Hammond - KeyBanc Capital Markets

Hi guys! I just want to come back to commercial marine. I think you have said, you had some cancellations this quarter and did it until October and you thought that there were some clean up. Maybe give us a little more cost color on what your customers are saying there and what gives you the confidence that we do not see a lot more of that in the go forward basis.

John A. Young

I think there are a couple of factors. One, if you look at our customer base in commercial marine we tend serve primarily European shipments, that is our largest ultimate customer base. Our sales go to shipyards in China, Korea, India and Vietnam but the ultimate customers for most part are European ship owners. Our customers tend to be well capitalized and well in business, so I think from that perspective, I think that gives certainly a little bit of confidence in that market. But also based on activity level, there certainly was a flurry of activity right as the financial crisis hit and a lot of concerns out there. But as we have gone into November, I think the mood has calmed down a little bit and we have certainly seen pretty substantial new order activity start to turn. So I do not think anticipating the huge boom in orders by any stretch of imagination and so we commented on that earlier, but we feel like it has certainly stabilized. But we are in the market place everyday talking to our customers, talking to the yards and as I have said we are monitoring it very closely for any changes in those trends.

Jeffrey Hammond - KeyBanc Capital Markets

Okay and where are you seeing the cancellations with sub verticals, is it mostly drive work or…?

John A. Young

It has been a mix. It has been container; I think more heavily weighted on the container side than anything else but it was a mix. There were some bulkers but it was primarily containers.

Jeffrey Hammond - KeyBanc Capital Markets

Okay and then, can you just remind us of what percentage of commercial marine’s aftermarket and if we have decent activity levels over the next couple of years as you work through the backlog. What might be the aftermarket look like in two or three years out as a percentage of that total mix?

John A. Young

Well, in total, aftermarket is about 25%, that percentage in the commercial marine vertical is lower because we had such strong fore market growth in that particular market over the last four years. We are starting to move into the gestation period where we should see just by the passage of time, a larger growth rate in the aftermarket in commercial marine. I think over time, if you look at our business, that the mix of the aftermarket 25% is actually on the lower ends of the range, because we have had some strong fore market growth. If you look at it, it ranges from 25% to maybe 32% to 35% at the very high end. So I think as we go into the next couple of years you will see that percentage start moving up and hopefully have a three on the front of it going out into the future.

Jeffrey Hammond - KeyBanc Capital Markets

Okay, thanks a lot.

Operator

And that concludes our question and answer session. At this time I would like to turn the conference back over to John Young for any closing or additional comment.

John A. Young

Okay thank you Tina. Again thank you for your participation today and all the questions. I think in closing third quarter, certainly it was a good quarter for us and our outlook for the fourth quarter still remains pretty strong, I think we are on target to hit our sales growth target that we have out there and hopefully come to our positive conclusion for 2008. So with that I think we will complete the call this morning, thank you very much for your participation.

Operator

This concludes today’s conference we thank you for your participation and have a nice day.

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Source: Colfax Corporation (F3Q08) Earnings Conference Call Transcript
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