EnPro Industries, Inc. (NYSE:NPO) Q4 2023 Earnings Call Transcript

EnPro Industries, Inc. (NYSE:NPO) Q4 2023 Earnings Call Transcript February 20, 2024

EnPro Industries, Inc. misses on earnings expectations. Reported EPS is $1.19 EPS, expectations were $1.47. NPO isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings. Welcome to the Enpro Q4 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]. 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.

James Gentile: Thanks, Darrell, and good morning, everyone. Welcome to Enpro’s fourth quarter and full year 2023 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 Vaillancourt, our President and Chief Executive Officer; Milt Childress, Executive Vice President and Chief Financial Officer; and Joe Bruderek, Executive Vice President, Finance. 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, including our most recent Form 10-K. 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 Vaillancourt, our President and Chief Executive Officer. Eric?

Eric Vaillancourt: Thanks, James, and good morning, everyone. Thank you for joining us today as we review our results for the fourth quarter and full year 2023 and provide a business update that includes our outlook for 2024. Before we get started, I’d like to introduce Joe Bruderek, who recently joined our team as Executive Vice President, Finance. Joe will be succeeding Milt Childress as Chief Financial Officer on April 1. Milt will be staying through the end of May to ensure a smooth transition of finance leadership. We are delighted to have Joe join our team, following his almost 25 years of senior financial and operational experience. This is an exciting time in our company’s history, and I’m glad to have Joe’s partnership as we look to capitalize on the opportunities ahead.

Please join us in welcoming Joe to Enpro. We are pleased with Enpro’s strong performance and execution in 2023. Sealing Technologies delivered strong performance, largely offsetting the negative year-over-year impact from a soft semiconductor market in AST. In Sealing Technologies, we saw record segment profitability with adjusted segment EBITDA margins exceeding 29% for the year, despite a sequential decline in the fourth quarter that we anticipated and communicated on our third quarter call. We are very pleased with the underlying strength of this segment, how our team is positioning the business for future growth while maintaining our disciplined focus on profitability and continuous improvement. AST revenue ended the year down roughly 16%, driven by weakness in the global semiconductor industry.

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Q&A Session

Despite the drop in volume, adjusted EBITDA margins for this segment was approximately 24% for the year clearly demonstrating the segment’s value-added capabilities and resilience. Our multiyear strategy to drive growth in this attractive market remains unchanged. We reported 238 million in adjusted EBITDA for 2023, which is inclusive of 7.1 million in share price-driven long-term incentive compensation expense. Given the downturn experienced in the semiconductor market throughout the year, we are pleased with the total Enpro margins at 22.5%. We made meaningful progress on several long-term strategic initiatives this year, including the recently completed acquisition of Advanced Micro Instruments, or AMI, which broadens our Sealing Technologies segment capabilities into compositional analysis.

We expect to leverage AMI’s differentiated gas analyzer technologies across multiple industry segments, the unique insight we will gain into our customers’ processes will expand our competitive advantage in designing seals in a variety of critical solutions. We are excited to welcome our new colleagues, AMI colleagues to Enpro. In AST, during the year, we continue to execute on our multi-faceted strategy of technological differentiation, vertical integration and regional expansion making significant progress on the phased build-out of our Arizona facility and expanding our capabilities in Asia. We are executing this expansion and strategic positioning in collaboration with key market-leading customers. In 2024, we anticipate additional investments in our semiconductor business to support what’s widely expected to be a near doubling of the semiconductor market by around end of this decade.

I’d like to take a moment to comment on our safety accomplishments. We strive to create an injury-free workplace as we deliver critical products and solutions to our customers. Safety, which includes both physical and psychological safety, is our number one core value. And for 2023, we are celebrating a 59% reduction in our total recordable incident rate as well as a 47% reduction in our lost time case rate. These outstanding results built upon our already world-class safety record and are well below the latest industry averages presented by the Bureau of Labor Statistics. I want to recognize our environmental, health and safety leadership team and our colleagues across the company for these terrific results. Before turning the call over to Milt to discuss our fourth quarter results and 2024 guidance, I want to reiterate what I’ve said on many occasions.

There is no better time to be part of Enpro, with our reshape portfolio generating excellent margins and cash flow, with a strong balance sheet, we are well positioned to drive continued growth through focused execution as together we empower technology with purpose. Milt?

Milt Childress: Thanks, Eric, and good morning, everyone. In the fourth quarter, sales of $249.1 million decreased 8.4% and organic sales declined 9% driven primarily by lower results in the AST segment due to ongoing softness in semiconductor. The decrease also reflects lower results in the Sealing Technologies segment, where we saw a sharp decline in the commercial vehicle OEM market and lower demand in general industrial, commercial aerospace and pharma markets. As a reminder, we posted very strong results in Sealing in the fourth quarter of last year. Fourth quarter adjusted EBITDA of $46.9 million decreased roughly 12% compared to the prior year period, and adjusted EBITDA margin of 18.8% decreased 80 basis points year-over-year.

Volume declines just noted were partially offset by strategic pricing, cost mitigation and continuous improvement initiatives. Results for the quarter were also adversely affected by $6.4 million of incremental long-term incentive compensation expense tied to our strong share price performance during the fourth quarter. By comparison, in the fourth quarter of 2022, share price-driven long-term incentive compensation expense was $4.8 million. We do not contemplate compensation expenses related to share price changes when determining guidance. As such, the incremental long-term compensation expense of $6.4 million during the fourth quarter of 2023 was not considered when providing prior 2023 guidance commentary. Modifications made to the long-term incentive compensation program during 2023 will lessen this impact in 2024 and eliminate the impact in years thereafter.

Corporate expenses of $14.4 million in the fourth quarter of 2023 were down from $15.6 million a year ago, primarily due to lower total compensation expense. Adjusted diluted earnings per share of $1.19, decreased 8.5% compared to the prior year period, largely because of the decline in adjusted EBITDA and partially offset by a 35% reduction in net interest expense driven by debt repayment during the year and higher interest income on cash balances. The previously noted $6.4 million share price-driven incentive compensation expense in Q4 equates to around $0.23 per share. Moving to a discussion of segment performance, Sealing Technologies sales of $147 million decreased 6.3%. During the quarter, we saw a sharp decline in commercial vehicle OEM sales, as well as softness in our general industrial, aerospace, pharma and commercial vehicle aftermarket demand.

Softness in these markets was partially offset by strategic pricing actions and continued strength in nuclear energy. Excluding the impact of foreign currency translation and our divested business, sales decreased 7.5% in the quarter. For the fourth quarter, adjusted segment EBITDA decreased 6.3%, in-line with the sales decline, resulting in adjusted segment EBITDA margin being flat with last year. Excluding the impact of foreign exchange and divestitures, adjusted segment EBITDA decreased 7.9%. Sealing’s margin performance through a sales decline reflects the benefits of strategic pricing actions, cost mitigation efforts and on-going 80:20 pruning across the segment. As Eric noted earlier, we are pleased with the progress made over the past few years in rationalizing the Sealing Technologies segment, and we will continue to invest and targeted growth opportunities, while maintaining cost discipline and continuous improvement.

Turning to Advanced Surface Technologies, while we saw a sequential improvement from the third quarter, fourth quarter sales of $102.1 million decreased 11.5% over the prior year, driven by continued weakness in semiconductor capital equipment spending. Our Cleaning Solutions business tied to advanced node chip production was a bright spot in the quarter and throughout the year. We also saw stabilization in the optical filter business with improved profitability during the quarter. For the fourth quarter, adjusted segment EBITDA decreased approximately 21% versus the prior year period. Adjusted EBITDA margin of 22.4% improved sequentially and as Eric mentioned earlier, finished the year close to 24%. The volume decline in addition to mix, material cost increases and increased operating expenses supporting growth investments were the primary drivers of the year-over-year reduction in profitability, offset in part by cost mitigation efforts and pricing actions.