Q1 2021 EnPro Industries Inc Earnings Call
Hello, and welcome to the MRO Industries Q1, 2021 earnings conference call and webcast. At this time all participants are in a listen only mode. If anyone should require operator assistance. Please press star zero on your telephone keypad.
And answer session will follow the formal presentation.
As a reminder, this conference is being recorded.
My pleasure to turn the call over to Milt Childress Executive Vice President and Chief Financial Officer Bill. Please go ahead.
Good morning, and welcome to <unk> quarterly earnings Conference call.
I'll remind you that our call is also being webcast at <unk> industries Dot Com, where you can find the presentation that accompanies the call.
With me today is Marvin Riley our CEO.
Before we begin our discussion a friendly reminder, that we will be making statements on this call that are not historical facts and are considered forward looking in nature. These statements involve a number of risks and uncertainties, including impacts from the COVID-19, pandemic and related governmental responses and their impact on the general economy as.
Well as other risks and uncertainties that are described in our filings with the SEC, including our most recent form 10-K, we.
We do not undertake to update any of these forward looking statements.
Also during the call we will reference a number of non-GAAP financial measures tables reconciling these measures to the comparable GAAP measures are included in the appendix to the presentation materials.
Also note that during this call we will be providing full year guidance, which excludes changes in the number of shares outstanding impacts from future acquisitions dispositions and related transaction costs restructuring costs incremental impacts of tariffs and trade tensions on market demand and costs subsequent to the end of the first quarter the impact of foreign exchange.
Rate changes subsequent to the end of the first quarter impacts from further spread of COVID-19, 19, and environmental and litigation charges.
I also want to remind you that as a result of the sale of Fairbanks Morse in January 2020, the former power systems segment is accounted for as discontinued operations in our financial statements for the prior year period, unless otherwise noted all our comments today will refer to continuing operations.
As previously announced <unk> will host a virtual investor day on Thursday may 27th members of impose the executive management team, including Marvin in May we will provide an overview and update of the company's long term vision growth strategy, There's a segment as well as operational and financial objectives.
Registration information for this virtual debt is available on the company's Investor Relations website.
And now I'll turn the call over to Marvin.
Thanks, Mel and good morning, everyone I really appreciate you joining us today and hope you and your families are safe and healthy.
As we begin to turn the corner on the pandemic in the United States due to the vaccine rollout. We're mindful that everyone is not yet vaccinated and the recovery is uneven throughout the rest of the world.
There are still many places in the world like India, where the virus is spreading rapidly. So we must remain vigilant regarding maintaining safety protocols operating processes and new ways of working that protects our employees and fellow citizens.
I'm extremely proud of our team members, who continue to exemplify and for the values of safety excellence and respect for all people, while delivering quality products and services to our customers.
Now moving onto our first quarter highlights.
Overall, we experienced a faster than expected recovery in most of our end markets. We delivered extraordinary results driven by improved demand the benefits of increased exposure to higher margin and faster growth businesses, which resulted from portfolio actions taken last year and cost savings initiatives driven by.
Our capability center.
Despite several countries returning to lock down February is it severe weather in the southwestern U S and challenges with global logistics and Ocean transport.
We were still able to fortify our key materials, while holding supply chain disruption to a minimum.
In our response to COVID-19, we enhance the collaboration between supply chain manufacturing and our commercial team.
This enhanced collaboration really helped us to respond quickly with price increases to offset higher material costs and increased customer engagement, where necessary. We have fundamentally transformed the way we work and the benefits are showing up in our results.
Our order trends are extremely strong.
As a point of reference March 2021 was the highest order intake months in the past three years, we continue to be encouraged by what we're seeing and hearing from our customers, particularly in the semiconductor food and pharma petrochemical automotive and heavy duty truck markets.
In the first quarter sales were down modestly on a year over year basis. As a result of the 2020 divestitures. Despite the divestitures orders were up over 10% on an organic basis, our sales were up five 5%.
Our first quarter adjusted EBITDA of $52 million increased 28% year over year, and adjusted EBITDA margin expanded 420 basis points to 18, 6%.
This strong performance was the result of actions taken to reshape our portfolio improving end market trends and cost mitigation initiatives.
All three business segments contributed to our adjusted EBITDA growth.
A key contributor to our success is our clear and consistent strategy. We're focused on four areas first focusing on niche high margin materials science related businesses with strong cash flow.
Second investing in faster growth markets, including technology, while maintaining a strong aftermarket exposure.
Third leveraging the end broke capability center to increase margins and cash flow return on investment and for maximizing long term shareholder returns for our commitment to sustainability and disciplined capital allocation.
While there were no transactions announced this quarter the portfolio optimization work continues and the corporate development team is hard at work setting a robust pipeline of opportunities that fit our portfolio strategy. As you know we executed a number of successful portfolio shaping actions over the last year and a half that have moved.
Us into a higher growth and less cyclical business model.
In February in connection with the portfolio reshaping actions, we announced our research mentation into three reporting segments sealing technologies advanced surface technologies and engineered materials.
The re segmentation better aligns our technical and operational expertise enables improvements in measuring and managing performance facilitate improved decision, making and enhances transparency for investors.
All three segments performed exceptionally well this quarter I would like to take a moment to highlight our new segment advanced surface technologies, given the level of our recent investments there.
The advanced surface technology segment, which includes our lucks are lean tech and the tech net extended conductor businesses posted 49% revenue growth.
137% adjusted EBITDA growth and adjusted EBITDA margin expansion of over 1000 basis points to 31, 6%.
These results were.
We're driven by a full quarter's contribution of a luxor accelerating revenue growth at lean Tech and solid performance of Tech net ex semiconductor the very very strong quarter.
Our cleaning coatings and refurbishment businesses, consisting of lean tech and the tech net ex semiconductor business have grown significantly year over year based on increasing demand for sub 10 nanometer semiconductor wafers.
We remain very optimistic about the lean tech business and despite the impact of COVID-19.
Its sales and earnings remain on track with our expectations at the time of the transaction.
We continue to add capacity in this business to meet increased demand the build out of the new lean Tech facility in Taiwan for expansion of five and three nanometer applications is expected to be qualified by the third quarter of the year. It will support continued growth.
We are also making great progress with customer acquisitions and qualifications at the U S site in Milpitas, California.
<unk> had a great start to the year with year over year sales growth across all of its markets during the first quarter.
We anticipate continued strong demand for the remainder of the year. Our integration process is going very smoothly by leveraging our collective thin film technology, IP and the and broke capability center, while being careful not to disrupt a luxe is day to day business.
We've made significant progress over the last two years, improving our financial results reshaping our portfolio and positioning the company for long term profitable growth.
With the successful acquisitions of lean Tech and.
The aseptic group and more recently the acquisition of a Luxor.
We have an excellent foundation to drive organic growth.
We continue to maintain a disciplined approach to capital allocation and relentless focus on cash generation, we have a healthy balance sheet and an untapped revolver. Therefore, we are well positioned with the financial flexibility to make strategic investments in our existing businesses as well.
Execute additional acquisitions that meet our M&A criteria.
Before handing the call over to milk for a more detailed overview of our financial results I will share some additional color on N froze sustainability initiatives, we will be releasing our 2021 sustainability report in a few weeks and I'm excited to give you a preview of the key highlights today.
In the area of employee development and safety, we've created an environment, where all employees can flourish in a culture, where financial performance and human development are equal and inextricably linked we strive to promote a safe environment, both physically and mentally.
We're the only public company recognized by EHS today as America's Safest company three separate times and 2020 was the safest year in the history of our company as measured by medical treatment case rates.
In the area of diversity and inclusion we are deliberately diverse which underscores our belief that a diverse workforce is critical to our success there.
The percentage of female promotions in the U S has increased 10% since January 2019 female and minority representation among senior leadership has increased 7% to 37%.
Since January 2020, with the goal of achieving 40% by 2025.
In the area of supporting our communities, we announced in December our 1 million dollar funding of the and profound Asian focused on advancing Education, Inc.
Equality diversity and the preservation of human dignity.
Regarding environmental responsibility and sustainability, we are committed to diligently exploring all opportunities to reduce our energy usage and to minimizing greenhouse gas emissions wherever feasible.
We've also gone so far as divesting certain carbon intensive lines of business, such as Fairbanks, Morse and selectively disengaging with market sectors that are highly carbon intensive.
Currently approximately 7% of our revenue comes from the oil and gas industry and we anticipate this percentage to decrease over time as our strategic transformation continues many of our products such as gaskets and seals protect the environment by helping to contain and prevent the release of harmful substances.
And then pro we're truly committed to sustainability as it is embedded throughout our entire global organization.
We're confident that our sustainability initiatives will be a key contributor to our continued success as a company.
Now I will hand, the call over to milk for a deeper dive into our financial results for the quarter milk.
Thanks Marvin.
As Marvin mentioned, we had a really strong quarter.
Positive momentum in the semiconductor food and pharma petrochemical automotive and heavy duty truck markets as well as the contribution from the acquisition for Luxor.
Mostly offset the reduction in sales due to last year's divestitures.
As reported sales of $279 million for the first quarter decreased one 2% year over year.
Excluding the impact of foreign exchange translation and sales from acquired and divested businesses.
Organic sales for the quarter grew five five per cent compared to the first quarter of 2020.
Sequentially, excluding portfolio reshaping activities sales were up seven 1%.
Gross profit margin of 39, 2% increased 550 basis points versus the prior year period the.
The increase was driven by the benefit of divesting low margin businesses. The addition of Alexa.
Sales growth at lean tech as well as initiatives supported by the improved capability center, including supply chain and other companywide cost reduction programs.
The year over year improvement in gross profit margin was achieved despite a $2 4 million dollar amortization of acquisition related inventory write up in the first quarter of 2021.
Adjusted EBITDA of $52 million increased 28, 1% over the prior year period as a result of organic sales growth strategic acquisitions and cost reductions taken across the company.
Adjusted EBITDA margin of 18, 6% increased approximately 420 basis points compared to the first quarter of 2020.
Yeah.
Corporate expenses of $11 $6 million in the first quarter of 2021 increased by $3 $2 million from last year.
The increase was driven primarily by higher incentive compensation accruals.
Adjusted diluted earnings per share of $1 37 increased 43 per cent compared to the prior year period.
As noted in our announcement in the fourth quarter 2020 results, we changed our adjusted EPS from the previous presentation of this non-GAAP measure to one that excludes after tax acquisition related intangible amortization.
Amortization of acquisition related intangible assets in the first quarter was $11.3 million compared to $9 million in the prior year period.
We anticipate amortization of acquisition related intangibles will be between $44 million and $46 million in 2021.
As a reminder, our estimated normalized tax rate used in determining adjusted EPS is 30%.
Okay.
Moving to a discussion of segment performance.
Sealing technologies, which includes garlock stinko in the tech net ex sealing businesses reported sales of $146.5 million in the first quarter.
The year over year decrease of 15, 6% was due to portfolio reshaping activities last year.
Excluding the impact of foreign exchange translation and sales from divested businesses sales increased 0.9% versus the prior year period.
During the quarter, we saw strong demand in the food and pharma petrochemical power generation metals and mining and heavy duty truck markets, while weakness in aerospace markets continued.
As you May recall, the sealing technologies segment reported exceptionally strong sales in the first quarter of last year.
Many distributors secured supply to mitigate pandemic related risks. We are pleased that our business has delivered even better results. This year.
For the first quarter adjusted EBITDA increased one 2% to $33 $9 million and adjusted segment EBITDA margin expanded 380 basis points to 23, 1%.
The margin expansion was driven primarily by the divestitures of low margin businesses last year cost reduction initiatives as well as pricing increases.
Excluding the impact of foreign exchange translation and divestitures adjusted segment EBITDA.
Increased $6 one per cent compared to the prior year period.
Turning now to advanced surface technologies, which includes Alexa clean tech and the techniques semiconductor businesses.
First quarter sales of $54 $7 million increased 49%.
Primarily by strong demand in semiconductor market and the acquisition of Alexa.
Excluding the impact of foreign exchange translation and the Alexa acquisition.
Sales increased 22, 6% versus the prior year period.
For the first quarter adjusted segment, EBITDA increased 137% $17 $3 million and adjusted segment EBITDA margin expanded from 19, 9% a year ago to 31, 6% driven primarily by the electorate contribution and growth in <unk>.
<unk> Tec business.
The contribution from Alexa was driven by strong sales and operating leverage.
Moving the impact of Alexa and foreign exchange translation adjusted segment EBITDA increased 57, five per cent compared to the prior year period.
And engineered materials, which consists of GTA V and CPI first quarter sales of $84 million increased seven 1% compared to the prior year.
Driven by stronger sales in general industrial automotive and petrochemical markets, partially offset by weakness in the oil and gas and aerospace markets.
Excluding the impact of foreign exchange translation, and the divestiture of Ggp's Bushing block business sales for the quarter increased five 3%.
For the first quarter compared to previous year adjusted segment EBITDA increased 51, 8% to $12.6 million and adjusted segment EBITDA margin expanded 460 basis points to 15, 7%.
These increases were driven primarily by strong sales volume recovery manufacturing cost reductions and savings from head count reductions in travel expenses.
Excluding the impact of foreign exchange translation, adjusted EBITDA increased 39, 3% compared to the prior year period.
Now lets turn for the balance sheet and cash flow.
We ended the quarter with cash of $232 million and with full availability.
$400 million revolver, less $11 million from outstanding letters of credit.
At the end of March our net debt to adjusted EBITDA ratio was approximately 1.4 times a sequential decline from the one six times reported at the end of the fourth quarter.
Our balance sheet remains in a healthy position and we have ample financial flexibility to execute against our strategic growth initiatives.
Free cash flow for the quarter was $14 1 million up from negative $4 $9 million in the prior year.
This was driven primarily by higher operating profits and improvements in working capital management.
During the first quarter, we paid a 27 cent per share quarterly dividend totaling $5 $7 million for a 4% increase versus the prior year.
Regarding capital allocation, we continue to prioritize investments in organic and inorganic growth.
Moving now to 2021 guidance.
Taking into consideration all the factors that we know at this moment Inc.
<unk> the ongoing global economic recovery from the COVID-19 pandemic, which.
Which is stronger than anticipated a quarter ago.
We are increasing 2021, adjusted EBITDA to be in the range of 190 million to $200 million up from our previous guidance of $178 million to a $188 million.
The updated adjusted EBITDA range is based on sales growth of 7% to 12% over 2020 pro forma sales of $983 million.
Up from previous guidance range of 6% to 10% growth.
We expect adjusted diluted earnings per share from continuing operations to be in the range of $4.74 to $5.08.
Up from the range of $4.32 to $4.66 provided last quarter.
Our guidance assumes depreciation and amortization expense.
Excluding amortization of acquisition related intangible assets.
And the range of $33 million for $35 million and net interest expense of $15 million to $17 million.
Both unchanged from prior guidance.
Given the stronger than expected first quarter results at order patterns to date, we now anticipate.
Dissipate a moderately stronger first half of the year relative to the second half.
This is in contrast to a quarter ago, when we expected a gradual strengthening as the year progressed.
Now I'll turn the call back to Martin for closing thoughts.
Thanks, Mel this quarter demonstrates the benefits of our clear and consistent strategy the capability center and our portfolio reshaping initiatives. We expect this momentum to continue as we focus on driving commercial excellence and operational excellence throughout the company.
I am confident that our profitable growth strategy experienced leadership team increasingly diverse and dedicated work force and strong financial position will lead to continued growth and long term shareholder value.
In closing I am extremely proud of our progress transforming <unk> into a leading industrial technology company using material science to push boundaries and semiconductor life Sciences and other technology enabled centers.
And now I'll open the line for questions.
Thank you and I'll be conducting a question and answer session if you'd like to be placed from the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question Hugh.
Press Star two if he'd like to remove your question from the queue for participants using speaker equipment, maybe necessary to pick up your handset before pressing the star one one moment. Please while we poll for questions.
Our first question today is coming from Jeff Hammond from Keybanc capital markets for line is now live.
Hey, good morning, guys.
Good morning, Jeff how are you doing Jeff.
Doing great.
Appreciate all the color here, just maybe digging into your your new segment I'm.
Just talk about the sustainability of the strength you're seeing in the semiconductor markets. Both in terms of the market trends and your ability to kind of outgrow there and then just on Alexa.
Yeah, I guess, we can kind of back into the profitability run rates and kind of the I guess the revenue contribution just talk about sustainability of the margins, there and you know and and kind of seasonality around that business you know as that kind of the run rate from here. Thanks.
A really really good question I. Appreciate the question I'll go ahead, and just talk a little bit about you.
Semi first.
I'll first talk a little bit.
About you know, what's really driving semi right. We've got rapid technology proliferation, driving semi as it relates to <unk> data centers cloud and the sorts right. It's got new chip technologies right sub 10 nanometer chips, you've got major IDM investments you know guys like TSMC Samsung.
Intel right coming into the game.
And you've got increased auto demand just so from a macro perspective, I think semiconductor is going to be strong for a meaningful period of time.
And when you look at market information about wafer starts you know we're talking anywhere in the neighborhood of 16% to 20% or so and when you look at where we're positioned specifically is on the leading edge nodes and the leading edge nodes as we've communicated in the past.
The compounded annual growth rate of 30, plus percent and that 30 plus percent should last for the you know a couple of years right. So as it relates to where we participate in semiconductor and how we participate in semiconductor the challenge on our side will be to ensure that we're increasing could.
<unk> in line with demand, but the robustness of the end market and sort of drivers are going to be there for a sustainable period of time. So I feel really really good about semiconductor and I also feel really really good about our ability to execute.
In terms of bringing new capacity online in Milpitas in Taiwan, and maybe you know further enhancements in the United States. So I I couldnt be more bullish on how I feel there and as it relates to our lucks are you know Alexa is performing exceptionally well actually.
Outperformed our expectations, particularly on the margin side, but you know if you think about Alexa. It's gotta wear it participates you know it's got a Tam of $13 billion Sam of $1 7 billion and that is growing at 9% a year right and their primary areas for us.
In life Sciences semiconductor and some industrial technologies so the underlying.
Conditions. There are the same so we would expect losses to continue to grow at a record pace and as it does.
Years prior to our ownership and you know they had another record quarter. So I have no reason to believe that that will not continue and you know all of the sort of end markets that they participate in are pretty robust and they're continuing to to get more.
Meaningful wins on the board I mean, they've day.
They've taken home some really interesting projects here recently and their backlog is pretty robust. So I feel really good about it I don't know if you have any additional color you want to add.
I think you've covered it well.
So we're certainly expecting in that segment.
Oh for continued growth both this year and beyond.
Okay, great color.
Just on the guide.
I just wanted to understand what informs you know what moving piece for them to what informs the stronger first half for second half because it just seems like.
Momentum is building and order rates are improving you know the economies.
Yeah, maybe save for a couple of our kind of going through this vaccination of reopening and I'm just kind of wondering if theres something.
I'm not seeing or are you know seasonally that we should be thinking about thanks.
Well I think Barbara do you want me to jump in on that one.
Yeah. That's it that's another good question Jeff.
If you if you look at our thinking or if you look at our guidance you'll notice that there was a larger per.
Percentage increase.
Our earnings guidance versus our sales guidance.
So part part of the shift is.
We've determined that we're off too much.
A much stronger start not just us, but the recovery in general its off to a much stronger start than we anticipated a quarter ago.
And so our assumption, where we're not pessimistic at all about the second half of the year, we were optimistic about the second half of the year too, but we're being cautious to recognize that there is a possibility that a lot of the snap back we're seeing more of it in the first half of the year than the second half obviously.
We expect continuing growth from that.
Surface technologies, particularly particularly lean tech and Alexa as the year advances and our other businesses, where we're seeing more of that snap back.
From a sealing and engineered.
Those those businesses, we're just being cautious that we may be seeing a larger percentage of that snapback in the first half of the year in the second half of the year just given how the year is starting for us in our current order patterns.
So that would that would be my response, we do have.
Some element of first half versus second half dynamics in some of our businesses with a stronger first half than the second half that's changing though as you know is our portfolio is changing but theres still some element of that as well. The other thing I would note Jeff is.
We had some pretty significant cost savings last year as we discussed.
<unk> indicated that that we took about $30 million of cost out last year.
The 15 that we expected to be permanent 15 of that we expect it to come back into the system.
And we're still we're still being very careful with our protocols internally on how we're conducting business. We had been successful so far and keeping some of the costs that we thought would be coming back this year as volume returns.
But undoubtedly we will see more of that happening as as the economy opens up as the year progresses. So that's that's part of the thinking on the earnings side.
Okay I appreciate all the color guys. Thanks.
Thank you.
Thank you. Our next question today is coming from Steve for resolving from Sidoti. Your line is now live.
Hi, good morning, everyone.
I'm just wondering if you could walk through if you could walk through sort of the timing on the strength of the recovery is clearly.
The quarter came out a lot stronger your guidance change just how quickly you saw that wave I think you sort of talked about in the scaling and the engineered but it was fairly broad based.
So how challenging was that on labor and supply chain, you'll work with share and pockets of issues.
In terms of meeting labor demand for that for just how strong.
They were covered gotten this spring.
Okay.
Well as we said.
We really really really.
So just a pretty aggressive snapback in.
As bill talked about and as I've talked to it a little bit about you know we did see strength in semi we saw strength.
In life Sciences, we saw strength in industrial Tech, we saw strength in automotive Petro Chem I mean, we really saw our business snapped back pretty aggressively as it relates to the supply chain and how we are supporting the supply chain. We did have a number of challenges, but no challenges that we were not able to overcome.
You know if you recall you know there was some shipment challenges that impacted a number of companies broad based just having to do with container vessels and then we had the weather issue.
Down in in Texas.
But our supply chain team you know really responded well.
The thing that we're paying close attention to from a supply chain perspective is just what's happening with.
Commodity prices and what that looks like for our business over time.
<unk> that we're paying close attention to our PTFE steel and bronze and obviously, Brian it's affected most by the price of copper.
<unk>, our largest commodity by far it's tracking.
We're actually doing quite well in terms of the contracts that we have for PTFE. If you go back you know I'd say I didn't know work and look back over the past 10 years, you will only find two years in the past 10, when we paid less for what we're paying for PTFE right now than what we expected for the year. So we're in pretty good shape there were.
And from increases in steel pretty sharp increases in steel quite frankly, Luckily, we divested our biggest steel consumer.
The central business. So we expect that even though we're seeing some increases in steel it won't be so dramatic in terms of how it's impacting our business.
The same goes for for abroad.
We're also doing a great job in terms of pricing to get ahead of the commodity price increases and then the labor shortages are real right. We are seeing tightness in the labor market and we're working aggressively to address those.
Whether it be you know by boosting wages that we're paying for temp employees and all the above but we are being very very aggressive on all of those fronts to try to offset some of those issues that we see I don't know if you want to add any additional color milk.
I think the only thing that I would add in terms of the cadence through the year is that.
The.
I guess, a pivotal month for US was the last month in the quarter.
March March was particularly strong.
And you know it's one of the reasons why we made the decision to increase our guidance by the magnitude that we did so just a little bit of additional color on cadence and momentum that we're seeing in response, Steve go to your question Jeffs question earlier.
Thanks.
Just a quick one on modeling.
G&A up on as you noted the incentive comp is there what else is left there I imagine more travel expenses, but is there a lot more of that comes back into SG&A or if we've seen the biggest bump.
Okay.
Yeah no.
It's a good question.
I mentioned earlier in response to Jeff's question, Steve that we.
We anticipated about $15 million of costs that were taken out in 2020.
Would come back.
In 2021 as volume improved.
And so some of that was travel some of it were expenses on marketing and trade shows.
There's a whole host of things that.
And most of those fell on the SG&A category.
You saw in the first quarter.
Was primarily differences in incentive compensation accruals.
Last year versus this year. In addition to the variable items that are related to volume.
So you know as the year progresses, we could see some higher travel costs, we could see some other other costs coming back in associated with with the robust economic <unk>.
Conditions.
Right.
If I could just get one last one in.
The additional capacity coming in.
Taiwan, California.
From a modeling standpoint interest and general business standpoint, how do we think about the additional capacity, adding to revenue is it like a snap on higher revenue or is there a gradual.
It's definitely a gradual right because you have to go through permitting to go through customer qualifications and then you know it's a slow ramp to come on line. So I would think about it that way, even though we're working aggressively on all fronts, but I would I would see it as a little bit more gradual.
And we've tried to do our best to bake that into our forecast and our new outlook.
Great.
Thanks for taking my question just wondering guys.
Thanks, Steve.
Thank you as a reminder, that star one to be placed in the question queue. Our next question today is coming from is if you know from Oppenheimer. Your line is that line.
Hi, great. Thank you very much.
Just one more question on from the details of the momentum you know.
Can you maybe give us an idea of how each region performed in the first quarter and sort of like what are you seeing.
Currently from each region.
Jim.
Yeah.
So that would be the question for Joe.
Okay.
Hey, good morning, Ian good good to hear from you.
As you probably know this won't come as a surprise given how COVID-19 impacted.
The world starting in Asia.
But if you look at our year over year growth.
Asia region would be the strongest just because it was so affected by COVID-19 in the first quarter of last year.
And then both Western Europe and in North America were reasonably strong there was not a lot of low.
A lot of.
Differentiation between the two if you look at just year over year growth.
Which was.
Good good for us to see.
So that's those are those are the main markets geographically for us.
Okay, and then I guess a couple of other questions would be you know how do you anticipate them then recovering as far as continuing the momentum accelerating or staying flat.
And then also just touch upon like.
The automotive business and.
You know, what they're telling you as far as far as demand as I guess, the chip for its just sort of.
Clipped a little bit of their production.
<unk>.
Yeah.
Yeah, I can just jump in here and you know just tell you that the.
The way the way I see things unfolding is that you know in in many cases I would expect our business to continue to improve and demand signals to continue to strengthen.
At this point, we have you know some modest recovery in our oil and gas business, but you have to expect that that will continue to improve.
At the same thing goes for aerospace right. These results that we delivered and the forecast that we have put together does not really take a lot of aerospace recovery into consideration. So you know at some point that starts to come back online likely will come back online sooner than we had anticipated. So we would expect.
That that you know, we're really add some additional fuel to what we're seeing right now as it relates to automotive auto demand is articulated.
<unk> articulated pretty strong something unique that's taking place with our particular automotive business right now is we.
We typically have we describe our business, it's fairly short cycle, not having a ton of visibility.
Into the future, but you know we've got some good clarity into the future. This year on automotive just given how our customer order patterns have shaped up so as we look out over the next quarter or so you know we've got you know just really good coverage in terms of what we budgeted for the quarter you know it's essentially.
He covered at this point and so there's no reason to believe our auto business is going to be impacted we do know that the chip shortages impacting all of our customers and we see some of that right and but it's not.
In any way shape perform creating any significant issue at this point in.
That can only improve over time it might take some time to improve but in terms of what we're seeing the strength of our backlog and the coverage that we have in the next quarter coming in automotive we feel really good.
Alright, great. Thank you very much.
Yeah.
Thank you. Our next question is coming from Justin Bergner from G. Research. Your line is now live.
Good morning, Marvin good morning, melt so a nice start to the year.
Morning, Jeff.
Good morning Joseph.
Good morning few questions here.
Yes to start Mark.
And you mentioned at the beginning of the call that lean Tech is tracking in line with your expectations at the time of the acquisition and I didn't know if you were just sort.
Sort of downplaying the success of that acquisition it would seem given the strength in the semi market that it would probably be tracking ahead of your expectations. So any sort of clarity there would be helpful.
No I I am trying to be modest in my communication lean track is performing exceptionally well actually better than my expectations to be very honest with you and so as a luxury for that matter I do want to be mindful and my communication, though that a lot.
Of the future of lean tech depends on us, bringing additional capacity online and so we do have to get capacity on line to deal with the surge that we're experiencing in the leading edge nodes.
Okay.
Great. That's a good perspective, and then on a lux.
Yeah.
You know if I look back and sort of infer what the margins were in the fourth quarter for the two months you had the business yes. They are.
We're modestly above.
I guess the figure that you indicated in your Oh Luxor presentation back in November I guess of greater than 20%. If I look at this quarter. They were way above that bogey I mean should I think about the sort of average of the fourth quarter and first quarter margins as being representative or is it.
Hard to gauge at this point and what would cause margins and Alexa to sort of move around.
So much quarter to quarter.
Okay.
The adjusted.
Yeah I will.
Thank you.
I don't want to look too much at the fourth quarter of last year. It was a partial quarter for one when one region.
Well you know when you.
You're looking at.
The adjusted results I think it's going to play out.
It's fairly consistent.
Throughout the year.
Especially if we have sequential growth in the business.
But we expect we expect most quarters because the underlying business is growing.
To see sequential.
Growth in the business, we would expect margins to be relatively stable, obviously, they're gonna be.
Affected somewhat based on the mix of sales to different markets and different applications.
There are some some projects.
Carry higher margins than other projects.
For example, last year, there was a fair amount of bid.
Business in response to COVID-19 testing kits and some of that business carried lower margins.
So it's kind of it's going to vary a little bit, but I wouldn't expect it to move around much from quarter to quarter I think the stub period in Q4 was a little bit of an anomaly.
Okay great.
Great. That's helpful. One more question here just on the guide so it looks like you took up.
The revenue guide versus pro forma 2020, but.
You know a 150 basis points at the midpoint or about $15 million.
Is it fair to say that like as much as half of that is coming or maybe even more than half of that is coming from advanced surface technologies.
And I guess the second part of the question would be that inventory write up if you could just remind us what amount is being absorbed into the guidance and was that anticipated before or is that an additional headwind that you're absorbing in the new guide.
Yeah, well, let me take the last question first.
Our adjusted EBITDA numbers.
Take out the impact of the amortization of the inventory write up.
So.
The those adjusted numbers represent.
What we would expect for the business going forward. So it does affect gross margin because we don't adjust the gross margin numbers that we cited.
But we do back out the impact of the acquisition.
Amortization of inventory from our adjusted numbers so.
So those are those are those are clean they'd been cleansed of that effect.
Does that does that answer your second question Justin Yes, that's great second part of your question Stephen.
The first part again.
The first part wasn't me it looks like you're increasing the revenue guide versus your pro forma 2020 revenue base by 150 basis points at the midpoint I guess, that's about $15 million I mean is it safe to say that half for over half of that increase is coming from advanced surface technologies within the mix of businesses.
No, it's really spread across all of our businesses and it's a function of.
The faster than expected the better than expected start to.
For the year.
We already had in our original guide.
Pretty strong growth.
That we were building in to the advanced surface technologies segment.
And we're certainly on track.
And as Marvin said, we're doing a bit better.
And even the expectations that we had for that segment, which were already in.
Bedded with some pretty strong growth.
And so the stronger bounce back that we're seeing a relatively speaking was.
Seen more in sealing technologies, and engineered materials versus our guidance and our outlook a quarter ago.
So I would say, it's going to be spread.
Net across all three segments.
Okay great.
Follow up on that last question.
If you're increasing your sort of revenue guide by you know 15.015 billion organics for $20 million reported and you're increasing your adjusted EBITDA Guide by 12 million at the midpoint sort of what's the primary driver of the higher expected margins because I assume that.
Just coming from Incrementals, you're not giving you know 60, 70% incrementals. So what's the primary margin driver versus your prior guide.
Yeah. That's a that's another good question and there are really two reasons for it.
One is we.
We are leveraging quite well if you look at engineered materials and <unk>.
<unk> business in particular.
We leverage quite well on the additional volume.
The same thing would be true in.
In sealing technologies for managing costs and some of this is is a factor of all the work that we did last year and with with with some stronger volume and a stronger recovery, we're seeing it leveraged pretty well to the bottom line. So that is a factor.
The other factor is you know where.
We are managing the business.
In a way that takes advantage of what we learned about how we can work together from anywhere where can the other remotely.
And it's not just our office work, but it's our commercial practices.
And how we interact with customers and so we're where we have teams that are working on how can we hold on to some of that $15 million of costs that we thought would be coming back into the system. So there's an intentional effort there and that's part of it.
Obviously, we're not going to be able to keep all of that $15 million, but.
It's it's certainly part of our plan for the year.
Yeah, we could we could talk for a pretty long time.
All of the cost saving levers that.
We pulled in 2020 that we're seeing the benefit of in 2021.
And all of those things are helping us from an operating leverage perspective, you know the way we were running feeling now is a little different so theyre able to take cost out, particularly in shared services across the sealing segment. We took a lot of low margin business out of stem co focused it back.
On its core business, that's higher margin, we're able to execute on price.
Some areas that we weren't able to execute on before you remember we divested the to go to engineered we divested the bushing blocks business. The <unk> business is also a high fixed cost business. So it levers just exceptionally well with additional volume. So I mean, we in Milton mentioned working together from anywhere we've got reduce travel.
We have pulled so many levers that we're starting to see the benefit of now and we still have more levers to pull right. So the work that's going on in sealing to take cost out.
Still in the early innings, and we see a fair amount of opportunity there still will talk a little bit more about you know some of these things during our Investor day.
And the recovery in engineered you know we can we expect that to continue so I think with the improved market conditions and just all the heavy lifting we did last year with the.
The team.
Great support we've had from our employee base is whats really causing or driving improved leverage.
Thank you.
Thank you we reached end of our question and answer session I'd like to turn the floor back over to management for any further closing comments.
Thank you, Kevin and thanks to all of you for being with US today I Hope you all have a good day take care.
Bye.
Bye bye.
Thank you that does conclude today's teleconference.
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