Enpro Inc.

Hello, and welcome to the NPRO fourth quarter and full year 2021 earnings call and webcast. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to James Gentile, Vice President, Investor Relations. Please go ahead, James.

Good morning and welcome to NPRO's fourth quarter and year-end 2021 earnings conference call. I'll remind you that our call is also being webcast at NPROindustries.com, where you can find the presentation that accompanies this call. With me today is Eric Valencourt, our President and Chief Executive Officer, and Milt Childress, Executive Vice President and Chief Financial Officer. Before we begin today's discussion, a friendly reminder that we will be making forward-looking statements on this call that are not historical facts, and that are considered forward-looking in nature. These statements involve a number of risks and uncertainties, including impacts from the 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 and Form 10-Q. 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. We do not undertake any obligation to update these forward-looking statements. Also during this call, we will be providing full-year guidance, which excludes changes in the numbers of shares outstanding, impacts from future acquisitions, dispositions, and related transaction costs, restructuring costs, incremental impacts of inflation, geopolitical variables, and trade tensions on market demand, and costs subsequent to the end of the fourth quarter, the impact of foreign exchange rate changes subsequent to the end of the fourth quarter, interest rate increases differing from assumptions outlined in guidance, impact from the further spread of COVID-19 or other variants and environmental and in litigation charges. With that out of the way, I'll turn the call over to Eric.

Thanks, James, and good morning, everyone. It was a successful year across ENPRO. as we continue to rise to the occasion to meet the challenges and opportunities that have arisen over the past 12 months. Thanks to our incredible teams, we once again delivered on our strategic and financial objectives. To begin, I'll provide financial and strategic highlights for the full year, and then Milt will share details on our fourth quarter results. 2021 represented another transformational year at ENPRO. We continue to successfully reshape our portfolio and shift toward growth markets with products and services that command higher margins and cash flow returns. With the acquisition of NexEdge and the divestiture of CPI in December, as well as the divestiture of the polymer components business in the third quarter, we achieved meaningful strides in our portfolio reshaping strategy, which is positioning our company for a very promising future. As volumes recovered from the 2020 pandemic lows, we saw positive momentum across the organization. For the year, sales grew 6.3% to $1.14 billion. Organic sales grew 14.4%. We saw strong demand in most markets, including general industrial, semiconductor, heavy duty truck, petrochemical, food and pharma, and aerospace. Adjusted EBITDA of $208.4 million increased by 23.8% compared to 2020. Adjusted EBITDA margin of 18.3% increased 260 basis points driven primarily by organic sales increases. Select product, select price actions and the net benefit of strategic portfolio reshaping completed in both 2020 and 2021. Partially offset by raw material inflation as well as supply chain labor and logistics constraints. As we said last quarter, we still expect raw material inflation and supply chain challenges to continue. And we will see uncertainty and volatility in the macro environment as we enter 2022. Our commercial and supply chain teams continue to evaluate all opportunities to mitigate these current circumstances while meeting the needs of our customers in this strong demand environment. We are realizing the substantial benefits of our portfolio reshaping actions. which have enabled us to capture incremental margin expansion in 2021 while keeping a close eye on cost and further simplifying our already agile organization. Our strong order trends continued during the fourth quarter and we are beginning 2022 with solid demand. In particular, we continue to see broad-based strength across our businesses and are encouraged by what we are hearing from our customers, particularly in semiconductor, heavy-duty truck, aerospace, nuclear, and food and pharma markets. As we look forward, we continue to invest both organically and inorganically in our advanced surface technologies and sealing technology segments while driving cost and return improvements in the engineered materials segment. We will build upon this core industrial technology foundation now in place, maintaining our focus on margins and cash flow returns. Further, we expect to maintain our strong recurring revenue streams. with aftermarket revenue across our businesses approaching 50% of total company revenue. Finally, we remain focused on driving long-term shareholder returns through a disciplined approach to capital allocation supported by our steady cash flows, and also through our commitment to sustainability and diversity. 2022 marks our 20th year as an independent public company. As I enter my first year as Enpro's CEO, I marvel at how far we have come and could not be more excited for what the future will hold for all of our stakeholders. I will now hand the call over to Milt for a deeper dive into our financial results for the fourth quarter. Milt.

Thanks, Eric. We had another solid quarter, despite the well-publicized headwinds we and many others faced. As reported, sales of $280.8 million in the fourth quarter increased 1.7% year over year. We saw strong demand in the semiconductor, heavy-duty truck, aerospace, general industrial, and food and pharma markets, as well as contributions from the acquisitions of Alexa and NexEdge, which were largely offset by the reduction in sales due to divestitures and weakness in the automotive market. Organic sales for the fourth quarter increased 10.4% compared to the fourth quarter of 2020. Adjusted EBITDA of $47.7 million decreased 0.8% compared to the prior year period. Adjusted EBITDA was impacted by inflationary pressures affecting raw materials, freight and labor costs, and higher SG&A, more than offsetting pricing initiatives and the benefit of the reshaping actions completed in 2020 and 2021. Corporate expenses of $26.9 million in the fourth quarter of 2021 were up from $10.6 million a year prior, driven primarily by acquisition-related expenses associated with the NexEdge transaction, as well as increased incentive compensation expenses driven mainly by our fourth quarter share price performance. Adjusted deleted earnings per share of $1.23 was essentially flat compared to the prior year period. As noted during prior calls, during the fourth quarter of 2020, we changed our adjusted EPS from the previous presentation of this non-GAAP measure to one that excludes after-tax acquisition-related intangible amortization. Such amortization, amortization of acquisition-related intangible assets, in the fourth quarter was $12.7 million, compared to $10.9 million in the prior year period, reflecting the additions of Alexa and NextEdge. Now let's move to a discussion of segment performance for the fourth quarter of last year. Due to the impact of divestitures, ceiling technology sales of $143.9 million decreased 7% versus the prior year. Excluding the impact of divested businesses and foreign exchange translation, sales increased 12% versus the prior year period, driven primarily by strong demand in heavy-duty truck, aerospace, nuclear, and food and pharma markets. Also due to businesses divested in 2020 and 2021, adjusted segment EBITDA decreased 12.3% versus the prior year period. Excluding the impact of divestitures and foreign exchange translation, adjusted segment EBITDA increased 3% compared to the prior year period. Results in the quarter were also impacted by inflationary pressures affecting raw materials, labor, and freight costs, with such pressures concentrated in our trucking business. These costs were offset by pricing initiatives and leverage on the organic volume increase in the segment. Turning now to advanced surface technologies, fourth quarter sales of $69.1 million increased 38.5% versus the prior year period, driven by strong demand in the semiconductor market and the acquisitions of Alexa and NextEdge. Excluding the impact of acquisitions and foreign exchange translation, Sales increased 16.6% versus the prior year period. For the fourth quarter, adjusted segment EBITDA increased 35.7% versus the prior year period, driven by the acquisitions and strong organic sales growth. Excluding the impact of the acquisitions and foreign exchange translation, adjusted segment EBITDA increased 10.4% compared to the prior year period. The growth in EBITDA, while strong, was partially impacted by timing delays in the launch of advanced node chips. Moving forward, our qualification and production work with semiconductor customers gives us confidence in the organic growth and profitability profile for our semi-business, both in the coming year and over the long term. In engineered materials, sales decreased 7.3% versus the prior year period. driven by the divestitures of the GGB pushing block and CPI businesses. For the quarter, sales to the automotive market were weak due to chip shortages affecting auto production, particularly in comparison to a strong auto market in the fourth quarter of 2020 that continued in the first half of 2021. Excluding the impact of divestitures and foreign exchange translation, sales were flat. Fourth quarter, adjusted segment EBITDA decreased 21.9% versus the prior year period, driven by raw material inflation and supply chain headwinds, as well as the decline in automotive production in Europe and the United States. Excluding the impact of divestitures and foreign exchange translation, adjusted segment EBITDA decreased by a comparable amount, around 20.2%, compared to the prior year period. Turning to the balance sheet and cash flow, we ended the fourth quarter with cash of $338.1 million, $310 million of which is located outside of the United States. We have initiated efforts to repatriate portions of this cash for use in debt reduction, where it makes sense to do so from a tax efficiency perspective. At December 31, we had $213.6 million available for borrowing under our revolving credit facility. Free cash flow in 2021 was $123.2 million, up from $39.3 million in the prior year, driven by higher operating profits and lower cash taxes resulting from a tax refund associated with a federal income tax audit resolution, partially offset by working capital investments supporting stronger demand. During the fourth quarter, we paid a 27 cents per share quarterly dividend. For the year, dividend payments totaled $22.4 million. Our board of directors voted to increase our quarterly dividend to 28 cents per share, effective with the March payment, representing our seventh consecutive annual increase in our quarterly dividend since we began paying dividends in 2015. Moving now to 2022 guidance. Taking into consideration all the factors that we know at this time, we expect low double-digit revenue growth over reported 2021 sales of $1.14 billion. And we expect adjusted EBITDA to be in the range of $263 million to $275 million, implying adjusted EBITDA margins north of 20%. We expect adjusted diluted earnings per share from continuing operations to be in the range of $6.70 to $7.25 using a normalized 27% tax rate, reduced from 30% last year. The reduction in our normalized tax rate assumption for 2022 results from the portfolio actions completed late in 2021, which tilt our portfolio to a higher portion of earnings in the United States. Our guidance assumes depreciation and amortization expense, excluding amortization of acquisition-related intangible assets, of $37 million to $39 million, and net interest expense of $30 million to $33 million. Our net interest expense estimate factors in four 25 basis point increases in our variable borrowing rate as 2022 progresses. Underlying demand and order trends remain strong as we enter 2022. Even as inflationary raw material costs, the impact of the Omicron variant on labor availability and supply chain and logistics constraints have put early year pressure on growth and margins. We will be implementing additional pricing actions across the company as the year progresses in response to inflationary headwinds. Finally, I want to note that we continue to monitor the current COVID situation and will remain attentive to the safety and well-being of our colleagues who have demonstrated great resilience in the face of the very challenging conditions over the past two years. Now I'll turn the call back to Eric for closing comments.

Thanks, Milt. Enver had a remarkable year. I'm proud of our team and our many accomplishments as we proceed in doing what we said we would do. Execute on our multi-year strategy to transform Enpro into a leading industrial technology company, leaning into our best businesses while investing in markets with faster growth, higher margins, and higher cash flow returns. Our 2022 guidance implies adjusted EBITDA margins around 21%, up from the 14% in 2019 when we first began our portfolio reshaping strategy. all the while remaining steadfast in our dual purpose of delivering outstanding financial results and enabling and supporting development of our colleagues in the communities in which we operate. Our journey is just beginning. I appreciate your support and welcome you to come along as there has never been a better time to be a part of ENPRO. Thank you for joining us today. We appreciate your interest in our company. Now I'll open the line to questions. Thank you.

Thank you. And I'll be conducting a question and answer session. If you'd like to be placed into 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 Steve Ferrazani from Sedota. Your line is now live.

Good morning, everyone. I appreciate all the information on the call. In terms of the 2022 guidance, obviously you had a stronger first half in 21. When you're thinking about 22, we know automotive probably ramps up throughout the year. You have supply chain constraints and raw material cost issues probably earlier. How are you thinking about the cadence for the quarters in terms of that guidance?

Yeah, good morning, Steve. You're right. Given the pressures that we've seen on labor in particular, I would say starting around Thanksgiving of last year and continuing in the early part of this year, that has had some impact on our ability to deliver on the strong backlogs that we have. So the good news is we have strong backlogs. really across most of our company. And so the headwinds are getting past the labor availability, responding appropriately as we have been to supply chain pressures, and also seeing what develops with the chip shortage with automotive. So those are the big drivers affecting the cadence throughout the year, as you've noted. And so because of all these factors, we're expecting a lower first quarter than you would have seen in the last year, where we got off to a strong first quarter as the economy was accelerating, as you'll recall, from the lows of 2020. So the quarterly sequence will be a little slower Q1 and then building in Q2.

Helpful. Thank you. Now that you have NexEdge, the deal completed, how are you thinking about that into 2022, given all the investment expected in the U.S., but maybe that's longer range, and just in general, the margin with that segment, given all the spending expected on the chip side?

Well, first of all, and now I'm going to turn it over to Eric for his color on NextEdge, but we're very pleased with that acquisition and the early results that we're seeing there. The acquisition, the strategic fit is exactly what we've expected, so we continue to be excited about that. Regarding the expansion in the U.S., We continue to follow that, and we are planning, as we maybe have intimated in our last call when we talked about the NextEdge acquisition, we are planning appropriate investments to support our semiconductor customers on the expansion of the US. So we think that over time, that will take time to develop, obviously, because these are big investments. But over the next three to five years, we do expect to benefit from that expansion.

I don't really have much to add. It's going very well. It's going to continue to go well. I don't think it'll have a huge impact on our margins as time goes on because it gets phased in as we go. So the investment is kind of monitored. In addition, the cleaning, coating, or refurbishment has much higher margins as it is. And so that business also expands essentially at the same rate. And so I think it'll be pretty much a wash in terms of our margins going forward.

Thanks. And if I could get one more in, in terms of your guidance for net interest expense. When I think about, given the guidance, we're expecting another year of probably even growing cash flow. Are you not thinking you're going to make significant debt repayments this year because of where the cash is? And how are you thinking about uses of cash in 2022?

So just general comments, I guess Steve comments on the free cash flow expectations for the year generally. So our interest, if you look at our interest expense, and we had some details on one of our slides in the presentation, we're carrying a little bit more debt. So we do have a focus this year on using our free cash flow to pay down indebtedness We are, you know, effectively not as levered as, you know, just a TTM look at our debt levels relative to EBITDA might suggest just because obviously we don't have our historical results. You don't see a full year of next edge. So, you know, we expect that we'll be in very good shape by the end of the year relative to leverage. But it is a priority for us. this year to pay down debt and to increase our availability, whether it's through cash or availability under our revolving credit facility.

Great. Thanks, guys.

Thanks, Steve. Thank you. Next question is coming from Jeff Hammond from KeyBank. Your line is now live.

Hey, good morning, guys. Morning, Jeff.

Morning.

Just on guidance, I was just wondering if you can break down, I think you just said double-digit growth, but how are you thinking about organic growth within that and any color direction within the segments?

Yeah, you're breaking up just a little bit, Jeff, but I think, let me restate your question, I think you said in terms of guidance with the low double-digit top-line growth, how are we thinking about that from an organic standpoint? And so there are a few moving pieces, obviously, because you have the divestiture impact of a few businesses like CPI, Technetics Houston that happened, and then overlay that with the NextEdge acquisition. And at NextEdge, having carrying stronger margins has lower sales relative to the other businesses. So there are a few moving pieces, but it If you strip it out and look at organic, it's probably roughly mid to high single-digit organic growth, roughly.

Okay. And then it just seems like the model, the margin pressure was in seedling around some of the things you talked about in the supply chain. But maybe just talk about what's getting better, what's getting worse, and where it's most acute.

Right now with the biggest challenges we have are in the heavy duty trucking segment and ceiling. And it's really just due to a mismatch between supply chain, labor and efficiency and pricing. And it's all catching up now. There's price increases a couple of times a year in that business, usually January and July. And so the effect of the January price increases are going in now and that'll accelerate as the quarter goes on as we work through the backlog. But there aren't any other headwinds in those businesses. It's really been limited in general to the heavy-duty truck segments. The other segments are performing as expected and as traditional with a, I'll call it a normal level of COVID. The heavy-duty trucking was affected a little more than most because they have a lesser vaccine rate in those areas that we operate.

Okay, so the margin of frustration is a little bit one key to that.

Jeff, you're breaking up. Maybe you can try one more time. We can try to rephrase the question.

Our next question today is coming from Justin Bergner from Gabali Funds.

Good morning, Eric. Good morning, Mel. Good morning, James. Yeah, good morning, Justin. I hope I'm transmitting more clearly here. And my first question would relate just to follow up on the organic guide. So, I mean, within that mid single digit to high single digit, is there a big price contribution or is the underlying sort of volumetric growth still pretty robust in there?

Yeah, it's, you know, we're expecting a little bit of price, as Eric mentioned. There, you know, are some additional price increases that go into effect. We were, I would say, as a company, we were ahead of the raw material cost increases in the first part of the year, starting in the first half, and the fourth quarter is a little bit more challenging. It caught up with us a little bit, and so we'll still have some of that hangover in Q1, and then we'll catch up as the year goes. So I think there's a little bit of price, but I wouldn't count on a lot of price relative to margin growth. In other words, the price increases will help us offset supply chain headwinds as well as increases in labor and so forth.

Great. My second question relates to the portfolio. How would you describe your appetite for further acquisitions and divestitures in the portfolio at this point in time? Are you focused on really executing on the portfolio you've put together over the last two years? Could there be more changes coming?

I would say we're always looking, and we're always looking to take advantage of opportunities as they present themselves. So I would say it's always just continuing. It's just part of what we do.

Okay. And then lastly, the question about ex-U.S. cash and its short-term ramifications was asked, but what is the large amount of cash outside the U.S.? ? mean for MPRO, if anything, thinking out longer term? Are there implications there?

Well, we have some tax planning that's been underway for quite some time, and we anticipate being able to repatriate a meaningful portion of that cash back to the U.S. for purposes of paying down debt and otherwise. We have a couple of initiatives underway with the CPI and Investiture We had a significant European presence in CPI, so a portion of the proceeds are in those entities, and our tax team is working with our Treasury team and putting into place a repatriation plan, so you can expect us to be bringing some of that back in the second quarter, I would estimate. And then we also have some tax planning underway that will enable us in a very tax-efficient way repatriate cash from Taiwan we generate a fair amount of cash at lean tech as we've discussed before and so we also anticipate bringing cash back from that region as the year progresses so so there's no particular reason that we need that cash we're trying to just take the steps that you know, are necessary and appropriate for us to bring it back in a very tax-efficient way.

Great. Thank you for taking my questions. Thanks, Justin.

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

That's it for the call today. Have a great day.

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