Greetings and welcome to the EnPro Industries Fourth Quarter and Full Year 2019 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris O'Neal. Please go ahead, sir.

Thanks, Kevin. Good morning and welcome to EnPro Industries quarterly earnings conference call. I remind you that our call is also being webcast at enproindustries.com, where you can find the slides that accompany the call. Marvin Riley, our CEO; and Milt Childress, our CFO, will begin their review of our fourth quarter performance and outlook in a moment. But before we begin our discussion, let me point out that we will be making statements on this call that are not historical facts and that are considered forward-looking in nature. These statements involve a number of risks and uncertainties that are described in more detail in our filings with the SEC, including our most recent Form 10-K and Form 10-Q. We do not undertake to update any of these forward-looking statements. Also, during the call, we will reference a number of non-GAAP financial measures. Tables reconciling these measures to the comparable GAAP measures are included in the appendix to the presentation materials. With regard to guidance that we share in this call, we have limited visibility into long-term demand as 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, many of our products serve niche applications for which demand has not correlated well with macro end market indicators. This further complicates accurate forecasting. Our guidance excludes changes in the number of shares outstanding; impacts from future acquisitions, divestitures and related transaction costs; restructuring costs; the impacts of tariffs and trade tensions on market demand and costs subsequent to the end of the fourth quarter; the impact of foreign exchange rate changes subsequent to the end of the fourth quarter; impacts from the further spread of the coronavirus and environmental and legacy litigation charges. I also want to note that as a result of the December signing of the definitive agreement to sell Fairbanks Morse, the Power Systems segment is accounted for as a discontinued operation in our fourth quarter and full year financial statements. Unless otherwise noted, all of our comments in the fourth quarter and full year results will be in reference to continuing operations. And now I'll turn the call over to Marvin.

Thanks, Chris and good morning, everyone. I'd like to start this morning by highlighting some of the changes that we made to the EnPro portfolio in 2019 and how those changes have affected the characteristics of the portfolio as we enter 2020. Our strategy is to take organic and inorganic actions to shift the portfolio to products and services and sustainable and structurally attractive markets that provide greater growth opportunities, generate strong cash flow returns and command higher margins based on the value provided to customers. All of our recent activities have supported this objectives. During the third quarter, we completed the acquisitions of LeanTeq, which provides cleaning and other refurbishment services for critical components and assemblies used in semiconductor aftermarket equipment. And The Aseptic Group, which distributes design to manufacture Aseptic food transfer products for the pharmaceutical and biopharmaceutical industries. Both companies have strong competitive positions in high growth markets plus excellent margins and cash flow. We have experienced a positive transition and integration of both of these businesses and continue to see strong demand patterns in line with our expectations. We have exceptional management teams in place who have grown these businesses in the past and have done an outstanding job maintaining momentum and focusing on growth throughout this process. We also continue to focus on improving the financial performance and the competitive position of our heavy-duty truck business. In support of this, we divested STEMCO business in Rome, Georgia, which produces brake shoes and kits. The sale of this business was uprooted next step, following our discontinuation of friction manufacturing in the same location in December 2018. In addition, we have ceased operations of several underperforming product lines. These actions were important steps as we continue to significantly reduce our exposure and aggressively reshape our heavy-duty truck…

Thanks, Marvin. Before I begin, as Chris noted, I want to note also that as a result of the December signing of the definitive agreement to sell Fairbanks Morse, the Power Systems segment is accounted for as a discontinued operation in our fourth quarter and full year financial statements. Unless otherwise noted, all of my comments on fourth quarter and full year results will be in reference to continuing operations. During the fourth quarter, sales decreased 1.4% compared to the same period of 2018. Growth in aerospace, semiconductor, food and pharma, nuclear and oil and gas, including the contribution from the businesses acquired in 2019 was more than offset by weakness in the heavy-duty truck, general industrial and automotive markets. Sales were also negatively impacted by unfavorable foreign exchange translation, the divestiture of the brake shoe business and the exit from the industrial gas turbine market in 2018. Excluding the impact of foreign exchange translation and sales from acquired and divested businesses, organic sales for the quarter declined 2.1% compared to the fourth quarter of 2018. For the full year, our sales decreased 5.4% compared to 2018. Excluding the impact of foreign exchange translation and sales from acquired and divested businesses, organic sales for the year declined 3.5% compared to 2018. Gross profit margin for the fourth quarter was 34.2%, up 330 basis points compared to the gross profit margin in the fourth quarter of last year. The gross profit margin increase was driven by our Sealing Products segment, primarily by the acquisitions of LeanTeq and The Aseptic Group, and improvements in our heavy-duty truck business. For the full year, our gross profit margin was 33.5%, up 70 basis points compared to 2018. Adjusted EBITDA in the fourth quarter was $43.3 million, up 27.7% compared to the fourth quarter of…

Okay. Now I'll discuss our outlook for 2020. In line with current macroeconomic forecast, we expect to see current trends continue through the first half of the year in most of the markets we serve. We expect continued weakness throughout the year in the heavy-duty truck market. We expect these headwinds to be more than offset by cost reductions across EnPro and increased earnings in our semiconductor and food and pharma businesses. Taking these factors into account, including the anticipated impact of the coronavirus, we expect adjusted EBITDA for 2020 to be in the range of $180 million to $190 million on relatively flat sales and adjusted diluted earnings per share from continuing operations to be in the range of $2.82 to $3.14. We currently anticipate 18% to 20% of our full year adjusted EBITDA to be in the first quarter, as a result of the anticipated impact of the coronavirus growth that we expect as the year progresses and seasonal patterns of our businesses. Our guidance is based on expected depreciation and amortization of between $73 million and $75 million, and net interest expense of between $14 million and $16 million for 2020. We have provided a table that details the net interest expense components, including the impact of the benefits of the net investment hedges that we entered into in 2018 and 2019. We’ve also updated our estimated normalized tax rate to 33% from 29%, as a result of the higher mix of non-U.S. earnings resulting from the divestiture of Fairbanks Morse. Additionally, our full year guidance does not reflect the potential full year impact of the coronavirus, the odd effects of which we are currently aware. I'd like to close our call today with some comments on the last several months, and then we'll take some questions.…

Thank you. [Operator Instructions] Our first question today is coming from Ian Zaffino from Oppenheimer. Your line is now live.

Hi, everybody. Thank you. Just kind of keying in on the transformation comment, how are we think about the remaining portfolio, I know FME was a big kind of divestiture. We also saw Rome, too. Anything else we should expect? Or how do we think about that? Thanks.

Well, one of the comments I made is that we're really trying to ensure that the portfolio in and of itself has a strategic fit, a knitting that holds the businesses together. And for us, it's really about material science. It’s about leveraging high-quality materials to create a value proposition for our customers. And so if we think about that as the lens that we look at our businesses, that would mean that we have maybe some more work to do in our heavy-duty trucking business, where we would probably have to address one to three, maybe business units within our heavy-duty trucking business. That's about where our lens is today. Obviously, we'll continue to manage the portfolio in line with the targets that we've communicated in the past, but that's where we're pretty much laser-focused on heavy-duty truck right now.

Okay. And then also, just turning to the coronavirus. So you've seen it already in some of your facilities, how are you thinking about that if it does make its way or I guess, it has made its way to Europe now? Any measures you could take over there, given that you've had experience now with it? And then how do we kind of get our head around what the potential exposure would be in Europe and maybe the financial impact, if you could. I know it's early though. Thanks.

Yes. That's a pretty different one, because the situation is dynamic and fairly fluid. I will first say, that's a really good question. That is something that we've contemplated here a lot. And I spent a number of hours talking through just corona in general. So we put together a response team in China to deal with what we saw as a fairly sophisticated and fast-moving issue taking place once we started to get word of the virus spreading. And through that process, we've developed a good approach to sort of monitoring our employees, to develop job safety analysis in terms of how we'll perform our work, how we'll manage the flow of individuals into and out of our workplace, the supply chain that's required to operate in terms of, for example, mass, et cetera, et cetera, trying to make sure that we obtain the appropriate amount, and we get them and we develop a supply chain that would allow it to get through customs into our facility. So with that in mind, we have had discussions about what would happen if it started to spread worldwide. And we have taken some preliminary measures to identify where we could increase our supply from in terms of mass and things of that nature. So that we would be able to operate. We've started to really deeply look at our supply chain, just to make sure that we would be able to produce product and supply our sites. But above and beyond that, it's really difficult to forecast what might happen above and beyond what we see today. We do know that as it gets warmer, this situation might get a little -- might improve for a period of time. So as far as we're concerned, we're really doing everything we can right now and hoping for the weather to get a little bit warmer.

Okay. Thank you very much.

Thank you. Our next question is coming from Justin Bergner from G. Research. Your line is now live.

Good morning, Marvin, good morning, Milt. Just on the STEMCO restructuring, are you expecting to benefit from the full $10 million of savings in 2020. Since, I guess, obviously, a weak market?

The answer to that is no, you won't see that year-over-year improvement in 2020. We're expecting the trailer builds to decline mid-20s percent from 2019. And so we're in the midst of a market that hasn't fully reset yet. So the actions that we've been taking have taken are partly in response to that and then partly in response to the strategic desire to exit certain businesses that we don't think are going to be the -- at our standard from a financial standpoint going forward. So the savings are really combination of the -- improving the quality of the business through the product line and the business exits that Marvin discussed, as well as in response to market conditions.

Okay. But are those actions sort of all complete going into this year? Or are there more actions to be taken to get that $10 million of savings in a normal market?

Those are actions that have already been taken.

Yes. We are taking more actions, but that gives you a sense of what we've done to date.

Okay. That's helpful. On the capital allocation front, I mean, should we expect repurchases to be part of the 2020 capital allocation, now that the window has reopened? Or is there still a strong preference to do additional acquisitions? And if so, sort of where is the current focus, if it's changed at all from sort of the prior focus?

Well, the answer to the first question is, our stated intention is to go back into the market and we certainly anticipate that we would likely finish out that authorization this year unless something change, but that's our intention right now. And we do have a really healthy pipeline of opportunities. So we would continue to look in semiconductor. We will continue to look in aerospace. We continue to look in food and pharma for the types of deals that we've expressed that we have an interest in, particularly ones where the margin profile fits what we'd like to look like in the future as well as having some real technology or material science deal to those companies.

Okay. Thank you.

Thank you. Our next question is coming from Jeff Hammond from KeyBanc. Your line is now live.

Hey, good morning, guys. Just really want to get a sense of how you're thinking about core growth in each of the segments, what you see is, obviously, truck is a headwind, but maybe some of the offsets? And then I'm just trying to square what the acquisition contribution is? The impact of divestitures? And the product line shutdowns are going to be on sales? And if there's any FX impact?

Yes. Jeff, are you referring to looking forward or your – some of your questions about the impact of acquisitions and divestitures on our fourth quarter results?

No. Looking forward.

Yes. Well, we are expecting overall, as Marvin said in his guidance relatively flat sales. Obviously, we will be getting growth, full year growth as well as organic growth in the acquisitions that we acquired, the businesses that we acquired in the third quarter of last year. But we are going to be saying that growth that we're expecting on a full year basis from the acquisitions as well as the organic growth that we anticipate from those acquisitions is going to be offset by the softness that we see in other parts of our business, particularly in heavy-duty trucking. So the net impact that we see for the year is relatively flat sales year-over-year, however, with EBITDA and margin improvement, as you've noted from our guidance. So at a high level, that's the picture. The most challenged market, by far, is heavy-duty trucking. Looking ahead, we think there's going to be some year-over-year softness in automotive. We believe that the semiconductor market will be stronger year-over-year than what we saw in 2019. Aerospace, it's a little bit of a wildcard given what's happening with the coronavirus. But we're expecting it to be a reasonably good market for us, given where we participate. And food and pharma, we expect some continued growth in the market as well as from the acquisition that we made. And so those – and then general industrial has been kind of tough. We believe this could be a down year from an industrial production standpoint, just globally, and so the part of our business is exposed to general industrial, will tend to move more with industrial production than with GDP. And then, I guess, the only other significant market that I haven't mentioned would be oil and gas. We had a good year in oil and gas, particularly in the midstream in 2019. We're expecting that to be relatively strong in the first half of the year, and then we'll see what happens in the second half of the year. That's about all the visibility that we have right now.

And I'd just touch on automotive a little bit. We see some softness in European automotive right now, but we do see some strength in North American automotive, not the macro market itself, but just our activities to take share in North American automotive than has been fairly successful. So automotive for us is sort of a two region story. Asia is soft in automotive just primarily due to corona. We don't know what the second, third and fourth quarter will look like. When that opens up, we'll get a better sense.

Okay. And then maybe you can give me for 4Q. What LeanTeq and Aseptic contributed? And what the offsetting divestiture impact was or product lines?

Yes. Yes. In the fourth quarter, we generated sales of roughly $11.5 million in the two acquisitions in the fourth quarter, and we had EBITDA of roughly $5.5 million, $5.7 million of EBITDA in the fourth quarter. If you look at the Rome divestiture that happened and you look to the fourth quarter of 2018, we had sales of about $7 million in the fourth quarter of last year. And we had a loss in that business. As you may recall, we weren't making money in that business. And then in addition to that, in the fourth quarter, we had a fairly significant warranty charge. So we lost about $5 million of EBITDA than the fourth quarter of 2018 in that business. So if you combine those two, the year-over-year impact in the fourth quarter from a profit standpoint was roughly $10.5 million taking the both components.

Okay. And then these additional product lines in TrailerTail? Like what's the revenue and -- I guess revenue headwind? And I don't know if there's a profit headwind or tailwind tied to exiting those in 2020?

Yes. We -- they're relatively small. I mean, TrailerTail, one of the reasons we shut it down. If you look at all of 2019, I think we only had maybe $3.5 million of revenues in 2019. And if you look at the other product lines that we exited in the fourth quarter, we had -- it was roughly $6 million, $6.5 million of sales in all of 2019, we really were not making any money on these product lines. And so yes, it will hurt us a little bit on sales, but it's almost a rounding year. When you look at what's going on in the market in heavy-duty trucking, but we're expecting it to be favorable from an earnings standpoint going ahead.

And I wouldn't underestimate sort of the resource drain that these businesses were using to try to stem the losses from these smaller product lines. And so it just made a lot of sense to exit these businesses and redeploy and focus the resources and where we can get greater impact.

Okay. And then any other noise in 1Q that's impacting 1Q other than coronavirus impact?

No. Obviously -- it's a good question. Obviously, we'll have the completion. If you look at our full quarter, not just continuing operations we'll be reflecting the completion of the Fairbanks transaction, you'll see the changes in our balance sheet that we've discussed by the pro forma glimpse here this morning. So that's the major thing.

Okay. And then last thing, can you give us the split of D&A, the $73 million to $75 million between the two segments? And I don't know if any of it runs through corporate?

Yes. Very little in corporate. Let's see we've got in Sealing. If you look at -- I'm going to give you -- I've got the break out in front of me for 2019, which is going to be pretty close. But we had $53 million in 2019 in Sealing Products. We had $15 million in 2019 in Engineered Products. So it looks like looking ahead, we have roughly, in 2020, roughly $60 million in Sealing and $13 million in Engineered.

Okay. Perfect. Thanks, guys.

Thank you. [Operator Instructions] Our next question is coming from Joe Mondillo. Your line is now live from Sidoti & Company.

Hi, guys. Good morning.

Good morning, Joe. How are you?

Good. So just to dive a little bit more into the transformation that's going on, and just really quick. Just wondering sort of how you envision the timing of the STEMCO transformation. I imagine, given what's going on with the industry, maybe a little challenging, maybe if you're trying to sell some of these businesses, but what kind of timing do you envision? Where you think that the business is now in place going forward?

Yes. That’s a really good question. And I want to first say that we're always thinking about maximizing value, that's first and foremost, when we're looking at any type of divestiture. We're also looking at sort of the impact to the portfolio over time, if we were to maintain some assets that may be underperforming, et cetera, et cetera. So we're trying to be comprehensive in our thoughts. So we're also looking at the resources required to turn around some of these businesses versus what they could do in other businesses. So we're trying to take a very comprehensive approach. As we think about heavy-duty trucking in aggregate, though, our desire and our plan, our internal plans are to complete this work in 2020. So our expectation is to execute what needs to be executed in 2020. I can't give you that breakdown quarter-by-quarter, but that's our aspiration is to be done this year.

Okay. Good. No, that's exactly what I was hoping to look for us. And so going forward, how – I guess, what is your appetite going to be like for more acquisitions? And what kind of leverage, especially given the macroeconomic environment and some uncertainty in what's going on with global growth and just the cycle overall? Relative to your appetite of acquisitions, where are you comfortable bringing leverage up to now that we have brought it down to a very nice level. What level would you go up to?

Yes. So before I mentioned, first of all, a really good question, right? Reflects a lot of the conversations that we've had here internally. Before I go into sort of a stated leverage, I'll first say that we like where we are today, and one of our imperatives is to be strategically patient. We are not in a rush to go do anything that will put us in a tenuous situation as we would characterize it. The macro environment is a little, I don't know, unusual, uncertain, it's difficult to determine how things will unfold. So we're being very patient. We're being very thoughtful about our approach. Now if we do something or more than one, then what we've talked about internally is our hard cap is 3x, right? So we're not intending at all to go above 3, so anything we would do would be below 3, and as I stated, we're not in a rush to do anything. We're really just trying to be thoughtful, trying to be patient. If we see something, that is a nice fit, that would give us really good synergies, that's consistent with the strategy that we've outlined. And obviously, we would want to move on that, especially if it's depressed right now, given the conditions that we see in the macro environment. And we see it as an opportunity to take advantage of something like that, but we do want to be patient. So the simple answer is 3x is our max, and we're planning to be patient and thoughtful and make sure that the things we do fit strategically with our portfolio and the way we want to shape the company going forward.

Okay, great. And then just a question on the fourth quarter. What was the non-operating income in the fourth quarter, the line item was $6.8 million, but I don't know if there's a couple of things in there, if there's one big thing. Just curious what that was related to?

Yes, give me one second, Joe.

And then while you're looking for that, I'm just wondering, do the corporate costs in 2020 change at all, given the changes, selling off Fairbanks and all the other acquisitions and divestitures. Do the corporate cost change that much in 2020?

Let me go back to your question. But you got through me a little bit because I thought you said non-operating income. It's actually an expense. You talked about the $6.8 million.

I’m sorry, yes – the expense sorry.

Yes. About $4.9 million was an environmental reserve and costs from previously disposed businesses. So $4.7 million of that was the environmental reserve that I noted in my comments. And so that was the biggest piece. And then we include the non-service cost of pension, which was under $1 million, but we include that and other non-operating expense. And then we have $1 million on a loss on sale of business charge. So those were the three components.

Okay. Great. And then the corporate cost for 2020?

Corporate cost for 2020, we had like $34.9 million for the year for 2018. For 2019, we are at $36.4 million, and we expect it to be down just a bit in 2020. I mean, obviously, we are – we're looking at our cost structure across all of our businesses, including the corporate office on a regular basis. And we have a number of functions that support the company regardless of size. For example, when we acquired LeanTeq and Aseptic, that did not trigger, those are fairly significant acquisitions for us in the aggregate, that did not trigger an increase in corporate costs. We've sold Fairbanks Morse. Obviously, we just closed, but that by itself doesn't necessarily trigger a decline in corporate cost. So relatively flat is our expectation year-over-year.

Okay. And last question for me, sort of more of a long-term type question. In the past, in your Investor Day, you've talked about sort of margin targets at the segment levels. Just wondering if you could update us on those targets based on some of the moves that you've made in terms of the portfolio?

Long-term or – I think you said longer term.

Yes. Longer term, multi-year?

Yes. I mean, what we've – what we're thinking about today. And I like to think about it is – is it phases, right? So for Phase 1 of our work, we like our segment adjusted EBITDA to be 20%, north of 20%, right? We have, as you know, a cash flow return on investment metric that we use internally, that we'd also like to be north of 20%, and we'd like to see growth upwards or north of 5%. So as we shape the portfolio, that's what we're looking to create something that's growing greater than 5% that has EBITDA margins greater than 20% and cash flow return on investment that's greater than 20%. And whenever we get to that horizon, we'll reset our thinking and get a sense of what the next approach that might look like. But we feel really good about our plan that we've put in place to get there. We feel really good about the moves that we're making right now, so that we can create the foundation to get there. And as I said in some of my prepared comments, we did show sort of a flash of that in Q4 in Sealing that we were north of 20%. So I feel pretty strongly that we have a portfolio that can demonstrate that level of performance. We'll get the foundation set right now and all the moves we'll do going forward would just propel us further in that direction. So I know you'd like a little bit more fixed timing on exactly when we'll hit that number, but it's something that we'd like to say is our long-term goal and maybe medium-term.

Okay. Great. All right thanks a lot. Appreciate it.

Thank you. [Operator Instructions] Our next question is a follow-up from Justin Bergner from G. Research. Your line is now live.

Thanks everyone for the follow-up. I guess, a two-part question on trucking and STEMCO. I mean, as you look out a couple of years, how should we think about sort of the portion of this business that you want to keep versus sort of the current revenue in the trucking business? And sort of what do you want to keep in the portfolio that's higher value add, longer-term.

Yes. I'll let Milt give you the numbers, and I'll just give you a sense of how we're thinking about it strategically and from a value proposition perspective, right? So STEMCO sits in our Sealing Products segment and has some aspect of the business that is very, very core to how we view the future of EnPro, which is a sort of technology-driven, material science-based company that creates a lot of value for our customers where we have a lot of manufacturing know how, trade secrets et cetera, et cetera, and it has a real competitive advantage in the marketplace. So STEMCO has what I would consider a really beautiful business. Inside its portfolio that we sort of built from in the past, but moved away from that core. And what we'd like to do is look back to that core. And if we build-out, again, we would build a really tight adjacencies to what that core looks like. And I'll let Milt give you a sense of maybe the size of that.

Joe, it’s a good question. If you look at 2019, we had sales of – in the heavy-duty truck business of about $350 million. And if you look at the combination of the moves that we've already made, that we've talked about on this call as well as some of those pieces that may not fit our long-term vision that Marvin has described, then we could see this part of our business being $200 million or a little bit below $200 million business. So that will help you get some idea. So as we look to the end of 2020 and we get some of the things done that we're contemplating. And as Marvin said, that's our objective. And we believe that we probably have a business with a run rate sales of $200 million or a little bit less and more profitable.

Yes. And this business that would be left would fit the stated financial goals that I've outlined a little bit earlier.

Okay. Understood. And you mentioned that your forecast envisions trailers down mid 20% on an OE basis in 2020. How does the aftermarket look for your trucking business in 2020, and was said in your guide, and it seems like at least the trailer number is a bit of a downgrade from what you kind of communicated at the third quarter, is that correct?

Yes. And Justin, I’m sorry, I called you Joe earlier, I apologize. You’re right. The – we've seen continuing deterioration in the outlook for the 2020, really beginning in the third quarter of last year, and it starts – continue to step down in the fourth quarter. So yes, the outlook has come down from – when we were talking a quarter ago. And what's your other question, I’m sorry.

The aftermarket view for 2020 on STEMCO.

Yes. It's going to be a function of two things. One is what's happening with the underlying economy. And with this being a soft kind of industrial production year then I think that we're going to have, I think, probably a slight decline in the aftermarket in this business just based on the economy, that's our outlook currently. And then we still have this several year period, where we're going through the transition to a lot of new equipment being on the market, which has also had have a suppressing effect on the aftermarket, which will normalize in a few years, but we're still in that window. We've talked about that before. So overall, we're expecting the aftermarket and the business to be down, I would call it, low single digits.

Great. Thank you.

Thank you. We've reached end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

All right. Thanks, Kevin, and thank you all for joining us this morning. If you have additional questions, you can call me – us at 704-731-1527. Have a great day. Thank you.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.