Good morning. My name is Angel, and I will be your conference operator today. At this time, I would like to welcome everyone to the EnPro Industries First Quarter 2016 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Dan Grgurich, you may begin your conference.

Thank you, Angel. Good morning and welcome to EnPro Industries' quarterly earnings conference call. I'll remind you that our call is also being webcast at enproindustries.com, where you can find the slides accompanying the call. Steve Macadam, our President and CEO; Milt Childress, Senior Vice President and CFO, are accompanied by Ken Walker, our Chief Operating Officer and will begin their review of our first quarter performance and our outlook in a moment. But before we begin our discussion, I will point out that you may hear statements during the course of this call that express a belief, expectation or intention as well as those that are not historical fact. These statements are forward-looking and involve a number of risks and uncertainties that may cause actual events and results to differ materially from such forward-looking statements. These risks and uncertainties are referenced in the Safe Harbor statement included in our press release and are described in more detail along with other risks and uncertainties in our filings with the SEC, including the Form 10-K for the year ended December 31, 2015. We do not undertake to update any forward-looking statements made on this conference call to reflect any change in management's expectations or any change in assumptions or circumstances on which such statements are based. Our earnings release and conference call presentation materials contain additional disclosures regarding non-GAAP financial information, collective references to EnPro and our subsidiaries, the deconsolidation of Garlock Sealing Technologies or GST and pro forma illustrative financial information presented as if GST was re-consolidated for financial reporting purposes. These disclosures are important to understanding comments we will make on today's call, and we urge you to read them carefully. In addition to our normal leading language I want to call to your attention to the pro forma…

Thanks, Dan and good morning, everyone. I thought it would be helpful to start with a quick summary of the macroeconomic context we’re operating in, because our results for the quarter reflect these conditions. As you may know in the United States the industrial production index has declined two percentage points since March of last year and new orders for durable goods had declined 2.6 percentage point. Driven in large part by the slowing global demand and corresponding drop in commodity prices. On a year-over-year basis the price of oil was 26% below a year ago, while metals have declined 16%. And as a diversified company we serve a variety of industrial markets with exposure to many of the sectors affected by low commodity prices, while we may be add or near the bottom in certain sectors our businesses are not yet seen signs of sustained recovery. Oil and gas, steel, metals and mining, agriculture equipment, OEM truck and other capital good sectors contracted significantly in the quarter from the prior year. Other markets we serve such as aerospace, automotive, aftermarket truck parts and parts for diesel and gas engines were stable to moderately higher. Semiconductor was lower in the first quarter of 2016 compared to the prior year, but order patterns indicate improved activity in this sector for the second half of the year. For the quarter our pro forma sales were $334.7 million, which is 4% up from last year's first quarter. Normalized pro forma sales were essentially flat as acquisitions contributed six points of growth offset by two points of year-over-year foreign exchange difference. Our pro forma adjusted EBITDA of $36 million was $3.5 million or 9% lower than a year ago, but excluding a $3 million non-recurring legal charge in Power Systems that Milt will cover…

Thanks, Steve. As Dan explained in the introduction, beginning this quarter we will focus most of our remarks on pro forma results which we believe to be at most interest to our shareholders given the consensual agreement reached in the ACRP. Also as Dan noted, beginning this quarter we are providing pro forma segment sales and segment profit information in our earnings release. The pro forma segment results are prepared as if GST had been reconsolidated at the beginning of each of the respective quarters. As you can see in your release most of the differences between reported and pro forma segment information isn't sealing the products with only small differences in engineered products and Power Systems stemming from foreign operations for those segments included in GST foreign subsidiaries. As Steve noted, our pro forma first quarter sales were $334.7 million up about $14 million from the same period of 2015. Acquisitions contributed $20.7 million and foreign currency translation reduced sales by $5 million. Normalizing to these factors, organic pro forma sales for the quarter were essentially flat compared to a year ago. Higher sales at Power Systems largely due to increased engine and parts revenues offset reductions in Sealing Products and Engineered Products due to softness in the North American oil and gas and general industrial markets. I will cover each segment in more detail in a moment. Pro forma gross profit for the quarter of $115.9 million or $6 million or 5% higher for the first quarter of 2015 and pro forma gross profit margins increased to 34.6% from 34.3%. Adjusting for the impact of the acquisitions made last year which have a lower margin profile, the pro forma gross profit margin would have been 35.6% for the quarter reflecting improved results from restructuring actions and other cost…

Thanks, Milt. We'll close with a discussion of current market conditions and our outlook for the year and then open the line for questions. As we discussed in the past we don't have much visibility to future demand for most of our businesses and the current volatility in global markets makes the industrial demand picture extremely difficult to forecast. Overall soft conditions in many of our markets as I mentioned in my opening remarks and the strong dollar continue to affect our results. For the full year we communicated last quarter that's subject to this limited visibility. We expected pro forma sales to be 3% to 5% higher on an FX-neutral basis with the growth attributable to acquisitions that we completed last year. We also noted that we expect flat to low single digit growth in pro forma adjusted EBITDA, implicit in this outlook was an assumption that we would begin to see signs of the second half improvement, which we have not yet seen. We will have a better picture of the outlook for the year following the completion of the second quarter. Longer-term we expect continued benefits from our strategic growth initiatives including growth from recent and future strategic acquisitions such as the recent addition of Rubber Fab and continued emphasis on both innovation and improving operational efficiencies. Now, we'll open the line to your questions.

[Operator Instructions] Your first question comes from the line of Jeffrey Hammond from KeyBanc. Your line is now open.

Hey, guys. This is James Picariello. Thanks for taking my call here. I guess just starting out with CPI and the restructuring benefits that clearly came through well within engineered products, nice profitability in the quarter. Can you just quantify maybe what the restructuring savings were and how you're thinking about it the rest of the year?

Yes, Milt why don't you address that.

Yes. James, we are making great progress at CPI. Our team is energized there. As I mentioned in my comment, the operational improvement that have come in part from I guess our cost reduction initiatives have also led to a much better improvement in the plant, on-time delivery being up and we are seeing some commercial wins. And so for CPI with our cost restructuring progress today and essentially complete will have some small restructuring charges in Q2. At this point, it’s mostly about volume. So without some help from volume I mean we're going have better results than we had last year, but we need some volume help as well. So Ken is here with us and Ken I don't know if you have any other comments about the progress that we're seeing.

No. I completely agree James; the team is performing very well. We've got the restructuring behind us for the majority of the case. We think we have a little bit to do as Milt mentioned, but the heavy lifting is behind us and now it's more about – it's all about growing our current customers and delivering our new customers. In addition to the on-time delivery improvement, we're seeing lead times which is allowing us in local markets to win business that we would not have won before. So I'm very encouraged by the team and the work that we're doing and the heavy lifting on the restructuring is all behind us.

James, we had said before that we expected in the segment with the restructuring of both CPI and some of the facility consolidations underway GGB that we expected $3 million to $4 million of cost savings from those initiatives for the year. And so I mean we're right on track. So I mean that's going according to our plan.

Got it. That's very helpful. Thank you. And then in Steve's opening remarks, he did note significant contraction in the OEM truck market for the Stemco business. Just maybe round out what you saw in the quarter and then maybe what you're expecting for the rest of the year given where we know Class A builds are heading this year. I do believe medium duty does account for the majority of the mix for that business. Can you just maybe remind us what the breakdown is there and again what you're seeing? Thank you.

Yes. James, first of all heavy duty is essentially all we do in Stemco, so it's all Class A equipment. Our exposure to trailers – the particular both in the aftermarket and OE is considerably higher than our exposure to the truck or tractor the power unit. What we've seen in the OE world is the decline has been so far in the truck area, where we have a lower exposure. So far the trailer volume is essentially still at the cyclical high. We have not end of backlogs. Excuse me; the backlogs are strong, so we actually don't see a forecast in the near-term which I'll say is kind of the next two to three quarters. We don't see a decline in the trailer OE production and our aftermarket is still hanging in there, obviously the aftermarket is just almost completely driven by U.S. GDP, how much freight is moving and while certainly not any stronger than it was last year, maybe marginally weaker and we see that kind of continuing on. We don’t see any sign, that’s ready to fall of the table top. So we feel pretty good about the Stemco business which as you know is in Sealing Products. And as I mentioned, our team has done a really terrific job to the air springs you'll know because you follow us that when we bought that business it's fair we didn't pay much for it on a multiple basis and it's a fairly low margin product line because of the way that the seller and the market chose to compete. But we're competing in a completely different way and quite frankly most that we've had - we've been working very, very hard on supply chain savings which will be substantial for that business relative to the…

Hi, James let me jump in with one additional comment just as a data point. As Steve said, how business even on the OE side is not affected as much as the headlines that you see on tractor, orders and production. So is one data point if you look at just the core wheel-in products of Stemco. Our OE business in the quarter year-over-year was down only about 10%. In the aftermarket side of our business for the wheel-ins was up 6% or 7%. So pretty good results relative to what the headlines are about the heavy duty truck industry.

Got it. I meant to say trailers not medium duty my apologies for that and I will get back in queue.

Yes, thanks James.

Your next question comes from the line of Ian Zaffino with Oppenheimer. Your line is open.

Hi, thank you very much. Question would be just beyond the guidance that you had mentioned I guess that we shouldn't be using that guidance anymore that you issued before. But what is the FX headwind that we should be assuming now, because I know you’re talking about the non-FX impact.

Ian I think from this point forward we won't see any I mean Milt I don't know if you've handy the - we’re mostly affected by the euro and as you know so I'm not looking at the sheet that it has the FX comparisons but you might be Milt but my guess is that we're now stable relative to where we were for Q2 and beyond last year. In fact we might - I think we're right at the same level. So I wouldn't expect any FX headwinds on a period-over-period basis going forward for the rest of the year. Milt is that fair?

Yes, I think that’s fair. So clearly there was some this quarters we mentioned, sales in total on a pro forma sales, but back to about $5 million but they have a smaller impact and we've seen over the last few quarters of last year. And some kind of modest impact on our earnings as well. So I agree with that starting with Q2 when we look on a year-over-year basis unless something changes dramatically we wouldn’t expect as much noise around FX.

Okay. And then just given the kind of that the different geographies and the strong dollar. And you know the bearing performance in different regions. How does that impacting your M&A thinking or your thoughts you know you look to use the - maybe the strong currency to go and do more stuff internationally or are you more cautious given the slowdown there? Just how you kind of balance that just giving kind of what you're seeing now and kind of what the company that you want to build going forward?

Yes, it’s a good point Ian. Look I think you know we try to look beyond the near-term business cycles, we think about M&A that has more to do with the strategic set. So quite frankly the place where demand feels the most stable and as the most tailwind, which is not a huge tailwind, but it's actually Europe, Western Europe. So we're actually feeling just a little bit of strength over there. So I think now we would be very open to acquisitions over there because of the – but we would use cash that we have in Europe, so yes there's an FX benefit kind of but frankly we’re using Euro's to buy Euro sales and earnings it really kind of neutralizes. So I would say it's really more, we don't really factor that in. That said we're not, we’ve certainly rethought our strategy in Asia because I think that's a much longer-term trough that we’re in, I don't see that turning around anytime soon and you may recall that a few years ago we bought a few small operations for Garlock in that region to try to grow our footprint in Asia not just China but in Taiwan and Singapore as well. Those are going okay. They were small acquisitions, so we didn't have a lot of exposure there, but the fact of the matter is that that whole region is feeling the weakness of China And the other places that we have really withdrawn from is Brazil, we had a both Garlock and CPI presence in Brazil and we have exited both of them. Again they were small we had hoped to grow those over time, we were investing not a lot of money but a fair bit of human capital and time and trying to move those operations forward, we have exited both of those. So the only thing left that we have in Brazil is a GGB facility, which is always done well and continues to do decent for us, it really supplies a lot of the automotive production in Brazil and we're able to take advantage of some low cost production there for export into other markets. So but that’s all we have left in Brazil, so I'd say it has not really affected our thought process too much about Western Europe but it has really in South America and Asia. Does that answer your question?

Okay. Thank you very much.

Yes, okay. Thanks.

Okay. Take care.

Your next question comes from the line of Justin Bergner with Gabelli & Company. Your line is open.

Good morning and thank you for taking my questions, this morning Steve and Milt.

Yes, hi, Justin.

Good morning, Justin.

I just want to delve a bit more into the Sealing Products margins this quarter. If I look at the sort of organic constant currency sales decline, which seems to be about $10 million and then I look at the pro forma adjusted EBITDA decline of a little over $4.5 million and Milt let's just say I assume very little EBITDA contribution from the acquisitions. It still seems like a pretty tough decremental there. And I was just wondering if you could call out any areas where either expense were higher or mix was weaker or pricing was worse to help us sort of understand that decremental?

Yes. Let me address that and Milt then you can chime in. That is the key that affected our results Justin I mean you've honed right in on it and what it was quite frankly is you know volume in some of our most profitable lines in Garlock as well as in Technetics quite frankly. We saw weak volume in Garlock, there is just no way to work around it all through last year and I’m talking about all of Garlock, all of last year as we were seeing declines in oil price, our volume slowed as well as steel I mean Garlock supplies a lot of Seals into the steel industry as well as and we have a big presence in oil and gas, a big presence in refineries, a big presence in chemical, a big presence in metals and mining and so forth right. So Garlock is just kind of right in the teeth of most significant hydrocarbon price reduction that we're seeing and throughout last year we were able to do a pretty darn good job to be honest with you of matching cost reduction with this declining volume. We've gotten that organization so lean, going into this year we were hopeful, but the demand would stabilize and we had a weak first quarter and there's just not a lot of additional cost that we can take out. So we did not see pricing degradation, so what you're seeing there's just the cold leverage of some of our most profitable product lines. In addition, in the Technetics Group, we saw a mix shift because our nuclear business was down a little bit. That is more as I've explained in the past that the timing of that – it's not like nuclear demand goes down, but it actually varies a fair bit quarter-to –quarter and it depends on refueling schedules in nuclear plants around the world, maintenance schedules in nuclear plants around the world. And some of it was timing for us in Q1 that they got pushed to Q2. That was unfortunate, but it’s just customer demand, but some of it is just the normal fluctuations that we see quarter-to-quarter, so that kind of compounded the effect of volume and margin decline in sealing. We don't see that part of it really continuing or repeating if you will. We think that will be solid going forward, but the Garlock piece really we need I mean that’s just a function of the market and we need the oil price to stabilize, we need maintenance work to start picking up again in those hydrocarbon and basic commodity and metals markets. Milt, do you want to add anything to that.

I think you’ve covered it. It really comes down to volumes, some of our higher - most higher margin product lines. So I don’t have anything else to add. We did see just a – we are looking for kind of the bright spots that might be signals. We don't know if this is one that we did see some higher maintenance activity in the North Sea although that accounts for a small part of our volume. We're not seeing the turnaround season yet at least higher than normal in other markets. So that's where we're keeping our watch on.

Thank you for all the detail. That's helpful. Just sort of go back to a comment you made in regards to the outlook for 2016 and the sort of lack of a second half versus first half pickup potentially as you had thought would be likely with your previous guidance. I mean I guess you're saying now that the first quarter was also weaker than you expected. So should I think about piecing together 2016 as a weaker first quarter off of which previous second half to first half growth will remain unchanged or should I think about 2016 as a weaker first quarter than you expected, but also lower second half versus first half growth than you expected.

Well, that’s what we have trouble with the visibility on Justin. I don't think it's too late to still have a slightly better second half, I would still anticipate it, but we haven't yet seen any real tangible signs if that's going to be the case. I don't know it’s just my optimistic thinking. In fact that I can't imagine that things would get any weaker in these commodity markets we've seen here in the last really four weeks a little bit of a rebound in the oil price. That's going to have a positive effect for our volume and we're going to see in the second half some of the improvements that I mentioned in the Air Spring’s business come through which will certainly benefit sealing as well. So we're still working hard to try to meet the guidance that we had given before, but certainly you know we certainly saw a weaker first quarter than we were expecting.

Okay. Thank you. I may get back in the queue.

[Operator Instructions] Your next question comes from the line Justin Bergner with Gabelli & Company. Your line is open.

Okay. That was quick I'm back. I guess just drilling down a little bit more on the weakness in the first quarter. We've seen a number of companies in the energy arena; I'm thinking kind of GE Endeavor being the standouts talking about increase margin headwinds in their industrial energy focus businesses. And beyond the sales decline in your higher decremental end markets and feelings are you also seen increased price and margin pressure or you know greater decrementals in those parts of Sealing Products and you would normally see.

Well, I think it's only natural Justin anytime competitors anytime volume strengths that’s the tendency. That's what free markets do right. So however, given the nature of our products, the critical nature of our performance the brand names where we compete, we haven't actually seen in our numbers a reflection of that we certainly hear that from our guys right that all things are tougher, tougher you know except and I'm not disputing that but when we when we look at the numbers that are generated we're not seen you know a reduction in price effect - it is volume and what you're seeing there is how those products leverage. When we have really in our view hit the bottom of what we're able to do on the cost side. Other than materials and efficiencies and so forth. So I mean we just can't take a lot more labor out than we did throughout last year. So I am just - we pulled the trigger on the CPI I think you could argue maybe we should have done it quicker, but I'm certainly glad we pulled the trigger when we did our team is done a great job of executing that restructuring. As you guys know because you follow us we moved and we really had the equivalent of four plant relocations last year in GDP as well those are all done. As well as we sit here today. So we're in decent shape now from cost position across the company and hopefully that will clean out some of the restructuring noise and other cost noise that we've had in the last couple of quarters. So we should have a much better clean or look going forward and obviously our numbers this quarter were affected by the ACRP settlement. So I think, and we also had that unexpected requirement to settle this lawsuit in FME that that were obviously we will working on that, but as that case progress towards trial we concluded that we needed to settle it because we felt like the exposure was larger obviously and we potentially larger than we settled it. So that was kind of a one-time thing that was a contractual dispute from many years ago and so obviously that won’t be recurring either so.

Okay. Thank you. And any quick metrics on your recent acquisition just to sort of put the size of it in perspective for us.

Milt

Yes, Justin we are not disclosing the price per agreement with the sellers, but just to give you some direction. We paid roughly 6 to 6.5 times trailing EBITDA. So and we've indicated in the announcement about the acquisition that we had sales of about $17 million in that business.

Great. Takes care with me. Thanks.

Yes.

Your next question comes from the line of Jeffery Hammond with KeyBanc. Your line is open.

Hi, guys. This is James again. Just the flesh out Power Systems and the margin results in the quarter. If we do add back to $3 million litigation charge, Milt did mention margins would be in that 7% to 7.2% range. Can you just talk about the margin impact the rest of the year how you're at least thinking about it for the EDF contract? And then maybe just provide any additional color on the one time related items in the quarter related to the warranty claims and the additional R&D spending just so we can get a better sense for what that base business mix looks like? Thanks.

Yes. Milt do you want to take that.

Yes. Let me take the EDF part of it first and then we can go back to James within the other questions. EDF in the quarter if you just looked at the year-over-year I mean in the quarter the impact of the foreign exchange as you know, we - recap I think you understand the background James of how we’re accounting for this, when the swing in foreign exchange last year threw us into a loss position on the contract, accounting policies require that the full loss be recognized for the entire contract even it's a multi-year contract. So I think you understand that. So sense that quarter-to-quarter we have been looking and recognizing the impact on the P&L of the change in foreign exchange on the contract based on the rate the euro to dollar rate in effect at the end of the quarter. So if you look at the impact of just the foreign exchange part in the first quarter of this year, it was a positive because the dollar weakened from the end of the year through the end of the first quarter, it was a positive $3.3 million approximately. Due to our estimated cost to complete going up with the contract, we offset that so we recognized no income nor loss associated with the contract, so EDF had a zero impact for the first quarter. Now if you look at going forward through the balance of the year, we're going to continue to be recognizing the sales on a percentage of completion basis as we go and we’ll be doing our estimated cost to complete and the combination of the estimated cost to completed and the exchange rates at the end of each quarter, the combination of those two will determine what the P&L impact is on the EDF contract for the balance of the year, so that EDF.

Yes. And so let me jump Milt here. So, James we said at the beginning of the year, one of the things it will affect Power Systems this year as we have $40 million roughly on revenue that zero margin stuff. Probably, roughly half of that ZDF and half of that is two other completed contract engines that have to shift this year that we've built several years ago. And are just holding, waiting to deliver to the customer. These are commercial engines into the nuclear reprocessing facility that Shaw runs for the U.S. government. And we took a charge for those because we – a couple years ago actually when we realized that cost to produce those engines was going to be significant. So we are not losing anything when we ship from their own completed contract that will ship in Q2 – one in Q2 and one in Q3 I believe is the current schedule. So we have still – we've shipped $10 million – where we booked $10 million percent completion EDF in Q1, we have $30 million more through the balance of the year for both the Shaw engines as well as other percent completion that we forecast for EDF. There will be zero margin new engines. So that’s what's affecting the margins and the mix in FME. In addition to that we will see a little bit higher expense, but not much for OP2 development this year versus last year. So the R&D expenses should be relevant I would just imagine through the balance of the year relatively similar maybe a little – maybe a million bucks more or something like that. It would be my estimate of that. And that's really the effect for FME.

Got it. That was very helpful. Thank you, guys.

In R&D just to kind of round up some of your other – third question. R&D was up about $700,000 over the first quarter of 2015 and that’s largely because of the spending on OP2.0 engine program. Warranty costs were up on a specific – one specific project that we've dealt with and it’s behind us.

Your next question comes from Melissa Bermudez with DDJ Capital. Your line is open.

Hi, guys. One quick one from me on the $80 million accrual you guys took, just wanted to check is that all you are expecting to take from now on panel reconsolidation and I don’t understand that accrual now is the cash payment at the time of reconsolidation or was there any cash payment associated for now?

There is no cash now and yes that’s – the pro forma financials now anticipates the plan that we have agreed to in a consensual settlement. Now the only possibility is if for some reason we can't get that plan approved by the court, but assuming that which is unlikely at this point highly likely, because we have the consensual deal with both the current Claimants Committee as well as the future Claimants representatives which is why was such a big deal what we announced in March 17, but what's in the financials now reflects the completion of that. It really reflects as if that plan would have already been adopted. And so that what we anticipate happening and none of it will be cash until the final plan of restructuring is approved, closed and we reconsolidate and create the actual trust, which is likely to be sometime next summer.

Got it. Okay, thanks for clarifying. End of Q&A

There are no further questions at this time. I’ll turn the call back to the presenters.

Thank you, Angel. And thank you all for joining us this morning. If you have additional questions please give me a call at 704-731-1527. Have a good day.