Good morning. My name is Kelly and I will be your conference operator today. At this time, I would like to welcome everyone to the EnPro 2018 First Quarter Results Conference Call. [Operator Instructions] I will now like to turn the call over to Mr. Chris O'Neal, Senior Vice President of Strategy, Corporate Development, and Investor Relations. Mr. O'Neal, you may begin your conference.

Thank you, Kelly. Good morning, everyone, 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 that accompany the call. Steve Macadam, our CEO; Marvin Riley, our COO; and Milt Childress, our CFO 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 expresses belief, expectation or intention as well as those that are not historical facts. 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 our Form 10-K for the year ended December 31, 2017. 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 the following: First, non-GAAP financial information; second, collective references to EnPro and our subsidiaries; third, the deconsolidation of Garlock Sealing Technologies, or GST, and OldCo, LLC or OldCo, during the relevant periods until their reconsolidation effective as of July 31, 2017. And finally, pro forma illustrative financial information for the first quarter of 2017 presented as if GST and OldCo were reconsolidated for financial reporting purposes throughout that period. These disclosures are important to understanding comments we will make on today's call and we urge you to read them carefully. Consolidated results in the periods after July 31, 2017 reflect a reconsolidation of GST, its subsidiaries and OldCo as a result of the completion of the Asbestos Claim Resolution Process. We believe that investors will find comparisons of consolidated results for the first quarter of 2018 to pro forma results for the prior year period to be the most illustrative of the year-over-year performance of all of Enpro's businesses. For clarity throughout this call, we will compare first quarter 2018 consolidated results to pro forma results for the first quarter of 2017. And now, I'll turn the call over to Steve.

Thanks, Chris. Good morning, everyone. Thanks for joining today. I am pleased to share that we continue to experience favorable conditions throughout the first quarter in many of our markets. Demand in semiconductor, food & pharma, general industrial, metals & mining, and oil & gas continued to be strong, while aerospace increased slightly and automotive was relatively flat. Power Systems also have gained, and grew in sales versus the first quarter of 2017 driven by higher engine sales. This positive momentum was partially offset by declines in nuclear demand and softness in the industrial gas turbine market. As you can see, in the right hand column of Slide 4, we expect these conditions to continue at least through the first half of 2018 with improvement expected in heavy-duty truck aftermarket parts and further increases in power systems engine sales. These positive market trends give us confidence in our ability to deliver strong year-over-year sales and earnings growth for the year. And as you likely noted in our earnings release we’re increasing our full year guidance, which I’ll cover in more detail at the end of the call. Now I'd like to cover some of our performance highlights. To start, I believe that despite some issues that I'll describe in greater detail in a minute the fundamentals of our company are very strong. In the first quarter, we generated positive year-over-year sales growth in each of our divisions and segments. Excluding the year-over-year differences in foreign exchange translation and acquisitions and divestitures, which we'll refer to as normalized results, sales were up approximately 5% in the first quarter over sales in the prior year. Consolidated adjusted EBITDA decreased 3.5% from prior year. The adjusted EBITDA decline is due to results in our power systems segment and in our heavy-duty truck business…

Thanks, Steve and good morning everyone. As Steve noted previously at Fairbanks Morse we had a strong quarter in sales relative to last year but suffered a decline in profitability. As you'll recall, sales of aftermarket parts were quite strong in the fourth quarter of last year and as a result we entered the year with a light backlog, which has since recovered. In addition, we continue to manufacture and ship EDF engines, which are at near zero margins. To date, we have shipped six production units to EDF’s facilities and have 16 engines left to deliver, 14 of which are currently in process and are approximately 40% complete in aggregate. We anticipate delivering the last engine for the program in 2019. Additionally, we had higher SG&A expenses in the first quarter relative to last year driven primarily by higher sales and marketing expenses. As many of you know, our business can be uneven throughout the year, while Fairbanks Morse experienced a decline in segment adjusted EBITDA in the first quarter relative to last year. We expect to recover the shortfall through the balance of the year. We anticipate stronger top line growth, which will be driven by normal levels of margins for engine sales to navy programs and growth in aftermarket parts and services revenues. Notably, our current parts and service backlog has grown $5.7 million since the beginning of the year and is up 42% year-over-year. We're also working to control our costs and increase productivity, which will drive higher levels of profitability through the remainder of the year. We communicated on our last quarterly call that we expect a significantly stronger second half of the year compared to the first and given current backlog and parts and service order momentum, we're confident in our ability to deliver…

Thanks Marvin. Before I begin, I want to remind you that we permanently closed the Asbestos Chapter in our company on July 31 of last year. And in the fourth quarter, we substantially satisfied all of our remaining obligations under the joint plan. So the first quarter of this year was the second full quarter in which consolidated results reflect all of EnPro’s entities. In order to provide the most meaningful information about the first quarter, I will make comparisons of consolidation results for the first quarter to pro forma results for the first year period of 2017. One final note, before reviewing our quarterly results and balance sheet, since Steve and Marvin covered the financial highlights for the quarter. I will not walk through segment results, as I had in the past. If you have questions that are not addressed on the call please refer to the segment results, the segment summaries in the press release and accompanying tables. Our first quarter sales of $368.8 million were up 9.1% over the first quarter of 2017. As Steve noted, normalized sales were up 4.8% over prior year; up 2.3% in Sealing, up 4.8% in Engineered Products and up 17.6% in Power Systems. Gross profit margin for the first quarter was 33.9%, down 215 basis points compared to the first quarter of 2017 resulting from performance in heavy-duty trucking and Power Systems, as Steve and Marvin have discussed. Adjusted earnings per share for the quarter of $0.85 were down 11.5% compared to the first quarter of 2017. Adjusted earnings per share adjusts for items such as environmental reserve charges, restructuring costs, impairment charges, acquisition expenses and normalized tax rates; all as shown in the tables attached to our earnings release. The first quarter year-over-year decrease is a result of the items…

Thanks, Milt. We will close with a discussion of current market conditions and our outlook for 2018 and then take your questions. As we've always explained we have limited visibility on future demand with the exception of the new engine production in Power Systems. Most of our businesses have relatively short order to shipment cycles and typical order backlogs range from a handful of days to a couple of months. Additionally, the component nature of many of our products often obscures correlations with macro end market indicators. Notwithstanding this limited visibility, we're optimistic about our overall financial performance for the remainder of the year. Garlock, Technetics, GGB and CPI are all performing very well, aided by the favorable market conditions that continue to show signs of strength. STEMCO's backlog heading into the second quarter was several million dollars higher than at the same time last year. And as we've known since the beginning of the year, Fairbanks Morse expects engine volumes to increase in aftermarket parts and service sales to be higher in the second half of the year. While rising commodity prices are concerned, we're taking actions to mitigate the impact on our margins. As usual, our guidance excludes the impacts of future acquisitions, restructuring costs, the impact of changes driven by foreign exchange subsequent to the quarter end and any litigation or environmental charges. Given current macroeconomic forecasts and continued strength in most of our end markets. And despite the overall slow start to the year due to the results in heavy-duty trucking and Power Systems, we're increasing our expectation for the full year of 2018 sales and EBITDA. We expect sales to be up between 6% and 8% over last year and adjusted EBITDA to be between $224 million and $230 million for the year. About $3.5 million of the EBITDA increase over prior guidance is due to the estimated impact of currency and the balance of the increase is a result of current momentum in our businesses. Now we'll open the line for your questions.

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

Hey, good morning, guys.

Hey, Jeff.

Good morning, Jeff.

Just on the truck issues. Can you kind of bucket or quantify the all-in of the number of issues and then I don’t know if you can go through either quantify in individual ones or kind of order of magnitude and then within that what is kind of one-time and isolated to the quarter versus carries over into 2Q? Thanks.

Yes, Jeff. I’ll just once again talk about the major buckets, we've obviously done all of our scrubbing we kind of got everything quantified, we had our action plan and our countermeasures but Steve framed it up. Well, I think in the comments. First of all, we had some volume loss that was expected. So coming into the year, if we look at our budget for Q1 in the heavy-duty trucking business in STEMCO compared to the last year. We were expecting a year-over-year decrease in the first quarter. So the loss of the key customers was expected, we knew we are going to be impacted by rising commodity prices and that there is going to be a lag before we could look at price increases to recover some of that. So those things were expected, we also knew that we had some ATD related litigation with some legal expenses and we also were involved in doing the kind of the consolidation in some facilities, too small facilities into one that Steve describes. So all of that was no – I think that what we did not see coming into the year. We saw as the quarter was developing, is a little bit more of a negative effect from mix in the business with OE continuing to be strong. And aftermarket particularly in some of our higher margin products to be off. Now if you look at the backlog coming into the second quarter of some of our higher margin product lines is picked up. So…

Hey, Milt, let me jump in because I think Jeff, the relative weakness in the aftermarket sales was exacerbated by a seal promotion that we have a promotion that we did in Q4 of last year. So did pull forward some demand and the other thing that isn’t probably more permanent is just there’s a lot of new equipment on the road. And so the newer, the mix of trucks and trailers that are driving around the less maintenance it's done on those trucks. And as you know, the OE demand for both trucks and trailers over the last few years has been well above long-term trend line. So it's a relatively kind of new fleet, when you look at the total U.S. trucks that are on the road. But that said, that's probably less impactful than the pull forward. So I have a lot of confidence that we'll be just fine in STEMCO, I really do it's not most of the stuff is cost that hit us in Q1 and a lot of things came through the team is operating well when you peel back the covering you look at the core operations. It's just as solid as it has ever been, we got a little bit behind on steel pricing because we were a little bit surprised with as everyone was with the spike that we saw that was associated with tariffs and so forth. So we've got price increases that are already announced and already on the street, those will start to pass through our commodity increases. So I don't have a lot of concerns about STEMCO but even short of that, we're going to be taking some pretty aggressive corrective actions to manage our cost and position ourselves to have acceptable margins going forward, but I don't – it's hard to see for you guys but as we peel back and look underneath the segment. Yes. I feel pretty confident that STEMCO's going to be right back on what has been our internal plan for the year.

And Jeff, if you look at the year-over-year delta in earnings EBITDA for the business, I would say roughly this is just for roughly about 40% of the year-over-year negative variance was related to some of these kind of untypical, non-typical business expenses the legal and the facility changes and so forth. Now what we have some of that dribble in to the second quarter on the legal front, yes, its likely we have some but that will help you maybe ballpark it a little bit.

Okay, that’s helpful. Maybe just ask in a different way. So I would like a $6 million variance and I guess I don't appreciate some of the volume loss in the litigation, some of the things that you knew. So I mean, can you just give us a sense of what the variance was versus what you were expecting. Maybe, since you guys had a better understanding of some of the dynamics.

The variance that we were expecting is probably about half of that, Jeff.

Okay.

And the other half and again, some of the stuff we actually work expecting was warranty cost that legal fees even came in higher than we've thought in the end because we didn't really know that going into the quarter. We knew we had these issues, but it was the warranty cost, it was the start-up costs of the friction line. It was the facility relo cost, we shut down two small operations and moved them one in Mexico, one in Rome. We got out of the distribution center there, consolidated back. And we just had a few things. So about half of what you would quantify maybe slightly bit more than that but was kind of what we expected in the other half was kind of the – just got the one-time issues. Now is that helpful?

Yes. And then just on the kind of what – so it sounds like legal, lingers, are the warranty and the relocation and plant move, are those costs behind us?

Well the two, yes, the two moves we have done the – we always think we get all the warranty costs, but what we don't know, Jeff, to be honest with you, I mean these are quite frankly driven by Dura-Line friction warranties. And a lot of our litigation costs are driven by trying to get the Dura-Line – historical Dura-Line relationship, cancel done and get out of that situation because they've been such a poor supplier to us over the years. That's one reason we're excited now about having the friction in line actually up and running. So I'd say the lion's share of those one-time costs are behind us, we – I'd like to sit here and say it's 100% behind this, but I don't believe that to be the case, but I would certainly think that 75% to 80% of them are behind us.

Okay, good. And then just on the – it looks like the guidance raises three points on revenue. Can you bucket what is FX and then the bigger buckets of the delta in the businesses. And then I'll get back in queue. Thanks.

Milt, you want to…

Yes, as Steve noted in the comments about 3.5 so we were 2.16 to 2.22 before in guidance, so we raised about $8 million and about 3.5 of that was related to currency changes in the quarter. So that's a combination, Jeff, of the income that resulted from favorable currency on the EDF contract plus our estimate of the translation effect of currency at the end of the first quarter assuming that continues throughout the year compared to where it was at the end of year. At the time we made our initial full-year guidance. So that the 3.5 and then the balance of roughly 4.5 is a result of us kind of tightening our thoughts about the year encouraged by the first quarter results that we saw in four our businesses and the confidence that we have and the full year for both Power Systems and heavy-duty trucking part of Sealing.

I think this goes without saying, but I want to just reiterate it, Jeff. I know you know this, but I want to make sure everybody else knows that. We're talking about currency rates at the end when we close the quarter not today because as most people know the dollar has strengthened since the end of the quarter. It's really back to where it was as we ended the quarter, as we entered the first quarter – as we entered the year, I should say. The numbers that we post or that we talked about in the forecast and all that are assume those currency rates as of the end of March.

And that's there was a – particularly euro, which is the biggest currency translation for us, it was at a $1.23 and we’re sitting here today at $1.20 which is where we're at the end of the year.

Correct.

So we'll be very explicit going forward as the year plays out as we talk about guidance from the impact of currency versus other changes.

Okay, thanks a lot.

And your next question comes from the line of Joe Mondillo of Sidoti & Company. Your line is open.

Hi, good morning guys.

Good morning, Joe.

Just to touch on the guidance that $4.5 million related to organic improvement. Could you give us sort of the puts and takes throughout your different segments or throughout the different businesses what ones really are outperforming and which ones are under obviously STEMCO seems like maybe you brought down those expectations. Can you just give us the puts and takes?

Yes, well, I mean I think it's evenly split, if you will between the sealing obviously because of the Garlock and Technetics and Engineered Products. It's kind of across the board really. We again, the simple story as we're performing better in all parts of the business. Other than STEMCO, SME has always been a back half story. We're very encouraged by the way on the parts and service backlog and encouraged by the progress we're making in Fairbanks overall. So it's kind of everything that we thought going into the year with Fairbanks is essentially just as good, maybe slightly better because of parts – because of aftermarket parts and service backlog that we see today. STEMCO is slightly lower only because we gave away, we took a little bit of a step back in Q1 but we have full confidence that we're going to recover throughout the year and be pretty darn close to where we were going into the year. So the strength is really from the other four divisions that make up the balance of sealing and all of the Engineered Products. I think it's the way I would characterize it, Joe.

Yes, I don’t really have anything else to add, Joe. We were up nicely on the earnings side, the Garlock and Technetics Group, GGB and CPI. Order pattern is still strong in GGB, strong in Garlock, strong in CPI, which are our three businesses that don't really have a backlog visibility that ever really helps us. So we just look at the flow of order patterns week to week, it's still healthy in all three of those. And quite frankly, our backlog in Technetics has never been higher. So we don't see any – again I caveat that by things changing the macros obviously – but we – if I stop reading the paper and just look at our own internal order patterns and backlogs I feel just as good, I feel better than I did at the beginning the year because they still stronger. So that's essentially what we're looking at which is what led us to increase our guidance.

All right, and so looking at the Sealing segment, obviously the year-over-year comp was big disappointment in the first quarter which we've already covered. Going into the second quarter compared to a year ago, I think you were at on an adjusted basis, just a little above 14%, considering sort of the lingering effects at STEMCO but then you're raising your guidance relative to Garlock and Technetics. How do you see sort of the comp in second quarter relative to a year ago. I'm just trying to get my sense of where STEMCO weighs in to the rest of the segments and how the year-over-year stock comps starts to look in the second quarter and then it sounds like STEMCO works itself out by maybe the second half of the year.

Yes, we would expect year-over-year in Sealing for the second quarter for sales to be up and margins – EBITDA margins to be relatively flat, maybe just a bit down but I would call it flat from a rounding standpoint to last year.

Okay. Okay, that’s helpful. And then in terms of looking at our Power Systems, you guys always have a pretty good visibility with us just given backlog and it seems like things are trending really positively. The first quarter it sounds like the low watermark of the year and just trying to get an idea of where we're seeing revenue growth for the year and maybe how margins fall out, I think last call you sort of called out that margins could be – should be sort of comparable to a year ago, but it seems like you're stressing the aftermarket a bit more, so are we looking at maybe some improvement on the margin side and where do we – what kind of growth are we looking for revenue at Power Systems?

I think our margins will – we could see some pressure on our margins year-over-year because of the strong engine sales that Marvin and Steve talked about.

And it’s primarily through a lot of EDF volume, I mean it's just an example. Marvin, we're going to ship, we've shipped seven EDF engines as of today. And how many more we are going to ship through the rest of the year.

Yes, so we’ve shipped six through today. And we should make our way all the way through 15 at the end of the year.

So we got nine more EDF engines to shift, Joe at essentially zero margin, right is where we are. That's what's putting pressure on our margins. If you take that out of the equation, the margins would look healthy.

And then so – I think we said this essentially on our last call. But we're expecting a much stronger second half of the year in Power Systems from an earnings standpoint than first half. So our expectations would be a ramp-up from Q1, Q2, Q3, Q4, as the year progresses.

Okay. And relative to the last call, are you more or less positive on the margin – are you guys on the profitability side of the business? Because I thought of…

The Fairbanks.

Yes, Fairbanks because I was looking, I thought you said last quarter or the last conference call that margins should be comparable to a year ago. And now you are sort of saying that maybe they're a little down because of the…

Not wholly comparable last year, the place to be.

Okay, okay. And then I guess, lastly, just curious what's going on with CPI in the Engineered Products segment. I think GGB's sounds like it's trending pretty well, but is that at all a contributor?

Yes, CPI margins were just a little bit below – just a little bit below 20%. So I mean CPI is doing very, very well. Solid execution, solid cost management decent demand I would say things are like white hot in terms of the market, but the market is solid. Continued a lot of the maintenance that was deferred in the oil and gas downturn in 2016, 2017 time period is has come back to us. And our execution has been good. We've got some new products in the market that should ramp-up force through the back half of the year and provide some incremental sales. So CPI is executing quite frankly as well as it ever has since I've been with the company. So things are all the problems are behind us and at this point, it's a rock solid business and we're looking for increased volume through new product innovation and some other things that work that we're doing there right. So I have no concerns about the profitability of CPI and then GGB I would echo the same thing, I mean we've been obviously we didn't have to work through all the huge problems of CPI and the GGB portion of that business it's always performed well, but it's we're continuing to execute better and better in GGB our operational teams have done a really phenomenal job. Our commercial efforts are improving all the time is a very the business leverage nicely, as we continue to grow volume there we're managing cost closely so. Engineered Products as a segment for us is in really good shape. Automotive is the only thing this year that's been but it's been flat, but it's been strong as we've always said it's industrial portion that business where we make better margins anyway, so we're not quite is affected by smaller fluctuations in the automotive demand but that's still just fine. I would think we didn't go into the year expecting it to be growing this year. So anything you want to add.

Yes, I wish to add one thing to Engineered Products, and we have talked about this in the past. And we did last year that in this segment, we tend to have the strongest part in the first half of the year, first and second quarters are typically the strongest quarters. Last year it was the first quarter was the strongest. We probably expect that to be the case now. But I we’ll see if general industrial continues to be strong, might be a little bit different this year. So that's all have things that I would add and we had a really good first quarter. We expect the first quarter in the same quarter be our strongest quarters in that segment.

That is just a general seasonal product.

Yes.

Okay, thanks a lot appreciated.

Your next question comes from the line of Liam Burke with B. Riley FBR. Your line is open.

Yes, thank you good morning. Could we touch back no the power segment, you have a healthy backlog. And could you could get a senses to how that timing shapes out and how it would translate to revenue growth both through the end of the year and next year?

Liam I will start and Marvin will add some additional color. But we are expecting to have some healthy top line growth this year because of all the percentage of completion in the engine revenues programs that we've talked about. So topline is it is to be driven by the new engine sales. We expect to have a much better second half of the year, than the first half with aftermarket parts and services. So we're encouraged by that too. But there can be some pretty big dollars of growth that will come from the engine sales of the challenge, though isn't that a lot of the discussed is not going to translate to the same type of earnings growth on the – we get to the bottom line. And then, so this year we would expect the step up in total revenues for the business partially driven by new engine sales. And then with the growing backlog from programs that we've blend that we've discussed on prior calls, we believe that the future is bright for the next several years. And Marvin you might be having any other color, that you want to add to that.

Yes, I would just echo Milt’s comment. Right, the future is really solid, the top line should remain strong primarily driven by multi-year engine programs and we'll have some sort of average margins that we've had just primarily because of that mix right you've gotten here zero margin programs that we need to flush out of the system and we're going to be a little rocky until we get those out of the system, but the aftermarket bolstered quite nicely and quite frankly, the backlog of higher margin engine program is bolstered quite nicely. So, I think the future is pretty bright.

So, what will happen is the new engine sales and as we get EDF out of our system. And, especially as we start doing the past of the first couple of engines in the new Navy program, we would expect our learning curve to result in higher margins on new engine revenues and then obviously those new engine revenues are seeding the future for aftermarket parts and service.

So I go back accordingly prepared statements, EDF is obviously new zero margin. It's 40% complete. So as we look forward, we've got a good backlog of new engines at margin offset by probably a negative mix because it will be heavily more weighted towards systems and then we still have EDF filtering through the power line is, I mean as we go into 2019.

We did – had a lot of EDF this year, should have a little bit less if all goes according to plan next year. We had a significant impact of that this year.

And you have stepped up your R&D investment with the freed up to cash. You highlighted new product announcement at Garlock, how has the new product pipeline been going at the Sealing Business in addition to this new product release?

Right. We highlighted that we would like to start at that. Since, our challenge in this company as a diverse run industrial is a lot of small wins, we’ve chosen and we’ve done this over the last several quarters to highlight just one or two because it is kind of a game a bunch and singles. So, we highlighted Garlock EPIX, since the first quarter we were – actually this is current. We're in the process of launching a very exciting new isolation gasket as well in Garlock. We've got a number really exciting new products for aerospace, semicon and the other divisions of the other business units within the Technetics Group. Even STEMCO has bunch of new products that are underway. So, I think quite frankly, I feel very good about our product pipeline across the board, of course, the biggest investment we’ve made has been in the OP Trident, which we're also very excited about, it is just a little bit longer timeframe, because it takes a very long sales cycle and it takes. These are major investments of new power facilities around the world. And, so the only thing we're bucking up against with Trident is the fact that we don't have one in the field. We will get one in the field, one or more, we'll get some in the field in the near-term and then markets, the industry is going to be able to see the fuel efficiency benefits that we are very confident they will see because we've seen it. So, I'm pretty optimistic our Company is, as we've said in the past, we went through a decade and a half without spending any money on development. And so, we had basically we had no pipeline until a few years ago when we really launched this effort and now we've got a nice pipeline that's growing of product innovation and developments that we're doing.

Great thank you very much.

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

Oh, good morning. Steve, my first question relates to just the price cost pressures. I know that you've talked about them in the context of STEMCO but how are they affecting your other businesses in terms of your pass-through whether they are lagged or not lagged and your general ability to put price through.

Yes. I would say, I mean it is an ongoing challenge for us. Our company performs better in rising commodity price environments for two reasons, one it does give us the ability to go in and pass-through price increases because things are moving and the world knows the commodity prices are going up. And many times, we can capture margin in that process over time. The second is when that's the case, that means the markets that we sell into are strong, right? So we sell a ton of product into the steel industry, we saw a lot of product into extraction in metals and mining and can commercial and agricultural. All the things that are driving commodity prices up are the verticals that we sell into. So, if you look at EnPro’s performance over a long period of time. We actually believe we not like it when it's rising environment even though we have to go to work more on the commercial side to pass through our commodity price, commodity cost situation. I am not very concerned about the steel frame, the steel frame was a little bit of an anomaly to be honest with you, but we'll recover from that. I'm not even concerned about recovering from that. It's really a timing issue for us.

Okay, I mean – would you have as sort of suggest how much outside of STEMCO price and raw materials sort of weighed down the quarter?

I don’t think at all.

Okay, and then just on the STEMCO side was the aftermarket OE mix headwind anticipated coming into the year, I think you said it was?

Not now. We frequently do, not every year but we frequently do a fourth quarter promotion. We did one in, let me get this right, we did one in fourth quarter of 2015, making the first quarter of 2016 a little weaker. We did not do one going into 2017, so if you look at the comps of Q1 as for STEMCO 2017 to 2016, they are very good. And part of it was, we had done a steel promotion that we didn't repeat. And then this year, it was the opposite of that, like because last year, a year ago, we did not do one and this year we did. So, that affects year-over-year aftermarket volume in Q1. Aftermarket volume in Q1 in STEMCO is always weak because of weather. We've talked about this before. Fleets are reluctant to bring their equipment off the road, when there is still bad weather and salt and rain and snow and all those stuff, all but not rain so much but snow and ice and salt on the roads, and sand and so forth. So, what we typically do is we see the aftermarket volume just seasonally, begin to pick up in Q2 and Q3 as the maintenance cycle happens and warm weather comes right so. So the issue is it that pull forward associated with the promotion on a percentage basis has more effect on aftermarket in Q1 than it would on any other quarter. Right? So this is kind of the way the industry works and the industry, we're not unique in doing promotions in Q4. And again, we don't do it every year so it throws it a little bit off. So, it's always hard going into the quarter to figure out exactly what that looks like, right. So that part of the pull through, I am not worried about. There are a couple of product lines that we make a lot of money in the aftermarket that are under competitive threat and competitive pressure, which were reacting to as best we can. But that is more permanent mostly in the brake products and suspension product area.

Okay. And then lastly, just on the liquidity. I just want to make sure I understood the moving parts there. The $128 million tax refund, that's about $20 million higher than you were anticipating. I guess, about $25 million higher than your anticipating and then there is no give back there I take and then the $31 million reduced taxes in future periods to the use of foreign tax credits. What sort of change there and how long will it take to realize those benefits?

That’s, let me answer the second question. We anticipate being able to use those over the next three years. So some this year, some in 2019, some in 2020. And the reason that's there has been somewhat of a moving target. And again, too much details just now I’d be happy to go offline with you and give you kind of all the details of how, what's changed with tax reform and so forth. But essentially at a very high level initially the guidance from IRS which caught us by surprise was that we were going to have to use our loss in 2017 to offset the total charge which therefore would have reduced the value of the carry back and then we got a clarification. We have done some lobbying on this point, I don't know how much the lobbying has an impact on the clarification from the IRS and said no. Have to do that. So now we were able to go back in use and take advantage of our full loss on the carry back, which is the primary reason for the number jumping up. So that's going to in a nutshell. We had some tax planning I referred to in the script, we did do some tax planning where we've increased some of our pension contribution to make sure we're in good shape there, which gave us some additional loss that we can fold into our 2017 loss carrybacks. We did other tax planning that helped us get that number that refund – expected refund up a bit.

Oh, it is not all the best as you [indiscernible]

Most of it is. That is the tax planning system in the margin.

Okay, thank you.

Your next question comes from the line of Jeff Hammond from KeyBanc Capital. Your line is open.

Just to follow-up on power. Just to make sure we're clear and close a little peer. So can you give us the revenue contribution this year from the EDF that comes in at zero?

Give us one second Jeff.

And while you are looking through that, so I head a couple of different things on the margins, so we should think of margins in power systems as flat year-on-year ex the EDF or even including that.

Yes, it was including everything. As I said maybe a fraction above or below because of the high engine revenue and Marvin said that are about the same. And so it's I'll just call it relatively flat. Then with question about EDF revenues are about $30 million roughly EDF revenues that we expect and to see…

And what was it in 2017? What’s the incremental…

Yeah, and let me have that handy, hold on a second.

Okay, I can follow up offline. Just last one CPI, a number of years, a bit of a challenge, you’ve resized it, it sounds like it's performing really well. So I think back when it was challenged, I think there's questions of how it fit, whether it fit. So now that the business is performing better, how do you think about that in terms of fit within the portfolio? Thanks.

Well, Jeff, I think about it exactly the same. The questions were once that you ask, I wasn't asking myself. I mean we always look at businesses and do they have a long-term future in our portfolio, which is really based on whether we feel like we are the rightful owner and we have the ability to create a real competitive advantage and actually grow the business. The nice thing about CPI performing now is if we've got a little time to really see if we can make that growth happen if we can. It does have a long-term future with our portfolio. If it can't then it's isolated to the size that it is today in a fairly narrow markets and to the extent we find something better and need the capital or believe we're not the rightful long-term owners and that will be a different, different question. So, I don't – as I've tried to share with you and others many, many times, when a business is not performing well because of things we control that's not the time in my mind to divest it and that was the case with CPI. It was not performing well for that market decline reasons that that happened because of the drop in oil and gas, the precipitous drop, I mean from $120 a barrel to $30, is not a small drop. And so the combination of that as well as our operating issues. And so, now that the oil and gas market has stabilized and our operational issues are behind us, it’s much, much easier for us to make a – the right strategic call on that vis-à-vis the EnPro portfolio, right. But I think you can appreciate the fact that when a business leadership team is fighting through all that restructuring and trying to get things operationally in line, there’s not a lot of efforts on growth and new product development and improving our value proposition and so forth and so on. That work is going on now. So, I'd say that’s the only way I know how to answer it and it's not necessarily unique to CPI, it’s really how we think about being the rightful owner of all of our assets that's why we divested the Garlock Rubber Technologies business a number of years ago or three or four years ago or five, that’s why we divested the Quincy compressor division. Under my tenure maybe 7 or 8 years ago, I don't remember exactly what it was, but that's why we didn't divested Franken Plastik and that's why we divested – we have divested bits and pieces of the portfolio that that don’t make sense and so that I'm just being transparent on how we think about.

Great, thanks guys.

Yep.

Your next question comes from the line of Joe Mondillo of Sidoti & Company. Your line is open.

Hi, guys. Just a couple of two follow up questions. Number one, excluding the $128 million that you expect to receive on the tax refund later this year, what kind of tax rate are you looking at for the year?

If you look at our normalized, I think the best way for me to answer it, Joe, as if you look at our adjusted earnings table, which I think is the last page in the earnings release. We are using a – provide normalized tax rate, we're using 29% tax rate. Obviously that would reflect our global blend of income. It would obviously reflect the lower rate in the U.S., also reflects the state taxes that we would have. So that's the rate that we're using to determine our adjusted earnings and adjusted earnings per share.

And then that could see downside relative to some of these carrybacks and other items that you sort of highlighted? Is that fair?

Hold a sec. I don’t want to confuse our tax rate for earnings purposes versus the cash the cash effect of taxes, okay. So if you look at the actual cash taxes that we’re going to paying and you’re taking into account – obviously totally different answer. Do I understand your question correctly?

Yeah, I think so. The cash tax rate is going to be much lower than 29%, is that...

Well, yeah, certainly, if you look at this year, you feel like all the cash that we’re going to be getting back. Now, our stats – our provisional – our tax provisional, our P&L is going to move around a bit. It was obviously very high this year because quarter-to-quarter as you know tax provisions obviously can move quite a bit especially early in the year. And one of the reasons that the tax provision is going to be a little bit higher this year because of some of the discrete items that we have that are in connection with the carryback and tax reform. So there is going to be some noise this year and not just for us, probably a little bit more for us because of the carryback, but there is going to be some noise in tax provisions for many, many companies this year because of the transition.

Okay. And then just last question regarding SME, what are sort of your long-term margin targets takeout EDF and all the backlog that you have sort of building in the positive trends. Where do you think margins can go to say post EDF?

Okay, I think we have – if you look at the business is configured today, which is at least on the new engine side primarily, navy marine, so if you exclude the impact of the product, OP, which is obviously going to come with growth, right. And you’re kind of up 60% after market and 40% new engine revenues then I think that we’ve got probably upper teens. Tight EBITDA margins for the segment. Now, if we have the cash excess that we think we can have over the next few years on the commercial side [indiscernible], I suspect we’re going to find early going is that’s probably going to have a negative effect on margins. But we’re going to be getting as additional growth that comes from that. And then over time we would expect the margins on the commercial engines to move up as well.

As they start to pull after market product…

And as our volume – just our volume increasing, we get more experience…

Yeah, yeah, yeah obviously that’s a margin comment, not absolute dollars of contribution. We will be making the money along the way, but on a margin basis and the commercial power market is competitive. So with the more success we have on that basis, the more growth, we'll see, the more mix down the margins we’ll be making more money and then after we usually think what Marvin that engineers be in for three years to four years before it start us to really see any significant aftermarket demand.

That's correct.

And we've been trying to balance that right now to make sure that we don't run out too far.

Yeah.

Okay, perfect. Thank you.

Yep.

Your next question comes from the line of Ashley Ying from DDJ. Your line is open.

All of my questions already answered. Thank you.

Thanks.

And that concludes the Q&A portion of today's call. I’ll now turn it over to Chris O'Neal for closing remarks.

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