Q2 2023 EnPro Industries Inc Earnings Call
Greetings and welcome to <unk> second quarter 2023 earnings Conference call.
This time, all participants are in listen only mode.
And answer session will follow the formal presentation.
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Please note this conference is being recorded.
It's now my pleasure to turn the conference over to James Gentilly, Vice President of Investor Relations Mr.
Mr Jin, telling you may begin.
Thanks, Rob and good morning, everyone. Welcome to <unk> second quarter 2023 earnings Conference call 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 Vaillancourt, our President and Chief Executive Officer, and Milt Childress Executive Vice President and Chief Financial Officer.
During today's call will reference a number of non-GAAP financial measures tables reconciling historical non-GAAP measures to the comparable GAAP measures are included in the appendix to the presentation materials also 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 include eating.
So as described in our filings with the SEC, including our most recent Form 10-K.
Also note during this call we'll be discussing our full year 2023 guidance, which includes unforeseen impacts from these risks and uncertainties as well as changes in the numbers of 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 second quarter the impact of foreign exchange rate changes subsequent to the end of the second quarter, an 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 <unk> President and.
<unk> Executive Officer, Eric Thanks, James and good morning, everyone. We're pleased to have delivered another solid quarter with total adjusted segment EBITDA margins of 29%.
Our optimized portfolio is showing balance a strong performance in sealing technologies, roughly offset weakness expected in asps.
That was driven by ongoing headwinds with semiconductor markets.
<unk> with our strategic priorities, we will continue to invest in multiple growth and productivity opportunities. It will build upon our strong foundation as we position <unk> for long term growth and value creation.
In the second quarter sales were essentially flat year over year with organic sales up slightly.
We saw steady demand in several of our sealing technologies markets with strong profitability in Q2 and year to date.
Asps based on recent customer feedback and overall market forecast, we now anticipate the expected recovery in our semiconductor markets to begin in 2024.
We continue to invest in various growth sectors or vectors.
As the semiconductor industry is expected to roughly double to one trillion by 2030.
And our positioning on the leading edge, we will continue to serve us well as the industry recovers in the meantime, we continue to successfully execute in Asps.
As evidenced by the year to date adjusted segment EBITDA margins exceeding 25%.
And fueling technologies, we delivered fantastic results with strong operating leverage and price realization in each of the businesses.
In particular, we saw incremental strength in our aerospace and nuclear energy markets as well as strong volume and profit performance in our commercial vehicle markets.
Performance improvement in recent years through the sealing segment is nothing short of remarkable as year to date fueling segment margins exceeded 30%.
Our results demonstrate the balanced then froze optimized growth portfolio, we are well positioned to outperform across a variety of macroeconomic and industry backdrops over the long term a credit to our focus on innovation and continuous improvement as well as technology and applied engineering advantages.
The resilience of our portfolio of businesses is enduring and our well capitalized balance sheet and strong free cash flow generation enabled continued opportunities to invest in growth and build upon our strong foundation.
Now I'll hand, the call over to Mel to discuss our financial results in more detail.
Thanks, Eric.
As Eric noted, we had another solid quarter of execution reported sales of $276 9 million in the second quarter were flat year over year and organic sales were up slightly despite the reduction in sales due primarily to weakness in semiconductor markets.
Strong demand across aerospace nuclear and commercial vehicle markets. In addition to pricing actions largely offset a reduction in sales in semiconductor and optical filters.
Adjusted EBITDA of $64 $9 million decreased 11, 9% over the prior year period, and adjusted EBITDA margins in the second quarter were 22, 4% down from 26, 6% from a year ago.
Total adjusted segment EBITDA was relatively flat year over year.
The declines in total adjusted EBITDA and adjusted EBITDA margins.
That's it from two specific factors.
Aggregate adversely affected the year over year comparison down $9 million.
$7 million of the nine plus share price driven incentive compensation expense.
$2 billion from the favorable impact of currency on foreign cash balances a year ago.
To elaborate a bit on the $7 million swing related to incentive compensation.
We incurred approximately $4 million of incremental incentive compensation expense in the quarter driven by the 29% rise in our share price during the second quarter.
In the second quarter of last year, we benefited from an approximately an approximate $3 million reduction in incentive compensation expense driven by a 16% decline in our share price.
Variability from these two factors will lessen over time.
The share price driven volatility will roll off gradually over the next 18 months as a result of a change in our long term incentive compensation plan.
Effective with the 2023 plan the relative tsi incentive component will be paid in shares rather than cash, which will eliminate the fluctuations in expense from share price changes.
The currency exposure on foreign cash has been eliminated in all material respects as a result of repatriation of significant overseas U S dollar holdings.
Corporate expenses of $15 million in the second quarter of 2023 increase from $9 $4 million a year ago, driven primarily by the share price related incentives.
Increased incentive compensation expense that I just described.
Adjusted diluted earnings per share of $1 83 decreased 10, 7% or <unk> 22 per share compared to the prior year period, the higher share price related incentive compensation expense and last year's currency related benefit combined <unk> 32 per share negative impact.
Moving to a discussion of segment performance sealing technology sales of 176 $7 million increased more than 13% driven.
Driven by strong demand in aerospace nuclear energy and commercial vehicle markets, along with a positive impact from pricing.
In the quarter, we continued to see firm demand in our general industrial markets.
Excluding the impact of the business divested in the fourth quarter of 2022 and foreign exchange translation sales increased 13, 9%.
For the second quarter adjusted EBITDA adjusted segment EBITDA of $56 $2 million increased more than 27% and adjusted segment EBITDA margin expanded 350 basis points to just under 32% strong volume growth and favorable mix, particularly in our aerospace and nuclear <unk>.
Mrs.
Solid demand and operational efficiencies and our commercial vehicle business and effective pricing strategies across the segment were the primary drivers of performance.
Excluding the impact of the divestiture and foreign exchange translation adjusted segment EBITDA increased more than 28% compared to the prior year period.
Turning now to advanced surface technologies second quarter sales of $103 million decreased 17, 4% driven by the current slowdown in semiconductor markets and to a lesser extent lower optical filter sales.
Excluding the impact of foreign exchange translation sales decreased 17% versus the prior year period.
For the quarter adjusted segment EBITDA decreased 36, 2% to $24 $1 million driven by the decline in volume and unfavorable mix and to a lesser extent the earnings impact of growth investments.
Excluding the impact of foreign exchange translation adjusted segment EBITDA decreased 35, 7%.
For the second quarter, we achieved an adjusted segment EBITDA margin in <unk> of 24% a strong result in light of the current weakness across the semiconductor supply chain.
One brief update on our participation in the U S semiconductor expansion.
We continue the staged up fit of the building we purchased in Arizona and are seeking.
Port, which would help us build out a state of the art semiconductor facility on an expedited basis.
Turning now to the balance sheet and cash flow.
We ended the quarter with a net leverage ratio of one five times.
Subsequent to the end of the second quarter in late July we repaid our term loan a one.
$133 $7 million with available cash.
Taking this into account with pro forma cash and short term investments exceeding $275 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.
Okay.
Our foundational portfolio is generating significant free cash flow for the first six months of 2023 free cash flow was more than $66 million.
Up from $56 million for the same period in the prior year.
The year over year increase in free cash flow was driven by strong cash generation across the company and lower cash taxes paid in the period, which more than offset higher net interest payments and higher capital spending to support growth and efficiency projects.
During the second quarter, we paid a <unk> 29 per share quarterly dividend and for the first six months of the year dividend payments totaled $12 $2 million.
One additional note before moving to guidance.
Second quarter result of Alexa or below our expectations, which required us to perform an interim test of <unk> goodwill.
For impairment.
Based upon the results of an updated analysis, we determined that the remaining balance of goodwill attributed to Alexa was impaired and a noncash impairment charge of $68 million was recognized in the quarter.
Acquired in the fourth quarter of 2020, Alexa is a leading provider of optical filters with differentiated optical coating capabilities to solve customers' most demanding needs and a variety of leading edge applications.
The business remains on solid footing with expectations of high single digit organic growth over a multiyear period and with adjusted EBITDA margins, well exceeding Ast's segment and total company averages.
Moving now to our 2023 guidance.
We expect revenue to be relatively flat compared to last year and adjusted EBITDA to be in the range of 248 million to $256 million.
The decline at the top end of the adjusted EBITDA range is due primarily to the impact of the $4 million share price related incentive compensation expense in the second quarter as discussed earlier.
We are raising adjusted diluted earnings per share guidance to a range of $6 77.
$7 10.
Due primarily to the repayment of a portion of our long term debt noted earlier and higher interest income on cash balances.
Our latest net interest expense view for 2023 is $32 million to $34 million, which is down from our previous assumption of $35 million to $40 million.
Compared to expectations a quarter ago.
We expect stronger full year results in sealing technologies offset by lower results in advanced surface technologies.
As Eric mentioned based on customer input and updated market forecasts, we now anticipate the inflection point and semiconductor markets to move from the fourth quarter of this year to.
2024.
In sealing technologies, we had exceptional mixed benefits in the first half that we expect will moderate in the second half.
Thanks for your time today, and now I'll turn the call back to Eric for closing comments. Thank.
Thank you Bill our teams continued to execute at a high level and remain steadfast in driving our strategic priority forward and delivering for our customers looking ahead and ceiling. We look to continue building on our momentum and we are proceeding with investments in critical new product development and value added efficiency improvements, while prudently considering acquisitions of.
Broaden our strong technology and market positions over time.
And as we continue to execute very well as we navigate through the current demand headwinds in semiconductor.
Which as noted we anticipate will abate in 2024.
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.
As I am grateful to 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 our multiyear strategy to drive and pro forward as a leading industrial technology company.
Now empowering technology with purpose. Thank you for joining US today, we appreciate your interest in and growth I'll open the call to alignment questions. Thank you.
Thank you.
At this time, we'll be conducting a question and answer session.
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One moment please poll for questions once again Thats star one thank you.
Our first question comes from the line of Jeff Hammond with Keybanc capital markets. Please proceed with your questions.
Hey, good morning, guys.
Good morning, Good morning, Jeff.
I just wanted to get a little more color on where specifically you're seeing incremental softness in.
In semi or ASP.
Maybe help us with the shape of the second half is <unk> still kind of the bottom and then just.
Expand on the <unk> write down I think this is the second one it just doesn't seem that far off from kind of how you've been thinking about the business over the long term.
Yes.
I'll start Jeff So first of all when you look at.
I guess, what's changed from a quarter ago as we mentioned in the guidance comments earlier.
There's been a slight shifting to the right and expectations for the inflection point in semiconductor and Thats not our view its industry data that youll see from.
Large semiconductor companies that have reported.
And so the moderation for us in the second half of the year, it's just reflecting that.
The comments on Alexa.
The situation with Alexa is some of the some of the dynamics with inventory Destocking that has affected the semiconductor industry have.
It had an impact on a number of the markets that <unk> is serving also in semiconductors.
<unk> has been one of the largest single markets for the optical filter business as well as we've mentioned in the past.
So it's a really good business, but our expectations for growth this year with that businesses are relatively flat compared to.
At the time, we did our previous goodwill impairment, we were expecting some stronger bounce back. This year. So we just recognize that kind of dealt with it and we determined that the balance of the goodwill is impaired we get that behind us and.
We will see we'll see good growth in that business in 2024 and beyond.
Okay, and then just on sealing.
I think you had previously built in some slowdown there double digit growth in the first half just kind of how do you think about organic growth in sealing and then.
It seems like all the areas you point out that are benefiting driving better mix seem like.
There is still strong so what's informing kind of the less favorable mix into the second half.
Yes, Jeff Eric we're just expecting some softness in general industrial our book to Bill is still strong but at the same time, all the leading indicators, we hear about continued to be a little bit softer.
I've always looked at FTR.
There are ton miles it continues to be down a little bit and so we're expecting some softness in general industrial overtime.
The other business as we start to be strong.
The one added point I would make is.
When it comes to some of our nuclear shipments for example.
Okay.
Sequence of orders and timing.
With that business.
Just based on the rates.
Patterns nothing thats changing overall look.
But we expected have expected continued.
A stronger first half of the year with nuclear shipments versus the second.
Comment.
In addition.
And assumption.
We'll see.
Some flattening of the general industrial markets.
Hey, Jeff.
Jeff I will also add if you look at <unk>.
If you look at the second half of the year given the weather.
Our views on semiconductor recovery.
Third quarter fourth quarter to be relatively equal.
A quarter ago, we anticipated that.
We thought that we.
We see Q2 Q3 being the low point with some recovery happening in Q4. So that's the only thing that I would point out in terms of the sequencing of Q3 and Q4.
But for the year, we probably expect total segment margins to approximate 25% plus or minus a little bit NASD and ESG.
And that comment about the.
Balance <unk> T as well not total company.
That's total company. If you look at total company Q3, Q3, and Q4 being relatively relatively split equally for the second half of the year.
Okay. Thanks.
Yes.
As a reminder to ask a question today you May press star one from your telephone keypad.
Our next question is 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.
In terms of the performance on ceiling can you.
But can you break that out a little bit in terms of the margin.
<unk> volume pricing mix.
Yes.
If you look at sealing and the second quarter, the organic growth that is roughly 14% about 60% of that was.
Yeah.
The impact of year over year pricing at about 40% of that was volume.
So still good organic volume growth if you do the math that gives you what five 5% or.
Thereabouts.
Volume growth in the <unk>.
Segment.
So.
And then the question next.
Sure Ed anything else to really add from what I mentioned yesterday, our previously to Jeff's question and if we looked at the second half.
We are expecting.
Maybe some of the favorable mix, particularly in nuclear to soften for us.
The other thing is in the second half.
We will just be catching up a little bit on price and so the year over year impact of of pricing will lessen in the second half compared to the first half.
Oh, if we expect some slowdowns as we get into next year and I know, it's a little bit earlier, which potentially on commercial transportation. I know you have a significant aftermarket I'm trying to get a feeling for how much your pricing you think.
As inflationary pressures ease if we see some of your markets slow.
Specifically, the heavy duty trucking or overall.
Boss Mr Code.
Heavy duty trucking I think while overall, let me say garlock and <unk>.
<unk> likely stick I don't see any reason for that to erode and generally typically holding those margins very well.
<unk>.
The heavy duty truck business I think we'll hold onto most of that will get a little more pressure on from Oems, but our aftermarket will also pick up and so I expect we'll hold onto most of it there will be a little bit.
Possibly a little bit with Oems, but not much.
Great.
I appreciate it.
Milt you commented on.
Provided an update on the Arizona facility, you were breaking up a little bit to me can you repeat that it sounded like you were trying to expedite the progress.
Yes, the major point was where.
We're pursuing chipset support in order to expedite the upselling of the facility that we purchased last year.
Any reason to expedited do you expect any kind of.
Benefits from the build out faster or are you just wanted to get it done ahead of time.
Well.
We are coordinating with our customers and.
We just wanted to do everything we can to make sure that we're ready for that.
<unk>.
Chip's chipset support obviously it would be helpful.
And that in that process.
Great last one for me, obviously cash flow was very strong we're seeing youre getting back towards that 100% conversion. It looks like receivables collection picked up a little bit.
How are you sort of balance sheets in great shape again, how are you thinking about one can you maintain that conversion rate and how youre thinking about cash usage besides debt pay down.
Yes, we anticipate that we will stay on pace second half of the year from a cash flow perspective compared to the first half. So yeah, we're going to be at or at least it will be in the same zip code or <unk> as adjusted.
Net income so.
Really strong conversion rate, which is a good characteristic of our new foundational portfolio.
It's a it's a.
It's one of the things that we had in mind as we were looking at.
Reshaping our portfolio over the past few years, a more dependable and stronger cash flow generating company.
And uses of cash beyond timing on debt Paydowns based on your guidance and how youre, how youre expecting timing based on that guidance and other uses of cash.
Yeah, well I noted that at the end subsequent to the end of the quarter, we repaid our term loan and a one that had a maturity of September of next year of 24. So we decided given our cash position to go ahead and pay that down there.
The remaining term debt has a 2026 maturity date and just for liquidity reasons, we saw no reason to pay that down.
So we don't have expectations currently to pay down additional debt.
We're more focused on investing into.
Vesting for growth and.
So we're we're obviously day in and day out where.
<unk> options for both investing capital in our businesses to support growth as well as.
Evaluating opportunities that might fit.
From an inorganic standpoint.
Okay.
Great. Thanks, everyone.
Thanks, Steve.
Thank you.
At this time, we've reached the end of the question and answer session I'll turn the call over to Mr. <unk> for closing remarks.
Have a great everyone. Thanks and have a great day, everyone. Thanks for your interest in <unk>.
This will conclude today's conference. Thank you for your participation you may now disconnect your lines at this time.