Enovis Corp

NYSE:ENOV

Earnings Call Transcript 2018-Q3

[Operator]

Good day, ladies and gentlemen, and welcome to the Colfax third quarter earnings conference call. [Operator Instructions]

As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Kevin Johnson. Sir, you may begin.

[Kevin Johnson, executive]

Thank you, Ermani. Good morning, everyone, and thank you for joining us. My name is Kevin Johnson, and I am Vice President of Finance at Colfax. Joining me on the call today are Matt Trerotola, President and CEO; and Chris Hix, Senior Vice President and CFO.

Our earnings release was issued this morning and is available in the Investors section of our website, colfaxcorp.com. We will be using a slide presentation to walk you through today's call, which can also be found on our website. Both the audio and the slide presentation of this call will be archived on the website later today and will be available until the next quarterly earnings 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 make today. The forward-looking statements speak only as of today, and do not -- 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 made during the call today, the accompanying reconciliation information relating to those measures can be found in our earnings press release and today's slide presentation.

Now I'd like to turn it over to Matt, who will start on Slide 3.

[Matthew Trerotola, executive]

Thanks, Kevin. We're pleased to report our third quarter results. We had another good quarter and are on track to deliver significant earnings growth in 2018.

Air & Gas Handling orders returned to organic growth in the quarter and its operating margin expanded sequentially from the second quarter as expected due to cost actions and improved project pricing. We had another very strong quarter of industrial growth as we execute our strategy to move aggressively into less cyclical industrial applications.

Fabrication Technology organic sales growth accelerated for the 7th quarter in a row, and we're driving additional price actions to cover the short-term impact of some additional currency and inflation that was beyond the price that we realized within the quarter.

We completed 3 acquisitions, including the GCE acquisition that I introduced on the Q2 earnings call. I spent a day with the GCE leaders recently, really excellent talent additions, and we're off to a great start together. In a few minutes, I'll share more details on the other acquisitions.

On Slide 4, you can see ESAB's continued growth trajectory. During the quarter, we achieved another growth step-up, posting double-digit core growth numbers. We continue to see constructive markets throughout the world, with core growth in all regions and all product groups. We had another strong performance from our ESAB automation business. Our recent acquisitions are on track, and we continue to bring a full range of new products and technologies to the market. We look forward to showcasing these at the upcoming FABTECH 2018 trade show in Atlanta. During the quarter, we also had some translational currency headwinds from the strengthening U.S. dollar and most of this was in our Argentinian, Brazilian and Russian businesses.

On Slide 5, you can see ESAB's year-to-date and current quarter year-over-year adjusted operating profit performance. In 2018, we've continued to see multiple sources of cost escalation, and the team has repeatedly increased price to offset this pressure. Year-to-date, pricing actions have delivered near -- nearly 4.5 points of price to offset material and other inflation pressures. Because these price actions are only covering inflation, the business's margin rates are being compressed by approximately 50 basis points. We had a similar impact in the quarter, but we also incurred about $5 million of short-term pressure from inflation and currency mostly in our businesses in South America that went beyond the 6% global price increase in the quarter. Our team is driving additional price actions to cover these and any other increases in Q4 and beyond. I expect the business margins to take a healthy step forward in Q4, supported by pricing action and continued operational improvements and exit the year solidly on our path to mid-teen segment margins.

On Slide 6, I want to share with you an example of how ESAB is delivering world-class technology to our customers. We recently completed a project with the second-largest industrial aluminum extrusion manufacturer in the world. This Chinese project included the installation of our friction stir welding technology that was applied by a joint team from our Sweden and China organizations. The customer chose our system for performance and productivity benefits. Compared with conventional arc welding, they've increased their welding speed by 5x with even better mechanical properties and [ steel ] performance. And this technology supports significant order growth for the customer in railway and shipbuilding end markets, a key area that China has been investing. Recently, the President of China visited this customer and in the photo on the slide, you can see the company proudly showcasing the improvements they've made with our friction stir welding technology.

Slide 7, shows our continued progress, reshaping the Air & Gas Handling business for less cyclical, more profitable growth. In the third quarter, the business had 16% core order growth plus another 15% from the STE acquisition. Orders were in the range we expected, and we continue to achieve strong growth in our strategic industrial applications even during the seasonally low third quarter. Industrial orders grew 30, 40 -- 34% organically over 2017, and were almost 2x our 2016 average quarterly rate.

Oil and gas orders returned to organic growth, and the profitability of new orders in oil and gas has improved. Our mining project funnel continues to strengthen, including many smaller projects as well as some very large ones that look promising. Mining is a segment where large orders have historically had healthy profitability. And finally, our power markets remain stable, and orders are projected to step up modestly in the fourth quarter.

On Slide 8, the Air & Gas Handling segment sales were in the range expected, with declines offset by the STE acquisition. Howden margins improved sequentially 250 basis points to 9.8%, and we see a clear path to continued, sequential improvement in the fourth quarter. Part of this improvement came from clearing low-margin projects from our backlog, and the rest is coming from price improvement, productivity and the impact from restructuring actions. The Howden team has done a really nice job recovering from the challenges that hit the business in late 2017 and getting the business back on a healthy path. The business remains on target to deliver 2018 profit growth, with benefits in the fourth quarter from higher volume and restructuring.

On Slide 9, we introduce the ACI and ACH acquisitions. These small acquisitions will contribute directly to Howden strategy for profitable growth in mining and are expected to generate strong returns.

ACI is a leading global provider of heaters for cold-weather mines, extending the reach and value of Simsmart's dynamic controls, and uniquely positioning Howden as a full-line solution provider for the growing cold-weather segment.

ACH is the leading servicer of ventilation systems in the Chilean mining industry and increases Howden's local aftermarket presence. I recently visited a mine in Chile and heard from our customer, how local service presence would create opportunities for valuable service contracts and also enhance our competitiveness on upcoming large projects.

Slide 10 provides an overview of our progress in 2018. We expect a strong performance in the fourth quarter, led by continued Fabrication Technology business growth and sequential margin improvement, expanded Air & Gas Handling margins and further benefits from our restructuring actions.

We continue to invest in and attract the best talent in 2018. We have hired key leaders that strengthen and deepen the team, and every year, we all become more proficient in applying CBS for value in our businesses. We also keep a close eye on retention and engagement of our existing talent. Our retention KPIs have remained in a healthy range for the past few years. We also annually assess associate engagement through an anonymous survey by a third party. The survey identifies issues that matter most to our associates, and then we drive action plans to address these. I'm encouraged that despite significant changes to the business in the past few years to ensure our long-term success, the scores have improved each year.

We continue to shape our portfolio through attractive acquisitions and are successfully delivering the expected performance from these acquisitions. We have an active pipeline of bolt-on opportunities, which will strengthen our businesses and accelerate their growth, and we remain focused on adding a new platform to our company.

In summary, we're strengthening and diversifying our company for long-term, profitable growth. We have an improved outlook for 2018 to deliver 26% adjusted earnings growth per share.

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

[Christopher Hix, executive]

Thanks, Matt. I'll start my comments on slide 11. Total company sales grew 4% in the third quarter to $875 million, reflecting 1% organic growth and 7% from acquisitions. We also experienced a 4% currency translation headwind from a stronger U.S. dollar, mostly compared with the Argentinian peso, Brazilian real and Russian ruble. We're well-positioned for very strong organic sales growth in Q4.

Gross profit grew $7 million in the quarter due to acquisitions, reduced by FX pressures and lower core results in our Air & Gas Handling business. As a result and including the price and inflation dynamic in our Fab Tech business, we posted a 20 basis point reduction in gross margin year-over-year.

Operating profit decreased $6 million or $2 million excluding amortization from acquisitions, and margins dropped 1 point to 8.7%. We expect year-over-year margin improvements in the fourth quarter from improved pricing, restructuring benefits and seasonally stronger fourth quarter volumes. Below the line continued focus from our tax team contributed to this quarter's results, as we drove the rate down to 21%.

In summary, Q3 operating performance was in line with our expectations, and FX pressures were offset by lower-than-projected tax rate, delivering $0.54 of adjusted EPS.

Slide 12 shows our progress on cash flow performance. Third quarter operating cash flow was $67 million versus $16 million last year, and the improvement -- with the improvement coming from the improved DSO and from higher milestone payments on new Howden projects. Year-to-date, cash flow was $14 million lower than the prior year, but last year included $34 million generated in the Fluid Handling business that we divested in December of 2017. Excluding that, cash flow improved over the prior year due to lower uses for working capital, partly offset by higher outflows for restructuring spending and U.S. pension funding.

The fourth quarter is typically one of our strongest for cash flow and for the full year, we expect to generate free cash flow of approximately $150 million, with the swing factors being the working capital needed for our fast-growing Fab Tech business and the pace of our restructuring programs.

I'll finish my remarks on slide 13 with our updated outlook. We started the year with an expectation of significant earnings growth, and our view has improved each quarter. But following our third quarter performance, we're tightening our adjusted EPS forecast from $2.15 to $2.30 to $2.20 to $2.30. This represents year-over-year growth of at least 26%. Embedded in this forecast is Fab Tech full year organic growth of 7% to 9% including price to offset inflation.

As Matt mentioned, the business continues to pursue pricing to recover additional inflation and currency pressures from Q3. Air & Gas Handling expects a strong finish to the year with sequentially higher Q4 adjusted operating margins resulting from seasonally high volumes and further restructuring benefits.

A few other housekeeping items, interest expense is forecasted at $40 million to $45 million for the year, and we expect a 20% to 21% tax rate for the year as well, which implies about 24% for the fourth quarter.

So that concludes our prepared remarks. Ermani, please open up the call for questions.

[Operator]

[Operator Instructions] Our first question comes from Jeff Hammond with KeyBanc Capital Markets.

[Jeffrey Hammond, analyst]

So just on the welding margins, I mean can you just -- I mean what really surprised you, because it seems like you guys were doing a pretty good job on price cost, and I just want to understand if it's FX nuance or if something else spiked? And then just give us a sense of where you see the margin shaking out in 4Q, and how to think about kind of a jumping-off point into '19?

[Matthew Trerotola, executive]

Yes, Jeff, thanks. Our team has been working very hard all year long as a number of different inflationary sources have hit the business and has been doing a nice job continuing to stay out in front of that. Here in the third quarter, we continued to have metals inflation, also had some FX shifts in specific countries where we buy in dollars and sell in local currency, and some of those were quite sharp. And then we also had the tariffs coming into the market, and while we saw those coming, there were some final changes in terms of what they apply to and what they didn't, and so -- and also some freight escalations. So a number of those things we saw coming at us, the FX in particular was the one that was sharp and unexpected in the quarter. Our team has done a -- knows that they're accountable for this. They've done a nice job in the past, when there's been these short-term squeezes in some of these high-growth markets. They have done nice job, quickly pricing through to the other side of it, and so we expect to see our margins step-up here in the fourth quarter and the -- in the range -- for on the full year basis, be in the range where our margins were last year in that business and that includes the 50-plus basis points of compression that comes to the rate from the pass-through of all this inflation.

[Jeffrey Hammond, analyst]

Okay, great. And then Just on Air & Gas. Sounds like, you've got some visibility on orders in the 4Q. Just as you see kind of the industrial strength and now oil and gas, kind of, ticking up, just give us a sense of kind of confidence that we start to see growth into '19 in Air & Gas?

[Matthew Trerotola, executive]

Yes, we are seeing some positive progress there, and in particular, in the strategic industrial segment and in the specific areas of oil and gas, where we're focused. We expect to be able to have some good orders growth here in the back half of the year and how that rolls overs into next year, it's going to depend a little bit on how the markets continue to play out here. We're really focused on in that business, on making sure that we can have strong earnings growth next year, and we've got a real clear path to that in the business, even based on some of the orders reductions we've had in the first half of this year.

[Operator]

And our next question comes from Nathan Jones with Stifel.

[Nathan Jones, analyst]

Just on the Air & Gas Handling order rates. You guys have talked earlier in the year about expecting some larger oil and gas projects to hit the order book in the back half of the year. Doesn't look like they really hit in the third quarter. Do you still expect some of those to come through in the fourth quarter? Have they pushed further to the right again? Have they been let out and you didn't win them? Just anything that's going on with the pipeline there?

[Matthew Trerotola, executive]

Yes, I think more recently in the year, we've talked about the larger oil and gas orders are less of a strategic focus to us. Those are some of the areas that we had some of the margin problems earlier this year, was from the amount of competitiveness that was coming to those large oil and gas orders. And we're continuing to see those large orders in a range of pricing competitiveness that really doesn't make sense. So we've focused our energy on reshaping our supply chain for our oil and gas businesses, so that we have a very healthy business without those large orders, and we're focusing on the aftermarket, the retrofits and the smaller orders, and we're on a good, healthy path there. We had oil and gas order growth in the quarter and also are above that -- the $50 million level there. So we expect to see more of a steady long-term growth in our oil and gas business based on the long-term, long-cycle recovery here versus any sharp recovery from oil and gas orders. We do have some large mining orders coming through the funnels, and those have been areas where we've been able to have healthy profitability in -- throughout the years in mining orders that are large, and we see some healthy ones there that are quite possible for the coming quarters.

[Nathan Jones, analyst]

Okay. So those projects have unattractive margins, and we're not very interested in them then.

[Matthew Trerotola, executive]

Yes, correct.

[Nathan Jones, analyst]

You obviously had some low-priced margin projects flowing through the first half of '18, margin is close to double digit in the third quarter, are you expecting [ the industry ] up in the fourth quarter. So you're going to be nicely above double-digit level there in the second half of the year. You've talked about improving margin profile in the backlog, you've talked about additional restructuring benefits and looking for potentially higher margins mining projects coming through. How should we think about the potential for margin expansion in 2019? Clearly, it would be up because you're going to have some pretty easy comps in the first half. Should we be thinking about the run rate in the second half as a good starting point for 2019. How much would you expect margins to be up, [ what are ] a range of margin expansion in 2019, for Air & Gas Handling?

[Matthew Trerotola, executive]

Yes, so first, we definitely have executed to a better place on margins here in the back half of the year, and it's a sustainable better place. Now, Q4 is always a heavier-revenue quarter in that business, and that leads to a heavier Q4 margins, so we'll have a step-up in Q4 and some of that is just from more revenue. So I wouldn't use Q4 as a rolling-over point for next year, but that kind of 10% range that we got in the range of here in Q3 I think is the right kind of a rolling-over point for next year, and then next year will have some of the normal seasonality through it with Q1 small, Q4 large but on a year-over-year basis next year, you're right, we should be able to drive healthy margin expansion based on having gotten past the low-margin projects, the value pricing that our teams have been doing, aftermarket price improvement that our teams have been doing and restructuring and other productivity efforts. And those are continuing in line with our commitment to keep driving towards 15% in that business. And we'll certainly share an update at our Investor Day and when we give our guidance as to how we see Q -- next year, but definitely, we see it as a year of healthy margin expansion up against what'll still be a challenging revenue environment based on the orders this year.

[Operator]

And our next question comes from Joe Giordano with Cowen.

[Joseph Giordano, analyst]

Was there a particular piece within orders at Air & Gas that was surprising in terms of what came in or what got, maybe, pushed over the line into the next quarter, and just in terms of the sequential pattern I think you guys were talking about probably up year-on-year -- sorry, up sequentially from 2Q, so how did that play out for you guys?

[Matthew Trerotola, executive]

I would say in any quarter, there is some quarters that slip back. I would say 2 things that I could think of in the quarter. One is there are a couple of some kind of medium-sized quarters that -- medium-size orders that slipped to the right, and there was an oil and gas order that we consciously decided to not to go to the price that it would have taken to get it done because it would have, kind of, recreated some of the low-margin backlog that we have committed to stay away from.

[Joseph Giordano, analyst]

And what market were those medium-sized projects?

[Matthew Trerotola, executive]

We had some good oil and gas and mining projects slide to the right, and we had 1 oil and gas project that we consciously decided not to participate in.

[Joseph Giordano, analyst]

And on the cash flow side, I think there was a mention of pension in the release, how much of an impact was that to the quarter's free cash flow?

[Christopher Hix, executive]

Yes, for the full year, we expect that to be in the range of $7 million to $9 million and in the quarter, it was I believe about $6 million.

[Joseph Giordano, analyst]

What are you guys thinking out for full year conversion?

[Matthew Trerotola, executive]

Well, I think we've commented that we expect the free cash flow of about $150 million, and so I think that gives you the pieces you need for conversion.

[Joseph Giordano, analyst]

$150 million. Okay.

[Operator]

And our next question comes from Walter Liptak with Seaport Global.

[Walter Liptak, analyst]

So just going back to Jeff's question about Fab Tech. I'm wondering if you can just provide us with a little bit more clarity on Fab Tech margin in the fourth quarter. I wasn't sure if you said that it should be up 50 basis points because of the price cost recoup or in line with the annual number for 2017?

[Matthew Trerotola, executive]

Yes, we said 2 things. One is that we should see a solid step-up from Q3 to Q4, and the other is the we expect the full year margins for the business to be about in the range of last year's, and that's before we add GCE and some of the early costs related to that acquisition.

[Walter Liptak, analyst]

Okay, so you'll leave any acquisition-related cost in the P&L for the fourth quarter?

[Matthew Trerotola, executive]

Yes, we do -- in our AOP, we do, and so that'll be a little bit of a drag.

[Walter Liptak, analyst]

Okay, switching over to Air & Gas Handling, the profit improvement from supply chain and restructuring and things, if revenue is flat year-over-year in 2019, what's the delta to profit because of those actions?

[Christopher Hix, executive]

If I understand the question, it's basically in a flat revenue environment, what kind of profit can the company produce?

[Walter Liptak, analyst]

Yes.

[Christopher Hix, executive]

And I think we're not -- I think we'll have a more precise guidance for that when we do our Investor Day, but clearly the amount of restructuring that we've done and the run rate that we have would suggest that we've got carryover benefits of, I'd say, of at least $15 million to $20 million, and so you certainly have that benefit. You've got the benefit of not having the low-margin projects that we had in the first half of the year repeating into next year. So I think those 2 pieces give you at least an early indication of partly what's possible there. Now we're continuing to work on cost actions, and so we'll have a refreshed view for that for 2019. I would expect there to be more than just year-over-year flow-through benefits from restructuring.

[Walter Liptak, analyst]

Okay, great. I appreciate the help on that. And then last one, when you were calling out FSW in the application in China, is this something that we should be watching? Is there a market opportunity for it? And what's the timing of it? What's the size of it?

[Matthew Trerotola, executive]

Well, FSW is one -- friction stir welding is one of a couple key emerging technologies in the welding industry that have good strong opportunities but in specific niche areas. And so within our automation business, it's a significant technology that is an important piece of how we're driving growth in automation. It's also a part of what gives us a reputation with customers around the world for having a strong set of technologies. Because it's really an innovative technology. So we see it as something that is both a reputation builder as well as something that is helping to drive the healthy order growth in our automation business.

[Operator]

And our next question comes from Julian Mitchell with Barclays.

[Ronald Weiss, analyst]

Ronnie on for Julian. So back on the growth. Chris, I heard you gave a guide for the Fab Tech business for the year, I was wondering if you could give a range for the Air & Gas Handling business as well, and I just want to be clear, you guys are assuming Q4 volume should increase year-on-year in that business?

[Christopher Hix, executive]

We're still projecting for that business to -- for the revenue to be flat to down 2, and that's been our consistent expectation since we announced our original guidance for the year.

[Ronald Weiss, analyst]

And then a little more broadly on the M&A front, I mean you guys are continuing to do small acquisitions here, seem to be integrating them pretty well, and you've done buyback now for second quarter in a row. I guess kind of strategically, why isn't this the best way to move forward, and kind of what keeps you guys committed to the third platform, instead of just continuing with this bolt-ons and the repurchase?

[Matthew Trerotola, executive]

Yes. So first of all, we think that strategic bolt-ons to our business is a good -- is a part of the best way to move forward. We intend to continue to drive bolt-ons in our businesses that make them stronger and help them to grow faster. But we've also -- we got an aggressive strategy for how we want to grow our company, and we are confident, we can create value by adding additional platforms and by driving both CBS-based continuous improvement in those businesses and driving bolt-on pipelines in those businesses, and we're constantly committed to not only doing that but doing it in areas that have less cyclicality than the existing businesses and have healthy, long-term growth drivers and innovation opportunities, so while we're improving our existing businesses, we can shape our corporate portfolio in a more and more positive direction over time that creates value for our shareholders.

[Ronald Weiss, analyst]

Understood, and then just one more quick one with FX becoming a bigger headwind here. I guess could you isolate what the impact was to profit for the quarter and going forward, what should we be thinking about as kind of a drop-through margin on the translation for FX?

[Christopher Hix, executive]

So I'll see -- I'll just answer the second question first. Generally, the translation impact comes through at the sort of company average margin. It just depends on where it comes from, but you can think about it that way. In terms of the quarter itself, what I would say is that we had somewhere in the low to mid-single-digit million impact on the profit from the -- from FX. And in my prepared remarks, I commented that the benefit we got on the tax side really matched up nicely with that FX pressure, not completely but pretty nicely, and then it was some of the other business overdrive that helped us to achieve the $0.54.

[Operator]

And our next question comes from Andrew Kaplowitz of Citi.

[Andrew Kaplowitz, analyst]

Matt and Chris, can you talk about the visibility and sustainability of your industrial Air & Gas Handling orders? Obviously, you had strong growth there. Some of it's coming from China. Do you have good visibility into that growth continuing? And maybe if you can give us a little more color to what's driving that industrial orders growth at this point. I know you've talked in the past, but maybe an update there?

[Matthew Trerotola, executive]

Yes, so first, I'd say, we've got pretty good visibility in terms of pipelines of projects and active things that we're working on and it is across a broad range of applications versus just 1 or 2. Some of those applications are environmentally driven. There's been a wave of environmental investments in steel plants in China, and we've been very successful in addressing those, as our China team has been always very successful at identifying and then pursuing those kinds of opportunities. And so that's where part of the growth is coming from, there's an area that the Chinese government seems quite committed to continue to drive through those environmental improvements, and then there are also some -- a next wave of opportunities in that industry that we see on the back side of that, that we see as an opportunity to continue significant growth over time. We've also got some key orders in areas like tunnels and wastewater that are a little more related to infrastructure build-out around the world. And those are -- they're kind of less specific. It's more of a broad spread. Some of them, you can very see specifically, the pipeline coming. Some of them, the visibility is a little bit shorter. And then within that industrial business we've got some government-related business that's got some very good visibility and solidness to it as well as very kind of broad, diversified general industrial that is diversified, which is good, but it's not something that I'd say there is a lot of long-term visibility to.

[Andrew Kaplowitz, analyst]

And, Matt, do your teams feel like they have a pretty good handle on the Chinese tariff situation? I think last quarter, you said that the max impact was just a couple of million dollars, is that sort of still the case from what you see from what's out there?

[Matthew Trerotola, executive]

Yes, I'd say, we continue to have a strong handle on it, but the situation does kind of change over time in terms of what's in, what's out, and so we've generally had multiple irons in the fire in terms of how we're going to address these and sometimes address them with price, sometimes address them with supply chain shifts. And I think the team's done a nice job on that, but there is definitely a little bit of pressure from that in terms of couple of millions as you said from places that we've got tariff pressure and couldn't pass it through quite as fast we could have based on the market environment, that's a piece of that Q3 pressure that we talked about.

[Andrew Kaplowitz, analyst]

Chris, I just wanted to stop on one thing you just said. You reiterated the organic guide for Air & Gas. If I'm not mistaken, that means something like $100 million or more sequential increase in revenue in Q4. I know, it's your strongest quarter. But are there just big projects that are letting out in the quarter? I mean, into the visibility into the burn in Q4. Maybe, if we can talk about that?

[Christopher Hix, executive]

Yes, so typically the fourth quarter for the Air & Gas Handling business, is its strongest performance. That's been true for quite some time. So it's not a surprise to us that we have a substantial amount of revenue in the quarter, and I think your math is in line with our view that we would have very strong organic growth in the quarter -- in the fourth quarter in that business. So we do -- we are aligned with you on that point.

[Matthew Trerotola, executive]

And I'll just add that yes, a lot of that is already in our backlog. Obviously, the new build stuff is -- most of it's in our backlog. At this point, there is also a lot of parts business that is coming through in the fourth quarter that -- a lot of that's in the backlog as well. And so our team has been very focused on making sure that we're getting stuff shipped out as early as possible in the quarter to avoid too much of a crunch as we come down the stretch and as of right now, we're confident in our ability to drive through and deliver that significant revenue step-up in the fourth quarter.

[Operator]

Our next question comes from Nicole DeBlase with the Deutsche Bank.

[Nicole DeBlase, analyst]

So I guess maybe just a couple of questions on power. I think you said in the slides that you expect power orders to turn positive year-on-year in the fourth quarter. Just curious, what gives you conviction to say that? Is it predominantly around the comps getting weaker? Or are you seeing an improving order pipeline?

[Matthew Trerotola, executive]

Yes, so it's mostly the former not the latter, just to be completely transparent. We said last year -- when new orders dropped down in the back half of last year and we got a chance to digest that, we said first half of the year was going to be a big shrink that we were kind of stabilized in the kind of range, where we were in the first part of the year. It was going to be big shrink first half of the year, because we were against kind of more normal comps, and we're now at the sort of the new reality level and then the third quarter would still be down because the comp is still a little tougher. And by the time we get to the fourth quarter, the comp is kind of more in the range of the new reality, and so we should be more in a flattish kind of range in that business, so we expect to be sequentially up a little, closer to flattish on a year-over-year basis. And the funnel and order pipeline supports that view, there has been different views, I've certainly seen and heard folks that believe that there'll actually start to be some recovery sometime here in the next year or so in China and actually a growth uplift, but at this point, we continue to remain of a view that we're at a stabilized level, and we're likely to stay at that stabilized level, and we're focused on the growth of the rest of the portfolio.

[Nicole DeBlase, analyst]

And just maybe as a follow-up, can you just talk a little bit about how power aftermarket performed during the quarter, and maybe what you're seeing from an order perspective there?

[Matthew Trerotola, executive]

We don't comment on specific in quarter aftermarket, but the consistent theme in the aftermarket in power over time has been that there's some pressure on the developed markets, and there's growth in the emerging markets because there's a lot of capacity that went into those in the past years. And that's -- on a year-to-date basis, that's the kind of trend that we've -- we continue to see there. So when we look forward in our power business, again, we tend to see the new build being in the flattish range, and the aftermarket also being able to about in that flattish range, as there's still plenty of aftermarket growth opportunity in the high-growth markets from the build-out that took place, and the developed markets are under pressure. But even as they're retiring things, there's opportunities to sell productivity into those developed markets, and so we do retrofits that brings productivity to customers that are looking for any kind of efficiency they can get, and so we're able to -- only have a modest decline in the developed market's aftermarket.

[Operator]

And our next question comes from Bryan Blair with Oppenheimer.

[Bryan Blair, analyst]

With GCE now closed and the two smaller bolt-ons in AGH, I was just hoping you could provide a little more color on expected financials there, the current growth rates, margin profile. And looking to 2019, what kind of accretion we should expect from those deals?

[Christopher Hix, executive]

Yes, so we've -- if you look at these deals collectively, what you'd find is that they follow the strategic vector that we've communicated which is businesses with more differentiation with a little bit better margin profile than what you'd expect to see. We've got to work through some of the integration and purchase accounting and all that in the fourth quarter and little bit in the early next year. But collectively, we think that those 3 acquisitions for next year could contribute anywhere from high single-digit EPS to maybe $0.10 cents or more. So we do expect this to have a healthy contribution to our results for next year.

[Operator]

And our next question comes from Matthew Trusz with G. Research.

[Matthew Trusz, analyst]

Can you talk a little bit about the trends in growth you're seeing out of China, what about any potential impact of China slowing in your business or end markets and that risks you are seeing today?

[Matthew Trerotola, executive]

Yes, so first, I'd say China has been pretty healthy on a year-to-date basis, but I'll also say we're seeing the same things that others are seeing and talking about in terms of some parts -- some different sectors in China slowing down, the GDP in China slowing down. The -- we play across a broad range of things in China, but we have quite a bit of business in China that's related to infrastructure and environmental and things of that nature and to-date, we haven't seen a pullback on those. And in the past, when the China government has tried to pull the economy back up, sometimes those have been areas that they lean into. So for us yes, we're seeing the short-term questions that are being raised. We're not sure yet how that'll impact our business if the short-term slowdown continues, there'd be some negatives, but if the government steps in to do more infrastructure, that could be a positive. And so at this point, we haven't seen any change in our business. In addition, our high-growth markets profile which is half our company is quite diverse, and China is a much smaller part of it than it is for many industrial companies. So we feel good about the diversification that we've got in our high-growth market. So that if China does come across a rough patch, we've got a lot of other possibilities for where to go for growth.

[Matthew Trusz, analyst]

And then with just with respect to the oil and gas project environment, does the current geopolitical climate in the Middle East pose any risks to your pipeline? How much of the pipeline or project environment overall would you say is Mid-East Centric at this point anyway?

[Matthew Trerotola, executive]

Yes, so we've got a global pipeline in oil and gas, Middle East is of course a meaningful part but it's not the majority of pipeline is what I would say. And the stuff that we do in the Middle East is across a range of countries in the Middle East, and so I wouldn't say that we've seen any meaningful geopolitical impacts on the pipeline. But I would say that for the past few years, the oil and gas recovery has been a viscous recovery, the project come into the pipeline, some of them move, some of them don't. And I think the good news is that there's plenty of long cycle recovery potential there, because there's still a whole lot of projects that people have been talking about that haven't happened yet, but at the same time in any given quarter or couple of quarters, sometimes more of them move and sometimes more of them don't for a whole range of reasons.

[Operator]

And our next question comes from Chris Dankert with Longbow Research.

[Chris Dankert, analyst]

Obviously, we've had some pretty meaningful restructuring this year, I'm sure you'll comment more at the Investor Day, but is the goal of CBS at this point to just kind of offset the inflation that keeps coming through, or is there still a more meaningful restructuring that could be done here as we move into '19 and beyond?

[Matthew Trerotola, executive]

Yes, I've said before is that in fact the restructuring as we moved through the past few years, the restructuring has moved from what you have to do -- what you have to do reactively when orders and revenue drop to what you get to do over time as you have a little more time and can be more strategic about where you focus your restructuring. And today, much more of our restructuring investment is what I would call a strategic realignment of the business in the Howden business, doing the realignment of value chains for some of the important decisions we've made about where we're going to participate aggressively, and where we're deemphasizing, realigning value chains and consolidating businesses in ESAB and Howden in order to have more streamlined cost structures. And some of the restructuring that you do when you do back office process optimization and you've got more automation and you've got shared services and you're able to then work through the fixed cost changes, so definitely more strategic versus reactive in offsetting inflation at this point. And I think we've still got some room to run on that as we move into next year as part of how we get these businesses to mid-teens.

[Chris Dankert, analyst]

Got it, thanks. And one quick, kind of housekeeping thing, as we look at the tax rate, nice work managing that this year. As we look into '19 at a more normalized tax effective basis, should we be thinking about like the 22% range as more normal?

[Christopher Hix, executive]

Yes, the tax team, I think, has done a great job of taking advantage of the opportunities that we have in front of us given the new business we have the following the divestiture of Fluid Handling with some of the acquisitions that we've done and taking advantage of U.S. tax reform. A lot of that's been very tactical, and as we transition into next year, the scope of projects that we'll be looking at are really geared toward making that a more sustainable rate, what you've seen this year, rather than taking advantage of more discrete benefits that are in front of us. So our target is to get the rate down into structurally and sustainably into the low 20s, and we'll have more to say about that when we get into the Investor Day.

[Operator]

This concludes today's Q&A session. I would now like to turn the call back over to Mr. Kevin Johnson for closing remarks.

[Kevin Johnson, executive]

Thank you, again, for joining us today. We look forward to updating you on our next call.

[Operator]

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