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?