Q2 2021 EnPro Industries Inc Earnings Call
Greetings.
And welcome to the NN Pro Q2, 2021 earnings conference call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder of this conference is being recorded.
I would now like to turn the conference over to your host James Gentilly, Vice President of Investor Relations. Please go ahead.
Thank you Brock good morning, and welcome to <unk> second quarter earnings Conference call I'll remind you that our call is being webcast at <unk> industries Dot Com, where you can find the presentation that accompanies this call.
With me today is Eric <unk>, our interim president and CEO, and Milt Childress Executive Vice President and CFO.
Before we begin today's discussion of friendly reminder, that we will be making statements on this call that are not historical facts and they are considered forward looking in nature of.
These statements involve a number of risks and uncertainties, including the 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 included including our most recent form <unk>.
10-K and form 10-Q.
Also during the call we will reference a number of non-GAAP financial measures tables reconciling historical non-GAAP measures to the comparable GAAP measures are included in the appendix to the presentation materials, we do not undertake any obligation to update these forward looking statements.
Also during this call we will be providing full year guidance, which excludes changes in the numbers number of shares outstanding impacts from future acquisitions dispositions and related transaction costs restructuring costs raw material availability and pricing and other costs subsequent to the end of the second quarter.
The impact of foreign exchange rate changes subsequent to the end of the second quarter impacts from further spread of COVID-19, and other variance.
And environmental and litigation charges. It is my pleasure to turn the call over to Eric Vaillancourt Eric.
Thanks, James and good morning, everyone. We appreciate you joining us today and hope you on your families are all staying healthy and safe.
You have likely seen the management transition press release, we issued this morning.
I want to begin by saying how honored I am that the board of directors has placed their trust in me to lead on pro as interim President and CEO I also want to recognize Marvin for his contribution and growth over the last several years.
On behalf of the board and management team I wish him the best in his future endeavors.
By the way of background for those who may be on familiar I of bandwidth and grow for the better part of 12 years and over that time have had the opportunity to work on a variety of the leadership positions across our sealing technologies segment.
Most recently served as president of the sealing technologies, the segment, which I am proud to say delivered an exceptional quarter.
I also have had the pleasure to serve as a member of the escrow Executive Council, which is the team of leaders from across on pro focused on developing and implementing our commercial strategic financial and operational objectives.
Surfing on these positions is giving me the opportunity to experience firsthand what is truly so special about this organization.
Our collaboration and focus on empowering our colleagues I know as well as anyone that the success of our organization is built on the hard work dedication and tireless execution and commitment of our 4400 employees around the world.
As we will discuss throughout today's call. Our team has continued to deliver for each other our customers and our shareholders in the second quarter and I know I speak for the entire leadership team when I say I am incredibly proud of what we have accomplished.
My goal is to continue to work with our leadership team to encourage and position of our employees to unleash the full potential as we continue the clear strategy articulated over the past year.
We are excited about what is the head with.
Of that introduction, let's move on to our second quarter highlights.
As I noted and as our results show, we had another exceptional quarter.
In the second quarter sales of $298.6 million increased 29% year over year, where the organic sales increased 27, 1%.
We saw sequential growth of 6.9% from the prior quarter.
Our strong top line results were driven by organic revenue growth and the addition of the Luxor.
Importantly, our growth was broad based as we experienced positive momentum across all of our businesses.
Our second quarter adjusted EBITDA of $57.2 million increased 52, 5% year over year and the adjusted EBITDA margin expanded 400 basis points to 19, 2%.
The strong performance reflects the sustainable benefits of our of our portfolio reshaping actions operating leverage on pricing strategies, partially offset by higher incentive compensation accruals and raw material inflation.
All 3 business segments contributed to our adjusted EBITDA growth year over year.
Thanks to the focused execution of our team we were able to secure key materials, while holding supply chain disruptions to a minimum and.
In the past year, we took action to increase the level of collaboration between supply chain manufacturing and our commercial teams. This enhanced focus and coordination throughout our organization has helped us improve customer engagement and respond quickly to mitigate raw material issues. Nevertheless, the raw material environment remains highly dynamic.
Due to the pandemic related impacts and we expect these conditions will likely persist at least through year end.
Our order trends in the quarter were extremely strong surpassing our solid first quarter.
And are at the highest level in 3 years as.
As we look ahead, we continue to see broad based strength across our businesses and are encouraged by what we are hearing from our customers, particularly in the general industrial semiconductor heavy duty truck food and pharma automotive and petrochemical markets.
Together. These factors played a role on our decision to raise our full year guidance, which mark will touch on in his presentation.
Now I will hand, the call over to bill for a deeper dive into our financial results for the quarter no.
Thanks, Eric.
As Eric mentioned, we had another exceptional quarter.
Positive momentum across most major end markets as well as the addition of Alexa contributed to strong top line results, partially offset by the reduction in sales due to last year's divestitures as.
As reported sales of $298.6 million in the second quarter increased 29% year over year organic sales for the quarter increased 27, 1% compared to the second quarter of 2020.
As Eric noted sequentially sales were up 6.9%.
Gross profit margin of 39, 2% increased 580 basis points versus the prior year period.
The increase was driven primarily by strong organic sales volume and the benefit of divesting lower margin businesses.
Adjusted EBITDA of $57.2 million increased 52, 5% over the prior year period as a result of higher operating leverage from solid organic sales growth the.
The addition of Alexa and increased pricing, partially offset by increased raw material costs and higher incentive compensation accruals.
Adjusted EBITDA margin of 19, 2% increased approximately 400 basis points compared to the second quarter of 2020.
Corporate expenses of $12.8 million in the second quarter of 2021 increased from $7.1 million a year ago.
The increase was driven primarily by higher incentive compensation accruals, reflecting the stronger year over year performance of company wide.
Adjusted diluted earnings per share of $1.56 increased 77, 3% compared to the prior year period.
As noted during prior calls during the fourth quarter of 2020, we changed our adjusted EPS from the previous presentation of this non-GAAP measure to 1 that excludes after tax acquisition related intangible amortization.
Amortization of acquisition related intangible assets in the second quarter was $11.3 million compared to $9 million in the prior year period, reflecting the addition of Alexa.
We anticipate amortization of acquisition related intangibles will be between $44 million at $46 million in 2021.
As a reminder, our estimated normalized tax rate used in determining adjusted EPS is 30%.
Moving to a discussion of segment performance.
The link technology sales of $162.5 million increased 7.9% compared to the prior year period, despite the impact of divestitures in 2020.
Excluding the impact of foreign exchange translation and divested businesses sales increased 25, 3% driven by strong demand in the heavy duty truck general industrial food and pharma and petrochemical markets offset partially by power generation and aerospace markets.
Sequentially sales increased 10, 9% as we saw momentum accelerate in our heavy duty truck general industrial aerospace and petrochemical markets.
For the second quarter adjusted segment, EBITDA increased 39% to $42.4 million and adjusted segment EBITDA margin expanded 580 basis points to 26, 1%.
The margin expansion was driven primarily by operating leverage commensurate with strong volume portfolio reshaping select pricing actions and continuous improvement initiatives.
Excluding the impact of favorable foreign exchange translation and divestitures.
Adjusted segment, EBITDA increased 45, 6% compared to the prior year period.
Okay.
Turning now to advanced surface technologies second quarter sales of $59.2 million increased 48% driven by continued strong growth in semiconductor and the addition of Alexa.
Excluding the impact of foreign exchange translation, and the Alexa acquisition sales increased 23, 8% versus the prior year period.
Sequentially sales increased 8.2% driven by growth in semiconductor markets.
For the second quarter adjusted segment EBITDA increased 41, 8% to $15.6 million net adjusted segment EBITDA margin contracted from 27, 5% of year ago to 26, 4% excluding.
Excluding the impact of Alexa and foreign exchange translation adjusted segment EBITDA remained unchanged.
The results for the quarter were impacted by increased operating costs related to the standup and qualification of the third Lane Tech facility in Taiwan and by foreign exchange transactional charges.
As a reminder, cleantech as a highly differentiated cleaning coding and related service provider with industry, leading solutions that support the most advanced technology nodes within the semiconductor industry of.
The high growth market that is strong secular tailwind.
The new facility nearly doubles our capacity in Taiwan.
More broadly across the entire <unk> segment.
We continue to see secular growth signals and expect sustained organic revenue growth and strong profitability over the long term.
In engineered materials second quarter sales of $80 million increased 36, 5% compared to the prior year driven by stronger sales on all major markets, including general industrial automotive oil and gas and petrochemical.
Excluding the impact of foreign exchange translation, and the divestiture of <unk> pushing black business completed in the fourth quarter of last year sales for the quarter increased 34, 2%.
Sequentially sales were flat when compared to a very strong first quarter, we saw quarter over quarter sales growth in petrochemical and oil and gas markets offset by slower auto automotive production of environment due to the supply chain constraints affecting that market.
Based on conversations with automotive customers, we believe that sales growth will resume in the latter part of the second half of the.
Of the year of supply chain shortages are resolved and production schedules normalized.
Second quarter adjusted segment EBITDA increased 165% over the prior year period, the $13 million and adjusted segment EBITDA margin expanded 790 basis points to 16, 3%.
The strong year over year increase in EBITDA and EBITDA margins was driven primarily by the brisk volume recovery from the pandemic flow, partially offset by increased material costs.
Excluding the favorable impact of foreign exchange translation and the impact of the bushing block business divestiture, adjusted EBITDA increased 155% compared to the prior year period.
Okay.
Now, let's turn to the balance sheet and cash flow.
We ended the quarter with cash of $262 million and full availability of our $400 million revolver less of $11 million of outstanding letters of credit.
At the end of June our net debt to adjusted EBITDA ratio was approximately 1.1 times a sequential improvement from the 1.4 times reported at the end of the first quarter.
Our balance sheet remains solid and we have ample financial flexibility to execute our strategic growth initiatives.
Free cash flow for the first 6 months of 2021 was $48 million up from $25 million on the prior year, driven primarily by higher operating profit offset partially by working capital investments supporting stronger sales.
During the second quarter, we paid of 27%.
Per share quarterly dividend for the first 6 months of the year dividend payments totaled of $11.3 million.
The 4.6% increase versus the prior year.
Moving now to 2021 guidance.
Into consideration all the factors that we note at this time, including current order patterns, we are increasing our guidance for 2021 adjusted EBITDA to be in the range of $200 million to $210 million up from our previous guidance of 190 million to $200 million.
The updated adjusted EBITDA range is based on sales growth of 9% to 14% over 2020 pro forma sales of $983 million.
Up from our previous range of 7% to 12% growth.
We expect adjusted diluted earnings per share from continuing operations to be in the range of $5.16.
The $5.50 up from the range of $4.74 sets the $5.8 provided last quarter.
Our guidance assumes depreciation and amortization expense, excluding amortization of acquisition related intangible assets in the range of 30 million to $32 million and net interest expense of $14 million of $16 million.
Like each of you we continue to monitor developments around COVID-19, and new variance and we will evaluate potential impacts of such developments on our business, while focusing on the health and safety of our colleagues.
Now I'll turn the call back to Eric for closing comments.
Thanks Mel.
Our second quarter results again demonstrate the benefits of our clear and consistent strategy the sustained benefits of our portfolio of reshaping actions and our intention to continue investing in organic growth opportunities. We expect this momentum.
To continue as we focus on driving safety commercial and operational excellence throughout the company with.
With the strong financial foundation in place I am confident that our experienced leadership team diverse and dedicated workforce and compelling profitable businesses will lead to continued growth and increase shareholder value.
I am proud to be in a position to lead this organization forward and look forward to speaking with menu over the coming months. Thank you operator, we'll now open the line of questions.
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1 moment, please while we poll for questions.
Our first question today comes from Jeff Hammond of Keybanc capital markets. Please proceed with your question.
Hey, good morning, guys.
Good morning, Jeff.
So the CEO change certainly pretty abrupt and I'm just wondering if theres anything you can expand on with respect to the change and what you think the timing is for a new CEO and then just as a follow on to that how you think the CEO change impacts any cadence in terms of.
M&A or other portfolio moves.
Thanks, Jeff I appreciate the question.
We outlined in the press release that you received this morning.
The board and Marvin reached a mutual agreement for him to step down as CEO.
I am very happy to say that the.
Born chose Eric to step in who is well qualified to step in as the interim CEO and in terms of process. The.
The release also indicated that the board is engaged.
The nationally recognized the executive search search for free.
Firm.
To move forward with a search for a permanent CEO, which will include.
Eric also internal candidates as well as external candidates.
And we don't know at this time, how long the process might take but I would guess it would be within 6 months.
And in terms of strategy I can make that really clear the the.
Agreement reached by the board and Marvin had nothing to do with our strategy or our financial results and nothing changes. So we're on the same track that we articulated during our Investor day and as we've articulated in our earnings calls over the past year. So.
Continuing on our team and I know Eric joins me, we continue to be excited about our path ahead.
We have made.
Some tremendous strides in our portfolio reshaping.
And our speed and our agility of execution and all of that will continue under Eric.
Okay great.
Just on the ASP margins can you is there a way to quantify this the startup costs on the FX transaction costs.
How you know impacting the margins and what the expectation is for those.
And the <unk>.
Yes.
Another good question.
First of all let me start by saying that.
We are.
Just every bit as excited about this business as we've ever been I mean, the future of whats happening in the semiconductor market, especially where we're playing it lean tech in the advanced nodes is very bright and we believe will be so for.
Quite some time and the investments that we've made the have resulted in some of the additional cost.
For the quarter is just the natural part of supporting that growth.
So if you look at the 2 factors that I cited in my prepared remarks the.
Currency the transactional basically.
As.
It gives rise to a difference of.
The currency rates between the time, we put receivables.
And payables and collect or pay so that's what we mean of what I mean by transactional costs.
That was.
Roughly $600000 for the quarter year over year impact and then if you look at.
Startup cost.
It was another probably roughly half million dollars in total so this is over of over $1 million impact for the quarter.
And we don't disclose specific sales on lane Tac, but the.
It probably goes without saying given the models that I'm sure you have in the estimates that you have.
Significant impact on the.
The margin for that particular business in the quarter and it had an impact on the overall ASP.
Margins.
There was also.
A slight impact on a major customer that was going through the systems.
The integration during the quarter that.
Load up orders a bit in the last proud of the quarter and that will recover in the second half of the year.
But once again I will just end on the net debt.
We remain very excited we got just on outstanding team, that's running that business. The other the other impact average side on on ASP.
In the quarter, if you're looking at margins, we had strong growth.
On the.
The the what we've called the legacy semiconductor of the business the business that we owned and operated prior to acquiring lean Tech we had very strong growth in that business in the quarter year over year and there is a significant margin differential between that business and the.
The.
Advanced nodes business that we acquired through <unk>, and so that has an impact on mix for the quarter, which impacts the overall margins in the segment.
Okay, and so how should we think about margin trajectory and of the second half of what those moving pieces that do some of those continue or go away or.
We will we will start to fill up the capacity in the second half of the year and the new building in Taiwan.
We will start to see we will certainly see the recovery from the systems integration.
The situation that I referenced earlier, we have been qualified on the 3 nanometers and.
So the timing for on revenue for the balance of the year is going to be affected in part by what's the ramp up rate for 3 nanometers and when does that begin.
But that's the that's a positive whether it happens in the second half of the of this year of fully or if it moves into next year, but that's a real positive for the business and part of the reasons that were probably the part of the reason, we're continuing to invest and expand our capacity.
So thats a positive and then overall.
We would expect overall to be yet.
We're up 30% or so and the.
For the full year in the <unk> segment.
Okay, great I'll get back on queue. Thanks, guys.
Yes.
The next question is from Steve <unk> of Sidoti <unk> Company. Please proceed with your question.
Good morning, everyone.
Obviously very nice improvement on sales.
The technologies.
On both on revenue and margins. So im trying to think about the margins, despite clearly higher material costs and how much of that is straightforward.
First as other changes you've made in the segment and how to think about that given ongoing material cost.
From a growth of the rest of the year.
Yes. Thank you for the question.
I expect our margins will continue to be excellent as we go forward, we've given some guidance from the Investor day that we expect to remain around 25%.
I think thats appropriate going forward there will be some.
The adjustments along the way as we add more travel costs back to our sales team et cetera, but overall I expect them to continue our supply chain raw.
Raw material prices are mostly impacted by steel and we've been able to move those prices through and sealing technologies, mostly it's coming from so I expect us to continue to have outstanding results going forward.
Steve I'll add on items in here.
Yes, Steve I'll, just add 1 other comment on sealing.
We just had we just had.
The outstanding.
Leverage overall on the segment if you look at it on on normalized.
Normalized for all of the year over year differences related to the divestitures in the segment year over year.
Our operating leverage was about 40% year over year in the segment and Thats. Just the result of the outstanding work that Eric and the team are doing overall in the segment as we are looking for opportunities to become more efficient operate the business too.
The ship some shared service models.
And so you're starting to see the benefit of that naturally it was a really really good year over year volume.
And so the volume impact was noticeable.
And as Eric said, we're still operating at fairly low travel cost carryover from last year. So we will see some of those costs come back in as Eric noted.
Okay.
And then on engineered materials, I mean still a nice quarter you commented a little bit about the the chip shortage on the potential impact on automotive just to clarify did you see it in the quarter.
On the on the on your automotive sales.
The sales to automotive customers and how youre thinking about that over the next couple of quarters, because we're still in very nice revenue quarter.
Yes, Youre right, Steve and thanks for the question.
It's a sequentially as I noted our.
Sales were down.
Dow and automotive from Q1 to Q2, so we had a really really strong bounce back in Q1 as you may remember if you turn the clock back a year the automotive industry of essentially stopped.
And.
And in the.
Flatter part of the first quarter and production came to a halt in the abrupt halt and so last year was a pretty tough year, we bounced back strongly in the first quarter had an outstanding quarter, we had a good quarter in the second quarter, just that compared to Q1, which was exceptionally strong quarter, we were down a bit in automotive and <unk>.
Part of that is a function of supply chain and our team believes that we will see.
Some of that correct in the latter part of the of the second half of this year don't know if were going to see it in Q3 or whether it will be Q4.
Okay.
Thanks, Mel Thanks, sorry, Chris This is Tom yes, thanks Stephen.
The next question is from Ian Zaffino of Oppenheimer. Please proceed with your question.
Okay, great. Thank you very much.
Just kind of wanted to get your sense or if you could tell me.
How how maybe July pace.
Yeah, particularly in the international markets that may have been hit by the Delta Varian first.
Maybe as a way that we could read through and what could maybe happened in the U S as well thanks.
Yes, and good morning.
As you know.
No.
We have a fair amount of European exposure and most of it is in engineered materials at least that's the largest concentration.
And.
We have had if you look at it.
At the year, so far we've had nice growth in our European sales and.
Right now we're still we're still operating.
We have figured out of cadence in a way to maintain the <unk>.
Safety and health in our factories.
And so we're continuing as we have been now for a number of quarters in terms of <unk>.
Third quarter, it's not unusual for us to see.
All things being equal some moderation in Q3 because of in part because of European holidays.
So when you look at.
Our guidance and the implied second half versus first half of the year Youll see it modestly down and part of it reflects.
What we're expecting for Q3 as the result of the European exposure and the holiday season in Europe.
So the I guess those would be some of my responses, we're not we're not seeing.
Any any significant problems with the delta variant in any of our factories.
We're watching it and we're taking appropriate action first and foremost we're lift.
Looking for the safety and health of our colleagues around the world and and also while we take care of customers.
Okay. Thanks, and then.
Can you maybe then talk about.
The pricing versus cost maybe.
Labor raw material.
How quickly can that all be recouped in share opportunity to get some margin expansion above and beyond thanks.
Yeah, Yeah. Thanks, that's something we're watching carefully Eric mentioned we've had.
Intentionally through our capability center, we brought a closer collaboration between our commercial teams on our supply chain teams. So that we're moving quickly.
The pace as conditions change and.
Yes, we have managed quite well in the first 6 months of the year. If you look at overall pricing versus cost increases. We've we've stayed above water now I think the challenges become a little bit more significant in the second half of the year for US. However, we also had additional pricing.
Sure.
Programs that we're putting in place for the second half of the year.
I'll, let Eric provide a little bit more color from his experience, but I will tell you that where we see the most pricing pressures in engineered materials.
In our heavy duty truck business because of of metals.
Yes, we've done an outstanding job pushing pricing through.
So our customer base in general of customers have been accepting of price increases is everything is going up.
The labor shortages of material price increases so it's the comment it's being seen by everybody in the industry in general is acting as a whole we had announced price increases the July 1 and the <unk> business that of just 1 and it will affect our second half of the year favorably.
I continue to see surcharges, and we've been using them effectively as well to offset some of the freight charges that we get from containers et cetera.
So I expect that pricing impact will be consistent throughout the year it should be.
On.
I don't think its going to affect our results from significantly.
Alright, great. Thank you very much.
As a reminder, if you would like to ask a question. Please press star 1 on your telephone keypad.
Our next question is from Justin Bergner of Gabelli funds. Please proceed with your question.
Hi, welcome aboard Erick into.
On your new role.
The mill.
Hi, Jessica.
With respect to advanced surface technologies.
Is it are you able to comment in regards to be on lots of margins were the sort of more of less sequentially flat within the context of some of the other.
The dynamics you described for the segment.
Well I'll say this with regard to the likes of business.
We're right on track.
With our.
<unk>.
Estimates for this business at the time, we made the acquisition so things are.
Continue to move quite well and as expected.
So.
The the business and the team are performing.
Quite well excited to be part of <unk>.
There are some of just kind of a small synergies that are already taking place and working with the rest of the advanced surface technologies team.
Particularly in the semiconductor market and so.
We're very positive continue to be very positive about the outlook for that business as we our semiconductor business.
Over the longer term and we think we could have some opportunities over time too.
Continue to add to the optical filtration business through some other other moves that we might make down the road. So yes, we plan to continue to invest in that business as we our semiconductor business.
Okay understood.
With respect to you mentioned the opportunities to add to that business.
With respect to M&A, obviously sort of.
An unplanned development with the the CEO transition.
Do you still feel that the organization can do the material M&A in the coming quarters or is it going to be more bolt on just given.
The CEO search process.
Well first of all obviously I absolutely.
Our organization has the ability of capability of the readiness.
The move forward with additional acquisitions.
Our board.
Is fully supportive of that so the change in CEO does not impact the board's views on our plan and support so.
Absolutely if we find the right opportunity, whether it's a bolt on or a larger move.
We're continuing to go down the same path. So our M&A team is active investing.
Candidates that we're looking at on a regular basis and that will continue and will continue to be following our guidance that we've communicated in the past we are looking for.
<unk> opportunities that are material science technology related.
And that have the type of margins that we defined at greater than the 20% EBITDA margins greater than 20% cash flow return on investment.
The mid to high single digit minimum on.
Organic sales growth so.
That work continues so no changes there.
That work is led by our M&A team and the integration is executed by the capability center through the divisions. So the entire team remains in place other than the CEO now may be new the end pro to this role, but I've been in the and pro now for 12 years, and then are the executive leadership Council for the entire time, So our strategy remains sound and we remained ready to execute.
Sure.
And then on Sandy Okay great.
Great. Thank you and then just 1 last quick 1.
The question of inflation came up.
The companies have struggled with freight inflation on maybe you could just comment on that how you're managing that at the supplies that are coming in perhaps.
Not turned around so quickly is to make it an issue for empower are you pricing that is true.
Where we're able to move most of that through especially container freight through surcharges versus price increases our customers in general would prefer a surcharge if it doesn't hit the same place.
In their P&L and as a result, the accept the more readily in the house.
So I expect them to go on to Don to go down as freight charges the <unk>.
Painter freight has gone up dramatically as you know over the last several months, we will also adjusted in the future.
So as it adjusting with the surcharges accordingly, so it doesn't move the overall material price through the way you look at their standard cost.
The using surcharges, we can move as the market moves we've been able to capture the freight increases.
Thank you best of luck here.
Okay.
There are no additional questions at this time I would like to turn the call back the James Gentilly for closing remarks.
Thank you for joining us this morning have a great day.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
Okay.
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