Enpro Inc.

Hello, and welcome to the MPRO Q1 2024 earnings conference call. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. You may be placed at the question queue at any time by pressing star one 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, sir.

Thanks, Kevin, and good morning, everyone. Welcome to Enpro's first quarter 2024 earnings conference call. I will remind you that our call is being webcast at Enpro.com, where you can find the presentation that accompanies this call. With me today is Eric Valancourt, our President and Chief Executive Officer, Joe Bruderick, Executive Vice President and Chief Financial Officer, and Milt Childress, Executive Vice President. During today's call, we will reference a number of non-GAAP financial measures. Tables reconciling the historical non-GAAP measures to the comparable GAAP measures are included in the appendix to the presentation materials. Also a friendly reminder that we will be making statements on this call that are not historical facts and that are considered forward-looking in nature. These statements involve a number of risks and uncertainties, including those described in our filings with the SEC. Also note that during this call, we will be providing full-year 2024 guidance, which excludes unforeseen impacts from these risks and uncertainties. We do not undertake any obligation to update these forward-looking statements. It is now my pleasure to turn the call over to Eric Valancourt, our President and Chief Executive Officer. Eric?

ERIC VALANCOURT Thanks, James, and good morning, everyone. Thank you for joining us today as we review our results for the first quarter and provide an update that includes our current outlook for 2024. Before we begin, I would like to take a few moments to thank Milt Childress for his service to Enpro. During his tenure at Enpro, the company's value has increased six-fold and its positive impacts on our business strategy, financial strength, and culture have been remarkable. Today marks Milt's 74th and final earnings conference call as he will be retiring at the end of this month. I know I speak for the entire Enpro team when I say that Milt will be greatly missed. His influence on our organization, the way all of us work together, And most importantly, his incredible heart, wisdom, and passion for our company will be alive throughout PenPro far into the future. Milt, would you like to say a few words?

Yeah, thanks, Eric. A few words is a pretty tough ask after nearly 19 years. I'll sum it up this way. To paraphrase the philosopher and theologian Elton Trueblood, and I'm doing this liberally, so give me a little bit of grace here as I state this. We have a start, and I'm talking about us collectively, have a start at understanding the purpose of life when we plant trees under whose shade we will never fully sit. And that precisely describes how I feel about the work of our team, not only what I've done here, but the work of our team. I couldn't be prouder of the way we work, nor more excited about the future of InPro watching this tree grow. Over time, our colleagues, investors, and other stakeholders will enjoy more and more of the shade. The best is yet to come. Thank you.

Thank you for everything, Milt. We wish you well in retirement, and we will work hard every day to make you proud. Now on to our first quarter performance. After my review, I will turn the call over to Joe for a more detailed discussion of our results and our current outlook for 2024. Sealing technology started the year with strong operating performance. As we expected, the softness in AST has persisted due to current conditions in the semiconductor market, and as previously noted, we expect that the first quarter will mark the low point for AST segment results. In ceiling technologies, despite volume declines in certain markets, adjusted segment EBITDA margins exceeded 30%. Strength in nuclear and aerospace, as well as strategic pricing actions and partial quarter contributions from AMI, which has performed very well since joining Enpro, offset weakness in commercial vehicle demand and continued softness in food and pharma. Strong cost controls and favorable mix were also contributing factors to the excellent results. Our continued positive momentum and profitability in sealing technologies reflect the underlying strength of this segment. Our focus on applied engineered differentiation, compelling aftermarket characteristics, incremental investments in organic growth, and continuous improvement opportunities have created a foundation for profitable growth. Additionally, we continue to pursue strategic opportunities in adjacent markets that build upon our core competencies in safeguarding critical environments as demonstrated with the recently closed AMI purchase. In the advanced surface technology segment, despite the revenue decline of 21%, we maintained a 20% adjusted segment EBITDA margin. We are continuing to make strategic growth investments and advance operational improvement initiatives to position AST for long-term growth. We are focused on executing our multi-year strategy to drive growth in AST's attractive markets. We are beginning to see signs of recovery in certain key product lines as the overall semiconductor market stabilizes and resumes its growth trajectory forward. AST is a key component of our vision for the future of EnPro, and we are confident this segment is well positioned to drive growth and profitability as markets improve. Total adjusted EBITDA margins were 22.7% this quarter, and our balance sheet remains in excellent shape. We continue to offer critical solutions for our customers and deliver them in world-class fashion. I would like to thank our teams across Venpro for their continued focus on our core values of safety, excellence, and respect. Every day, our teams work hard, empower one another, and find purpose in their work. The company is built upon a strong foundation, and there is no better time to be empowered of Venpro. Joe?

Thank you, Eric, and good morning, everyone. I would like to thank Milt for his guidance and tremendous partnership in recent months, and I am honored to succeed him as CFO. It is clear that we have a great team in place at every level of the organization, and I am excited about the significant opportunities that lie ahead. Diving into the results, in the first quarter, sales of $257.5 million decreased almost 9%, and organic sales declined 12%, driven primarily by lower results in the AST segment due to ongoing softness in semiconductor. First quarter adjusted EBITDA of $58.4 million decreased roughly 15% compared to the prior year period. Adjusted EBITDA margin of 22.7% decreased 160 basis points year over year. These revenue declines were partially offset by strength in certain resilient markets, strategic pricing, cost mitigation, and continuous improvement initiatives. Again, the company showed solid management of decremental margins in the face of softness in semiconductor and commercial vehicle markets, while continuing to prioritize ongoing investments to drive future growth. Corporate expenses of $12.2 million in the first quarter of 2024 were up from $11 million a year ago. Last year, reductions in share price-related incentive compensation accruals benefited corporate expense by $1.9 million. Adjusted diluted earnings per share of $1.57 decreased almost 20% from last year, largely driven by the factors impacting adjusted EBITDA. Moving to a discussion of segment performance, ceiling technology sales of $171 million decreased 1%. The partial quarters contribution from AMI, strategic pricing actions, and strength in nuclear and aerospace offset softness in commercial vehicle, food and pharma, and general industrial demand in Asia. Our aftermarket positions in this segment offer enduring stability, and our critical and innovative solutions for a number of leading edge applications clearly differentiate us. The segment is structurally strong, with adjusted EBITDA margins exceeding 30% for the first quarter, despite demand headwinds in some markets. For the first quarter, adjusted segment EBITDA increased 6.6%. Strategic pricing and sourcing actions, the partial quarter contribution from AMI, improved mix, 80-20 discipline and focus on aftermarket work, and continuous improvement initiatives throughout the segment offset overall volume declines to drive the strong result. Ceiling's ability to maintain robust margin performance through a sales decline reflects the strength of our market positioning and the criticality of our technology and essential applications. We are encouraged by positive order momentum in certain shorter cycle product lines that we expect to drive improved performance in sealing technologies into the second quarter. Demand in our longer cycle, backlog-driven solutions such as an aerospace, space exploration, and sustainable power generation is growing nicely and gives us confidence for continued solid performance in the segment moving forward. We turn now to advanced service technologies. As expected, we saw a sequential and year-over-year decline in financial performance. First quarter sales of $86 million decreased 21.4%, driven primarily by continued weakness in semiconductor capital equipment spending. Portions of the segment are showing continued secular growth and recovery, while we are experiencing headwinds in certain product lines where inventory destocking could persist in coming months. Our positioning on advanced node platforms in the semi-space and our ability to utilize our technological advantages and process know-how for future platforms is encouraging. We continue to invest in AST and are pleased with our strategic positioning in these critically important markets. For the first quarter, adjusted segment EBITDA decreased 41% versus the prior year period. Adjusted segment EBITDA margin remained above 20%. The volume decline was the primary driver for the year-over-year reduction in profitability. We have balanced the realities of short-term volume levels where their goals are remaining well-positioned for the market upturn in investing in future growth opportunities. Turning to the balance sheet and cash flow. We completed the AMI purchase on January 29th, utilizing $210 million in available cash. In addition, we acquired the remaining non-controlling interest in Aluxa in February for $17.9 million. Our net leverage ratio, inclusive of these transactions, stands at approximately 2.3 times trailing 12-month adjusted EBITDA. Free cash flow in the first quarter turned slightly negative compared to about $21 million of positive free cash flow in the prior year quarter. Due to the year-over-year reduction in EBITDA, timing of working capital, $5 million of incremental long-term incentive compensation payouts related to prior periods, $3.3 million of transaction fees associated with the AMI purchase, and higher cash tax payments of $5 million in the quarter. We received a tax refund in the year-ago quarter. For the year, we continue to expect free cash flow to exceed $100 million and capital expenditures in the $60 million range, the majority of which will be focused on growth and efficiency projects. We have strong financial flexibility to execute our strategic initiatives, both organically and through acquisitions that broaden our capabilities. Our goal is to build upon our leading-edge positions in markets with secular growth drivers that safeguard critical environments and applications that touch our lives every day. Our strong balance sheet and cash flow generation provide us with ample liquidity to make these investments while continuing to return capital to shareholders. In the first quarter, we paid a 30 cent per share quarterly dividend, totaling $6.4 million. Moving now to our 2024 guidance. Taking into consideration all the factors that we know at this time, we maintain our total year 2024 guidance issued in February. We expect total MPRO sales growth to be in the low to mid-single-digit range, adjusted EBITDA of between $260 million and $280 million, and adjusted diluted EPS to range from $7 to $7.80. The normalized tax rate used to calculate adjusted diluted earnings per share remains at 25%, and fully diluted shares outstanding are approximately $21 million. In the advanced surface technology segment, we expect a slight sequential improvement in the second quarter. We continue to see growth in our advanced noted cleaning business and positive demand signals in our chambered tool performance coatings business. Overall, the semiconductor market appears to be stabilizing, and we are seeing signs of recovery that should drive improved results in coming periods. In sealing technologies, we expect an improved order pattern in certain shorter cycle product lines, Firm backlog and positive mix can offset weaker demand in commercial vehicle OEM. We expect ceiling to exhibit the typical seasonal patterns where the first half is slightly stronger than the second half. We continue to anticipate that where we land within our guidance range will primarily depend on the timing and magnitude of the recovery and semiconductor. Regardless of the precise timing, we are well positioned and are making appropriate investments to drive future growth and value. I will now turn the call back to Eric for closing comments.

Thanks, Joe. Overall, the balance inherent in Enpro's portfolio is evident again in 2024. Our discipline and rigor enable us to perform well under diverse set of market conditions. Our best-in-class portfolio generates attractive margins and cash flow returns, and our value-creating strategy remains unchanged. Thank you again for joining us today. We appreciate your interest in Enpro. We'll now welcome your questions.

Thank you. And now we'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. 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. Hey, Jeff. Yeah, so... You know, a couple on – Milt, thanks again for everything. We appreciate all your time that you've spent with us. Thank you, Jeff. Appreciate it. Really just want to dig in on semiconductor. I guess it sounds like cleaning and leading-edge nodes seems to be getting better. You know, maybe talk through – the parts where you're still seeing destocking and still seeing weakness, and then just, you know, if we snap a line as of today, are we feeling kind of more or less confident around, you know, kind of second half ramp in AST? Thanks.

I'll jump in and start, Jeff. It's Eric. So first off, in all segments, our backlogs grew. So we're feeling better about the second half as time goes on. Our cleaning and coating business certainly have some momentum, I would call it, and the rest of our business, I would say, is kind of choppy. I wouldn't say destocking is still going on. We just haven't had momentum there. We're seeing green shoots where it's getting a little bit better here and there, but it just hasn't taken off, and we're getting ready for that to happen sometime hopefully later this year.

Thank you. Next question today is coming from Steve Ferdinand from, from Sidonian Company. Your line is now live.

Morning everyone. And good luck Milt with everything. Um, I want to follow up that last question in terms of how the semiconductor recovery fits into your guidance. You know, when, when the semi decline began, you guys lagged it by really even a couple of quarters. The concern would be that we start seeing that recovery, but you lag into 25. So I'm trying to figure out your confidence level that, indeed, even outside of cleaning and coating, you get that recovery in the second half. And I guess that's specific to what you're hearing from your customers.

Steve, first, I mean, we definitely saw some strength in the first half of 2023, given firm backlogs. Throughout this entire down period, the secular drivers around advanced node positioning in our advanced cleaning business and in certain other areas actually were pretty steady, if not growing, with positive mix factors affecting this segment. If you kind of take a step back, there are periods, there's still a little slow order flow, and we're seeing, you know, periods of kind of, you know, intermittent kind of inventory destocking on certain capital equipment platforms. But that should loosen up in coming periods. And the drivers of our positioning are, you know, giving us some confidence that, you know, the back half will show some, you know, significant improvement.

Okay, fair enough. So I could ask about Alexa. Can you explain that? Was there a leadership change resulting in that non-controlling interest purchase and Can you give us a general update on what's going on with Alexa?

Oh, that was just a small kind of a put call arrangement that was initiated when we completed the acquisition in 2020. And they decided to exercise that put call provision. And Alexa has now become a wholly owned subsidiary of EndPro.

No surprise there. That was all expected according to plan. Okay.

Okay. Fair enough. Thanks for that. On the ceiling side, You had a little bit of a bump in the fourth quarter, obviously the commercial vehicle market weakened. At that time, you talked about transitioning some of your sales more directly towards the aftermarket. Looking at the numbers, was there success in that? I would guess there was, or was it just the other markets, aerospace and nuclear being very strong?

Yeah, Steve, as we talked about coming out of the fourth quarter, the heavy-duty trucking commercial OEMs, side of things was expected to be down about 25% in the market, and that's what we've seen so far. So because of that, we've really focused on positioning to the aftermarket. That's been successful, and that's what's led to some of the favorable mix coming into the first quarter. We've seen improved aftermarket business that's offsetting the OEM business being down, and we're approaching aftermarket mix in the 70% range versus commercial OEM, and it's been quite successful there. So the STEMCO and overall ceiling team has done quite well, and you've seen the results in the improved margins.

Absolutely. Could get one more in integration of AMI, how that's going, how you felt about that business so far, and what you think the look ahead for it and how it fits within ceiling.

AMI has been just a home run. We've been really excited about that business. They continue to operate very, very well. We're very, very proud to have them, and the team is executing incredibly well. So we continue to be very excited about that business.

Great. Thanks, everyone. Thanks, Steve.

Thank you. Next question is coming from Ian Zaffino from Oppenheimer. Your line is now live.

Hey, good morning. This is Isaac Salzen on for Ian. Thanks for taking the questions. I'll echo the previous sentiment. Milt, congrats on a great career at Enpro and then retirement. Certainly missed on these errands calls and welcome Joe as well. The question is on ceilings. Could you speak a bit about the nuclear and aerospace businesses that were stronger this quarter? Maybe if you could remind us how big the nuclear end market is and some of the near to long-term growth drivers there. Thanks.

Sure. Are you familiar with the ITER project in France and nuclear fusion, ITER? Yes. Okay. Well, certainly that project is driving some results for us. It's early, but we participate there as well as elsewhere. So I would call it a renaissance, a resurgence of nuclear, especially across Europe and France. We are located there, doing very, very well with those businesses, and I continue to think those trends are going to continue.

As a small and meaningful but meaningful part of our ceiling technologies, we've had very strong positioning in nuclear for many years. And, you know, as you kind of look forward, given, you know, basically the reduction in fossil fuels and needing to kind of build baseload power generation capacity, nuclear could be a very strong solution in the Western countries.

In regards to space, we're on virtually every space launch there is in the U.S. So as you see more launches, of course, that drives our business as well.

We're certainly delighted with our positioning in certain areas in space, aerospace, and sustainable power generation.

Okay, great. That's helpful. And then just higher level, I guess on ceilings, I guess you've had some pricing that's helped the quarter a bit, but maybe if you could just speak to just following versus price mix and sort of what's embedded in guidance here.

Yeah, so Isaac, we've seen surgical pricing that's been quite successful so far this year. You know, the environment is not conducive to the broad-race pricing that we've seen in the post-COVID market in the last few years, but the team continues to execute quite well in surgical pricing. So you're seeing low to mid-single-digit pricing execution, largely beginning of the year pricing activity. and really value-based pricing for some of our businesses that are positioned quite well and have a technological advantage position. Volume, we're definitely seeing headwinds in certain spaces. We called that out when you look at general industrial and food and pharma and volumes down in the mid-single-digit range there, but on the margin side and favorable mix side being offset by largely being offset by those two impacts.

Also, I want to point out another thing. We had a very successful launch of a product called AutoTorque in our commercial vehicle market. It's doing extremely well, and that will continue to grow over time. The other thing I want to point out is the trailer bills this year are artificially low. What you're seeing is the capex spending being put towards truck to avoid expensive requirements coming in 2027 model year. So the trailer will rebound as well next year and continue to grow into 26. So we're still excited about that business in the future. Okay, awesome.

Thank you.

Thank you. Next question is a follow-up from Jeff Hammond from KeyBank Capital Markets, your line is now live.

Jeff, we lost you.

Hey, guys. Yeah, I know. I don't know what happened there. Just on, I guess... I'm just trying to get the shape of how – maybe at the midpoint of the guidance or baseline. It sounds like AST is up slightly sequentially, but just at the midpoint of the guidance, how much of a step-up do you need into the second half to kind of hit that midpoint?

Yeah, so Jeff, as we said, we're going to see a sequential – improvement in the second quarter over the fourth quarter. We talked last quarter and then reiterated again today that we believe the first quarter is the bottom in AST. And we should see sequential improvement into the second quarter. The second half includes about a double digit, low double digit improvement in AST in the second half versus the first half. We're seeing signs of that so far. but the timing of which, you know, still up in the air, but that's sort of what we've included in the guide for the second half.

Okay, and then that second half, your ramp, is that, you know, more market recovery, or is that, you know, some of the investments you're making kicking in, synergies from, you know, NextEdge and LeanTech kind of coming together? It's all of the above, Jeff, as you described. Okay. And then just, you know, unsealing, I guess, you know, is kind of the best way to think about organic is kind of, you know, flat. And the first half is, you know, got tough comps and negative. And then the second half you get some growth.

There is definitely a softer Q3, Q4, you know, period of time, so we would probably, you know, included in our guidance range is reflective of what you just said, correct? And then, of course, the addition of AMI. Okay.

The good news is all the backlog in all three of those businesses grew as well in the first quarter, so we are seeing some momentum there as well.

Okay. Thanks so much, guys.

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 for the time today. It was a pleasure. We look forward to the conversations later. Bye.

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