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Gardner Denver, Inc. (NYSE:GDI)

Q4 2011 & Year End 2011 Earnings Call

February 10, 2011 8:30 am ET

Executives

Barry L. Pennypacker – President, Chief Executive Officer & Director

Michael M. Larsen – Chief Financial Officer & Vice President

Analysts

Kevin Maczke – Barry L. Pennypacker &T Capital Markets

James C. Lucas – Janney Montgomery Scott

Jamie Sullivan – RBC Capital Markets

Michael P. Halloran – Robert W. Baird & Co.

Julian Mitchell – Credit Suisse Securities (NYSE:USA) LLC.

Cliff Ransom – Ransom Research

Joseph Mondillo – Sidoti & Company, LLC

Jeffrey Hammond – Keybanc Capital Markets

Joshua Pokrzywinski – MKM Partners, LLC.

Operator

Welcome to the Gardner Denver fourth quarter 2011 earnings call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions) As a reminder, this call is being recorded. It is now my pleasure to introduce your host Barry Pennypacker, President and CEO.

Barry L. Pennypacker

Welcome to Gardner Denver’s fourth quarter 2011 earnings conference call. I’m joined this morning by Michael Larsen, Gardner Denver’s Vice President and Chief Financial Officer. Before we begin with our remarks Mike will have a few comments regarding our forward-looking statements.

Michael M. Larsen

Let me remind you that any statements made by Gardner Denver during the call today other than historical facts are forward-looking statements made in reliance upon the Safe Harbor of the Private Securities Litigation Reform Act of 1995. As a general matter, forward-looking statements are those focused upon anticipated events or trends and assumptions, expectations and beliefs relating to matters that are not historical in nature.

Such forward-looking statements are subject to uncertainties and factors relating to Gardner Denver’s operations and business environment, all of which are difficult to predict and many of which are beyond the control of the company. These uncertainties and factors could cause actual results to differ materially from those matters expressed in or implied by such forward-looking statements.

Please refer to Gardner Denver’s fourth quarter 2011 earnings press release issued on February 9, 2012 for further information regarding potential uncertainties and factors that could cause actual results to differ from anticipated results. Gardner Denver does not undertake or plan to update these forward-looking statements even though the company’s situation may change. Therefore, you should not rely on these forward-looking statements a representing the company’s or its managements’ view as of any date subsequent to today.

As a reminder, this call is being broadcast in listen only mode through a live webcast. This free webcast will be available for replay up to 90 days following the call through the investor relations page on the Gardner Denver website at www.GardnerDenver.com or the Thompson Street website at www.Earnings.com. Now, I’d like to turn the meeting back over to Barry.

Barry L. Pennypacker

Gardner Denver had a solid fourth quarter to cap off another outstanding year. We established quarterly records for diluted earnings per share in the fourth quarter and annual records for revenue, operating income, net income, diluted earnings per share, and cash flow from operations.

For the full revenues were up 25%. Operating margins at 16.9% were up 360 basis points and diluted earnings per share for the year ended at $5.33 up 63%. On an adjusted basis, diluted earnings per share were $5.51, up 63% from $3.39 in 2010. Our orders for the fourth quarter were $598 million, up 15% versus prior year, up 13% organically and our book-to-build was close to one as revenues of $614 million were up 16%, 15% organically.

Sequentially from third quarter to fourth quarter, our orders declined 5%. Down 3% organically as we saw moderate declines in IPG, down 6% driven primarily by Europe, and EPG which was down 4%. In EPG Nash well servicing were up sequentially but not enough to offset the non-repeat of some larger orders in Emco Wheaton and moderate declines in Thomas.

We are closely watching our orders as always. We are not panicked by moderating growth rates but rest assured we are prepared. Importantly we’re off to a strong start in January with orders up approximately 10% year-over-year and quarter-over-quarter.

Backlog at year end was $670 million up 21% versus prior year. Our backlog positions us well as we head into 2012 and provides good visibility through the first half of the year. There is however some uncertainty as it relates to the later part of the year which I will discuss in more detail shortly.

Operating income for the fourth quarter was $108 million, a 35% increase over last year as operating margins improved 240 basis points to 17.6%. Net income was $77 million, up 36% over last year’s fourth quarter and diluted earnings per share increased 41% to $1.52 and a $1.54 on an adjusted basis.

In addition, our cash flow from operating activities totaled $300 million for the year and $88 million in the fourth quarter. Well ahead of net income and in 2011 our strong balance sheet enabled us to purchase $131 million of our outstanding shares, acquire Robuschi for approximately $200 million on December 15th and invest $56 million in capital equipment focused on increasing capacity and reducing costs on the shop floor.

Now, I’d like to give you a little more color on the performance of our two operating segments. Focusing on engineer products for the total year, revenues reached $1.1 billion up 40% and adjusted operating margins in EPG reached 23.7% for the year up 370 basis points year-over-year.

Our engineered products group continued to experience strong growth in the fourth quarter with orders up 27% and $289 million and revenues up 29% to $292 million driven by continued growth in our energy business and encouraging momentum in our later cycle business such as Nash. In EPG the backlog typically gives you a good sense of where the business is going and our backlog at quarter end is $416 million, up 22% year-over-year.

In the fourth quarter operating margins in EPG reached an all time high of 24.9% on an adjusted basis. Incremental profit on revenue growth, favorable product mix, cost reductions, and pricing in our well servicing equipment and after market fluid ends all contributed. I will tell you that the fourth quarter EPG margins did have better than expected flow through on a few larger projects which we can’t expect to repeat going forward.

Revenues in our petroleum and industrial pump business were in excess of 60% year-over-year and orders in our pressure pumping business were up more than 40% in the quarter. Despite the decline in natural gas prices we have seen no signs of slow down in our energy business, no indication of double booking of orders and no cancellations.

But with natural gas completely decoupled from crude oil prices and trading at 10 years low, let me talk about natural gas prices and what it could mean to our well servicing business. Approximately one third of the North American rigs are gas or a combination of gas and liquids and it is estimated that there are currently 300 to 350 rigs that are drilling for dry gas only. At current natural gas and crude oil levels these dry gas only rigs are likely to continue the trend of converting to liquids that obviously are very profitable at current crude oil prices.

In fact, this is a trend we have seen for a while now. If you look at the last three months, rig count has stayed relatively stable while gas only rigs have declined offset by an increase in the number of liquids focused rigs. Therefore, we don’t believe that declining gas rigs necessarily means that total rig count will decline provided the ongoing drop in gas activity is offset by increasing activity in liquid rig spaces.

In addition, we believe that any potential reductions in activity will be temporary only due to the growing international demand for natural gas and the limited spare oil capacity as noted by our largest customers. While it is likely that the overall market demand for new pressure pumps is going to moderate in 2012 it is also likely that the demand for aftermarket services in fluid ends will increase as a result of the installed base that was put into service in 2011. And, I might add, those suppliers who can deliver with accuracy and reliability may find little affect.

Our recent investments in the aftermarket for well servicing in the Marcellus Shale and in Forth Worth Texas will enable us to take full advantage of the aftermarket opportunity and our projects are progressing well according to plan. We remain confident that we’ve made the right investment decisions and we believe that the trends in the unconventional gas exploration will continue to drive growth for our pressure pumps and associated aftermarket goods and services and we intend to take full advantage of this opportunity going forward.

Now, turning our attention to industrial products group, for the total year revenues reached $1.25 billion up 14% and operating margins in IPG reached 11.9% for the year up 270 basis points year-over-year. We continue to progress on our 14x14 journey supported by the principles of the Gardner Denver way. As expected, demand for our shorter cycle business in industrial products is moderating from high levels.

Fourth quarter orders were up 4% year-over-year, 3% organically and declined sequentially by about 6%. Obviously, comparisons are getting tougher and the cautionary tone from our customers that we discussed previously has turned into lower order rates especially in Europe. Keep in mind that in the fourth quarter traditionally, over the last 10 years, we’ve seen some seasonality affect within IPG.

Since there is uncertainty as to the macro environment in Europe, let me give you a little more color on our presence in Europe. If you look at 2011, our sales in Europe represented about 31% of our total global sales and our European sales were up 12% last year. The largest country in terms of sales was Germany which represented about 10% of our total sales followed by the UK at 5% and France at 3%.

While other European markets have slowed in terms of growth, Germany continues to perform well. Our industrial business in China which was down year-over-year in the third quarter came back nicely in the fourth quarter as both orders and revenue grew at double digit. On margin expansion we took a step backwards relatively to a very strong third quarter as IPG margins came in at 11.6% down from third quarter but in line with second quarter and up 150 basis points from the fourth quarter 2010. The sequential decline in margins was primarily driven by Europe.

Now, at Gardner Denver we know how to expand margins by reducing costs and that’s exactly what we’re focused on as growth rates appear to be moderating from high levels in IPG. Now, as I go through an update on our five strategic objectives let me start with arguably the most important one, margin expansion, and tell you what we’re doing to grow earnings in a slower growth environment.

We’ve recently spent a substantial amount of time with our team in Europe focused on developing the plans to consolidate our high cost footprint and the movement of production into much lower cost sites. We currently have 10 facilities in the industrial products group alone: three in the UK; three in Germany; three in Italy; and one in Finland. Simply too many to remain competitive in a moderating demand environment. We will begin to address this issue in 2012 and have it mostly complete by the end of 2013.

Our plans are still in the works and therefore our 2012 guidance excludes any European restructuring but you should expect to see restructuring charges as we finalize our plans and aim for a two year or better payback on these programs as we have demonstrated in the past. This European restructuring program will be incremental to 14x14 and therefore will enable us to take margins beyond 14% in IPG.

On organic growth we made great strides in 2011 as the business added almost $400 million of organic revenues year-over-year on relatively flat headcount I might add. A significant portion of that growth came from our investments and focus on emerging markets. Today, 26% of our sales are from emerging markets outside of North America and Europe and these sales grew at a rate of 27% year-over-year.

While it’s probably fair to say that growth rates are slowing in some of the emerging countries, Gardener Denver’s presence and market share is still relatively small and as we continue to expand in places like India we’re confident that we can continue to grow the business at attractive rates.

Regarding aftermarket expansion, we continue to make progress towards our goal of having over 40% of our total business coming from the aftermarket. In 2011 aftermarket as a percentage of revenue grew to 32% from 31% in 2010. While a 100 basis point improvement year-over-year may not sound like significant progress, consider that overall revenue grew by 25%. We expect that our aftermarket sales will continue to increase at a good pace in 2012 especially as demand for fluid ends and our well servicing business continues to grow.

By the way, if the trend continues to favor more drilling for liquids versus gases, we would continue to benefit from an aftermarket perspective as drilling for liquids tends to involve higher fracing intensity which in turn creates more demand for Gardner Denver replacement parts and services. And, as I have reiterated in the past three calls, as we continue to shift the percentage of revenue to the aftermarket we are going to see less orders in the backlog as we bring capacity on stream and our deliver cycles are shortened as customers do not have to get in the queue as they had in the past.

Turning to innovation; the teams continue to make great strides on product development based on the voice of the customer. We talked quite a bit about or fracing business this far and we made good progress on delivering innovation in fluid end technology while keeping up with the demands of the business from an orders and execution perspective.

The team at Tulsa has developed a new exotic material fluid end that is significantly better in terms of reliability and longevity. In fact, we have been able to attract new business recently from a handful of new customers who also prefer the new design and ease of maintenance that these fluid ends provide. Look forward to more innovations in this segment of our business and in particular our new Falcon product line where lower stress equals longer life.

In some of our other businesses we made great progress in redesigning existing product lines and taking cost out of our business in order to compete in the marketplace. Last quarter we talked about the Dragon series of compressors that was introduced in the China market as a lower cost alternative to replace US and European made products. The Emco Wheaton team has taken a similar approach in developing a lower cost loading arm which will open up new markets for us, particularly in emerging markets.

On the acquisition front we have a track record of buying good companies and making them accretive in year one from an earnings perspective. Robuschi will be no exception. Last month we had our first [inaudible] event in Robuschi and I introduced the management team to the Gardner Denver way.

Mr. Ugo Remitti, Operations Director for the Parma operation is already convinced that the Gardner Denver way will free up a significant amount of space as well as precious working capital in the operation. We expect that Robuschi will add $0.15 of diluted earnings per share in 2012 excluding acquisition related cost of approximately $0.10 that will record in the first quarter of 2012. Robuschi will be accretive in year one but the real affect will come to the bottom line in 2013.

I am convinced that our secret sauce in regards to acquisitions is to not only buy superior companies with superior brands but buy ones with great management teams. Paolo Urbanis and his team of executives know how to grow a business in difficult times and now with the Gardner Denver way principles guiding their efforts I look forward to expectations well beyond what we originally had imagined.

Finally, the acquisition environment remains active and we would expect to close a number of deals in 2012. I would point out that multiples remain high which can be a challenge for a disciplined buyer like us.

Turning to our outlook for 2012, we obviously see the same macroeconomic activities as everyone else especially, in Europe. There are some positive signs in the US as evidenced by recent improvements in industrial production and capacity utilization. Emerging markets should continue to grow, potentially at a more moderate pace than in 2011.

As discussed earlier, we expect rig count for 2012 to be flat with the fourth quarter of 2011. This equates to a mid single digit increase in rigs and horizontal rigs should grow faster than that. We do not expect international pressure pumping to be a major growth river in 2012 although, some of our customers are making good progress in places like Poland and Argentina.

Our January orders are off to a good start up approximately [inaudible] a year on organic basis and our current backlog, strong portfolio of businesses, and continued progress on margin expansion position us well for 2012 as we remain committed to achieving 14x14 in IPG and 50 basis points of improvement in EPG on no volume growth driven by restructuring, productivity, and low cost sourcing.

In terms of 2012 guidance, we anticipate that the adjusted diluted earnings per share for the year will be approximately $6.00 to $6.20 up 9% to 13% over prior year. This excludes $0.15 of restructuring and other items. We estimate that our first quarter of 2012 adjusted earnings per share will be in the range of $1.30 to $1.40 up 13% to 22% over the first quarter of 2011 which excludes $0.10 of restructuring and other items.

In summary, our business has had a strong year as we set records for essentially all key financial metrics and made progress on our five point strategy support by the principles of the Gardner Denver way. We expect top and bottom line growth to continue at a more moderate pace in 2012 as certain end market dynamics remain favorable, especially in our higher margin energy business and late cycle businesses, and as we continue to execute on our profit improvement initiatives.

With the disciplined execution of our five point strategy, the diversity of our businesses, our higher margin aftermarket growth, the continued margin expansion through the implementation of the Gardner Denver way, and accretive M&A, complimented by a very dedicated group of nearly 6,700 employees worldwide we are in a great position to continue to deliver superior results in an uncertain macro environment.

With that, I’ll turn the call over to Michael for some more details on the financials.

Michael M. Larsen

As Barry said, we had a solid fourth quarter and an excellent 2011. Let me give you some additional detail in a couple of areas. We continue to make good progress on SG&A. For 2011 SG&A as a percentage of sales was 16.2% down more than 250 basis points from prior year as we maintained good cost controls and essentially flat headcount with strong top line growth.

For the year, SG&A was up 7% on revenues up 25%. In the fourth quarter the foreign exchange impact to earnings was negligible on a year-over-year basis and in line with our October guidance. Our guidance for 2012 assumes current exchange rates which creates about three percentage points of revenue headwind and $0.15 of earnings per share headwinds year-over-year. The year average $1.40 in 2011 and currently trades closer to $1.30 so for the first quarter of 2012 we expect to see about $0.05 of fx headwind compared to the fourth quarter of 2011.

Our effective tax rate was slightly better than our expectations at 27% for the fourth quarter and in line with guidance at 28% for the full year. For 2012 we estimate that our tax rate will be in the 29% range as we expect that our US earnings will continue to grow faster than our overseas earnings putting pressure on the rate.

We did not repurchase sales in the fourth quarter given the large buy back we completed in the third quarter and the closing of the Robuschi acquisition in December. We remain committed to buying back shares opportunistically and as of today, approximately 1.6 million shares remain under the authorization from our board of directors.

On the balance sheet, working capital defined as the net of inventory receivables payable to accrued liabilities was 14% of sales in the fourth quarter which was flat to the fourth quarter of last year. Working capital performance, especially inventory, is a top priority for 2012. As of year end we had approximately $155 million of cash on hand and total debt was $404 million, up $116 million from 2010 year end resulting in a net debt to capital ratio of 24% up from 20% at the end of 2010 which still gives us plenty of flexibility in terms of capital deployment.

Depreciation and amortization was $15 million for the quarter and $60 million for the full year. 2012 depreciation and amortization is expected to be approximately $66 million including Robuschi.

Operating cash flow was $88 million in the fourth quarter up 80% from the fourth quarter last year and for the year we generated $300 million cash flow up 48% from 2011 and 108% of net income. Free cash flow was 88% of net income as we invested $56 million in capital equipment and we’re planning for capital expenditures of $55 to $60 million in 2012 again, including Robuschi.

We had two adjustments to operating income in the fourth quarter related to the Robuschi acquisition. These items are also described in the press release on page nine. First, as a result of the timing of the Robuschi financing and a foreign exchange hedge we put in place, we realized a $3.4 million fx gain and secondly; the amortization of the fair market value adjustments to backlog and inventory coming out of purchase accounting led to an expense of $1.6 million in the fourth quarter.

Both of these items have been excluded in our fourth quarter adjusted EPS results. The expense associated with the Robuschi fair market value adjustments will be approximately $7 million or $0.10 in the first quarter of 2012 which is again, excluded from our adjusted earnings per share guidance of $1.30 to $1.40.

In summary, we had an excellent 2011 as we established new records for the key financial metrics and in 2012 will remain totally focused on delivering cash and earnings growth. With that, I’ll turn it back over to Barry.

Barry L. Pennypacker

Now before we take questions, I want to share with you a story about a great win that actually happened very recently here at Gardner Denver. Gardner Denver has been pursuing the Pep Boys account for several years. The company has extremely high expectations for its supply channel partners. Choices are made only after considerable evaluation and demonstrated performance.

Merton Porter, Gardner’s National Account Sales Manager convinced the property management team at Pep Boys to give us a shot. Our Gardner Denver managed care service group was given 40 to 50 stores as a test program for evaluation by property management. The test period was approximately three months.

The service phase in compressed air systems are mission critical for Pep Boys and there is no allowance for down time. In that period Gardner Denver’s performance was impressive to Pep Boys property management and we were advised in January that GDI would become the steward of an additional 500 stores. We are confident that Pep Boys made a wise choice in selection of Gardner Denver as a supply chain partner for compressed air systems and stand ready to serve its every need. I would like to thank Merton and the entire team for this gratifying win.

This concludes our prepared remarks and with that I’d like to turn it back to the operator to entertain some questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Kevin Maczke – Barry L. Pennypacker &T Capital Markets.

Kevin Maczke – Barry L. Pennypacker &T Capital Markets

Barry, I guess first in EPG on the non-energy side you made a comment about seeing some declines in Thomas which is a more early cycle business but seeing some encouraging things at Nash which is a little bit more later cycle. Can you just talk a little bit about the Thomas side? I think you said you’re not concerned there but what are you seeing that makes you have that view when you’re starting to see some order decline?

Barry L. Pennypacker

Well, some of the moderation is due to uncertainty of what’s going to happen with healthcare cost in the US. A substantial portion of our Thomas business is in fact dedicated to things like portable oxygen concentration and with the uncertainty that currently exists in what’s going to happen with Medicare and Medicaid in the future, inventory in the channel is coming down.

We’re not concerned by this, our margins in that business continue to improve and as we continue to become better and better at implementing the Gardner Denver way in our large facility in Louisiana, I’m convinced that a slight downturn in that business will be more than manageable for us.

In regards to Nash, we’re seeing some very, very encouraging signs. We’re seeing some large projects starting to loosen up and I think as we progress through this quarter and talk to you as a result of the first quarter, you’ll see that some of those large mega projects as we call them will in fact book.

Kevin Maczke – Barry L. Pennypacker &T Capital Markets

Shifting over to the energy side of EPG, can you comment on the mix there of OEM versus aftermarket? I think it’s understandable that as you see more aftermarket that will have a negative effect on the backlog if you will, but can you comment on what that does to orders? Should we expect further order decline from that transition as well?

Barry L. Pennypacker

I don’t think you should expect further order declines. As you remember what I said, 40% organically the order rate in that particular segment of our business was up. What I will say is that you’re not going to see backlog in EPG in the aftermarket portion of our P&IP business grow. This is a spot demand business, it’s a very uncertain as people continue to require higher and higher pressures. As we enter these liquid rich basins the demand on the pumps are increasing.

Those of us who have the ability to effectively produce a fluid end that’s more reliable and the ability to deliver are going to capitalize on that. I can’t put a number on that at this point in time but all you have to do is read the transcripts from our three largest customers in this space and you’ll see that there’s a substantial amount of understanding within that customer base of exactly what’s going to happen in these basins. We’re following it, we’re continuing to invest, and I am very pleased with the investment decisions that we made and continuing to evaluate further capacity expansions within this business.

Kevin Maczke – Barry L. Pennypacker &T Capital Markets

Barry, can you comment on what the mix is currently? Is that something that you’ll disclose to us?

Barry L. Pennypacker

No. I think you’ll see as time goes on market dynamics will in fact report that but we’re going to continue to protect that particular piece of information internally.

Kevin Maczke – Barry L. Pennypacker &T Capital Markets

Okay, but it sounds like your message given what you’re hearing from your biggest customers and what you’re seeing is –

Barry L. Pennypacker

Let me say it this way, I worry about a lot of things but I am not worried about our P&IP business for the year 2012. Let me just make that clear. I am not worried about our P&IP business for the year 2012.

Operator

Your next question comes from James C. Lucas – Janney Montgomery Scott.

James C. Lucas – Janney Montgomery Scott

Let’s start first with a housekeeping question. Michael, what was the total capital allocated to share repurchase in ’11 and how many shares were repurchased?

Michael M. Larsen

We spent $131 million buying back the stock last year. I believe it was 1.8 million shares.

James C. Lucas – Janney Montgomery Scott

Then I wanted to spend a minute on IPG. Starting first on the sequential margin decline, with Robuschi being included in the numbers, where is their margin profile versus the IPG segment and what impact did that have on the sequential decline?

Barry L. Pennypacker

Actually, the IPG margins with regards to Robuschi, Robuschi is above the average so Robuschi was not a drain. It was other places in Europe and we’re, as I mentioned in my prepared remarks, we’re going to be very aggressive in addressing that situation this year.

James C. Lucas – Janney Montgomery Scott

That was the second part of the question, obviously there’s been some changes over the last few weeks with regards to IPG and specifically, when you look at Europe being a little bit behind the curve with regards to the cost realignment, I mean Robuschi helps get you back on track if you will, to what extent can you share with us your plans there in terms of getting Europe on track?

Barry L. Pennypacker

Way too much roofline. I mean, I’ve got 10 facilities there and those 10 facilities, they all have plant managers, they all have finance people, they all have material planning people and when you look at our competition globally in the IPG space, that’s not the model that works for them. We have a substantial opportunity with using the Parma facility to enable that they’ve gotten immersed in the Gardner Denver way if you will, by a visit from myself and others. As I said, we’re already making progress and I can already see, that’s the picture I got yesterday, of about 4,000 square foot of space that was freed up in the last week as a result of just talking to one supplier.

Now, that space not only is freed up for future expansion or future restructuring activities but it also had an implication on our working capital. That’s exactly what the Gardner Denver way is all about.

Michael M. Larsen

In the guidance that we gave today we have not included the restructuring for Europe because these plans are still a work in progress. But, you should expect throughout this year to see restructuring charges coming through for the activities that Barry talked about for IPG Europe.

James C. Lucas – Janney Montgomery Scott

I know this doesn’t come together right away, but is this something that you think you could have in place by the end of the first quarter or is it really a first half event before you have all the plan aligned.

Barry L. Pennypacker

By the time we have our next earnings release everyone will be fully up to speed with exactly what our charges will be and what our payback will be.

James C. Lucas – Janney Montgomery Scott

Finally, I just wanted to touch real quickly, you did refer to some of the innovation. I wanted to just get an update on how the new products introduced over the last 12 months have been playing out. You mentioned Falcon, any color you can give on exactly what that is?

Barry L. Pennypacker

Falcon was talked about when I was discussing fluid ends so you can probably infer that Falcon might be a technological advancement in fluid end technology. I think that would be logical. I prefer at this point not to give any more color on that. But, rest assured that innovation is alive and well in every one of our businesses and just even when we look at simple things like loading arms.

Better ways to make distribution loading arms which we never talk about which is a nice business for us. Lower cost and more user friendly and we just introduced a new line of lower cost loading arms for distribution that actually improved the overall throughput of the products and services that are being unloaded.

With regards to the others, I mean the Hoffman Revolution is still booking and we are putting that into backlog. Quantima continues to show extreme promise and we’re booking those globally. We continue to get customer testimonies that the energy savings that we say they’re going to receive are in fact coming to reality. So as we continue to offer these to more and more broad distribution our innovation activities will continue to show us substantial growth organically.

Operator

Your next question comes from Jamie Sullivan – RBC Capital Markets.

Jamie Sullivan – RBC Capital Markets

Barry, just to clarify you’re still expecting the usual 150 in IPG and 50 in EPG this year?

Barry L. Pennypacker

I’m expecting 50 minimum in EPG and 14x14.

Jamie Sullivan – RBC Capital Markets

If I’m just kind of running the numbers given the typical margin expansion in the segments it looks like the low end of your range is really not assuming much in terms of organic growth in 2012 on the top line. I just wondered if you could comment on that whether it’s just conservatism in areas that you would see growing and maybe declining to offset that in that scenario?

Michael M. Larsen

What I would say is that, like we always do, we put together appropriately conservative guidance that factors in all the uncertainties that we see in the environment that we operate in. I think Barry and I walk through those. The other things to consider are some of the puts and takes around foreign exchange being a headwind in the year, we got some pressure on the tax rate and that offsets essentially the reduction in the number of outstanding shares that we have as well as the impact from Robuschi.

But, it is fair to say that we are entering into a more moderate growth environment than we had in 2011 and I don’t think that surprises anybody. Like we always do, we put together a set of guidance numbers that we believe that we can deliver and potentially do a little bit better on.

Jamie Sullivan – RBC Capital Markets

You’re not assuming future buy backs in the numbers, right?

Barry L. Pennypacker

Correct.

Michael M. Larsen

That’s correct. What we will continue to do is at least offset the creep associated with the options that are included in the benefit plans at Gardner Denver and then if the opportunities ever arise we would obviously consider buying back beyond that and that’s why we have this authorization from the board that I talked about.

Operator

Your next question comes from Michael P. Halloran – Robert W. Baird & Co.

Michael P. Halloran – Robert W. Baird & Co.

You said that January orders were up on a relatively healthy start to the year, any split not necessarily quantitatively but maybe qualitatively talk about the EPG side versus the IPG side? It sounds like things have remained relatively constant but wouldn’t mind hearing a little bit more color.

Barry L. Pennypacker

On the EPG side, the mix that we exhibited last year and the growth profile is continuing in January and the first week of February. In IPG we’re still showing some nice growth but to be perfectly honest it’s shifted out of Europe and is really geographically showing itself in the US, as well as I mentioned in the prepared remarks, we’re going a much better job of growing in areas of Asia Pac that we haven’t in the past.

Michael P. Halloran – Robert W. Baird & Co.

When you talk about the Europe side of the business, could you just maybe talk about how things progress sequentially through the quarter? When you started seeing the slowdown and have things stabilized on an absolute level yet?

Barry L. Pennypacker

Yes. We saw the October time frame was equivalent to what we thought it would be. We entered November and we saw a sequential slowdown and that continued through the quarter. Now, through the first five weeks of January and the first week of February, we have seen a little bit of an uptick but definitely no further weakening.

Michael P. Halloran – Robert W. Baird & Co.

Then on the drill pump side of things maybe you could just update us on what kind of trends you’re seeing just for the drill pumps and mud pumps themselves?

Barry L. Pennypacker

They’re doing just fine. We’re booked through a substantial portion of next year already with our largest customer. Their plans continue to evolve but I think you can read, as I hear, that the drilling contractors who build the best and most flexible rigs are bullish on the market.

Michael P. Halloran – Robert W. Baird & Co.

Then kind of an overall basis including the pressure pumping side, the comments that no double booking, very healthy outlook, how far out now does that order book trend for you guys on that side?

Barry L. Pennypacker

Six months.

Operator

(Operator Instructions) Your next question comes from Julian Mitchell – Credit Suisse Securities (USA) LLC.

Julian Mitchell – Credit Suisse Securities (USA) LLC.

I understand there’s a very good outlook for overall spending on aftermarket and fluid ends this year particularly versus OE, but I just wanted to ask you about the actual market shares inside the fluid ends themselves because I guess some [inaudible] have mentioned using contract manufacturers fluid ends. Also, I guess some of your own fluid ends could potentially be used alongside competitor pumps, so can you talk a little bit about your expectations on market share for ’12 and for ’13?

Barry L. Pennypacker

I don’t expect market share to go down. I expect market share to go up as we continue to become more and more flexible. The only reason some of our customers might consider using outside contractors for fluid ends is if we were not able to deliver. Therefore, that’s why we’re making substantial investments currently still in shale plays to be able to satisfy their needs. With regards to actual market share, as I have said in the past, if you add up everyone else you’ve got 100% of the market so I’m not going to comment on that.

Julian Mitchell – Credit Suisse Securities (USA) LLC.

Secondly, on the OE side what sort of decline are you factoring into your assumptions for this year and next year in terms of pump OE orders?

Michael M. Larsen

What we are planning for is not a decline in OE pumps in 2012. It will be flat or better in 2012.

Operator

Your next question comes from Cliff Ransom – Ransom Research.

Cliff Ransom – Ransom Research

Barry, a tiny issue, when you were talking about your three largest customers understanding what happens with the geology and the pressure needs of some of these big basins you said, “We’re going to be ready to add capacity.” Were you saying those customers are adding capacity or you’re adding capacity?

Barry L. Pennypacker

Both.

Cliff Ransom – Ransom Research

If I can go back to 35,000 feet again, if you look at the last six months, what’s the single largest negative deviation from your previous game plan? Is there one item that stands out and can you talk to us about what counter measures you’ve taken to ameliorate it?

Barry L. Pennypacker

That’s a very good question. We’ve taken multiple counter measures. I think some of the issues that we’ve alluded to with regards to our cost structure in Europe is probably my single largest disappointment. But, I’m confident now that with the leadership that we have in place in Europe complimented by the activities that they will be getting direction from, from the current head of IPG which is me, that we will have a plan and a plan that will deliver superior results to what we’ve demonstrated in the past. So single biggest area of surprise was Europe restructuring.

Cliff Ransom – Ransom Research

It seems to me that we’ve talked repeatedly over the last three to six months that the plan was to concentrate on you’ve done basically the rooftop rationalization in North America, you’ve begun to make the investments in emerging markets, but you really hadn’t systematically attacked Europe. Wasn’t that always a 2012 program?

Barry L. Pennypacker

Yes, definitely. But I thought, to be honest, I thought for sure that on this call and I’ve said in our prior call that we should be able to be in a position in this timeframe to tell you exactly what our restructuring charges would be and what the payback will be so we’re not in that position and that’s an extreme disappointment and I apologize for that.

Cliff Ransom – Ransom Research

Then the last thing is at the risk of trying to double think European psychology, to the extent that Europe perceives itself to be in a slowdown, does that help or hinder the political and social costs associated with restructuring in Europe.

Barry L. Pennypacker

Most definitely helps, most definitely helps.

Cliff Ransom – Ransom Research

Can you just give us one or two examples of how that helps? What kinds of things? I know you haven’t made any announcements about specific sites but give us an idea what you put your handle on?

Barry L. Pennypacker

Let’s use our prior experiences as an example. When we restructured our Thomas business in Europe, particularly in Germany we saw a substantial slowdown in the later part of ’08 and basically we had people standing around who were operating at 25% to 30% efficiency. So when you sit down with the works council and the see that there are people standing around who don’t have as much to do the social cost and the overall mood of the ability to restructure the operations changes dramatically.

When you’re driving 85% efficiency through a plant and you try and go in and talk to the works council about restructuring it, it’s a difficult sell. But I believe this opportunity that will present itself to us over the course of the next 18 months will drive a substantial amount of shareholder value. And I might add, as I said in my prepared remarks, well beyond 14x14.

Operator

Your next question comes from Joseph Mondillo – Sidoti & Company, LLC

Joseph Mondillo – Sidoti & Company, LLC

I was wondering if you could tell me what the cost savings from the 14x14 plan were in 2011 in each segment?

Barry L. Pennypacker

We don’t give that much clarity. All you know is that you saw that we went up by 340 basis points.

Joseph Mondillo – Sidoti & Company, LLC

Can you disclose how much of the 340 was organic and how much was it from the 14x14?

Michael M. Larsen

We don’t break it down that way. What we will say is that the benefit we saw in 2011 were primarily driven by productivity. So as we invested in capital equipment we drove improved productivity in our plants. There was some restructuring last year and you’ll see every quarter, as we did a little restructuring. Frankly, limited progress on the low cost country sourcing efforts so that’s really where we’ve intensified our focus and we should be starting to see some benefits here in the second half of 2012.

Joseph Mondillo – Sidoti & Company, LLC

What regions primarily are you focusing on the low cost sourcing other than Europe is an obvious?

Michael M. Larsen

All high cost regions so it’s the US and it’s Western Europe.

Joseph Mondillo – Sidoti & Company, LLC

In terms of the drilling activity, I was just wonder as a general question just what your thoughts are on profitability of rigs in North America are the highest they’ve been in over 20 years, I’m trying to get a sense of sort of what you guys are thinking of the upside? I mean the oil rig count just continues to climb sort of how much upside there is? Also, if you had any feelings on sort of what the breakeven price of drilling is these days?

Barry L. Pennypacker

We don’t have that particular data and let me tell you why, particularly in the US. We can tell you the breakeven price on gas and we’ve always said that it’s around $2. But with regards to oil there’s so many new discoveries happening every day with regards to fracing in some of these basins that our customers just are not in a position yet to say what those breakeven prices are.

I think you’ll see over time as that becomes less and less of a competitive data for them internally that that will be shared externally but right now it’s a new dynamic as our customers have said. They’re just trying to find their way through it and as they do they’re going to need more drilling pumps, and they’re going to need more fracing pumps, and they’re going to need more fluid ends to support them.

Joseph Mondillo – Sidoti & Company, LLC

Last question, just as it pertains to China I believe you said September sales were down 5% on the last call.

Barry L. Pennypacker

Correct.

Joseph Mondillo – Sidoti & Company, LLC

How did that play out through the rest of the quarter and how are you looking at that region?

Barry L. Pennypacker

As I said in my prepared remarks it’s recovered in the fourth quarter and that trend is continuing very nicely for us in the first six weeks of this year.

Michael M. Larsen

We were up double digit in China year-over-year quarter-over-quarter in the fourth quarter so good progress there. Some indications that we may have taken some share as well.

Joseph Mondillo – Sidoti & Company, LLC

What do you attribute to the September downturn and sort of the rebound? What part of your business is that I guess?

Barry L. Pennypacker

Well, it was in some OEM large - as I said in the third quarter it was in some large packaged plant [error] type of expansions that were just put on hold as the economy cooled in China. Now, some of those are back and some of those are still lingering around as to whether or not that capacity is going to be put in place. But it was large plant [error] types of applications that we saw demand drop for in that period.

Michael M. Larsen

What we heard from customers was liquidity issues and the ability to get credit, and there were requests for extended payment terms and things like that and we decided that in this environment we were not going to loosen our credit policies.

Operator

Your next question comes from Jeffrey Hammond – Keybanc Capital Markets.

Jeffrey Hammond – Keybanc Capital Markets

I guess what are you assuming or what are you hearing from the marketplace on pressure pumping capacity additions and just kind of equilibrium or oversupply, or are we still at under supply? Then, separately, you mentioned international not helping, I think some of your large customers are talking about shifting more towards international, maybe just speak to when you think that starts to move the needle?

Barry L. Pennypacker

I think as we said in the past, we believe that 2013 we’ll start seeing the needle move in regards to international pressure pumping. I think that’s evidenced by some of the things that our customers are saying. To be honest, I think some of our customers are a little bit more bullish on the later part of the year on international markets as they have stated publically but we’re going to be very disciplined in meeting their needs and understanding that as we go forward.

You look at what our customers have said from a cap ex spending standpoint this year. Our largest customer said cap ex spending is going to be up, particularly in pressure pumping and we’re following with them. Their incoming order rates to us look that way, their aftermarket expectations as we continue to expand our capacity in Forth Worth and in Altoona are playing out nicely. All I can tell you is that their expectations are that we continue to add capacity and we are doing that.

Jeffrey Hammond – Keybanc Capital Markets

Then just in terms of share shifts, do you expect based on your capacity additions and what you’re doing, are you expecting share gain more focused on fluid end or both the new frac pump and the fluid end side?

Barry L. Pennypacker

Both.

Operator

Your next question comes from Joshua Pokrzywinski – MKM Partners, LLC.

Joshua Pokrzywinski – MKM Partners, LLC.

I understand we’re still maybe a quarter away from knowing the specifics on timing and magnitude of restructuring in IPG and I’ll bear with you as those numbers come together. But, just maybe a path to what the drivers of the downtick from 3Q to 4Q and if there are any barriers from getting back to the 3Q margin rate in the next kind of two to three quarters?

Barry L. Pennypacker

Absolutely not, no barriers at all, we just didn’t execute properly. If you don’t execute you’re not going to expand margins and you’re going to have degradation and that’s not the Gardner Denver way. The Gardner Denver way is we expect margin to increase every single day. Structurally there is nothing that affected those costs in order for the margin degradation. I think you’ll see a rebound in that in the first quarter and throughout the year.

Operator

Your next question comes from Cliff Ransom – Ransom Research.

Cliff Ransom – Ransom Research

Barry would you help us and give us a little more color, I know the issue about the price of gas being a concern for a lot of people, but can you just overlay the issue of the gas price with the fact that they’re finding their approach to what they’re looking for in terms of gas in horizontal and directional drilling, this shift to gas and liquids what does that do? I know you’ve said that your customers aren’t ready to talk about it directly but maybe you could provide a little bit more color on that general topic because it seems to me that what we talked about three months ago looks a little differently, a little better frankly today, maybe you could update us there?

Barry L. Pennypacker

I think as WTI stays above 100 our customers are continuing to fall back and look at liquid rich basins that typical technology hasn’t been able to extract. Based on what we’re hearing from them with the extraction technology advancements over the course of the last two years some of these basins that have been idled since the 70s, show great opportunity at $100 through fracing and technological advances to continue to drive demand. We’re positioned very well for that and our customers are continuing to invest.

It’s not just me saying that, all you have to do is read our top three customers’ external communications. They’re saying the exact same thing we are. Some of the smaller customers in the space may not be as liquid if you will, to continue to invest in this environment when gas prices drop but when your customers are our customers they have a tendency to continue to invest no matter what the opportunity is for future horsepower requirements.

Operator

Ladies and gentlemen we have come to the end of our allotted time for questions. This will conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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