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Edited Transcript of NPO earnings conference call or presentation 31-Oct-17 2:00pm GMT

Thomson Reuters StreetEvents

Q3 2017 EnPro Industries Inc Earnings Call

CHARLOTTE Nov 29, 2017 (Thomson StreetEvents) -- Edited Transcript of EnPro Industries Inc earnings conference call or presentation Tuesday, October 31, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* J. Milton Childress

EnPro Industries, Inc. - CFO & SVP

* Stephen E. Macadam

EnPro Industries, Inc. - CEO, President and Director

* William C. O'Neal

EnPro Industries, Inc. - VP of Strategy, Corporate Development & IR

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Conference Call Participants

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* Ian Alton Zaffino

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* James Albert Picariello

KeyBanc Capital Markets Inc., Research Division - Associate

* Joseph Logan Mondillo

Sidoti & Company, LLC - Research Analyst

* Justin Laurence Bergner

G. Research, LLC - VP

* Liam Dalton Burke

FBR Capital Markets & Co., Research Division - Former Analyst

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Presentation

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Operator [1]

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Good morning. My name is Kelly, and I will be your conference operator today. At this time, I would like to welcome everyone to the EnPro Industries 2017 Third Quarter Results Conference Call. (Operator Instructions) Thank you.

Mr. Chris O'Neal, Senior Vice President of Strategy, Corporate Development, and Investor Relations, you may begin your conference.

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William C. O'Neal, EnPro Industries, Inc. - VP of Strategy, Corporate Development & IR [2]

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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. Steve MacAdam, our President and CEO; and Milt Childress, our Executive Vice President and CFO, will begin their review of our third quarter performance and our outlook in a moment.

But before we begin our discussion, I'll point out that you may hear statements during the course of this call that express the belief, expectation or intention as well as those that are not historical fact. These statements are forward-looking and involve a number of risks and uncertainties that may cause actual events and results to differ materially from such forward-looking statements. These risks and uncertainties are referenced in the safe harbor statement included in our press release and are described in more detail, along with other risks and uncertainties, in our filings with the SEC including our Form 10-K for the year ended December 31, 2016.

We do not undertake to update any forward-looking statements made on this call to reflect any change in management's expectations or any change in assumptions or circumstances on which such statements are based.

Our earnings release and conference call presentation materials contain additional disclosures regarding 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 the relevant periods until their reconsolidation effective as of July 31, 2017; and finally, pro forma illustrative financial information presented as if GST and OldCo were reconsolidated for financial reporting purposes throughout the 3 and 9 month periods ended September 30, 2017 and 2016. These disclosures are important to understanding comments we will make on today's call, and we urge you to read them carefully.

Just as we did in the last few quarters, we are providing pro forma segment sales and pro forma segment adjusted EBITDA information as if GST and OldCo were reconsolidated with EnPro throughout the periods presented based on the consummation of the joint plan reorganization, which was consummated July 31, 2017.

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

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Stephen E. Macadam, EnPro Industries, Inc. - CEO, President and Director [3]

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Thank you, Chris. Good morning, and thanks for joining us today. I'd like to start by highlighting that in the third quarter, we experienced positive year-over-year pro forma sales growth in each of our segments. We achieved positive growth despite the adverse effect of the 2 large hurricanes on several of our facilities within the Sealing Products and Engineered Product segments.

Excluding the year-over-year differences in foreign exchange translation, acquisitions and divestitures, pro forma sales in total were up 6%, up 4.5% in Sealing, 11.7% in Engineered Products and up 5% in Power Systems.

Pro forma adjusted EBITDA increased 3.9% year-over-year primarily due to strong sales growth across all segments and the positive impact from restructuring activities that occurred during 2017 and early 2017. Pro forma adjusted EBITDA margins were 15.1%, down approximately 50 basis points compared to the same period of 2016 primarily due to unfavorable product mix and higher incentive compensation expense versus last year.

In the third quarter, we continued to experience favorable conditions in several of our core markets. Demand in semiconductor, aerospace, automotive, food and pharma, metals and mining, and general industrial continued to be strong while demand in heavy duty trucking and oil and gas increased modestly on a year-over-year basis. Power systems experienced an increase in sales versus the third quarter of last year driven by higher aftermarket part sales.

The general positive market momentum was slightly offset by continued softness in nuclear and industrial gas turbines. As you can see on the right hand column of Slide 5, we generally expect these conditions to continue through the balance of the year.

Before turning the call over to Milt to discuss our financial results in more detail, I want to discuss some positive developments from the third quarter, including the completion of the ACRP and subsequent reconsolidation, and recent investments in our commercial capabilities. We previously announced the consummation of the ACRP joint plan of reorganization effective July 31 of this year. As most of you know, we have permanently closed our company's asbestos chapter.

GST and related entities have been reconsolidated with EnPro for financial reporting purposes and are reflected in our consolidated results starting in August of this year. Milt will explain in more detail the accounting implications of the reconsolidation on our financial results in a moment. The consummation of the ACRP joint plan concluded our 7-yearlong effort to free the company from the costly asbestos program and marks the beginning of a new era for EnPro. As we've mentioned before, since 2002, net of insurance, we paid nearly $800 million in settlements and legal costs related to allegations that GST's products caused asbestos related illness, despite scientific evidence to the contrary. This drag on our cash flow limited our capacity to invest in growth. With the conclusion of the ACRP, we're looking forward to a future growth through accelerated organic investments in innovation, expansion of our product portfolio, and new adjacencies.

Over the last several quarters, we have detailed several exciting investments that we've made throughout the company to develop next generation products and enhance our technological innovation, and we anticipate continued investment to support those programs going forward. Additionally, we will continue to pursue acquisitions that exhibit attractive business and financial characteristics and support our strategy.

As we discussed last quarter, we've continued to invest on our commercial capabilities to drive growth across our segments. The 2 initiatives we highlighted last quarter were GGB's new web store as a new way to reach certain customer segments, and a significant expansion of Garlock's distribution network in Asia to support Rubber Fab's growth in the region. These both continue to gain traction and are creating value for the company.

This quarter, I'd like to elaborate on an initiative that offers tremendous growth potential for STEMCO, which is in our Sealing Products segment. As most of you likely know, STEMCO manufacturers and supplies high quality components to the heavy duty and medium duty truck and trailer markets primarily in North America. The primary markets include wheel-in, break, and suspension components.

During the last 5 years, STEMCO has expanded its portfolio of great products to include a comprehensive offering of drum and air disc brake components. Since the beginning of the third quarter, we announced 2 significant developments in support of this strategy. On our second quarter conference call, we announced that STEMCO had opened a new state of the art production line in our existing Rome, Georgia facility to manufacture friction components for medium and heavy-duty trucks. This investment enables STEMCO to provide a higher quality product by optimizing product consistency and eliminating error and waste in the production process.

And yesterday, STEMCO announced the acquisition of commercial vehicle components or CVC, which is located in Shanghai, China. Using its proprietary friction formulation, the company manufacturer's air disc brake, and medium duty hydraulic disc brake pads. This acquisition will provide STEMCO a premium portfolio of air disc brake pads designed to exceed OE performance specifications and will enable STEMCO to expand further into medium duty commercial vehicle markets. I'd like to publicly welcome that team to EnPro.

Now I'll turn the call over to Milt.

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J. Milton Childress, EnPro Industries, Inc. - CFO & SVP [4]

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Thanks, Steve. Before a review of our prepared financial results on a pro forma basis, which we believe is most meaningful, I'd like to take a minute to review the impact that the consummation of the ACRP joint plan of reorganization and resultant reconsolidation had on EnPro's consolidated financial statements this quarter. With the reconsolidation of GST and other related entities on July 31, EnPro's consolidated balance sheet at September 30 includes the assets and liabilities of the reconsolidated entities at fair value as of the reconsolidation date.

EnPro's consolidated income statements for the current quarter and 9-month periods include the results of the reconsolidated entities for the months of August and September only. As further background regarding the accounting, for reconsolidation of GST and related entities was accounted for as a purchase acquisition as required under GAAP. Absent the negotiated arm's length purchase price that would be known in a negotiated transaction, the fair value of the entities being reconsolidated into EnPro was determined with the support of evaluation specialists as of the reconsolidation date of July 31.

Based on the excess of the fair value of the reconsolidated entities of $485.2 million over EnPro's cost basis investment of $236.9 million, plus the elimination of EnPro's payables to the reconsolidated entities as of July 31 of $286.1 million, a non-cash gain of $534.4 million was recognized in the third quarter.

With the reconsolidation, $595.7 million in assets and $110.5 million in liabilities at fair value were added to EnPro's consolidated balance sheet at July 31, including $52.1 million in receivables and inventory, $63.2 million in (inaudible) plant and equipment, $132.6 million of goodwill and $180.8 million of other intangible assets. These valuations are preliminary as the accounting rules permit 12 months for the finalization of purchase accounting after an acquisition. However, we presently do not anticipate any revisions.

The reconsolidated entities contributed sales of $35.5 million to consolidated sales for August and September of this year. The increased appreciation, amortization, and other purchase accounting impacts of the reconsolidation did not and will not impact pro forma adjusted EBITDA as we have defined it.

As discussed on previous earnings calls, the pro forma segment results that I will discuss are prepared as if TSP and OldCo had been reconsolidated on the basis described in our earnings release throughout all periods.

As a reminder, most of the difference between consolidated and pro forma segment information is in Sealing Products with only small differences in Engineered Products and Power Systems, stemming from foreign operations of those segments included in GST foreign subsidiaries.

Our pro forma third quarter sales of $355 million were up 7.2% from the same period of 2016. As Steve noted, excluding the impact of foreign exchange translation and acquisitions and divestitures, pro forma sales were up 6% in total, up 4.5% in Sealing, up 11.7% in Engineered, and up 5% in Power Systems. Pro forma gross profit margin for the third quarter was 35.1%, which was flat compared to the third quarter 2016. The effect of additional sales volume was mostly offset by unfavorable product mix.

As previously mentioned, several of our facilities within Sealing Products and Engineered Products were adversely impacted by hurricane activity in the third quarter. We estimate that our earnings were negatively impacted by approximately $2.3 million as a result of lost or deferred sales and cost incurred due to temporary plant closings.

Total pro forma segment SG&A increased in the third quarter of 2017 by $2.8 million over the third quarter of 2016, primarily due to higher incentive compensation expense versus prior year. Pro forma adjusted net income was $18.2 million, up slightly from the prior year. As shown in the reconciliation tables, pro forma net income adjusts for items such as restructuring, environmental reserve changes, charges related to the reconsolidation including the $534.4 million non-cash gain recognized in the quarter, a $10.1 million non-cash impairment of intangible assets associated with AT Dynamics, which was acquired in February 2015, and tax effects associated with these items.

Pro forma sales in the Sealing Products segment were $224.6 million in the third quarter, up 5.4% over the third quarter of 2016. Excluding the impact of the Qualiseal acquisitions, the Franken Plastik divestiture that closed in December of last year, and foreign exchange translation, pro forma sales were up 4.5% in the third quarter. This year-over-year sales increase was due to strength in semiconductor, aerospace, food and pharma, energy, trucking, metals and mining, and general industrial, while industrial gas turbines and nuclear experienced continued headwinds.

Pro forma segment adjusted EBITDA, which excludes the impact of restructuring and acquisition expenses, was $42.4 million, up 1.4% from the third quarter of last year. Excluding the impact of acquisitions and divestitures, including a $1.5 million positive contingent purchase price adjustment in the third quarter of last year related to the Fabrico acquisition, and foreign exchange translation, pro forma adjusted EBITDA increased 3.3% year-over-year.

On the same basis, excluding these items, the segment's pro forma adjusted EBITDA margin was 18.7%, which is relatively flat to prior year, reflecting unfavorable mix offset by higher volume. Several facilities in the Sealing Products segment were impacted by hurricane activity in Texas and Florida in the third quarter and we estimate that the hurricanes adversely affected segment profit by approximately $1.5 million.

Pro forma segment SG&A costs were $51.7 million in the third quarter compared to $48.7 million in the prior year. Excluding the impact of acquisitions and divestitures, the previously mentioned contingent purchase price adjustment related to the Fabrico acquisition, restructuring costs, and charges related to the reconsolidation, segment SG&A costs in the third quarter were $50.3 million compared to $48.9 million in the prior year.

In the Engineered Products segment, third quarter pro forma sales of $75.6 million increased by 14.9% from the third quarter of 2016. Excluding the impact of foreign exchange translation, pro forma sales were up 11.7%. This year-over-year sales increase was due primarily to strength in the general industrial, automotive, and aerospace markets and modest improvements in North American and European oil and gas markets.

Pro forma segment adjusted EBITDA of $11.8 million increased from $8.7 million in the third quarter of last year, primarily due to increased volume and the continued positive impact from cost-reduction efforts and restructuring activities that occurred throughout 2016 and early 207. Pro forma segment adjusted EBITDA margins were 15.6% in the third quarter versus 13.2% in the prior year. We estimate that Hurricane Harvey adversely affected Engineered Products segment profit in the third quarter by approximately $800,000. Pro forma segment SG&A costs were $21.3 million in the third quarter compared to $28.8 million (sic) [$21.8 million] in the prior year.

In the Power Systems segment, pro forma sales were $55.8 million, up 5.3% compared to the third quarter of 2016. As Steve noted, the sales increase in power was primarily due to the higher aftermarket parts revenue. Engine sales were relatively flat as a decrease in percentage of completion engine revenue was offset by the shipment of the first of 2 [MOX] engines. As a reminder, the MOX engines are accounted for on a completed contract basis.

Pro forma segment adjusted EBITDA for the quarter was $9.6 million, up from $8.6 million a year ago. The increase was due to higher aftermarket parts revenue, lower warranty costs, and a positive (inaudible) inventory adjustment, partially offset by lower margins on engine programs and a net $800,000 negative adjustment for the EDF contract. These EDF contract adjustment was driven by increased production cost estimates partially offset by favorable foreign exchange in the third quarter.

As a reminder, since we are in a loss position on the EDF contract, GAAP rules require that any change in the gross profit of the program be recognized in the current quarter.

Pro forma segment SG&A costs were $7.7 million in the third quarter compared to $7.4 million in the prior year.

As we've discussed in the past, we're committed to a disciplined and balanced allocation of capital and maintaining a strong balance sheet as we drive long-term growth and the value of our company. In conjunction with the joint plan of reorganization in the third quarter, we funded $400 million to satisfy a portion of the U.S. asbestos trust obligation and $16.7 million to fully satisfy the Canadian asbestos settlement obligation. An additional $80 million payment to satisfy the remaining U.S. asbestos trust obligation is due by July 31, 2018.

Additionally, in the third quarter, on a pro forma basis, our capital expenditures for equipment and facilities and software were $10.5 million. We paid a $0.22 per share dividend totaling $4.7 million and repurchased approximately 24,000 shares for $1.7 million as part of the $50 million share repurchase program that expired last week.

In aggregate, under the share repurchase program, we repurchased approximately 898,000 shares for a total of $47.2 million. We announced yesterday that our Board of Directors authorized a new $50 million 3-year program for the purchase of common shares in both open market and privately negotiated transactions.

As in previous quarters, we outline on Slide 15 our consolidated net debt and leverage ratio at the end of the third quarter. As you can see, our leverage ratio at the end of the quarter was approximately 2.1x trailing 12 month pro forma adjusted EBITDA. The leverage calculation in this table does not include the tax benefit of the ACRP plan funding that we expect to realize over time. Including our current tax refund estimate of approximately $115 million, our leverage ratio would be approximately 1.5x trailing 12 month EBITDA.

You will note that in past quarters, we used an estimated tax benefit of $150 million but have updated the former estimate to reflect recent tax analysis and part of the tax benefits that we realized this year. Our tax team is continuing to work on refining our tax estimate and we will provide updates as necessary.

As we have provided during the last few quarters, we're including an update of our pro forma valuation relative to earnings. As shown on Slide 16, our enterprise value to trailing 12 months pro forma adjusted EBITDA at the end of the third quarter, including the benefit of the estimates ACRP related tax refund, was approximately 9.9x compared to a multiple of 14.8x indicated by our consolidated results.

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

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Stephen E. Macadam, EnPro Industries, Inc. - CEO, President and Director [5]

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

As we've always explained, most of our businesses have relatively short order to shipment cycles, which naturally limit visibility of future demand. With the exception of new engine production and power systems, the typical order backlogs range from a handful of days to a couple of months. Additionally, macro end market indicators do not necessarily correlate with the performance of our businesses due to the component nature of our products.

Notwithstanding this limited visibility, demand in most of our markets that we serve remains strong and demand in other markets such as heavy duty trucking and oil and gas has improved modestly. Accordingly, notwithstanding ongoing challenges in nuclear and industrial gas turbine markets, we remain optimistic that we'll continue to maintain our improved year-over-year performance through the fourth quarter. Given sustained strength in a number of our markets, current macroeconomic forecasts, customer order patterns, we are increasing guidance for 2017 pro forma adjusted EBITDA from our previous full year range of $200 million to $205 million to a revised full year range of $207 million to $212 million. This revised range includes the impact from previously announced Qualiseal and CBC acquisition and excludes any impact of further M&A activity, changes in foreign exchange rates from the end of the third quarter, accounting adjustments associated with the reconsolidation of GST and OldCo and any fourth quarter litigation or environmental charges.

Before I open the line to your questions, I want to reiterate my excitement for the current position of our company. We have made and continue to make great progress on a number of operating improvements and growth initiatives. We've become more reliable every day and our execution and precision with which we're able to manage our company. We've invested heavily in our facilities to get them modernized and we're well positioned to drive growth in the value of our company in our post-ACRP world.

Now, we'll open the line for your questions.

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Questions and Answers

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Operator [1]

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

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Ian Alton Zaffino, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [2]

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A question would be I guess on the capital allocation front. I think now that you are unencumbered by the bankruptcy process, what does the outlook look like now? Were there missed opportunities previously that you now could go after and how are you thinking about ultimately where you want your leverage to be and cash flow?

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J. Milton Childress, EnPro Industries, Inc. - CFO & SVP [3]

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Ian, you rightly acknowledged we're in a much different position, will be, as we move through the next year when you look at our balance sheet. We do have strong cash flow as a company so we'll be delevering but when you consider the tax refund that we expect from the plan to carry back the loss from this year associated with the trust funding, we will have a lump sum cash coming in, in the balance of the year. So we're going to be in great shape as a company and it really does open up opportunities, as you noted, for us to accelerate our growth initiatives, both what we're doing with innovation as well as our hedging out opportunities, our bolt-ons and our adjacency moves on the M&A front.

So we do plan to maintain our over time on average our net debt to EBITDA in that 2x to 2.5x range. So we're not -- we're okay with spiking up above that if it's the right strategic investment opportunity but knowing that we have strong cash flow and can bring it back in line pretty quickly. So that's how we're thinking about it, how we feel like we have lots of growth opportunities to pursue currently.

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Stephen E. Macadam, EnPro Industries, Inc. - CEO, President and Director [4]

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Let me just add one thing to that, Ian. Obviously, you were at our investor day earlier in the year and what we've been focused on in the last number of years is really trying to build the organizational capacity to do this growth well. So we explained when we had you guys together in New York that we've invested a lot in an innovation process in the company and how to really sort out what stuff is commercially viable and how to pursue ideas, how to manage them through a project pipeline.

We've invested a lot in productivity improvements. We've created our talent. The teams in place now in the divisions have been there, the leadership teams have been in place now for a number of years and really starting to get traction and we've invested in our acquisition team that reports into Chris and Milt and we've gotten much, much better at how we think about acquisitions as well as how we integrate them.

So what I would like to point out is we are now entering a period of time where the balance sheet capital availability of the company and the organizational capacity to execute effectively are really coming together. And that's why I'm so excited about the next several years of our company because it's hard to describe to the outside how much better our company functions today than it did over the last number of years. Because when work on solving problems, we try to solve them at the root cause.

And so the company has really got a lot of the backward looking, heavy lifting, fixing, shutting down facilities, exiting unprofitable facilities, consolidating facilities, upgrading processes, et cetera. We got a lot of that behind us and now, the organizational energy is more and more focused on execution and growth. So we're really in a much different position than we've been as we were working through all these issues and also obviously mired down in the bankruptcy.

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Ian Alton Zaffino, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [5]

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So just dovetailing off of those comments, it seems to me that Europe in particular is a very big market for you. Europe is getting better and I know that's been an area of a lot of your cost cuts and a lot of your efficiency initiatives. How do we think about incremental margins as that market recovers? Do we get back to where we were previously? Is it higher? Maybe if you could discuss a little bit about the incrementals.

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J. Milton Childress, EnPro Industries, Inc. - CFO & SVP [6]

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I think the best indication of progress that we're making is looking at our results over the past this year really in Engineered Products. We have a higher exposure to Europe Engineered Products than we do in the other 2 segments and so it obviously reflects some restructuring but it also shows some of the positive impact we're seeing interest he markets that we serve and you look at our topline growth in Engineered Products in Q3 over last year, that's a reflection of some of the improved activity in Europe.

So we're seeing some significant benefit in our margins as a result of both our actions that we've taken as well as the market improving somewhat. Going forward, we'll be in a position next time we're together after our Q4 results to talk more about our outlook for next year. But as you can see, on Engineered Products we're already at the level or close to exceeding the 3-year margin targets that we put out earlier this year. So we had really strong performance in that segment. Once again, a lot of that is driven by improvements that we've seen in the European marketplace but also in North America because with our CPI business, we had some significant improvements in North America year-over-year as well.

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Operator [7]

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

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James Albert Picariello, KeyBanc Capital Markets Inc., Research Division - Associate [8]

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James Picariello. Since it's included in your guidance, the CVC acquisition, can you help us size that and maybe cover the rationale? It sounds like it gets you deeper into the medium duty space. Is it 100% China right now? What are the leading opportunities from a cost out or international expansion mentality there? Thanks.

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Stephen E. Macadam, EnPro Industries, Inc. - CEO, President and Director [9]

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This is Steve. I'll start with the second part of your question, which is how does it fit strategically. It's a factory in China that makes air disc brake pads and those almost exclusively get shipped into North America today. It's an operation that started up a few years ago and it's a growth play for STEMCO. So we have over the past couple of years had an outsourced supplier for these brake pads and we've grown the business a fair bit.

The U.S. market is going in the same direction the European market is, which is over time, air disc brakes will overtake drum brakes or foundation brakes as we call them, and heavy-duty trucks. That probably will not happen as quickly as it could in Europe because the truck OEMS don't have as much power in our country relative to the market as they do in Europe. And so it's the fleets that really control it, and obviously, there's a big install base of foundation brakes that are already in the marketplace but to be in the brake products business in the heavy duty and medium duty markets, it's essential to have both foundation brake capacity as well as disc brake pad capacity.

So this is essentially rather than us trying to do a greenfield startup of a plant, we bought one that is going to displace a lot of the volume that we're buying from a third party, although we'll continue to have a relationship with that for some of the specialty skews that they do for us. But we'll ship that volume and we'll pick up the volume that this facility already has.

So the way to think about it is really a more efficient way for us to get in the business in a bigger way and up to speed quicker than building the factory.

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J. Milton Childress, EnPro Industries, Inc. - CFO & SVP [10]

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It's a relatively small investment, James. So as Steve mentioned, we have made this move to be able to add this technology to our offering. So we're making an investment that we think will yield good results over time.

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James Albert Picariello, KeyBanc Capital Markets Inc., Research Division - Associate [11]

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And the key competitors within the air disc space specifically in North America, how do you guys define that?

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J. Milton Childress, EnPro Industries, Inc. - CFO & SVP [12]

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Well, first of all, the market is growing rapidly. I think the competitors would be -- Bendix would probably be the biggest, a European company. But what's happening is the market is growing considerably because it's displacing foundation brakes. So there's plenty of room for growth for us to be in that business.

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James Albert Picariello, KeyBanc Capital Markets Inc., Research Division - Associate [13]

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On Sealing, it looks like leverage was just a hair light in the quarter even if you scrub it for the impact of the storm. It sounds like mix was the leading factor there. It doesn't sound like semiconductor, it getting any weaker. That remains strong, nuclear and gas the weak points there. Does that mix dynamic change thinking about the fourth quarter and early 2018?

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Stephen E. Macadam, EnPro Industries, Inc. - CEO, President and Director [14]

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We're just having a banner year in the semiconductor segment and that does fall, as you've noted, in Sealing. And we've talked about this in the past, some of our legacy semiconductor business carries margins lower than the average in the segment for the rest of our products. And that's gradually changing over time as we add new products, and new know how and content. But currently, overall, the margins in our semiconductor products are lower than other products on average in the segment.

So what you're seeing is that combined with volume being down in nuclear, which does command very high margins, and volume being down significantly in the industrial gas turbine business where we're hurting significantly from volume and the loss of leverage in that facility, it's really those 2 things that really combine to give a fairly flat margin picture for the quarter even though sales were up nicely.

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James Albert Picariello, KeyBanc Capital Markets Inc., Research Division - Associate [15]

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We should think about those dynamics remaining intact for next quarter?

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Stephen E. Macadam, EnPro Industries, Inc. - CEO, President and Director [16]

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I think for sure for Q4, James, but I think they're different answers for the segment. In industrial gas turbines, that's going to be a tough road into next year as well. We don't see that changing. That's a dynamic that's driven by technology shifts in the power gen market that large platform industrial gas turbines are struggling to other competitive offerings, which by the way bodes well for the OP 2.0 recips engine that we're going to introduce. That said, it hurts our industrial gas turbine business because that's where our exposure has been.

So we're trying to get that business repositioned to sell components into technologies that are not struggling as much in the end use market. So I would say that has lots to do with an ebb and flow of demand and more of a shift in long-term outlook for large platform industrial gas turbines. So that's that piece. So that will continue. It's something that we're trying to address and we have to address for that facility.

The nuclear business is different. The nuclear business, as you know, is some of our most high margin product lines in the company. We have the dominant share in many of our applications and it just simply ebbs and flows with refueling and maintenance cycles for large nuclear facilities around the world. So it just happened to be that this year was a relatively light year for that and I think that will probably continue into the first part of next year but it doesn't change the long-term outlook for nuclear. It will come back again and it will be just as strong, and we're doing some -- actually, you may not care about this deal but we're doing some exciting work to try to expand the offering.

As you may have known from studying us in the past, we don't currently have -- we have the dominant share in the reactors that were basically designed and built by western companies, right, so the ones in the U.S. and Western Europe, China, and so forth. But the Russian companies have a Russian design for these that has been predominant for the nuclear reactors in both Russia as well as the old communist bloc, eastern Soviet Union bloc, so in countries like Ukraine and all the ex-communist countries over there.

And they don't use our sealing technology in their reactors. They have a different technology that seals them. And turns out, ours is much better and so we've been working with a lot of these operators to convert their reactors to our technology so that our seals essentially can be applied in those reactors. And we've actually made some progress. We're going to have our first conversion happen hopefully next year of a reactor to be suited to our seals. And there's probably 20 -- I don't remember the exact number -- but 22, 23 of these reactors include Poland and old Czechoslovakia, and Ukraine, and these other countries. That doesn't include what's in Russia, which is unlikely to get converted.

But we think we've got a pretty good chance of converting some portion of the other reactors and because our value proposition is so much stronger. So that's a way that that team is working to mitigate the long-term challenges in the nuclear markets. It won't happen quickly but it should offset some of the German and Japanese reactors kind of aging out if you will and being decommissioned.

So we have a pretty balanced view of the nuclear industry longer term, but we'll still see what we've seen in the last few quarters for another few quarters. That's more detail than you wanted. I know that but I think it's exciting. It's just a good illustration of the kind of work that our teams are doing now.

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Operator [17]

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(Operator Instructions) Your next question comes from the line of Liam Burke from FBR Capital.

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Liam Dalton Burke, FBR Capital Markets & Co., Research Division - Former Analyst [18]

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Steve, Milt mentioned as cash gets freed up, obviously, capital investment acquisitions but also frees up more resources for R&D and product innovation.

Could you just give us a sense where you are on the new product flow this year going into 2018?

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Stephen E. Macadam, EnPro Industries, Inc. - CEO, President and Director [19]

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We're doing very, very well. If I could retrace you guys in time, it was really about 4 or 5 years ago that we first started with the implementation of our innovation process across all the divisions and we did a lot of work to embed our technical team and business teams, did a lot of work to essentially install and innovation approach because before that, we really had none for the reasons I've explained to this group a number of times, and hadn't had one for 20 years in the legacy Coltec, or certainly not in Goodrich and before. We just couldn't afford it, right, so there was very, very little activity going on.

We didn't want to just start throwing money at it so we focused on building the process first and then as that process began to crank up and we had more and more ideas, we started funding that at the level that we could afford while being in the ACRP and learning as we go. Obviously, the biggest single investment that we've made is in the OP2 but I think I've talked in calls about our hydrodynamic seal, which goes into aerospace. I've talked about work in elastomers, which goes into food and pharma. I've talked new sealing applications for both pipeline chemical and industrial pipeline applications as well as food and pharma applications.

We're doing some exciting things in the coatings world in number of our different segments. So the appetite to fund new ideas is very robust in our company and so we've been trying to get good at selecting what ideas get funded and which ones don't, anticipating quite frankly, this period of time where we're going to have more money and we certainly don't want to just spend it to spend it. But our technical teams have gotten stronger. Our commercialization muffle of how to introduce these new products into the marketplace has gotten stronger over the last couple of years because we've really only been beginning the introduction of these new products very, very recently and much will happen this year.

In fact, very excited about the biggest trade show in the power gen market is coming up in the first part of December where we're going to introduce and showcase the OP2, Trident OP2 engine to the industry. We've been quietly sharing with some customers the performance characteristics and specs for the new engine, but we really haven't rolled it out and made a big splash in the industry yet because, one, we haven't been ready until very recently with really good performance test data. And we've been waiting for the show.

So the show is, I think term insurance's the second week of December in Las Vegas, and we're going to make a big splash and introduce the OP2 and how it performs to the industry. And I'm just very excited about it because I think I mentioned to the group that I was actually in a session with the Power Systems team where we had 3 or 4 customers in the room and we actually opened the curtain a little bit on how the fuel efficiency performance and emissions performance, and other performance characteristics of the engine was. And they were kind of like, wow, is that real and this is a big deal, which we've been trying to say.

So that's going to happen here in a month and a half. So I'm pretty excited about it.

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Liam Dalton Burke, FBR Capital Markets & Co., Research Division - Former Analyst [20]

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On the Engineered Products front, could you give us a sense, you did have the step up in revenue and a nice step up in pro forma EBITDA margins. Could you give us a sense how that business split between GGB and CPI? Did they both perform equally well?

Well, GGB is still performing better than CPI. CPI is on the mend. Doing better every quarter by the way and really has had a substantial improvement in its performance. It's a lot smaller than GGB and GGB was not a -- GGB has not been a "turnaround story" although they've done just an outstanding job with manufacturing performance and commercial performance. GGB in the last couple of years was in the most difficult market that we've had and I would say that's true even relative to oil and gas because they've been predominantly -- as you know, GGB is 2-thirds Europe and so while the automotive business has been strong volume wise globally for a few years, the industrial business has been absolutely in the tank because it's mostly European based and that has come back this year and as the dollar has weakened a bit, GGB is doing very, very well.

And we've had the leadership team in place now for a few years. That's a new division President. She took over a couple years ago and she's just doing a heck of a job and she's got the team has solidified. We got the people in the right spot. We're doing some little joint ventures to edge out technologically and our commercial team has gotten a lot better at growing that business organically and we've had a little bit of market help. So GGB is doing quite well.

I would say CPI is also doing very well but came from really -- we had -- that team has been fighting through a major restructuring activity driven by the issues we've had in the gas patch and so forth over the past number of years. So as you know, I think our total count is 15 facilities, 15 small service centers around the world that we have either sold or closed or consolidated. So that activity finished in Q1 of this year. Most of that activity happened throughout last year but the last couple of locations in Australia were exited in the first quarter of this year.

So that team is much, much more focused. The plants are operating, performing much better. The sales team is in place. That market, by the way, is not -- has come back and stabilized but it's not like it's doing great. It's in the same situation so I'd say that business is now stabilized and at a profitable level and growing at a pace that's fast enough that we should see nice leverage there as well as we go-forward.

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Operator [21]

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Your next question comes from the line of Justin Bergner of Gabelli and Company. Your line is open.

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Justin Laurence Bergner, G. Research, LLC - VP [22]

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First question relates to the revised guidance and obviously nice quarter. If I take the midpoint, it looks like it's come up about $7 million. If you add back the hurricane and EDF effects, it looks like it's about $10 million increase in your EBITDA guide excluding those temporary factors. How should I think about that increase in terms of the amount that would be flowing through Sealing Products, Engineered Products, and Power Systems, particularly Power Systems since that can be lumpy?

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J. Milton Childress, EnPro Industries, Inc. - CFO & SVP [23]

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We may get a bit -- I think the key full effect of the hurricanes is going to be relatively flat so I understand how you're looking at it that effectively, were it not for that, we would be at about $9 million increase in the guidance. So I'm with you on that. If you look at Q4 on a year-over-year basis, we do expect significantly stronger performance in Power Systems on a year-over-year basis than we do in the other 2 segments.

So I think just a little bit of what our expectations are currently. We had a relatively weak quarter in the fourth quarter of last year in Power Systems. Some of that was currency related and we expect to have another relatively strong aftermarket quarter in Power Systems. As you know, that drives a lot of the profitability. So I think in terms of just looking ahead to the fourth quarter impact, you're likely to see or think that we're going to see stronger year-over-year performance in that segment than with the other 2.

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Justin Laurence Bergner, G. Research, LLC - VP [24]

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I appreciate the hesitancy to get specific on the increase relative to that $9 million but I'll shift to a second question, which just relates to the reconsolidation. On the tax benefit, you mentioned it was downsized from $150 million to $115 million. Does that have the potential to be re-upsized and how much has already been realized so that we can think of the total asset value of the tax benefit on top of that $115 million?

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J. Milton Childress, EnPro Industries, Inc. - CFO & SVP [25]

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This is ballpark, but if you look at 2017 in total, we expect that we'll be getting the benefit of roughly $30 million in 2017 just by virtue of the fact that paying less in cash taxes or estimated payments so far this year compared to what we would have paid in 2017 had it not been or were it not for the expense associated with the trust funding.

So let's call it roughly $30 million we will have seen in our year-end balance sheet will have seen roughly that benefit in 2017. So that's a big part of the decline. And then our tax team is still working on this, but as we look at carrying back the loss, we will lose the benefit we've taken in prior years for credits on foreign earnings. We won't lose them permanently but we've taken those in prior years. Now, with the carry back, we'll have no income against which to use those credits. So we'll have to take those credits and carry those forward. So the impact of that on a present value basis and then sometimes, there's a useful life that we may run into.

So that's another reason why the number is coming down modestly for factors other than just what we're using this year. We're continuing to do the work. These are still, I would characterize them as directional, but a lot of work before we finalize and go out with our return.

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Justin Laurence Bergner, G. Research, LLC - VP [26]

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So the $115 million MPV number is as of September 30. You mentioned the $30 million benefit in 2017. So how much benefit has been realized if any as of September 30 on top of that $115 million?

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J. Milton Childress, EnPro Industries, Inc. - CFO & SVP [27]

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If you just look at it year to date, so I'm not going to answer your question exactly but I'll give you some direction. If you look at the year to date cash taxes paid, we're down about $18 million year-over-year through 9 months. So bracket it. Call it $20 million or so.

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Justin Laurence Bergner, G. Research, LLC - VP [28]

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Any update on OP 2.0? I know that in past quarters there's been an update on calls and I was just curious if there's anything you wanted to share ahead of some of the major events in early 2018?

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Stephen E. Macadam, EnPro Industries, Inc. - CEO, President and Director [29]

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Just what I already shared that we're going to be rolling it out to the industry. We've got a number of potential customers looking at it very seriously so that's where we are.

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Justin Laurence Bergner, G. Research, LLC - VP [30]

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Do you still hope to have a launch customer by year-end? I recall that was a stretch goal.

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Stephen E. Macadam, EnPro Industries, Inc. - CEO, President and Director [31]

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Yes.

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Operator [32]

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Your next question comes from the line of Joe Mondillo of Sidoti and Company. Your line is open.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [33]

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I wanted to ask just to get the number of the quarterly amortization expense related to the reconsolidation of GST, what that quarterly number is going to look like going forward, 1.7 in the third quarter.

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J. Milton Childress, EnPro Industries, Inc. - CFO & SVP [34]

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On a full year amount, it's about $8.6 million. So you can do the math and figure out what it would be quarterly. And that's on intangible assets on the fair value accounting of about $181 million. So roughly an average 10-year life.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [35]

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That $8.6 million is going to be there for the next several years at least?

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J. Milton Childress, EnPro Industries, Inc. - CFO & SVP [36]

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Correct, average about 10 years, 10 to 15 years. There's a smaller increase in depreciation because there was some step up in the property plant and equipment. That is a smaller number of -- about $1 million per year.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [37]

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Also wanted to get the number of the currency related adjustment to the EDF content in the quarter.

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J. Milton Childress, EnPro Industries, Inc. - CFO & SVP [38]

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We mentioned that we had an $800,000 net adjustment in EDF for the quarter. If you look at it, we have an FX -- I think you understand the accounting, Joe, since we're in a loss position so we do an estimated cost to complete every quarter and any changes in that, we reflect in our current P&L changes for the entire program, not just what happened in the quarter. So it is in a loss position. This is not our typical percentage of completion accounting.

So in the quarter, we recognized additional cost to complete of roughly $3 million and we had an FX benefit offsetting part of that of about $2.3 million. So that's how you net down to about the $800,000 additional loss that we recognized in the quarter.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [39]

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Regarding the outlook for Power Systems related to one of the prior questions, when you were talking about the fourth quarter benefit or the guidance and the outlook for the whole entire company, the biggest year-over-year difference or comparison is going to be at Power Systems. Were you referring to the adjusted operating income at Power Systems a year ago?

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J. Milton Childress, EnPro Industries, Inc. - CFO & SVP [40]

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Adjusted EBITDA.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [41]

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So on top of the adjusted EBITDA from a year ago, you're expecting even that much bigger of a difference because of aftermarket?

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J. Milton Childress, EnPro Industries, Inc. - CFO & SVP [42]

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I was taking that into account. That was one factor for the expectation that we'll see some improved year-over-year impact in Power Systems at the adjusted EBITDA line.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [43]

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Right, so taking adjusted EBITDA per fourth quarter of 2016 compared to what the adjusted number is going to be for fourth quarter 2017, it's still going to be a big increase relative to the other 2 segments because of the aftermarket. Is that what you're saying?

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J. Milton Childress, EnPro Industries, Inc. - CFO & SVP [44]

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Partially aftermarket and some of it is currency. Do we have the details of currency impact in fourth quarter of last year?

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [45]

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I just want to make sure that we're talking about adjusted --

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J. Milton Childress, EnPro Industries, Inc. - CFO & SVP [46]

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It's going to be a combination of currency and aftermarket.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [47]

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And then looking at 2018, there's a lot of different dynamics with this segment, Power Systems, new engines, aftermarket, and then we have all the costs associated with OP 2.0 and the lack of margin that you get if you do see a sale. I don't know if there's an expectation of one sale in 2018 but just wondering, it seems like this year for Power Systems it was much better than we actually were looking for at the beginning of the year. So just wondering if you have any insight on margins and revenue growth for 2018 for Power Systems?

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J. Milton Childress, EnPro Industries, Inc. - CFO & SVP [48]

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Well, generally, we talked about this over the past quarters. We've had some nice wins on the government marine side and so we still start a percentage of completion accounting, we'll start recognizing more and more benefit of that over time. And so I think that we would expect that we would see continued progress in growth in Power Systems. Now, the real benefit of this investment we're making in the Trident engine, OP 2.0, that's going to evolve over time.

So we don't expect to see a large impact of that in 2018. Maybe something in the rollout of some launch partners and so forth, but that's a 5 plus year investment that we're making.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [49]

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So you're thinking new engine wins are going to be up a little bit in terms of revenue there and then you didn't really mention aftermarket at all. Can you guys even see that bar in terms of aftermarket plans?

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J. Milton Childress, EnPro Industries, Inc. - CFO & SVP [50]

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It's a little bit like Steve described nuclear earlier. It ebbs and flows. There's a schedule. We get a little bit of advanced notice but it ebbs and flows a bit. Obviously, as our install base grows over time that's a good long-term indicator of what we think will be the health of the aftermarkets parts business.

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Stephen E. Macadam, EnPro Industries, Inc. - CEO, President and Director [51]

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Joe, to measure that install base, you'll remember that slide that we showed in the investor day that showed the number of power cylinders in use in the Navy and Coast Guard. That's the key because obviously, a 12 cylinder requires more service over time than an 8 cylinder and so forth. So we measured it by what's our install base of power cylinders, and you can see, if you go back to that slide, that reflected the wins that we had at the time and it shows even more than offsetting the retirements of some of the old World War II sub-class vessels. This shows an increase over time in total install base of power cylinders.

So as Milt said, we should benefit from the aftermarket flow of that over the next decade.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [52]

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Right, but just looking at 2018, just to put it simple directionally, just so we sort of maybe have an idea, is it fair to say maybe we see a modest increase in revenue next year and then maybe margins are a little pressured year-over-year? Is that a fair way to look at that segment?

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Stephen E. Macadam, EnPro Industries, Inc. - CEO, President and Director [53]

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I'd rather save our thoughts on guidance until the next call, Joe, if we could because -- yes.

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Joseph Logan Mondillo, Sidoti & Company, LLC - Research Analyst [54]

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In terms of corporate costs, they were up a little bit here this quarter. Just wondering how we should think about corporate costs increasing as the business continues to recover.

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J. Milton Childress, EnPro Industries, Inc. - CFO & SVP [55]

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Almost all of the increase year-over-year for the third quarter, Joe, is related to differences in compensation costs. We obviously are having a much better year this year than we did last year and so that accounts for really the delta between third quarter of last year and third quarter of this year. And we'll see some of that in the fourth quarter as well. I suspect the year-over-year magnitude of that would be less in Q4 than in Q3.

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Operator [56]

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There are no further questions at this time. Mr. O'Neal, I'll turn the call back over to you.

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William C. O'Neal, EnPro Industries, Inc. - VP of Strategy, Corporate Development & IR [57]

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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 everyone.

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Operator [58]

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This concludes today's conference call. You may now disconnect.