EnPro Industries, Inc. (NPO) Q2 2015 Earnings Report, Transcript and Summary

Good morning. My name is Kim, and I will be your conference operator today. At this time, I would like to welcome everyone to the EnPro Industries’ Second Quarter 2015 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Dan Grgurich, Director of Relations and Corporate Communications. You may begin your conference sir.

Thank you, Kim. Good morning and welcome to EnPro Industries quarterly earnings conference call. I’ll remind you that our call is also being webcast at enproindustries.com, where you can find the slides accompanying the call. Steve Macadam, our President and CEO; and Milt Childress, Senior Vice President and CFO will begin their review of our second quarter performance and our outlook in a moment. But before we begin our discussion, I will point out that you may hear statements during the course of this call that express the belief, expectation or intention, as well as those that are not historical fact. These statements are forward-looking and involve a number of risks and uncertainties that may cause actual events and results to differ materially from such forward-looking statements. These risks and uncertainties are referenced in the Safe Harbor statement included in our press release and are described in more detail along with other risks and uncertainties in our filings with the SEC, including the Form 10-K for the year ended December 31, 2014 and the Form 10-Q for the quarter ended March 31, 2015. We do not undertake to update any forward-looking statements made on this conference call to reflect any change in management’s expectations or any change in assumptions or circumstances on which statements are based. Our earnings release and conference call presentation materials contain additional disclosures regarding non-GAAP financial information, collective references to EnPro and our subsidiaries, the deconsolidation of Garlock Sealing Technologies or GST and pro forma financial information presented, as if GST was reconsolidated for financial reporting purposes. These disclosures are important to understanding comments we will make on today’s call and we urge you to read them carefully. And now, I will turn the call over to Steve.

Thanks, Dan, similar to our first quarter activity levels in our markets were mixed in the second quarter. Our North American heavy-duty truck markets benefited from higher demand from original equipment manufacturers, and we saw strength in other markets, including defense, chemical and European automotive. However, lower commodity prices led to softness in the other sectors, most notably, in oil and gas, steel, metals and mining and agricultural equipment. In North America refinery maintenance activity continue to be soft as oil and gas companies delay turnaround maintenance due to taking advantage of profitable conditions in refining to offset profit loss, and slowing upstream operations and projects. However, we have seen some recent pickup in activity around the Gulf Coast projects. However, we’ve seen some recent big certain activity around the Gulf Coast region. The translation impact of the strong dollar also adversely affected our results for the quarter. Our consolidated sales were down 5% for the quarter and pro forma sales which include the results from deconsolidated GST were also down 5%. Excluding the impact of currency translation and the year-over-year impact of acquisitions net of a divestiture consolidated sales were down 2% for the quarter and pro forma sales were also down 2%. Milt will provide more specifics on the segments basis in a moment. Based on continued weakness in the market for maintenance of reciprocating gas gathering processing and transmission applications particularly in western Canada and the expectation that market conditions in these areas will not rebound soon we booked a non-cash impairment charge for goodwill and intangible assets associated with our CPI division. The after-tax charge of $45.8 million impacted our reported earnings by $2.03 share for the quarter. We continue to believe that actions we’re taking to adjust this business to meet current and expected market conditions will result in improving the contribution of CPI to impose consolidated results. We believe CPI is still a very viable competitor. Our European CPI operations continue to perform well and we’re improving operationally in the United States. Though we’ve already see in progress in terms of improved on time delivery and operating efficiency, we do anticipate additional restructuring charges in the second half of the year and I’ll continue to update you on our progress in future calls. Our consolidated adjusted EBITDA of $42.4 million for the quarter was up 8% from a year ago. And our pro forma adjusted EBITDA of $54.6 million was level with last year’s second quarter. I want to give you an update on several acquisitions made in the Sealing Products segment. Stemco is in the midst of integrating the A T dynamic suite of aerodynamic products for heavy duty trucks that was acquired in February. Integration into Stemco’s business is proceeding nicely, with emphasis on commercial initiatives to accelerate fleet adoption of the Company’s flagship TrailerTail product. In addition plans are under way to move manufacturing from ATDynamics Hayward, California location to Stemco's Longview, Texas facility later this year. The order pipeline for this new product line is building and margins are improving, by leveraging the power of Stemco sales force and distribution network. Also at Stemco, earlier this month we announced the acquisition of Vance North American air spring from Continental AG for $18.1 million in cash, which is a 4.1 times multiple of EBITDA. The business produces and sells air springs that are used in the suspension systems of commercial vehicles. The addition of the air springs business significantly expands Stemco’s presence in the commercial vehicle suspension market. As mentioned in our July 1 press release the business currently generates approximately $100 million in annual revenue with a fairly even split between OE and aftermarket. Margins for the air springs line are currently lower than the average for our other truck components. And with integration costs, in the second half of this year, this acquisition will likely have a negative impact on earnings in 2015. However, on a normalized basis, excluding integration and transitional related costs, we expect to generate EBITDA of 7% to 10% within three years, as we focus on growing the aftermarket portion of this business. We’re extremely excited about this acquisition and believe that it fits perfectly into our strategy of adding well known, established brands that can leverage Stemco’s sales and distribution network to create value added for our customers and opportunities grow sales and earnings. Successful examples of this sprag and how it has worked can be seen by Stemco’s success with other products in its suspension components offering. The Kaiser branded Atkin pins, spring pins and bushings was acquired in early 2008. Since that time sales have nearly doubled, yet margins have remained stable and robust. Similarly sales of Gaff, our high performance polyurethane suspension components line, that we added in August of 2010 through an exclusive distribution agreement have grown from the mere $200,000 a year utilizing only 33 U.S. distribution centers to well over $5 million through over 480 distributors. Also in Sealing Products our Technetics Group has substantially completed a very successful integration of the fabric business acquired in December. As a reminder, Fabrico manufactures components for hot pad sections of industrial steam and gas turbines. We are already seeing significant commercial synergies that enhance Technetics Group position with turbine manufacturers. Fabrico’s second quarter bookings were strong and the financial performance is ahead of plan. The business has several new projects underway for both current and potentially new customers. The total investment for these three acquisitions was approximately $110 million. And we expect that the acquired businesses will contribute annual sales of $170 million to $175 million and annual EBITDA of $20 million to $25 million within three years. During the second quarter, we also completed the previously announced agreement to accelerate and offset settlement obligations related to the call options for our convertible debentures which resulted in a net share settlement of approximately 900,000 shares being delivered to us. These shares were immediately retired and no longer considered outstanding. This brings our outstanding share count to approximately 22 million shares. Just a quick update on the status of GST’s Asbestos Claims Resolution process. During the second quarter GST initiated the court approved multimedia campaign designed to reach current and future claimants with details about GST’s proposed plan of reorganization. You may have seen GST’s commercials on television and ads in popular print publications. The campaign is intended to ensure that all who claim to have been exposed to and injured by a Garlock Asbestos containing product know about the plan of reorganization and have the opportunity to explore their rights and express their views. The campaign will continue for a few months leading up to the bar date for current claims that is set for October 6, 2015. Meanwhile, the case is now in the midst of ongoing fact discovery and preparation of expert reports on economics, science, medical and other issues in preparation for the plan confirmation trial that the court has set to begin on June 20, 2016. Upon completion of fact discovery and initial round of expert reports will be followed by rebuttal reports, then expert depositions. In the courtroom, GST had a significant victory as Judge Whitley ruled that Garlock is entitled to data and other information in the [indiscernible] trust database, related to persons who had pending claims against Garlock for use by experts at the confirmation trial. The judge ruled that such information is clearly relevant to plan confirmation and he overruled objections by both the [indiscernible] trust and the Asbestos Claimants Committee. As to the five lawsuits, GST is pursuing against the Asbestos plaintiff law firms, GST is proceeding in earnest with discovery in three of the cases and awaiting rulings from the district court on motions before proceeding with discovery in the other two. Now I’ll turn the call over to Milt to review our second quarter results in more detail.

Thanks, Steve. First, I want to point out that in the earnings press release this quarter we included normalized net sales, and normalized segment profit margin information for the first time, a practice that we will continue to do going forward. The normalized data adjusts for changes between periods for foreign currency, acquisitions, divestitures, M&A related expenses and other situational adjustment, such as the EDF loss provision that we explained in our first quarter call. Our aim is to provide greater clarity of organic sales and earnings changes on a year-over-year basis. I will refer to both reported results and normalized results in my comments about the quarter. Our consolidated second quarter sales were $298.4 million, down about $15 million or 5% from the same period of 2014. Normalized sales, which exclude foreign exchange and acquisitions net of the GRT divestiture, declined 2%. By geography, normalized European sales declined 3% as both Sealing Products and Engineered Products were lower. Markets were mixed as increases in European automotive and selected industrial markets were offset by lower nuclear sales and oil and gas related market, including exports from Europe to the Mid East. In North America, excluding power systems, normalized sales declined 6% as Sealing Products were lower by 3% due to weaker demand in oil and gas, truck aftermarket and semiconductor markets. And Engineered Products sales were 16% lower than a year ago due to weaker demand in fluid power, automotive and oil and gas markets. Including Power Systems, North America normalized sales were 2% year-over-year. Gross profit for the quarter of $101.3 million was $6.8 million or 6% lower than in the second quarter of 2014, and gross profit margins decreased to 33.9% from 34.5%. Unfavorable volume and mix particularly in Sealing Products and Engineered Products more than offset the favorable impact from Power Systems and overall higher selling prices and lower operating costs at most of our businesses. SG&A was down $9.4 million or 11% from the second quarter of 2014. Foreign currency had $5.4 million favorable impact and corporate expenses declined $7.3 million, primarily driven by incentive compensation accrual reductions. Partially offsetting the lower SG&A were higher SG&A from acquisitions net of the GRT divestiture, spending on growth initiatives at Stemco and R&D at Power Systems. Sales in the Sealing Products segment were $173 million in the second quarter down about 1% from the second quarter of 2014. Normalized sales were down 2% when adjusting for the $7.3 million net contribution of acquisitions and the $6.7 million unfavorable foreign currency translation effect. Higher volumes in industrial valves and OEM truck parts were more than offset by softer demand in oil and gas truck aftermarket and semiconductor component markets. Sealing Products segment profits were down $1.6 million or 7% from a year-ago and margins declined at 12.3% from 13%, primarily due to lower sales volume and unfavorable mix and about $1 million in acquisition related expenses. On a normalized basis, which excludes the effects of foreign exchange acquisitions, the GRT divestiture and restructuring, segment profit was up 1% and segment margins increased from 13% to 13.4%. In the Engineered Products segment, second quarter sales of $78.5 million declined by 18% from the second quarter of 2014. Normalized sales were down 7% as unfavorable foreign exchange accounted for 11 points of the reported sales decline. Improved demand in European automotive markets was more than offset by decreased demand in oil and gas markets in North America, UK and Middle East. Also demand from agricultural and industrial equipment OEMs was lower in both Europe and North America. Segment profits declined $4.9 million from a year-ago, excluding the $1.1 million effect of currency and $0.5 million restructuring charge at GGB, normalized segment profits declined by $3.4 million largely due to the impact of the sales volume decline. Normalized margins declined in the quarter from 9.3% a year-ago to 6.3% this year. In the Power Systems segment, sales increased $4.9 million or 11% from the second quarter of 2014. Increased revenues on engine using the percentage of completion that did contribute to $5.5 million and were partly offset by lower completed contract engine revenue compared to the second quarter of last year. Parts and service revenues were about level with last year. Segment profit increased to $2.9 million and margins improved from 7.9% to 13.2% for the second quarter of 2015, compared to prior year. Profits and margins benefited from stronger margins on engine revenues and higher parts prices. Material cost improved by $1 million as a result of foreign currency impacts. On a normalized basis, which removes $1.2 million favorable currency impact on the EDF loss provision, segment margins were 10.6% for the quarter. We reported a GAAP net loss of $37.3 million or a negative $1.66 a share for the quarter. This compared to GAAP net income of $8.3 million or $0.32 a share in the second quarter of 2014. Excluding restructuring costs a loss on the exchange and repurchase of convertible debentures, the CPI goodwill and intangible asset impairment, interest expense and royalties with GST and other selected items, we earned $15.2 million or $0.69 a share compared to $15 million or $0.64 a share a year-ago. Cash flow for the first six months of 2015 was a use of $116.7 million compared to the source of $0.5 million in the first six months of 2014. The use of cash resulted from our focus on accomplishing several of our capital allocation goals including a share repurchase program, initiation of the dividend, purchasing most of the remaining convertible debentures and strategic spending on acquisitions in plant and equipment. Also contributing to the use of cash were interest payments related to the issuance of debt last fall and seasonal investments in working capital. Despite these activities, we borrowed approximately $70 million under our revolving credit facility in the first half of the year. More detail on the sources and uses of cash during the first six months can be seen in the accompanying slide. Sales at the deconsolidated operations of GST and its subsidiaries in the second quarter of 2015 decreased about 10% compared to the second quarter of 2014. The decrease reflected softer market conditions particularly in Eastern U.S. and Canada; our normal seasonal maintenance activity was lower. Sales also reflected the affect of lower global oil prices and reduced activity in the steel and mining industries. Operating profits which exclude asbestos related expenses were down 24% from the second quarter of 2014, primarily due to lower volume and to margin compression resulting from the stronger dollar. Asbestos related expense was $8.5 million in the second quarter of 2015 compared to income of $181.3 million in the second quarter of 2014. As you may recall a reduction in the asbestos liability accrual on GSTs balance sheet was made in the second quarter of last year to reflect GSTs amended plan of reorganization. Excluding the adjustment to the asbestos liability accrual, asbestos expenses were $5 million in the second quarter of last year. EBITDA before asbestos expense for the quarter was $12.2 million down 20% or $3 million compared to last year. GSTs cash and investment balance was $259.8 million at the end of the second quarter compared to $216.2 million at the end of the second quarter of 2014. The increase included the collection of $20.2 million of asbestos related insurance proceeds since June 30, 2014. The balance of GSTs insurance receivable at the end of the second quarter was $80.6 million. Now, I’ll turn the call back to Steve.

Okay, thanks Milt. We’ll close with the discussion of our outlook for the full year of 2015 and then open the line for your questions. We have solid bookings in the nuclear petrochemical, OEM truck parts and strong booking and backlog in Power Systems. However, we still face headwinds as economic volatility outside of North America and sluggish oil and gas markets result in lower demand levels in a few of our businesses. In addition, the weaker euro and other foreign currencies continue to affect our results. In view of these conditions and our first half results, we are adjusting our full year consolidated net sales guidance for 2015 to a range of $1.2 billion to $1.25 billion and our consolidated segment profit guidance for 2015 to a range of $116 million to $125 million. The revised guidance assumes exchange rates at the levels in effect at the end of the second quarter and does not include any new restructuring charges for plans that are under consideration for the second half of the year. The revised guidance does include the year-to-date impact of the EDF loss provision, restructuring charges to-date, acquisition related expenses, the projected impact of the recently acquired air springs business, none of which were included in the guidance provided in March. On a comparable basis, adjusting the March guidance for these items, the revised segment profit range is 6% to 8% below the adjusted march segment profit guidance. For deconsolidated GST we expect 2015 net sales of $210 million to $220 million and operating income of $36 million to $39 million. The accompanying slide provides revised guidance by segment. Despite these current challenging market conditions, longer term we expect continued benefits from our strategic growth initiatives including growth from our recent and future strategic acquisitions and our continued emphasis on improving operational efficiencies. Now we’ll open the line for your questions.

[Operator Instructions] And your first question comes from the line of Jeff Hammond. Your line is open.

Hey, good morning guys.

Good morning, Jeff.

Good morning, Jeff.

So just on the guidance, very helpful lot of detail. But can you just – it sounds like you were excluding a number of items and now you are including can you just kind a walk through when you add all those up. How much the delta is? Because it just seems like the margin degradation from March to July for the sales, sales chain seems pretty severe and maybe it’s a lot of these charges being included.

Yes, Jeff. I will run through that with you. If you look at the items that Steve mentioned that are excluded now in the guidance that were not included in the guidance we provided earlier in the year, breaks down about $5 million for the EDF, foreign exchange related loss on the multi-year contract. You are familiar with that. It includes restructuring of $3.2 million based on restructuring charges to-date and some modest continuation of programs that have already been initiated and announced. But not anything new as Steve mentioned. It includes for the Veyance acquisition a little over $1 million loss – around $1 million loss in the second half of the year related to integration costs that we have for that business. And then finally it includes on the completed transactions acquisition expenses of about $1.2 million. So that’s a total of about $10.4 million of items that are not discrete and not included in the March guidance when we communicate at that time that the guidance didn’t include restructuring and EDF. And then obviously some of these other items have developed, since then related to other deals.

Okay, okay. Very helpful.

Okay.

It’s very helpful. And then I guess just given how your stock has acted in this kind of tough tape and tough macro tape, maybe just update us on how you are thinking about – maybe re-upping a buyback or capital deployment from here?

Yes, Jeff, also we can really say about that at this point is its continued ongoing dialogue with our board as you know in the context of our total capital allocation strategy. So we are still thinking about it, looking at it pretty carefully, but that’s really where we are today.

Okay, thanks.

And you next question comes from the line of Todd Vencil. Your line is open.

Hey, guys, good morning.

Hey, good morning, Todd.

Good morning.

You just – Milt, I think you just said Veyance you are looking at $1 million integration charge in the back half of the year. Steve, you mentioned that it was not going to be accretive this year, the acquisitions, but we will be accretive next year. Is that $1 million kind of that the total swing there from Veyance or is there something on top of the integration cost?

No, that $1 million is the net of operating income minus – we will be about $4 million of integration cost for the balance of the year.

Perfect. Thanks for that.

Yes.

And then you talked about strengthen the truck aftermarket some weakness, I mean, I'm sorry, truck OEM, some weakness in the U.S. truck aftermarket. What’s going on there? Can you talk about what you’re seeing?

Yes, I mean, things are slowed in the trucking world a little bit in the aftermarket. I mean it’s not – and we started to see that actually early – very early in the quarter. But the backlog for new trucks and trailers has continued to hold up, so there is still ongoing deliveries of trucks and trailers. So our OEM volume is, as you would imagine and as I know you know, totally dependent upon new truck and mostly new trailer shipments which is still been good to the first half of the year and still has a decent backlogs. So we expect that to continue. The aftermarket started to weaken and I think it’s just because of a wide range of pressures on the economy. I think it's less exports, I think it's housing hasn’t really picked up fully yet. I think it's a – I think it's reduced capital spending through the oil and gas markets and the ripple effects of that. So there is just of a down – because remember when you look at GDP growth year-over-year, GDP includes all spending on – everything, services, electronics, you know, things that don't really require a lot of Internet service, et cetera, things that don't require a lot of trucking. So trucking is much more sensitive to industrial production numbers than anything else. And so, it’s just what we’re seeing. It’s just kind of general weakness in the trucking sector. And then of course that we’ve shared with you all before that over time, we’re facing just a slight – we think it’s about 1 to 1.5% decrease in aftermarket demand for our products in a levelized basis just simply because they last longer and they perform better. So we have to gain a little share which we think just to keep things even, but what we're seeing now is kind of across-the-board and what we're hearing from the industry, from our distributor saying everybody is down, you know from an aftermarket perspective, so that's about all I can say about that.

Got it. That makes a fair amount of sense. And then on the CPI write-down, I mean, obviously there's been, you know, you guys have been doing work on that for a while not terribly surprised that you took a write-down there but can you tell us what prompted the write-down now as opposed to at some point previously? Was there a change in thinking or some change in trajectory? And then relatedly, you know, has there been a related change in your plans for restructuring there or is that process still kind of on the same track that it was before?

Well, I am going to let – let me take those in reverse orders, I am going to let Milt address the impairment charge and the timing of that. But just in terms of lease structuring, you know, that that we have and frankly have under consideration as well as I mentioned in the prepared remarks, Todd. We came into this year, well, we – let me just say, we were in the second half of last year through first half of last year, we were feeling pretty good about CPI actually. Things were starting to improve in terms of all the operational metrics. We were doing a little bit better as you know financials always lagged that a little bit, but if you have asked me last July, I would have said, you know, yes, I feel pretty darn good about the recovery of CPI and then all of a sudden, you know, the extent of the oil price decline and the backup of – of gas as well and kind of the dramatic reduction in the project spending and so forth in those markets, really, really started to kick in and really put a lot of pressure on us in the second half of last year and has obviously continued into the first half of this year. And as we look at it, we don’t think it’s going to change anytime soon, so we’ve been looking very, very hard and what to do kind of to once and for all set CPI on a good and productive path for the future. And we will have more to say about that in the next quarter. These plans are kind of in process that’s why I indicated that we are very likely going to have a restructuring charge in CPI, sometime in the second half of the year once we finalized those plans. Now, related but different to that is the timing associated with the impairment charge. So Milt, why don't you walk Todd through that?

Okay. And Todd, the short answers falls directly from Steve's comments the deterioration of our outlook for the business and it really culminated in May of this year, when our forecast for the business came down considerably from the forecast that we have for the year prior that time driven by all the factors that Steve just went through. And so when our forecast came down considerably, in May, we determined we had an obligation to take another look at the goodwill impairment test that we normally perform on an annual basis and in the later half of the year. So with that we determined that we can no longer justify the – carrying the goodwill on our books. And so we did an analysis, which led to the conclusion that you see in this quarter’s results. So it was really, really driven by the deterioration that we saw that really hit us pretty strongly in terms of our forecast in May of this year.

Make sense. Thanks guys.

And your next question comes from the line of Joe Mondillo. Your line is open.

Hi, good morning guys.

Good morning Joe.

I have a question on GST just it seems like so a lot of the oil and gas exposure within that business is oiling – is the downstream oil and gas business. And I know a lot of these refineries have been pushing off maintenance in such, but it seems like the fundamentals there are actually quite well compared to the other side of the oil and gas sector. Just wondering if you could speak to sort of what's – how your outlook is there going forward, you’ve seen a pretty decent contraction on the top-line. And then also if you can address the margin, is that primarily volume or are you still sort of seeing, I know you were having some issues with the competitor coming offline and then was coming back online and there is some pricing issues there. If you could address that that would be great, thanks.

No, okay. That’s some good question there, Joe. Just – so we’re talking about deconsolidated GST at this point…

That’s correct. Yes.

Yes, yes, right. So there is actually a fair bit of exposure that that business has to the steel market because we sell – that’s where the closure product line sits and it’s basically oilfields that their primary – I thought that half of their business goes into the U.S. and to some extent Asian steel markets. So that as you know steel production has been dramatically down under tremendous price pressure, right. The other big market that they sell into is mining so we call it metals and mining, but it’s – a lot of it is mines. So when you look at the Australian units for instance which is – which is part of the deconsolidated GST is dramatically down because most of their volume over there is mining related. So – and then we obviously that's where we have the really probably nearly all of our exposure to the way upstream business of – of oil and gas. I was actually up there recently. And one of our largest down haul customers has been Halliburton in the past and our volume year-to-date with Halliburton is literally down 40%. So they have gotten the absolute brunt of that. Now, and then to make matters worse, as you have mentioned in the downstream portion of refineries and in fact you could – if you listen to Exxon’s – Exxon reported this morning, right, they had a loss in their upstream business and made all of their profits in the downstream portion, which is exactly the behavior we’re seeing from these large refineries, which is [indiscernible] them running because that's the only place for making any money. They got low feedstocks and then of course all the non-integrated refiners are doing well. And so the bottom had deferred maintenance. We are fairly optimistic that in the fall and particularly next spring in the early 2016, we’re going to see a rebound in that activity because there is only so far you can push turnaround out. Now in terms of the product line that we were selling – so one of our competitors had a fire in their plan. We decided to sell, basically private label product or un-labeled product to them for strategic reasons. We have not lost any share to them. We are back to where we were before, but that portion of the business, actually sells into the petrochemical markets on the chemical side and that business is actually up. So pricing is good and volume is actually a little bit up. And once again benefitting from very, very low feedstocks and they continue to expanded U.S. chemical presence. So we have not been impacted on that – by that competitor resolving their plant issues and having product being sold.

Okay.

Yes, that’s the deconsolidated portion. And then in the consolidated portion, that’s where the pipeline business sits and where our European business Garlock business fits and – and so we have got on the pipeline side we have got pretty significant reduction in oil and gas projects and a lot of that work is project driven. There is still after market there, but there is a lot of this project, which has really been canceled, but slowed dramatically. And then the European business a lot of that product that they sell in Europe is actually transferred to them from the U.S. deconsolidated entity. And so it's priced in dollars and so their margins are squeezed, because of the transaction, that’s where you heard us in the past, talk about some transaction effect of FX and it hits really in consolidated portion of Garlock, because its buying product on a transfer price in U.S. dollars from the deconsolidated part of Garlock if you follow me.

Okay. Yes, I do. On the deconsolidated piece regarding the margin, then essentially it’s primarily related to volume then.

It is a 100% volume good.

Okay. Regarding Technetics, it sounds like Stemco is sort of slowing a bit. Garlock struggling with the oil and gas exposure. How is Technetics faring and what is your outlook for the back half of the year in terms of that business?

Yes, now Technetics is doing well. Their nuclear shipments in the first half of the year were a little soft compared to what we expected. However, their nuclear bookings were stronger than what we expected. So we've got a nice backlog in nuclear. That’s a great product line for the Technetics Group as I mentioned Fabrico the integration is essentially done and – and they have got a lot going on there. The orders are great, they are busy. So lot of good things going on in Technetics and we don’t anticipate any kind of huge weakness in semiconductor in the second half of the year. That’s the only thing that – that has me slightly concerned in Technetics if that were to pop up that could impact demand for Technetics. So far based on the bill rates we see and so forth and what our customers are telling. It seems to be certainly not deteriorating. So we feel pretty good about the second half of Technetics. Milt, you want add anything to those comments.

No. I think you covered that. I would say that generally, our results for the first half of the year, we’re generally inline with our expectations going into the year and so no big surprises there. And if we come in with a good second half of the year, especially on the nuclear front, I think we’ll – we’re going to be able to be achieving our expectations for that business.

And regarding the nuclear piece of that, what is actually driving that? Because I mean I feel like that market is relatively – not extremely strong, So is that just sort of small piece of the market that you're taking advantage of or what's going on there?

Yes, Joe. Look, I think the market is very stable there and what we're seeing is just really just timing. I mean it's a solid business and we have a significant presence in it actually and it's a very good margins for us. So we – so – and this is – there is some big products, you know the big nuclear [indiscernible] that we ship and those orders can move around from month-to-month and quarter-to-quarter. So there is nothing that’s out of our expectations when you look at the – on a full year basis.

Okay. And then just lastly GDP, it sounds like that’s a stronger piece of the business or it has been certainly within the Engineered Products it definitely is. However, it seems like there is sort of mix feelings and what’s going on in Europe. How has that been trending in the first half of the year and sort of what's your outlook in the back half?

Yes. Our outlook in the back half is stronger than it’s been in the first half. But obviously, that’s the business that’s most affected by the strong dollar just on a fewer translation business, because as you know, most of that two-thirds of that business is European based. So – and we have seen some weakness. They sell half of their business as automotive and half as what we call industrial which is everything and the weakness that we’ve seen in the first half has been related to industrial products much of it in the U.S. [indiscernible] in Europe in agricultural, fluid power, and so forth. And unfortunately for us, again the margins in the industrial segment are much more attractive than the margins in the automotive. So when volume demand goes down in industrial, it leverages more dramatically then when volumes goes down in automotive. Automotive is then has been decent in both North America and Europe. So we’re hoping that – and we're making some adjustments as you know in GGB but moving some plants and so forth in the second half the year and so the cost position will be a little bit improved. So our second half outlook for GGB is more positive than the first half.

And the industrial piece where geographically are you seeing – or did you see that weakness?

In both in the U.S. and in Europe.

Okay.

Yes. And I think part of the U.S. is just general commodity price weakness in ag, and I think, again it’s more difficult for our customers to export their heavy equipment now with the strong dollar.

Great.

I’m sure that’s affected this as well.

All right. Okay, thanks for talking my questions.

Yes.

[Operator Instructions] And your next question comes from the line of Justin Bergner. Your line is open.

Good morning everyone.

Good morning.

Hi, Justin. How are you?

Good. How is everyone on your end?

We are doing fine. Thanks.

Good. I have a few questions which -- some of which are cleanup type questions and some which are more big picture questions. With respect to the deconsolidate GST business and its steel end market. Is it actually selling into Chinese steel markers materially or is the Asian presence more ex-China?

No. Not materially, Justin.

Okay.

I can’t give you the exact number, but most of our share in steel is in the U.S.

Got it. And just to clarify with respect to the new guidance, it seems like excluding the Veyance acquisition the sales guidance has been taken down by about $25 million or 2%. Is my math correct there?

Yes. The Veyance – the estimate for Veyance would be $45 million to $50 million in revenues for the second half of the year. So you could reduce, if you want to reduce the overall revised guidance for revenues by the $45 million to $50 million to look at it on a revenue basis relative to March, you could do that way.

Okay, and then that sort of translates into about by my math 2% reduction in sales. I’m assuming a fairly similar exchange rate environment. So the 6% to 8% reduction in operating profit guidance excluding sort of some of the one-timers you called out, how much of that 6% to 8% decline is related to the lower sales growth? And how much of it is related to other sort of structural factors that might be affecting the business be it, you know, foreign competition or other factors?

It’s two things, we are volume sensitive as you know, and so the contribution margin on volume declines it kind of leverages it hurts us and then we benefit – or down and then equally benefit when our volumes go up. So much of it is volume-related adjustment, we do, as Steven mentioned earlier, in the deconsolidated part of Garlock, in particular we have margin pressures associated with having a dollar cost product that we’re selling into markets outside the United States. So that is a factor, as well.

Okay, very well. And then just to clarify one point, with respect to the aftermarket headwind in the Stemco trucking business relating the parts lasting longer, 100 to 150 basis points headwind, that is specific to Stemco aftermarket or in the context of Stemco as a whole?

You want to take that, I didn’t exactly follow it maybe.

Yes, I think Justin was referring to a comment that you made earlier about the fact that even without downward pressure in the aftermarket, because parts are lasting longer that there is a bias toward kind of cost slightly declining market as a result of that. And so really is for the – mainly on the wheel-end seals, at Stemco, which is kind of the core original part of the Stemco business. Less impact in some of the other components that we’ve added plus with…

Milt let me add to that, that's not new either, Justin. That’s been the case for a decade.

And we have a large share of that market for that particular product. We have much smaller share for components that we’ve added over the last several years. So we’ve also got more headroom so to speak in some of the areas that we branched into over the last few years through acquisitions or alliances or distribution agreements.

Okay, understood. I think, I don’t know if it was you or the person asking the question, but I think it was quantified there was a 100 to 150 basis points headwind associated with, I guess, the longer lasting parts in Stemco aftermarket. And I just want to make sure I understood there, 100 to 150 basis points, is specific to the Stemco headwind or the Stemco aftermarket headwind?

It’s the Stemco, no, it’s actually just certain products actually within the Stemco market. So it would be about a third of Stemco’s sales on average. Our products that Milt is talking about. The current rate of products. That does not include the Vance. If you’re looking for the way to quantify it, Justin, which sounds like, I would take 1% times a third of what Stemco’s first half – an estimate of Stemco’s volume. But it doesn’t affect the whole thing, it’s just, as Milt said, it’s only the core wheel end products and it might not even be all of that because we do put some stuff in the wheel end component category that’s not being [indiscernible] down or not being extended life like that. It’s really the core oil seal that we continue to make better all the time where we see a little bit of that pressure.

Okay. That’s helpful. Thank you for the clarification. And one big picture question to sort of finish up on my end, which is as you look at some of the pressures associated with foreign competition, decelerating industrial production globally, how do you sort of incorporate those pressures which could persist for a few years into how you think about the business and how you plan the business?

Well, I think it re sets how we think about building the cost structure for these various businesses, as I mentioned before, year-over-year more focus on CPI because that, we don’t see that market changing any time soon. So I would say, it helps us drive that, as we look at it, and look at it going forward. It helps the size the right cost structure, in addition it helps us focus on which segments we want to do acquisitions in and grow in and so forth. And as we said before, pretty consistently that Stemco and Technetics are the two businesses that we will see within sealing that will pull most of the acquisition capital probably followed by some – some in power systems to help us get the OP 2.0 engine into the market and in the commercial market, commercial power markets, which by the way the OP 2 is still progressing and should be that the test engine should be complete by the end of August and on the test stand by September. So we’re still very excited about that, but we need – since our primary market in power systems has been focused on the U.S. Navy. We believe we might need to do some acquisitions in the channel that help us get or do something. We’re not sure exactly what but to get the channel set up to more – to access the commercial markets better than we have in the past, because that’s where that product will go. So, but the vast majority of our acquisition money will be in Stemco, which as you know is in North America – primarily in North American business and in Technetics which is a global business. But serves a lot attractive end use industries like aerospace and turbines and power generation and semiconductor and so forth, which we think still have strong paradigms and are not affected by some of the trends that you highlighted.

Great, that’s a good answer. And certainly, I think there is some people out there that view, M&A as just as value creating as repurchases. So I’m curious to see what comes up next in that front?

Okay.

And your next question comes from the line of Gary Farber. Your line is open.

Good morning. Just had a couple of questions, can you address sort of your overall, sort of manufacturing footprint, given with the demand trends are and with your visibility is, how you think about it just the layout of your plans and things like that.

Well, there won't be huge changes in our footprint, Garry, we are making a number of – we have some small facilities that we’re consolidating into existing facilities. I mentioned the ATDynamics manufacturing will move into our existing Longview facility. That's really the only thing going on in Stemco. And in GTB we’re moving, you may recall a few years ago we bought fairly small operation in Chicago, that makes products for the fluid power market that we’re in the middle of consolidating into one of the two-third of their plants. We also have to move that thoroughfare plant, the small one. We have two plants in thoroughfare New Jersey. And the small one we have to move across the street because it’s not big enough for our growth needs, it runs one particular products line it's called the filament product line. They need more space and we’re also then consolidating the Chicago facility into that. That’s underway this year. And then we also bought a company back in 2005 with the five or six 4GTB over in Germany and that lease or that facility is up and we're moving and consolidating that operation into our Slovakia, Slovakia plant. And then China, we have a co-located Stemco and GTB facility. That’s just simply not big enough for our needs because that business is growing and continues to actually grow very rapidly. So we’re moving both those operations into another building. And that project is underway, as well. So we’ll continue to do things like that, that make sense for us. Kind of small facility into big facility into big facility, but there’s no huge play in our business to dramatically reduce the number of facilities, because our facilities a lot of time make different products, serving the local market, they make niche products. And the economics are just not there to consolidate just to have bigger and fewer plants.

Right. Okay and then just a couple of other ones. Can you also discuss the competitive environment in CTI, sort of what your competitors are doing in that market and to a lesser extent GTB?

Yes, in CPI, I think, they are doing the same thing we are, which is retrenching. It’s competitive and we’ve seen our competitors exiting many other markets in Western Canada and consolidate each of their service centers and so forth. So that entire industry is – I’d characterize it retrenching. In GTB, because it’s such an important niche product for OEM, we are not really seeing any dramatic shifts in competitive behavior in GTB. So we don’t really see anything there.

Okay. And then just last on your visibility, the businesses a lot of them are sort of short cycle so you don’t sort of have long-term visibility. I’m just sort of wondering during the quarter and sort of how you see it for the rest of the year, is the visibility similar but sort of demand is just coming in less, or has the visibility become less?

No, I think the visibility is the same as we’ve had all long, I don’t see a difference in that area. I just think we’ve reset the guidance slightly lower than where we were before because things were weaker than we saw back in February. But the reduction is not huge, right. So anytime we give guidance as a company, I think, it’s going to be subject to a range similar to what we did here in a couple of percent on the sales line and 5%, 6%, 7% on the LI [ph] line depending on what’s going on.

Milt, I don’t see us of – unless we widen the range dramatically but we’re giving you guidance the best we can in terms of our outlook. But as we’ve always said before it is extremely short cycle business.

And as you know up and till recently Gary, until this year really we haven’t provided this level of guidance. So we’re really doing it to try to provide information as we see it when we provide it. But nothing has change. And the fact that we’re providing it now doesn’t mean that we have more visibility than we used to. And it’s obviously subject to changes as the market changes.

Okay, thank you.

And there are no further questions at this time.

Okay, well thank you all for joining us this morning. If you have further questions please give me a call, 704-731-1527. Thank you very much.

Ladies and gentlemen this concludes today’s conference call. And you may now disconnect.