Enpro Inc.

Greetings. Welcome to the NPRO second quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to James Gentile, Vice President, Investor Relations. Thank you. You may begin.

Thanks, Daryl, and good morning, everyone. Welcome to EnPro's second quarter 2025 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 Vallencourt, our President and Chief Executive Officer, and Joe Bruderick, 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-GATT measures to the comparable GATT 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 2025 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? Thanks, James, and good morning, everyone. We appreciate your interest in Enpro as we discuss second quarter financial results and our improved sales and earnings outlook for the full year 2025. Now on to our second quarter performance. After my overview, Jill will provide a more detailed discussion of our quarterly results and perspectives driving our improved outlook for the balance of 2025. Enpro delivered another strong quarter, demonstrating the resilience of our business while continuing to invest in growth with discipline. We grew organic sales 6% in the second quarter, driven by 14.5% revenue growth in AST and continued top line growth in ceiling technology. despite the difficult comparison to last year that we discussed last quarter. In ceiling technologies, sales increased about 2%, driven by strength in aerospace and food and farmer markets, firm general industrial markets, and strategic pricing initiatives, more than offsetting continued weakness in commercial vehicle OEM demand. Timing of nuclear orders also impacted year-over-year performance. Adjusted segment EBITDA margin approached 34% for the quarter, We continue to identify opportunities for incremental growth throughout the ceiling technology segment and are focused on expanding our market reach by leveraging our differentiated technological capabilities and applied engineering expertise. We are focused on capturing opportunities in key markets such as aerospace, sustainable power generation, including nuclear, food and pharma, and compositional analysis where our differentiated capabilities can drive long-term profitable growth. We continue to invest in incremental capacity expansion, supporting new platforms and enhanced strategic marketing and engineering capabilities to position this segment to deliver on our targeted mid-single digit organic revenue growth rate. More than 60% of the segment's revenue is tied to the aftermarket, with specified positions providing critical process and safety functions for our customers. We continue to be delighted with the best-in-class performance of their C-Wing technology segment, which we expect to perform well in a variety of macroeconomic environments. In the Advanced Surface Technology segment, sales increased more than 14%, led by growth in leading-edge precision cleaning solutions, optical coatings, and improved demand for in-chamber semiconductor tools and assemblies. Operating expenses supporting growth in new platforms and transactional foreign exchange headwinds crimped operating leverage during Q2, which Joe will discuss later. We continue to make targeted organic investments at AST and expect execution of our growth and optimization plans to drive high single to low double digit revenue growth with improved profitability over time. We continue to believe this segment can generate 30% adjusted EBITDA margins, again, over time as growth programs and optimization playbooks are implemented. Our balance sheet remains in excellent shape, increased capacity from our recent debt refinancing activities, along with consistently strong free cash flow generation, provide us with ample flexibility to execute on our forward growth strategy while pursuing strategic acquisitions that meet our rigorous strategic and financial criteria. Our colleagues across the organization are empowered as we embark on the first year of EnPro 3.0, our multi-year strategy for the next chapter of the company's evolution. With NPRO 3.0, we are accelerating both personal and profitable growth. In our view, these goals are equally important and inextricably linked. At the halfway point here in 2025, our teams are motivated with individual development plans in hand that drive their own personal and professional growth. We are casting our employees to chart their own development path, to pursue courses to expand their work knowledge in areas that inspire and build business acumen, engage in helpful activities, and practice awareness, problem solving, and communication techniques that enable our colleagues to grow and thrive within and outside of our organization. I would like to thank our colleagues across ENPRO who embrace our way of working and partner with our customers to solve important processing problems using our technological capabilities and applied engineering expertise. Developing relationships of trust and reliability with our customers enable us to continue producing exceptional results. There has never been a better part of EnPro. I will now pass the call over to Joe to discuss our quarterly results in greater detail and discuss the drivers of our improved outlook for the balance of the year. Joe?

Thank you, Eric, and good morning, everyone. Through the halfway mark of 2025, we have delivered strong results, and our improved outlook for the year reflects the differentiation of our products and solutions. technology leadership and process know-how, customer intimacy, as well as the balance inherent in the EnPro portfolio. Turning to our results for the second quarter, sales of $288.1 million increased 6%, driven by continued strong performance in the ceiling technology segment and a 14.5% increase in AST. Second quarter adjusted EBITDA of $71.1 million declined 3.9% year over year. Total company adjusted EBITDA margin was 24.7%. Increased operating expenses supporting growth, transactional foreign exchange headwinds, which I will discuss in a moment, and increased incentive compensation accruals drove the slight year-on-year decline in total adjusted EBITDA. Corporate expenses of $12.1 million in the second quarter of 2025 increased from $10.5 million a year ago, driven primarily by higher incentive compensation accruals and increased health insurance costs. Adjusted diluted earnings per share of $2.03 decreased slightly from $2.08 last year, primarily driven by the factors behind adjusted EBITDA performance in the quarter. Moving to a discussion of segment performance, ceiling technology sales increased 1.9% to $187.5 million. Strength in aerospace and food and pharma applications, firm general industrial performance, and strategic pricing more than offset continued slow commercial vehicle OEM demand and mix associated with timing of nuclear orders compared to last year. For the second quarter, adjusted segment EBITDA margin was 33.8%, down from last year's high water mark of 35.5%. Sequentially, ceiling segment margin expanded 110 basis points. Continued demand weakness in commercial vehicle OEM markets, timing of nuclear orders year over year, as well as $1.9 million of transactional foreign exchange headwinds given the weakening of the U.S. dollar were the primary factors affecting segment profitability during the second quarter. We are very pleased with the first half performance in ceiling. with adjusted segment EBITDA margin exceeding 33% through June. We expect solid performance to continue as our teams focus on adjacent market expansion and incremental capacity investments, as well as continued value pricing, 80-20, and cost discipline. Turning now to advanced surface technologies. Second quarter sales increased 14.5% year-over-year to $100.9 million. While overall semiconductor capital equipment spending remains choppy, we saw continued growth in leading-edge precision cleaning solutions and in optical coatings, in addition to improved demand for certain in-chamber semiconductor tools and assemblies. For the second quarter, adjusted segment EBITDA increased nearly 4%. Adjusted segment EBITDA margin was 19.6% versus 21.7% last year. Operating leverage was absorbed during the quarter primarily due to $2.5 million of higher operating expenses supporting future growth initiatives and transactional foreign exchange headwinds totaling $2.8 million. In the first half of 2025, AST's adjusted segment EBITDA margin was 20.7%, with increased operating expenses supporting growth programs totaling $4.3 million and $3 million of unfavorable transaction FX. As Eric noted, we continue to make targeted growth investments in areas where we have the strongest competitive advantages, while implementing our continuous improvement playbooks to drive enhanced profitability and achieve our longer-term goals for AST segment performance. Turning to the balance sheet and cash flow. Our balance sheet remains strong, and we have ample financial flexibility to execute on our long-term organic growth initiatives. while considering select acquisitions that fit our rigorous strategic and financial objectives without the use of excess leverage. On May 29, 2025, we successfully completed an offering of $450 million of six and an eighth percent senior notes due in 2033. A portion of the net proceeds of the newly issued senior notes was used to fully redeem the outstanding $350 million of five and three quarters percent senior notes due 2026. In addition, we completed an amendment to our credit agreement on April 9th, which doubled the size of our revolving credit facility to $800 million. On June 30th, revolver capacity was $770 million. As a result of these refinancing and debt repayment actions, we now expect lower net interest expense of $26 million to $28 million for 2025 versus our previous expectation of $34 to $36 million. We ended the second quarter with net debt of $364 million, resulting in a net leverage ratio of 1.4 times trailing 12-month adjusted EBITDA. Free cash flow in the six months ended June 30th was $52.8 million versus $35.5 million last year. Higher net income driven by strong operating performance, working capital management, and lower cash interest expense were the primary drivers of free cash flow growth. We continue to expect capital expenditures to be around $50 million this year as we invest in future growth opportunities across the company at a creative margin and return thresholds. Finally, our strong balance sheet and cash generation provide us with ample liquidity to make these investments while continuing to return capital to shareholders. In the second quarter, we paid a $0.31 per share quarterly dividend with year-to-date payments totaling $13.2 million. We also have an outstanding $50 million share repurchase authorization expiring in October 2026. Turning now to guidance, we are raising full year 2025 guidance and now expect EnPro sales growth to be between 5% and 7% versus our previous expectation of low to mid single-digit revenue growth. Based on our better sales outlook, we now expect adjusted EBITDA in the range of $270 million to $280 million and adjusted diluted earnings per share in the range of $7.60 to $8.10. Previously, we expected adjusted EBITDA in the range of $262 million to $277 million and adjusted diluted earnings per share of $7 to $7.70. The normalized tax rate used to calculate adjusted diluted earnings per share remains at 25%, and fully diluted shares outstanding are 21.2 million. The primary factors driving our increased guidance ranges are a stronger outlook for aerospace applications, continued strength in food and biopharma markets, and slightly improved orders in general industrial markets and sealing technologies. We continue to expect weak commercial vehicle OEM demand for the remainder of this year in this segment. Altogether, we expect ceiling to show top-line growth in the mid-single-digit range for the year, with segment profitability remaining at the high end of our previously communicated range of 30% plus or minus 250 basis points. In AST, incrementally better demand for in-chamber semiconductor tools and assemblies and continued strength in leading-edge precision cleaning solutions are now expected to drive AST sales growth in the high single to low double-digit range year over year. Despite continued investments supporting growth programs and transaction FX headwinds, we expect full-year AST segment profitability to again exceed 20%. Tariff exposures remain minimal and manageable as we move into the second half. Our supply chain teams are executing with agility and resilience, well prepared to perform in a variety of macroeconomic environments. I will now turn the call back to Eric for closing comments.

Thank you, Joe. We are eager to continue demonstrating our leading-edge capabilities and differentiated products and solutions that deliver significant value to our customers and drive long-term profitable growth. Our development programs that encourage our colleagues to grow both personally and professionally in the early days of ENPRO 3.0 will help unlock the full potential of our team to advance our strategy and create value for all stakeholders. I would like to thank our shareholders for their support as we embark on the next phase of our value creating strategy, NPRO 3.0. Thank you for your interest in NPRO, and we'll now welcome your questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, 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 would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for your questions. Our first questions come from the line of Jeff Hammond with KeyBank Capital Markets. Please proceed with your questions.

Hey, good morning, everyone. Good morning, Jeff. Hey, I'm sorry. I missed the FX transaction headwind and ceiling, and then just, you know, on the nuclear, is that Just a goodness that was there last year, or was there timing between quarters this year as well?

Yeah, Jeff, this is Joe. For the nuclear answer, it's both. Last year's second quarter was a very, very strong nuclear quarter. We had a series of timing of orders for replacement cycles. And then this year, we kind of had the opposite effect. 1Q is very strong. Second quarter, we saw some timing just between 1Q and 3Q. So that's really a timing issue on nuclear. Underlying demand is very strong. On the transactional FX, so the impact we're feeling here is in transactions that are in non-functional currency denominations. So we pointed to it most predominantly in AST, where we had $2.6 million in the quarter Most of that impact is in Taiwan, where we're US dollar functional, but we have certain local expenses that are in Taiwanese dollars. So predominantly salary and benefits, lease obligations, and liabilities attached to income tax. The impact was less in ceiling, but we had a similar effect. With the weakening dollar overall, anywhere ranging from 5% to 12%, depending on the alternate currency, you know, where we had expenses and liabilities tied to local currencies that were not U.S. dollar functional is where we felt that impact.

And in ceiling it was $1.9 million.

Okay. Yeah, I mean, back on AST a little bit, Jeff, I mean, you know, obviously we felt the impact of FX on margins year over year in AST. And we pointed to the $2.5 million of growth investments there that we're making in OPEX tied to critical areas we're investing behind growth. If you just took out the FX piece of roughly $2.8 million year over year, AST segment margins would be in the mid 22% range. And then you see the growth investment expense around OPEX impacting us by another 2.5% roughly. So you can see the underlying performance of AST from an operational perspective, which we're quite happy with at the moment.

Yeah, that's what I wanted to come back to. So how should we think about incremental margins and AST into the second half? And do these FX headwinds, is that kind of one time to the quarter, or do they stay with us for a bit?

Thanks. Yeah, for the most part, the FX headwinds were impacted by the significant weakening of the US dollar in the second quarter. So we don't expect that continue, especially not in the magnitude that we saw in 2Q based on the revaluation of the payment out of liabilities. But AST should continue to leverage pretty well going forward. I mean, we've invested in key growth areas behind geographical expansion, technology differentiation in different areas, including Arizona, Milpitas, and Taiwan. And we've put in People expenses, OPEX associated with that. So as revenue comes associated with those growth investments, it should leverage pretty well as we move into the second half of this year and into the next.

Okay, and then just last one. Ceiling, I guess the inflection or improvement in ASTs was pretty apparent, and I understand the guide up there. Ceiling, what's driving the... the better growth rate into the second half. I think you said mid-single digits. You're now thinking for that business. Thanks.

Yeah, Jeff, there's a bunch of good things going on. We have some new programs and customer wins, specifically an OEM commercial truck with our auto torque product that we talked about several times in the past. We're starting to win more and more customer business, sir, with the large OEMs that will transition to aftermarket over a period of time. But in addition to that, our efforts in space, we picked up some significant wins with a few new customers in the last quarter that will start to show up in that balance at the end of this year that are going to require a little bit more investment for us that we've already planned for. But they're all exciting opportunities, and that is business is growing rapidly. It's really got a good future ahead of us. That's leading to the guidance improve. In addition, markets are still pretty strong. We look across our general industrial. We're still our book to build strong. Our backlog is strong. And so we're excited about the second half of the year. But a lot of good things are happening. We continue to focus on execution and execute extremely well. And we control the things we can control. And life is good at Enpro.

Great. Thanks for the call, guys.

Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next questions come from the line of Steve Ferrazani with Sodoti and Company. Please proceed with your questions.

Good morning, everyone. Appreciate the detail on the call. I just wanted to ask about the raised ceiling expectations. Turn over to the raised AST expectations. You were talking now potentially low double-digit growth this year, which would indicate pretty strong second-half growth. Is that an extension of what you were seeing in 2Q, or you could talk a little bit about what you're seeing second half for AST?

Second half AST, we have a lot of investment that's gone on in the past. We're starting to get a little bit of that coming in now. As we said earlier, Joe mentioned we have investments both in Arizona and Alpitas, California, and Taiwan that are all coming on along with Singapore. So we're getting a little bit of benefit from that that will accelerate over time. In addition, I would say a little bit of market recovery, although I wouldn't say it's significant. It's still very choppy in that regard. But overall, the business is healthy and getting better.

Where are you in the Arizona? I know you're going through a lengthy certification process. Is that generating material revenue now? And can you give any kind of indication of the ramp on that this year?

I wouldn't say it's generating material revenue. We're still in the... testing phase, if you will, and certification phase.

That adds, Steve, like Eric mentioned, we're in the qualification phase, which is going very well in Arizona, but we are supporting a little bit from Milpitas as well. In areas where we have spent the time in the past to demonstrate our capabilities in Milpitas and have the ability to be qualified and fully support our customers there, some of the early revenue from customer locations in Arizona is being qualified and supported with test volumes in Arizona, but also we have the ability to supplement from Milpitas. So that's supporting some of the revenue growth that we've seen as well.

Got it. I did want to ask about one comment you made in terms of ceiling growth. You mentioned compositional analysis. I know that comes out of the AMI acquisition from last year. Are you seeing any successes there lately? Can you talk about how that market is developing for you since that acquisition?

It's been outstanding. They continue to exceed our growth expectations with both new customers and existing. That business has been a home run. Outstanding leadership by Kevin out there.

We're also investing in additional capacity expansion and new capabilities within AMI. You know, not only we're delivering on our existing capabilities and technologies, but there's more coming, right, with additional capacity and new technologies and new products that the team is launching.

Yeah, they've outgrown the space they're in. They'll be moving into a new building later this year. Yeah. Excellent.

And if I could just ask about – oh, go ahead. Go ahead.

I was just going to say, we're talking about ceiling, and I want to just point out that that was our second best quarter ever in ceiling. So, although it was a difficult concept last year, it's still our second best quarter ever. And I think it's going to be better in the future.

Excellent. And then just on the expanded credit availability, should we be thinking about M&A at all? How's the M&A market looking like?

Yeah, I mean, we continue to be very active there, proactive in working our pipeline. There are opportunities that are starting to free up a little bit. We're extremely active. As we've talked about in the past, Steve, we continue to be very excited by some of these growth nodes that we have in key markets where we have these kind of 5% to 8% of total in pro-revenue positions, like in compositional analysis that we just talked about, food and biopharma. you know, space and aerospace, surface protection and surface coating. You know, these are spaces that we really like. We're actively working our development pipeline there, and it's just the ability to, you know, meet our financial and strategic criteria and be actionable at the same time. So we're working it hard.

Excellent. All right. Thanks, everyone.

Thank you. This does now conclude the question and answer session. I would now like to turn the floor back over to James Gentile for closing comments.

Thank you for your interest in MPRO. We're delighted with, you know, the balance of 2025 and the forward look. It's going to be an exciting few years ahead. Take care.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect at this time. Enjoy the rest of your day.