Enpro Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 31, 2023

There are 7 speakers on the call.

Operator

Greetings. Welcome to the EnPro Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded.

Operator

At this time, I would like to hand the call over to James Gentile, Vice President, Investor Relations. Thank you. You may begin.

Speaker 1

Thanks, Daryl, and good morning, everyone. Welcome to EnPro's Q3 2023 earnings conference call. I will remind you that our call being webcast@enproindustries.com, where you can find the presentation that accompanies this call. With me today is Eric Valancourt, our President and Chief Executive Officer And Milt Childress, Executive Vice President and Chief Financial Officer. During today's call, we will reference a number of non GAAP financial measures.

Speaker 1

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, including our most recent Form 10 ks. Also note, during this call, we will be discussing our full year 2023 guidance, which excludes unforeseen impacts From these risks and uncertainties as well as changes in the numbers of shares outstanding, impacts from future acquisitions, Dispositions, incremental impacts of inflation, foreign exchange and interest rate changes subsequent to the end of the third quarter, We do not undertake any obligation to update these forward looking statements. It is now my pleasure to turn the call over to Eric Vaillancourt, our President and Chief Executive

Speaker 2

Thanks, James, and good morning, everyone. We will get started with an overview of our performance and strategic progress, and then I'll hand the call over to Milt For a more detailed analysis of our quarterly results. Sealing Technologies results remained robust in the Q3, but we saw a year over year sequential weakness in AST resulting from the continued slowdown in the semiconductor industry. Despite these macro headwinds, company delivered adjusted EBITDA margins of 23% for the 3rd quarter and 23.6% year to date. Our ability to maintain healthy margins during the semiconductor industry downturn reflects the benefits of our balanced portfolio and resilient business model, Which will enable us to continue navigating effectively through macroeconomic cycles.

Speaker 2

We are carefully controlling cost, while working proactively with customers to mitigate Volatility. As we do so, we will continue to invest in multiple growth and productivity opportunities that will build upon our strong foundation. We are confident that the continued execution of our strategy and key priorities will position us for long term growth and value creation. The current slowdown in the semiconductor capital equipment spending and wafer starts drove 3rd quarter sales well below the prior year. While we observed pockets of growth in AFC during the quarter, build plans shifted to the right as customers intensified their efforts to destock inventories.

Speaker 2

Also, mix was unfavorable, especially compared to last year's Q3 when we saw very strong results in this segment. Based on recent customer feedback and overall market forecast, we anticipate softness in semiconductor capital equipment spending into 2024. We are taking cost actions where appropriate to maintain solid margin levels without sacrificing investments to advance our portfolio and position us The semiconductor market is widely expected to double in the upcoming decade, Driven by macro forces including AI and the Internet of Things. As chip architectures evolve, complexity is increasing. More processing steps are needed to manufacture each new generation of chips and increasingly sophisticated tools are required to complete these steps.

Speaker 2

With enhanced complexity, process yield efficiencies, contamination control and lifecycle management of critical in chamber tools become even more critical. Our semiconductor business sits squarely in the middle of these trends and we are well positioned to participate in the industry's growth. To meet this opportunity, we are investing to maintain and expand our technological differentiation and to position our businesses in regions where Above average growth is expected. We are excited to partner with our customers to drive the industry forward, including supporting the production of leading edge chips. This strategic focus paired with our customers with our deep customers' relationship positions EnPro for sustainable long term profitable growth.

Speaker 2

Now, I'll hand the call over to Milt to discuss our financial results in more detail.

Speaker 3

Thanks, Eric. Reported sales of $250,700,000 in the 3rd quarter were down 10.5% year over year. The decline in sales is primarily due to weakness in semiconductor markets, partially offset by growth in other markets along with a positive contribution from price. Adjusted EBITDA of $57,700,000 decreased around 19% over the prior year period, while adjusted EBITDA margins in the 3rd quarter We're still healthy 23%. Corporate expenses of $9,400,000 increased slightly from $9,100,000 In the Q3 of last year, increased professional fees and personnel related costs were largely offset by reduction in incentive compensation expenses.

Speaker 3

Adjusted diluted earnings per share of $1.58 decreased 16.4% compared to the prior year period. Lower AST segment results were the primary driver of the decline, offset in part by higher interest income. Moving to a discussion of segment performance. Sealing Technologies sales of $161,400,000 Increased 1.4% organically, driven by strong demand in nuclear and commercial vehicle aftermarket, along with a positive impact from pricing. Growth in these markets was mostly offset by a drop in commercial vehicle OEM sales, destocking in food and pharma And some weakness in general industrial, particularly in Europe and China.

Speaker 3

For the 3rd quarter, Adjusted segment EBITDA of $48,000,000 increased 20.9%. Adjusted segment EBITDA margin expanded 4.60 basis points to just under 30%. Favorable mix driven by continued strength in nuclear and commercial vehicle aftermarket sales, The positive impact of pricing actions and cost controls more than offset rising labor costs and softness in certain markets just referenced. Year to date, adjusted segment EBITDA margins were 30.1%, up from 25.3% in the prior year. In addition to favorable mix and pricing, ongoing strategic and operational improvements continue to benefit our results.

Speaker 3

Turning now to Advanced Surface Technologies. 3rd quarter sales of $89,400,000 decreased 27%, Driven by the current slowdown in semiconductor markets and related customer inventory adjustments. For the quarter, adjusted segment EBITDA decreased A little over 50% to $19,000,000 driven by the decline in volume and unfavorable mix. 3rd quarter results were also impacted to a lesser degree by investments to support growth, including the build out of our in Arizona to expand our domestic advanced cleaning and coding capabilities. A brief update on our participation in U.

Speaker 3

S. Semiconductor expansion. We continue to update on a stage basis the building that we purchased in Arizona. As mentioned previously, we are seeking to help us transform this building into an advanced semiconductor facility on an expedited basis. We expect to use this facility to support the production of advanced node semiconductors at new fabs being constructed in Arizona.

Speaker 3

For the Q3, adjusted segment EBITDA margin of 21.3% reflects unfavorable mix and the deleveraging impact of lower volume. Even with this year's decline in the semiconductor market, year to date adjusted segment EBITDA margins exceeded 24%. As Eric discussed, we continue to be excited about the multi year trajectory of our AST segment against the backdrop of a widely expected Doubling in the industry over the coming decade. Turning to the balance sheet and cash flow. We have ample financial flexibility to execute on Our long term strategic growth initiatives.

Speaker 3

We ended the quarter with a net leverage ratio of 1.4 times. Cash and cash equivalents were nearly $330,000,000 and we had nearly full availability under our 400 dollar revolving credit facility. During the Q3, we reduced term debt by approximately $140,000,000 bringing our total long term debt to around $650,000,000 We continue to generate strong free cash flow. For the 1st 9 months of 2023, free cash flow exceeded $134,000,000 Up from $101,000,000 in the same period a year ago. Our focus on the cash conversion cycle throughout the organization And lower cash taxes paid in the period more than offset higher capital spending.

Speaker 3

During the Q3, we paid a $0.29 per share quarterly dividend. And for the 1st 9 months of the year, dividend payments totaled $18,300,000 Moving now to our 2023 guidance. We continue to expect revenue to remain relatively flat compared to last year. Adjusted EBITDA and adjusted diluted earnings per share are now expected to be towards the lower end of our previous guidance ranges Of $248,000,000 to $256,000,000 for adjusted EBITDA and 6 point in the Q4, given slowing demand in certain markets mentioned earlier and typical seasonality returning in certain parts of the segment. In AST, based on current orders and production schedules, we expect higher results sequentially in the Q4.

Speaker 3

Thanks for your time today and I'll turn the call back to Eric.

Speaker 2

Thank you, Milt. Our 3,500 colleagues across EnPro continue very well and are energized to win. Our teams have navigated exceptionally well for a variety of market cycles in the past and today is no different. Our long term strategic and financial plans remain unchanged. And day after day, we deliver differentiated products and solutions for our customers across several Growing end markets.

Speaker 2

The Seiling segment's performance has been remarkable and our teams deserve praise for delivering best in class profitability, While producing highly engineered solutions that enable safe, sustainable and reliable operations for our customers. In AST, despite a challenging year, we are a critical part of the global semiconductor ecosystem And continue to invest in a variety of growth opportunities. Our long term growth trajectory remains intact, and We are focused on capitalizing on the investments we have made and will continue to make throughout AST. Thank you for joining us today. We appreciate your interest in EnPro.

Speaker 2

Now open the line to questions.

Operator

Thank you. We will now be conducting a question and answer session. Our first question comes from the line of Jeff Hammond with KeyBanc Capital Markets. Please proceed with your questions.

Speaker 4

Hey, good morning, everyone.

Speaker 2

Good morning, Jeff.

Operator

Good morning,

Speaker 3

Jeff. Good

Operator

morning, Jeff.

Speaker 4

So just on Tee, I guess maybe a better sense of what the shape looks like into 4Q? And then just How maybe you're thinking about the timing of recovery inflection? I think you said weakness into 2024. So it seems like maybe that's pushing out a little bit.

Speaker 3

Yes. Hey, Jeff, let me jump in there, and I'll just go back and forth on this one. As I indicated in my prepared remarks, based on current orders and schedules, we're expecting Some sequential improvement in the semiconductor markets in Q4. The outlook remains uncertain. And As you know, there has been pushing out in the industry, not just for us, but you've heard it from other companies as well As the year has progressed and in the Q3, we saw some additional pushing out just based on inventory in the system.

Speaker 3

So we're expecting this progression and some improvement in the 4th quarter and Then we'll need to see what the year brings. We do think things are pushed out to the right. It's going to be uncertain for a quarter or 2. We'll see.

Speaker 2

I think the key word is just uncertain, Jeff. When we talk to customers, the inventory destocking has been taking longer than we thought and longer than they anticipated. So things just continue to seem to move to the right a little bit. But at the same time, the long term risk prospects haven't changed. When you look at what's going to happen over the next decade, we're looking at doubling in the industry, we're still positioned extremely well between the on shoring and North American focus and the leading edge nodes.

Speaker 2

Our businesses overall are performing very well and we're still excited about the future. Our customers are working with us to make sure that we're ready for the recovery. The Concern recently has switched. We're ready when things change. And so making sure that even though we've adjusted cost here or there that we're positioned to grow Quickly as this thing rebounds.

Speaker 2

And so that's where spending a lot of time with customers now is how quickly can you ramp up.

Speaker 4

Okay. Very helpful. And then just on Sealing, maybe just update us Kind of this margin resiliency, even as you get maybe some seasonal step down in 4Q? And then just expand on General Industrial, is that Destocking or is that real demand weakness? And I guess last and sealing, how long do you think this Food Pharma destock takes?

Speaker 2

I'll take that first. The food and pharma stock destocking, we think will continue into 'twenty four, but we don't have much more visibility than that. If you look at our margins, I expect them to hold pretty tight. There's a few things happening. So when you look It's FTR, which I always forget as a leading indicator of freight ton miles.

Speaker 2

Ton miles are relatively flat according to latest projection. I think it's down A couple less than a few tenths of a point this year and up a few tenths of a point next year or something like that, but plus or minus 1, so I'll call that flat. And so when you look at that, our aftermarket business should perform very well at STEMCO and it is. Our OEM business, when you look at that Trucking or trailer builds is projected to be down double digits, but it also improves our mix and our margin profile. Lastly, we'll get some price increases we always do.

Speaker 2

We'll have some January 1 price increases that will be strategic and Let's say surgical. And then in addition to that, the supply chain is really in balance now from my point of view in sealing and we're starting to see more cost downs in the supply chain. So our prices in some commodities have dropped and so we're picking up some margin there as well. We don't intend to give most of that price back. So overall, I expect our margins to remain robust and ceiling.

Speaker 4

Okay. Thanks, guys.

Operator

Thank you. Our next questions come from the line of Steve Farizzani with

Speaker 5

Wanted to ask a little bit about AST margins, which now are declining some more and you noted that And are there any meaningful cost cuts you can make knowing that the outlook is the timing of the recovery now is uncertain, so maybe comes back faster?

Speaker 3

Well, Steve, we have a comment as what you saw in the Q3 when you look at AST margins, When you lose the kind of year over year volume drop that we had, most of that is just deleveraging. And We took some additional actions, but it's I'll use the word surgical because We want to be prepared for the uptick when it comes. And as Eric said, the conversations with customers have really Moved from uncertainty to we need to be prepared. Even though still in a certain environment. We need to be prepared for the uptick.

Speaker 3

And so those conversations are very constructive. So it's now really what we need in the business is volume. And also, we've had some Unfavorable mix, as we've talked about throughout the year, as a result of some of the more Severe drops in volume we've had have been in areas where we've had very strong profitable Margins for certain product lines. And some of that is tied to the big drop in memory, as we've mentioned before. So that will change, That will rebound and the volume will come back and we will leverage on the upside As much as we delever on the downside and our focus is really, we're doing what we need to In this environment, but our focus is really on the excitement about the long term.

Speaker 3

And we continue to feel and the long term is not 5 years out. The long term is we expect to see some uptick in 2024 based on Just uncertain of when we're going to see the start of that.

Speaker 2

Some customers have started to talk about memory showing a little bit of life as well recently. That would be exciting if that actually happens.

Speaker 5

And then flipping, you addressed this a little bit on the ceiling margins where you would also have expected to see some deleveraging, because I'm assuming but I'm assuming it's getting more than offset by price. Is that a fair way to look at this, Your volume is down year over year more than offset by price given you that little bit of revenue uptick?

Speaker 2

Our volume is off, but our backlogs have returned to more, what I'll call, traditional levels, still robust for us. And so we're able to have still able to have operational efficiencies. And we have I do think it's fair to say we've captured more price. But overall, our volume is still pretty strong in sealing historically.

Speaker 5

Okay. And then you think about, obviously, you're starting to see that weakness in In heavy truck, commercial truck OEM, but that would typically be lower margin, right? So based on trends, Your mix should be better entering 2024 and you get more pricing, right? So even if volume doesn't come back substantially in other areas, You still get some margin as long as volumes holds up, Brent?

Speaker 2

Yes, that's absolutely correct. And we could see it in this quarter's results as well.

Speaker 3

And Steve, you know this, but I'll just remind you, as you know, our commercial vehicle business is Much more heavily weighted toward aftermarket than it is on OEM.

Speaker 5

And if we get one

Speaker 1

Just another thought on the volume declines. As we exited the supply chain situation as a result of COVID, it seems like The industrial distributors are removing kind of that crust of safety stock and That's just the normal course. So as you look forward, there are definitely some opportunities for growth For mix and growth in the future.

Speaker 5

Great. And just get one last one in on obviously a very strong cash Good strong receivables collection. Meaningful debt reduction this year, do you what are you thinking about the cash is growing, Your net debt is way down. How are you thinking about capital allocation at this point? Any shift in priorities?

Speaker 3

No shift currently. We continue to have a focus first on investing in our business for growth, whether it's Organic investments such as the investment we're making in the new facility in Arizona or selective Acquisitions that meet our strategic and financial criteria, we continue to look at a lot of opportunities We're very, I'll use the word picky. We're not interested in making acquisitions just for the sake of growth and acquisitions, but

Speaker 4

We do

Speaker 3

continually look at opportunities. And our pipeline is actually quite good. We're trying to find the right fit for us. And I think as we've mentioned last quarter, we're spending more time And the Sealing segment and looking at opportunities that fit with us there and can advance our strategy going forward Than we are with AST where we have a strong organic path ahead.

Speaker 5

Thanks, Mills. Thanks,

Operator

James. Thank you. Our next questions come from the line of Ian Zaffino with Oppenheimer. Please proceed with your question.

Speaker 6

Hi, great. Just a couple of clarification questions. On the destocking, I know you mentioned food and pharma. Is there any Other anticipated destocking that you might see across like any of your other ceilings industries or end markets that we should expect?

Speaker 2

In ceiling, no, the only issue the only I think right now we're back to seasonal demand and normal cycles. I do think one thing is different. Since COVID, we had elevated backlogs due to supply chain constraints. And I do think the supply chain is in balance. And so I think that is that part is cleared up.

Speaker 2

And so and when James talked earlier about taking out extra safety stock, I think Distributors have returned to more normal inventory levels instead of increased safety stock. So overall, I think things are in balance. But don't see any more destocking other than food and pharma.

Speaker 6

Okay. And then can you maybe give us an idea of what the Pricing actions were versus volume actions?

Speaker 3

When you look at the Sealing you're referring specifically to the Sealing segment, Ian?

Speaker 6

Exactly, yes.

Speaker 3

Yes. It's mostly if you look at the organic growth, it's going to be more heavily weighted toward Pricing on a year over year basis, then volume growth, just kind of where we are in the cycle. And then some of the seasonal Our typical seasonal patterns that Eric referred to, we had volume growth in certain markets like nuclear and aerospace and space. And then we had some volume declines in general industrial because of slow Europe and China. So it's a the patterns were different depending on the market.

Speaker 3

So there are certainly pockets of growth. But overall, when you look at the year over year growth for the segment, it was more heavily weighted toward price.

Speaker 6

Okay. And then just a final one on the mix at AST, I know you mentioned memory weakness. Can you maybe

Speaker 3

Yes, in AST, I'll take the last question first. In AST, We've said in the past, and this is rough because it changes quarter to quarter, year to year A little bit, but we're roughly a third of our semiconductor business is driven by recurring revenues And recurring meaning products, solutions that are driven by the production of chips Where chamber components need to be refurbished or cleaned or recoded. And so that's what we mean by recurring. And then roughly remaining 2 thirds is driven more by new equipment. It's being So to the foundries and the ADMs to support growth.

Speaker 3

And so Yes, on the recurring part of our business, given where we're positioned, a lot of that we are in advanced nodes. And so that part of our business is We're seeing some year over year growth there. The weakness has been more on the equipment side of the business, Given the inventory situation that we alluded to earlier.

Speaker 4

And you

Speaker 2

captured it nicely.

Speaker 6

Okay. Thank you very much.

Operator

Thank you. Our next questions come from the line Jeff Hammond with KeyBanc Capital Markets, please proceed with your questions.

Speaker 4

Hey, guys. Just a couple of follow ups. One, you guys have You mentioned in the past wins, but I think you're right to kind of give an update there. But just within AST kind of qualitatively, What are you seeing from kind of new customers, breadth of current customers as you kind of roll out kind of this Combination in ExEdge Leantech and just some of the opportunities as you think about Chips Act and the recovery?

Speaker 2

I spoke a few quarters about our and probably got myself a little bit of trouble about our pipeline. I'll say, I won't quantify it, but I will say this, our pipeline continues to grow. It continues to be exciting and it continues to be more and more vertically integrated. So when you look at the new opportunities coming in, our customers are recognizing the value of what our vertical integration play can be And they're excited about those opportunities. So our pipeline is very heavily weighted to vertical integration opportunities.

Speaker 2

I don't want to quantify it, but it's Substantial and it increases there monthly. So the number and size of our opportunities continues to grow and our pipeline continues to grow And we are holding our win rate.

Speaker 4

Okay. And then just any update on, you know, Milt, we love Having you around, but any update on kind of the CFO search?

Speaker 3

I'll defer to Eric on that question.

Speaker 2

We remain And very selective much like our acquisition strategy. We're looking for we're being very disciplined in the search to find somebody that's going to Perform equally as well as Milton be as valuable as Milton is for the company. So we're excited about it and we continue to be in the process, but there isn't any immediate update.

Speaker 4

Okay. Thanks so much, guys.

Operator

Thank you. We have reached the end of our question and answer session. I would now like to turn Thank you. This does conclude today's teleconference. We appreciate your participation.

Operator

You may disconnect your lines at this time. Enjoy the rest of your day.

Powered by Quartr
Earnings Conference Call
Enpro Q3 2023
00:00 / 00:00