Q1 2023 EnPro Industries Inc. Earnings Call
Greetings.
And welcome to the Aimco first quarter 2023 earnings conference call.
Time, all participants are in a listen only mode a question.
And answer session will follow the formal presentation.
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As a reminder, this conference is being recorded I would now like to turn the call over to James John Kelly, Vice President of Investor Relations. Thank you you may begin.
Thanks, Darryl and good morning, everyone. Welcome to <unk> first quarter 2023 earnings Conference call I will 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 <unk>, our President and Chief Executive Officer, and Milt Childress Executive Vice President and Chief Financial Officer.
During today's call, we will reference a number of non-GAAP financial measures tables reconciling the historical non-GAAP measures to the comparable GAAP measures are included in the appendix to the presentation materials.
A friendly reminder, that we will be making statements on this call that are not historical facts and that are considered forward looking in nature.
These statements involve a number of risks and uncertainties, including those described in our filings with the SEC, including our most recent Form 10-K.
Also note that during this call we will we will be discussing our full year 2023 guidance, which excludes unforeseen impacts from these risks and 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.
Subsequent to the end of the first quarter the impact of foreign exchange rate changes subsequent to the end of the first quarter and interest rate increase is different from the 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 Vallat, CT, our President and Chief Executive Officer, Eric Thanks, James and good morning, everyone. I'm pleased to update all of you on another outstanding quarter and grow before we begin I would like to share that Milt Childress has announced his plans to retire in the first half of 2024, while milk is not going away anywhere.
Yes, I would like to take a moment to recognize his many contributions to <unk> growth for the past two decades.
There's been a great partner to all of US and we know they have significant important impact on our organization will live on well into the future. We are moving forward with the process of identifying the right leader to succeed milk and we are pleased that he will remain with us to ensure a smooth transition once a successor is named.
Now I'll turn to the first quarter results.
We delivered outstanding financial results this quarter driven by a record performance in sealing technologies segment, and our advanced surface technology segment successfully managing the current slowdown and semiconductor equipment markets. We are proud of all of our team members across the enterprise, who together have helped us to get off to such a strong start for the year.
In the first quarter sales increased almost 5% year over year with organic sales increasing more than 6%.
We saw strong demand in several of our sealing technologies markets, which more than offset headwinds in certain areas of our semiconductor business.
Our performance this quarter highlights the benefits of our balanced portfolio of high margin businesses with technological advantages serving critical applications that touch our lives every day.
We achieved record results in sealing technologies during the quarter evidenced by the significant year over year increase in adjusted EBITDA and Asps. We are actively engaged with our customers to capitalize on growth opportunities and semiconductor markets recover.
We are proud of the agile culture, we have built grounded in our focus on innovation and continuous improvement, which combined with our technological and apply an engineering advantages.
<unk> been grow to outperform regardless of the macroeconomic environment.
We had a terrific quarter and now I'll hand, the call over to Mel to discuss our financial results in more detail. Thanks.
Thanks, Eric.
I appreciate your kind words, and your introductory comments and probably spend about home for nearly two decades and I'm incredibly proud of all of our team.
And what our team has accomplished over that time.
I've never even though Theres news now my retirement I've never been more enthused about our company.
Never in my 20 years, nearly 20 years of being here and remain focused and I remain focused in the year ahead on continuing to build upon our strong momentum.
And to ensuring a seamless CFO transition prior to my retirement next year now.
Now to our financial results.
As Eric noted, we had another strong quarter of execution and results reported sales of $282 $6 million in the first quarter increased four 6% year over year and organic sales were up six 3%.
Strong demand across aerospace nuclear general industrial and commercial vehicle markets. In addition to pricing actions in response to inflationary pressures more than offset a reduction in sales due to the current slowdown in the semiconductor market.
Adjusted EBITDA of 68 $6 million increased 16, 3% over the prior year period, driven primarily by operating leverage on volume growth in sealing technologies and pricing initiatives in response to labor and material cost inflation as well as cost controls keeping SG&A expenses in check.
Adjusted EBITDA margin of 24, 3% expanded more than 240 basis points compared to the first quarter of 2022.
Corporate expenses of $10 $7 million in the first quarter of 2023 decreased from $12 $9 million a year ago, driven primarily by decreased incentive compensation accruals and reduced restructuring and professional expenses.
Adjusted diluted earnings per share of $1 95 increased 25% compared to the prior year period strong operating results drove the increase in addition to the decrease in our normalized tax rate to 25% from 27% in 2022.
Net interest expense was up only modestly despite higher rates and the maturity of a portion of the net investment hedges in September 2020 to.
Lower debt balances and the good work by our Treasury team to deploy cash and short term investments to say higher yielding instruments, partially mitigated the increase.
Moving to a discussion of segment performance.
Sealing technology sales of $173 $3 million increased 12, 8% driven by strong demand in several key end markets as discussed earlier.
Excluding the impact of the business divested in the fourth quarter of 2022 and foreign exchange translation sales increased 15, 1%.
For the first quarter adjusted segment EBITDA of $49 $7 million increased almost 45% and adjusted segment EBITDA margin expanded 640 basis points to 28, 7% strong volume growth and favorable mix, particularly in our aerospace and nuclear business.
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Operational improvements in our commercial vehicle business and effective pricing strategies in response to inflationary pressures drove record performance in the sealing technology segment.
Excluding the impact of the divestiture and foreign exchange translation adjusted segment EBITDA increased more than 48% compared to the prior year period.
Turning now to advanced surface Technologies' first quarter sales of $109 $4 million decreased six 3% driven by the current slowdown in semiconductor capital equipment spending.
The impact of foreign exchange translation sales decreased five 3% versus the prior year period.
For the first quarter adjusted segment EBITDA decreased 15, 5% to $29 5 million.
Driven primarily by the decline in volume unfavorable mix and higher material and labor costs.
Clearly the impact of foreign exchange translation adjusted segment EBITDA decreased 13, 5%.
For the first quarter adjusted segment EBITDA margin was 27%.
We have taken measured actions to reduce operating costs in response to the slowdown in demand without sacrificing our ability to capitalize on the numerous opportunities for growth driven by our positioning in the semiconductor industry and the differentiated products and solutions, we offer our customers.
Yeah.
Turning to the balance sheet and cash flow, we ended the quarter with a net leverage ratio of one six times.
With cash and short term investments of more than $370 million and nearly full availability under our $400 million revolving credit facility, we have ample financial flexibility to execute on our long term strategic growth initiatives.
Free cash flow for the first three months of 2023 was $21 million down.
Down from $24 million in the prior year year over year decrease in free cash flow was driven by higher net interest payments and higher capital spending and working capital investments to support growth, which offset the increase of operating profit.
And during the quarter, we paid a <unk> 29 per share quarterly dividend for the first three months of the year dividend payments totaled $6 2 million a.
Five 1% increase versus the prior year.
Moving now to our 2023 guidance.
We maintain the annual guidance issued in February and continue to expect revenue growth of flat to low single digits adjusted EBITDA of 248 million to $260 million and adjusted diluted earnings per share from continuing operations of $6 45 to $7 of SaaS apps.
Compared to a quarter ago, when we first initiated guidance for the year, we expect stronger full year results in sealing technologies offset by lower results in advanced surface technologies.
In sealing technologies, our guidance reflects expectations for continued strong results in the second quarter and the assumption of some macroeconomic softness in the second half.
An advanced surface technologies, our guidance reflects a softer second quarter relative to the first quarter.
And based on customer input.
Stabilization in semiconductor demand by the fourth quarter with the resumption of growth in 2024.
Thanks for your time today, and now I'll turn the call back to Eric for some closing comments.
Thank you Bill our teams continue to execute at a high level and demonstrate agility to drive our strategic priorities forward and deliver for our customers in the quarter resulted in sealing technologies were exceptional.
However, this segment's advantages are unclear display.
In sealing we will continue to invest in new product development and continuous operating improvements while prudently considering acquisitions that will enhance our strong competitive position over time.
We are executing very well through a short term demand slowdown in semiconductor over a multiyear period. We continue to expect strong organic growth and are well positioned to capitalize on a variety of exciting opportunities using our technological advantages to deliver comprehensive solutions for our customers are.
Our results demonstrate both our ability to outperform across economic and industry cycles, and the resilience of our portfolio of businesses.
With our well capitalized balance sheet and strong free cash flow generation, we will continue to invest in growth opportunities to build upon our strong foundation.
As I share every quarter I am proud of our team and our many accomplishments as we continue to do what we said we would do execute on a multi multiyear strategy to drive and pro forward as a leading industrial technology company, while empowering technology with purpose.
Thank you for joining us today, we appreciate your interest in and growth now open the line to questions.
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One moment, please while we poll for your questions.
Okay.
Our first questions come from the line of Jeff Hammond with Keybanc. Please proceed with your questions.
Hey, good morning, everyone Milt congrats on the announcement, it's been great working with you and look forward to.
Certainly the next the next couple of quarters.
Just really wanted to dig in on kind of the the semiconductor you know incremental weakness, where you're seeing it what's kind of the confidence that you know this is the last cut here and then just maybe expand on kind of the mix and cost take out dynamics and how we should think about that.
<unk> playing out in a S T from here.
Yeah. Thanks, Jeff.
And by the way I'm not going anywhere I'll be here for allowances I'm trying my luck on retirement.
Yes.
I've told the team here that I'd, rather have a Roy Williams type retirement, which is just at the end of the season of resident coach K, but the coach K announcement works best for the whole process.
So to your question.
The dynamics in the first quarter in semiconductor are very similar to what we described on our fourth quarter results we had.
Areas that were still relatively strong and a good portion of our semiconductor business.
And what drove the decline and the weakness was primarily.
And.
Part of our business.
That is coatings related.
And it happens to be one of the higher margin product lines as well. So your question about leveraging.
You saw a fairly high.
Downward leverage on the decline in sales is primarily just because of mix.
In the pocket.
Pockets of our of our semiconductor business.
That will rebound.
And to your question of win based on customer feedback. We think Q2 Q3 likely will continue to be relatively slow.
The industry and then stabilization in the fourth quarter and strong growth in 2024. So we have no concerns with them, we sleep well at night, we're doing the right things to control cost, we're still making the investments that we want to make whereas still having the conversations with customers about new platforms.
Long term growth.
We're positioned extremely well and we're executing extremely well in that segment notwithstanding the results.
Okay and then.
You mentioned kind of strong growth in 2024, just maybe update us on.
Kind of new wins visibility there you know obviously, it's hard to call a cycle, but you know just.
Seeing what you can control and in some of the new opportunities.
You know kind of you know what.
What kind of underpins our confidence in growth in 'twenty four.
Underpinning the growth in 2024 is our pipeline when you look at our pipeline of new new products, new new customer wins, new vertical integration from the re shoring all of that is very very positive I think we had 31 new opportunities.
Since the fourth quarter, and we expect to capitalize in our typical closed I should probably give you that typical close rates in the 30% range and so I expect us to ramp up very very quickly and not only that these the existing business is going to recover. So we're going to continue to win new business as well as just grow with our existing customers and we also picked up some new customers.
Exciting with some technology.
I'd also like to add that some of the recurring revenue characteristics of of the ASC segment have continued to stabilize some of the cyclicality that we have.
The near term here given some some some.
Weakness in the capital equipment space, but you.
You can expect us to continue to move forward on building, our refurbishment and cleaning coating capabilities moving forward.
Okay, great I'll get back in queue.
Thank you our next questions come from the line of Steve <unk> with Sidoti <unk> Company. Please proceed with your questions.
Good morning, everyone I appreciate all the color on the call.
I wanted to follow up with some of the questions on the chip industry.
Obviously as we go through earnings season, we're hearing a variety of very different outlook from the timing of a recovery I'm just trying to get your sense. If it was stronger and faster in the second half than you thought can you give us some some color on the cost you've taken out and how quickly you could put them back in if we do see a better recovery or faster.
Maybe youre guiding for right now.
I'm not sure I understood. The question, but I can tell you that the Cogs right you.
We don't need to put back in.
The cost we took out we've gained an improvement so we don't need to add to actually grow but I'm not sure. The first part of your question.
What we've heard is obviously some of the larger chipmakers thinks it's a recovery could come faster in the second half then maybe reflected in your guidance is what I'm, saying. So just quick how quickly you could step up again, because the idea of future temporary costs out yes.
Yeah, we can step up we can serve up quickly we set them up multiple occasions. It's worth repeating here is we're executing extremely well if you look at that.
Our revenue decline.
It really is pretty strong results given what you've seen in the industry with the industry decline data, which now WSB. The latest I think it was down 22% for the year with Gartner on the.
The semiconductor industry down 6% for the year overall, let me just look it up.
Yeah, Jim consumption units.
So <unk>.
Our performance if you look at the blend of those two has really been quite good.
Yes, we will respond to whatever the environment is we're being cautious we don't know with the lag in how much inventories in the system.
When the uptick will start benefiting us, but when it does we'll read.
The issue and ultimately your customers have a fair amount of inventory and we won't respond until we move through that inventory. So although they see the orders up picking it may take a little lag before we see it but once we see it will respond immediately we can respond today frankly with the orders.
Okay. That's fair that's helpful. Thanks can you give an update on the Arizona facility and how Youre seeing development on.
U S chip infrastructure.
We're ready and going and keep continue to be on target. So we're ready as soon as the customers are ready.
Okay, and then turning to sealing pre inflation get one more in obviously commercial aviation looks very strong for the remainder of the year commercial trucks.
Order books look good but clearly the market thinks it's going to soften if we look at some of those stocks. How are you seeing orders right now in terms of your commercial truck customers and how.
Are you getting more confident on the second half.
Yeah, No sealing is performing outstanding if you look at our commercial truck market. FTR is latest report actually shows a recovery. So since July of last year, they've been showing a decrease month over month and I think it was.
Improved from negative one 6% to flat for the outlook for the rest of the year that bounces around a little bit and if you look at EPS package deliveries there down so it's a little bit hard to tell we're getting conflicting information, but our business is doing outstanding and continues through to us and we talked about it in the first quarter of last year are having some softness and improving in that business and we.
Have we continue to execute and do the things we say, we're going to do when you look at that.
Rest of the sealing business techniques with the space Aerospace business nuclear performing just outstanding it's incredible what theyre doing today in Garlock, just continues to surprise and deliver more and more when you look at the margin expansion in that business and continuous improvement effort is just fantastic.
We have great businesses, they are performing extremely well.
When you look at our margin right now at 28, 7% a few years back we said we'd get to 25.
I'm not sure where the sealing is but we continue to find ways to improve and find the annealing in sealing I'm just yeah.
And about all of our businesses and we're executing flawlessly across all of them.
Exciting to see.
Perfect. Thanks, Eric Thanks Mel.
Hi.
Thank you our next questions come from the line of Ian Zaffino with Oppenheimer. Please proceed with your questions.
Hi, great. Thank you very much no doubt, it's great working with you as you're gonna be missed for sure.
Thanks, David keep in mind there'll be alright.
Yeah, Yeah at least for a little while ago.
As far as just if I could sneak in another question on a S T.
You know when you talk about softness can you maybe tell us where are you seeing that or maybe just kind of parse. It by you know what are you seeing in the equipment side versus the cleaning and coding side and then maybe you know what are you seeing sort of logic versus non law Jaguar, leading edge versus non leading edge. If you could kind of help us understand what's.
The moving parts are if you bucket it that way.
Yes.
Go ahead, Eric Yeah, So leading edge continues to be very strong and we see that across across the portfolio weakness in memory and computing.
Cpus, that's where it hits, our coding business and equipment businesses I would say just just getting inventory in balance. So we have mixed kind of results across the segments, but the biggest margin pieces in the coating business and thats in memory and in Cpus, and Thats, where were seeing the biggest impact currently today.
And then when you look at Alexa Alexa is doing great collections back growing and performing like we expect and margins are improving another great business. So overall, we're executing extremely well and the only thing we needed a little bit of market stabilization and our results will accelerate.
Okay. Good and then also how are you thinking about M&A here the environment.
As far as multiples any holes you think you need to plug right now or any kind of other areas you wanted to enter or get deeper into.
Well, we would love to get deeper into the Garlock Iconix technology space. We'd also look at other opportunities in nuclear but right now we're focused on sealing.
We have some great opportunities there, but again, we're going to remain disciplined and will be.
Very disciplined in our approach we look at opportunities holiday everyday almost but we're looking for the right opportunities at the right valuation and as we continue to be disciplined and look for good opportunities, but we are we're definitely active we just haven't found the right thing yet.
So the question is the availability and obviously with the recent rate increases.
Affecting maybe the M&A market. There is no reason for us to press.
Sure.
We're just waiting for the right opportunities our pipeline is incredibly robust with very solid high margin businesses that are in there.
Participating in secular tailwind.
When one or more of those properties come available.
We'll definitely play to win and we will make sure of that.
On the underlying strategy and underlying financial criteria will will delight.
And I'll just add will remain.
Vigilant and watchful to maintain it.
Very strong balance sheet.
Okay.
Alright, perfect. Thank you very much.
Thank you as a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question comes from the line of Jeff Hammond with Keybanc. Please proceed with your questions.
Hey, guys just a couple of follow ups here.
I'm, just trying to understand kind of the magnitude of the good and sealing versus the <unk>.
The offset in N S T just to kind of.
No understand kind of how much better sealing is how much worse are S. T S.
Yeah, you can tell about my comments.
Around guidance for the year and the fact that we've maintained.
But indicated that we expect sealing to be stronger for the year for the full year.
Asps to be lower relative to where we were a quarter ago for the full year. So the two essentially offset right.
The message and your takeaway from my comments earlier.
If.
If you look at the.
Maybe the outperformance in.
Sealing relative to your expectations in the first quarter.
And.
Add a little bit.
For for a strong quarter, perhaps not the same magnitude.
The outperformance relative to your expectations.
That will give you a pretty good idea pretty good idea of.
Of the change from a quarter ago our.
<unk> so.
Sealing up and then offset tempered tempered by some caution.
On expectations for Asps for.
For the balance of the year.
Does that help you does that help you.
Yeah, that's very helpful.
So and then just just on sealing you know any kind of I know mix was favorable but any kind of aberrations in that margin.
Maybe how to think about.
Martin cadence from here and kind of revisiting that that long term margin target, which you're you're kind of running above.
Okay, what I can say right now.
We expect it to continue the way it's gone there wasn't any aberrations there wasn't really one time thing that affected the margin. It was just excellent execution and like I said before we continue to have continuous improvement efforts.
But we need to remain balanced.
The mix is very favorable right now when you look across the portfolio and also the second half of the year is a little bit unknown. So we have some caution in there for that as well and it just depends on what the general economy does.
The team will continue to perform flawlessly I don't have any doubt about that.
Okay, great. Thanks, guys.
Thank you there are no further questions at this time I would now like to hand, the call back over to James Johnson for any closing remarks.
Thank you for your interest in <unk> and have a great day.
Thank you. This does conclude today's teleconference. We appreciate your participation you may disconnect. Your lines at this time and enjoy the rest of your day.