Enpro Inc (NPO) 2012 Q2 法說會逐字稿

Good morning, my name is Lisa and I will be your conference operator today. At this time I would like to welcome everyone to the EnPro Industries second quarter 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. Mr. Don Washington, you may begin your conference.

Thank you, Lisa, and good morning, everyone. Welcome to our quarterly earnings conference call. In just a minute Steve Macadam, our President and CEO, and Alex Pease, our Senior Vice President and CFO, will review the results for the second quarter of 2012. And I will remind you that our call is being webcast at EnProIndustries.com where you will also find the slides that accompany the call.

This morning you may hear statements during the course of the 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 and the quarter ended March 31, 2012.

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 those 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 business assets, debts or affairs of EnPro 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 want to remind you that our financial results reflect the de-consolidation 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. With that I will turn the call over to Steve.

Thanks, Don; good morning, everyone. I will start with an overview of our financials before Alex goes through his detailed review. Our top-line grew about 14% from the second quarter of 2011 with much of our growth coming from the Tara, PI Bearing and Motor Wheel acquisitions. They combine to contribute about $33 million or 13% improvement in sales.

Additionally, our organic growth was a healthy 6%, primarily the result of higher demand in certain of our Sealing Products markets and higher engine revenues at Fairbanks Morse. In the Engineered Products segment sales at both GGB and CPI were down, demand declined in both companies' European operations and it remained weak in CPI's North American natural gas markets. Foreign-exchange translation reduced sales by about 5%.

By geography sales were up about 4% in North America from last year excluding Fairbanks Morse, but down about 7% in Europe. Most of the softness that we saw in Europe came in the second half of the quarter.

Segment profits and margins were lower than in the second quarter of last year for several reasons. Although GGB produced good results in the quarter, demand decreased and volumes were lower in its European operations. CPI also felt the effect of weaker European demand in addition to the continued effect that low natural gas prices had on its Canadian operations.

The combination of the Tara Technologies acquisition, sluggish aftermarket activity at Stemco, and higher engine revenues at Fairbanks Morse all contributed to a higher mix of lower margin OEM business.

Finally, segment profits and margins reflected expenses of $2.1 million for restructuring and an inventory step up at the Motor Wheel acquisition. Adjusting for those expenses segment margins would be 13.1%.

Excluding the restructuring expense and the inventory step up, acquisitions completed since the second quarter of last year generated more than $5 million in segment profits for a margin of over 15%. Overall we are pleased with their contribution in the quarter and also with the pace of our integration activities.

Our GAAP earnings reflect the decrease in segment profits. However, our adjusted earnings, which eliminate intercompany interest, the acquisition related expenses, restructuring and other selected items were the same as a year ago.

Our results reflected the economic environment that we encountered in the second quarter, but I remain confident we are making continued progress in building stronger businesses in all parts of our Company. Now let me take a few minutes to share my thoughts on where we are after the first half of 2012.

We got off to a good start with a strong first quarter, but those market conditions didn't hold, especially in regard to Europe. Sequentially sales in Europe were down about 8% from Q1 to Q2 and demand in the region was down in all our businesses to some degree. Although, as you know, GGB represents about half of our sales in Europe.

In North America, excluding Fairbanks Morse, Q2 sales were up about 2% from the first quarter. Both Stemco and CPI reported sequential growth in demand from US markets and sales growth in the mid-single digits. Stemco's original equipment markets continue to benefit from trailer builds and CPI had a good quarter in its US petrochemical markets.

Conditions in our markets are mixed, and we are closely monitoring demand so we can respond appropriately. Current economic conditions appear to be very fluid and the short-term nature of our order cycle could magnify any further deterioration. Based on current conditions we expect activity in our markets will remain mixed for the rest of the year with normal seasonal trends. Should conditions change we are prepared to manage costs as necessary.

Actions are already underway at CPI that will improve the performance of that business. They include significant restructuring completed in the first half of 2012 and plans that will be executed in the second half of the year. Those plans include consolidating several CPI manufacturing locations in Texas and Colorado into one facility in Houston and consolidating two Houston area service centers into another Houston facility.

The facility moves will also allow right sizing of the business for the current market environment. These actions will result in about $1 million of additional restructuring expense for CPI this year plus about $5 million of capital to purchase a building that we currently lease as part of this facility's consolidation. Annualized savings at CPI for these actions plus actions already taken in the first half of the year should total about $5 million annually.

Look -- going forward we also are expecting growing contributions from our acquisitions. We've cleared a number of integration hurdles with the acquisitions completed early last year and should see increasing benefits.

The Tara acquisition that we completed in the third quarter of last year has performed well in the first half of 2012 as its semiconductor business benefited from stronger than anticipated demand. That market is forecasted to cool off in the second half of the year.

As we have said before, the addition of Tara gives the Technetics Group extremely valuable technology and products with great long-term opportunity and we have a number of exciting prospects in the pipeline with customers and applications.

At GGB, PI Bearings is also performing well and at Stemco I'm on record as saying the Motor Wheel acquisition will be one of the best if not the best acquisition EnPro has ever made and so far I've seen nothing that changes my opinion.

Before I turn the call over to Alex, let me give you a brief update on GST's asbestos claims resolution process. We continue to be pleased with the recent rulings by the bankruptcy judge in GST's favor on several important discovery matters. Just last week he ruled that several asbestos trusts which had objected to discovery request must provide information that will allow GST to identify claimants who both reached settlements with GST in the 2000's and also filed claims against the trust.

In addition, as a result of previous discovery rulings GST is currently receiving and analyzing useful evidence that demonstrates large numbers of currant GST claimants that filed claims against various trusts. We believe this data will permit GST to demonstrate convincingly at the estimation trial the extent to which GST's payments to resolve asbestos claims were improperly inflated by pervasive double dipping practices.

On the subject of the data gathering process, we continue to have difficulty with the completion of mesothelioma personal injury questionnaires now more than a year after those questionnaires were finalized and distributed.

At the time of the filing we had 5,813 open mesothelioma claims filed, 1,730 of those have been eliminated for various reasons. Some of the claimants didn't have mesothelioma, others no longer claim exposure to GST products and others have been dismissed. 716 claimants still have not responded at all, that leaves 3,367 mesothelioma claims many of which continue to be deficient in some significant respect.

We mentioned on last quarter's call that the claimant representatives had asked the court to allow them to file derivative claims against GST affiliates. Since then the judge has denied their motion. The judge's decision leaves open the possibility they could ask to file claims again after the estimation trial. However, we believe there is no legal basis for derivative claims and that they will become moot once GST's liability is determined.

Turning to the estimation trial itself, at the conclusion of the recent hearing the judge set the schedule for pretrial discovery. As that schedule filled out the judge agreed that additional time is needed for trial preparation and shifted the start date back to April 22, 2013. Now I will turn the call over to Alex.

Thanks, Steve. As Steve mentioned, we continued to show nice top-line growth in the quarter. Sales were up 14% from the second quarter last year with the bulk of the growth coming from acquisitions. Organic growth was also healthy at 6% and more than offset the effect of foreign currency translation which reduced sales by about 5% from a year ago.

Our organic growth came from the Sealing Products segment and also from FME where a percentage of completion accounting for new engines increased revenues in 2012. Last year, before we began to use POC accounting, no engines were shipped in the second quarter and no engine revenues were recorded. Sales also benefited from pricing actions throughout the Company and those actions helped to offset volume declines.

When we look at the geographical breakdown, sales in North America were up at all operations except Stemco where aftermarket and brake replacement activity continues to be soft. Excluding FME, North American sales were up about 4%.

As you would expect, Europe was significantly softer and sales there were off about 7%. All of our European operations reported declines even when sales are normalized for foreign exchange. On the positive side, our European nuclear markets remained firm and Asia was slightly stronger than last year. We also feel as though we are outperforming the broader market even in this soft economic environment.

To round off my comments on sales, Tara, Motor Wheel and PI combined to contribute $33 million in sales and, as Steve indicated, their integration is going well on all fronts. Now let's take a look at some of the details around profitability.

As you see, gross margins are down about 3.5 points. Predominantly driven by a shift in mix, Stemco's sales were more heavily weighted to lower margin OEM sales than they were a year ago. Tara, which was not included a year ago, has a high proportion of OEM business in the semiconductor markets with much lower margins than its legacy nuclear and Aerospace businesses.

Percentage of completion accounting led to increased revenues at Fairbanks Morse which had an impact since margins on engines are generally lower than those on parts and services. In addition, parts and service revenue was down at FME.

We also had some unusual costs including depleting an inventory of higher cost PTFEs at one of our operations secured last year when global supplies were scarce and material prices were high. We also recorded the $1.4 million Motor Wheel inventory adjustment that Steve mentioned in the Sealing Products segment.

Pricing had a favorable impact of 200 basis points across the portfolio and we continue to be very proactive in capturing the full value for a more specialized engineered product portfolio.

Looking at SG&A, it declined as a percent of sales and reflects some leveraging, particularly at Fairbanks Morse, related to the increase in revenues there. Acquisitions accounted for most of the increase in SG&A spending from a year ago, although their effect was partially offset by foreign exchange.

Going into the details of our segment results, we will start with Sealing Products. Sales in the segment grew modestly apart from the benefit of the Motor Wheel and Tara acquisitions and the effect of FX. Segment margins were down largely due to a mix shift to lower margin OEM sales at Stemco and then Technetics as a result of the Tara acquisition.

In addition, a portion of the margin compression is explained by the Motor Wheel inventory step up and restructuring related expenses at the consolidated Garlock operations. Those expenses were related to closing down a Houston facility formerly used by PSI. Production at that facility has now been relocated and is up and running.

Together the inventory step up and the restructuring expenses totaled $1.8 million. Excluding those, margins in the segment would have been 14.9% or a little more than a full point higher than what we reported.

In addition to the inventory step up in restructuring costs there was another $1.4 million other acquisition related expenses including acquisition related amortization. Generally we don't adjust for these expenses because they carry on for a fairly long period after the deal.

Now let's review the individual operations in the segment beginning with the consolidated Garlock operations. Sales in these businesses were moderately higher in North America and up slightly in Asia.

Europe, on the other hand, was softer than a year ago as political and financial uncertainty began to cause delays in normal maintenance turnaround schedules at refineries and other process industries and as public infrastructure projects came under increased pressure from tightening government budgets. Profitability at the consolidated Garlock operations remains steady.

At the Technetics Group normalized sales, excluding Tara, were about the same as the second quarter of last year. We were able to capture price increases on some products which helped to offset volume declines and we benefited from strength in nuclear power -- in the nuclear power market.

While we have a backlog of nuclear orders, the strength in semiconductor during the first half of 2012 was somewhat unexpected and, as Steve mentioned, it is forecasted to decline in the second half of the year.

Excluding activity in nuclear power markets, Technetics' European markets were weaker than a year ago. Profits were about the same as a year ago in Technetics, although without the benefit of Tara they would have been reduced by the higher PTFE cost that I mentioned earlier as well as the mix shift that I have just described.

Stemco also experienced a shift in mix from the second quarter of last year. OEM trailer build rates in the United States are up 28% over last year while aftermarket demand for Stemco products, particularly in brakes, has been soft, at least partly because of the mild winter weather.

Key indicators for aftermarket demand at Stemco such as brake volumes, truck loadings and ton miles are either flat or showing low growth through the first half of 2012 which will likely continue to have a significant impact on mix and profitability for that business.

Stemco's margins are down from last year predominantly driven by this OE mix effect and the nature of the brake market in general where we have a growing presence. Stemco continues to move aggressively on pricing to ensure it is capturing the full value of the products it sells. Profits and margins at Stemco also reflected the $1.4 million inventory step up related to revaluing the Motor Wheel inventory.

At Engineered Products sales were down 7% primarily because of the effect of foreign exchange translation. As you may realize, the majority of this segment's sales are in Europe as a result of GGB's large European presence. GGB's PI acquisition added a couple of points to sales, but not enough to offset FX and the general weakness we saw in the European markets, especially in the second half of the quarter.

Although we were able to more than offset cost increases with price, margins fell from the level of the second quarter a year ago and were 2 points lower predominately driven by scale effects. The difference was mostly due to volume in Europe, but it was also a result of investments in restructuring at CPI which totaled around $200,000.

To put a little color on the businesses in this segment, GGB sales were down about 4% before FX and acquisitions. By region the US was up about 3%, but that was not enough to offset weakness in Europe and sales in that region were down about 7%.

European industrial production continued to weaken in the quarter and even slowed in Germany where conditions had been previously firm -- had been fairly firm previously. Despite these unfavorable conditions and a 10% decline in profits after FX, GGB reported good margins.

The business benefited from success in a couple of key areas of our enterprise excellence programs, specifically our pricing initiatives and our supply chain improvements. Both of these programs are providing meaningful benefits to GGB and will be very important to helping the business in this challenging economic environment.

In the United States margins showed very good leveraging on the increase in US sales and on the benefits of the PI acquisition, which has already begun to contribute to improvements in GGB's manufacturing footprint and processes. Overall we are very pleased with GGB's performance for the quarter.

At CPI Europe was down about 2% compared to the second quarter of last year. CPI's German markets were flat with the year ago, but volumes in France and the UK fell short of the levels we saw last year. Activity in Europe reflected weak economic conditions and reductions in spending on refinery maintenance as CPI's customers began to conserve capital in the face of the uncertain situation in Europe.

In North America CPI's sales were up about 1% and benefited from a healthy level of activity in US petrochemical markets as well as improvements in field service and higher activity at our service centers. However, conditions in CPI's Canadian markets reflect high Natural Gas Storage levels and a 10 year low in North America natural gas prices, which limits consumption of the Canadian gas where the bulk of our footprint sits.

Obviously this creates a challenging economic environment for the Canadian portion of our CPI business, but we remain committed to the business and optimistic about the long-term potential that we see there and feel even more positive given a number of the infrastructure investments underway and announced to tap into that resource.

CPI recorded a small restructuring charge in the quarter in connection with the ongoing restructuring program that Steve mentioned in his opening remarks. It is important to note that this restructuring is part of the ongoing acquisition integration as well as our work to create a strong platform for future growth in the business. Margins were also affected by investments in field service resources consistent with our strategy for CPI.

Looking at the performance of Fairbanks Morse engine in the Engine Products and Services segment, we saw significant top-line improvement over the second quarter of 2011 largely because of percentage of completion accounting for new engines. As a result of POC, engine sales were significantly higher in this year's second quarter than in the second quarter of 2011 when no engines were shipped and no engine revenues were recorded.

Parts and service sales were down slightly from last year when major engine repairs on several Navy ships were underway. Those repairs have been completed and the parts and service sales were lower. Segment profits were up 39% on the increase in engine revenues and although margins were down from a year ago they were still a healthy 18.5%.

The change in margin from a year ago reflects a shift in mix to engine sales which carry lower margins than parts and services. Although margins at Fairbanks Morse in the first half of the year were very strong, we don't expect them to be sustained at this level. For the full year of 2012 they should be in line with our long-term goal for FME of about 16.5%.

FME's backlog stood at just under $190 million at the end of June and relatively constant with the March backlog. If I put all this together our GAAP net income in the quarter was $10.2 million, that reflects slightly less corporate expense than last year, slightly more interest expense than last year and a tax rate of 32.2% compared to 33.8% a year ago.

On an EPS basis that translates to $0.47 of GAAP earnings or about $0.09 less than last year. The primary drivers of the difference between last year and this year were about $0.02 of restructuring costs, the inventory step up which contributed about $0.04 and then a $0.03 increase in interest expense.

The increase in interest expense reflects an increase in the principal balance on the intercompany note as well as interest on borrowings against our revolving credit agreement in conjunction with the purchase of the Motor Wheel acquisition. As a reminder, a portion of the interest on the note is made in payment in kind and that amount accrues to the principal.

Adjusted EPS was $0.76 or the same as we reported in the second quarter of last year. The adjustments to the second quarter of 2012 include $0.21 in interest due to GST, $0.04 for the inventory step up, $0.02 for restructuring and $0.02 for tax accrual and other items.

Overall we feel as though we performed relatively well in the quarter, particularly given the challenging external environment that we faced as the quarter progressed.

Turning to cash flow measures, EBITDA was $89.5 million in the first half of 2012, up 6% from the first half of last year. Free cash flow in the first half was lower than the first half of last year for several reasons. Working capital increased as we saw more activity in our markets and the effect of acquisitions. I will remind you that working capital needs typically diminish in the second half of the year.

We also increased capital spending slightly over the first half of the year -- of last year as we continued to invest in facility and efficiency improvements, particularly in Europe. Acquisition spending was down from the first half of last year when we closed three transactions in the first quarter of 2011.

Spending this year reflects the acquisition of Motor Wheel early in the second quarter. We paid for Motor Wheel by drawing on our revolving credit agreement. At the end of June we had about $40 million in available credit on that revolver.

For the second half of the year we expect cash flows will be sufficient to fund working capital and capital expenditures which we expect to be in the range of about $40 million for the full year assuming that all currently planned capital projects go as scheduled.

Before we go on to our outlook let's review GST's results in the quarter. Sales at GST were up about 3% as price increases and sales from an Asian joint venture overcame some softness in GST's US markets. Gross margins improved about 1.5 at GST, but operating profits were down slightly and margins were also lower, primarily because of ACRP related expenses. Those expenses were about $8 million in the quarter or roughly double the second quarter of 2011.

As you know, GST pays the expenses of both sides in the case. Those expenses have gone up for a number of reasons including activities required as both sides gear up for the estimation trial. GST's cash balance remains healthy and increased to nearly $138 million at the end of June.

I will close with a review of our outlook and then open the line for your questions.

First, I want to reiterate that in light of the short cycles which characterize most of our businesses, the current conditions of the global economy create a very challenging environment. While we are prepared to effectively address additional shifts in conditions, further deterioration of the global economy could very well affect our outlook.

With that said, the decline in the value of the euro changes our expectations for sales growth. We now expect sales to grow by more than 10% over 2011, a reduction from our previous outlook for growth greater than 12%. The reduction is driven primarily by the changing value of the euro and the translation effect associated with that.

At current rates we expect the translation of sales made in foreign currencies into US dollars will reduce our sales by about 3% from last year. However, the contribution of acquisitions completed since the second quarter of 2011 should more than offset the decline. We expect those acquisitions to contribute sales of $90 million to $95 million for the full year and about 8 percentage points of growth over last year.

We anticipate the balance of our growth will come from organic factors as we benefit from price and share gains. We should also see about 2 points of growth as a result of increased sales at FME.

On a geographic basis it appears that North America will be stable for the rest of the year, although it should go without saying that North American markets are not immune to what is going on in the rest of the world.

We expect conditions in Europe to remain soft and activity in our European businesses to remain low for the rest of the year with the possible exception of European nuclear markets. We expect to report segment profit margins comparable to the 12.8% we reported in 2011.

Our reported margins will reflect the restructuring and acquisition-related costs we have already incurred as well as additional restructuring costs as we size our operations to compete in the current environment. We expect those expenses to total between $5 million and $6 million for the full year, including the $3.4 million of acquisition and restructuring expenses recorded in the first half of 2012.

For third quarter we expect modest sales growth over the third quarter of 2011, acquisitions completed since the second quarter of 2011 should contribute $15 million to $18 million in sales. We expect activity in North America to improve somewhat over last year but activity in Europe is likely to be weaker than a year ago. We expect restructuring costs of around $1.5 million primarily in Engineered Products and that will affect segment profits in the third quarter.

We believe we are positioned for our operating performance to improve over the third quarter of last year. Overall we are confident in our position as we look to the second half of 2012. While we are cautious about the state of the global economy, our organizational structure and enterprise excellence program give us significant flexibility to respond to unanticipated changes in the economic environment.

We expect to continue to make progress in 2012 and we believe the steps we've taken to improve our results will be reflected in our performance for the rest of the year. With that we will open the lines for questions.

(Operator Instructions). Brett Linzey.

Just as it relates to the Sealing Products segment, I think while we anticipated some slowing in Europe, your comment pointing to lower activity in global oil and gas I think was somewhat of a surprise. You gave a little bit of color in your remarks. Could you just give us a little more detail on what you are seeing there across the different pockets of those businesses?

I think it sort of depends as you look market by market. In North America we actually feel very good about the refinery petrochemical spending; the maintenance levels have stayed strong. We did see some pre buying in the distribution channel, but the volumes in the channel remain strong. So we feel quite good about the refinery markets in North America.

Similarly for the [GPT] business, our pipeline technology business, in North America we are continuing to see very good infrastructure investments in natural gas and oil pipelines, which really benefit that business. So overall the North American oil and gas market feels pretty good.

In Europe we are seeing a little bit of softness in that softness is driven both by more conservative maintenance spending in the refineries, but more significantly by a reduction in infrastructure investments predominately in water and sewer, which is obviously driven by the state of the economy there. So does that help?

No, that is helpful. And then on Stemco, maybe just a little bit of color as to what you are seeing and hearing from operators in some of the fleets you work with? And just kind of expectations for the balance of the year within the legacy Stemco business. And then any update on the Motor Wheel acquisition integration and some of the cross-selling opportunities there would be helpful.

Yes, the first part of your question, kind of what the fleets are saying and what we are seeing just in market demand, I think we are -- our best view would be that kind of our aftermarket business, which is driven by revenue miles and truck loadings and so forth, basically freight movement activity, is fairly steady. It's not showing strength, it's not showing weakness, I think it is up just slightly from a year ago if you look at the first half.

So I think it will be, based on what we are hearing, in that same order of magnitude. We benefited in the first half of the year through increased OEM trailer builds. As you probably know if you know Stemco, our share of new trailer -- of new OEM versus aftermarket is much lower. So our business is dominated by aftermarket.

But we did see a big benefit because the truck -- new trailer builds were up pretty good even when you compare them to last year. We are seeing some fleets that are kind of deferring those purchases a little bit or taking delivery a little bit later. I don't think it will go back down to where it was a year ago, but I don't think it will be quite as strong as it was in the first half of the year.

So that is the core Stemco business and that is really where we have the best view of what is happening because, as you know, the other adjacent products that we acquired have been growing through different vehicles -- joint ventures, partnerships, acquisitions and so forth. In some cases our share is still pretty low and so we can be seeing gains in share that's not necessarily reflective of what the market is doing.

But in terms of the Motor Wheel acquisition, it has gone great. That is a great product, it's nice that we have a group of employees that now feel like they have a permanent home because they were owned by a financial sponsor and so there is always a tenuous view; they know that they are now part of the Stemco family.

And in terms of our cross-selling opportunities, we have one go to market model in Stemco, so we essentially cross sell and bundle all of our product offering. That is really why we did the Motor Wheel acquisition. So this gives us a high-performance brake drum, lightweight brake drum that we have now integrated into our sales approach. And so it is being actively sold by our fantastic group of 40 Stemco sales reps that are out in the field doing performance clinics with fleets every day of the week.

So that is why -- one of the reason I'm so optimistic about its because I'm pretty confident we are going to be able to grow the percentage of brake drums that are -- that are these high-performance, lighter weight brake drums. The value proposition is fantastic. Yes, I'm very encouraged with that.

Okay, great. I will get back in queue. Thanks a lot, guys.

Ian Zaffino.

Just a quick question. I know you had mentioned the US being flat barring any catastrophes over in Europe. Does that then mean I guess what you have seen through July and maybe the beginning of August has been similar to what you have seen in May and June? Because you've seen some of the manufacturing data get a little bit worse recently. And I know you are short cycle so I'm just wondering if you have seen that yet?

Yes, you're talking about broadly, not just in transportation?

Correct, yes.

Yes. No, I -- to be honest with you, we saw actually in the second half of May and early June kind of almost a bit of a knee-jerk reaction in the market where it was like whoa, what is going on. Because all of a sudden orders were affected pretty dramatically relative where they had been. And then once we got into June, second and third week and beyond things stabilized a little bit, thank goodness, because we were like, oh my goodness.

And so when you balance it, yes, we did see the weakness in the second half of the quarter, but things seemed to level out a little bit in June and we have not seen our July numbers yet. So I really can't comment on July. I don't -- just anecdotally I don't feel it is a whole lot different than where we were in the second half of June.

Okay, great. Thank you very much.

Todd Vencil.

A housekeeping item, Alex. The margin guidance that you gave saying it would look similar to the 12.8% for the segments for last year, was that for the full year or for the second half in particular?

That was for the full year.

Okay, great. One of the themes that I sort of think I gleaned from reading the press release and hearing you talk about it is aftermarket --.

Todd, the reported margins for 2011 were 12.8% the forecast is for around basically 12.5%, 12.6%.

Got it. Okay, thanks for that. One of the themes is sort of softness in the aftermarket business. Am I reading that right and that is across sort of engines where I think you might have had a tough comp? And then in the sealant -- various parts of the sealing business as well. I mean am I right to think that that was sort of a theme and would that be driven by uncertainty in the market or how are you thinking about all that?

Yes, I think that's right. Let me take that, Alex. I think that is right, Todd. As you know, it is never dramatic weakness in the aftermarket relative to OEM; we have seen in the first half of the year, particularly in Q2, we saw two counterbalancing effects. We saw surprising strength in some of our OEM markets which we articulated in the script. And so that was raising that part of the mix.

Plus we're just going to have to get everyone recalibrated that Tara comes to us, as we said before, which is obviously within sealing, comes to us with this, with a very, very high mix of OEM business, a bunch of which is semiconductor, it's to Applied Materials, which makes the equipment for semi conductor chips.

And it's very cyclical over time and we feel that cyclicality even more than the equipment folks because we are supplying to the equipment folks, they feel it more than the end-users. And it is OEM stuff and it's not great margins, we still make money on it. And then in addition to that we do this pass through revenue.

So it is just that part of the business, while still profitable, we got it for a good price, it makes good sense, returns and so forth and it's just kind of structurally lowered a little bit the Technetics margin expectation when the semiconductor business is at kind of midcycle and normal levels. It was good in the first half; it's going to be weaker in the second half.

So we saw a combination of both increase in some of our OEM businesses or share of that within the Company. And in addition to that we saw just I don't know if I'd call it weakness in aftermarket, it is just more reflective of where the global economy is, right. I mean things are not robust out there, as you guys know, not just from us but anybody you talk to, right. Stronger North American than Europe, but I think everywhere folks in the aftermarket are starting to really be extremely cost-conscious because they don't see what is coming, they can't anticipate it. Again, worse in Europe than in North America, but, as Alex said, certainly North America is not immune to the effects of what is going on in Europe. So that is how I would characterize it. You want to add anything to that, Alex?

No, I think you got it.

Okay. Todd, does that help?

Yes it does. Thanks for that. You mentioned I think the GST's US markets were a little soft and I don't think I heard just kind of color under that. Can you give me a little bit and talk about which of their businesses -- which of their markets were particularly soft?

You talking about GST, the --?

GST the bankrupt entity, yes.

Yes, well, obviously that is mostly US operation as well as a little bit in Australia and Mexico -- well Mexico is North America. So it doesn't include any of the European operations. That business is cranking along. I think we said organic was what 3% or 4% in that -- 3% growth --.

Yes.

So that is a mature business, we bought the Gore ONE-UP Pump Diaphragm product line in the middle of (inaudible), that is going very well, not huge but it's integrating. So we continue to perform better in that business just operation with our on-time delivery and so forth we are working hard on product development.

So, yes, the business is healthy and given the mature nature of that product -- of those products, we are never going to see a huge bump quarter to quarter. But if we can keep cranking there at 3%, 4%, 5% growth period over period we will be very pleased with that.

Todd, let me just give some additional color to Steve's remarks just because I made this point to Brent and I wanted to be clear. We sell in that business predominantly through distribution. We had a number of pricing initiatives at the beginning of the year which pulled forward some sales. And what we saw -- because we have to get the sales numbers from our distributors as a mechanism for them to get rebates.

What we saw was actually the volumes from the distributors were quite a bit -- reflected a very healthy petrochemical refinery market. So we actually feel pretty good about the state of the refiner and petrochemical markets which is a huge portion of GST's business here in North America. So to the extent that is not purely baked into the number there's sort of this slight effect of the pull forward into the distribution channel. So I just wanted to clarify that.

I got it. So I'd say again, I may have heard it wrong, Alex. I thought you called out a little bit of softness in GST in the US, but am I right that you said that in your prepared remarks. And B, if I am right is that just reflective of the timing difference maybe between the pre-buy -- between what they are selling and what they've bought?

Yes, I think that's right, Todd.

Okay. Final one from me. Just to kind of make sure we are calibrated right on FME with the percentage of completion accounting. Can you talk about how much of the revenue in the quarter was from percentage of completion versus aftermarket?

Well, the percentage of completion accounting contributed basically $17.5 million.

Perfect.

We don't break down the split between aftermarket and new engines.

Is there any new engine revenue in there at this point other than percentage of completion?

There wasn't in Q2 but there will be going forward because when we shifted last July or August, whenever we shifted, if you will recall, Todd, what we did is we put it in kind of as new engines were starting in the shop to be fabricated and we didn't switch over the ones that were already in. So I think we got just a couple more that are left that are like -- that are on the old accounting method that will ship in Q3.

But to answer your question, Todd, no, there is no revenue in that member that wasn't percentage or completion revenue.

And after Q3, at least according to what your shipment schedule is for right now, we're going to be all percentage completion?

I think there might be one --.

It is a little bit of a mix. In Q3 we will have a completed contract engine that is shipped and then the remainder will be percentage of completion. What happens is it is not 100% clean back-and-forth.

But even after Q3 I think we got -- do we have one more next year -- is that it?

No. And then the fourth quarter will be all percentage of completion.

Yes, next year I think there is a couple more. We could get you the details on that, Todd. I just don't remember when they are scheduled to ship. And then we will be done and fully converted.

Appreciate that.

(Operator Instructions). Chris Bamman.

Can you maybe talk about Stemco business? You have increased that addressable market. Is there going to be more OEM business in that market going forward? Can we perhaps see margins come down going forward with that business?

We will still do smart acquisitions as we go forward, we hope to sell more OEM business because that is a nice seed for aftermarket. But in terms of what we have, Chris, right now in the portfolio, I would not expect margins to go down because of mix below where we are -- where we were in Q2. If anything I would expect the opposite because we were dominated by more of an OE mix at this point.

Plus we will see additional benefits the integration of Rome Tool & Die as well as Motor Wheel as we go forward. We'd like to sell more lightweight brake drums from Motor Wheel in both new units as well as aftermarket. We don't differentiate our strategy trying to drive margins; we try to sell as much as we can to whoever we can sell it to.

That is very helpful, thank you. Can you perhaps just talk a little bit more about some of the pricing initiatives that you have implemented, maybe give a little bit more color to that if you could, please?

Do you want to take -- why don't you take that, Alex?

Yes, sure. So generally speaking there is a handful of things that we do to make sure we are capturing the full value for our products. The first is obviously just being very, very clear with our customers where the value is added and pricing much more on a value basis than a cost-plus bases.

And we have seen that that has had a significant impact because the customers do recognize the premium nature of the product, the specialized engineering that goes into it, the performance improvements and so forth. And so we are able to share a portion of that value with the customers quite effectively.

The second thing that we are quite effective at doing is using raw materials, raw material increases to the extent that they exist as a mechanism for clawing back some of that inflation, if you will. So we have seen, particularly in last year, as an affect of the raw material environment we were able to again get compensated for that with our customers.

The third thing that we have done is basically increase our analytic capacity so that we can now look and very clearly understand customer profitability and we are very proactive in terms of making sure that our most attractive customers we are getting the maximum value out of those. And for customers that are not quite as attractive we are being a little bit more discerning in terms of how we interact with those -- what those customers.

So obviously it is a sensitive topic, I don't want to get into too, too much detail. But hopefully that helps you understand the three different levers we try to pull.

Right, and that is very helpful. And I guess do you sort of in this environment -- do you get pushback?

Well, look (multiple speakers). It would be nice if it weren't so, but --.

Okay, that's helpful. Thank you very much, guys.

Joe Mondillo.

Real quickly, I just wanted a clarification in terms of the one-time expenses. Where did the restructuring and acquisition related expenses fall on the income statement? In terms of what line?

Yes, it will be below gross, above OI.

Okay, all of it? All of the $2.4 million and then I guess what is about $600,000 or $650,000 on restructuring?

Sorry, Joe, the inventory step up, the $1.4 million of inventory step up will actually be embedded in the gross margin and then the restructuring will be below gross margin above OI.

Okay. And so you mentioned $2.4 million of acquisition related expenses in the sealing segment, $1.4 million of that is the inventory. What is the other $1 million and where does that fall?

Well, let's see. You are going to have -- a portion of that is going to be related to some restructuring activity and PSI, then another portion of that is going to be retention payments and amortization. So I believe it is about $600,000 in retention payments and amortization rough numbers and about $400,000 in PSI related restructuring.

Okay, okay, great. My next question, regarding the sealing segment, just trying to understand a better picture and sort of what expectations going through the rest of the year. We've seen a 15% plus sort of operating margin in the first half, last year you saw the seasonality especially in the fourth quarter where margins fell off drastically due to seasonality. Could you just talk us through that and are we expecting a drastic fall off like we saw last year in terms of seasonality and margin in that segment?

Well, I will let Steve add some additional color. Typically -- did you ask for sealing or for engineered?

Sealing.

Yes, for sealing, so typically for the Stemco business you do see that the sales cycle is more heavily weighted towards the first half of the year because that is when a lot of the maintenance activity takes place, the brake season is typically in the first half of the year.

That said, as we've indicated on the call, a lot of our aftermarket activity was soft, the brake season was essentially nonexistent because of the mild winter. So I would anticipate that there is probably quite a bit less aftermarket seasonality affective this year relative to last year.

In Garlock you tend to not see particularly seasonal pattern; you do see the turnaround cycle for the oil and gas segment tends to be in the milder weather, but there isn't a huge seasonality pattern there. And then Technetics, again, is really not a particularly seasonal business, although it is a very cyclical business. And so as we indicated, second half of the year for Technetics is likely to be down given where we are in the semiconductor cycle.

So all of that -- and then you obviously have vacations in Europe and you have a short month in December. So all of that sort of combined would indicate that the second half of the year does see a slight downtick just based on normal seasonality and that obviously, given the scale and so forth, has an impact on the margin performance.

Okay. So I (multiple speakers).

So if you want to roll all that together you are going to see, if I were guessing, 1 point to 1.5 point of margin reduction from last year to this year in sealing in Q3.

Okay, okay, great (multiple speakers). Perfect, thank you. And then I just wanted to sort of ask sort of a similar question in terms of Engineered Products. And I guess you can talk about it just broad-based top-line to bottom-line, just expectations there.

Obviously the CPI business is what it is and the GGB having exposure in Europe is. But the top-line -- it didn't really see much of a change in the second quarter from first quarter. How are you looking at that in the back half of the year compared to the first?

Well, you know, I would say given the environment we are still -- I'd say call it cautiously optimistic or I mean not -- at least cautiously not pessimistic, let me just say that because I don't want to mislead you to think we're going to see some big rebound. But I think hopefully we will be relatively stable and both GGB and CPI will perform better margin wise than they did a year ago.

We have invested a lot in CPI for restructuring already. We are going to be benefiting from the stuff we did in the first half of the year. Most of the facility consolidation costs will probably not hit until Q4 actually just because of the timing of the schedule for us to do that. And GGB continues to just perform better overall.

So barring a significant reduction in demand at GGB in Europe, which as you know, GGB is two-thirds Europe. So if barring a huge decline in demand in Europe, if GGB holds reasonably constant to where they are now, I would anticipate engineered margins being actually a little bit better than they were a year ago Q3.

Okay, perfect. And then real quickly, I apologize if I missed this, but the engine segment, your expectations for the year? Is it still the same that you've had in the past (multiple speakers) conference call?

Yes, Engine Products and Services is more of historical. I think what we said in the remarks was just shy of 17%, around 16.5%. You can go back or I can look it up, but ball park that is about right.

The margin or the top-line?

Margin.

What about the top-line expectations?

It's certainly consistent with where we have been, Joe, we are not kind of revising that.

Okay, okay. Perfect, thank you.

There are no further questions. I will turn the call back to the presenters.

All right, well thank you, everybody. We appreciate you joining in this morning and please give me a call if you have any further questions, 704-731-1527. Thanks.

This concludes today's conference call, you may now disconnect.