Enpro Inc.

Greetings and welcome to the M-Pro Industries fourth quarter 2020 earnings conference call. At this time, all participants are in your listen-only mode. 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 turn the call over to Jerry Johnson, Senior Vice President of Strategy, Corporate Development, and Investor Relations. Please go ahead, sir.

Thank you. Good morning and welcome to InPro's quarterly conference call. I'll remind you that our call is being webcast at InProIndustries.com, where you will 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 ask for your understanding should we encounter any and many more. 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 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 gap measures are included in the appendix to the presentation materials. I'll also note that during this call, we will be providing full year guidance, which excludes changes in the number of shares outstanding, impacts from future acquisitions, dispositions, and related transaction costs, restructuring costs, incremental impacts of tariffs and trade tensions on market demand, and costs subsequent to the end of the fourth quarter. The impact of foreign exchange rate changes subsequent to the end of the fourth quarter impacts from further spread of COVID-19 and environmental and litigation charges. I also want to remind you that as a result of the sale of Fairbanks-Morris in January 2020, the former power system segment is accounted for as discontinued operations and our financial statements for both the current year and prior year periods. Unless otherwise noted, all of our comments today will refer to continuing operations. Also, as of this fourth quarter's financial results, the company is updating its reported adjusted EPS to exclude the after-tax effect of acquisition-related intangible amortization. The company believes reporting adjusted EPS in this manner better reflects the core operating results and offers a more meaningful measure for comparison against prior periods. A full reconciliation between GAAP and adjusted EPS is included in the appendix at the end of the accompanying presentation. As communicated in its February 4th, 2021 press release, the company changed its segment reporting structure effective with the fourth quarter of 2020. Our new reporting segments are ceiling technologies, advanced surface technologies, and engineered materials. Current and prior year quarters and full year financial metrics have been recast to reflect the new segment structure. Historical data for the new reporting structure is available at the investor relations section of InPro's company website. We are pleased to announce that InPro is planning to host a virtual investor day on Thursday, May 27th. Marvin Riley, President and Chief Executive Officer, Milt Childress, Executive Vice President and Chief Financial Officer, and other members of InPro's executive management team will provide an overview and update of the company's long-term vision, growth strategy, business segments, and others. Registration information for this virtual event will be forthcoming, and we hope you will mark your calendars for what we believe will be an informative and exciting meeting on the direction of our company. And now I'll turn the call over to Marvin.

Thanks, Jerry, and good morning, everyone. Thank you for joining us today. I hope you and your families continue to remain safe and healthy. As vaccines become available, we're hopeful that the severe impacts of the global COVID-19 pandemic will begin to subside. Our organization continues to remain vigilant about enhancing safety protocols, updating operating processes, and adapting to new ways of working. Together, we are exemplifying NPRO's core values of safety, excellence, and respect for all people, while continuing to excel at delivering quality products and services to our customers. We have remained steadfast in our commitment to these core values and to all of our team members, which has been demonstrated through our public stance against discrimination and social injustice. Human capital management, including diversity and inclusion, has enabled NPRO to achieve success. Over the last year, we have made progress in our commitment to our employees and society, including establishing our charitable foundation with an initial commitment of $1 million in support of education, equality, diversity, and the preservation of human dignity as announced in our February 11th press release. Developing our Working Together From Anywhere initiative to enable our global workforce to collaborate in new ways, increasing the number of females and minorities on our senior leadership team to 35%, We are creating and filling a diversity and inclusion leadership position to further strengthen our commitment to equality for everyone and developing a platform for small groups to talk openly about biases, belief systems, and the importance of valuing different perspectives. Moving on to our fourth quarter highlights, I'd like to discuss three key themes reflected in our results. I am pleased to report better than expected fourth quarter results. Despite the continued challenges created by the pandemic and further lockdowns across much of Europe, our fourth quarter adjusted EBITDA margin expanded 230 basis points to 17.4%, with adjusted EBITDA of $48.1 million, an increase of 11% year-over-year. The strong performance was the result of actions taken to reshape our portfolio, including the acquisition of Aluxa and several strategic divestitures, as well as our quick and decisive cost mitigation initiatives in response to COVID. Second, we maintain a disciplined approach to capital allocation and a strong balance sheet as we drive long-term shareholder returns. With approximately $230 million of cash on the balance sheet at the end of the quarter, an untapped revolver, and our relentless focus on cash generation, we're well positioned to consider additional bolt-on acquisition opportunities. And third, we have made significant progress over the last 18 months, stabilizing our financial results and evolving our portfolio towards more profitable businesses in higher growth markets to improve cash flow return on investments. With the successful acquisitions of LeanTech and the Aseptic Group during 2019 and the most recent acquisition of Aluxa, we have a solid foundation for our organic and inorganic strategies to drive profitable growth. Turning to slide five. As we look back over the year, we have adjusted successfully to pandemic conditions and are now in the final stage of our COVID pandemic response plan. As a consequence of the pandemic, we fundamentally changed several aspects of our business. We developed a number of enhanced safety practices during the pandemic that we will continue to use even after the pandemic has subsided. We have established appropriate inventories of PPE and a full loop system to test, trace, and monitor employee health. We hold the safety of our team members to the highest standards while they continue to deliver the exceptional level of service that InPro customers expect. We are committed to maintaining the advantages of our Working Together From Anywhere initiative for salaried employees where it makes sense on a permanent basis. Our IT team has put new tools and cyber protocols in place to allow us to enhance connectivity, engage collaboratively, and work productively across our businesses and geographies. Our reimagined way of working has provided a new lens through which to think about how we can take advantage of the unique talents of colleagues across our global organization. The new way of working has allowed us to experiment and as a result has provided us with insight on how we might connect in a more meaningful way with our customers. Our supply chain team remains a notable strength as we have had no significant supply chain disruptions during the pandemic. We fortified our supply base in 2020 by establishing strategic secondary sources for critical raw materials. We work with reliable suppliers in multiple geographic regions to mitigate a broad spectrum of risk and promote supply continuity. Our transportation agreements with multiple ocean over the road and small parcel carriers allow for flexibility in how we optimize inbound and outbound movement of goods. Our nimble response to the COVID pandemic and robust cost mitigation initiatives together with our portfolio reshaping actions enabled our company to achieve flat year-over-year adjusted EBITDA despite a nearly 11% decline in sales during 2020. This represents and adjusted EBITDA margin expansion of 170 basis points for the full year, a tremendous feat for the N4 team amid 2020's macroeconomic challenges. Our strategy has remained clear and consistent. We're focused on four areas. First, reshaping our portfolio to accelerate growth and niche High-margin materials science-related businesses with strong cash flow.

Second, maintaining our high aftermarket exposure and increasing our exposure to faster growth businesses.

Third, leveraging the NPRO Capability Center to increase margins and cash flow return on investment. And fourth, maximizing long-term shareholder returns through a commitment to disciplined capital allocation. Through the Capability Center, we leverage continuous improvement methods across the company to improve productivity, efficiency, pricing, and sales force effectiveness to drive increased margins and increase cash flow. Since its inception, the Capability Center has utilized industry best practices and a collaborative approach to problem solving to drive improvement throughout our businesses. The Capability Center methods and tools are fully integrated in our company. Serving both existing and newly acquired businesses and reaching from the C-suite all the way to the shop floor. We look forward to talking more about the Capability Center at our upcoming Investor Day. We continued our actions to reshape our portfolio during the fourth quarter by closing the acquisition of Aluxa in late October, completing the sale of Stemco's Air Sprints business in November and completing the sale of GGB's bushing block business at the beginning of December. The air springs and bushing block divestiture will allow us to refocus the respective businesses on higher margin product lines. Specifically, the sale of Stemco's air springs business marks the completion of our efforts to reduce our heavy duty truck market exposure. Our remaining Stemco heavy duty truck business will now be focused on high margin We'll end ceiling 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 total sales in trucking from the mid-20s to the mid-teens. On February 4th, We issue the press release announcing the resegmentation of our business into three reporting segments. The resegmentation aligns our technical and operational expertise, improves performance management decision-making, and enhances transparency for investors. Our new segments are, first, ceiling technologies, which is comprised of Garlock, SEMCO, and the Technetics Healing Businesses. These businesses are focused on safeguarding critical environments. Second, Advanced Surface Technologies, which is composed of Aluxa and our semiconductor business, including LeanTech. These businesses are focused on advancing precision services and solutions. And third, Engineered Materials, which is composed of GGB and CPI. These businesses are focused on enabling high performance polymer applications. Let me now highlight the success of our recent acquisitions. The three acquisitions made within the last year and a half are great examples of investments we're making to execute our profitable growth strategy. The Aseptic Group acquisition closed in July 2019, followed by LeanTech, which closed in September of that year, and Aluxa, which closed in October 2020. These acquisitions expand our reach into the attractive semiconductor aftermarket, pharmaceutical, biopharmaceutical, and life sciences industry. All these companies have strong competitive positions in high growth markets, excellent margins, robust cash flow, and serve markets with secular trends supporting long-term growth. These acquisitions also align with our capabilities and growth strategy due to their technical expertise, niche market leadership, mission-critical application and recurring revenue model. The Aseptic Group, which designs, manufactures and distributes Aseptic Fluid Transfer Products to support manufacturing of next-generation biopharmaceuticals by the world's largest pharma companies has performed well since joining ENCRO and has been integrated into the ceiling technology segment. During this integration, our growth initiatives focus on geographic and product range expansion. By leveraging our resources in the Capability Center, we move quickly to bring in talent, increased warehouse capacity and implement new supply chain policies to improve response time to our customers. This resulted in a 30% increase in backlog, mainly driven by an increased order flow from heightened demand for clean room services. Lean Tech, which provides cleaning services for critical components used in leading-edge semiconductor equipment, has been a very successful acquisition. Over the past year, the business has maintained its high profit margins while increasing revenue approximately 40%, driven by continued demand for advanced node semiconductor chips. To manage the tremendous growth we're experiencing, we are opening new capacity in a different facility in Taiwan that is specifically designed to increase our capabilities in five and three nanometer applications. We're also in the midst of increasing capacity utilization within Lean Tech's Milpitas California facility to support next-generation wafer fab equipment development. And finally, Aluxa, which provides precision optical filters and thin-film coatings for the industrial technology, life sciences, and semiconductor markets. While we're still in the early stages of integrating this business, its potential contribution is every bit as promising as Lean Techs. Our integration approach is very balanced, focusing on utilizing the Enpro Capability Center while being careful not to disrupt day-to-day business. Even in the early innings, the Capability Center has already identified ways to reduce logistics costs and is currently working to enhance the quality system at Alexa. Our goal is to allow the experienced management teams at these successful businesses The latitude to continue to run their operations effectively and efficiently while providing them with ENPRO resources in the form of capital, talent, functional, and organizational support. With Aluxa, we anticipate a strong first quarter given their order intake momentum and backlog heading into the year, which gives us great confidence in the initial stages of the acquisition. We have been very pleased with the overall performance of these acquisitions to date, and as we enter 2021, we're focused on capturing the full benefits of these acquisitions to drive further value creation for shareholders. Now, I will turn the call over to Milt for a deeper dive into financial results for the quarter. Milt?

Thank you, Marvin, and good morning, everyone. In the fourth quarter, Sales of $276 million decreased 3.7% year over year, reflecting weakness in oil and gas, general industrial, and aerospace markets. This was offset in part by positive momentum in the semiconductor, food and pharma, automotive, power generation, and heavy-duty truck markets, as well as the contribution from the acquisition of Alexa. While demand increased in the heavy-duty truck market, Revenues declined as a result of portfolio reshaping actions. Excluding the impact of foreign exchange translation and sales from acquired and divested businesses, sales for the quarter declined 1.6% compared to the fourth quarter of 2019. As Marvin indicated, our fourth quarter performance was significantly better than our expectations at the time of last quarter's conference call. On a sequential basis, Sales in the fourth quarter increased 2.9% over the third quarter. In markets where we saw the greatest sequential sales improvement included general industrial, automotive, power generation, and food and pharma. Sequential sales also benefited from the Alexa acquisition. Gross profit margin of 37.5% increased 330 basis points versus the prior year period, driven by the benefit of divesting low margin businesses as well as initiatives supported by the InPro Capability Center, including supply chain and other company-wide cost reduction programs. The year-over-year improvement in gross profit margin was achieved despite a $3 million amortization of acquisition-related inventory write-up in the fourth quarter of 2020. Adjusted EBITDA of $48.1 million increased 11.1% over the prior year period, as a result of strategic acquisitions and previously announced cost reductions taken across the company in response to COVID. Adjusted EBITDA margin of 17.4% increased approximately 230 basis points compared to the fourth quarter of 2019. Corporate expenses for the quarter were $10.6 million, a decline of 2.8% compared to the prior year period. Adjusted income from continuing operations attributable to InPro Industries was $25.4 million, an increase of 27% compared to the fourth quarter of 2019. Adjusted diluted earnings per share of $1.24 increased 27.8% compared to the prior year period. As noted in our earnings release and mentioned by Jerry, commencing with the fourth quarter of 2020, We are changing adjusted EPS from the previous presentation of this non-GAAP measure to one that excludes after-tax acquisition-related intangible amortization. We believe presenting adjusted EPS in this manner better reflects core operating results and offers a more meaningful measure for comparison against prior periods. Amortization of acquisition-related intangible assets in the fourth quarter was $10.9 million compared to $11.1 million in the prior year period. We have also updated our estimated normalized tax rate used in determining adjusted net income and adjusted earnings per share to 30% from the previously used normalized rate of 33%. This update is driven largely by our portfolio reshaping moves that have resulted in a greater percentage of earnings in lower tax rate jurisdictions such as the U.S. and Taiwan. In the fourth quarter, we recognized environmental charges of $22 million, which led to our gap net loss in the fourth quarter. These charges were principally for reserve increases associated with estimated remediation costs for two legacy environmental matters where we did not have sufficient information to estimate certain remediation costs until the fourth quarter. The responsibility for these matters was contributed to INPRO at the time of the 2002 spinoff from Goodrich Corporation. One of these matters involves the eight uranium mines in Arizona operated by a corporate predecessor in the 1950s that had been closed for decades. The second matter involves the cleanup underneath the plant at the Water Valley, Mississippi site owned by a third party, which is incremental to the remediation work at other areas at Water Valley ongoing for some time. We booked reserves to reflect our baseline estimate of the remediation costs for these sites based on information on potential remediation plans that developed in the quarter. We separately recorded an asset of $3.8 million related to an expected recovery from the U.S. government associated with the uranium mine remediation, which is included in other non-current assets. We now have established baseline reserves for all sites where we have known environmental remediation obligations. Adjustments to these reserves may be required in the future as remediation plans further develop or to reflect changes in estimated costs to implement these plans. We are not aware of any need to make any such adjustments at this time. Cash outlays for all environmental matters were $33.8 million in 2020. For 2021, we expect environmental cash payments to decline to approximately $13 million. Beyond 2021, we anticipate annual cash payments for the next four to five years to decline to low single digits, reflecting the significant progress we have made over the past two years in addressing and resolving our most significant legacy environmental liabilities. Let's take a look at segment performance. Sealing Technologies, which includes Garlock, Stemco, and the Technetic Sealing business, had sales of $154.7 million in the fourth quarter. The year-over-year decline of 11.3% was due to softer demand in general industrial and aerospace markets. Offset in part by stronger performance in food and pharma and heavy-duty truck markets. The sales decline was impacted meaningfully by the divestiture of Stemco's Air Springs manufacturing business in late November and the sale of Stemco's motor wheel and cruising businesses during the third quarter. Excluding the impact of foreign exchange translation and sales from acquired and divested businesses, sales decreased 2.9% versus the prior year period. On a sequential basis, Sales in the fourth quarter decreased 2%, and excluding portfolio reshaping activities, sales growth would have been in the high single digits. For the fourth quarter, adjusted segment EBITDA increased 5.4% to $34.9 million despite the decline in sales, and adjusted segment EBITDA margin expanded 360 basis points to 22.6%. Improve margin was driven primarily by production and operational cost reduction initiatives and by portfolio reshaping in the segment. Excluding the impact of foreign exchange translation, acquisitions, and divestitures, adjusted segment EBITDA increased 10.6% compared to the prior year period. Turning now to advanced surface technologies, which includes Alexa and our semiconductor business. Fourth quarter sales of $49.9 million increased 27.3%, driven primarily by the acquisition of Alexa and continued strength in the balance of the segment. LeanTech is showing strength as the five nanometer platform is ramping quickly, and we are responding to demand with agility by expanding our capacity in both Taiwan and the US. In addition, demand for Alexa's products remains robust with strong performance across its end markets and solid order intake and backlog heading into 2021. Excluding the impact of foreign exchange translation and sales from acquired businesses, sales increased 10.7% versus the prior year period. On a sequential basis, fourth quarter sales increased by approximately 12% from the third quarter, driven by the acquisition of Alexa at the end of October. For the fourth quarter, adjusted segment EBITDA increased 57.1% to $15.4 million, and adjusted segment EBITDA margin expanded 590 basis points to 30.9%, driven primarily by the Alexa acquisition and growth in the balance of the segment. Excluding the impact of acquisitions, divestitures, and foreign exchange translation, adjusted segment EBITDA increased 10.2% compared to the prior year period. In engineered materials, which consists of GGB and CPI, fourth quarter sales of $73.6 million decreased 2.5% compared to the prior year, primarily due to weakness in oil and gas, general industrial and petrochemical markets, partially offset by strength in the automotive and power generation markets. Excluding the impact of foreign exchange translation, sales for the quarter decreased 5.6%. Sequentially, sales increased approximately 9% as we saw demand rebound in automotive and general industrial markets. For the fourth quarter, adjusted segment EBITDA decreased 2.6% and adjusted segment EBITDA margin of 15.5% was flat versus the prior year period. This was driven primarily by sales declines, partially offset by cost reduction initiatives that included decreases in headcount and discretionary spending. Excluding the impact of point exchange translation, adjusted segment EBITDA decreased 7.7% compared to the prior year period.

Now let's turn to our financial position.

Our balance sheet remains strong. We ended the quarter with cash of $230 million and had full availability of our $400 million revolver plus $11 million in outstanding letters of credit. At the end of December, Our net debt to adjusted EBITDA ratio was approximately 1.6 times. During the fourth quarter, we financed the Alexa acquisition through a combination of $238 million of cash and rollover equity from Alexa executives equating to 7% of the acquisition price. When taking this transaction into account, as well as the vestitures and exits since December 31, 2019, Our pro forma net debt to adjusted EBITDA leverage ratio would be comparable to the year end reported level. Other than nominal amortization of our term loan, we have no debt coming due until 2024, subject to applicable reinvestment requirements related to the Fairbanks Morse and other divestitures. We have largely met these requirements as a result of the Alexa acquisition. and in January, we obtained an amendment to waive that requirement under our credit facility. For our senior notes, we have until April 25th to satisfy any remaining outstanding reinvestment requirements which can be satisfied if needed by paying down a portion of the term loan under the credit facility. 2020 free cash flow of $39.3 million was down from $109.2 million in the prior year primarily driven by higher 2020 payments related to environmental settlements and a third quarter legal settlement, both of which we discussed on our third quarter earnings call, as well as significantly higher year over year tax payments resulting largely from the gain on the sale of Fairbanks Morse. Excluding environmental and legal settlements, as well as tax payments in both years, free cash flow increased 12% from the prior year. During the fourth quarter, we paid a 26 cents per share quarterly dividend totaling $5.5 million. Last week, our board of directors approved a 4% increase in the quarterly dividend from 26 cents per share to 27 cents per share. We continue to prioritize investments in organic and inorganic growth and have not made any repurchases under the two-year share repurchase authorization announced last quarter. Under this authorization, We may repurchase up to $50 million in shares, providing us with the flexibility to return capital to shareholders subject to balance sheet and growth investment considerations. Now I want to provide a high-level look at the impact of our portfolio reshaping on sales, adjusted EBITDA, and adjusted EBITDA margins. Slide 14 provides results for 2020. as if acquisitions and divestitures completed in 2020 had closed effective January 1, 2020. As shown on the slide, on a full year basis, our 2020 pro forma sales are $983 million, or 8.5% lower than reported sales. 2020 pro forma adjusted EBITDA is $167.5 million, or relatively flat with reported adjusted EBITDA. resulting in a net adjusted EBITDA margin increase of approximately 130 basis points to 17%. This information shows the trailing effect of portfolio changes, and we expect our strategic actions to enhance sales growth and margin improvement in the years ahead. Moving now to 2021 guidance, taking into consideration all the factors that we know at this moment. including the ongoing global economic recovery from the COVID pandemic. We expect 2021 adjusted EBITDA to be in the range of $178 million to $188 million on sales growth of 6% to 10% over 2020 pro forma sales of $983 million. We expect adjusted diluted earnings per share from continuing operations to be in the range of $4.32 to $4.66. The table in the earnings call presentation provides additional assumptions to help bridge from adjusted EBITDA to adjusted EPS. We currently anticipate slightly less than half of our full year adjusted EBITDA and adjusted EPS guidance to be realized in the first half of 2021 with acceleration as the first half progresses. Now I'll turn the call back to Marvin for closing comments.

Thanks, Milt. I'm extremely proud of the progress you've made during 2020 in transforming ENPRO into a leading industrial technology company using material science to push boundaries in semiconductor, life sciences, and other technology-enabled sectors. Our strategic achievements during 2020 have built a solid foundation for profitable growth in 2021 and beyond. Our teams have adapted remarkably well. during the COVID-19 pandemic, and we're now positioned to capture growth as our markets recover. Our current order trends are strong, surpassing what we saw in January 2019. We're encouraged by what we're seeing and hearing from our customers, particularly in the semiconductor, heavy-duty truck, and automotive markets. We're expecting year-over-year improvement in most of the markets and geographies we serve. We continue to focus on driving operational excellence by leveraging the Enpro Capability Center to reduce costs, improve productivity, and maintain high-quality control across all our businesses, including those recently acquired. Enpro's success will be determined by our adherence and commitment to our profitable growth strategy, our experienced leadership team, our increasingly diverse and dedicated workforce, our strong financial position, and our focus on driving long-term shareholder value. And before we open the line for questions, I'd like to share that both Technetics and GGB supplied parts used in the Mars landing of the Perseverance rover last Thursday. GGB provided metal polymer bushings in the suspension components for a drill spindle attached to a robotic arm that drills and breaks rocks to collect samples for analysis. Technetics provided edge welded metal bellows that are a part of the sample collection system and function as vacuum and ducting for the system to support the goal of returning the cleanest sample possible from Mars. We are happy and proud to be suppliers to such a historic mission. Thank you again for joining us on the call today. Let's open the line for questions.

Thank you. And I'll be conducting a question and answer session. If you'd like to be placed into question queue, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star one. One moment, please, while we poll for questions. Our first question today is coming from Jeff Hammond from Capital Markets. Your line is now live.

Hey, good morning, guys. How are you? Morning, Jeff. Morning, Jeff. So just, you know, I know a lot of moving pieces, but I think, Milt, you mentioned this 6% to 10%, you know, growth from a pro-former standpoint. Is that kind of the way to think about core sales? Or can you give us kind of a core sales range, you know, kind of adjusting for Alexa coming in and some of the businesses coming out and anything? FX in there.

Yeah, that's a good question, Jeff, especially given all the changes that we had in our business over the past year. The best way to look at us for the baseline going into 2021 is exactly what you pointed to, and that was the pro forma information that I provided. And you see a slide summarizing that in the presentation that accompanies this call. and so that will give you a pretty good idea. So we're going in to 2021 on a pro forma basis because this assumes that the Alexa acquisition happened at the first of 2020 as well as the divestitures and heavy duty truck, the move in dues and GDP, that all those things happened at the first of 2020. That was the purpose of putting the pro forma together. You see what that shows in terms of the sales change versus reported, the margin change versus reported. And I think that addresses your question, but anything else, please jump back in.

And as you look at the three segments, do you think the growth rates within each of those on an organic basis are going to be similar or is there outsized growth because I know certainly AST is kind of a long-term higher grower, but certainly you've got some cyclical juice in the other two. Yeah, another good question.

And, Marvin, if you want, I'll provide a little bit of color that might help you a little bit think about it in terms of pro forma. And then, Marvin, if you want to comment on growth rates because there certainly are some differences among segments when it comes to growth. But if you look at ceiling and you break down the 8.5% delta between reported and pro forma sales in total, you're going to find most of that declines in ceiling, obviously, because that's where we had a good bit of our divestiture activity on the heavy duty truck side. It's all in that segment. And so on a pro forma basis versus reported, ceiling would be down about 17% as a result of those moves. Advanced surface technologies would be up about 16% on a pro forma basis versus actual. And engineered relatively flat, down a few percentage points. Dews was a fairly small business, but call it down 4% or so. And then on the margin front, on a pro forma basis in ceiling, As a result of the moves, we had an expansion of around 150 basis points in margin, once again, reported versus pro forma. Advanced ceiling, advanced surface technologies, you know, nice expansion reported versus pro forma of 250 basis points or so, and then engineered materials, you know, a small, a small increase because the dues operation was operating essentially at a slight loss at the EBITDA level. So, you know, less than 100 basis points improvement in engineered materials reported versus pro forma.

And Marvin, if you want to field the question about... Yeah, in terms of growth rate, Jeff, I think the best way to think about it is you know Ceiling you know has a lot of our legacy businesses that that are really strong you know resilient businesses that you know are GDP plus kind of businesses we might see a little bit more growth this year just because of the kind of year that we're coming out of you know industrial production for this year is you know roughly four and a half percent and so that you know a lot of the businesses there is industrial production and then you've got you know heavy duty truck which might have some outsized growth this year just because of what's happening in the market. There's a rebound there. If you look at FTR, truck builds or trailer builds are going to be up over 30%. Ton miles are going to be up over 5%. So we might see a little bit more growth in STEMCO this year than we would typically see. So that gives you a little bit of color. on what's going on in ceiling. And then AST, our new segment, that's a double digit grower just because of what's in there and the end markets that they serve. So that's what you should anticipate there. And then in engineered, I think you've got another unique situation going into 2021 where we should experience a rebound in automotive If you look at automotive from a light vehicle production perspective on a global basis, that's up around 14% in aggregate. We'll see a little bit more lift this year than we typically see, but our other business in engineered is CPT, and that's impacted on the downside by oil and gas. It's hard to give you exact numbers, right? We've given you a good full year forecast, but we're going to see some strength in some pockets that, you know, depending on our ability to meet demand and, you know, the resiliency of the demand that we're seeing, we could have, you know, some stronger growth areas than normal, particularly heavy-duty truck, semiconductor, and automobile.

Okay, and then just last one. So your pro forma EBITDA margin for, you know, in your slide, it's 17%. I think the guidance is just above that, like low 17s. I guess on kind of robust growth, I would have thought, you know, the incremental margins would have given a bigger lift than, you know, than kind of flattish or slightly up EBITDA margins.

Jeff, it's a good observation. If we do get robust sales, we're expecting to be able to at least perform at the same level as we have on a pro forma basis. Once again, this is pro forma. It's still a nice increase year over year. Part of what we have is we're planning on some of the costs that we took out, and we talked about this earlier, in the year or last year on previous calls, some of the costs that we took out in 2020 as a result of COVID coming back into our system. And so that's part of the reason why, as you've observed in our guidance, we're not showing more margin expansion than you see.

How much of the temp cost do you have coming back?

We estimate that we were able to take out roughly $30 million as a result of the initiatives that we put in place last year. And I would say that those plans were put in place in the middle of the second quarter last year. And we estimate about $15 million would be coming back. So 15 will be able to hold on to, 15 coming back. And then obviously, we have year-over-year cost increases that we're managing that are offsets against permanent reductions.

Okay. Very helpful. Thanks, guys.

Thank you. As a reminder, that's star one to be placed in the question queue. Our next question today is coming from Justin Berkner from G Research. Your line is now live.

Good morning, Marvin. Good morning, Mel. Good morning, Jerry. Good morning, Justin. How are you doing?

Good morning, Justin.

Good day. Good end to 2020. Just had one quick follow-up question on the sort of growth guide, or I guess two sort of follow-up questions there. You know, what currency tailwind are you assuming in the revenue guide and, you know, outside of the sort of faster growth and advanced surface technologies that you described versus the business as a whole. Are there any other material mix issues affecting sort of the margin outlook as you look into 2021, the rest of 2021?

Hey, Justin, this is Mel. Let me take the first question on currency. When we provide guidance or outlook This is true throughout the year. We're always doing it with the perspective of where we are currently at the time. If you look at our biggest currency exposure, it would be the euro. I think it was $1.20, $1.21 or so at the end of the year. It stayed at about that level since the end of the year. Our guidance is is based on rates. So we don't project what might happen to currency. So yeah, currency moves a good bit. Either the dollar continues to weaken or if it reverses and strengthens, that'll have some impact on our guidance. And we'll comment on that as the year progresses. Marvin, do you want to take the second question on cost?

Yeah, I'll add a little color on the sort of mix piece and the cost piece. So, Justin, as you know, you know, we've been through a couple of these downturns before and have some history in terms of what typically happens, right? So coming out of these downturns, you know, we typically get, you know, nice rebounds in all of the end markets that we serve. We're seeing that today. you know, minus aerospace and oil and gas, everything else is really rock solid. But we also see commodity prices start to take off as well, right? So on the cost side, what we're managing right now is increases in steel pricing, increases in bronze pricing. We're pretty well positioned with PTFE, which is the largest commodity that we've purchased. But, you know, some of the mix, issues that we'll see this year that impacts our cost basis is we do have a strong recovery in automotive, but we also have steel and bronze powder increases that will impact our automotive businesses a little bit, as well as the STEMCO business. So we're real thoughtful in how we thought about the full year, taking those things into consideration. Obviously, we price and price aggressively. We put some good processes in place during the downturn to really link the supply chain group to commercial group a little bit tighter so that we can pass on price increases immediately if we start to see them, and we've already started that process. But I think it's mindful, we're mindful that we have to manage sort of an increasing cost exposure, particularly with our commodities.

Great, thanks, that's helpful. Maybe with respect to just the portfolio reshaping, I guess your comments on the call use the words sort of bolt-on to describe your current M&A focus. The press release just sort of spoke to general inorganic growth. As we look forward from the recent more material-sized acquisitions that sort of added new legs to the business, are you thinking of additional legs to the business, or are we sort of more bolting on to the new platforms that Ampro's added over the last two years?

That's a really, really good question. Let me just take a step back and just maybe give you a sense of you know how we think about M&A and I think that might give you a little bit of color but I'll start first and foremost with you know what does a good fit look like for us particularly as we think about material science. So in its most simplistic way we think about it from the perspective of is the business we're looking at you know, does it fall in the material science umbrella? Meaning does, is there some kind of a substrate that you place a performance material on top of that enhances that solution's performance in a specific application, right? So whether it's a bearing where you have steel and you layer on PTFE, you know, or whether it's a Luxor where you have maybe a glass substrate and you layer on some deposition material so that you could perform better as a filter. At the end of the day, that's kind of the lens that we look at it with. Are we putting a performance material on top of a substrate? Then it's a question of do we have the capabilities in-house to enhance what that business is doing, whether it's from the perspective of the customer, whether it's from an operations perspective, and whether it's supply chain, et cetera, et cetera. We look at the customer buying patterns. Do they care about technical specifications and lead time more than they care about cost? Those are the kinds of things that we look at. The science itself, we're a little bit more agnostic because we think we have deep expertise within our businesses. So as we added Aluxa, for us it's really building on skill sets and capabilities that we have in the business. When we added lean tech, we're building on skill sets and capabilities that we have in the business. As we look at other acquisitions, we'd be looking at it through the same lens. Can we build on skill sets and capabilities that we have in the business? Is someone taking a scrub straight, adding some kind of performance material, using some deposition process that we know really, really well? that we can add on to the business. That's how we look at it. It keeps the aperture wide enough, but it keeps us focused enough around where we have the skill sets and capabilities to participate. We like a strong management team. We like attractive segments with strong growth. We want a strong competitive position. We want robust IP and trade secrets. Those are the kinds of things that we think about. Any acquisition we look at will be looked at through that lens. As we think about businesses in the future, as long as it fits those criteria, we would be very, very interested. Obviously, if it's something that enhances something that we've already acquired, we'd be super, super excited about that. If we found a business that supercharged what Alux is doing, we would be excited. If it supercharged what LeanTech is doing, we would be excited. If it supercharged what were doing in sealing technologies, we'd be excited, right? So that's how we think about it, and I hope that's helpful.

No, that is very helpful. So I guess the distinction is not so much, as you said, around bolt-on versus larger, it's around the material science and performance material. That's right. Okay, that's helpful. And then just lastly, I guess a lot of moving parts on the environmental and legal liabilities I imagine the 10K will have the specifics, but I mean, should I think of the remaining sort of unpaid environmental liabilities to sort of be that, you know, around 30 million, thinking about that, you know, 13 million in 2021 plus a few million, you know, going out over the following five years and, you know, what remains sort of on the legal side beyond, you know, the environmental claims?

Yeah, Justin, we will have and a lot of disclosure in the K. So yeah, you're right. You can look at the details that we provide there. Essentially what we tried to provide or what I tried to provide on the call was just an indication of what to expect from a cash outlay over the next few years because we've had some pretty large reserve increases this year. We've had some settlements There were pretty big dollars, relatively speaking, in 2020. But it's all in an effort to bring these larger legacy environmental matters to completion. And as you know, liabilities of this type have really long, long tails. And so the good news is, you know, after a pretty significant cash outlay year in 2020, partly because of settling some third party claims, and partly because of remediation, we're expecting that number to step down significantly, the cash payment significantly in 2021 and then to tail off significantly after that for several years. Now, some of the effect of the reserves that we took for the uranium mines, for example, you know the actual remediation of that you know could be out a number of years and so we don't think you know over the next four or five years that the cash outlays are going to be significant and then we just have to deal with what the final solution is we provided the estimate in the reserves to the best of our ability and as you know for open-ended matters Like this, we have estimates when we have a low end of the estimate and it's no better than any other estimate in a range. That's what we accrue for. So that gives you a little bit of color, but you can expect the cash that goes out over the next few years to decline fairly dramatically from what we saw in 2020.

Okay, great. Thank you for taking my questions. Thank you.

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

I just want to say thank you, Kevin, and thank you all for joining us this morning, and have a great day.

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