EnPro Industries' CEO Presents at Corporate Conference (Transcript)

Jan.13.14 | About: EnPro Industries, (NPO)

EnPro Industries, Inc. (NYSE:NPO)

Corporate Conference Call

January 13, 2014 9:00 AM ET

Executives

Donald Washington – Director-Communications & Investor Relations

Stephen E. Macadam – President and Chief Executive Officer

Richard L. Magee – Senior Vice President

Analysts

Jeffrey D. Hammond – KeyBanc Capital Markets, Inc.

Ian A. Zaffino – Oppenheimer & Co., Inc.

Todd Vencil – Sterne, Agee & Leach, Inc.

Operator

Good morning. My name is Jake and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the EnPro Industries Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

Mr. Don Washington from EnPro Industries, you may begin your conference.

Don Washington

Thank you, Jake, and good morning, everyone. Welcome to today’s conference call to discuss last Friday’s court ruling in Garlock Sealing Technologies’ asbestos claims resolution process. I remind you that our call is also being webcast on enproindustries.com and you’ll be able to find a replay there. On the call this morning are Steve Macadam, our President and CEO; and Rick Magee, EnPro’s former Senior Vice President and General Counsel. Rick officially retired from the company earlier this month. He continues to coordinate and assist our efforts on the ACRP as a consultant to the company and will continue in that role through the completion of this process.

Before I begin, I want to point out to you that you may hear statements during the course of this call that express a belief, expectation or intention, as well as those that are not historical fact. These statements are forward-looking and involve a number of risk 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 risk and uncertainties in our filings with the SEC, including the Form 10-K for the year ended December 31, 2012 and the Form 10-Q for the quarter ended September 30, 2013. We do not undertake to update any forward-looking statements made on this conference call to reflect any change in management's expectations or any change in assumptions or circumstances on which such statements are based.

You should also note that EnPro owns a number of direct and indirect subsidiaries. From time-to-time, we may refer collectively to EnPro and one or more of its subsidiaries, as we, or to the businesses, assets, debts or affairs of EnPro or a subsidiary as ours. These and similar references are for convenience only and should not be construed to change the fact that EnPro and each subsidiary is an independent entity with separate management, operations, obligations and affairs.

And now I’ll give the line to Steve.

Stephen E. Macadam

Thanks, Don. Thanks to everyone for joining us this morning. On Friday, we reached a very gratifying point in a process that we began 3.5 years ago when GST filed for Chapter 11 protection in order to resolve asbestos claims against it. Our goal was to free GST from an unfair system. In our opinion, the deck was unjustly stacked against GST and toward the claimants and their lawyers. GST’s products were safe and did not contribute to asbestos-related diseases. Yet the system allowed claimants’ attorneys to present questionable, scientific evidence that made it appear GST’s products were dangerous and leveraged this evidence and the high cost of litigation to extract settlement payments from GST.

We also set out to show that GST’s settlement costs were in fact greatly inflated by abuses in the tort system that flourished after the bankruptcy wave began in the early 2000s. Claimants’ attorneys were successful in concealing and suppressing evidence of their clients’ exposures to asbestos containing products made by defendants, who left the tort system when they entered bankruptcy. With those defendants absent from the courtroom and the evidence of exposures to their products no longer acknowledged, GST settlement cost increased dramatically.

We said at the time of the filing that we had embarked on a difficult journey. Much of what we set out to prove took us into unchartered territory. GST’s case required difficult decisions about challenging and complicated issues. Quite often the outcome of those decisions was difficult to predict. However, we’d attempted during this process to be responsible and forthright with you at each step and to fulfill all responsibilities as a public company. This has sometimes been a challenge, because of the inherent uncertainty in this process. With the judge’s opinion on Friday, we’ve passed an important milestone, but we want to make it clear that the process is not over yet. Much work remains and important issues are yet to be clarified.

Over the next few minutes, we hope to help you understand some of those issues and we will take your questions about where we are in the process. As I said, we’re extremely gratified by the court’s ruling on last Friday and very appreciative of the time and energy Judge Hodges put into the estimation trial and his decision. His opinion estimating GST’s liability on a $125 million is exceptionally well-reasoned, well-written and will, no doubt, become an important, and in our opinion, a historic landmark in asbestos litigation.

We’re also very grateful to GST’s team of lawyers and experts, who we believe prepared and conducted the most comprehensive and effective defense ever presented in asbestos litigation. We are deeply indebted to this wonderful team, who communicated complicated legal and medical and economic issues in a manner that was both understandable and compelling. The judge’s ruling concludes that $125 million is a reasonable and reliable estimate of GST’s liability for present and future mesothelioma claims and is sufficient to satisfy GST’s obligations.

Citing with approval, the estimation methodology used by GST’s economic expert Bates White. Judge Hodges has not yet determined the amounts of – for GST’s liability for other asbestos claims or for administrative costs that would be required to review and process claims and payments, which would add some to that amount. GST plans to incorporate Judge Hodges’ ruling into a plan of reorganization that will replace the plan previously filed and proposed in November of 2011. The new plan will propose to move the case forward towards confirmation.

GST has not yet determined the amount it will propose. The amount it will propose be included in the revised plan, as it continues to hope it can reach a consensual resolution with the representatives of current and future claimants. In light of the Judge’s ruling, we hope the claims – that those claimants’ representatives will reconsider previous positions and engage in good faith negotiations that can lead to an expeditious conclusion to the case. The reconciliation of GST into EnPro and the certainty and finality for all of the EnPro, so that EnPro can move forward and achieve its full potential as a company.

Now, I’ll turn the call over to Rick for his comments.

Richard L. Magee

Thanks, Steve. Good morning, everyone. I know that many of you have already read the judge’s 65 page opinion, so I won’t go through it all in detail. If you haven’t read it, I would certainly encourage you to do so. You can find it in the Investor Relations section of enproindustries.com. I do want to take a few minutes to review the essence of the decision and to highlight a few of the important points that Judge Hodges emphasized.

As Steve said, most importantly, Judge Hodges’ rulings specifically stated that and I’m quoting here; a reasonable and reliable estimate of the amount sufficient to satisfy Garlock’s obligation for present and future mesothelioma claims under a plan of reorganization is $125 million. To reach this estimate, Judge Hodges adopted Garlock’s legal liability approach, focused on the mix of claims and he rejected asbestos claimant representatives “settlement” approach, which focused solely on Garlock's historical settlement history.

The following are several important findings in the opinion. First, Garlock’s products resulted in a relatively low exposure to asbestos to a limited population and its legal responsibility for causing mesothelioma is relatively de minimis. After making that comment, the judge cited the Sixth Circuit’s bucket in the ocean analogy in the molar decision, which we referred to many times in the past.

Next, chrysotile, the asbestos fiber type used in almost all of Garlock’s asbestos products is far less toxic than other forms of asbestos. In fact, the court found reliable and persuasive Garlock’s expert epidemiologist to testify that there is no statistically significant association between low-dose chrysotile exposure and mesothelioma. Another important point, the population that was exposed to Garlock’s products was necessarily exposed to far greater quantities of higher potency asbestos from the products of others. Judge Hodges made repeated references to the dangers of thermal insulation.

Next, the estimates of Garlock’s aggregate liability that are based on its historic settlement values are not reliable, because those values are infected with the impropriety of some law firms and inflated by the cost of defense. These are of course the two factors that Garlock and we have emphasized throughout this process. To further make those two important points, the judge found Garlock’s evidence demonstrated that the last 10 years of its participation in the tort system was infected by the manipulation of exposure evidence by plaintiffs and their lawyers. And for Garlock, the expense of preparing, trying and winning an asbestos injury case far exceeds the average settlement paid to mesothelioma claimants.

Specifically, the judge found that Garlock demonstrated that exposure evidence was withheld in each and every one of the 15 settled cases for which the court permitted Garlock to have full discovery. Also in limited additional discovery allowed by the court in more cases, the evidence demonstrated additional misrepresentation of exposure elements evidence. Judge Hodges referred to this again “as a startling pattern of misrepresentation.” And he stated that it appears certain that more extensive discovery would show more extensive abuse.

In addition, the judge discussed with approval the opinions and observations of several of Garlock's science witnesses and several of its outside lawyers who testified. While he discredited the views of some of the claimant committee witnesses, some of whom are very important witnesses in asbestos litigation. The court's estimation ruling does not address Garlock's estimated liability for claims based on asbestos diseases other than mesothelioma. Although, in his opinion, the judge does note that the parties agreed and the court ordered the proceeding to move forward in that manner because of the relative overwhelming magnitude of mesothelioma claims in comparison to claims based on other diseases. Those claims would include lung and other cancer claims and claims based on nonmalignant conditions.

The ruling also does not address the costs of operating an asbestos trust. According to information gathered by one of GST’s experts, the administrated – the administration cost for trusts formed as a result of previous asbestos cases have averaged about 7% of the trust’s assets. Of course, those trusts have had significantly higher dollars, so it’s entirely possible that that 7% might be different in a case like this.

We are sure you have questions about what this decision means for the process and what is ahead in the case. To some extent, we will be plowing new grounds as we move forward, so we certainly don’t claim to have all the answers at this point. As Judge Hodges pointed out, GST’s case is unique, because GST, unlike the debtors' and precedent asbestos bankruptcy cases, has produced a very low-dose product and has strong defenses to disease causation.

We can say for sure that Garlock's next steps will include work to revisit its proposed plan of reorganization, determine how to incorporate the court's ruling into a revised plan to meet the requirements of confirmation under the Bankruptcy Code, revise the plan accordingly and submit a revised plan that we believe is best suited to win confirmation. As Steve noted, we are not yet sure what amount of compensation GST will provide in that plan, but the plan will be designed to provide fair compensation to claimants consistent with the judge’s decision and to enable GST to achieve finality and certainty.

We continue to be willing to engage in discussions about a consensual and we continue to recognize that an agreed settlement would provide the best path to certainty and finality through section 524(g) of the Bankruptcy Code, could provide for faster and more efficient completion of the case, would save significant future costs and could allow for the attainment of complete finality for all of the EnPro on the asbestos front. We certainly remain open to that possibility. In fact, we prefer it. But at the same time we stand ready to grind through the fight ahead, secure in the knowledge that the judge in GST’s case, understands the truth about GST’s experience defending claims and its true legal liability.

We are prepared to explore with our legal team all avenues that could lead to the eventual confirmation of a plan and the team is working diligently on next steps as we speak. However, we caution that in the absence of a consensual deal, the process will take us into more unchartered territory, could still take a number of years to complete and will require both your and our patience along the way. Having said that, with this decision in hand, we are confident – more confident now than ever that GST will ultimately be reorganized and reconsolidated into EnPro with significant equity value.

With that, Don, I think we’re ready to take any questions that folks have.

Don Washington

Thank you, Steve and Rick, and Jake, we can open the line for Q&A now

Question-and-Answer Session

Operator

Certainly. (Operator Instructions) Your first question comes from Jeffrey Hammond of KeyBanc. Your line is open.

Jeffrey D. Hammond – KeyBanc Capital Markets, Inc.

Hey. Good morning, guys. Congratulations. Great news here.

Stephen E. Macadam

Yeah, thank you, Jeff

Richard L. Magee

Thanks.

Jeffrey D. Hammond – KeyBanc Capital Markets, Inc.

Just can you talk about – I mean, you kind of mentioned timing, but maybe just timing around an appeals process or has there been any initial reaction from the plaintiffs around appeals process? And if just – if you said you settle here near-term versus kind of the longer route, what's kind of the band of kind of shortest timeframe to longer timeframe to be able to reconsolidate GST?

Richard L. Magee

Hi, Jeff, this is Rick. Thanks. You are asking some difficult questions that we are also asking. We haven’t heard anything specific from the claimant representatives at this point about their plans. We’re sure obviously they’ll take whatever steps they believe are available to them to challenge the ruling and that they will certainly try to appeal. We have a view that because this is not a final order of confirmation that an appeal may not be available to them at this point, but that will all be sorted out in the near future. It’s really hard to guess at the amount of time.

As we said in our prepared remarks, if we are able to negotiate a consensual deal, then we could move forward with the plan and get something put in place in a year to a year and a half. But absent a consensual deal, this could take a number of years to complete. Much of the path that we will be going down is as we said uncharted, and as we told you guys many times before, the precedent asbestos cases that we’ve dealt with all involved consensual deals. So in the absence of a consensual deal, we’ll be putting a plan in place and we’ll be asking the judge to confirm that plan, and there will no doubt be objections from claimant representatives. So we’ll see how that sorts out and how that plays out. We are confident that the judge is going to want to cooperate and help move the case along and we’re going to certainly try to do that as best we can, but it’s really hard to predict how much time that could take.

Jeffrey D. Hammond – KeyBanc Capital Markets, Inc.

Okay, and then maybe shifting gears. Steve, can you maybe just – given that you kind of have a marker and a little more certainty, how do you think about differently today strategically running the company, thinking about M&A, bigger M&A, what you want to do with your pipeline, et cetera and kind of running the business kind of on an ongoing basis versus what this liability over your head?

Stephen E. Macadam

Yeah, yeah, so Jeff, that’s a great question and to all of the covering analysts and also buy side analysts and investors on the call that I've met with up and spoken with in conferences and visits over the years, this is a really big deal. This is a game changer for our company and this allows us to move forward in a fundamentally different way. Rick talked about the range of timing. Obviously, it’s still our hope that we can reach a consensual deal and be done with this whole thing in a year or so, but this is such an important precedent in the world of asbestos litigation that we believe the other side is going to be quite desperate to somehow discredit this process and make it seem like it’s a one-off thing or what not.

However, we’re not going to cave under the timing pressure, because we – if this is the price at the end, which is – I say that, I mean, if we believe and I – we believed it from the beginning and now the judge believes it, that Garlock’s products were fundamentally safe and that we don’t have this liability, that’s anything more than nuisance value. That’s what we’re going to get and we’re prepared to stay in for the long haul to do it. We are going to be very, very actively exploring ways that we can move forward with the company in capital markets and so forth on a – talking to folks on more of a pro forma basis and so forth and so on with the confidence that we have a very, very credible independent federal judge, who agrees with our position.

I think I have said from the beginning that we have continued to operate GST, the GST leadership team has continued to operate GST in a relatively unencumbered way in the marketplace, because as I said to you guys so many times before, asbestos litigation is so well understood by the marketplace and so forth and so on, we have gotten really from a supplier standpoint, customer standpoint et cetera, very, very little negative; if any, quite frankly, negative burden associated with that in the marketplace, where we do real work.

So we feel very confident that we’ll able to move forward and begin thinking about our company as an unencumbered company. Yes, it will be still an important process for us to conclude at some point, but I really believe, Jeff, we’ll be able to run the company in a way that feels just far less encumbered by this uncertainty than we have until this ruling. So we don’t know what all that means yet, but we’ll be keeping you guys informed as we go.

Jeffrey D. Hammond – KeyBanc Capital Markets, Inc.

Perfect. Thanks.

Stephen E. Macadam

Yes.

Operator

Your next question comes from the line of Ian Zaffino. Your line is open, from Oppenheimer.

Ian A. Zaffino – Oppenheimer & Co., Inc.

Hi, thank you. I know you guys mentioned that these cases end in settlements or some type of both sides getting together. Can you just walk us through maybe the other type of potentials, I mean, is there a potential to maybe this thing go to the district courts, and then after that, the circuit courts or are we sort of about like at the ninth inning here or eighth inning, call it?

Richard L. Magee

Hi, Ian, this is Rick. I certainly don’t think we’re at the ninth inning or even the eight inning, and as we said, it’s really uncertain what the process will be if the claimants choose, as we’re confident they will, to challenge the decision. Some of that will up to the judge in terms of what he believes. He can allow them to do with this, what would be an interim or interlocutory order and whether that’s subject to appeal or whether they have to wait till a confirmation order is entered before they can appeal. We’re going to move forward and propose a plan and try to have that plan move forward under this judge’s jurisdiction to get it to confirmation and along the way, we’re certainly willing to consider a consensual deal.

Well, there is a game plan laid out for what you do when you have a consensual deal and how you get to confirmation. In the absence of that, we are willing to plow new ground, and to move forward, as if this were a bankruptcy that wasn’t related to asbestos to get confirmation of a plan, just as you will in any other bankruptcy. It will be difficult, because there will be challengers along the way, but we’re prepared to move down that path. Again, the lawyers are working on what that means and how we move down that path as we’ve really not met with them to talk in detail about it, but that’s the course that we’ll pursue and we’ll see how that plays out.

Ian A. Zaffino – Oppenheimer & Co., Inc.

All right. Thank you very much. Congratulations.

Richard L. Magee

Thanks.

Operator

(Operator Instructions) Your next question comes from Todd Vencil from Stern Agee. Your line is open.

Todd Vencil – Sterne, Agee & Leach, Inc.

Thanks. Good morning.

Stephen E. Macadam

Hey, Todd.

Richard L. Magee

Hi, Todd.

Todd Vencil – Sterne, Agee & Leach, Inc.

So Rick, you said – you gave us a nice sort of framing of the administrative cost side, of noting that 7% sort of the average, but this was maybe different, because of the size of the trust. Is there any way you can help us think about how – relatively how big the non-meso amounts could be or might be?

Richard L. Magee

Sure Todd. A couple of things to note there, the GST’s historical database for the three years prior to the filing of the petition, about 15% of the money it spent on indemnity was related to claims that were not mesothelioma claims and of course those included lung and other cancer claims and to the extent GST still had to resolve the payments, some nonmalignant claims. It included some nonmalignant claims. I'm not sure I would use that 15% number and that’s why we didn’t put it in the prepared remarks and the reason is because, is even more than mesothelioma, other asbestos-related diseases are highly dose respondent and as the judge has said in this order and as we’ve said, all along, Garlock’s products just did not result in fiber release and so there is no possibility that there – that they could contribute to a dose-respondent disease.

So again, those – that 15% was driven even more by the cost of defense and that sort of thing, but many of those cases were sort of joined with mesothelioma cases to get settlement dollars. So it’s really hard to use that sort of settlement data to predict what an amount might be for those claims. In the Bondex case, another sort of point of reference, the parties before the estimation trial agreed that whatever their mesothelioma result was, that they would agree to add 6% to that number to represent the cost of all other claims, both cancer and nonmalignant claims and that whatever the number was would be sort of a 106% of the mesothelioma determination. Again, we got no agreement like that. We’ve got no agreement about anything, so we’ll see, but those are some data points for you to think about.

Todd Vencil – Sterne, Agee & Leach, Inc.

Totally appreciate that, and then one other question just on process, and you've touched on this, and if you've touched on it as much as you can or will, I apologize, but the process, if we do see an appeal from the other side, can you sort of walk us through who they would be appealing to, is the court required to review that case and where can it go from there?

Stephen E. Macadam

Certainly, the – if Judge Hodges were willing to certify the case for immediate appeal, that appeal would be to the district court in the Western District of North Carolina, the federal district court and any further appeal then would be to the Fourth Circuit Court of Appeals. I’m sure there is some possibility that the district court could be bypassed by agreement to get to the Fourth Circuit, but my view would be any next step beyond Judge Hodges would have to start in the district court hearing in Charlotte in the Western District, North Carolina.

Again, a lot of that will be determined by how Judge Hodges views the process and what the rights are with respect to challenging of that order through an appeal process. They may – it may very well be, but you would like to see his opinion reviewed at the district court level and would certify it for an immediate appeal. On the other hand, he may take a position that because it’s an interim order, it’s not appealable until there is a point of confirmation in place.

Does that, does that…

Todd Vencil – Sterne, Agee & Leach, Inc.

Of course, yes, yes, that – that’s perfect. Thank you so much.

Operator

And there are no further questions at this time.

Don Washington

Well, thank you very much, Jake, and again, thanks everybody for dialing in to listen to this very important call. If you have other questions, we’ll be around all day for follow-up. Please feel free to give me a call 704-731-1527. Thanks and talk to you again soon

Operator

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

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