Hello, and welcome to the EnPro Industries Q1 2021 Earnings Conference Call and Webcast. [Operator Instructions]. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Milt Childress, Executive Vice President and Chief Financial Officer. Milt, please go ahead.

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 is Marvin Riley, our CEO. Before we begin our discussion, a friendly reminder that we will be making statements on this call that are not historical facts and are considered forward-looking in nature. These statements involve a number of risks and uncertainties, including impacts from the COVID-19 pandemic and related governmental responses and their impact on the general economy as well as other risks and uncertainties that are described in our filings with the SEC, including our most recent Form 10-K. We do not undertake to update any of these forward-looking statements. Also, during the call, we will reference a number of non-GAAP financial measures. Tables reconciling these measures to the comparable GAAP measures are included in the appendix to the presentation materials. I'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 and dispositions and related transaction costs, restructuring costs, incremental impacts of tariffs and trade tensions on market demand and costs subsequent to the end of the first quarter, the impact of foreign exchange rate changes subsequent to the end of the first 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 Power Systems segment is accounted for as discontinued operations in our financial statements for the prior year period. Unless otherwise noted, all our comments today will refer to continuing operations. As previously announced, EnPro will host a virtual Investor Day on Thursday, May 27. Members of EnPro's executive management team, including Marvin and me, will provide an overview and update of the company's long-term vision, growth strategy, business segments, as well as operational and financial objectives. Registration information for this virtual event is available on the company's Investor Relations website. And now I'll turn the call over to Marvin.

Thanks, Milt, and good morning, everyone. I really appreciate you joining us today and hope you and your families are safe and healthy. As we begin to turn the corner on the pandemic in the United States due to the vaccine rollout, we're mindful that everyone is not yet vaccinated, and the recovery is uneven throughout the rest of the world. There are still many places in the world, like India, where the virus is spreading rapidly, so we must remain vigilant regarding maintaining safety protocols, operating processes and new ways of working that protects our employees and fellow citizens. I am extremely proud of our team members who continue to exemplify EnPro's values of safety, excellence and respect for all people while delivering quality products and services to our customers. Now moving on to our first quarter highlights. Overall, we experienced a faster than expected recovery in most of our end markets. We delivered extraordinary results, driven by improved demand, the benefits of increased exposure to higher-margin and faster growth businesses, which resulted from portfolio actions taken last year and cost savings initiatives driven by our Capability Center. Despite several countries returning to lockdown, February's severe weather in the southwestern U.S. and challenges with global logistics and ocean transport, we were still able to fortify our key materials while holding supply chain disruptions to a minimum. In our response to COVID-19, we enhanced the collaboration between supply chain, manufacturing and our commercial teams. This enhanced collaboration really helped us to respond quickly with price increases to offset higher material costs and increased customer engagement where necessary. We have fundamentally transformed the way we work and the benefits are showing up in our results. Our order trends are extremely strong. As a point of reference, March 2021 was the highest…

Thanks, Marvin. As Marvin mentioned, we had a really strong quarter. Positive momentum in the semiconductor, food and pharma, petrochemical, automotive and heavy-duty truck markets as well as the contribution from the acquisition of Alluxa, mostly offset the reduction in sales due to last year's divestitures. As reported, sales of $279 million for the first quarter decreased 1.2% year-over-year. Excluding the impact of foreign exchange translation and sales from acquired and divested businesses, organic sales for the quarter grew 5.5% compared to the first quarter of 2020. Sequentially, excluding portfolio reshaping activities, sales were up 7.1%. Gross profit margin of 39.2% increased 550 basis points versus the prior year period. The increase was driven by the benefit of divesting low margin businesses, the addition of Alluxa, sales growth at LeanTeq, as well as initiatives supported by the EnPro Capability Center, including supply chain and other company-wide cost reduction programs. The year-over-year improvement in gross profit margin was achieved despite a $2.4 million amortization of acquisition-related inventory write-up in the first quarter of 2021. Adjusted EBITDA of $52 million increased 28.1% over the prior year period as a result of organic sales growth, strategic acquisitions and cost reductions taken across the company. Adjusted EBITDA margin of 18.6% increased approximately 420 basis points compared to the first quarter of 2020. Corporate expenses of $11.6 million in the first quarter of 2021 increased by $3.2 million from last year. The increase was driven primarily by higher incentive compensation accruals. Adjusted diluted earnings per share of $1.37 increased 43% compared to the prior year period. As noted in our announcement of fourth quarter 2020 results, we changed our adjusted EPS from the previous presentation of this non-GAAP measure to one that excludes after tax acquisition-related intangible amortization. Amortization of acquisition-related intangible assets in the…

Thanks, Milt. This quarter demonstrates the benefits of our clear and consistent strategy, the Capability Center and our portfolio reshaping initiatives. We expect this momentum to continue as we focus on driving commercial excellence and operational excellence throughout the company. I'm confident that our profitable growth strategy, experienced leadership team, increasingly diverse and dedicated workforce and strong financial position will lead to continued growth and long-term shareholder value. In closing, I'm extremely proud of our progress transforming EnPro into a leading industrial technology company, using material science to push boundaries in semiconductor, life sciences and other technology-enabled sectors. And now I'll open the line for questions.

[Operator Instructions]. Our first question today is coming from Jeff Hammond from KeyBanc Capital Markets.

Appreciate all the color here. Just maybe digging into your new segment, just talk about the sustainability of the strength you're seeing in the semiconductor markets, both in terms of the market trends and your ability to kind of outgrow there. And then just on Alluxa, I guess we can kind of back into the profitability run rates and kind of, I guess, the revenue contribution. Just talk about sustainability of the margins there and kind of seasonality around that business. Is that kind of the run rate from here? Thanks.

A really, really good question. I appreciate the question. I'll go ahead and just talk a little bit about semi first. And I'll first talk a little bit about what's really driving semi, right? We've got rapid technology proliferation driving semi as it relates to 5G, data centers, cloud and the sorts, right? We've got new chip technologies, right, sub 10-nanometer chips. We've got major IDM investments, guys like TSMC, Samsung and Intel, right, coming in the game. And you've got increased auto demand. So from a macro perspective, I think semiconductor is going to be strong for a meaningful period of time. And when you look at market information about wafer starts, we're talking anywhere in the neighborhood of 16% to 20% or so. And when you look at where we're positioned specifically, it's on the leading-edge nodes. And the leading-edge nodes, as we've communicated in the past, has a compounded annual growth rate of 30%+. And that 30%+ should last for a couple of years, right? So as it relates to where we participate in semiconductor and how we participate in semiconductor, the challenge on our side will be to ensure that we're increasing capacity in line with demand. But the robustness of the end market and the sort of drivers are going to be there for a sustainable period of time. So I feel really, really good about semiconductor. And I also feel really, really good about our ability to execute in terms of bringing new capacity online in Milpitas, in Taiwan, and maybe further enhancements in the United States. So I couldn't be more bullish on how I feel there. And as it relates to Alluxa, Alluxa is performing exceptionally well, actually outperformed our expectations, particularly on the margin side. But if you think about Alluxa, it's got a - where it participates, it's got a TAM of $13 billion, a SAM of $1.7 billion, and that's growing at 9% a year, right? And there, primary areas of thrust is in life sciences, semiconductor and some industrial technologies. So the underlying conditions there are the same. So we would expect Alluxa to continue to grow at a record pace as it's done years prior to our ownership, and they had another record quarter. So I have no reason to believe that that will not continue. And all of the sort of end markets they participate in are pretty robust, and they're continuing to get meaningful wins on the board. I mean they've taken home some really interesting projects here recently, and their backlog is pretty robust, so I feel really good about it. I don't know, Milt, do you have any additional color you want to add?

I think you covered it well. It's - we're certainly expecting in that segment for continued growth, both this year and beyond.

Okay, great color. Just on the guide, I just want to understand what informs, what moving pieces or what informs the stronger first half versus second half? Because it just seems like momentum is building and order rates are improving, the economies, maybe say, for a couple, are kind of going through this vaccination and reopening, and just kind of wondering if there's something I'm not seeing or seasonally that we should be thinking about? Thanks.

Marvin, do you want me to jump in on that one?

Yes.

Yes, that's another good question, Jeff. If you look at our thinking, or if you look at our guidance, you'll notice that there was a larger percentage increase in our earnings guidance versus our sales guidance. And so part of the shift is we've determined that we're off to a much stronger start. Not just us, but the recovery in general, off to a much stronger start than we anticipated a quarter ago. And so our assumption, we're not pessimistic at all about the second half of the year, we're optimistic about the second half of the year too, but we're being cautious to recognize that there is a possibility that a lot of the snapback, we're seeing more of it in the first half of the year than the second half. Obviously, we expect continuing growth from Advanced Surface Technologies, particularly LeanTeq and Alluxa, as the year advances. And our other businesses where we're seeing more of that snapback from sealing and engineered, those businesses we're just being cautious that we may be seeing a larger percentage of that snapback in the first half of the year than the second half of the year, just given how the year is starting for us and our current order patterns. So that would be my response. We do have some element of first half versus second half dynamics in some of our businesses with a stronger first half than the second half. That's changing, though, as our portfolio is changing, but there's still some element of that as well. The other thing I would note, Jeff, is we had some pretty significant cost savings last year, as we discussed. We had indicated that we took about $30 million of costs out last year with $15 million of that, we expect to be permanent, $15 million of that we expect to come back into the system. And we're still being very careful with our protocols internally on how we're conducting business. We have been successful so far in keeping some of the costs that we thought would be coming back this year as volume returns out, but undoubtedly, we'll see more of that happening as the economy opens up as the year progresses. So that's part of the thinking on the earnings side.

Next question today is coming from Steve Ferazani from Sidoti.

If you could walk through sort of the timing on the strength of the recovery, because clearly, the quarter came out a lot stronger, your guidance changed. Just how quickly you saw that wave. I think you sort of talked about in the sealing and the engineered that it was fairly broad-based. So how challenging was that on labor and supply chain? We're hearing pockets of issues in terms of meeting labor demand for just how strong the recovery got in the spring.

Well, as we said, we really, really, really saw just a pretty aggressive snapback. And as Milt talked about, and as I talked a little bit about, we did see strength in semi. We saw strength in life sciences. We saw strength in industrial tech. We saw strength in automotive, petrochem. I mean we really saw our business snapback pretty aggressively. As it relates to the supply chain and how we're supporting the supply chain, we did have a number of challenges, but no challenges that we were not able to overcome. If you recall, there were some shipment challenges that impacted a number of companies, broad-based, just having to do with container vessels and then we had the weather issue down in Texas. But our supply chain team really responded well. The thing that we're paying close attention to from a supply chain perspective is just what's happening with commodity prices and what that looks like for our business over time. The commodities that we're paying closest attention to are PTFE, steel and bronze. And obviously, bronze is affected most by the price of copper. PTFE is our largest commodity by far. It's tracking - we're actually doing quite well in terms of the contracts that we have for PTFE. If you go back, I'd say did a little work and look back over the past 10 years, you'll only find 2 years in the past 10 where we paid less than what we're paying for PTFE right now and what we expect to pay for the year. So we're in pretty good shape there. We're seeing some increases in steel, pretty sharp increases in steel, quite frankly. Luckily, we divested our biggest steel consumer out of the STEMCO business. So we expect that even though we're seeing some increases in steel, it won't be so dramatic in terms of how it's impacting our business. The same goes for bronze. We're also doing a great job in terms of pricing to get ahead of the commodity price increases. And then the labor shortages are real, right? We are seeing tightness in the labor market. And we're working aggressively to address those, whether it be by boosting wages that we're paying for temp employees and all of the above, but we are being very, very aggressive on all of those fronts to try to offset some of those issues that we see. I don't know if you want to add any additional color, Milt?

I think the only thing that I would add in terms of cadence through the year is the - I guess, a pivotal month for us was the last month in the quarter, March. March was particularly strong. And it's one of the reasons why we made the decision to increase our guidance by the magnitude that we did. So just a little bit of additional color on cadence and momentum that we're seeing in response, Steve, both to your question and Jeff's question earlier.

Great, thanks. Just a quick one on modeling. SG&A up on, as you noted, the incentive comp. Is there - what else is left there? I imagine more travel expenses, but is there a lot more that comes back into S &A, or have we seen the biggest bump?

Yes. No, it's a good question. I mentioned earlier in response to Jeff's question, Steve, that we anticipated about $15 million of costs that we had taken out in 2020 would come back in 2021 as volume improved. And so some of that was travel, some of it were expenses on marketing and trade shows. There's a whole host of things and most of those fell in the SG&A category. What you saw in the first quarter was primarily differences in incentive compensation accruals last year versus this year, in addition to the variable items that are related to volume. So as the year progresses, we could see some higher travel costs. We could see some other costs coming back in associated with robust economic conditions.

If I could just get one last one in, with the additional capacity coming in, Taiwan, California, from a modeling standpoint or just a general business standpoint, how do we think about the additional capacity adding to revenue? Is it like a snap on higher revenue? Or is there a gradual?

It's definitely a gradual, right? Because you have to go through permitting, go through customer qualifications, and then it's a slow ramp to come online. So I would think about it that way, even though we're working aggressively on all fronts, but I would see it as a little bit more gradual. And we've tried to do our best to bake that into our forecast and our new outlook.

[Operator Instructions]. Our next question today is coming from Ian Zaffino from Oppenheimer.

Great, thank you very much. Just one more question on kind of the details of the momentum. Can you maybe give us an idea of how each region performed in the first quarter? And sort of like what are you seeing currently from each region? I imagine - yes, so that would be the question.

As you probably - this won't come as a surprise given how COVID-19 impacted the world starting in Asia, but if you look at our year-over-year growth in the Asia region would be the strongest just because it was so affected by COVID-19 in the first quarter of last year. And then both Western Europe and North America were reasonably strong. There was not a lot of differentiation between the 2, if you look at just year-over-year growth., which was good for us to see. So that's - those are the main markets geographically for us.

Okay. And then I guess a couple of other questions would be, how do you anticipate them recovering as far as continuing the momentum, accelerating or staying flat? And then also, just touch upon like the automotive business and what they're sort of telling you as far as demand as, I guess, the chip shortage has sort of crimped a little bit of their production. Thanks.

Yes. I can just jump in here and just tell you that the way I see things unfolding is that in many cases, I would expect our business to continue to improve and demand signals to continue to strengthen. At this point, we have some modest recovery in our oil and gas business, but you have to expect that that will continue to improve. The same thing goes for aerospace, right? These results that we delivered and the forecast that we have put together does not really take a lot of aerospace recovery into consideration. So at some point, that starts to come back online, likely will come back online sooner than we have anticipated. So we would expect that that will really add some additional fuel to what we're seeing right now. As it relates to automotive, our auto demand is, as articulated pretty strong, something unique that's taking place with our particular automotive business right now is we typically have - we describe our business as fairly short cycle, not having a ton of visibility into the future, but we've got some good clarity into the future this year on automotive, just given how our customer order patterns have shaped up. So as we look out over the next quarter or so, we've got just really good coverage in terms of what we've budgeted for the quarter. It's essentially covered at this point. And so there's no reason to believe our auto business is going to be impacted. We do know that the chip shortage is impacting all of our customers, and we see some of that, right? But it's not in any way, shape or form, creating any significant issue at this point, and that can only improve over time. It might take some time to improve, but in terms of what we're seeing, the strength of our backlog, the coverage that we have in the next quarter coming in automotive, we feel really good.

Our next question is coming from Justin Bergner from G Research.

A few questions here. I guess to start, Marvin, you mentioned at the beginning of the call that LeanTeq is tracking in line with your expectations at the time of the acquisition. And I didn't know if you were just sort of downplaying the success of that acquisition. It would seem, given the strength in the semi market, that it would probably be tracking ahead of your expectations, so any sort of clarity there would be helpful.

No, I am trying to be modest in my communication. LeanTeq is performing exceptionally well, actually better than my expectations, to be very honest with you. And so is Alluxa for that matter. I do want to be mindful in my communication though that a lot of the future of LeanTeq depends on us bringing additional capacity online. And so we do have to get capacity online to deal with the surge that we're experiencing in the leading-edge nodes.

Great. That's good perspective. And then on Alluxa, if I look back and sort of infer what the margins were in the fourth quarter for the 2 months you had the business, they were modestly above I guess the figure that you indicated in your Alluxa presentation back in November I guess of greater than 20%. If I look at this quarter, they were way above that bogey. I mean, should I think about the sort of average of the fourth quarter and first quarter margins as being representative? Or is it hard to gauge at this point? And what would cause margins in Alluxa to sort of move around so much quarter-to-quarter?

I think you don't want to look too much at the fourth quarter of last year. It was a partial quarter for one reason. And when you're looking at the adjusted results, I think it's going to play out being fairly consistent throughout the year, especially if we have sequential growth in the business that we expect. We expect most quarters, because the underlying business is growing, to see sequential growth in the business. We would expect margins to be relatively stable. Obviously, they're going to be affected somewhat based on the mix of sales to different markets and different applications. There are some projects that carry higher margins than other projects. For example, last year there was a fair amount of business in response to COVID-19 and testing kits and some of that business carried lower margins. So it's going to vary a little bit, but I wouldn't expect it to move around much from quarter-to-quarter. I think the stub period in Q4 was a little bit of an anomaly.

Okay. Great, that's helpful. One more question here, just on the guide. So it looks like you took up the revenue guide versus pro forma 2020 by 150 basis points at the midpoint or about $15 million. Is it fair to say that like as much as half of that is coming or maybe even more than half of that is coming from Advanced Surface Technologies? And I guess the second part of the question would be that inventory write up, if you could just remind us what amount is being absorbed into the guidance, and was that anticipated before or is that an additional headwind that you're absorbing in the new guide?

Yes. Well, let me take the last question first. Our adjusted EBITDA numbers take out the impact of the amortization of the inventory write-up. So those adjusted numbers represent what we would expect for the business going forward. So it does affect gross margin because we don't adjust the gross margin numbers that we cited, but we do back out the impact of the acquisition of amortization of inventory from our adjusted numbers. So those are clean. They've been cleansed of that effect. Does that answer your second question, Justin?

Yes, that's great.

And the first part again?

The first part was, I mean, it looks like you're increasing the revenue guide versus your pro forma 2020 revenue base by 150 basis points at the midpoint. I guess that's about $15 million. I mean, is it safe to say that half or over half of that increase is coming from Advanced Surface Technologies within the mix of businesses?

No, it's really spread across all of our businesses, and it's a function of the faster than expected, the better-than-expected start to the year. We already had in our original guide, pretty strong growth that we were building into the Advanced Surface Technologies segment, and we're certainly on track. And as Marvin said, we're doing a bit better than even the expectations that we had for that segment, which we're already embedded with some pretty strong growth. And so the stronger bounce back that we're seeing, relatively speaking, was seen more in Sealing Technologies and Engineered Materials versus our guidance and our outlook a quarter ago. So I would say it's going to be spread across all 3 segments.

Okay. Great. And just a follow-up on that last question, if you're increasing your sort of revenue guide by $15 million in organic or $20 million reported and you're increasing your adjusted EBITDA guide by $12 million at the midpoint, sort of what's the primary driver of the higher expected margins? I assume that's not just coming from incremental, you're not getting 60%, 70% incremental. So what's the primary margin driver versus your prior guide?

Yes. That's another good question. And there are really 2 reasons for it. One is, we are leveraging quite well. If you look at Engineered Materials in our bearings business in particular, we leveraged quite well on the additional volume. The same thing would be true in Sealing Technologies, we're managing costs. And some of this is a factor of all the work that we did last year. And with some stronger volume and the stronger recovery, we're seeing it leverage pretty well to the bottom line. So that is a factor. The other factor is we are managing the business in a way that takes advantage of what we learned about how we can work together from anywhere, working together remotely. And it's not just our office work, but it's our commercial practices and how we interact with customers. And so we're - we have teams that are working on how can we hold on to some of that $15 million of costs that we thought would be coming back into the system? So there's an intentional effort there, and that's part of it. Obviously, we're not going to be able to keep all of that $15 million, but it's certainly part of our plan for the year.

Yes. We could talk for a pretty long time about all of the cost saving levers that we pulled in 2020 that we're seeing the benefit of in 2021. And all of those things are helping us from an operating leverage perspective. The way we're running sealing now is a little different, so they're able to take costs out, particularly in shared services across the Sealing segment. We took a lot of low-margin business out of STEMCO, focused it back on its core business that's higher margin. We're able to execute on price in some areas that we weren't able to execute on before. You remember, we divested the Good Engineer, we divested the Bushing Blocks business. The GGB business is also a high fixed cost business, so it levers just exceptionally well with additional volume. So I mean, we - and Milt mentioned the working together from anywhere. We've got reduced travel. I mean, we have pulled so many levers that we're starting to see the benefit of now. And we still have more levers to pull, right? So the work that's going on in sealing to take costs out is still in the early innings, and we see a fair amount of opportunity there still. We'll talk a little bit more about some of these things during our Investor Day. And the recovery in Engineered, we expect that to continue. So I think with the improved market conditions and just all the heavy lifting we did last year with the team and the great support we've had from our employee base is what's really causing or driving the improved leverage.

Thank you. We have reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further closing comments.

Thank you, Kevin, and thanks to all of you for being with us today. I hope you all have a good day. Take care. Bye-bye.

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