Greetings, and welcome to the EnPro Industries Third Quarter 2019 Earnings Conference Call. [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, Investor Relations, Strategy and Corporate Development. Please go ahead, Chris..

Thanks, Kevin. Good morning everyone, 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.

Marvin Riley, our CEO; and Milt Childress, our CFO, will begin their review of our third-quarter performance and our 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 and Form 10-Q. We do not undertake to update any of these forward-looking statements. Also, during the call, we will reference a number of non-GAAP financial measures.

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

With regard to guidance that we will share in this call, we have limited visibility into long-term demand as 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. Power systems is the exception to this.

Additionally, many of our products serve niche applications for which demand has not correlated well with macro end market indicators. This further complicates accurate forecasting.

Our guidance excludes changes in the number of shares outstanding; impacts from future acquisitions, divestitures and related transaction costs; restructuring costs; the impacts of tariffs and trade tensions and market demand and costs subsequent to the end of the third quarter; the impact of foreign exchange rate changes subsequent to the end of the third quarter; and environmental and legacy litigation charges.

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

Thanks, Chris, and good morning, everyone. Before I share my remarks on our third-quarter results, I want to provide an update on my transition to the CEO role and a few of my thoughts on our strategy moving forward.

Having completed my first quarter as CEO, I have been spending my time out on the road speaking with our employees, investors and customers. I've also been spending time with each business to understand how we can improve our customer intimacy, operational efficiencies and competitiveness in each market we serve.

Additionally, during the quarter, I was able to spend time with the leaders of LeanTeq and Aseptic, the two businesses acquired during the quarter. They and their teams are extremely excited about the development of their businesses and being a part of the Enpro family.

I'm personally delighted to have the LeanTeq and Aseptic teams on board and look forward to supporting the growth of those businesses using the capabilities we have developed at Enpro. While acknowledging our current challenges, we have a number of strengths upon which to build for the future.

This includes an outstanding dual bottom-line culture that emphasizes both financial results and human development, strong brands with market-leading products, 52% aftermarket revenue and a safety-first manufacturing excellence mindset. I do not see any challenge that cannot be overcome with the strategy we are putting in place.

The key elements of our strategy going forward will involve reshaping the portfolio while maintaining a balanced approach to capital allocation, increasing our aftermarket exposure and recurring revenue opportunities, and leveraging our operating system, which is housed in what we call the capability center.

The capability center has been created as a part of the Enpro operating system to support our priority of improving margins and increasing cash flow. Looking toward 2020 and beyond, I see an extremely bright future for Enpro. I plan to execute on the strategic priorities outlined above and provide updates on our progress as we meet for future calls.

We're planning to host an investor day in mid-2020, which will provide a platform to update you in much more detail regarding the actions we have taken and our path forward. We're actively implementing our new strategy to address the structural issues and market dynamics impacting our results.

Our sense of urgency, attention to detail and bias for action will certainly give you a sense of how we're crafting a new future for Enpro. I'll now go into further detail on the initiatives that we've put into place to address these short-term challenges.

Overall, results in the heavy-duty trucking portion of our sealing products segment overshadowed a strong year-over-year third-quarter operating performance in the rest of our company. Third-quarter sales were down 4%, and adjusted EBITDA was down 15%, both versus the prior year.

As a result of challenges in heavy-duty trucking that were driven by market-related lower volumes and by warranty expenses related to a product quality problem identified and fixed last year, the year-over-year decline in earnings also reflects a 2018 third-quarter legal settlement of $4.2 million, favorably impacting the prior-year period.

Excluding the heavy-duty trucking business, sales were up 1% for the quarter and flat year to date, and adjusted EBITDA in the quarter was up 7% and 6% year-to-date, all versus the prior year. Most notably, our power systems segment results were strong in the third quarter as they have been throughout the year.

Adjusted segment EBITDA in engineered products and sealing products, excluding the heavy-duty trucking business, were also up year-over-year, despite challenging conditions in a number of our served markets. We have taken several actions this quarter to improve our operational efficiencies in the business.

In engineered products, we resized our cost structure in the first half of the year in response to volume declines, and we're seeing the benefit of our results. Actions taken have included staff reductions, improved plant overhead management and reductions in SG&A spending. In sealing products, we consolidated a facility in the U.K.

into one of our U.S. plants and completed various cost optimization projects. These actions in engineered products and sealing products reflect the impact of our capability center and our team's focus on cost structure, commercial and operational improvements.

Relative to heavy-duty trucking, we're moving aggressively on several fronts to improve the performance of this business. We've already taken actions to cut SG&A costs, reduce freight charges and conduct quality improvement initiatives.

Additionally, we're evaluating the manufacturing network to reduce our footprint, resizing our staffing levels to support the lower levels of demand and renegotiating contracts with our suppliers. In addition, we're evaluating a structural competitiveness of every business unit in heavy Duty trucking.

One action taken swiftly in the quarter as a result of the business unit competitiveness review was the sale of our brake shoe manufacturing business located in Rome, Georgia, which closed on September 25, as previously announced. Our work in heavy-duty trucking is on-going, and we expect to fundamentally reshape this business and its cost structure.

I want to emphasize that we find our overall results for the quarter to be unacceptable. My team and I have an unwavering mind-set about striving for excellent results throughout the economic cycle. We saw the impact of this mind-set in all businesses outside of the heavy-duty trucking business during the third quarter.

The sale of the brake shoe business is an extension of our decision in December of last year to discontinue friction manufacturing in their Rome facility.

Both of these moves are consistent with our new strategy of shifting the EnPro portfolio to products and services in structurally attractive markets that generate strong cash flow returns and command high margins based on value provided to our customers.

We will continue to evaluate our businesses through this lens as part of our portfolio shaping strategy. This portfolio shaping lens is also evident in the acquisitions completed in the third quarter.

In July, we announced the acquisition of The Aseptic Group, which distributes, designs and manufacturers aseptic fluid transfer products for the pharmaceutical and biopharmaceutical industries.

In September, we completed the acquisition of LeanTeq, which provides cleaning and other refurbishment services for critical components and assemblies used in state-of-the-art semiconductor equipment. Overall, we feel that the initial integration process of these businesses is off to a great start.

These businesses will collectively contribute approximately $55 million to EnPro's annualized revenue. Focusing more specifically on the impact to sealing products, we anticipate the combined transactions will be accretive to sealing products segment margins by approximately 175 to 200 basis points on an annualized basis.

Both LeanTeq and The Aseptic Group generate consistent cash flow and high returns on operating capital. Additionally, I would like to share that during the quarter, we issued our inaugural sustainability report. At EnPro, we are committed to delivering both strong financial results and maximizing the development of our employees.

We're also committed to protecting our planet and minimizing our environmental impact across our operations.

The report, which is available on our website, highlights our environmental performance, cultural initiatives, ethics and compliance practices, innovation efforts, employee development programs and our overall safety initiatives and accomplishments. Now I will turn the call over to Milt to discuss our financial results for the quarter..

Thanks, Marvin and good morning, everyone. During the third quarter, sales decreased 3.9% compared to the same period of 2018.

Growth in engine aftermarket parts, military marine engine sales, aerospace and midstream oil and gas was more than offset principally by weakness in heavy-duty trucking and, to a lesser extent, in general industrial, automotive and semiconductor capital equipment markets.

In addition, our results were impacted by the stronger dollar and the company's exit from the industrial gas turbine market in 2018. Excluding the impact of foreign exchange translation and acquisitions and divestitures, sales for the quarter declined by 2.4% compared to the third quarter of 2018.

Adjusted EBITDA in the third quarter was $54.8 million, down 14.8% compared to the third quarter of last year.

As Marvin noted, results in our heavy-duty trucking business overshadowed an otherwise strong year-over-year third-quarter performance, with adjusted EBITDA, excluding the heavy-duty trucking business, growing 7.4% over the third quarter of last year.

Performance in our heavy-duty trucking business resulted in gross margin for the third quarter declining by 1.2 percentage points compared to the gross margin in the third quarter of last year.

The gross margin decrease was driven primarily by lower volume and unfavorable mix in heavy-duty trucking and the year-over-year increase in warranty accruals in this part of our business, offset in part by the high mix of aftermarket parts in power systems.

Sales in the sealing products segment were down 7.6% compared to the prior-year period, excluding the impact of foreign exchange translation and acquisitions and divestitures.

Strength in the midstream oil and gas market was more than offset by year-over-year declines, principally in heavy-duty trucking and, to a lesser extent, in semiconductor capital equipment sales. Excluding heavy-duty trucking, organic sales were down 1.2%.

Excluding the impact of foreign exchange translation and acquisitions and divestitures, segment adjusted EBITDA decreased 21.5% compared to last year, driven primarily by results in heavy-duty trucking.

The earnings decline resulted from the impact of volume changes, which, as I mentioned earlier, were most pronounced in heavy-duty trucking, warranty charges in heavy-duty trucking and a 2018 third quarter $4.2 million legal settlement, favorably impacting the prior-year period also in our heavy-duty trucking business.

As Marvin noted, the third-quarter year-over-year increase in warranty expense is related to a product quality issue identified in 2018 that has since been fixed. And during the quarter, we increased our warranty accrual to reflect current warranty claim expectations for the product.

Segment adjusted EBITDA was up 7.9% versus the third quarter of last year, excluding results in the heavy-duty trucking and the impact of foreign exchange translation and acquisition and divestitures. Sales in the engineered products segment were down 4.2% over the prior-year period, excluding the impact of foreign exchange translation.

The decline was primarily due to weakness in the automotive and general industrial markets, partially offset by strength in aerospace.

Excluding the impact of foreign exchange translation, segment adjusted EBITDA increased 7.5% in the third quarter over the prior-year period, primarily due to cost reduction initiatives implemented in the first half of the year in response to market challenges, as Marvin noted previously.

In the third quarter, sales in power systems were up 20.5% over the prior-year period. The increase was due to strong aftermarket parts and military marine engine sales, partially offset by lower sales to the power generation market.

Third-quarter segment adjusted EBITDA was up 10.2% over the prior-year period, primarily due to the increase in higher-margin aftermarket parts sales.

Excluding the impact of foreign exchange on the EDF contract in both periods, which was $1.4 million unfavorable in the third quarter of this year and $200,000 unfavorable in the third quarter of last year, segment adjusted EBITDA in power systems was up $2.3 million or 21.3% over the third quarter of last year.

As a reminder, the EDF contract includes 20 production generator sets plus two spares. We have shipped 16 sets to date and expect to ship the remaining four production sets by January of next year, updated from our prior estimate of delivery by the end of this year. The manufacturing of the production generator sets is now 91% complete.

We expect to ship the two spares in 2020. Adjusted diluted earnings per share for the quarter of $1.13 was down 17.5% compared to the third quarter of 2018.

The third-quarter decrease was driven by the drop in earnings resulting from the heavy-duty truck business, offset by a $2.1 million decrease in net interest expense, a $2.1 million decrease in adjusted income tax expense and a slight decrease in diluted earnings -- diluted shares outstanding.

Contributing to our GAAP net loss for the quarter, other non-operating expense totaled $24.6 million in the third quarter of 2019. The expense is largely the result of a $15.3 million non-cash loss on the sale of the brake shoe business and a $7.9 million increase in environmental reserve adjustments.

We have been working very hard to resolve discrete environmental matters contributed to EnPro at the time of its spinoff from Goodrich in 2002. During the third quarter, we reached very positive settlements in two matters.

First, we reached a settlement with Honeywell to completely resolve environmental liabilities related to Honeywell's clean-up of Onondaga Lake in New York, which resulted in a reserve increase of $3.5 million.

Second, we resolved a significant portion of liabilities related to the Water Valley, Mississippi site by settling the lawsuits of a group of private landowners, which, along with other matters, resulted in a reserve increase of $4.4 million. These settlements are a significant step in resolving these pre-spin environmental matters.

Slide 16 summarizes our major uses of capital in the quarter. First and most importantly, as Marvin noted, we completed both The Aseptic Group and LeanTeq acquisitions in the quarter. The combined cash investment in the two businesses was approximately $310 million.

Total consideration for the two acquisitions was approximately $345 million when including the LeanTeq rollover equity. We also invested $6.8 million in purchases of property, plant and equipment, compared to $17.6 million during the same period of 2018.

While we expect capital spending to be higher in the fourth quarter than the average through nine months of this year, we anticipate spending for the full year to be considerably below 2018, reflecting our focus on cash flow and cash flow return on invested capital. Also in the third quarter, we paid a $0.25 per share dividend totaling $5.1 million.

We did not repurchase any shares in the third quarter, and we do not anticipate repurchasing additional shares for the remainder of this year.

For the nine months ended September 30, cash flow from operations, net of purchases of property, plant and equipment, was $126.9 million, compared to $112.7 million for the same period a year ago, resulting from the lower year-over-year cash interest expense, lower capital spending and working capital changes, partially offset by lower income this year and last year's tax refund in connection with the ACRP-related 10-year loss carry back.

At September 30, our cash balance was approximately $112 million, and our borrowings totaled approximately $666 million. Net debt at September 30 was approximately $221 million higher than at the end of 2018 as a result of the acquisitions completed in the quarter.

Our adjusted net debt to pro forma EBITDA ratio at the end of the third quarter was approximately 2.6 times. When taking into account the expected full-year earnings from our two completed acquisitions, our leverage ratio would be lower.

Post completion of the acquisitions, we continue to have a well-balanced capital structure with a favorable mix of pre-payable floating rate debt and long-term fixed rate bonds.

During the quarter, in conjunction with the LeanTeq acquisition, we increased our credit facility by $200 million through a combination of $150 million term loan A and expansion of our revolver capacity from $350 million to $400 million. At the end of the quarter, we had approximately $213 million of availability under our revolver.

Before turning the call back to Marvin, I want to provide you with an update on the status of our remaining tax refund in connection with the 2017 ACRP related loss and our subsequent 10-year loss carryback return.

As previously communicated, we received a federal tax refund of $17.1 million in the first quarter of this year and had expected a refund of the approximate $19 million balance due by the end of this year.

Based on the latest feedback from the IRS, however, we now expect the final carryback refund to be processed in the third quarter of next year at the earliest. Now I'll turn the call back to Marvin to discuss our guidance for the quarter..

Thanks, Milt. We'll close with a discussion of current market conditions and our latest outlook for the rest of 2019 and then take questions.

Given our performance in the third quarter and our outlook for the remainder of the year, we are lowering our full-year adjusted EBITDA guidance to a range of $210 million to $214 million and our adjusted diluted earnings per share guidance to the range of $3.90 to $4.04.

This guidance includes the anticipated fourth quarter impact of the LeanTeq transaction. The decline in the outlook for the year is driven primarily by results in heavy-duty trucking and expected continued softness in automotive and European general industrial markets.

In sealing products, we expect sales in the fourth quarter, inclusive of Aseptic Group and LeanTeq, to be relatively flat compared to last year.

This outlook assumes a continued decline in heavy-duty trucking throughout the end of the year, moderate softness in a number of other markets, improved year-over-year demand for semiconductor capital equipment and continued strength in midstream oil and gas.

In contrast, we expect fourth quarter adjusted EBITDA in sealing products to be up meaningfully over prior year, primarily as a result of lower warranty charges, cost structure and productivity improvements and heavy-duty trucking, as well as contributions from The Aseptic Group and LeanTeq.

In engineered products, we expect sales in the fourth quarter to be down high single digits compared to prior year as weakness in automotive and general industrial continues. We anticipate EBITDA to be relatively flat despite the drop in sales as a result of cost control and productivity measures implemented earlier this year.

Lastly, in power systems, with a high backlog for aftermarket parts, we expect adjusted EBITDA to be in line with results for the past few quarters, but well below the record level of the prior-year fourth quarter. And now, we'll open the line for questions..

Thank you. [Operator instructions] Our first question today is coming from Ian Zaffino of Oppenheimer. Your line is now live..

Hi. Great. Thank you very much. Question would be on the truck side. Give us a rationale of why you got rid of Rome. And then also, what does that mean maybe for a little bit more to the truck business, especially, I guess, as you're trying to reshape the portfolio maybe to try to bring it a little bit more cyclical? Thanks..

Ian, this is Milt. Hi. I'll address the question about Rome and then Marvin can jump in as well. But we -- in the Rome facility, we did several things. We at one time, we were making brake shoes. We added friction manufacturing, as you'll recall.

We made the decision last December to shut down the friction line because we decided that we weren't the best provider of that, and it was not a product line that we felt like could generate the margins that were acceptable to us.

So we took that move and then that left the Rome facility as essentially facility that was making brake shoes and shoe kits and selling it. It quite frankly, it just wasn't a profitable part of our business, and it didn't meet our standards. Marvin outlined the lens that we're looking at now as we reshape our portfolio.

And it was a result of looking at it through that lens, so we've made the decision. So we actually have been losing money so the fact that we've sold it will be accretive to our earnings going forward. So I think that answers the first part of your question.

The second part of your question, could you repeat it?.

I guess the question was just a follow-up on that. What was the revenue contribution of Rome in the third quarter of 2018? And then also, how are you thinking, I guess, about the portfolio, broadly speaking, as far as you're starting to shed some businesses now.

Do we expect more of that? And how do we look at the portfolio going forward?.

Yes. So I'll start talking about the portfolio and give Milt a chance to look up the details as it relates to Rome.

So big picture, as we're thinking about the portfolio, we're thinking about assets that are growing greater than 7% a year, we're thinking about EBITDA margins greater than 20%, we're thinking about cash flow return on investment greater than 20% using our ECFROI formula. That's sort of the lens that we're looking through.

We want really strong businesses that have a strong value proposition, that really are enduring businesses. We have a number of exceptional businesses in our portfolio, high-quality assets that meet that criteria today.

And they're being stifled, quite frankly, by some of the businesses that are not performing well, that are structurally disadvantaged, like Rome, for example.

And so as we're thinking about the portfolio, we're just really thinking about it from the perspective of how do we prune the underperforming assets that we have and focus on the really strong businesses that we have in the portfolio and acquire more businesses of that profile, very high quality businesses that we can get at a very fair price.

That's how we're thinking about the portfolio. And this big picture, that's how I would think about it going forward. Ian, I missed one point and that is, we have a strong focus on the aftermarket and a strong focus on recurring revenue and a strong focus on businesses where our capability center can add a lot of value.

Some of the capabilities within the capability centers, things like pricing, supply chain excellence, manufacturing, etc. We really want to find good businesses that we can essentially activate to perform better using our capability center..

Okay. Thank you very much..

Thank you. Our next question today is coming from Justin Bergner from G. Research. Your line is now live..

Good morning, Marvin. Good morning, Milt..

Hi, Justin..

Hey, I guess, to start, I just wanted to clarify a couple of comments made during your prepared remarks.

So did I hear that the acquisitions are expected to contribute $50 million of annualized sales?.

Yes, $55 million of annualized sales, roughly..

Okay. So the $55 million is unchanged from where you had sort of indicated in the announcement of those deals. Okay. And then the margin improvement was $175 to $200 or was there a higher upper band than 200? I might have missed that..

That was $175 to $200 and, once again, that's consistent with our expectations at the time of our call about the acquisitions. And that's once again -- once again, that's $175 to $200 basis points improvement of the sealing products EBITDA margins..

Okay. Thank you for clarifying that.

If I look at sort of the contribution from the acquisitions this year, vis-à-vis your lowered guidance, is there anything to suggest that they're not sort of contributing one quarter worth of EBITDA in the fourth quarter, making the organic guide down more pronounced than the reported guide down?.

Yes. We indicated -- or Marvin indicated that sales in -- we expect sales in sealing products in the fourth quarter to be relatively flat compared to prior year. That does include the benefit -- the one-quarter benefit that we're getting from LeanTeq and additional-quarter benefit from Aseptic.

So you are correct in that the fact that it's flat with those additions suggest that we are going to be down more than previously thought on our last call when we provided guidance in the other parts of sealing. It's principally because of the results we've seen in heavy-duty trucking now..

Okay. Great. And maybe if I could just hone in on heavy-duty trucking, is there a reason why you haven't quantified the impact of the warranty expense in the third quarter? I think in the past, you may have either in prepared remarks or in the Q&A..

Yes. It was roughly a $4 million charge in the third quarter..

Okay. And just maybe help clarify exactly what that is and why that caught you off guard, given that the problem had been fixed, just to get a sense as to whether or not we can expect this to sort of wrap up the issue or whether or not there could be more in the horizon..

Yes. Every quarter, as you can appreciate and as you know, we work diligently based on warranty claims experience to make sure that we're properly reserved. And so in the past, we thought we were properly reserved for this particular product. Based on our experience this year, we took another look at it this quarter.

We concluded that we needed to take the reserve up. And so at this point, we believe that we have done everything we need to do regarding that product line. Once again, the product itself was diagnosed and fixed last year.

So what we're dealing with is just the runoff of the problems that were identified last year with this particular brake products -- product line..

Okay. And then just one last question. On STEMCO, obviously, the heavy-duty trucking market is very weak. But from what I understand, the business is 60%-plus aftermarket. So maybe if you could hone in on exactly the OE versus aftermarket weakness and if the aftermarket is very weak within the overall mix, what you understand to be driving that..

No -- you're right, the majority of the decline is on the OE side, and it's quite dramatic on the OE side, which is what's causing the drag on the overall business in general. We have started to see, since July, some softness in the aftermarket, but it's nowhere near as dramatic as the drop-off in OE.

And that's what's really causing the impact at STEMCO..

Okay. Thanks for taking all my questions..

Thank you..

Thank you. [Operator instructions] Our next question today is coming from Joe Mondillo from Sidoti & Company. Your line is now live..

Hi, guys. Good morning..

Good morning, Joe..

So just one quick question on the guidance.

Just wanted to verify your guidance includes is it roughly about $2 million related to EDF expenses?.

It includes all the EDF accounting through nine months of the year. So --.

Can you verify what that amount is?.

Yes. Hold on a second. Give me a second. For this quarter, the impact was $3 million. $1.3 million roughly of that was the impact of currency, and then $1.7 million, an increase in the estimated cost to complete the contract. So that was this quarter. I need -- give me a second, I need to find for the full year..

Okay. Sure. I can ask my second question, if you want, and you can sort of look that up as I speak..

Yes. Go ahead..

So at engineered products segment, just trying to get a sense of what -- I mean, the margins expanded on revenue being down 4%. And in your prepared commentary, you mentioned that that was largely related to some of the cost restructuring and some of the initiatives that you took place took in -- earlier in the year.

Just trying to understand what we can expect in terms of decremental margins. I believe you mentioned that you're anticipating high single-digit revenue declines in the fourth quarter.

But in terms of decrementals, how can we think about that for the fourth quarter?.

And you're referring to specifically engineered products?.

Yes, that's correct..

Yes, I think for the reasons that Marvin cited, even though we expect revenues to be down high single digits for the fourth quarter compared to last year, we expect EBITDA to be relatively flat.

And so we're expecting -- accordingly, we're expecting because of the work that's done by our teams earlier this year and rightsizing our cost structure in response to volume and other measures, we're expecting margins in engineered to be up over the fourth quarter of last year..

Okay.

So the initiatives in terms of the cost side of things that you've taken are fully offset -- are expected to fully offset any of the effects from lower volumes?.

That's correct..

That's right. That's how we're thinking about it right now, and that's how we see it right now.

Everything sort of -- all indications we've seen to date indicate that we've done a nice job in that business because we had an early -- obviously, things started to degrade in that business earlier this year, and we had the sort of foresight to jump on it pretty early. And so we're starting to see the benefit of that..

Okay. Great. And then….

And Joe -- yes, go ahead, Joe..

I was just going to move to power systems. So if you actually have other ideas --.

Yeah, keep going. Keep going..

Just in terms of power systems, excluding -- it looks like if I exclude the $3 million this quarter, you're looking at about roughly 16% op margins. I thought maybe that the margins could have been -- we're going to be maybe a little higher just given that I knew was going to be -- a large chunk of the revenue growth was going to be from aftermarket.

How are you thinking about the operating margins that you realized in the quarter itself? And then looking at the fourth quarter, how are you -- should that be any different in terms of mix or any other factors?.

Well, as you realize, last year, we had a blowout quarter in the fourth quarter in power. And so don't expect those kinds of margins and that kind of performance, and Marvin highlighted that when he was talking about guidance for the year. So we expect in power in the fourth quarter for performance to be generally in line with what we've seen.

We've had good results throughout the year in power systems. I think it's possible that we do see some sequential improvement in our margins in the fourth quarter, but below what we saw last year, obviously, on the really strong volume we had in the fourth quarter of last year..

Yes. I'm in agreement with Milt on that. It's fourth quarter is typically a strong quarter for that business. So if you look at Q3 versus Q4, it might be slightly up, but definitely not what we saw in Q4 of 2018..

And then, Joe, on your question, let me give you the -- answer your question quickly on the EDF impact for this year for the full year. The currency impact on the contract for the full year is roughly $2 million. And the additional costs are approximately $2 million, so a total of about $4 million for the year for the nine months..

Okay. Great. Thank you. Appreciate that. And then in terms of just power systems, looking in I mean, you guys have some pretty good visibility with this business.

So how are you thinking about, at this point, with less than two months left in this year, how sort of 2020 should be sort of maybe shaping up? Just curious on a revenue standpoint, in terms of the comp that you're anticipating this year, you're probably going to have a pretty good comp, a pretty tough comp.

And then on the margin side, ex EDF, how are you thinking about that?.

Well I mean, I expect 2020 to be another good year for power systems. The backlog is in decent shape. And as you know, the team has been working really, really hard to identify new opportunities there. So I would expect 2020 to be a good year for power systems.

We're not in a position right now to give you percent increases, etcetera, but I think power systems will be helpful for the EnPro portfolio in 2020..

Okay. And then any update with OP 2.0? Any changes there? Anything to say about that? Or is --.

No. No major updates. Continuing as we communicated last, going through its paces with the endurance testing, looking at opportunities that the team has identified, etcetera, as it relates to launch, continuing to do our work there very diligently. So no major updates at this point. But the team is continuing to work it.

And I was there visiting the team here recently, still upbeat, high spirits, working diligently, identifying and resolving issues every day and out in the market. So that would be the update..

Okay.

And then just in terms of your cost initiatives and restructuring and headcount, everything that you're doing to sort of combat some of the headwinds that we're seeing, where are we amongst I guess, the main two segments? Where are we at implementing that? Are those already sort of implemented? Or are we still in the midst of going through some things?.

The way I would size it up is obviously, everything is market related, right? So if the markets continue to erode, we may have to do some further adjustment. But everyone is locked in to make the changes that are necessary to be in line with the run rates that we're experiencing on the top line.

And I would say that most, if not all, of our energy right now is in heavy-duty trucking. We feel very comfortable with where engineered is. We feel, obviously, really good with where power systems is. We don't see anything alarming and feeling outside of, really trucking. We -- obviously, general, industrial in general is soft everywhere.

I think every industrial would likely tell you that, but we're poised to really combat those headwinds in each of our businesses, and our heavy-duty trucking business is just acutely challenged a little bit more than others, which requires a little bit more action.

So it's hard to give you a sense of what inning we're in or what quarter we're in, but I would say, we're waking up every day thinking about heavy-duty trucking and not anywhere else.

But we do feel good about the actions that are taking place in heavy-duty trucking and, more importantly, I feel good about the pace, right? I think we are moving at a pace that is the pace that's necessary to get this issue behind us as fast as possible. I think that's the most important piece. I mean, the pace is right for what we're dealing with..

Okay. And then I wanted to also ask about the environmental reserve that you guys have been -- it seems like costs have been ramping up a little bit there in terms of making these reserve payments, but you must have been close to making these settlements. I'm sure it's related to that.

What is -- can you sort of describe sort of how big -- how significant this is going forward, now that we've made these two settlements? Should this be a much smaller issue going forward? Or is there still some major progress that you have to make to get this behind us?.

Joe, you'll find good disclosure in our Qs and K on the environmental matters. But just to summarize we're involved in remediation activities in roughly 21 sites. But most of those are there's already been a plan of remediation that's been put in place, and it's just the on-going monitoring and clean up activities, which is fairly modest.

The cost of that is fairly modest. And then we had the settlement of these two significant items this quarter. We're very pleased with the terms and being able to get those situations behind us.

And then that leaves us with three matters where we continue to negotiate, address, evaluate for which we have established reserves that are appropriate for what we know and where we are in those situations.

But there are three remaining situations that we're not at a point really where we can provide a full estimate of what might be required, ultimately, because we're evaluating it. But the good news is it's -- we're dealing with only just a small -- these three situations that have really yet to be quantified. So we're really in pretty good shape.

We don't have a lot of exposure. And bringing these to completion was a big step forward..

Yes. It's pretty hard to convey how we feel about these in the script. But if you check the mood here relative to these issues, we'd be pretty darn excited about it. We've got some big issues behind us that were taking up leadership team, resources, time and energy.

And it's sort of a big deal to move beyond some of these issues that have been lingering around in the past.

And so we're not able to convey that appropriately in the script, but I certainly feel really good about the fact that these issues are behind us and no longer consuming time and energy, so we can focus on the business that we're running today. So I mean that's the feeling everyone should have as it relates to these issues..

And just to make sure, I think this is clear, but just to be certain it's clear, none of what we talked about today in these sites that require significant evaluation are matters that we at EnPro contributed to. These are -- go back well before the spinoff from Goodrich that created EnPro.

So these are very old matters that had been liabilities of Enpro as a result of the spin. So just -- I just wanted to make sure that's clear.

Our stewardship on environmental is something that's really important to us, and we have a good track record in how we operate our facilities, and that's been the case since the spin and we became a separate company..

Great. Thanks for clarifying that. My last question, just really quick. Wondering your normal annualized D&A, what that would be going forward, including the acquisitions? Not sure if you have the purchase accounting amortization calculation sort of done yet, but sort of what to expect sort of annualized D&A..

Yes. I think we'll have to cover that on another call, I mean, our purchase accounting. We did have the preliminary cut that was, obviously, baked into our balance sheet, but since I don't have that number in front of me, we'll have to cover that at a different time..

Well, do you have the number excluding the purchase accounting related to these recent acquisitions?.

Yeah. I mean, we've -- I just don't have it in front of me, Joe..

Okay. I can follow up. That's fine..

You can -- yeah. And you can look at D&A for the nine months in our financial statements. As a matter of fact, I can pull that up. And obviously, it's going to be -- if you take that and you annualize it, it's going to step up a bit because of the acquisitions. There's not a lot of depreciation.

There, obviously, will be considerable amortization of intangibles in connection with the acquisition. But the nine months D&A is, depreciation nine months is around $28 million; amortization around $26 million. So if you annualize the 27.9%, which was nine months for depreciation, that will give you pretty close to depreciation.

And then amortization, obviously, is going to step up a bit..

Okay. All right. Thanks. Appreciate you taking my questions..

Thank you. Our next question is coming from Jeff Hammond from KeyBanc Capital Markets. Your line is now live..

Hey. Good morning, guys. Thanks for putting me in here..

Yeah. Good morning, Jeff..

Just on truck, it looks like kind of backing into mid to high teens declines.

Can you just give us a sense of how weak OE is versus aftermarket?.

Yes. I'd say, OE is down about 20% in the business. Aftermarket is down, call it, 7% or 8% or so, something like that, maybe a little bit more accelerated since July, but nowhere near as drastic as OE. That's how I would size it up..

Okay.

And then just, I guess, the expectation is OE continues to be weak just as we kind of head into '20 and you see the big drop-off in production expectations?.

Yes. So we expect OE to continue to be weak. We expect to size our business in line with what we're seeing in the market right now and everything else would be steady..

Our team's latest view is that truck -- OE on the truck side will drop maybe 25% year over year in 2020. Trailers, which we have more exposure to, is probably more like high teens mid-to-high-teens. They've also observed or made the comment that those -- the market information continues to decline and chase -- it's chasing actual experience down.

So we don't really know, but that's the best information we have right now from our team based on the industry data..

Okay. Good. And then it seems like if I cut through your comments, Marvin, about portfolio that maybe some of these noncore businesses fall within the truck sector.

And so just how should we think about divesting those businesses at a time where you're kind of facing cyclical challenges versus waiting for cyclical recovery?.

Yes. Obviously, that's the question, right? I mean, where we feel like we have an opportunity to get value for a business, we will. Obviously, the ideal is to wait as long as possible for the markets to improve so that we can take advantage of those situations.

It's hard to predict how long that will take, but we are doing some analysis to get a sense of how long that would take and what the value would be at that time versus doing something now. And so that's the conversation that we're having inside the company.

And I think at the end of the day, for us, it has just it has a lot to do with our belief and whether or not the business has a real strong competitive advantage or not. And I mean, that's sort of how we're thinking about it..

Okay. And then just on -- it looks like you brought the EBITDA guidance by about down about $15 million. Can you just isolate how much this acquisition contributes into the guide? And then, I guess, how much of that $15 million or $15 million-plus, if you consider the acquisition, was truck versus other? Thanks..

Jeff we, I think we've talked about this on the call when we announced the acquisitions. We provided -- tried to provide you with enough information to understand the impact that the acquisitions are going to have on us overall in the aggregate.

For commercial reasons, we didn't want to, and we still don't want to get into the specifics in terms of dollars of EBITDA contribution. But I will just say that nothing has changed. We continue to be very excited about the additions, the expansion into pharmaceutical and semiconductor.

So the drop in the guidance is really more of a function of heavy-duty trucking and a different view now from where we were a quarter ago, as well as continued softness in automotive and general industrial, primarily European general industrial and engineered products.

So those are the two factors, the largest, by far, if you look at the delta between expectations now versus a quarter ago, is in heavy-duty trucking. But we've also had a decline in our expectations for engineered products for the reasons I just mentioned..

Okay. Thanks, guys..

Thank you. Our next question is a follow-up from Justin Bergner from G. Research. Your line is now live..

Thank you for the follow up, guys.

So just to clarify, in power systems, you're absorbing an extra $3 million of EDF costs that wasn't anticipated in your guidance coming out of the second quarter?.

That's correct..

Okay. Great. And then going back to the STEMCO business.

Is there anything that's going on from like an inventory stocking point of view, particularly in the aftermarket side? Or do you believe of the weakness you're seeing and expect to see in the coming quarters is end market related?.

We certainly believe its end market-related, and obviously, there's some inventory adjustments that take place when end markets adjust. But we certainly believe that the primary driver is the end markets. We don't -- I don't want to sit here and talk about why that is exactly, whether that's trade related, etcetera, etcetera.

But it's primarily been driven by the end markets. And obviously, everyone is adjusting their supply chains to sort of normalize to a new run rate. The further down the supply chain you get, you have a little bit of a bullwhip effect and so maybe a little bit more aggressive in some of our businesses than others, obviously, on the down side.

On the upside, some may come back a little bit stronger as well. So we certainly think it's end market related..

Okay. And then maybe just to wrap up on a comment you made earlier about STEMCO's competitive advantage.

If one goes back a few years to one of the investor day presentations where STEMCO was held up as an example of EnPro really building a new business inorganically with attractive EBITDA margins, what has potentially changed at STEMCO besides the state of the trucking and trailer cycle that might cause you to sort of rethink that view from a few years back?.

So as I'm the new guy, I'll just give you the new view and not have anyone tell you what view has changed. But my view is, we do have, obviously, some weakness in the market, which is acutely affecting the STEMCO business in a way that it's not affecting any other businesses.

I mean, let's face it, the drop-off in trucking is far more dramatic than we're seeing in general industrial or anywhere else. So there is something quite significant there. And then we bought some, I would say, structurally unattractive businesses, where we went in with the thinking that we could buy those businesses and improve those businesses.

And that's what our strategy was at the time. And I've come in with the thinking that we'd just like to acquire better businesses at a fair price versus businesses that we have to put a lot of resources in to turn around. Some of those have worked and some have not worked. The ones that have not worked are hurting us greatly.

And that's primarily what's gone bad, right? We have some businesses that we bought, we thought would perform -- we could turn around and it would perform well and they haven't. And so that would be, I would say, the lesson learned. And the way forward is not to do that again..

Okay. Thank you. Understood..

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

All right. Thanks, Kevin, and thank you all for joining us this morning. If you have any additional questions, please give me a call at 704731-1527. Have a great day..