Greetings. And welcome to the EnPro Industries Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to turn the call over to Jerry Johnson, Senior Vice President, Strategy, Corporate Development and Investor Relations. Please go ahead sir.

Thank you. Good morning, and welcome to EnPro's quarterly conference call. I’ll remind you that our call is also being webcast at enproindustries.com, where you will 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 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’ll also note that during this call we will be providing full year guidance which excludes changes in the number of shares outstanding, impacts from future acquisitions, dispositions and related transaction costs. Restructuring cost, incremental impacts of tariffs and trade tensions on market demand and cost 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 further spread of COVID-19 and environmental and litigation charges. I also want to remind you that as a result of the sale of Fairbanks Morse in January 2020, the former…

Thanks, Jerry. And good morning, everyone. Thank you for joining us today. I hope you and your families continue to remain safe and healthy. As vaccines become available, we're hopeful that the severe impacts of the global COVID-19 pandemic will begin to subside. Our organization continues to remain vigilant about enhancing safety protocols, updating operating processes, and adapting to new ways of working. Together, we are exemplifying EnPro’s core values of safety, excellence and respect for all people, while continuing to excel at delivering quality products and services to our customers. We have remained steadfast in our commitment to these core values, and to all of our team members which has been demonstrated through our public stance against discrimination and social injustice. Human Capital Management, including diversity and inclusion has enabled EnPro to achieve success. Over the last year, we have made progress in our commitment to our employees and society, including establishing our charitable foundation with an initial commitment of $1 million in support of education, equality, diversity, and the preservation of human dignity, as announced in our February 11 press release. Developing are working together from anywhere initiatives to enable our global workforce to collaborate in new ways, increasing the number of females and minorities on our senior leadership team to 35%, creating and filling a diversity and inclusion leadership position to further strengthen our commitment to equality for everyone and developing a platform for small groups to talk openly about biases, belief systems and the importance of valuing different perspectives. Moving on to our fourth quarter highlights, I'd like to discuss three key things reflected in our results. First, I am pleased to report better than expected fourth quarter results, despite the continued challenges created by the pandemic and further lockdown across much of Europe. Our fourth…

Thank you, Marvin and good morning everyone. In the fourth quarter, sales of $276 million decreased 3.7% year-over-year, reflecting weakness in oil and gas, general industrial and aerospace markets. This was offset in part by positive momentum in the semiconductor, food and pharma, automotive, power generation and heavy duty truck markets, as well as the contribution from the acquisition of Alluxa. While demand increased in the heavy duty truck market, revenues declined as a result of portfolio reshaping actions. Excluding the impact of foreign exchange translation, and sales from acquired and divested businesses, sales for the quarter declined 1.6% compared to the fourth quarter of 2019. As Marvin indicated, our fourth quarter performance was significantly better than our expectations at the time of last quarter’s conference call. On a sequential basis, sales in the fourth quarter increased 2.9% over the third quarter. End markets where we saw the greatest sequential sales improvement included general industrial, automotive power generation including pharma. Sequential sales also benefited from the Alluxa acquisition. Gross profit margin of 37.5% increased 330 basis points versus the prior year period, driven by the benefit of divesting low margin businesses, as well as initiatives supported by the EnPro capability center, including supply chain and other company wide cost reduction programs. Year-over-year improvement in gross profit margin was achieved despite a $3 million amortization of acquisition related inventory right up in the fourth quarter of 2020. Adjusted EBITDA of $48.1 million increased to 11.1% over the prior year period as a result of strategic acquisition and previously announced cost reductions taken across the company in response to COVID. Adjusted EBITDA margin of 17.4% increased approximately 230 basis points, compared to the fourth quarter of 2019. Corporate expenses for the quarter were $10.6 million, a decline of 2.8% compared to the…

Thanks, Mil. I'm extremely proud of the progress you've made during 2020 in transforming and grow into a leading industrial technology company, using material science to push boundaries in semiconductor, Life Sciences and other technology enabled sectors. Our strategic achievements during 2020 has built a solid foundation for profitable growth in 2021 and beyond. Our teams have adapted remarkably well during the COVID-19 pandemic and we're now positioned to capture growth as our markets recover. Our current order trends are strong to pass in what we saw in January 2019. We're encouraged by what we're seeing and hearing from our customers, particularly in the semiconductor heavy duty trucks and automotive markets. We're expecting year-over-year improvement in most of the markets and geographies we serve. We continue to focus on driving operational excellence by leveraging the EnPro capability center to reduce costs, improve productivity, and maintain high quality control across all our businesses, including those recently acquired. EnPro’s success will be determined by our adherence and commitment to our profitable growth strategy, our experienced leadership team, our increasingly diverse and dedicated workforce, our strong financial position, and our focus on driving long term shareholder value. And before we open the line for questions, I'd like to share that both Technetics and GGB supplied parts used in the Mars landing of the Perseverance rover last Thursday. GGB provided metal polymer bushings in the suspension components for drill spindle, attached to a robotic arm that drills and breaks rocks to collect samples for analysis. Technetics provided Edge-welded metal bellows that are a part of the sample collection system and function as vacuum and ducting for this system to support the goal of returning the cleanest sample possible from Mars. We are happy and proud to be suppliers to such a historic mission. 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 Capital Markets. Your line is now live.

Hey good morning guys. How are you?

Good morning, Jeff.

Good morning, Jeff.

So just I know a lot of moving pieces. But I think Mil you mentioned this 6% to 10% growth from a pro forma standpoint? Is that kind of the way to think about core sales? Or can you can you give us kind of a core sales range? Kind of adjusting for Alluxa coming in and some of the businesses coming out and any FX in there?

Yes, that's a that's a good question, Jeff especially given all the changes that we had in our in our business over the past year. The best way to look at us for the baseline going into 2021 is exactly what you pointed to. And that was the pro forma information that are provided. And you see a slide summarizing that in the presentation that accompanies this call. And so that that will give you a pretty good idea. So we're going into 2021 on a pro forma basis, because this assumes that the Alluxa acquisition happened at the first of 2020, as well as the divestitures and heavy-duty truck that move in and do some GGB that all those things happened at the first of 2020. That was the purpose of putting the pro forma together. So you see what that shows in terms of the sales change versus reported the margin change versus reported? And I think that addresses your question, but anything else, please jump back in?

And as you look at the three segments, do you think the growth rates within each of those on an organic basis, are going to be similar? Or is there outsize growth? Because I know certainly, AST is kind of a long term higher grower, but certainly you got some cyclical juice and the other two.

Yes. And that's another good question. And Marvin, if you want to have a little bit of color, that might help you a little bit. Think about it in terms of pro forma. And then Marvin if you want to comment on growth rates, because there certainly are some differences among segments when it comes to growth. But with if you look at it ceiling, and you break down the 8.5% delta between reported and pro forma sales in total. You don't find most of that declines and Sealing obviously, because that's where we had a good bit of our divestiture activity on the heavy duty truck side, it's all in that segment. And so on a pro forma basis versus reported Sealing would be down about 17% as a result of those moves. Advanced Surface Technologies, would be up about 16% on a pro forma basis versus actual and engineered relatively flat down, a few percentage points. Dues was a fairly small business, but call it down 4% or so. And then on the margin front on a pro forma basis and Sealing, as a result of the moves, we had an expansion of around 150 basis points and margin, once again reported versus pro forma Advanced Sealing, Advance Surface Technologies, nice expansion reported versus pro forma of 250 basis points or so, and then engineering materials, a small a small increase, because the dues operation was operating essentially, at a slight loss at the EBITDA level. So, less than 100 basis points, improvement in engineered materials recorded versus pro forma. And Marvin, if you want to feel the…

Yes, in terms of growth rate, Jeff, I think the best way to think about it is, Sealing has a lot of our legacy businesses that that are really strong, resilient businesses that, are GDP plus kind of businesses, we might see a little bit more growth this year, just because of the kind of year that we're coming out of, industrial production for this year is, roughly 4.5%. And so that, a lot of the businesses there is industrial production, and then you've got, heavy duty truck, which you might have some outsize growth this year, just because of what's happening in the market is a rebound there, if you look at FDR, truck builds or trailer builds are going to be up over 30% ton of miles are going to be up over 5%. So it might be a little bit more growth, in STEMCO this year, and then we would typically see. So that gives you a little bit of color on what's going on in Sealing and then you know, AST our new segment that's a double digit grower just because of what's in there and the markets that they serve. So that's, that's what you should anticipate there. And then, in Engineered, I think you've got another unique situation going into 2021 where we should, experience a rebound, in automotive. If you look at automotive from a, like vehicle production perspective on a global basis, that's up around 14%, sort of an aggregate, so we'll see a little bit more lift this year than we typically see. But, our other business and engineered is CPT [ph]. And that's impacted on the downside by the oil and gas. So, it's hard to give you exact numbers, right. We’ve given you a good full year forecast, but we were going to see some strength in some pockets that, depending on our ability to meet demand, and the resiliency of the demand that we're seeing, we could have some stronger growth areas than normal, particularly heavy-duty truck, semiconductor and automotive.

Okay and then just last one, so your pro forma EBITDA margin for in your slide at 17%. I think the guidance is just above that, like low 17s. I guess on kind of robust growth, I would have thought, the incremental margins would have would have given them a bigger lift, then kind of flattish or slightly up EBITDA margins.

Yes, that's, Jeff, it's a good observation. If we, if we do get robust sales, we're, we're expecting to, be able to at least perform at the same level as we had on a pro forma basis. Once again, pro forma, it's still a nice increase year-over-year. Part of what we have is, we're, we're planning on some of the costs that we took out, and we talked about this earlier, in the year or, or, or last year on previous calls, some of the costs that that we took out in 2020, as a result of COVID coming back into our system. And so that's part of part of the reason, as you've observed, and our guidance, we're not showing more margin expansion initially.

[Indiscernible] capacity of coming back?

We estimate that that we were able to take out roughly 30 million as a result of the initiatives that we put in place last year. And I would say that, that those plans were put in place to have a middle of middle of the second quarter last year, and we estimate about $15 million would be coming back. So 15 will be able to hold on to 15 coming back. And then obviously we have year-over-year cost increases that, we're managing that are offset against permanent reductions.

Okay, very helpful. Thanks, guys.

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

Good morning, Marvin, good morning Mil, good morning Jerry.

Good morning, Justin, how are you doing?

Going into 2020, just had one quick follow up question on this sort of growth guys, or I guess, two sort of follow up questions there. What currency tailwind are you assuming in the revenue guide? And outside of the sort of faster growth and Advanced Surface Technologies that you described, versus the business as a whole, are there any other material mix issues affecting sort of the margin outlook, as you look into 2021, the rest of 2021?

Hey, Justin, this is Mil. Let me take the first question. On currency, when we provide guidance or outlook, and this, this is true throughout the year, we're always doing it with the perspective of, of where we are currently at the time. And so, if you look at our biggest currency exposure, it would be the euro. And I think it was $1.20, $21 or so at the end of the year, it stayed at about that level since the end of the year. And so, our guidance is, is based on right, so we're not we don't we don't project, what might happen to currency. So, yes, the currency, moves it could be at the dollar continues to weaken, or if it reverses and strengthens, that'll have some impact on our guidance, and we'll comment on that as the year progresses. Marvin, do you want to take the second question on cost?

Yes, I’ll add a little color on the sort of mix piece and the cost piece. So Justin, as you know, we've been through a couple of these downturns before and have some history in terms of what typically happens, right. So coming out of these downturns we typically get, nice, really nice rebounds in all the end markets that we serve. We're seeing that today, minus aerospace in oil and gas, everything else is really rock solid. But we also see commodity prices start to take off as well. Right. So on the cost side, what we're managing right now is increases in steel pricing increases in bronze pricing; we're pretty well positioned with PTFE, which is the largest commodity that we've purchased. But, some of the mix issues that we'll see this year that impacts our cost basis is we do have, strong recover in automotive but, we also have steel and bronze powder increases that will impact our automotive businesses a little bit, as well as the STEMCO business. So we're, we're real thoughtful, in how we thought about the full year taking those things into consideration. Obviously, we price and price aggressively, we put some good processes in place during the downturn, to really link the supply chain group commercial group a little bit tighter, so that we can pass on price increases immediately as you start to see them and we've already started that process. But I think it's mindful, we're mindful that, we have to manage a sort of an increasing cost exposure, particularly with our commodities.

Great, thanks. That's helpful. Maybe with respect to just the portfolio reshaping I guess, your comments on the call, use the words for bolt-on’s describe your current M&A focus, the press release, just sort of spoke to [Indiscernible] inorganic growth, as we look forward from the recent, more material sized acquisitions that sort of add new legs to the business. Are you thinking of additional edge to business? Or are we sort of more bolting on to the new platforms that EnPro has added over the last two years?

That's a great, that's a really, really good question. Let me let me just take a step back, and just maybe give you a sense of you know how we think about M&A. And I think that might give you a little bit of color. But I'll start first and foremost with, what, what is what is a good fit look like for us, particularly as we think about material science. So, in its most simplistic way, we think about it, from the perspective of is the business we're looking at, does it fall into material science umbrella? Meaning does is there some kind of a substrate that you place a performance material on top of that enhances that solutions performance in a specific application, right. So whether it's a bearing where you have steel, and you layer on PTFE, or whether it's Alluxa where you have maybe a glass substrate, and you layer on some deposition material, so that you can perform better as a filter at the end of the day, that's kind of the lens that we look at it with, right? Are we putting a performance material on top of a substrate? Right. Then it's, then it's a question of, do we have the capabilities in house to enhance what that business is doing? Whether it be whether it's, from the perspective of the customer, whether it's from the perspective of from an operations perspective, and whether it's supply chain, etcetera, etcetera. We look at the customer buying patterns, do they care about technical specifications and lead time more than they care about cost? Those are the kinds of things that we look at. The science itself is a little bit more agnostic, because we think we have deep expertise within our businesses. So as we…

Yes, that is very helpful. So I guess the distinction is not so much, as you said, around bolt-on versus larger, it's around the material science and performance. Okay, that's helpful. And then just lastly, I guess a lot of moving parts on the environmental and legal liabilities. I imagine the 10-K will have the specifics. That means should I think of the remaining sort of unpaid environmental liabilities to sort of be that, around 30 million thinking about that, $13 million in 2021, plus a few million, going out over the following five years, and what remains sort of on the legal side beyond, the environmental claims.

Yes, Justin, we will have a lot of disclosure in the K. So, yes, you're right, you can you can look at, at the details that we provide. They're essentially what we tried to provide or what I tried to provide on the call was just a indication of what to expect from, from like, our cash outlay over the next few years, because we've had some pretty large reserve increases this year, we had had some settlements. They were pretty big dollars, relatively speaking in 2020. But it's all in an effort to bring these larger legacy environmental matters to completion. And as you know, liabilities of this type have really long, long tails. And so the good news is after a pretty significant cash outlay year in 2020, partly because of settling some third party claims, and partly because of remediation, we're expecting that number to step down significantly, the cash payments significantly in 2021. And then to tail off, significantly after that for several years. Now, some of the, the effect of the reserves that we took for the uranium mines, for example, the actual remediation of that, could be out a number of years. And so we don't think, over the next four or five years, that the cash outlays are going to be significant. And then we just have to deal with what the final solution is. We provided the estimate in the reserves to the best of our ability. And as you know for open ended matters like this, we have estimates when we have a low end of the estimate. And it's, it's, it's no better than any other estimate in a range. That's what we accrue for. So it gives you a little bit of color, but you can expect the cash that goes out over the next few years to decline fairly dramatically from what we saw in 2020.

Okay, great. Thank you for taking my questions.

Thank you.

Thank you. We reached the end of our question-and-answer session. So I’ll turn the floor back over for any further or closing comments.

So say thank you, Kevin. And thank you all for joining us this morning. And have a great day.

Thank you, Jerry. Thank you all. That does conclude the teleconference. And you may disconnect your line at this time and have a wonderful day. We thank you for your participation today.