CLARCOR's (CLC) CEO Chris Conway on Q4 2015 Results - Earnings Call Transcript

| About: CLARCOR Inc. (CLC)

CLARCOR Inc. (NYSE:CLC)

Q4 2015 Earnings Conference Call

January 14, 2015 11:00 AM ET

Executives

Van Mol - DVL Seigenthaler

Chris Conway - CEO

David Fallon - CFO

David Janicek - Corporate Controller

Analysts

Jim Giannakouros - Oppenheimer

Brian Drab - William Blair

Stanley Elliott - Stifel

Richard Eastman - Robert W. Baird

Nick Prendergast - BB&T

Larry Pfeffer - Avondale Partners

Operator

Good morning ladies and gentlemen and thank you for standing by. Welcome to the CLARCOR Inc. Fourth Quarter 2015 Earnings Conference Call. Today’s conference call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions.

It is now my pleasure to turn the conference over to Mr. Van Mol of DVL Seigenthaler. Please go ahead, Van Mol.

Van Mol

Thank you. We appreciate your interest in joining us on CLARCOR's conference call to discuss results for the fourth quarter of 2015. By now, everyone should have received a copy of the news release that was distributed yesterday. If anyone does need a copy, it is available on CLARCOR's website at www.clarcor.com or you can call Katherine Berent at 615-244-1818, and she will send you a copy immediately.

Before I turn the call over to Chris Conway, CLARCOR's Chairman, President and CEO, I’ll remind you that all statements made in the news release and during this conference call, other than statements such as historical facts, are forward-looking statements. These statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

The Company believes that its expectations are based on reasonable assumptions. However, these forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the Company's actual results, performance or achievements, or industry results, to differ materially from the Company's expectations of future results, performance, or achievements expressed or implied by these forward-looking statements. In addition, the Company's past results of operations do not necessarily indicate its future results.

Finally, we wanted to let people know that the information statements made during the call are made as of the date of the call, January 14, 2016. Those listening to any replay should understand that the passage of time by itself will diminish the quality of the statements. Also the contents of the call are the property of the Company, and the replay or transmission of the call may be done only with the consent of CLARCOR.

It is now my pleasure to turn the call over to Chris Conway for his opening remarks. Mr. Conway.

Chris Conway

Thank you. Good morning and thank you for joining us today. With me are David Fallon, our Chief Financial Officer; and David Janicek, our Corporate Controller. We had a challenging fourth quarter but as we turn the corner on 2015 and look to 2016, I am optimistic about a number of things.

I’ll give a brief overview of our results and spend a few minutes discussing our market outlook and what we are doing to strengthen CLARCOR during these challenging times by building on foundations we laid this past year. Then I’ll turn it over to David Fallon to review our financial results in more detail and discuss our guidance.

We reported diluted earnings per share of $0.67 for the quarter and $2.67 for the full year after the close of trading yesterday. As noted in our press release our full year 2015 results contained restructuring cost and the impact from disposition of JL Clark. When adjusted for this charges 2015 non-GAAP adjusted EPS for the quarter was $0.74 versus non-GAAP EPS of $0.84 in the fourth quarter of 2014. Full year non-GAAP EPS was $2.65 compared to 2014’s $2.91 non-GAAP figure and 9% decrease. David Fallon will spend a little more time on this in a moment.

As I said 2015 was a challenging but foundation building year for CLARCOR, despite the micro-economic headwinds we faced in many of our markets sales expanded 3% when adjusted for changes in average foreign exchange rates. We achieved these result as we continue to invest in and successfully execute upon our long term strategic growth initiatives.

For example this was the first year following our acquisition of filter resources which is now a part of our PECOFacet business. This acquisition helped us at lowering natural gas filtration system sale leading to flat sales overall for oil and gas business in Q4 adjusted for foreign exchange. We met the filter resource acquisition objective set for the first year and the business is now integrated into PECOFacet, as a result we have additional products and improved market access to downstream opportunities in refining and petro-chemical operations in U.S. specifically in the Gulf Coast Huston market.

Another great example of our longer term strategy to grow a new vertical market is our support to a large new commercial retail customers in the Engine Mobile business. We exceeded the expected plan for sale this customer for the year and added over 4,000 SKUs to our product line in support of them.

As we grow we are also making investments in our corporate support areas IT, innovation R&D and lean continues improvement. To leverage the advantages of scale of our company while maintaining closeness to the markets with our operating companies, one of these areas as in information technology. As a remainder we expect our investment in new information technology to be a three or four year project and anticipate spending 4 million to 5 million per year of expense to achieve it.

As you know we operate in a decentralized space and therefore have multiple and different legacy systems to replace during this initiative. While we believe this decentralized structure mitigates some of the risk of the project, it also make it more time consuming to implement. We did complete the transition of our acquisition of Stanadyne filtration off of a shared system with their prior owner and are operating that business on our own CLARCOR platform as we start 2016.

We have also completed transition of our corporate financial consolidation and reporting system into a new advanced platform and are running in parallel with the old system for a few months before fully transitioning on the new platform. This will enable us to more efficiently gather information from our various entities as well as provide tools to enable faster and better decision making.

We continue to advance our technical capabilities in 2015 with the opening of our new CLARCOR R&D center in Tennessee. This centers capabilities includes specialized analytics and testing equipment, advanced manufacturing technology development and the ability to accelerate new filter media and product development. Our corporate R&D investments are intended to complement existing R&D capabilities at many of our operating units and to allow us to more dramatically develop and leverage technology across our company.

One of the most exciting areas we made significant progress in this past year was the implementation of the CLARCOR management system aimed at standardizing the tools and spreading the sharing of improvement ideas across the company. We made progress improving our safety record, trained over 1,000 employees in principles of lean and achieved significant improvement in each of our companies. This included reductions in setup time improved quality and increased responsiveness to customers.

As we entered 2016, economic conditions are as unsettled as they were at the start of the year. Last year at this time I provided some perspective on three specific markets about which you likely have questions again this year. First, what impact or risk do we see from containing low price of food on our business? Second, what is our outlook for gas turbine sales giving the turmoil in the energy market? And last one is the outlook for our Engine Mobile business given that the off road, Ag [ph] markets in the U.S. and Europe are weakening.

Conditions in these markets remain challenging in an Ag and oil and gas have even deteriorated from where they were last year at this time. As a result we made adjustments in our business with our restructuring in the fourth quarter in order to reflect the market conditions we face. We expect a headcount reduction and other cost reduction initiative we have undertaken. We have reduced cost by 30 million on an annualize basis with 20 million of this realized in 2016. This includes 10 million to 12 million from headcount reductions, 6 million from purchasing savings and 4 million from tightening discretionary spending. This saving will be substantially offset in 2016 by incremental year-over-year expenses for our company wide incentive compensation program and by ongoing investments in IT and R&D.

As we restructured we sharpen our sales organizations, we doubled efforts to introduce new products and increased our focus on great execution and support of our customers across our organization. We have new leadership in our Engine business having appointed Jacob Thomas as President of Engine Mobile which was previously announced. And we have a new leader for our Purolator business Rob [indiscernible] who joined us this months. Having most recently work for Hynksed [ph] as President of their North American business.

Now I’ll turn it over to David Fallon who will give more detail on our financial results as well as our guidance. David?

David Fallon

Thank you Chris. We have certainly navigated through a challenging fourth quarter as we faced many of the same unfavorable market conditions that we experienced in the third quarter. Based upon these challenges and our expectation that these dynamics will likely continue into fiscal 2016. We have taken some aggressive cost reduction actions as summarized by Chris in his comments.

One of these initiatives, a companywide reduction force resulted in a $5.6 million restructuring charge in a fourth quarter. And my comments are based upon non-GAAP adjusted financial information, excluding the impact of these restructuring charges and the operating results of JL Clark from the fourth quarter of 2014. We had included several schedules in our earnings release that reconcile our GAAP financial statements to non-GAAP adjusted figures that we referred to this morning.

Fourth quarter adjusted consolidated net sales declined approximately $19 million or 5% from the fourth quarter of 2014 with $13 million or 3% related to lower foreign currency exchange rates, as our weighted average basket of foreign currencies declined 12% versus the U.S. dollar from last year's fourth quarter. Net sales in our Engine Mobile segment decline approximately $19 million or 11% while net sales in our Industrial/Environmental segment remain relatively flat from last year's fourth quarter. The 19 million net sales declined in our Engine Mobile segment included a $5 million reduction from unfavorable foreign currency exchange rates. Approximately half of the remain $40 million negative sales variance was related to lower off road heavy duty engine fuel filtration sales concentrated in the agricultural and construction equipment markets.

Net sale in these markets decline steadily, as we progressed through 2015 with net sales in the last two quarters 20% lower than our first two quarters. We expect pressures in these markets to continue into 2016 but we anticipate improvement as we move through the year, certainly as it relates to prior year quarterly comparables. We also continue to be negatively impacted by the dynamics of our oil and gas exposure in the Engine Mobile segment.

Fourth quarter net sales to distributors that we primarily identify as oil and gas declined about $3 million from last year's fourth quarter and declined about $10 million for the full year.

Fourth quarter net sales in our Engine Mobile or in our Industrial/Environmental segment were relatively flat was last year's fourth quarter. But increased almost $9 million when adjusted for lower foreign currency exchange rate. This increase was almost entirely driven by $10 million or 70% increase in sales of first-fit gas turbine systems and filters as we delivered upon a strong backlog from the end of the third quarter.

Currency adjusted net sales in other filtration markets in this reporting segment were relatively flat from last year's fourth quarter including our natural gas business were year-over-year quarterly sales growth progressively declined as we moved through 2015 and where we expect continued topline pressures as we transition into 2016. Lower year-over-year consolidated adjusted operating margin in this year's fourth quarter was primarily driven by lower adjusted gross margin percentages in both filtration segment. As the Engine Mobile segment was negatively impacted by lower fixed cost absorption and unfavorable sales mix and our Industrial/Environmental segment was adversely impacted by a higher sales mix of lower margin first-fit gas turbine systems and filters.

As it relates to cash in the fourth quarter we effectively used the proceeds from the sale JL Clark to repurchase $41 million or 850,000 common shares. For the full year we repurchased $71 million or $1.3 million common shares. We are currently evaluating our share repurchase strategy for 2016, but we believe at a minimum we will purchase enough shares to offset dilution from employee stock awards and we could opportunistically increase our share repurchases depending upon share price as we progress through the year.

Now moving to our 2016 guidance. We project 2016 diluted earnings per share between $2.60 and $2.80. As the midpoint about 2% higher than 2015 adjusted diluted earnings per share. We project consolidated net sales to decline between 1.5% and 4.5% including between 2.5% and 6.5% in our Engine Mobile segment and between 1% and 3% in our Industrial/Environmental segment. A primary driver of lower expected sales in our engine mobile segment is a projected 16% reduction in off road heavy duty engine fuel filtration sales heavily influenced by continued adverse pressures in the agricultural and construction equipment market.

We expect year-over-year net sales in the first half of 2016 in these off road markets to decline between 25% and 30% from the first half of 2015 with relatively flat year-over-year sales in the second half of 2016 in part due to the easier year-over-year comparables in the second half. Elsewhere in our Engine Mobile segment we project low single digit sales growth in our traditional Baldwin U.S. on-road business partially offset by lower automotive filtration sales driven by a deliberate effort and to exit a lower margin segment in that market.

We expect continued pressure in our export business in 2016 in part due to the continued strength of the U.S. dollar and we project filtration sales in China to decline about 10% from 2015 as a result of continued economic uncertainty in that geographic market. We are projecting relatively flat heavy duty engine filtration sales in Europe in 2016 hopefully conservatively, after experience 8% currency adjusted net sales growth in 2015.

The 2% projected 2016 net sales decline at the midpoint in our Industrial/Environmental segment is primarily driven by an expected $24 million or 9% reduction in natural gas filtration sales. Our natural gas filtration backlog which was at an all-time high in the second half of 2014 dropped consistently as we progressed through 2015, in part due to a slowdown in shale activity. Despite lower year-over-year sales we anticipate a quarterly sequential increase in natural gas filtration sales as we progress through 2016 as we transitioned from shale based projects to projects reporting LNG infrastructure in the U.S. 2016 net sales in the other filtration markets in this reporting segment are projected to be relatively flat in 2016 from 2015.

As a result of our five four-four [ph] quarterly closing calendar every four or five years we operate in a fiscal year with 53 weeks. 2016 is such a year. We expect 2016 net sales to benefit from this additional week by approximately 1%, but this benefit is expected to be substantially offset by the negative impact of lower year-over-year foreign currency exchange rates in 2016 including our estimate for the Euro at a $1.08 compared to a $1.12 in 2015.

We are projecting a 50 basis points increase in the consolidated adjusted operating margin from 14% in 2015 to 14.5% the mid-points in 2016. Adjusted operating margin in our engine mobile segment is expected to remain relatively flat as savings from cost reduction initiatives should be offset by lower absorption of fixed cost and the projected 4.5% net sales declined and also from continued sales mix as our higher margin off road heavy duty engine fuel filtration product sales are projected to decline 16%.

Adjusted operating margin in our Industrial/Environmental segment is projected to increase almost 1% at the midpoint. Higher adjusted operating margin in this reporting segment is expected to be driven by net savings from cost reduction initiatives in our industrial air business and continued operating margin improvement in our HVAC business which is now comfortably above 5% after being in low single digits for many years. We anticipate interest expense to increase $3 million in 2016 primarily due to higher interest rates and an increase in our spread pursuant to the new credit facility.

We are projecting a tax rate between 31% and 31.5% including benefit from both the 2015 and 2016 R&D tax credit extensions. Average common shares are expected to decline by about a 100,000 or 900,000 shares in 2016 due to the higher share repurchases in the fourth quarter of 2015. CapEx is expected to be between $45 million and $55 million which includes carry over spending from 2015 and about $10 million for information technology projects.

Finally from a pacing perspective we expect quarterly diluted earnings per share, net sales and operating margins to sequentially increase as we progress through 2016. Of course year over year quarterly comparables will be more challenging in the first half of 2016 including the first quarter when we expect net sales to decline approximately 7% after removing 2015 sales from JL Clark and diluted earnings per share to decline up to 25% from last year's first quarter which implies lower first quarter operating margin, primarily due to unfavorable sales mix as we expect our higher variable margin heavy duty fuel filtration sales to decline 25% to 30% and our natural gas filtration sales to decline 20% to 25%.

With that said I thank you for your time and I turn it back over to Chris.

Chris Conway

Thank you David. We'll open it up for questions now.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Jim Giannakouros from Oppenheimer. And Jim your line is open.

Jim Giannakouros

Is oil and gas the guidance, your expectations for sales in 2016 to be down 9%, that's as far as I can see that's better than how midstream CapEx budgets are trending and you mention a little of offset as far as expectations down to more LNG, et cetera? How much of your order book entering '15 splits into '16?

Chris Conway

Probably about 25% of the -- I guess I'd say is the backlog that we carry into 2016, we believe about 25% to 30% of it is of our 2016 sales are covered with current backlog.

David Fallon

And Jim, we did have some slippage from the fourth quarter, into the first quarter but that's going to be minimal compared to the pressures we're going to see in the first quarter of 2016 versus what we saw in 2015. As I mentioned we think our oil and gas sales will be down about 25% year-over-year, first quarter of '16 versus '15. That should sequentially improve as we go through the year. I think to address your question about oil and gas exposure just to remind everybody that we are primarily natural gas and you know the price of oil does impact our business but probably not as much as some of the comparable companies that you're looking at that have -- are probably more exposed to oil.

Jim Giannakouros

Got it, okay, and then on that 1Q guidance, just so I understand, when you're talking about the 25% decline in EPS are you talking apples-to-apples excluding JL Clark or are you talking what you guys -- last year including JL Clark but then in '16 you're excluding it.

David Fallon

It's excluding JL Clark, so last year's sales in the first quarter excluding JL Clark we’re about 335 million, we would expect sales to be about 7% lower than that.

Jim Giannakouros

Okay, and then last one if I may on your CapEx. Came in a little lower than I anticipated, your free cash flow has taken a nice, again a nice bump in 2016 relative to how you've been tracking from a conversion perspective. Can you just talk about your free cash flow, you know post what that maintenance CapEx I thought was maybe 25 million to 30 million or so, correct me if I'm wrong. Where -- what you would characterize as your growth investments that's embedded in that 50 million or so and then how -- is your free cash flow conversion that's implied by your guidance is that sustainable going forward.

David Fallon

So the CapEx guidance at the midpoint of 50 million as we spoke out in my comments about $10 million of that will be IT, we'll have continued CapEx investment in IT going forward as Chris mentioned in the next couple of years. But if you strip out IT you get a $40 million number I would say 30 million to 35 million of that is maintenance CapEx.

When you look at free cash flow, I think we're converting or projecting to convert about a 120% of net earnings into free cash flow. If you take the midpoint of our cash from operations number that is not sustainable in the long run. In the long run we would target in the 80% to 90% range. The benefit that we will have in 2016 is actual cash inflow from working capital.

So we are projecting a $15 million reduction in working capital in part due to lower sales but we have some very specific working capital initiatives with the very significant portion of that being inventory and CLARCOR management system program.

So as you know working capital is essentially a onetime benefit and then it should stabilize going forward. So the 210 cash from operation left the 50 million CapEx, it’s about 120% of earnings of that probably is not sustainable going forward.

Operator

We will go next from Brian Drab with William Blair.

Brian Drab

Just first could you tell what the revenue contribution from filter resources group was in the quarter?

David Fallon

About 5 million.

Brian Drab

Okay, and then another housekeeping item, then this retail opportunity that you had in 2015 and the impact there I think in the past parsed that out for us in terms of the growth rate and impact that had on the growth rate and heavy duty engine, can you give us any color on that?

Chris Conway

Yes it added roughly 35 million for the full year.

Brian Drab

Okay and for the fourth quarter, can you give us any sense what heavy duty engine would have looked like without this particular opportunity?

David Fallon

The sales to that customer were about $10 million in the quarter. At every call we launch that in the first quarter so the first quarter was a little bit light and we have been running at a $35 million $40 million run rate since then, so it was about 10 million in the Q4.

Brian Drab

Okay got you that’s helpful. And then maybe lastly first thanks David for going through the progression of revenue and earnings for 2016, I am wondering if you could maybe give us a little bit more in terms of where you get the confidence that it is going to ramp like that? I don’t know if you could structure the answer in terms of oil and gas and other industrial and heavy duty engine, so what gives you the confidence in each of those business lines that are going to progress positively through the year?

David Fallon

Well, there is a lot there, if you take some of the larger businesses one at a time from the natural gas perspective we’ve certainly seen a reduction in our sales as we progress through 2015. And we have also seen a concurrent reduction in our backlog as Chris mentioned. So our backlog is 25% lower at the end of 2015 than it was at the end of 2014. A lot of that decline in backlog was related to a fall of shale projects. And as Chris mentioned and as I mentioned a lot of that shale activity is been replaced by projects supporting many of LNG plans that are popping up on the east coast and in the Gulf of Mexico. We have line of sight to those projects and just based on timing a lot of those projects are hitting in the back half of the year.

So in oil and gas we have good line of side, we don’t have booked backlogs but we have very good line of site to significant projects there in the fourth quarter. If you look at some of the other businesses that we anticipate the see pressure one is agricultural and construction equipment businesses. Sales there were down by 23% in the fourth quarter only 16% for the year so it's certainly ramped up as we moved through in the third and fourth quarters.

We anticipate that pressure to actually get a little bit worse based on the orders that we have here in the first quarter. Number one, we should, in the second half for the year have easier comparables. So if you look at it from a sales growth perspective -- year-over-year sales should flatten out as we go through the year. But I would say we don’t have crystal ball, it’s hard for us to project when agricultural activity is going to turn around, however we do believe we are at a low point here in the first quarter as it relates for that activity based on conversation with some of our customers.

So we expect that business to improve in the second half compared to what we see here in the first half.

Chris Conway

And I think on gas turbines we have backlog and timing of some of the backlog of orders that also helped fill out what we think is a stronger second half than the first half.

Brian Drab

Than on road engine as well?

Chris Conway

I think we see a slightly up for the year, but again it's driven as you know by the indexes -- the truck tonnage indexes and I think we've seen those -- not really changing too much we saw recent indexes that showed in December tonnage was down a little bit compared to prior year 3% to 4%. So we don't see that that's going to really change significantly one way or the other.

Brian Drab

Okay that's all really helpful. Thank you.

Operator

[Operator Instructions] Will hear next from Stanley Elliott from Stifel.

Stanley Elliott

Just talk a little bit more about the margin improvement on the -- or the expected margin improvement on the industrial side of the business kind of given where business trends are and I would have guessed with the natural gas business that some of the liquids business being down and significantly higher margin or very good margins, that that would have been a headwind.

Chris Conway

Well it is a headwind, but I think if you look at the rest of the industrial you got to take in the factor of what we talks about the improvement in margins and the HVAC business, we've had a continued not big change, but continued uptick in our distribution business TFS and the GE business we acquired gradually has been making improvement in their operating margins as well so those helped to offset the impact of what you might see from the oil and gas business.

Stanley Elliott

And as far as the top line for the other segments within the industrial business, I mean if industrial production is flat to down and this business looks like it's kind of hanging in there at least. What are some of the pockets of that business that are I guess kind of proving that growth or kind of keeping pace with the market?

Chris Conway

Talking about Industrial/Environmental?

Chris Conway

On the industrial -- correct. Is that more on the liquid side or is that the air side or anyway to think about that?

Chris Conway

Well I think what we see is the industrial air side of business we see some improvement there we’re introducing a number of new products there and those are starting to hit the market. As I mentioned air filtration products business, our commercial and industrial A track business is up actually, we have a project going on we've talked about previously to filter barns for chickens in Saudi Arabia and that continues to grow for us, it's helping a little bit there. The aerospace business that we have as the part of the Purolator business is actually seeing good build on OEM programs as well as aftermarket work and then the other part of that business is just generally holding its own at this point.

So I think that -- those basically help to kind of level out the whole sector. So I don’t know if that helps answering the question.

Stanley Elliott

Absolutely. Then kind of one last question from me on the air margins or in the HVAC margins, kind of getting it up to mid-single digits. Are you still -- should we think about this business eventually reaching a high single digits sort of a number can it get to a double digit number. And I know that you guys have made considerable progress on this business but just how you’re thinking about the opportunity there?

Chris Conway

We look at it as being a high single digit business. I mean aspirationally trying to break 10% those is their goal, but I think we don’t see it going as double digits without some significant change in portfolio, of course there are changes in the market competitive situation still remains very competitive market, very easily to get into low obstacles to enter and relatively simple product to deal with. So that's high single digit.

Stanley Elliott

Perfect. Thank you very much and best of luck.

Operator

Richard Eastman from Robert W. Baird. Your line is open.

Richard Eastman

Looks like it is going to be Engine Mobile side of the business. When you are referencing Ag in off road and the declines there that we’re seeing. Does the reference entirely to Stanadyne or does the reference include the portion of Baldwin that end up there?

Chris Conway

It is both. It includes what Baldwin was doing before as well as the Stanadyne business. Obviously, the Stanadyne business being more heavily influence by the OE first-fit activity.

Richard Eastman

Is there any -- when you look at Stanadyne I mean that's been a -- maybe a little bit of a rolling disappointment just in terms of the revenue and quite frankly the end market there? But when you look at Stanadyne has there been any lost share or any share shift that’s occurred with your purchase of Stanadyne into the aftermarket there. Just simply any lost accounts or lost businesses as that business transitioned over to you?

Chris Conway

No, no, there hasn't been. I know we've talked about there's always a battle going on, puts and takes going on for business that's two to three years out and we continue that battle every day.

Richard Eastman

Yes, understood, and then is -- Carquest has been a tremendous win. The thought was there was added business as they look at product and part numbers for '16 and I know we at least have modeled maybe a 20 million step up in revenue with Carquest as you expanded that agreement to include more part numbers. Is that, is that still a valid assumption for '16 that that business might in total grow to 50 million or 60 million.

Chris Conway

I'm not sure that we’d put that high a number on it at this point. We did as we finished the year, continued to add part numbers for them, there's some other programs that are being looked at but at this point I wouldn't throw a number like 20 out there for that.

Richard Eastman

Okay, all right, so some expansion. And then on the Industrial/Environmental piece of the business, when you talk about PECO it sounds like backlog is down, you know the cadence to that business from a revenue standpoint, it sounds like you know maybe the first quarter and second quarter might be flattish in terms of dollars, but it does sound like the second -- the third and fourth quarters have to step up in terms of dollars, right. And then that business isn't running sequentially flat in revenue is it?

David Fallon

I would say from a revenue perspective first quarter will be down significantly from the first quarter last year in the 20% to 25% range.

Richard Eastman

Okay, I got that. But I'm thinking sequentially in terms of dollars, in other words you're exiting the fourth quarter in revenue, first quarter is that flat, just a tough compare or is it, is it down sequentially?

David Fallon

Quarter-versus-quarter yes.

Richard Eastman

Okay, okay and then it ramps in dollars when you get the second to third and third to fourth, that would ramp in dollars, okay and that would be the LNG influence. And it sounds like the fourth quarter needs to be a big quarter and that's where you have some at least a comfort level that LNG kicks in by then.

David Fallon

That's exactly right, and I would say our fourth quarter number is certainly the highest and you could probably say significantly higher than the other three quarters.

Richard Eastman

Okay, okay and then can I just ask about the BHA piece of the GEO acquisition, you know that's -- I know there's a lot of aftermarket business there in parts business and spares business but it does tend to trend with cap spending. How is that business from an outlook standpoint into '16?

Chris Conway

It's flat at this point, when we look at it, it is you know you have ongoing maintenance activity that's going around, we've had some good orders but generally people have been trying to make their equipment last longer so that's put the pressure on the business and we battled a position there that's fairly significant in terms of market share and at this point we don’t see that necessarily growing [multiple speakers].

Richard Eastman

Okay, I understand, and then Dave just a basic question. On the restructure expense the 5 to 6 number, I can see how you adjusted that out of the EBIT line, that's pretty straight forward but can you, can you just carve that 5.6 million up by EM and IE.

David Fallon

We can -- [multiple speakers].

Richard Eastman

Not easily. I think I took the wind out of you on that question that was a simple one.

David Fallon

Okay. So the 5.6, we recognized 3.4 million of that was in industrial environmental and 2.2 million was in Engine Mobile.

Richard Eastman

Thanks so much.

Operator

We'll move next to Nick Prendergast from BB&T.

Nick Prendergast

So the last caller actually, he asked my question I needed which was the breakup of the 5.6 million. But beyond that just to be sure can you give me the size, because you're talking about oil and gas and I'm assuming when you're talking about oil and gas, that's PECO is that correct?

David Fallon

Yes.

Chris Conway

For the most part, yes.

Nick Prendergast

I mean more or less interchangeable I guess is the jest of it and so can you size how big was PECO in -- during -- for the year and how big was the construction and Ag for the year?

Chris Conway

PECO was 265 million and construction and Ag --.

David Fallon

So, as we talked about in the last series of questions, a significant portion of that is Stanadyne or business acquired from Stanadyne and that was in the $90 million to 95 million range. And then there is a portion that was in the traditional Baldwin business line. That was the combination of first-fit and after market and that is likely in the $50 million to $60 million range.

Nick Prendergast

Okay alright. Okay well thank you very much.

Operator

[Operator instruction] We hear from Larry Pfeffer with Avondale Partners.

Larry Pfeffer

So just a quick kind a housekeeping question David on the 53 week year, looking at Q4 EPS and I know kind a walking through that the revenue gets washed out a little by currency, but do you see any EPS benefits to the fourth quarter on a year-to-year basis from the 53rd third week?

David Fallon

There inevitability will be some and we have run probably 40 different models looking historically at the impact at the 53rd week and generally we get less than a week impact though if the full quarter is 13 weeks, you have 14 weeks in a 53 week year. So it’s something a little bit left then that additional week.

Larry Pfeffer

Okay understood. And then looking at free cash generation in '16 I know you mentioned potentially being opportunistic on the share repurchase, but just kind of in a broader framework any change to what you are looking for in terms of a longer term leveraged target on the balance sheet, any plans to take down that significantly in 2016?

Chris Conway

No, I don’t think we will change our capital structure or approach. We will continue to ride the dividend support, purchase other than opportunistic share repurchase, we’ll purchase at the leveled offset dilution and continue to keep our leverage within the kind of traditional range that we’ve usually been in.

Larry Pfeffer

Okay thank you guys and best of luck.

Operator

We will move next to Richard Eastman from Robert W. Baird. With a follow up.

Richard Eastman

Just Dave or Chris perhaps can you just clarify as we talk about the 20 million of savings that’s a big savings number of the 5.6 million of restructure expense? There is a suggestion here I guess in the press release that the 20 million ultimately can grow to more of a 30 million number in an annualized basis pushed out in the fiscal '17, is that incremental 10 million of save, is that going to be yet to be determine adjusted restructuring cost or is that the acquired -- the benefit acquired restructuring here. In other words are you going to absorb the cost or should we look for some added restructuring expense as the year unfolds.

David Fallon

Okay I am going to answer with the famous, it depends. So if you look at the $20 million that we have included in our guidance we had very clear line of sight to those initiatives and those initiatives in our material respect don’t come with it -- within restructuring cost. So as Chris mentioned we have headcount reduction we should benefit from that on day one of fiscal 2016 as between 10 million and 12 million. We have about $6 million related to our purchasing initiative that will be ramping up as we go through the year but there is no upfront cost related to that initiative. And then the third one is just a reduction in discretionary spend and then you can think of travel and other discretionary cost, that’s about $5 million and there is no upfront cost related to that.

So effectively those three initiatives cover that 20 million and two-third of the 30 million, the remaining 10 million we are still evaluating and the benefit of that 30 million likely will not be contained within fiscal 2016, but those initiatives could have with them upfront restructuring cost. At this point in time we are not in a position to provide detail on those and for that reason we have not included benefit nor any cost for those project in 2016. But there is a likelihood if we undertake those projects we could see some restructuring cost in the second half of 2016 but not see the benefit until 2017.

Richard Eastman

I understand, okay. And Chris how would you -- when you step back and I think we’ve went through this drill in the last couple of years, but when you step back and look at China and your assets in China and your expectations for China, a 10% decline actually seem like that’s maybe not a real aggressive assumption for what's going on in China. But how do you look at that market now relative to your efforts to grow into it, your asset base there and maybe just the opportunity over the next year or two.

Chris Conway

I think you will see us taking a critical eye to how we’re set up in China. We -- to your point, is the number of lower, well part of what we do in China is -- a portion of what we do is ship back to the U.S. and other parts of the company. So we’ve still got intercompany business that flows through China and that will remain. So I guess when we think about it long-term yes, we still need to be in position in China and actually are looking at it from the long-term point of view.

The market is going to remain a good market. I mean even if you discount it and say their GDP is 5% it's still growing faster than most other markets and it's got a bigger base than many in the world. So it's a market we will continue to work forward on, but at this point yes it's going to remain somewhat smaller compared to the rest of our business.

Richard Eastman

Sure. And was your third party China revenue in ’15 was it kind of 35 million-ish or could we round that number or is it smaller yet?

David Fallon

That was more like 25.

Richard Eastman

I got you. Okay very good. Thank you.

Operator

And at this time there are no further question in the queue. I'd like to turn the conference back over to Mr. Conway for any additional or closing remarks.

Chris Conway

Thank you. As we close the book on 2015 and look to 2016. I'm excited about what I see, albeit cautious given the turmoil in various markets around the world and in the U.S. Our focus remains on profitably growing our business organically and through the right acquisitions that provide us access to new markets, geographies and technologies. We are transforming CLARCOR into a stronger company with the increasing capability to respond to global customer demand.

I want to thank all CLARCOR employees, who contributed to the results for 2015 and thank you for your interest and your questions.

Operator

And that does conclude today's conference. At this time, you may disconnect.

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