Enpro Inc (NPO) 2017 Q1 法說會逐字稿

Good morning. My name is Candy, and I will be your conference operator today. At this time, I would like to welcome everyone to the EnPro Industries 2017 First Quarter Results Conference Call. (Operator Instructions) Thank you. Chris O'Neal, Vice President of Strategy, Corporate Development and Investor Relations, you may begin your conference.

Thank you, Candy. Good morning, and welcome to EnPro Industries quarterly earnings conference call. I'll remind you that our call is also being webcast at enproindustries.com, where you can find the slides that accompany the call. Steve MacAdam, our President and CEO; and Milt Childress, our Senior Vice President and CFO, will begin their review of our first quarter performance and our outlook in a moment.

But before we begin our discussion, I will point out that you may hear statements during the course of this call that express the 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 included in our press release and are described in more detail, along with other risks and uncertainties, in our filings with the SEC, including our Form 10-K for the year ended December 31, 2016. 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.

Our earnings release and conference call presentation materials contain additional disclosures regarding non-GAAP financial information, collective references to EnPro and our subsidiaries and the deconsolidation of Garlock Sealing Technologies, or GST, and OldCo, LLC, or OldCo, and pro forma illustrative financial information presented as if GST and OldCo were reconsolidated for financial reporting purposes. These disclosures are important to understanding comments we will make on today's call, and we urge you to read them carefully.

Just as we did in the last few quarters, we are providing pro forma segment sales and pro forma segment adjusted EBITDA information in conjunction with the ACRP settlement agreement announced on March 17, 2016, to provide investors additional pro forma information illustrating each segment's results as if GST and OldCo have been reconsolidated with EnPro based on confirmation and consummation of the joint plan of reorganization, as described in our earnings release. Given where we are in the bankruptcy process and due to requests from investors for this type of information, we believe this disclosure of pro forma operating results is instructed to investors as it reflects performance of all of our subsidiaries. Until the ACRP process is completed, however, our published GAAP financials on Forms 10-Q and 10-K will continue to reflect GST and OldCo on a deconsolidated basis.

And now I'll turn the call over to Steve.

Thanks, Chris. Good morning, everyone, and thanks for joining us. In the first quarter, for the first time in a number of years, we experienced modestly improving demand conditions in several of our markets. The modest volume strength, along with significant year-over-year cost reductions, combined to produce very favorable year-over-year results. For the past several years, we've invested in modernizing facilities, equipment and IT systems and also invested considerable time and money in our comprehensive operating system to improve talent, commercial capability, productivity and innovation, and it's exciting to see the positive effects of those efforts in our Q1 results.

For the first quarter, pro forma sales increased 1% year-over-year from the same period last year. Organic year-over-year sales increases in Sealing Products and Engineered Products of approximately 3% and 4%, respectively, were mostly offset by a decline in Power Systems due to lower engine sales. Pro forma adjusted EBITDA increased 50% year-over-year due to a variety of factors, including these volume increases in Sealing Products and Engineered Products; the positive impact from company-wide cost-reduction actions, including restructuring activities that occurred throughout 2016; the favorable comparison impact from the $3 million of legal expenses that Power Systems incurred in the first quarter of 2016; and the favorable effect of currency on Power Systems' EDF program.

In the first quarter, we experienced modestly strengthening conditions in several markets we serve. Demand in semiconductor, food and pharma and aerospace continue to be strong. Oil and gas, automotive, refining, steel and mining improved, while general -- while industrial gas turbines, general industrial and nuclear remained flat year-over-year. The general positive market momentum was partially offset by modest weakness in heavy-duty trucking, particularly early in the quarter. Sales were down year-over-year in Power Systems segment due to lower engine revenue noted previously. The decline rate -- relates only to the timing of work performed and does not represent any change in customer demand.

The column on the far right of Slide #5 provides directional guidance on how we currently see our end markets performing on a year-over-year basis through the rest of 2017. As you can see, we currently expect continued modest improvement on a year-over-year basis in many of our key end markets.

Before turning the call over to Milt to discuss our financial results in more detail, I want to highlight some positive developments in the first quarter, including the strong performance of STEMCO air springs and progress in the ACRP. As you'll recall, in July of 2015, we acquired Continental Corporation's air springs business, which manufactures air springs for heavy-duty truck suspensions. The business is a natural fit with STEMCO, and we've outperformed our original investment case. Much of this value has come from the successful integration of air springs and STEMCO's systems, processes and facilities. Major integration activities have included the implementation of a new ERP system in each of -- the air springs locations, reorganization of air spring distribution through STEMCO's distribution center in Berea, Kentucky, the negotiation of new supply chain agreements that significantly reduce product cost and the relocation of air springs' R&D facility into a newly-constructed building in Fairlawn, Ohio. Each of these activities is required a tremendous amount of time and attention from the STEMCO team, and those efforts are paying off. We expect adjusted EBITDA to nearly double from the run rate at the time of the transaction to the run rate in 2017, and we expect further growth over time. Our STEMCO team has done an outstanding job on this integration.

The ACRP remains on schedule. I want to take a moment to remind you of a few of the important milestones that we achieved since the end of last year. As we discussed during our last quarterly conference call on June -- sorry, January 30 of this year, we announced the successful merger of Coltec into a new indirect EnPro subsidiary, OldCo, LLC, and subsequent prepackaged Chapter 11 petition filing of that entity.

On February 2, we reported that we obtained final court approval for the settlement agreement previously reached with the Canadian workers' compensation boards for each of the 10 Canadian provinces to resolve current and future asbestos claims. Each of these activities was a significant milestone in our effort to permanently resolve our legacy asbestos burden. The confirmation hearing with the Bankruptcy Court is still scheduled to begin in 2 weeks. And absent any unanticipated objections or appeals, we expect to reconsolidate GST and OldCo into EnPro in the third quarter of this year.

On March 24, we completed the $150 million addition to our 5 7/8% senior notes and used the proceeds to pay down our revolver. While this was not directly related to the ACRP, we issued the additional debt to increase our liquidity in preparation for the anticipated settlement payment -- trust payment later this year.

Now I'll turn the call over to Milt.

Thank you, Steve. As discussed before, the pro forma segment results that I will discuss are prepared as if GST and OldCo had been reconsolidated on the basis described in our earnings release. As a reminder, most of the difference between consolidated and pro forma segment information is in Sealing Products, with only small differences in Engineered Products and Power Systems stemming from foreign operations of those segments included in GST foreign subsidiaries. It's important to note that the pro forma results do not represent a projection of the financials as of the expected future date of reconsolidation.

Our pro forma first quarter sales of $337.9 million were up 1% from the same period of 2016. Organic sales for the quarter were also up 1% as the impact of the Rubber Fab acquisition net of the small divestiture was offset by unfavorable foreign currency translation. Solid organic pro forma sales increases in Sealing Products and Engineered Products of 3.2% and 4.1%, respectively, were offset by sales decline in Power Systems due to lower engine revenue versus last year. Pro forma gross profit for the quarter of $121.8 million was 5.1% higher than in the first quarter 2016, and pro forma gross profit margins were up 140 basis points year-over-year to 36%.

Total pro forma segment SG&A declined in the first quarter of 2017, about $14.3 million, to $77.8 million. Excluding restructuring costs, $3 million of legal cost in the first quarter of 2016 related to the ABL lawsuit and SG&A cost associated with acquisitions and divestitures, pro forma segment SG&A was $8.5 million lower than in the prior year. As previously mentioned, the company-wide cost-reduction initiatives, including the restructuring activities that occurred throughout 2016, contributed to the year-over-year improvement.

Corporate expenses were $7.5 million in the first quarter of 2017 compared to $9 million in the same period last year. The year-over-year decrease was driven primarily by lower professional fees and administrative costs and lower employee cost as a result of workforce reductions implemented in 2016.

Pro forma adjusted net income, which adjusts pro forma net income for items such as restructuring, legacy environmental reserves and tax effects associated with these items, all that's shown in the reconciliation table in our earnings release, was $20.1 million, up $11.5 million from a year ago. Pro forma sales in the Sealing Products segment were $219.4 million in the first quarter, up 3.9% over the first quarter of 2016. Excluding the impact of the Rubber Fab acquisition, the Franken Plastik divestiture and foreign exchange translation, pro forma sales were up 3.2% in the first quarter.

During the first quarter, we continue to experience strong demand in our semiconductor, food and pharma and aerospace markets. Additionally, demand in oil and gas, refining, steel and mining improved modestly, and demand in industrial gas turbines, general industrial and nuclear markets remained relatively flat year-over-year. Our positive momentum throughout the quarter was partially offset by modest year-over-year decline in heavy-duty trucking.

Pro forma segment adjusted EBITDA, which excludes the impact of restructuring and acquisition expenses, was $39.9 million, up 17.7% from the first quarter of last year. Pro forma segment adjusted EBITDA margins increased to 18.2% in the first quarter from 16.1% a year ago. Excluding the impact of acquisitions, divestiture and foreign exchange translation, first quarter pro forma segment adjusted EBITDA increased 16.3%. The increase was driven primarily by the increased volume noted previously, the positive impact from restructuring activities that were completed throughout 2016 and the continued focus on managing costs.

Pro forma segment SG&A cost were $49.8 million in the first quarter compared to $55.6 million in the prior year. Excluding restructuring cost and SG&A cost related to the acquisition and divestiture, pro forma segment SG&A costs were $5.3 million lower in the first quarter versus last year.

In the Engineered Products segment, first quarter pro forma sales of $75.2 million increased by 1.6% from the first quarter of 2016. Excluding the impact of foreign exchange translation, pro forma sales were up 4.1% in the first quarter over the prior year. This year-over-year sales increase was due primarily to the strength in the European automotive, North American oil and gas and general demand in Asia. Pro forma segment adjusted EBITDA of $14.1 million was up significantly from $9.6 million in the first quarter of last year as a result of a combination of increased volume, manufacturing efficiencies, cost reductions and the favorable impact of the restructuring efforts completed in 2016. Pro forma segment adjusted EBITDA margins were 18.8% in the first quarter versus 13% in the prior year. Pro forma segment SG&A costs were $21.6 million in the first quarter compared to $25.9 million in the prior year. Excluding restructuring costs, pro forma segment SG&A costs were $1.9 million lower in the first quarter of 2017 versus a year ago.

In the Power Systems segment, pro forma sales were $44.3 million, down 12.8% compared to the first quarter 2016. The sales decline was primarily due to lower engine revenue versus last year. Pro forma segment adjusted EBITDA for the quarter was $8.2 million, up from $2.5 million a year ago. Contributing factors to the higher pro forma segment adjusted EBITDA in the first quarter were decreased operating cost attributable to prior year cost savings initiatives, lower warranty costs and the positive year-over-year impact of the $3 million of legal cost incurred in the first quarter of 2016. Additionally, Power Systems recorded a $0.5 million positive accounting adjustment related to the EDF contract during the first quarter of 2017.

As a reminder, GAAP rules require that we evaluate the impact of the dollar to euro foreign exchange rate on the EDF contract each quarter. Reflecting the total projected loss on the long-term EDF contract in proportion to the percentage of completion of the contract, as is the accounting practice for positive gross margin long-term contracts and excluding the effect of the 2016 ABL charge, first quarter pro forma segment adjusted EBITDA increased 46.9% from a year ago. Pro forma segment SG&A cost were $6.4 million in the first quarter compared to $10.6 million in the prior year. Excluding the $3 million ABL legal settlement charge, pro forma segment SG&A costs were $1.2 million lower in the first quarter versus last year.

As we've discussed in the past, disciplined capital allocation remains one of our top priorities for creating shareholder value. In the first quarter of 2017, on a pro forma basis, we invested $7.1 million in equipment and facilities, most of which was growth-oriented. Additionally, we repurchased approximately 61,000 shares for $4 million as part of the ongoing $50 million share repurchase program. Through the end of the first quarter of 2017, we have repurchased approximately 788,000 shares for a total of $39.6 million under the $50 million authorization. Additionally, during the quarter, we paid a $0.22 per share dividend in March.

As in previous quarters, we outline on Slide 15 our pro forma net debt and leverage ratio, taking into account funding under the ACRP consensual agreement. Had reconsolidation and initial trust funding occurred at the end of the first quarter, our pro forma leverage ratio would have been approximately 2.3x in contrast to the 4.6x EBITDA leverage ratio indicated by our consolidated results. As we pointed out last quarter, this pro forma leverage calculation does not include tax benefits of the planned funding that we expect to realize over time.

As Steve mentioned earlier, we completed $150 million tack-on to our 5 7/8% senior notes. The additional offering was priced at $1.01 for the yield to maturity of 5.66% compared to the 6% yield to maturity of the original $300 million issuance. We used the proceeds to pay down our revolver. And while this was not directly related to the ACRP, we issued the additional debt to increase our liquidity in preparation for the anticipated settlement payments into the trust later this year.

As we provided during the last few quarters, we are including an update of our pro forma valuation relative to earnings. As shown on Slide 16, our pro forma enterprise value to pro forma adjusted EBITDA multiple at the end of the first quarter was approximately 9x compared to a multiple of 14.5x indicated by our consolidated results.

Now I'll turn the call back to Steve.

Thanks, Milt. We'll close with a discussion of the current market conditions and our outlook for 2017, and then take some questions.

As we've discussed throughout our comments, demand in many of our markets showed signs of stability or modest improvement. Our order patterns suggest that these encouraging trends will continue into the second quarter, and we're cautiously optimistic about the balance of the year. It's important to note that $12 million of our $18 million increase in adjusted EBITDA in the first quarter versus the same period last year was caused by a reduction in total SG&A. SG&A costs in the first quarter of last year were the highest of the year, with costs moderating considerably in the second through fourth quarters of 2016 as we implemented a number of cost reduction and restructuring actions. We do not expect significant benefits from year-over-year SG&A comparisons for the rest of 2017. And therefore, we expect that market growth, product mix, operating efficiencies, along with continued cost discipline, will be the key drivers of our performance during the balance of the year.

Given our first quarter results, current macroeconomic forecasts, order patterns and customer feedback, we are increasing our guidance for our 2017 adjusted EBITDA. Excluding the future impact of acquisitions, changes in foreign exchange and any litigation or environmental charges, we're increasing our previous pro forma adjusted EBITDA estimated range of $188 million to $193 million to a revised estimated range of $193 million to $198 million. I want to be clear that this guidance is based on our limited visibility into the second quarter and the demand levels that we've recently been experiencing.

I'd also like to point out that we expect our second quarter pro forma adjusted EBITDA to be relatively flat compared to the first quarter of this year 2017. While we expect improving performance in Sealing Products on a sequential basis and a stable but strong quarter in Engineered Products, pro forma segment adjusted EBITDA in Power Systems will likely decline sequentially in the second quarter compared to the first quarter as a result of 0 gross margin in Shaw MOX and EDF engine sale, lower aftermarket parts and service resulting from normally -- normal quarterly fluctuations related to customers maintenance intervals and an increase in R&D related to the start of endurance testing of the OP2 engine.

Before I open the line to questions, I want to reiterate my excitement not only for our first quarter results, but also for the many growth and cost improvement initiatives that we have underway across our company. We're well positioned to drive growth in value of our company as we move forward toward completion of the ACRP and the reconsolidation of GST and OldCo into EnPro.

Now we'll open the line for questions.

(Operator Instructions) Your first question comes from the line of Ian Zaffino from Oppenheimer.

Good quarter. Glad to see some of your markets have improved nicely there. A question, I guess, Steve, would be on the cost front, and maybe help me understand this a little bit more. So you said you're going to focus on costs, but there's no more SG&A savings? Or there is? And then, what will be sort of the largest buckets of cost savings that you'll be focused on? And then I have a follow-up.

No. I think our -- we're hoping to keep SG&A relatively constant of where we are, Ian. And what I was trying to point out is the year-over-year -- the biggest year-over-year benefit that we're going to see happened in Q1. Because we started the cost reduction and restructuring -- actually, we started it back in late 2015, carried over into '16. And then as things declined last year even further, as markets deteriorated further, we implemented a bigger and more comprehensive cost reduction in, I think it was June -- May or June of last year or in late spring, some point. I don't remember exactly. But it was another -- it punctuated it. So we've been working hard on costs up until then, and so these started to be implemented throughout the year. So all I'm saying is the comp gets tougher as we go through the year.

Right, okay, understood. And then just sticking on that, I guess, as end markets begin to improve, how much more room is there to take out costs versus eventually having to add cost back to take advantage of the stronger markets?

Well, I mean, we'll see -- we didn't pay much incentive last year, incentive comp. And so one of the things that will drift our -- that will be a little higher for SG&A will be more incentive comp for this year, we hope, if things keep going well. And obviously, we give some merit increase that we do typically on an annual basis. That's a little bit. So we expect productivity gains and further improvements to work to offset those. And so -- and we're in a commodity -- we're a raw material commodity market that is mixed at this point. It's really kind of challenging to figure out. I'd say, in general, we're seeing rising costs, but it's not that extreme. We are in a good position to maintain our margin and continue improving our margin because of the nature of our products and our customer relationships and so forth.

So we're seeing some drift up in cost if you look at the aggregate, but there are several large categories that we buy that actually are flat to modestly down. So we don't see a lot of cost squeeze coming from commodities. Look, the company's in great shape. I mean, I feel -- I'm very optimistic. We -- you were at our Investor Day. And so you saw, we've made a lot of growth investments. Those growth investments are starting to hit, if you will, and will throughout the year. So I don't see us taking a lot of SG&A cost out going forward. But also, I don't see a ton of SG&A cost in terms of structural cost, which is really driven by headcount. I don't see a lot of that coming back either because I think we can compete effectively in growth markets with the team we have. Milt, do you want to add anything to that?

No, I think that covers it well. As you know, Ian, we talked in the past. With volume, we leverage quite well as a company, and you're seeing some of that with the modest improvement we had in the first quarter of this year.

Your next question comes from the line of Jeff Hammond from KeyBanc Capital Markets.

Steve, just a clarification on your, I guess, final comment about kind of the guide and color. Was that 2Q you see similar to 2Q last year? Or similar to this 1Q we just put up?

To this 1Q.

Yes. We were talking sequentially in that case.

Yes.

Okay, that's what I thought I heard. Okay. I want to really dig in on Engineered Products. I mean, you guys put up a 13% op margin. That's a big outlier from what you've been putting up over a multiyear period. And I know a while back, you had talked about higher margin targets. So any aberrations within that? How should we think about that sustaining going forward?

Yes, that's a great question, Jeff. I think, believe it or not, it's actually the elimination of aberrations that we've had in the past 2 years. So I would call this a much more normalized rate of margin with 2 caveats: One is, Q1 and Q2, as you know, are GGB's strongest quarters. The first quarter was strong. It wasn't a blowout. It wasn't a blowout quarter from a volume standpoint. I mean, we started seeing -- I think -- personally, I believe demand in general industrial in Europe will pick up throughout the year. We don't really have that built in that much to our outlook. But I think there's a good chance that, that will happen because I think there's some latent strength in Europe that were not yet seen that I think the market even calls a little bit with the certainty that's being resolved in the French election period that we've already seen and we're going to see this weekend, I assume. So I think that will help stabilize it. Europe has been so weak for so long that, I think, there's a light potential there. And so GGB, we really didn't benefit from, what I would call, a hugely robust market. It was a decent market for them. And then the other thing is, CPI. I mean, we've been clearing the dust -- the smoke off the battlefield for 2 years. And the market's been in a free fall really until the first quarter, as I said. And again, in the Investor Day, it was -- once we got back into this year, there were some renewed activity. And our cost structure was in good shape.

Now we have, in the first quarter, exited 2 small service centers in Australia. We sold those to the operator there, so we're still -- those were marginal facilities, so we'll still benefit from parts sales over there. But we -- but it'll be -- it'll shrink the top line, hold the bottom line. So that will help margins in CPI. And we have taken a little bit more, just another, let's call it, another nibble at SG&A cost in CPI this year as well. So cost position is great in both of those businesses. Operationally, we've never done better. Our on-time deliveries are better than they've ever been across the board in all our operating facilities at both CPI and GGB. The teams have really, really worked hard to get those businesses competitive. We got some exciting things going on in GGB that will play out over the next few years. So I think, quite frankly, it's the first quarter in a number of years that's a clean look at Engineered Products based on the current demand levels, which, again, are better than we've seen, but they're certainly not back to the glory days of 2011 and '12 when we were seeing tons of demand in those markets. Milt, what do you want to add?

I'll add one other thing, Jeff. I mean, Steve alluded to it when he first started talking about the segment. But just to remind you, Q1, historically, has been our strongest quarter for the segment, particularly driven by the results in our bearings business. So - and then followed by Q2. And historically, there's a been a fairly noticeable difference in volume and margins in the second half of the year compared to the first half of the year, so I'll just remind you of that. A lot of that is driven by -- we have a heavy European exposure in both businesses in Engineered Products.

Okay, yes. Good color there. Helpful. So Power Systems, I think the guide coming into the year was that you would get a decent amount of growth from the EDF contract at low margins, and then you'd have some margin pressure. That clearly didn't play out. So is that how to think about -- that starts to normalize in this second quarter and beyond, where you see maybe better revenues but lighter margins?

Yes. I -- let's be clear. The EDF is not at low margins. It's at 0, excluding any changes in currencies. So what we did get -- if the dollar weakens, right, if the euro strengthens, we recover some of these reserves that we've been hit with in the past because the dollars has been going -- dollar's been strengthening, right? So we saw -- as Milt articulated, at Q1, we saw a lift in the euro that helped Power Systems. So that's why we booked -- I think it was $0.5 million gain that, that covers through the end of the contract. But that's still basically at 0 margin. That's the new 0 margin number, right, because we're still underwater. I think the euro has to get back in the mid- to high teens before we hit the breakeven mark and would stop recovering that gain, right? So it's still a 0 margin. We will shift the number of engines that we've talked -- the number of EDF engines that we've talked about this year, right? So it is just as we've said before. Let me just reiterate it one more time. It is very, very difficult to draw any conclusions about Power Systems with 1 quarter. Because what we saw in 1 quarter was a fairly robust service volume. And when we do aftermarket work -- and as you all know, in Power Systems, that's where our higher-margin stuff comes from. So -- and that just -- that fluctuates quarter to quarter. That's not something that we can control. We're responding to customer demand. So it -- Jeff, it's just so hard to draw any conclusions with 1 quarter. You really have to look at it on a rolling average basis. So I think our guide for the segment for the year is still valid.

And Jeff, just to -- a follow-on comment. You might recall, if you go back and look at the second quarter of last year, we had a blowout quarter at Power Systems in terms of parts. Parts and sales, it was a very strong quarter. And as Steve alluded to in our closing remarks, there will be a negative year-over-year comparison on parts and service. We already know that based on what we see coming up. And that just ebbs and flows, as you know, and it's not indicative of any changes in the business and the fundamental drivers of the aftermarket business. But it's timing.

And we're finally going to get the Shaw MOX units shipped in the next 2 quarters. There's 2 units. And what did you say, Chris, we signed that contract in...

2009.

2009. So we're in 8 years into this. The engines are still there. It's a complicated thing because it's going into a nuclear fuel reprocessing station down in Savannah River that Shaw runs, right? So this has been a bad deal for us from the beginning. And I don't even remember when it was, 2012 or '13, we wrote the thing down to 0 because we knew it was a -- we took a $2 million or $3 million hit because of the cost. So they've been basically sitting there with a little bit more work to be done, but knowing that we're kind of selling at 0 margins, and that's about $10 million of revenue.

Yes. $10 million spread over Q2 and Q3.

Yes. So finally, we'll get that out. And then the other -- obviously, the other big slug in there is the EDF issue, right, which we've talked about. So -- and by the way, the other thing about FME, I -- let me just say, there's a few really exciting things. The first is, as we said before, we had a record year last year in landing new government contracts. That worked really -- I mean, that work starts -- I mean, I'm sure we'll do some long lead time procurement this year, but it doesn't really kick in until '18, '19 and '20. But that's very, very positive. The second is obviously the OP2 engine, which we're extremely excited about. We shared some of the early performance data when we were in New York with that for the first time. And we're starting the endurance testing. And every time we -- every move we make forward in OP -- in the OP development gets us more excited about the potential of that.

And the third is the business has been working hard on selling into the power gen market. We signed this deal with MAN a few years ago to take some of it outside the government piece, to take their -- take some of their technology into the power gen market in the U.S., and we've got some promising things in the pipeline there. So we're not ready to announce anything, but we got a lot of things that are working towards the end of the pipe. So we're -- so I'm very optimistic about FME. But again, that's not going to affect Q2, right? These are things that we're building for the next several years in the future of the business.

Okay. If I could just sneak one more in. You mentioned kind of weakness in truck, and I think that continues. Can you just -- anything you're seeing that would get you feeling better about that? Or any kind of inflection where maybe that market picks up with some of these other markets you're feeling better about?

Yes. I -- look, January and -- January was really weak. February was a little less weak, and March was decent. April has been slightly off of where we were in March, but not back to where we were in February and -- or January, right? And a lot of our weakness going into the year was based on -- a lot of our projected weakness, I should say, was based on OE volume, particularly trailer kind of catching up with truck. Trailer had a better year last year. And so we have not seen the weakness in orders for trailers and truck. It's been much better than the industry had been forecasting. So I think it's still too early to tell. The order books for trailers are looking okay. But they can slide those orders without really any penalty. So that's just -- it's a rough indicator. It's not a hard indicator. And I think the aftermarket has been kind of cooking along. I wouldn't call it really weak, but I wouldn't call it robust either.

So that's what we're dealing with in STEMCO. So I don't know if that's helpful, Jeff, but it's kind of a nonanswer to your question. I don't see any big inflection points coming, although I also don't think the bottom's going to fall out either. It seems to be holding its own. I got to tell you, I told Milt this the other day. This quarter, the demand level underlying the company broadly in Q1 feels solid to me. It doesn't feel like it was an aberration. It doesn't feel like we're on the verge of a grand slam home run either. But it feels like a much more solid foundation across many of our segments, across many of our geographies than we've had for 3 years. So -- and that has been maintained in our order book. So that's why I think the company performance in Q1 was reasonably indicative of the environment that we're in.

Your next question comes from the line of Joe Mondillo from Sidoti & Company.

So I just wanted to come back to Engineered Products and to sort of clarify. Obviously, a really good quarter, and I appreciate the color, Steve, on that question. Just wanted to -- so your long-term guidance seems like it's -- I think it's mid-double-digit EBITDA type margins. I think we were close to 19% here this quarter. And that sort of guidance, that mid-double-digit sort of long-term guidance, we've already sort of surpassed that here in the first quarter. Obviously, seasonally strong in the first quarter, and that's going to trend down. But even considering that, it seems like we're close to that sort of long-term guidance. And you were even expressing that it wasn't really a home run of a quarter. So how can we think about long-term profitability of that business? And in addition to that question, in terms of aberrations, do you see any risk of not seeing clean quarters going forward? Or have things been cleaned up that, that should be a smaller risk at this point?

Let me -- I'll address the second half of your question, Joe, and then let Milt talk about the margin targets and so forth. There's always a risk of some aberration. I don't want to sit here and say there's no risk. We live in a risky world. But I got to -- but what I said I hold to, which is -- I mean, I'm not sure that our investors always appreciate the level of work and distraction that it takes to move factories, major investments in factories, build new factories while we're trying to run in an extremely weak environment and manage cost. I mean, in Engineered Products, in the last 3 years, we have exited 9, now 11, locations in CPI, exited 11 locations around the world. We've laid off -- had to reduce the workforce by probably approaching 15% of that group at this point in total, maybe more. I don't know from beginning to end. It's been a big number. We have -- we put a new President in there that's doing a great job 2 years ago, and the team has been upgraded.

We put people on the right spots. We got organized, and we're running very, very effectively. We had a fantastic focus in operational execution. We raised on-time delivery across the board, which we measure very precisely. We raised on-time delivery from probably a low in the mid-80s to now in the high 90s. And that's solid stock improvement that is not going to go away because our operating system is solid. And then in the bearings business, we built a new plant in China and relocated what we have. We built a new plant in Thorofare for the filament wound product and moved into that. We shut down our Chicago operation, consolidated that into the new Thorofare building. We shut down a flailing facility that we bought before I got to the company in 2006 in Germany that we've been burdened with for years, and we finally got that shut down and consolidated into our existing Slovakia and Heilbronn facilities. I mean, every one of those is a major -- and that all happened in the last 3 years, right.

And we finally, through late last year and early this year, got all that stuff done. And so yes, those were all the issues. And we are not going to face a situation -- I'm certain that we're not going to face a situation similar to that in Engineered Products in the next 3 years because I know what the footprint looks like. And we're in good shape, and we've invested in these facilities. That doesn't mean there's not improvement still to make. There is. But it's not -- the level of disruption of trying to run a business and make all these fundamental changes, it's just night and day, right? So yes, I don't think there's a ton of risk that all of a sudden, the wheels are going to fall off. And I think this is a better look at where the business is. Now to your question of the margins and so forth, it is the strongest quarter. Q1 and Q2 are the strongest quarters. So we have to recognize that. That's the structural issue with the demand profile on those businesses. So Milt, I'm going to let you speak to that.

Yes. Joe, as you know, in our Investor Day -- recent Investor Day, we had indicated that our margin target for the segment was 15.5% to 16.5%. So you're correct. If you just look at Q1, you say, well, at 18.8%, we're well north of that. Part of the answer, Steve just emphasized again, is the seasonality and the strong Q1, which is a seasonal high in the segment. Part of the reason is we indicated in our Investor Day that the targets that we were putting out were targets that we expected to meet or exceed. So these were not aspirational targets. And so I would expect, if the year holds, that we'll be in the first year of this 3-year target range. If the year holds and we continue to see kind of modest improvement throughout the course of the year, I would expect us to be within this range in the first year. So the -- once again, we're aspiring to beat the targets that we set forth during our Investor Day.

Okay. Also in addition to that, could you remind us sort of where incremental margins are with that segment at this point?

Our contribution margin, it is -- and this is general. This is directional. But it's probably in the 50% to 60% range, maybe closer to 50%. I don't have the -- our contribution margin chart in front of me, but it's -- that's directional. Probably around 50%.

Okay. And then I -- and I wanted to ask you about GST as well because that was, I thought, somewhat of an outlier in the quarter. Very strong quarter, it seems like, both on the top line as well as on the margin side of things. I know steel production and maybe some refining was certainly a headwind over the last couple of years, and that seems like maybe that's come back. But could you provide a little more color on -- is that sort of sustainable if we continue to see the trend that you saw in the first quarter? Any color there would be...

Yes. Yes, no, I think so. I think it's the first time we've had, I would call, a marginally acceptable turnaround season in Garlock for, again, for a few years, right? We've always said, and you all know, that there's only so long you can put off maintenance work. And again, it wasn't a blowout quarter from that perspective, but it was at least a move in the right direction. So -- and I assume, when you're saying GST, you're talking about the deconsolidated part, Joe. Is that right?

Yes, yes, that is correct.

As I said before -- I'm sorry, I have trouble isolating because we just don't think about it that way. We think about Garlock as the total family of companies, particularly now when we're literally 2 weeks away from starting, finally at the end of such a long journey, our confirmation process -- official confirmation process. So I think about the whole thing. So if you look at all of Garlock, right, we had good performance in steel end markets, in oil and gas end markets, in the downstream. And the pipeline business was a little bit weak, making Garlock overall down. Now that shows the pipeline business is in the consolidated portion, so it didn't show up in GST. So Garlock was ahead of our -- in total, Garlock was ahead of expectations. And so all this nonpipeline stuff, including the hygienic space that we're in now after the Rubber Fab acquisition, all did well. That was offset a little bit by weakness in pipeline. It's not unusual for January and February to start slow on the pipeline side anyway. So -- but it was a little weaker than we had anticipated. So all in all, Garlock was ahead. It was strong. That was skewed towards what you would see in the deconsolidated portion.

It's basic blocking and tackling and with some marginal help from the market. So the cost, the restructuring, so all of the things that we've been talking about that have been going on across the company are responsible for the GST results we saw in the quarter compared to last year.

Okay, understand. Just lastly and I'll jump back in queue here. The environmental reserve adjustment that you've seen in the last couple quarters, it's running at a $12 million annual rate the last 2 quarters, at least. Could you remind us what that is referenced to and sort of what the outlook going forward to that is?

Yes. The adjustments that we've had -- and you'll see the details behind this when we release our Q. But the primary adjustment that we had in the quarter is related to the Water Valley site. And we'll have more disclosure, once again, in our Q of what it was happening at that particular location. This falls in the category of a legacy liability that Goodrich put into EnPro at the time of the spinoff. We, as EnPro, have not operated a business there. It's a successor liability issue. And in the quarter, we will have a $3.25 million adjustment increase in our reserve for that particular site. So that's really the primary change that you'll see this quarter in our environmental reserve.

And we think that that's going to be -- that represents the picture for the year. So we see it being relatively flat throughout the rest of this year, Joe.

So you were -- when you were mentioning a 3-point something number, Milt, you were referencing the first quarter or another one in the second quarter?

No. It's in the first quarter. It's a reserve-taking in the first quarter. But as Steve just said, when we establish a reserve like that, add to the reserve, we'll look over a future period of time to cover what we know of at the point in time we take -- make the additional reserve. So we would not expect an additional -- absent some other pending developments that we don't know of, we would not expect an additional increase in that reserve.

Okay. And your -- and the guidance, the EBITDA guidance that you provided includes that reserve adjustment?

We exclude environmental reserve adjustments on our calculation of adjusted EBITDA. Because Joe, it's not an ongoing recurring expense. In response -- the charges we take are in response to specific situations that happen from time to time.

Your next question comes from the line of Liam Burke from Wunderlich.

You talked a lot about Garlock. And getting back to Sealing Products, could you give us some color on how the other 2 businesses have done? We talked about end markets, but did one particularly stand out this quarter?

No. It's 3 businesses, as you know, Liam. And STEMCO is a trucking business. That was a little under our expectations, driven by top line. But we had really great operating performance. The air springs business, as I highlighted in my prepared remarks, did very, very well. It's generating great contribution to the business. So it's -- our STEMCO business is just rock solid. It's very driven by aftermarket miles in trucking, right? So the good news is most of it's aftermarket. So even when there's weakness in OE volume, it doesn't impact us near as much as many folks who compete in the trucking world. So it's a little bit behind our expectations. But certainly, nothing to get too excited about. And they got a lot of really good things going on. And operationally, they've got a lot of the issues that we've been dealing with in the air springs integration behind them, and so that feels pretty good. And then in the Technetics Group, we did have some weakness in nuclear. Some of the shipments we were hoping to have in Q1 got pushed further out into the year. Again, that's a customer request, and that drives a lot of fluctuation quarter to quarter.

But we saw really good semiconductor demand, good aerospace demand and so forth. So that -- the Technetics business is a little bit longer lead time, not quite as much day-to-day order fluctuation in terms of what we get. It's not like Garlock, where we don't really have much visibility. A little bit more visibility in the Technetics Group, and a lot of the new work and new application work that we're doing is specked in. So we're working with the design team and so forth. So hard to move demand in the near term through any of our actions. The demand that we move in Technetics is typically 6, 12, 18 months in the future. Industrial gas turbines was still weak. GE is our main customer there, and their volume was weak in Q1. So again, Technetics is a little bit behind our expectations in Q1, but we see them kind of recovering that throughout the balance of the year. Milt?

Yes. Liam, if you look at it year-over-year and you look at the segment broken down at sales and earnings, we had earnings growth year-over-year in all 3 businesses. It was driven more by year-over-year, and Steve was making some comments relative to expectations for Technetics Group. But even in Technetics Group, if you look at it year-over-year, we had pretty significant growth in earnings, as we did in Garlock. We had more top line year-over-year growth in Technetics. And a lot of that was driven by the semiconductor market, strong sales we had in semiconductor, which we've seen a spike over the past few quarters. That's been really a strong segment for us. STEMCO, on a year-over-year basis, our revenues were down modestly, as we talked about in the -- in our prepared remarks. But with cost reduction and other things going on, we still had a growth in earnings overall. Does that give you a little bit more color year-over-year?

Sure. Yes, it does. And Milt, just quickly on capital allocation. You talked about the buyback. You do have growth capital projects better than your allocation -- capital allocation plans. Have those plans changed after the first quarter? Or it's pretty much the same as it was as you ended 2016?

It's always evolving. Things are deferred. Or occasionally, some new things come up. But overall, it's directional for what we talked about during the Investor Day. And just as a reminder, we think that over time, our level of capital, given the investments that we'd made over the past several years, because we really stepped up some of our investment, we talked about that at length, some things that we're doing to prepare for the future, whether it's investment on new facilities or new growth initiatives, and we expect our investment to -- and ERP systems, and we expect our investment over time to moderate. But we did indicate that we expected still kind of a fairly high level of spending in 2017 more in line with what you've seen over the past couple of years.

Your final question comes from the line of Justin Bergner from Gabelli & Company.

I guess I wanted to ask about sort of the embedded sales outlook in your guidance. I realize you don't explicitly guide to organic sales growth, but how much of the sort of higher EBITDA growth is related to a higher sales growth outlook versus other drivers?

Yes. It's -- the growth year-over-year is going to be -- you're going to see it more in our manufacturing efficiencies, our cost reductions, the results of restructuring. But as we mentioned earlier, across the board, not just in Engineered Products, but across the board, particularly in Sealing and Engineered, we leverage quite well with volume. So the volume changes do have some outsized effect, maybe greater than you might think on our -- so if you look at our top line, it's -- we would expect that very modest year-over-year change. If you exclude the impact of acquisitions, much more significant impact on earnings. So that's generally -- that's kind of general. We could go through and talk about what's happening in the individual segments, but I think that kind of covers it in general. Now at Power Systems, it's a different story. Because in Power Systems, revenue there is going to be a function of new engine sales. And we are going to have some pretty strong -- expect to have some pretty strong revenue quarters on the top line in Power Systems due to getting the Shaw MOX engines out. That's $10 million of revenues spread over the next 2 quarters. That's our last engine program that's on a completed contract basis, so we'll be recognizing all of the revenue when those are shipped. And then we'll have the acceleration -- some acceleration of revenues on EDF, although we're -- we've been accounting for that on a percentage of completion basis, so we have had revenue recognition there. So Power Systems, you have to kind of carve out some -- my comments earlier pertain primarily to Sealing and Engineered.

Okay. As I think about sort of the implied first half versus second half EBITDA guidance per your annual guidance and your view that the second quarter's going to be flat with the first quarter, I mean, EBITDA would drop fairly materially even if it were at the high end of your range from sort of $105 million to $110 million in the first half to something on the order of $90 million in the second half. I realize that Engineered Products is less strong, and Power Systems might also taper from OE engine deliveries. But are you expecting within that annual guidance Sealing Products to have a similar EBITDA cadence in the second half versus the first half?

In Sealing Products? We -- well, in Sealing Products, we typically -- the first half is typically stronger than the second half. We don't see quite the pronounced difference in Sealing as in Engineered, but we still have the pattern. Historically, in Sealing Products, the second quarter has been our strongest quarter. It's typically the first quarter in Engineered Products. But in both cases, the first half is stronger than the second half.

And it's a very -- Justin, thanks. It's very hard to call major seasonal patterns in our business. It really is. Because within each segment, there's different end use markets that are following different overhaul cycles, some of which have an annual nature to them, and many of which don't. They're driven by -- like semiconductor, there's no annual cycle associated with semiconductor. There's a long cycle effect, and it's a significant cycle, peak to trough. And the semiconductor business, it just doesn't have anything to do with the season of the year, right? And then you swing all away from that over to businesses like trucking, which is always stronger in Q2. Every -- it doesn't do as much in the winter. And so Q2, the first part of Q3, are usually the strongest in that business, and then weaker in Q4. So it's really hard to step back and see what's the overall seasonal pattern, right? Because when we give our guidance, we're trying to look at where -- we look at it obviously below the segment level, even below the division level, to try to pick out what these different things are and then kind of roll it up. So it's not the kind of top-down seasonal approach that -- I just don't want anybody on the call to be misled by the fact that we have this big seasonal pattern. Because it's -- as we've studied it over the years, there are some conclusions that you can draw, but there's exceptions to many of those conclusions.

Okay, that's helpful. I mean, maybe another way to phrase the question is I mean, excluding the seasonal variation in Sealing Products and Engineered Products, does the new guidance basically embed sort of sales staying at current levels -- first quarter levels, that is, as we go through the rest of the fiscal year?

Yes. It basically assumes that the modest improvement that we're seeing year-over-year in the first quarter relative to whatever seasonal impacts there might be remains about the same year-over-year as we saw in Q1.

Okay. And then just lastly, any updates on OP2.0 or sort of M&A initiatives versus what was communicated at the Investor Day?

Not really, Justin. As I mentioned in my prepared remarks, we're getting ready to start the endurance testing for OP2, which will reflect the last iteration of design. We're still not quite ready to start it up, but that will definitely happen in Q2 if we maintain our schedule. So again, still very, very optimistic about that. But we got to have a little bit more time on the test end before we really are able to talk any more -- anything definitive about the commercial side of that program. And on the M&A front, broadly for the company, we've got a good pipeline. And we're pretty encouraged that a couple of the things we're looking at, not huge, but a couple of the things we're looking at might come through. So we've had, as you -- everyone knows, we still have an active program. Strategy is still the same in terms of really smart, strategic bolt-ons that add a lot to the business. It's one of the reasons we wanted to highlight air springs. It's to show you all we're spending your capital effectively on acquisitions. So we got a couple of things that we might get over the goal line in the next quarter and a lot of things in the pipeline behind it. So we'll see. Not able -- not ready to announce anything yet because we don't announce them until we get them done. So -- but yes, it wouldn't -- don't be surprised if we have something that happens in Q2.

I'll now turn the call back over to Chris O'Neal for closing remarks.

Thank you, Candy, and thank you all for joining us this morning. If you have any additional questions, please give me a call at (704) 731-1527. Have a good day.

Ladies and gentlemen, this concludes today's conference call, and you may now disconnect.