Good morning. My name is Anastasia, and I will be your conference operator today. At this time, I would like to welcome everyone to the EnPro Industries First Quarter 2014 Results Conference Call. [Operator Instructions] Thank you. Don Washington, Director of Investor Relations for EnPro Industries, you may begin your conference.

Thank you, Anastasia, and welcome, everyone, to EnPro Industries' quarterly earnings conference call. I will remind you that the call is also being webcast at enproindustries.com, where you can find the slides accompanying the call. Steve MacAdam, our President and CEO; and Alex Pease, Senior Vice President and CFO, will begin their review of our quarter performance and our outlook in just a moment. But before we begin, I want to point out that you may hear statements during the course of this call that express a belief, expectation or intention as well as those that are not historical fact. These statements are forward-looking and involve a number of risks and uncertainties that may cause actual events and results to differ materially from such forward-looking statements. These risks and uncertainties are referenced in the Safe Harbor statement included in our press release, and are described in more detail along with other risks and uncertainties in our filings with the SEC, including the Form 10-K for the year ended December 31, 2013. We do not undertake to update any forward-looking statements made on this conference call to reflect any change in management's expectations or any change in assumptions or circumstances on which such statements are based. You should also note that EnPro owns a number of direct and indirect subsidiaries. From time-to-time, we may refer collectively to EnPro and one or more of its subsidiaries as we, or to the businesses, assets, debts or affair of EnPro or a subsidiary as ours. These and similar references are for convenience only and should not be construed to change the fact that EnPro and each subsidiary is an independent entity, with separate management, operations, obligations and affairs. I want to remind you that our financial results reflect the deconsolidation of Garlock Sealing Technologies LLC, Garrison Litigation Management and their subsidiaries, effective June 5, 2010. The results of these entities will remain deconsolidated during the pendency of the Chapter 11 legal proceedings to resolve asbestos claims against GST. We refer to this as the Asbestos Claims Resolution Process or ACRP, and you will hear us use that acronym during the call today. GST's results -- summary results are presented separately in our earnings release. And now, I'll turn the call over to Steve.

Thank you, Don, and good morning, everyone. As you can see in our earnings release, we reported a slight increase in consolidated sales compared to first quarter of 2013. Sales grew from the benefit of foreign exchange and the small impact from 2 acquisitions completed in March of this year. Excluding those items, organic sales declined about 1%. As Alex will discuss in more detail, the Sealing Products segment sales were well above the first quarter of 2013 by about $8.4 million, or 6%. Sales in the Engineered Products segment were about the same as the prior year, and sales in the Power Systems segment, formerly named Engine Products and Services segment, were down about $8.3 million, or 17%. Compared to the first quarter of last year, market demand was mixed. We experienced increases in our semiconductor, aerospace, nuclear and heavy-duty truck markets, as well as in our European industrial and automotive markets. However, activity was slower than last year in both the oil and gas pipeline and engine parts and services markets. Sales at GST, our deconsolidated entity were lower than the first quarter of last year. Uncommonly cold weather in January and February affected demand across most of our operations in North America. However warmer weather in March produced an uptick in activity in these markets. Looking at profitability in the first quarter of 2014, overall gross margins improved over the first quarter of 2013. However, SG&A costs including R&D expense were also higher as we invested to support our growth strategies. As a result, segment profits of $29.1 million were 10.1% of sales, versus 11.1% in the first quarter of last year. The deconsolidated results of GST included $52.8 million in third-party sales, down about 7% from the first quarter of last year. GST's operating profit margins…

Thanks, Steve. To repeat Steve's comments about first quarter sales, they were about $287.2 million, up slightly from the same period of 2013. However, organic sales were down about 1% compared to the first quarter of 2013, primarily because of lower sales in the Power Systems segment, where aftermarket demand remained soft. By geography, after adjusting for foreign exchange and acquisitions, sales in Europe were up 2% overall from the first quarter of last year, with improvements in GGB, CPI and Technetics. However, the Garlock Companies European sales were lower, primarily due to lower oil and gas project activity. In North America, Technetics sales were up significantly, and sales at Stemco and GGB were both up modestly. The Garlock companies, CPI and FME, all reported North American sales below the first quarter of 2013. I'll discuss the performance of our individual businesses in more detail when I cover our segment results. For the quarter, gross profits were higher by $2.3 million compared to the first quarter of 2013, and gross profit margins improved to 33.6% compared to 32.8% in the first quarter of 2013. Cost improvements at GGB and Fairbanks Morse, along with price improvements at almost all of the business, more than offset the effects of lower volume and less profitable mix at the consolidated Garlock companies, CPI and Fairbanks Morse. SG&A expense at $78.9 million in the first quarter, was compared to the first quarter was higher compared to the first quarter of last year by about $6.3 million. Higher corporate costs accounted for $1 million of the increase, with the remainder spread across our operations. The increase in SG&A largely reflects project-related expenses as we continue to invest in new ERP systems, R&D programs and other growth-related initiatives. Looking at our segment's operating performances. Sales in the…

Thank you, Alex. Before I get into the outlook, I want to just take a personal moment to publicly thank Don Washington for his fine service as EnPro's Director of Investor Relations and Corporate Communications for the past 12 years. As some of you already know, Don will be happily stepping into retirement at the end of June. And although he'll remain at the Head of our IR program until then, this is his last earnings call. Don will be succeeded by Dan Grgurich, who some of you have met, and whom all of you will get to know better. Dan has been a member of our Corporate Planning and Development staff and has recently served as the Chief Restructuring Officer for GST. But he also brings an operational background, having served as Vice President of Finance at Stemco and the Garlock Companies. Don has done just a simply outstanding job in successfully communicating our relatively complicated company's journey from the spinoff of Goodrich in 2002 until today. During that tenure, he has contributed to the wider communications and acceptance of our strategies and accomplishments in both good times and difficult times, and of the dynamics of the business that is complex and not easily understood. I also know many of you have worked closely with Don over the years, and I know you'll join me in wishing Don the very best in his retirement. Now looking at the second quarter of the year, which is traditionally the strongest quarter of the year due to the seasonality of some of our markets. We're encouraged to see increased demand in our heavy-duty truck markets, semiconductor market and GGB's European and North American markets. Markets served by other EnPro businesses also have improved with the warmer weather in North America, although CPI continuous to deal with soft demand in the Canadian natural gas market. Based on the year-to-date orders in the current backlog, we expect volumes at Power Systems to begin an upward trend in the second quarter that should continue through the rest of the year. Our segment profits in the second quarter should benefit from the restructuring and other operational improvements we've made over the past several quarters. But our product mix is likely to reflect higher sales to original equipment markets, where our profit margins tend to be lower. This is especially true in the Sealing Products segment, where lower margin sales in the semiconductor industry are likely to increase. With those factors in mind our segment profits and profit margins in the second quarter of 2014 are likely to be in line with those we reported in the second quarter of 2013. Now we'll open the line for your questions.

[Operator Instructions] Your first question comes from the line of Jeffrey Hammond with KeyBanc.

So really just want to delve into the Sealing margins a little bit more. I mean I guess if we pull out the one-timer from last year, margins were down 200 basis points. I'm just wondering if you can maybe quantify how much was mix? And then in terms of the kind of SG&A and R&D, what you think is bad lumpiness or 1x versus maybe something ongoing? Because it just seems like these margins are -- I go back in my model, I just haven't seen a margin this low in a long time, and it's just a little confusing given the revenue growth.

Yes, no, and I understand that, so -- and actually you shouldn't be concerned, that it's kind of sustainable level at all because we did have a number of things going on in the segment. You highlighted one, which is the comp is screwed up a little bit because of the $1.5 million, good guy last year, in Q1. The other thing is, in the pipeline business within Garlock, it's a very -- it's kind of very lumpy in terms of sales. This is where we sell the insulating gaskets to oil pipeline projects throughout the world, and those who typically come in -- those orders come in at big slugs, Jeff. There's not much of an aftermarket there. There's some. And they're pretty good margin products. And we just were a little bit weak in Q1. We don't anticipate that being the case for the year, as we look at projects coming forward, so that's one. The second, in Garlock, outside of the pipeline business, the performance overall was pretty good. But when you feather in the impact that the weather had, actually I'm pretty encouraged about the Garlock base business. The third big issue was in Stemco, we are in the middle, literally when we finished the quarter, we were 50% transitioned. We are opening -- I've referenced this in previous calls, but we are opening a U.S. centralized distribution center for Stemco in Berea, Kentucky. It happens to be one of the Motorwheel facilities we purchased a few years ago. So this has been a pretty -- it's a -- one, it's a very, very exciting strategic move because as I've explained to you guys before, up until this point, to buy the full range of Stemco products, you would have had make 4 or 5 phone…

Okay. And then it sounds like you expect growth in Sealing and Engineered Products in 2Q and I guess, sequential improvement in engine or power products. Can you give us a little more granularity -- I mean is mid-single digits too hopeful in Sealing and Engineered Products for Q2?

For 2Q, based on 2Q of last year?

Yes, year-on-year growth.

Year-on-year growth? Do you have that handy, Alex?

Yes. I would anticipate, based on what we're seeing now, mid-single digits for the top line is probably a little aggressive. I certainly expect the year-over-year comps to be better, and I would expect sequentially, the margins to improve to sort of more normal levels, particularly as the after-market demand comes back in some of -- in both the Power Systems segment, as well as the Sealing Products segment. But I really don't have a very good visibility in terms of what you should expect sort of business by business right now.

Okay. And then just finally on engine, are you seeing the avail schedules kind of coming through more favorably as you would have thought maybe the last couple of quarters?

Yes is the short answer. We've had nice bookings in FME year-to-date. And so those bookings, many of them carry on through the balance of the year, Jeff, so we won't see it all in -- we won't see Q2 all of a sudden with a huge jump. But I think some it -- we'll certainly start to see trending improvement in the top line at Power Systems in Q2. And then like I said in the script, that will -- I mean, we anticipate that that'll continue through the year.

Your next question comes from the line of Ian Zaffino with Oppenheimer.

Just wanted to circle back on your plans as far as getting GST out of bankruptcy. And I guess that you mentioned that you're going to maybe proceed without sort of mutual consent. Can you walk us through the hurdles there? Did something, per se, happen in the negotiations that you're deciding to maybe go out on your own? Or just any type of color or more detail on sort of what's going on there and really, the motivation for kind of your statements?

Yes. Ian, look, it's always been our intention to come forward with a confirmable plan that the court can move forward with without a consensual resolution. The good news about the judge's decision was it was, obviously, very favorable to us because it was right, as I've said in the past, and I'm not going to get into all that again. But everybody knows how I feel about it. Our products were safe, and the judge recognized that, that is, in fact, the case, and we've really been -- it's been a factor of us trying to offset the unbelievably high defense costs and deal with the abuses in the system. And he recognized that and outlined that in his order. So it was very favorable opinion to us. That's the good news. The balance of that is -- the balancing side of that is, it is going to make the process more complicated going forward because we're not going to just ignore the fact that we got a very favorable judge's ruling, and so -- and obviously, the other side is very unhappy with that. It's precedent-setting thing in their world, and they don't know how to deal with it. And so we're going to deal with it by putting forth a plan to the court, that the court has the authority to implement. That -- this has never been done before in any asbestos-related bankruptcy, that the plan has been implemented by the court absent a consensual deal. In fact, I would argue the other side's complete approach is based on the fact that they believe that they control the company's ability to exit Chapter 11 through requiring a consensual settlement. We don't agree with that. Our legal team don't agree with that. So that's why it has…

Yes, that's pretty reassuring, too. So just one quick question. On the -- so whatever you would file would then contain that $125 million ruling as sort of the liability amount. Is that kind of right?

Well, it's going to be -- it's a bigger number than that, which we said in the beginning, because it has to include other claims, which is other cancers, as well as there are still some junk claims in the system that we have to deal with, some non-mesothelioma, non-cancerous claims. And it has to have an administrative element to it. And given the structure of the plan that we've landed on, it has several different kind of pools of money if you will. So that will all become public when we file the plan in, hopefully, in 3 or 4 weeks, certainly by the end of the quarter. But -- and we'll have to help you guys sort out why that structure looks like it does. I can't talk too much about it. It's not yet filed. But -- so it's going to be -- but the base number of the base amount of $125 million for mesothelioma claim, it will definitely incorporate that estimation as its foundation if you will. But it won't -- it's not going to be $125 million. It will be $125 million plus these other pieces and elements.

[Operator Instructions] Your next question comes from the line of Todd Vencil with Sterne Agee.

Steve, can you talk a little bit about the opportunity on the commercial side in the power Segment. Maybe I was going to ask the question, and you threw out there that you've got a commercial contract that you're going to announce, and then a design and feasibility study. Could you give us some color on -- any color you can on both of those things?

Yes, we're just not at liberty yet to talk publicly about the contract that we've won. But again, we will be in a few weeks. Pretty darn excited for Fairbanks, won't have a huge impact on '15, although it does have a little bit of impact -- or sorry, on '14. It does have a little impact on '14 because of the lead engineering and advanced work we have to do on kind of the qualification engine of that, and then -- but most of it will hit them in '15 and '16. We're really looking forward to being able to talk to you all about that. And then the second is we -- as we started -- and that is with the Fairbanks Morse OP engine, opposed-piston engine, the current design is what we won the commercial deal with. So it's not the MAN design product that we got at the beginning [ph] that we make for the Navy on the license agreement. So It's basically a FME-owned design. Now in addition to that, as we announced last fall, we've entered a formal partnership with a technology company called Achates Power that's out in California. And Achates, that's -- you can easily go on the Internet and look at it. You probably have already. But I mean, it's funded by some private investors, including John Walton, Sam Walton's son. So it's got plenty of financial backing. And it's a technology company, and they have figured out how to make -- how to basically achieve substantial improvements and efficiency emissions and power density generation for an OP engine, which ought to be able to be done at pretty darn competitive cost as well because the fundamental design of an opposed-piston engine has some significant advantages versus a four-stroke engine. It's…

So you think on both of those factors, efficiency and emissions, you will be competitive with sort of more popular designs with the Achates adjustments?

I think we'll be better.

Fantastic. So that -- so you think you'd potentially be in the market with that in, say, '17?

Yes.

Okay. All right. And, Alex, within the SG&A, is up $6.3 million. How much -- can you split that out between the ERP cost and the R&D, just ballpark?

Yes, yes.

Go ahead.

Yes, the R&D was around -- just over $1 million. And then...

And some of that, by the way, is Achates.

Exactly, the bulk of that would be the Achates piece. There's also a piece that we can't give you a whole lot of detail on but within Stemco. So the 2 primary R&D investments were within FME and Stemco. Both are, what Steve just told you about the Achates work, which is highly strategic and exciting. And I would just say that the Stemco work is equally strategic and transformational for that business. So that's really where the bulk of the -- just north of $1 million and increased R&D spending went. We mentioned also in the SG&A number is the -- about $1.5 million benefit that didn't -- that existed last year that didn't exist this year. And then there's probably about, I would say, mid-$1.5 million, just north of that, in IT-related expenses to the ERP conversion. A lot of -- basically a lot of contract labor that we're investing in to get those systems in place that ultimately should yield a net benefit for the company in terms of being able to get some of the redundancy out of the system. So that's -- those are sort of really the big drivers. Also, in the SG&A number was an increase in the environmental accrual of around $600,000 related to 1 of our legacy sites that's been an issue for a while. So does that help? Do you need more details than that?

Absolutely. No, that's great. And then the final question from me, I guess, it feels like both within CPI and within the Sealing Products businesses, you called out in the press release and you talked a little bit about the oil and gas markets being weaker, refining, this and that. I mean, is there something thematic going on there? Is that just lumpiness? Is it weather? I mean, what do we attribute that to?

Well, again, I think that the oil and gas pipeline -- I think it's different depending on what specific segment you're talking about, Todd. So I don't think there's one blanket issue. Certainly, in -- look, CPI, weak, not where we want it to be, always weak in the first quarter, but they're basically on plan through Q1, both top line and segment income. So we're actually, Alex and I and the rest of the team are -- as I said, we're encouraged for the first time in a long time about CPI, and what we're looking at now, I don't -- it's not going to return to profitability of a few years ago in next quarter, but I do believe we're tracking and trending effectively. Obviously, I've spent a lot of time in and around that business myself, and I think we've got some really good, good stuff going on, really good activity. But the first quarter is very weak, and the tough winter in North America hit them probably. It always hits them, but it probably hit them a little harder than usual. And then the oil pipeline business out of Garlock, I think, is due more to the lumpiness aspect, but it's -- that's just a really, really challenging business for us to try to have any visibility on. So while I think it's -- we've definitely gotten some increase in orders in Q2, it's such a short-cycle business. It's hard to look much beyond that. And then all of the chemical and refining weakness that we saw, I think it's all just weather related, just kind of buried across the board in both of those businesses. And quite frankly, also, at Stemco, certainly versus our expectations. So it was up versus last year, but it was below our internal plan.

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

A few questions. First off, I did have a question on CPI, and since you were just talking about that, I guess, I'll start there. I understand that you're, I think, putting a little more money into the business that you might have taken out over the past 12, 18 months or so. But my question is sort of on volume, and it sounds like you're getting a little more excited. My standpoint, higher gas prices, production rates improving supposedly this year. Volumes had start to improve. Are you starting to see that, say, in the month of April? Or are you anticipating volume to be up in the second quarter at CPI?

We're anticipating it to be up a little bit, Joe, but we're not ready to throw a party.

And I guess with, I guess, some additional costs coming into the business that maybe you've taken out to align with...

I'm sorry [indiscernible]...

Is that not correct?

No, I don't think that's actually correct. I don't -- we haven't said that, and I'm not sure...

Well, I thought you might have over-restructured the business, per se, and when you brought in new management, I thought that might have started to get reversed a little bit to try to...

Not in a meaningful way really. We've got to upgrade a lot of positions from a talent standpoint, but we haven't thrown a lot more headcount at it.

Okay. So I guess, what I was trying to get out was the sort of the incremental margin or the operating leverage within that business. We should see a pretty good growth on the bottom line once we start seeing that volume improvement, correct?

Yes.

Okay. All right. Second question was related to the Power Systems business and really, it's more so the margin. You gave some pretty good color on how you expect improvement throughout the year on the top line, but the margin's a little confusing just given the mix between the POV revenue, completed contract revenue and sort of how the aftermarket's playing out or how you anticipate that. If you can give any sort of color on the margin trending throughout the year, that'll be helpful.

Well, I mean, I'll just tell you guys, I mean, last year, the -- since we report that segment separately, last year, the OI margin was about [ph] 9% in that business for the year. Historically, that's been a high-teens business. And I think we'll be halfway between, somewhere around halfway between the 9% and what it's historically been, for the year. That's for the balance of the year -- that's for the full year. That's why [indiscernible] ...

Okay. So that's for the full year. So you would anticipate maybe the high margin to the comeback in the second half of the year?

Not as high as it was prior because we're not going to be -- even with spare parts, that we're not going to be as busy at Fairbanks in 2014, period. We're just not, as we had been before last year, we just -- the backlog is not that healthy. But it's a lot more healthy than -- I mean, we'll do more than last year top line.

Okay. And I guess, I'll -- lastly, I'll end with Engineered Products, and I should have probably gone right to that from the CPI question that I had. 9.5% in the first quarter, that's one of the highest you've seen, maybe not the highest but 1 of the highest in the last 3 years, marginalized. Just trying to understand, in the past, you guys talked about low teens as a goal out 2, 3 years. And you're talking about that 2 years ago. I'm just trying to get an update on where you see maybe the profitability in that segment going.

Well, what you've seen in the first quarter is the benefit from GGB getting more volume because of the recovery in Europe. Remember, GGB is the largest part of Engineered Products, and it's 2/3 Europe. And on of that European business is half automotive and half industrial. So we've continued to say consistently over the last few years that we feel like GGB was executing extremely well given the hand they were dealt. They've been dealt a really lousy hand. In fact, Dan and I were just looking yesterday afternoon at that GDP for the Eurozone countries. Now relative to where the demand -- total GDP, [indiscernible] percent improvement. But just the GDP, the economic output of the core Eurozone countries, and are any of them back to the levels that they were in 2007? And basically, Germany is just now getting to the level it was in 2007, and that's the only one. And the U.K. is still at about 90% of where it was in 2007. France is at about 83% or 84%, and Italy's at 75%. And Spain's at 70%. So we are -- even though Europe is better, we're still, I would describe it as in the early innings of recovery of Europe relative to where they've been before. Your guess is as good as mine as to how much will they ultimately recover, right? But for all the structural reasons that we've talked to you guys about before, GGB leverages extremely well with volume, and they were pretty darn busy in the first quarter, and that has continued. So I'm optimistic about GGB. And then, obviously, the whole segment was weighted down by our underperformance in CPI, and we're getting -- beginning to get a handle on that. So I haven't fundamentally changed my few-year outlook on Engineered Products segment. We've always said that it depends on some recovery in Europe, and that would still be the case.

Okay, great. So if we continue to see improvement in both those 2 businesses, is it fair to say the 9.5% is sort of a base for the year? Or is there a product mix, OE related, that may sort of offset some of the operating leverage?

I think we're going to be in that neighborhood.

There are no additional questions at this time. I'll turn the call back over to the presenters.

Well, thank you, everybody, for dialing in again today. We hope you enjoyed the call, and if there's more questions than you have, as usual, please don't hesitate to contact me at (704) 731-1527. Thanks.

This concludes today's conference call. You may now disconnect.