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.