Colfax's (CFX) CEO Matt Trerotola on Q2 2016 Results - Earnings Call Transcript

| About: Colfax Corporation (CFX)

Colfax Corporation (NYSE:CFX)

Q2 2016 Earnings Conference Call

July 28, 2016 08:00 AM ET

Executives

Terry Ross - VP of IR

Matt Trerotola - President and CEO

Scott Brannan - CFO

Chris Hix - Incoming CFO

Analysts

Andrew Obin - Bank of America

Joe Ritchie - Goldman Sachs

Joe Giordano - Cowen

Eli Lustgarten - Longbow Securities

John Inch - Deutsche Bank

Andrew Kaplowitz - Citigroup

Nathan Jones - Stifel

Jeff Hammond - KeyBanc Capital Markets

Operator

Good day, ladies and gentlemen and welcome to the Colfax second quarter earnings conference call. At this time, all parliaments are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference is being recorded.

I now would like to introduce your host for today's conference, Mr. Terry Ross, Vice President of Investor Relations. Sir, you may begin.

Terry Ross

Thank you, Sabrina. Good morning, everyone and thank you for joining us. My name is Terry Ross and I'm Colfax's Vice President of Investor Relations. With me on the call today are Matt Trerotola, our President and CEO, Scott Brannan, our Chief Financial Officer, and Chris Hix, our incoming Chief Financial Officer.

Our earnings release was issued this morning and is available in the Investors section of our website, colfaxcorp.com. We will also be using a slide presentation to supplement today's call which can also be found on the Investors section of the Colfax website. Both the audio of this call and the slide presentation will be archived on the website later today and will be available until the next quarterly call.

During this call, we'll be making some forward-looking statements about our beliefs and estimates regarding future events and results. These forward-looking statements are subject to risks and uncertainties, including those set forth in our SEC filings. Actual results might differ materially from any forward-looking statements that we might make today.

Forward-looking statements speak only as of today, and we do not assume any obligation or intent to update them except as required by law. With respect to any non-GAAP financial measures during the call today, the accompanying reconciliation information relating to those measures can be found in our earnings press release and supplemental slide presentation under the Investors section of the Colfax' website.

Now, I’d like to turn it over to Matt.

Matt Trerotola

Thanks, Terry. Good morning and thank you for joining us today. Our second quarter operating results continue to track to the expectations we discussed in December. And we anticipate this steady delivery performance to continue through the year. Scott will discuss the tightening of our guidance range later on the call.

Our fabrication technology business is building momentum with a more stable global market environment, strong commercial performance and increasing read through on our productivity and cost reduction efforts. The weak oil and gas markets are impacting gas and fluid handling results and the volume detrimentals obscured some very good cost reduction and market expansion activity in these businesses.

Taking a closer look at our fabrication technology business, organic sales declined 4.2% for the second quarter. This result was again favorable to our guidance range, driven by improved results in Europe where we had positive growth after eight quarters of year-over-year declines. The underlying trends in South America and Asia were stable with both still seeing low to mid-single-digit volume declines offset by proactive pricing by our teams. However, market conditions in North America took a step down, finishing down low teens from prior year.

This was also an encouraging quarter for newly started products. We launched the Rebel in Europe to very positive early response. In North America, most distributors are now placing restocking orders. One large distributor I met with recently has turned their stock four times already since late in the first quarter. And we're now working with that distributor on several new co-marketing initiatives that help them to sell the Rebel but also help them to sell some other products that are high priority for them.

While this is just one example, it shows how an innovative new product can strengthen the level of partnership we have with our distributors. We also launched important next generation filler metal offerings in the first half. These products may not have the sizzle of a new category entrant like the Rebel, but they're meaningful to the welders and welding engineers who are responsible for productivity and quality and they create user preference for these top brands.

Internally, our execution on productivity and cost reduction efforts is beginning to read through the financial results. Adjusted operating profit margin in ESAB is up over 100 basis points year-over-year and now above 11%. And we expect to stay above 11% in Q3 and Q4, despite seasonally lower volumes and the anticipated impact of higher steel costs. This performance marks an inflection point and gets us again moving positively toward our longer term mid-teens goals for the segment.

Improving our cost structure is not just about restructuring. ESAB and our freight sourcing team continue to make excellent progress in delivering cost savings through the application of our CBS sourcing tools. Our North American team completed new truck and intermodal agreements, reducing the number of suppliers from 20 to 4. The reductions in freight partners has enabled us to leverage their expertise on our inbound shipments in addition to the outbound contracts negotiated. Year-over-year cost savings through a combination of price, consolidated shipments and ideas from our freight partners have enabled us to achieve cost improvements in excess of 10% on outbound and 20% on inbound shipments.

Turning to gas and fluid handling segment, orders for the second quarter were 446 million, down 16% organically. This result was below our expectation with the difference driven by the continued delays in oil and gas project awards that I referred to on the previous call. It is a positive sign that almost all of the target projects are still moving forward, but we need to see these orders come to fruition within the next few months to meaningfully contribute to 2017 revenue.

Let me take a moment to discuss the implications of the order levels we've seen through the first half in this segment. Assuming we continue our current aftermarket performance, the segment revenue expectation for 2016 will be slightly below our guidance range. But the entire company remains unchanged because of the favorable performance in fabrication technology.

Looking beyond 2016 revenue, our project funnel provides a clear path to order growth in the second half of this year. Growth could be considerable if some or all of the large projects which are now fairly far advanced were to come to fruition. But given the uncertainty around timing of these potential orders, it's not yet possible to provide a specific quantification of likely order growth or the potential 2017 revenue estimates for this segment. The third quarter bookings activity will help us better understand these metrics and I'll have more to say about this on our next quarterly update.

As I stated in our last call, we've developed and are now implementing additional cost reduction projects across the corporation. The benefit from these cost reduction actions combined with other productivity efforts will position us to succeed even if market conditions remain weak into next year. We've also developed a range of additional potential actions and will decide which of these programs to implement once we have greater clarity of the second half bookings.

Looking at our other end markets, power generation revenues for the quarter increased by 2% organically as expected, while orders decreased 12% organically. As we discussed on the previous call, China announced that it will slow the pace of new thermal power capacity additions in response to the slowing industrial electricity demand and the large number of power plants in progress. At the same time, China decided to pull forward the timing of compliance to the new air pollution standards.

Although the policy changes are still in the early phase, we can provide more clarity on how this will impact Colfax. As we communicated on the last call, these changes will have almost no impact on our 2016 revenues. But they have begun to impact orders. The net of these two policies is expected to be $10 million to $30 million of revenue headwind in the Chinese power market in 2017 and the team are working very hard to drive acceleration of our aftermarket efforts and our industrial growth efforts to offset this.

Turning to marine, which is primarily served by fluid handling, revenues were down 12%, but orders were up 10% organically. We do believe that we're outperforming the weak commercial marine market due to our strong wins in the cruise ship market which is the only commercial ship class seeing growth, and our strong long-term relationships with ship owners.

However, new ship contract awards to Asian shipyards have dropped sharply and industry forecasts now point to the contract awards starting to recover early next year. For the general industrial end markets, sales were down 12% and orders were down 11% organically. The softer orders reflect the timing of larger steel projects and mechanical vapor compression projects, and the broader industrial fan and fluid handling products were roughly flat to general industrial customers.

Despite the continuing difficult end markets, the gas and fluid handling team continues to execute on the safe cost saving initiatives and to improve the business by applying the Colfax Business System. A terrific example of the energy and enthusiasm that drives CBS even during tough market environments was the Howden President [indiscernible] that I was able to attend at the Howden Roots location in Connersville, Indiana. The team decided to solve poor on time delivery and inventory performance on one of their blower product lines by insourcing the production from the supplier.

Within a week, the first single piece closed cell was in place along with high junk at scheduling and con-bon material replenishment to start production. By August, additional cells will be in place to insource the entire product line. This will improve absorption in the facility and save almost $2 million in finished goods inventory. It also solves a chronic customer service problem that the team believes will enable us to regain share.

In another example of synergy from the Howden acquisition, we closed a large order for a steel customer in China. It was only possible by combining the Roots technology and process knowledge with the project management capability of the local Howden China team. This order will be built in the Connersville facility.

And now, I'll turn it over to Scott to discuss the financial results.

Scott Brannan

Thanks, Matt. This morning, we reported our second quarter results. Adjusted EPS was $0.41 per share, which was in line with our operational expectations. Net sales were 957 million, a decrease of 6.7% from the same period last year. It consists of a 5.6% organic decline, a negative 3.8% impact from foreign exchange, which was partially offset by 2.7% growth from the Simsmart and Roots acquisitions. Adjusted operating income was 87.6 million and adjusted operating margin was 9.1%, down from 10.3% in the prior year quarter. The margin decrease is entirely within our gas and fluid handling segment which I will discuss shortly. Excluded from adjusted results are $15 million of restructuring costs, which were incurred in connection with the previously announced cost reduction program.

Gas and fluid handling net sales for the second quarter were 484 million, a 7% organic revenue decline, a 2.8% negative foreign exchange impact, and a 5.6% increase from the Roots acquisition. Adjusted operating margin for the segment was 9.3%, down 340 basis points from the prior year. While a regrettable comparison with 2015, these results were generally in line with our internal expectations.

Significant causes of the margin decline are the detrimentals on the lower volume, continued weakness in the higher contribution reliability service market, and overall product mix. The Howden business has significant variability in margins from quarter-to-quarter based on which projects are progressing. We expect to see improved margins in this segment in the third quarter relative to 2015 performance.

For fabrication technology, revenue was 474 million, down 4.2% organically and 4.8% from foreign exchange. Adjusted operating margin was 11.5%, up 110 basis points from the 10.4% in the prior year despite the lower volumes. Price management relative to input costs, along with productivity and cost reduction efforts, drove the improved margins. We believe the price increases we have taken, the supply agreements in place, and the benefits of the cost actions already taken will enable us to continue to hold margins for the balance of the year despite further expected raw material price increases.

Corporate and other costs of approximately $12 million met expectations. Interest expense was approximately $9 million for the quarter. That includes $1 million of non-cash amortization of the debt discount and deferred issuance costs. Also included are facility fees and the costs of bank guarantees and letters of credit.

We continue to benefit from low short-term rates in both the US and Europe. In Europe, we're borrowing at rates below 1.5%. As we see a little likelihood of significant short-term increases before year-end, we will be adjusting our guidance to reflect the lower borrowing costs. Our effective tax rate for adjusted net income and adjusted net income per share was 31%, which was higher than expectations due to the distribution of profit across various tax jurisdictions. Finally, backlog in gas and fluid handling segment was 1.1 billion at quarter end.

Although some of our markets remain challenged, we continue to see the volume levels and cost reduction efforts that are in line with our original guidance. As both Matt and I have discussed overall revenue expectations, while shifting slightly between the reporting segments is expected to be in line with the original guidance. Also, with the benefit of an additional quarter and the recent Fed decisions, we expect lower interest costs for the balance of the year.

The share count will also be lower than the December guidance, primarily due to the repurchases in the first quarter. As a result, we are raising the bottom end of our guidance range by $0.05, bringing our 2016 adjusted EPS guidance to $1.45 to $1.55. Components of this guidance change are approximately 2 million less shares, approximately $8 million to $10 million less interest expense and we now expect our full year tax rate to be approximately 30%.

As Matt discussed, the project delays and the week end market conditions in gas and fluid handling increased the uncertainty around likely revenue levels for 2017. Since early this year, our teams have been identifying and developing the next level cost reduction programs. And we are beginning to implement these actions. We now expect approximately $80 million of 2016 restructuring expense, which includes both the previously announced and these additional project costs.

Before closing, I do want to take this opportunity to thank each of you on the call for your support over my years at Colfax. This has been an exciting transformative time for both Colfax and for me personally. Chris Hix is most of the way through his CBS immersion and I will pass the baton to him at the conclusion of our second quarter reporting process. Chris starts his era with a solid financial foundation in terms of team, process, and balance sheet, and I am excited to hand this over to Chris who will say a few words now.

Chris Hix

Thank you, Scott and thanks for your support during the transition. My CBS immersion has been a great way to get to know the company and our continuous improvement culture here at Colfax. Yes, I'm impressed with the quality of the associates I've met, the strength of our brands, the power of our business system, and the relentless commitment we have to our customers' success. As investors know and Scott mentioned, we also have a solid financial foundation. Frankly, I'm eager to get in the saddle and work with Matt and the team to build long-term shareholder value and I look forward to meeting and communicating with the investment community in the near future.

Matt Trerotola

Thanks, Scott and Chris. Before we end today, I want to update you on our recent leadership additions to Colfax. Shyam Kambeyanda has completed his CBS immersion and is now fully engaged leading the ESAB team. I will continue to support Shyam but he's coming up to speed very quickly. As Scott shared, Chris will fully assume the CFO responsibility over the next few weeks, and I’d like to take this opportunity to again thank Scott for his leadership and steady hand through a truly transformative period for the company. Scott has been extremely valuable to me in my first year here at Colfax and he's made sure that Chris starts his era on solid footing. I think many of you know Chris already and if you don't, I think you'll really enjoy getting to know him as well.

I also want to comment on the current M&A environment. With Shyam now in the chair and ESAB building positive momentum, we have the opportunity to put more corporate energy towards acquisitions. Our pipeline is more active than it's been in some time, but it's still a difficult environment to get buyers and sellers aligned. Acquisition, cultivation, and integration, are the core part of the Colfax business model and acquisitions remain an important part of our future.

In closing, we delivered another solid quarter, despite ongoing market headwinds. We have several bright spots gaining momentum in the business. I'm encouraged by our improving customer relationships and a more stable fab tech market. The progress we're making to improve our cost structure creates long-term benefits and I'm pleased that our fabrication technology segment is back on track to increase operating margins over time.

These are tough times in gas and fluid handling, but we have a strong team around the world, and they're focusing where the growth is and will be to get this business, the orders in this business growing as fast as possible. And I think our business leaders have developed creative, thoughtful approaches to continue to reduce our long-term cost structure and allow us to create value through the trough of this cycle. We're committed to improving profit, operating profit, even in a tough market environment, and I look forward to updating you all on our next quarterly call.

With that, we'll open up the session for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Andrew Obin with Bank of America. Your line is now open.

Andrew Obin

Good morning. Congratulations, Scott, I guess. Congratulations and thank you, I guess.

Scott Brannan

Thank you, appreciated and enjoyed working with you, Andrew.

Andrew Obin

Yes. It's been a pleasure. So a question on oil and gas. As we look at various geographies and end markets, can you just comment where the opportunities are, where the uncertainty is, just to provide us some sort of color as to what the opportunity set is for the second half in more granularity as I said, by region and maybe end market.

Matt Trerotola

Yes. I think I'll comment and say there's two areas that we see project possibilities in the second half of the year. One is in the downstream part of oil and gas, there were a number of very good projects that got stalled, for end users that got stalled, not because of the project became less attractive, but because the entities that were executing and funding those projects saw a low price of oil and were concerned about overall cash flow and just kind of holding off on their capital budgets. And we've really started to see activity turn back up in the last quarter and this quarter on those projects and I think there's very good possibility of some of those projects coming to fruition in the back half of the year.

We've also seen some, in the last quarter or so, some movement on some of the projects more in the upstream part, particularly where people are working on additional extraction from existing wells. There's a number of projects in different parts of the world where the project activity has increased in those areas as well. So those would be the two things I would comment to that are positive project activity but not positive order activity at this point in time.

Andrew Obin

And maybe I missed it. Can you comment what's the pricing environment in oil and gas and specifically new and aftermarket if you can comment on that.

Matt Trerotola

Well, I would say I don't think we've seen a substantial change in the pricing environment on aftermarket. But certainly on the new projects -- in an environment with fewer projects moving forward, there's a significant amount of competition for every project. And our teams have been working very hard. We've got highly capable teams that work hard on the engineering front, work hard to have people understand the value of our support and our brand. And we also work hard to make sure that our sourcing and execution against those projects is going to be as efficient as possible so that then we can be as competitive as possible in the competitive environment we're in.

Andrew Obin

Thank you very much.

Operator

Thank you. And our next question comes from the line of Joe Ritchie with Goldman Sachs. Your line is now open.

Joe Ritchie

Thanks, good morning, everyone and congratulations, Scott and welcome, Chris.

Scott Brannan

Thank you.

Chris Hix

Thank you.

Joe Ritchie

So my first question, Scott, maybe just a little bit of clarification on the guidance. It seems like the guidance range and correct me if I'm wrong is really on a lot of the below the line items. I'm just wondering if there's any change in the composition of your guidance as it relates to the segment.

Scott Brannan

Well, there is a little change in the revenue and I think consistent with the comments we made last quarter, the trends continued into this quarter in that we had given a 5% to 7% down organically estimate for fab tech and we're doing better than that and correspondingly we're doing slightly below the range in gas and fluid handling. So there's a slight shift in revenue between the two segments consistent with the commentary we gave on the last quarterly call.

As far as the profitability goes, there's a slight decrease in the expected profitability in gas and fluid handling for the detrimental volumes as well as for this mixed -- mix of products that I discussed in the prepared remarks that would have a minor effect on the top end of the range. The midpoint of the range operationally is very close to where we were in December and the pull-up of the bottom end of the range is related to those below the line items.

Joe Ritchie

Okay, got it. That's helpful. And then maybe just touching on Matt, your comments on China. So it sounds like you're starting to see some orders on the environmental regs but the new builds are maybe just a little bit slower? Maybe just provide a little bit of color on what you know at this point on the new builds coming on line and the order trajectory, particularly as it relates to 2017.

Matt Trerotola

Yes, sure. Yes, as we talked about it a little bit on the last call, at that point, there was kind of a firming up of policy there in China that they were going to dial back on new builds at power plants. That's now just starting to get into the marketplace. We're seeing the execution against existing orders continuing, so we don't expect to have any meaningful revenue impact from it this year. But we have just in the quarter started to see some downward pressure on the new builds' power orders there.

But at the same time, it's clear that they're taking the opportunity to pull forward the environmental changes, the particulate regulations there and that's going to create some offsetting positive there and we've been working hard to bottom out what the net of those is, I gave you a range in my comments of a $10 million to $30 million headwind there. But the team is actually seeing this coming and they've been working hard on improving their aftermarket execution and improving. There's a number of industrial applications that the team has been targeting and so really the mission of that team there is to make as much traction as possible on those other fronts and on the environmental so that the fall-off on new builds is mitigated.

Joe Ritchie

Thanks. That's helpful. Maybe one last quick one. Aftermarket, is it still trending positive in gas and fluid this year?

Matt Trerotola

I would say we're still having good positive progress on our aftermarket growth initiatives. We are seeing some market headwinds in the aftermarket. While the aftermarket doesn't have as large swings as the project-based activity, it's not immune to market pressure and so we are seeing some market headwinds that are offsetting some of the great execution the teams are doing and in particular there's some specific aftermarket issues in South America that have been a bit of a headwind and there's some positive activity on some of the South American aftermarket. That's probably one more area in oil and gas that we've seen things kind of start to get a little more active but these are a little complicated situations in terms of making sure that the end users are able to bring the cash forward in order to serve them.

Joe Ritchie

Got it. Thank you.

Operator

Thank you. And our next question comes from the line of Joe Giordano with Cowen. Your line is now open.

Joe Giordano

Hey, guys. Good morning. I wanted to start with getting into the M&A comments you made with Shyam. Now ramped up, and you said you're going to put some more capital to work. How should we be thinking about forward M&A in the context of bolt-ons to existing kind of businesses or are we talking about saving up for more of a platform acquisition. How should we think about that, maybe, like, over the next 12 months and maybe over the next couple of years?

Matt Trerotola

Yes, well first throughout the past quarters, we've continued to work the pipeline of bolt-ons and my comment about fuller pipeline refers to bolt-ons, so we have continued to work bolt-ons. We're able to now put even more attention into those and with a fuller pipeline and more focus and attention, we're going to be really driving to get the most attractive of those to the finish line across the coming quarters. At the same time, we'll also turn some of our attention to more thinking about strategy and larger platform acquisitions, but we would not expect any of those to happen in the short term.

Joe Giordano

Okay. And then just further on the order side of gas and fluid. With your comments on the China new build stuff following that you mentioned last quarter, are there new build orders, like, in this quarter's number for example? I'm trying to think about where that goes versus now. Are they out of the 450 or whatever you did this quarter, are there China new build orders in that number?

Matt Trerotola

Yes, Joe, the situation in China, new builds in China are not dropping to zero. They're just down.

Joe Giordano

Right.

Matt Trerotola

So we still have new build orders in this quarter's number and will continue to but it's in a lower rate than we had originally anticipated as we start 2017 and that's what led to the comments in the prepared remarks in putting as we promised on the last call, putting some range estimate to the impact.

Joe Giordano

So as you look forward from here, absent some incremental market deterioration in any particular end market and the ones that had been okay, moving off a little bit in marine and mining stepping up a lot, from a sequential perspective, is this level that you feel is sustainable what you put up this quarter?

Scott Brannan

I'm not sure I have completely understand the question. I don't think the pickup in marine is sustainable as Matt said in the prepared remarks, we had quite a bit of success in the cruise ship market here in the second quarter. The overall order book for large ships is very, very weak so I don't see a continued growth in marine. Mining is a very small portion, so.

Joe Giordano

Yes, I guess what I'm getting at is at the consolidated level, do you feel like you're at -- there's always puts and takes as to which markets are up or town at each given quarter but do you feel that level that you have posted this quarter is, absent any further deterioration, any particularly end market could be sustainable on a sequential basis?

Scott Brannan

We expect to do better sequentially as we said in the prepared remarks. We see growth opportunity in the order book for the second half of the year.

Matt Trerotola

And maybe just add, obviously we've got aftermarket piece of our orders and we have kind of a flow smaller project piece and then we've got the larger projects on top that really create some of the quarter-to-quarter swings and I think we would say our aftermarket performance is something that we think is sustainable and continue. The flow as well might have some small gives and takes over time but that's also something that we think is sustainable and continue and then it's really a question of how and when the large orders come. And we've had some large orders in the first half of the year but not as many as we had expected we might be able to and we're working hard to make sure we've got more in the back half of the year.

Joe Giordano

And then just last for me. Is there an opportunity for you guys related to the Chinese auto emission standards, not just the power plant standards, but as far as if it necessitates some sort of refinery upgrades or anything like that?

Matt Trerotola

Yes, I mean there could be some indirect opportunity. The refineries have got to go through an upgrade. That upgrade includes sulfuric acid plants. We've got some compressors going through. There's no question there are some kind of secondary or tertiary effects that are kind of positives within the broader kind of industrial growth efforts that we're playing out there. But it wouldn't be -- the area like steel and cement are a much more direct hit for us in terms of the regulations having positive impacts.

Joe Giordano

Good. Thanks, guys.

Operator

Thank you. And the next question comes from Eli Lustgarten with Longbow Securities. Your line is now open.

Eli Lustgarten

Good morning, everyone.

Matt Trerotola

Good morning.

Eli Lustgarten

Nice quarter. Can you help me a little bit? The result that you have from the welding business is quite impressive with the operating profitability and the softness in the market. Can you give me -- tell me a little bit, a little understanding what's going on in this space as we look through the rest the year? I guess the margins, if I understood you correctly pause it's not the fact that price was down but the management of price versus cost remains very favorable. And you expected that to happen. And can you give some idea had to expect in the second half the year particularly in the volume side? There's a lot of concern that there's some parts of manufacturing slowing down including automotive so give us an idea of what we're seeing out there? And you're sort of indicating that you expect better results from the welding business at this point.

Matt Trerotola

Yes. I really appreciate your comment because one of my observations at year-end is that is that business and our position in it is underappreciated. We've had some challenging times late 2014 to early 2015 and I'm really hoping people take a hard look at where we are right now and where we've been the last handful of quarters so I do really appreciate your comments very much. As far as where things go from here -- on the growth front the first half of the year, the markets outside of the US and our performance in those markets is something that is a positive and moving in the right direction, and in particular it's great to see Europe turn over to positive growth and we've got a strong position there in Europe. At the same time, the first quarter has been difficult in the market in the US -- or first half of the year and the second quarter was even stepped down from the first quarter. We're pleased with our position in the US market is stronger than it was a year ago but it's been a tough market.

So on the growth part when we look to the back half of the year, we do see the markets outside the US continuing to be solid and we believe we can continue to execute very well in those markets. But we're cautious about where the US goes from here. The start of the first quarter in the US market has been soft and so we're certainly cautious about what's going to happen in the back of half of the year in the US. Moving to margins, I think when we bought this business, we said we could substantially improve the profitability of it and drive it up into the mid-teens range. And we've now started to drive the profitability back upwards and we have each made strong progress there based on a combination of cost management as well as price management and sourcing and making sure that we're capturing the value of our products. And in the back half of the year, we expect that we will see some raw material headwinds and so it's going to take continued hard work on the costs and pricing front to make sure that we can hold the level of profitability where we are and then as we turn into next year, we'll be working hard to make sure that we continue to drive forward toward that mid-teens performance.

Eli Lustgarten

How much better do you expect volume to be in the welding business this year than your original guidance? That's sort of a key number for us, I guess.

Matt Trerotola

Well, we've been sort of running at this 4% organic decline level when you adjust for the number of days in the first quarter and whatnot. And I think that's probably in line with our expectation for the balance of the year. And as I said in my earlier remarks, that would be better than our original guidance.

Eli Lustgarten

And one other question. We have a lot of warning caution on the China decline of $10 million to $30 million and going out. Do any other markets in the gas and food handling business that looking over your shoulder that you worry about that could come up and bite you or is really the focus on gas is lousy, but we know that probably doesn't change much, and mining, it doesn't matter almost at this point. So is there anything else that we need to worry about as we look out besides the things that you have and identified so far?

Matt Trerotola

No. At this point I think there's a lot of things that have hit us there and I think we're really focused on not waiting for these markets to come back but let's drive our aftermarket execution, let's drive more aggressively into industrial applications, let's drive after the best opportunities within markets like oil and gas even though they're down and make sure that we can make progress even as those large markets are down. And then as those markets can come back, then that would be just an additional tailwind. That's really where our focus is and I couldn't point to -- we've tried to be very transparent about things like the China situation in power. In fact, some folks say why were you talking so much about that? But the reality was we thought it was important to share and we don't see anything else like that looming as a specific headwind.

Eli Lustgarten

And you still expect to be able to achieve low-double-digit margins and gas and fluid power handling this year?

Matt Trerotola

Yes.

Eli Lustgarten

Thank you very much.

Matt Trerotola

Thank you.

Operator

Thank you and the next question comes from John Inch with Deutsche Bank. Your line is now open.

John Inch

Thank you. Good morning, everyone.

Matt Trerotola

Hi, John.

John Inch

By the way, congrats, Scott. And congrats to Chris. I wanted to ask you, you called out the magnitude of raw increases that you seem to be offsetting. Remind me, are you doing that again? Is it just productivity are you able to raise pricing? And how much of this -- none of us can really forecast these raws but if you were to extra late a run rate, how much of a headwind if you didn't take action is it actually either to your gross margins or however you would frame it?

Scott Brannan

Yes. Yes, so there's two things that we're doing there that -- one is there's certain places in the world where there are inflation-based impacts on our raw materials, currency-based impacts on our raw materials. And we've been really working hard in the tail end of last year into this year and we'll continue in the back half of this year to make sure that in those markets we're being very proactive wherever we can with our pricing to stay out in front of those in front of those cost pressures. At the same time, the broader steel pricing bottomed out there in the early part of the year and has started to come up, depending on the market some more than others. And so in all of our marks around the world, there's an ongoing challenge to make sure that where we can adjust based on some of those pricing recoveries but based on those cost increases we do and where we can't to adjust on our filler metal prices that we look at other ways where we can capture the value, whether it's pricing on other products or whether it's more productivity efforts. Those are the things that we've been doing and things that we will continue to do in the back half of the year and frankly good things to do in this business at any point in time.

I can't speak to the specific amount of raw material headwinds in the back half of the year but from where things bottomed out, depending on the markets steel prices are bouncing and in some cases steel prices are bouncing 10% in some cases as much as 20 on 30% from specific grades from the low that they hit earlier in the year to where they're headed in the back half of the year.

John Inch

This is an issue, though, mostly I'm assuming for aftermarket, right? If I'm not mistaken, don't you have pass-throughs for aspects of your business for the project stuff? But I guess -- it seems like a filler metal -

Matt Trerotola

This is a filler metal. Filler metal issue. Certainly we buy steel in other parts of our business, but that's something that's generally managed within the way that we execute the project. So no, this is specifically an issue in filler metals and obviously not all filler metals are steel but predominantly they are. And certainly some of the filler metals where we sell filler metals in the automotive in the US for example they tend to flex. The first half of the years we've got downward pricing in Europe that is really the price tracking down along with what metal did in the back half of last year as they came down. So there's a portion of the business smaller portion of the business that flexes contracts reflected in our alloys contracts and others but then there's the larger portion of the business has it is not contracted in that way and so it's really about adapting pricing over time based on based on what's happening to our cost structure, and the value and competitive dynamic in the marketplace.

John Inch

If you guys were to hit, let's just say you were to hit around the average of these new sort of customer initiatives and so forth that you're working on, you talk about some sequential improvement. Just take sort of an average. At what point does your organic growth for the company do you believe turned positive? So no real rebound in markets assumed, just kind of the trajectory but you're working on a lot of stuff. You're probably going to hit on some of that stuff. Is that kind of a second half of 2017 event or is it possibly sooner?

Matt Trerotola

Yes, I can't comment on that now but certainly we'll be looking to comment on that as soon as we feel like we can comfortably. I think what we did say in our remarks is that we can see the path to have orders growth in the back half of the year of some of these large projects can come in and certainly having orders growth is the right step on the way to having revenue growth, but there's a time lag in-between and certainly we will be speaking more about that over time. But at this point we're trying to make sure we execute the best we can around the growth front and we have taken the most conservative end of our revenue possibilities and making sure that we have proactive cost projects heat up to make sure that we can realign our cost structure should we hit the more on what can happen on revenues.

John Inch

But Matt, if you're down orders today, they're down a lot. But if you're working on these and maybe orders turn up in the second half, it wouldn't be crazy to think if you assume what, a maybe a six to 12 months lag that by the end of 2017, you could actually -- I'm not asking for guidance. I'm just trying to understand -

Matt Trerotola

It would not be crazy at all but we also there's a consideration of our backlog and how that's evolving that needs to factor into the equation. But you're right. It would not be crazy if we got orders growing again to be able to get growing again in the back half of last year. That's something that we're really not ready to make any specific commitments around.

John Inch

And just lastly, what kind of restructuring benefit are we getting this year? Again I think you said $80 million of restructuring. I assume the step-up initiatives are all in 2016. There's no spill on to 2017. What's the benefit of the actions taken in 2015 that probably spill into 2016 and then what's the carry-forward to 2017 assuming you did no more restructuring in 2017? Thank you.

Scott Brannan

Yes, John, we put in the guidance at the original $70 million of the programs that deliver a $50 million benefit for 2016 and we would expect it to be slightly better than that with the new initiatives that we've just added although primarily the new initiatives will impact the 2017 costs. We've also previously disclosed from the original book of business or book of programs that we would expect to have $20 million to 25 million of incremental add-on in 2017, incremental to the $50 million from 2016 and I would expect that to go up another $5 million or $10 million because most of the benefit of the new projects will be realized next year. That's about as close as I can get it at the moment. As Matt said in the comments, we have a whole list of other projects that we may elect to pull the lever on which may change those numbers, make them bigger over time and when we can provide a more granular estimate, we will be certain to do that.

John Inch

Thanks very much. Appreciate it.

Matt Trerotola

Thank you, John.

Operator

Thank you and our next question comes from the line of Andrew Kaplowitz from Citigroup. Your line is now open.

Andy Kaplowitz

Hey. Good morning, guys, close enough. How you doing?

Matt Trerotola

All right.

Andy Kaplowitz

Can you given us a little more color on your decremental margin within gas and fluid handling? It's a little lower than we modeled in the quarter, I think you talked about it on gas weakness. If organic decline is due to accelerate a little bit in the short term, how do we talk about you the ability to hold margins, the incremental cost cutting you are instituting, and how difficult is going to be to reach double-digit margins now that you just reiterated for 2016?

Scott Brannan

Well, let me make a couple of comments, Andy, about the overall seasonality of this business. I think you'll see if you study the historical results for any period of time that we always have a very strong fourth quarter with mid-teens kind of typical margins in that quarter and significantly higher revenue. So it is assuming a seasonably typical fourth quarter but it's not a hockey stick. It's something that these businesses have delivered year after year after year. I think we tried to be clear in the comments that the third quarter will be more along the line of the second. The third quarter is a seasonably low quarter and will be again this year. We don't expect a big ramp up in margins in the in that segment in the third quarter but we do expect a very strong fourth quarter both on revenue and margins which will pull the margin for the year sort of just into the double digits.

Andy Kaplowitz

Okay. That's helpful. And then could you give us a little more color as to what's happening in your general industrial markets within gas and fluid handling? Last quarter it seemed that order rates had leveled off you talked about being comfortable with stabilization in those marbles. Now when we look at orders in 2Q, they've come down a little bit. Did you see any slow-down in any portion of that business? I think you mentioned on the call, but how are you thinking about that particular business moving forward?

Matt Trerotola

Yes. We see the industrial area as an attractive growth area where there's a broad set of opportunities and there's a solid market environment. I wouldn't call it a strong market environment but it's at least there's a lot of positive activity right now. But really that industrial part of our portfolio, there's some larger project stuff in areas like steel that's a little more lumpy and then there's' broader set of opportunities across pumps and fans and as I said in the comments in the quarter the kind of project timing and some of the larger end of that was created some downward pressure on our order growth there. But the broader set of applications there around the world is still running in more of a flat range and we see opportunity to drive that over time and drive that growth.

Andy Kaplowitz

Okay. And just a quick clarification on marine. Do you guys still expect a decline in order rates for the year? Is that what we're still looking at?

Matt Trerotola

Yes.

Andy Kaplowitz

Okay. Thank you guys.

Matt Trerotola

Yes.

Operator

Thank you. And the next question comes from Nathan Jones at Stifel. Your line is now open.

Nathan Jones

Good morning, everyone.

Matt Trerotola

Morning.

Nathan Jones

Matt, if you could just a little bit about the price mix number in welding. You had plus 60 basis points in the first quarters, minus 250 basis points in the second quarter. Can you give me a little bit more color on what changed there? Is that largely an increase in steel prices? Something else in there? And how would you expect that to progress from here?

Matt Trerotola

Yes, maybe Scott can help me a little bit there. The meaningful impact is what I commented on about Europe, in that we've got a decent proportion of our business from Europe where we've had downward price in the first half of the year, based on what metal did last year, and how that passes through some of our contracts. And that would ultimately come back after steel comes back in the back half of this year. So that's definition a portion of that what you're seeing. And maybe Scott might come on...

Scott Brannan

The other two portions is that there's a mix component in there which is the relative price of filler metals and equipment that might be sold. And then other, the most significant component is just the timing of price increases. We typically have, as a lot of the industry does, price increases in equipment in the second quarter. So the first quarter shows better read-through because you've got the full-year value of the previous year's price increase.

Nathan Jones

If that's the case, and you are going to implement price increases to catch up on the steel cost, we should expect that price/mix number to become less negative in the second half, if not positive in the second half? And then how should we think about that running through into the overall margin for the business?

Scott Brannan

I wouldn't want to forecast that because as I mentioned, there's a lot of component in there, including mix. I would not go that far as to say that we would expect that to be positive. The underlying dynamics of what you said, and consistent with Matt's comments, is that we do particularly well in the higher inflationary territory than the territories where we have foreign exchange impacts. We do expect to have continued price increases there. So that will make that number less negative, but I wouldn't assume that it's going to be positive.

Nathan Jones

Okay. Matt, during your prepared remarks, you made a comment about reducing the number of truck and intermodal supplies from 20 to four, and talking about the general business simplification initiatives. Can you talk about what's left in the pipe that can make a major difference to margins this year and next year, what kinds of things you're working on from that angle?

Matt Trerotola

Yes, I think that we're looking at how to continue to advance our cost production. We additional opportunities in back office simplification. More sharing across Colfax, more use of outsourcing of transactional activities to our service centers. We have made progress in those areas. We see additional opportunity. The second is, we have a few more plant closures and consolidations that we are looking at in which we can create additional opportunities to simplify our supply network. And then third, we worked through some significant realignments of our organizations, the SG&A structures of our organizations and that took out a lot of costs. But as the dust settled, we are now finding additional areas where we can simplify some of the overall SG&A structure. I'd say those are the three areas where we're starting to execute additional things as well as teeing up additional projects that can be executed in the back half of this year and through next year.

Nathan Jones

Okay, thanks very much.

Matt Trerotola

Um-hm.

Operator

Thank you. And the next question comes from Jeff Hammond from KeyBanc Capital Markets. Your line is now open.

Jeff Hammond

Hey, good morning guys.

Matt Trerotola

Good morning.

Scott Brannan

Jeff.

Jeff Hammond

Hey, just a few quick ones. So it sounds like form your order trends and the additional actions, you're thinking gas and fluid is down. More revenue pressure into 2017, but is there anything in the project pipeline and quoting activity that would suggest that maybe that's too bearish at this point?

Matt Trerotola

Yes, as I tried to say in my comments is that we see a number of opportunities in the funnel that can firm up in the coming months and close. They can move us into an order growth situation in the back half of the year. That would be a positive in terms of revenue next year, but whether that means we'd have positive revenue or not next year really depends on a number of factors that we're not ready to comment on yet.

Jeff Hammond

Okay. And certainly encouraged to hear fab tech was up in Europe for the first time in a while. Can you maybe speak -- have you seen any impact at all from Brexit? Do you expect any prospective slowing as a result of that?

Matt Trerotola

We have not seen any significant impact from Brexit. We're certainly watching closely the impact that it might have on the overall European market. But also said, the number of things that welding is sold into in the UK are things that are exported, and the Brexit might have a positive impact on it. We have not seen a significant impact except maybe on our share price the day after.

Jeff Hammond

Okay great. Thanks guys.

Matt Trerotola

Um-hm.

Operator

At this time, I'm not showing any further questions. I would like to turn the call over to Mr. Ross for closing remarks.

Terry Ross

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

Matt Trerotola

Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.

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