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Kaydon Corporation (NYSE:KDN)

Q2 2013 Earnings Call

July 25, 2013 11:00 am ET

Executives

Rick Mosteller - Assistant Corporate Controller

James O'Leary - Executive Chairman, Chief Executive Officer and President

Timothy J. Heasley - Chief Financial Officer and Senior Vice President

Analysts

Edward Marshall - Sidoti & Company, LLC

Peter Lisnic - Robert W. Baird & Co. Incorporated, Research Division

Rick Mosteller

Welcome to the Kaydon Corporation's Second Quarter 2013 Earnings Conference Call. Before the conference begins, the company would like to make the legal disclaimer that certain information in this formal discussion and that may be included in the question-and-answer session is forward-looking within the meaning of the federal securities laws. These forward-looking statements are only predictions based on the company's current expectations about future events. While the company believes that any forward-looking statements made are reasonable, actual results could differ materially since the statements are based on the company's current expectations and are subject to risks and uncertainties beyond the control of the company. Listeners are cautioned to refer to the company's 2012 Form 10-K for a list of risk factors that could cause its results to differ from those anticipated in any forward-looking statements. The company does not undertake and expressly disclaims any obligation to update or alter its forward-looking statements whether as a result of new information, future events or otherwise, except as required by applicable law.

During this conference call, Kaydon spokespersons will refer to certain non-GAAP measures, such as adjusted net income, adjusted earnings per share, adjusted EBITDA, adjusted gross margin and free cash flow. To assist you in understanding these non-GAAP measures, as well as to comply with SEC requirements, the company has included in its press release a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures.

Participating in today's call are Mr. Jim O'Leary, Chairman and Chief Executive Officer of Kaydon Corporation; Tim Heasley, our Chief Financial Officer; Laura Kowalchik, our Chief Accounting Officer; and Therese Houlahan, our Treasurer.

Today's conference is being recorded. Now I'd like to turn the call over to Jim O'Leary, Chairman and Chief Executive Officer. Jim, please go ahead.

James O'Leary

Okay. Thank you, Rick, and thank you, all, for joining this morning. I know it's a busy earnings morning, and there are a lot of other calls going on.

Before we go into the obligatory ceremonial, and as painful for me as they are for you, prepared remarks, more to give some color that may or may not necessarily be in the press release, to frame the economic backdrop relative to things you see in our press release and how they compare to others out there and to get some broader guidance on how we see the macro environment. And it's not broad guidance that will help you with the next quarter or the quarter after, but it'll provide the framework, I think, that will help avoid surprises. And I think this quarter and the last quarter, I'd also say our restructuring of wind in a 3 or 4 quarters time, we tried to avoid surprises because we've been consistently talking about referring to the macro trends and talking about how it impacts our end markets. So what I would like to do is anecdotally and briefly go through end markets, which is usually a Q&A item, but I thought I would frame it before we get to Q&A, geographies, and then take kind of a completely different thought but what I think is helpful, particularly in an environment where I do think the economies are recovering, there are elements of start and stop and stuttering in various end markets. But when you look at capital spending, it is a head scratcher as why profits are reasonably good, cash is great, and CapEx seems to be on hold. And I think some of the comments at the end may -- if not explain it totally, at least give you some color to it.

Now in our case, I would categorize our performance as strong, good and -- not as good but totally expected. I don't want to categorize it as good, bad and ugly because there really was nothing ugly. Most of the things were expected. There's nothing screamingly good right now. I'd say in this environment, good is the new great for at least the time being. And the good thing is it gives us a lot of things that we can control and a lot of variables that are within -- a lot of variables, a lot of leverage that are within our grasp and we're able to manage, one being cash flow, which has been consistently fantastic over the last couple of quarters. And looking forward, the leverage that we've restored with the restructuring and our ability to manage SG&A, again, things within our control and things that we can use to manage in an uncertain but definitely improving environment.

What markets were strong, in our case, medical, semiconductor were very good. If you stripped apart the book-to-bill, which is about 1.05, wind was mathematically off the charts, but that's because you had some orders this quarter and no orders last quarter. Wind was very, very good. Military was a little below 1. And industrial, overall, was a little above 1, and that's principally driven by really, really good performance, as expected, at Kaydon specifically because of the size of those markets in medical and semiconductor.

Wind, again, was really strong, particularly relative to expectations. And by really strong, look, we were still down 14 million compared to last year in sales, not a surprise. I think what's a little bit of a surprise is you should have expected it to be down more. I don't think we expected really that much in the way wind shipments sell. If you did 5 to 6, which was a little bit of pulling from next quarter, latter this quarter a little bit, that's still a positive performance relative to what you might have expected.

The particularly surprising and positive performance in wind was on the order book, where we had some orders which really weren't anticipated. It gives you a book-to-bill, which overall, mathematically, more than offset military. And, again, anecdotally, it really suggests that we think the wind market has bottomed. A lot of the marginal players may have shaken out, and it doesn't help next quarter as much as it will help next year. You start to see the foundations of what we're suggesting, which is a healthy, 30-ish million dollar market going forward, with leverage restored to the overall business.

Again, we'll not get back to that $100 million high watermark we had. It won't be the business we all hoped it would be in 2006 and '07, but it's going to be a good solid business and a contributor, and it looks like it may be a contributor a little bit sooner than we thought a couple of -- even just a couple of quarters ago.

What was solid? Industrial machinery was solid, not great. And industrial machinery is where most of our flow business, a lot of booked and shipped business, and I'd attribute that to what I'd categorize before as stuttering, it starts, it stops. People have a hard time really making big commitments on capital. I'll talk about that in a couple of minutes as -- my theories on it. But the industrial machinery market was okay. I think a lot of that, if you kind of follow it through, had to do with European tepid performance, and concerns about China because a lot of our industrial machinery goes into product that is higher-end capital. In the last couple years, it's been making its way through Europe, principally Germany, into China or other places that are developing nations.

Also, I think solid is pretty good in this environment because in North America, which is clearly recovering, is -- I don't want to say the tallest midget in the room, but it's clearly the strongest among the developed nations in terms of recovery. People still holding their fire. If you look at the ISI Surveys, if you look at CapEx numbers, there's a lot of pent-up demand even in North America. But even if you're hurt, you get to be called.

Now what things were less solid but pretty much as expected? Military and heavy equipment. Military is pretty much where we expected. I couldn't attribute it to sequestration more than drawdown, more than just a tougher environment. I would say it's probably still more to do with drawdown and sequestration. And again, this is totally anecdotal. I hope it's still consistent with what the paper said this morning. But if you look at the Sunday news shows this week, with a deficit that is better, a North American economy that is better, tax receipts that are better, and a lot of concern that austerity may overcome fiscal stimulus -- or monetary stimulus, excuse me, you know there's a good chance some of that is going to get rolled back. Now we aren't expecting it. We're not planning for it. We're still keeping -- our own expense control is pretty tight. But if anything, it stays the same or maybe gets modestly better. And I would still say most of the military underperformance, industry-wide, is attributable to drawdown. And there's a more cautious military consumer.

If you look at it geographically, North America, fine. Europe, it's kind of a mixed bag. Sales were a little better. Orders were a little worse. I think, overall, it's still okay, not dramatically better, not dramatically worse. Totally anecdotally, I would say the GE comments, some of the other things from earlier this week from people who ultimately end up driving some of their end markets was positive but has yet to really translate. But Europe, about the same, not taking off but mercifully not getting worse. China, where we don't have a lot of exposure, still, if you believe the economic numbers, so high single digits, so that 5% to 7%, 7.5% range. And we still are investing in resources there. We opened -- we've put some feet on the ground, boots on the ground for our ACE business. We've done the same for our Kaydon business, our Kaydon Bearings business. But in kind of the last cut on how we look at end markets, what I think should be helpful, again, not for next quarter but more broadly, our flow businesses, things that are in and out, booked and shipped, depending on how you categorize it. The business has been good. It hasn't been great. Anywhere where people can hold off on spending, they do, but the business has been good.

Again, the word stuttering or start and stop is I think the right categorization. You get 1 good week, 1 bad week, 2 good weeks, 1 bad week, 2 bad weeks, 1 great week. Overall, it ends up being good.

Where's the business, particularly now, not good? I think it has a lot to do with China in mining. It has a lot to do with the overall savviness of CFOs all over the world. It's a project business. The 2 obvious -- when I look at across the industrial companies I follow within our business and within segments of our business, anywhere where there's project business that is big ticket, whether it's building, construction related, and I'm not talking about residential construction but factory type work, anywhere where there is a big mining element to it, so that would be our Cooper business, particularly in overseas. The indications, the quotations, the chatter, the amount of work people are doing. It's absolutely fine. It's the pulling of the trigger. It's getting the projects going. So whether you'd call it -- we have one guy in our business, they call him the blue bird. There have been projects flying in the window every now and then, and they're big and you can count on them. You'll get 1 or 2 a year. It's those things, where CFOs, purchasing managers on bigger projects, where you can avoid putting the spade in the ground, starting the factory, building inventory, we still need -- we all need better crystal balls. But what that does tell me, and if you saw the really good article from the Financial Times this morning on capital spending, why is cash flow so good? Why are profits reasonably good? The acceleration isn't obvious yet, but it's a level they are given the 2% GDP, you've got to say profits are pretty good. Why isn't the capital spending there? And it has a lot to do with people restraint and their willingness to hold off on pulling the trigger. And you have a capacity utilization number now that's not terrible. It's in the high-70s, I think. And it's largely because there hasn't been a lot of replacement capital.

So at some point, that well breaks, the tide stop rising, and it's good for everybody. Is that point next quarter? Probably not at this point. Is it soon? It's got to be, but the age of the stock, and ISI does some really good stuff, I know most of you subscribe to it, on the age of capital, if you look at the last 2 years, the CFO survey said capital was not going to change materially. At some point, it does. And you can see the restraint and the impact on, not just our business, but most people's businesses. It's -- the aging ones will be a project, and the flow business is good enough to sustain pretty healthy profitability. With the leverage we and others have restored through the business, it could be a little bit better than it has historically, but still 1 -- 1.5% to 2% GDP environment. It's the project business that at some point, it's going to come. But in our case, yes, still, it's good quotation, indications, lots of good chatter, we're doing work but has yet to resolve in the trigger pulling.

So okay, so I rambled on a bit longer than I intended. Hopefully, that responded to some of the questions or at least helped frame some of the questions later. And we will now get to the ceremonial reading of the press release.

Second quarter, very solid. We continue to successfully manage the variables within our control. Relative to last year's second quarter, we saw improved margins, free cash flow and orders despite the still challenging economic environment. In aggregate, bookings for the industrial businesses were good, with trends consistent with this year's first quarter.

As expected, military bookings were lower due to anticipated reductions in military activity. Again, I put that more to general withdrawal than clear signs of sequestration, although that has to be part of it. And timing. Last quarter was a little better, probably it had to do with when people place their orders, and timing impacted this quarter relative to last quarter a bit in military.

However, this was more than offset by strong wind energy bookings in the quarter supporting our view that wind energy has bottomed and will continue to show signs of improvement as we look a couple of quarters forward. Like most of the industrial space, we anticipate gradual improvement in the latter half of this year. While we wait for the clearer signs of this pick up, our principal focus continues to be on managing the things within our control, while we've looked [ph] well at the opportunities on the acquisition front. The operational focus will translate the continued strength in both free cash flow and margins, as we've demonstrated in the last few quarters and further improvement when the economic growth picks up in a more pronounced, and more importantly, sustained fashion.

We remain focused on managing the things within our control, principally improving margins, reducing SG&A, driving free cash flow and accelerating organic growth within our portfolio of leadership companies. This quarter again demonstrates our ability and our success in controlling the things within our control.

Sales in the second quarter of 2013 were $117.3 million as compared to $124.4 million last year. And the decline from the second quarter of last year was solely attributable to the $14.3 million decrease in wind sales, which has been anticipated, partially offset by a $4.5 million net increase in other sales lines, so military, a little down; industrial, up.

Adjusting for certain discrete items outlined in our press release, adjusted operating income was $19.6 million compared to $20.2 million last year. Adjusted net income was $13.4 million compared to $13.6 million this year. So it's getting pretty close to flat, while adjusted EPS was $0.42 in both quarters. Adjusted EBITDA was $25.6 million in the second quarter of this year as compared to $27.3 million last year. Adjusted gross margin, a real positive right now, was $38.6 million in the second quarter of 2013. That compares to $33.7 million in the second quarter of 2012 as the current period continues to benefit from the increased operating leverage that resulted from the restructuring activities we took within our operations at the end of last year. As general economic activity improves and manufacturing activity increases commensurately, we expect further benefits from the actions taken to reduce capacity last year.

Free cash flow, again, a real positive. For the second quarter, it was $18.7 million compared to $13.3 million last year. Orders improved both sequentially and year-over-year at $123.2 million in the second quarter of this year compared to $112.8 million in the second quarter of last year, resulting in a book-to-bill of 1.05 in the current quarter. Backlog as of June 29 was $158.1 million compared to $169.5 million last year. And excluding wind, backlog was $133.8 million compared to about $139.5 million last year.

Now I'll turn it over to Tim to cover some of the financial details.

Timothy J. Heasley

Thanks, Jim, and good morning, everyone. Capital expenditures in the second quarter were $3 million compared to $4.8 million in the prior year second quarter. For the full year, we expect capital expenditures to be in the $15 million to $17 million range. As Jim mentioned, we had another strong cash flow quarter. Free cash flow was $18.7 million or 16% of revenues compared to $13.3 million or 11% of revenues in the prior year second quarter. On a year-to-date basis, we have generated $43 million of free cash flow, up $25.2 million from the prior year.

Cash and cash equivalents totaled $69.9 million at the end of the second quarter compared to $53.6 million at the end of the fourth quarter of 2012. During the quarter, we paid down $7.8 million of debt and paid cash dividends of $6.4 million. At quarter end, we had $25 million of borrowings outstanding under our revolving credit facility and $139.7 million outstanding under our term loan facility. Net debt was $94.8 million. As of quarter end, we got $222 million of unused credit under our revolving credit facility.

Working capital management continues to be a focus, and we saw improvements here in all key metrics. Inventory turns for the quarter were 3.0 versus 2.9 turns in the prior year second quarter. And on the receivable side, day sales outstanding for the quarter was 58 days compared to 73 days in the prior year second quarter.

The effective tax rate for the second quarter was 28.7% compared to 30.1% for the second quarter of 2012. The decrease is primarily due to nondeductible acquisition-related costs in 2012. For the full year 2013, we expect our effective tax rate to be approximately 29%.

Now I'd like to turn the call back over to Jim.

James O'Leary

Okay. Thanks, Tim. As I said before, we're pleased with our solid second quarter results, which were achieved in a just okay economic environment. And while we remain cautious as we continue 2013, we continue to take steps to improve our results and position ourselves for the long term. With the leadership positions we have in sound end markets, we'll be able to take full advantage of those opportunities to further build on the foundation and place, respectively.

Today, we declared our third quarter dividend of $0.20 per share payable on September 27, reflecting our confidence in the fundamental strength in cash-generating ability of our businesses. Our ability to generate strong levels of free cash flow while providing meaningful cash returns to our shareholders remains a hallmark of Kaydon.

And that concludes the formal presentation of the call. Jamie, we would be glad to take any questions if people are still alive out there.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Edward Marshall with Sidoti & Company.

Edward Marshall - Sidoti & Company, LLC

So just a quick question as we kind of look at a trend that's been over the last maybe 2, maybe even 2.5 quarters, we see a little bit higher SG&A line. I think last quarter we addressed and talked a little bit about investments into maybe some salespeople or marketing, and that's somewhere, I think, historically, Kaydon hasn't been in the past. Can you kind of parse together with what we're seeing maybe on the SG&A line and kind of the comments that we've talked about previously in headcount in the sales department?

James O'Leary

Absolutely. And that's a good question because if you look at the "things that we can control" and you try to relate it to the strategy, which, I think, we very clearly articulated in the past couple of years, we, Kaydon, was always an OE-centric company. The number of salespeople we had in distribution, the number of salespeople we had internationally, our physical presence in some of these places was in years, it was many years deferred. While we were growing the wind business, which was a very OE, original equipment, manufacturer-centric business, and we built the business from 0 to $100 million, now it's dropped down to $30 million, the revenue there obscured what was a progression up from what it once was, which was mid- to high-teens SG&A investments, to what right now is about 21, 22. I think you should look at the next 3 or 4 quarters, around 21 or 22. But all those investments, in putting the feet on the street, the boots on the ground, as I said before, it's setting up, in some cases like manufacturing, in some cases, sales offices, or Kaydon Bearings or ACE in places like China, expanding our European force, adding the first VP of international sales. Had that been done a 1.5 decades ago, you'd see the benefits already because no company gets that right the first time. It's a little bit of trial and error. We've done in an environment where, as you kind of go through the world, North America is pretty much the best performing market. But you have to believe in the developing nations, particularly China. I do believe Europe will eventually get better, particularly Germany, which will always be an industrial machinery producer for the world because of their excellence there. So a lot of the sales and marketing resources we've added, it puts the SG&A investment in advance of the sales. So what does that mean for the next couple of quarters? The other comments which we have made in the past, there's a couple of businesses that we added which have performed stellarly in the last couple of quarters, replacing the wind investment, that being Hahn, Fabreeka, within velocity control, where their SG&A was historically a little bit heavier. And in some cases, it's duplicative of what we have within the rest of the segments. So in the next couple of quarters, a couple of things are going to happen. We're going to get the sales, not the wind sales, which I think artificially covered it up a little bit, but we're going to get the sales that these resources are expected to contribute. And we're going to sharpen it with a scalpel, not a chainsaw, trimming a couple of things. So right now, it's low-20s. There's absolute no doubt in my mind we are going to be, by the middle of next year and leaving 2014, in a number that is below 20%. The ability to do that faster and get into what I would say the right long-term number is high-teens, you need to relook at how we're going to recover it. The words were carefully chosen. That's why we probably have about 20 drafts of a press release, which kills our Investor Relations person as we go, pronounced and sustained. What this economic recovery has left is a pronounced, sustained, invisible trend on sales and orders. So once you get that, and the benefits from the resources we've put in pay off, you'll drop down pretty easily below 20%. Even if that doesn't happen, let's hope it does, by middle of next year, we have some specific consolidation activities that have always been on the table within velocity control, which means we will leave 2014 at least to a few hundred basis points lower than where we're at right now.

Edward Marshall - Sidoti & Company, LLC

I guess the next point I'd like to touch on maybe is the order book, and you gave a lot of detail on kind of what should be driving the business and what isn't necessarily driving the order book, and that is a testament to see kind of the book-to-bill on how well you've done in such a tough environment. But I kind of want to look at it in maybe a different way. And I know there were some due diligence expenses in there. Maybe in lieu of capital spending, maybe you're looking at acquisitions, and I think maybe that's going on across the board. But when does Kaydon start to put capital work on their own -- high-cap expenditures? And historically, I understand you're not a heavy-CapEx company, but maybe we can look at it from a Kaydon perspective and think about when does Kaydon open and start to add capacity on their side and maybe that's -- we can translate that back to maybe the broader economy, so to speak.

James O'Leary

That -- after spending a couple of minutes talking about how all those other guys aren't spending capital, and that's a big problem, now I'm a little bit two-faced in saying that it's definitely not us. We started -- during the wind boom, we spent a lot of capital on inventing that business. We wrote some of it down, but we did get most of our cash back -- we got all our cash back on that business. What was lost in there is we pretty well capitalized the business, and I'm not talking about Kaydon Bearings, I'm talking about everywhere. Cooper Bearings, we've put in some made-to-order stuff, which will stand us very well when the project business unleashes. We've put a lot of capital into not just ACE but in Hahn, the acquired business, that add -- and it is a family-owned business. They hadn't spend a lot, so we put a lot of capital in there. So we did a lot of that catch-up capital even while we're doing the wind investment. And where we are now is, again, kind of the trademark, hallmark, the positive thing about Kaydon. We don't have real capital-intensive businesses. I'd say our capacity utilization now is probably in the 70s, and that is where we've been historically. We have ability to add second shifts in a lot of places, which we're not doing right now. We don't talk a lot about it, and probably, we should. We do have Lean initiatives. We do have -- I wouldn't say it's sufficiently far advanced to call it the Kaydon business system, in place. But we're doing most, if not all, of the same things that other companies are doing. We're just in the earlier stages of it. So our ability to add capacity without spending capital is pretty good. And again, it's just the nature of our businesses. We don't need a lot of new bricks and mortar and a lot of new machines because we're pretty well capitalized, and that's from spending we were doing from 2007 to as recently as last year. We've put a lot of new capital into both Cooper and Hahn. So acquisitions, for our cash flow, we're going to pay down debt, and we'll show that we're going to continue to return to shareholders if obvious opportunity aren't there. But the obvious opportunities for us are on the acquisition front. This is a diversified industrial company that has a large spectacular bearings and velocity control business. That leaves us a lot of room to look at other diversified industrial businesses. We spend a lot of time looking, but I think as we've demonstrated, we're pretty disciplined about capital allocation, and we'll continue to be.

Edward Marshall - Sidoti & Company, LLC

The last question, and I'm going to be a bit nitpicky, I guess. At 19% operating margin, it's still a good solid business but did tick down, on the average, about 300, 400 basis points on the margin in Q2.

James O'Leary

Yes.

Edward Marshall - Sidoti & Company, LLC

Velocity control. Was any of that onetime cost run through that segment or kind of just maybe it's just being choppy. Can you address that?

James O'Leary

It's just being choppy. It's just being choppy.

Operator

And we'll take our next question from Peter Lisnic with Robert W. Baird.

Peter Lisnic - Robert W. Baird & Co. Incorporated, Research Division

Jim, I guess, first question, I think you've historically done a great job with the end market color commentary. I'm wondering if you could give us a little feel on the gross margin line. It's pretty significant improvement year-over-year versus second quarter last year, close to 500 basis points, and I'd assume that a piece of that is favorable mix, a little bit of pricing, some cost reductions. Just wondering if you can give us a feel for kind of what drove that increase in the second quarter and then if you want to give us the obligatory what the upside is or how we should think about the leverage as we get a little bit better demand here in the back half and into '14 would be great as well.

James O'Leary

Mostly improved mix and restoration of operating leverage. The go forward at this level of demand, it's high-30s, with a little bit extra demand and if you look at Kaydon historically because of the margin on our products and a low capital base. We typically have more operating leverage than most people in the industrial sector. So when volume comes back, I don't think we ever get back -- and I've said this many, many times, I don't think we'd ever get back to the 2000 -- late 2006, early 2007 hallmark of the last expansion. But when I say that, I got a caveat. I don't know if we'd get back to the way we got back the last time, but that's not to say that something else is not going to come out of the blue. Kaydon is historically a very opportunistic company in terms of finding trends and jumping on, whether it's wind, whether it's semiconductor, whether it was medical in prior cycles, so we'll have the leverage. And we have the margin structure to get north of 40% easily when the volume is back and you get that right mix. But where we are now, we'll continue to be at the much higher end of most industrial companies in this economic backdrop. And with a little volume, we'll get towards 40%. And then the other question on operating leverage, which has to be -- it's particularly important, if we get the leverage from enhanced sales not just on our capital base but on the SG&A spend to put those resources in place, it'll kind of be the virtuous cycle, where if you can even get back to anything like that 2003, '04 run-up, excluding military -- I do want to prognosticate the next global hotspot in terms of warfare -- but even just in industrial space, we should handily be able to beat where we are. And in this economic environment, roughly that 38% to 40% band is about where we should be.

Peter Lisnic - Robert W. Baird & Co. Incorporated, Research Division

Okay. And that there should be no -- presumably, there should be no significant impact then from the wind business growing from whatever the run rate is that we want to talk about this year, $15 million to $20 million, toward that $30 million, realizing it's not a huge increase from a sales perspective. But given the cost structure changes you've made in the wind business, that should no longer be, perhaps, just negative on mix. Is that a fair assumption?

James O'Leary

Absolutely. Yes. Remember, we sized to do around 30-plus. Absolutely, flat-out part, if we do, we'd probably do better than 30. If we've done a different use for the equipment, which, by the way, we're exploring. We're exploring other -- in some of the equipment that is taken out of service, we put in service elsewhere, Brazil, other parts of the developing nations, where they're still committed to wind business, if things like that happen, you could do a little bit better. The mix impact would probably be marginally negative to gross margin, and I mean probably not even worth calling out, but very positive to SG&A.

Peter Lisnic - Robert W. Baird & Co. Incorporated, Research Division

Okay. All right. Perfect. And then just going back to the Europe and China growth initiatives that you put people on the ground for and spend some dollars on, I totally understand that. Can you give us a feel for just to what degree are those starting to bear fruit from a revenue perspective? And how big are those potential opportunities? And maybe if you want to dive into particular markets, that would be helpful to understand -- there's probably some strategic reasons for not doing that. So just kind of what's the traction on some of those initiatives at this point would be great.

James O'Leary

Only a year ago, for our velocity control segment, we set up the sales office, put some people in market in China. It will be $1 million plus this year. In 3 or 4, it should be comfortably over 5, massive payback on the limited SG&A we've put there. Similarly but a little bit more of a competitive issue, we set up light manufacturing, we've done some things specifically for customers and some at Kaydon Bearings end markets. And again, in a healthier macro environment, those are already doing what we like. With a little bit of volume, they'll be far better than the payout than we expected. They're not huge dollars. It's not tens of millions, like wind was, and it's mostly SG&A, which -- as it contributes to that slightly north of 20 SG&A line. But there are things that will have to be paid back once you get the volume, and that should be in the next 2 to 3 years.

Peter Lisnic - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then just the last follow-up on that one. Would it be safe to assume that you could leverage some of those potential opportunities with a bolt-on acquisition? Would that be part of the strategy as well?

James O'Leary

Yes, it would be, but each -- remember, each acquisition, particularly given that we're looking at some diversified industrial businesses, there are some factors and circumstances specific, but I couldn't call out how exactly that's going to unfold. I would say in the case of Hahn and Fabreeka within velocity control, there is absolutely leverage, and that was part of the strategy when we did both those acquisitions, both Hahn, Fabreeka. And within the ACE umbrella, they're all going to be leveraging each other's international opportunities. Now in the case of Fabreeka, much, much more international, much more touches there, which will be facilitated through ACE. In the case of Hahn, which was a very European, German-centric company, we might have been their only North American customer, many, many, more touches through ACE's network here, both its distribution network and the direct effort which we're really kick-starting here in the case of the ACE product line that we had our first -- not our first but probably our best distributor meeting in 1.5 decades. It was the second in a decade, it was the best of the 2 that we've had since I've been here, and the distributors were over the moon about opportunities with Fabreeka. We had a lot of presentations on Hahn opportunities, in addition to Fabreeka opportunities within the ACE distribution, the ACE direct sales. So a lot of good things. Yes, good things. Maybe you got to plant the seeds, you got to water them. If it was a 3% or 4% GDP environment. You'd see the benefits, if not this year, in the next year. It might be a little bit slower just because -- I hate using the word stuttering or start and stop, but that has, I think, limited the immediate traction, I think, we're going to get there.

Operator

[Operator Instructions] And we have no questions at this time, sir.

James O'Leary

All right. Thanks. For those of you on the call, thank you very much. We will be around and available to answer questions today over the next couple of days, if you have any. And enjoy the rest of your summer. We will talk to you in a few months. Thank you, Jamie.

Operator

Thank you. And again, that does conclude today's conference. We do thank you for your participation.

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