Greetings and welcome to the EnPro Industries First Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Mr. Chris O’Neal, Senior Vice President, Strategy, Corporate Development and Investor Relations. Thank you. You may begin. Chris O’Neal: 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 presentation that we will be referencing. With me on the call today are Marvin Riley, our CEO and Milt Childress, our CFO. 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, including impacts from the COVID-19 pandemic and related governmental responses and their impact on the general economy as well as other risks and uncertainties that are described in our filings with the SEC, including our most recent Form 10-K. 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. I also want to remind you that as a result of the December 2019 signing of the definitive agreement to sell Fairbanks Morse which closed on January 21, 2020, the Power Systems segment is accounted for as a discontinued operation in our first quarter statements for both periods. Unless otherwise noted, all of our comments on first quarter results will be in reference to continuing operations. And now, I will turn the call over to Marvin.

Thanks, Chris and good morning everyone. Thank you for joining us. We have a lot to cover today, but first, I would like to start by expressing my sincere gratitude to the true heroes who have been on the frontlines battling the COVID-19 pandemic. I want to thank the healthcare professionals, emergency responders, grocery store employees, government officials and our EnPro colleagues working on the frontline in our factories around the world. I am very proud of how our employees have adjusted to this different way of working while adopting enhanced safety practices throughout the organization. EnPro’s core values of safety, excellence and respect have been at the heart of our actions as we have continued to proactively service our customers with quality products and solutions. Before we get into our financial performance, I would like to take the opportunity to center everyone on three important themes that relate to EnPro. First, we acted with urgency and decisiveness when we first learned about the seriousness of COVID-19. Our top priority was to ensure the health and well-being of our dedicated employees around the world. And to do so, we enacted a COVID-19 response and support team and quickly implemented new safety protocols, more on this in a moment. Second, we have a very strong balance sheet fortified by the cash proceeds from the recent Fairbanks Morse divestiture. With nearly $400 million of cash, a largely untapped revolver and a relentless focus on cash generation results we are in a very strong position to weather the current economic conditions. Third, we have spent the last year building a portfolio of businesses through organic and inorganic actions that are significantly more durable weighted more towards higher margin and higher growth markets and that places emphasis on recurring revenue and cash flow generation.…

Thanks, Marvin and good morning everyone. Thanks for being here with us today. As Marvin noted, during the quarter, our businesses adapted quickly to the changing economic climate. At the time of our fourth quarter earnings call, based on the growing view at that time that COVID-19 might be confined primarily to Asia, we estimated the earnings impact of this novel coronavirus to be less than $3 million, much of which we expected to hit in the first quarter from reduced volumes in Asia and the derivative impact on the European industrial economy. As we all know, the world changed considerably in March with migration of the virus to essentially every part of the globe. Demand remained steady in sealing products for much of the quarter and thanks to our frontline workers and operations teams who implemented new safety protocols, we were able to convert such demand to healthy sales and earnings levels. In contrast to Sealing Products, we began to see significant demand changes in Engineered Products during the quarter, primarily due to softening automotive, petrochemical and general industrial markets, much of which was driven by COVID-19. Against this economic backdrop, total sales decreased 6.7% in the first quarter compared to the same period of 2019. Growth in the semiconductor and food and pharma markets, including the contribution from the businesses acquired in 2019, held strong for the majority of the quarter, but was more than offset by weakness in the heavy-duty truck, general industrial, automotive and petrochemical markets. Excluding the impact of foreign exchange translation and sales from acquired and divested businesses, organic sales for the quarter declined 7.1% year-over-year. Gross profit margin for the first quarter was 33.7%, up 90 basis points. The increase was driven by our Sealing Products segment, primarily the result of the LeanTeq…

Thanks, Milt. In closing, we’re confident in our ability to safely and successfully navigate the current environment, taking every opportunity to strengthen our organization. That focus begins with people. We will continue to ensure the health and safety of our employees and deliver the high level of service to our customers that EnPro is known for. We’re in a strong financial position with ample liquidity. Our management team comprises experienced leaders who have successfully managed through challenging economic environments in the past, including the 2008 recession and the 2014 to 2015 industrial recession. And I am confident we will successfully navigate through this global crisis. We are successfully managing what is within our control and are acting with compassion and agility. We’ll continue to take the necessary measures to protect EnPro and all of its stakeholders, and are determined to maximize shareholder value during this challenging time and beyond. I want to end our call where we began, thanking our over 5,000 employees for their hard work and dedication. You are the heart of our organization and you inspire me. Thank you for all that you’re doing. And now we’ll open the line for questions.

[Operator Instructions] Before we get into the Q&A session, I would like to turn the floor back over to Chris for some additional comments. Chris O’Neal: Thank you, Donna. Due to the COVID-19 pandemic, we are holding today’s call virtually to observe social distancing. This is our first time attempting a virtual call, so we ask for your understanding as we coordinate our responses during Q&A. Now we’ll take your questions.

Thank you. Our first question today is coming from Jeff Hammond of KeyBanc Capital Markets. Please go ahead.

Hi, good morning guys.

Good morning, Jeff.

So I appreciate the scenario planning, and that was very helpful. A lot of good color there. Can you maybe just speak to what you’re seeing in April or what you saw in April that kind of informs some of those ranges? Certainly, 1Q was much more resilient, but sales or order kind of activity and maybe if you can break that out by segment?

Milt, why don’t we try to tag team, and I’ll provide some maybe high level color, and then maybe Milt can chime in a little bit. So as you know, we’ve sized our sort of most acutely impacted businesses down to where we think we need to operate. And we’ll have to continue to do more work in some areas that started to decline a little bit later. Like for us, oil and gas started to decline a little bit later, general industrial as well. And I think in the context of this, we should just touch on China a little bit. Our China operations, seems to have settled down. They performed in line with expectations in April. So just to give you a sense of that and our overall EnPro performance was also in line in April. What I mean by in line means it sort of just fits in the context of the scenarios that Milt outlined for you. So we would say coming out of April that we feel pretty good that we have a good understanding of what might happen, but we’re fairly optimistic, I would say, based on how April turned out. Milt, do you want to provide any more color?

I think you’ve covered it, Marvin. The only thing that I would note, maybe this is just reiterating a point that you’ve made, is that, obviously, Jeff, we did a lot of our initial work on the scenario planning before seeing results for April. But after seeing the results come in for April, as Marvin noted, they’re generally consistent with the scenarios that we outlined.

Okay. But I imagine that certainly, first Q was only down like 7% core. And I’d imagine that April is probably the – from your perception, the bottom and then it gets maybe sequentially better from there. So I’m just trying to get a sense of, are we bottoming out at that down 25%, and then it gets better? Or is the April trend kind of worse than that, at least in the near term?

Yes. So Jeff, I would...

So the...

Go ahead, you know.

You got it, Marvin.

No. I would just say that the one thing I would be cautious about is to assume that April was the bottom, right? We don’t know, to be very honest with you. Our April was down roughly 25%. Now that’s the bottom and we go up from there, I think we would all be happy. We don’t know though, whether that is the bottom. So I just want to caution you on that.

But if you look at that April down 25%, what markets are at risk to maybe still getting worse where it hasn’t fully played out?

Just about all of our markets are down. Semiconductor is holding in there, but effectively flat, food and pharma holding in there as well. But there is not much we can do to sort of drive that up right now given some of the restrictions on movement and adopting new customers as we had planned. Our automotive business is down. We would like to think that automotive will recover from here, but we don’t know. We don’t know if we can go down any further in automotive. So that’s one question mark. Aerospace, for us was down, could that go down any further, we are not sure. So I think that’s where we have a little bit of caution. Milt, I don’t know if you want to add any more color to that.

No, Jeff, we – the 20% to 25% scenario planning for the year as we looked at it, the 15% to 25%, it’s – we’re still thinking for the full year, that 20% to 25% is probably a realistic range, at least for our planning. If it’s better than that, as you know, we are largely composed of short-cycle businesses. If it’s better than that, then we’ll be very happy. But we have to do our planning assuming that the demand is not going to pick up real quickly. Because as Marvin said, we just don’t know. So it’s difficult to just point to April and say that’s the worst. We would rather take a look at the whole year because we need to do our own planning internally over a longer term period so we’re ready to pull levers that are needed, depending on the demand scenario as it unfolds.

In our business, 1 month is just not enough of an indicator of what’s going to happen for the quarter. So we can’t base our decisions on that.

And so then based on the comments, like food and pharma and semi holding up better, I mean, presumably, the Engineered Products business see sharper declines for 2Q and for the year than Sealing, if those trends hold up?

That’s right. That’s right.

Okay. Yes. And then certainly, the margin performance in Sealing was excellent in 1Q. I’d imagine some of that’s LeanTeq and Aseptic coming in, some of that’s exiting some of these truck markets. But can you give us a sense of how you think the decremental margins look for the Sealing segment within those planning scenarios, and how the decrementals look for Engineered Products on an EBITDA basis? Thanks.

Jeff, in total, I think what you’re going to see is that – and we did a lot of work, going back to 2008, 2009 to look at our – how our cost structure, what we were able to do as demand dropped off precipitously, as it has this year. And we believe we’re in a position because we’re giving early focus to this, that our decrementals will be better than they were going from 2008 to 2009. If you go back and you look at that period, we were probably in total as a company, probably 35% or so, 35% to 40% in that range. Worse in Engineered, as you would expect, because you know us very well, due to the fact that we have a lot more OE business in Engineered than we do in Sealing Products. And so – and then a little bit better than that in the 2008, 2009 time frame in Sealing Products. We expect, if you just kind of do the analysis of the numbers based on the 15% to 25% drop in sales, the 11% to 13% EBITDA margins. You go through the math and you compare it to 2019, we believe our decrementals year-over-year this year under that scenario planning versus ‘19, we’ll be able to manage closer to roughly mid 20s percent. Now obviously, it’s going to be better in Sealing than it is in Engineered. It’s going to be better in Sealing for 2 reasons. One, we will get the beneficial impact of the acquisitions that we’ve made in 2019 plus we – the volume and the declines are not expected to be as severe in Sealing as in Engineered for the year. So that’s a little bit of color. And hopefully that helps without getting into a lot of detail on individual businesses or the differences between the two segments other than what I’ve noted.

No, that’s perfect. I appreciate that. I’ll get back in queue. Thanks.

Thank you, Jeff.

Thank you. Our next question is coming from Justin Bergner of G. Research. Please go ahead.

Good morning.

Good morning, Justin.

Hi, Justin.

I guess to start, I just wanted to ask if you could quantify the acquisition contribution in dollars or percent to the Sealing products performance in the first quarter?

Well, as – Justin, as you know, I’ll give you a little bit of color, but as you’ve noted, we’ve not provided specific sales and margins for those acquisitions. We provided some color in the past on what our expectations were for those businesses. I will tell you this, if you look at our Sealing Products segment, and you look at our kind of margins on a kind of a normalized basis, which exclude – would exclude the impact of the acquisitions on a year-over-year basis. And also exclude the Rome divestiture, so if you – and scrubbing out translation. And in Sealing Products, we had about 160 basis point improvement year-over-year in Sealing Products margins. And then that compares to the information that you see in the release of about a 410 basis point improvement overall. So that will help you quantify the difference that was related to a combination of currency, the LeanTeq acquisition, the Aseptic acquisition and the Rome divestiture.

Okay, understood. I was actually hoping maybe you could just clarify between the organic constant currency decline and the reported decline, how much of that was acquisition dollars versus currency? I guess if we stay away from sort of margins, but just on the sales number?

Yes. Well, if you look at – staying once again, staying with Sealing products, the translation impact was fairly minor. It was about $1.3 million year-over-year, Q1 ‘19 to Q1 2020. So, most of that impact on the margin differential that I noted earlier, the 410 versus the 160, is a result of the two acquisitions and then the divestiture of Rome and that was – by the way, the $1.3 million was the impact of currency on sales and the impact on EBITDA was about $400,000 year-over-year.

Okay, great. That’s helpful. The other question I wanted to ask with respect to margins and decrementals, how is the – your expectations for sort of OE versus aftermarket shaping up in the coming quarters? And how does that potentially help your decrementals and limit margin declines, if at all?

You want to take that, Milt, or do you want me to take it?

Well, I will – Marvin, why don’t you jump in? I’ll just start out by maybe stating the obvious, Justin, which I think is where you’re headed. If you look at the immediate impact of the decline we see. You see it – you see it’s magnified with the OE portion of our business, which is true. We’ve seen that in a big way with automotive. And the decline there when that industry shuts off, a lot of our business in Engineered Products that’s auto-related shuts down also. We also are seeing it in the heavy-duty truck business. Now I will say, it’s making the expected OE decline in heavy-duty trucking worse. We were already coming in this year expecting a pretty noticeable year-over-year decline in OE and trucking. So I think I agree with where you’re coming from, is that the early impact of the decline demand, the drop in demand is going to be focused a lot on the OE part of our business. As the overall economy weakens, though, as we look into Q2, I think the demand impact that we’re expecting is going to be not only on the OE side but also aftermarket.

Okay, that’s helpful. And just one quick question, I am following up on the aftermarket. With respect to truck, has your view of the aftermarket also dropped off considerably? I know that’s more than half of the heavy-duty truck business for EnPro, or is the after market trajectory not looking that much worse than it did three months ago, just given the need for trucking and transport in this environment?

Yes. I would not say that our aftermarket in trucking has settled down yet. It’s difficult to predict what will happen. There are many of the reports out like FDR, for example, and others that project that aftermarket may go down as much as 20%. But it’s just difficult to call it right now. I think at the end of the quarter, we’ll have obviously a lot more color on what we’re seeing. But it’s really difficult to call it right now in trucking.

Okay thanks. I will hop back in queue.

[Operator Instructions] Our next question is coming from Joe Mondillo of Sidoti & Company. Please go ahead.

Hi guys. Good morning.

Morning Joe.

Morning Joe.

I was wondering if you could just talk geographically, maybe to your two biggest geographic exposures in terms of Europe and U.S. Have you started to see a little bit of a rebound yet in Europe or is it still too early? And how does that compare to sort of your general – just in general, what you’re seeing in the U.S.?

Yes. I think it’s still too early. I mean, we only have really the month of April as a gauge. And I wouldn’t say we have all of April as a gauge. What we’re able to say is, we see something in China that looks as though they have settled down. The same for maybe the broader Southeast Asia, Singapore and the [indiscernible] as we look into Europe, the European market is just starting to open up. So for me, I’d be looking for May to get a good indication of whether Europe starts to follow the trend in China. I’d like to say that’s the case. But it’s too early we don’t have anything concrete at this point that would give us that indication. Obviously, they’ve started to open up Germany and the Netherlands and etcetera, in those places. So we would expect that they should improve a little bit in May, but we’ll have to see.

Okay. In terms of China, is – what exactly are you seeing there? Is it just – has it just sort of stabilized? Or are you actually starting to see a little bit of a rebound from the worst months, whether that was February or March?

Yes. I mean, it’s hard to tell, right, because we have 1 month. So if I were to run out that month, we would probably pick up a little bit from Q1, but it’s not enough data to do much with it, right? So – but if I look at where we ended in Q1 to where we have come in, in April, we’ve definitely found a bottom at the end of Q1. And we have seen stable in April, performed well in April. And if we were to – we would have to see what happens through the rest of the quarter to get an indication of whether we’ll get an uptick or not. But my sense is that, that’s going to be very dependent on the strength of the European economy as well, because they’re coupled to China in some ways, right? So I think if the demand signals from Europe start to pick up as we would expect, then we’ll continue to see a lift in China.

Okay. In terms of your cost management strategies, is anything – are you able to take advantage of this downturn to make any major structural changes that maybe were a little harder while the economy was in a better footing? And depending on what the answer to that is, or regardless of what the answer is to that, how much of your cost – changes to your cost structure would you consider sort of permanent versus temporary?

Yes. So I’ll cover the first half of the question. And then maybe, Milt, you can add a little bit of color on permanent versus temporary. It might be a little bit too early to call it. But the answer to the first half of your question is yes, we’re definitely looking at some things, structural things that we need to do that we’ve always contemplated, but we now have a scenario where we – it makes really good sense to do that. And I won’t get into specifics about it, of course, because there are people impacted by some of these decisions. But definitely, we are looking at some things we’d like to do. And we have plans underway. We’re sort of executing that as we speak. So we can probably – well, not probably, we’ll definitely be able to provide some color on that at the end of the quarter. Before I go into sort of maybe trying to give you a sense of how much of the cost structure will stick, the thing that we’re evaluating now is there are some benefits to the way we are working as it relates to reduced costs, travel, etcetera, etcetera that we will – we are taking a hard look at, to figure out if there are more changes that we can take that fundamentally re-imagine how we do things like selling, for example. How we do some of our corporate functions that require a fair amount of travel and face-to-face contact that we think you may not need to do going forward, for example. And so if we’re able to do some of those things in the quarter, then we can be – we can definitely quantify what those will look like on a run rate basis. But those discussions are underway. We’ve taken action already on one piece of that that we think will be successful. If it works as we think it will work, that’s something we can do everywhere across the network, but that’s the color I would give you on that without getting into specifics.

Okay. Thanks in terms of – I just wanted to ask a question regarding your heavy-duty trucking exposure. Could you just update us, given all the changes that you have made there? I was wondering if you could just update us on what that market makes up as a percent of the whole? And then regarding that business, what the breakout now – that breakout we see market used to be one-third or two-third roughly haven’t changed at all with the changes to the portfolio there?

Yes, you were breaking up a little bit but – yes, go ahead, Milt now.

No, I was going to say the same thing, Joe. I think I’ve got the gist of your question even though you were breaking up, so I may have missed the last part of it. But if you look at the quarter, and you looked at just the sales piece for the quarter, it’s – the heavy-duty trucking is roughly 25% of total sales. We had mentioned on the call that – our last call, our Q4 earnings call that based on some reshaping that has happened in heavy-duty trucking and that we expect to continue to happen over time, that we expected or envisioned a heavy-duty truck business that would be a good bit smaller than it was in 2019, maybe in the $200 million range in revenues and much more profitable than it was in 2019. So we’re – that’s still part of our vision as we look longer term. Obviously, things – under the current situation, things may get pushed out a bit. But it’s still the direction in which we’re heading. Marvin, do you have anything else you want to add?

No, the only thing I would do – I would add here is just to really give the team working with within the heavy-duty truck unit a lot of credit. I mean if you think about it, just to take a big picture look here, we put a new president in place and in short order, he’s developed a really nice senior leadership team. They’ve been working for well over a year on very, very aggressive cost actions. They’ve worked really, really, really hard on improving their quality control systems, feedback and feed forward systems in the shop, which was causing a lot of the issues that they had. They’ve already executed on TrailerTail. They’ve already executed on Rome. They’ve already executed on AirBatRF, and they’re still working that solution. So I just thought it’d be a good opportunity to just share that we’ve got a great team there that’s been working really hard to execute our plan, which is to turn our heavy-duty truck business into a smaller but exceptionally profitable business, with EBITDA margins that sort of fit the financial characteristics that we’ve outlined before. And I just thought I would share that. So in terms of our thinking around them continuing to execute and getting there by the end of this year, that’s fully in line with my expectation. I think they’ll be done with the work they’re doing here next year and move on to growth – I mean this year. They’ll be done that work this year and move on to growth.

Okaym thanks for taking my questions. Good luck with everything.

Thank you

And your next question is a follow-up coming from Justin Bergner of G. Research. Please go ahead.

Hi, thank you for the follow-up. Just to make sure I understand what I heard earlier. So you are not providing numbers around the savings associated with cost actions at this point in time, maybe at the end of the June quarter. Could you just verify that point? And then maybe just any sort of view – and again this can wait until the June quarter if desired, to restructuring costs or cash costs as it relates to thinking about free cash flow generation in 2020?

Yes. Justin, just to go back and maybe repeat the bookends, we are doing a lot of planning right now. So the cost estimates that we might be able to take out of the business are going to vary quite a bit depending on various demand scenarios which we really won’t know until the year – we get a little bit more visibility on the year. So presuming that we’re there following Q2, and we’re back together, I suspect at that point we’ll be able to talk more specifically. But with a 15% to 25% year-over-year revenue decline, managing margins to 11% to 13% EBITDA, it’s – as you might imagine, the costs that we need to take out are not insignificant. But it is going to vary. So the number is going to vary depending on where we are and the demand that we’re seeing. But the major point is we’re kind of locked and loaded with our teams kind of knowing what needs to be done as each month unfolds here and we get a better read on what’s happening in our markets.

Okay, understood. And just to clarify, those 15% to 25% revenue decline scenarios that would be net of the benefit of the acquisitions you made in the second half of ‘19.

That would – that is actual year-over-year. So effectively, if you throw in the benefit of the acquisitions, the year-over-year decline would be a little bit greater. But keep in mind, as, the businesses we bought are highly profitable. And so the impact on earnings is more significant than the impact on sales, if you look at it on a percentage basis.

Okay. Thank you for the follow-up.

At this time, I’d like to turn the floor back over to Chris O’Neal for closing comments Chris O’Neal: Thank you, Donna, and thank you all for joining us this morning. Have a great day.

Ladies and gentlemen, thank you for your participation. This concludes today’s event. You may disconnect your lines at this time and have a wonderful day.