Greetings and welcome to the EnPro Industries First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Chris O’Neal, Senior Vice President of Corporate Development and Investor Relations. Please go ahead, sir..

Thanks, Kevin. Good morning and welcome to EnPro Industries’ quarterly earnings conference call. I 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 CEO; Marvin Riley, our COO; and Milt Childress, our CFO will begin their review of our first quarter performance and outlook in a moment. But before we begin our discussion, let me point out that we will be making statements on this call that are not historical facts and that are considered forward-looking in nature.

These statements involve a number of risks and uncertainties that are described in more detail in our filings with the SEC including our most recent Form 10-K. We do not undertake to update any of these forward-looking statements. Also during the call, we will reference a number of non-GAAP financial measures.

Tables reconciling these measures to the comparable GAAP measures are included in the appendix to the presentation materials.

With regard to guidance that we share on this call, we have limited visibility of future demand with the exception of 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 end market indicators.

Our guidance excludes changes in the number of shares outstanding, impacts from future acquisitions and acquisition-related costs, restructuring costs, incremental impacts of tariffs and trade tensions and market demand and cost subsequent to the end of the first quarter, the impact of foreign exchange rate, changes subsequent to the end of the first quarter and environmental and litigation charges.

Now, I’ll turn the call over to Steve..

Thank you, Chris. Good morning and thanks for joining us today. We had a very strong quarter in our Power Systems segment both sales and earnings up significantly compared to the first quarter of the prior year due to strong demand for military marine engines and aftermarket parts and services.

We also saw year-over-year strengthened food and pharma and petrochem in sealing products. These positive results were more than offset by unexpected softness in Engineered Products, automotive and general industrial businesses due to weakness in Europe and Asia.

And by the anticipated year-over-year declines in Sealing, related to a softer semiconductor market, last year’s midyear exit from the industrial gas turbine business and timing-related differences in ship – in shipment patterns and product mix.

As a result of both, the anticipated differences in Power Systems and sealing products and the greater than anticipated weakness in Engineered Products adjusted EBITDA in the first quarter was down approximately 12% versus last year, excluding the impact of foreign exchange on the EDF contract in both the current and prior periods.

Against our expectations for the quarter adjusted EBITDA was down 4% or about $3 million. Of this $3 million shortfall to our plan about $1 million was due to the impact of the stronger dollar on the EDF contract in Power Systems.

And the remainder primarily due to the earnings impact of softer-than-expected market conditions in the European and Asian automotive and general industrial markets in our Engineered Products segment.

We currently anticipate a relatively strong second quarter and we’re adjusting, full-year guidance only for the impact of the first quarter currency related EDF loss provision, which has been our normal practice.

Based on foreign exchange rates at the end of the first quarter, our revised adjusted EBITDA guidance for 2019 is $224 million to $232 million. This translates to an adjusted diluted earnings per share outlook of $4.25 to $4.52 for the year. Now, I’ll turn the call over to Marvin, who will provide some additional comments on our guidance.

More details on countermeasures we’re taking in Engineered Products and some additional highlights..

Thanks, Steve and good morning everyone. I’d like to start by noting several reasons for our confidence in the 2019 full-year guidance. First, in a typical year, we experience year-over-year fluctuations in our quarterly results for both anticipated and unanticipated reasons.

As you may recall in 2018, despite a soft first half of the year, we still achieved the full-year guidance that we set forth at the beginning of the year, while our first quarter results were below prior year, some of this was anticipated and we are expecting a stronger second quarter than last year.

Second, and specific to this year, we began taking action in the first quarter to adjust our cost structure in Engineered Products to address the market weakness we began experiencing in European and Asian automotive and general industrial markets.

Finally, we have a strong aftermarket parts and service backlog in Power Systems that provide some upside to our original plan. In response to the softer than expected European and Asian automotive and general industrial market conditions, we have launched a reorganization plan, a hiring freeze and a reduction in temporary workers.

We’ve also implemented cost control measures and taken action to reduce inventory in these businesses. We’re already seeing the early benefits of these actions and anticipate continued improvement throughout the remainder of the year.

Although the majority of our year-over-year total Company shortfall in the quarter was anticipated, we do not consider this level of performance to be acceptable and has communicated this message throughout the Company. We have a high standard of excellence that must be achieved during every market environment.

During prior calls and our Investor Day, we’ve been acutely focused on leveraging the EnPro operating system for continuous improvement within the organization to drive shareholder value.

I’m pleased to announce that during the first quarter, we took a large step forward by putting the right person in place to lead our capability center, which has been created as a part of EnPro’s operating system to support our priority of improving our margins and increasing cash flow.

We have identified an exceptional leader to lead the team that will drive best practices and operational improvements across the organization. Additionally, I’d also like to comment on our efforts to achieve increased growth as we discussed during our Investor Day in March.

We’re focusing our growth in food and pharma, aerospace and semiconductor markets. Food and pharma, continue to grow this quarter and we remain committed to seeking out opportunities to expand within that market. In aerospace, we’re actively looking at a variety of opportunities to grow our portfolio.

Finally in semiconductor, our strategy is to further expand into the aftermarket, and we are already seeing progress with this effort. Now I will turn the call over to Milt to discuss our financial results for the quarter..

Thanks Marvin.

We experienced mixed conditions during the first quarter with demand in military marine engines and after part market, parts and services, food & pharma and petrochem being strong in the quarter, offset as Steve and Marvin have discussed about weakness in Engineered Products, European and Asian businesses, power generation and the anticipated softer semiconductor market.

In total, our organic sales, which we defined as excluding the impact of acquisitions, divestitures and currency translation were relatively flat over the prior year period, with strong growth in Power Systems, offset by declines in Sealing Products and Engineered Products.

The sales decline in Sealing Products was driven primarily by softer demand in semiconductor and about the 2018 mid-year exit from the industrial gas turbine business, which contributed revenues of $3.7 million in the first quarter of last year.

The decline in Engineered Products was largely a function of the drop in European and Asian sales in both automotive and general industrial markets. Adjusted EBITDA was $43.1 million in the first quarter, down 16.1% compared to the same period in the prior year, despite strong performance in Power Systems.

As Steve noted, the year-over-year decline was driven by an expected softness in Engineered Products automotive and general industrial businesses due to weakness in Europe and Asia. And by the anticipated year-over-year declines in Sealing related to the softer semiconductor market and timing related differences and shipment patterns and product mix.

Excluding the impact of foreign exchange on the EDF contract, adjusted EBITDA was down 11.6% in the first quarter, compared to the prior year period. Gross profit margin for the first quarter was 31.4% down about 2.5 percentage points compared to the gross margin in the first quarter of last year.

There were three primary drivers of the year-over-year decline. First, margins were affected by an improved allocation of IT costs, which is implemented in the second quarter of last year and which resulted in moving certain cost from SG&A to cost of goods sold.

Second, our margins were affected by our transition to outsource friction in Sealing Products and higher indirect spend due to lower production levels in Engineered Products. Third, our margins were affected by sealing products timing related to product mix.

In the Sealing Products segment, despite overall sales being down in the quarter as a result of softness in the semiconductor market and last year’s exit from the industrial gas turbine business we were encouraged by strong performance in many of our core markets, including food and pharma and petrochemical, excluding the impact of foreign exchange translation, sales were down 1.8% compared to the prior year period.

Excluding the impact of foreign exchange translation, segment adjusted EBITDA which excludes the impact of restructuring and acquisition expenses decreased $2.4 million or 6.7% compared to last year.

The decrease year-over-year was driven primarily by the aforementioned softness in semiconductor and unfavorable timing related mix, resulting from lower sales of certain high margin product lines partially offset by improved SG&A costs.

Sales in Engineered Products segment were down 2.6% over the prior year period, excluding the impact of foreign exchange translation. The decline was driven primarily by weakness in European and Asian automotive in general industrial markets as we previously discussed.

Coming into the year, we anticipate some challenges in Asia due to tariff related uncertainties in China. So we anticipate a more constructive environments in both Asia and Europe then ended up being the case.

Excluding the impact of foreign exchange translation, segment adjusted EBITDA decreased 40.1% in the first quarter over the prior year period, primarily due to decreased sales and under absorption related to lower production volumes that as Marvin noted outpaced our ability to reduce spend in the short term.

In first quarter, sales in Power Systems, were up 10% over the prior year period. The increase was due to strong aftermarket parts and services sales and strong year-over-year military and marine engine revenues, partially offset by lower power gen engine sales.

First quarter segment adjusted EBITDA of $8.5 million was up 60% over the prior year period, driven by the favorable mix of aftermarket parts and services and to a lesser degree by reduced SG&A costs. Results for the first quarter included a program loss of $1 million for the EDF program.

Foreign exchange on the EDF contract accounted for $900,000 of the quarterly program loss compared to a positive impact of $1.7 million in the first quarter of 2018. Excluding the impact of foreign exchange on the EDF contract in both periods, segment adjusted EBITDA in Power Systems was up $5.8 million or 162% over the first quarter of last year.

Sales related to EDF program were $2.6 million in the quarter compared to $9.4 million in the first quarter of last year. Through the end of the quarter, we had shipped 13 production engines and expect to ship the remaining seven production engines by the end of 2019. Additionally, we expect to ship two spare engines in 2020.

Production of the 22 engines was approximately 84% complete at the end of the quarter and we had build approximately 55% of the total contract value.

Due to the timing of billings, which is mostly triggered by engine deliveries, we had a net working capital investment in the EDF program at the end of the quarter of approximately $33 million compared to $36 million at the end of 2018.

We continue to expect to convert much of this networking capital to cash in 2019, as we complete and deliver the remaining production engines.

We expect the quarterly adjusted EBITDA distribution in Power Systems to be very different than it was in 2018 with a much more evenly weighted level throughout the year based on our current engine and aftermarket backlog.

We estimate that Power Systems adjusted EBITDA will be weighted approximately 35% to 40% for the first half of the year and 60% to 65% to the second half. This compares to 18% in the first half and 82% in the second half of last year. Adjusted diluted earnings per share for the quarter of $0.72 was down 13.3% compared to the first quarter of 2018.

First quarter decrease was driven primarily by the $7.3 million decrease in adjusted segment profit, partially offset by a $3.3 million decrease in net interest expense and a decrease in diluted shares outstanding.

Average diluted shares outstanding were $20.9 million in the first quarter of 2019, compared to $21.6 million for the same period a year ago. The reduction was driven by share repurchases, net of equity incentive awards.

As a reminder, when we refer to adjusted diluted earnings per share, we are adjusting for items such as environmental reserve charges and select legacy litigation, restructuring costs, impairment charges acquisition expenses and normalized tax rates, all as shown in the tables attached to our earnings release.

Slide 15 summarizes our major uses of capital in the quarter. During the first quarter, we invested $10.4 million in our facilities, equipment and software, compared to $15.2 million a year ago. Consistent with our previously announced dividend increase, we paid $0.25 per share dividend in the first quarter totaling $5.4 million.

During the first quarter, we also repurchased 36,000 shares for a total value of approximately $2.4 million under the $50 million program authorized by the Board last October.

In connection with the legacy ACRP related loss of 2017 and our subsequent filing in the 10-year loss carryback return, we received a federal tax refund of $17.1 million in the first quarter of 2019. We anticipate receiving the final refund payment of $19.3 million by the end of 2019, although the timing of the final payment remains uncertain.

At March 31, our net debt was up slightly from December 31 of last year, primarily as a result of seasonal working capital needs. Our cash balance was $131 million and our borrowings totaled $473 million.

We are on Slide 16, our net debt leverage ratio at the end of the first quarter, as you can see our trailing 12-month leverage ratio at the end of the quarter was approximately 1.6x trailing 12-month adjusted EBITDA. And now we’ll open the line for questions..

Thank you. We will now be conducting question-and-answer session. [Operator Instructions] Our first question today is coming from Ian Zaffino from Oppenheimer & Company..

This is Mark on for Ian. Thanks for taking our questions. So, can you guys just help provide some additional details regarding the cost cuts you guys are implementing specifically the areas and extent of the cost control measures and how much margins you guys can expect to capture during this year? Thanks..

Thank you, Mark. Yes, I mean – so we are specifically focused within Engineered Products, because that’s where we saw most of the cost issues.

And as we articulated during the script, we’ve really gone after temporary headcount in our European operations because permanent headcount is a little bit more difficult to get out, but we also are executing a permanent headcount reduction there as well.

We’ve a fairly substantial program that started in February, that activity is ongoing through March, April and also through May. So most of it was in the February-March time frame, but we will continue with our plan, going through May.

The cost reduction – the cost control measures are just about everything you can think of in terms of indirect spend, direct labor, indirect labor everything you can think of, we are hitting every category we can, and we have a pretty strong focus on working capital as you can imagine..

Go ahead Mark..

I’m sorry, just I guess I can on the margin question any insight into how much you could capture in 2019?.

Well, we – at a very high level in our goal and we’re working toward – is to get back on track with margins comparable or maybe slightly below, but in the ballpark of where we were last year. And obviously we’ve got some work to do, but the intent of the cost cutting, the other actions that Marvin described is to guess on that track.

So that’s what where we’re working towards..

And I think it’s important to know let me just add one thing Mark, not directly related to the question, but with respect to the industrial and automotive business that we’ve seen in Engineered Products. The weakness that we saw in the first quarter was actually the phenomenon was the pushing out of orders, not the canceling of orders.

So now, who knows if they will continue to get pushed out, but as of right now through a few weeks – through basically the month of April, things seemed to have stabilized and the order book is actually not that bad for the rest of the year.

But again, coming into the year, the order book was actually quite strong and a lot of stuff got pushed out of Q1. So, we’re still – we certainly are anticipating a recovery, but we’re not anticipating based on what we’ve seen and again, this is – this has just been going on in last few weeks. We’re beginning to see a little of stabilization.

So, hopefully we will have – we won’t have an ongoing continuing increasing volume issue in those markets.

But, as we’ve always said our visibility on that is difficult because we have orders on the books and sometimes they get pushed out, but that’s what happened to us and as Marvin said in his script, we started with the cost reductions in mid-February on the temp labor and everything that we can control and are positioned for additional SG&A reductions for permanent employees really this month.

So, that’s where we stand..

O ay, great. Steve, thanks for going into details on the order book. That actually you [indiscernible] into my next question is – I guess like you went over Engineered Products, how does the order book look for sealing products and specifically within semiconductor, any insight for the balance of 2018 will be much appreciated? Thanks..

Yes. So, first for the segment broadly, things still feel fine. We have said in the call – over the last three or four calls, it’s still true that the nuclear portion of Sealing products will be weak this year, just like it was weak last year and we view these two years as the trough with recovery not coming until next year to 2020 and 2021.

That is 100% due to refueling cycles in the fact that the nuclear industry globally is really tried to extend those fueling cycles, which created this trough in 2018 and 2019 for us. But, we have decent longer-term visibility on that, because these maintenance cycle basically have to happen. In nuclear, it’s even different than petrochem and refining.

So one of the order pattern is going to be that, we’ve talked about that, that’s still in place. The broader business in Garlock and Technetics and Stemco is still decent in terms of volume and orders.

I don’t really anticipate, one of the year-over-year differences we had on mix was because we sold a lot of our – one of our high end gasketing products last year with the launch of the new product, basically, we sold a bunch of it in Q1 and that’s returned to bit normal levels. But that will continue to be a good product for us going forward.

So I feel pretty good about that. Semiconductors is a tough one, because we have one major – one predominant customer, who’s is a fair percentage of our total mix and they give us a rolling quarterly look forward for about 12 months out. But again, that changes fairly frequently.

They are anticipating a bit of a lift in the – at the end of the year and our fourth quarter and into early 2020.

But again it’s hard for us to know Mark, whether they have actually started to see that firm, or is that’s just kind of what their view is – and certainly what their view is in terms of what they’re telling us to give us this forecast, but we don’t really have a good way to anticipate how confident they are in it.

We kind of do some rough planning against it. So, but again it’s a market where we don’t see it deteriorating any further and it’s really a question of when we’ll start to see some level of recovery.

Milt you want to add something?.

Well, I’ll just add – just to give you some idea. We were down year-over-year in the first quarter roughly 15% in our semiconductor business. But we did sequentially – we didn’t see deterioration in Q4 [indiscernible] kind of flattened down if you look at it sequentially. So just a little additional color to support what Steve was talking about..

Okay, great. Thank you guys very much for all the color..

Thank you. Your next question is coming from Joe Mondillo from Sidoti & Company. Your line is now live..

Hi Joe..

Hi Joe..

Just, I just wanted to sort of tackle a little bit more on sort of the trajectory or activity that you’re seeing in Engineered Products.

Back in Investor Day that you had in early March, you talked about I think margins down zero to 50 basis points or so this year and so it seems like things have probably started off worse than you were expecting at that point in time.

Did things get incrementally worse in March and April, or I guess you said April is maybe a little more stable, but did things get worse as the quarter went on..

So the best way to think about that is, as Steve described, the order situation in engineered – the orders weren’t canceled, they were moved out, right. So, in aggregate as you look at the numbers, the numbers still look quite good, but they were pushing out of the quarter.

And so, from a cost perspective, we had not started to aggressively adjust our cost until we determined that it – things would actually moved completely out of the quarter and we didn’t really know exactly how far it would go.

Where we started to see sort of concentrated weakness is really in European Industrial and Automotive and a lot of the European industrial is macro related, the automotive.

A lot of it has to do with the emissions activities that are taking place in Europe, so we were never under the impression that things would continue to get materially moved out as they were, so that’s really the real difference..

Yes, and let me just add to that – Joe, let me just add to that, what Marvin said, that’s where the weakness was. Now, obviously, it’s a smaller portion of Engineered, but it to our oil and gas, petrochem and refining business globally and there, we actually had this was all expected.

First of all, Q1 is always weak in that market because of where we compete and that’s a seasonal thing, right.

And then in addition to that we actually relocated one of our facilities, the French CPI location and we’ve been working on this, that move started to physically happen right around the turn of the year and was completed in Q1 and while they didn’t disappoint any customers and the move was executed actually quite well.

It was part of our expectations in engineered that we would see that level of weakness. However, if you look at globally CPI, the book-to-bill in Q1 was 1.2.

So the order book in that portion, the petrochem and refining and gas of engineered is actually pretty healthy and that backlog does not behave like the general industrial and automotive market, because those orders are shorter-term and they don’t get moved because they are for deliveries within the next few weeks, whereas the bigger OEs in automotive and general industrial are typically forecasting for their production factories move further ahead.

And so that’s subject to moving and shifting as we’ve described,.

I’ll just add, I’ll want to reference what we said in the Investor Day for both sales and margins and Engineered products. So, we said flat to low single-digit growth in Engineered Products. We were probably thinking more flattish, given the fact that we had softness in lower sales in the first quarter for the segment.

And I mentioned previously it’s our goal to drive toward margins that are comparable with last year, but I think we’d still hold to flat to 50 basis points decline and we’ve got some puts and takes as Steve, just described. We had the weakness in the auto general industrial in the bearings business due to Europe and Asia.

And that’s where lot of heavy cost reductions and cost cuts are happening and the restructuring and then we have on the flip side, what Steve is just describing for the petrochemical side of engineered products..

Okay. So it definitely sounds like things with the restructuring and maybe the order timing that things will improve as the year goes along..

That’s certainly our view..

Okay, great.

I wanted to get an update on the friction sourcing, where – how that’s progressed and where we’re at in terms of that at the sealing segment?.

Yes, we’ve continued to make reasonably good progress there with our supply chain team securing supply. So, first and foremost, as we think about it is meeting our customer deliveries as it relates to timing and quality. So from a macro perspective, we’re doing a decent job there.

From a cost perspective, we are continuing to work to take our cost down on our supply. It’s not exactly where we’d like it right now, but we’re continuing to see good signs from the folks that are working this issue in the supply chain team.

So we think, as we continue throughout the course of the year, we’ll continue to get better and better pricing as we do our source and competitively bid and all those types of things..

Okay.

And lastly, wondering what your outlook is on Stemco given sort of the cyclicality in the heavy-duty trucking market? And then I was hoping, Marvin, you could just also touch on the EnPro operating system, if that’s fully in place at this point in time and sort of how that’s helped you maybe deal with some of the issues with Engineered products right now or any other issues that you may have in the future.

I know you talked about that in Investor Day.

I just wanted to sort of see what the update with that is and how the things are going on a centralized management basis?.

Sure, I’ll let Milt start with the outlook and then I’ll come back and talk about the capabilities if you don’t mind..

And you were talking about the outlook specifically for the heavy-duty truck business, Joe?.

Yes, Stemco..

Yes. I mean I think the way we would describe it is, we expect the aftermarket is relatively stable and steady.

We are expecting the OEM market, which as you know, does not drive nearly as much of our profitability as aftermarket, but we are expecting to see some declines over time in the OE market because, we had such a strong build period over the last couple of years. So from the market standpoint, that’s how we see it.

Obviously from our performance standpoint, we’re expecting year-over-year improvement in our earnings because of the actions that we’ve taken in some of the very specific isolated earnings hits that we had last year.

So I think you’ll see that, we don’t provide that level of detail, but we will – we are expecting to see earnings performance improvement in that business throughout the balance of this year..

Just talking a little bit about the capability center in EnPro and how we’re using that as it relates to the operating system, if we were to sort of gauge how I feel about that, I would say my level of emotion and excitement is off the charts. I mean it’s where I am spending a lot of time.

It’s where I see the most opportunity, it’s where I wake up every day excited about EnPro quite frankly. If you think about the capability center, we’re looking at commercial excellence, we’re looking at manufacturing, lean manufacturing specifically. We’re looking at driving improvements in supply chain.

We’re looking at really, creating a platform for rapid response and improvement throughout the Company. So if you look at what’s happened in Engineered, for example, never before have we been able to immediately deploy resources, once we started to see things shape up in the direction that we didn’t like, right.

So we are able to deploy folks to first and foremost, make an assessment of the situation and start to make improvements in sort of drive [indiscernible] events and all the above to create more of a real-time improvement initiative or sort of response to the situation that we saw.

So, from where I sit, I’m basically ecstatic about what’s happening in the capability center, not to mention the fact that it’s appropriately staffed. Now, we have amazing leader that’s been with the company for over 10 years that’s contributed exceptionally for the Company and it’s proven to be exceptional of being focused on creating value, right.

So from where I sit, it’s a reason to be very excited about what we’re doing..

Okay, great. Well, thanks for taking my questions and good luck for the rest of the year..

Thanks Joe..

Your next question is coming from Justin Bergner from G. Research. Your line is now live..

Good morning, Steve. Good morning, Milt. Good morning, Marvin..

Hi Justin..

Hi Justin..

Hi Justin..

With respect to the Engineered Products performance in the, I guess operating profit or EBITDA decline there in, is it possible for you to isolate how much was due to under-absorption actually producing below the level at which your sales declined and how much of it was sort of related to the 3%-ish organic sales decline?.

Well, I think combined, it was….

Those loan demand, under absorption combined, it’s almost $5 million. Milt, you want to take a look at that..

Just about $5 million and so and so again, some of that was expected and so because of just, we had a really strong Q1 in those markets last year, and so we were not anticipating that level of strength.

And so, of the $5 million, just off the top of my head, probably about $3 million plus or minus was built into our plan and $2 million was kind of on top of that. So that’s the difference there, but that drove a lot of the difference just in between the year-over-year comparison that you guys look at versus what our internal plan set.

So from our internal plan, as we said in the script, my internal plan rolling off $2 million bucks through Q1 and we know exactly where it is. We’ve taken aggressive action to address it in mid – starting in mid-February. Things across the Company look pretty good.

So that’s why we feel pretty darn confident for the rest of the year, which is why we really didn’t change our guidance. I mean we always take it – we always move it up or down based on wherever currency lands at the end of the quarter, as it relates to EDF and then obviously it’s a bigger move as it relates to translation in general.

So we really, if you think about, if you take that out, we really didn’t change our guidance because we think we’ve got plenty of juice to overcome the $2 million shortfall that we saw in Q1. That’s how we’re thinking about it right.

I know you don’t have visibility on that, you got to compare it to last year’s Q1, but that’s a really, really hard thing to do in our Company, because we got – even if you just look at the nuclear business or other we have – we are concentrated in a lot of high margin products in – across the board and as well as in sealing.

And so when these – when the mix just shifts a little bit and the timing of that mix shifts a little bit, which it typically does, it moves our numbers quite a bit, right. And the Power Systems is a perfect example, right.

One of the reasons Power Systems this year, so much better than last year is when we were bogged down doing nothing, but EDF engines in the shop, patent parts and service was good, but last year we had what $9 million or $10 million of revenue in the EDF and this year was like $3 million.

So the shop was able to spend its time on the military marine and reasonably profitable engines as well as is aftermarket stuff. And so, the numbers look a heck of lot better. That’s why we’ve always said, getting the EDF program behind us, which we’re just about here will be really a huge help to the Company and specifically the Power Systems..

Justin, let me just pipe down.

The other thing I would note is, you’ll remember, if you get because of this little bit of unpredictability from quarter-to-quarter, year-over-year that Steve was talking about and that we highlighted earlier, if you go back and you look at Engineered Products in the first quarter of last year, it was an extremely strong quarter in Engineered Products.

So understanding the year-over-year different requires to kind of understanding that too, and that’s not always the case. It’s not always our strongest quarter in Engineered Products, it happened to be last year for a lot of reasons..

Well, yes. If you remember, Justin the macro environment going into last year in the industrial world was I believe a little bit, almost, it was very frothy and frankly got ahead. So, our customers were ordering expecting this kind of gangbuster year and it was a decent year, right, but that’s my view of like Q1 last year was so strong in engineered..

I just some – two follow-up questions there, I mean, if $5 million of the decline was volume and under-absorption, what was the other $3 million?.

We had some SG&A, it is probably about $1 million..

Okay.

Were there any other pieces?.

Probably in CPI with some year-over-year….

Steve highlighted the move of the French facility, which was rounding a $0.5 million and I mean there’s still – there are other things, it would get into a fairly detailed bridge, which probably not a good use of time right now..

Okay, understood.

And then, is it safe to say that as you maintained your full year guide Power Systems is tracking a little bit above where you anticipated the year to play out a couple of months ago and Engineered Products is tracking a little bit below?.

That’s accurate. Just to give you a sense, the Power Systems aftermarket parts and services backlog for example on a year-over-year basis, if you look at it, at the end of last week, it’s up almost 70%. So just to give you a sense of the magnitude.

And it’s stronger now than it was even going into late last year. Now, we don’t think as quite as much of it is shipable as we had last year, if you remember, Justin, Q4 was very, very strong for that. So we don’t anticipate it being that strong.

Milt went through the split for the percentages of EBITDA that we expect in Power Systems, but it will not be as back-end loaded relative to the first half this year as it was last year, all right. So, but on balance, the year it will be stronger..

As it relates to sort of looking for, I know you’re focused on the capability center and improving the cost structure engineer products, but where does the pipeline stands for bolt-on acquisitions? Does the CEO transition slow that down or cause you to push the pause button somewhat there?.

Not at all. No it didn’t slow it down at all. Marvin has been a key part of the team now for two years since he was named COO. We’re lockstep on everything that we do, we have been. And I’m going to continue to be with the Company through the second half of the year as well in a different role, still spending time with Marvin and so forth.

So we’re not going to miss a beat. We’ve planned this thing out very, very well and we’ve got a – we’ve got a nice looking pipeline now in the three markets that we’ve been targeting..

Yes, I mean that would be the only color I was going to add at the end, is that the focused markets that we articulated during the Investor Day, now we think the pipeline is as healthy as it’s ever been in those focused areas and the level of collaboration and communication that takes place here is really excellent and my expectation is, we would just continue on as we have and be successful in those areas that we’ve articulated..

Okay, great. Thank you..

[Operator Instructions] Our next question is coming from Jeff Hammond from KeyBanc Capital Markets. Your line is now live..

Hey, good morning..

Good morning..

Good morning..

Hi Jeff..

I was nervous that I wasn’t going to make it in. Hey, just to go back, maybe just to round out the guidance pieces.

I think you said in your Analyst Day flat sealing for revenue and 100 basis point to 125 basis points in sealing, how are you feel about that? This seems like on the margin front, you had a pretty easy comp and you’re kind of starting in the whole and just want to get the confidence in that margin jump?.

Yes. Now, we still feel good about the guidance that we provided in sealing for the year, if you look at it for the full year.

So 100 basis points to 125 basis point improvement, I think we had indicated, which is true, which is driven primarily by the improvements in trucking we had as well as on the top line fairly flat because of the decline in semiconductor and the exit last year from IGT. So, no real changes.

We still feel like – for the balance of the year and I think you’ll start to see it Jeff in Q2 if we hit our expectations for the quarter. We’ll be back on – back on track for what you’re expecting to see in sealing products generally for the year, no real changes in our outlook there..

Okay. And then just on Engineered Products. If I look at some of the auto production data, it looks like Europe and China are going to continue to be weak into 2Q and I know the macros in those markets seem challenging. It looks like you have a fairly tough comp on both margin and top line.

So if you can just give us a sense of how you think EP shapes up going into 2Q that would be helpful?.

Well, if you look at sequentially, if you look sequentially at Engineered Products going from Q1 to Q2, we are expecting some improvement. Obviously, we, because of – in part because of some of the actions that Marvin described that we’re taking in engineered and the part of the business has been soft. But we expect an increase in revenues.

We would expect Q2 in engineered to be our strongest quarter of the year on the top line and I think that’s typically the case, if you look at over a multiyear period. And then we – because we have more European exposure in that segment and other places in the Company and it’s more than 50%.

We typically see a little bit of slowdown in Q3 with the summer holidays. That’s the typical pattern and we expect that to repeat this year. So we expect our revenues to be up in the second quarter and we also expect improvement, a noticable improvement in our profitability and margins in the second quarter.

So yes, I mean we have, Steve mentioned in our outlook for the second quarter, it’s relatively strong and [indiscernible] back in Engineered Products is certainly part of that. So, we’re expecting to see improvement in margins really in both Sealing and in Engineered in the second quarter.

Power Systems may moderate a bit, because we had such a strong first quarter with overall. The outlook for the full year is very strong in Power Systems and when I say moderate, I mean, sequentially. It’s – we’re clearly going to have a stronger second quarter this year in power systems than we did last year..

Okay. Thanks guys..

Yes..

Thank you..

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

Thanks, Kevin, 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 great day..

Thank you. That does conclude today’s teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today..