TriMas Corp (TRS) 2013 Q2 法說會逐字稿

Good day and welcome to the second quarter 2013 TriMas Earnings Conference Call. Today's conference is being recorded. At this time it is my pleasure to turn the conference over to your host today, Ms. Sherry Lauderback. Please go ahead, ma'am.

Thank you. Thank you and welcome to the TriMas Corporation's second quarter 2013 earnings call. Participating on the call today are Dave Wathen, TriMas' President and CEO and Mark Zeffiro, our Executive Vice President and Chief Financial Officer.

Dave and Mark will review TriMas' second quarter 2013 results as well as provide an update on our 2013 outlook. After our prepared remarks we will open the call to your questions.

In order to assist with your review of our results we have included the press release and power point presentation on our company website at www.trimascorp.com, under the investor section. In addition, a replay of this call will be available later today by calling 888-203-1112 with a replay code of 5087909.

Before we get started I would like to remind everyone that our comments today, which are intended to supplement your understanding of TriMas, may contain forward looking statements that are inherently subject to a number of risks and uncertainties. Please refer to our form 10k for a list of factors that could cause our results to differ from those anticipated in any such forward looking statements.

Also we undertake no obligation to publicly update or revise any forward looking statements except those that are required by law. We would also direct your attention to our website where considerably more information could be found. At this point I would like to turn the call over to Dave Wathen, TriMas' President and CEO. Dave?

Thanks Sherry. A good morning to everyone on this call. We sure appreciate your interest and involvement with TriMas. I look forward to these calls where we get to share some details on how TriMas is continuing to grow and improve for you.

On this call Mark and I will communicate four key take-aways. One, we had 12% top line growth. About half organic and half acquisition which I view as a healthy mix.

Two, income increased 20%, this places revenue and earnings growth right in line with our long term strategic aspirations and supports our 2013 for your guidance.

Third, underlying margins on repeat business are improving. Our choice to rapidly integrate acquisitions, effects margins for the short term but supports longer term revenue and earnings growth.

And fourth, we continue to invest in multiple areas to improve TriMas for the long term, new plants, globalization, new products, and most importantly, in our people. As a reminder our performance as a company is because of our peoples efforts and focus.

There are few economic tailwinds to help, so growth, our revenue, and earnings requires differentiation from competitors and great execution of programs and projects. We have a great team of people throughout TriMas who make all the difference.

Slide four, summarizes TriMas' record second quarter results. Mark and I have recently visited our operations in Asia and traveled for quarterly operating reviews at each business unit. And out operating performance is very encouraging. We have many complex projects that are underway that are on track, including Rieke switching from manual to automated assembly in China.

LAMONS' new branch in Thailand is adding our full product range. MONOGRAM is implementing another new set of machining centers for productivity capacity, plus ramping up their new plant in Arizona. ARROW's new product launches, NORRIS' steel productivity programs. Cequent's ramp up in Mexico and multiple new Cequent product wins in Asia and South Africa.

Executing these types of programs effectively and efficiently are keys to our ongoing success and our thanks to our people at TriMas.

Slide five is an update to our environment. You know that I am a big fan of consistency and the positive tailwinds that we identify to focus on haven't changed this quarter so our work is in optimizing our responses and execution.

Headwinds are still strong, though, and short term events like recent political unrest in Brazil, require fast responses to minimize the impacts on our businesses.

Slide six is a reminder of how we grow by identifying bright spots at each business to capitalize on. Again we have just finished Operating Reviews, I am able to report ongoing progress here. Some highlights include. Arminak and Innovative products continue to capture share for Rieke. European branches at LAMONS are growing.

MONOGRAM has repeat orders from China and the 787 build rate is climbing. NORRIS assigned several new contracts. ARROW compressor contract demand is increasing in non-US gas fields. And Cequent's Thailand and Africa businesses are ramping up nicely. All of our businesses have growth programs underway, totally more than 150 projects for the Company.

I will wrap up now with slide seven, summarizing our 2013 acquisitions so far. We do bolt-on acquisitions that we integrate quickly into existing businesses. We are willing to pay for new product additions when it is cost effective for us. We strategically add geographic coverage in our target countries and we expand our customer reach when attractive.

This is certainly true with these acquisitions in 2013. I remain willing to acquire businesses that make us strong for the long term despite short term effects on margins. We intend to grow internationally even though these acquisitions take time and cost more to ensure that we do them right.

Our track record of synergies is good for earlier acquisitions and I look forward to reporting strong results from these six acquisitions in future years.

Now Mark will discuss our financial [point] segment results.

Thank you Dave and good morning. Before we move onto the financial results I would like to reflect on our progress to date, as there are some themes that are important to note. First, we continue to face a challenging macro economic environment. Yet, we have successfully capitalized on our organic growth initiatives to generate another quarter of double digit sales growth.

Second, we have continued to acquire bolt-on businesses that add revenue through new products, geographies, and customers. The cost to complete them, purchase accounting adjustments and the fact that the businesses we buy often have lower initial margins have a short term impact.

So we have plans in place to expand these margins in time. We continue to improve the acquired businesses and have a track record of targeting, acquiring and integrating complementary businesses that add value over time.

Third, we remain focused on productivity and lean initiatives and we have plans in place to optimize our footprint and improve margins. These programs continue to gain momentum across the enterprise.

Let's continue with a brief summary of our second quarter results on slide nine.

Our record second quarter sales were $378 million an 11.7% increase compared to second quarter 2012, with growth in five of our six segments. This was our thirteenth consecutive quarter of double digit year over year sales increases. Our organic growth efforts represent more than 50% of our growth, in addition our bolt-on acquisitions contributed as expected to the top line.

Second quarter 2013 income from continuing operations attributable to TriMas would have been $27.6 million excluding the special items relating to the restructuring cost associated with sequence manufacturing footprint optimization. This represents an increase of 20% compared to Q2 2012.

For the quarter we achieved a record quarterly diluted earnings per share of $0.69 excluding special items. An increase of 13% compared to $0.61 since Q2 2012. While absorbing the effect of 6% more shares resulted from our May 2012 equity offering.

We remain focused on cash flow and our results to date are in line with our expectations. Q2 generated almost $40 million in free cash flow compared to almost $19 in Q2 2012. We plan to generate $40 million to $50 million in free cash flow for the year. We ended the quarter with approximately $481 million in total debt as compared to $506 million as of March 31st, 2013.

The debt level was higher than year end due to seasonality of working capital to support our businesses as well as using approximately $47 million in cash in bolt-on acquisitions year to date. As a result we ended the quarter with a levered ratio of 2.57 times and continued target a levered ratio of between 1.75 and 1.5 times for the long term. We ended the quarter with $198 million of cash and an aggregate availability.

A couple of comments on our six month results which are consistent with our second quarter. Year to date sales increased 12.5% with approximately 50% of the growth driven by organic initiatives. Our Q2 year to date diluted EPS excluding special items would have been $1.13, an increase of approximately 12% when compared with prior year period EPS of $1.01.

To date we are pleased with our record sales and earnings for the Company in light of the headwinds and the global economy. I will provide some additional color on our first half margin rates in a couple slides.

I would like now to provide a little bit more detail on our sales growth in the quarter on slide 10. This slide provides a sales bridge from our Q2 2012 revenue of $338 million to $378 million in Q2 2013. Breaking out by segment as well as identifying growth from legacy businesses as well as recent acquisitions.

As you can see we have achieved organic growth in most of our businesses with packaging, energy, and sequent, growing faster than the respective markets. In addition, we have had targeted success in expanding TriMas outside of the businesses home markets outside of Asia, South America, and Europe.

These moves provide us with a platform for continued growth in the future with our existing and new global customers. The exception to our growth has been at Arrow Engine which has been impacted by lower demand as a result of decreased levels of market activity. We expect this to be a short term adjustment and are seeing market forecasts that would indicate improvement in later 2013.

Moving onto slide 11 which provides an Operating Profit Bridge. Our focus on productivity continues to drive legacy businesses performance and margin. We see continued opportunities through our lean enterprise efforts to continue this progression.

A couple of examples as a result of these efforts, we have experienced good momentum in packaging which delivered 25% operating profit in the quarter and in energy with international branch profit improvement and further improved efficiencies in our lead manufacturing facility in Houston.

Manufacturing and efficiencies in certain businesses has been a result of rapid and continued growth. These effects include smaller lot sizes and reduced lead time requirements are now the targets for continued focus on lean related projects. The market downturn at ARROW has had a negative effect on margin in the short term.

Second quarter margins were also tempered by our recent acquisitions, including diligence and integration costs, purchase accounting adjustments and lower initial margin rates from the acquired businesses.

Some of these costs are temporary in nature and as we integrate these businesses we will see real margin rate improvement,. We have plans in place to enhance these levels and are committed to drive synergy, including growth, productivity, and lean related initiatives.

At this point I would like to share a few highlights on our segments beginning with packaging on Slide 13. Q2 packaging sales grew 11% compared to Q2 2012, primarily driven by increases in specialty system product sales in North American, Europe and Asia. Industrial closer sales also increased during the quarter as Europe appears to have stabilized. Our Ohio Beauty Park facility and our recent sales efforts in Asia continue to ramp up. We will continue to improve margins on this business as we implement higher efficiency production in Asia. The combination of Rieke, Arminak and Innovative has positioned us for long term growth and we continue to focus on sustainable operating profit margins in the mid 20% range.

End market growth prospects remain positive for this segment and we will continue to support the launch of new dispensing and (inaudible) products.

Moving out to Slide 14, Energy. Energy sales increased approximately 25% for Q2 2013 compared to a year ago. This growth was a result of multiple initiatives including our recent acquisitions in Brazil, United Kingdom, and Thailand. Increased focus on customers in the engineering and construction space and incremental sales from our European branches.

Entering new markets like Brazil has proven to be rewarding and challenging and the recent events in the country put some short term pressure on demand. Brazil continues to be a market of significant opportunity and we continue to gain commercial traction through our acquisitions and existing customers.

We are also pleased with our March 2013 acquisitions with Wulfrun, a European manufacturer of specialty bolts which rounds out our product offering in that region. And the acquisition of the assets of Tat Lee, a gasket manufacture in Thailand. We continue to focus on margins in this segment and are pleased that our foreign start up branches are profitable and all of our product lines continue to show a margin improvement.

On slide 14, Aerospace and Defense. These sales increased approximately 23% in the second quarter as we expanded our content on aircraft with the acquisition of Martinic Engineering in January 2013. We continue to experience higher order activity as Aircraft build rates climb. Back logs remain at record levels and we are proceeding with the ramp up of our new facility in Tempe, Arizona, where we will manufacture new products for our key customers.

We have also been installing new more efficient equipment for planned productivity and capacity gains. We expect this business to continue to grow as a result of increasing aircraft build rates. Our efforts to maintain new product qualification and our expanded geographic coverage.

Moving onto Slide 16, Engineered Components. Q2 sales decreased 5% primarily due to lower demand for engines, compressors, and other well-site products. As a results of reduced levels of drilling and well completions. Drilling weakness continues to be improving going in the back half according to industry reports. This temporary buying stretch added pressure in the quarter on margins.

Sales in our industrial cylinder business increased during the quarter primarily due to market share gains both domestically and internationally, as well as new product successes.

On Slide 17, we show the performance of Cequent split into two segments. Overall Cequent America sales increased approximately 7% in the second quarter as a result of higher sales levels from the auto OE aftermarket and retail channels.

We continue to out perform the economy as a result of market share gains, new product introduction and the July 2012 acquisition in Brazil, although results were tempered there as a result of our inability to ship during the recent unrest. As evidenced by our continued footprint optimization, we remain focused on making these businesses more efficient and are pleased with our results to date.

Cequent Asia Pacific was renamed during the quarter to Cequent APEA, better representing the geography served by these businesses, including Asia pacific, Europe and Africa. Cequent APEA sales increased 34% when compared to Q2 2012 due to the recent acquisitions and our new customer awards in Asia and South Africa. Our April of Witter Tow bars in the UK will allow Cequent to leverage its full product line and strong brands around the world.

We recently added to this portfolio by acquiring the towing assets of Al-Ko out of Germany and Finland July 19, 2013. We remain focused on productivity, product leverage and expansion in the Cequent segment.

At this point I will summary the first half on Slide 18. During the first half we continued to invest in growth and productivity. We are realizing positive momentum on both fronts. We pursued areas where we saw real areas to capture share or launch new products.

We remain flexible and react with speed to better support our customers needs. In a tough economy we continue to derive significant organic growth and maintain our focus on generating margin improvement.

In addition to our organic growth we have included six bolt-on acquisitions year to date to expand our geographic footprint product lines and customers. All of these acquisitions come with incremental costs in the beginning. We have consistently proven that we know how to derive value over time with these acquisitions.

Lastly we remain focused on margins, cash flow, working capital levels, and leverage.

That concludes my remarks, now Dave will provide some comments on our 2013 outlook. Dave?

Thanks Mark. Slide 20 shows our outlook for our 2013 key metrics. These estimates remain unchanged so we reaffirm our previous outlook. Consistency is a good thing, especially in tough economies we all operate in.

I feel comfortable that our acquisitions should increase our growth expectations through the higher end of our 6% to 8% sales growth range. Our $2.15 to $2.25 EPS range is approximately 20% above 2012 and consistent with the results discussed and our expectations going forward.

$40 million to $50 million of free cash flow affirms the quality of TriMas earnings, especially while we invest somewhat heavily in acquisitions, productivity, and capacity this year.

I'll close on Slide 21 with our strategic aspirations, our go to list of what matters at TriMas as we make project and program decisions and balance short term and long term impacts.

We have accomplished a lot during the first half of 2013 and we look forward to strong performance during the second half.

Thanks for your attention and now we will gladly take your questions.

Thank you. (Operator Instructions)

We will first go to Joe Bess with Roth Capital Partners.

Good morning gentlemen, good morning Sherry. Mark you mentioned in the aerospace and defense section that you guys are doing some new product qualifications. Can you talk a little bit about that and what type of aircraft that would be going after?

Yes, it is titanium collars, Joe. It is something that is sourced for many of the product line up in the Boeing air set. So to that end that is where that product will be installed.

Okay, and when are you guys expecting qualification?

Here shortly.

Okay. And then Dave I was hoping you could give a little bit more color on your guidance. You guys have a great start to the year. About 12.5% growth for the first half. And you maintain guidance and still it looks like you are implying a flat to 3.5% growth for the back half of the year. Could you talk a little bit more about that and what you guys are seeing?

You know me pretty well, it is safe to underline the word conservative. I just have to stay conservative given the state of the economies. We are still hearing, seeing 1.5% GDP numbers in the US, which with a little bit of inflation is really flat.

And while Europe being stable is OK, it is not good. So the guidance reflects genuine concern about the state of the world economy. China feels pretty darn good to us and it is all upside. But China has gone from 9% to 7% growth rates and maybe dropping a little more. So I would flavor it with the macro view of the world. Not anything specific for us.

And when you think about that in terms of the acquisitions you guys have done year to date. What percentage of that would you say would be coming from acquisitions at this point?

Joe, this is Mark. When you think about the back half. There is clearly some continue and protracted things that Dave made mention of that we are being conservative about. But there is still acquisitions represent, circa lets call it $20 million worth of growth plus or minus in the back half.

Okay great, thank you for that. And then I was hoping you could give a few examples that you guys for your productivity enhancement opportunities that you guys are seeing now. That chart was great where you laid out all the tings that are impacting operating margins. I was hoping that you could talk a little bit about what you are seeing going forward in terms of operating margin can go.

Our productivity we tracked. Just like it is 150 growth programs it is a similar number of productivity programs. And part of them were equipment driven.

New banks of machine tools going into the [rail] machining centers, three and four access machining centers going into MONOGRAM that are not only run faster but have higher yield rates and they set up faster. So you immediately get gross margin productivity. And overhead productivity because of set up times.

You know we have had to sort out what to do in China in particular for Rieke capacity. As we get more orders there and you have this artificial issue of duties. With that background, I give the team a lot of credit for sorting through what they can automate in the current China facility to take labor content down because it is getting more expensive. And what can they build across the line in the non-duty are to get the right mix of cost to serve customers in China.

So there is a lot of capital driven productivity. And then while it is not a new subject to talk about lean and green belts and Six-sigma and all that sort of thing, TriMas has a lot of catching up to do in all that.

We just actually ran our first internal green belt training program and we have two more scheduled this year. Every time turning out another green belts that work on lean projects. And so those are both variable costs and overhead costs projects and there is nothing like getting a whole group of current employees engaged in doing that.

So you put that all together and we purposely didn't put numbers on the margin bridge chart because it gets too specific. But you can tell by looking at that chart that we have got pretty decent margin enhancement. What we were running last year, w can certainly run at that rate.

The caveat being I am still willing to make acquisitions that cost us something in the short term. And that is the balance. That is what Mark was trying to share with you on that chart. Kind of the balance of what we do repeat costs and what do we do with repeat costs and what do we do with new costs driven by acquisition.

Joe I would also like to....Joe, the strategic aspirations remain the same. Three to five percent growth productivity we are going to generate. And that is just part of the mantra associated with the Company.

That is also and Dave didn't reiterate the point around Cequent. Recognized that that footprint as well as the footprint optimization in our energy business are pretty sizable multiyear projects that are still either a, underway, or not even fully realized. So there are some pretty sizable things here in 2014 and beyond that are clearly targets of optimization over the next 18 months.

Okay, great and just lastly on that, if we were to think of all these acquisitions, fully integrated what would you view as a target operating margin to years down the line, three years down the line?

Now are you talking about the Company in total Joe? Or are you talking about those acquisitions unto themselves?

The Company in total assuming the foot print optimization is completed and successful and any integration of the acquisitions that you guys have done over the years are integrated as well. What would be your target operating margin?

I would tell you that the pressure we felt in Q2 of 100 bps plus approximately for the acquisition related activities clearly would otherwise be lapped. The reality is productivity continues to be a good guide for us in the future. Sorry to tell you that there is 100 to 125 bps that I think is in the foreseeable future and productivity continues to add to that over time as we expand margins in those years two, three and four over time.

Okay great. Thank you for that.

We will take our next question from Steve Barger with Keybanc Capital Markets.

Hello, good morning guys.

Good morning Steve.

I just want to dig in a little bit more. I agree, that was a great operating margin bridge. So thank you for that. If I am reading it correctly, it sounds like there is just under $4 million in purchase accounting, diligence, and mix impact. Looks like into next G&A. Is that right?

That is about right.

So at a 30% tax rate, that suggests about $0.07 in what is essentially non-recurring costs that are going to go away in coming quarters. Is that a fair way to frame that up?

If we did no more acquisitions. Just keep that caveat.

No, I get it. I am just trying to make sure I understand the message and really the true earnings power here. I know you are going to continue to do acquisitions.

Based on what is in that model right now, do those three categories roll off fairly equally?

What they do is, the first two fall off quicker and the mix discussion falls off over time, Steve.

Got you. And for the first two, they are pretty much done and again, barring any further acquisitions, but those are probably done in 2013. Is that correct?

That is correct.

Okay perfect and Dave you said you were confident in the higher end of the revenue range. Is it fair to say that you feel better about the high end of the EPS range as well?

I am hesitating because I hate to get too specific. If everything goes right, yes. But you know you get riots in Brazil that shut you down for a month, who knows what is coming. We have got a different time in the world of disruption and unrest and who knows. We intend to deliver results with no excuses, so I have to have a certain amount of risk stuff in it.

I hear you, but the things that you are mentioning are beyond your control. So if it comes down to the things that you can't control, it sounds like you are feeling pretty confident about the way you are executing.

Yes, yes I do. I am very complimentary of the people in TriMas and the ongoing improvement on how we improve our execution skills.

Steve, there obviously is range for a reason. And as in Dave's prepared remarks you would also have to reflect on there is some pretty complex things that we are taking on right now in 2013 that we just have to make our way through. And the teams are doing a great job so far so there is a reason why there is a range, but of course, our goal is consistent optimization.

Right and kind of switching gears to the acquisition front. You have done a lot of deals over the last 18 months, clearly getting a benefit relative to some other companies that I cover in terms of the revenue numbers you are putting up. Without getting in to specifics by property, what percentage of those are accretive to return our capital at this point and what is the time of how you feel the rest can start to contribute to that?

Are you talking about current ones or past ones. Recent ones or the past ones?

Let's say the last 18 months, right? They are typically below...

Mark takes to the Board a view of past acquisitions a year in. And that is part of the deal that the Board needs to decide whether they want to continue supporting us doing acquisitions. And the answer is yes, and it is because we can show while not every acquisition is right on its original plan.

Some are ahead and some are behind, overall the acquisitions awe have made. What matters is what will the effected multiple be now and it is much improved a year in because of being accretive. That is a round about way of saying they are helping our return on capital.

Got it, okay.

I said I look for ward to reporting the same kind of results on these six. We will know a year in.

If you look at some of them Steve, there are great examples, for example [Taylor Lord] acquisition, the South Texas bolt-on fitting, Innovating Molding, [Excel India], the Arminak purchase. There are clearly ones that have been very additive to us as an organization.

I don't consider them not just singles but doubles, triples, and in some cases, home runs. There are other ones in 2012 that are singles in this point in time. And those are ones that are tougher to integrate for us being new markets. It is early in the life of that acquisition so there is a range of activity.

Right. Overall it is obviously been a benefit to the top line and it seems like it is coming along on the bottom line. I was just trying to frame up the aggregate impact and when you feel really solid about those all contributing if it is possible to frame it up.

But I think you have answered it well. On the last call you mentioned that the acquisition prices in Europe were coming down. Obviously, you just picked up a new Cequent property there, but more broadly what are you seeing in the market place? Are there any targets coming into your price range that fit into the segments that you want to grow?

The acquisitions funnel remains very healthy, first and foremost. And Dave's view of diversifying, obviously, TriMas into end markets that aren't our home markets, we have made real great steps where in 2013.

And I'll tell you that [Brazil] efforts in 2012 clearly added to that. If you look at relative pricing, the pricing remains what I would consider more reasonable in Europe that it has been. And I think it has been the recognition of the new reality in terms of volume levels versus unrealistic expectations of a couple years ago. To that end we remain very active in terms of building the funnel and our division President's clearly have lead in that respect.

Very good, I will get back in line. Thank you.

We will go next to Scott Graham with Jefferies.

Good morning.

Hello Scott.

I was hoping that maybe you guys, with the exception of Aerospace and Defense which is always lumpy, would you maybe broad brush Dave what you saw order rates as the quarter progressed?

Lumpy through the quarter but even if you back up and smooth it, I would say organic growth of half and half organic growth and acquisition growth in the quarter. So that would say 6% but a lot of that was new product.

On the pure repeat business it was a 2% growth kind of quarter. As you got closer to the consumer a specific would be, it seemed like there was a slow down in June and then after the July 4th weekend things picked up. How much of that is retailers controlling inventory and all that short of thing. Some of that went on.

I think if you sat through a a bunch of operating review you'd consistently hear people being worried about the short term because of customers waiting until the last second to place orders and wanting them in a hurry.

That just seems to be the mood and I can't really second guess anybody on that, everybody is still cautious that we still know.

And it shows on that up and down stuff and expectation of shorter lead times. You know I like speed and learning how to fill orders faster and using that as a competitive advantage. While I like it philosophically it is tough stuff. We are stressed in operations by having to run on much shorter cycles and do a lot more setups and all that. It has become the way of the world though, Scott.

That is not uncommon at all. So if you could also then, and maybe this is more of a question for you Mark? The Aerospace and Cequent segments had some specific purchase accounting notations. Could you just tell us what that dollar amount was in each business?

Available in the Q that will follow Scott, in terms of each one of the acquisitions. If we were to look at the Martinik acquisition the purchase accounting adjustment was circa $300,000 and in terms of the activities focused around Cequent APEA the number is a similar kind of a number, $307,000 in purchase accounting associated with Witter and ENO yet to be dealt with in terms of our things around the acquisition that closed just a day or so ago.

We call it $1 million in purchase accounting activities. The rest of it is as Steve asked is similar kind of level, a little bit more in terms of the integration and acquisition costs as well. Those are the two things that fall off in relatively fast order.

All right, thank you. The last question is this. It looks to be like the energy margin decline was the shallowest in two years. Are we at the bottom there, do you think, in the year over years? Do you think?

I would tell you that if you looked, Scott, your observation of the margin rates actually being stable and operationally if you look at them in terms of the legacy business they showed improvement, not only quarter on quarter but also year on year, is a good one.

2012 was a tough year in terms of that [layman's] business as it ramped pretty heavily in volume and fuel production inefficient challenges as a result of that rapid and contained inconsistent growth. So I will tell you it is on the other side of improvement at this point.

I would add, I am real happy with the progress in that business. Europe looks the best margin wise, we have seen in. Sales in Europe are not all bad in energy because you are still getting all refinery work and all that but margins are the best we have seen them.

The only drag in that business right now mixing it down is Brazil and that is really driven by all this investment right now is new plants. And while we know how to do new plant work what we make the most money at is replacement stuff, is in the MRO world. We are just going to ride new plant construction for a while.

It is going to be good for revenue but it is always a little lower margin and kind of heavy engineering costs. But it's establishing the base for the future, when you know [overall] the MRO business. We know that going in and Brazil is continuing to spend money at numbers you can hardly believe on investment and energy and it will continue.

So I like the trends in the energy business. We were at the Tat Lee acquisition while we were in Asia. Mark, Josh, Collin, and I were all traveling together. That is an acquisition of a fully functioning gasket and seal company and now we are rapidly bringing in fasteners.

And almost couldn't be a better model. Great as is and then you add a whole other product line to it and the sales go up and leverages and profits rise accordingly. So we are looking for more of those.

That is really all I had, thank you. Nice quarter.

Thanks Scott.

Thank you. (Operator Instructions). We will go to Robert Kosowski with Sidoti

Hello good morning guys and Sherry, how are you doing?

I'm all right.

I was wondering on slide 11. Thank you for putting that in there, what goes into the economics portion of the bridge? And does the productivity portion of the bridge include the fixed cost leverage that we would have seen on the 6% organic revenue growth.

No we don't...we play that game clean in terms of our productivity. It is real cost productions and real cost identification. Economics for us are things like salary increases, healthcare costs increases. We have not seen a lot of material cost effects so it is really that kind of nature of expense.

Price is in that column.

Price is also there

We are actually getting a little bit of price around the Company, you would think it would be zero, but there is a few things where we get price.

Okay and what level incremental margins would you expect to have seen on a 6% revenue growth? (Inaudible) it seems -- just trying to square away the 100 basis points of legacy margin degradation versus fixed cost leverage should have had a tailwind?

My rule of thumb is is you look at our reported gross margin and say that there is fixed cost, depending on the business unit, 6% to 10% fixed cost that is a normal incremental margin that you should feel.

Okay and other wise on the packaging segment could you maybe just bridge the margin expansion we saw year over year, just between or at least operating income growth year over year, between the elevations of some of the acquisition related costs, some of the productivity increases, better product mix, because closure was a better quarter?

Yes we are not going to get to a price volume mix kind of discussion within the segments at the point in time, Rob. But let me give you the general trail signs associated with it. We have gotten productivity in Asia as a result of basically automation that we made mention of.

We way improvements in margin rates not only in terms of production efficiencies and lien related activities in the Innovative Molding business.

Arminak and Associates, we have seen not only the leverage associated with the new Beauty Park facility but also the margins continue to ramp in that new facility.

We have seen positive price in this business. I would tell you that this 25% operating profit within that Q2 horizon was an outstanding performance for that team.

Okay sounds good. And then otherwise just on CEQUENT North America could you talk about where you stand right now on the move from Goshen to Mexico? Where there are some efficiencies going on or redundant costs going on in the quarter as you kind of had lines running two different areas and you are trying to find out the right way?

The project, and you track a project like that on the number of part numbers moved, the product rate in [Rinosa] versus the production rate in Goshen, you track it with customer approvals because that is a regulated industry and you need customer approvals on most of the moves.

And we just had a operative review and it's good say that those metrics are on track. So we are absorbing the costs we are expecting to absorb as we go through it. We had built a bank of some products for the move. We work through that. You can tell it in the inventory numbers. The other moves that are going with that are warehouses and that sort of thing.

For example, I like to track transaction costs and there have been a number of transactions in a business like that. Partly for long terms trends, but also in that business there is still a master warehouse open in Huntington, Indiana and a new one in Dallas, Texas.

And they are filling orders, one order winds up getting a shipment from each warehouse. So you have a double cost on that, double transaction costs and all that. And it is always the same conversation.

You don't want to load up a whole fleet of trucks and move it from Huntington to Dallas because that is a wasted effort, but at some point you cross the line where it is worth loading a smaller fleet of trucks and moving it so you do away with those costs.

That is kind of a round about way of saying we are still kind of right in the middle of eating double costs.

And you can tell by the sales the business is pretty strong and so we are having to really at capacity at both plants.

Okay and when do you expect the move to be completed?

It is still the end of this year. The physical move will be done, there will probably be some residual effects going into the first part of next year. It is right on track.

Okay, cool, thank you very much, good luck with the back half of the year.

Thanks Rob.

Thank you. (Operator Instructions).

It appears at this time we have no further questions. I will turn the conference call back over to our speakers for any additional comments.

Well thanks everybody again we sure appreciate your attention. I do look forward to these calls. I am glad to share a lot of positives going on on our side and we learn something from your comments and questions. So we appreciate it. So again thanks all, we will keep our efforts high and stay focused. Thank you.

Thank you, ladies and gentlemen this does conclude today's presentation you may now disconnect.