Enpro Inc.

Greetings and welcome to the MPRO industry's first quarter 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Chris O'Neill, Senior Vice President, Strategy, Corporate Development, and Investor Relations. Thank you. You may begin.

Good morning and welcome to InPro Industries' quarterly earnings conference call. I'll remind you that our call is also being webcast at InProIndustries.com where you can find the presentation that we will be referencing. With me on the call today are Marvin Riley, our CEO, and Milt Childress, our CFO. Before we begin our discussion, let me point out that we will be making statements on this call that are not historical facts and that are considered forward-looking in nature. Thank you. Thank you. are included in the appendix to the presentation materials. I also want to remind you that as a result of the December 2019 signing of the definitive agreement to Self Airbanks Moores, which closed in January 21st, 2020, the power system segment is accounted for as a discontinued operation in our first quarter statements for both periods. Unless otherwise noted, all of our comments on first quarter results will be in reference to continuing operations. And now I'll turn the call over to Marvin.

Thanks, Chris, and good morning, everyone. Thank you for joining us. We have a lot to cover today, but first I'd like to start by expressing my sincere gratitude to the true heroes who have been on the front lines battling the COVID-19 pandemic. I want to thank the healthcare professionals, emergency responders, grocery store employees, government officials, and our NPRO colleagues working on the front line in our factories around the world. I'm very proud of how our employees have adjusted to this different way of working. while adopting enhanced safety practices throughout the organization. NPRO's core values of safety, excellence, and respect have been at the heart of our actions as we have continued to pridefully service our customers with quality products and solutions. Before we get into our financial performance, I'd like to take the opportunity to center everyone on three important themes that relate to NPRO. First, we acted with urgency and decisiveness When we first learned about the seriousness of COVID-19, our top priority was to ensure the health and well-being of our dedicated employees around the world. And to do so, we enacted a COVID-19 response and support team and quickly implemented new safety protocols. More on this in a moment. Second, we have a very strong balance sheet fortified by the cash proceeds from the recent Fairbanks-Morse divestiture. With nearly $400 million of cash, a largely untapped revolver, and a relentless focus on cash generation results, we're in a very strong position to weather the current economic conditions. Third, we have spent the last year building a portfolio of businesses through organic and inorganic actions that is significantly more durable, weighted more towards higher margin and higher growth markets, and that places emphasis on recurring revenue and cash flow generation. While we're still on our journey to achieve our vision for EnPro, we're a much stronger company than in the 2008-2009 timeframe. We have a clear strategy, cycle tested and dedicated leadership team, a strengthened talent force and a path to navigating through the current environment where we will emerge an even stronger organization. With that, let me review our first quarter results. We're pleased to report that adjusted EBITDA increased 19% to $40.6 million, and the adjusted EBITDA margin expanded approximately 320 basis points to 14.4%. Adjusted diluted earnings per share increased 38% to $0.62 per share, while navigating challenging demand conditions in heavy-duty trucks General Industrial, Automotive, and Petrochemical markets that resulted in a sales decrease of 7%. The divestiture of Fairbanks-Morse division in late January was timely and strengthened our balance sheet, providing additional liquidity. As a result of this divestiture and our performance in Q1, our net debt to adjusted EBITDA was just 0.6 times. Since taking on the position of CEO in July 2019, Margin expansion has been a core focus. Our team's efforts to reduce SG&A costs and improve productivity while improving our quality control systems led to these strong results, and we continue to maintain a relentless focus on reducing costs and improving operational efficiency across all of our businesses. As I sit here today, this is great progress, but we're only getting started. For the first quarter, ceiling products adjusted EBITDA grew 23%. and adjusted EBITDA margin expanded 410 basis points. This was primarily due to last year's acquisitions of LeanTech and the Accepted Group. Meaningful year-over-year improvements in our heavy-duty truck business and cost control measures implemented elsewhere in the segment. In engineered products, we continue to optimize the cost structure in response to volume declines in this business and are taking actions to right-size our workforce, improve plan overhead and decrease SG&A spending. On our full year earnings call in late February, we identified risks associated with COVID-19 and the potential for a broader impact of the pandemic if it continued to spread beyond China. While we were forced to suspend our operations in our Chinese facilities for a short period of time, we're pleased to share that all of our operations in that region have resumed normal levels of production. Our early experience with COVID-19 in China provided many learnings, and we've been able to leverage insights gleaned on effective safety procedures to help combat this current situation across our sites globally. Overall, we had a strong first quarter and have been working diligently to manage the COVID-19 situation. Turning to slide five, I'd like to take a few moments to discuss the four-phased approach that we've developed to navigate through the COVID-19 pandemic. Phase 1 is focused on health and safety while Phase 2 centers on business stability and progression, including running our business in adverse conditions, resetting the business to new demand levels, managing liquidity, and being responsive to our customers. Phase 3 is focused on process improvement based on the learnings from the previous phases, and Phase 4 is the post-pandemic period where we'll adapt to new normal and be well-positioned to capture growth as it returns. I'll spend most of my time this morning discussing the steps we've taken during the first phase, as this is where the bulk of our actions have been taken to date. As a company, we've always placed safety as our overriding priority. Faced with the challenge of this pandemic, our focus is on the health and well-being of our 5,000 plus global employees, their families and our communities, as well as our customers and suppliers. During this phase, we created and mobilized our COVID-19 response and support team, which is composed of our global executive leadership team. A subset of this team was deeply involved in developing internal safety protocols when this issue emerged in China. This team, along with our local site teams, is meeting daily to manage coordination efforts across the company. We've also enacted preventative measures in line with recommendations from the World Health Organization, the Center of Disease Control, and the local governments presiding over the locations where we have operations. Where feasible, we've implemented flexible and remote work options for employees. As for our essential onsite employees, we've enacted safe operating procedures that include temperature screening for facility access, additional PPE, including face masks and gloves, physical plexiglass barriers to separate employees working within close proximity, and enhance visual management to support good social distancing practices. In addition, we've developed employee training and enhanced cleaning and disinfecting, strategically placed sanitizing stations throughout our facilities and contracted with third-party services in the event we need to perform broad-based deep cleaning. Our supply chain and manufacturing teams have done a phenomenal job executing in a proactive and creative manner while also moving with a sense of urgency. Additionally, we have developed a global safe work playbook, which is an interactive guide for COVID-19 pandemic preparedness and response. This playbook provides best practice guidelines for the safe operation of our manufacturing facilities, as well as how to respond in the event of a single positive case of community transfer to multiple individuals. This level of standardization is allowing us to educate, collaborate, and distribute our learnings quickly to each of our manufacturing sites as we adjust to this new way of working. We're currently conducting playbook training for each of our facilities. I'm happy to report that as of today, 100% of our primary manufacturing facilities are currently operating, although at various levels of capacity, and we have not experienced significant supply chain disruptions thanks to the tireless effort of our teams. Of our 5,000 plus global workforce, we have had 13 confirmed COVID-19 cases as of Friday, May 1st, many of whom have fully recovered. We recognize the exceptional challenge our employees are facing and have taken steps to provide enhanced benefits and support to them and their families during this difficult time. As we've had the right size our business, we have implemented healthcare benefits for those employees impacted. We're confident our efforts around the first phase have provided our colleagues with enhanced safety and security. However, we're continuing to implement new practices every day as we learn more and more about this virus. With a focus on people, we're committed to supporting our local communities where we work and live. We've connected institutions with NPRO suppliers to aid in sourcing difficult-to-locate materials. like infrared thermometers and have distributed several thousand masks, including the medical grade N95 to doctors and hospitals in the United States and Europe. We will continue to do everything we can to assist our medical professionals to flatten the curve. The second phase of our response, which we're now entering, involves a keen focus on business stability and progression. We have planned for several contingency scenarios of increasing severity and are taking decisive, informed action to prevent the spread of COVID-19 while ensuring business continuity and success in any environment. Each of our businesses has developed a detailed playbook and will enact initiatives as necessary to adjust to new demand levels. Milt will discuss our sensitivity analysis in further detail in a few moments. We know the future will have pockets of uncertainty, so we're maintaining the ability to be agile when the environment starts to improve. From a supply chain perspective, risk mitigation for us is a standard focus. We have weekly working sessions with our supply chain leadership council, which includes representatives from across all of our businesses, solely focused on stability, progression, and risk mitigation. We've implemented a tracking system to understand the operational status of major suppliers, for each of our businesses and we communicate regularly with suppliers at all levels on a consistent basis. We developed a supply chain playbook two years ago and everyone in the supply chain organization has demonstrated competence during our supply chain capability building workshops. We feel fortunate to have such strength in our supply chain organization during these times. The third phase of our plan involves monitoring and improving the processes, procedures and new ways of working that emerge from the first two phases. While we acknowledge this phase will involve many changes to our legacy businesses, we're confident in finding solutions that will allow our employees to thrive in the new environment. For example, we're already embracing the speed, efficiency, and increased communication facilitated by increased video usage. We view phase four, our last phase, as the point in which market conditions have returned to a state of relative normalcy. While we plan to continue making progress on broader strategy during the economic downturn, we view Phase 4 as a point at which we can fully shift our resources and priorities back to our strategy to transform the NPRO portfolio. Now let me spend a few moments discussing our strategic outlook. Our strategy has been and remains focused on reshaping our portfolio to include businesses with compelling margins, leading technologies, and strong cash flow in markets with favorable secular trends. We're focused on businesses where we can increase our aftermarket exposure and drive even greater concentration of recurring revenues. We're committed to maintaining a balanced approach to capital allocation and leveraging the NPR operating system to increase margins in cash flow return on investment. Importantly, at a time like this, Our balance sheet is strong, thanks in part to progress in reshaping our portfolio over the last year, including exiting several businesses and product lines that did not align with our future vision for the company. In sealing products, we exited our brake sheet business located in Rome, Georgia, as well as our trailer-tail Ares and air-bat RF heavy-duty truck businesses located in Longview, Texas. In January, we completed the sale of our Fairbanks Morse business, which constituted our power system segment. We also made two strategic acquisitions in 2019, LeanTech and the Aseptic Group, expanding our reach into the attractive semiconductor equipment, pharmaceutical, and biopharmaceutical industries. Both companies have strong competitive positions in high growth markets, excellent margins, compelling cash flow profiles, and strong secular trends supporting long-term growth prospects for their businesses. These acquisitions align with our long-term growth strategy through their focus on technical expertise, niche market leadership and mission critical applications with significant aftermarket contributions. The portfolio shaping we've done over the past year has strengthened the durability of our business model. Despite the current near-term dynamics associated with COVID-19, We remain focused on advancing our strategy and I'm confident we will emerge as a stronger, faster growing business when this crisis is over. And now I'll turn the call over to Milt for additional discussion on our quarterly results. Milt?

Thanks Marvin and good morning everyone. Thanks for being here with us today. As Marvin noted, during the quarter our businesses adapted quickly to the changing economic climate. At the time of our fourth quarter earnings call, based on the growing view at that time that COVID-19 might be confined primarily to Asia, we estimated the earnings impact of this novel coronavirus to be less than $3 million, much of which we expected to hit in the first quarter from reduced volumes in Asia and the derivative impact on the European industrial economy. As we all know, the world changed considerably in March with migration of the virus to essentially every part of the globe. Demand remained steady in sealing products for much of the quarter, and thanks to our frontline workers and operations teams who implemented new safety protocols, we were able to convert such demand to healthy sales and earnings levels. In contrast to sealing products, we began to see significant demand changes in engineered products during the quarter, primarily due to softening automotive, petrochemical, and general industrial markets, much of which was driven by COVID-19. Against this economic backdrop, total sales decreased 6.7% in the first quarter compared to the same period of 2019. Growth in the semiconductor and food and pharma markets, including the contribution from the businesses acquired in 2019, held strong for the majority of the quarter, but was more than offset by weakness in the heavy duty truck, general industrial, automotive, and petrochemical markets. Excluding the impact of foreign exchange translation, and sales from acquired and divested businesses. Organic sales for the quarter declined 7.1% year over year. Gross profit margin for the first quarter was 33.7%, up 90 basis points. The increase was driven by our ceiling product segment, primarily the result of the lean tech and aseptic group acquisitions, as well as cost and mix improvements in our heavy duty truck business. Companywide sales volume decreases offset a portion of this margin expansion. Adjusted EBITDA in the first quarter was $40.6 million, up 19.4%, while adjusted EBITDA margin expanded 320 basis points to 14.4%. The biggest drivers of our adjusted EBITDA increase were benefits from recent acquisitions, improved results in heavy-duty truck resulting from cost reductions, and the sale of the brake shoe business. Adjusted diluted earnings per share for the quarter increased nearly 40% to $0.62 per share, primarily driven by improved profitability in our ceiling product segment. Turning to segment performance, despite growth in food and pharma, general industrial, and semiconductor markets, sales in the ceiling product segment decreased 3.7% in the first quarter versus the prior year period due to decreased demand in the heavy-duty truck and petrochemical markets. Results were also impacted by unfavorable foreign exchange translation, as well as the decision to cease operations in three underperforming product lines during the fourth quarter of 2019 and the divestiture of our break shoe business in the third quarter of 2019, all of which support our long-term vision for the company. Excluding the impact of foreign exchange translation and acquisitions and divestitures, first quarter sales decreased 4.8%. Segment adjusted EBITDA increased 22.6% to primarily to acquisitions as well as cost realignment in the heavy duty truck business and the sale of the brake shoe operation. Segment adjusted EBITDA margin expanded 410 basis points to 19.1% compared to the prior year period. Excluding the impact of foreign exchange translation, the two acquisitions and the divestiture of the brake shoe business Segment adjusted EBITDA margin expanded 160 basis points compared to last year as a result of a disciplined and relentless focus on managing costs. Sales in the engineered product segment decreased 14.6% in the first quarter versus the prior year period, primarily due to weakness in the automotive, general industrial, and petrochemical markets exacerbated by COVID-19 as the quarter progressed. Excluding the impact of point exchange translation, sales decreased 12.6%. First quarter segment adjusted EBITDA decreased 25% and segment adjusted EBITDA margin declined 160 basis points to 11.5% compared to the prior year period as a result of the lower sales volume partially offset by cost reduction initiatives. Excluding the impact of point exchange translation, Segment adjusted EBITDA margin declined 139 basis points. Now let's turn to our financial position. Maintaining the strength of our balance sheet is a key priority to ensure we are well positioned to navigate the current economic environment and be in a position to act on strategic opportunities when we emerge from the current crisis. Our balance sheet is very strong, bolstered by the $450 million sale of Fairbanks-Morse and the senior notes and credit facility refinancings completed over the last 18 months. We ended the quarter with cash on hand of $391 million and the full availability of our $400 million revolver plus $13 million in outstanding letters of credit. At the end of March, our net debt to adjusted EBITDA ratio was approximately 0.6 times. Of note, while this includes the cash proceeds from the sale of Fairbanks-Morse, It does not include the estimated taxes on the gain on sale of approximately $60 million that will be paid in the second half of the year. Our credit facility and senior notes mature in 2024 and 2026 respectively, subject to applicable reinvestment requirements related to the Fairbanks-Morse divestiture. In mid-March, in response to COVID-19, we suspended our share repurchase program after having repurchased approximately 117,000 shares at a cost of $5.3 million during the quarter, leaving approximately $30 million remaining under the current $50 million repurchase authorization. Given the strength of our balance sheet, we remain committed to our dividend, and during the first quarter, we paid a 26 cent per share quarterly dividend totaling $5.5 million. Free cash flow in the quarter was negative $4.9 million, reflecting payments of $15.5 million to resolve legacy environmental matters discussed last quarter, and a working capital increase of approximately $26 million, which is largely a result of a very strong end to the first quarter in ceiling products and receivables in connection with Fairbanks-Morse divestiture. Excluding environmental payments in both periods and the Fairbanks-related receivables this year, Free cash flow was $13.8 million in the first quarter compared to negative $4.5 million in the first quarter of last year. A priority of ours is to ensure we maintain a strong cash position throughout the year, balancing the short-term focus on cash preservation with our long-term strategy of profitable growth. We plan to continue to invest in growth opportunities tied to our recent acquisitions, but expect overall capital spending to be at or below 2019 levels. Given the evolving macroeconomic climate and uncertainty surrounded the COVID-19 pandemic, we are withdrawing our 2020 guidance. While we cannot forecast the impact of COVID-19 on our business with accuracy at this time, I'd like to provide some color on how we're planning for the year. In our ceiling product segment, our largest served markets are medium duty and heavy duty truck, General Industrial and Semiconductor. We are anticipating accelerating weakness in trucking and general industrial compared to the first quarter. And we have started to see some signs of order push outs in the semiconductor market. In engineered products, our primary market exposures are automotive, general industrial, oil and gas, and petrochemical. We anticipate that the weakness we experienced in these markets as the first quarter progressed will accelerate into the second quarter and possibly remain soft in the second half of the year. While we had very limited visibility in the balance of the year, we anticipate that the second quarter will be our hardest hit quarter, followed by continued softness in Q3 and the beginning of a recovery in Q4. We have modeled a variety of different scenarios for the year based on revenue and the aggregate falling from 15% to 25% if revenues decline in this range, our scenario planning suggests our adjusted EBITDA margins may range from 11 to 13% for the year, depending on the market mix of the decline and taking into account the benefits of our recent acquisitions and cost actions identified for various levels of demand decline. Even in our downside case, we expect to generate positive pre-cash flow for the year, as a result of the actions we have taken, additional levers we will pull if demand deteriorates, and disciplined capital spending and working capital management. As a reminder, my comments on market trends, revenues, and adjusted EBITDA margins do not represent guidance and are intended to be for illustrative purposes only, as there are many uncertainties surrounding how the COVID-19 crisis will impact demand and revenue. As Marvin discussed earlier on the call, Our businesses have already taken many actions to mitigate the impacts of decreased demand as a result of the COVID-19 pandemic and have further contingency plans that we will enact if needed. We are well prepared for the near term challenges and will move quickly to address additional risks that may arise as the year progresses. Now I'll turn this call back to Marvin for closing comments.

Thanks, Mel. In closing, We're confident in our ability to safely and successfully navigate the current environment, taking every opportunity to strengthen our organization. That focus begins with people. We will continue to ensure the health and safety of our employees and deliver the high level of service to our customers that NPRO is known for. We're in a strong financial position with ample liquidity. Our management team comprises experienced leaders who have successfully managed through challenging economic environments in the past, including the 2008 recession and the 2014 to 2015 industrial recession. And I am confident we will successfully navigate through this global crisis. We're successfully managing what is within our control and are acting with compassion and agility. We'll continue to take the necessary measures to protect NPRO and all of its stakeholders and are determined to maximize shareholder value during this challenging time and beyond. I want to end our call where we began, thanking our over 5,000 employees for their hard work and dedication. You are the heart of our organization and you inspire me. Thank you for all that you're doing. And now we'll open the line for questions.

Thank you. The floor is now open for questions. If you would like to ask a question, please press star 1 on your telephone keypad at this time. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that is star 1 to register questions at this time. Before we get into the Q&A session, I would like to turn the floor back over to Chris for some additional comments.

Thank you, Donna. Due to the COVID-19 pandemic, we were holding today's call virtually to observe social distancing. This is our first time attempting a virtual call, so we ask for your understanding as we coordinate our responses during Q&A. Now we'll take your questions.

Thank you. Our first question today is coming from Jeff Hammond of KeyBank Capital Markets. Please go ahead.

Hey, good morning, guys. Morning, Jeff. So I appreciate the scenario planning and that was very helpful, a lot of good color there. Can you maybe just speak to what you're seeing in April or what you saw in April that kind of informed some of those ranges? Certainly 1Q was much more resilient, but sales or order kind of activity and maybe if you can break that out by segment.

Hey, Milt, why don't we try to tag team it? I'll provide some maybe high-level color, and then maybe Milt can just chime in a little bit. So, you know, as you know, we've sized our sort of most acutely impacted businesses down to where we think we need to operate. And we'll have to continue to do more work in some areas that – started to decline a little bit later. Like for us, oil and gas started to decline a little bit later, general industrial as well. And I think in the context of this, we should just touch on China a little bit. Our China operations seems to have settled down. They performed in line with expectations in April. So just to give you a sense of that. And our overall NPR performance was also in line in April. And what I mean by in line means it sort of just fits in the context of the scenarios that Milt outlined for you. So we would say coming out of April that we feel pretty good that we have a good understanding of what might happen, but we're fairly optimistic, I would say, based on how April turned out. Milt, do you want to provide any more color?

I think you've covered it, Marvin. The only thing that I would note, maybe this is just reiterating a point that you've made, is that obviously, Jeff, we did a lot of our initial work on the scenario planning before seeing results for April, but after seeing the results come in for April, as Marvin noted, they're generally consistent with the scenarios that we outlined.

Okay, but I imagine that certainly first Q was only down like 7% core, and I'd imagine that, you know, April is probably the, you know, from your perception, the bottom, and then it gets maybe sequentially better from there. So I'm just trying to get a sense of, you know, are we bottoming out at that down 25, and then it gets better, or is the April trend kind of worse than that, at least in the near term?

Yeah. Go ahead, Bill. You got it, Marlon. No, I would just say that the one thing I would be cautious about is to assume that April was the bottom, right? We don't know, to be very honest with you. Our April was down roughly 25%. Now, if that's the bottom and we go up from there, I think we'd all be happy. We don't know, though, whether that is the bottom, so I just want to caution you on that.

but if you look at that April down 25, what markets are at risk to maybe still getting worse where it hasn't fully played out?

Just about all of our markets are down. Semiconductors holding in there but effectively flat. Food and pharma holding in there as well but There's not much we can do to sort of drive that up right now given some of the restrictions on movement and adopting new customers as we had planned. Our automotive business is down. We'd like to think that automotive will recover from here, but we don't know. We don't know if we can go down any further in automotive. So that's one question mark. Aerospace for us. was down. Could that go down any further? We're not sure. I think that's where we have a little bit of caution. Milt, I don't know if you want to add any more color to that.

No, Jeff. The 20% to 25% scenario planning for the year as we looked at it, the 15% to 25%, it's We're still thinking for the full year that 20% to 25% is probably a realistic range, at least for our planning. If it's better than that, as you know, we're largely composed of short cycle businesses. If it's better than that, then we'll be very happy. But we have to do our planning, assuming that the demand is not going to pick up real quickly. because as Marvin said, we just don't know. So it's difficult to just point to April and say that's the worst. We'd rather take a look at the whole year because we need to do our own planning internally over a longer-term period so we're ready to pull leverage that are needed depending on the demand scenario as it unfolds.

In our business, one month is just not enough of an indicator of what's going to happen for the quarter. So we can't draw any conclusions on that.

And so then based on the comments like food and pharma and semi holding up better, I mean, presumably the engineered products business sees sharper declines for 2Q and for the year than ceiling, you know, if those trends hold up.

That's right. That's right.

Okay, and then... Yeah, and then certainly, you know, the margin performance and ceiling was excellent in one queue. I'd imagine some of that's, you know, lean tech and septic coming in, some of that's, you know, exiting some of these truck markets. But can you give us a sense of, you know, how you think the decremental margins look for the ceiling segment, you know, within those, you know, planning scenarios and how the decrementals look for engineering products on an EBITDA basis. Thanks.

Jeff, in total, I think what you're going to see is that, and we did a lot of work going back to 2008, 2009 to look at how our cost structure, what we're able to do as demand dropped off precipitously as it has this year. and we believe we're in a position because we're giving early focus to this that our decrementals will be better than they were going from 2008 to 2009. If you go back and you look at that period, we were probably in total as a company probably 35% or so, 35 to 40% in that range. worse than engineered as you would expect because you know us very well due to the fact that we have a lot more OE business and engineered than we do in ceiling products. And then a little bit better than that in the 2008-2009 time frame in ceiling products. We expect if you just kind of do the analysis and the numbers based on the 15 to 25% drop in sales, the 11 to 13% EBITDA margins. You go through the math and you compare it to 2019 and we believe our decrementals year over year this year under that scenario planning versus 19 will be able to manage closer to roughly mid-20s percent. Now obviously it's going to be better in ceiling than it is in engineered It's going to be better in ceiling for two reasons. One, we will get the beneficial impact of the acquisitions that we've made in 2019. Plus, you know, the volume and the declines are not expected to be as severe in ceiling as in engineer for the year. So that's a little bit of color, and hopefully that helps without getting into a lot of detail on individual businesses or the differences between the two segments other than what I've noted.

No, that's perfect. I appreciate that, guys. I'll get back in queue. Thanks. Thank you, Jeff.

Thank you. Our next question is coming from Justin Bergner of GDOT Research. Please go ahead.

Good morning, Marvin. Good morning, Milt. Good morning, Justin.

Hey, Justin.

I guess to start, I just wanted to ask if you could quantify the acquisition contribution in dollars or percent to the ceiling product performance in the first quarter.

Well, Justin, as you know, I'll give you a little bit of color, but as you've noted, we've not provided specific sales and margins for those acquisitions. We've provided some color in the past on what our expectations were. for those businesses. I will tell you this, if you look at our ceiling products segment and you look at our margins on a normalized basis, which would exclude the impact of the acquisitions on a year-over-year basis and also exclude the Rome divestiture and scrubbing out translation. And in ceiling products, we had about 160 basis point improvement year over year in ceiling products margins. And then that compares to the information that you see in the release of about a 410 basis point improvement overall. So that will help you quantify the The difference that was related to a combination of currency, a lean tech acquisition, a septic acquisition, and the roamed investiture.

Okay, understood. I was actually hoping maybe you could just clarify between the organic constant currency decline and the reported decline, how much of that was was acquisition dollars versus currency. I guess if we stay away from sort of margins, but just on the sales number.

Yeah, well, if you look at, once again, staying with ceiling products, the translation impact was fairly minor. It was about $1.3 million year over year, Q1 2019 to Q1 2020. So most of that impact on the margin differential that I noted earlier, the 410 versus the 160 is a result of the two acquisitions and then the divestiture of Rome. Okay, that's great. And that was, by the way, the 1.3 million was the impact of currency on sales and the impact on EBITDA was about 400,000 year over year.

Okay, great. That's helpful. The other question I wanted to ask with respect to margins and sort of decrementals, how is your expectations for sort of OE versus aftermarket shaping up in the coming quarters, and how does that potentially help your decrementals and limit margin declines, if at all?

Do you want to take that melt or do you want me to take it?

Well, I will. Marvin, why don't you jump in? I'll just start out by maybe stating the obvious, Justin, which I think is where you're headed. If you look at the immediate impact of the decline we see, you see it's magnified with the OE portion of our business, which is true. We've seen that in a big way with automotive. and the decline there when that industry shuts off. A lot of our business and engineered products that's auto-related shuts down also. We also are seeing it in the heavy-duty truck business. Now, I will say it's making the expected OE decline in heavy-duty trucking worse. We were already coming in this year expecting a pretty noticeable year-over-year decline in OE in trucking. So, you know, I think I agree with where you're coming from is that the early impact of the decline demand, the drop in demand is going to be focused a lot on the OE part of our business. You know, as the overall economy weakens, though, as we look into Q2, I think the demand impact that we're expecting is going to be not only on the OE side but also aftermarket.

Okay, that's helpful. And just one quick question on following up on the aftermarket. With respect to truck, has your view of the aftermarket also dropped off considerably? I know that's more than half of the heavy-duty truck business for MPRO. Or is the aftermarket trajectory not looking that much worse than it did three months ago, just given the need for trucking and transport in this environment?

I would not say that our aftermarket in trucking has settled down yet. It's difficult to predict what will happen. There are many reports out, like SDR, for example, and others that project that aftermarket may go down as much as 20%. But it's just difficult to call it right now. I think at the end of the quarter, we'll have obviously a lot more color on what we're seeing. But it's really difficult to call it right now in trucking.

Okay, thanks. I'll hop back in the queue.

Once again, ladies and gentlemen, if you would like to register a question, you may do so by pressing star 1 on your telephone keypad. Our next question is coming from Joe Mundio of Sidodian Company. Please go ahead.

Hi, guys. Good morning.

Morning, Joe. Morning, Joe.

I was wondering if you could just talk geographically, maybe your two biggest geographic exposures in terms of Europe and U.S., Have you started to see a little bit of a rebound yet in Europe, or is it still too early? And how does that compare to sort of your general, just in general, what you're seeing in the U.S.?

Yeah, I think it's still too early. I mean, we only have, you know, really the month of April as a gauge, and I wouldn't say we have all of April as a gauge. What we're able to say is... We see something in China that looks as though they have settled down. The same for maybe the broader Southeast Asia, Singapore and the sorts. As we look into Europe, the European market is just starting to open up. So for me, I'd be looking for May to get a good indication of whether Europe starts to follow the trend in China. I'd like to say that's the case, but it's too early. We don't have anything concrete at this point that would give us that indication. Obviously, they've started to open up Germany and the Netherlands and et cetera in those places, so we would expect that they should improve a little bit in May, but we'll have to see.

Okay, in terms of China, What exactly are you seeing there? Has it just sort of stabilized, or are you actually starting to see a little bit of a rebound from the worst months, whether that was February or March?

Yeah, I mean, it's hard to tell, right, because we have one month. So, you know, if I were to run out that month, we would probably kick up a little bit from Q1, but it's not enough data to to do much with it, right? So, but if I look at where we ended in Q1 to where we've come in in April, we definitely found a bottom at the end of Q1. And we've seen stable in April, performed well in April. And, you know, if we were to, you know, we'd have to see what happens through the rest of the quarter to get an indication of whether we'll get an uptick or not. But my sense is that that's going to be very dependent on the strength of the European economy as well, because they're coupled to China in some ways, right? So I think if the demand signals from Europe start to pick up as we would expect, then we'll continue to see a lift in China.

Okay. In terms of your cost management strategies, is anything Are you able to take advantage of this downturn to make any major structural changes that maybe were a little harder while the economy was in a better footing? And depending on what the answer to that is or regardless of what the answer is to that, how much of your cost changes to your cost structure would you consider sort of permanent versus

Yeah, so I'll cover the first half of the question and then maybe you can add a little bit of color on permanent versus temporary. It might be a little bit too early to call it, but the answer to the first half of your question is yes, we're definitely looking at some things, structural things that we need to do that we've always contemplated, but We now have a scenario where it makes really good sense to do that. And I won't get into specifics about it, of course, because there are people impacted by some of these decisions. But definitely, we are looking at some things we'd like to do. And we have plans underway. We're sort of executing that as we speak. So we can probably would not probably, will definitely be able to provide some color on that at the end of the quarter. Before I go into sort of maybe trying to give you a sense of how much of the cost structure will stick, the thing that we're evaluating now is there are some benefits to the way we're working as it relates to reduced costs, travel, et cetera, et cetera, that we are taking a hard look at to figure out if there are more changes that we can take that fundamentally reimagine how we do things like selling, for example, how we do some of our corporate functions that require a fair amount of travel and face-to-face contact that we think you may not need to do going forward, for example. And so if we're able to do some of those things in the quarter, Then we can definitely quantify what those will look like on a run rate basis. But those discussions are underway. We've taken action already on one piece of that that we think will be successful. If it works as we think it will work, that's something we can do everywhere across the network. But that's the color I would give you on that without getting into specifics.

Okay, thanks. I just wanted to ask a question regarding your heavy-duty trucking exposure. Could you just update us, given all the changes that you've made there, I was wondering if you'd just update us on what that market makes up as the percent of the whole? And then regarding that business, What the breakout now? That breakout we used to be one or two-thirds roughly. Has it changed at all with the changes to the portfolio there?

Yeah, you were breaking up a little bit. Go ahead, Matt.

No, I was going to say the same thing, Joe. I think I've got the gist of your question there. even though you were breaking up so I may have missed the last part of it but if you look at the at the corridor and you look at just the sales piece for the corridor it's heavy duty trucking is roughly you know roughly 25% of Total Sales. We had mentioned on the call that our last call, our Q4 earnings call, that based on some reshaping that has happened in heavy-duty trucking and that we expect to continue to happen over time, that we expected or envisioned a heavy-duty truck business that would be a good bit smaller and than it was in 2019, you know, maybe in the $200 million range in revenues and much more profitable than it was in 2019. So, you know, that's still part of our vision as we look longer term. Obviously, things under the current situation, things may get pushed out a bit, but it's still the direction in which we're heading. Harvey, do you have anything else you want to add?

The only thing I would add here is just to really give the team working within the heavy duty truck unit a lot of credit. If you think about it, just to take a big picture look here, we put a new president in place and in short order he's developed a really nice senior leadership team. They've been working for well over a year on very, very aggressive cost actions. They've worked really, really, really hard on improving their quality control systems, feedback and feed forward systems in the shop, which was causing a lot of the issues that they had. They've already executed on Trailer Tail. They've already executed on Roam. They've already executed on Aerobat RF. And they're still working that solution. So I just thought it'd be a good opportunity to share that we've got a great team there that's been working really hard to execute our plan, which is to turn our heavy-duty truck business into a smaller but exceptionally profitable business. with EBITDA margins that sort of fit the financial characteristics that we've outlined before. And I just thought I would share that. So in terms of our thinking around, you know, them continuing to execute and getting there by the end of this year, that's fully in line with my expectation. I think they'll be done with the work they're doing here next year and move on to growth. I mean this year. They'll be done with that work this year and move on to growth.

Okay, thanks for taking my questions. Good luck with everything. Thank you.

Thank you. Our next question is a follow-up coming from Justin Bergner of GDOT Research. Please go ahead.

Oh, hi. Thank you for the follow-up. Just to make sure I understand what I heard earlier, so you're not providing numbers around the savings associated with cost actions at this point in time, maybe at the end of the June quarter. Could you just verify that sort of point, and then maybe just any sort of view, and again, this can wait till the June quarter if desired, on sort of restructuring costs or cash costs as it relates to thinking about free cash flow generation in 2020.

Yeah, Justin, just to go back and maybe repeat the bookends. We're doing a lot of planning right now. The cost estimates that we might be able to take out of the business are going to vary quite a bit depending on various demand scenarios, which we really won't know until the year we get a little bit more visibility on the year. Presuming that we're there following Q2 and we're back together I suspect at that point we'll be able to talk more specifically. But with 15% to 25% year-over-year revenue decline, managing margins to 11% to 13%, as you might imagine, the costs that we need to take out are not insignificant. But it is going to vary, so the number is going to vary depending on where we are and the demand that we're seeing. But the major point is we're kind of locked and loaded with our teams, kind of knowing what needs to be done as each month unfolds here and we get a better read on what's happening in our markets.

Okay, understood. And just to clarify, those 15% to 25% revenue decline scenarios, that would be net of the benefit of the acquisitions you made in the second half of 2019? Yes.

That is actual year over year. So effectively, if you throw in the benefit of the acquisitions, the year over year decline would be a little bit greater. But keep in mind, as you know, the businesses we bought are highly profitable, and so the impact on earnings is more significant than the impact on sales if you look at it on a percentage basis. Okay, thank you for the follow-up.

Thank you. At this time, I'd like to turn the floor back over to Chris O'Neill for closing comments.

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

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time and have a wonderful day.