Q1 2025 Enpro Inc Earnings Call
Enjoy your time, stay safe.
Speaker Change: Greetings, and welcome to the EnPro Q1 2025 Earnings Conference calling webcast. At this time, all participants are in the synonymy mode. If anyone should require operator assistance, please press star zero on your telephone keypad.
Speaker Change: A question and answer session will follow the formal presentation. He may be placed in the question queued anytime by pressing star one on your telephone keypad. As a reminder, this conference is being recorded. It's not my pleasure to turn the conference over to James Gentile advice president and investor relations. Please go ahead, James.
James Gentile: Thanks, Kevin and good morning, everyone. Welcome to EnPro's first quarter 2025 earnings conference call. I will remind you that our call is being webcast at empro.com where you can find the presentation that accompanies this call.
Speaker Change: With me today is Eric Vaillancourt, our President and Chief Executive Officer and Joe Bruderek, Executive Vice President and Chief Financial Officer.
Speaker Change: During today's call, we were reference a number of non-GAAP financial measures, tables reconciling the historical non-GAAP measures to the comparable GAAP measures or included in the appendix to the presentation materials.
Speaker Change: 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. Let's see.
Speaker Change: Also note, during the call, that 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.
Speaker Change: It is now my pleasure to turn the call over to Eric Vaillancourt, our president and chief executive officer, Eric.
Eric Vaillancourt: Thanks James, and good morning everyone. Thank you for your interest in EnPro as we discuss our latest quarterly results, along with an update on strategic initiatives and our current views for 2025.
Eric Vaillancourt: Before we discuss the quarter, I would like to recognize our colleagues across EnPro who are energized and focused on providing critical products and solutions to our customers.
Eric Vaillancourt: while displaying discipline and agility in continuing to deliver exceptional commercial and financial results.
Eric Vaillancourt: At EnPro, one of our overarching philosophy is the dual bottom line, which is our belief that outstanding financial performance and personal development are intertwined in such a way that one does not happen without the other.
Eric Vaillancourt: Consistent with this belief, we invest significant time and effort to develop strategic agile leaders with a high degree of awareness and business acumen that thrive in a variety of economic environments.
Eric Vaillancourt: We have clarity on the elements of our business that we can control and show agility in pulling these levers of control to drive strong execution when economic uncertainty arises, only to emerge stronger on the other side.
Eric Vaillancourt: Our people are the cornerstone of our efforts to drive unprotein new heights as we encourage our colleagues to accelerate personal and profitable growth in EnPro 3.0, the next phase of our value-creating strategy launched earlier this year.
Eric Vaillancourt: We are excited in a moral position to continue demonstrating on gross growth capabilities and durable business model as we move forward.
Now I'm to our first order performance.
Speaker Change: After my overview, Joe will provide more detailed discussion of our quarterly results and perspectives, underpinning our current outlook for 2025.
Joe Bruderek: The first quarter report highlights continuing out performance in ceiling technologies and year-on-year revenue growth in the ST. We grew organic sales in the 6% in the first quarter with strong execution driving operational leverage in year-on-year earnings growth.
Joe Bruderek: In ceiling technologies, organic sales increased 4.5 percent, driven by strength and aerospace, general industrial and food and farmer markets, offset by continued weakness in commercial vehicle OEM demand.
Joe Bruderek: Adjusted segment EBITDA margins exceeded 32%. Continuous improvement initiatives, favorable pricing and mix also contributed to another strong quarter in Suming.
Joe Bruderek: In line with our long-term strategy, we continue to invest in organic growth opportunities in areas where we have clear applied engineering and technological differentiation, while pursuing capability expansions through acquisitions that meet our rigorous strategic and financial criteria.
Joe Bruderek: We are driving market share gains and accelerating sales in aerospace markets with technological innovation and differentiator to applied engineering expertise.
Joe Bruderek: In the commercial vehicle market, new products are helping stabilize sales and improve mix during this period of weaker demand for trailers.
Joe Bruderek: We continue to encourage imagination and are investing in adjacent market development opportunities to leverage our market-leading strengths.
Joe Bruderek: Additionally, the segment's aftermarket positioning provides stability during periods of economic or geopolitical uncertainty.
Joe Bruderek: Two-thirds of the segments serves the aftermarket with critical solutions qualified to safeguard a wide range of customer processes, and we expect the segment to perform well in a variety of economic environments.
Err...
Joe Bruderek: In the advanced surface technology segment, sales increased 9.1% a year over a year, driven by double-digit revenue growth and precision cleaning solutions and optimal coatings and filters, more than offsetting still choppy semi-conductor capital equipment spending.
Joe Bruderek: Despite expenses to support growth initiatives, operating leverage dropped nearly 19% improvement and adjusted segment EBITDA to a margin rate of around 22%.
Our targeted growth investments in the segment are developing nicely.
Joe Bruderek: Interoperational Improvement Initiates positioned the ASD segment well for future-all performance and our eventual overall market recovery. We continue to be pleased with the overall segments performance during this pro long period of weakness in semiconductor capital equipment spending as we lean into our best growth opportunities.
Joe Bruderek: Investing in areas where we have strong technological advantages and differentiated capabilities. Total Total company adjusted EBITDA increased over 16% on the 6% increase in sales with margins expanding to 24.8% this quarter.
Joe Bruderek: Our balance sheet remains an excellent shape, providing us ample flexibility on our value
Speaker Change: Before I hand the call over to Joe, I'd like to take a few minutes to discuss our direct tariff exposures.
Speaker Change: With respect to direct impact to our businesses, we believe our exposure to be minimal and manageable. Like others, we will continue to monitor potential secondary impacts that tariffs could have on the broader macroeconomic environment.
Speaker Change: Most of our production is in Region 4 region, and our supply chain teams have secured diversified raw material sources to support operations for the rest of the year.
Speaker Change: Our supply chain teams have demonstrated their discipline time and time again in a variety of challenging environments. We are grateful for their continued agile execution during this period of macroeconomic and geopolitical uncertainty.
Speaker Change: Their performance is reflective of our entire team's continued focus on our core values that safe the excellence and respect as we empower technology with purpose.
Speaker Change: I want to thank all of our colleagues for their dedication and commitment to our business. Our values and our customers that continue to allow us to differentiate ourselves with excellent performance and build a bottom market leadership. Joe.
Joe Bruderek: Thank you, Eric. Good morning, everyone. We started 2025 with strong results and consistent execution despite the currently dynamic macroeconomic environment.
Joe Bruderek: In the first quarter, sales of $273.2 million increased more than 6%. Driven by continued strong performance in the ceiling technology segment and a 9.1% increase in AST.
Joe Bruderek: First quarter, adjusted EBITDAV $67.8 million increased more than 16% compared to the prior year period.
Joe Bruderek: Total company adjusted EBITDA margin of 24.8% expanded 210 basis points year over year.
Joe Bruderek: Volume growth in both segments, favorable mix, and cost controls drove operating leverage. Offset and part by expenses tied to growth investments.
Joe Bruderek: Corporate expenses of $11.3 million in the first quarter of 2025 decreased from $12.2 million a year ago. With lower restructuring costs and professional fees, the primary drivers of the reduction.
Joe Bruderek: Adjusted diluted earnings per share of $1.90 increased 21%, driven by the factors behind Adjusted eva.grofe for your over year.
Joe Bruderek: Moving to a discussion of segment performance, ceiling technology sales increased 4.7% to $179.6 million.
Joe Bruderek: Strength and aerospace, General Industrial and Food and Farma, more than offset continued weakness and commercial vehicle OEM demand, and still tepid sales in Asia.
Joe Bruderek: Strong positions in diverse markets drove you over your sales growth and ceiling against a prior quarter that included stronger commercial vehicle OEM demand.
Joe Bruderek: The weakness in that market, which continues today, was more pronounced for us in the second half of 2024.
For the first quarter, it's just a second EBITDAI increase nearly 11%.
Joe Bruderek: Adjusted Tegment EBITDA margin, this quarter at 32.7%, remained above 30% for the fifth consecutive quarter.
Turning now to Advanced Service Technologies
Joe Bruderek: We are pleased with the segment's return to growth, with first quarter sales increasing more than 9% to almost $94 million.
Eric Vaillancourt: While overall semiconductor capital equipment spending remains choppy, as Eric mentioned, we saw double digit growth in our precision cleaning solutions and optical coatings and filter revenue.
Eric Vaillancourt: We continue to believe the low point of AST sales experience in the first quarter of last year is behind us.
Eric Vaillancourt: For the first quarter, adjusted segment Ivedon increased 18.5% versus the prior year period.
Adjust the segment EBIT down margin and expand in 180 basis points to 21.9%.
Eric Vaillancourt: Operating leverage on higher sales growth, favorable mix and cost reductions were offset in part by increased expenses tied to growth initiatives.
Eric Vaillancourt: Continue to make targeted growth investments in areas where we have the strongest competitive advantages while reducing costs and implementing our continuous improvement playbooks to drive enhanced profitability and achieve our longer-term goals for AST segment performance.
Turning to the balance sheeting cash flow.
Eric Vaillancourt: Our balance sheet remains strong, and we have ample financial flexibility to execute on our long-term organic growth initiatives and consider select acquisitions that fit our rigorous strategic and financial objectives.
Eric Vaillancourt: Subsequent to Quarter End on April 9, 2025, and Pro-Amended Its Existing Credit Agreement.
Eric Vaillancourt: The amended credit agreement provides a revolving credit facility of up to $800 million, which will mature in 2030, offering us more financial capacity to execute on our strategic growth initiatives.
Eric Vaillancourt: This facility replaces a previously undrawn $400 million revolver and a term loan with an outstanding balance of $287 million, which were set to mature in 2026.
Eric Vaillancourt: As of May 1st, 2025, corporate debt totaled $580 million, composed of the $350 million senior notes, maturing in late 2026.
Eric Vaillancourt: and $230 million on our new Revolving Credit Facility that maturers in 2030.
Eric Vaillancourt: Reflecting the use of cash to partially fund the repayment of the term loans, our cash balance approximates $193 million as of May 1st.
Eric Vaillancourt: Our net leverage ratio following these moves is currently 1.5 times trailing 12-month EBITDA as of March 31st.
Eric Vaillancourt: Free cash flow in the first quarter was $11.6 million, driven by strong operating performance during a seasonal period where cash from operations is typically used.
Eric Vaillancourt: We continue to expect capital expenditures to be around $50 million this year, as we invest in future growth opportunities across the company at a creative margin and return thresholds.
Eric Vaillancourt: Finally, our strong balance sheet and cash generation provide us with ample liquidity to make these investments while continuing to return capital to shareholders.
Eric Vaillancourt: In the first quarter, we paid a 31 cent per share quarterly dividend, totaling $6.6 million [inaudible]
Eric Vaillancourt: We also have an outstanding $50 million share repurchase authorization expiring in October over 2026.
Moving on to guidance.
Eric Vaillancourt: We maintain our total year 2025 guidance issued in mid-February and continue to respect total intro sales growth to be in the low-to-mid single-digit range.
Eric Vaillancourt: Adjusted EBITDA between $262 million to $277 million, and adjusted diluted earnings per share to range from $7 to $7.70.
Eric Vaillancourt: The normalized tax rate used to calculate adjusted diluted earnings per share remains at 25 percent and fully diluted shares outstanding or 21.2 million.
Eric Vaillancourt: As discussed, with respect to the recently announced tariffs, we believe any direct cost impact to be minimal and manageable, and at this time we are not seeing broad demand impacts on our business.
Eric Vaillancourt: or Maintained Guidance contemplates a range of economic outcomes in the back half.
Eric Vaillancourt: In sealing technology, shorter cycle order pandas remain solid into our seasonally strong second quarter.
Eric Vaillancourt: Last year's Q2 was a challenging comparison, especially with its adjusted segment EBITDA margin being at the high water mark of 35.5%.
Eric Vaillancourt: We are encouraged by positive order momentum in certain shorter-cycle product lines, such as general industrial and food and pharma, that we expect to drive improved sales performance in ceiling technology sequentially into the second quarter.
Eric Vaillancourt: while not contemplating or recovering our commercial vehicle markets for the balance of this year.
Eric Vaillancourt: Demand for longer cycle, backlog German solutions such as in commercial aerospace, space exploration, and sustainable power generation is growing nicely and contributes to our confidence for continued strong performance in the segment moving forward.
Eric Vaillancourt: Finally, we expect ceiling segment profitability to remain towards the high end of our previously communicated target range of 30% plus or minus 250 basis points for the year.
Eric Vaillancourt: In the advanced service technology segment, we continue to seek growth in our advanced no-cleaning business and positive demand signals in our optical coatings and filter business.
Eric Vaillancourt: We expect choppiness to persist in product lines tied to semiconductor capital equipment spending.
Eric Vaillancourt: We continue to expect AST revenue growth in the mid-to-high single-digit range for 2025 and we expect adjusted segment EBITDA margin to remain above 20% for the year.
Eric Vaillancourt: I will now turn the call back to Eric for closing comments.
Eric Vaillancourt: Thank you, Joe. We are excited to demonstrate our strength and agility as we embark on accelerating the personal and profitable growth of our colleagues and our company in the next phase of our value-creating strategy, EnPro 3.0.
Joe Bruderek: Thank you all for your interest in EnPro. We look forward to updating you in early August when we report results for the second quarter. We now welcome your questions.
Speaker Change: Thank you. Now I'll be conducting a question and answer session. If you'd like to be placed in the question, cue, please press star one on your telephone keypad. One moment please when we pull for questions. Our first question is coming from Jeff Hammond from Keybank Capital Market. The line is now live.
Hey, good morning, guys
Morning Jeff. Morning Jeff.
Speaker Change: I'm just wondering if you can put some some numbers around your comment that the tears are minimal and manageable and then you know any kind of pricing actions you've you've undertaken you know for you know for that I guess minimal headwind
Speaker Change: Yeah, Jeff, I can give you some color anyways. We say minimal when manageable because most of our products are in region for region. When you look at our export versus import, we import very little in comparison to others perhaps.
Speaker Change: If you look at the products we import from China, it's really one product. It's bearings that are used in our trailer manufacturing at our commercial vehicle business.
Speaker Change: And we've already been agile in securing other production. We can get it in Spain or India as an example. So our supply chain is very agile. We go back to it at the time during COVID.
Speaker Change: We went through significant challenges at that point, and if you remember during our conference calls then we never once pointed to that impacting our results.
Speaker Change: to secure pricing that meets our customers demand in these critical applications. We don't have the flexibility of substituting necessarily cheaper prices, so we have to be agile, and our teams are excellent.
Speaker Change: So, if you look at our North American exposure, it's Canada and Mexico, which are both been exempted by the tariffs, it's been products that we produce and ship the cross-board. There's very little impact there. So, when you look around the region, around the world, they have very, very little exposure.
Speaker Change: to really to tariffs in general in the primary, let me say in the primary products and services that we do.
Speaker Change: where we're exposed, potentially, is just in the greater macroeconomic conditions that we can't predict. But we say minimal and manageable and very confident that we can perform well in this environment with terrorists.
Speaker Change: Okay, great. And then I understand the guidance is unchanged. Are there any end markets that you're feeling particularly better or worse about, you know, versus say 90 days ago?
Speaker Change: I feel equally good about basically all of the markets at this point, from the personally commercial vehicle is basically what we expected.
Speaker Change: So it's less than the last year. The official vehicle, all the M demand. But if you look at ton miles, which is where I always anchor
Speaker Change: It's less than 1% difference. I think right now they're currently forecasting about a 0.4% decline.
Speaker Change: So basically flat, and that's consistent with last year. And again, we have some innovation there as well that I think will help that business and so I'm still excited about the businesses.
Speaker Change: and Aerospace and Space, doing strong food and farmer recovering nicely and energy is also doing well. And again, we have a very strong aftermarket and recurring revenue to kind of insulate us from a lot of that.
So, still, if you're good about that
Speaker Change: Yeah, just overall, I mean, the man environment has been pretty good so far, right, and we talked about our guidance range and, you know, if you were to contemplate the demand environment staying like it is now.
Speaker Change: That would bring the range of assumptions for the outcomes on the demand side. If we see things softening a little bit...
Speaker Change: You could bring a bottom half of our range into play and that's what we talk about in our guidance range that we contemplate a range of economic incomes in the back half really. But again we haven't seen any broad signals there yet.
and overall the man has been pre-firm.
Speaker Change: I would like to add a good thing, you know, our teams are positioning, you know, with our incremental growth investments.
Speaker Change: You know, finding opportunities to pick up share using technological and applied engineering capabilities really across the company. So, you know, the energy internally despite, you know, what may be a more difficult macro economic environment in the second half.
Speaker Change: Doesn't necessarily stop the engine of our folks, you know, producing what they want, what they're doing, driving, you know, maybe some outsides grow from the future in line with our long-term growth algorithms.
Speaker Change: Yeah, that was my follow-up on. I mean, you guys seem really uniquely well positioned, you know, to manage tears I'm wondering if you look at the competitive landscape if there's anything anywhere that you think
Speaker Change: You know, because of your positioning versus others that may have to really push price, where you could start to really pick up some share. Thanks.
Speaker Change: I always think there's opportunities in these kind of uncertain environments and that's why I spent a lot of time talking about agility and the talent development that we do.
Speaker Change: So we spent a lot of time recruiting, developing, and training what I call Agile aware of business leaders with a high degree of acumen.
Speaker Change: and they need to be able to perform well, really, in any environment. And I look at Terrace.
Speaker Change: It's just another event. If you go back now to the last four or five years, we had COVID, then you had the war in Russia, Ukraine, then you have the Israel situation. And the next thing we'll be talking about in a couple years will be AIM. There'll be another inflection point. It's just going to be continuous change.
Speaker Change: and our teams may be able to thrive in all these environments. We spend a lot of time developing our people to do that, and I'm confident that we'll perform well.
Thank you for watching!
Okay, thanks a lot, guys.
Speaker Change: Thank you. As a reminder, that star one to be placed in the question, Q. Our next question is coming from Steve Ferazani from Sedodian Company. Your line is now live.
Steve Ferritani: Good morning everyone. Appreciate the detail on the call. I just wanted to circle on and double check on this Eric. You know, the first place we might see a slowdown is some distributor destocking. You've seen no examples of that yet.
Steve Ferritani: Now, we never, we never really saw an inventory build, which is it's kind of been getting the supply chain and balance for the last year or so and there hasn't been
Steve Ferritani: A big accumulation of inventory because if we go back to the call of slasher, we talked about somewhere around 50% of our business being kind of in a flat to downturn. There wasn't a reason really to build inventory, so I haven't seen any destocking.
Speaker Change: Okay, perfect. Flipping over to AST, any updates on the Arizona facility?
Speaker Change: It's on track. We're through qualification and starting to get some early revenue for testing and getting ready to go. But the soil systems are go, but we're still in phase one and business is still ramping.
Speaker Change: And, Steve, as we talked about, we expect qualifications to continue for some time, right? So, last quarter, we talked about early revenue in the fourth quarter.
Speaker Change: Not material but symbolic and important to get our momentum started but we expect to be in qualification mode for the majority of this year.
Speaker Change: Everything is on track, doing very well and seeing good signs of qualifications.
Speaker Change: The continuous improvement efforts on ASTU which you started applying last year, are you starting to see any benefit from it or will we see it as top-line grows?
Speaker Change: You know, it's just a little bit here and there, I would say it's continuous improvement, it's very brief, so it's just a little bit all the time, and so it'll continue, we're seeing a little bit, but it'll never be like a...
Speaker Change: Step change, we're all studying to see this big increase all of a sudden. It'll just be consistent a little bit when's here and there So yeah, we are seeing some results and we'll continue to see results. So be improvement over time [inaudible]
Speaker Change: And then if I could just ask about capital allocation, given the current environment is M&A activity kind of freezing up a little bit, I imagine due diligence efforts have to be much more.
Speaker Change: diligent given you have to check supply chains of any potential acquisition. But you can talk about one M&A and does that mean more likelihood is you're paying down debt because by our model you're still going to generate a ton of cash this year.
Speaker Change: Yes, Steve, I mean there's still activity out there, right? There's still processes coming, but as you said right given the uncertainty in the market it has slowed a little bit
Speaker Change: We have to be extra diligent to make sure that we understand the current environment that everyone is operating in and the current business situation.
Speaker Change: We're going to continue to prioritize high-quality assets and high-quality businesses that fit our strategic in.
Speaker Change: is in great working order. The new credit facility that we put in place gives us even more flexibility with the revolver taking out the term loans and we have the ability to kind of pay down debt as we have cash and preserve our overall capacity there.
Speaker Change: So we have even more flexibility in capital allocation going forward. We continue to prioritize organic growth in M&A from a capital allocation standpoint. We're just going to continue to be patient.
Speaker Change: An extremely diligent and making sure that the areas that we're looking in our pipeline of our quality, but that's the continued focus from capital allocation standpoint.
Okay. Thanks, Eric. Thanks, Joe.
Speaker Change: Thank you. Our next question is killing from Ian Zaffino from up on Hammer, your line is now live.
Ian Zaffino: Hi, great. Thank you very much. Maybe you could help us understand the margin expansion a little bit more, especially in stealing. How much of that was volume versus price? Maybe help us understand the pricing outlook for aerospace and general industrial in general. Thanks.
Drone up.
Thank you very much.
Speaker Change: I think it was more mixed-driven. We had great success with strategic pricing initiatives in recent years as inflation kind of lifted all boats, if you will, but underneath that value-pricing dynamic is really the...
Speaker Change: The margin driver there, I would say that if you look at the areas where we were strongest, areas like...
Aftermarket General in Dustrial.
Speaker Change: Aerospace with a heavy accident on space. Those will generally mix our margins higher, just on core volume growth. When you, you know, end market related, Aerospace is up just over 20% for us in sealing.
Speaker Change: Year of Rear. In terms of general price, what you'll see now is just traditional 2% or so general price increase.
Speaker Change: And we typically do that year after year. And so we did that in January of this year and you'll continue to see that type of thing in this environment.
Speaker Change: But to James' point right, we are seeing good, strong demand and some of our key end markets, space aerospace, food and farmer and they drive favorable mix.
Speaker Change: You know, we also continue to just execute extremely well on the ceiling side especially so where you see margin expansion it's our traditional playbook of continued strong cost control operational efficiency you know strong good
Speaker Change: incremental margins on the volume and the strong levers that we're bringing forward. So it's our continuous playbook of everything at the moment. Right, and not to be de-emphasized as the two-thirds position in the aftermarket there, which is, you know, a qualified spec position with strong, strong market leadership.
Speaker Change: Okay, good. And then, if I could just turn to ASG for a sec.
Speaker Change: Oh, we're still pretty confident that this mid-high single-digit growth for the year there.
[inaudible]
Speaker Change: Yeah, we continue to see, we continue to expect the mid-high single-digit growth in ASD.
Speaker Change: So, I still say choppy. Do we see the OEM demand picking up? I would still say choppy. It's a little bit here, a little bit there.
Speaker Change: in our facilities in California, in Milpitas, California. And we're seeing strong demand there, continued penetration into leading edge production. And as we've talked about in the past, that business has grown.
through the entire cycle from the OEM side.
Speaker Change: and we just continue to be very well positioned in seeing continued penetration.
Speaker Change: into leading edge notes there and that's driving the growth and that's expected to continue.
Speaker Change: and continued to outperform there, and then the other areas that were investing behind.
Speaker Change: So, you know, that work is ongoing to, you know, drive it, you know.
Speaker Change: Good solid, top line growth at AST over the long term, and if the market recovers, that would be great. Just a little bit more color maybe to give you some time frame if you think about it that way.
Speaker Change: should be filled up within the next year. So, if you think about California, how long it took to ramp that, Arizona will start to benefit from California overflows, and we're getting close to that. Just recently, we added a third shift in California.
So that's showing me a capacity before long.
Alright, great. Thank you very much for the color.
Thank you. Have a great night. Bye.
James Gentile: Thank you. We reached out to our question and answer session. I'd like to turn the floor back over to James for any further closing comments.
James Gentile: Thank you for your time today. You know, we're delighted and look forward to updating you in the second quarter when we report in early August and in the meantime we'll likely spend a lot of time with you all. Our investor relations calendar is quite busy in coming periods.
Thank you for your interest.