EnPro Industries, Inc. (NYSE:NPO) Q1 2023 Earnings Call Transcript May 2, 2023

EnPro Industries, Inc. beats earnings expectations. Reported EPS is $1.95, expectations were $1.49.

Operator: Greetings and welcome to the EnPro First 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. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to James Gentile, Vice President of Investor Relations. Thank you. You may begin.

James Gentile: Thanks, Darrell, and good morning everyone. Welcome to EnPro’s first quarter 2023 earnings conference call. I will remind you that our call is being webcast at enproindustries.com, where you can find the presentation that accompanies this call. With me today is Eric Vaillancourt, 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. Tables reconciling the historic 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-K. Also note that 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 number of shares outstanding, impacts from future acquisitions, dispositions and related transaction costs, restructuring costs, incremental impacts of inflation, subsequent to the end of the first quarter, the impact of the foreign exchange rate changes subsequent to the end of the first quarter and interest rate increases differing from the assumptions outlined in guidance. 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 Officer. Eric?

Eric Vaillancourt: Thanks, James, and good morning everyone. I’m pleased to update all of you on another outstanding quarter at EnPro. Before we begin. I would like to share that Milt Childress has announced his plans to retire in the first half of 2024. While Milt is not going away anywhere just yet, I would like to take a moment to recognize his many contributions to EnPro for the past two decades. Milt has been a great partner to all of us and we know that his significant impact on our organization will live on well into the future. We are moving forward with the process of identifying the right leader to succeed Milt, and we are pleased that he will remain with us to ensure a smooth transition once his successor is named.

Now, I will turn to the first quarter results. We delivered outstanding financial results this quarter, driven by a record performance in Sealing Technologies segment and our Advanced Surface Technologies segment successfully managing the current slowdown in semiconductor equipment markets. We are proud of all of our team members across the enterprise who together have helped us to get off to such a strong start for the year. In the first quarter, sales increased almost 5% year-over-year with organic sales increasing more than 6%. We saw strong demand in several of our Sealing Technologies markets, which more than offset headwinds in certain areas of our semiconductor business. Our performance this quarter highlights the benefits of our balanced portfolio of high margin businesses with technological advantages serving critical applications that touch our lives every day.

We achieved record results in Sealing Technologies during the quarter evidenced by the significant year-over-year increase in adjusted EBITDA. In AST, we are actively engaged with our customers to capitalize on growth opportunities when semiconductor markets recover. We are proud of the agile culture we have built grounded on a focus on innovation and continuous improvement, which combined with our technological and applied engineering advantages, positions EnPro to outperform regardless of the macroeconomic environment. We had a terrific quarter. And now I’ll hand the call over to Milt to discuss our financial results in more detail. Milt?

Milt Childress: Thanks, Eric, and I appreciate the kind words in your introductory comments. EnPro has been my home for nearly two decades and I am incredibly proud of all of our team and what our team has accomplished over that time. I’ve never even though — there’s news now of my retirement, I’ve never been more enthused about our company, never, in my 20-year — nearly 20 years of being here and remain focused — and I’ll remain focused in the year ahead on continuing to build upon our strong momentum and to ensuring a seamless CFO transition prior to my retirement next year. Now to our financial results. As Eric noted, we had another strong quarter of execution and results. Reported sales of $282.6 million in the first quarter increased 4.6% year-over-year and organic sales were up 6.3%.

Strong demand across aerospace, nuclear, general industrial and commercial vehicle markets in addition to pricing actions in response to inflationary pressures more than offset a reduction in sales due to the current slowdown in the semiconductor market. Adjusted EBITDA of $68.6 million, increased 16.3% over the prior year period, driven primarily by operating leverage on volume growth in Sealing Technologies and pricing initiatives in response to labor and material cost inflation, as well as cost controls keeping SG&A expenses in check. Adjusted EBITDA margin of 24.3% expanded more than 240 basis points compared to the first quarter of 2022. Corporate expenses of $10.7 million in the first quarter of 2023 decreased from $12.9 million a year ago, driven primarily by decreased incentive compensation accruals and reduced restructuring and professional expenses.

Adjusted diluted earnings per share of $1.95, increased 25% compared to the prior year period. Strong operating results drove the increase in addition to the decrease in our normalized tax rate to 25% from 27% in 2022. Net interest expense was up only modestly despite higher rates and the majority of a portion of the net investment hedges in September 2022. Lower debt balances and the good work by our treasury team to deploy cash and short-term investments to save higher-yielding instruments, partially mitigated the increase. Moving to a discussion of segment performance. Sealing Technologies’ sales of $173.3 million increased 12.8%, driven by strong demand in several key end markets as discussed earlier. Excluding the impact of the business divested in the fourth quarter of 2022 and foreign exchange translation, sales increased 15.1%.

For the first quarter, adjusted segment EBITDA of $49.7 million increased almost 45% and adjusted segment EBITDA margin expanded 640 basis points to 28.7%. Strong volume growth and favorable mix, particularly in our aerospace and nuclear businesses, operational improvements in our commercial vehicle business and effective pricing strategies in response to inflationary pressures drove record performance in the Sealing Technologies segment. Excluding the impact of the divestiture and foreign exchange translation, adjusted segment EBITDA increased more than 48% compared to the prior year period. Turning now to Advanced Surface Technologies. First quarter sales of $109.4 million decreased 6.3%, driven by the current slowdown in semiconductor capital equipment spending.

Excluding the impact of foreign exchange translation, sales decreased by 5.3% versus the prior year period. For the first quarter, adjusted segment EBITDA decreased 15.5% to $29.5 million, driven primarily by the decline in volume, unfavorable mix and higher material and labor costs. Excluding the impact of foreign exchange translation, adjusted segment EBITDA decreased 13.5%. For the first quarter, adjusted segment EBITDA margin was 27%. We have taken measured actions to reduce operating costs in response to the slowdown in demand without sacrificing our ability to capitalize on the numerous opportunities for growth, driven by our positioning in the semiconductor industry and the differentiated products and solutions we offer our customers.

Turning to the balance sheet and cash flow. We ended the quarter with a net leverage ratio of 1.6 times. With cash and short-term investments of more than $370 million and nearly full availability under our $400 million revolving credit facility, we have ample financial flexibility to execute on our long-term strategic growth initiatives. Free cash flow for the first three months of 2023 was $21 million, down from $24 million in the prior year. Year-over-year decrease in free cash flow was driven by higher net interest payments and higher capital spending and working capital investments to support growth, which offset the increase in operating profit. During the quarter, we paid a $0.29 per share quarterly dividend. For the first three months of the year, dividend payments totaled $6.2 million, a 5.1% increase versus the prior year.

Moving now to our 2023 guidance. We maintain the annual guidance issued in February and continue to expect revenue growth of flat to low single-digits, adjusted EBITDA of $248 million to $260 million and adjusted diluted earnings per share from continuing operations of $6.45 to $7.05. Compared to a quarter ago when we first initiated guidance for the year, we expect stronger full year results in Sealing Technologies, offset by lower results in Advanced Surface Technologies. In Sealing Technologies, our guidance reflects expectations for continued strong results in the second quarter and the assumption of some macroeconomic softness in the second half. In Advanced Surface Technologies, our guidance reflects a softer second quarter relative to the first quarter and based on customer input, stabilization in semiconductor demand by the fourth quarter with resumption of growth in 2024.

Thanks for your time today. And now I’ll turn the call back to Eric for some closing comments.

Eric Vaillancourt: Thank you, Milt. Our teams continue to execute at a high level and demonstrated agility to drive our strategic priorities forward and deliver for our customers. In the quarter results from the Sealing Technologies were exceptional and the power of the segments advantages are on clear display. In Sealing, we will continue to invest in new product development and continuous operating improvements, while prudently considering acquisitions that will enhance our strong competitive positions overtime. In AST, we are executing very well through a short-term demand slowdown in semiconductor. Over a multiyear period, we continue to expect strong organic growth and are well positioned to capitalize on a variety of exciting opportunities using our technological advantages to deliver comprehensive solutions for our customers.

Our results demonstrate both our ability to outperform across economic and industry cycles and the resilience of our portfolio of businesses. With our well-capitalized balance sheet and strong free-cash flow generation, we will continue to invest in growth opportunities to build upon our strong foundation. As I share every quarter, I am proud of our team and our many accomplishments as we continue to do what we said we would do, execute on our multi-year strategy to drive EnPro forward as a leading industrial technology company while empowering technology with purpose. Thank you for joining us today. We appreciate your interest in EnPro. Now, I’ll open the line to questions.

Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Jeff Hammond with KeyBanc. Please proceed with your questions.

Operator: Thank you. Our next question comes from the line of Steve Ferazani with Sidoti and Company. Please proceed with your questions.

Operator: Thank you. Our next question comes from the line of Ian Zaffino with Oppenheimer. Please proceed with your questions.

Operator: Thank you. [Operator Instructions] Our next question comes from the line of Jeff Hammond with KeyBanc. Please proceed with your questions.

Operator: Thank you. There are no further questions at this time. I would now like to hand the call back over to James Gentile for any closing remarks.

James Gentile: Thank you for your interest in EnPro and have a great day.

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