Enpro Inc.

Hello and welcome to the MPro Industries Q3 2020 earnings conference call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to introduce Jerry Johnson, Senior Vice President for Corporate Development and Strategy. Please go ahead, sir.

Thank you. Good morning and welcome to InPro's 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 accompanies the call. With me today are Marvin Riley, our CEO, and Milt Childress, our CFO. We are holding our call virtually and are dialed in from different locations, so we will ask or your understanding should we encounter any technical issues as we coordinate our responses during Q&A. Before we begin our discussion, a friendly reminder that we'll 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 the 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 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-Morris in January 2020, the former power systems segment is accounted for its discontinued operations in our financial statements for both current year and prior year periods. Unless otherwise noted, all our comments today will refer to continuing operations. And now I'll turn the call over to Margaret.

Thanks Jerry, and good morning everyone. Thank you for joining us today. I hope that you and your families remain safe and healthy during this time. Before I begin today's call, I'd like to welcome the newest member of our management team, Jerry Johnson, who recently joined EnPro as Senior Vice President of Corporate Development, Strategy, and Investor Relations. Jerry brings tremendous knowledge and experience from his prior roles in merchant banking, private equity, and management consulting. I'm delighted he has joined our team and I'm confident his deep expertise will be a significant contributor to NPRO's success as we continue to execute our strategic priorities. As we continue to navigate the COVID-19 pandemic, I'm extremely proud of how our team has risen to the challenge of practicing enhanced safety protocols and incorporating new ways of working throughout the organization. And while keeping our core values of safety, excellence, and respect for all people at the forefront of their actions and excelling in delivering quality products and solutions to our customers. As I mentioned on our call last quarter, ENPRO stands against racism and discrimination of any type. which are a violation of our core values and what we stand for as a company. Over the last year, we have taken several concrete actions to increase diversity and inclusion at EnPro and will continue to do so. We stand together in solidarity in response to systemic racism and social injustice and are committed to being part of an enduring solution in creating real sustainable change starting right here at EnPro. I'd like to start by discussing three key themes reflected in our third quarter results. First, I'm pleased to report better than expected third quarter top and bottom line performance despite the challenges created by the pandemic. Our third quarter adjusted EBITDA margin expanded 140 basis points. Thank you for joining us. Second, we've made significant progress in our portfolio evolution towards more profitable businesses in higher growth markets that generate higher cash flow return on investment, resulting in improved stability of financial results over time. The acquisition of Eluxa completed last week marks another milestone in this journey. Extending our presence in high growth, high margin material science businesses with technology based competitive advantages. And third, we will maintain a disciplined capital allocation approach and strong balance sheet as we drive long term shareholder returns. with approximately $204 million of cash on the balance sheet following the Aluxa acquisition, a largely untapped revolver, a relentless focus on cash generation and strong performing businesses were well positioned to consider additional bolt-on acquisition opportunities that may arise. Turning to slide five and an update on our four-phased approach to navigating the COVID-19 pandemic. Phase one focused on health and safety, Phase 2 centered on business stability and progression, Phase 3 emphasized cost and process improvement, and Phase 4 positions Enpro to capture growth as our markets recover. At the onset of the pandemic, we took quick and decisive action, including applying the processes and protocols across our network that were developed at our Asian facilities. We then moved swiftly to redesign how our manufacturing teams conduct their work, and have fully implemented baseline COVID testing across the Americas and are in the process of implementing digital contact tracing technology in the U.S. and Europe. This is in addition to our existing manual contact tracing, temperature checks and ample PPE at all of our facilities. We've applied the tools, processes and technology to protect our employees' safety while they continue to deliver the high level of service that Enpro customers expect. Delving deeper into the fourth and final phase of our COVID-19 response playbook, let me discuss our supply chain and working together from anywhere initiatives. Our supply chain team remains a notable strength, and we have had no significant supply chain disruptions. Our supply chain organization is built around resilience and has supported operations seamlessly during this time. We have built inventory of PPE and established a full loop system to test, trace, and monitor any COVID infections in our employee base. As a standard practice, we continue to closely monitor supplier viability as well as operational and financial risk. Our Working Together from Anywhere initiative demonstrates our team's ability to respond with agility and adapt successfully, enabling us to continue working smoothly in the new environment. Our IT team supports the tools necessary to work remotely, which limits employee risk, as the office setting generally has one of the highest people densities in all of our facilities. We have seen many benefits to working this way, including increased connections and productivity across our businesses and geographies, as well as a greater ability to use our colleagues' unique talents and provide job opportunities across the global organization. We have created customized plans to optimize our working environment while evaluating a reduction in office space across our footprint, remaining focused on providing the appropriate workforce density, air quality, and social distancing to protect the health of each of our team members. Given the success and seamless integration of the Working Together from Anywhere initiative, we have communicated to our employees that we will continue to work this way through the end of 2021. As market conditions recover, we expect our businesses to be better positioned to deliver results owing to the structural improvements made to our cost-based productivity and supply chain, as well as the benefits of the portfolio transformation work we have completed over the past year. While demand continues to remain soft across several core markets, we are focused on continuing to execute our profitable growth strategy. Now let me spend a few moments discussing our strategy and actions taken over the last year to reposition our portfolio towards a more durable business in higher growth markets that generate higher margins and cash flow. Our strategy is focused on three areas. First, reshaping our portfolio to accelerate growth through the addition of niche, high margin, material science related businesses with leading technologies and strong cash flow in markets with favorable tailwinds. Second, increasing our aftermarket exposure and driving greater recurring revenues. And third, leveraging the NPRO operating system to increase margins in cash flow return on investment. As we implement our enduring strategy, we're committed to disciplined capital allocation with the goal of maximizing long-term shareholder returns. Let me briefly summarize the main actions we've taken to reshape our portfolio over the last year and how they have benefited our overall business. First, I'll cover divestitures and business exits by segment. In January, we completed the $450 million sale of Fairbanks-Morse, which constituted the former power assistance segment. After careful review, we determined Fairbanks-Morse was no longer a fit, given the strategy I just described. In our ceiling product segment, We conducted an extensive review during the second half of 2019 to identify businesses and product lines that are no longer aligned with our long-term strategy. As a result, we have exited or divested several product lines in our heavy duty truck business. During the second half of 2019, we divested our break sheet business and ceased operations of three underperforming product lines. In September of this year, we closed the sale of the motor wheel and cruising businesses. Finally, in early August, we announced a definitive agreement to sell our air springs business, which is expected to close in the fourth quarter. Upon completion of the airsprings divestiture, we will have completed the heavy-duty truck portfolio reshaping work in line with our previously communicated year-end 2020 timeframe. Going forward, our Stemco heavy-duty truck business will be focused on our high-margin, wheel-end sealing systems and suspension components. With these actions we anticipate, our heavy-duty truck business annual sales will range from $125 million to $175 million, reducing the percentage of our sales in trucking from the mid-20s to the mid-teens. Now, our ceiling segment as a whole has significantly reduced cyclicality and increased exposure to resilient, technology-oriented aftermarket businesses with a predominant focus on materials science technology leading to increased adjusted EBITDA margins and cash flow return on investment. Moving to our engineered product segment, In June, we announced plans to exit operations at GGB's Bushing Block manufacturing facility headquartered in Deuce, France, to refocus the business on higher margin product lines. We've been successful in obtaining an agreement for the sale of this business, which is expected to close by the end of the fourth quarter. Next, I'll cover our recent acquisitions. We made two strategic acquisitions in 2019. Leantech which closed in late September and the Aseptic Group which closed in early July. These acquisitions expanded our reach into the attractive semiconductor aftermarket and pharmaceutical and biopharmaceutical industries, respectively. Both companies have strong competitive positions in high growth markets, excellent margins, robust cash flow, and strong secular trends supporting long-term growth. These acquisitions align with our growth strategy due to their technical expertise, niche market leadership, mission-critical applications, and recurring revenue models. Both businesses are showing resilience in the wake of COVID with solid order intake and backlog. More specifically, both lean tech and aseptic groups year-over-year revenue growth remains strong despite market challenges. We've been very pleased with the overall performance and are currently executing capacity expansion plans to support lean tech's current demand growth. We look forward to continued contributions from both lean tech and aseptic as demand remains strong. So now I'm excited to share further details on our previously announced acquisition of Aluxa, which closed Monday of last week. Aluxa is a technology company that provides specialty optical filters, complementing our growing material science capabilities. Aluxa offers a unique and compelling customer value proposition enabled by its technology platform. The acquisition is consistent with the strategy I communicated earlier and is aligned to our stated M&A criteria. Aluxa's financial profile is compelling with an attractive revenue and margin profile including 18 quarters of consecutive revenue growth. We expect Aluxa's track record of double-digit annual revenue growth to continue under our leadership. Using the EnPro operating system, We believe we can accelerate Aluxa's growth as we leverage our capability center specifically in the areas of data science and commercial excellence. We will also be leveraging our industry relationships, global footprint, and extensive capital resources to support Aluxa. Going deeper on Aluxa's end markets and growth rate. Within the broader $13 billion optical coating market, Aluxa participates in a $1.7 billion addressable niche market that is focused on ultra-high precision coatings. We estimate that Aluxa's niche will grow at a compounded annual growth rate of approximately Thank you for joining us. Alexa serves a broad array of high growth end markets with primary exposure to industrial technology and life sciences as well as smaller positions in niche semiconductor and aerospace and defense markets. To share some specific examples of Eluxa's applications within these end markets, Eluxa provides filters for LIDAR and autonomous vehicles, filters for PCR testing for COVID, DNA sequencing, extreme ultraviolet lithography and semiconductor, and also flow cytometry. Further, we've identified pockets of nascent growth where we can utilize EnPro's existing market strength to help accelerate Eluxa's growth in these markets. We're thrilled to welcome the founder of Aluxa, Mike Scobie, who will continue to lead the business with his highly talented team, and we look forward to working together to create value for our customers and shareholders. Collectively, the actions we have taken to proactively manage our portfolio and acquire complementary businesses increases our exposure to more resilient, leading-edge, advanced technology and material science-based niche markets that are poised for growth with semiconductor as our largest end market. We will continue to identify Inorganic growth opportunities align with our strategies through a disciplined set of strategic and financial filters. We have a seasoned M&A team overseeing this effort, including the addition of Jerry. Beyond sourcing and acquiring, we have the right talent in place to integrate and optimize acquired businesses and expect to continue to create value through our approach. And now, I'll turn the call over to Milt for additional discussion on our third quarter results.