Enpro Inc.

Greetings. Welcome to MPRO Industries Incorporated Q2 2020 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to your host, Chris O'Neill, Senior Vice President, Strategy Corporate Development and Investor Relations. You may begin.

Good morning and welcome to InPro's quarterly earnings conference call. I remind you that our call is also being webcast at InProIndustries.com where you can find the presentation that accompanies the call. With me today are Marvin Raleigh, our CEO, and Milt Childress, our CFO. Due to the COVID-19 pandemic, we are holding our call virtually to observe social distancing. We're dialed in from different locations, so we ask for your understanding if we encounter any technical issues. and as we coordinate our responses during Q&A. But before we begin our discussion, a friendly reminder that we will be making statements on this call that are not historical facts and that are considered forward-looking in nature. These statements involve a number of risks and uncertainties, including impacts from the COVID-19 pandemic and related governmental responses and their impact on the general economy, as well as other risks and uncertainties that are described in our filings with the SEC, including our most recent Form 10-K and Form 10-Q. We do not undertake to update any of these forward-looking statements. Also, during the call we will reference a number of non-GAAP financial measures. Tables reconciling these measures to the comparable GAAP measures are included in the appendix to the presentation materials. I also want to remind you that, as a result of the sale of Fairbanks Morse in January 2020, the power system segment is accounted for as a discontinued operation. and our financial statements for both current and historical periods. Unless otherwise noted, all of our comments today will refer to continuing operations. Additionally, in the second quarter of 2020, we moved the oil and gas component of our garlic pipeline technologies or GPT business from the ceiling product segment to the engineered product segment. This move allowed us to group our two largest oil and gas businesses, GPT and CPI, together so they can be managed as one business unit. Thanks, Chris, and good morning, everyone.

Thank you for joining us. I hope that you and your families are safe and healthy. 2020 has been a very unpredictable year as we continue to battle the COVID-19 pandemic. As we navigate through these unprecedented times, our top priority remains the health and safety of our global employees, their families, our communities, customers and suppliers. I want to express my sincere gratitude to the heroes who continue to battle the COVID-19 pandemic. The 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 am very proud of the way our teams, Thank you for joining us. Thank you for joining us. This racism and discrimination of any type violates our values and what we stand for as a company. On June 5th, our executive team and board of directors issued a statement that shared our company's commitment to being part of an enduring solution. If interested, you can read our End Pro Standing Together letter by using the link posted on the homepage of our website or the link in today's press release. Over the last year, we've taken several concrete actions to further these values that we hold so strongly, including increasing the diversity of our leadership team, creating a diversity and inclusion leadership position, implementing bias training, leveraging our internal leadership programs to provide a forum for small groups to talk openly about biases, belief systems, and different perspectives. Providing enhanced mental and emotional health resources and establishing an internal charitable foundation to support ongoing education, equality, and diversity. We stand in solidarity with the African American community, persons of color across the globe, our employees, our customers, our friends, and our families. We stand together to create real and sustainable change, starting right here at NPRO. As we begin our discussion on our second quarter highlights, I'd like to start by discussing four key themes. First, I am pleased to share that despite the impacts of COVID-19 and weaker year-over-year conditions across most of our markets, our Q2 adjusted EBITDA margin held up extremely well, contracting approximately 30 basis points to 15.2% with adjusted EBITDA of $37.5 million. When the pandemic emerged, we acted quickly to develop rigorous cost management plans to navigate this new landscape and we are seeing the benefits of these savings on our bottom line. Second, we continued to optimize our portfolio. We announced the final steps in reshaping our heavy-duty truck business, which upon completion will significantly reduce our revenue exposure to the commercial vehicle and heavy-duty truck markets, while increasing adjusted EBITDA margins in that business. This is evidence of our portfolio evolution towards a more durable business in higher growth markets that generate higher margins and cash flow. Thank you for joining us today. We continue to focus on preserving capital. We have a very strong balance sheet, fortified by cash proceeds from the recent Fairbanks-Morse divestiture, which closed in January. Our net debt to adjusted EBITDA ratio was 0.4 times at the end of the second quarter, with $424 million in cash. A largely untapped revolver and a relentless focus on cash generation. We feel good about our financial position. We're poised to emerge from this economic downturn with the flexibility to take advantage of opportunities as they arise. Turning to slide five, I'd like to take a few moments to provide an update on our four-phase approach to navigating the COVID-19 pandemic. To level set, I'll start with a quick summary. Phase 1 focused on health and safety, while Phase 2 centers on business stability and progression, including running our business in adverse conditions, calibrating the business to new demand levels, managing liquidity, and being responsive to our customer needs. Phase 3 encompasses cost and process improvements, based on our learnings from the previous phases. And Phase 4 is the post-pandemic period we will be well positioned to capture growth as markets recover. During our first quarter earnings call, I discussed in detail the steps we took during Phase 1, and today I'll delve deeper into Phases 2 and 3, which we entered into during the second quarter. The second phase of our response involves a keen focus on business stability and progression. Leading up to and during the second quarter, we planned for several contingency scenarios of increasing severity. We took decisive, informed action to prevent the spread of COVID-19 Thank you for watching. Thank you for joining us today. Thank you for watching. We'll see you next time. From a supply chain perspective, we maintained our focus on risk mitigation. Due to the diligent efforts of our Supply Chain Leadership Council, we have not experienced any material supply chain issues this year. We are utilizing best practice proprietary tools and techniques developed by our teams to understand operational status and are communicating regularly with our suppliers. Our supply chain organization is a notable strength during these challenging times. Our third phase, which involves monitoring and improving the processes, procedures, and new ways of working that have emerged from the first two phases. Early on, we reimagined how our manufacturing teams conduct their work, implementing manual tracing at each of our facilities along with temperature checks and additional PPE requirements. To date, we have had only 32 known infections out of approximately 5,000 employees worldwide. We're taking our safety protocols a step further and are in the process of implementing testing for all plant employees and contact tracing technology across our US manufacturing footprint. This technology is currently being tested in one facility and following pilot success will be rapidly rolled out to the rest of our plants. While we cannot fully control the number of cases we may see, We can apply new tools, processes, and technology to increase our employees' safety while they deliver on our customer needs. Another initiative we're in the process of developing is called Working Together From Anywhere. Our teams have rapidly and effectively adopted new technologies that have achieved similar or better results than with the manner in which we were working before the pandemic. While we acknowledge that our sales and M&A teams will be required to travel to conduct specific aspects of their business, we do not anticipate that our company's overall travel will return to pre-COVID-19 levels. Through this initiative, we're confident that we will develop solutions to enable our employees to thrive in the new environment, while also maintaining a lower expense base related to these activities. Moving now to our fourth and last phase. Once market conditions return to a state of relative normalcy, we expect improved financial characteristics across our businesses as a result of the structural actions we've taken, including improvements in our cost base, productivity, and supply chain. While demand continues to remain soft across several core businesses, we're focused on controlling what we can and executing our profitable growth strategy. Now let me spend a few moments discussing our strategy and actions taken this quarter to reposition Enpro. Our strategy is focused on three areas. First, reshaping our portfolio to include businesses focused on material science with compelling margins, leading technologies, and strong cash flow in markets with favorable secular trends. Second, increasing our aftermarket exposure and driving greater recurring revenues. And third, maintaining a balanced, disciplined approach to capital allocation while leveraging the NPR operating system to increase margins and cash flow return on investment. Thank you for joining us. In January, we completed the $450 million sale of Fairbanks & Morris, which constituted the power system segment. After careful review, we had determined Fairbanks & Morris was no longer a strategic fit. While a great business, the sale, which was completed at an attractive valuation, contributed to our goal of owning businesses with high cash flow return on investment that are based on our core competency of material science. Second, in our sealing product segment, we conducted an extensive review to identify businesses and product lines that are no longer aligned with our long-term strategy. As a result, we exited or divested several businesses while reducing our exposure to heavy-duty truck. These actions include the recently announced agreement to sell our airsprings business and our announced plans to exit brake products. With the announcement of the AirSprings transaction, we have now addressed all the portfolio reshaping actions in our trucking business, and we expect to complete this reshaping work in line with our previously communicated timeframe of year-end. These steps refocus Demco's resources on its higher margin wheel in business, which is aligned with our strategy to shift the Enpro portfolio to markets and products that offer the most value to our customers and our shareholders. With these exits, we anticipate that going forward, our annual sales to the heavy-duty truck market will be in the range of approximately $125 million to $175 million. These actions significantly reduce portfolio cyclicality and increase our exposure to resilient, technology-oriented recurring revenue businesses. Further, these efforts will increase our adjusted EBITDA margins and cash flow return on investments. Thank you for joining us. These acquisitions align with our growth strategy due to their technical expertise, niche market leadership, mission critical applications, and significant aftermarket contributions. Both businesses are performing in line with expectations and showing resiliency through the cycle with solid order intake and backlog. It is important to note that with the executed and announced portfolio reshaping moves, We will have a more attractive portfolio with semiconductor as our largest end market. We're committed to continuing to seek organic and inorganic growth opportunities in faster growing, higher margin, advanced technology spaces. Third, let's look at our engineered product segment. In this segment, we're focused on increasing margins and asset efficiency while optimizing our cost structure. In support of this work, on June 18th, we announced plans to exit operations at GGB's Bushing Block manufacturing facility headquartered in Deuce, France, which will refocus the business on higher margin product lines. Overall, the actions taken over the past year demonstrate our commitment to proactive portfolio management and strengthening the durability of our business. Before turning the call over to Milt, I want to touch briefly on M&A. Our growth strategy is focused on organic initiatives as well as strategic M&A. We remain focused on identifying opportunities that align with our strategy. We have built a strong M&A practice at EnPro and have a seasoned team overseeing this effort from sourcing and purchasing to integrating and optimizing businesses. Thank you for joining us today. We're being patient and will remain disciplined while actively pursuing attractive opportunities. And now I will turn the call over to Milt for additional discussion on our second quarter results. Milt?