EnPro Industries, Inc. (NYSE:NPO) Q3 2023 Earnings Call Transcript

EnPro Industries, Inc. (NYSE:NPO) Q3 2023 Earnings Call Transcript October 31, 2023

EnPro Industries, Inc. beats earnings expectations. Reported EPS is $1.8, expectations were $1.57.

Operator: Greetings. Welcome to the EnPro Third Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. At this time, I would like to hand the call over to James Gentile, Vice President, Investor Relations. Thank you. You may begin.

James Gentile: Thanks, Daryl, and good morning, everyone. Welcome to EnPro’s third 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 historical non-GAAP measures to the comparable GAAP measures are included in the appendix to the presentation materials. Also, a friendly reminder that we’ll 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, 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 Officer. Eric?

Eric Vaillancourt: 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 third quarter, but we saw a year-over-year sequential weakness in AST, resulting from the continued slowdown in the semiconductor industry. Despite these macro headwinds, our company delivered adjusted EBITDA margins of 23% for the third 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.

We are carefully controlling costs while working proactively with customers to mitigate volatility. As we do so, we will continue to invest in multiple growth and productivity opportunities that were built 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 third quarter sales well below the prior year. While we observed pockets of growth in AST during the quarter, build plan shifted to the right as customers intensified their efforts to destock inventories. Also, mix was unfavorable, especially compared to last year’s third quarter, when we saw very strong results in this segment.

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Q&A Session

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 for growth as these markets recover. 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. With enhanced complexity, process yield efficiencies, contamination control and life cycle 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 growth as expected. 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 customer relationship, positions EnPro for sustainable, long-term profitable growth. Now I’ll hand the call over to Milt to discuss our financial results in more detail.

Milton Childress: Thanks, Eric. Reported sales of $250.7 million in the third 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 $57.7 million decreased around 19% over the prior year period while adjusted EBITDA margins in the third quarter were a still healthy 23%. Corporate expenses of $9.4 million increased slightly from $9.1 million in the third quarter of last year. Increased professional fees and personnel-related costs were largely offset by a reduction in incentive compensation expenses. 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 $161.4 million 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. For the third quarter, adjusted segment EBITDA of $48 million increased 20.9%. Adjusted segment EBITDA margin expanded 460 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% and 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. Turning now to Advanced Surface Technologies. Third quarter sales of $89.4 million 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 million, driven by the decline in volume and unfavorable mix. Third quarter results were also impacted to a lesser degree by investments to support growth, including the build-out of our facility in Arizona to expand our domestic advanced cleaning and coating capabilities.

A brief update on our participation in the U.S. semiconductor expansion. We continue to upfit on a stage basis, the building that we purchased in Arizona. As we — as mentioned previously, we are seeking CHIPS Act support 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. For the third quarter, 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.