Enpro Inc (NPO) 2012 Q4 法說會逐字稿

Good morning, my name is Megan and I will be your conference operator today. At this time I would like to welcome everyone to the EnPro Industries fourth-quarter year-end 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, you may begin your conference.

Thank you, Megan, and good morning, everyone. Welcome to EnPro Industries' quarterly earnings conference call. I will remind you that our call is also being webcast at EnProIndustries.com where you can find the slides that accompany the call. In a moment, Steve Macadam, our President and CEO, and Alex Pease, our Senior Vice President and CFO, will review the results for the full year and fourth quarter of 2012.

But before we begin I want to point out that 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 10-Q for the quarter ended September 30, 2012.

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 to one or more of its subsidiaries as we or to the businesses, 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.

Also, I 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. The results of these entities will remain deconsolidated during the pendency of 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 at use that acronym during the call today. GST's results are presented separately on our earnings release. And now I will turn the call over to Steve.

Thanks, Don; good morning, everyone. Thanks for calling in. I am pleased to report that we closed 2012 with strong margin and profit performance, even though our markets were soft in the fourth quarter and organic sales were lower in both our Sealing Products and Engineered Products segments than they were a year ago. Our initiatives to control and reduce costs and to improve pricing supported an increase in segment margins despite the circumstances in our markets.

Clearly we are not pleased with the weak environment we encountered in the second half of last year. I will talk about our 2013 outlook at the end of the call. But our continued improvement from enterprise excellence work will obviously be important to our performance as we go forward.

Before I turn the call over to Alex to talk about the quarter, I want to touch on some of the highlights for the full year. As you can see from our press release, our consolidated sales grew 7% to almost $1.2 billion. Acquisitions contributed sales of about $91 million or growth of 9%.

Excluding acquisitions and the unfavorable effect of foreign exchange, sales were up about 1%, primarily because of increased sales in the Engine Products and Services segment. Sales in that segment were up about 15% with just over half the increase coming from engine revenues and the rest from increased parts and service sales.

The increase in engine revenues needs a moment to explain. We began the transition to percentage of completion accounting for new engines in the third quarter of 2011 when we had the necessary (inaudible) and controls in place to track progress on engines as they moved towards completion.

Engines already in progress continued under the completed contract method which recognizes revenue when the engine is shipped. We recorded revenues under both methods in the second half of 2011 as well as all of 2012. The transition increased revenues by almost $10 million in 2011 and by approximately $40 million in 2012.

If we had recognized revenues under the completed contract method in both years, engine revenues excluding parts and service in 2012 would have been about 18% lower than in 2011, even though we shipped 14 engines in both years. The accounting change will also affect 2013 as we booked about $40 million of revenue last year for engines that we will ship this year. We expect to ship 22 engines in 2013 all under percentage completion.

In our Sealing Products segment sales grew organically by about 1% in 2012 while in Engineered Products segment markets weakened as the year progressed and organic sales in the segment were down 4%.

Looking at segment profits, contributions from acquisitions and better pricing more than offset the reduced effect -- the effects of reduced volumes and higher restructuring and acquisition-related costs. As a result we reported a 5% increase in segment profits in 2012.

Segment margins were 12.5%, slightly below the 12.8% we reported in 2011. But if we adjust for restructuring and other unusual costs, which totaled $6.2 million in 2012 and $3.4 million in 2011, (technical difficulty) were the same in both years at 13.1%. Our EBITDA improved by about 11% to just over $172 million or 14% of sales. In 2011 EBITDA was about $155 million or 14% of sales.

Our GAAP earnings of $1.90 a share were $0.16 lower than in 2011 primarily because of increases in restructuring costs and interest due to GST. Our adjusted earnings in 2012, which exclude interest due to GST, restructuring and other unusual items, were up about 7% to $3.07 a share from $2.87 a share in 2011. The largest portion of the difference between GAAP earnings and adjusted earnings in both years is of course our intercompany interest.

The preceding numbers do not include any contribution from GST which also had solid performance in 2012. GST's markets are primarily in the United States and were relatively stable throughout the year. Third-party sales were up about 3% to $220 million. GST's operating income improved by 5% to $47 million as demand improved and the business benefited from our enterprise excellence initiatives.

Operating margins at GST were 21.5%, up from 20.9%, and adjusted net income was up 10% to almost $32 million. GST's EBITDA-A, which excludes expenses associated with the ACRP, was over $53 million or about 6% above 2011. ACRP-related expenses were about $31 million for the year and, as you know, these expenses represent costs incurred by all parties involved in the case including representatives of present and future claimants, their counsel and experts. We expect this level of expense will continue as the estimation trial date approaches.

Our 2012 results reflect the work we've done to control manufacturing costs and improve supply-chain management and product pricing. We also moved further along with the integration of acquisitions. The performance of the acquired businesses has been hampered somewhat by soft demand, but they significantly expand our addressable markets and bring us very exciting new opportunities.

I also want to mention our safety performance in 2012. Last year was the best we have ever had for employee safety, which is very impressive when you consider it means we improved over our performance in 2011 when we were recognized as one of America's safest companies.

We empower every employee at every EnPro facility to identify and correct safety hazards and our record in 2012 speaks to the effectiveness of our organization in living safely as a core value. We are proud of this accomplishment and we give full credit to our employees for their commitment to live safely both at home and at work.

Moving to the ACRP, the case is progressing towards the estimation trial when the judge will hear evidence that will allow him to estimate the number and amount of allowed present and future mesothelioma claims against GST. The trial is currently scheduled to begin July 22 and last for two to three weeks.

We do not know when the judge might render a decision or whether there will be further hearings or discovery after the trial. During the past several months depositions and other discovery has been completed. The time for fact discovery and preparation for the estimation trial is almost over and expert reports are due in mid-February.

After the reports are submitted expert discovery will commence. We can't discuss the details of the information uncovered during the fact discovery because of the confidentiality order entered by the court. But we can tell you that we believe the evidence that has been produced provides substantial support for GST's case.

We have said from time to time that past asbestos chapter 11 cases have often been settled just before, during or after estimation trial. While that is true, GST's case is very different from past cases. There can be no assurance that GST will reach a settlement and, if so, when it might be reached.

Given the sensitive nature of this topic and the fact that the parties are within six months of trial, we are not going to talk about settlement discussions when they may or may not be active or how they may or may not be progressing. We will say only that we are hopeful that GST and the claimant's representatives can reach a settlement in 2013 and it will provide finality and certainty to GST's asbestos-related payments.

Settlement would also allow us to re-consolidate GST's financial results, although the value of GST upon re-consolidation would depend on the terms. But again, there is no assurance that the ultimate resolution of the case will come through settlement, nor can we anticipate when a resolution might occur or the value of GST that might ultimately be preserved. Now I will turn the call over to Alex.

Thanks, Steve. As Steve noted, our operating performance improved in the fourth quarter of 2012 even though we had no organic growth in sales. In comparison to the fourth quarter of 2011 total sales were up by 3% or just less than $8 million all as a benefit of the Motorwheel acquisition, which was completed in the second quarter of last year.

Motorwheel had sales of almost (technical difficulty) and added 4% of top-line growth. However, unprofitable -- or unfavorable foreign exchange rates reduced sales by 1%. Higher sales in the Engine Products and services segment were fully offset by decreases in organic sales in the Sealing Products and Engineered Products segments.

I will go into more detail on the segments performance shortly. Looking at profitability gross margins in the quarter were 32.6% and in line with the fourth quarter of 2011 when they were 32.8%. Even though unit volumes were lower almost across the board, gross margins held as we got better pricing in most of our businesses in addition to material cost savings and the broad range of enterprise improvement initiatives.

SG&A spending dropped by about 9% as we moved aggressively to complete the integration of our acquisitions. Corporate expense was also lower primarily due to lower incentive compensation costs. As a percent of sales SG&A declined to 24.3% from 27.5%.

Turning to our segment results, fourth-quarter sales in the Sealing Products segment were up about 2% or $2.8 million compared to fourth quarter of 2011. The contribution of Motorwheel increased Sealing Products sales by about 7%, but that was more than offset by the combination of unfavorable foreign exchange which reduced sales by about 1% and softer conditions in all of the segment's markets.

Excluding the impact of foreign exchange and the acquisition the segment sales declined by 4%. The segment's profits were up by about $5 million or 34%. Motorwheel accounted for about a third of the increase, but each of the businesses in the segment reported a strong increase in operating income. Segment margins were 14% compared to 10.7% in the fourth quarter a year ago.

In both quarters restructuring and unusual charges related to acquisitions reduced margins. Those charges totaled about $400,000 in 2012 and about $1 million in 2011. Excluding those charges fourth-quarter segment margins were 14.3% compared to 11.4% a year ago.

Taking a look at the individual operations in the segment, sales were down from a year ago in the consolidated Garlock operations. Industrial activity in North America and Europe slowed as did project-related activity in oil and gas and water and wastewater markets. However, profits and margins improved at the consolidated Garlock operations as cost decreases more than offset lower volumes.

The Technetics Group's nuclear market continued to perform very well in the quarter, but the semiconductor market remained weak and the Group's sales were lower than they were a year ago. Profits grew and margins improved at Technetics primarily due to strong sales in nuclear power and Aerospace markets.

At Stemco, sales benefited from Motorwheel, but overall demand for Stemco's products remained sluggish. Sales of core aftermarket products were about the same as a year ago while sales of brake products excluding Motorwheel were lower. Sales in suspension products and other new product lines were substantially higher.

Revenue miles and other indicators of Stemco's aftermarket business weakened in the quarter and OEM demand from trailer manufacturers continues to be soft. Despite these challenges ongoing operational excellence programs and the benefits of acquisition integration led Stemco to report an increase in profits and operating margins improved significantly compared to the fourth quarter of 2011.

Fourth-quarter 2012 sales in the engineered products segment were down by about 13% or $11.9 million as both GGB and CPI continue to deal with weak market conditions. Excluding FX sales in the Engineered Products segment were down 11%. Profits in the segment were down by about $1.9 million reflecting a $1.4 million increase in restructuring costs primarily in CPI and a decline of volume for both businesses.

Segment margins were 1.5% of sales compared to 3.4% a year ago. Excluding restructuring expenses margins were about the same as in the fourth quarter of 2011 when they were 3.5% on that basis. Although unfavorable FX had some effect on GGB sales the primary driver of the decline was significantly lower demand from European automotive and industrial markets. Sales in Europe were down 9%.

In North America activity slowed as the end of the year approached and GGB's North American sales were down 5%. Even though GGB benefited from significant improvements in price and from operational improvements, profits and margins declined because of sharply lower volumes and costs incurred for labor reductions in Europe.

CPI also reported lower sales in the quarter as conditions in North America and Europe weakened. In North America, sales were down about 20%, primarily reflecting softer US markets and continued weakness in Canada. CPI's North American sales were also affected by the ongoing consolidation of three facilities into a single facility at Houston, which has delayed some product shipments. CPI's European sales declined by 8% as petrochemical and refining markets there remained soft.

As we continue to work aggressively to address the issues facing CPI, we incurred just over $1 million in restructuring expense in the quarter. These expenses were associated with a facilities consolidation and other steps to position that business to compete in the current environment.

In the Engine Products and Services segment, Fairbanks Morse reported another strong quarter. Sales were up just over $17 million compared to the fourth quarter of 2011, with about two thirds of the increase coming from higher engine revenues and the remaining one third coming from increased parts and services sales. Parts and service sales reached record levels in the quarter due a higher sales and environmental upgrades and increased demand from the Navy.

Environmental upgrades, which are designed to extend the life of engines in the installed base, are a recent focus at FME and accounted for a little more than half of the increase in parts and service sales. A portion of the remainder came as the Navy pulled some service originally scheduled for 2013 into 2012.

Engine revenues were about $12 million higher than in the fourth quarter a year ago. Percentage of completions increased by about $14 million, but there was no completed contract revenue in the quarter, even though we shipped four engines. In the fourth quarter of 2011, two engines were shipped and about $2.5 million of revenue was recognized under the completed contract method. Percentage of completion revenues were just over $6 million a year ago.

Profits in the Engine Products and Services segment improved by $1.9 million or 26%, but margins decreased to 16% from 18.1%, in part reflecting increased engine revenues and higher sales in environmental upgrades, both of which are less profitable than the parts and service sales.

FME's backlog was about $150 million at the end of December, a little lower than the backlog at the end of the third quarter. There is still a fair amount of uncertainty about the potential effect of sequestration and possible federal budget cuts on FME. In the near term, we believe the Navy and Coast Guard are most likely to reduce maintenance spending, which could affect parts and service sales. The longer-term impact could come in future years if the Navy also scales back it shipbuilding plans.

Looking at earnings for the quarter, we reported GAAP net income of $5.7 million, more than twice what we reported in the fourth quarter of 2011, when net income was $2.6 million. On an EPS basis, that translates to $0.27 of GAAP earnings, or $0.15 better than last year.

The primary difference between the quarters was the significant increase in operating income, as we benefited from acquisitions and lower operating costs, which helped improve gross profits, as SG&A expense also declined.

Our adjusted EPS increased to $0.59 from $0.37 in the fourth quarter of last year. After tax adjustments to take the $0.27 of fourth-quarter 2012 GAAP earnings to $0.59 include $0.21 of interest due to GST, $0.06 for restructuring and then a nickel for tax accrual and other items.

Free cash flow increased to about $82 million in 2012 as our operating performance improved and as we benefited from lower income tax payments. Cash taxes were lower as a result of a refund we received for overpayments of 2010 taxes and the application of 2011 overpayments to our 2012 taxes. Acquisition spending was down from 2011, when we closed several transactions, and reflects only the $85 million spent to acquire Motorwheel early in the second quarter. We paid for Motorwheel by drawing on our revolving credit facility, with a plan to pay down the borrowing with operating cash flow. At the end of the year, we had reduced the outstanding balance on this facility to about $34 million and had $91 million of borrowing availability. Capital expenditures in 2012 were about $35 million and in line with our historical average.

Before I close, I'd like to take a look at GST's results in the fourth quarter. Third-party sales at GST were down about 2%, primarily because activity in GST's North American markets slowed toward the end of the year as distributors became more conservative with their inventory levels. [EBITDA-A] and operating profits were down on lower volumes, but margins remained healthy. EBITDA-A was 22.3% of sales, while operating income was 19.5% of sales. As Steve explained, ACRP-related expenses increased in 2012. At $31.4 million. they were up nearly 85% from 2011, and are likely to remain high as the case moves forward.

GST continues to generate cash. At the end of the year, GST had cash and long-term investments totaling about $154 million on its balance sheet. Now I will turn the call back to Steve.

Thanks, Alex. As you see in our earnings release, we expect our markets to remain soft in the first quarter of 2013 and our results to be down from the first quarter of 2012. This comparison is against what was the strongest quarter of 2012, when our markets were more active and demand was higher than it is today. Our European market started out fairly strong in 2012, but steadily deteriorated over the rest of the year, and we see no indication they will improve in the near term.

The first quarter of 2012 also benefited from strong demand from the semiconductor market. Conditions in that market weakened in the second half of 2012 and continue to be depressed. However, customers are indicating that demand may pick up later in the year, which could benefit us in the second half of 2013.

We also see a drop in sales at Fairbanks Morse compared to the first quarter of last year, when the combination of percentage of completion and completed contract engine revenues benefitted sales. Parts and service sales and POC revenues should be about the same in the first quarter as last year, but because we will not have any new engines shipped on completed contract method, we expected sales at FME to be down between 25% and 30% compared to the first quarter of last year.

Total segment profits and margins will also be lower than they were in the first quarter of 2012, when demand was higher. In the Sealing Products segment, we expect a less attractive product mix than we've had in recent quarters, in part because of lower sales of high-margin products into nuclear power markets.

In the Engineered Products segment, the restructuring we completed in 2012 should support an improvement in margins, but the segment's performance will be dampened by weak volumes at GGB and at CPI, and also some additional expense to complete the restructuring that CPI began in 2012. CPI's first-quarter restructuring expense should total less than $1 million. Margins in the Engine Products and Services segment should remain in line with recent quarters.

Our short cycles make the rest of the year difficult to predict, but we are cautiously optimistic that conditions will improve as we approach the second half of the year. Our Garlock businesses, both those that are included in our consolidated results and those involved in the ACRP, expect their markets to be stable this year as compared to 2012.

In Stemco's heavy-duty truck market, which has typically been a leading indicator for us, activity has been low but stable. And there is some optimism in the industry for improvement in the second half of the year.

Our Engineered Products markets are not likely to improve in 2013 based on what we are currently seeing. However, unless demand declines significantly, the segment should benefit from GGB's operating and manufacturing flexibility and from the steps we've taken to restructure CPI.

Fairbanks Morse will report lower sales this year than it reported in 2004 because of the effect of the accounting change I mentioned earlier. The aftermarket is also likely to be a little weaker in comparison to 2012, when the threat of budget cuts stimulated some pull-forward spending by the US Navy on parts and service in the third and fourth quarters. Under these conditions, we expect FME's overall sales to be down about 15% in 2013 and margins to decrease slightly.

Currently, we expect the drop in sales at FME in 2013 to offset any increase in activity we might see in the Sealing Products and Engineered Products segments. However, we are confident that we are very well prepared to meet the current market conditions and take advantage of improvements in them as the year progresses. Our brands are very strong and we have exciting opportunities in our markets. We are focused on our goal of building long-term value at EnPro.

Now we will open the line for your questions. Operator.

(Operator Instructions) Jeff Hammond, KeyBanc Capital Markets.

Just a few questions on kind of 2013 and how you are thinking about it. First, what do you think for restructuring savings for the full year and how might that parse out by segment?

You want to take that, Alex?

Sure. So essentially, if you take the impact of both the nonrecurring restructuring expenses, as well as the savings that we plan on getting it from that, that will take you -- in Engineered, that will give you about $9 million of savings for the year. The vast majority of that comes from headcount reductions, although there is also a fair chunk from lease -- basically the elimination of leases as we consolidate some of these facilities. So that is what it looks like in Engineered.

In Sealing, we had about $1.2 million of expense associated with an inventory writeup in Stemco that obviously won't recur. And then we had an additional kind of $1 million, $1.1 million in Garlock related to the consolidation of the Houston facility. So, does that help?

You'll get a couple million of cost savings in Sealing?

Yes, so in Sealing, that gives you about $2.5 million, $2.5 million to $3 million.

Okay, perfect.

Then that gives you about $9 million or so in Engineered.

Okay. And then it sounds like on a core basis, you expect Sealing and Engineered Products to be down in the first quarter. But do you anticipate -- I mean are you kind of building your budget and forecast for growth in those businesses on a full-year basis in 2013?

Jeff, we are thinking that the growth will offset the decline that we know we are going to see in FME, just simply because of the new engine schedule that we are going to see and the accounting change. So, yes, we are building up some modest growth in those two segments combined, for the full year.

Okay. And then just finally, can you -- I mean, is this engine dynamic simply accounting noise or --?

Well, it is. We shipped 14 engines in 2011, we shipped 14 engines in 2012, and the schedule calls for 22 engines in 2013. Okay? So it is going to be a good year for FME. But as you know, because you have followed us for a while, that usually with the completed contract method, the quarters would move around a ton, because it would reflect when the engine is shipped, not when the work is actually being done, which is more levelized over time.

So once we have the systems in place to shift to that method, we are really required to use that method, and we did that in -- I think it was July -- sometime in the third quarter of 2011. And we decided rather than do all the work required for a Big Bang and moving everything, we are going to shift to the new method -- new engines that get started. But any that are already in process, just keep them through -- keep them on completed contract, right. So that resulted in, obviously, in the second half of 2011, a combination of the two. So we shipped some completed contract for work that had been done prior to the shift. And then last year, we shipped -- we had still engines on completed contract, where that work had been done in 2011, right.

So, all in all -- and then we did a lot of work in the shop last year for engines, many of which will ship this year. But a lot of the work has been done. Right? Because we are shipping 22 engines this year versus 14 last year.

So, basically the shift is behind this at this point, because even though we do have a couple of programs -- there's only a couple of engines -- none of which are scheduled to ship this year -- that remain on completed contract because they were part of overall engine programs. But it is just -- I can't remember the exact number, do you --? It's like two or three or four engines over the next three years. So --

Completed contract?

Yes.

It's four.

It's four engines over three years, none of which are scheduled to ship this year. So going forward, we are pretty much done with that transition and it will be all based on percent of completion. I know it has been complicated for you guys to follow. We apologize; we've tried to be transparent about it. But the work in the shop continues to be strong this year. As Alex mentioned, the backlog is about where it was before. So it is just a shift in what we have been -- what everyone has been used to tracking prior to the middle of 2011. So that is where we are. Does that answer your question, Jeff?

Yes, absolutely. Thanks, guys.

Kevin Bennett, Sterne, Agee.

First off, on 2013, you mentioned in the release that there is some indications of a second-half recovery. And I am just wondering what some of those indications would be.

Well, that is a very, very good question, because as you know, we have short-cycle markets.

Sure.

So it is really hard for us to see visibility. But most of that comes from customer feedback, right? So give you a couple of examples. One is we have a pretty significant exposure to one significant customer in the semiconductor industry that makes semiconductor -- basically, chip manufacturing equipment. We have a nice position with them.

And they give us -- they have a rolling -- gosh, we see at least four, sometimes six quarters in advance, what they believe their build schedule will be. Obviously, it is updated because it is a rolling -- it is a rolling schedule. And that shows an increase in volume as the year progresses, okay. So that is an example. Now, again, it could always be revised, right, (multiple speakers) revised and updated. But that is their best look at it today.

And the other is -- I mean, you can read the press as well -- many people believe that -- finally that the German automotive market has truly bottomed out and that there is going to be more auto sales over there as the year progresses. We're (technical difficulty) clearly at the bottom today, and Germany just reported lower registrations in January. But I don't know if you have seen some of the press, but at least in some of the southern European countries, I mean, they are bumping along at a 30-year low for automotive production.

So our view is it can't get any worse, and it's likely to get better. Just how much better and when, we don't really have a lot of visibility into that.

Plus, China has started to do better for us, both our operations in China and, as we have said before, GGB has also a nice exposure -- it's a really good business for us -- in Germany primarily, but in Europe overall, on the industrial side. And a lot of that is machine tools and construction equipment and so forth, and a lot of that gets exported from Germany to China, because it's really high-quality stuff. And they have a great position in China. So as China's economy begins to recover, they will buy more of that stuff from Germany and we benefit from that at GGB in Europe. So those are some of the things that we're [looking at] that give us a little bit of cautious optimism.

Got it, perfect. That's helpful. Hopefully those will pan out.

Yes.

Next question, in terms of the first quarter, it is pretty clear that it is going to be down year over year. But can you speak to the magnitude in Sealing and Engineered? I know you did in Engines. But I mean, is it going to be similar to the fourth quarter or should it be up sequentially or what are your thoughts around that?

Well, part of it is -- let me let Alex give you some numbers. Do you have handy?

I think there is a couple of things that we're -- there's a couple of headwinds that we are facing. So the first is the semiconductor cycle that Steve mentioned. So that, we are going to have to offset that. The second is a significant decline in FME's parts and services -- parts and services outlook. I think that sequentially, we should see a nice bit of sequential growth, typical to what you see in terms of our normal seasonal pattern. From a year-over-your standpoint, I think you will probably see us down slightly.

But again, remember, last year, the first half of the year was substantially stronger for us than the second half of the year. So it is not a great comparison looking at it on a year-over-year basis.

Yes, that is certainly fair.

So on balance for all the segments, including -- I'm not adjusting for any acquisition deal here, just total bottom line -- we are looking at somewhere with about a 4% decline in total. Right? Obviously, most of that is going to be FME-driven.

Got it. And you said that was the bottom line?

Yes. That's -- well, no, no, no. That's the total -- meaning -- no, that is the revenue, but the total of all the segments.

Got it, got it.

(multiple speakers) is what I meant, yes.

Got it, fair enough. A couple more for me. I know you guys have put acquisition kind of on the back burner while you were integrating the 2011 and then the Motorwheel one. But now that we are kind of further along in that process, can we expect you guys to kind of pick up the pace of looking for deals or are you still working on the integration?

No, no, no. Well, the integration has actually gone quite well. We feel very good about where we are. All the heavy lifting of any facility consolidations, combination of organizations, et cetera, is behind us. We still do have some systems work to do, but that is kind of ongoing stuff; it is not really impeding the capturing of any synergies or anything like that.

So I actually feel very, very good about the kind of strategic position of our businesses, including CPI. We've done a lot of work in CPI to get that business positioned. So I am pretty optimistic about the performance there as we go forward.

Now, to answer your question, and for everyone, the simple fact of the matter is we've got the estimation trial for the ACRP coming up this summer. And we've got $150 million plus of cash that is kind of frozen up in that process. And we've got an intercompany note that we have to support for GST. So it is not a great time for EnPro overall to be raising new capital in the market, so we have to do it kind of based on our own cash flow, our own availability, et cetera, et cetera, this close to the estimation trial, which is, as you guys know, we have been working on for 2 1/2 years now getting ready for this.

So, part of it last year just happened to fit so that we had a lot of integration work to do and didn't have a lot of capital available on our existing balance sheet that we could tap or leverage. We are still in that situation on the balance sheet. So we are looking at a couple of smaller opportunities. None of those are likely to happen in the first quarter. And there is nothing big that is going to happen until -- unless and until we know what is going to happen with our ACRP case. Either we're going to be in the thing for quite a bit longer or we are going to reach a settlement sometime this year, or the judge is going to do something to change the game in July. So given that we are so close to that, it is really prudent for us to kind of see how that plays out over the next six to nine months.

Got it, sure, that's fair. Last one for me. The Canadian natural gas business at CPI, kind of been a problem child for a while. I know you guys have done a ton of work to try to rightsize it. But given some of the structural challenges in that market, I mean, how committed are you guys to that business? I mean, do you think you can -- does it make sense to just get out of it? Or do you think you can earn a sufficient return? What are your thoughts around that?

That's a good question. I mean, it is something that we obviously have robust debate about internally. I don't know that we have the definitive answer for the long term because we continue to look at it. But right now we feel like we are at least going to be moderately profitable up there, given the demand that we see today and given the restructuring that we put in place.

And we still think that long-term it is a viable play. I mean, there is a lot of gas up there as the total demand for energy around the globe continues to increase, that gas is going to be -- that resource is going to be tapped, and so we feel like strategically we are positioned very, very well. So as long as we can continue to go forward on a go forward basis, be moderately profitable, we are going to certainly continue to strengthen our position, try to gain share and be positioned for when it starts to get -- when the resource starts to get utilized more.

Got you. All right. Thanks a lot, guys.

Joe Mondillo, Sidoti & Company.

Just to follow up on that last question, just wondering directionally-wise, compared to say the third quarter, if that environment has improved at all. It seems like -- I think I have in my notes that you sort of barely broke even in the third quarter. So just wondering, have we seen any improvement, or are we still treading on the bottom there?

I think we -- it is tough to tell, Joe, because Canada, Western Canada and where we are is Q4 and Q1 are always the slowest quarters, by far, versus quarter two and quarter three. So we really don't know how the market feels and is going to shake out until we get into the second quarter. So I would have to say we don't see any indications that it's any better -- certainly not any worse, but I would say it is almost too early to tell, to be honest with you.

Okay, fair enough. Also, could you just maybe give a little more color just in terms of the competitive landscape within that business and sort of the competitive pressures that you are seeing?

You mean within CPI overall?

Yes, within CPI.

Yes, I don't think it is any -- I mean I think it is about like it has been. I mean, our focus is on solving customer problems. And so we can still get paid when we effectively solve customers' problems for how they run their compressors with our parts and materials. That is what we focus on doing.

I guess I am just trying to ask or try to get a feel of your competitor -- the competitive landscape, I mean, is this such a niche business where there is only a couple sort of competitors, or --?

I mean there is a few other big guys. Cook Compression, which is part of Dover, Hoerbiger, which is primarily on the valve side, but also they sell rings and packing that compete with us, and we also sell valves that compete with them. That is a large Austrian company. And us are really the three big guys in the market. Then there is a whole competitive set, which is the compressor companies trying to protect their aftermarket business, right, because these -- our parts are going on compressors made by GE and Dresser-Rand and Ariel and Neuman & Esser and so forth. And so -- it's GE Gemini by the way -- and they all have some level of aftermarket activity that they try to do to support their machines.

And then there is still -- there is still some -- there is a fair bit of fragmented mom-and-pops out there. That is a big part of what we acquired over the last 4, 5 years to grow our business. So I like our position. I mean, you have got to look at it, really it is a local market business supported by a global company. So to look at the competitive dynamics you almost have to look at it on a regional basis, different regions. There is at least three or four significant regions for this activity in the US alone. There is obviously Western Canada, and even Western Canada is so big there is a couple of regions that have different dynamics. And then you've got a few regions in Europe that we look at, et cetera.

So as we look at our strategic position, we look at it within each one of those regional frames. And that is what we have been working on with our acquisition program over the last several years. It's just unfortunate that we have encountered such a difficult demand environment as we have had to consolidate these things and try to take advantage of some growth. But again, just to emphasize we have got -- by the end of the first quarter I did mention we will have -- we didn't quite get done with the restructuring that was done as it was begun in 2000 -- early 2012. That spilled over a little bit into January, but -- this year.

So we will have another restructuring charge less than $1 million in Q1. And at that point, I'm not saying we won't do anything going forward because we are always open to re-looking at it. But at this point we have got the business to where we want it in terms of the headcount footprint, et cetera.

Great, thanks. That was helpful. Then also at GGB, staying in the Engineered Products segment, how has your headcount, or sort of footprint, been looking over the last quarter or so considering the market headwind?

The footprint in terms of facilities is the same and will be. I mean we have 10 global facilities in GGB. They are all sizable operations and stable. What we did do last year -- and Alex mentioned this in the restructuring costs -- even when you flex hourly -- hourly work and hourly workers in France, you have a fair bit of severance that's different than the US because we flex labor in Europe, primarily France.

In the second half of last year we had to pay some severance costs. Most of what we do to downsize is contract and temporary labor, so that is why the number is not that big from a restructuring standpoint. But we flex labor in Europe (technical difficulty) and some even in the fourth quarter. So -- but at this point, again, the demand in Europe for GGB is I just can't really imagine that it would be lower in 2013 than it was in 2012. It may not get a lot better, but I don't see it getting any worse.

Okay. And did you say that North America was down 5% at GGB?

Only in Q4.

In Q4. Could you just give some color on that? I thought maybe that would be at least sort of flattish, sort of what you are seeing there.

Yes, it's fourth quarter year over year.

Right. For the fourth quarter year over year it was down about [five], and most of that, Joe, happened toward the end of the year. So what we actually found was in December the European market appeared to stabilize. It appeared to sort of reverse a trend that we had seen earlier in the year. And the North American markets got substantially weaker. So --

Is that automobile, or what end market would that --?

Not auto. In North America we are primarily in the industrial space. As you know, the automotive markets in North America have actually been quite strong.

Yes, that is why I was sort of wondering what was --?

Yes, I think quite frankly, Joe, it's as much that Q4 in 2011 was a pretty darn good quarter for that business because it always slows in Q4 because of the year-end holidays and customers wanting to get their inventories cleaned up a little bit, and so forth. So GGB historically has been fairly weak just seasonally in the fourth quarter. It wasn't that week in 2011, but it kind of returned to that. So some of it is just the year-over-year comp.

Okay. And then just one last question, if you will. GST, I was wondering if you could give a little more color on the end markets there and how they are trending. I thought maybe, given that it is more sort of downstream oil and gas that it might not have -- might have held in a little bit more. And also, how much is that PetroChem part of that business?

I don't know the PetroChem off the top of my head. Don, do you have that handy?

I don't know --

You can follow up with Don on that. I mean I know it is in our stuff. I just don't want to quote the wrong number, Joe. But, no, that market has been good because, again, when we -- you have got to make sure that when you're looking at GST Garlock, you are looking at the whole family of Garlock companies, which would include both what is consolidated and what is de-consolidated. So when you add that whole thing up, that's been the -- and most of the refinery and petrochem exposure in Garlock is actually in GST LLC, in the five entities. So it is going to be in the GST -- in the separate de-consolidated numbers. Okay? Certainly in the US.

But when you look at the business as a total and the whole family of companies, no, we -- it has been very, very -- it has been stable. And we feel pretty good about it. I mean, we feel that there is going to be a decent turnaround season that comes up in Q2 this year. We have got decent distribution orders for that.

The weakness that we are seeing in Garlock is in the consolidated portion in Europe as part of the PSI acquisition we did. We have some exposure to waste water and water projects. So when a city municipality does a big refurb of the wastewater plant or puts new water piping in, et cetera, et cetera, we sell a lot of pipeline products into that market. That's a business that we acquired with -- it came as part of the PSI acquisition, and it's European-based, primarily Germany. And because none of the -- and so when Alex talks about infrastructure for water and wastewater, he is talking about infrastructure really in Europe. And because they don't have a lot of money in those cities, even though they have got a pretty antiquated infrastructure, that project activity has been very, very slow. And that is really the primary area of weakness that we have seen in Garlock, and that does show up on the consolidated side.

Joe, just some additional, couple of points. One thing that we did see in the fourth quarter was -- I mentioned it in my remarks -- some conservatism in the supply chain as distributors were drawing down inventories, just some anxiety around what 2013 looked like. But actually I'm looking at the January numbers, and as Steve mentioned, for GST sales are actually quite strong, which is in line with what we have heard for the spring turnaround season. So not only does that bode well for GST, it also is a positive indicator for CPI's petrochemical and refining businesses.

Okay, perfect. Thanks a lot, guys. Appreciate it.

Megan, do we have any more questions? Hello?

There are no further questions in queue. I turn the call back over to the presenters.

All right, we thank you all for attending the call this morning, and we look forward to talking to you again soon. As always, if you have any questions or need any follow-up, please don't hesitate to give me a call. Thank you again, and we will talk to you next quarter.

This concludes today's conference call. You may now disconnect.