Q4 2024 Enpro Inc Earnings Call
Speaker Change: Greetings and welcome to the EMPRO Q4 and full year 2024 earnings conference call and webcast. At this time all participants are in listen-only mode. If anyone requires operator assistance please press star zero on your telephone keypad.
Speaker Change: A question and answer session will follow the formal presentation. You may be placed into question queue at any time by pressing star 1 on your telephone keypad.
Speaker Change: As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to James Gentile, Vice President, Investor Relations. Please go ahead, James.
James Gentile: Thanks, Kevin, and good morning, everyone. Welcome to Enpro's fourth quarter and full year 2024 earnings conference call. I will remind you that our call is being webcast at Enpro.com, where you can find the presentation that accompanies this call.
James Gentile: With me today is Eric Vaillancourt, our President and Chief Executive Officer, and Joe Bruderek, Executive Vice President and Chief Financial Officer.
James Gentile: During today's call, we will reference a number of non-GAAP financial measures.
James Gentile: Tables reconciling the historical non-GATT measures to the comparable GATT measures are included in the appendix to the presentation materials.
James Gentile: 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.
James Gentile: Also note that during this call we will be providing full year 2025 guidance, which excludes unforeseen impacts from these risks and uncertainties. We do not undertake any obligation to update these forward-looking statements.
James Gentile: It is now my pleasure to turn the call over to Eric Vaillancourt, our President and Chief Executive Officer. Eric? Thanks, James, and good morning, everyone. Thank you for joining us today as we review our results for the fourth quarter in full year 2024 and provide a business update that introduces our outlook for 2025.
James Gentile: Before we get started, I would like to thank our colleagues across the company for delivering another great year of results. I very much appreciate all of your hard work and the remarkable contributions that you make each day to enable our company's success.
James Gentile: I look forward to continuing our work together as we empower technology with purpose and create opportunities for each of us to flourish and thrive. Now on to our results.
James Gentile: Enpro performed well in 2024, executing effectively despite persistent weakness in semiconductor capital equipment demand and a sharp decline in commercial vehicle OEM sales.
James Gentile: Excellent performance across ceiling technology segment offset an overall soft demand environment in AST, driving improved bottom-line results year-over-year.
James Gentile: Thanks to the inherent balance and quality of the Enpro portfolio and the resilience of our business model, we generated strong free cash flow in 2024 and ended the year with a net leverage ratio of 1.6 times, well within our desired range.
Concealing Technologies
James Gentile: Our excellent performance and efficient operations drove an adjusted segment EBITDA margin of over 32% for the year.
James Gentile: We are very pleased with the strength of this segment and how our teams are positioning the businesses to drive above-market growth by leveraging our applied engineering capabilities
James Gentile: and Specification Physicians to deliver important solutions to our customers in areas where we have clear technology and process advantages.
James Gentile: Our efforts to improve and evolve Sealink technologies to position the segment for world-class performance have unlocked significant value.
James Gentile: In 2019, when we embarked on our Portfolio Optimization Strategy, the ceiling Adjusted Segmented Emitter Margin approximated 17%.
James Gentile: Through this purposeful and structural transformation, we have created a group of businesses that can deliver adjusted segment EBITDA margins around 30% consistently.
James Gentile: Now that this portion of our evolution is complete, we are leaning into our strengths and our best growth opportunities.
James Gentile: Identifying adjacent markets for our products to drive long-term organic growth while considering selective acquisitions that would expand the segments capabilities
James Gentile: At AST, revenue ended the year down roughly 10%, as weakness in semiconductor capital equipment spending continued, partially offset by the strength of our solutions serving leading edge applications.
James Gentile: The low point of AST's revenue in 2024 came in the first quarter, and then sales modestly improved sequentially each quarter as the year progressed.
James Gentile: Adjusted segment EBITDA margins finished the year above 21%, reflecting our resilient performance in a choppy demand environment.
James Gentile: In total, NPR reported approximately $255 million in adjusted EBITDA for 2024, up 7% year-over-year.
James Gentile: Considering weak demand in areas of semiconductor capital equipment spending and the sharp decline in commercial vehicle OEM demand, we are pleased with ENPRO's adjusted EBITDA margins of 24.3% that are up 180 basis points from prior year.
James Gentile: Next, I would like to take a couple minutes to share some recent highlights from our January Leadership Conference, where 85 leaders from across the company gathered to launch NPro 3.0, the next phase of our purposeful value creation journey. Our teams aligned on our long-term strategic goals and focused on areas where we can accelerate profitable business growth and meaningful personal and professional advancement.
But first, what is Enpro 3.0?
James Gentile: We think of our company's elevation in three phases. Following our spinoff from Goodrich Corporation in 2002, the company's first phase was about permanently resolving significant legacy liabilities while establishing the beginning of our dual bottom line culture.
The second phase, ENCRO 2.0, was about portfolio transformation.
James Gentile: We began this phase in 2019, divesting a number of businesses and product lines that did not meet our growth, profit, and return criteria, while reallocating proceeds from these divestments into growth markets, where we added strong technological and applied engineering capabilities.
James Gentile: During this phase, we optimized the ENPRO portfolio and widened and adjusted EBITDA margins by 1,000 basis points, creating significant shareholder value, returning nearly 27% annually since 2019.
upon a much more efficient and profitable revenue base.
James Gentile: These moves optimized our go-forward portfolio and set the stage for NPRO 3.0, a period where we expect higher revenue growth coupled with best-in-class profitability and strong returns on invested capital.
James Gentile: Successful execution of this next phase event probe will accelerate our value creating strategy and continue our excellent track record of delivering double-digit shareholder returns.
James Gentile: At the Leadership Conference, we had several discussions and exercises that focused on driving top-line profitable growth.
James Gentile: While encouraging a growth mindset to embrace challenges, refine our processes, and actively implement our continuous improvement playbooks to reimagine areas where both commercial market expansion and efficiency opportunities exist.
James Gentile: I was struck by the genuine excitement that our leaders have for our businesses and their motivation to achieve profitable growth to unlock additional opportunities for our colleagues and value for our stakeholders.
James Gentile: With our optimized portfolio in place, Enpro is positioned to generate mid- to high-single-digit top-line growth over the long term at strong profitability and return levels.
James Gentile: Over the next five years, we are targeting mid-single-digit growth in ceiling, while at AST we are targeting at least high-single-digit growth, with both segments capable of generating 30% adjusted segment EBITDA margins, plus or minus 250 basis points.
James Gentile: The entire team is excited to deliver the next phase of growth in Enpro 3.0.
James Gentile: Before I turn the call over to Joe to discuss our fourth quarter results in more detail and provide 2025 guidance, I would like to comment on safety, which is our most important core value.
James Gentile: In 2024, our safety results for total recordable case rate and lost time case rate continue to be much better than industry averages.
James Gentile: Rose by double digits. We are building on ENPRO's approach to safety culture by aligning with ISO 45001.
James Gentile: Occupational Health and Safety Management Systems to ensure repeatable processes and drive continuous improvement. This year, three NPRO locations received third-party certifications for ISO 4001. Joe?
Joe Bruderek: Thanks, Eric, and good morning, everyone. In the fourth quarter, sales of $258.4 million increased 3.7%, and organic sales increased 1.2%.
Speaker Change: Increase was primarily driven by strong sales performance in the ceiling technology segment.
Speaker Change: Strong demand in aerospace and nuclear markets and a recovery in European general industrial and food and pharma demand, as well as strategic pricing initiatives and the addition of AMI, more than offset slower sales tied to wafer fab equipment at AST and a sharp decline in commercial vehicle OEM demand.
Speaker Change: Fourth quarter adjusted EBITDA of $58.2 million increased 24%. An adjusted EBITDA margin of 22.5% expanded 370 basis points year-over-year.
Speaker Change: Positive mix in both segments, the addition of AMI, the benefits of cost mitigation actions, and lower corporate expense were the primary drivers of this year-over-year improvement.
Speaker Change: Corporate expenses of $13.4 million were down from $14.7 million in the fourth quarter of 2023, primarily due to the decrease in long-term incentive compensation expense related to cash-settled share-based rewards tied to share price performance compared to last year.
Speaker Change: Adjusted diluted earnings per share of $1.57 increased 32% compared to the prior year period, largely driven by the factors increasing adjusted EBITDA.
Speaker Change: Moving to a discussion of segment performance, ceiling technology sales of $163 million in the fourth quarter increased 11% from the prior year period.
Speaker Change: Strong demand in aerospace and nuclear markets, strategic pricing actions, the addition of AMI, and a recovery in food and pharma and European general industrial markets, more than offset continued weakness in commercial vehicle OEM and Asian industrial markets.
Organic sales increased 6.7 percent.
Speaker Change: For the fourth quarter, Adjusted Segment EBITDA increased nearly 32% from the prior year period, with Adjusted Segment EBITDA margin expanding almost 500 basis points to 31%.
Speaker Change: Positive Mix, Strategic Pricing, Improved Volume, and the addition of AMI contributed to the strong year-over-year profit performance.
Speaker Change: We are very pleased with the impressive performance throughout the sealing technology segment and plan to continue making targeted investments to drive incremental organic growth.
Speaker Change: along with considering select strategic acquisitions that meet our rigorous criteria to expand our capabilities and market positioning.
Speaker Change: With two-thirds of the segment comprising critical specified positions in the aftermarket and the sustained structural improvements made in the segment in recent years, we expect to continue achieving world-class performance and ceiling and driving mid-single-digit top-line growth at superior margins.
Turning to advanced surface technologies.
Speaker Change: While we saw sequential improvement from the third quarter, sales of $95.6 million decreased 6.4% year-over-year.
Speaker Change: Continued weakness in semiconductor capital equipment spending offset strength and solution service serving leading-edge applications which continue to be a bright spot for AST in the fourth quarter and throughout the year.
Speaker Change: For the fourth quarter, adjusted segment EBITDA decreased approximately 7% versus the prior year period.
Speaker Change: Adjusted segment EBITDA margin of 22.1% improved sequentially by 130 basis points and was flat year-over-year.
Speaker Change: Positive mix and continuous improvement initiatives offset the overall volume decline, material cost increases, and operating costs related to growth investments.
Speaker Change: We were pleased that we were able to hold the line on decremental margin and AST year-over-year during the fourth quarter.
Speaker Change: We see several long-term revenue growth and continuous improvement opportunities throughout AST and are taking actions to unlock the potential of this business.
Speaker Change: We have made progress in identifying levers to implement our optimization playbooks that led to the improved performance within the ceiling technology segment that we will expect will enable us to expand margins in AST toward 30%, plus or minus 250 basis points more consistently as volume and mix normalize.
Speaker Change: Finally, the accelerated qualification work that we discussed last quarter in Arizona gained traction, and we generated small initial revenue from the facility during the quarter.
Speaker Change: We believe the long-term growth opportunities in AST far outweigh the recent market choppiness, which we expect to continue this year.
Speaker Change: Accordingly, we will continue to invest in the segment to drive high single-digit long-term revenue growth with improved profitability.
Turning to the balance sheet and cash flow.
Speaker Change: Our balance sheet remained strong, and we exited 2024 with a net leverage ratio of 1.6 times, inclusive of the $210 million in cash used to acquire AMI in late January of 2024.
Speaker Change: We continue to generate ample free cash flow to invest the necessary capital and operating expenses into our strategic organic growth opportunities.
Speaker Change: In 2024, we generated $130 million in free cash flow, net of $33 million of property, plant, and equipment and capitalized software expenditures, in addition to approximately $7 million that remained in payables on December 31st.
Speaker Change: We have strong financial flexibility to execute our strategic initiatives, both organically and through strategic acquisitions that broaden our capabilities.
Speaker Change: Our goal is to build on our leading-edge positions in markets with secular growth drivers that safeguard critical environments and applications that touch our lives every day.
Speaker Change: We are also maintaining our commitment to return capital to shareholders, and during 2024, we paid a $0.30 per share quarterly dividend, totaling $25.3 million for the year.
Speaker Change: On February 13th, our Board of Directors approved another increase to the quarterly dividend to 31 cents per share, representing the 10th consecutive annual dividend increase since we initiated a quarterly dividend in 2015.
Moving now to our 2025 guidance.
Speaker Change: Taking into consideration all the factors that we know currently, we expect total and pro-sales growth to be in the low to mid single-digit range in 2025.
Speaker Change: We expect adjusted EBITDA to be in the range of $262 million to $277 million, and adjusted diluted EPS to range from $7 to $7.70 per share.
Speaker Change: The normalized tax rate used to calculate adjusted diluted earnings per share remains at 25%, and fully diluted shares outstanding are approximately $21 million.
Speaker Change: This view does not contemplate any material, macroeconomic, or trade-related variability.
Speaker Change: In 2025, capital expenditures are expected to approximate $50 million, or around 4.5% of sales, as we continue to invest in future growth opportunities across the company at a creative margin and return threshold.
Speaker Change: In the ceiling technology segment, we expect demand drivers to remain largely the same as we saw in 2024, and expect low- to mid-single-digit revenue growth in 2025.
Speaker Change: Areas with longer cycle backlog, such as aerospace, space, and nuclear, are expected to continue to be strong, while we expect commercial vehicles to be flat to slightly up.
Speaker Change: In North America and in Europe we expect firm general industrial demand with some recovery in food and pharma.
Speaker Change: In the advanced service technology segment, we expect AST sales to grow in the mid to high single digits.
Speaker Change: with the second half of 2025 being slightly stronger and adjusted segment EBITDA margins to remain above 20% for the year.
Speaker Change: Industry sources and conversations with our customers suggest continued weakness in semiconductor cap and equipment spending throughout 2025, and we are making targeted cost adjustments to account for this reality.
Speaker Change: While overall capital spending for WaferFab equipment will remain muted again this year, we expect our solutions serving leading-edge nodes and advanced chip architectures to continue to grow.
We also expect demand for optical filters to improve.
Speaker Change: Thank you for your time today. I will now turn the call back to Eric for closing comments.
Speaker Change: Thank you, Joe. As we enter 2025, we are energized and working hard to deliver another year of strong results for our customers and shareholders. We continue to operate the business with balance in an effort to achieve excellent financial results in a variety of economic environments.
Speaker Change: Our value-creating strategy remains unchanged, and we continue to invest in areas where we are strongest, while considering strategic acquisitions that build upon our leading-edge capabilities.
Speaker Change: I want to again thank our dedicated colleagues across the company who are the driving force for our company's success. And we believe we have built a clear path to achieve our vision of Enpro 3.0. Thank you for joining us today. There's no better time to be a part of Enpro, and we now welcome your questions.
Speaker Change: Thank you. We will now be conducting a question and answer session. If you would like to be placed in the question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.
Speaker Change: Once again, that's star 1 to be placed into question 2, and star 2, if you'd like to remove yourself from the queue. One moment, please, while we poll for questions.
Speaker Change: Our first question is coming from Jeff Hammond from KeyBank Capital Markets, your line is now live.
Hey, good morning, gentlemen.
Morning, Jeff.
Speaker Change: We'll start with the $64,000 question, semiconductor, you know, kind of...
Speaker Change: Just wanted a better, I think you said mid to high single-digit growth for AST, so just trying to better get a sense of what you're assuming for...
Speaker Change: WFE or wafer starts and when you think you see an inflection or if the growth is really just all kind of outgrowth and leading edge focus.
and James Gentile. Thank you.
Speaker Change: I think it is mostly outgrowth in leading-edge applications, but I also see to some degree the law of small numbers that's just gone down so much there's room to improve at this point. There's also a little bit of market share gain in there. We can look at our funnel and see some programs we've won to give us some confidence we'll get to those numbers spread into the year. I'm not looking for strong market recovery. I expect it to be quite choppy throughout the year.
Speaker Change: Yeah, Jeff, I think when you look at a lot of the industry sources, they're kind of saying low to mid single digits.
Speaker Change: You know, it varies depending on where you're exposed and, you know, how much China exposure you have versus non-China.
Speaker Change: But that's sort of what we're expecting, you know, low growth in WFE overall for the market in 2025 and then, you know, the investments that we've made and the growth initiatives that we have, especially on leading edge applications, to kind of outperform.
Speaker Change: Okay, then just how should we think about AST sequentially, you know, you kind of...
Speaker Change: ramped through 24. I don't know if you step back down or if fourth quarter is kind of a new run rate to think about.
Speaker Change: Yeah, I think it's going to be choppy, you know, for the first half a little bit again. We could see a little bit of step back to be slightly flat to slightly down, you know, in the first half, but not materially.
Speaker Change: We do think it will be second half slightly stronger than the first half overall for AST. So you could see some choppiness quarter to quarter, but I don't think we're going to see a material step down in any way.
Speaker Change: You know, we've invested behind all the growth investments. Arizona, as we talked about, had some initial revenue in the fourth quarter. You know, that testing revenue and qualification work will continue in 2025.
Speaker Change: But the reality is that we'll be mostly spending ahead of demand for now. We see that ramping up a little bit through 2025, but materially production volume coming in 2026.
Speaker Change: and even beyond that as our key customers kind of ramp their volume. But it's another year of strong growth investments for us behind AST and then,
and scaling with our customers as they grow.
Speaker Change: Okay, and then last one, just a lot of news flow on tariffs, so I know it's pretty new, but just, how are you thinking about, you know, and how have you built, you know, tariff
Speaker Change: risk into into the guide maybe just talk about you know any pricing actions you're considering you know and maybe just remind us of you know kind of any sourcing footprint you know China, Mexico, Canada
Sure.
Speaker Change: So, most of our sourcing is done in region, and the largest part of our supply chain is actually source-directed by customer. So, the areas where we have exposure, we have three product lines, one small one in Mexico, one small one in Canada, and then another one, again, small volume out of China.
Speaker Change: All together, it wouldn't be material, and I also think there will be some offsets of the U.S. if and when the tariffs are enacted, depending on how much they are. But we've already got price plans in place, and we'll also use, in some cases,
Speaker Change: What do you call them? I'm sorry surcharges to capture them immediately and so we can also adjust as the administration sorts out what they're doing So we will capture most of the price and in any event in the worst case scenario wouldn't be material
and the customer-directed
Speaker Change: You know sourcing is that you know, is that have pass-throughs for for tariffs?
Speaker Change: We buy it at a net cost, so whatever price, we get it from them at their net cost, so that tariffs would already be improved in there, and we would go from that point, Jeff.
Speaker Change: It would be in the base, if you will. It wouldn't affect us.
Okay, I'll get back in queue. Thanks.
Thank you.
Speaker Change: Thank you. Next question is coming from Steve Ferritani from Sidonian Company. Your line is now live.
Morning, everyone. Appreciate all the detail on the call.
Steve Ferritani: I was actually a little positively surprised by your AST margin this quarter, given I know you were going through that certification process. I assume there would have been a sequential decline. You actually had a sequential increase. Given the costs associated with that, was it just much better mix this quarter? Can you walk us through how you got to that?
that sequential increase despite the certification process in Arizona.
Steve Ferritani: Yeah, good morning Steve. Yeah, we talked, as you mentioned, last quarter about, you know, the qualification work that we were accelerating.
and pulling from 2025 into 2024.
Steve Ferritani: We did all that, and frankly, it went as according to plan. So we did see a little bit higher cost.
in the fourth quarter than we originally intended.
Steve Ferritani: But, you know, we did see positive mix, especially on leading edge.
Steve Ferritani: work, both in Taiwan and in the U.S., and that drove favorable mix, volume was pretty strong through the back half of the year, or back half of the quarter, and so that favorable mix ticked our margins up a couple points, more favorable than we expected even going into the fourth quarter.
Thank you. Thank you.
Speaker Change: As you expect the solutions to be the stronger side in 2025 and that's the better margin where it's appear to be the better margin side, is there any reason to think you can get above low 20s in 2025 on the margin side?
Speaker Change: You're right in the fact that we do see the solution side to be stronger and that you know will kick our growth rate up a little bit through the year but we we continue to invest in in the work in Arizona and in other opportunities for growth that we're going to really pay off in 26 and beyond so we're still investing ahead of demand.
Frank: And in Frank, we're investing a little bit increasingly more than we did in 2024.
Frank: You know if volume overall volume growth is is a little stronger than then we're talking about and we're on the higher end of our overall revenue guide
Frank: I think we could see margins tick up a little bit, but the reality is they'll probably be in the same range as we saw above 20% in 2025.
Speaker Change: Okay, that's helpful. On the ceiling side, I want to ask the tariff question in a different way. We've seen
Frank: Some markets, maybe the spending on the industrial side, slow down given general uncertainty, Europe and other places being concerned about what might be coming.
Frank: I know a lot of your stuff on ceiling is mission-critical, but have you seen any kind of a slowdown given the uncertainty in the world?
Frank: The short answer is no, we really haven't seen any slowdown at all.
Frank: Okay, fair enough. Last one on the much higher CapEx next year, anything specific you want to highlight? And it looks like some stuff probably pushed out of 2024, given how low that number came in. Is that fair?
Frank: Yeah, that's right, Steve. I mean, as we talked about, we lowered our CapEx number as we moved through the year.
Frank: A lot of the projects, not Arizona, but other growth investments that we're making in additional capabilities both geographically and from a technology standpoint, we're kind of getting off the ground a little bit in 24. And so as we refine the scope.
Frank: Late on our engineering plans on that, you know, they were a little bit paced through the year to start later than originally expected. So that's going to push into 2025. Those projects are often going now. We're in execution mode. So we do feel a little bit higher.
Frank: You know confidence in our ability to spend at that level And we did talk about we got probably our eyes got a little bit ahead of our stomach in 24 a little bit but we're often running in those projects, and you know the 40 to 50 million is probably our normal capacity to spend
Okay, okay, great, thanks everyone.
Speaker Change: Thank you. As a reminder, that's star one to be placed into question Q. Our next question is coming from Ian Zepino from Oppenheimer. Your line is now live.
Speaker Change: Hey, good morning. This is Isaac Salazan on for Ian. Thanks for taking all the questions
Speaker Change: and also on the details on the NPRO 3.0 phase, I guess on AST what would be sort of the steps or high-level thinking to get to 30% even at margins?
Speaker Change: versus around 20 plus percent today. I guess the main drivers as far as like top-line growth or operational improvements or contributions from the Arizona facility. Thanks.
Speaker Change: In 26, as Joe started, it'll start to ramp up there. But in addition, there'll be some market share gain along the way, and then a bunch of operational improvements. So when you look at it, it's the same as we ran in the ceiling playbook.
Speaker Change: So, we say it's an overnight success, but as you saw earlier in the script, it was from 2019 to today, we've improved about 1,000 basis points. So, it's a little bit of everything, it's a little bit of 80-20, it's a little bit of customer mix, it's a little bit of share gain, and it's a little bit of leaning edge technologies that, of course, have a little higher margins.
Speaker Change: Yeah, there's no doubt, Isaac, that the majority of that will come from, you know, just growth, whether it be market recovery or, you know, outsized growth that we're driving through our strategic positioning, but there will be a decent element from the continuous improvement and other operational efficiency.
Speaker Change: programs that we're driving now that will affect over a multi-year period that will clearly be part of the algorithm to get to that 30% sustainably.
Speaker Change: Okay, great. Thank you. And then just a quick follow-up on the semi-cap equipment side. Maybe if you could provide any kind of details you could give with the conversations you've had with customers and maybe sort of how they're thinking about growth, you know, beyond 25 or, you know, into 26. Thanks.
Speaker Change: Yeah, so I guess the best way, in conversation with the customers what they're saying is basically choppy 2025.
Speaker Change: and 2026 is too far ahead to have a great look at it right now and the customers are hesitant as we are to say anything more than that because we've been saying now and it'll be coming back in six months now for two years and I don't know that we have more visibility than that.
Speaker Change: So I think Gartner is probably as good a reference as anybody right now and our customers are a fair amount of uncertainty still with what's going on with the US situation, let's say.
Okay, understood. Thank you.
Yeah.
Speaker Change: Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to James for any further closing comments.
That's all today. Thank you for your interest in MPro.