Enpro Inc (NPO) 2018 Q1 法說會逐字稿

Good morning. My name is Kelly, and I'll be your conference operator today. At this time, I would like to welcome everyone to the EnPro 2018 First Quarter Results Conference Call. (Operator Instructions) I will now turn the call over to Mr. Chris O'Neal, Senior Vice President of Strategy, Corporate Development, and Investor Relations. Mr. O'Neal, you may begin your conference.

Thank you, Kelly. 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. Stephen Macadam, our CEO; Marvin Riley, our COO; and Milt Childress, our 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 a 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, 2017. 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 in which such statements are based.

Our earnings release and conference call presentation materials contain additional disclosures regarding the following. First, non-GAAP financial information; second, collective references to EnPro and our subsidiaries; third, the deconsolidation of Garlock Sealing Technologies, or GST, and OldCo, LLC or OldCo, during relevant periods until their reconsolidation effective as of July 31, 2017, and finally, pro forma illustrative financial information for the first quarter of 2017 presented as if GST and OldCo were reconsolidated for financial reporting purposes throughout that period. These disclosures are important to understanding comments we will make on today's call and we urge you to read them carefully.

Consolidated results in the periods after July 31, 2017 reflect a reconsolidation of GST, its subsidiaries and OldCo, as a result of the completion of the Asbestos Claim Resolution Process. We believe that investors will find comparisons of consolidated results for the first quarter of 2018 to pro forma results for the prior year period to be the most illustrative of the year-over-year performance of all of EnPro's businesses. For clarity, throughout this call, we will compare first quarter 2018 consolidated results to pro forma results for the first quarter of 2017.

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

Thanks, Chris. Good morning, everyone, and thanks for joining today. I'm pleased to share that we continued to experience favorable conditions throughout the first quarter in many of our markets. Demand in semiconductor, food and pharma, general industrial, metals and mining and oil and gas continued to be strong, while aerospace increased slightly and automotive was relatively flat. Power Systems also gained -- grew in sales versus the first quarter of 2017, driven by higher engine sale. This positive momentum was partially offset by declines in nuclear demand and softness in the industrial gas turbine market.

As you can see in the right-hand column of Slide 4, we expect these conditions to continue at least through the first half of 2018 with improvement expected in heavy-duty truck aftermarket parts and further increases in Power Systems engine sales. These positive market trends give us confidence in our ability to deliver strong year-over-year sales and earnings growth for the year. And as you likely noted in our earnings release, we're increasing our full-year guidance, which I'll cover in more detail at the end of the call.

Now I'd like to cover some of our performance highlights. To start, I believe that despite some issues that I'll describe in greater detail in a minute, the fundamentals of our company are very strong. In the first quarter, we generated positive year-over-year sales growth in each of our divisions and segments. Excluding the year-over-year differences in foreign exchange translation and acquisitions and divestitures, which we'll refer to as normalized results, sales were up approximately 5% in the first quarter over sales in the prior year. Consolidated adjusted EBITDA decreased 3.5% from prior year. The adjusted EBITDA decline is due to results in our Power Systems segment and in our heavy-duty truck business in Sealing Products, much of which we were expecting coming into the year.

Our Engineered Products segment had a very strong start to the year with sales and adjusted EBITDA increasing year-over-year. We saw continued momentum in the general industrial and European oil and gas markets, and relatively flat demand in the automotive and aerospace end markets. Normalized segment sales were up about 5% compared to the prior year. Segment adjusted EBITDA was up approximately 33% relative to last year, primarily driven by increased volume and relatively flat SG&A compared to last year. We also had a very good start to the year in 2 of our Sealing Products businesses, which was masked by some unique and challenging circumstances in our heavy-duty truck business.

In order to help you better understand the first quarter results in Sealing Products, I'm going to share a few details at the division level. Garlock and Technetics representing nearly 2/3 of the segment generated strong performance in the quarter as demand in many of their core markets continued to be positive and our teams executed on our innovation and operational improvement initiatives. Normalized sales, that is sales after the adjustments described in our earnings release for these 2 divisions were up approximately 3% and adjusted EBITDA was up approximately 15% compared to the results in the same period in the prior year.

As I mentioned a moment ago, STEMCO, our heavy-duty truck business encountered some headwinds to profitability that I will describe. First, some of the decline in earnings was driven by issues we knew about coming into the year, including the loss of business from 2 accounts in the middle of last year and a fourth quarter of 2017 promotion that affected volume in the first quarter of this year. Second, we experienced several unusual charges, including legal expenses warranty expenses, startup costs in our brake friction, manufacture and sale and relocation expenses from 2 small satellite sites consolidated into larger facilities. Third, we suffered from commodity cost increases that negatively impacted our margins. Most of these were steel prices and our pass-through price increases have been announced, but not yet in place in Q1.

Finally, STEMCO had an unfavorable product mix in the first quarter relative to last year driven by lower aftermarket sales in several of our more profitable product categories. While much of the decline in STEMCO's profitability was either anticipated or was driven by higher costs, a large portion of which are unusual in nature, we're still taking significant countermeasures to improve cost and productivity. And we're seeing improved aftermarket orders and anticipate price increases resulting from higher commodity costs to begin to take place. Both of these give me confidence that STEMCO's results will improve over the balance of the year.

In the Power Systems segment, sales increased approximately 18%. The increase in sales was driven by higher engine revenue primarily from EDF engine production, which was partially offset by lower aftermarket parts and sales revenue. In addition to the unfavorable product mix, SG&A costs were higher in the first quarter relative to last year primarily driven by commercial launch activities for the Trident OP engine. We are also working through the production launch of 2 new major programs, the Offshore Patrol Cutter and the Tanker Oiler. The first engines in the new program typically result in higher costs as we define the custom fabrication and assembly standard work necessary for these engines. The combination of these resulted in a 36% decline in segment adjusted EBITDA.

Marvin will speak more about Fairbanks Morse in a minute, but we anticipate aftermarket parts and service and engine sales on Naval programs, which are normally and significantly are with the remaining quarters of the year as we noted in February during our fourth quarter 2017 earnings call. Our backlog today at Fairbanks for parts and services are strong. Both of these facts give us confidence about the performance in the second half of the year.

And now, I'll turn the call over to Marvin to provide a further update on Power Systems and to speak to our commercial and innovation efforts.

Thanks, Steve, and good morning, everyone. As Steve noted previously at Fairbanks Morse, we had a strong quarter and sales relative to last year, but suffered a decline in profitability. As you'll recall, sales of aftermarket parts were quite strong in the fourth quarter of last year and as a result, we entered the year with a light backlog, which is since recovered.

In addition, we continue to manufacturing ship EDF engines, which are at near 0 margins. To date, we have shipped 6 production units to EDF facilities and have 16 engines left to deliver, 14 of which are currently in process and are approximately 40% complete in aggregate. We anticipate delivering the last engine for the program in 2019.

Additionally, we had higher SG&A expenses in the first quarter relative to last year driven primarily by higher sales and marketing expenses. As many of you know, our business can be uneven throughout the year. While Fairbanks Morse experienced a decline in segment adjusted EBITDA in the first quarter relative to last year, we expect to recover the shortfall through the balance of the year. We anticipate stronger top line growth, which will be driven by normal levels of margins for engine sales to Navy programs and growth in aftermarket parts and services revenue.

Notably, our current parts and service backlog has grown $5.7 million since the beginning of the year and is up 42% year-over-year. We're also working to control our costs and increased productivity, which will drive higher levels of profitability through the remainder of the year. We communicated on our last quarterly call that we expect a significantly stronger second half of the year compared to the first. And given current backlog and parts and service order momentum, we're confident in our ability to deliver on this as the year progresses.

Finally, I'd like to provide an update on our Trident OP program, which as you know, is our next-generation opposed piston engine that provides industry-leading fuel efficiency. We have continued to optimize this best-in-class product and have demonstrated its fuel efficiency advantages over the fuel efficiency of our competitive set. In the first quarter, our pipeline of sales opportunities continue to grow as we added potential launch partners and collaborated with them on their timeline.

In prior quarters, we have highlighted innovation initiatives across our segments. Today, I'd like to briefly note an exciting new product launch at the Sealing Products segment. As many of you know, Garlock is a manufacturer of high-performance fluid sealing products and its products are known within the industry as setting the standard in performance, quality and reliability. In the first quarter, Garlock introduced GYLON EPIX, a newly developed family of PTFE gasket to its customers through regional launch events in North America, Europe, Asia and the Middle East. With EPIX, Garlock is redefining high-performance PTFE gasketing by combining the traditional attributes of our flagship product GYLON with an innovative surface design.

Garlock's EPIX effectively seals a broader range of applications and is more forgiving during the installation process, allowing the end user to save valuable turnaround time, reduce rework and lower costs. Garlock's EPIX launch was well received by the distributors around the globe bringing to more orders than the launch team expected. This is just one example from our enhanced focus on new product development and innovation across EnPro.

And now, I'll turn the call over to Milt.

Thanks, Marvin. Before I begin, I would remind you that we permanently closed the asbestos chapter in our company on July 31 of last year. And in the fourth quarter, we substantially satisfied all of our remaining obligations under the joint plan. So the first quarter of this year was the second full quarter in which consolidated results reflect all of EnPro's entities.

In order to provide the most meaningful information about the first quarter, I will make comparisons of consolidated results for the first quarter to pro forma results for the first quarter of 2017. One final note before reviewing our quarterly results and balance sheet. Since Steve and Marvin covered the financial highlights for the quarter, I will not walk through segment results, as I had in the past. If you have questions that are not addressed on the call, please refer to the segment results, the segment summaries in the press release and accompanying tables.

Our first quarter sales of $368.8 million were up 9.1% over the first quarter of 2017. As Steve noted, normalized sales were up 4.8% over prior year, up 2.3% in Sealing, up 4.8% in Engineered Products and up 17.6% in Power Systems. Gross profit margin for the first quarter was 33.9%, down 215 basis points compared to the first quarter of 2017 resulting from performance and heavy-duty trucking and Power Systems as Steve and Marvin have discussed.

Adjusted earnings per share for the quarter of $0.85, we're down 11.5% compared to the first quarter of 2017. Adjusted earnings per share, adjusted for items such as environmental reserve charges, restructuring costs, impairment charges, acquisition expenses and normalized tax rates, all are shown in the tables attached to our earnings release. The first quarter year-over-year decrease is result of the items affecting Power Systems and the heavy-duty trucking part of Sealing Products, once again as Steven and Marvin discussed; a $0.5 million increase in corporate and other costs, $1.3 million increase in net interest expense, offset by $1.1 million decrease in adjusted income tax expense. Average diluted shares were 21.6 million for the first quarter of 2018, compared to 21.8 million for the same period a year ago.

Slide 15 summarizes our major uses of capital in the quarter. We invested $11.5 million in our plant facilities including software. Consistent with our previously announced dividend increase, we paid $0.24 per share dividend in the first quarter totaling $5.3 million. And during the first quarter, we also repurchased approximately 224,000 shares for total value $17 million under the $50 million program authorized by the board last October.

Our cash balance at December 31, was approximately $189 million and we ended the first quarter with cash of approximately $118 million, partially as a result of repatriating about $83 million of our overseas cash pursuant to tax reform. As discussed on previous earnings calls, we also are taking action to realize the benefits of the loss created last year in conjunction with the ACRP-related trust funding.

As you know, the tax refund estimate in connection with the filing of our 10-year loss carryback return has been a bit of a moving target due to tax reform modifications and clarifications by the IRS, since the initial announcement of tax reform.

In our fourth quarter earnings call, we estimated the tax refund to be $85 million. In our 10-K, which was filed subsequent to our earnings call, we estimated tax refund to be $102.5 million driven by tax planning subsequent to the earnings call. Based on the most recent guidance issued by the IRS, we now anticipate receiving tax refunds totaling approximately $128 million by the end of 2018. Beyond 2018, the carryback freeze up approximately $31 million important tax credits, which will reduce our tax payments in future periods. Also in 2018, we expect to receive approximately $17 million from ACRP-related insurance recoveries, about $1 million of which was received in the first quarter of this year.

As in previous quarters, we outline on Slide 13 our consolidated net debt leverage ratio at the end of the first quarter. As you can see, our leverage ratio at the end of the quarter was approximately 2.2x trailing 12-month performance adjusted EBITDA. As discussed on our last call, please note that we are limiting the asbestos-related insurance amount in this schedule to the portion that we know will be received this year. In addition to the $1 million received in the first quarter and $16 million expected in the balance of 2018, we estimate that we will receive approximately $27 million in future periods. The leverage calculation in this table does not include the approximately $128 million tax refund related to ACRP trust funding that I mentioned previously. Including this benefit, our leverage ratio at the end of the first quarter would have been approximately 1.6x.

Now, I'll turn the call back to Steve.

Thanks, Mill. We will close with the discussion of current market conditions and our outlook for 2018, and then take your questions. As we've always explained, we have limited visibility on future demand. With the exception of the new engine production in Power Systems, most of our businesses have relatively short order-to-shipment cycles and typical order backlogs range from a handful of days to a couple of months.

Additionally, the component nature of many of our products often obscures correlations with macro in-market indicators. Notwithstanding this limited visibility, we're optimistic about our overall financial performance for the remainder of the year. Garlock, Technetics, GGB and CPI are all performing very well, aided by favorable market conditions that continue to show signs of strength. STEMCO's backlog heading into the second quarter were several million dollars higher than at the same time last year. And as we've known since the beginning of the year, Fairbanks Morse expects engine volumes to increase in aftermarket parts and service sales to be higher in the second half of the year.

While rising commodity prices are a concern, we're taking actions to mitigate the impact on our margins. As usual, our guidance excludes the impacts of future acquisitions, restructuring costs, the impact of changes driven by foreign exchange subsequent to quarter-end and any litigation or environmental charges. Given current macroeconomic forecast and continued strength in most of our end markets, and despite the overall slow start to the year due to the results in heavy-duty trucking and Power Systems, we're increasing our expectation for the full year of 2018 sales and EBITDA. We expect sales to be up between 6% and 8% over last year and adjusted EBITDA to be between $224 million and $230 million for the year. About $3.5 million of the EBITDA increase over prior guidance is due to the estimated impact of currency and the balance of the increase as a result of current momentum in our businesses.

Now we'll open the line for your questions.

(Operator Instructions) Your first question comes from the line of Jeff Hammond from KeyBanc Capital.

Just on the truck issues, can you kind of bucket or quantify the all-in of the number of issues and then if you can go through either -- quantify in individual ones or kind of where magnitude and then within that, what is kind of one time and isolated to the quarter versus carries over into 2Q?

Yes, Jeff. (inaudible) once again talk about the major buckets. We've obviously done all of our scrubbing, we kind of get everything quantified, we have our action plan, our countermeasures, but Steve framed it up well, I think in the comments. First of all, we had some volume loss that was expected. So coming into the year, if you -- if we looked at our budget for Q1 in the heavy-duty truck business and STEMCO compared to last year, we were expecting a year-over-year decrease in the first quarter. So the loss of the key customers was expected, we knew we were going to be impacted by rising commodity prices and that there was going to be a lag before we could look at price increases to recover some of that. So those things were expected. We also knew that we had some [ATB] related litigation with some legal expenses and we also were involved in doing the kind of the consolidation of some (inaudible) into one that Steve describes. So all of that was known. I think that what we did not see coming into the year, we saw as the quarter was developing is a little bit more of a negative effect from the mix in the business with OE continuing to be strong and aftermarket, particularly some of the higher margin products to be off. Now if you look at the backlog coming into the second quarter of some of our higher margin product lines has picked up. So --

Milt, let me jump in because I think Jeff, the relative weakness in the aftermarket sales was exacerbated by Seal promotion that we -- a promotion that we did in Q4 of last year. So it did pull forward some demand. And the other thing that is probably more, more permanent is, there's just a lot of new equipment on the road. And so the newer the mix of trucks and trailers that are driving around the -- the less maintenance is done on those trucks. And as you know, the OE demand for both trucks and trailers over the last few years has been well above long-term trend line. So it's a relatively kind of new fleet, when you look at the total U.S. trucks that are on the road. But that said, that's probably less impactful than the pull forward. So I have a lot of confidence that we'll be just fine in STEMCO, I really do. It's not -- most of the stuff is cost that hit us in Q1 and a lot of things came through. The team is operating well. When you peel back the covering the look at the core operations, it's just -- it's solid as it has ever been. We got a little bit behind on steel pricing because we were a little bit surprised as everyone was with the spike that we saw that was associated with tariffs and so forth. So we've got price increases that are already announced and already on the street, those will start to pass through our commodity increases. So I don't have a lot of concerns about STEMCO, but even short of that, we're going to be taking some pretty aggressive corrective actions to manage our cost and position ourselves to have acceptable margins going forward. But I don't -- it's hard to see for you guys but as we peel back and look underneath the segment, I feel pretty confident that STEMCO is going to be right back on what has been our internal plan for the year.

And Jeff, if you look at the year-over-year delta and earnings EBITDA for the business, I would say roughly this is just roughly about 40% of the year-over-year negative variance was related to some of these kind of untypical, non-typical business expenses, the legal and the facility changes and so forth. Now what we have some of that dribble into the second quarter on the legal front, yes, it's likely we are going to have some, but that will help you maybe ballpark it a little bit.

Maybe just ask in a different way. So I would like a $6 million variance and I guess I didn't appreciate some of the volume loss in the litigation, some of the things that you knew. So I mean, can you just give us a sense of what the variance was versus what you were expecting, maybe since you guys had a better understanding of some of the dynamics?

The variance that we were expecting is probably about half of that, Jeff. And the other half and again, some of the stuff we actually weren't expecting was warranty cost, the legal fees even came in higher than we thought in the end because we didn't really know that going into the quarter, we knew we had these issues, but it the warranty cost, it was the start-up costs, the friction line. It was the facility relo cost, we shut down 2 small operations and moved them, 1 in Mexico, 1 in Rome. We got out of the distribution center there, consolidated back. And we just had a few things. So about half of what you had quantified maybe slightly more than that was kind of what we expected and the other half was kind of -- just got the one-time issues. Now -- is that helpful?

Yes. And then, just on the kind of what -- so it sounds like legal lingers. The warranty and the relocation implant move, are those costs behind us?

Yes, well the 2 -- yes, the 2 moves are done. We always think we get all the warranty costs, but what -- we don't know, Jeff, to be honest with you, I mean these are quite frankly driven by Duroline friction warranties. And a lot of our litigation costs are driven by trying to get the historical Duroline relationship, cancel, done and get out of that situation because they've been such a poor supplier to us over the years. That's one reason we're excited now about having the friction Duroline actually up in running. So I'd say the lion's share of those one-time costs are behind us. We'd like to sit here and say it's 100% behind us, but I don't believe that to be the case, but I would certainly think that 75% to 80% of them are behind us.

And then just on the -- it looks like the guidance raises 3 points on revenue. Can you bucket what is FX and then the bigger buckets of the delta in the businesses, and then I'll get back in queue?

Yes, we -- as Steve noted in the comments about $3.5 million, so we were $216 million to $222 million before in guidance. So we raised it about $8 million and about $3.5 million of that was related to currency changes in the quarter. So that's a combination, Jeff, of the income that resulted from favorable currency on the EDF contract plus our estimate of the translation effect of currency at the end of the first quarter assuming that continues throughout the year compared to where it was at the end of year at the time we made our initial full-year guidance. So that -- the $3.5 million and then the balance of roughly $4.5 million is a result of us got tightening our thoughts about the year, encouraged by the first quarter results that we saw in 4 of our businesses and the confidence that we have in the full year for both Power Systems and heavy-duty trucking part of Sealing.

I think this goes without saying, but I want to just reiterate it, Jeff. I know you know this, but I want to make sure everybody else knows it. We're talking about the currency rates at the end when we close the quarter, not today because as most people know, the dollar has strengthened since the end of the quarter. It's really back to where it was as we ended the quarter, as we ended the first quarter -- as we entered the year, I should say. So...

It will continue to.

So the numbers that we post or that we talked about in the forecast and all that, assume those currency rates as of the end of market.

And that's -- except the euro, which is the biggest currency translation for us, it was at $1.23 and we're sitting here today at $1.20 which is where we were at the end of the year.

Correct.

So we'll be very explicit going forward as the year plays out as we talked about guidance on the impact of currency versus other changes.

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

Just to touch on the guidance, that $4.5 million related to organic improvement. Could you give us sort of the puts and takes throughout your different segments or throughout the different businesses, what ones really are outperforming and which ones are under -- obviously STEMCO seems like maybe you brought down those expectations, but just give us the puts and takes?

Yes, I think it's evenly split. if you will, between Sealing obviously because of the Garlock and Technetics and Engineered Products. It's kind of across the board really. We again, the simple story is we're performing better in all parts of the business. Other than STEMCO, SME has always been a back half story. We're very encouraged by the way on the parts and service backlog and encouraged by the progress we're making in Fairbanks overall. So it's kind of -- everything that we thought going into the year with Fairbanks is essentially just as good, maybe slightly better because of parts -- because of aftermarket parts and service backlog that we see today. STEMCO is slightly lower only because we gave away -- we took a little bit of a step back in Q1, but we have full confidence that we're going to recover throughout the year and be pretty darn close to where we were going into the year. So the strength is really from the other 4 divisions that make up the balance of Sealing and all of the Engineered Products. I think it's the way I would characterize it, Joe.

Yes, I don't really have anything else to add Joe. We were up nicely on the earning side at Garlock, at Technetics Group, at GGP and CPI.

Order pattern is still strong in GGB, strong in Garlock, strong in CPI, which are 3 businesses. We don't really have a backlog visibility that ever really helps us. So we just look at the flow of order patterns week-to-week. It's still healthy in all 3 of those. And quite frankly, our backlog in Technetics has never been higher. So we don't see any -- again I caveat that by things changing, the macros obviously will -- but we if I stop reading the paper and just looked at our own internal order patterns and backlogs, I feel this is good. I feel better than I did at the beginning of the year because things feel stronger. So that's essentially what we're looking at which is what led us to increase our guidance.

All right. And so looking at the Sealing segment, obviously the year-over-year comp was a big disappointment in the first quarter which we've already covered. Going into the second quarter compared to a year ago, I think you were at on a justice basis, just a little above 14%. Considering sort of the lingering effects at STEMCO, but then you're raising your guidance relative to Garlock and Technetics, how do you see sort of the comp in second quarter relative to a year ago? I'm just trying to get my sense of where STEMCO waives in to the rest of the segment and how the year-over-year stock comp starts to look in the second quarter and then it sounds like STEMCO works itself out by maybe the second half of the year.

Yes, we would expect the year-over-year in Sealing for the second quarter for sales to be up and margins, EBITDA margins to be relatively flat, maybe just a bit down, but I would call it flat from a rounding standpoint to last year.

And then in terms of looking at our Power Systems, you guys always have a pretty good visibility with this just given backlog and it seems like things are trending really positively. The first quarter it sounds like the low watermark of the year. Just trying to get an idea of where we're seeing revenue growth for the year and maybe how margins fall out. I think last call you sort of called out that margins could be -- should be sort of comparable to a year ago, but it seems like you're stressing the aftermarket a bit more. So are we looking at maybe some improvement on the margin side and where do we -- what kind of growth are we looking at for revenue at Power Systems?

I think our margins will -- we could see some pressure on our margins year-over-year because of the strong engine sales that Marvin and Steve talked about.

And it's primarily -- it's a lot of EDF volume. I mean it's just (inaudible), Marvin, we're going to ship, we've shipped 7 EDF engines as of today. And how many more are we going to ship through the rest of the year?

So we've shipped 6 through today. And we should make our way -- all the way through 15 at the end of the year.

So we got 9 more EDF engines to ship Joe, at essentially 0 margin, right, it's where we are. That's what's putting pressure on our margins. If you take that out of the equation, the margins would look healthy.

And then, so I think we said this essentially on our last call, but we're expecting a much stronger second half of the year in Power Systems from an earnings standpoint than first half. So our expectations would be a ramp up from Q1, Q2, Q3, Q4 as the year progresses.

Okay. And relative to the last call, are you more or less positive on the margin -- I guess, on the profitability side of the business? Could I -- I thought of -- yes, at Fairbanks, because I was looking at -- I thought you said last quarter or at the last conference call that margins should be comparable to a year ago. And now you are sort of saying that maybe they're a little down because of the --

No, I'd hold the comparable -- I'd hold the comparable last year, it's good place to be.

And then I guess, lastly just curious what's going on with CPI in the Engineered Products segment? I think GGB sounds like it's trending pretty well, but is that at all a contributor?

Oh, yes. CPI margins were just a little bit below 20%. So I mean, CPI is doing very, very well. Solid execution, solid cost management, decent demand I wouldn't say things are like white hot in terms of the market, but the market is solid, continued a lot of the maintenance that was deferred in the oil and gas downturn again in '16, '17 time period has come back to us. And our execution has been good. We've got some new products in the market that should ramp up of course, through the back half of the year and provide some incremental sales. So CPI is executing quite frankly, as well as it's ever has since I've been with the company. So things are -- I think that all of the problems are behind us and at this point, it's a rock-solid business and we're looking for increased volume through new product innovation and some other things that we're doing there right. So I have no concerns about the profitability of CPI. And then GGB I would echo the same thing. I mean, we didn't have -- obviously we didn't have to work through all the huge problems of CPI and the GGB portion of that business it's always performed well, but it's -- we're continuing to execute better and better in GGB. Our operational team has done a really phenomenal job. Our commercial efforts are improving all the time. It's a very -- the business leveraged nicely, as we continue to grow volume there. We're managing cost closely. So Engineered Products as a segment for us is in really good shape. Automotive is the only thing this year that's been -- it's been flat, but it's been strong. And so, we've always said it's the industrial portion of that business where we make better margins anyway, so we're not quite as affected by smaller fluctuations in the automotive demand but it's still just fine. We didn't go into the year expecting it to be growing this year. So anything you want to add Marvin?

Yes, there is one thing. In Engineered Products and we've talked about this in the past and we did last year, that in this segment, we tend to have the strongest part in the first half of the year, the first and second quarters are typically the strongest quarters. Last year it was the -- first quarter was the strongest, we probably expect that to be the case now, but we'll see. General industrial continues to be strong, might be a little bit different this year. So that's the only other thing that I would add. We had a really good first quarter. We expect the first quarter in the same quarter be our strongest quarters in that segment.

That's just a general seasonal comment.

Yes.

Your next question comes from the line of Liam Burke from B. Riley FBR.

Could we touch back on the Power segment? You have a healthy backlog and could I get a senses to how that timing shapes out and how it would translate to revenue growth both through the end of the year and next year?

Well, Liam I will start and Marvin might have some additional color, but we are expecting to have some healthy top-line growth this year because of (inaudible) the percentage of completion in the engine revenues programs that we've talked about. So top line is it's going to be driven by the new engine sales. We expect to have a much better second half year than first half with aftermarket parts and services. So we're encouraged by that too. But there will be some pretty big dollars of growth that will come from the engine sales. The challenge, though is that, because a lot of EDFs we discussed, it's not going to translate to same type of earnings growth on the -- we get to the bottom line. And then, so this year we would expect the step up in total revenues for the business partially driven by new engine sales. And then with the growing backlog from programs that we've won, that we've discussed on prior calls, we believe that the future is bright for the next several years. And Marvin, I don't know if you have any other color that you want to add to that.

Yes, I would just add to Milt's comment. Right, the future really solid, the top line should remain strong primarily driven by multiyear engine programs and we'll have some sort of average margins that we've had just primarily because of that mix right. You've gotten near 0 margin programs that we need to flush out of the system and we're going to be a little rocky until we get those out of the system, but the aftermarket bolstered quite nicely and quite frankly, the backlog of higher margin engine program bolstered quite nicely. So I think the future is pretty bright.

So what happened is the new engine sales as we get EDF out of our system, and especially as we start doing the past -- the first couple of engines in new Navy program, we would expect our learning curve to result in higher margins on new engine revenues and then obviously those new engine revenues are seeing the future for aftermarket parts and service.

Sort of going back -- I'm sorry Milt, I'll let you finish.

Go ahead.

So I go back, according to your prepared statements, EDF is obviously a new 0 margin, it's 40% complete. So as we look forward, we've got a good backlog of new engines at margin offset by probably a negative mix because it will be heavily more weighted towards systems and then we still have EDF filtering through the power line, I mean as we go into 2019.

Yes, there was a lot of EDF this year, should have a little bit less, (inaudible) just going to plan next year. (inaudible) impact of that this year.

Okay, and you've stepped up your R&D investment with the freed up cash. You highlighted new product announcement at Garlock, how has the new product pipeline been going at the Sealing business in addition to this new product release?

Right. We highlighted that Liam, we would like to start at that since our challenge in this company as a diversified industrial is a lot of small wins. We've chosen and we've done this over the last several quarters to highlight just 1 or 2 because it is kind of a game of bunch and singles. So we highlighted Garlock EFIX. Since the first quarter, we were actually -- this is current, we're in the process of launching a very exciting new isolation gasket as well in Garlock. We've got a number of really trying new products for aerospace and semicon and the other divisions or the other business units within the Technetics Group. Even STEMCO has bunch of new products that are underway. So I think quite frankly, I feel very good about our product pipeline across the board. Of course, the biggest investment we've made has been in the OP Trident, which we're also very excited about. It's just a little bit longer timeframe, because it takes -- it's a very long sales cycle and it takes -- these are major investments of new power facilities around the world. And so the only thing we're bucking up against with the Trident is the fact that we don't have one in the field. But we'll get one in the field -- one or more, we'll get some of the field in the near-term and then the markets, the industry is going to be able to see the fuel efficiency benefits that we are very confident they will see because we've seen it. So I'm pretty optimistic our company is -- as we've said in the past, we went through a decade and a half without spending any money on development. And so we had -- basically we had no pipeline until a few years ago when we really launched this effort and now we've got a nice pipeline that's growing of product innovation and developments that we're doing.

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

Steve, my first question relates to just the price cost pressures. I know that you've talked about them in the context of STEMCO, but how are they affecting your other businesses in terms of your pass-throughs, whether they are lagged or not lagged and your ability to put price though?

Yes, I'd say that we've -- it's an ongoing challenge for us. Our company performs better in rising commodity price environments for 2 reasons. One it does give us the ability to go in and pass through pricing increases because things are moving and the world knows that commodity prices are going up. And many times, we can capture margin in that process over time. The second is when that's the case, that means the markets that we sell into are strong, right. So we sell a ton of product into the steel industry, we sell a lot of product into extraction in metals and mining and commercial and agricultural. All the things that are driving commodity prices up are the verticals that we sell into. So, if you look at EnPro's performance over a long period of time, we actually, believe it or not, like it when it's a rising environment even though we have to go to work more on the commercial side to pass through our commodity price, commodity cost situation. I'm not very concerned about it. The steel thing (inaudible), the steel thing was a little bit of an anomaly to be honest with you, but we'll recover from that. I'm not even concerned about recovering from that. It's really a timing issue for us.

Would you (inaudible) to sort of suggest how much outside of STEMCO price and raw material sort of weighed down in the quarter?

I don't think at all.

Okay. And then just on the STEMCO side, was the aftermarket OEM mix headwind anticipated coming into the year, I think you said it was?

It looks. We frequently do not every year but we frequently do a fourth quarter promotion. We did one in -- let me get this right, we did one in fourth quarter of '15 making the first quarter of '16 a little weaker. We did not do one going into 2017, so if you look at the comps of Q1 as for STEMCO '17 to '16, they're very good and part of it was, we had done a steel promotion -- a promotion that we didn't repeat. And then this year, we offset that, like as last year, a year ago, we did not do one and this year we did. So that affects year-over-year aftermarket volume in Q1. Aftermarket volume in Q1 in STEMCO is always weak because of weather. We've talked about this before. Fleets are reluctant to bring their equipment off the road, when there is still bad weather, and salt and rain and snow and all those stuff, all the -- not rain so much, but snow and ice and salt on roads and sand and so forth. So what we typically do is we see the aftermarket volume just seasonally begin to pick up in Q2 and Q3 as the maintenance cycle happens and warm weather comes right. So the issue is that pull forward associated with the promotion on a percentage basis has more effect on the aftermarket in Q1 than it would on any other quarter, right. It's just kind of the way the industry works. In the industry, we're not unique in doing promotions in Q4. And again, we don't do it every year so throws a little bit off. So it's always hard going into the quarter to figure out exactly what that looks like, right. So that part of the of the pull forward I'm not worried about. There are a couple of product lines that we make a lot of money in, in the aftermarket that were under -- are under competitive threat and competitive pressure which we're reacting to as best we can. But that is more permanent mostly in the brake products and suspension products area.

And then lastly, just on liquidity. I just want to make sure I understood the moving parts there. The $128 million tax refund, that's about $20 million higher than you were anticipating -- about $25 million higher than you are anticipating, and then there is no give back there I take. And then the $31 million of reduced taxes in future periods for the use of foreign tax credits, what sort of changed there and how long will it take to realize those benefits?

In that, certainly answer the second question. We anticipate being able to use those over the next 3 years. So some this year, some in '19, some in '20, 2020. So that -- and the reason that's -- there has been somewhat of a moving target. I don't want to give too much detail just now. I'd be happy to go offline with you and give you kind of all the details of how -- what's changed with tax reform and so forth. But essentially at a very high level, initially regards from IRS, which called us got surprised, but we were going to have to use our laws in 2017 to offset that whole charge which therefore would have reduced the value of the carryback and then we got a clarification. We had done some lobbying on this point, I don't know how much the lobbying had an impact on, but there was clarifications from the IRS and said no. I have to do that. So now we were able to go back and use, take advantage of pro-loss on the carryback, which is the primary reason for the number jumping up. So that's in a nutshell. We had tax planning I referred to in the script. We did do some tax planning where we increased some of our pension contribution to make sure we're in good shape there, which gave us some additional loss that we could fold into our 2017 loss carrybacks. We did some other tax planning that helped us get that number bumped up that refund -- expect to refund up of a bit.

So it's not all the asbestos, the bump in...

Most of it is. That's the tax planning just on the margin.

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

Just a follow-up on Power, just to make sure we're clear and close up here. So can you give us the revenue contribution this year from the EDF that comes in at 0?

Give us one second, Jeff.

And then why you're looking for that. So, I heard a couple different things on the margins. So we should think of margins in Power Systems as flat year-on-year ex the EDF or even including that?

Yes it was including everything. The asset -- relative asset, maybe a fraction above or below because of the high engine revenue and margins that are about the same. And so it's I'll just call it relatively flat. And then question about EDF revenues are about $30 million roughly of EDF revenues that we expect and to say...

What was it in '17, what's the incremental?

Look we had that -- (inaudible).

Okay. I can follow up offline. Just last one, a CPI number of years are bit of a challenge. You resized it, it sounds like it's performing really well. But I think back when it was challenged, I think there is questions of how it fit, whether it fit. So now that the business is performing better how do you think about that in terms of fit within the portfolio?

Well, Jeff, I think about it exactly the same. The questions were ones that you ask, I wasn't asking myself. I mean we always look at businesses and do they have a long-term future in our portfolio which is really based on whether we feel like we are the rightful owner and we have the ability to create a real competitive advantage and actually grow the business. The nice thing about CPI performing now is that we got a little time to really see if we can make that growth happen, if we can, it does have a long-term future with our portfolio. If we can't then it's isolated to the size that it is today in a fairly narrow market than to the extent we find something better and need the capital or believe we're not the rightful long-term owners and that will be a different question. So I don't -- as I've tried to share with you and others many, many times, when a business is not performing well because of things we control, that's not the time in my mind to divest it and that was the case with CPI. It was not performing well for the market decline reasons that happened because of the drop in oil and gas. The precipitous drop, I mean from $120 a barrel to $30 is not a small drop and so the combination of that as well as our operating issues. And so now that oil and gas market has stabilized and our operational issues are behind us, it's much, much easier for us to make a -- the right strategic call on that vis-a-vis the EnPro portfolio, right. But I think you can appreciate the fact that when a business leadership team is fighting through all the restructuring and trying to get things operationally in line, there's not a lot of effort on growth and new product development and improving our value proposition and so forth and so on. That work is going on now. So I'd say that's the only way I know how to answer it and it is not necessarily unique to CPI, it's really how we think about being the rightful owner of all of our assets. It's why we divested the Garlock Rubber Technologies business a number of years ago 3 years or 4 years ago. It's why we divested the Quincy Compressor division under my tenure maybe 7 years or 8 years ago, I don't remember exactly when it was. But that's why we even divested Franken plastic, that's why we divested -- we divested bits and pieces of the portfolio that don't make sense. And so that's I'm just been transparent on how we think about it.

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

Guys, just a couple -- 2 follow-up questions. Number one, excluding the $128 million that you expect to receive in the tax refund later this year, what kind of tax rate are you looking at for the year?

If you look at normalized, I think that the way for me to answer it, Joe, is if you look at our adjusted earnings table which I think is the last page in the earnings release, we are using a quite normalized tax rate, we're using a 29% tax rate. Obviously that would reflect our global end of income. It would obviously reflect the lower rate in the U.S. and also reflects the tax, state taxes that we would have. So that's the rate that we're using to determine our adjusted earnings and adjusted earnings per share.

And then that could see downside relative to some of these carrybacks and other items that you sort of highlighted, is that fair?

Hold a sec, firstly I don't want to confuse our tax rate for earnings purposes versus the cash effect of taxes okay. So if you look at the actual cash taxes that we're going to be paying and you take into account the refund obviously you have totally, different answer. (inaudible) got your question correctly?

Yes I think so. The cash tax rate is going to be much lower than 29%, is that relative?

Well yes certainly. If you look at this year, (inaudible) all the cash that we're going to getting back. Now our provisional, our tax provision in our P&L is going to move around a bit. It was obviously very high this year, because quarter-to-quarter as you know, the tax provisions obviously can move quite a bit, especially early in the year. And one of the reasons that the tax provision is going to be a little bit higher this year is because of some of the discrete items that we have that are in connection with the carryback and tax reform. So there is going to be some noise this year, not just for us, probably a little bit more for us because of the carryback, but there is going to be some noise in tax provisions for many, many companies this year because of the transition.

Okay, and then just last question, regarding SME, what are the sort of your long-term margin targets, take out EDF and all the backlog that you have sort of building the positive trends, where do you think margins can go to say post EDF?

I think we have -- if you look at the businesses configured today which is based on the new engine side primarily Navy, Marine so if you exclude the impact of the Trident OP, which is obviously come with growth right and the kind of 60% aftermarket and 40% new engine revenue, and I think that we've got probably -- probably upper teens type EBITDA margins for the segment. Now if we have the cash excess that we think we can have over the next few years on the commercial side with the Trident OP, I suspect we're going to find (inaudible) is that's probably going to have a negative impact on margins. But we're going to be getting additional growth that comes from that. And then over time, we would expect the margins on the commercial engines to move up as well as.

As they start to pull aftermarket parts.

And as our volume, net volume increase and we get more experience.

Obviously that's a margin comment not an absolute dollars of contribution. We'll be making money along the way, but on a margin basis. And the commercial power market is competitive. So the more success we have on that basis, the more growth we'll see, the more mix down of margins we'll be making more money and then after -- we usually think what Marvin did, the engine has to be in for 3 years to 4 years before it starts to really see any significant aftermarket demand.

We've been trying to balance that right now to make sure that we don't run out too far.

And you next question comes from the line of (inaudible).

My question is already answered. Thank you.

And that concludes the Q&A portion of today's call. I now turn it over to Chris O'Neal for closing remarks.

Thank you, Kelly, 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.

And this concludes today's conference call. You may all disconnect.