TriMas Corporation
Q2 2013 Earnings Call Transcript

Published: 25 Jul 2013

[Operator:]

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.

[Sherry Lauderback:]

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 then open the call to your questions. In order to assist with your review of our results, we’ve included the press release and PowerPoint presentation on our company website, at www.trimascorp.com, under the Investors 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 supplementing 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 10-K 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 as required by law. We would also direct your attention to our website where considerably more information may be found. At this point, I will like to turn the call over to Dave Wathen, TriMas’ President and CEO. Dave?

[David M. Wathen:]

Thanks, Sherry and good morning to everyone on this call. We sure appreciate your interest and involvement with TriMas. I look forward to these calls, but 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 takeaways. 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 full-year guidance. Third, underlying margins on repeat business are improving. Our choice to rapidly integrate acquisitions, affects 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 plans, globalization, new products and most importantly in our people. As a reminder, our performance as a company is because of our people’s efforts and focus. There are few economic tailwinds to help, so both the revenue and earnings requires differentiation from competitors and great execution of programs and projects. We have a great team of people throughout TriMas that make all the difference. Slide 4 summarizes TriMas’ record second quarter results. Mark and I had recently visited our operations in Asia and traveled for quarterly operating reviews at each business unit, and our operating performance is very encouraging. We have many complex projects underway that are on track, including Rieke switching from manual to automotive assembly in China. Lamons new branch in Thailand is adding our full product range. Monogram implementing another new set of machining centers for productivity and capacity plus ramping up their new plant in Arizona. Arrows new product launches. Norris’ new productivity programs. Cequent ramp up in Mexico and multiple new Cequent product wins in Asia and South Africa. Executing these kinds of programs effectively and efficiently are keys to our ongoing success and our thanks to our people at TriMas. Slide 5, is an update to our current 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 at optimizing our responses and execution. Headwinds are still strong though and short-term events like recent (inaudible) Western Brazil require fast responses to minimize the impacts on our businesses. Slide 6 is a reminder of how you grow; by identifying bright spots in 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 alignments are growing. Monogram has repeat orders from China, and the 787 build rate is climbing. Norris has signed several new global contracts. (inaudible) and pressure product demand is increasing in non-U.S gas fields. At Cequent Thailand and South Africa businesses are ramping up nicely. All of our businesses had growth programs underway, totaling more than 150 projects for the company. I’ll wrap-up for now with Slide 7, summarizing our 2013 acquisition so far. We do bolt-on acquisitions that we integrate correctly into existing businesses. We are willing to pay for new product additions that is cost effective for us. We strategically add geographic coverage in our targeted countries and we expand our customer reach went attractive. This is certainly true with these acquisitions in 2013. I remain willing to acquire businesses that make us stronger for the long-term despite short-term effects on margins. We intend to grow internationally. Even though these acquisitions take more time and cost us 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 and segment results.

[A. Mark Zeffiro:]

Thank you, Dave, and good morning. Before we move on to the financial results, I’d like to reflect on our progress today as there are some themes that are important to note. First, we continue to thank that challenging macroeconomic 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 and 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 the 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. Thus continue with a brief summary of our second quarter results on slide 9. Our record second quarter sales were $378 million, and a 11.7% increase compared to second quarter 2012 with growth in 5 of our 6 segments. This is our 13h consecutive quarter of double digit year-over-year sales increases. Organic growth efforts represent more than 50% of our growth, in addition our bolt-on acquisitions contributed as expected in the top line. Second quarter 2013 income from continuing operations attributable to TriMas, would have been $27.6 million excluding the special items related to the restructuring cost associated with Cequent 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 in Q2 2012, while absorbing the effect of 6% more shares resulting from our May 2012 equity offerings. We remain focused on cash flow and our results to-date are inline with our expectations. Q2 generated almost $40 million in free cash flow compared to $90 million 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 31, 2013. The debt level is higher than year-end due to seasonality of working capital to support our businesses as well as using approximately $47 million in cash on bolt-on acquisitions, year-to-date. As a result, we ended the quarter with a leverage ratio of 2.57 times and continue to target a leverage ratio of between 1.75 and 1.5 times for the long-term. We ended the quarter with $198 million of cash in aggregate availability. A couple of comments on our six month results which are consistent with the 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 to prior-year EPS of $1.01. Today, we are pleased with our record sales and earnings for the company in light of the headwinds in the global economy. I’ll provide some additional color on our first half margin rates in a couple of slides. I’d like now to provide a little more detail on our sales growth in the quarter on Slide 10. This slide provides the sales growth from our Q2 2012 revenue of $338 million to $378 million in Q2 2013. Breaking up by segment as well as identifying growth from legacy businesses versus recent acquisitions. As you have seen, we achieved organic growth in most of our businesses with Packaging, Energy and Cequent growing faster that their respective markets. In addition, we’ve had targeted success of expanding TriMas outside of the businesses whole markets through acquisitions in Asia, South America and Europe. These news 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 demands as a result of decreased levels of market activity. We expect it to be a short-term adjustment and are seeing market forecast that would indicate improvement in later 2013. Moving on to slide 11, which provides an operating profit bridge. Our focus on productivity continues to drive our legacy businesses performance and margin. We see continued opportunities through our Lean enterprise efforts to continue it’s progress. A couple of examples as a result of these efforts, we have experienced good momentum in packaging, which delivered approximately 25% operating profit in the quarter. And in energy with international brands profit improvement and further improved production efficiencies in our lead manufacturing facility in Houston. Manufacturing inefficiencies in certain businesses has been a result of rapid and continued growth. These effects include smaller loss sizes and reduced lead time requirement, and other targets for our 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 tampered by our recent acquisitions including diligence and integration cost, 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 driving synergies, including growth, productivity and Lean related initiatives. At this point, I’d like 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 America, Europe and Asia. Industrial closure 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 the segment and we will continue to support the launch of new dispensing and closure products. Moving now 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 constructions base and incremental sales from our European branches. Entering new market like Brazil has proven to be rewarding and challenging and the recent events in the country puts 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’re also pleased with our March 2013 acquisition of 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 manufacturer in Thailand. We continue to focus on margins in this segment and are pleased that our four start-up branches are now profitable and all of our product lines continue to show margin improvements. On slide 15, Aerospace & Defense. These sales increased approximately 23% in the second quarter, as we expanded our content on aircraft with the acquisition of the Martinic Engineering in January 2013. We continue to experience higher order activity as the aircraft build rates climb. Backlogs remain at record levels and we’re proceeding with the ramp-up of our new facility in Tempe, Arizona. There we will manufacture a new facility in Tempe, Arizona, there we will manufacture new products for our key customers. We’ve also been installing new, more efficient equipment for plant productivity and capacity gains. We expect this business to continue to grow as a result of increasing aircraft build rates, our efforts to obtain 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 result of reduced levels of drilling and well completions. Drilling rebates appears to be improving, going into the back half according to the industry reports. This temporary volume stress 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 products 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 outperform the economy as a result of market share gains, new product introductions and the July 2012 acquisition in Brazil, although results were tampered, 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 regained 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 the Q2 2012 due to the recent acquisitions and our new customer awards in Asia and South Africa. Our April acquisition of Witter Towbars 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 (inaudible) assets of Alcoa of Germany and Finland on July 19, 2013. We remain focused on productivity, direct leverage and regional expansion in the Cequent segment. And at this point, I will summarize the first half on slide 18. During the first half, we continue to invest in growth and productivity and ARPU. We are realizing positive momentum on both fronts. We pursued areas where we saw real opportunity to capture share or launch new products. We remain flexible in reacting to the speeds to better support our customers needs. In a tough economy, we continue to drive significant organic growth and maintain our focus on generating margin improvement. In addition to our organic growth, we concluded six bolt-on acquisitions year-to-date to expand our geographic footprint, pipeline and customers. All these acquisitions come with incremental cost in the beginning. We have consistently proven that we know how to drive value over time from 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?

[David M. Wathen:]

Thanks Mark. Slide 20 shows our outlook for 2013 key metrics. These estimates remain unchanged, should we reaffirm our previous outlook. Consistency is a good thing, especially in the tough economies we all operate in. I feel comfortable that our acquisitions should increase our growth expectations to 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 we discussed and our expectations going forward. $40 million to $50 million of pre-cash flow affirms the quality of TriMas’ earnings especially while we invest on more heavily in acquisitions, productivity and capacity this year. I’ll close on slide 21 with our strategic aspirations. I would go through list of what matters the TriMas, as we make project and program discussions and balance short-term and long-term impacts. We’ve accomplished a lot during the first half of 2013 and we look forward to strong performance in the second half. Thanks for your attention, and now we’ll gladly take your questions.

[Operator:]

Thank you. (Operator Instructions) We’ll first go to Joe Bess with ROTH Capital Partners.

[Joe Bess:]

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

[A. Mark Zeffiro:]

Yes, it’s titanium collars, Joe. It’s something that is source to many of the product line up within the Boeing air set. So to that end, that’s where that product will ultimately be installed.

[Joe Bess:]

Okay. And then when are you guys expecting qualification?

[A. Mark Zeffiro:]

Here shortly.

[Joe Bess:]

Okay, and then Dave, I was just hoping that you can give a little bit more color on your guidance. You just had this great start the year about 12.5% growth in the first half, and you maintained guidance and so it looks like you’re playing about a flat to 29% growth in the back half of the year. Can you talk a little bit more about that, what you guys are seeing?

[David M. Wathen:]

I would – you know me pretty well, it’s safe to underlining the word conservative.

[Joe Bess:]

Right.

[David M. Wathen:]

I have to stay conservative given the state of the economy. So I mean, we’re still hearing, seeing 1.5% kind of GDP numbers in the U.S., which was a little bit inflation as we reflect. And while Europe being stable, okay, no it’s not good. So the guidance reflects genuine concern about the state of the world economy. China feels pretty damn good to us, and it’s all upside, but China has gone from 9% to 7% growth rate, so maybe drop a little more. So I would flamboyant with the macro view of the world, not any specific for us.

[Joe Bess:]

And then when you think about that in terms of the acquisition that you guys have done year-to-date, what percentage of that would you say would be coming from acquisitions at this point?

[A. Mark Zeffiro:]

Well, Joe this is Mark. When we think about the back half there is clearly some continuing for package things that they may mention, that were being assertive about but there is still acquisitions represent surface, let’s call it $20 million with the growth plus or minus in the back half.

[Joe Bess:]

Okay, great. Thanks for that. And then, I was hoping you would just give a few examples that you guys have for your productivity enhancing opportunities that you guys are seeing right now, that (inaudible) kind of lay out all the things that are impacting operating margin. So hoping that you could talk a little bit about what you guys are seeing going forward in terms of where you think operating margin can go?

[David M. Wathen:]

I mean our productivity, we tracked just like it’s a 150 growth program, it’s a similar number productivity programs. And part of them were equipment driven, new banks and machine tools going into newer machining centers, three and four access machining centers going into monogram that are not only run faster they have higher yield rates and they set up faster. So you believe we can get gross margin productivity and overhead productivity in terms of the set up times. We had to sort out what to do in China in particular for Rieke capacity. There as we get more orders there and you have this artificial issue of duties. With that background, we have – I think we keep a lot of equipment for sorting through what can they automate in the current China facility to take labor content out, because it’s getting more expensive and what can they built and I’ll say across the line in the non-duty area to get the right mix of cost to serve customers. So there is a whole lot of capital driven productivity and then, well it’s not a new subject to talk about Lean and Green Belts and Six Sigma and all that sort of thing. TriMas has got a lot of catching up to doing all that. We actually just ran our first internal Green Belt training program, and we have two more scheduled this year. Every time we’re talking about 20 Green Belts that work on Lean projects. And so those are both variable cost and overhead cost projects and there is nothing like getting the whole group of current employees engaged in doing that. So we put that all together and we purposely didn’t put these on the margin chart, because it gets too specific, but you could tell by looking at that chart that we’ve got pretty decent margin enhancement. Where we were running last year is we can certainly run at that rate, except the caveat being, I am still willing to make acquisitions that caused us something in the short term and that’s the balance and that’s what we were trying to. But Mark was trying to share with you on that chart was the kind of the balance of what do we do with repeat costs and what do we do with new costs driven by acquisition.

[A. Mark Zeffiro:]

Generally I was of that view that the strategic aspirations remain the same, right? 3% to 5% growth productivity we are going to generate and that’s just part of the monetary associated with the company. Yet that’s also indicated, reiterate the point around Cequent recognized that that footprint optimization is also the footprint optimization in our energy business. So, a pretty sizeable multi year projects that are still either underway or not even beginning to be fully realized. So there is some pretty sizeable things here in 2014 and beyond that are clearly targets of optimization over the next 18 months.

[Joe Bess:]

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

[A. Mark Zeffiro:]

Are you talking about the company in total Joe or are you talking about those acquisitions themselves?

[Joe Bess:]

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

[A. Mark Zeffiro:]

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

[Joe Bess:]

Okay, great. Thank you for that.

[A. Mark Zeffiro:]

Bet you.

[Operator:]

Thank you. We will take our next question from Steve Barger with KeyBanc Capital Markets.

[Steve Barger:]

Hi, good morning guys.

[David M. Wathen:]

Good morning Steve.

[Steve Barger:]

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 mixed impact, looks like you do not see in there, is that right?

[David M. Wathen:]

That’s about right.

[Steve Barger:]

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

[A. Mark Zeffiro:]

If we did no more acquisitions, these feedback caveat.

[Steve Barger:]

No, I get it. I am just trying to make sure, I understand the message and really the two earnings power here and I know you are going to continue to do acquisitions. Based on what’s in that model right now, does that roll-off – those three categories roll-off fairly equally?

[A. Mark Zeffiro:]

What they do is, the first two follow up quicker and the mix discussion follows-up over time Steve.

[Steve Barger:]

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

[A. Mark Zeffiro:]

That’s correct.

[Steve Barger:]

Okay, perfect. 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?

[A. Mark Zeffiro:]

I’ll tell you, I’m hesitating because I need to get two specific on it. If everything goes right, yes, but you can get rights in Brazil but it shuts you down for a month, you get, who knows what’s coming. We’ve got a different time in the world of disruption and unrest and who knows. So, we intend to deliver results with no excuses. So I got to have a certain amount of that risk stuff in it.

[Steve Barger:]

But the things that you’re mentioning are beyond your control, so if it comes down as the things that you can’t control, it sounds like you’re feeling pretty confident about the way you’re executing?

[A. Mark Zeffiro:]

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

[David M. Wathen:]

And Steve, there is obviously a range or a reason and as engage prepared remarks, you’d also have to reflect on this, with some pretty complex things that we’re taking on right now in 2013 that – would you start to make a 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.

[Steve Barger:]

Right. Okay. And I’m switching gears to the acquisition front, you’ve done a lot of deals over the past 18 months, clearly getting a benefit relative to some of the other companies that I cover in terms of the revenue numbers you’re putting up. Without getting into specifics by property, what percentage of those are accretive to our return on capital at this point and what’s the timing for how you feel the rest can contribute to that?

[David M. Wathen:]

See that’s a good thing. But current ones are past, the recent wins, I mean the…

[Steve Barger:]

We say the last 18 months, right.

[David M. Wathen:]

Mark takes to the board a view of past acquisitions at year-end. And that’s part of the deal, but the board needs to decide whether they want to continue supporting us doing acquisitions and the answer is yes. And it’s because we can show – well, not every acquisition is right on its original plan, some are ahead and some are behind. Overall, the acquisitions we’ve made, what kind of matters is, what would the effective multiple be now? And it’s much improved at year-end, because of being accretive. That’s a roundabout way to saying they’re helping our return on capital.

[Steve Barger:]

Got it, okay.

[David M. Wathen:]

And I have said that I look forward to reporting the same kind of results on these six. We’ll know at year-end.

[Steve Barger:]

Right.

[David M. Wathen:]

If you look at some of them Steve, I mean there is great examples for example, the Taylor-Wharton acquisition at South Texas Bolt & Fitting, Innovative Molding, X

[Steve Barger:]

Right. I mean overall it’s obviously been benefited the top line, it seems like it’s coming along on the bottom line, so I was just trying to get to frame up the aggregate impact and when you feel really solid about those all contributing if it’s possible to frame it up, but I think you have answered it well. On the last call, you mentioned that acquisition prices in Europe were coming down, obviously you just picked up new Cequent product there, a property there, but more broadly what are you seeing in the marketplace, are there are any targets coming into your price range that kind of fit into the segments that you want to grow?

[A. Mark Zeffiro:]

No, I would tell you, the acquisitions funnel remains very healthy first and foremost, and Dave you are diversifying I would see TriMas into end markets that are home markets, we made real great steps here in 2013. And I will tell you Brazil opportunity that involve clearly added to that. in 2012 grow we have into that. If you look at, we are also pricing that, the pricing remains what I’d consider more reasonable in Europe that has been and I think it’s a recognition of the new realty in terms of volume levels versus unrealistic expectations that’s couple of years ago. So to that end, we remain very active in terms of building the funnel and our Division President clearly have a lead in that respect.

[Steve Barger:]

Very good, I’ll get back in line. Thank you.

[Operator:]

Thank you. We will go next to Scott Graham with Jefferies.

[R. Scott Graham:]

Hey, good morning.

[A. Mark Zeffiro:]

Good morning Scott.

[David M. Wathen:]

Good morning, Scott.

[R. Scott Graham:]

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

[David M. Wathen:]

Lumpy through the quarter, but if you back up and smooth it, I would say I mean we often have organic acquisitions growth in the quarter. So that would say 6% but a lot of that was new product. On the pure prepaid business, it was a 2% growth kind of quarter and I mean if you got closer to the consumer, a specific would be, it seems like there was a slowdown in June and then after the July 4 weekend, things picked up. Now, how much of that is retailers control in inventory and all that sort of thing, some of that went on. I think if you set through a bunch of operating reviews, you consistently hear people being worried about the short-term because of customers waiting to the last second to place orders and then want them in a hurry and that just seems to be the mood and I can’t use certain guess anywhere, everybody is so cautious is that we don’t and it shows in that up and down stop and expectation of shorter lead times and I like speed, learn it how to fill orders faster and use that as a competitive advantage, well, I like it philosophically, it is tough stuff and if we are stressed in operations by having to learn on much shorter cycles and do a lot more set-ups and all that, like that it has become the way of the world Scott.

[R. Scott Graham:]

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

[David M. Wathen:]

They are available in the Q deck will follow the step, in terms of each one of the acquisitions. If you were to look at the Martinic acquisition, the purchase accounting adjustment was $300,000 and in terms of the activities focus around Cequent APEA, the numbers kind of a similar kind of number, $300,000 to $700,000 in purchase accounting associated with Witter and yet to be dealt with in terms of our things around the acquisitions that closed just now. So well we call it a $1 million plus in purchase accounting activities. The rest of it is, as Steve asked is, there is similar kind of level little bit more in terms of the integration and acquisition costs as well. So those are the two things that follow-up and relatively fast order.

[R. Scott Graham:]

All right. Thank you. And the last question is, it looks to me like the energy margin decline was the shallowest in like two years, are we at the bottom there you think on the year-over-year share?

[David M. Wathen:]

Yeah, I will tell you that if you look Scott, your observation of the margin rates actually being stable and if you operationally – if you look at them in terms of 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 alignment business as it ramped pretty heavily in volume and had full production and efficient challenges as a result of that rapid and consistent growth. So I would tell you that it’s on the other side of improvement at this point.

[A. Mark Zeffiro:]

I would add, I’m real happy with the progress in that business. Europe looks the best margin wise, we have seen it. Sales in Europe are not bad in energy and you could still a lot of refiner working on that, but margins are the best we have seen them. But the only real drag in that business right now mix in a down is Brazil and that’s really driven by all these investment in Brazil right now is new plans and why we know how to do, we plan work, what we make the most money at is replacement stuff is in the (inaudible) world and we are just going to lay new plan constructions for a while, it’s good for revenue, but it’s always little over margin and kind of heavy engineering cost,. but it’s established and the base for the future when we have our own business. We knew that going in and of course Brazil is continuing to spend money at numbers you can help it believe on investment in energy and it will continue. So, yeah, I like the trends in the energy business. We were at the Tat Lee acquisition while we are in Asia, Mark and Josh and I were and all traveling together and that’s an acquisition away fully functioning gasket and seal company and now we’re rapidly brining investors and almost it couldn’t be a better model, great assets and then you add a whole another product line and sales go up leverage capitalize accordingly, so we will confirm on those.

[R. Scott Graham:]

That’s only all I have. Thank you, nice quarter.

[A. Mark Zeffiro:]

Thanks, good stuff.

[Operator:]

Thank you. (Operator Instructions). We’ll go to Robert Kosowsky with Sidoti.

[Robert Kosowsky:]

Hi. Good morning, guys and Sherry. How are you doing?

[David M. Wathen:]

Good morning, Rob.

[Robert Kosowsky:]

I was wondering on Slide 11, thank you for putting that in there. Walk us into the economics portion of the bridge and as the productivity portion of the bridge include the fixed cost leverage that we would have seen on the 6% organic revenue growth?

[David M. Wathen:]

Yeah, we play that game clean in terms of productivity, it’s real cost reductions and real cost identification. Economics for us are things like salary increases, healthcare cost increases. We haven’t seen a lot of material cost effects, though it’s really those that kind of nature of expense.

[Robert Kosowsky:]

Is that price is in that cost?

[David M. Wathen:]

Yeah, price is also there of course. We actually are getting a little bit of price around the company. You think it would be zero, but there is a few things where we do get price.

[Robert Kosowsky:]

Okay. What level of incremental margins would you expect to do see on like I said for revenue growth environment? It seems I’m just trying to square away the 100 basis points of like legacy margin degradation versus fixed cost leverage that would add kind of a tailwind?

[A. Mark Zeffiro:]

My real affirm is if you look our reporting gross margin and say that there is fixed cost indeed, depending on the business unit, 6% to 10% fixed cost, that’s a normal incremental margin that you should feel.

[Robert Kosowsky:]

Okay. Then otherwise on the packaging segment, could you maybe just bridge the margin expansion we saw year-over-year, its just between early stable income growth year-over-year between kind of lead deviations or some of the acquisition related costs or productivity increases, better product mix, disclosures, files a better quarter?

[A. Mark Zeffiro:]

Yeah. We are not going to get to a portfolio mix kind of discussion at moving the segments at this point in time Rob, but let me give you the general trail science associated with it. We’ve got productivity in Asia as a result of basically automation that we mentioned. We saw improvements in margin rates not only in favorable production, efficiencies and lean related activities in the innovative moulding business. Arminak & Associates, we’ve seen not only the leverage associated with the new Beauty Park facility, but also the margins continue to ramp in that new facility. We see positive price in this business. Outside of that, this 25% operating profit within that horizon, within the Q2 horizon was an outstanding performance by that team.

[Robert Kosowsky:]

Okay, sounds good. And then otherwise just on Cequent North America, could you talk a little bit about where you stand right now and the move and goes into Mexico and where there is some inefficiencies going on or redundant costs going on in the quarter as you kind of headlines running in two different areas and trying to figure out the right way.

[David M. Wathen:]

The project, when you track a project like that on the number of odd numbers move the production rate and also versus the production rate negotiated and also when you track it with customer approvals, because that’s a regulated industry, they need customer approvals on some of the moves – on most of the moves. And we just have an operating review and it’s good to say those metrics are on track. So we are more absorbing the cost we expected to absorb as we go through it. We had built a bank of some products for the move. We work through that and kind of (inaudible) in the inventory numbers. The other moves that are going with that are warehouses and that sort of thing. We have, for example, I like to track transaction cost a bit, number of transactions in a business like that, partly for long-term trends, but also in that business, there is still a big master warehouse open in India and (inaudible) and their flow of orders, one order lines up getting a shipment from each warehouse, so you have get double costs on that and double transaction costs on that and its always the same conversation that you don’t want to load up whole fleet of trucks and move it from (Inaudible) to Dallas, because that’s kind of wasted effort, but at some point you cross the line, more it is, the smaller fleet of truck that’s moving, so you do well at those cost. That’s kind of whereabouts way of you say, we are still kind of right in the middle of yielding double cost, and you can jump on the sales, the business is pretty strong and so what happen to one really at capacity in both plans.

[Robert Kosowsky:]

Okay. And I guess when do you expect to move to be ultimately completed?

[A. Mark Zeffiro:]

It’s still at the end of this year, the physical move will be done, the public need some residual effects going into the first part of next year, but now it’s right on track.

[Robert Kosowsky:]

That’s cool. Thank you very much and good luck with the back half of the year.

[A. Mark Zeffiro:]

Thanks Rob.

[Operator:]

Thank you (Operator Instructions) it appears at this time we have no further questions. I will turn the conference back over to our speakers for any additional comments.

[A. Mark Zeffiro:]

Well, thanks everybody, again we still appreciate your attention. I do look forward to these calls, I am glad to share a lot of positives going on our side and we are learning something from your comments and questions, so we are doing on our side and we’re learning 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.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude today’s presentation, you may now disconnect.