Q3 2023 EnPro Industries Inc Earnings Call
Yes.
[music] usual operator.
Greetings and welcome to the enterprises third quarter 2023 earnings Conference call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
And what should require operator assistance during the call. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded at this time I would like to hand, the call over to James <unk>, Vice President Investor Relations. Thank you you may begin.
Thanks, Darryl and good morning, everyone. Welcome to <unk> third quarter 2023 earnings Conference call I will remind you that our call is being webcast at anthro industries 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.
Sure.
During today's call, we will reference a number of non-GAAP financial measures tables with 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, including those described in our filings with the SEC, including our most recent Form 10-K.
Also note during this call 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 incremental impacts of inflation foreign exchange and interest rate changes subsequent to the end.
In the third quarter, we do not undertake any obligation to update these forward looking statements.
It is now my pleasure to turn the call over to Eric Alan Clark, Our President and Chief Executive Officer, Eric.
Thanks, James and good morning, everyone. We'll get started with an overview of our performance and strategic progress and then I'll hand, the call over to Mel for a more detailed analysis of our quarterly results see.
Sealing technologies results remained robust in the third quarter, but we saw a year over year sequential weakness in I S. T, resulting from the continued slowdown in the semiconductor industry.
Despite these macro headwinds our company delivered adjusted EBITDA margins of 23% for the third quarter and 23, 6% year to date.
Our ability to maintain healthy margins during the semiconductor industry downturn reflects the benefits of our balanced portfolio and resilient business model, which will enable us to continue navigating effectively through macroeconomic cycles, we are carefully controlling cost while working proactively with customers to mitigate volatility.
We do so we will continue to invest in multiple growth and productivity opportunities that will build upon our strong foundation. We are confident that the continued execution of our strategy and key priorities will position us for long term growth and value creation.
The current slowdown in the semiconductor capital equipment spending and wafer starts drove third quarter sales well below the prior year.
Well, we observed pockets of growth in IFC during the quarter build plans shifted to the right as customers intensified their efforts to destock inventories.
Also mix was unfavorable especially compared to last year's third quarter. When we saw very strong results in this segment.
Based on recent customer feedback and overall market forecast, we anticipate softness in semiconductor capital equipment spending into 2024.
We are taking cost actions, where appropriate to maintain solid margin levels without sacrificing investments to advance our portfolio and position us for growth as these markets recover.
The semiconductor market is widely expected to double in upcoming decade, driven.
Driven by macro forces, including AI and the Internet of things, Yes, chip architectures evolve complexity is increasing more processing steps are needed demand in fact manufacturer each new generation of chips and increasingly sophisticated tools are required to complete these steps.
With enhanced complexity process yield efficiencies contamination control and lifecycle management of critical and chamber tools become even more critical.
Our semiconductor business fits squarely in the middle of these trends and we are well positioned to participate in the industry's growth to meet this opportunity we are investing to maintain and expand our technological differentiation and position our businesses and regions were above growth as expected.
Above average growth as expected we are excited to partner with our customers to drive the industry forward, including supporting the production of leading edge chips.
This strategic focus paired with our customers with our deep customer relationship positions and pro for sustainable long term profitable growth now I will hand, the call over to Mel to discuss our financial results in more detail.
Thanks, Eric.
Reported sales of $257 million in the third quarter were down 10, 5% year over year.
The decline in sales is primarily due to weakness in semiconductor markets, partially offset by growth in other markets along with a positive contribution from price.
Adjusted EBITDA of $57 $7 million decreased around 19% over the prior year period, while adjusted EBITDA margins in the third quarter, whereas still healthy 23%.
Corporate expenses of $9 $4 million increased slightly from $9 $1 million in the third quarter of last year.
Increased professional fees and personnel related costs were largely offset by a reduction in incentive compensation expenses.
Adjusted diluted earnings per share of $1 58 decreased 16, 4% compared to the prior year period lower a S. T segment results were the primary driver of the decline offset in part by higher interest income.
Moving to a discussion of segment performance sealant technologies sales of $161 $4 million increased one 4% organically.
Driven by strong demand in nuclear and commercial vehicle aftermarket along with a positive impact from pricing growth. In these markets was mostly offset by a drop in commercial vehicle OEM sales, destocking and food and pharma and some weakness in general industrial, particularly in Europe and China.
For the third quarter adjusted segment EBITDA of $48 million increased 29%.
Adjusted segment EBITDA margin expanded 460 basis points to just under 30%.
Favorable mix driven by continued strength in nuclear and commercial vehicle aftermarket sales the positive impact of pricing actions and cost controls more than offset rising labor costs and softness in certain markets just referenced.
Year to date adjusted segment EBITDA margins were 31% up from 25, 3% in the prior year.
In addition to favorable mix and pricing ongoing strategic and operational improvements continue to benefit our results.
Turning now to advanced surface technologies.
Third quarter sales of $89 $4 million decreased 27% driven by the current slowdown in semiconductor markets and related customer inventory adjustments.
For the quarter adjusted segment EBITDA decreased.
A little over 50% to $19 million driven by the decline in volume and unfavorable mix.
Third quarter results were also impacted to a lesser degree by investments to support growth, including the build out of our facility in Arizona to expand our domestic advanced cleaning and coating capabilities.
A brief update on our participation in the U S semiconductor expansion.
We continue to upset on a stage basis, the building that we purchased in Arizona.
As mentioned previously we are seeking chipset support to help US transform this building into an advanced semiconductor facility on an expedited basis, we expect to use this facility to support the production of advanced node semiconductors that do that.
<unk> being constructed in Arizona.
For the third quarter adjusted segment EBITDA margin of 21, 3% reflects unfavorable mix and the deleveraging impact of lower volume.
Even with this year's decline in the semiconductor market year to date adjusted segment EBITDA margins exceeded 40% 24%.
As Eric discussed we continue to be excited about the multiyear trajectory of our ASD segment against the backdrop of a widely expected doubling in the industry over the coming decade.
Turning to the balance sheet and cash flow, we have ample financial flexibility to execute on our long term strategic growth initiatives.
We ended the quarter with a net leverage ratio of one four times.
Cash and cash equivalents were nearly $330 million and we had nearly full availability under our $400 million revolving credit facility.
During the third quarter, we reduced term debt by approximately $140 million, bringing our total long term debt to around $650 million.
We continue to generate strong free cash flow for.
For the first nine months of 2023 free cash flow exceeded $134 million up from $101 million in the same period a year ago.
Our focus on the cash conversion cycle throughout the organization and lower cash taxes paid in the period more than offset higher capital spending.
During the third quarter, we paid a <unk> <unk> per share quarterly dividend and for the first nine months of the year dividend payments totaled $18 $3 million.
Moving now to our 2023 guidance, we continue to expect revenue to remain relatively flat compared to last year.
Adjusted EBITDA and adjusted diluted earnings per share are now expected to be towards the lower end of our previous guidance ranges of $248 million to $256 million for adjusted EBITDA and $6 70.
$7 10 for adjusted diluted earnings per share.
In sealing we expect continued strong results, but lower sequentially in the fourth quarter, given slowing demand in certain markets mentioned earlier and typical seasonality returning in certain parts of the segment.
Yes.
Based on current orders and production schedules, we expect higher results sequentially in the fourth quarter.
Thanks for your time today, and I'll turn the call back to Eric.
Thank you Bill our 3500 colleagues across and growth continue to execute very well and are energized to win our teams have navigated exceptionally well through a variety of market cycles in the past and today is no different our long term strategic and financial plans remain unchanged and day after day, we deliver differentiated products and solutions for our.
Customers across several growing end markets.
The sealing segment performance has been remarkable and our teams deserve praise for delivering best in class profitability, while producing highly engineered solutions that enable safe sustainable and reliable reliable operations for our customers.
And Asps.
Despite a challenging year, we are a critical part of the global semiconductor ecosystem and continue to invest in a variety of growth opportunities are.
Our long term growth trajectory remains intact and we are focused on capitalizing on the investments we have made and will continue to make throughout asps.
Thank you for joining us today, we appreciate your interest in Anthro now open the line for questions.
Thank you we will now be conducting a question and answer session.
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Our first questions come from the line of Jeff Hammond with Keybanc capital markets. Please proceed with your questions Hey.
Hey, good morning, everyone.
Morning, Jeff Good morning, Jeff and Jeff.
So just on ASP T. I guess, maybe a better sense of what the shape looks like into <unk> and then just how maybe you're thinking about the timing of a recovery an inflection I think you said weakness into 24. So it seems like maybe that's pushing out a little bit.
Okay.
Okay.
Yes.
Jeff Let me, let me jump in Eric I'll, just go back and forth on this one.
As I indicated in my prepared remarks.
Current orders and schedules.
We're expecting some sequential improvement in the semiconductor markets in Q4, the outlook remains uncertain and.
As you know there has been pushing out in the industry not just for us, but you've heard it from other companies as well as the year has progressed.
And in the third quarter, we saw some additional pushing out just based on inventory in the system.
So.
We're expecting this progression.
Progression and some improvement in the fourth quarter, and then we'll need to see what the year brings.
We do think things are pushed out to the rights can be uncertain for for.
A quarter or two we'll see.
I think the keyword is just uncertain, Jeff when you talk to customers. The inventory destocking has been taking longer than we thought and longer than anticipated. So things just continue to seem to move to the right a little bit but at the same time the long term growth prospects haven't changed when you look at what's going to happen over the next decade, we're still looking at a doubling in the industry are still positioned extremely well.
Between the onshoring of the North American focused.
And the leading edge nodes our businesses overall are performing very well and we're still excited about the future. Our customers are working with us to make sure that we're ready for the recovery.
Concern recently, a switch we ready when things change and so making sure that even though we've adjusted cost here or there that we're positioned to grow quickly existing rebounds and.
And so that's we're spending a lot of time with customers now is how quickly can you ramp up.
Unknown Attendee: Greetings. Welcome to the EnPro third quarter 2023 earnings conference call. At this time, all participants are in a listen only mode.
Sure.
Okay very helpful.
And then just on sealing maybe just.
Unknown Attendee: The question and answer session will follow the formal presentation. If anyone should require operator assistance during the call, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.
Date us on.
It kind of this margin resiliency, even as you get.
You know, maybe some seasonal step down in <unk> and then just expand on general industrial is that destocking or is that real demand weakness and I guess last and ceiling. How how long do you think this food pharma destock.
James Gentile: At this time, I would like to hand the call over to James Gentile, vice president, investor relations. Thank you. You may begin. Thanks Darryl and good morning, everyone. Welcome to EnPro's third quarter 2023 earnings conference call. I will remind you that our call is being webcast at nproindustries.com where you can find the presentation that accompanies this call.
<unk>.
I'll take that first the food and pharma that Destocking, we think will continue into 'twenty four.
Don't have much more visibility than that if you look at our margins I expect them to hold pretty tight theres a few things happening. So when you look at the FTR, which I always look at it and this leading indicator of freight ton miles.
James Gentile: With me today is Eric Vaillancourt, our president and chief executive officer and milk children's executive vice president and chief financial officer. During today's call, we will reference a number of non-gap financial measures. Tables reconciling the historical non-gap measures to the comparable gap measures are included in the appendix to the presentation materials.
Those are relatively flat according to the latest projections I think its down a couple less than a few tenths of a point this year and up a few tenths of a point next year or something like that plus or minus one so I'll call that flat.
James Gentile: Also, a friendly reminder that we'll 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 10K. Also note, during this call, we will be discussing our full year 2023 guidance, which excludes unforeseen impacts from these risks and uncertainties, as well as changes in the numbers of shares outstanding impacts from future acquisitions, dispositions, incremental impacts of inflation, foreign exchange, and interest rate changes subsequent to the end of the third quarter. We do not undertake any obligation to update these forward-looking statements.
And so when you look at that our aftermarket business should perform very well at Semco and it is.
Our OEM business when you look at that trucking or trailer builds is projected to be down double digits.
But it also improves our mix and our margin profile.
Lastly, we will get some price increases we always do we will have some January 1st price increases there'll be strategic.
Let's say surgical and then in addition to that the supply chain is really in balance now from my point of view in sealing and we're starting to see more cost downs in the supply chain. So our prices in some commodities have dropped and so we're picking up some margin there as well and.
We don't intend to give most of that price back.
Eric Vaillancourt: It is now my pleasure to turn the call over to Eric Vaillancourt, our president and chief executive officer, Eric. Thanks, James. Good morning, everyone. We will get started with an overview of our performance and strategic progress, and then I'll hand the call over to milk for a more detailed analysis of our quarterly results. Sealing technologies results remain robust in the third quarter, but we saw a year-over-year sequential weakness in ASP, resulting from the continued slowdown in the semi-conductor industry.
Overall, I expect our margins to remain robust in sealing.
Okay.
Yeah.
Okay. Thanks, guys.
Okay.
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 detail on the call. This morning.
I wanted to ask a little wanted to ask a little bit about asps margins, which now are.
Eric Vaillancourt: Despite these macro headwinds, our company delivered adjusted EBITA margins of 23% to the third quarter and 23.6% year-to-date. Our ability to maintain healthy margins during the semi-conductor industry downturn reflects the benefits of our balance portfolio and resilient business model, which will enable us to continue navigating effectively through macroeconomic cycles. We are carefully controlling costs while working proactively with customers to mitigate volatility. As we do so, we will continue to invest in multiple growth and productivity opportunities that will build upon our strong foundation.
Declining more and you noted that.
Weakness in extended it also sounded like you made some comments about you'd look at some further cost cuts I know you took a pretty substantial ones beginning of the year. So the question is are we bumping along is your expectation that we're bumping along the bottom of Asps and margins and are there any meaningful cost cuts you can make knowing not to.
The outlook is the timing of the recovery now is uncertain. So maybe comes back faster.
Well.
Steve what I would comment on is what you saw in the third quarter. When you look at Asps and margins.
Eric Vaillancourt: We are confident that the continuing execution of our strategy and key priorities will position us for long-term growth and value creation. The current slowdown in the semi-conductor capital equipment spending and wafer storage drove third quarter sales well below the prior year. While we observed pockets of growth in ASP during the quarter, build plans shifted to the right as customers intensified their efforts to de-stock and mentor. Also, MIX was unfavorable, especially compared to last year's third quarter when we saw very strong results in this segment Based on recent customer feedback and overall market forecast, we anticipate softness in semiconductor capital equipment spending into 2024.
You lose.
Kind of year over year volume drop that we had its most of that is this deleveraging and we have we have.
We took some additional actions, but it's I'll use the word surgical because.
We want to we want to.
We want to be prepared for the uptick when it comes and as Eric said the conversations with customers have clearly moved.
Uncertainty too.
We need to be prepared even though there is still an uncertain environment, we need to be prepared for the uptick and so those conversations are very constructive.
Now really what we need in our business as this volume.
Eric Vaillancourt: We are taking cost actions where appropriate to maintain solid margin levels without sacrificing investments to advance our portfolio and position us for growth as these markets recover. The semiconductor market is widely expected that double in the upcoming decade driven by macro forces, including AI and the Internet of Things. As chip architectures evolve, complexity is increasing. More processing steps are needed to manufacture each new generation of chips and increasingly sophisticated tools are required to complete these steps.
And also we've had some unfavorable mix as we've talked about throughout the year.
As a result of.
Some of the more severe drops in volume we've had that in areas, where we've had.
Very strong.
Profitable.
Margins for certain product lines.
Some of that is tied to the big drop in memory as we've mentioned before.
That will change that will rebound and and the volume will come back and we will do we will leverage on the upside as much as we've de levered on the downside and.
Eric Vaillancourt: With enhanced complexity, process yield deficiencies, contamination control, and life cycle management of critical and chamber tools become even more critical. Our semiconductor business sits squarely in the middle of these trends, and we are well positioned to participate in the industry's growth. To meet this opportunity, we are investing to maintain and expand our technological differentiation and position our businesses and regions where above growth is expected. We are excited to partner with our customers to drive the industry forward, including supporting the production of leading-edge chips. This strategic focus paired with our customers, with our deep customers' relationship, positions and growth are sustainable, long-term, profitable growth.
Our focus is really yes, we're doing what we need to do in this environment. Our focus is really on the excitement about the long term.
We continue to fill in the long term is not.
Five years out the long term as is.
We expect to see some uptick in 2024 based on conversations with customers just not certain of when we're going to see the start of that due to some customers have started to talk about memory, showing a little bit of life as well recently, so that would be exciting if that actually happens.
Okay.
And then flipping and you addressed this a little bit on the sealing margins, where you would also have expected to see some deleveraging some assume but I'm, assuming it's getting more than offset by price is that a fair way to look at this that your volume is down year over year more than offset by price, giving you that little bit revenue uptick.
Milk Children's: Now I'll hand the call over to Milk to discuss our financial results in more detail. Thanks, Eric. Reported sales of $250.7 million in the third quarter were down 10.5% year over year. The decline in sales is primarily due to weakness in semiconductor markets, partially offset by growth in other markets along with a positive contribution from price. Adjusted EBITDAF $57.7 million decreased around 19% over the prior year period, while adjusted EBITDA margins in the third quarter were a still healthy 23%.
Our volume is off but are back loaded per turn to more what I'll call traditional levels still robust for us and so we're able to have it still able to have operational efficiencies and.
I do think it's fair to say, we've captured more price, but overall, our volume is still pretty strong and ceiling historically.
Okay, and then you think about obviously, you're starting to see that weakness in.
Milk Children's: Corporate expenses of $9.4 million increased slightly from $9.1 million in the third quarter of last year. Increased professional fees and personnel-related costs were largely offset by reduction in incentive compensation expenses. Adjusted deluded earnings per share of $1.58 decreased 16.4% compared to the prior year period. Lower AST segment results were the primary driver of the decline offset in part by higher interest income. Moving to a discussion of segment performance, ceiling technology sales of $161.4 million increased 1.4% organically.
Heavy truck commercial truck Oems that would typically be lower margin right. So.
Based on trends your mix should be better entering 2024, and you get more pricing right. So even if volume doesn't come back substantially in other areas.
You still get some margin as long as volumes hold Sop Brian.
Yes, that's absolutely correct.
And we could see it in this quarter's results as well.
And Steve you know this.
I'll, just I'll, just remind remind us as you know our commercial vehicle businesses.
Much more heavily weighted towards aftermarket.
On OEM.
Milk Children's: Driven by strong demand in nuclear and commercial vehicle aftermarket, along with a positive impact from pricing. Growth in these markets was mostly offset by a drop in commercial vehicle OEM sales, destocking in food and farmer, and some weakness in general industrial, particularly in Europe and China. For the third quarter, adjusted segment EBITDAF $48 million increased 20.9%. Adjusted segment EBITDA margin expanded 460 basis points to just under 30%. Favourable Mix driven by contingent strength and nuclear and commercial vehicle aftermarket sales, the positive impact of pricing actions and cost controls more than offset rising labor costs and softness and certain markets just reference.
Yep.
And just another one.
Just a thought on the on the on the volume declines as we exited.
Supply chain situation as a result of Covid it seems like some of.
The industrial distributors are removing kind of that crossed a safety stock.
And.
That's just the.
Normal course so.
As you look forward.
There are definitely some opportunities for growth.
For mix and growth in the future.
Great and just get one last one in on obviously had a very strong cash flow quarter.
Strong receivables collection, meaning.
Meaningful debt reduction this year, what are you thinking about the cash is growing.
That's way down how are you thinking about capital allocation at this point any shift in priorities.
No no shift currently we continue to have a focus first on investing in our business for growth, whether it's organic investments such as the investment we're making in the new facility in Arizona.
Milk Children's: The operational improvements continue to benefit our results. Turning now to advanced surface technologies, third quarter sales of $89.4 million decreased 27%, driven by the current slowdown in semiconductor markets and related customer inventory adjustments. For the quarter, adjusted segment EBITDA had decreased a little over 50% to $19 million, driven by the decline in volume and unfavorable mix.
Milk Children's: Third quarter results were also impacted to a lesser degree by investments to support growth, including the build out of our facility in Arizona to expand our domestic advanced cleaning and coding capabilities.
Or selective.
Acquisitions that meet our.
The strategic and financial criteria, we continue to look at a lot of opportunities where we.
We're very I'll use the word picky.
We're not interested in making acquisitions just for the sake of growth and acquisitions, but.
We do continually look at opportunities in our pipeline is actually quite good.
And we're trying to find the right fit for us and I think as we've mentioned last quarter, we're spending more time in the ceiling segment and looking at opportunities that fit with us there and can advance our strategy going forward than we are with <unk>, where we have.
Milk Children's: A brief update on our participation in the U.S, semiconductor expansion. We continue to update on a stage basis the building that we purchased in Arizona. As we mentioned previously, we are seeking chips act support to help us transform this building into an advanced semiconductor facility on an expedited basis. We expect to use this facility to support the production of advanced node semiconductors that do fast being constructed in Arizona. For the third quarter, adjusted segment EBITDA margin of 21.3% reflects unfavorable mix and the deleveraging impact of lower volume.
Strong organic path ahead.
Yes.
Thanks miles.
James.
Thank you as a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next questions come from the line of Ian Zaffino with Oppenheimer. Please proceed with your question Hi, great.
A couple of clarification questions I'm a destocking.
Milk Children's: Even with this year's decline in the semiconductor market, year-to-date adjusted segment EBITDA margin exceeded 24%. As Eric discussed, we continue to be excited about the multi-year trajectory of our AST segment against the backdrop of a widely expected doubling in the industry over the coming decade.
I know you mentioned food and pharma is there any other anticipated destocking that you might see your costs like any of your other hearings industries or end markets that we should expect.
And ceiling now the only issue the only I think right now we're back to seasonal demand and normal on cycles. I do think one thing is different since COVID-19, we had elevated backlogs due to supply chain constraints and I do think the supply chain is in balance and so I think that that part is cleared up.
Milk Children's: Turning to the balance sheet and cash flow, we have ample financial flexibility to execute on our long-term strategic growth initiatives. We ended the quarter with a net leverage ratio of 1.4 times. Cash and cash equivalents were nearly $330 million, and we had nearly full availability under our $400 million revolving credit facility. During the third quarter, we reduced term debt by approximately $140 million, bringing our total long-term debt to around $650 million.
So and when James talked earlier about taking out extra safety stock that we guard our distributors have returned to more normal inventory levels. Instead of increased safety stock. So overall I think things are in balance.
See any more destocking other than food and pharma.
Okay, and then can you maybe give us an idea of what the pricing actions wire versus volume actions.
When you look at the ceiling.
Milk Children's: We continue to generate strong free cash flow. For the first nine months of 2023, free cash flow exceeded $134 million, up from $101 million in the same period a year ago. Our focus on the cash conversion cycle throughout the organization and lower cash tax has paid in the period more than offset higher capital spending. During the third quarter, we paid a 29 cents per share quarterly dividend, and for the first nine months of the year, dividend payments totaled $18.3 million.
You are referring specifically to the sealing segment Ian exactly yes.
Sure.
Yes.
It's mostly if you look at the organic growth.
To be more heavily weighted toward pricing on a year over year basis.
Then volume growth just kind of where we are in the cycle and then some of the seasonal typical seasonal patterns that Erik referred to.
We had volume growth in certain markets like nuclear and aerospace and space.
And and then we had some volume declines.
Milk Children's: Moving now to our 2023 guidance, we continue to expect revenue to remain relatively flat compared to last year. Adjusted EBITDA and adjusted deluded orange per share are now expected to be toward the lower end of our previous guidance ranges of $248 to $256 million for adjusted EBITDA and $6.70 to $7.10 for adjusted deluded orange per share. In ceiling, we expect continued strong results but lower sequentially in the fourth quarter given slowing demand in certain markets mentioned earlier and typical seasonality returning in certain parts of the segment. NAST based on current orders and production schedules, we expect high results sequentially in the fourth quarter.
General industrial because the slowdown in Europe and China.
So it's.
So it's.
The patterns are different depending on the market. So there are certainly pockets of growth, but overall when you look at the year over year growth for the segment. It was more heavily weighted towards price.
Okay, and then just a final one on.
The mix I E. S. T. I know you mentioned memory weakness can you maybe give it back to you.
It's been relatively strong versus memory and then also how did aftermarket versus.
The OE business Tim Thanks.
Yes <unk>.
I'll take the last question first and ASC.
Eric Vaillancourt: Thanks for your time today and I'll turn the call back to Eric. Thank you, Mill. Our 3500 colleagues across EnPro continued to execute very well and are energized to win. Our teams have navigated exceptionally well for a variety of markets cycles in the past and today is no different. Our long-term strategic and financial plans remain unchanged. And day after day, we deliver differentiated products and solutions for our customers across several growing end markets.
We've said in the past and this is rough because it changes quarter to quarter or year to year.
All of that but we're roughly a third.
Our semiconductor business is driven by recurring revenues and recurring meaning.
Sure.
Products <unk> solutions that are that are driven by the production of chips.
Eric Vaillancourt: The ceiling segments performance has been remarkable and our teams deserve praise for delivering best-wing class profitability while producing highly engineered solutions that enable safe, sustainable and reliable operations for our customers. In AST, despite a challenging year, we are a critical part of the global semiconductor ecosystem and continue to invest in a variety of growth opportunities. Our long-term growth trajectory remains intact and we are focused on capitalizing on the investments we have made and will continue to make throughout AST.
Were chamber components need to be refurbished or claimed or re coded.
And so that's what we mean by recurring.
And then roughly.
Two thirds is driven more by new equipment, it's being it's being.
So to the foundries and the idms to support.
<unk> growth.
So yeah on the recurring part of our business given where we're positioned a lot of that we are in advanced nodes.
And so that part of our business is performing well we are seeing some year over year growth there.
James Gentile: Thank you for joining us today. We appreciate your interest in EnPro. Now open the line to questions. Thank you.
The weakness has been more on the equipment side of the business given the inventory situation that we alluded to earlier.
Unknown Attendee: We will now be conducting a question-and-answer session. If you would like to ask a question, 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 would like to remove your questions from the queue. For participants using speaker equipment and maybe necessary to pick up your handset before pressing the star keys. One moment please, what we pull for your questions.
You captured it nicely.
Okay. Thank you very much.
Hi.
Thank you our next questions come from the line of Jeff Hammond with Keybanc capital markets. Please proceed with your questions.
Hey, guys just a couple of follow ups. One you guys have mentioned in the past wins, but I think you're reticent to kind of give an update there, but just within ASP kind of qualitatively.
Jeff Hammond: Our first questions come from the line of Jeff Hammond with key bank capital markets.
Jeff Hammond: Please proceed with your questions. Good morning everyone. Good morning, Jeff. So just on AST, I guess maybe a better sense of what the shape looks like into 4Q and then just how maybe you are thinking about the timing of recovery and flexion. I think you said weakness into 24 so it seems like maybe that's pushing out a little bit.
What are you seeing from kind of new customers breads with current customers as you kind of rollout.
You know kind of this combination and next edge lean tech and and just some of the opportunities as you think about chipset in the recovery.
I spoke a few quarters about about our.
And it probably got it myself, a little bit of trouble about our pipeline, but I will say I won't quantify it but I will say that our pipeline continues to grow it continues to be exciting and it continues to be more and more vertically integrated so when you look at the new opportunities coming in and our customers are recognizing the value of what our vertical integration play can be.
Eric Vaillancourt: Yeah, well, Jeff, let me jump in, Erica, I'll just go back and forth on this one. As I indicated, I prepared remarks based on current orders and schedules where we're expecting some sequential improvement in semiconductor markets in Q4.
Eric Vaillancourt: The outlook remains uncertain. And as you know, there has been pushing out in the industry, not just for us, but you've heard it from other companies as well, as the year has progressed. And in the third quarter, we saw some additional pushing out just based on inventory in the system. So, you know, we're expecting this progression and some improvement in the fourth quarter and then we'll need to see what the year brings. We do think things are pushed out to the right, it's going to be uncertain for a quarter or two, we'll see.
And they are excited about those opportunities so our pipeline is.
Very heavily weighted to vertical integration opportunities I don't want to quantify it but its substantial and it increases their monthly so the number and size of opportunities continues to grow and our pipeline continues to grow.
And we are holding our win rate.
Okay, and then just any update on.
Milt, we love, we love, having you around but any update on them.
I'm kind of the CFO search.
Ill defer to Eric that question.
We remain active and very selective much like our acquisition strategy, we're looking for.
Eric Vaillancourt: I think the keyword is just uncertain, Jeff. When we talked to customers, the inventory of these stockings has been taking longer than we thought and longer than they anticipated. So things just continue to seem to move to the right a little bit, but at the same time, the long-term risk prospects haven't changed. When you look at what's going to happen over the next decade, we're still looking at doubling in the industry, you know, we're still positioned extremely well.
We're being very disciplined in the search to find somebody that's going to.
Perform equally as well as Milton as valuable as notice to the company. So we're excited about it and we continue to be in the process, but there isn't any immediate uptake.
Okay. Thanks, so much guys.
Eric Vaillancourt: Between the Han showing the North American focus and the leading edge nodes, our business is overall performing very well and we're still excited about the future. Our customers are working with us to make sure that we're ready for the recovery, the concern recently has switched. We're ready when things change. And so making sure that even though we've adjusted costs here or there, that we're positioned to grow quickly is this thing rebounds. And so that's worth spending a lot of time with customers now is how quickly can you ramp up? Okay, very helpful.
Thank you we have reached the end of our question and answer session I would now like to turn the floor back over to James <unk> for closing comments.
Have a great day, everyone. Thank you for your interest.
Thank you. This does conclude today's teleconference. We appreciate your participation you may disconnect your lines at this time.
The rest of your day.
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Eric Vaillancourt: And then just done on ceiling, maybe just update us on, you know, kind of this margin, resiliency, even as you get, you know, maybe some seasonal step down in 4Q and then expand on general industrials that be stocking or is that real demand weakness?
Hum.
Okay.
[music].
Okay.
Eric Vaillancourt: And I guess last and ceiling, how long do you think this food farm or destock takes? I'll take that first. The food and farm is about destocking. We think we'll continue into 24, but we don't have much more visibility than that. If you look at our margins, I expect them to hold pretty tight. There's a few things happening. So when you look at the FTR, which I always look at, is an leading indicator of freight ton miles.
Hum.
Eric Vaillancourt: Ton miles are relatively flat. According to the latest projection, I think it's down a couple less than a few tens of a point this year and up a few tens of a point next year or something like that. But plus or minus one, so I'll call that flat. And so when you look at that, our aftermarket business should perform very well. It's done going. It is our OEM business. When you look at that, trucking or trailer builds is projected to be down double digits.
Okay.
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Mhm.
Eric Vaillancourt: But it also improves our mix and our margin profile. Lastly, we'll get some price increases. We always do. We'll have some January first price increases. It'll be strategic and let's face surgical. And then in addition to that, the supply chain is really in balance now from my point of view in ceiling. And we're starting to see more cost downs and the supply chain. So our price is in some commodities have dropped. And so we're picking up some margin there as well. We don't intend to give most of that price back. So overall, I expect our margins to remain robust and feeling.
Unknown Attendee: Okay.
Unknown Attendee: Thanks, guys.
Unknown Attendee: Thank you.
Stephen Ferazani: Our next question has come from the line of Steve Farazani with the Dodie company. Please proceed with your questions. Good morning, everyone. Appreciate all the detail on the call this morning. Want to ask a little, want to ask a little bit about AST margins, which now are, you know, declines more. And you noted that the weakness is extended. And it also sounded like you made some comments about your look at some further cost cuts.
Stephen Ferazani: I know you took police substantial ones beginning of the year. So the question is, are we bumping along? Is your expectation that we're bumping along the bottom of AST margins? And are there any meaningful cost cuts you can make knowing that the outlook is the time of the recovery now is uncertain. So maybe comes back fast.
Eric Vaillancourt: Well, Steve, we have a comment as well. You saw in the third quarter when you look at AST margins, when you lose the kind of year of year volume drop that we had, most of that is just the leveraging.
Eric Vaillancourt: And we took some additional actions, but I'll use the word surgical because we want to be prepared for the uptick when it comes. And as Eric said, the conversations with customers have really moved from uncertainty to we need to be prepared, even though they're still in a certain environment, we need to be prepared for the uptick. And so those conversations are very constructed. So it's now really what we need in the business is volume.
Eric Vaillancourt: And also we've had some unfavorable mixes we've talked about throughout the year, as a result of some of the more severe drops and volume we've had in areas where we've had very strong profitable margins for certain product lines. And some of that is tied to the big drop in memory as we mentioned before. So that will change, that will rebound. And the volume will come back. And we will leverage on the upside as much as we've delivered on the downside.
Eric Vaillancourt: And our focus is really, we're doing what we need to do in this environment. But our focus is really on the excitement about the long term. And we continue to fill. And the long term is not five years out. The long term is, is, you know, we expect to see some uptick in 2024 based on conversations with customers, just uncertain of when we're going to see the start of that. Some customers have started to talk about memory, showing a little bit of life as well recently. So that would be exciting if that actually happens. Right.
Eric Vaillancourt: And then flipping and you address this a little bit on the ceiling margins where you would also have expected to see some deleveraging. Because I'm assuming, but I'm assuming it's getting more than offset by price. Is that a fair way to look at this that your volume is down year over year more than offset by price, giving you that little bit revenue uptick? Our volume is off, but our back loads have turned more, what I'll call traditional levels, still robust for us. And so we're able to have, still able to have operational efficiencies. And we have, I do think it's fair to say we've captured more price, but overall our volume is still pretty strong in ceiling historically.
Eric Vaillancourt: Okay. And then you think about, obviously you're starting to see that weakness in heavy truck commercial truck OEM, but that would typically be lower margin. So based on trends, your mix should be better entering 2024 and you get more pricing. So even if volume doesn't come back substantially in other areas, you still get some margin as long as volume holds up. Yeah, that's absolutely correct. And we could see it on this quarter's results as well. And Steve, you know, that's about the street, I'll just remind remind you, do you know our commercial vehicle businesses much more heavily weighted toward aftermarket that is on OEM?
Unknown Attendee: Just another one. Just another thought on the volume declines as we exited, you know, the supply chain situation as a result of COVID, you know, it seems like some of the industrial distributors are removing kind of that crust of safety stock. And, you know, that that's just, you know, the normal course.
Unknown Attendee: So as you look forward, you know, there are definitely some opportunities for growth up for mixed and growth in the future.
Unknown Attendee: And just get one last one in on obviously a very strong cash flow quarter. Good strong receivables collection, meaningful debt reduction this year.
Unknown Attendee: What are you thinking about? The cash is growing. You're net debts way down.
Milk Children's: How are you thinking about capital allocation at this point? Any shift in priorities? No, no shift currently. We continue to have a focus first on investing in our business for growth, whether it's organic investments such as the investment we're making in the new facility in Arizona, or selective acquisitions that meet our strategic and financial criteria. We continue to look at a lot of opportunities where we're very, I'll use the word picky.
Milk Children's: We're not interested in making acquisitions just for the sake of growth and acquisitions, but we continually look at opportunities and pipeline is actually quite good. And we're trying to find the right right fit for us. And I think as we've mentioned last quarter, we're spending more time in the ceiling segment and looking at opportunities that fit with us there and can advance our strategy going forward. Then we are with AST where we have a strong organic path ahead.
Milk Children's: Thanks, Mills.
Unknown Attendee: Thanks.
James Gentile: All right, James.
Unknown Attendee: Thank you. As a reminder, if you would like to ask a question, please press star one on your telephone keypad.
Ian Safina: Our next questions come from the line of Ian Safina with Oppenheimer. Please proceed with your question. Hi, great. You know, just a couple of clarification questions. I'm a destocking. I know you mentioned food and pharma. Is there any other anticipated destocking that you might see across like any of your other ceilings industries or markets that we should expect? In ceiling? No. It's only I think right now we're back to seasonal demand and normal cycles.
Ian Safina: I do think one thing is different since COVID we had elevated backlogs due to supply chain constraints. And I do think the supply chain is in balance. And so I think that is that part is cleared up. And so when James talked earlier about taking out extra safety stock, I think our distributors have returned to more normal inventory levels instead of increased safety. So I'll go all I think things are in balance, but I don't see any more destocking other than food and pharma. Okay.
Milk Children's: And then you may give us an idea of what the pricing actions are versus volume action. When you look at the sealant, your reference specifically to the sealing segment Ian? Exactly, yes. Yeah, it's mostly if you look at the organic growth, it's going to be more heavily weighted toward pricing on a year of your basis than volume growth. It's just kind of where we are in the cycle and then some of the seasonal or typical seasonal patterns that Eric referred to.
Milk Children's: We had volume growth in certain markets like nuclear and aerospace and space. And then we had some volume declines in general industrial because of slow down Europe and China. So the patterns were different depending on the market. So there are certainly pockets of growth. But overall when you look at the year of your growth for the segment, it was more heavily weighted toward price.
Milk Children's: Okay, and then just the final one on the mix at AST. I know you mentioned memory weakness, can you maybe give us an idea of what's been relatively strong versus memory and then also, you know, how did aftermarket versus, you know, the OE business. Thanks. Yeah, and AST, I think the last question first. And AST, you know, we've said in the past, Mrs. Ruff, because it changes quarter to quarter year to year a little bit.
Milk Children's: But we're roughly a third of our semiconductor businesses driven by recurring revenues and recurring meaning products, solutions. That are driven by the production of chips where chamber components need to be refurbished or cleaned or recoded. And so that's what we mean by recurring. And then roughly remaining two-thirds is driven more by new equipment. It's being sold to the foundries and the adiums to support growth. And so, yeah, on the recurring part of our business, given where we're positioned, a lot of that, we are in advance notes.
Milk Children's: And so that part of our business is performing well. We're seeing some European growth there. The weakness has been more on the equipment side of the business, given the inventory situation that we alluded to earlier. Thank you, Captain. Okay. Thank you very much. Thank you.
Jeff Hammond: Our next question has come from the line of Jeff Hammond with Keybank Capital Markets. Please proceed with your questions. Hey, guys.
Jeff Hammond: I'm just a couple of faults. One, you know, you guys have mentioned the past wins, but I think you're innocent to kind of give an update there. But just within AST, kind of qualitatively, what are you seeing from, you know, kind of new customers, breadth with current customers, as you kind of roll out, you know, kind of this combination and next edge, lean tech and, and, you know, just some of the opportunities, as you think about, you know, chipsect and the recovery.
Jeff Hammond: I spoke a few quarters about our, I probably got it myself a little bit of trouble about our pipeline, but I'll say I won't quantify it but I will say that's our pipeline continues to grow, it continues to be exciting and it continues to be more and more vertically integrated. So when you look at the new opportunities coming in, our customers are recognizing the value of what our vertical integration play can be and they're excited about those opportunities.
Jeff Hammond: So our pipeline is very heavily weighted to vertical integration opportunities, I don't want to quantify it, but it's substantial and it increases there monthly. So the number and size of our opportunities continues to grow and our pipeline continues to grow and we are holding our win rate.
Eric Vaillancourt: Okay, and then just any update on, you know, Mill, we love having you around, but any update on, I'm kind of the CFO search. I'll defer to Eric, kind of like that question. We remain active and very selective, much like our acquisition strategy, we're looking for, we're being very disciplined in the search to find somebody, it's going to perform equally as well as Milton, be as valuable as Milton, as a company.
Eric Vaillancourt: So we're excited about it and we continue to be in the process, but there isn't any immediate update. Okay, thanks so much, guys. Thank you.
Unknown Attendee: We have reached the end of our question and answer session.
James Gentile: I would now like to turn on the floor back over to James Gentilly for closing comments. Have a great day, everyone. Thank you for your interest. Thank you.
Unknown Attendee: This concludes today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day. Thank you.