Q4 2022 EnPro Industries Inc Earnings Call
Hello, and welcome to the <unk> Q4, 2022 earnings conference call and webcast. If anyone should require operator assistance. Please press star zero on your telephone keypad, a question and answer session will follow the formal presentation. As a reminder, this conference is being recorded its now my pleasure to turn the call over to.
James <unk>, Vice President of Investor Relations. Please go ahead James.
Thank you, Kevin and good morning, everyone welcome to entrust fourth quarter and full year 2022 earnings conference call I'll remind you that our call is being webcast and pro industries Dot Com, where you can find the presentation that accompanies this call with me today is Eric Vallat Court, our President and Chief Executive Officer, and Milt Childress Executive Vice.
President and Chief Financial Officer, an important reminder, that the fourth quarter and full year 'twenty to 2022 results, we will be discussing today reflect the continuing operations of <unk> in the third quarter, we determined our former engineered materials segment to be a discontinued operation and we completed the divestiture of its remaining.
Components, GGP and GPT in November of last year and in January 2023, respectively.
All financial data has been recast to reflect our go forward portfolio comprised of the sealing technologies and advanced surface technologies segments.
During today's call, we referenced 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.
So a friendly reminder, that we will be making statements on this call that are not historical facts and that are considered forward looking in nature. These statements involve a number of risks and uncertainties, including those described in our filings with the SEC, including our most recent Form 10-K and Form 10-Q.
Also note that during this call, we will be providing full year 2023 guidance, which.
Excludes unforeseen impacts from these risks and uncertainties and certain uncertainties as well as changes in the number of shares outstanding impacts from future acquisitions dispositions and related transaction costs restructuring costs incremental impacts of inflation geopolitical variable and trade tensions on market demand.
And costs subsequent to the end of the fourth quarter the impact of the foreign exchange rate changes subsequent to the end of the fourth quarter and interest rate increases differing from assumptions outlined in guidance, we do not undertake any obligation to update. These forward looking statements. It is now my pleasure to turn the call over to Eric <unk>.
Our president and Chief Executive Officer, Eric <unk>.
Thanks, James and good morning, everyone. Thank you for joining US today as we review our results for the fourth quarter and full year 2022, and provide a business update then includes our outlook for 2023.
Before I get started this morning, I would like to celebrate Bernard Burns on his retirement from our board of directors.
Service over the past 11 years has been invaluable to our company our people and our go forward strategy, we wish Bernard the absolute best. We're also pleased to announce that Ron Keating will be joining our board of directors and look forward to his future contributions to our company.
2022 was an outstanding year as we continue down the path of driving on pro forward and delivering on our commitments to shareholders customers and our people.
We further optimized our portfolio by exiting the engineered materials segment, which we officially completed last month.
Now have a streamlined portfolio of high margin businesses that compete in diverse markets, where we got technological and applied engineering advantages.
In 2022, our optimized portfolio.
Focus portfolio resulted in a robust organic sales growth and adjusted EBITDA margin expansion of more than 400 basis points.
We achieved these results despite the many challenges that we and others continue to face such as inflationary pressures supply chain constrained macroeconomic and geopolitical variability.
Labor market and increasing interest rates.
We are proud of how our teams continued to demonstrate resilience by advancing our strategic pillars to differentiate and grow as a leading industrial technology company we.
We will now build on our momentum as we empower technology with purpose and grow profitably and responsibly well into the future.
I will now turn to the highlights for <unk> full year 2022, and then we'll jump into share more details on our fourth quarter results and our outlook for 2023.
Our optimized portfolio drove strong results. This year on an organic basis sales grew 14% higher volume across most markets and strategic pricing initiatives each contributed significantly to our organic sales growth.
Adjusted EBITDA of 257 $4 million increased more than 58% compared to 2021.
Adjusted EBITDA margin of 23, 4% increase over 400 basis points, driven primarily by the 14% organic sales increase pricing actions incremental operational efficiencies and the sustained benefits of our portfolio reshaping strategy.
These were partially offset by inflationary pressures, including material wage and freight costs as well as higher operating costs associated with the ongoing integration of <unk> and investments supporting growth opportunities.
Our team remains nimble with Swift execution, as we navigated through inflationary pressures and supply chain constraints, our supply chain and commercial excellence teams as well as our environmental health and safety personnel across the company continued to support safety disciplined supply chain procurement and operational efficiencies.
The company.
For the year sealing technology segment, adjusted EBITDA margins exceeded 25% three years earlier than the target of 2025 set forth during our 2021 Investor day.
William growth strategic pricing and operational efficiencies drove profitability in each of our sealing technologies businesses.
We enter 2023 in a strong position.
Our advanced surface technologies segment ended the year with an adjusted segment EBITDA margin of around 30%. Despite weakening in demand in the semiconductor market seen late in the fourth quarter and while continuing to invest in long term growth opportunities.
Our suite of technological capabilities and process Knowhow will benefit us as we build out our vertical integration strategy and capitalize on opportunities created by the development of regional supply chain for advanced node semiconductor production.
We remain excited about the many opportunities ahead for Asps and are confident in our ability to weather the weaker semiconductor market expected this year.
We just wrapped up our 20th year as an independent public company and with our optimized portfolio now in place we have never been in a better position to grow and pro has a strong balance sheet with a current net leverage ratio of one seven times, we will continue to invest in and enhance our leading edge capabilities and applied engineering.
Expertise.
We evaluate both organic and inorganic opportunities to build our portfolio and expand in key growth applications across many of our markets.
Our culture drives the way, we work daily and we will continue to focus on developing our people and sustainably improving the communities within which we operate we have already made great strides in environmental social and governance priorities, we outlined last year.
And probably as established baselines for each of our facilities measuring electricity natural gas and water usage, we plan to continue improving our resource utilization and efficiency moving forward.
Additionally, we advanced our diversity equity and inclusion initiatives and more than 40% of our talented colleagues three senior levels into the organization are diverse by gender <unk> ethnicity.
Our culture of learning and development empowers, our employees, providing them with resources and opportunities to become future leaders and then growth.
We plan on publishing our next sustainability report later this spring, where we will highlight the great work that has been ongoing throughout the company to limit our environmental impacts improve the lives of our colleagues their families and our communities our government's props processes that are responsible and repeatable.
Internally, we have been hard at work defining our efforts as an organization around our central message mission of empowering technology with purchase purpose.
Each of our products and solutions solve critical problems for our customers and applications that touch each of our lives every day and our colleagues find purpose in their work to drive both our organization and the World forward I will now turn the call over to Bill for a thorough look into our fourth quarter results.
Thanks, Eric.
Eric and good morning, everyone.
<unk> fourth quarter capped off a strong year for our company as reported sales of $271 $9 million in the quarter increased 27, 8% year over year.
Organic sales increased 14, 8% driven as Eric mentioned and by strong demand in most major end markets and strategic pricing actions.
Adjusted EBITDA of $53 $4 million increased more than 39% compared to the prior year period, and adjusted EBITDA margin of 19, 6% increased 160 basis points year over year.
Volume growth strategic pricing actions operational efficiencies and the sustained benefits of our portfolio portfolio optimization were partially offset by higher incentive compensation costs, driven by strong share price performance during the period inflationary raw material and wage expenses and late quarter waiting.
In the semiconductor capital equipment market that affected volume and mix.
Corporate expenses of $15 $6 million in the fourth quarter of 2022 were down from $27 $8 million a year ago, driven primarily by the absence of acquisition related expenses experienced last year.
Partially offset by $2 $4 million of increased incentive compensation expense that resulted mostly from the rise in our share price during the quarter.
Adjusted diluted earnings per share of $1 47 increased more than 48% compared to the prior year period with growth in operating income more than offsetting higher interest expense, resulting from higher debt balances higher interest rates and a reduced benefit from net investment hedges compared to the fourth quarter of 2021.
Moving to a discussion of our segment performance.
<unk> technologies sales of $156 $9 million increased 9% over the fourth quarter of 2021 sales increased organically 13, 4% driven by successful pricing strategies and strong volume in the aerospace and general industrial heavy duty truck and food and pharma markets.
For the fourth quarter adjusted segment EBITDA increased more than 32% over prior year with an adjusted segment EBITDA margin over 26%.
Excluding the impact of foreign exchange and divestitures adjusted segment EBITDA increased about 39%.
Strategic pricing actions operating leverage on organic sales growth operational efficiencies and the benefits of portfolio reshaping actions completed in recent years contributed to the sustained improvement in segment profitability more than offsetting inflationary pressures from raw materials labor and freight costs.
Turning now to advanced surface technologies fourth quarter sales of $115 $4 million increased 67% over the prior year driven by the acquisition of Nex edge and more broadly increased demand in the semiconductor market even in the midst of softness late in the quarter.
Excluding the acquisition and the impact of foreign exchange translation sales increased 17, 5% versus the prior year.
For the fourth quarter adjusted segment EBITDA increased approximately 38% versus the prior year period, driven primarily by the acquisition of Nex edge and strong organic sales growth offset by the impact of the late quarter softness at Sydney markets that adversely affected volume product mix and absorption.
A variable and fixed costs in parts of our semiconductor business.
Excluding the acquisition of FX or foreign exchange translation adjusted segment EBITDA increased 10%.
Notwithstanding the crop reduced demand in parts of the semiconductor market. We are continuing to invest in our advanced surface technologies segment as the long term growth opportunities in this segment far outlay recent market headwinds.
As an example during the fourth quarter, we completed the purchase of our facility in Arizona, which will support future demand in the United States driven by the regionalization of the semi supply chain.
In the year ahead will be updating the facility.
As we have noted previously this facility will focus on products and solutions for advanced node wafer production.
Across the segment, our robust portfolio of leading edge solutions, our depth of talent and the strength of our innovation engine provide us with a unique value proposition for our customers. We are confident that ASE is poised to capture the long term organic growth opportunities.
Turning to the balance sheet and cash flow analysis, we ended the quarter with cash of $334 million and full availability of our $400 million revolver less $10 $8 million in outstanding letters of credit.
At the end of December our net debt to adjusted EBITDA ratio was approximately one eight times and as Eric noted currently stands at about one seven times.
In 2022, we repaid more than $370 million and net borrowings inclusive of the acquisition of the Noncontrolling interests and lean Tech.
Using the after tax proceeds from the engineered materials divestitures.
Charlie generate cash and repatriation of cash from our foreign subsidiaries in 2022, we repatriated just under $300 million in cash from foreign locations and expect to bring back an additional $100 million in 2023.
As Erik highlighted our balance sheet is in excellent shape, we have ample financial flexibility.
Our strategic initiatives, both organically and Inorganically as we drive our long term growth of the company.
We generated free cash flow of approximately $105 million in 2022, when excluding an estimated $26 million.
Tax payment on the gain on sale of GTD.
Capital expenditures totaled $30 million up from $15 million last year, due primarily to the fourth quarter purchase of the Arizona facility.
Operating working capital relative to sales was up modestly as we continue to invest selectively in inventory to support customer demand respond to certain constraints in the supply chain and build inventory of high value products.
During 2022, and we paid a <unk> 28 per share quarterly dividend totaling $23 $4 million for the year.
On February <unk>, our board of directors approved a 4% increase to the quarterly dividend to <unk> 29 per share.
Three additional items to note on the quarter before moving to our outlook for the year ahead first we recognized a $65 $2 million noncash goodwill impairment charge in the fourth quarter in the electric business, which we acquired in the fourth quarter of 2020.
The impairment was a function of both reduced cash flow projections for the business compared with earlier outlooks and an increase in the discount rate, resulting from rising interest rates the impact of the higher discount rate was approximately $50 million.
Notwithstanding this noncash charge, we expect a lesser a provider of optical filters for the most advanced applications to grow at high single digit to low double digit rates well into the future.
Second in December 'twenty.
Last year as alluded to earlier, we acquired the full noncontrolling interest in latex held by its former owners who remain leaders in this business. This.
This purchase reduced our remaining redeemable noncontrolling interests, which we include in our net leverage calculation to $18 million the remaining noncontrolling interests related to Alexa.
Lastly, three weeks ago, we completed the divestiture of GPT. Following the strategic review that we announced in early September of last year, we expect to receive net after tax proceeds of approximately $25 million from the sale transaction.
Moving now to our 2023 guidance, we expect our optimized portfolio of high margin businesses to perform well during what could be a difficult year from a macroeconomic perspective in particular in the semiconductor sector.
Taking into consideration all the factors that we know at this time, we expect total pro sales growth to be in the flat to low single digit range.
And the sealing technologies segment, we expect full year revenue revenue growth in the low to mid single digits or.
Patterns in sealing remain constructive and we expect a strong start to the year.
Within this segment, we see pockets of strength in markets, such as aerospace nuclear energy and food and pharma and we expect demand in other markets, we serve to largely mirror the general industrial economy.
The short cycle nature of a large portion of sealing technologies, along with an uncertain macro economic outlook makes our second half outlook for sealing more difficult to predict.
Strong aftermarket mix, which currently approximates approximates two thirds of segment revenue provides a buffer during periods of economic softness at our enduring brands and technological strengths offer strong value propositions independent of the economic cycle.
And the advanced surface technologies segment, we currently expect sales to be in the range of flat to negative 5% for the year.
Guidance assumes that both wafer production and capital equipment demand stabilized in the first half of the year with growth resuming in the second half.
As noted earlier, we will continue to invest in the promising opportunities in the segment to drive long term high margin growth, while focusing in the near term on controllable costs.
I am confident in our ability to outperform the overall semiconductor market, while continuing to invest in our leading edge capabilities.
For adjusted EBITDA, we expect a range of $248 million to $260 million and for adjusted diluted earnings per share a range of $6 45 assets $7 <unk> per share.
As you May recall, our 2022 earnings benefited from currency related transaction gains, which combined with translation at current exchange rates creates a $6 million adjusted EBITDA headwind in 2023 relative to 2022 and.
In addition.
Despite lower net debt in 2023 compared to 2020 to the rise in interest rates and reduced benefit of net investment hedges will result in net interest expense increasing to approximately $40 million.
Also of note the normalized tax rate used to calculate adjusted diluted earnings per share in 2023 is 25% down from 27% last year as a result of the completion of our portfolio reshaping actions that have significantly reduced our European exposure.
As we have in the past, we will navigate through any challenges by focusing on the long term value, creating attributes of our company to emerge in a position of even greater strength.
Now I'll turn the call back to Eric for some closing comments.
Again, 2022 was an outstanding year for and growth, we executed well and continued optimizing our portfolio as promised.
With the divestiture portion of our portfolio optimization efforts complete we enter 2023 with a streamlined portfolio of market, leading businesses that safeguard critical environment and meet the mission critical needs of our customers are.
Our businesses operate in attractive end markets, where we are well positioned for growth through our enduring technological advantages I'd like to take a moment to thank all of our colleagues across <unk> for your dedication and terrific performance. Your hard work continues to be the foundation of our success. Thank you again for joining US today. We appreciate your interest in <unk>.
Company now open the line for questions.
Thank you well 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 true move your question from a Q1 moment. Please while we poll for questions our first <unk>.
<unk> today is coming from Jeff Hammond from Keybanc capital markets. Your line is now live.
Hey, good morning, everyone.
Good morning, Jeff and Jeff.
So just to dig in on the semi softness just.
Maybe you can give us a little better picture of kind of where youre seeing it is it cleaning and coding is it the legacy business.
Is it somewhere else and then.
I'm just trying to understand kind of the margin bridge from <unk> to <unk>.
Pretty.
A pretty steep drop and you know how much of that is kind of mix in the absorption issue versus.
Kind of investments for the long term.
<unk>.
Eric do you want me to jump in and jump on that and then you. Please come in with some color. So yes, if you look at the fourth quarter, Jeff we.
We did see some of the downturn late in the quarter in the semiconductor industry affected us more in certain parts of our company that it did others.
Some of our higher margin.
Coatings business was affected some of the precision machining business was affected and.
When something happens fairly quickly.
The essentially all your cost in the short term our fixed cost.
And so the degradation in margins that you saw from Q3 to Q4 in <unk>.
Is largely a function of both the mix.
And the inability to adjust cost structure.
Given a fairly abrupt change in the market dynamics.
So.
Other parts are.
Our cleaning solutions business continued to perform well in the quarter. Our legacy will continue to work off of a strong backlog.
Yes, we saw it in pockets not across the board.
So I think that addresses most of your questions.
You'll note that we have taken action on the variable costs.
So you will see that we will be able to talk more specifically about that on our next earnings call.
Yes, the only other pieces just investment.
That might not have been capitalized you know around you know kind of growth opportunities I don't know if thats stepped up in <unk>.
Yes.
It was probably.
It's starting to step up more and more as we progress.
With the expansion in the southwest.
So it was probably in the million million and a half range in the quarter and then looking ahead to next year I suspect, we're going to be up in kind of mid single digits from an operating expense expense standpoint, and perhaps.
I would I would gauge it.
As sub sub $10 million on the capital side as we continue to update there'll be more investment to come beyond 2023.
Okay.
And just maybe level set us on.
Where do you think you know margins are for Asps in that flat to down five in.
You know with some of the adjustments you make to the cost structure versus kind of the investments you did 30. This year is that a is that a good line set are we closer to 28 are or just maybe a little more color on that.
Yes.
Here's what I've said.
It's a tale of two cities, which is which is really a positive for us in terms of stability.
And I know you are asking about asps, but first of all to say, we're entering the year in sealing in a great position and we expect strength continued strength in the first half of the year and then we will see what the economy gives us in the second half, but we will adjust accordingly, there and then ASE as we're looking at it now it's the opposite the reverse so we're entering into.
You.
2023 with volumes still being down.
And then we're expecting that to stabilize and then to resume growth in the long term outlook as you know.
It is very positive for this segment.
But we expect growth to assume in 2000.
Uh huh.
<unk> 23 in the second half and so your question about volume is going to be largely.
Marge answers can be largely a question of volume and what kind of volume declines we see in the first half and then how do we how do we bounce back in the second half I know I didn't answer I'll give you a specific number but.
That's kind of a color around that.
Jeff Jeff It's Eric Let me give you some color on the backlog and maybe that'll help and maybe it'll provide more clarity or maybe even a little less because it's uncertain to us as well if you look at sealing overall the backlog is up both in the near term.
Compared to last year at this time and also the backlog when I call longer term over 12 months. So it's up in both places.
Look at ASD. That's also true so our backlog is stronger December 31 of 22, then December Tony December 31 of 2021, South was stronger in the near term and the long term. So our business Foundation is still a very very strong.
There's a lot of uncertainty in the macroeconomic environment.
If you look at the sequential fall off from fourth quarter to first quarter. It's also normal.
So we don't have a lot of visibility and a lot of our business is short term.
And Thats the hesitation I think to give you a more precise number at the moment.
Okay, and then just just on the <unk>.
Last one on Asps.
Second half recovery is that an expectation or a forecast that the semiconductor market recovers or is that a function of some of this backlog visibility that you have in hand or or some of the you know some of the growth opportunities here in the U S.
Okay.
It's a function of all of it but primarily our assumption is in line with what we're seeing from industry experts as you are second half recovery.
Supported by our backlog and what we're hearing from our customers at this point.
Yes, we do expect outperformed the market. So if you look at Gartner, others, we expect to be much stronger than that.
But thats the only visibility we have at the time.
Okay. Thank you.
Thank you next question is coming from Steve <unk> from Sidoti and company. Your line is now live.
Good morning, everyone I appreciate all the detail on the call. This morning.
Alright dig into the other segments, the sealing side, which reported another really strong quarter. It sounds like some of your larger end markets continues to look healthy.
Looked like it can be healthy through 2023, if you look at some of the industry forecast I'm trying to get a sense on the.
It's a low to mid single digit growth I guess in terms of <unk> and then as Youre looking out to next year, how much of that spend has been and will continue to be pricing and how sticky that pricing can be for instance.
Is your pricing up mid single digits. So that you only need flat volume Mark could you give us a sense of.
Ice versus volume there.
I would say our pricing is very very sticky. So it typically doesn't change much we'd have some surcharge, but there we don't leverage that either snack Watson will go up and down and adjust as freight as a as an example.
So I would say its a mixture of price we have some carryover from last year, certainly and we will also have always have pockets for price increases.
In detail customer customer product line by product line, but I don't see a lot of broad based price increases at this point, so I would say less price than we've had in the last year certainly.
Similar oriented growth.
And Steve just if we are in.
Quarter, four I would say in sealing price versus volume is probably.
Largely equal a little bit heavily weighted a little bit more heavily weighted towards price in the quarter for it.
Results.
So if we play that out over next year.
Youre looking at at least low single digit growth just on price alone right I'm, just trying to think about why that couldn't be higher if those some of those end markets hold up through 2023, and obviously second half the second half.
It's certainly possible.
Largely going to be based on the.
Macro.
Outlook versus what actually happens in the second half of this year, so its entirely possible yet you're right Steve.
Great I would say.
So caution around quarter four around in the second half and then future.
Current demand trends, we're entering very strong.
<unk> in sealing.
The guidance on net interest expense of 40 million. It looked like it was about $10 million in the quarter, we know there'll be some further interest hikes on your on your variable but.
That's $40 million guidance is not assuming anything on debt repayments.
At this point we are.
Preserving our balance sheet and our cash position just to see how the first half of the year plays out and then when we get to the first half will have a better idea for the outlet for the second half.
And so we're just being very cautious.
And we want to preserve capital.
This uncertain environment as much as we can now think it's I think it's likely as we get to the second half of the year that we'll reassess and depending on what our.
The opportunities we see for investment in the business and what our capital needs are whether it's inorganic or organic.
It's possible that we could choose to pay down some of our term debt.
Totally out of our revolver and we paid off all of our revolver balance. So the only debt we have outstanding SaaS, our senior unsecured notes are.
Some term debt and we can prepay that without penalty in the tab.
And then Steve just to know remember in the September quarter.
One of our net interest expense hedges had had matured and we collected cash during that time and just for.
Quantification purposes in modeling that saved us about $5 million in interest expense last year that we do not expect to recur this year.
And the reason for that just as a reminder.
The net investment hedge was tied to our.
Euro.
Denominated portion of equity in our in our company and obviously with a lower.
European presence out there.
It's not appropriate to carry the same thing and we got some significant benefits from the debt we still have.
A tranche of the net investment hedge in place, but the larger of the two that we had a matured as James mentioned.
B.
Did you offer capex guidance for this year.
I did I did not but we do expect it to be up.
Considerably from.
From prior year.
And part of that is it's very intentional on our part we've we've seen Eric can jump in here in a minute, but we have seen.
A number of opportunities that are emerging in our business to drive projects that are going to be good shareholder value, creating opportunities and we were hampered over the past couple of years from just getting people in our facilities because of the pandemic and so as we're coming out of that we're identifying.
More good investment opportunities.
And with Covid, we just couldn't get people in the plants due to the work we have a lot of automation opportunities that really take advantage of this year that will drive shareholder return for this year. Some of this year and of course later on as well.
Yeah, and I would gauge it being closer.
Excluding <unk>.
The Arizona project.
Put brackets of 335%.
Sales and then if you.
If you include the updating in Arizona, we could get up to close to 4% of sales in that range. So our normal target. We've just under spent the last couple of years.
Yep.
Okay.
You went a little bit through the goodwill impairment on <unk>. It sounds like a significant portion, but not all was related to higher interest rates can you give us a sense of how Alexa is performing versus your expectations. When you closed that acquisition.
Well you know it is.
We indicated it.
When discussing the goodwill impairment.
We did reduce our cash flow projections going out, but it's still a very.
Got it.
The company strategically isn't that just.
In an outstanding position they compete at the highest end.
And optical filter filters they take on the most demanding applications is consistent with what we do as a company is in pro around our company.
As I mentioned in my prepared remarks.
The outlook is still for low double digit I mean, excuse me low single digit too.
Excuse me high single digit to low double digit growth for the foreseeable future. So.
Yeah. Those are my comments on the on the business itself.
The business overall is very strong basically we got into a little bit behind with Covid because it came in.
Some work slowed down and but we're accelerating again like what we got into the future. It's a great business.
Okay.
Thanks, everyone I appreciate the commentary.
Thank you we've reached end of our question and answer session I'd like to turn the floor back over to James for any further or closing comments.
Thank you very much for your time today have a terrific rest.
The rest of your day.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your line at this time and have a wonderful day, we thank you for your participation today.