Enpro Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Third quarter sales were up year-over-year despite softness in over half of served markets. Aftermarket or recurring revenue solutions comprise 54% of year-to-date revenue. Consolidated adjusted EBITDA margin was 24.6%.
• Sealing Technologies had solid operating performance with 4.5% sales growth, adjusted segment EBITDA margin expanded 300 basis points. Focus on applied engineering, aftermarket, organic growth, and continuous improvement.
• AST saw revenue improve 3.5% year-over-year and 5% sequentially, but margin narrowed due to shifting demand. Investments in precision cleaning solutions and operational improvements ongoing, but slower recovery than expected.

Segment Performance

• Sealing Technologies: Third quarter sales were $169 million, up 4.5% organically. Aftermarket sales comprise 63% of total segment revenue. Adjusted segment EBITDA margin expanded 300 basis points to 32.7%. Year-to-date adjusted segment EBITDA margins for Sealing were around 33%.
• Advanced Surface Technologies (AST): Third quarter revenue was $92.5 million, up 3.5% year-over-year and 5% sequentially. Adjusted segment EBITDA was flat year-over-year, with margin at 20.8%, down 80 basis points from last year. Revenue growth in precision cleaning solutions tied to advanced node chip production, but demand for capital equipment, coatings, etc., was choppy.

Guidance

• Reduced full year 2024 sales guidance to low single digits decline vs 2023. Adjusted EBITDA expected between $250 million to $255 million, adjusted diluted EPS $6.75 to $7.
• AST soft demand to persist into 2025, with fourth quarter profitability in mid-single-digit range decline. Sealing Technologies resilient in seasonal low period but commercial vehicle OEM sales weaker than expected.

Risks

• Uncertainties in semiconductor capital equipment spending affecting AST.
• Volatility in demand for commercial vehicle OEM in Sealing Technologies.
• Slower than expected recovery in AST segment sales and margins.

Question and Answer

• Q: Semiconductor order funnel and 2025 outlook A: Demand still choppy, slow rebound from bottom, customers cautious.
• Q: Sealing Technologies nuclear business A: Nuclear business ~7% of sales, steady long-term growth, not transformative but profitable.
• Q: AST margin softening and growth spending A: Accelerated qualification work in Arizona, investment in operational excellence playbook leading to higher spending now, benefits later.
• Q: AMI integration and M&A pipeline A: AMI integration a success, robust M&A pipeline, disciplined in finding similar businesses.