Carlisle Companies Inc (CSL) 2016 Q2 法說會逐字稿

Good morning. My name is Jennifer, and I will be your conference operator today. At this time I would like to welcome everyone to the Carlisle Companies Inc. second-quarter earnings conference call.

(Operator Instructions)

I'll now turn your conference over to Mr. Chris Koch, President and CEO. You may begin your call, Sir.

Thank you, Jennifer. Good morning, and welcome to Carlisle Companies second-quarter 2016 conference call.

On the phone with me this morning are Steve Ford, our Chief Financial Officer; Julie Chandler, our Treasurer; and I would like to welcome, for the first time, Titus Ball, our new Chief Accounting Officer.

On this call, I will be discussing our overall second-quarter performance and the 2016 outlook. Steve will review our segment performance, balance sheet, and cash flow.

Before I discuss our results in more detail, I would ask that you review slide 2 of our presentation entitled forward-looking statements and the use of non-GAAP financial measures. Those considering an investment in Carlisle should read these statements carefully along with reviewing the reports we file with the SEC before making an investment decision. These reports explain the risks associated with investing in our stock which is traded on the New York Stock Exchange under the symbol CSL.

As announced this morning, Carlisle reported record earnings per share of $1.75 in the quarter, a 22% improvement over the second quarter of 2015. We also generated record EBIT margin of 17.9% in the second quarter. We are extremely pleased with these record earnings, and they are a reflection of our focused efforts to invest in our businesses, pursue acquisitions and drive a culture of operational excellence throughout Carlisle.

Please turn to slide 3 of the presentation to begin our review of second-quarter results. Net sales were up 1.2% in the quarter, reflecting 0.7% organic sales growth and 0.5% contribution from the acquisitions of Micro-Coax, in the Interconnect Technologies segment; and MS Powder, in the Fluid Technologies segment.

Our 0.7% organic net sales growth generally reflects the current demand in our core markets, partially offset by sales declines, relative to our strong pricing discipline in Canada, challenging economic conditions in the Middle East, and continued weakness in CBF industrial markets. Overall Carlisle's core markets remain favorable, and we continue to affirm our positive outlook for the year.

Our EBIT was up 21% in the quarter, and EBIT margin increased 290 basis points to 17.9%, setting a record margin for a quarter. These results reflect robust demand in the US commercial roofing market; continued selling price discipline by CCM, along with a favorable raw material environment; sales growth at CIT and CFT; and solid execution of the Carlisle Operating System at all our businesses.

Income from continuing operations and earnings per share were each up 22%. Free cash flow was $43.7 million in the quarter adding to the strong year-to-date cash generation of $134 million, up 16.5% over last year.

At CCM, sales in the US were up 5%. Demand in the US for commercial roofing and commercial insulation continues to be robust, driven by growth in new construction and reroofing demand.

In addition to CCM's strong US performance, sales into Europe grew 2% in the quarter, a solid result given the economic conditions in that region. These positive results were offset by lower sales to Canada and the Middle East.

In Canada, revenues were lower in the current quarter, due to the non-recurrence of certain low-margin sales, contributing to improved product mix in CCM. In the Middle East, we experienced project delays due to the decline in oil prices. Continued favorable selling price raw material dynamics along with further COS driven operation efficiencies contributed to outstanding earnings leverage at CCM in the quarter and a record EBIT margin of 22.8%.

CIT sales in the second quarter met the expectations for higher growth we had indicated would occur as we moved further into the year. CIT achieved 4.4% year-over-year organic sales growth in the quarter, up from the 1% growth in the first quarter. Operating leverage was also strong with EBIT up 10%.

Aerospace demand continues to be strong, and CIT achieved significant sales growth in medical, up 8%. In the quarter, we began shipments of CIT's SatCom antenna adapter plate from our Franklin, Wisconsin facility. We remain extremely pleased with the market response and the strong growth potential for this aerospace application.

We are also very excited to have added the Micro-Coax businesses to CIT on June 10. Micro-Coax provides high-performance radiofrequency microwave applications and expands our capabilities in a number of high-technology markets, including space and defense. Integration of the Carlisle Operating System at Micro-Coax is already underway, and we are already seeing significant cost savings potential and revenue opportunities.

Fluid Technologies sales and earnings results were also in line with our expectations for the second quarter. Organic sales grew 6.6% on higher sales outside the US. As a reminder, over 60% of CFT sales are outside the US, and CFT high single-digit organic sales growth is impressive considering global economic headwinds and reflects focus by the team on its overall growth strategies.

As planned, we incurred $1.7 million of additional expense to integrate the CFT platform globally and drive our key initiatives. These initiatives include consolidation of our footprint, expansion of our manufacturing capabilities to vertical integration projects, and staffing to support CFT's growth strategy.

These significant and ongoing investments are reflected in CFT's EBIT results this quarter and are expected to continue for the remainder of 2016. In addition, the ongoing staffing investment and integration of MS Powder will impact EBIT balance for the rest of the year.

Carlisle FoodService sales grew 2.4% in the quarter, and its EBIT grew 14% as CFS continues to enjoy significant earnings leverage from increased sales and improvements in core operations. This focus on operational excellence has continued to deliver improvement in EBIT for CFS as evidenced by the favorable earnings leverage and reflects solid execution of their key strategies that they began in 2014. This is the fourth consecutive quarter of sales growth and margin improvement at CFS.

Carlisle Brake & Friction sales performance in the second quarter continue to be negatively impacted by the ongoing weakness in global commodity markets. Carlisle Brake & Friction sales declined 14% in the quarter. Our large, global OEM customers continue to report lower sales volume and a negative outlook.

We are not planning for a recovery in 2016. The CBF team continues to focus, though, on reducing costs, generating positive EBIT and cash flow, as well as pursuing new sales and new product initiatives in these tough market conditions.

Slide 4 is a recap of our sales results. Total sales growth was 1.2% for the quarter, comprised of 0.7% organic growth and 0.5% acquisition growth. Foreign exchange had a negligible impact to the quarter.

As expected, selling prices at CCM and CIT had a negative 2.2% impact to sales. Sales volume was up 2.9% driven by organic sales growth at CIT and CFT.

Turning to our margin bridge on slide 5, EBIT margin increased 290 basis points in the quarter to a record 17.9%. The non-recurrence of $10.7 million in acquisition costs from the Finishing Brand acquisition last year had a 100 basis point positive impact for margin this quarter. The net impact of selling price and raw materials also had a positive 100 basis point impact to our margin. Volume was positive 40 basis points and COS was positive 90 basis points.

Steve will next review our second-quarter segment performance balance sheet and cash flow, and after Steve's review, I will discuss our outlook for 2016. Steve?

Thank you, Chris. Good morning. Please turn to slide 6 of the presentation.

At CCM, sales increased 0.8% in the quarter reflecting higher demand in the US commercial roofing market offset by lower international sales. Increased volume was partially offset by lower selling prices in a favorable raw material cost environment.

As Chris referenced, CCM sales into Canada had a difficult comparison to the prior-year, as certain lower margin sales did not recur in the current quarter contributing to overall improvement in product mix. Orders from the Middle East declined due to holds placed by the Saudi government on project funding. Offsetting these sales declines was an increase in sales into Europe of 2%.

CCM's EBIT grew 19% in the quarter and EBIT margin increased 340 basis points to a record 22.8% reflecting continued selling price discipline, lower raw material costs, savings from the Carlisle Operating System, reduction in lower margin international sales and higher sales volume.

Please turn to slide 7 to review CIT's results. CIT's net sales increased 5.6% in the quarter reflecting organic growth of 4.4% and contribution of 1.2% from the acquisition of Micro-Coax. CIT's organic sales increase reflected higher volume of approximately 6% offset by slower selling price.

Sales to the aerospace market increased 5% primarily on increased demand for in-flight entertainment and connectivity applications.

Medical sales grew 8% in the quarter on increased demand in the medical device market and new product development.

CIT's EBIT margin increased 70 basis points to 18.9% primarily due to savings from COS and higher sales volume partially offset by lower selling price. Included in CIT's EBIT in the quarter is $1 million in plant startup costs for its new Dongguan, China facility and $900,000 in charges related to the acquisition of Micro-Coax, a total impact to CIT's EBIT margin of 90 basis points. We anticipate a further $1 million in Micro-Coax acquisition related costs for inventory step-up in the third quarter and additional plant startup costs for the remainder of 2016.

Shipment of CIT's new SatCom product from our expanded Franklin, Wisconsin, facility began in the second quarter.

Construction of CIT's new state-of-the-art 260,000 square foot production facility in Dongguan, China, which will support expected growth in its medical business, also remains on schedule. Production in this new factory also began in the second quarter. We expect the ramp-up of operations in Dongguan to continue throughout 2017.

As Chris noted, we completed the purchase of Micro-Coax on June 10. This acquisition expands CIT's capabilities in the satellite and space market, as well as highly advanced offerings in the military defense market. We expect Micro-Coax to be accretive to CIT's EBIT in the first 12 months.

On slide 8, CFT sales grew 10.5% in the second quarter representing 4.7% growth from the acquisition of MS Powder in Switzerland and 6.6% organic sales growth. Foreign currency fluctuations had a negative 0.8% impact to net sales. CFT achieved significant volume growth in Asia and Europe from execution of its global sales growth strategy.

CFT's EBIT margin in the quarter of 10.7% includes 680 basis points of intangible asset amortization expense and 250 basis points, or $1.7 million, of restructuring costs. The MS Powder acquisition had a 150 basis point dilutive impact to CFT's EBIT margin in the quarter as integration of this powder finishing system business continues.

Turning to slide 9, CBF's sales declined 14% in the quarter. Foreign-currency had a negligible impact to CBF sales results for the quarter. Sales to the construction market were down 16%. Sales to the mining market declined 15%, and sales to the agricultural market declined 3%.

CBF's EBIT margin declined 300 basis points to 6.5% as a result of lower sales volume, partially offset by actions taken to reduce costs through sourcing efforts, operating efficiencies and reduction in SG&A expense. CBF has also increased its positive cash flow generation in 2016, achieving free cash flow conversion well above 100%.

Please turn to slide 10 to review FoodService's results for the quarter. FoodService's sales increased 2.4% this quarter. Sales to the food service market grew 6%, reflecting higher sales across all categories in part due to order fill rate improvements.

Net sales to the healthcare market declined 3% on lower equipment sales. Sales to the janitorial sanitation market were level to the prior year. FoodService's EBIT margin grew 130 basis points to 12.9% on higher sales volume, savings from COS, operating efficiencies, and lower raw material costs.

Please turn to slide 11 of the presentation as we review our balance sheet. As of June 30, we had $398 million of cash on hand.

We used $95 million of our cash in the quarter to acquire Micro-Coax. We continue to have all $600 million of availability under our credit facility.

In the second quarter, we returned $31.9 million to our shareholders, consisting of $19.5 million in dividends and $12.4 million in share repurchases. Through the second quarter 2016, we have purchased a total of 1.9 million shares, returning $178.1 million to our shareholders since we began our systematic repurchase program in the first quarter of 2015.

Our balance sheet remains strong. At June 30, our net debt-to-capital ratio was 12%. Our net debt-to-EBITDA ratio was 0.5 times, and our EBITDA-to-interest ratio was 20.3 times. In August of this year, our $150 million senior notes are due, and we currently plan to repay these notes with cash on hand.

Turning to slide 12, our free cash flow for the second quarter was $43.7 million compared to $84.6 million in the prior year. Year-to-date, we have generated free cash flow of $134 million compared to $115 million in the prior year period while increasing our capital expenditure investments.

Turning to slide 13, our average working capital as a percentage of annualized sales for the second quarter 2016 was 18.7%, level with the prior year.

And with those remarks, I will turn the call back over to Chris.

Thanks, Steve.

Please turn to slide 14 as we discuss our 2016 outlook. Consistent with our view from previous quarters, we expect Carlisle's total sales growth to be in the mid-single digits in 2016. While global economic headwinds have increased since the beginning of 2016 and we've added the uncertainty of Brexit, we feel that, on the whole, we have the strategies in place to deliver sales growth and earnings leverage in 2016 for the Carlisle Companies.

By segment, at CCM, our expectations are that demand in the US market will remain robust, that relative selling price discipline will continue, and that our international sales situation will remain challenging. We expect 2016 to be a record earnings year with overall revenues growing in the mid-single digits.

At CIT, we expect high single-digit growth the full year, including sales contribution from the Micro-Coax acquisition. Demand for our key verticals in aerospace and medical remain strong. We are anticipating further sales growth in the second half of the year from increased aircraft production and the ramping of our SatCom product shipments. CIT remains on track for another record year of sales and earnings growth.

At CFT, we continue to plan for mid-single-digit growth reflecting continued progress on its global sales growth initiatives. CFT's new headquarters in Phoenix will be ready in August, and the transfer of certain administrative functions will occur throughout the remainder of the year. We will continue to drive consolidation and manufacturing improvements, and we will continue to execute on our previously stated operational initiatives.

At Carlisle FoodService, following another quarter of positive results, we expect to achieve sales growth in the low single-digit range in 2016 with corresponding EBIT improvement.

At CBF, our outlook remains largely unchanged from the previous quarters. We expect CBF sales in 2016 will decline from 2015 in the high single-digits. The team at CBF continues to focus on sales and new product initiatives as well as operating efficiencies to offset the lower demand.

The impact of the recent Brexit vote on our sales and manufacturing activities in the UK and EU will take some time to unfold as the UK negotiates terms of its exit from the EU. Thus far, we have not seen any immediate material impact, and the currency effect has been very limited.

Our current view is that we do not believe Brexit will have a material impact to our operating performance in 2016, and while staying vigilant to potential changes, we will continue to drive our long-term strategies for growth in the UK and the EU markets.

Corporate expense is expected to be $62 million and D&A is expected to be $139 million. For the full-year, we are planning for capital expenditures of between $90 million and $110 million.

We are expecting free cash conversion to exceed 100% providing us with additional liquidity to pursue our growth objectives while continuing to return capital to our shareholders. Interest expense is expected to be $30 million, and our tax rate is projected to be 33% versus 31.7% in 2015.

Once again, we are very pleased with our record results this quarter and the disciplined execution of our strategies. We continue to be on track for another record year at Carlisle.

This concludes our formal comments on our second-quarter 2016 results and the 2016 outlook. Jennifer, we are now ready for questions.

(Operator Instructions)

Jim Giannakouros, Oppenheimer.

Good morning, everyone.

Good morning, Jim.

Could you remind us how big the Middle East is in CCM? And, also, are there different price-cost dynamics there, or materials, driving lower mix there versus the experience in the US?

Jim, the Middle East is relatively small. It is certainly well below 5%, but Middle Eastern sales were down 90%. And, just in general, international sales represent 14%, 15% of CCM's total sales, and international sales on a whole were down 28% and that is why the second quarter ended up only being up 1%.

And Jim there is no real difference in the raw material base or that dynamic going into the Middle East, either.

Got it. That down 90% explains it. I thought it was bigger. I wasn't expecting that for it to be down that much.

And in the US, was there any pull forward or anything you would call out in that 5% volume growth?

No. No, not really. Very good quarter in the US. No real pull forward.

I'm sorry if I missed it in your prepared remarks, but did you disclose, or can you, the price-cost impact to margins, specifically in CCM?

The net was a positive $7 million.

Was pricing down in the quarter?

Pricing was down about 3%.

Okay. And, I will get back in queue, but one quick one. The $2 million restructuring in CFT, is that expected to be ratable through the second half or is that a 3Q event?

We will see approximately the same level of restructuring costs and investments as we move through the rest of the year, Jim.

Got it. Thanks, guys.

Joel Tiss, BMO.

Wow. I didn't think I would make it so quick.

Good morning, Joel.

How's it going?

I wonder, just a little bit of color on a couple of the end markets. Is there any sense that the Ag equipment market is bottoming? That was kind of a small decline relative to what we have seen in prior quarters, and just a quick outlook on the construction equipment end market, too.

Yes. On Ag, we'd like to think it's hit a bottom. We've had a tough time. I don't even think we've tried to call a bottom in the past. But we saw lower declines, which was positive; but yet we saw layoffs at Deere in Moline this quarter, and so I think we are just cautiously optimistic that maybe we are at a bottom, but I'd hate to call it that.

Then on construction, I think there has been some uptick, and as you see by some of the other companies that are in the equipment market, I think Asia-Pacific had a little uptick for the first time in the construction market and I think the US is doing better.

And just on acquisitions, is there anything that is bigger that is out there that you guys -- that makes sense for you? Or do you think that the way that the pipeline is looking that it is going to continue to be a series of these kind of smaller, nichier kind of acquisitions?

Joel, we are seeing acquisitions, or potential acquisitions, of all sizes. I can't really tell you what the next one will be, but they are all out there, big and small.

Yes. I was just wondering about your roughly $1 billion worth of easy availability, is that plenty for what you see out there for the next 18 months or 24 months? Plenty of liquidity?

Yes. I think we are fine, and we have plenty of cash and available liquidity to execute whatever strategies we see in the near future.

That's great. Thank you.

Matt McConnell, RBC.

Thank you. Good morning.

Good morning.

Just hitting on the decline in Canada. It sounds a little like some of that might have been proactive, and this is in construction materials. Are you proactively walking away from business there, and if so, could you size that just so we understand what kind of drag might be coming in the next couple quarters?

Yes, Joe, in Canada we were down 35%, 40% year over year, and as we noted in the comments that was because there was a number of low margin projects that did not recur.

I think we are more disciplined here in 2016, and that is reflected in the quarter. We would expect that to continue. Although I don't expect the year-over-year decline to be as pronounced in the second half of the year as it was in Q2.

Okay. Great.

And then just on the roofing price comment. One of your competitors, I think, was trying to push through an increase? Did you also have any list pricing increases or just what are you seeing in the marketplace? Maybe expectations for price over the next couple quarters.

We saw the pricing action there by one of the competitors, and that rolled out, I believe, in July. You know, our commentary on whether it would stick or not, I would say we would classify it as maybe more of bringing more stability to the market. I wouldn't really want to characterize that prices were increasing but that it brought more stability in pricing to the market. And as we look out, we hope that continues.

There has been, as Steve mentioned, some pricing degradation in each quarter this year. We do think it is relatively stable, and so that is our outlook.

Okay. Great.

And then, last one, real quick, on MS Powder. That added about $3 million. I thought the run rate was around $6 million.

I know the numbers are kind of small, but did that have a bunch of new products coming, or should we expect a run rate higher than the $6 million when you bought it?

The demand, I think, through the acquisition period here and into the second quarter is a little bit lumpy. I think your initial estimate at $6 million to $7 million range for the year is probably a good range. And then I think as we roll out new products which should come in the third, fourth quarter of this year, we should see some uptick as we move into 2017.

Okay. Great. Thank you, very much.

Ivan Marcuse, KeyBanc Capital Markets.

Thanks for taking my questions.

First one. Are you seeing any inflationary raw materials or are raw materials remaining fairly stable? What is, sort of, your outlook looking at the next quarter or two?

Yes, raw materials are pretty stable, Ivan. We don't see much happening on that front. At least not increases.

Okay, and for CBF: I know it tends to be, the second half tends to be a lot seasonally weaker at this sort of level of sales or it is another decline of high single digits or whatever it may be. Can it stay profitable?

Yes. We would like to think it will stay profitable. The team's doing a good job. They have done a good job over the last many quarters now to maintain that, and that is our goal for the second half of the year, is to remain positive.

And Ivan, the revenue comparisons get easier, second half of the year, so we would not anticipate double-digit revenues decline year over year in Q3 or Q4.

And then, within, in CIT, I believe a pretty large customer of yours is talking about extending payments, et cetera. Have you seen any impact from that or any, I guess, initial discussions, or how do you expect that to impact you going forward?

We have not seen any impact, yet. We are very close with that customer, and we are always in discussions, so we are aware of the things are happening, but I can't really comment on what would be happening in discussions in the third and fourth quarter.

I'd just say, we haven't seen anything to date.

Okay. Great. Last question: the bond that you will be paying off. Will there be a cost associated with that, or is that built into your interest expense outlook?

There is no cost associated with the retirement of the bond and, obviously, the interest expense on that note goes away, so it will be positive to results and no incremental cost.

Great. Thanks for taking my questions.

Kevin Hocevar, Northcoast Research.

Good morning, guys.

Good morning, Kevin.

I'm wondering if you could comment on, you mentioned pricing down 3% in CCM, which is a bit of an acceleration from where it has been. It has been down 1%, 1.5%, so I'm wondering if you saw some increased competition during the quarter in that segment?

Yes. I think, again, Chris made the comment earlier about one of our competitors announcing an increase effective for July. We are certainly hopeful that, that provides some stability and improves the pricing environment as we head into the second half of the year.

We did see some, again on the pricing side, the pressure is not across the board. It is not all product categories. It tends to be more on the insulation and in certain regions, and, again, that is what contributed to the 3% decline here in Q2, but we are optimistic with the announced increase by one of our competitors that things will further stabilize.

Okay. And then, typically, when I think about -- when I look back at margins, margins have been phenomenal in CCM. And when I look from the second quarter to third quarter, at least in my model, I've looked back about nine years, it looks like it has always increased except -- so eight out of the last nine years it has increased sequentially, so I am curious how we should think about margins there.

Is it crazy to think margins could be a little bit higher in the third quarter from where they were in the second quarter? How should we think about that?

Kevin, obviously the second quarter was truly an exceptional margin quarter for the business. We were up 500 basis points from an outstanding first quarter; and the 23% margin that we recorded here in Q2 is a record. So this is not -- I think that you need to take that into consideration when you look back at history. And I think as we move into the third quarter, that benefit that we have enjoyed from a raw material pricing standpoint, we are not anticipating that same sort of benefit. So it will certainly be a real challenge to improve on Q2's margins in the third quarter.

Got you. Okay.

And then just final question, and maybe I missed this, but in terms of cash deployment. How should we think of share repurchases going forward?

M&A has been pretty active this year. Completing a couple acquisitions and then you're paying off the -- I think you mentioned you are expecting to pay off that senior note. How do you think of share repurchases, you know, the balance of the year?

Similar to what you have seen in the first half of this year and what we saw all throughout all last year. We are buying on a regular and continuous basis certainly enough shares to avoid any further dilution from equity awards, and I think the levels that you have seen in these last 6 quarters, we would expect that to continue in the second half of the year

Okay. Great. Thank you, very much.

Neil Frohnapple, Longbow Research.

Good morning, guys. Congratulations on a great quarter.

Regarding the CFT segment, could you talk more about the margin outlook for the back half of this year?

Can you give us a sense on whether you would expect margin growth versus the second half of 2015, or will the additional restructuring costs and other initiatives you guys have talked about kind of preclude you from delivering higher profitability?

I think you are going to see, you should see some improvement as we go through relative to the first half of the year. But these projects -- the vertical integration, the footprint consolidation, the staffing levels, adding sales people, this kind of thing, moving the headquarters -- as it continues, I think we will be a little bit higher than the first half, but those will have a significant impact going forward.

Got it. And then will the recent rise in steel prices negatively impact any of your segments such as CFT; obviously it wouldn't impact CCM. But just trying to get a sense for, in the coming quarters, will you guys see any sort of steel cost inflation in any of the segments?

I don't think we will see any material impact from the steel increases.

Got it. And then one final one, can you provide any more detail on the Micro-Coax acquisition? Can we think about margins being additive to CIT's overall margin profile longer term?

Certainly, it's going to take time for that to occur. And then can you just talk about some of the revenue and cost synergies? I think you mentioned COS is already underway.

Yes, the COS is underway. We see some opportunities to invest in capital there. Also, just bringing in the whole Lean Sigma toolkit into Micro-Coax will deliver some nice cost-savings opportunities in terms of factory layout.

When we look to the sales side, there are some very good synergies between our CIT teams and the Micro-Coax teams. We think they have a good, obviously a good sales force and a good product line, and I think bringing that into the fold just creates more opportunities for us on sales.

And we would not expect it to be a dilutive to CIT earnings long term. If anything, with the investment in these space, missile defense, unmanned aircraft segments, we would expect them to be a little bit additive.

Great. Thanks, very much, guys.

Josh Chan, Baird.

Good morning. Good quarter. Just a follow-up on Canada. Did the competitive environment there change, or did you think about, I guess, margins a little bit differently? Can you explain a little bit more about the decision or the strategy to step away more aggressively in that market?

This is a very fluid situation, and just based on where we were in the quarter this year compared to last, there was some business that we pursued last year that we just did not feel was in our interest to pursue this year. It was lower margin, and again I think it was the right decision that the business made. It had a negative impact on overall revenues, but it was certainly very positive to product mix.

I think the comparison gets a little bit easier the second half of the year. We are not going to have quite the revenues decline in the second half as we did in Q2. But in Q2, I think it was the right call that the business made, and that is reflected in the strong margin performance.

Sure. Absolutely. You reported a very good margin there.

And switching over to the fluid margin comment. It sounds like that some of the improvement initiatives could actually result in somewhat of a step up in margin at some point. When do you think we will start to see the benefits of those initiatives?

We have already seen some benefits in initiatives. They have been small, but on COS, for example, we are already seeing some improvements there, in factory layout, and that.

The other improvements in investments really are going to be a little bit staged. If you think of the vertical integration, that will occur -- that return will occur a lot sooner than something on the order of factory consolidation. So I think we will start to see things continue to build in 2017 and 2018 as we execute on those strategies.

But obviously buying machinery, putting it into place, making those major capital expenditures and then changing a factory footprint takes time.

Okay. Great. Thanks for the color, and good quarter.

Thank you.

(Operator Instructions)

Charley Brady, SunTrust.

Thanks. Good morning, guys.

My first question really is on CIT with respect to SatCom. It sounds like it started shipping a little bit earlier than you thought. Can you quantify? I'm assuming it's pretty small in Q2, but can you quantify what that was, and what is your expectation for SatCom sales for the year?

Yes. It was very small. Some very initial -- the beginning of the initial orders there to be shipped, so I would not even want to characterize it in dollar terms on the call. Let's just say it was small, but we did begin shipping.

And then about $10 million is our projection for the second half of this year.

Okay. Thanks. And can you comment overall on the market in commercial aerospace? You have seen a lot of negative commentary from the airshow a week or so ago from Boeing and from Airbus: Airbus cutting back on some of their shipments, Boeing doing the same.

It doesn't really seem to be having any impact on your outlook for the aerospace segment. Can you just kind of speak to how you are being insulated from that and what is driving that?

Well I think when you look at the Airbus and Boeing, these are big companies with a big portfolio.

We know, for example, Airbus with the A380, there are issues there. They've been widely publicized. We also know there have been issues on engine delivery and other things.

But for our big platforms, the 787 and that, we still see good demand. We think those planes are rolling out.

They are well-accepted in the marketplace. And in the long-term, traffic patterns that we see and demand from customers for air travel around the globe just continues to really point towards a very favorable market for us.

So I think one of the things is the platforms we are on; one of the things is the market for the planes we are on; and then lastly, we continue to introduce new products and gain share on planes, and a great example is SatCom and how the CIT team has expanded their presence on the airframe.

Thanks. And just one more and I'll get back in the queue here. Just on CIT. I don't know if I missed it, or not, the commentary on lower selling price. Can you quantify that?

Just under 2%. About 1.5%.

Great. Thank you.

Liam Burke, Wunderlich.

Thank you. Good morning, Chris. Good morning, Steve.

Good morning, Liam.

On the fluid technology side, you had very strong growth organically. You highlighted two geographies outside US.

Were there any particular verticals within those geographies that were stronger?

Really the core verticals were strong. The transportation, the general industrial were really strong in both those regions.

Okay. Thank you. And just getting back on the pricing on CIT. Is that within any particular vertical? You quantified it, but is that across-the-board or within any particular vertical?

A combination of commercial aerospace and a little bit on the medical side.

Okay. Great. Thank you.

You are welcome.

At this time, there are no further questions. I will now turn the conference back to Mr. Koch for his closing remarks.

Thanks, Jennifer.

This concludes our second-quarter 2016 earnings call. I want to thank everyone for your participation, and we look forward to speaking with all of you at our next earnings call. Thanks, again.

Thank you, ladies and gentlemen.

This does conclude today's conference call. You may now disconnect.