Enpro Inc (NPO) 2012 Q1 法說會逐字稿

Good morning. My name is Stephanie and I will be your conference operator today. At this time, I would like to welcome everyone to the EnPro Industry's First Quarter Earnings 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. Don Washington, Director of Investor Relations for EnPro, you may begin your conference.

Thank you, Stephanie, and good morning everyone, and welcome to our quarterly earnings conference call. As usual, in a moment, Steve Macadam, our President and CEO, and Alex Pease, our Senior Vice President and CFO will review the results for the first quarter of 2012. I will remind you that the call is being webcast at our website, EnProIndustries.com, where you'll also find the slides accompanying the call.

This morning, you may hear statements during the course of this call that express a 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, 2011. We do not undertake to update any forward-looking statements made on this call to reflect any change in management's expectations or any change in assumptions or circumstances on which such statements are based.

You should also note that EnPro owns a number of direct and indirect subsidiaries. From time to time we may refer collectively to EnPro and one or more of its subsidiaries as we or to the businesses, assets, debts or affairs of the EnPro's or a subsidiary as ours. These and similar references are for convenience only and should not be construed to change the fact that EnPro and each subsidiary is an independent entity with separate management operations, obligations and affairs.

I also want to remind you that our financial results reflect the deconsolidation of Garlock Sealing Technologies LLC, Garrison Litigation Management and their subsidiaries effective June 5, 2010. These entities have been de-consolidated from EnPro's results and will remain de-consolidated during the pendency of the Chapter 11 legal proceedings to resolve asbestos claims against GST. We refer to this as the asbestos claims resolution process or ACRP, and you will hear us use that acronym during the call today. GST's results are presented separately in our earnings release.

I'd also like to remind you of our Investor Day in New York on June 19. We sent out invitations earlier this week. The half-day event will include presentations by the senior managers you've seen named on this slide. You can access our Web-based registration system by following the RSVP link that you see on the slide or by selecting the Events tab in the Investor Relations section of our website.

In any case, we've got an exciting and informative day lined up for you and we hope you'll be able to join us.

Now, I'll turn the call over to Steve.

Thanks, Don. Good morning, everyone, and thanks for taking the time to dial in this morning. Sales for the quarter were up 16% versus a quarter a year ago. 5% of that growth was organic driven by a combination of volume, mix, and pricing, and 12% came from acquisitions that completed last year, which included PSI which is now included in the consolidated part of Garlock; Mid Western Companies, which is now part of CPI; PI Bearings, which is GGB; and Tara Technologies, which we combined with our other units -- the other units of our high-performance sealing business to create the Technetics Group, which of course is also part of the sealing products segment.

The integration of these businesses is going actually quite well. Through the end of the first quarter, we've really completed what I would describe as the heavy lifting of the integration, including facility consolidations and restructuring, and some redundancy eliminations, et cetera, as well as an integration of the sales forces and the product lines and so forth.

So we feel very, very good about where we stand on those acquisitions relative to our original plans for integration. Combined, these added almost $32 million of sales for the first quarter and made a modest contribution to segment profit. Our segment margin moved back to the mid-teens, which is more normal level for us as we discussed in the fourth quarter of last year. Still a little bit below 2011 Q1.

And those differences reflect two primary factors. The first of which is our mix has shifted a little bit towards OEM markets as we've described in the past. And, second, there were acquisition-related expenses that created about a point of decline in those margins in the quarter, which was approximately $2.7 million, roughly half of which was one-time restructuring events that happened in the quarter, and other half, from increased amortization.

Pretax income is about the same as it was in the first quarter of 2011, but a higher tax rate led to lower GAAP earnings, which were down about $0.07. Adjusted EPS was about the same as it was the first quarter of last year.

Overall, we felt like it was a decent quarter. We feel like that we're well-positioned for the rest of the year and look forward to continued progress as we go forward. The second quarter is also off to a good start with the acquisition we completed for Stemco about three weeks ago. We acquired a company called Motorwheel which manufactures lightweight brake drums for heavy-duty trucks. This very nicely fills out Stemco's brake product line, which now includes automatic brake adjusters, friction material, brake shoes, and now these brake drums.

Motorwheel makes a premium product that has longer life and better performance than the average heavier weight cast drums. And the lightweight drum improves the safety, fuel efficiency, and allows the truck to carry a bigger payload. The Motorwheel business has a 60% share today of the lightweight market, which makes up only about 15% of the total market for brake drums.

So our intention is to grow the lightweight segment of the market, utilizing our world-class sales force in Stemco and our go-to market model, which has about 5 times the number of actual sales folks versus Motorwheel and over 10 times as many distributors as they have used as a separate company. So we completed this deal for cash of about $85 million of which we borrowed against our credit facility. This is a great opportunity for Stemco and should contribute about $35 million to our 2012 sales.

Let's turn for a second to the ACRP. We're pleased with actually three recent developments that we've seen in the court. Judge Hodges, who's the bankruptcy court judge in the GST case, overruled the other side's objections to the mesothelioma claimant questionnaire and compelled the non-responding claimants to comply. You may recall that there were originally 5,813 mesothelioma claims in the GST database when GST entered bankruptcy.

As of March 1 of this year, fewer than 600 or only about 10% had actually responded with questionnaires that GST deemed substantially complete. Of the balance, 1,558 were eliminated because their claims had been dismissed or their counsels had acknowledged that they don't have a claim or their claims were not from mesothelioma or for some other reason, and 821 had not responded to the questionnaire at all. Of the 3,434 questionnaires that were actually submitted 2,870 of those were deficient in some key respect.

So the judge ordered claimants who had not completed questionnaires to do so and claimants who had returned incomplete questionnaires to complete them within 60 days of March 16 when he sent an order to the claimants' counsel. He also ordered counsel to GST and counsel to the claimants to confer in attempts to resolve disputes about the completeness of the information. GST's counsel and experts are reviewing and analyzing these responses as they come in.

The second point, Judge Hodges also ruled that the ballots filed in previous bankruptcy cases are public record and that GST is entitled to a subpoena and receive copies of these. You may recall that these ballots indicate claims against other companies and are important to GST as they clearly point out other far more serious exposures to insulation and other types of products are far more dangerous than anything Garlock ever made.

That process is ongoing and GST counsel and experts are now receiving and reviewing the voting records of claimants in a number of prior cases and eventually will get all significant cases that have gone before us. We're confident that the information will demonstrate clearly the double-dipping practices that we've talked about for years and will be very valuable to GST in its estimation case.

In a third positive development, Judge Hodges granted GST's motion and set a trial to estimate allowed claims both current and future on the basis of their merit. He stated that GST would be permitted to put on its science-based causation case to refute liability. As we've maintained from the outset, we believe the science demonstrates clearly that GST's products were safe and that, therefore, the plan it has proposed provides more than ample funding to cover any and all of GST asbestos-related liabilities.

The judge allowed the claimants represented -- he also allowed that they would be permitted to present their theory that current and future claims should be valued based on GST's settlement history in the years prior to the bankruptcy filing. So the judge set the date for the beginning of the estimation trial for December of 2012.

The final development that I want to make you aware of is something we've anticipated and shared with you from the very beginning of the ACRP process. Late last week, the asbestos claimants committee and the future claims representative filed a motion asking the court to allow them to file a complaint that alleges claims against EnPro and various affiliates. We expected this because this is standard operating procedure for the asbestos claims bar.

They're following the same playbook that they've followed in many previous asbestos bankruptcy cases, seeking to impose a subsidiary company's asbestos liability on its parent and affiliates based on allegations of domination, control and breach of fiduciary duty. In our case, the claimants allege that there was fraudulent intent and a breach of a fiduciary duty in connection with GST's 2005 transfers of certain unrelated businesses, primarily Stemco and the North American GGB businesses to other EnPro affiliates.

Those transfers were in exchange for full and fair consideration, both the amount and the terms of which were set by and opined on by a respected independent third-party valuation firm. As you know, these transactions were the source of the large promissory notes that have resulted in significant annual interest payments from consolidated EnPro affiliates to GST. Yet, the claimant representatives referred to this debt as illusory.

We're confident that every single one of their claims and allegations is unfounded, spurious, time-barred, and inappropriate, and we'll defend our company and our affiliates, and we assure you that we will not succumb to these pressure tactics now or any time in the future. We continue to prepare to assist GST in its case and defend the attacks against us. At the same time, we're also active in supporting nationwide efforts to bring positive reform to what continues to be a broken asbestos claiming system.

The week before last, I was in Washington with representative of the US Chamber to support the further Asbestos Claims Transparency Act, or as it's referred to, the Fact Act, when it was actually introduced to the House of Representatives. The act is a bipartisan bill. It's championed by Congressman Ben Quayle of Arizona and is designed to require regular reporting claims made against the asbestos trust and full disclosure of information in those claims to describe exposures of the products of the bankrupt former asbestos defendants.

We believe this will go a long way towards discouraging the appalling double-dipping practices that are rampant today, and I encourage you to contact your congressman to support this bill. Similar asbestos transparency bills have been introduced in several states and we've also seen recent reform in court systems of Madison County, Illinois and Philadelphia and a Supreme Court decision, a California Supreme Court decision positive for the equipment manufacturers. As you know, reform of the asbestos system is very important to me and to our company.

So with that update on ACRP, I will turn the call over to Alex to go into a more detailed review of the quarter. Alex?

Thanks, Steve, and good morning, everyone. As Steve mentioned, sales are off to a great start this year, up 16% from last year. If we normalize for acquisitions, we were up 5% over the last year, with the majority of that improvement coming from volume and a smaller amount coming from price.

If we took a look geographically, expansion appears to be continuing in the US where sales were up about 6%. Europe was a bit softer, with sales up 3%, but that's substantially stronger than what you read about in the news, reflecting the fact that the majority of our European exposures in France and Germany, both of which have shown strength relative to the rest of the EU.

Asia was also slightly softer as a slowdown in China takes effect, although our largest positions in semiconductors and oil and gas, both in Singapore related to the Tara acquisition, were actually quite strong, and we continue to see that region as a platform for future growth that we're investing in actively. In general, we feel quite good about our market.

Very quickly on our acquisitions. PSI, Tara, Mid Western and PI contributed almost $32 million in sales, which was in line with our expectations and reflects a strong rebound in the semiconductor market from the slowdown we described to you in the fourth quarter. The integration work, which Steve also mentioned, continues to go as planned, and I'll describe that in more depth later.

If I get in to the profitability details, you'll see gross margin was basically flat even though we had a substantially higher mix of OEM-related business, in line with the elements of our growth strategies for Stemco and Technetics that we've described to you previously. Embedded in the margin are some mix effects, operational improvements, and a substantial amount of pricing discipline across the portfolio, as we move to capture full value for our more specialized and engineered components. Also embedded in the margin is a reflection of our global sourcing initiatives and some other scale and leverage advantages that are offsetting the structurally lower-margin OEM volume.

Quickly on SG&A, you'll see that it stayed basically flat as a percentage of sales despite the increase in sales volume. The increase in dollars spent is driven significantly by acquired G&A in our new businesses, which that explains about 50% of the increase, and half of the remainder are the results in investments in sales resources in our fastest growing markets. We also had a slight uptick in incentive comp which raised corporate expenses.

I'll use the next slide to go into the segments detail. Sealing products continues to deliver very strong performance on the top line and good bottom line performance, despite the change in mix and higher acquisition cost. Of the 29% top line growth, roughly a third came organically and the remaining two-thirds came from the Tara and PSI deals.

OI margins were down almost 2 points with more than half of the compression explained through acquisition and restructuring-related expenses, all of which will deliver stronger operational performance going forward. At the consolidated Garlock operation, geographically, we see broad-based strength across both North America and Europe, with some weakness in Asia. From the markets, oil and gas have been very strong as the turnaround season picks up pace, and we're making investments for growth in both food and pharmaceuticals. We're also seeing strengthening in work for project-related work in both petroleum and water.

The PSI integration continues with the closure of the Houston facility as planned and the integration of those products into the Denver production location and that deal is on track to perform nicely this year. The profitability for that business is within historical ranges with mid-teen returns on sales.

At Technetics, we also saw broad base growth with particular strength in the semiconductor markets, rebounding from the lows of Q4. Margin performance was a bit better than we anticipated, also in the mid-teens range, as the group had less of the buy-sell related revenue that we had described in earlier calls, and more of the higher value-added products both in the semiconductor market.

In the high-margin nuclear business, demand was down slightly, although, the outlook is good. And finally, at Stemco, OEM volume has been quite strong, continuing trend we saw taking shape in Q4. The aftermarket business is still building towards the spring peak, which gives us optimism for the second quarter. Margins are down roughly 5 points from last year, predominantly driven by the OE mix and the nature of the brake market, in general, where we have growing exposure. That said, the group is moving aggressively with several product innovations and pricing initiatives to ensure we're capturing full value for the products that we sell.

In engineered, we saw a good 9% top line growth before adjusting for FX, although margins were 2 points lower than last year, driven by weaker-than-expected performance at CPI, which I will explain in a minute. Acquisitions contributed 7 points of sales growth and resulted in $1.2 million in amortization and restructuring expenses, of which we expect only about $300,000 to be recurring in future periods. Not included in these acquisition expenses is an additional approximately $350,000 in retention payments and accruals for earn-outs that we expect to roll out in the near term.

In terms of the individual business and markets, in GGB, we saw very, very strong North American results which offset some flatness in Europe and Asia. A combination of heavily-weighted industrial mix versus automotive, operational improvements and pricing leverage led to very healthy margin levels, reflecting the strength of that business. In addition, a number of interesting product and process innovations are coming to market and the team is integrating the PI Bearings acquisition as it builds an industry-leading global bushing block business, which we can talk about in the Q&A if you're interested.

At CPI, we continue a substantial integration work as part of our overall growth strategy for that business. A restructuring charge reduced CPI's income by $900,000 and it's part of our efforts to create a single optimized operating unit in Canada.

Additionally, the North American gas market and Europe in general were somewhat weaker than anticipated, although the US petrochemical market continues to be healthy, and we anticipate continued strengthening as the turnaround season picks up.

Looking forward, we anticipate improvements in both volumes and costs, especially as the integration cost taper down and we start to see the results of our restructuring efforts. Overall, we continue to be very optimistic about the growth and the profitability outlook for CPI, but recognize we have substantial work to do to meet our own expectations.

Lastly at SME, sales were up slightly primarily because we recorded higher engine sales than in last quarter. As you know, engine sales are now being recorded using a percentage of completion accounting which was not the case last year, and over time, we will migrate away from commenting specifically on engine shipments.

Aftermarket parts and service sales were also up from last year. Margins were stable on moderately higher service revenue, and the group is making progress on a number of exciting opportunities for growth in commercial markets.

The quarter was strong in terms of new orders, and we closed with a healthy backlog of $194 million which includes $24 million of orders received in Q1. As we look to Q2, you should anticipate some margin compression largely driven by mix.

If we put it all together, GAAP EPS was about $0.07 lower than last year despite the $2.4 million higher NOI. So let me give you some color to explain the difference between the two.

We had about $1.6 million higher in corporate expenses, primarily driven by compensation and consulting related expenses. We had just over $1 million higher in interest payment due to both the GST note, as well as the revolver, and we had about the same amount in higher taxes.

On the higher tax rate, we had a rate of 36.2% compared to 30.4% last year. The rate increase was because certain US tax credits expired and have not yet been renewed by Congress. From a full year basis, we expect the rate to be in the 34% to 37% range.

On the adjusted EPS line, we are about the same as last year. For 2012, the adjustments include a $0.04 restructuring cost, $0.21 of interest due to GST, and tax accruals and other expenses of $0.02.

Moving to the cash flow statement, it reflects our normal seasonality trend as we always build working capital in the beginning of the year, and particularly in Europe. On a days basis, our AR balance stood at 58 days versus 61 days for this time last year.

So we continue to improve our overall level of effectiveness and our working capital metrics stayed flat. After the close, we finalized the transaction for Motorwheel, as Steve mentioned which produced a couple of implications on both the cash flow and the balance sheet.

We borrowed $85 million against our revolving credit facility bring the outstanding balance on that facility to approximately $105 million. Through our normal cash flow generation, we anticipate having the facility largely paid down by the end of the year, and are very comfortable that our operating cash will be more than sufficient to meet all of our internal capital requirements as well as paying down the revolver.

Moving quickly to GST, LLC, our deconsolidated entity, we continue to see strength despite the constraints of the legal process that it worked through. Sales and profits were up around 10% gross margin about 39% and the team is investing in a wide range of operational and commercial opportunities to even further improve the competitive position of that business, and we're very optimistic about its future.

ACRP-related expenses were about $4 million, and about the same as in Q1 of 2011. Its cash balance remains a very healthy $120 million. Before I turn over for questions, I'll close with a quick review of our outlook. Except for the impact of the acquisition of Motorwheel, there is no fundamental change in our outlook for the remainder of 2012.

We expect continued organic growth in line with normal seasonal patterns. The current economic indicators combined with our current results support an outlook for modest growth in North America.

And while Europe remains uncertain, we currently expect it to be flat with 2011. Acquisition should contribute about $55 million to $60 million of sales for the full year with Motorwheel accounting for $35 million of that this year.

It's important to note on the acquisition line, PSI, Mid Western, and sorry -- PSI, Mid Western and Rome all closed in the first quarter which is why you only see a $20 million to $25 million impact for the remainder of the year.

For the year, margin should improve over the 12.8% we reported in 2011. This improvement should be driven by an improving performance from acquisitions as costs decrease and contributions to profits increase. And also by the continued benefit of our enterprise excellence programs.

For the second quarter, we expect market conditions to be relatively stable compared to Q1. The Terra, PI and Motorwheel acquisitions should contribute sales of about $30 million through the quarter, and sales will likely be lower at Fairbanks Morse. Mix and acquisition-related costs are likely to impact segment margins again.

Overall, we feel like things are on the right track for both the second quarter, and the rest of the year, and so we're very optimistic about the remainder of the year. We'll open the line for questions now.

(Operator Instructions) Jeff Hammond, Keybanc Capital Market.

Hey, good morning guys.

Good morning Jeff.

Hey Jeff.

So clearly, you guys came in well ahead of consensus expectation, but I want to get a better sense of kind of where you saw, you know, the upside and downside surprises relative to your internal plan for 1Q. And you know, how that kind of shades, how you feel about the rest of the year given kind of just unchanged expectations.

Yes well, Jeff, I think as you know, we don't share exactly what our internal plan is. So I'm not going to talk to specific numbers. But in general, CPI was weaker then we had thought. Obviously we knew about -- knew the restructuring was coming. So we knew we were going to have about $1 million dollars of cost to do that which kind of brings some finality to the restricting necessary after the Mid Western acquisition.

But we also moved a facility in CPI which we didn't mention in the comments, but we have a facility in Germany for CPI that's old and too small and so forth than that. And we opened a new facility a couple of miles from that, and they actually moved in -- during the time period of late January and early February.

So we don't feel like we fundamentally missed any business, but we see all the team over there feels like some of that business got moved out in time. March was back on our plan, but didn't recover from the business that was off a little bit due to that move.

We expect to make that up in the first half of the year. But then in general on top of that, we saw some weakness and a little bit more weakness in CPI because we were counting on those two things although we had underestimated the impact of the move.

So CPI was behind plan and Stemco was a little bit behind plan, but nothing to be concerned about. We thought we'd see a little bit bigger brake season in the first three months because we did last year right after we bought Rome, we did not see that as much, we think actually there's some reason -- some industry reason why that might be more levelized going forward than peaky, but it wasn't a huge difference, and we weren't very far off plan at Stemco, a little bit.

And everybody else was ahead. Probably led by the biggest gap was within the Technetics Group sitting in sealing products, and it really was because we saw stronger semiconductor sales. And that business in general has good margins, but just semi, but the whole Technetics Group has very good margins, and so it leverages quite well on the upside.

So we had sales plan, sales beat plan in Q1 for them. So that's -- is that helpful? Is that what you were --

That's perfect. Can you just talk about you know, cadence, seasonality, 1Q to 2Q and any of the moving pieces there we should be aware. I know you mentioned Stemco being seasonally stronger, but anywhere else that --

Yes Garlock always does better in the first half of the year than the second just because of the turnaround season and that's why we had that big working capital build. But to be honest with you, you know, it's really hard for us to figure out because as you peel all our businesses back, they don't have a consistent, strong, repeatable seasonality.

It's got business cycle effects folder in to it. And so it's really hard to say. I mean I think -- we don't see a huge -- we think Q2 is going to be pretty consistent with Q1. As you know, we have a short cycle business that's hard for us to really project into the future too much.

Okay. No, that's helpful. And then just finally, can you give us a little more color on Motorwheel? I mean it looks like based on the -- maybe you can give sense of where it fell within -- where you typically pay from a multiples standpoint.

But just on a sales basis, you know, pretty profitable business, how should we think about you know, accretion in year one, and how it impacts sealing margins, you know, going forward?

Well, I'm on record internally saying that this will go down in history as the best acquisition we ever made. So we'll see if that -- longer term, we'll see if that -- we'll see if that pans out. This is right in the excuse the pun but right in the wheel house for Stemco because we can fold this right into the go-to-market model, it's a value added product, it's a high end product, it's a well recognized product brand name called Centrifuge.

They dominate the light weight market, and we've got a better way of bringing that to market. So we're just really excited about it. Now we closed it in mid April, and so we will have the normal first year effects of an acquisition for all the transaction expenses and the inventory write up and the amortization of intangibles, there will be some severance cost et cetera so we won't see a lot of accretion benefits in 2012 because of those factors, but we expect it to see pretty decent contribution in 2013.

Okay. Great. Thanks, Steve.

Yes.

Todd Vencil, Sterne Agee.

Good morning. Steve, on that Motorwheel deal, I think Alex said $30 million of top line for the rest of the year. So can we --?

Did you say $30 million or $35 million?

I said $35 million.

$35 million. Sorry about that. So then can we assume about $45 million or $50 million on a run rate basis coming on to your expansion of the channel Steve?

Yes, yes coming in. That's right.

Okay, good. And you know, you guys said your plan to pay down the revolver over the course of the year, but you know, you're getting close on that, and you know, where are you from a financial and a management standpoint I guess on more acquisitions? Are you fully loaded, or you feel like you got some room to go or will have soon?

No, I think we're --

If you look at the next six months, I think we're pretty fully loaded as you described. We've got substantial bites in Stemco and CPI and Garlock that we're -- that we've talked about. And GDB, the PI deal was not that significant from an integration standpoint. But the rest of it, you know, we're really looking forward -- beginning to capture some of the synergy upside of those and as you know from our revolver, we do -- we are pretty much up against the limits.

We got plenty of room to operate the company and you know, we'll release a lot of cash through working capital reduction through the balance of the year as well as generate a lot of operating cash because our capital needs are more or less in line with what they've been in the past, you know, plus or minus $40 million a year.

So I think you will see us kind of just take a bit of a pause at least until late in the year, and that's kind of what our pipeline reflects to. We don't have a huge robust pipeline that -- we got a nice pipeline, but it's a little bit longer, a little bit more stretched out.

So is that helpful, Todd?

It's very helpful. Thanks. And then Alex, you've done a good job in the couple of quarters kind of give us a roadmap for how to think about, you know, the margin progression, you know, obviously you guys get a lot of internal things going on to sort of improve those as well as you know, the sort of weighing effects of the acquisition, the acquisitions I should say.

So if we kind of roll out that together, I mean is there much of a change in the progression that you sort of laid out last quarter you know, toward normalized margins? Or how should we think about that?

I think if you think in terms of the true one-time cost that we incurred this quarter, there was about $1.3 million or so. So that obviously is truly a one-time cost issue. Then you had about another $1.4 million or so in amortization, which obviously will be with us for some point in time. So that gets you to the $2.7 million charge that Steve mentioned.

On top of that, this quarter you had about $350,000 in retention-related payments, which -- it will be hard for me. They roll off over a period of time; I would say, not more than two years, is probably generally a safe assumption. So it's sort of more of a midterm issue. And then there's more integration related stuff, particularly at CPI that we've talked about, the ERP system we've talked about quite a bit is getting roughly 2 points of improvement on CPI's margins as we bring that up up to speed.

There's also sales synergies that we'll get that we think in the CPI case is probably another 2 to 3 points. So those are, I would say, a little bit softer, certainly, from an accounting standpoint, but no less real from kind of an operational standpoint.

That's sort of the way we thought about the roadmap. It's not fundamentally different than what I've said previously. It's just the hard numbers are updated, obviously.

Got it. And on that amortization, which is -- I guess it feels like most of the rest of that, at least in terms of the cost rolling off, it's sort of a two-year or less kind of timeframe. How long do we think about the amortization sticking around?

Yes. Typically, that's about a 15-year period.

Okay. Perfect. Thank a lot.

Gary Farber of C.L. King.

Yes. Good morning. Just a question on the acquisitions. I'm just wondering is there a lot of opportunity to improve your free cash flow generation, your working capital, things like that once you get these things fully integrated or do you think it's sort of status quo?

No, I mean, I wouldn't say there's a big working capital pop, in general. I mean, I think we kind of -- just because they are new product lines to us or new locations or both, so, Gary, there's not a lot of redundancy in working capital that can be extracted, in general.

And then cash flow is just basically kind of the cash flow we're acquiring plus the synergies associated with that. What we don't have in any of these cases is a big capital nut to invest for fixing things up, if you will. I mean, we don't -- the strategic rationale behind our acquisitions is not going out and buying businesses that we believe need to be fixed up and improved. We go out and, in general, buy good solid businesses that have a product line that we like or a geographic position on end-use market position that we'd like and it can be used and leveraged much, much greater inside the EnPro family of companies.

And so we use strategy to drive acquisitions. Acquisitions in and of themselves are not a strategic thrust that we have. We're trying to grow our business and when we see a product adjacency that's part of what we want to accomplish and we can do that through an acquisition, that's what drives it, particularly in the Stemco example.

In the case of Garlock and CPI, it's been really a combination of both product and geographic footprint.

Great. And then just on the acquisitions you said that you probably are going to take a pause here. I'm just wondering that you've been very active, so you must obviously see a lot of the acquisitions that are out there. Just your take on the opportunities, generally, that are out there for people that are looking to buy properties. Is it more active than it was three months ago or is it about the same?

Well, three months ago, yes, I can't comment on the -- I mean, to me three months ago, it was last week. I mean, my time horizon is in years, not quarters. So is it better, is it continuing to get better than it was over the last two years and is it generally trending up? Yes, I think it is. Our approach as you know is to really not participate in auctions. We don't do that as a matter of policy, but typically, when things get auctioned off by one of these extremely capable investment banks that we deal with frequently, it gets pretty frothy and the pricing gets too high, quite frankly, for us and we tend to back out.

So mostly what we do is individual cultivation of owner operators or some kind of special situation. So our cultivation timeline is also sometimes measured in years. So from our perspective, it feels a little bit more active than it might have been a year or 18 months ago, but it was still pretty solid back then too for the types of businesses that we look at.

Our need to take a pause is primarily around the fact that our revolver is getting close to the top end. We need to generate some cash to basically restock the coffer, so to speak.

But you feel you have the operational capacity to take on more stuff if you have the capital.

Yes, we do. We do. Certainly in the second half of the year, yes.

Okay, thanks.

Joe Mondillo, Sidoti & Company.

Good morning, guys. First question. Just related to sort of your European operations. I was wondering if you could just give a little more color on that. We've done some macro data coming out showing that Germany could be dipping down in the recession as well. I'm just wondering sort of what you guys are actually seeing.

Well, you got to think about it in two pieces. If you think about it from the sealing segment, it's mostly Garlock exposure, but it's also a Technetics exposure, and that's very heavily energy, nuclear, and petrochemical, oil and gas related. That's all doing very well. And even as you'll recall, Joe, during the recession, we didn't really see a lot of weakness in that segment. So from the sealing product standpoint, Europe feels just fine.

On the engineered side, it's both, CPI and GGB that have European exposure, GGB being two-thirds of it and the lion's share of GGB as a business is European and probably of its European exposure, over half of it is automotive and the other half is industrial.

I actually just spoke to our industrial sales manager in Europe this morning because I wanted to get a sense of what he's seeing, and it just absolutely reflects what most people have been reading in the press, which is the businesses that we have in Germany and in the UK and in France and Austria is solid. We're on plan and the outlook that we're hearing from our customers is still good. Eastern Europe is also decent. It's our business in Italy -- we don't do a lot of business in Spain at all. GGB has negligible sales there. But we do have a decent presence in Italy and that has been weak and continues to be weak.

So I don't know if that's helpful, Joe, but that's kind of what we're seeing there.

Sure, definitely. And then moving onto the next question, related to the engine segment. I just wanted to clarify your sort of expectations for the year. Are you still expecting sort of a flattish -- I believe your past expectations were flattish to slightly down, potentially. Could you just clarify what your expectations are?

Sure. For the top line?

For the top line, yes, for the year.

Yes. I think it's pretty flat to maybe a little bit less than last year, but pretty flat. Obviously, it's part -- we don't know exactly what part sales is going to look like. We don't expect the margins that we had in the first quarter in the engine business to continue, because the margins will be a little bit less and some of which, frankly, is due to what we're pursuing, a fairly large opportunity that's requiring some cost and engineering expense and so forth. Nothing that will be huge, but it's enough to be a point or so of margin for the quarter that we're spending on cost trying to win this bid, which we'll know about later in the fall.

But the engine margins in Q1 were about 19% and I'd expect -- you can expect that to drift down to a more normalized level, which would still be in the high-teens, but not 19%, not that high-teens.

Okay. Great. And then just two more questions, one related to the CPI business. I was wondering if you could talk a little bit about the directional activity that you've been seeing in CPI over the last several quarters. Do we expect to sort of see a bottom maybe here in the second and third quarter? And then maybe, finally, as natural gas and demand hopefully begins to pick up with gas prices so low that maybe we start to see some growth in fourth quarter 2013.

And then the second question, just if you could address GST and the profitability that you're seeing there. It seemed to be a little lighter than it was in the fourth quarter.

Okay. Well, first on CPI, yes, I think you've characterized it well. I think I would actually say we think the bottom was in fact the first quarter, at least from our performance now. That's because also of this restructuring activity that's been under way and a bunch of it is behind. I mean, we're continuing to move through the ERP system that we've been talking about for awhile.

We're going to be done with that by the end of the year, and we expect to see the synergy benefits associated with Mid Western continue to grow over time. Yes. I mean, the business is, from a market standpoint, I can't imagine gas prices would go any lower, and we're beginning to see as you can read about in the press more and more and more end uses for the low natural gas position of North America, many project, developmental projects under way for compressed natural gas, liquefied natural gas, petrochemical capacity, et cetera.

Those just don't happen overnight. But those have been under way now for awhile and are going to continue to grow and demand more gas consumption, which is good for us. So yes, I think from our perspective, we feel like Q1 was, in fact, the bottom.

And then your other question, what was it? GST, you're talking about the de-consolidated GST.

Yes. Just the margin looks like it came down from the fourth quarter. I just was wondering what's sort of going --

Yes. It would come down. It's pretty darn high in the fourth quarter and it didn't come down much. So I'm not sure where to go with that. It's a good business. We're still trying to improve that business. It's still part of -- 100% owned by EnPro. It's one of our families that we got to slug through this ACRP process. But coming out of the backend, we've got a good business there.

Okay. Thank you.

Chris Bamman, Capstone Investments.

Good morning, gentlemen. Just a couple of quick questions. Can you maybe help me understand, I guess -- with regard to -- I guess you made comments with regard about high levels of restocking. How does that work? So I look at that and think that, okay, maybe sales are going to go down just because of the high stocking. Can you maybe just talk about some of the cyclicality or how that moves?

Okay. Hold on one second. I didn't understand fully your question. I think some other guys in the room did. So just hold on one sec. Okay. You're talking about restocking in a year ago.

Yes.

Yes. Well, two things that we saw. One is in GGB and one is Stemco. In GGB, during the recession, the entire supply chain got leaned out so much, because we make bearings that go into sub-assemblies, that go into, in some cases, full assemblies that go into a car or a crane or some kind of piece of equipment, a machine tool, a conveyor, et cetera. But remember our bearings are typically -- so we're the tier-two guy that's going to a tier-one supply, which is going to the OEM.

And so what happened in the recession there, because the industrial equipment business and automotive business just got creamed, as you know, there was nothing on the shelves through that whole supply chain. And then when we went in to 2011, if you'll remember, late 2010, early 2011, the whole world brought, hey, we're back, the recovery is here, good days are here again, and we're off to the races.

And so our business was exceptionally strong because a lot of that supply chain had to get restocked. So we were running harder at GGB a year ago in 2011 from a demand standpoint, from a unit supply standpoint. We were basically running 24/7 around the globe in GGB. That has not happened in Q1 of this year, but it's still very healthy. It wasn't being propped up by that artificial -- to some extent, one time or artificial restocking within GGB.

In Stemco, we saw a similar effect in the first half of last year primarily even frontend loaded in to the first quarter, which was during the recession, when freight is so far off in the United States what happens is a lot of the fleets idle trailers. But when they idle a trailer, they don't put their good equipment in the parking lot. They put their old equipment that needs maintenance work in the parking lot.

And so when they need that trailer again, they're ready to put it back in service, that's when it needs work done to it in terms of brake jobs and seal jobs and so forth. And so as that equipment was being pulled back in, it needed work and we benefited from that. And so, again, a bit of a one-time restocking.

The Stemco business is still strong. It's good. The trucking outlook is good. But we're still not back to moving the same freight in the country that we did back in 2006. We're still below that. I mean, the economy is. But we've able to grow Stemco both because we continue to gain share as well as the product adjacency acquisition strategy that we've been driving.

That's very helpful. And I guess with regard to what you just said regarding things being idle, then once they start moving, there's going to be demand for bearings and brake parts and things of that nature. How should we look at the brake market? I think you said there was some seasonality to that. Can you maybe provide a little bit more color in that?

Yes. I mean, normally in the trucking industry, if you talk to most people, there was a brake season that they called it, which is really late first -- first quarter, second half of first quarter and to the second quarter was when most of the equipment -- a lot of the equipment, there was aftermarket brake jobs done.

And we certainly saw that last year; at least we thought we did. But because of some of the safety regulations and requirements and so forth in that industry, there's a bit of a sense that that might get levelized a bit. I think it will still exist to some extent, but it will get levelized a little bit.

So the brake business is good. We have grown our presence. I mean, four years ago, Stemco wasn't in the brake products business. So we're still learning ourselves. But we've had pretty good success there. So we're pretty excited about it.

And I guess just one final thing, sticking with Stemco. I mean, the way we should really look at, the OEM component of sales is going to probably increase a little bit. Is that a good --

Yes. Relative to history, that would be accurate, Chris.

Okay. And is this more looking to a 20/80 split or is it not quite that?

Yes, I think that's in the ballpark.

Okay. That's very --

20% OEM, still 80% aftermarket, yes.

Okay. That's very helpful. Thank you very much.

Fred Buonocore, Rodman & Renshaw.

Yes. Good morning. I'm going to take you back to your 2012 outlook comments. My phone cut out right before you got to the good part. So I'm sorry if I make you repeat yourself. But just on the more than 12% revenue growth over 2011 expectation for the year, obviously, that could be 12.1% or much higher, what do you think would be the factors that could make your revenue growth for the year significantly higher than 12%? Where would upside most likely come from?

I think it would be just general economic activity, Fred, because if the recovery happens to be strong -- we're still counting on, what, we've built a plan around 2.5% plus or minus GDP growth in the US, and I think we've built it around about 0.5% growth in Europe, maybe 0%, but it was, don't quote me up between 0% and 0.5%. That's still what we see.

But if we're wrong on that and all of a sudden the market recovers better and there is freight moving and people are buying equipment, capital equipment, and so forth, we would benefit from that. But I don't know if there's any -- there's not any one individual economic driver that would move -- be enough that would impact the entire company.

I mean we could see pockets of things. Like Alex mentioned earlier, in the Technetics group, we've got a decent business in the semiconductor industry. If that continues to be healthy, we'll see that, but it won't be enough to make a fundamental shift in EnPro's numbers overall. It would help by another $5 million or $10 million, would be even optimistic even if -- in any given one factor that makes any sense to you.

Yes, absolutely. And then my other question is on Motorwheel. So you indicated that these lightweight brake drums only make up about 15% of the market. Is that correct?

That's correct today. That's right.

How long has this type of product has been in existence and is there any reason at the penetration of what appears to be a superior product is still only 15%?

Well, one, it's a lot more expensive. So you have to have a team that can sell the value and demonstrate the lifecycle benefit, because it does last a lot longer and performs a lot better, and we do that better than anybody in the industry, by far. So that's what we're going to do.

But, yes, it's been around for awhile and there's one other company that makes a lightweight drum that has the other 40%. So we just think we can -- we just think with the go-to market model that Stemco has, we can sell it, sell it better, and do it better.

We bought a company called Kaiser Engineering, you may recall, about four years ago. It's a kingpin company, and same thing. It had been around, had a great aftermarket present sales of -- sells a top of the line high-margin, but tremendous value product. It was a lot more expensive than a standard kingpin. It's called a quick kit. And in four years, the Stemco team has essentially almost doubled the sales of that business.

So I'm not saying we're going to double the sales of Motorwheel in four years, but I think we can grow the amount of share that's going through the lightweight segment, because it makes so much sense to fleet customers when you can make that value pitch appropriately and integrate it with a package of other brake products that's engineered for better performance over the lifecycle. It has dramatic effects on safety, performance, lifecycle cost, et cetera.

You just have to be -- they have to be able to communicate that value proposition to the customers, and that's what we do well.

Okay, great. That sounds exciting. Thank you.

Thanks. Okay. How about one more question, if there is one in the queue, operator?

Mark Keller, Confluence Investments.

On the ACRP, regarding the claimants' desire to file claims against the GST affiliate, is this going to require a judge's decision? Can you describe a little bit how this particular motion may proceed and what kind of timeframe we might expect?

Yes, sure. The general counsel that we have that manages that process, Rick Magee, is in the room. So I'm going to let Rick address that question.

Yes, Mark. That remains to be seen. It is a motion before the bankruptcy judge asking him to allow them to proceed to file those claims. And so there will be hearing on that motion and there'll be lots of considerations in connection with that hearing. Number one, whether the judge thinks they should be allowed to proceed at all. Number two, whether he thinks they're premature, because as you know, we believe that GST has way more than ample resources to fund any liability that it ultimately has.

So this attempt to stretch beyond GST to go after more assets is just, as Steve said, part of the playbook that the asbestos claimant counsel uses in every case. And so, there are a lot of factors. There will be an initial hearing in June and we'll know a lot more about the timing from then. The reason for the timing of the actual filing is a claim like that would've been -- we believe it's already time-barred because the transaction they complain about was way back in 2005.

But from a bankruptcy standpoint, it would've been even further and definitely time-barred had it not been filed by June 5 of this year, the two-year anniversary of the case. So they got it in. At that point, as Steve said, the transaction they complained about involved a third-party well-respected adviser, who not only blessed the transaction but determined the terms of the transaction.

This was one where they came in and decided what the amount of the consideration should be, what form it should take and what interest rate should be attached to it. So we feel really good about the defenses to the claim. We hope the judge will not even let it get forward. But all that remains to be seen.

Okay. Thanks. And then one other question related to that, do we have any expectation yet of when the claimants are likely to present their --

Their reorganization plan?

Yes. Essentially, yes. Thanks.

Yes, Mark. They've talked about a plan. We know what their plan will look like. Whether they file it or not, it will be similar to what they've done in other cases. We don't think they'll put a number on the table in the court room, because the purpose of the estimation trial that, as Steve said, has been set to begin in December of this year will be for the judge to estimate the amount and value of allowed claims so that whatever plan is finally put in place, whether it'd be the plan we've got on the table or some other plan that GST puts on the table or some plan a claimant group puts on the table, that trial will determine how much value will have to be in that plan to have a successful reorganization plan.

I see. So you do not expect them to put a number on the table prior to that trial then. Am I understanding correct?

They will have an expert who will put a number on the table at that trial. Whether they will put that number out before then or not remains to be seen. They may well put a plan, offer a plan that they would like without a number in it. I would not be surprised to see that, and with the number to be determined at estimation.

Okay. Well, thank you very much. Appreciate that.

Okay, Mark.

And there are no questions in queue.

Okay, great. Well, thanks, everyone, for joining, and have a great day. We'll talk to you next quarter.

And this concludes today's conference call. You may now disconnect.