Enpro Industries (NPO)

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EnPro Industries, Inc. (NPO)

Q4 2013 Earnings Conference Call

February 7, 2014 10:00 ET

Executives

Don Washington - Director, Investor Relations

Steve Macadam - President and Chief Executive Officer

Alex Pease - Senior Vice President and Chief Financial Officer

Analysts

Jeff Hammond - KeyBanc Capital Markets

Todd Vencil - Sterne, Agee

Joe Mondale - Sidoti & Company

Gary Farber - C.L. King

Presentation

Operator

Good morning. My name is Jay and I will be your conference operator today. At this time, I would like to welcome everyone to the EnPro Industries’ Fourth Quarter and Year End 2013 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

I would now like to introduce Mr. Don Washington, Director of Investor Relations. Please go ahead.

Don Washington - Director, Investor Relations

Thank you, Jay and good morning everyone. Welcome to EnPro Industries’ quarterly earnings conference call. I will remind you that our call is also being webcast at enproindustries.com on our website, where you can find the slides accompanying the. Steve Macadam, our President and CEO and Alex Pease, Senior Vice President and CFO will begin their review of our fourth quarter performance and our outlook for 2014 in a moment.

But before we begin, I will point out that you may hear statements during the course of this call that expresses belief, expectation or intention as well as those that are not historical fact. These statements are forward-looking and involve a number of risks and uncertainties that may cause actual events and results to differ materially from such forward-looking statements. These risks and uncertainties are referenced in the Safe Harbor statement including in our press release and are described in more detail along with other risks and uncertainties in our filings with the SECOND, including the Form 10-K for the year ended December 31, 2012 and the Form 10-Q for the quarter ended September 30, 2013. We do not undertake to update any forward-looking statements made on this conference call to reflect any change in management’s expectations or any change in assumptions or circumstances on which such statements are based.

You should also note that EnPro owns a number of direct and indirect subsidiaries. From time-to-time, we refer collectively to EnPro and one or more of its subsidiaries as we, or to the businesses, assets, debts or affairs of EnPro or a subsidiary as ours. These and similar references are for convenience only and should not be construed to change the fact that EnPro and each subsidiary is an independent entity, with separate management, operations, obligations and affairs.

Also I want to remind you that our financial results reflect the deconsolidation of Garlock Sealing Technologies LLC, Garrison Litigation Management and their subsidiaries, effective June 5, 2010. The results of these entities will remain deconsolidated during the pendency of the Chapter 11 legal proceedings to resolve asbestos claims against GST. We refer to this as the Asbestos Claims Resolution Process or ACRP and you will hear us use that acronym during the call today. GST’s summary results are presented separately in our earnings release.

And now, I will turn the call over to Steve.

Steve Macadam - President and Chief Executive Officer

Thanks, Don and good morning everyone. About a month ago, we had the privilege of talking to you about the judge’s order estimating GST’s mesothelioma liability to $125 million. His opinion endorsed GST’s arguments on key factors in the case, including using legal liability, not historical settlements, as the basis for his estimates. Accepting the compelling scientific evidence that GST’s product did not cause disease and agreeing that GST’s settlements in the tort system were not based on merit but were severely inflated by the necessity of avoiding defense costs and the concealment by both plaintiffs and their lawyers of exposures to other asbestos products.

I will have more to say about the judge’s opinion and the process going forward, but first I want to turn your attention to our operating performance, including our results for the fourth quarter of last year and our outlook for 2014. As you see in our earnings release, we have reported a slight decline in total company sales compared to the fourth quarter of 2012 even though sales were higher in both sealing products and engineered product segments. The decline in the total is entirely the result of lower sales at Fairbanks Morse engine, where engine revenue was down and where parts and service demand softened due to the combined effects of sequestration and the Navy’s ship maintenance schedule. The drop at FME more than offset improvements in the other two segments, where sales were up between 6% and 7% from 2012’s fourth quarter as many of our markets strengthened compared to the earlier period.

We were especially pleased to see improvement in the markets of Technetics Group and growth in GGB’s markets particularly in Europe. GGB had reported year-over-year declines in European sales for six consecutive quarters beginning in the third quarter of 2011 before comparisons stabilized at low levels in the second, third quarters of 2013. This means that the fourth quarter of 2013 is the first time in nearly 18 months that we have seen a meaningful increase of activity in GGB European markets. Although we have reported a strong improvement in segment profits and profit margins in this sealing products segment. Our total company segment profits and margins were lower than in 2012’s fourth quarter. Sealing products profits were up around 20% on a 7% increase in sales and margins improved by more than point and a half driven by the performance of both the consolidated Garlock businesses and of Technetics.

In engineered products GGB also turned to very healthy profits and margins compared to the fourth quarter of 2012. The benefit of GGB’s performance was offset by CPI where restructuring costs and material costs increased. We also saw a decline in profits in the engine products and services segment where volume and mix for both the engines and products and services were unfavorable and where we had a non-cash inventory adjustment. Alex will go into more detail on our financial results, but I want to make it clear that we are confident we have the proper plans and strategies in place to address the issues at both CPI and Fairbanks Morse engine. The new team at CPI is quickly addressing both operational and commercial issues that have been responsible for the business’ weak results. And I believe that 2014 will be the turning point for that business.

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