Enpro Inc.

Hello and welcome to the MPRO Q2 2024 earnings conference call-in webcast. At this time all participants are in listen-only mode. If anyone would require operator assistance, please press star zero. A question and answer session will follow the formal presentation. You may be placed into 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 of Invest Relations. Please go ahead, James.

Thank you and good morning, everyone. Welcome to MPRO's second quarter 2024 earnings conference call. I will remind you that our call is being webcast at MPRO.com where you can find the presentation that accompanies this call. With me today is Eric Valencourt, our President and Chief Executive Officer, and Joe Brudderick, Executive Vice President and Chief Financial Officer. 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 Valencourt, our President and Chief Executive Officer. Eric.

Thanks, James, and good morning, everyone. Thank you for joining us today as we review our results for the second quarter and provide an update that includes the narrowing of our outlook for full year 2024. We performed well in the second quarter with strong profitability in the ceiling technology segment and sequential improvement in both sales and adjusted segment EBITDA and advanced surface technologies. Consolidated adjusted EBITDA margins exceeded 27 percent for the first time. We are pleased with the team's agility this quarter as profitability shined even as soft demand persists in certain areas of the business. Again this quarter our people worked very hard to achieve these results that demonstrate a compelling balance inherent in the Enthro portfolio and our ability to execute well in a variety of macroeconomic scenarios. We would like to thank our 3,500 colleagues across the company for their outstanding contributions and commitment to the company's ongoing performance. Now on to the second quarter performance. After my review, I will turn the call over to Joe for a more detailed discussion of our results and our outlook for the balance of 2024. Operating performance in the ceiling technology segment was excellent during the second quarter. At AST we delivered sequential improvement both sales and adjusted segment EBITDA. While the semiconductor market remained soft, particularly for the semiconductor capital equipment, we have seen pockets of continued growth in the beginnings of recovery. We continue to believe the low point of AST segment performance is behind us. In ceiling technologies, adjusted segment EBITDA margin exceeded 35 percent. Strength in nuclear and aerospace as well as strategic pricing actions in the contribution from AMI more than offset weakness in commercial vehicle OEM and Asian industrial markets. Food and pharma sales increased during Q2, although demand remains choppy, particularly in Europe. Favorable mix, cost controls, supply chain effectiveness were also contributing factors to the record quarterly results in this segment. Our continued positive momentum in profitability in ceiling technologies reflects the underlying strength of this segment. Our focus on applied engineering differentiation, compelling aftermarket characteristics, incremental investments in organic growth, and continuous improvement opportunities has 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. We are very pleased with the performance of the ceiling technology segment, and our outlook remains constructive. In the advanced surface technology segment, revenue declined 12 percent year over year. Adjusted segment EBITDA margins of 21.7 percent improved 160 basis points sequentially. Strategic growth investments and operational improvement initiatives proceed as we continue to position AST for long-term growth. Areas of continued growth, such as in our precision cleaning business and a brighter outlook for both our coating and refurbishment solutions and certain critical in-chamber tools gives us confidence that the AST segment will grow sequentially for the remainder of 2024. Long-term, we are focused on executing our multi-year strategy to drive growth in AST's attractive markets with key capacity expansions and efficiency improvements that showcase our technological and process advantages that provide our customers with essential value in the semiconductor supply chain. Our balance sheet remains in excellent shape as we continue to pursue a variety of growth opportunities both organically and through strategic acquisition. We are pleased with our second quarter and our first half performances despite well-understood macro headwinds. We expect strong execution and disciplined capital allocation to continue as we drive our value-creating strategy forward.

Joe? Thank you, Eric, and good morning, everyone. Let's now go into the details of our second quarter performance. In the second quarter, sales of $271.9 million decreased .8% compared to the prior year, and organic sales declined 5%, driven primarily by lower results in the AST segment due to ongoing softness in semiconductor. Second quarter adjusted EBITDA of $74 million increased 14% compared to the prior year period. Adjusted EBITDA margin of .2% increased 380 basis points. Favorable mix, strategic pricing, lower corporate expenses, and continuous improvement initiatives offset soft demand in certain markets while other markets experience resiliency and growth. Growth initiatives on new products and key capacity expansions continued along with ongoing continuous improvement discipline and supply chain efficiency. Corporate expense of $10.5 million in the second quarter of 2024 was down from $15.6 million a year ago. Last year, corporate expense was unfavorably impacted by approximately $4 million due to -to-market valuation of awards under long-term equity incentive plans, compared to a favorable impact of approximately $1 million in the current quarter. In 2023, we made changes to the structure of incentive plans that will mitigate the volatility of corporate expenses due to share price performance for the remainder of this year and eliminate variability thereafter. Adjusted diluted earnings per share of $2.08 increased almost 14%, largely driven by the factors that drove the adjusted EBITDA improvement year on year. Moving to a discussion of segment performance, ceiling technology sales of $184 million increased over 4% and organic sales were essentially flat. Strength in nuclear and aerospace markets, the contribution from AMI, strategic pricing actions and improved sales in food and pharma offset deep declines in commercial vehicle OEM revenue and soft general industrial demand in Asia. Our aftermarket positions in this segment continue to show stability as the critical nature of our innovative products and solutions differentiate. For the second quarter, adjusted segment EBITDA increased more than 16%. Strategic pricing, supply chain gains, the contribution from AMI, improved aftermarket mix and 80-20 discipline drove the segment's profit growth during the period. Adjusted segment EBITDA margin was .5% in the second quarter, up 360 basis points. For the first half of 2024, ceiling delivered adjusted segment EBITDA margins above 33%. As we have said since the beginning of the year, we expect a return to normal seasonal patterns in the segment this year, where we generally see a stronger first half. That said, underlying demand remains firm in our domestic and European general industrial markets. New products like AutoTorque in our commercial vehicle market and new platform wins in commercial aerospace are incremental drivers for the segment's future performance. We also expect continued strength in our space exploration and sustainable power generation markets. We are excited about the various levers our team will pull to proactively grow the transformed ceiling technology segment. Turning now to AST. Second quarter sales of $88.1 million were down around 12% year over year and up modestly on a sequential basis. While soft semiconductor capital equipment spending persisted during the second quarter, we saw continued growth in certain areas such as our precision cleaning solutions business supporting leading edge nodes. Additionally, we saw more consistent signs of recovery in advanced coatings and refurbishment solutions as the second quarter progressed. Market forecasts from a variety of sources suggest that while the overall semiconductor market is in a strong secular growth position long term, the timing and magnitude of an overall recovery in capital equipment spending continues to evolve and move to the right. In the second quarter, adjusted segment EBITDA decreased around 20% year on year. Adjusted segment EBITDA margin was .7% down from last year but up 160 basis points sequentially. The volume decline was the primary driver of the year over year reduction in profitability. Throughout the downturn, we have invested in targeted capacity expansions that will position AST well as the semiconductor market resumes a growth trajectory. In addition, we are pursuing a number of continuous improvement and optimization initiatives that will better position the segment long term. Overall we are pleased with the AST segment's performance through a challenging market environment. The segment has consistently maintained adjusted segment EBITDA margins in excess of 20% during the slowdown. Turning to the balance sheet and cash flow. Our net leverage ratio following our purchase of AMI in January stands at approximately two times trailing 12 months adjusted EBITDA. Free cash flow in the first half of 2024 was $35.5 million down from $66.5 million last year. Timing of working capital and to a lesser extent higher cash tax payments compared to last year were the primary drivers of the year over year reduction. For the year, we continue to expect free cash flow to exceed $100 million. When we started the year, we expected capital expenditures to approximate $60 million. Some of this growth spending will push into next year based on supplier lead times and delivery schedules. We continue to be excited about our pipeline of organic growth opportunities as we invest to drive long term high margin growth. We have strong financial flexibility to execute our strategic initiatives both organically and through acquisitions that broaden our capabilities while returning capital to shareholders. In the second quarter, we paid a 30 cents per share quarterly dividend with year to date payments totaling $12.7 million. In a steady state, assuming no acquisition activity in the second half, we expect to take into account the current revenue of the year. Moving now to our current view of guidance. Taking into consideration all the factors that we know at this time, we are narrowing our full year 2024 earnings guidance ranges and we also now expect total and pro sales to be approximately flat compared to 2023 versus our previous revenue guidance of low to mid single digit growth. The primary factor in adjusting our sales view is the magnitude of the expected recovery and semiconductor capital equipment in the back half. We now expect adjusted EBITDA of between $260 million to $270 million and adjusted diluted earnings per share to range from $7 to $7.6 versus our previous view of $260 million to $280 million and $7 to $7.8 respectively. The normalized tax rate used to calculate adjusted diluted earnings per share remains at 25% and shares outstanding approximate $21 million. In AST, we expect sequential improvement in the back half driven by continued growth in our advanced node cleaning business, a better outlook for coatings and refurbishment and some demand improvement for certain critical in-chamber tools. In ceiling technologies, we continue to see firm demand in certain shorter cycle product lines and a return to normal seasonality in the segment where the first half is slightly stronger than the second half. We continue to see strong backlog and positive mix that will help offset the continued weakness in commercial vehicle OEM demand. I will now turn the call back to Eric for closing comments.

Thanks, Joe. We are delighted to have reported strong profitability in the face of demand weakness in certain of our markets. Our balanced portfolio generates attractive margins and cash flow returns with several opportunities to advance our strategy and drive long-term high margin growth. Every day, we deliver critical leading edge solutions for our customers that safeguard critical environments and applications that meaningfully impact our lives. Thank you again for joining us today. There is no better time to be a part of Enpro. We will now welcome your questions.

Thank you. We will now be conducting a question and answer session. If you would like to be placed into question Q, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question Q. You may press star 2 if you would like to remove your question from the Q. Once again, that is star 1 to be placed into question Q. Our first question is coming from Steve Sardatani from Sidoti & Company. Your line is now live.

Good morning, Eric, Joe. I appreciate all the detail on the call. First I want to ask about the strength on the ceiling margins. Obviously, I mean, you noted some of your end markets are challenged. You still are generating, you are still expanding those margins. The question really is how sustainable is that? How much of that is mixed that may revert? Can you maintain pricing in this environment? And in general, are there some sustainable cost cuts that came in there as well? It's kind of a big broad question.

Thanks, Steve. I'll give you a big broad answer. The answer is we execute very, very well in a variety of ways. We expect to hold on to price. We had some supply chain savings. Our mix and volume are very good. You see our commercial vehicle OEM sales are down, but the mix shift has been typically from 60-40 aftermarket OEM to about 70-30 right now. So with much better aftermarket margins, it's propping up that commercial vehicle business. We have strong businesses that perform well in a variety of environments. And it really is just really good execution. Our focus on aftermarket sales continues to drive the way.

Yeah, I'll add, Steve, we perform extremely well, as you noted, in the second quarter in ceiling with margins at 35%. We think we're sustainably in that 30% plus or minus a little bit range. Second quarter has historically been our strongest quarter. We talked about the seasonality, where the second half will be slightly softer than the first half, and that will come with slightly lower margins. But in general, we feel really good about the execution that our teams are delivering, and we think we're sustainably in that 30% plus or minus range for ceiling margins.

Can you give a sense of how much new products might be contributing? I know you've been pretty excited about AutoTorque, and I'm assuming you get better pricing on some of these. Is that meaningful contribution, or is it given the size of that whole market, not necessarily that material?

It's incremental, but I wouldn't call it material. Okay. That business will ramp up over time. We're limited by how much we can produce today, but the market is excited for the product, and next year it will be even better.

Yeah, and we continue to invest in future opportunities for growth in AutoTorque. We're very pleased with early indications there, but as Eric noted, it's incremental at this

point. I'd also like to add, we've been very successful in certain key critical components in both sustainable power generation on the nuclear and natural gas side, and also in commercial aerospace platforms and incremental kind of growth that we're seeing in space exploration.

Are those better margin and markets?

Generally, yes. And as we've kind of transformed the segment, you know, we just want to kind of press where we're strongest. We want to continue to invest where we have the best advantages to kick up the growth rate a little bit and show really strong -in-class margins.

We've got a nice order for WavePro this quarter that's not meaningful in any ways in terms of size, but meaningful in the sense that we're getting the product accepted into the market.

And again, you know, the two-thirds aftermarket position in the segment is a governing factor that, you know, we're super excited about.

Excellent. If I could turn briefly to AST before I turn it over, in terms of the guidance, I mean, we've all heard some of the higher profile earnings calls this quarter, and I know you sort of cited market sources for the, you know, saying the recovery might be a little bit slower to the right. But can you give a sense of specific customer conversations, whether they have changed and whether the conversations have been more around timing versus the actual recovery?

I would say that if we're thinking about kind of the underlying, where we're focused is to kind of execute on where we're strongest. And, you know, I think less about customer conversations and more about kind of what's happening as the semiconductor industry has continued its recovery after almost a couple of years of pretty significant de-stocking. You've seen, you know, memory prices increase substantially, which is driving underlying market growth statistics for some of those external sources. But underlying capacity utilization is still light. So as capacity gets absorbed, semiconductor capital spending generally follows. And that, you know, where we're seeing that pricing dynamic on units kind of drive industry statistics higher, that capacity utilization variables are still a little bit slower to recover.

Not to say that

long term, you have, you know, very strong positions and new platforms. You know, we continue to invest in where we're strongest. Any update

on...

It's just a little bit of a move to the right. We're seeing some build plans a little bit to the right with customers, but that's it. Nothing out of the ordinary. It really is coming down to capacity utilization, just being a little slower.

Fair enough. Great. Thanks, everyone.

Thank you. As a reminder, that's Star 1 to be placed in the question queue. Our next question is coming from Ian Zepino from Oppenheimer. Your line is now live.

Hey, good morning, guys. This is Isaac Salson on for Ian. Thanks for taking all the questions. Just to follow up on AST, could you just touch on trends you've seen moving past the second quarter? Sounds like you've seen some improvements sequentially in a few areas that you noted. I guess I've seen things start to turn the corner yet as far as any positive flexion that the capital equipment side... I know you just commented on that, but maybe if you could just touch on some of the growth areas that you've seen sequentially.

Our cleaning business is doing very well and has throughout the whole cycle. So that's grown basically every quarter. So that's ingenious BSA's source of strength. Our coatings business is starting to recover a little bit. I would call it green shoots where we're getting some new orders here or there. We also see some of our in-chamber parts picking up a little bit of momentum. But again, it's just a gradual recovery. So it's not a hockey stick. A little slower than we would have liked, but consistent and we're still very well positioned for long-term growth. Once we get through this recovery, I look for things to be very good.

Okay, I understood. And then as far as the growth investments and sort of the continuous improvement initiatives that you've talked about in the segment, could you just remind us again what those entail? And then as far as investments you've made in Asia and the US, sort of where we are with those investments as well. Thanks.

Our Arizona investment is just about ready to come online. We may even see a little bit of revenue this year, which would be earlier than expected. It won't be significant. It'll be testing and ramping up, if you will. We also invested in Singapore. So we've invested in key markets for expansion and we're well positioned there in both markets, just waiting for business to take off there. In terms of continuous improvement efforts, it's really just the Enveril operating system. It's not, I don't, to me it's just basic blocking and tackling. When you look at what we do in ceiling technology, we do the same thing in AST. We just haven't owned those businesses as long. So what you see is a little bit of facility consolidation. You're seeing some machining being moved around for lean activities, better utilization of people, better utilization of equipment, and narrowing our footprint a little bit. So it's a little bit of everything. It's not anything, there's a little bit of price, a little bit of supply chain savings. It's just basic good execution. And that team is getting the EnPro way, if you will, and will continue to improve over time.

Okay, thank you very much. Best of luck.

Thank you. Our next question today is coming from Jeff Hammond from QPAN Capital Market Control Line is now live.

Hey, good morning guys.

Morning Jeff. How are you?

Just, I mean, maybe to put a finer point on AST sequential improvement, just, you know, should we look at, you know, two Q to three Q as being similar to one Q to two Q, or is it a little bit stronger than that?

Jeff, as we talked about coming out of the first quarter, right, we expected really slight improvement second quarter over first quarter. I think we'll see a little bit more gradual than that going into the back half of the year where we continue to see kind of mid single digit quarter over quarter improvement through the second half of the year. We're definitely more gradual, you know, than it looked like coming into the year, but still, you know, sequential improvement quarter over quarter through the rest of this year. We continue to see good performance as we see our cleaning and refurbishment business moving into advanced nodes, concentration there, continued strong growth through the cycle. And as Eric talked about, you know, some of our refurbishment work and in-chamber tools are starting to pick up a little bit here and there. And again, it's just more gradual versus a, you know, a strong bounce back and strong recovery in any given period.

Okay, that's helpful. And then just in ceiling, yeah, I think we've been hearing, you know, PMI weakening and kind of softening the US short cycle, you know, maybe outside of truck, it doesn't really seem like you're seeing that. Maybe just, you know, talk about US short cycle and what you're kind of building in for the back half.

We're not seeing that at this point, Jeff. We're building in our normal seasonality. If you look at our seasonality over time, usually about 52% in the first half, 48 in the second half. And that's what we're building into the model. We're still very strong in nuclear, still strong in space. So there's some good things there. The mix and commercial vehicle is also part of it. Our demand is still pretty strong. So right now we're just building a normal seasonality. Yeah, and I

would add we're not, you know, seeing any significant inventory destocking or stocking in any direction. You know, our order demand is in line with distribution and demand. And, you know, things still feel pretty firm right now as we head into the second half.

Okay, and then just last one on CapEx. I think you said you thought 60. What do you think that number is? And I guess do we anything that you fall short, I'd assume, you know, falls into 25?

Yeah, I mean, we have a really strong pipeline of opportunities to invest in for an organic growth standpoint in both segments. We talked about that this year. And heading into the year, we, you know, we were executing towards the 60 million. And it just looks like some of that spending may leak into next year a little bit in the magnitude of five plus or minus a little bit. And it's just timing of execution on the supply chain side and our suppliers ability to get equipment to us at the right time. So, you know, we're still extremely committed to those projects and feel really excited about the long term growth prospects we're investing behind. It's just timing of that spend is going to most likely leak into next into 2025 a little.

OK, perfect. Thanks, guys.

Thanks, Jeff.

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

Have a great day, everyone. Thank you for your interest.

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.