Greetings. Welcome to EnPro Industries, Incorporated Q2 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] Please note, this conference is being recorded. I will now turn the conference over to your host, Chris O'Neal, Senior Vice President, Strategy, Corporate Development and Investor Relations. You may begin.

Good morning, and welcome to EnPro's quarterly earnings conference call. I 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. Due to the COVID-19 pandemic, we are holding our call virtually to observe social distancing. We're dialed in from different locations, so we ask for your understanding if we encounter any technical issues and as we coordinate our responses during Q&A. But 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 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 and Form 10-Q. We do not undertake to update any of these forward-looking statements. Also, during the call, we will reference a number of non-GAAP financial measures. Tables reconciling these measures to the comparable GAAP measures are included in the appendix to the presentation materials. I also want to remind you that as a result of the sale of Fairbanks Morse in January 2020, the Power Systems segment is accounted for as a discontinued operation in our financial statements for both current and historical periods. Unless otherwise noted, all of our comments today will refer to continuing operations. Additionally, in the second quarter of 2020, we moved the oil and gas component of our Garlock Pipeline Technologies, or GPT, business from the Sealing Products segment to the Engineered Products segment. This move allowed us to group our two largest oil and gas businesses, GPT and CPI, together so that they can be managed as 1 business unit. Prior year segment level results have been restated to reflect this change for all periods presented. We have also provided a supplemental table at the end of the press release, with restated quarterly segment results reflecting this change going back to 2019. And now I'll turn the call over to Marvin.

Thanks, Chris. And good morning, everyone. Thank you for joining us. I hope that you and your families are safe and healthy. 2020 has been a very unpredictable year as we continue to battle the COVID-19 pandemic. As we navigate through these unprecedented times, our top priority remains the health and safety of our global employees, their families, our communities, customers and suppliers. I want to express my sincere gratitude to the heroes who continue to battle the COVID-19 pandemic, the health care professionals, emergency responders, grocery store employees, government officials and our EnPro colleagues working on the front line in our factories around the world. I'm very proud of the way our teams have continued to excel in delivering quality products and solutions to our customers, while adopting enhanced safety practices throughout the organization and keeping our core values at the heart of their actions. Before I begin my remarks on the quarter, I want to emphasize EnPro's core values of Safety, Excellence and Respect for all people. We hold dearly the sanctity of all human life and each person's inherent and equal right to grow and develop into the best and truest expression of themselves and start contrast to our enduring values and purpose. There's an acute and systemic racism against black people in the world today. This racism and discrimination of any type violates our values and what we stand for as a company. On June 5, our executive team and Board of Directors issued a statement that shared our company's commitment to being part of an enduring solution. If interested, you can read our EnPro Standing Together letter by using the link posted on the homepage of our website or the link in today's press release. Over the last year, we've taken several concrete actions to…

Thank you, Marvin, and good morning, everyone. In the second quarter, sales decreased 22.1% to $247 million, coming in better than our expectations at the onset of the COVID-19 pandemic. We experienced growth in our semiconductor and food and pharma businesses, including the contribution from the LeanTeq and Aseptic Group businesses acquired in 2019, while seeing declines across our heavy-duty truck, general industrial, automotive, aerospace, oil and gas and petrochemical markets as the COVID-19 impacts ripple through the global economy. Excluding the impact of foreign exchange translation and sales from acquired and divested businesses, organic sales for the quarter declined 23.6% year-over-year. Gross profit margin for the first quarter was 33.4%, down 80 basis points. The decrease was driven by sales volume declines across our businesses and $5 million in inventory write-downs related to the recently announced heavy-duty truck exits, offset in part by acquisition contributions and company-wide cost-reduction programs. Adjusted EBITDA margin held up well, contracting about 30 basis points to 15.2%, with adjusted EBITDA of $37.5 million. The largest factor driving the decline was decreased demand in markets noted previously. This decline was mostly offset by prior year acquisitions and divestiture actions and cost reductions across the company. Excluding the impact of foreign exchange translation, acquisitions and divestitures, decremental year-over-year adjusted EBITDA margins were approximately 30% in the second quarter, which is significantly below the weighted average contribution margin for the company. This result was achieved largely through executing on cost management actions developed as part of our scenario planning work in response to the COVID-19 pandemic. As Marvin noted, we enacted cost reductions resulting in full year 2020 savings of approximately $30 million, of which we estimate half will be sustainable annual savings moving forward. Adjusted diluted earnings per share decreased 42% to $0.54 per share, primarily…

Thanks, Milt. In closing, as I reflect on my first year as CEO, we've made significant strides in improving the quality of our portfolio and execution and in building upon the cultural foundation established by my predecessor and mentor, Steve Macadam. We've exited or divested businesses that were no longer a strategic fit and acquired those that align with our long-term vision for EnPro. We have focused on driving operational excellence by leveraging the EnPro operating system to reduce costs and improve productivity and quality control across all our businesses. We have developed new ways of working as we navigate through the COVID-19 environment while protecting the health and safety of our employees and delivering the high level of service that EnPro customers expect. We're standing behind our company's commitment to equality and standing up against any form of discrimination that exists in our society today. It's been quite a busy year. And while we have made great progress, we're only just beginning. Looking forward, I'm confident that we will emerge from the current environment as a stronger organization with many opportunities on the horizon. Our success will be fueled by the commitment of our cycle-tested leadership team, strong financial position, portfolio transformation work completed and operational improvements we continue to make throughout the organization. I invite you to join me and our approximately 5,000 global employees on this journey to push boundaries in advanced industries while maintaining a diligent focus on capturing above-market growth, expanding margins and driving cash flow return on investment to maximize shareholder value. And now we'll open the line for questions.

[Operator Instructions] And our first question is from Joe Mondillo with Sidoti & Company. Please proceed with your question.

Hi. Good morning, guys.

Good morning, Joe.

Good morning, Joe.

I just first wanted to start with the guidance. And I was just hoping, just given all the divestitures and product that fits, if you could help translate what that 15% to 25% decline is in absolute dollars? And then also, what is that 15% to 25% look like on a organic basis?

Yeah. Joe, good morning I hope you're doing - you and your family are doing well. Our sales, our reference, the 15% to 25% down, is in reference to 2019. So our 2019 actuals were about $1.2 billion. So 15% down would be roughly $200 million. Now 25% down would obviously be more. So you can do the math on that, but it is -- it's directly in reference to our 2019 actual revenues from continuing ops. So hopefully, that helps. That was the first part of your question. Now if you look at our performance organically was your question, how did we perform for the quarter, year-to-date on an organic basis from both the sale as well as EBITDA standpoint?

No, I think - correct me if I'm wrong, but the 15% to 25% includes some divestitures that you just have made this year and exiting products. And I'm wondering, excluding exiting those revenue streams, what does the 15% to 25% look like on an organic basis?

Yeah. Let me give you some data so you'll know. Let's just take the first 6 months of the year because it's a little bit of a target keeps moving, depending on the time period we're talking about. So let me help you with some information on here to date. So this would be in the first half of the year, we had revenues from acquisitions of roughly $13 million. And then in the Rome business that we divested at the end of 2018, '19 - excuse me, at the end of '19, was about $8 million. So the net of those two, it wasn't a big difference. If you net out those two for the - excuse me, that's for the quarter. For the first half of the year, it's $24 million from acquisitions, net of about $15 million of Rome. So it's only about a $9 million impact in the first half of the year. And then the EBITDA impact is - on a net basis, was - for the first half of the year, probably a net of about an $8 million favorable. So that will give you some impact for the first half of this year of the impact of sales and earnings to help you estimate that for the - impact for the first half of the year.

Okay. So would you say the 15% to 25% is almost - it's not going to fluctuate a ton when you net out all of these acquisitions and divestitures? And I mean, just even the Air Spring business that you just announced that you just divested it, would you say the net numbers, plus or minus 1 point or 2 from that 15% to 25%, it sounds like?

Well, if you - let's - again, if you look at the second half of the year, in addition to what I just covered, we will have the exit from the Air Springs business, let's say, after regulatory approvals and we get to closing. That happens, let's just say, by the end of the third quarter, just as an estimate. And if that happens in the fourth quarter of the year, yes, we would likely have some falloff. In the first half of the year - let's say, in the second quarter of the year, we had Air Springs revenue of about $15 million. So that will help you size roughly what an impact might be if that transaction closes at the end of the third quarter. The 15% to 25% modeling that we're using does assume that we no longer have the Air Springs business in the fourth quarter. That also assumes that the previously announced exit from Motor Wheel happens so that we - that revenue drops off in the fourth quarter of the year. And that revenue, by the way, was also around $15 million in the second quarter of this year. So those two businesses combined in the fourth quarter, the way we're doing our scenario planning to reflect about a $30 million drop-off in the fourth quarter resulting from those two moves.

Okay. That's helpful. As far as the Sealing segment, flat operating income despite a 20% decline in revenue. Is this mainly the - I mean, I assume a big portion of that is the cost cuts that you initiated in the quarter. Could you just talk about that kind of performance despite the 20% decline in revenue? And how we can look at, I guess, the segment going forward?

Yes, it's really a function of two things, Joe. It's certainly a function of the cost efforts and the restructuring actions that we've taken during the quarter. It also reflects the benefit of the acquisitions in 2019 of Aseptic and LeanTeq. So - and thirdly, it reflects the positive impact of the divestiture of Rome that happened at the end of last year because that business had been losing money. So it's really a function of all three of those things.

Got it. And just in general, not just feeling, but in general, in terms of the cost cuts, you mentioned $30 million total, half of which is going to be permanent. A couple of things there, and then I'll hand it off to someone else. Are any temporary costs coming back, say, immediately in the third quarter regardless of revenue? I'm just curious because some companies have operated differently than others, where you're seeing a big chunk of, I don't know if it's furloughs or other temporary costs that come back, no matter what revenue does in the third quarter. So that's number one. And number two, as far as the permanent cost cuts, have - did we see most of those annualized benefits in the second quarter? Or should that be a progression of benefit into the second half?

Yeah, it's a good question, Joe. Some of the costs, the benefits from the cost actions, we will see more fully in the third quarter and some in the fourth quarter. The numbers that we've provided, obviously, were annual numbers. And so let me tell you how we approached the cost savings. We were looking - the numbers that we provided on the call, the roughly $30 million and indicating that about half of that would be sustainable in the future, those are costs that we've identified as being non-volume related. And the reason that not all of those are sustainable, let's say, in a different environment is because some expenses we would not anticipate to be as low under more normal conditions, T&E expense, for example. While we don't expect that to go back to the levels that was pre-pandemic, we certainly expect T&E going forward to be greater than it was - has been this year and then we expect it will be for the full year of this year. So - but that includes supply chain savings. It includes labor cost savings. It includes other manufacturing costs. It includes SG&A. So it's a lot of individual line items that make up the cost savings that we've been able to execute on this year.

Okay. It sounds like - go ahead.

Yes. I was just going to chime in at a high level. I mean, our posture is we want to maintain our cost savings for as long as possible. And if we are improving or increasing, T&E, for example, that's directly aligned to trying to grow sales, right? So if you look at our headcount reductions, they're in line with the demand drop off. We see some increases. It's going to be in line with growing revenue. We're really trying to maintain a posture that is one of being very thoughtful on our - as it relates to spending, very thoughtful as it relates to the hard work we put in to get these cost savings. So our intention is not to give them right back.

Okay, perfect. Thanks a lot. Appreciate it.

[Operator Instructions] Our next question is from Jeff Hammond with KeyBanc Capital Market. Please proceed with your question.

Hey. Good morning, guys.

Hey, Jeff. How are you doing?

Good, good. Just on the 15%, I think last quarter, you said the 15% to 25% decline of bias was towards the worse end of that. Just wondering if after 2Q results and kind of based on the incoming order rates, if you're still feeling that way? Or if anything's changed within that wide band?

Well, I'll give you a sense of incoming order rates, and then we can go back to sort of the band. We feel comfortable about the band because we want to be thoughtful. We want to be mindful that we don't really understand exactly what will happen in the future. But from an order intake perspective, we feel really good about what's happening. If you look at our trucking business, I'm going to get a little granular here just to give you a little bit more perspective. If you look at our heavy-duty trucking business, from an order's perspective, our orders troughed in April, and we've been recovering every month since. Trailer builds, if you were to look at FTR is thinking about trailer builds being down about 40%. And Mackay is seeing the aftermarket being down about 18%. Our business is probably in line with the OE and performing a little better on the aftermarket side. And if you look at our trucking business, you know that 70% of that business is aftermarket. So we would expect that to perform nicely going forward. In automotive, our orders troughed in April and have improved ever since. We actually had a really strong July, some of that fueled by increased orders from the Dieuze announcement. But even without that, we really had a strong recovery here in July. If you look at our energy and sort of petro business, our orders troughed in May and has been essentially flat. Since then, no further degradation, which we like and with the cost savings that's worked out nicely. In general industrial, our business troughed in the May time frame and has improved nicely since. And as you know, semiconductors performed really strong for us all throughout and continues to be strong, and we expect that to continue to be strong going forward through 2021. So we are maintaining our 15% to 25% range, just because that mix varies, but the indication across the board is that orders are improving. I just wanted to give you that color.

Okay. So it sounds like the bias is maybe no longer the lower end, just given the trend in order rates? Is that fair?

I would say - go ahead, Milt.

Marvin, go ahead, and then I'll chime in.

Yeah. I would focus for me, it's a mix. I mean, the bias is it's going to be in that range. It's hard to give you a bias, quite frankly, but it's going to be in that range. It all depends on how things shake out. That's what I'd say. I'd like to stick to the range just to keep it safe. It's probably right in the middle. Go ahead, Milt.

The only thing I would say is just to go back to our results for the first half of the year. And you've got the data, but just to summarize it. If you look at our top line sales for the quarter, we were down 22% year-to-date because the pandemic wasn't fully felt. In the first quarter, we were down 15%. So 22% down in the second quarter. That's kind of the environment that we're in currently, even with some modest improvement. So I think you look to our historical numbers, what's changed, maybe colored a little bit by some of the order pattern information that Marvin described. And I think you just see yourself kind of in that range, in that 15% to 25% range.

Okay. The Air Springs business, can you give us like either '19 revenue and EBITDA or trailing 12 months revenue and EBITDA, what comes out on an annualized basis?

Yes. Let's see, we can give you kind of a ballpark of how it will affect us. If you look at 2019, business - Jeff, I'm going to lump in both Air Springs and Motor Wheel together because they're both businesses that we're exiting. But in 2019, we had revenues of roughly $140 million, $145 million in those two businesses. And the first half of this year, we've had roughly $65 million of revenues in those two businesses. If you look at EBITDA in 2019 in those two businesses, we had roughly $10 million of EBITDA. And then if you look at this year, those two businesses combined, probably first half of this year, probably about $3.5 million of EBITDA. So that will give you information where you can estimate the overall impact that we'll have once we complete those exits.

Okay. And then final question. Marvin, you've cleaned a lot of the portfolio. And you've talked about the direction you want to go. I mean it looks like Engineered Products still, though, is at minimum - maybe differentiated, but still a very cyclical business, as we can see obviously, unique circumstances. But very cyclical, pretty high decrementals, even with the better performance, just how do you think about the portfolio shaping, particularly Engineered Products?

Yes. I mean, the best way to answer that is, Sealing is basically the way we like it. And as we think about our capital going forward, that's where we'll direct it, primarily because of its financial profile, the exposure to the end markets that we like and want to participate in, in the future. That's how I would think about it. And as it relates to engineered, it's primarily around getting as much cost out as possible, improving the profitability and just running those operations as lean as we can going forward and making sort of some decisions down the road around whether or not they will achieve what we consider to be the hurdles necessary to participate in sort of the portfolio of the future. That's how I would think about it.

Okay, great. Thanks, guys.

Yeah.

And we have reached the end of the question-and-answer session. And I will now turn the call over to Chris O'Neal for closing remarks.

Thank you, Shamali, and thank you all for joining us this morning. Have a great day.

And this concludes today's conference. And you may disconnect your lines at this time. Thank you for your participation.