EnPro Industries, Inc. (NPO) Q3 2015 Earnings Report, Transcript and Summary

Good morning. My name is Anastasia and I will be your conference operator today. At this time, I would like to welcome everyone to the EnPro Industries Third 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. You may begin your conference.

Thank you, Anastasia. 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 third 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 June 30, 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 such 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. Please also note that during the call we will be using the terms normalized sales and normalized segment profit. Normalized sales refers to actual or pro forma sales adjusted for year-over-year differences in foreign exchange translation and the impact of acquisition and divestitures. Normalized segment profit refers to actual or pro forma segment profit adjusted for foreign exchange translation, the impact of acquisitions and divestitures, acquisition related expenses, restructuring charges and the out of period impact of the multi-year EDF loss provision. The intent of providing normalized results is to provide greater clarity of results in the current period compared to the prior year period. And now, I will turn the call over to Steve.

Thanks Dan. Good morning to everyone. I would like to start my comments this morning with an update on the markets we serve. Certain sectors such as oil and gas, steel, mining, agricultural equipment and really more generally other capital goods sectors have exhibited recessionary conditions due to slowing global growth and low commodity prices. Aerospace, nuclear, trucking and auto markets have been stable to moderately higher, while semiconductor was growing earlier this year before turning down in the third quarter. Government spending on ships and maintenances also remain steady this year. In large part our results for the quarter mirror these macroeconomic conditions. For the third quarter, our consolidated sales were up 1% and pro forma sales which include the results from deconsolidated GST were down 1%. On a normalized basis, consolidated sales were down 4% for the quarter and GST’s net sales were down 6%. Our consolidated adjusted EBITDA of $41.8 million for the quarter was down 3% from a year ago and our pro forma adjusted EBITDA of $53.0 million was down 5% compared to last year’s third quarter. Consolidated EPS of $0.51 a share was up significantly from the $0.33 a share reported in the third quarter of 2014. This improvement reflects lower corporate income tax and other expenses as well as the reduced number of shares outstanding compared to a year ago as a result of our share repurchases and transactions related to our convertible debentures. While Milt will provide more details on our financial results in a moment, I want to point out that our results in Sealing Products and Power Systems for the quarter and for the year have been reasonably strong considering market condition and the negative impact of the strong dollar. In Engineered Products however, our results have suffered due to more concentrated exposure to oil and gas, agricultural equipment and capital goods markets, and a higher percentage of revenue generated outside the U.S. In response we have initiated a number of restructuring moves in Engineered Products that will result in the elimination of two plants through consolidation at GGB and the exit from nine other service and manufacturing facilities at CPI. These moves have resulted in restructuring charges in the segment of approximately $2 million through the third quarter of this and we expect an additional $8 million to $10 million in the fourth quarter and $1 million to $2 million in the first quarter of 2016, most of which relates to plant at CPI. Upon completion we estimate these actions will result in annualized cost savings in our engineered products segment of approximately $4 million to $5 million. The restructuring at CPI will provide heightened focus on our tire margin core petrochemical and refining markets, and a scaling back in the natural gas production markets, in response to market conditions particularly in Western Canada. That we do not believe will reband any time soon. In addition to these moves we have also had an intense focus on top rational improvements at CPI and we've made great progress over the past year. As an example CPI's division wide on time delivery was an unacceptable 81% in the third quarter of 2014, it improved to 89% in the third quarter of this year and is on track to exceed 93% in 2016. Milt will provide more detail in a few moments about the recent restructuring actions at CPI. At GDB our focus is on optimizing our manufacturing footprint while establishing operational excellence in supporting our customers. In North America we're currently consolidating two leased manufacturing facilities which are coming off lease this year into a newly purchased facility across the street from our main operation in Thorofare, New Jersey. In Europe we consolidated our solid polymer operation, again a leased facility coming off lease into GDB facilities in Slovakia and Germany. And in China we're replacing the leased facility with one that we own which will halve manufacturing for both GDB and Simco in China. Going into 2016 our engineered products manufacturing equipment will be leaner and more efficient. Switching gears to our capital allocation strategy yesterday our board of directors authorized the repurchase of up to $50 million of our common shares in addition to declaring our normally quarterly dividend of $0.20 per share. This authorization made in response to the low multiple at which our stock trades relative to pro forma earnings and our belief in the underlying value of our company. We will determine the timing and the amount of the repurchases based on our evaluation of market conditions and other factors and expect that repurchase program to be executed within the course of the next two year authorization period. As a reminder during our March Investor Day and on earnings calls since then we have communicated our commitment to creating long term shareholder value through a balanced allocation of capitals that includes investing and maintenance in growth programs through capital equipment and facility spending along with new product development and strategic acquisitions while also returning capital to shareholders through regular dividend and periodic share repurchases. We've also communicated our goal of maintaining a net debt to EBITDA ratio of around 2 times. Through the course of this year we've allocated capital accordingly and our leverage ratio was approximately 2 times excluding notes payable to GST at September 30th. I also want to report that we're making very good progress on the three acquisitions in our sealing products segment completed over the last year. Integration activities are proceeding according to plan and in the aggregate we expect results over the next two years to exceed our original expectations. We invested approximately a $110 million in three businesses and we expect they will contribute about $6 million in the EBITDA this year reflecting first year purchase related expenses, integration cost and the midyear timing of the Airspring's acquisition. Within a two year period we expect these acquired businesses to contribute annual EBITDA of approximately $20 million to $25 million. All three are excellent strategic fits with our core sealing segment businesses. Finally I want to update you on the status of GST the asbestos claims resolution process. We’re moving down the path toward next summer's conformation hearing scheduled to begin on June the 20th. We continue to be confident that GST's plan of reorganization meets all the requirements of the bankruptcy code and can be confirmed. The plant continues to have the full support of the future claimants' representative. A very large number of alleged claims, about 180,000 were filed on or before the October 6th claims bar date as expected. And as expected current claimants were voted overwhelmingly against approval of the plan. However we believe we will demonstrate that the filings and the vote were orchestrated by the asbestos plaintiffs bar and the current claimants committee and that notwithstanding the vote the offers under GST's plan of reorganization will pay sufficiently more than the full value of any liability the company many have to the claims. Our experts have recently begun what will ultimately be a thorough analysis of the claims voted and filed. Based on a preliminary review we believe that a significant portion of the claims are demonstrably bogus. Many are in fact already time barred and a large number are actually previously dismissed or settled claims. Many others are brought back claimants who had no meaningful if any contact with GST products, and still others are non convincible foreign claims and finally a large number of claimants have absolutely no evidence of even having a compensable [disease]. Importantly, more than two-thirds of the claims were filed by a total of 11 plaintiff firms. We have traditionally focused on non-malignant claims. Also, it’s important to note that significant claims that were pending prior to the Chapter 11 filing were not filed, and therefore are now barred, including those that were even settled by GST prior to the filing date. In addition, some significant plaintiffs firms did not file any of their pending claims and others didn’t file a large number of [indiscernible] appealing on the claims for which they filed personal injury questionnaires early in the case. We believe that these missing filings are telling and that the law firms obviously don’t want their claims to face the scrutiny of the court and the public. With respect to GST’s fraud and RICO cases against asbestos plaintiff firms we continue to move forward with discovery and motion in the U.S. District Court. The presiding Federal District Judge rule in GST’s favor on several motions denying motions to dismiss and motions to prohibit the broad discovery that GST seeks. [He cited] the Bankruptcy Court’s estimation order and findings of demonstrable misrepresentation in the [indiscernible] appealing on the cases that were reviewed and while acknowledging GST’s discovery request were quite broad he also stated that as the fraud in which defendants are engaged is also broad. We anticipate lengthy discovery periods ahead with potential trials in 2017. We are committed to moving forward to achieve a just result for GST. Now I will turn the call over to Milt to review our third quarter results in more detail.

Thanks Steve. Before I begin, I want to mention that we’ve added a summary table in the front of our earnings release that illustrates on a pro forma basis financials as the results for deconsolidated GST were reconsolidated within EnPro under the terms of GST’s second amended plan of reorganization. Please refer to the disclosure notes to the company, is pro forma financials in the earnings release to understand the assumptions behind the numbers. As Steve mentioned our consolidated third quarter sales were $306.6 million, up about $4 million or 1% from the same period of 2014. Normalized sales declined 4%. By geography, normalized European sales declined 5% as both sealing products and engineered products were lower. Markets were mixed as increases in automotive and aerospace were offset by softness in broader industrial markets. In North America, excluding Power Systems, normalized sales declined 6% as sealing product sales were lower by 3% primarily due to weaker demand in oil and gas and semiconductor markets. North American Engineered Product sales were 15% lower than a year ago, primarily due to weaker market conditions in agriculture, fluid power, oil and gas and general industrial markets. Including Power Systems, North American normalized sales were down 3% year-over-year. Gross profit for the quarter of $101.4 million was 4.8 million or 5% lower than in the third quarter of 2014 and gross profit margins decreased to 33.1% from 35.1%. Adjusting for the impact of the lower margin businesses acquired this year, the gross profit margin is 34.8% for the quarter which is a strong result given unfavorable volume in the quarter. The lower margins of the two businesses acquired this year reflect current margin characteristics of these businesses as well as the initial impact from integration activities. As Steve noted, we are very pleased with our integration progress and expect these businesses to add considerable value relative to the prices paid within a short period of time. SG&A was down 2.6 million or 3% from the third quarter of 2014. Foreign currency translation had a $4.5 million favorable impact and corporate costs declined 3.8 million primarily driven by lower salary and benefit expenses and incentive compensation accruals. Partially offsetting were additional SG&A expense of $5.8 million from acquisitions net of the GRT divestiture and higher spending on growth initiatives at [Stemco] and for the OP 2.0 new engine development project to Power Systems. Consolidated net income for the quarter was $11.4 million or $0.51 per share, up 2.8 million or 33% compared to net income of 8.6 million or $0.33 per share in the third quarter of 2014. In addition to lower SG&A expense the year-over-year comparison benefited from lower other expense primarily related to a $4 million loss on the purchase of debentures that occurred in the third quarter last year, a $3.7 million lower income tax expense in the third quarter 2015 resulting from discrete items and the reduced share count compared to a year ago that Steve highlighted previously. Sales in the Sealing Products segment were $186.3 million in the third quarter, up about 10% over the third quarter of 2014. Normalized sales were down 4%. Softer demand from oil and gas, semiconductor and general markets were partially offset by stronger nuclear and aerospace sales. Sealing products segment profits were down $0.5 million or 2% from a year ago and margins declined to 12.1% from 13.6%. On a normalized basis think the profit down 1% the segment margins increased to 14.1% from 13.8%. The improvement was largely due to cost reduction initiatives, favorable pricing and lower material costs. In the engineered products segment third quarter sales of $72.1 million declined by 18% from the third quarter of 2014. Normalized sales were down 8% as unfavorable foreign exchange translation accounted for 10 points of the reported sales decline. Improved demand in European automotive markets was more than offset by decreased demand for compressor parts and services in oil and gas markets in North America, the UK and the Middle East. Also demand from agricultural and industrial equipment OEMs was lower in both Europe and North America. Segment profits declined $4.5 million from a year ago. Normalized segment profits declined by $3.8 million largely due to the impact of the sales volume decline. Normalized margins declined in the quarter from 6.8% a year ago to 2.7% this year. Restructuring charges in the segment were 0.7 million in the third quarter and $2.2 million year to date. As Steve mentioned earlier we expect to incur additional restructuring charges in the fourth quarter of this year and the first quarter of next year of approximately $9 million to $12 million with 8 to 10 million of this amount to be at CPI in conjunction with the plan announced to the CPI organization on October 21st. On Tuesday of this week we filed an 8K disclosing details of our plans. Of the CPI estimated restructuring charge over the next two quarters four to five million will be in the form of cash payments. 40% of these cash payments are expected to be made in 2015 with the remaining 60% most of which are associated with future lease payments to be made over time. The remaining $45 million will be non-cash in nature resulting from the impairment of various tangible and intangible assets. In the power system segment revenues increased $2.6 million or 6% from the third quarter of 2014, engine revenues using the percentage of completion method were $2.6 million higher than in last year's third quarter. Lower parts revenues were offset by higher service revenues in the quarter. Gross profit and margins benefited from stronger margins on engine and parts revenues and lower operating costs but these were partially offset by the lower mix of parts sales. Material cost also improved partly due to the benefit of the strong dollar on European source material. Offsetting the gross margin gains is higher spending on R&D and SG&A. Segment profit decreased $0.4 million and margins declined from 20.6% to 18% for the third quarter of 2015 compared to the third quarter of last year. Due to the several Euro to dollar exchange rate at the end of the third quarter compared to June 30 there was no adjustment during the current quarter to the EDF loss provisions recorded earlier this year; Cash flow for the first nine months of 2015 was a use of $102.2 million compared to the generation of 134 million in the first nine months of 2014. The use of cash reflects accomplishments accomplishment of several of our capital allocation goals including a share repurchase program, initiation of the dividend, purchasing most of the outstanding convertible debentures and strategic spending on acquisitions and plant equipment. Also contributing to the use of cash were interest payments related to the issuance of debtless small and seasonal investments in working capital. To support these activities we borrowed approximately $78 million under our revolving credit facility in the first nine months of the year. Sales of the deconsolidated operations of GST and its subsidiaries in the third quarter of 2015 decreased by 12% compared to the third quarter of 2014. The decrease reflected softer market conditions particularly in the eastern US and Canada where normal seasonal maintenance activity was lower. Sales also reflected the effect of lower global oil prices and reduced activity in the steel and mining industries. On a normalized basis sales were 6% lower than in last year's third quarter. Operating income which excludes asbestos litigation related expenses was down 15% from the third quarter of 2014 primarily due to lower volume, normalized operating income was $10.1 million compared to $11.1 million in the third quarter of last year and normalized operating margins were 17.6% compared to 18.2% last year. Asbestos related expenses was $5.3 million in the third quarter of 2015 compared to $4.9 million last year. Adjusted EBITDA before asbestos expense for the quarter was $11.1 million down 12% or 1.5 million compared to last year. Justice cash and invested balance was [263.3 million] at the end of the third quarter compared to 229.3 million at the end of December 2014. The increase includes the collection of $21 million of asbestos related insurance proceeds since December 31, 2014. The remaining balance of GST’s insurance receivable at the end of the third quarter was approximately $80 million. Now I will turn the call back to Steve.

Thanks Milt. We will close with the discussion of our outlook for the full year 2015, then open the line for questions. We have solid demand levels in the nuclear petrochemical and engine parts and service markets. However softer conditions in many of our other markets in the strong dollar continue to affect our results. Given these ongoing market headwinds, our results -- and our results for the quarter, we expect segment profit for the year to be at or slightly below the low end of our guidance previously provided excluding the impact of restructuring charges expected in the fourth quarter of 2015. We estimate restructuring charges for the year to be in the $12 million to $13 million range compared to the $3.2 million included in our previous guidance. We expect GST’s results to be within the range previously provided. The revised guidance is based on exchange rates in effect at the end of the third quarter. Despite current challenging market conditions longer term, we expect continued benefits from our strategic growth initiatives, including growth from the recent and future strategic acquisitions, and continued emphasis on improving operational efficiencies. Now we will open the lines for your questions.

[Operator Instructions]. Your first question goes to Ian Zaffino with Oppenheimer. Your lines is open.

Hi, thank you very much. Good quarter to turn the tough markets you are operating under. The question would be on the engine business and Steve I know you’ve talked a lot about the opportunities there to be able to patch up beyond the core market, maybe something EDF. What are you seeing as far as that initiative? Are you in talks with any customers about it or just maybe give us an update on that initiative that would be helpful? Thanks.

Yes, good question Ian. And good morning. There’s two big aspects to it. The first and really most important is our development of a new opposed-piston engine, our new design that we’re doing with a whole bunch actually a proprietary technology from our partner’s Achates Power. The -- as you know we have an existing OP engine which is in fact the design that we are using for EDF that’s the kind of current -- it’s called the current generation engine. The one that we are developing, we have been working on for a couple of years and really have had -- this may not mean much to financial folks but to an engineer like me it’s a huge accomplishment to have a team of eight to 10 people that in really two years from the start and redesigned 6,000 of 8,000 parts assemble an engine, build a new test and having engine up and running in a test configuration. That all happened. We started the new OP in September of this year. So I am just very, very excited about what that could bring to us because that could be a -- our hope is that that’s a competitive [indiscernible] engine on the market in the world and have the unique characteristics that a opposed-piston 2 stroke engine provide which are substantial. So we are hopeful that some time in the first quarter of next year we will have real performance results from our kind of designed experiment to testing that’s going on right now and that we will be able to communicate that to the world, diesel engine customers and really have a much better sense probably late in the first quarter, early second quarter of our timing to be commercially, have that engine commercially available and kind of the market feedback. So that’s one big aspect and it’s still until we get the actual performance results coming in the next several months. We will really know exactly what we think the potential is. Although we think that these are going -- for [indiscernible] it’s going to be significant. The question is whether it’s like really significant or whether it’s just significant for a business our size. So that’s the first. The second is the partnership we announced about a year ago with [MAN] who as you know is already our technology partner for many engine styles that we sell to the navy and we have with their exclusive license for licensee in the U.S. to sell to the U.S. Government. We entered another deal with them which is to sell their natural gas engines in the U.S. market as well. That’s a new market for us and we have made several large proposals to customers. We have not won anything yet. We have learned a tonne about where it’s about to take to compete in that world. We have a number of active discussions and proposals going on. It has not yet yielded any fruit but I am not surprised actually. I am surprised with as we have, we had for the first time ever and [indiscernible] at the main factory in August a customer event where we had invited a bunch of customers up to tour the factory see the new OP engine, made a bunch of presentation technical presentations to them, [indiscernible] was there and presented and we talked about our main gas engine availability and so forth and the response from the industry and the customer base that that buys diesel engines was overwhelmingly positive, it is the first time really for gosh certainly since I've been at EnPro and really years before that Anthony is kind of the impact in the commercial market in visible and viable way. So that's kind of the status I know it doesn't help you in trying to project you know what this might be worth because we're still a little bit too early to really put any numbers around what we think the potential is. And I apologize for that, that's just it I mean it's a long cycle business developing these engines and markets just takes a while.

That's very helpful, thanks for all the color. Thanks.

Your next question comes from Jeff Hammond with KeyBanc Capital Markets. Your line is open.

Hey guys, just wanted to go back to the guidance here, it looks, and just to be clear so your former guidance was 116 to 125 of segment income you're saying kind of lower at or below the low end. That includes the restructuring that you've taken to date and that includes the FX hit on power systems but excludes future restructuring is that right.

Jeff you may recall on our last call we indicated that the revised guidance that we'd provided included restructuring expense through the first half of the year plus ongoing additional restructuring expense that was associated with actions that were already have identified and planned so the total of that in the guidance was around a little over 3 million I think it was $3.2 million. So that was what was in the previous guidance so you're correct, when Steve indicated that we expect to be at or slightly below the low end of the range previously provided, it does not include any restructuring expense in addition to that $3.2 million.

And nor Jeff does it include any potential changes in the FX rate between the end of Q3 and the end of the year.

Okay, so it looks like if I'm doing my math correct, year to date you're kind of at 86-7, so you need somewhere around 29 million to hit your low end. And I think you did 33 in the third quarter, can you just talk about what's stepping down 3Q to 4Q within the businesses that would, you know would drive kind of a $4 million sequential decline in segment of profit or more.

Yes. Jeff it's really a reflection of you know the ongoing softness in many of our markets that Steve alluded to. What we've experienced as a company in the late summer there was a little bit of a resurgence where we thought maybe we bottomed and we're going to start ticking back up and then as the third quarter progressed we really saw how that softness resurface, and. So our conclusion is that you know Q4 is going to be a tough quarter given the market conditions, that we faced and it's really a bifurcated economy in the industrial world. The businesses that are more consumer facing seem to be holding up relatively well and then others on the industrial world that are selling into capital goods markets, oil and gas, steel mining, ag, heavy equipment, those are we would describe as kind of recessionary conditions. So it's largely based on our assessment of how we see the quarter, nothing unusual.

What businesses are getting worse though, because it seems like third quarter kind of already stepped down, you're taking another leg down or is there something within power systems where the margins at 19% aren't sustainable or?

No, actually we expect a decent fourth quarter in power systems, so, and we have actually a pretty attractive shippable backlog of parts and a number of engines that will ship as well, if the current schedule is maintained. So it's not a power systems issue. I think, I think part of it is we'll, no I don’t know how this compares to the third quarter, but a year ago in Simco, we had a pretty aggressive seal promotion in Q4 which we will not have this year. And we had a kind of a regional outside the US promotion Q3 which helped Simco's numbers so that'll be, they won't get as much demand in Q4 as they had in Q3 would be my guess. So, but, marginally down. And then in, and then I think Garlock always has a little bit into the fourth quarter, it’s been our experience.

And the other thing I would note Jeff is that we see this downturn in semiconductor and that’s going to continue, had a bigger impact on us in Q4 than it had in Q3 when we received [indiscernible] from some of our large customers [AMAT] [indiscernible] agent in the [quarter advantage].

You’ve got different numbers Jeff if you compared it to Q3 and so forth. But I mean I think our guidance of being at or just slightly below is reasonable so.

So in sealing products, if you had look at this segment normalized margins, your margins were actually up year-over-year in the base business against a revenue decline. Can you just talk about what was driving the margin resiliency? I am just looking at the slide 10.

Yes, well, on a normalized basis, right. So our Garlock team has done actually an outstanding job reducing their costs and getting positioned for this difficult environment. It’s been a tough road. They have done a great job. And we’ve managed costs well in the other two, in Technetics and in Stemco. So their demand has held up much better but we’ve still been really working hard on the cost side. So we think that’s sustainable. We think we are now positioned in Garlock. And again, when I say Garlock in this sense, it’s both the consolidated and deconsolidated portions, Jeff. So because as you know from an operational standpoint, we continue to run it as one big family of companies. So they have done a really nice job and so when we look at their gross margins, it’s more or less same as where we were a year ago in the face of pretty dramatic drop in demand. So yes.

And then just real quick on ACRP, I mean a lot of really good detail there Steve. Can you just maybe give us what happens that would drive this June 2016 date to move materially?

The June 20 date, yes, what would drive that to move materially? I guess if the case took a fundamental shift in direction somehow, the scheduling orders been made, the discovery process is underway leading up to that. There is always something hath could pop up that would require a different scheduling order but so far we have not -- we haven’t seen anything like that. So I think the closer we get to it, the more likely it is to be maintained. So it would be hard for me Jeff to speculate on things that could actually move it to be honest with you. But I think it could, but the number of things it could or so there are so many of them but I would assess the probably of those many being so low. It’s really hard to gauge what -- it is hard for me to answer your question.

Okay, no that’s fair.

Thanks Jeff.

Yes.

Your next question comes from Joe Mondillo with Sidoti & Company. Your line is open.

Good morning guys.

Good morning Joe.

Wondering if you could talk a little bit more about the CPI, this has been a business that’s been challenging for the last couple of years. Now you are exiting a few different facilities or service centers. What is sort of the -- could you give us sort of your take on entering the second half of the year, now going through this, and what is sort of the before and after sort of structure of CPI? I mean are we starting to sort of exit this business or if you can give more color on that, that would be great?

Yes, let me all address it from a strategic standpoint and Milt you can maybe talk a little bit about some of the numbers. Look Joe, this is not something we just [ramped up]. We have been working on this restructuring program for a quite a lot of time to figure out exactly what to do really for frankly for six months. CPI as a business, it’s a global business, as a business it has two main segments served. One is the petrochemical and refining segment which is really the parts and service to large reciprocating compressors, large gas compressors that in refineries and petrochemical plants. These are typically slow speed compressors and they are much larger and they are kind in many cases the heartbeat -- a part of the process in a refinery or a petrochemical plant. The other segment is natural gas processing, natural gas gathering mission storage etc. Those compressors are different, they're high speed compressors and they're remote, they're out in the field and they service the gas industry broadly. Our European CPI business is almost exclusively dominant in the petrochemical and refining segment, very-very little natural gas. But our Western Canada assets were all frankly pointed at the natural gas market and so when we did our acquisitions in CPI five to six years ago, frankly we made a mistake, it's my mistake, I'm not blaming anybody else but we felt like the value proposition that CPI had to petrochemical and refining customers was transferable to the natural gas segment. And what we learned is we were wrong, the value proposition is different, it's much more around price, availability, service, response time, etc. Now in addition to that it was an ill timed move because natural gas as you well know and everyone knows dramatically fell off the table top in terms of pricing and the amount of gas collected in Western Canada that's being sent to the US dropped by I think one year it was 30%, so. And it's getting worse not better. So, what you see in our restructuring efforts now is kind of what we believe are final move to retrench if you will back to our core profitable higher margin petrochemical and refining segment, kind of what we grew up doing. And significantly downscaling our presence in the natural gas, well not exclusively because we do have a couple of larger, larger facilities in larger markets in Western Canada that are profitable even in today's market that we're maintaining. But we're scaling back from that and so we have exited a number of facilities in Western Canada as well as kind of what I would call smaller, more remote parts of the world that are challenged for some reason or another much of which is related to kind of the pressure in the gas market. So we are still, CPI's going to be profitable next year, it's going to be making more money, we've made great operational improvements as I gave an example just the one time delivery just to give everyone a feel for it. But if you look at really every dimension, of lead times, for customers, parts availability, perfect order rate, our cost position, our quality position out of our main manufacturing facilities around the world in CPI. I actually feel pretty darned good about the business and quite frankly some of these remote locations that had been struggling because of the gas market and because quite frankly our value proposition didn't work there. It's been a distraction to the management team at CPI, so as painful as this was for our team to do because you know we downsized a lot of people, it's always a challenging to exit a facility. But as challenging as it was the team I think, the leadership team is really excited about how this positions CPI going forward to do what we do well and we can just get much-much more focus within that, within that team. So, that's a little bit of color let me see Milt if you want to add anything from a financial standpoint.

Nothing Joe, if you have any follow up questions. We'll obviously…

No, that's really helpful, I guess in terms of the financial aspect I would just follow just to clarify the four to five million of savings, that includes any losses you're realizing regarding that nat gas gathering transmission business, as well as personnel expenses, labor, overhead, that includes all that, so that.

Just to clarify Joe, the four to five million included, it was for the engineered products segment, the estimated cost savings, believe we noted this in our, we note this in our earnings release, for the CPI initiative was roughly three to four million and so most of that cost savings, is that CPI, and you're correct, it's cost savings associated with the closure of certain locations that were unprofitable and represents our estimate of what we will realize as a result of the restructuring moves. If you look at, you know if you look at, maybe this is partially response to Jeff's question earlier to about the quarter-over-quarter results Q3 and Q4. We're expecting, we had a loss at CPI over the third quarter we're expecting to have a loss at CPI for the fourth quarter, and this is excluding these additional restructuring charges. Small but nonetheless not make money and part of it is some main efficiencies that we're expecting as we approach this restructuring, there's a lot of activity, a lot of work that's going on and this is a big undertaking. We have a good project team in place, we're going to execute on it, but we got to get through that. So going forward after we get the restructuring program complete we expect we are going to turn the corner, we are going to be profitable, CPI next year as Steve said. Now it’s not going to be a V-shaped recovery by any stretch because we are still dealing with very soft oil and gas markets that are affecting both sides of the CPI business. And I am thinking one is projecting, we are certainly not expecting oil and gas prices to [shield up] next year, I mean they may move moderately up but we don’t anticipate anything that’s going to change the conditions in the certain market significantly as we head into 2016.

Okay. And if you these re-structural changes say at the end of 2014 would CPI be profitable this year?

Yes.

Yes.

Okay. And then just in terms of the engineered products business overall, down 7% on a normalized basis for the first nine months, 8% in the quarter. I guess what I am trying to determine is, how is GGB performing relative to the engineered products segment overall?

Well we had some challenges in GGB Joe, we’ve had a few personal changes that we had to make kind of late first quarter to address operational issues. They’ve has a lot of work going on because they are actually exiting four -- exiting or moving four locations. And at the end of the day we will be down in that two locations, right. But we had as I said in the script, I don’t refuse I ever visited Thorofare, New Jersey but we had two -- we’ve always had two plants there. One is kind of the core metal [vacced] and one is where we do our filament wound product line. And that was a small crowded leased facility. And so we moved that facility literally, it’s right near each other and we moved that into a facility literally across the street that we now own. So that move is just a move from one to the other in a larger plant to give it room for expansion and plus removing our Chicago location and consolidating that into this one location. That project is still underway. The filament wound piece is done. Chicago is underway currently. In Germany, we had a solid polymer operation that also was coming of leased and we were able to consolidate that into our existing facility in Slovakia and move a small piece of it to our facility in Germany. So we are exiting that. So that’s a move from one plant kind of split into two and then finally our landlord in China had indicated to us a while ago that we -- that he was not going to let us stay in the facility that we were in, that has a co-located GGB and Stemco operation. And so to keep us from being forced to move again and give us more operating flexibility were building the facility that we own near the other one but in China. And that project is underway currently and we will extend a little bit into the first quarter of next as well. So GGB has had a lot going on from a project perspective as well and then in addition to that obviously they have gotten a lot of market headwinds and they are mostly, a lot of it’s outside U.S. So they’ve got the currency and I know that’s normalized down. However, over the course of this year, we’ve seen again a dramatic improvement in our factory performance measure in on time delivery, quality and the new products and platforms that we now are working to have some in the market and have some underway. So also we are expecting GGB to have even the same demand environment. Next year we are expecting GGB to have a much better 2016 than they did ‘15.

Okay, so I understand that industrial side of that business is probably challenged a lot, just given what’s going on.

Yes, and that’s a lot higher margin than the auto side, right.

Yes, right.

This has been decent in Europe and in the U.S. North America but of course the mix is [hurt] and so I mean.

Right, understandable.

Yes, yes.

So relative to the 7% or 8% normalized engineered products growth, are they doing worse or was CPI dragging that down even?

Oh no CPI dragged it down more.

Okay. So they are sort of may be low single-digits, mid single-digits or something, declines GGB?

That’s probably about right.

Okay. Just lastly, the corporate costs have been bouncing around in the last few quarters. First quarter was 9 million, second quarter 3 million, third quarter 6 million. What is going on there I guess and sort of what can we expect this, maybe as a decent run rate or is it just -- for whatever reason is it going to bounce around?

Yes, there a couple of factors. One that Joe we expect is part of our budgeting process for the year and some of our allocated costs to our divisions changed which affects things a little bit. And then the most significant thing that was not expected the first of the year is how the year was going to turn out and the impact that was going to have on incentive compensation accruals. So those are the largest two reasons why you're seeing some significantly lower costs of corporate expenses year over year both in the quarter and year to date.

So, are those going to smooth out going forward and you know is 6 million of that run rate or what sort of normal.

6 million will be a little low on the run rate.

High single digits, or.

Yes, yes.

Okay, thanks a lot, appreciate it guys.

Your next question comes from the line of Justin Bergner, with Gabelli. Your line is open.

Good morning. Thank you for taking my questions. My first question relates to tailwinds that you noted which I guess is unusual from industrial companies to talk about tailwinds.

They're not very strong Justin. Anything that's not a headwind, feels like a tailwind in today's world. So stable feels good.

I mean I guess even if nuclear and petrochemical are only modestly supportive, sort of what are the drivers there that are leading to you know positive trends, or what's, I don't know if that was the case before this quarter or if it sort of inflect parts of last quarter, I guess…

No, no petrochemical has always been decent because of low natural gas prices frankly. Low energy prices is good for chemical. So you know that's where a lot of our flagship product in [indiscernible] goes, so that and there's a fair bit of construction under way in petrochemical expansion. It's probably not the furrow that everybody felt a couple of years ago but many projects continue, so that's why. Keep in mind our exposure in US to those markets is primarily in GST.

Okay, great and on nuclear.

Well nuclear is, nuclear is just a stable business for us. It as you know nuclear power plants are base low globally and so we have a very good position in a number of attractive product lines and so you know a lot of that's aftermarket related you know when the nuclear power plant gets its maintenance cycle which kind of happened that can be a little lumpy year to year but not that lumpy and then we continue to win new, as the new reactor activity in China has continued, it's kind of come back since the slight lull after Fukishima, yes we continue to win that business as well. So nuclear is now, the world at least as we see it is not prepared to build a whole bunch of new nuclear power plants. China's really leading the way in that, but it's a solid aftermarket business for us and we do well in that market, so it's very stable. Gosh, even we had the recession five six years ago nuclear stayed stable throughout that, because those plants always run.

Okay, great, thank you and then the other tailwind mentioned was strong orders in power systems, is that something that you expected sort of earlier in the year or has that been surprise to the positive.

No, I think we pretty much expected it, it's a reasonable lead time and we see that come in even for parts, some parts are not, but a lot of the parts are for, for large ship avails, so they're scheduled ahead of time, we can see which, how many orders come in from the Navy and other sources that are ahead of time, these are planned shutdowns and so forth. Once in a while we'll have a nice you know emergency order for something that breaks, but most of it is planned work, and you may Justin before you were really tracking us closely, [indiscernible], it was last year and the year before, I think it was last year actually that we had a unusually weak avail schedule for navy ships that actually happened to have our engines on them and obviously we had the sequester problem, a lot of goes well, so when you look at the cost for FME on parts, that can throw you off. So I say we're just back now, I would call it a mid cycle I mean hasn’t been a spectacular year but it's been a good year and it’s certainly been a lot better than last year, on the part's side.

And even though our part sales this quarter were slightly below a year ago, our parts backlog is very positive.

And year to date.

Okay, one driver that wasn't talked about was any mix effects that might be occurring in your sealing products business to the positive but the negative was that a contributor to margin strength this quarter or was it most entirely cost cutting.

No, I think it was mostly, I mean in Simco we still had a mix actually all year and even in the third quarter a mix relative to history now. A tougher mix that has been more OE than aftermarket, a higher share of OE than we seen historically which hurts margins there. Technetics is probably steady in terms of their mix and Garlock, what would you say about the mix effect there?

Yes.

It’s been mostly cost reduction.

Mostly cost reduction, yes.

Yes.

Okay. Great. And one more if I may. Acquisitions you mentioned a goal to improve EBITDA from recent acquisitions 20 million, to 25 million over two years. I think you indicated they were tracking somewhat ahead of your plans. Could you maybe frame what the 20 million to 25 million goal, how that compares to earlier goals?

Well look when we -- every time we buy a business right, we have a justification case that lays out what the team, what we have basically, what we buy the business for? And so based on what we’ve experienced with Fabrico and what we’ve experienced already frankly with the air springs business and what we’ve -- what our integration teams have identified in terms of cost reduction and always looking at what we are going to do on margins and so forth. We’ve kind of revised up our internal expectations in particular for those two businesses. And then the TrailerTail business we did have a couple of what I would call speed bumps this year. We had to fight a competitor who infringed on our patent and that was legal expense associated with that and we had -- again we won and they now have an injunction, they are not allowed to sell the product in the marketplace, they were gaining momentum there and then we actually also inherited early on a quality problem in the field that when we bought the business we were not aware of. So this will be part of our indemnity claim with the seller. But it was -- it took us a couple of months to get that problem fixed and corrected in the field, then there was an engineering design solution that has been put in place a number of months ago. So even TrailerTail business, which is a little bit behind, our expectations this year, we have just as much confidence as we did before. So we are not revising that internal target up. But we are certainly not taking it down. So in aggregate that will move these businesses in total from -- our normal expectation is a hurdle for acquisition is about 20% return and it will move us from low 20s to mid to high 20s. So we are very excited about it. So these are not just -- I wouldn’t call them goals for improvement, they are kind of consistent with what we have done. We just realized as we got into them that there is more potential there than we originally thought and the integration is going well. The Fabrico team and the Technetics team with them have identified and captured extra [arrays] and synergies that we didn’t have in our justification case and their volume has been great. The team is doing a great job. So yes, we are excited about all three of those. I think this shows when we buy these things right and they have a good strategic home with the business that they are integrated into, it’s great for our shareholders. So we are excited about it.

Great. Thank you for taking my question Milt.

Yes.

Your final question comes from Todd Vencil with Sterne Agee CRT. Your line is open.

Thanks. Good morning guys.

Hey Todd.

Hi Todd.

Most of my questions have been answered. You guys have given a lot of good information. I wanted to just come back around to the engineered products business as well as the sealing products business a little bit and quick about what margins there can look like going forward, I mean I heard what you had to say cost savings from the restructuring and things like that, and I appreciate that. But if still have to look at engineering products down the road both as a result of this restructuring and then maybe someday will have more decent markets. I mean how are you thinking about margins in that business longer term?

You are talking about the aggregate for this segment here?

Yes, unless you want to break out, breaking out the revenue for me.

The wild card what gives reason -- that gives me reason to [follow] is the wild card is trying to figure out how quickly we’re going to see improvement at CPI affecting what will be with respect to this business given the change in the mix from -- to more heavily petrochem and refinery and less natural gas and so what the conditions are going to be in the oil and gas industry. So if you -- that’s surely is wild card of it and how long is that going to take. If you look historically at the segment our margins in the segment in 2014 were jumped up because we had a better year at CPI, for the segment we were about 7.5%, the year before we were at 5%, the year before that we were 5.5%. So I mean I think we should get to the point with this restructuring in CPI to kind of low double digits in the segment. And maybe when the volumes, global conditions, global growth improves, we get more volume in CTD which leverages very well as we've discussed in the past. And we have a stronger recovery in the oil and gas markets, perhaps we exceed that.

Okay, so just to be clear, just the restructuring all be itself, we think we can get back to low double digits and then a better market making it to I guess we'd be in mid teens.

I don't think we can expect that next year. Now the three to four million of savings from the restructuring are not going to move us back to double digit.

Right, okay. I understand.

So you know, we may rebound back to where we were last year in 2014, where I think what we've done in CPI and GDB this year I certainly would expect a high single digit margin next year.

Okay.

Mid to high. So let's just, yes in that neighborhood. But again that's still reflects, that doesn't reflect really any improvement in the market.

Okay, got it. Thanks for that. And then similar question just on sealing. There's been a lot of headwinds in the businesses [indiscernible] mix around but if, it's not like I'm asking you to parse through a restructuring on that one, but even you're sort of consolidated sealing and GDB if we can sort of think about it separately. If you take out some of the volume headwinds and the mix effects that we've seen you know how do those shake out longer term.

You talking about sealing.

Sealing, yes sir.

Look there's one factor that's important because the Airspring's business is a large business sales wise. And I think we shared when we bought it that the margins are not at the level first of all not at the Simco level, second of all not near at the level that we're going to get them to. However it's going to take some time. We're qualifying a bunch of new suppliers for reducing costs and we're focusing on our after market value proposition. Those are going to take some time, and even if we're successful we never anticipated that they would get that product line ever has the potential to get to the margin levels of Simco overall. But again this business we paid four times for, so on a return basis it's kind of off the charts actually, if we're able to do what we're pretty sure we're going to be able to do. But it’s still, even at the end of it it's going to mix down the sealing margins down because it's such a, it's just a large revenue business. So in sealing what would you say Milt if you.

I don’t think, I think where we perform historically in sealing you know is representative, yes we're down a little bit because of volumes, particularly if you look at the consolidated part of Garlock it's in sealing. You look at it from a consolidated basis as opposed to a pro forma basis, you know margins have suffered a little bit this year because of the heavy upstream exposure that we have and the consolidated part of Garlock. So we expect some marginal improvement, but we've had, we've had some pretty good results and once again it’s all going to be driven by volume and how you see the future. 2016 if you assume that there is not a lot of improvement in market conditions hopefully some as we enter the second half of the year. We should expect some improvement.

So that, we thinking, naturally had a good market, maybe that's a mid teens margins business, not like the high teens that we saw before some of the acquisitions that you guys did a few years ago.

Yes, I think it's going to be, it's going to be, I would say it's going to be in the mid to upper teens.

Got it, okay that's helpful, thanks for the help.

What we would expect.

Got it, and Milt I just want to say thanks for those additional schedules, it's helped a lot this morning.

Good, good.

That's all I got.

There are no additional questions at this time, I turn the call back over to Dan Grgurich.

Okay, well thank you all for joining us this morning, have a good day.