Enpro Inc.

Hello, and welcome to the Enpro Industries Q1 2021 Earnings Conference Call and Webcast. At this time, all participants are in listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Milt Childress, Executive Vice President and Chief Financial Officer. Milt, please go ahead.

Good morning and welcome to InPro's quarterly earnings conference call. I'll remind you that our call is also being webcast at InProIndustries.com where you can find the presentation that accompanies the call. With me today is Marvin Riley, our CEO. Before we begin our discussion, a friendly reminder that we will be making statements on this call that are not historical facts and are considered forward looking in nature. These statements involve a number of risks and uncertainties, including impacts from the COVID-19 pandemic and related governmental responses and their impact on the general economy, as well as other risks and uncertainties that are described in our filings with the SEC, including our most recent Form 10-K. We do not undertake to update any of these forward-looking statements. Also, during the call, we will reference a number of non-GAAP financial measures. Tables reconciling these measures to the comparable GAAP measures are included in the appendix to the presentation materials. I'll also note that during this call, we will be providing full-year guidance, which excludes changes in the number of shares outstanding, impacts from future acquisitions, dispositions, and related transaction costs, restructuring costs, incremental impacts of tariffs and trade tensions on market demand, and costs subsequent to the end of the first quarter The impact of foreign exchange rate changes subsequent to the end of the first quarter impacts from further spread of COVID-19 and environmental and litigation charges. I also want to remind you that as a result of the sale of Fairbanks-Morris in January 2020, the former power system segment is accounted for as discontinued operations in our financial statements for the prior year period. Unless otherwise noted, all our comments today will refer to continuing operations. As previously announced, INPRO will host a virtual investor day on Thursday, May 27th. Members of INPRO's executive management team, including Marvin and me, will provide an overview and update of the company's long-term vision, growth strategy, business segments, as well as operational and financial objectives. Registration information for this virtual event is available on the company's investor relations website. And now I'll turn the call over to Marvin.

Thanks, Milt, and good morning, everyone. I really appreciate you joining us today and hope you and your families are safe and healthy. As we begin to turn the corner on the pandemic in the United States due to the vaccine rollout, we're mindful that everyone is not yet vaccinated and the recovery is uneven throughout the rest of the world. There are still many places in the world like India where the virus is spreading rapidly, so we must remain vigilant regarding maintaining safety protocols, operating processes, and new ways of working that protects our employees and fellow citizens. I am extremely proud of our team members who continue to exemplify NPRO's values of safety, excellence, and respect for all people while delivering quality products and services to our customers. Now moving on to our first quarter highlights. Overall, we experienced a faster than expected recovery in most of our end markets. We delivered extraordinary results driven by improved demand, the benefits of increased exposure to higher margin and faster growth businesses, which resulted from portfolio actions taken last year and cost savings initiatives driven by our capability center. Despite several countries returning to lockdown, February's severe weather in the southwestern U.S. and challenges with global logistics and ocean transport We were still able to fortify our key materials while holding supply chain disruptions to a minimum. In our response to COVID-19, we enhanced the collaboration between supply chain, manufacturing, and our commercial team. This enhanced collaboration really helped us to respond quickly with price increases to offset higher material costs and increase customer engagement where necessary. We have fundamentally transformed the way we work, and the benefits are showing up in our results. Our order trends are extremely strong. As a point of reference, March 2021 was the highest order intake month in the past three years. We continue to be encouraged by what we're seeing and hearing from our customers, particularly in the semiconductor, food and pharma, petrochemical, automotive, and heavy-duty truck markets. In the first quarter, sales were down modestly on a year-over-year basis as a result of the 2020 divestitures. Despite the divestitures, orders were up over 10%. On an organic basis, our sales were up 5.5%. Our first quarter adjusted EBITDA of $52 million increased 28% year-over-year, and adjusted EBITDA margin expanded 420 basis points to 18.6%. The strong performance was the result of actions taken to reshape our portfolio, improving end market trends and cost mitigation initiatives. All three business segments contributed to our adjusted EBITDA growth. A key contributor to our success is our clear and consistent strategy. We're focused on four areas. First, focusing on niche, high-margin material science-related businesses with strong cash flow. Second, investing in faster growth markets, including technology, while maintaining a strong aftermarket exposure. Third, leveraging the NPRO Capability Center to increase margins and cash flow return on investment. And fourth, maximizing long-term shareholder returns through a commitment to sustainability and disciplined capital allocation. While there were no transactions announced this quarter, the portfolio optimization work continues, and the corporate development team is hard at work vetting a robust pipeline of opportunities that fit our portfolio strategy. As you know, we executed a number of successful portfolio shaping actions over the last year and a half that have moved us into a higher growth and less cyclical business model. In February, in connection with the portfolio reshaping actions, We announced our resegmentation into three reporting segments, ceiling technologies, advanced surface technologies, and engineered materials. The resegmentation better aligns our technical and operational expertise, enables improvements in measuring and managing performance, facilitates improved decision-making, and enhances transparency for investors. All three segments performed exceptionally well this quarter. I would like to take a moment to highlight our new segment, Advanced Surface Technologies, given the level of our recent investments there. The Advanced Surface Technologies segment, which includes Aluxa, LeanTech, and the Technetic Semiconductor businesses, posted 49% revenue growth, 137% adjusted EBITDA growth, and adjusted EBITDA margin expansion of over 1,000 basis points, to 31.6%. These results were driven by a full quarter's contribution of a LUXA accelerating revenue growth at LeanTech and solid performance of Technetics Semiconductor. It's a very, very strong quarter. Our cleaning, coatings, and refurbishment businesses consisting of LeanTech and the Technetics Semiconductor business have grown significantly year over year based on increasing demand for sub 10 nanometer semiconductor wafers. We remain very optimistic about the lean tech business and despite the impact of COVID-19, its sales and earnings remain on track with our expectations at the time of the transaction. We continue to add capacity in this business to meet increased demand. The build out of the new lean tech facility in Taiwan for expansion of five and three nanometer applications is expected to be qualified by the third quarter of the year and will support continued growth. We are also making great progress with customer acquisitions and qualifications at the U.S. site in Milpitas, California. Aluxa had a great start to the year with year-over-year sales growth across all of its markets during the first quarter. We anticipate continued strong demand for the remainder of the year. Our integration process is going very smoothly by leveraging our collective thin-film technology IP and the Enpro Capability Center while being careful not to disrupt Aluxa's day-to-day business. We've made significant progress over the last two years, improving our financial results, reshaping our portfolio, and positioning the company for long-term profitable growth. With the successful acquisitions of LeanTech and the Aseptic Group, and more recently the acquisition of Aluxa, we have an excellent foundation to drive organic growth. We continue to maintain a disciplined approach to capital allocation and relentless focus on cash generation. We have a healthy balance sheet and an untapped revolver. Therefore, we are well positioned with the financial flexibility to make strategic investments in our existing businesses, as well as execute additional acquisitions that meet our M&A criteria. Before handing the call over to Milt for a more detailed overview of our financial results, I will share some additional color on NPRO's sustainability initiatives. We'll be releasing our 2021 sustainability report in a few weeks, and I'm excited to give you a preview of the key highlights today. In the area of employee development and safety, we've created an environment where all employees can flourish in a culture where financial performance and human development are equal and inextricably linked. We strive to promote a safe environment, both physically and mentally. We're the only public company recognized by EHS today as America's safest company three separate times, and 2020 was the safest year in the history of our company as measured by medical treatment case rates. In the area of diversity and inclusion, we are deliberately diverse, which underscores our belief that a diverse workforce is critical to our success. The percentage of female promotions in the U.S. has increased 10% since January 2019. Female and minority representation among senior leadership has increased 7% to 37%. since January 2020, with the goal of achieving 40% by 2025. In the area of supporting our communities, we announced in December our $1 million funding of the NPRO Foundation focused on advancing education, equality, diversity, and the preservation of human dignity. Regarding environmental responsibility and sustainability, We're committed to diligently exploring all opportunities to reduce our energy usage and to minimizing greenhouse gas emissions wherever feasible. We've also gone so far as divesting certain carbon-intensive lines of business, such as Fairbanks-Morse, and selectively disengaging with market sectors that are highly carbon-intensive. Approximately 7% of our revenue comes from the oil and gas industry, and we anticipate this percentage to decrease over time as our strategic transformation continues. Many of our products, such as gaskets and seals, protect the environment by helping to contain and prevent the release of harmful substances. At ENPRO, we're truly committed to sustainability as it is embedded throughout our entire global organization. We're confident that our sustainability initiatives will be a key contributor to our continued success as a company. Now, I will hand the call over to Milt for a deeper dive into our financial results for the quarter. Milt? Thanks, Marvin.

As Marvin mentioned, we had a really strong quarter. Positive momentum in the semiconductor, food and pharma, petrochemical, automotive, and heavy-duty truck markets as well as the contribution from the acquisition of Alexa, mostly offset the reduction in sales due to last year's divestitures. As reported, sales of $279 million in the first quarter decreased 1.2% year over year, excluding the impact of foreign exchange translation and sales from acquired and divested businesses. Organic sales for the quarter grew 5.5% compared to the first quarter of 2020. Sequentially, excluding portfolio reshaping activities, sales were up 7.1%. Gross profit margin of 39.2% increased 550 basis points versus the prior year period. The increase was driven by the benefit of divesting low-margin businesses, the addition of Alexa, sales growth at LeanTech, as well as initiatives supported by the Impro Capability Center. including supply chain and other company-wide cost reduction programs. The year-over-year improvement in gross profit margin was achieved despite a $2.4 million amortization of acquisition-related inventory write-up in the first quarter of 2021. Adjusted EBITDA of $52 million increased 28.1% over the prior year period as a result of organic sales growth, strategic acquisitions, and cost reductions taken across the company. Adjusted EBITDA margin of 18.6% increased approximately 420 basis points compared to the first quarter of 2020. Corporate expenses of $11.6 million in the first quarter of 2021 increased by $3.2 million from last year. The increase was driven primarily by higher incentive compensation accruals. Adjusted diluted earnings per share of $1.37 increased 43% compared to the prior year period. As noted in our announcement of fourth quarter 2020 results, we changed our adjusted EPS from the previous presentation of this non-GAAP measure to one that excludes after-tax acquisition related intangible amortization. Amortization of acquisition related intangible assets in the first quarter was $11.3 million compared to $9 million in the prior year period. We anticipate amortization of acquisition-related intangibles will be between $44 million and $46 million in 2021. As a reminder, our estimated normalized tax rate used in determining adjusted EPS is 30%. Moving to discussion of segment performance, Sealing technologies, which includes Garlock, Stemco, and the Technetix sealing businesses, reported sales of $146.5 million in the first quarter. The year-over-year decrease of 15.6% was due to portfolio reshaping activities last year. Excluding the impact of foreign exchange translation and sales from divested businesses, sales increased 0.9% versus the prior year period. During the quarter, we saw strong demand in the food and pharma, petrochemical, power generation, metals and mining, and heavy-duty truck markets, while weakness in aerospace markets continued. As you may recall, the ceiling technology segment reported exceptionally strong sales in the first quarter of last year, as many distributors secured supply to mitigate pandemic-related risks. We are pleased that our businesses delivered even better results this year. For the first quarter, adjusted EBITDA increased 1.2% to $33.9 million, and adjusted segment EBITDA margin expanded 380 basis points to 23.1%. The margin expansion was driven primarily by the divestitures of low-margin businesses last year, cost reduction initiatives, as well as pricing increases. Excluding the impact of foreign exchange translation and divestitures, adjusted segment EBITDA increased 6.1 percent compared to the prior year period. Turning now to advanced surface technologies, which includes Alexa, Lean Tech, and the Technetix semiconductor businesses, first quarter sales of $54.7 million increased 49 percent, driven primarily by strong demand in the semiconductor market and the acquisition of Alexa. Excluding the impact of foreign exchange translation, and the Alexa acquisition, sales increased 22.6% versus the prior year period. For the first quarter, adjusted segment EBITDA increased 137% to $17.3 million, and adjusted segment EBITDA margin expanded from 19.9% a year ago to 31.6%, driven primarily by the Alexa contribution and growth in the lean tech business. The contribution from Alexa was driven by strong sales and operating leverage. Excluding the impact of Alexa and foreign exchange translation, adjusted segment EBITDA increased 57.5% compared to the prior year period. In engineered materials, which consists of GTV and CPI, first quarter sales of $80.4 million increased 7.1% compared to the prior year. driven by stronger sales in general industrial, automotive, and petrochemical markets, partially offset by weakness in the oil and gas and aerospace markets. Excluding the impact of foreign exchange translation and the divestiture of GTB's bushing block business, sales for the quarter increased 5.3%. For the first quarter compared to previous year, adjusted segment EBITDA increased 51.8%, to $12.6 million, and adjusted segment EBITDA margin expanded 460 basis points to 15.7%. These increases were driven primarily by strong sales volume recovery, manufacturing cost reductions, and savings from headcount reductions and travel expenses. Excluding the impact of point exchange translation, adjusted EBITDA increased 39.3% compared to the prior year period. Now let's turn to the balance sheet and cash flow. We ended the quarter with cash of $232 million and with full availability of our $400 million revolver, less $11 million in outstanding letters of credit. At the end of March, our net debt to adjusted EBITDA ratio was approximately 1.4 times, a sequential decline from the 1.6 times reported at the end of the fourth quarter. Our balance sheet remains in a healthy position and we have ample financial flexibility to execute against our strategic growth initiatives. Pre-cash flow for the quarter was $14.1 million, up from negative $4.9 million in the prior year. This was driven primarily by higher operating profits and improvements in working capital management. During the first quarter, we paid a 27 cent per share quarterly dividend totaling $5.7 million, a 4% increase versus the prior year. Regarding capital allocation, we continue to prioritize investments in organic and inorganic growth. Moving now to 2021 guidance, taking into consideration all the factors that we know at this moment, including the ongoing global economic recovery from the COVID-19 pandemic, which is stronger than anticipated a quarter ago. We are increasing 2021 adjusted EBITDA to be in the range of $190 million to $200 million, up from our previous guidance of $178 million to $188 million. The updated adjusted EBITDA range is based on sales growth of 7% to 12% over 2020 pro forma sales of $983 million. up from previous guidance range of 6% to 10% growth. We expect adjusted diluted earnings per share from continuing operations to be in the range of $4.74 to $5.08, up from the range of $4.32 to $4.66 provided last quarter. Our guidance assumes depreciation and amortization expense excluding amortization of acquisition related intangible assets in the range of $33 million to $35 million and net interest expense of $15 million to $17 million, both unchanged from prior guidance. Given the stronger than expected first quarter results and order patterns to date, we now anticipate a moderately stronger first half of the year relative to the second half This is in contrast to a quarter ago when we expected a gradual strengthening as the year progressed. Now I'll turn the call back to Marvin for closing thoughts.

Thanks, Milt. This quarter demonstrates the benefits of our clear and consistent strategy, the Capability Center, and our portfolio reshaping initiatives. We expect this momentum to continue as we focus on driving commercial excellence and operational excellence throughout the company. I'm confident that our profitable growth strategy, experienced leadership team, increasingly diverse and dedicated workforce, and strong financial position will lead to continued growth and long-term shareholder value. In closing, I'm extremely proud of our progress transforming ENPRO into a leading industrial technology company, using material science to push boundaries in semiconductor, life sciences, and other technology-enabled sectors. And now I'll open the line for questions.

Thank you. And I'll be conducting a question and answer session. If you'd like to be placed in the question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star 1. One moment, please, while we poll for questions. Our first question today is coming from Jeff Hammond from KeyBank Capital Markets. Your line is now live.

Hey, good morning, guys. Good morning, Jeff. How are you?

Good morning, Jeff.

Doing great. Appreciate all the color here. Just maybe digging into your new segment. Just talk about the sustainability of the strength you're seeing in these semiconductor markets, both in terms of the market trends and your ability to kind of outgrow there. And then just on Alexa, you know, I guess we can kind of back into the profitability run rates and kind of, I guess, the revenue contribution. Just talk about, you know, sustainability of the margins there and, you know, and kind of, you know, seasonality around that business. You know, is that kind of the run rate from here? Thanks.

A really, really good question. I appreciate the question. I'll go ahead and just talk a little bit about, you know, SEMI first. And I'll first, you know, talk a little bit about, you know, what's really driving SEMI, right? We've got rapid technology proliferation driving SEMI as it relates to 5G, data centers, cloud, and the sorts, right? We've got new chip technologies, right? Sub-10 nanometer chips. You've got major IDM investments, guys like TSMC, Samsung, and Intel coming in the game. And you've got increased auto demand. So from a macro perspective, I think semiconductor is going to be strong for a meaningful period of time. And when you look at market information about wafer starts, we're talking anywhere in the neighborhood of 16% to 20% or so And when you look at where we're positioned specifically is on the leading edge nodes. And the leading edge nodes, as we've communicated in the past, you know, has a compounded annual growth rate of 30-plus percent. And that 30-plus percent, you know, should last for the, you know, a couple of years, right? So as it relates to where we participate in semiconductor and how we participate in semiconductors, The challenge on our side will be to ensure that we're increasing capacity in line with demand. But the robustness of the end market and sort of drivers are going to be there for a sustainable period of time. So I feel really, really good about semiconductor, and I also feel really, really good about our ability to execute in terms of bringing new capacity online in Milpitas, in Taiwan, and maybe, you know, further enhancements. in the United States. So I couldn't be more bullish on how I feel there. And as it relates to Alexa, you know, Alexa is performing exceptionally well, actually outperformed our expectations, particularly on the margin side. But, you know, if you think about Alexa, it's got a – where it participates, you know, it's got a TAM of $13 billion, a SAM of $1.7 billion, and that's growing at 9% a year, right? And their primary areas of thrust is in life sciences, semiconductor, and some industrial technology. So the underlying conditions there are the same. So we would expect Eluxa to continue to grow, you know, at a record pace. As it's done, you know, years prior to our ownership and, you know, they had another record quarter. So I have no reason to believe that that will not continue and All of the sort of end markets that they participate in are pretty robust, and they're continuing to get meaningful wins on the board. I mean, they've taken home some really interesting projects here recently, and their backlog is pretty robust. So I feel really good about it. I don't know, Milt, you have any additional color you want to add?

I think you've covered it well. You know, we're certainly expecting in that segment for continued growth both this year and beyond.

Okay, great, Culler. Just on the guide, I just want to understand what informs, you know, what moving pieces or what informs the stronger first half for second half because it just seems like, you know, momentum's building, order rates are improving. The economies, maybe save for a couple, are kind of going through this vaccination and reopening and just kind of wondering if there's something I'm not seeing or seasonally that we should be thinking about. Thanks.

Marvin, do you want me to jump in on that one? Yes, please. Yeah, that's another good question, Jeff. If you look at our thinking or if you look at our guidance, you'll notice that there was a larger percentage increase in our earnings guidance versus our sales guidance. And so part of the shift is we've determined that we're off to a much stronger start, not just us, but the recovery in general. off to a much stronger start than we anticipated a quarter ago. And so our assumption, we're not pessimistic at all about the second half of the year. We're optimistic about the second half of the year, too. But we're being cautious to recognize that there is a possibility that a lot of the snapback, we're seeing more of it in the first half of the year than the second half. Obviously, we expect continuing growth from advanced surface technologies, particularly lean tech and Alexa, as the year advances. And our other businesses where we're seeing more of that snapback from ceiling and engineered, those businesses, we're just being cautious that we may be seeing a larger percentage of that snapback in the first half of the year and the second half of the year, just given how the year is starting for us and our current order patterns. So that would be my response. We do have some element of first half versus second half dynamics in some of our businesses with a stronger first half than the second half. That's changing, though, as our portfolio is changing, but there's still some element of that as well. The other thing I would note, Jeff, is we had some pretty significant cost savings last year as we discussed. We had indicated that that we took about $30 million of costs out last year. With 15 of that we expected to be permanent, 15 of that we expected to come back into the system. And we're still being very careful with our protocols internally on how we're conducting business. We have been successful so far in keeping some of the costs that we thought would be coming back this year's volume returns out. But undoubtedly, we'll see more of that happening as the economy opens up, as the year progresses. So that's part of the thinking on the earnings side.

Okay. Appreciate all the color, guys. Thanks. Thank you.

Thank you. Next question today is coming from Steve Ferrazani from Sedoti. Your line is now live.

Hi. Good morning, everyone. If you could walk through sort of the timing on the strength of the recovery, because clearly the quarter came out a lot stronger, your guidance changed, just how quickly you saw that wave. I think you sort of talked about in the ceiling and the engineered that it was fairly broad-based. So how challenging was that on labor and supply chain? We're hearing pockets of issues in terms of meeting labor demand for just how strong they were. the recovery got in the spring.

Okay. Well, as we said, we really, really, really, you know, saw just a pretty aggressive snapback. And, you know, as Mel talked about and as I talked a little bit about, you know, we did see strength in semi. We saw strength. in life sciences. We saw strength in industrial tech. We saw strength in automotive, petrochem. I mean, we really saw our business snap back pretty aggressively. As it relates to the supply chain and how we're supporting the supply chain, we did have a number of challenges, but no challenges that we were not able to overcome. If you recall, there were some shipment challenges that impacted a number of companies, broad-based, just having to do with container vessels. And then we had the weather issue, you know, down in Texas. But our supply chain team, you know, really responded well. The thing that we're paying close attention to from a supply chain perspective is just what's happening with, you know, commodity prices and what that looks like for our business over time. The commodities that we're paying closest attention to are PTFE, steel, and bronze. Obviously, bronze is affected most by the price of copper. PTFE is our largest commodity by far. It's tracking. We're actually doing quite well in terms of the contracts that we have for PTFE. If you go back, I'd say I did a little work and looked back over the past 10 years and You'll only find two years in the past 10 where we've paid less for what we're paying for PTFE right now and what we expect to pay for the year. So we're in pretty good shape there. We're seeing some increases in steel, pretty sharp increases in steel, quite frankly. Luckily, we divested our biggest steel consumer out of the STEMCO business. So we expect that even though we're seeing some increases in steel, it won't be so dramatic in terms of how it's impacting our businesses. The same goes for bronze. We're also doing a great job in terms of pricing to get ahead of the commodity price increases. And then the labor shortages are real, right? We are seeing tightness in the labor market. We're working aggressively to address those, you know, whether it be, you know, by boosting wages that we're paying for temp employees and all the above. But we are being very, very aggressive today. on all of those fronts to try to offset some of those issues that we see. I don't know if you want to add any additional color notes.

I think the only thing that I would add in terms of cadence through the year is I guess a pivotal month for us was the last month and a quarter, March. March was particularly strong, and it's one of the reasons why we made the decision to increase our guidance by the magnitude that we did. So just a little bit of additional color on cadence and momentum that we're seeing in response, Steve, to both your question and Jeff's question earlier.

Great, thanks. Just a quick one on modeling. SG&A up on, as you noted, the incentive comp. What else is left there? I imagine more travel expenses, but is there a lot more that comes back into SG&A, or have we seen the biggest bump?

Yeah, it's a good question. I mentioned earlier in response to Jeff's question, Steve, that we anticipated about $15 million of costs that we had taken out in 2020 would come back in 2021 as volume improved. And so some of that was travel. Some of it were expenses on marketing and trade shows. There's a whole host of things that, and most of those fell into the SG&A category. What you saw in the first quarter was primarily differences in incentive compensation accruals last year versus this year, in addition to the variable items that are related to volume. So as the year progresses, we could see some higher travel costs. We could see some other other costs coming back in associated with robust economic conditions.

Now, if I could just get one last one in. With the additional capacity coming in, Taiwan, California, from a modeling standpoint or just a general business standpoint, how do we think about the additional capacity adding to revenue? Is it like a snap on higher revenue or is there a gradual?

It's definitely a gradual, right, because you have to go through permitting, to go through customer qualifications, and then, you know, it's a slow ramp to come online. So I would think about it that way, even though we're working aggressively on all fronts, but I would see it as a little bit more gradual. And we've tried to do our best to bake that into our forecast and our new outlook.

Great. Thanks for taking my question this morning, guys.

Thanks, Steve. Thank you. As a reminder, that's star one to be placed in the question queue. Our next question today is coming from Ian Zinfino from Oppenheimer. Your line is now live.

Hi, great. Thank you very much. You know, just one more question on kind of the details of the momentum. You know, can you maybe give us an idea of how each region performed in the first quarter and sort of like what are you seeing You know, currently from each region, you know, I imagine, yeah, so that would be the question.

Okay. Hey, good morning, Ian. Good to hear from you. This won't come as a surprise given how COVID-19 impacted the world starting in Asia, but if you look at our year-over-year growth, the Asia region would be the strongest just because it was so affected by COVID-19 in the first quarter of last year. And then both Western Europe and North America were reasonably strong. There was not a lot of differentiation between the two if you look at just year-over-year growth, which was good for us to see. So those are the main markets geographically for us.

Okay. And then I guess, you know, a couple other questions would be, you know, how do you anticipate them recovering as far as continuing the momentum accelerating or, you know, staying flat? And then also just touch upon, like, the automotive business and, you know, you know, what they're sort of telling you as far as demand as, I guess, the chip shorters is sort of crimped a little bit of their production. Thanks.

Yeah, I can just jump in here and, you know, just tell you that, you know, the way I see things unfolding is that, you know, in many cases I would expect, our business to continue to improve and demand signals to continue to strengthen. At this point, we have some modest recovery in our oil and gas business, but you have to expect that that will continue to improve. The same thing goes for aerospace. These results that we delivered and the forecast that we have put together does not really take a lot of aerospace recovery into consideration. at some point that starts to come back online, likely will come back online sooner than we have anticipated. So we would expect that that will really add some additional fuel to what we're seeing right now. As it relates to automotive, our auto demand is, as articulated, pretty strong. Something unique that's taking place with our particular automotive business right now is You know, we typically have, you know, we describe our business as fairly short cycle, not having a ton of visibility into the future. But, you know, we've got some good clarity into the future this year on automotive, just given how our customer order patterns have shaped up. So as we look out, you know, over the next quarter or so, you know, we've got, you know, just really good coverage in terms of what we've budgeted for the quarter. You know, it's essentially covered at this point. And so there's no reason to believe our auto business is going to be impacted. We do know that the chip shortage is impacting all of our customers, and we see some of that, right? But it's not in any way, shape, or form creating any significant issue at this point. And that can only improve over time. It might take some time to improve. But in terms of what we're seeing, the strength of our backlogs, the coverage that we have in the next quarter coming in automotive, we feel really good.

All right, great. Thank you very much.

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

Good morning, Marvin. Good morning, Milt. Nice start to the year. Hey, good morning, Justin. How's it going?

Good morning, Justin.

Good morning. A few questions here. I guess to start, Marvin, you mentioned at the beginning of the call that lean tech is tracking in line with your expectations at the time of the acquisition. And I didn't know if you were just sort of downplaying the success of that acquisition. It would seem, given the strength in the semi-market, that it would probably be tracking ahead of your expectations. So any sort of clarity there would be helpful.

No, I am trying to be modest in my communication. Lean Tech is performing exceptionally well, actually better than my expectations, to be very honest with you, and so is Alexa for that matter. I do want to be mindful in my communication, though, that a lot of the future of Lean Tech depends on us bringing additional capacity online. And so we do have to get capacity online to deal with the surge that we're experiencing. in the leading edge nodes.

Great, that's a good perspective. And then on Alexa, if I look back and sort of infer what the margins were in the fourth quarter for the two months you had the business, they were modestly above, I guess, the figure that you indicated in your Alexa presentation back in November, I guess, of greater than 20%. If I look at this quarter, they were way above that bogey. I mean, should I think about the sort of average of the fourth quarter and first quarter margins as being representative, or is it hard to gauge at this point and what would cause margins in Alexa to sort of move around so much quarter to quarter?

Justin, yeah, I will. I think you don't want to look too much at the fourth quarter of last year. It was a partial quarter for one reason. And, you know, when you're looking at the adjusted results, I think it's going to play out being fairly consistent throughout the year. especially if we have sequential growth in the business that we expect. We expect, you know, most quarters because the underlying business is growing. To see sequential growth in the business, we would expect, you know, margins to be, you know, relatively stable. Obviously, they're going to be affected somewhat based on the mix of sales to different markets and different applications. There are some projects that carry higher margins than other projects. For example, last year there was a fair amount of business in response to COVID-19 and testing kits, and some of that business carried lower margins. So it's going to vary a little bit, but I wouldn't expect it to move around much from quarter to quarter. I think the stub period in Q4 was a little bit of an anomaly.

Okay, great. That's helpful. One more question here just on the guide. So it looks like you took up the revenue guide versus pro forma 2020 by, you know, 150 basis points at the midpoint or about 15 million. Is it fair to say that like as much as half of that is coming or maybe even more than half of that is coming from advanced surface technologies? And I guess the second part of the question would be that inventory write-up, if you could just remind us, you know, what amount is being absorbed into the guidance and was that anticipated before or is that an additional headwind that you're absorbing in the new guide?

Yeah. Well, let me take the last question first. Our adjusted EBITDA numbers take out the impact of the amortization of the inventory write-up. So those adjusted numbers represent, you know, what we would expect for the business going forward. So it does affect gross margin because we don't adjust the gross margin numbers that we cited but we do back out the impact of the acquisition of amortization of inventory from our adjusted numbers. So those are clean. They've been cleansed of that effect. Does that answer your second question, Justin?

Yes, that's great.

Second part of your question?

Okay.

And the first part again?

The first part was, I mean, it looks like you're increasing the revenue guide versus your pro forma 2020 revenue base by, you know, 150 basis points at the midpoint. I guess that's about 15 million. I mean, is it safe to say that half or over half of that increase is coming from advanced surface technologies within the mix of businesses?

No, it's really spread across all of our businesses, and it's a function of business you know, the faster than expected, the better than expected start to the year. You know, we already had in our original guide pretty strong growth that we were building in to the advanced surface technology segment. And, you know, we're certainly on track. And as Marvin said, we're, you know, doing a bit better than even the expectations that we had for that segment, which were already embedded with some pretty strong growth. And so the stronger bounce back that we're seeing, relatively speaking, was seen more in sealing technologies and engineered materials versus our guidance and our outlook a quarter ago. So I would say it's going to be spread across all three segments.

Okay, great. And just to follow up on that last question, if you're increasing your sort of revenue guide by, you know, $15 million in organics or $20 million reported, and you're increasing your adjusted EBITDA guide by $12 million at the midpoint, sort of what's the primary driver of the higher expected margins? Because I assume that's not just coming from incrementals. You're not getting... you know, 60, 70% incremental. So what's the primary margin driver versus your prior guide?

Yeah, that's another good question. And there are really two reasons for it. One is we are leveraging quite well. If you look at engineered materials in our bearings business in particular, we leverage quite well on the additional volume. The same thing, you know, would be true in and sealing technologies. We're managing costs. And some of this is a factor of all the work that we did last year. And with some stronger volume and a stronger recovery, we're seeing it leverage pretty well to the bottom line. So that is a factor. The other factor is we are managing the business in a way that takes advantage of what we learned about how we can work together from anywhere, working together remotely. And it's not just our office work, but it's our commercial practices and how we interact with customers. And so we have teams that are working on how can we hold on to some of that $15 million of cost that we thought would be coming back into the system. So there's an intentional effort there, and that's part of it. Obviously, we're not going to be able to keep all that $15 million, but it's certainly part of our plan for the year.

Yeah, we could talk for a pretty long time about all of the cost-saving levers that we pulled in 2020 that we're seeing the benefit of in 2021. And all of those things are helping us from an operating leverage perspective. The way we're running ceiling now is a little different so they're able to take cost out, you know, particularly in shared services across the ceiling segment. We took a lot of low margin business out of STEMCO, focused it back, you know, on its core business that's higher margin. You know, we're able to execute on price in some areas that we weren't able to execute on before. You remember we divested the We go to engineered. We divested the bushing blocks business. The GGB business is also a high fixed cost business, so it levers just exceptionally well with additional volume. So, I mean, and Milt mentioned the working together from anywhere. We've got reduced travel. I mean, we have pulled so many levers that we're starting to see the benefit of now, and we still have more levers to pull, right? So the work that's going on and feeling to take cost out, you know, it's still in the early innings and we see a fair amount of opportunity there still. We'll talk a little bit more about, you know, some of these things during our investor day and the recovery, you know, in engineered, you know, we expect that to continue. So I think with the improved market conditions and just all the heavy lifting we did last year with the the team, you know, and the great support we've had from our employee base is what's really causing or driving the improved leverage.

Thank you.

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 closing comments.

Thank you, Kevin, and thanks to all of you for being with us today. I hope you all have a good day. Take care. Bye-bye.

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