Q3 2021 EnPro Industries Inc Earnings Call and M&A Call with NxEdge
Hello, and welcome to the Emperor Industries third quarter earnings review and a strategic acquisition of <unk>. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded.
Now my pleasure to turn the call over to James you until you Vice President of Investor Relations. Please go ahead.
Thank you Kevin Good morning, and welcome to <unk> third quarter earnings Conference call and review of the strategic acquisition of Nex edge I'll remind you that our call is being webcast and pro industry Dot Com, where you can find the presentation that accompanies this call with me today is Eric Vallat, CT, our interim president and CEO and Milt Childress Exec.
They've vice President and CFO.
Before we begin today's discussion a friendly reminder, that we'll be making forward looking statements on this call that are not historical facts and are considered forward looking in nature.
These statements involve risks and 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, including our most recent Form 10-K and Form 10-Q also.
This 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 in the presentation materials, we do not undertake any obligation to update these forward looking statements.
Also note that during this call, we'll be providing full year guidance, which excludes changes in the number of shares outstanding impacts from future acquisitions dispositions and related transaction costs, the impact of any pending or potential labor disputes.
Structuring costs and costs subsequent to the end of the third quarter the impact of foreign exchange rate changes subsequent to the end of the third quarter impacts from further spread of COVID-19, and environmental and litigation charges and now I'll turn the call over to Eric Eric.
Thanks, James and good morning, everyone. Thank you for joining us today with the COVID-19 pandemic remaining top of mind for our colleagues and stakeholders around the world. We hope that you and your families remain safe and healthy.
We certainly accomplished a lot this quarter our teams remain focused on our commercial and strategic objectives and with the volatility of supply chain with COVID-19, I would like to take the opportunity to thank each of you for your hard work every day to make Umbro and incredibly special place to work. These are exciting times for our company and.
In our addition to our third quarter results. We are excited to announce today that we reached an agreement to acquire <unk>, which will significantly expand our solutions offerings in the semiconductor industry. We will cover that news in a few minutes, but first I'd like to touch briefly on our third quarter highlights.
We delivered another strong quarter in Q3 with sales, increasing approximately 16% organically and adjusted EBITDA margin expanding 250 basis points.
As Milton will describe in greater detail shortly performance in the sealing technologies and advanced surface technologies segment.
Were the primary drivers of these results.
Aten collaboration among our supply chain manufacturing and commercial teams for the past year has been foundational to our strong year over year earnings growth.
We have held supply chain disruptions to a minimum and successfully manage supply shortages material cost increases and pricing initiatives.
The global supply chain pressures will likely continue for some time and we will remain vigilant in working with our suppliers and delivering on customer needs.
Results for the quarter and year to date also reflect the positive effects of our portfolio reshaping and growth initiatives during the quarter, we announced additional moves that enhanced and overall.
Our overall portfolio of businesses.
Third we announced the divestiture of our polymer components business, continuing our efforts to optimize pursuing technology segment.
Boeing quarter close we announced the agreement to sell our compressor products international business, marking another meaningful step in our company's evolution, which will significantly reduce our exposure to the oil and gas market.
And today the announcement of the agreement to acquire <unk> is yet another significant step in our transformational journey.
Turn the call over to mill for other highlights on the quarter, following which we will come back to today's announced acquisition.
Thanks, Eric.
As Eric mentioned, we had another strong quarter positive momentum across most major end markets as well as the addition of Alexa contributed to top line results, partially offset by the reduction in sales due to last year's divestitures and weakness in power generation oil and gas and automotive markets.
As reported sales of $293 $1 million in the third quarter increased five 5% year over year.
As Eric noted organic sales for the quarter increased about 16% compared to the third quarter of 2020.
Gross profit margin of 38, 7% increased 350 basis points versus the prior year period.
The increase was driven primarily by strong organic sales growth increased pricing benefit of divesting lower margin businesses and the addition of Alexa partially offset by increased raw material costs.
Adjusted EBITDA of $51 $5 million increased 22, 3% over the prior year period as a result of operating leverage on organic sales growth.
The benefit of reshaping actions completed in 2020, including the addition of Alexa and pricing initiatives, partially offset by increased raw material costs.
Adjusted EBITDA margin of 18, 2% expanded approximately 250 basis points compared to the third quarter of 2020.
Corporate expenses of $11 6 million in the third quarter were essentially flat from a year ago.
Adjusted diluted earnings per share of $1 40 increased 39% 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 one that excludes after tax acquisition related intangible amortization.
Amortization of acquisition related intangible assets in the third quarter was $11 2 million compared to $9 million in the prior year, reflecting the addition of Alexa as a reminder, our estimated normalized tax rate used in determining adjusted EPS is 30%.
Moving to a discussion of segment performance sealing technologies sales of $146 $9 million decreased six 9% due to the impact of divestitures in 2020 <unk>.
Excluding the impact of foreign exchange translation and divested businesses sales increased 15, 7% driven by strong demand in the petrochemical heavy duty truck food and pharma and general industrial markets, partially offset by tepid aerospace and power generation markets.
For the third quarter adjusted segment EBITDA increased seven 8% to $34 $5 million and adjusted segment EBITDA margin expanded 320 basis points to 23, 5% the.
The margin expansion was driven primarily by operating leverage on volume growth portfolio, reshaping and select pricing initiatives, partially offset by increased material costs and SG&A expenses.
Excluding the impact of favorable foreign exchange translation and divestitures adjusted segment EBITDA increased 26, 5% compared to the prior year period.
Turning now to our surface technology segment third quarter sales of $64 $3 million increased 44, 2% driven by continued strong demand in the semiconductor market and the addition of Alexa.
Excluding the impact of foreign exchange translation, and the Alexa acquisition sales increased 23, 6% versus the prior year period.
For the third quarter adjusted segment, EBITDA increased 44, 8% to $19 $4 million and adjusted segment EBITDA margin of 32% was relatively flat compared to a year ago.
Excluding the impact of Alexa and a foreign exchange translation adjusted segment EBITDA increased eight 2%.
Reflecting transactional foreign exchange headwinds and startup costs of the new facility in Taiwan.
To support strong lean tech growth.
As a reminder, latex acquired in the fourth quarter of 2019 is a leading provider of highly differentiated cleaning coating and related solutions supporting the most advanced technology nodes within the semiconductor industry.
Sequentially adjusted EBITDA margins improved 380 basis points since quarter.
More broadly across the entire <unk> segment.
We expect sustained organic revenue growth and strong profitability over the long term.
As Eric noted, we'll talk more in a moment about the exciting opportunity and asked this morning to expand this part of our business.
In engineered materials third quarter sales of $73 $8 million increased 9% compared to the prior year, driven primarily by sales and general industrial markets, partially offset by sales in power generation oil and gas and automotive markets.
Excluding the impact of foreign exchange translation and last year's divestiture of Ggp's Bushing block business sales for the quarter increased 11%.
Third quarter adjusted segment EBITDA increased 11, 4% over the prior year period to $8 8 million and adjusted segment EBITDA margin was relatively flat year over year.
The year over year increase in EBITDA.
Was partially the result of operating losses incurred in the prior year related to the divested bushing block business.
<unk> the impact of foreign exchange translation and the impact of the Bushing block divestiture adjusted EBITDA was relatively flat compared to the prior year period, reflecting material cost headwinds and higher SG&A that offset the benefit of higher volumes and pricing initiatives.
Now turning to the balance sheet and cash flow.
We ended the quarter with cash of $330 million and full availability of our $400 million revolver less $12 million in outstanding letters of credit at the end of September our net debt to adjusted EBITDA was approximately <unk> eight times.
A sequential decline from the one one times reported at the end of the second quarter.
We'll talk about materially about the anticipated impact of today's announced acquisition on leverage.
Free cash flow for the first nine months of 2021 was $84 million.
Up from $37 million in the prior year, driven primarily by higher operating profits offset by working capital investments supporting higher sales.
And during the third quarter, we paid a <unk> 27 per share quarterly dividend for the first nine months of the year dividend payments totaled $16 8 million.
A three 7% increase versus the prior year.
Before moving to guidance I'd like to mention a few additional items, including event subsequent to quarter end.
First we increased our environmental reserve for the Passaic River site about $4 $5 million in response to estimated remedial costs and ongoing settlement negotiations with the United States EPA, bringing our total reserve for this legacy environmental liability to $5 4 million at the end of the third quarter.
These negotiations bring us one step closer to resolving this legacy liability.
Second subsequent to quarter end, we received a tax refund from the internal revenue service for $26 million in conjunction with several years of audits preceding the 2017 completion of the CRP process.
And finally as previously noted we signed an agreement to sell CPI for a price of $195 million with estimated after tax proceeds of approximately approximately $175 million in conjunction with the sale, which is expected to close by the end of the first quarter of next year.
Moving on to slide 11, and our 2021 guidance.
In light of the divestiture of our polymer our components business. We are adjusting our sales guidance to be in the range of one point or <unk> 5 billion to $1 $2 billion and our 2021 adjusted EBITDA range to 202 million to $208 million the.
The only changes to prior guidance or a tightening of the range on the low end and exclusion of earnings from polymer components on the high end of guidance that was the business that we sold in.
In September.
We expected adjusted or we expect adjusted diluted earnings per share from continuing operations to be in the range of $5 35 to $5 55.
Up slightly at the midpoint from the range of $5 16 to $5 50, <unk> provided last quarter.
Our guidance assumes depreciation and amortization expense, excluding amortization of acquisition acquisition related intangible assets in the range of 28 million to $30 million and net interest expense of 13 million to $15 million.
Now I'll hand, the call back to Eric to discuss the acquisition of Nex edge. Thanks, Bill as you have seen this morning, we announced that <unk> has entered into a definitive agreement to acquire <unk> from <unk> capital.
<unk> is an advanced manufacturing cleaning coating and refurbishment business focused on the semiconductor value chain.
This is an exciting acquisition of a highly complementary business that we believe will be transformative to our ISP segment and deliver compelling strategic and financial benefits for <unk> pro and the customers we serve.
It also marks a significant next step in our ongoing portfolio reshaping strategy.
Before getting into more specifics on <unk> I'd like to remind everyone of our strategy as outlined during our May investor day and in subsequent communications.
Since 2018, we have been executing on a transformative strategy to reshape our portfolio.
These actions have strengthened profitability and enhanced growth through a focus on high margin technology related businesses, which possess stronger and more consistent cash flow operating in faster growth markets.
We are executing this strategy through divestitures of noncore businesses and product lines as well as strategic acquisitions of high growth high margin businesses that meet our M&A criteria.
<unk> seen evidence of this strategy and the acquisitions of aseptic, Cleantech and Alexa and through a number of divestitures completed over the past three years.
This morning's announcement.
Greg This morning's announced agreement with <unk> edge and the recently announced sale of our compressor products International business represented another large step forward in our strategy.
Let's turn to slide 14 for a closer look at next edge.
Based in Boise, Idaho, <unk> serves the semiconductor supply chain from six main facilities located in Idaho in California. The company is expected to generate sales and EBITDA in 2021 of approximately $190 million and 70 million respectively.
We've long admired <unk> and its management team and are very familiar with their business with vertically integrated capabilities across the semiconductor value chain, including a robust aftermarket business <unk> will broaden our solutions portfolio. In addition, <unk> will bring asps more opportunities to earn process of record qualifications with key.
Customers.
<unk> is highly complementary with <unk> existing semiconductor business and upon closing will become part of our ASP segment the.
Combined business will have enhanced capabilities across the semiconductor value chain with significantly expanded customer relationships and new high margin revenue streams.
Beyond the compatibility of our businesses, we have been drawn from the start to next hedges experienced leadership and our talented employee base Jackson Chow has been a driving force in building next edge into the highly profitable high growth company that it is today and we're excited for him to continue leading next edge as part of that.
<unk>.
We believe <unk> culture aligns closely with ours, including our shared focus on values of safety excellence and respect, which we believe will support a smooth transition and integration.
We're excited by the prospect of combining complementary products technical capabilities customer bases and teams, making the combined company stronger and better positioned for long term profitable growth, while offering customers differentiated products and solutions.
Turning to slide 15.
As we outlined at our Investor day, we have put in place and adhere to our rigorous set of criteria for screening acquisitions, including thoughtful strategic filters and financial criteria.
We are focused on businesses with growing addressable markets that benefit from secular growth trends.
We look for businesses with recurring revenue streams as it relates to the organizational profile talent is critical and we look for experienced management teams and engaged employees just as we found their luxate lean tech.
Finally, we look for EBIT margins and cash flow return on investment greater than 20%.
And next outage, we founded business that checks all of these boxes.
The combination is expected to significantly enhance the scale and breadth of <unk> offerings across the semiconductor value chain at a time.
With the entire industry is being driven by powerful secular trends some of which already some of which I will review on the following slides.
From a services standpoint, <unk> brings to outgrow highly complementary and differentiated capabilities across the semiconductor value chain.
From an advanced manufacturing through cleaning coating refurbishment replacement and new components.
I want to highlight coatings in particular, which together with related proprietary material science is the linchpin of our overall semiconductor strategy.
Advanced coatings are increasingly critical to the semiconductor production process, increasing production yields, especially for the advanced nodes.
We believe that <unk> high performance proprietary coatings materials will be a key differentiator for and grow as a supplier in the semiconductor industry <unk> facilities are all located domestically, which will position us for us to support <unk> expansion in semiconductor supply chain development in the U S.
<unk> has long term strong relationships with top tier global idms, and Oems that will provide meaningful customer engagement and geographic diversification, while driving higher margin growth, including an expanded aftermarket mix.
As shown on slide 16, the <unk> combination with <unk> will expand our geographic footprint.
With facilities in Idaho in California, we expect to add significant value to our global IDM customers, we're expanding capacity in the United States and developing new domestic supply chains.
Reducing lead times, we are expanding our product and service portfolio in the U S is timely.
<unk> has high degree of aftermarket exposure will increase recurring revenue mix, which remains a core component of our strategy. The combination of <unk> with the existing Asps businesses would result in aftermarket recurring revenue increasing from 35% to 44% 2020 pro forma ASD sales.
Moreover, next I just focused on full lifecycle management vertically integrated model and superior surface coating technology provides revenue visibility over a long term horizon.
We expect this combination to deliver long term revenue growth expand capabilities with NASP.
And strengthened customer relationships.
Turning to slide 17, we expect A&P will benefit from next edges integrated design build and vertical integration strategy, which is a major advantage and reducing lead times and improving quality controlled traceability.
With its vertical integration in broad scope of solutions next HIV unique capability to provide customers with improved supply chain efficiency, while providing compelling products cleaning coding and refurbishment solutions all along the semiconductor value chain.
Further asps will benefit from <unk> differentiated coating capabilities.
<unk> is a leader in advanced plasma spray coatings, while <unk> semi annual Luxor offer high density physical vapor deposition like coatings.
Binding these differentiated capabilities will enable the combined entity to serve a wide range of leading edge semiconductor applications.
Together next Gen probe will touch many steps of the PARP lifecycle from the initial design and engineering to Recoding in reconditioning.
<unk> is a vertical integration strategy for.
For next generation products will create a greater installed base for our cleaning coating and refurbishment capabilities globally, increasing process of record stickiness and resulting in growing aftermarket opportunities through the lifecycle.
As the installed base of advanced manufacturing equipment grows our service annuity escalates.
Further as semiconductor production becomes more advanced particular at the sub 14 nanometer nodes chamber components require more frequent maintenance.
Looking at slides 20 and 21.
As most of you know well consumer trends and increased computing power in the semiconductor industry are creating powerful secular tailwind.
Including growth in data management, <unk> networks Internet of things and machine learning as well as the expansion of the use of semiconductors from consumer and auto electronics and numerous business sectors.
Most semiconductor devices are manufactured on silicon wafers and annual wafer starts are a good indicator for predicting the volume level at which semiconductor fabs are running and.
And the corresponding aftermarket opportunities that are generated to support the fabs as the chart on slide 20 shows for the last two decades wafer starts have been steadily growing.
The demand for refurbished and afternoon market components is directly tied to growth and ongoing capacity utilization and semiconductor fabs, which is driven by the growing demand for integrated circuits next edges aftermarket business directly course correlates to wafer starts it makes us less sensitive to capital equipment side.
Eccles.
With next edge, we will be able to expand asps participation to other areas of the processing chambers. These in chamber products go through regular preventative maintenance cycles to ensure the fab yields meet expectations.
Next I'd just capabilities provide new components replacement parts and refurbishment of worn parts relative equipment lifecycle.
Once combined <unk> and <unk> will be well positioned in the regions, where semiconductor capacity expansions and capital expanding is expected to accelerate.
Capacity expansions planned in coming years around the world as depicted in slide 21 show, a consistent capital spending environment, which will favor the complementary nature of the combination with <unk>.
In addition to adding more products inside the chamber are combined positioning in the Americas in Taiwan positions us in regions, where spending is expected to accelerate.
This not only helps our OEM business, where drives longer term recurring revenue opportunities for replacement policy cleaning coating and refurbishment services.
Advanced semiconductor manufacturing is returning to the U S and domestic fabs in Ibm's will create incremental step change revenue opportunities for capital equipment, and subsequently drive demand for U S based component manufacturers and cleaning coating and refurbishment.
Service providers.
MMC, Intel and Samsung have all announced major expansions in the U S focused on leading edge chip nodes sub 14 nanometer.
<unk> capabilities in domestic locations will position, our ASC segment to capitalize on ongoing IDM expansion in semiconductor supply chain development domestically.
With that let me turn the call back to <unk> to review the financial details of the transaction and the combination in more detail.
Great. Thanks, Eric.
Under the terms of the agreement announced today.
<unk> will acquire <unk> from <unk> capital for $850 million in cash subject to limited closing adjustments, including working capital.
We expect to fund the purchase with a combination of cash.
<unk> from our revolving credit facility and additional term loan debt provided by our bank group.
The transaction is expected to close by the end of the year following regulatory approvals.
As Eric mentioned next as expects to generate sales and adjusted EBITDA in 2021 of approximately $190 million and $70 million respectively.
Based on global semiconductor benchmarks, the announced expansion of wafer production in the U S and the capabilities of <unk> combined with those of our ASC business.
We anticipate next edges annual revenue growth over the next five years on average to be in the high single digit low double digit range.
At current interest rates, we expect next edge to contribute approximately $1 70, and adjusted diluted earnings per share in 2022.
Which represents approximately 30% above the midpoint of our 2021 guidance range.
As Eric noted next edge will continued to be led by current CEO Jackson shell and will become part of our advanced surface technologies segment.
The addition of next edge continues to migration of impose and market exposure toward faster growing markets, including semiconductor.
As you can see on slide 25 on a pro forma basis, including the impact of the announced <unk> acquisition in the CPI divestiture semi.
Semi sales would represent about a third of our total sales with noticeable drops since 2018 in heavy duty trucking and oil and gas.
Slide 26 provides multiyear trends for sales adjusted EBITDA and adjusted EBITDA margin, which reflects the results of our performance and portfolio reshaping.
2019, and 2020, our as reported <unk>.
2021 is based on the midpoint of current guidance and 2021 pro forma shows the midpoint of guidance adjusted to reflect reflect next edge CPI and polymer components as if those transactions occurred at the beginning of the year.
Of note 2021 pro forma adjusted EBITDA margins or 700 basis points above 2019 margins and.
With 240 basis points of that improvement attributable to the impact of this year's completed and announced transactions.
Looking at the balance sheet upon completion of the <unk> acquisition, we anticipate net leverage of approximately three seven times adjusted EBITDA.
Proceeds from the sale of CPI will lower our leverage ratio to about three three times.
Overtime through operating cash flow and possible further portfolio optimization, we expect expect to bring our leverage ratio back to a target of around two times.
Now I'll pass the call back to Eric for closing comments.
Before we open up for questions I'd like to thank them tire and pro team for delivering strong third quarter results, which yet again demonstrates the benefits of our clear and consistent strategy.
Sustained benefits of our ongoing portfolio reshaping actions and our intention to continue investing in growth opportunities. We expect this momentum to continue as we focus on driving commercial and operational excellence throughout the company.
Our team also helped us put us in a position.
The exciting transaction with next edge, we're focused on completing the transaction before the end of the year and.
And beginning the integration planning process. So we can hit the ground running upon close.
Very excited about welcome everyone at next etch the proteins and look forward to realizing the value of this combination.
This was the right deal at the right time with the right company with the right leadership and growth in a growing market expected to exceed a trillion dollars by 'twenty. Three we're really excited about the combination with that we'll open it up to the operator. Thank you.
Thank you, we'll now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing.
Star one.
One moment, please while we poll for questions.
Our first question today is coming from Jeff Hammond from Keybanc capital markets. Your line is now live.
Hi, good morning, guys.
Well, Jeff and Jeff.
Congrats on the deal and certainly managing.
A challenging supply chain environment, just want a great color on the on this deal.
Just some some questions around it one whats the interest cost you're assuming around the deal.
Kind of give us the I think he gave us forward growth rates, but what's the historical long term growth rate for next edge and then just trying to understand a little bit better the that the fit between lean tech and.
And next edge.
Okay.
Okay, Hey, Jeff I'll take the first part and then I'll pass it to Eric to comment more on the fit.
<unk>.
Our financing.
As I noted on the call in our prepared remarks, we're financing partially with cash partially withdraw on our revolver and then partially through some new.
I think that already within our bank group and it will be variable rate debt.
At the same pricing grid, nothing changes our pricing grid because of the leverage the rates will go up a little bit, but basically LIBOR plus 175 to give you an idea of what our costs will be on the incremental debt.
And in terms of growth rate, yes.
I mentioned that we expect on average over the next five years.
For <unk> to grow.
And you can interpret that as as.
As both sales and EBITDA, but to grow it.
High single digit low double digit rates.
Some of it's going to depend on how quickly.
Things developed in the U S with <unk>.
Development of the supply chain to support new fabrication.
Chips here in the U S. So there is there is some upside to that depending on how things develop but that's how we're planning planning our business and planning around this acquisition.
Okay.
Hey, Jeff It's Eric Yes.
<unk>. It does a few very important things for us first off it expands our customer base secondly geographic footprint.
Thank you very much needs to be in Asia.
And it helps us very much domestically with all the.
Investment going on in the U S. So it helps us from those two things. In addition, the technology is similar very complementary and their processes are in slightly different than ours and not open up different opportunities for us so expands the amount of.
<unk>.
Products, we can serve inside the chamber.
Expands our reoccurring revenue there increased our aftermarket sales exposure widens, our customer base items, the geographic footprint all in all it's just a homerun for us.
That's great color I appreciate that.
Just going back to the base.
So a lot of discussion around supply chain I'm just wondering.
Where are you seeing the biggest pinch points, which businesses seem most impacted and if you've seen kind of any.
Sales deferrals as a result of some of the noise here.
Yes, Jeff Youre, referring to.
You're referring to engineered materials or just more broadly just broadly yes.
Yes, unless that's where it's mostly focus yes.
Let's start there with engineered materials.
Yes.
The segment, where we're seeing the most headwinds.
From the supply chain from shortages from customer slowdown due to supply chain shortages, and it's particularly pronounced in our bearings business as you know automotive.
Accounts for a significant portion of the revenue in that business.
And.
Automotive production has been down because of the chip shortage and so.
We're responding to that so.
So that was a that was a significant factor for us in the third quarter in that segment.
Oil and gas through much of the segment to US was not really direct obviously, it's making a little bit of a push now is oil and gas prices have been rising.
But that was relatively relatively flat to down a bit year over year. So all in all we saw the most pressure in the quarter in engineered materials.
Sure.
Okay great.
<unk>.
Heavy duty trucking business as well.
So it sounds like it's primarily the auto.
Auto truck markets, you know that that seem to be having these production cutbacks versus you being able to get supply or materially added costs around your supply chain.
Yes, it's fighting fires.
Every day.
Eric can speak more to that that we've been doing it successfully thanks to our team.
It is fighting fires every day, we've been doing it through a combination of surcharges and price increases and being very agile.
Meet weekly and we focus on pricing weekly.
It is a challenge in this environment I keep describing it as whack a mole because every day, there's a new issue, but our team has been very good this year at capturing value throughout the issues.
And so we've been able to fight most of it off.
Okay, great I'll get back in queue. Thanks.
Thank you. Our next question today is coming from Ian Zaffino from Oppenheimer. Your line is now live.
Alright, great guys. Thank you very much.
How are you guys. Good morning, good morning.
A couple a couple of questions here, just firstly building on the last question.
Can you actually give us like a price cost gap.
What you faced in the quarter and maybe what we should expect in kind of a run rate basis.
Yeah overall, if you look at the total company.
We're above water, our head was above water on price and cost.
It did vary business by segment.
And as I mentioned earlier, we've had the most.
Most pressure.
In the engineered materials segment, and so we were a little bit underwater there, but overall.
On a net on a net basis.
We were up a few million dollars on the trade between price and material costs were a little bit under water as I mentioned in engineered materials as Eric mentioned.
We've had some pressure in.
In our heavy duty truck business, but overall in the sealing segment. We did we did we did five we did we did well actually.
Given the performance at Garlock and <unk> sealing.
Biggest difference is the amount of.
Raw material and engineered materials businesses versus sealing technologies segment. So when you look at the percentage of material cost is much bigger impact.
Okay, and Thats, a safe assumption to make going forward as well that you'll be above water.
Well supply chain has gotten got more tricky and I think you've probably read that and you've heard that from other companies.
So we're not declaring victory yet that we have a totally vessel to the ground. So.
While we are confident in is that our teams our supply chain teams our commercial teams are well coordinated.
And we're doing the good work to stay ahead of the curve with timely price increases where appropriate surcharges as Eric mentioned.
And and reacting based on what happens.
Perfect and <unk>.
<unk> you just help us understand how you found that deal was at auction was it something that you have a close relationship with the owner.
How did that go with that.
I would say as a close relationship with the owner we've had we've had a relationship with Jackson child going back to 2014. This is a company. We've long admired we often talk about being a disciplined investor when you look at the acquisitions. We've done recently the aseptic group, we have over a five year relationship with rubber fab we.
Six to seven year relationship with and going back with Jackson tow now seven years. So this is a company we've been following for a long time and admiring and trying to find the right deal at the right time at the right place and with the semiconductor industry moving back to the U S. This is perfect timing.
And it's a great company, a great leadership team and we're really happy to have them as part of <unk> family.
Okay and then just just one last question if I could sneak it in.
These numbers that you gave us for next year.
Is that assuming any.
Cost outs.
Or or is there not an or.
How do we think about that as well.
No.
<unk>.
This isn't a deal where you will find when we didn't we're not acquiring it and baking any cost synergies. So it's mostly going to be the commercial benefits that Eric has talked to.
And this is pretty much our expectations for what they will contribute.
On a standalone basis to us.
Okay perfect. Thank you very much.
Thank you as a reminder, its star one to be placed in the question queue. Our next question today is coming from Steve <unk> from Sidoti. Your line is now live.
Hey, good morning, everyone.
People are still up some other questions.
Surrounding supply chain and just as you noted going through earnings season, how many companies that werent seeing slowdowns previously now or when Youre thinking about guidance and probably what you've already seen particularly on the engineered materials side.
Have you seen any meaningful slowdown beyond automotive.
Would make you.
A little more cautious.
It's primarily automotive when you look at engineered materials, Eric Eric.
All of our businesses have had backlog is growing.
Continues so if you look at the fourth quarter, our backlog continue to grow so I don't see any slowing there is we could be growing faster I would say that but no. It hasnt.
Been harmed us other than automotive.
When I think about that.
The significant transformation efforts this quarter, obviously, there was a lot of caution going back a quarter given the sudden leadership change if we can sort of walk us through.
<unk> said this on the last quarter that it would slow things down, but obviously there were some concerns can you just walk us through just the transformation efforts, even as you went through the leadership change.
I can speak to it first and then I'll, let bill jump in yeah, we operate with an ROA and operate and grow.
C counsel so the umbrella leadership comp executive Council and have for that way operated that way for now going back at least 10 years and so the leadership team is where our strategy is created and then executed into the divisions. So this is just an ongoing part of our strategy that's been evolving over a number of years through three CEO succession.
And the next.
So it is just a continuation it isn't it's this plug and play this isn't start and stop so it's very easy to continue and as you can tell these things were underway and the next edge was actually initiated.
Long time ago.
And the only thing else I would add Steve is next as is the result of our executing our strategy as Eric has described.
Any update on the timing of the CEO announcement.
Yes, let me take that one.
Yes, let me just that Eric is our CEO, we have a terrific leadership team as he talked about.
With really strong business leaders.
And a strategy that we're executing to it.
So it'll it'll the board is proceeding.
As it plans with its fiduciary obligation and taking the final decision seriously, but I think I can speak for the board and saying that they have total confidence in our existing team.
And then just in terms of segment reporting with CPI soon to be exited do you expect to report GGP Standalone is the third segment.
Yes, we will still have an engineered materials, which will be GGP, primarily yes.
And you sort of alluded to ongoing portfolio optimization efforts.
Any thoughts on long term of GGP.
Well I just mentioned possible.
Further portfolio optimization and it could come from product lines.
And other moves.
So really there are no decisions have been made there just noting that that is possible in the future that some of that continues.
Thanks, so much everyone.
Thank you. Our next question today is coming from Justin Bergner from Gabelli funds. Your line is now live.
Good morning, Eric Good morning Milt.
Adjusted pay just.
Congratulations on the announced deal.
Thank you. Thank you.
A handful of questions.
I'll start with search.
Just three quick questions there.
Are there any sales outside of the semiconductor vertical would be the first the second would be why does this transaction not have a rollover equity component.
And then I guess, the third would be sort of what do you see as the major risk I realize there are a lot of positives with the deal, but it's always good for investors and analysts to know about the risk that you've considered.
Yes.
The answer to the first question is no. This is the revenue base of the company is all focused on the semiconductor industry. So that was question number one I believe.
Okay.
The.
The answer to question number two is Jackson child has decided to take $10 million from its proceeds and invested in that growth stock, so and growth Jackson's a believer in our strategy as well and once the share and the potential that.
That we realized for the next few years, so Jackson will be one of them and for our shareholders and we're excited to have him as part of the family and I don't remember your third question I'm sorry.
The third question was just about general risks that you perceived to this deal I mean, I understand there are a lot of positives and you've highlighted them, but what were the sort of risk that you consider in steel.
Breast of as you move forward to close and integrate.
Well.
There are just general risks that you have with with.
Businesses. There is some customer concentration that's the nature of competing in the semiconductor industry we have.
Capacity expansion that is planned for the United States to support what's happening here and so we know we're going to have some investments to make I mean thats a good problem to have I guess, you could call it that as a risk.
<unk> because it's.
<unk>.
Unknown exactly how it's going to play out, but we're already working on that we're working on that before the acquisition of nex edge.
And the addition of next edge actually makes that.
Probably less risky.
Then if we were going at.
Without <unk>, just because of their strength and capability in the U S.
So I'm not sure I would.
There are any other risks that I would highlight Eric just timing I think the biggest risk is.
Intel Samsung and their investment gets delayed or it takes longer than we think but that would be in out years. So that would be <unk> 2425, something like that but I, absolutely don't see risk in the long term.
Semiconductor strategy in the U S.
Okay. Great. Those are that's very helpful. Just always good to know the other side of the equation.
And then in regards to the results and guidance. So I mean with the guidance essentially have kept the high end on the adjusted EBITDA, if not for the polymeric components.
Divestiture. It seems like the answer is yes, but just to confirm that and then the second thing is.
If the sales guide is increasing and it looks like it's increasing about $10 million midpoint, and absorbing 10 million plus.
Of the divested sales why isn't the EBITDA guide going higher or is that because you know there.
There are some supply chain headwinds offsetting.
The better sales pace or what is constraining the adjusted EBITDA.
Yes, it's a little bit more granular to answer the question, we have Philip business by business, but I think.
I think some of it is what you described some of it is were anticipating higher SG&A costs.
As we're returning a little bit more to normal how that's all in advance of supporting additional future growth obviously.
Because we spend SG&A and we travel and we meet with customers for a reason.
So all of that.
Yes.
Our outlook for the fourth quarter, and therefore, our revised guidance for the year.
Okay, Great and then it would have clipped the high the high end of the EBITDA range, where it stayed the same without the Palmer correct correct last night revised it you're right. It's it remains unchanged at the high end, except for the divestiture of polymer polymer components, which I think you and our investors understand.
Okay, and just lastly on the <unk>.
Higher sales guide, but sort of unchanged EBITDA guide at the high end you mentioned some higher SG&A is there also an element that part of the higher sales guide is just sort of passing through higher input costs and it's not really volume.
Correct.
Yes, that's.
Thats correct and some of the surcharges that Eric talked about as well.
Great. Thanks for taking all the questions.
Thank you.
Thank you we reached end of our question and answer session I would like to turn the floor back over to James for any further closing comments.
Thank you very much everyone that concludes our conference call. This morning talk soon.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.