Enpro Inc (NPO) 2015 Q3 法說會逐字稿

Good morning. My name is Anastasia, and I will be your conference operator today. At this time, I would like to welcome everyone to the EnPro Industries third-quarter 2015 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. Dan Grgurich, Director of Investor Relations, you may begin your conference.

Thank you, Anastasia. Good morning and 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 accompanying the call. Steve Macadam, our President and CEO, and Milt Childress, Senior Vice President and CFO, will begin their review of our third-quarter performance and our outlook in a moment.

But before we begin our discussion, I will point out that you may hear statements during the course of this call that express 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, 2014, and the Form 10-Q for the quarter ended June 30, 2015. We do not undertake to update any forward-looking statements made on this conference call to reflect any change in management's expectations or any change in assumptions or circumstances on which such statements are based.

Our earnings release and conference call presentation materials contain additional disclosures regarding non-GAAP financial information; collective references to EnPro and our subsidiaries; the deconsolidation of Garlock Sealing Technologies, or GST; and pro forma financial information presented as if GST was reconsolidated for financial reporting purposes. These disclosures are important to understanding comments we will make on today's calls, and we urge you to read them carefully.

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

And now I'll turn the call over to Steve.

Thanks, Dan. Good morning, everyone. I would like to start my comments this morning with an update on the markets we serve.

Certain sectors, such as oil and gas, steel, mining, agricultural equipment, and really more generally other capital goods sectors, have exhibited recessionary conditions due to slowing global growth and low commodity prices. Aerospace, nuclear, trucking and auto markets have been stable to moderately higher, while semiconductor was growing earlier this year before turning down in the third quarter. Government spending on ships and maintenance has also remained steady this year.

In large part, our results for the quarter mirror these macroeconomic conditions. For the third quarter, our consolidated sales were up 1%. And pro forma sales, which includes the results from deconsolidated GST, were down 1%. On a normalized basis, consolidated sales were down 4% for the quarter, and GST's net sales were down 6%.

Our consolidated adjusted EBITDA of $41.8 million for the quarter was down 3% from a year ago, and our pro forma adjusted EBITDA of $53.0 million was down 5% compared to last year's third quarter.

Consolidated EPS of $0.51 a share was up significantly from the $0.33 a share reported in the third quarter of 2014. This improvement reflects lower corporate income tax and other expenses, as well as the reduced number of shares outstanding compared to a year ago as a result of our share repurchases and transactions related to our convertible debentures.

While Milt will provide more details on our financial results in a moment, I want to point out that our results in sealing products and power systems for the quarter and for the year have been reasonably strong considering market conditions and the negative impact of the strong dollar. In engineered products, however, our results have suffered due to a more concentrated exposure to oil and gas, agricultural equipment and capital goods markets, and a higher percentage of revenue generated outside the US.

In response, we have initiated a number of restructuring moves in engineered products that will result in the elimination of two plants through consolidation at GGB and the exit from nine other service and light manufacturing facilities at CPI. These moves have resulted in restructuring charges in the segment of approximately $2 million through the third quarter of this year, and we expect an additional $8 million to $10 million in the fourth quarter and $1 million to $2 million in the first quarter of 2016, most of which relates to plans at CPI.

Upon completion, we estimate these actions will result in annualized cost savings in our engineered products segment of approximately $4 million to $5 million. The restructuring at CPI will provide heightened focus on our higher-margin core petrochemical and refining markets and a scaling back in the natural gas production markets in response to market conditions, particularly in Western Canada, that we do not believe will rebound anytime soon.

In addition to these moves, we have also had an intense focus on operational improvement at CPI, and we have made great progress over the past year. As an example, CPI's division-wide on-time delivery was an unacceptable 81% in the third quarter of 2014. It improved to 89% in the third quarter of this year and is on track to exceed 93% in 2016. Milt will provide more detail in a few moments about the recent restructuring actions at CPI.

At GGB, our focus is on optimizing our manufacturing footprint while establishing operational excellence in supporting our customers. In North America, we are currently consolidating two leased manufacturing facilities which are coming off lease this year into a newly purchased facility across the street from our main operation in Thorofare, New Jersey. In Europe, we consolidated our solid polymer operation, again a leased facility coming off lease, into GGB facilities in Slovakia and Germany. And in China, we are replacing a leased facility with one that we own, which will house manufacturing for both GGB and Stemco in China. Going into 2016, our engineered products manufacturing footprint will be leaner and more efficient.

Switching gears to our capital allocation strategy, yesterday our Board of Directors authorized the repurchase of up to $50 million of our common shares in addition to declaring our normal quarterly dividend of $0.20 per share, this authorization made in response to the low multiple at which our stock trades relative to pro forma earnings and our belief in the underlying value of our Company. We will determine the timing and the amount of the repurchases based on our evaluation of market conditions and other factors and expect the repurchase program to be executed within the course of the next two-your authorization period.

As a reminder, during our March investor day and on earnings calls since then, we have communicated our commitment to creating long-term shareholder value through a balanced allocation of capital that includes investing in maintenance and growth programs through capital equipment and facilities spending, along with new product development and strategic acquisitions, while also returning capital to shareholders through regular dividends and periodic share repurchases. We have also communicated our goal of maintaining a net debt-to-EBITDA ratio of around 2 times. Through the course of this year, we have allocated capital accordingly, and our leverage ratio was approximately 2 times, excluding notes payable to GST, at September 30.

I also want to report that we're making very good progress on the three acquisitions in our sealing products segment completed over the last year. Integration activities are proceeding according to plan, and in the aggregate we expect results over the next two years to exceed our original expectations.

We invested approximately $110 million in three businesses, and we expect they will contribute about $6 million in EBITDA this year, reflecting first-year purchase-related expenses, integration costs, and the midyear timing of the air springs acquisition. Within a two-year period, we expect these acquired businesses to contribute annual EBITDA of approximately $20 million to $25 million. All three are excellent strategic fits with our core sealing segment businesses.

Finally, I want to update you on the status of GST's Asbestos Claims Resolution Process. We are moving down the path toward next summer's confirmation hearings scheduled to begin on June 20. We continue to be confident that GST's plan of reorganization meets all the requirements of the bankruptcy code and can be confirmed. The plan continues to have the full support of the future claimants' representatives.

A very large number of alleged claims, about 180,000, were filed on or before the October 6 claims bar date, as expected. And as expected, current claimants were voted overwhelmingly against approval of the plan. However, we believe we will demonstrate that the filings and the vote were orchestrated by the asbestos plaintiffs bar and their current claimants committee and that, notwithstanding the vote, the offers under GST's plan of reorganization will pay sufficiently more than the full value of any liability the Company may have for the claims.

Our experts have recently begun what will ultimately be a thorough analysis of the claims voted and filed. Based on a preliminary review, we believe that a significant portion of the claims are demonstrably bogus. Many are, in fact, already time-barred. A large number are actually previously dismissed or settled claims. Many others are brought by claimants who had no meaningful, if any, contact with GST products. And still others are noncompensable foreign claims. And, finally, a large number of claimants have absolutely no evidence of even having a compensable disease. Importantly, more than two-thirds of the claims were filed by a total of 11 plaintiff firms who have traditionally focused on nonmalignant claims.

Also, it's important to note that significant claims that were pending prior to the Chapter 11 filing were not filed and therefore are now barred, including those that were even settled by GST prior to the filing date. In addition, some significant plaintiffs' firms did not file any of their pending claims, and others didn't file a large number of mesothelioma claims, for which they filed personal injury questionnaires earlier in the case. We believe those missing filings are telling and that the law firms obviously don't want their claims to face the scrutiny of the court and the public.

With respect to GST's fraud and RICO cases against asbestos plaintiffs' firms, we continue to move forward with discovery and motions in the US District Court. The presiding federal district judge ruled in GST's favor on several motions, denying motions to dismiss and motions to prohibit the broad discovery that GST seeks. He cited the bankruptcy court's estimation order and findings of demonstrable misrepresentation in the mesothelioma cases that were reviewed, and, while acknowledging that GST's discovery request were quite broad, he also stated that, as the fraud in which the defendants are engaged is also broad. We anticipate lengthy discovery periods ahead, with potential trials in 2017. We are committed to moving forward to achieve a just result for GST.

Now I will turn the call over to Milt to review our third-quarter results in more detail.

Thanks, Steve. Before I begin, I want to mention that we have added a summary table in the front of our earnings release that illustrates on a pro forma basis financials as if the results of deconsolidated GST were reconsolidated with EnPro under the terms of GST's second amended plan of reorganization. Please refer to the disclosure notes that accompany these pro forma financials in the earnings release to understand the assumptions behind the numbers.

As Steve mentioned, our consolidated third-quarter sales were $306.6 million, up about $4 million or 1% from the same period of 2014. Normalized sales declined 4%. By geography, normalized European sales declined 5% as both sealing products and engineered products were lower. Markets were mixed as increases in automotive and aerospace were offset by softness in broader industrial markets.

In North America, excluding power systems, normalized sales declined 6% as sealing product sales were lower by 3%, primarily due to weaker demand in oil and gas and semiconductor markets. North American engineered product sales were 15% lower than a year ago, primarily due to weaker market conditions in agriculture, fluid power, oil and gas, and general industrial markets. Including power systems, North American normalized sales were down 3% year over year.

Gross profit for the quarter of $101.4 million was $4.8 million or 5% lower than in the third quarter of 2014. And gross profit margins decreased to 33.1% from 35.1%. Adjusting for the impact of the lower-margin businesses acquired this year, the gross profit margin is 34.8% for the quarter, which is a strong result, given unfavorable volume in the quarter. The lower margins of the two businesses acquired this year reflect current margin characteristics of these businesses, as well as the initial impact from integration activities. As Steve noted, we are very pleased with our integration progress and expect these businesses to add considerable value relative to the prices paid within a short period of time.

SG&A was down $2.6 million or 3% from the third quarter of 2014. Foreign currency translation had a $4.5 million favorable impact, and corporate costs declined $3.8 million, primarily driven by lower salary and benefit expenses and incentive compensation accruals. Partially offsetting were additional SG&A expense of $5.8 million from acquisitions, net of the GRT divestiture, and higher spending on growth initiatives at Stemco and for the OP 2.0 new engine development project at power systems.

Consolidated net income for the quarter was $11.4 million or $0.51 per share, up $2.8 million or 33% compared to net income of $8.6 million or $0.33 per share in the third quarter of 2014. In addition to lower SG&A expense, the year-over-year comparison benefited from lower other expense, primarily related to a $4 million loss on the purchase of debentures that occurred in the third quarter last year, a $3.7 million lower income tax expense in the third quarter of 2015 resulting from discrete items, and the reduced share count compared to a year ago that Steve highlighted previously.

Sales in the sealing products segment were $186.3 million in the third quarter, up about 10% over the third quarter of 2014. Normalized sales were down 4%. Softer demand from oil and gas, semiconductor and general industrial markets were partially offset by stronger nuclear and aerospace sales.

Sealing products segment profits were down $0.5 million or 2% from a year ago, and margins declined to 12.1% from 13.6%. On a normalized basis, segment profit was down 1%, but segment margins increased to 14.1% from 13.8%. The improvement was largely due to cost reduction initiatives, favorable pricing and lower material costs.

In the engineered products segment, third-quarter sales of $72.1 million declined by 18% from the third quarter of 2014. Normalized sales were down 8% as unfavorable foreign exchange translation accounted for 10 points of the reported sales decline. Improved demand in European automotive markets was more than offset by decreased demand for compressor parts and services in oil and gas markets in North America, the UK and the Middle East. Also, demand from agricultural and industrial equipment OEMs was lower in both Europe and North America.

Segment profits declined $4.5 million from a year ago. Normalized segment profits declined by $3.8 million, largely due to the impact of the sales volume decline. Normalized margins declined in the quarter from 6.8% a year ago to 2.7% this year.

Restructuring charges in the segment were $0.7 million in the third quarter and $2.2 million year to date. As Steve mentioned earlier, we expect to incur additional restructuring charges in the fourth quarter of this year and the first quarter of next year of approximately $9 million to $12 million, with $8 million to $10 million of this amount to be at CPI in conjunction with the plan announced to the CPI organization on October 21. On Tuesday of this week, we filed an 8-K disclosing details of our plans.

Of the CPI estimated restructuring charge over the next two quarters, $4 million to $5 million will be in the form of cash payments. 40% of these cash payments are expected to be made in 2015, with the remaining 60%, most of which are associated with future lease payments, to be made over time. The remaining $4 million to $5 million will be noncash in nature, resulting from the impairment of various tangible and intangible assets.

In the power systems segment, revenues increased $2.6 million or 6% from the third quarter of 2014. Engine revenues, using the percentage of completion method, were $2.6 million higher than in last year's third quarter. Lower parts revenues were offset by higher service revenues in the quarter.

Gross profit and margins benefited from stronger margins on engine and parts revenues and lower operating costs, but these were partially offset by the lower mix of parts sales. Material costs also improved, partly due to the benefit of the strong dollar on European-sourced material. Offsetting the gross margin gains was higher spending on R&D and SG&A.

Segment profit decreased $0.4 million, and margins declined from 20.6% to 18% for the third quarter of 2015 compared to the third quarter of last year. Due to the stable euro-to-dollar exchange rate at the end of the third quarter compared to June 30, there was no adjustment during the current quarter to the EDF loss provision recorded earlier this year.

Cash flow for the first nine months of 2015 was a use of $102.2 million compared to a generation of $134 million in the first nine months of 2014. The use of cash reflects accomplishment of several of our capital allocation goals, including a share repurchase program, initiation of a dividend, purchasing most of the outstanding convertible debentures, and strategic spending on acquisitions and plant and equipment. Also contributing to the use of cash were interest payments related to the issuance of debt last fall and seasonal investments in working capital. To support these activities, we borrowed approximately $78 million under our revolving credit facility in the first nine months of the year.

Sales of the deconsolidated operations of GST and its subsidiaries in the third quarter of 2015 decreased by 12% compared to the third quarter of 2014. The decrease reflected softer market conditions, particularly in the eastern US and Canada, where normal seasonal maintenance activity was lower. Sales also reflected the effect of lower global oil prices and reduced activity in the steel and mining industries. On a normalized basis, sales were 6% lower than in last year's third quarter.

Operating income, which excludes asbestos litigation-related expenses, was down 15% from the third quarter of 2015, primarily due to lower volume. Normalized operating income was $10.1 million compared to $11.1 million in the third quarter of last year, and normalized operating margins were 17.6% compared to 18.2% last year. Asbestos-related expense was $5.3 million in the third quarter of 2015 compared to $4.9 million last year.

Adjusted EBITDA before asbestos expense for the quarter was $11.1 million, down 12% or $1.5 million compared to last year.

GST's cash and investment balance was $263.3 million at the end of the third quarter compared to $229.3 million at the end of December 2014. The increase includes the collection of $21 million of asbestos-related insurance proceeds since December 31, 2014. The remaining balance of GST's insurance receivable at the end of the third quarter was approximately $80 million.

Now I will turn the call back to Steve.

Thanks, Milt. We will close with a discussion of our outlook for the full year of 2015 and open the line for questions.

We have solid demand levels in the nuclear, petrochemical and engine parts and service markets. However, softer conditions in many of our other markets and the strong dollar continue to affect our results.

Given these ongoing market headwinds and our results for the quarter, we expect segment profit for the year to be at or slightly below the low end of our guidance previously provided, excluding the impact of restructuring charges expected in the fourth quarter of 2015. We estimate restructuring charges for the year to be in the $12 million to $13 million range compared to the $3.2 million included in our previous guidance. We expect GST's results to be within the range previously provided. The revised guidance is based on exchange rates in effect at the end of the third quarter.

Despite current challenging market conditions, longer term, we expect continued benefits from our strategic growth initiatives, including growth from the recent and future strategic acquisitions and continued emphasis on improving operational efficiencies.

Now we will open the line for your questions.

(Operator Instructions) Ian Zaffino, Oppenheimer.

Good quarter, considering the tough markets you are operating under. The question would be on the engine business. Steve, I know you've talked a lot about the opportunities there to be able to branch out beyond the core market, maybe something a la EDF.

What are you seeing as far as that initiative? Are you in talks with any customers about it? Just maybe give us an update on that initiative. That would be helpful. Thanks.

Yes, yes. Good question, Ian. Good morning. There's two big aspects to it. The first and really most important is our development of a new opposed piston engine, a new design, that we are doing with whole bunch, actually, of proprietary technology from our partners, Achates Power.

As you know, we have an existing OP engine, which is in fact the design that we are using for EDF. But that's the current -- let's just call it the current-generation engine.

The one that we are developing we have been working on for a couple years. And really just have had -- this may not mean much to financial folks, but to an engineer like me, it's a huge accomplishment to have a team of 8 to 10 people at FME that in really 2 years from the start can redesign 6,000 of 8,000 parts, assemble an engine, build a new test stand, and have the engine up and running in a test configuration.

That all happened. We started the new OP in September of this year. So I'm just very, very excited about what that can bring to us because that could be a -- our hope is that that's a competitive with any engine on the market in the world and has the unique characteristics that an opposed piston two-stroke engine provide, which are substantial.

So we are hopeful that sometime in the first quarter of next year, we will have real performance results from our design of experiment testing that's going on right now. And that we will be able to communicate that to the world of diesel engine customers and really have a much better sense probably late in the first quarter or early second quarter of our timing to be commercially -- have that engine commercially available and the market feedback.

So that's one big aspect. And it's still -- until we get the actual performance results coming in the next several months, we won't really know exactly what we think the potential is, although we think it's either going to -- for FME, it's going to be significant. The question is whether it's like really significant or whether it's just significant for a business of our size. So that's the first.

The second is the partnership we announced about a year ago with MAN, who, as you know, is already our technology partner for many engine styles that we sell to the Navy. And we are their exclusive licensor -- licensee in the US to sell to the US government. We entered another deal with them, which is to sell their natural gas engines in the US market as well.

That's a new market for us and we have made several large proposals to customers. We have not won anything yet. We have learned a ton about what it's going to take to compete in that world. We have a number of active discussions and proposals going on. It has not yet yielded any fruit, but I'm not surprised, actually. I'm surprised we have come as close as we have.

We had, for the first time ever at FME in Beloit, at the main factory, in August, a customer event, where we had invited a bunch of customers up to tour the factory, see the new OP engine; made a bunch of technical presentations to them. Achates was there and presented, and we talked about our MAN gas engine availability and so forth.

And the response from the industry and the customer base that buys diesel engines was overwhelmingly positive. It's the first time, really, for, gosh, certainly since I have been at EnPro and really years before that FME has been back in the commercial market in a visible and viable way.

So that's the status. I know it doesn't help you in trying to project what this might be worth because we are just still a little bit too early to really put any numbers around what we think the potential is. And I apologize; that's just it. It's a long-cycle business; developing these engines and markets just takes a while.

That's very helpful. Thank you for all the color. I'll let someone else hop on. Thanks.

Jeff Hammond, KeyBanc Capital Markets.

I just wanted to go back to the guidance here. It looks -- and just to be clear: so your former guidance was $116 million to $125 million of segment income. You are saying low, at, or below the low end. That includes the restructuring that you have taken to date? And that includes the FX hit on power systems, but excludes future restructuring? Is that right?

Yes. Jeff, you may recall on our last call, we indicated that the revised guidance that we had provided included restructuring expense through the first half of the year plus ongoing additional restructuring expense that was associated with actions that were already identified and planned. So the total of that in the guidance was a little over $3 million; I think it was $3.2 million. So that was what was in the previous guidance.

So you are correct. When Steve indicated that we expect to be at or slightly below the low end of the range previously provided, it does not include any restructuring expense in addition to that $3.2 million.

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

Right.

Okay. So it looks like, if I'm doing my math correct, year to date, you are at $86.7 million, so you would need something around $29 million to hit your low end. And I think you did $33 million in the third quarter. Can you just talk about what is stepping down 3Q to 4Q within the businesses that would drive a $4 million sequential decline in segment-out profit? Or more?

Jeff, it's really a reflection of the ongoing softness in many of our markets that Steve alluded to. What we have experienced as a Company in the late summer -- there was a little bit of a resurgence where we thought, well, maybe we have bottomed and we are going to start picking back up. And then as the third quarter progressed, we really saw how that softness resurfaced.

So our conclusion is that Q4 is going to be a tough quarter, given the market conditions that we face. And it's really a bifurcated economy in the industrial world. The businesses that are more consumer facing seem to be holding up relatively well.

And then others on the industrial world that are selling into capital goods markets -- oil and gas, steel, mining, ag, heavy equipment -- those are -- we would describe as recessionary conditions. So it's largely based on our assessment of how we see the quarter, nothing unusual.

What businesses are getting worse, though? Because it seems like third quarter already stepped down. Are you taking another leg down? Or is there something within power systems where the margins at 19% are not sustainable or--?

No. Actually, we expect a decent fourth quarter in power systems. And we have, actually, a pretty attractive shippable backlog of parts and we've got a number of engines that will ship as well, if the current schedule is maintained. So it's not a power systems issue.

I think part of it is -- now, I don't know how this compares to the third quarter. But a year ago, in Stemco, we had a pretty aggressive steel promotion in Q4, which we will not have this year. And we had a regional, outside the US, promotion in Q3, which helped Stemco's numbers.

So they will be -- they won't get as much demand in Q4 as they had in Q3, would be my guess, but marginally down. And then I think Garlock always has a little bit weaker fourth quarter has been our experience.

And the other thing I would note, Jeff, is that we see this downturn in semiconductor, and that's going to continue. I think it's going to have a bigger impact on us in Q4 than in Q3, when we received an order from one of our large customers, AMAT, of a change in the order patterns.

But I talked -- you have done different numbers, Jeff, in comparing it to Q3 and so forth. But I think our guidance of being at that or just slightly below is reasonable.

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

Yes. Well, on a normalized basis, right. So our Garlock team has done, actually, an outstanding job reducing their costs and getting positioned for this difficult environment. It has been a tough road for them. But they have done a great job. And we have managed cost well in the other two, in Technetics and in Stemco. So their demand has held a much better, but we have still been really working hard on the cost side.

So we think that's sustainable. We think we are now positioned in Garlock. And again, when I say Garlock in this sense, it's both the consolidated and deconsolidated portions, Jeff. Because as you know, from an operational standpoint, we continue to run it as one big family of companies.

So they have done a really nice job. And so when we look at their gross margins, it's more or less the same as where we were a year ago in the face of a pretty dramatic drop in demand. So, yes --.

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

The June 20 day? Yes. What would drive that to move materially? I guess if the case took a fundamental shift in direction somehow. The scheduling orders have been made. The discovery process is underway leading up to that. There's always something that could pop up that would require a different scheduling order. But so far, we have not seen anything like that. So I think the closer we get to it, the more likely it is to be maintained.

It would be hard for me, Jeff, to speculate on things that could actually move it, to be honest with you. But there are things that could. But the number of things that could are so -- there's so many of them, but I would assess the probability of those many being so low it's really hard to gauge what -- it's hard for me to answer your question.

Okay. No, that's fair. Thanks, guys.

Joe Mondillo, Sidoti & Company.

Wondering if you could talk a little bit more about CPI. This has been a business that has been challenging for the last couple years. Now you are exiting a few different facilities or service centers.

Could you give us your take on entering the second half of the year and now going through this? And what is the before-and-after structure of CPI? Are we starting to exit this business? If you could give more color on that, that would be great.

Yes. I'll address it from a strategic standpoint. And then, Milt, you can maybe talk a little bit about some of the numbers. Look, Joe, this is not something we just dreamt up. We have been working on this restructuring program for quite a while trying to figure out exactly what to do really, frankly, for six months.

CPI as a business -- it's a global business. As a business, it has two main segments it serves. One is the petrochemical and refining segment, which is really the parts and service to large reciprocating compressors, large gas compressors, that are in refineries and petrochemical plants. These are typically slow-speed compressors and they are much larger and they are in many cases the heartbeat of part of the process in a refinery or a petrochemical plant.

The other segment is natural gas processing, natural gas gathering, transmission, storage, etc. Those compressors are different. They are high speed compressors and they are remote; they are out in the field. And they service the gas industry broadly.

Our European CPI business is almost exclusively dominant in the petrochemical and refining segment -- very, very little natural gas. But our Western Canada assets were all, frankly, pointed at the natural gas market.

And so when we did our acquisitions in CPI 5, 6 years ago, we -- frankly, we made a mistake. It's my mistake. I'm not blaming anybody else. But we felt like the value proposition that CPI had to petrochemical and refining customers was transferable to the natural gas segment. And what we learned is we were wrong. The value proposition is different. It's much more around price, availability, service, response time, etc.

Now in addition to that, it was an ill-timed move because natural gas, as you well know and everyone knows, dramatically fell off the table top in terms of pricing. And the amount of gas collected in Western Canada that was being sent to the US dropped by -- I think one year, it was 30%. And it's getting worse, not better.

So what you see in our restructuring effort now is what we believe our final move to retrench, if you will, back to our core profitable higher-margin petrochemicals and refining segment, what we grew up doing, and significantly downscaling our presence in the natural gas world. Not exclusively, because we do have a couple of larger facilities in larger markets in Western Canada that are profitable, even in today's market, that we are maintaining. But we are scaling back from that.

And so we have exited a number of facilities in Western Canada as well as what I would call smaller, more remote parts of the world that are challenged for some reason or another, much of which is related to the pressure in the gas market.

So we are still -- look, CPI is going to be profitable next year. It's going to be making more money. We've made great operational improvements, as I gave an example just of on-time delivery, just to give everyone a feel for it.

But if you look at really every dimension of lead times for customers, parts availability, perfect order rate our cost position, our quality position out of our main manufacturing facilities around the world in CPI, I actually feel pretty darn good about the business and, quite frankly, some of these remote locations that have been struggling because of the gas market and because, quite frankly, our value proposition didn't work there. It has been a distraction to the management team of CPI.

So, as painful as this was for our team to do because we downsized a lot of people. It's always challenging to exit a facility. But as challenging as it was, I think the leadership team is really excited about how this positions CPI going forward to do what we do well. And we can just get much, much more focused within that team. So that's a little bit of color.

Let me see, Milt, if you want to add anything from a financial standpoint. Then, Joe, if you have any follow-up questions, we obviously --

No. Yes. No, that's really helpful. In terms of the financial aspect, I would just follow up just to clarify the $4 million to $5 million of savings. That includes any losses you were realizing regarding that nat gas gathering transmission business as well as personnel expenses, labor, overhead. That includes all that? So that --

Yes. Just to clarify, Joe. The $4 million to $5 million included -- it was for the engineered products segment. The estimated cost savings -- I believe we noted this in our -- yes, we noted this in our earnings release. For the CPI initiative, it was roughly $3 million to $4 million, so most of that cost savings, that's CPI.

And you are correct; it's cost savings associated with the closure of certain locations that were unprofitable and represents our estimate of what we will realize as a result of the restructuring moves.

If you look at -- maybe this is partially in response to Jeff's question earlier, too, about the quarter-over-quarter results Q3 to Q4. We are expecting -- we had a loss at CPI for the third quarter. We are expecting to have a loss at CPI for the fourth quarter. And this is excluding these additional restructuring charges -- small, but nonetheless not make money.

And part of it is some inefficiencies that we are expecting as we approach this restructuring. There's a lot of activity, a lot of work that has gone on. This is a big undertaking. We have a good project team in place. We're going to execute on it. But we got to get through that.

So going forward, after we get the restructuring program complete, we expect we're going to turn the corner and we're going to be profitable in CPI next year, as Steve said. Now, it's not going to be a V-shaped recovery, by any stretch, because we are still dealing with very soft oil and gas markets that are affecting both sides of the CPI business.

And I don't think anyone is projecting -- we are certainly not expecting oil and gas prices to shoot up next year. They may move moderately up, but we don't anticipate anything that's going to change the conditions in the served market significantly as we head into 2016.

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

Yes.

Yes.

Okay. And then just in terms of the engineered products business overall, down 7% on a normalized basis for the first 9 months, 8% in the quarter. I guess what I'm trying to determine is how is GGB performing relative to the engineered products segment overall?

Well, we've had some challenges in GGB, Joe. We've had a few personnel changes that we had to make late first quarter to address operational issues. They've had a lot of work going on because they are actually exiting or moving four locations. And at the end of the day, we will be down net two locations. Right?

But we had, as I said in the script -- I don't know if you have ever visited Thorofare, New Jersey, but we have always had two plants there. One is the core metal-backed plant and one is where we do our filament-wound product line. And that was a small, crowded, leased facility.

And so we moved that facility literally -- they are right near each other. And we moved that into the facility literally across the street that we now own. So that move is just a move from one to the other. But then it is in a larger planned to give it run for expansion, and plus, we're moving our Chicago location and consolidating that into this one location. That project is still underway. The filament-wound piece is done. Chicago is underway currently.

In Germany, we had a solid polymer operation that also was coming off lease. And we were able to consolidate that into our existing facility in Slovakia and move a small piece of it to our facility in Germany. So we are exiting that. So that's a move from one plant split into two.

And then finally, our landlord in China had indicated to us awhile ago that he was not going to let us stay in the facility that we were in that has a collocated GGB and Stemco operation. And so to keep us from being forced to move again and give us more operating flexibility, we are building the facility that we own near the other one, but in China. And that project is under way currently and will extend a little bit into the first quarter of next year as well.

So GGB has had a lot going on from a project perspective as well. And then in addition to that, obviously, they have gotten a lot of market headwinds and they are mostly European -- a lot of it is outside the US. So they have gotten a currency hit. I know that is normalized out.

However, over the course of this year, we have seen, again, a dramatic improvement in our factory performance measured in on-time delivery, quality, and the new products and platforms that we now are working -- have some of the market and have some underway. So also we are expecting GGB to have -- even in the same demand environment next year, we are expecting GGB to have a much better 2016 than they did 2015.

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

Yes. And that's a lot higher margin than the auto side. Right? So our auto business has been decent in Europe and in the US -- or North America. But of course, the mix is hurting them.

Right, understandable. So relative to that 7% or 8% normalized engineered products growth, are they doing worse? Or was CPI dragging that down even --

No; CPI drags it down more even with (multiple speakers).

Okay. So they are may be low single-digits or mid single-digits or something? Declines at GGB?

That's probably about right.

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

Yes. There are a couple of factors -- one that, Joe, we expected. It was part of our budgeting process for the year and some of our allocated costs to our divisions changed, which affects things a little bit.

And then the most significant thing that was not expected at the first of the year is just how the year was going to turn out and the impact that was going to have on incentive compensation accruals. So those are the largest two reasons why you have seen some significantly lower costs of corporate expenses year over year, both in the quarter and year to date.

So are those going to smooth out going forward? Is $6 million a good run rate? Or what is normal these days?

No, $6 million would be a little low on the run rate. [We maybe] --

Okay. So maybe high single-digits?

Yes, yes.

Okay. Thanks a lot. Appreciate it, guys.

Justin Bergner, Gabelli.

Thanks for taking my questions. My first question relates to tailwinds that you've noted, which I guess is unusual from industrial companies to talk about tailwinds.

They are not very strong, Justin. Anything that's not a headwind feels like a tailwind in today's world.

Stable feels good.

Even if nuclear and petrochemical are only modestly supportive, what are the drivers there that are leading to positive trends? Or what has changed? I don't know if that was the case before this quarter or if it inflected positively this quarter. I guess that's sort of my --

No, no. Petrochemical has always been decent because of low natural gas prices, frankly. Low energy prices is good for chemical. And that's where a lot of our flagship product in Garlock called GYLON goes. So yes, and there's a fair bit of construction underway in petrochemical expansion. It's probably not the fervor that everybody felt a couple of years ago, but many projects continue. So yes, that's why.

And keep in mind, our exposure in the US to those markets is primarily in GST.

Okay, great. And on nuclear?

Well, nuclear is just a stable business for us. As you know, nuclear power plants are baseload globally. And so we have a very good position in a number of attractive product lines. And so a lot of that is aftermarket related; when the nuclear power plant gets its maintenance cycle, which happened, that can be a little lumpy year to year, but not that lumpy. And then we continue to win new -- as the new reactor activity in China has come back since the slight lull after Fukushima, we continue to win that business as well.

So nuclear is -- the world, at least as we see it, is not prepared to build a whole bunch of new nuclear power plants. China is really leading the way in that. But it's a solid aftermarket business for us and we do well in that market. So it's very stable. Gosh, even when we had the recession 5, 6 years ago, nuclear stayed stable throughout that because those plants always run.

Okay, great. Thank you. And the other tailwind mentioned was strong orders in power systems.

Yes.

Is that something that you expected earlier in the year or has that been a surprise to the positive?

No, I think we pretty much expected it. It's a reasonable lead time and we see that coming even for parts. Some parts are not, but a lot of the parts are for large ship avails, so they're scheduled ahead of time. We can see what's coming. The orders come in from the Navy and other sources ahead of time. These are planned shutdowns and so forth.

Once in a while, we will have a nice emergency order for something that breaks. But most of it is planned work. And you may -- Justin, this is before you were really tracking us closely, at least as far as I'm aware.

It was last year and the year before -- I think it was last year, actually, that we had an unusually weak avail schedule for Navy ships that actually happened to have our engines on them. And obviously, we had the sequester problem a while ago as well.

So when you look at the comps for FME on parts, that can throw you off. So I would say we are just back now to I would call it a mid-cycle. It hasn't been a spectacular year, but it has been a good year. And it's certainly been a lot better than last year's on the parts side.

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

And year to date things are good. Yes.

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

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

Yes.

It has been mostly cost reduction.

Mostly cost reduction, yes.

Okay, great. And one more, if I may. Acquisitions -- you mentioned a goal to improve EBITDA from recent acquisitions from $6 million to $20 million to $25 million over 2 years. And I think you indicated they were tracking somewhat ahead of your plans. Could you maybe frame what that $20 million to $25 million goal -- how that compares to earlier goals?

Well, look, every time we buy a business, we have a justification case that lays out what the team -- basically what we buy the business for. And so based on what we've experienced with Fabrico and what we've experienced already, frankly, with the air springs business and what our integration teams have identified in terms of cost reduction and always looking at what we are going to do on margins and so forth, we've revised up our internal expectations, in particular for those two businesses.

And then the trailer tail business -- we did have a couple of what I would call speed bumps this year. We had to fight a competitor who infringed on our patent. And that was some legal expense associated with that. And we won and they now have an injunction. They are not allowed to sell the product in the marketplace, so we are gaining momentum there.

And then we actually also inherited early on a quality problem in the field that when we bought the business, we were not aware of. So this will be part of our indemnity claim with the seller. But it took us a couple of months to get that problem fixed and corrected in the field. And there's an engineering design solution that has been put in place a number of months ago.

So even in the trial tail business, which is a little bit behind our expectations this year, we have just as much confidence as we did before. So we are not revising that internal target up, but we are certainly not taking it down.

So in aggregate, that will move these businesses in total from our normal expectation and hurdle for acquisitions is about 20% return, and it will move us from low 20%s to mid to high 20%s. So we are very excited about it.

So these are not just -- I wouldn't call them goals for improvement. They are consistent with what we have done. We just realized as we got into them that there's more potential there than we originally thought. And the integration is going well; the Fabrico team and Technetics team with them. And we have identified and captured, actually, already some synergies that we didn't have in our justification case. And their volume has been great. The team is doing a great job.

So yes, we are excited about all three of those. I think it just shows when we buy these things right and they have a good strategic home with the business that they are integrated into, it's great for our shareholders. So we are excited about it.

Great. Thank you for taking my questions this morning.

Todd Vencil, Sterne Agee CRT.

Most of my questions have been answered. You guys have given a lot of good information. I wanted to just come back around to the engineered products business as well as the sealing products business a little bit and think about what margins there can look like going forward.

I heard what you had to say about cost savings from the restructuring and things like that, and I appreciate that. But if we look at engineered products down the road, both as a result of this restructuring. And then maybe someday we will have more decent markets. How are you thinking about margins in that business longer term?

And you are talking about in the aggregate for this segment?

Yes, unless you want to breakout -- you guys can start breaking out revenue for me, if you want to.

No. Well, the wildcard -- I'm trying to figure out how quickly we are going to see improvement at CPI back to what we would expect for this business, given the change in the mix to more heavily petrochem and refinery and less natural gas. So what the conditions are going to be in the oil and gas industry. So that's really the wildcard. And how long is that going to take?

If you look historically at the segment, our margins in the segment in 2014, were -- jumped up because we had a better year at CPI. For this segment, we were at about 7.5%. The year before that, we were at 5%. The year before that, we were at 5.5%.

So I think we should get to the point with this restructuring at CPI to low double digits in the segment. And maybe when our volumes, global conditions, global growth improves, we get more volume at BBG, which leverages very well, as we've discussed in the past, and we have a stronger recovery in the oil and gas market, perhaps we exceed that.

Okay. So just to be clear, just the restructuring all by itself -- we think we can get back to low double digits. And then a better market might get us to -- I guess we have been midteens; besides midteens (multiple speakers)?

No, no. We're not --

I don't think we can expect that next year.

No. The $3 million to $4 million of savings from the restructuring are not going to move us back to double digit.

Right, okay. I understand.

So we may rebound back to where we were last year in 2014.

Well, I think with what we've done in CPI and GGB this year, I certainly would expect a high single-digit margin next year. Mid to high. So let's just -- yes, in that neighborhood. But again, that's still reflects -- that doesn't reflect really any improvement in the market over next year.

Okay, got it. Thanks for that. And then similar question just on sealing. There has been a lot of headwinds in the businesses that has moved your mix around. And it's not like I'm asking you to parse through a restructuring on that one. But your consolidated sealing and GGB, if we can think about them separately, if you take out some of the volume headwinds and the mix effects that we've seen, how do those shake out longer term?

You are talking about sealing?

Sealing, yes.

There's one factor that's important because the air springs business is a large business sales-wise. And I think we shared when we bought it that the margins are not at the level -- first of all, not at the Stemco level; second of all, not near the level that we are going to get them to.

However, this is going to take some time. We are qualifying a bunch of new suppliers for reducing costs and we are focusing on our aftermarket value proposition. Those are going to take some time. And even if we're successful, we never anticipated that they would get -- that product line ever has the potential to get to the margin levels of Stemco overall. But again, this is -- we've paid 4 times for it. Right?

So on a return basis, it's off the charts, actually, if we are able to do what we are pretty sure we are going to be able to do. But it's still, even at the end of it, is going to mix down the sealing margins a little bit because it's just a large revenue business.

So in sealing, what would you say, Milt, if you --

Yes, I think where we have reformed historically in sealing is representative. Yes, we are down a little bit because of volumes, particularly if you look at the consolidated part of Garlock that's in sealing. If you look at us on a consolidated basis as opposed to a pro forma basis, margins have suffered a little bit this year because of the heavy upstream exposure that we have in the consolidated part of Garlock. So we would expect some marginal improvement.

But we've had some pretty good results. Once again, it's all going to be driven by volume and how you see the future. In 2016, if you assume that there's not a lot of improvement in market conditions, hopefully some as we enter the second half of the year, we should expect some improvement.

So are we thinking, though, naturally in a good market, maybe that's a teens margin business, not like the high teens that we saw before some of the acquisitions that you guys did a few years ago?

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

Got it. Okay, that's helpful. Thanks a lot.

What we would expect.

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

Good. Good.

That's all I got.

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

Okay. Thank you all for joining us this morning. Have a good day.

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