Hello. And welcome to the EnPro Industries Q3 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to introduce Jerry Johnson, Senior Vice President for Corporate Development and Strategy. Please go ahead sir.

Thank you. Good morning, and welcome to EnPro's 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 accompanies the call. With me today are Marvin Riley, our CEO; and Milt Childress, our CFO. We are holding our call virtually and are dialed in from different locations, so we will ask for your understanding should we encounter any technical issues as we coordinate our responses during Q&A. Before we begin our discussion, a friendly reminder 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 risk and uncertainties, including impacts from the COVID-19 pandemic and related governmental responses and their impacts 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 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 comparable GAAP measures are included in the appendix to the presentation materials. I also want to remind you that, as a result of the sale of Fairbanks Morse in January 2020, the former Power Systems segment is accounted for as discontinued operations in our financial statements for both current year and prior year periods. Unless otherwise noted, all our comments today will refer to continuing operations. And now, I will turn the call over to Marvin.

Thanks, Jerry, and good morning, everyone. Thank you for joining us today. I hope that you and your families remain safe and healthy during this time. Before I begin today’s call, I’d like to welcome the newest member of our management team, Jerry Johnson, who recently joined EnPro as Senior Vice President of Corporate Development, Strategy, and Investor Relations. Jerry brings tremendous knowledge and experience from his prior roles in merchant banking, private equity and management consultant. I am delighted he has joined our team and I am confident his deep expertise will be a significant contributor to EnPro’s success as we continue to execute our strategic priorities. As we continue to navigate the COVID-19 pandemic, I am extremely proud of how our team has risen to the challenge of practicing enhanced safety protocols and incorporating new ways of working throughout the organization and while keeping our core values of safety, excellence and respect for all people at the forefront of their actions and excelling and delivering quality products and solutions to our customers. As I mentioned on our call last quarter, EnPro stands against racism and discrimination of any type, which are a violation of our core values and what we stand for as a company. Over the last year, we have taken several concrete actions to increase diversity and inclusion at EnPro and we’ll continue to do so. We stand together in solidarity in response to systemic racism and social injustice and are committed to being part of an enduring solution in creating real sustainable change starting right here at EnPro. I’d like to start by discussing three key themes reflected in our third quarter results. First, I am pleased to report better than expected third quarter top and bottom-line performance despite the challenges created by the pandemic.…

Thank you, Marvin, and good morning, everyone. In the third quarter, sales were $268 million a decrease of 10.3% year-over-year reflecting weakness across many of our end-markets. However, this performance was better than what we expected when we announced second quarter results. On a sequential basis, sales increased 8.6% in the third quarter. We experienced growth in our legacy semiconductor business in addition to the contribution from LeanTeq, which was acquired at the end of the third quarter of last year. Excluding the impact of foreign exchange translations and sales from acquired and divested businesses, organic sales for the quarter declined 12.4% year-over-year. Gross profit margin was 35.2%, an increase of 250 basis points versus the prior year period driven by the benefit of acquisitions, supply chain initiatives, company-wide cost reduction programs, and improved operating performance including a reduction in warranty expense, offset impart by the impact of the sales decline. Adjusted EBITDA was $42.1 million, a decline of only 1.4% as the continued impact of COVID was nearly offset by the addition of strategic acquisitions, divestitures of underperforming businesses, and cost reductions across the company. Adjusted EBITDA margin of 15.7% increased approximately 140 basis points. Our decremental year-over-year adjusted EBITDA margins were approximately 35% this quarter excluding the impact of acquisitions, divestitures and foreign exchange translation, which remains significantly below our weighted average contribution margin. This result was achieved largely through our cost management actions which as we discussed last quarter are expected to result in full year 2020 savings of approximately $30 million, about half of which we expect to be permanent in an improved economic environment. Adjusted diluted earnings per share of $0.67 decreased 8.2%. Excluding amortization of intangibles, our adjusted diluted earnings per share decreased 1.5% versus the prior year period. I’d also like to note…

Thank you, Milt. I am proud of the meaningful strides we have made in improving the quality and resilience of our portfolio. In a short period, we have acquired several businesses that align with our long-term material science vision and exited or divested those that were no longer strategic fit. With these actions, we are well on our way to transforming EnPro into a leading technology company using material science to push the boundaries of semiconductor, life sciences and other technology-enabled sectors. We continue to drive to capture above market growth, expand margins and increased cash flow return on investment to maximize shareholder value. Our teams have adapted well to the new ways of working as we navigate the COVID-19 pandemic and we are well positioned as our markets recover. We continue to focus on driving operational excellence by leveraging the EnPro operating system to reduce cost, improve productivity, and achieve quality control across all our businesses. We are emerging from this challenging environment a stronger company with many opportunities on the horizon. EnPro’s success will be fueled by our commitment to our strategy, our cycle tested leadership team, our increasingly diverse and dedicated workforce, our strong financial position, and our focus on driving long-term shareholder value. Thank you again for joining us on the call today. Let’s open the line for questions.

[Operator Instructions] Our first question today is coming from Jeff Hammond from KeyBanc. Your line is now live.

Hey. Good morning guys.

Good morning, Jeff.

Good morning, Jeff.

Yes. So, just on Alluxa, I wanted to get a better sense of – I think, it looks like the historical growth is faster than the forward growth and just want to understand that a little bit better. And then, I don’t know if you can frame, kind of the 2020 revenue runrate as a starting point? And kind of any profitability metrics around Alluxa would be helpful.

So, what I’d like to do, Jeff, since I assume we’ll have a lot of questions on Alluxa. I might take a little bit more time just to talk a little bit more about Alluxa in general. As I said in the prepared remarks, the TAM is roughly $13 billion and SAM is $1.7 billion growing it roughly 9% a year. As we think about the CAGR going forward, in our planning, we’ve thought about mid-teens, branded the underlying markets that it participates in from an application perspective, they are growing a little bit faster than that. But for planning purposes, we want to be thoughtful and we want to be conservative as we think about things. So, if you think about Alluxa and where they participate today, in life sciences it has really nice growth characteristics in cytometry, endoscopy, things of that nature or it’s participates in semiconductor and lithography, it’s got really nice growth characteristics, high teens in some cases. We have growth characteristics that maybe in 20s. We feel like we will perform exceptionally well. But we want to be thoughtful and conservative in our approach as we look at Alluxa. So, I can spend a little bit more time there on sort of why and fit and some of those things. But I’ll wait to hear some of your more specific questions. As it relates to financials, and as it relates to its runrate revenue, we are trying to be careful not to communicate too much as it relates to its financial profile or its margin profile strictly for competitive reasons. I mean, what I’ll tell you is, it’s a great business. It’s an exceptional business in terms of its growth, exceptional in terms of its margins, and I mean exceptional. And so, we want to be thoughtful about not giving away too much of that from a competitive perspective.

Okay. And I appreciate that.

This is – yes. Hey, Jeff, this is Milt. It’s one of the reasons we provided the pro forma look to give you a better idea of with all the moves that we’ve made on a CPM basis what the profile of the company looks like, what’s again its CPM it’s not looking forward. But it does give an idea of overall sales, EBITDA margins as we look ahead.

And just to be clear on that, Milt, the $95 million of sales that come out net and the EBITDA adjustment, that includes what? The Air Springs, the GGB, bushing block, the motor wheel and then the Alluxa coming in or is there anything else in that?

That’s pretty much. Yes, those are the big pieces. Yes.

Okay. Okay, great. And then, just on the revenue guide, good to see that’s coming closer to the better end. Can you just frame what comes – how much is coming out in the fourth quarter for Motor Wheel and Air Springs as we kind of firm up our models?

Well, I think that – I think the best way to think about it Jeff, is, with the three quarters that we have completed and if you look at our guidance, it will give you a overall pretty good result, I mean, pretty good idea of what we are expecting for the fourth quarter and then you can circle that pretty tightly. And that is going to reflect the revenues that come out. It is going to reflect the impact of Dieuze, the impact of Air Springs, the impact of Motor Wheel and Crewson. What it does not reflect the guidance that we gave, what it does not reflect is the contribution from Alluxa. So, we do expect some upside in the fourth quarter for that reason. We also have not yet closed the Air Springs divestiture, as you know. And so, since the timing of that remains uncertain at this point, there could be some upside depending on where we end up closing Air Springs, because it currently is operating in a profitable fashion.

Okay. And then, just last one, if you look at the sequential revenue improvement maybe versus your internal models, what end-markets or businesses surprised you the most?

Well, I mean, automotive, as you might see with us and as well as other companies, really on a sequential basis rebounded quite nicely. Same thing with heavy-duty truck, obviously, still down year-over-year, but heavy-duty truck rebounded nicely. We saw a nice sequential improvement in oil and gas and of course semiconductor. So, the big stand out was automotive. It kind of came roaring back for us, of course, and then, heavy-duty truck came back nicely as I said before in semiconductor, as well.

Okay. Great. Thanks guys. Appreciate it.

Thanks. Our next question today is coming from Ian Zaffino from Oppenheimer. Your line is now live.

Hi. Great. Thank you. I guess, a question will be on the buyback. So, you announced the buyback, but it also seems like you are trying to shift the portfolio to higher growth areas. So, what’s the priority? Or how does the capital returns stay into – which is of priorities versus going out and keeping into other areas? Thanks.

Yes. I’ll start Milt, and then you can chime in. I’ll start first with the authorization. We thought it’s very important for us to have an authorization, not that we intend to pull the trigger and immediately use it, but it’s important for us to have all the tools available to us given what might happen. So we start with that, right. We want to make sure that we have every tool available to us. As we think about prioritization though, we are thinking about obviously organic growth in some of the areas where we’ve already made investments. If you look at our LeanTeq investment, which we did last year, it’s growing nicely. We’ve got some capacity expansion plans that are underway in that business. We want to continue to support the growth of that business. And obviously, the same goes for the Aseptic business. We want to continue to support the growth of that business, as well. And we are bringing Alluxa online. They’ll obviously want support to continue their expansion plans. And obviously, on the inorganic side, we are able to find another Alluxa, another LeanTeq or another Aseptic, we would definitely want to take advantage of those opportunities. Those are rare businesses that have unique characteristics growing really fast with really high margins. We wouldn’t want to pass up an opportunity like that if it fits and matches our capabilities. And so, that’s how we think about it. And that’s how we would likely go forward in our planning. I don’t know if you want to add anything there, Milt?

I think you covered it well. It’s just a good distinction Ian, between having the authorization in place versus using it. And as Marvin has described, we are currently focused on supporting the growth of our company.

Okay, great. And then, also, as you look at divestitures, I mean, are there more to come? What’s sort of the criteria for divestments? And how do you think about maybe losing scale, as you divest out of certain areas, but then you are still in certain areas?

Yes. That’s a really, really good question. I really appreciate you asking that question. It’s one where we spend a lot of time. So, thank you for that. So, as we think about EnPro, let me just kind of start big picture as we think about EnPro, we want to make sure that all of the businesses that we own have a material science capability, right. We have IP. We have technology. We have knowhow, et cetera, et cetera, all around material science. So that’s first and foremost as we think about a criteria. Then we think about the margin performance of the business, right. What can the business deliver and what we set as the minimum threshold is 20%. Obviously, we are in the middle of a pandemic. Some businesses are experiencing declines. We want to be thoughtful about the kind of work that’s required to bring those businesses back. But we also have good analytical capabilities that give us a sense of whether or not we can get there based on the capabilities that we have in our capability center and the knowhow that’s built in our operating system, right. And so, then we are looking at cash flow return on investment, right. We want businesses that throw off a fair amount of cash. We have our own formula that we use here for cash flow return on investment and we set a minimum threshold there, as well of 20%, right. And we want to make sure that the businesses that we have in the portfolio meet those characteristics and that’s – those characteristics we consider to be pretty strict. And we want to be reasonable. We want to make sure we make the best efforts to get all of our businesses there. But we also need to be disciplined in terms of what we are trying to create. We know that the cash flywheel we are trying to generate only works at a certain level. So the businesses need to perform at that level. So that we can continue the growth that we have in mind. And obviously, as we think about adding, we want to add in areas that have good momentum as well, which is why we think about that end-market having an underlying growth in the 5% to 7% range and we’d like to be north of that as possible. So, hopefully that gives you a sense of how we are thinking about it. We don’t – as a policy, we don’t intend to specifically say this particular business or that particular business is one that we are looking at just because our employees are our primary concern here. We want to be thoughtful and respectful. We also don’t want to hurt our chances in the market if we decide to make them up.

Alright. Thank you very much for the color.

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

Good morning, Marvin. Good morning, Milt. Good morning, Jerry.

Good morning.

Hey, Just, how are you?

Hey. Good morning.

I have a couple clean up questions and then some sort of bigger picture questions. On the clean up questions, the close of the Air Springs sale, the guidance, sort of what does that assume like a mid-quarter close at present or end of year close?

It assumes a mid Q4 close. So, to the extent that we go beyond that, it could affect on the margin. It’s not going to be material to the overall view that we have at the year. But that’s the assumption that we made, Justin.

Okay. Understood. And then, on the legal side, I mean, this is $21 million in cash. I assume that’s going to be going out the door to fund these legal settlements. Just to verify that’s the case? And then, the remaining legal liabilities after these two settlements de minimis?

Yes. If you look at what affected the quarter, the big areas – there are four primary areas that led to the provision in the third quarter. One was the Dieuze exit that we talked about. And probably, two-thirds, roughly two-thirds of that number will end up being cash at some future point fourth quarter, maybe some of it drifts into the first quarter of next year. The second item was the impairments. And that’s just the impairments of investments, trade names and it’s just a function of what’s happening in the market on the top-line, because it’s that valuation is all tied to sales. The third was the BorgWarner settlement that we mentioned and then the fourth was the Water Valley legal settlement. So those were the two settlements. That concludes all of the open items where we’ve had active – I would say active negotiations and discussions. We have very – most of our other impairments, I think we have roughly 20 environmental matters going on. Most of those with the legacy businesses and 18 of the 20 are in steady state maintenance mode where we are just pursuing annual ongoing clean up for our remediation plan where the cost of that is fairly nominal. And then that leads to the outstanding matters. Once again, this detail has been in our Q, but it’s two areas that we can’t – we are not following that along and determining what the exposure might be. But the bottom-line is, we made significant progress and I mean, significant progress over the last couple of years in getting most of these major legacy matters behind us. And I really want to give a lot of credit to our legal and environmental teams that have worked diligently on bringing a number of these matters to a close.

Okay. Just two clarification questions there. The $21 million in legal that is going to be cash and that is not against the environmental reserve charges. This is a separate sort of legal bucket. And then you mentioned the first issue, which I didn’t catch. Two-thirds of that number being cash, just maybe that came in a bit fast.

Okay. I am sorry. Could you repeat the second part of the question?

Well, you said there were four matters in the quarter and then the first one you – I didn’t catch it all and you said, two-thirds of that number is cash. What was that?

That was the Dieuze - exit the bushing block exit, in Dieuze France.

Okay.

Yes. So, and then, to answer your question, if you look at the two legal settlements, one is an environmental settlement. The Water Valley is an environmental settlement. The other was the supply of bearings more than a decade ago that GGB supplied to BorgWarner.

Okay. Got it. I won’t delve too much hunger there. Then, maybe big picture on Alluxa, thank you for the detail on the bridge with respect to revenue and EBITDA. As you look at Alluxa, you mentioned sort of it’s in markets that are growing mid-teens, but then you said, some of its markets growing high-teens or low-20s. Were you trying to suggest sort of the life sciences and semi conductor end-markets as a whole are growing high-teens, maybe as high as low-20s? And then, that would make industrial technology portion growing more of a low double-digit? Or were you just highlighting certain sub-end-markets in life sciences and semiconductor with that comment?

Yes. So, I might get a little more specific here than we are accustomed to. But it’s easier for me to give you the thinking behind how we see some of these micro verticals that Alluxa plays in. So, what we are communicating, obviously is that, the CAGR we are thinking about is mid-teens. But I wanted to make sure that we communicated they are obviously playing in markets that are growing even faster than that and it is possible that it will outperform, but we want to be thoughtful and constructive as we think about the acquisitions we bring on board, right. So, if you look at, where they play in semiconductor, which is specifically in lithography, our work says that, that may grow about 15%. And if we look at some of the other micro verticals that we are in - that they are in like, flow cytometry and endoscopy, those areas are going to grow 20 plus percent as we go forward. And in the industrial tech space, the industrial sensors are growing 15% or so, lidar, 20% or so. It all depends on how the business grows, going forward where we can gain more share going forward, but based on that mix of growth in the micro verticals, it is possible that we might beat the mid-teens that we have built into our model. But that’s what I wanted to communicate.

Okay. That’s very helpful. I appreciate that clarity. Finally, on the margins on Alluxa and I realize you are not clarifying what they are for us. But is the general profile for how you intend to bring this business into hold sort of keeping the margins constantly, you grow the top-line or are you expecting any meaningful improvement or perhaps deterioration of the margins from their current high level over the next couple of years?

No, ideally, we want to keep the margin profile. But that’s how we are thinking about it. I mean, if we obviously, as the business plateaued, but we are talking a substantially larger business at that point before we start seeing any degradation in the margins. But our thinking is to maintain the margin, focus on these micro verticals, try not to attack any verticals that would require margin compression, so that we can maintain the rich profile that we purchased.

Great. Thanks for taking my questions.

Thank you.

Thank you. We’ve reached the end of our Question-and-Answer Session. I would like to turn the floor back over to Jerry for any further or closing comments.

Yes, just wanted to say, thank you Kevin, and thank you all for joining us this morning and have a good day.

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

Thank you.