Title

Presentation

EnPro Industries, Inc. beats earnings expectations. Reported EPS is $1.9, expectations were $1.57.

Operator: Greetings, and welcome to the Enpro Q1 2025 Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. [Operator Instructions] A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to turn the conference over to James Gentile, Vice President, 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 enpro.com, where you can find the presentation that accompanies this call. With me today is Eric Vaillancourt, our President and Chief Executive Officer; and Joe Bruderek, Executive Vice President and Chief Financial Officer. During today’s call, we will reference a number of non-GAAP financial measures. Tables reconciling the historical non-GAAP measures to the comparable GAAP measures are included in the appendix to the presentation materials. 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. 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. 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. 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, while displaying discipline and agility and continuing to deliver exceptional commercial and financial results. At Enpro, one of our overarching philosophies 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.

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. 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. Our people are the cornerstone of our efforts to drive Enpro to 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. We are excited and well-positioned to continue demonstrating Enpro’s growth capabilities and durable business model as we move forward.

Now on to our first quarter performance, after my overview, Joe will provide a more detailed discussion of our quarterly results and perspectives underpinning our current outlook for 2025. The first quarter report highlights continuing outperformance in Sealing Technologies and year-on-year revenue growth in AST. We grew organic sales 6% in the first quarter with strong execution, driving operational leverage and year-on-year earnings growth. In Sealing Technologies, organic sales increased 4.5%, driven by strength in aerospace, general industrial and food and pharma markets, offset by continued weakness in commercial vehicle OEM demand. Adjusted segment EBITDA margins exceeded 32%. Continuous improvement initiatives, favorable pricing and mix also contributed to another strong quarter in Sealing.

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. We are driving market share gains and accelerating sales in aerospace markets with technological innovation and differentiated applied engineering expertise. In the commercial vehicle market new products are helping stabilize sales and improved mix during this period of weaker demand for trailers. We continue to encourage imagination and are investing in adjacent market development opportunities that leverage our market-leading strengths. Additionally, the segment’s aftermarket positioning provides stability during periods of economic or geopolitical uncertainty.

Two-thirds of the segment 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. In the Advanced Surface Technologies segment, sales increased 9.1% year-over-year driven by double-digit revenue growth in precision cleaning solutions and optical coatings and filters, more than offsetting still choppy semiconductor capital equipment spending. Despite expenses to support growth initiatives, operating leverage drove a nearly 19% improvement in adjusted segment EBITDA to a margin rate of around 22%. Our targeted growth investments in this segment are developing nicely, and our operational improvement initiatives position the AST segment well for future outperformance and an eventual overall market recovery.

We continue to be pleased with the overall segment’s performance during this prolonged period of weakness in semiconductor capital equipment spending as we lean into our best growth opportunities, investing in areas where we have strong technological advantages and differentiated capabilities. Total company adjusted EBITDA increased over 16% on the 6% increase in sales with margins expanding to 24.8% this quarter. Our balance sheet remains in excellent shape, providing us ample flexibility to execute on our value-creating strategy. Before I hand the call over to Joe, I’d like to take a few minutes to discuss our direct tariff exposures. 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. Most of our production is in region for region, and our supply chain teams have secured diversified raw material sources to support operations for the rest of the year. Our supply chain teams have demonstrated their discipline time and time again in a variety of challenging environments, and we are grateful for their continued agile execution during this period of macroeconomic and geopolitical uncertainty. Their performance is reflective of our entire team’s continued focus on our core values of safety, excellence and respect as we empower technology with purpose. 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 upon our market leadership.

Joe?

Joe Bruderek: Thank you, Eric, and good morning, everyone. We started 2025 with strong results and consistent execution despite the currently dynamic macroeconomic environment. In the first quarter, sales of $273.2 million increased more than 6% driven by continued strong performance in the Sealing Technologies segment and a 9.1% increase in AST. First quarter adjusted EBITDA of $67.8 million increased more than 16% compared to the prior year period. Total company adjusted EBITDA margin of 24.8% expanded 210 basis points year-over-year. Volume growth in both segments, favorable mix and cost controls drove operating leverage, offset in part by expenses tied to growth investments. 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.

Adjusted diluted earnings per share of $1.90 increased 21%, driven by the factors behind adjusted EBITDA growth year-over-year. Moving to a discussion of segment performance. Sealing Technologies sales increased 4.7% to $179.6 million. Strength in aerospace, general industrial and food and pharma more than offset continued weakness in commercial vehicle OEM demand and still tepid sales in Asia. Strong positions in diverse markets drove year-over-year sales growth in Sealing against the prior quarter that included a stronger commercial vehicle OEM demand. The weakness in that market, which continues today, was more pronounced for us in the second half of 2024. For the first quarter, adjusted segment EBITDA increased nearly 11%. Favorable mix and higher volume, strategic pricing, 80-20 and cost discipline all contributed to the operating leverage realized on the almost 5% increase in sales.

Adjusted segment EBITDA margin this quarter at 32.7% remained above 30% for the fifth consecutive quarter. Turning now to Advanced Surface Technologies. We are pleased with the segment’s return to growth, with first quarter sales increasing more than 9% to almost $94 million. 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. We continue to believe the low point of AST sales experienced in the first quarter of last year is behind us. For the first quarter, adjusted segment EBITDA increased 18.5% versus the prior year period. Adjusted segment EBITDA margin expanded 180 basis points to 21.9%. Operating leverage on higher sales growth, favorable mix and cost reductions were offset in part by increased expenses tied to growth initiatives.

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 sheet and cash flow. 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. Subsequent to quarter end, on April 9, 2025, Enpro amended its existing credit agreement. 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.

This facility replaces a previously undrawn $400 million revolver and the term loan with an outstanding balance of $287 million, which were set to mature in 2026. As of May 1, 2025, corporate debt totaled $580 million, composed of the $350 million senior notes maturing in late 2026 and $230 million on our new revolving credit facility that matures in 2030. Reflecting the use of cash to partially fund the repayment of the term loans, our cash balance approximates $193 million as of May 1. Our net leverage ratio following these moves is currently 1.5 times trailing 12-month EBITDA as of March 31. 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.

We continue to expect capital expenditures to be around $50 million this year as we invest in future growth opportunities across the company at accretive margin and return thresholds. Finally, our strong balance sheet and cash generation provide us with ample liquidity to make these investments while continuing to return capital to shareholders. In the first quarter, we paid a $0.31 per share quarterly dividend totaling $6.6 million. We also have an outstanding $50 million share repurchase authorization expiring in October 2026. Moving on to guidance. We maintain our total year 2025 guidance issued in mid-February and continue to expect total Enpro sales growth to be in the low to mid-single-digit range, adjusted EBITDA between $262 million to $277 million and adjusted diluted earnings per share to range from $7 to $7.70.

The normalized tax rate used to calculate adjusted diluted earnings per share remains at 25% and fully diluted shares outstanding are $21.2 million. 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. Our maintained guidance contemplates a range of economic outcomes in the back half. In Sealing Technologies, shorter-cycle order patterns remained solid into our seasonally strong second quarter. Last year’s Q2 was a challenging comparison, especially with its adjusted segment EBITDA margin being at the high watermark of 35.5%. 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 Sealing Technology sequentially into the second quarter, while not contemplating a recovery in our commercial vehicle markets for the balance of this year.

Demand for longer cycle backlog-driven 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. Finally, we expect Sealing 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. In the Advanced Surface Technologies segment, we continue to see growth in our advanced node cleaning business and positive demand signals in our optical coatings and filter business. We expect choppiness to persist in product lines tied to semiconductor capital equipment spending. 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.

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. 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.

Operator: Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question is coming from Jeff Hammond from KeyBanc Capital Markets. Your line is now live.

Jeff Hammond: Hey, good morning guys.

Eric Vaillancourt: Good morning, Jeff.

Joe Bruderek: Good morning, Jeff.

Jeff Hammond: I’m just wondering if you can put some numbers around your comment that the tariffs are minimal and manageable. And then any kind of pricing actions you’ve undertaken for that, I guess, minimal headwind?

Eric Vaillancourt: Yes, Jeff, I can give you some color anyways. We say minimal and manageable because we’re – 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. If you look at the products we import from China, it’s really one product that’s bearings that are used in our trailer manufacturing and our commercial vehicle business. 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 the times during COVID. 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.

So we have a very, very good team that has a lot of agility, moves product rapidly 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. So if you look at our North American exposure, it’s Canada and Mexico, which have both been exempted by the tariffs, and the products that we produce and ship cross-border. So there’s very little impact there. So when you look around the region around the world, we have very, very little exposure to – really to tariffs in general in the primary – let me say, in the primary products and services that we do, where we’re exposed potentially is just in the greater macroeconomic conditions that we can’t predict.

But when we say minimal and manageable and we’re very confident that we can perform well in this environment with tariffs.

Jeff Hammond: Okay. Great. And then I understand the guidance is unchanged. Are there any end markets that you’re feeling particularly better or worse about versus, say, 90 days ago?

Eric Vaillancourt: I feel equally good about basically all of the markets at this point for me personally. Commercial vehicle is basically what we expected. So it’s less than last year, the commercial vehicle OEM demand. But if you look at ton miles, which is where I always anchor, it’s less than 1% difference. I think right now, we’re currently forecasting about a 0.4% decline. 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. When you look at our semiconductor business, still choppy and aerospace and space is doing strong, food and pharma recovering nicely, and energy is also doing well. And again, we have a very strong aftermarket and recurring revenue that kind of insulates us from a lot of that. So we still feel good about that.

Joe Bruderek: Yes, Jeff, just overall, I mean, the demand environment has been pretty good so far, right? And we talked about our guidance range. And if you were to contemplate the demand environment staying like it is now, that would bring the range of assumptions for the outcomes on the demand side. If we see things softening a little bit, you could bring the bottom half of our range into play. And that’s what we talked 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 demand has been pretty firm.

James Gentile: I would like to add one thing. Our teams are positioning with our incremental growth investments, finding opportunities to pick up share using technological and applied engineering capabilities really across the company. So the energy internally despite what may be a more difficult macroeconomic environment in the second half doesn’t necessarily stop the engine of our folks producing what they want – what they’re doing and driving, maybe some outsized growth in the future in line with our long-term growth algorithms.

Jeff Hammond: Yes, that was my follow-up on – I mean you guys seem really uniquely well positioned to manage tariffs. I’m wondering if you look at the competitive landscape, if there’s anything – anywhere that you think because of your positioning versus others that may have to really push price where you could start to really pick up some share? Thanks.

Eric Vaillancourt: I always think there’s opportunities in these kind of uncertain environments, and that’s why I spend a lot of time talking about agility and the talent development that we do. So I’d say we spend a lot of time recruiting, developing and training what I call agile aware business leaders with a high degree of acumen. And they need to be able to perform well really in any environment. And I look at tariffs is 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 next thing we’ll be talking about in a couple of years will be AI. There’ll be another inflection point that’s just going to be continuous change, and our team is going to be able to thrive in all these environments. So we spend a lot of time developing our people to do that, and I’m confident that we’ll perform well.

Jeff Hammond: Okay, thanks a lot guys.

Operator: [Operator Instructions] Our next question is coming from Steve Ferazani from Sidoti & Company. Your line is now live.

Steve Ferazani: Good morning, everyone. Appreciate the detail on the call. I just wanted to circle on and double check on this, Eric. The first place we might see a slowdown in some distributor destocking. You’ve seen no examples of that yet?

Eric Vaillancourt: No. We never really saw an inventory build, which is it’s kind of been getting the supply chain in balance for the last year or so, and there hasn’t been a big accumulation of inventory because we’ve been – if we go back to the calls last year, we talked about somewhere around 50% of our business being kind of in a flat to downturn. So there wasn’t a reason really to build inventory. So I haven’t seen any destocking.

Steve Ferazani: Okay. Perfect. Flipping over to AST, any updates on the Arizona facility?

Eric Vaillancourt: It’s on track. We’re through qualification and starting to get some early revenue for testing and getting ready to go. But all systems are go, but we’re still in Phase 1 and business is still ramping.

Joe Bruderek: And Steve, as we talked about, right, we expect qualifications to continue for some time, right? So last quarter, we talked about early revenue in the fourth quarter, 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 and then starting to see some revenue contribution in – and production level volume starting towards the end of the year. And everything is on track, doing very well and seeing good signs of qualifications.

Steve Ferazani: The continuous improvement efforts on AST, which you started applying last year, are you starting to see any benefit from it? Or will we see it as top line grows?

Eric Vaillancourt: It’s just a little bit here and there. I would say it’s continuous improvement, it’s area breathe. So it’s just a little bit all the time. And so it will continue. We’re seeing a little bit, but it will never be like step change where all of a sudden, you see this big increase all of a sudden. There’ll just be consistent, a little bit wins here and there. So yes, we are seeing some results, and we’ll continue to see results. So it will be improvement over time.

Steve Ferazani: 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 diligent given you have to check supply chains of any potential acquisition. But you could talk about one M&A? And does that mean more likelihood as you’re paying down debt because by our model, you’re still going to generate a ton of cash this year?

Joe Bruderek: 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, and 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. So we’re going to continue to prioritize high-quality assets and high-quality businesses that fit our strategic and financial criteria. We can be patient. As you said, we’re generating good cash. Our balance sheet is in great working order. The new credit facility that we put in place gives us even more flexibility, right, 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.

So we have even more flexibility in capital allocation going forward. We continue to prioritize organic growth and M&A from a capital allocation standpoint. We’re just going to continue to be patient and extremely diligent in making sure that the areas that we’re looking in our pipeline is of our quality. And – but that’s the continued focus from a capital allocation standpoint.

Steve Ferazani: Okay. Thanks, Eric. Thanks, Joe.

Operator: Thank you. Our next question is coming from Ian Zaffino from Oppenheimer. 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 Sealings, how much of that was volume versus price? And maybe help us understand the pricing outlook for aerospace and general industrial in general. Thanks.

Eric Vaillancourt: How much was pricing?

Joe Bruderek: I think it was more mix driven. We had great success with the strategic pricing initiatives in recent years as inflation kind of lifted all boats, if you will. And we’re – but underneath that, that value pricing dynamic is really the margin driver there. I would say that if you look at where – the areas where we were strongest, areas like aftermarket, general industrial, aerospace with the heavy accent on space, those will generally mix our margins higher just on core volume growth. When you – end market related, aerospace was up just over 20% for us in Sealing year-over-year.

Eric Vaillancourt: In terms of general price, what you’ll see now is just traditional 2% or so general price increase, 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.

Joe Bruderek: To James’ point, right, we are seeing good strong demand in some of our key end markets, space, aerospace, food and pharma, and they drive favorable mix. We also continue to just execute extremely well on the Sealing side, especially. So where you see margin expansion, it’s our traditional playbook of continued strong cost control, operational efficiency, strong, good incremental margins on the volume and the strong leverage that we’re bringing forward. So it’s our continuous playbook of everything at the moment.

James Gentile: Right. And not to be deemphasized is the two-thirds position in the aftermarket there, which is a qualified spec position with strong, strong market leadership.

Ian Zaffino: Okay. Good. And then if I could just turn to AST for a second. Are we still pretty confident in this mid to high single-digit growth for the year there. Are you seeing any positive indicators on the capital equipment side? And then if I could squeeze in one more, the double-digit growth in cleaning solutions. Does that include any contributions from the Arizona facility in the first quarter? Thanks.

Eric Vaillancourt: Yes, we continue to see – we continue to expect the mid to high single-digit growth in AST. 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. We are getting some commercial wins and our pipeline is very strong and very little contribution from Arizona in the first quarter.

Joe Bruderek: Yes. You asked about precision cleaning. So that business is extremely strong, right? And we’re positioned very well on leading-edge nodes, both in our foundation in Taiwan, but also 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, and we just continue to be very well-positioned in seeing continued penetration into leading-edge nodes there, and that’s driving the growth, and that’s expected to continue, and continue to outperform there. And then the other areas that we’re investing behind starting to contribute towards the end of this year and feel very confident in our mid to high single-digits overall for AST.

James Gentile: Yes. And just longer-term as well, our teams are working on new areas of growth as new platforms develop in the coming years. So sometimes the qualification cycle lasts two years plus. So that work is ongoing to drive good solid top line growth at AST over the long-term and if the market recovers, that would be great.

Eric Vaillancourt: Just a little bit more color maybe to give you some time frame, if you think about it that way. Our California facility has just recently 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 when California over flows, and we’re getting close to that, just recently added a third shift in California. So that facility will be at capacity before long.

Ian Zaffino: All right. Great. Thank you very much for the color.

Operator: Thank you. We reached the end of our question-and-answer session. I’d like to turn the floor back over to James for any further or closing comments.

James Gentile: Thank you for your time today. 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.

Operator: Thank you. That does conclude today’s teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.