EnPro Industries, Inc. Q2 FY2025 earnings call

• Enpro delivered strong Q2 with organic sales growth. Sealing Technologies showed resilience despite challenges, and AST saw significant growth. - Focus on expanding market reach in key sectors like aerospace, sustainable power, food/pharma, and compositional analysis. - Enpro 3.0 strategy underway, emphasizing personal and profitable growth. - Balance sheet remains strong with refinancing and strong free cash flow, allowing flexibility for growth and acquisitions. - Continued investment in capacity expansion and strategic capabilities across segments.

Sealing Technologies: Sales increased 1.9% to $187.5 million in Q2. Strength in aerospace, food and pharma, general industrial, and strategic pricing offset commercial vehicle OEM weakness and nuclear order timing. Adjusted segment EBITDA margin was 33.8% in Q2, down from last year's 35.5% but up 110 basis points sequentially. Over 60% of the segment's revenue is tied to the aftermarket. Advanced Surface Technologies (AST): Sales grew 14.5% year-over-year to $100.9 million in Q2. Driven by leading-edge precision cleaning solutions, optical coatings, and improved demand for in-chamber semiconductor tools. Adjusted segment EBITDA increased nearly 4% in Q2, with margin at 19.6% vs. 21.7% last year. Operating expenses and transactional FX headwinds impacted operating leverage.

• Raised full-year 2025 sales growth guidance to 5%-7% from previous low to mid-single-digit. - Adjusted EBITDA expected in range of $270 million to $280 million, and adjusted diluted earnings per share in range of $7.60 to $8.10. - Sealing Technologies expected mid-single-digit organic revenue growth with segment profitability at high end of 30% ±250 basis points. - AST expected high single to low double-digit revenue growth with segment profitability exceeding 20% despite growth investments and FX headwinds.

• Transactional foreign exchange headwinds, particularly affecting AST and Sealing Technologies due to currency fluctuations. - Weak commercial vehicle OEM demand impacting Sealing Technologies. - Timing of nuclear orders year-over-year affecting Sealing Technologies' performance. - Macroeconomic uncertainties impacting overall business conditions.

Q: I'm sorry, I missed the FX transaction headwind in Sealing. And then just on the nuclear, is that just a goodness that was there last year? Or was there timing between quarters this year as well?

A: Yes. For the nuclear, answer is both, right? Last year, second quarter was a very, very strong nuclear quarter. We had a series of timing of orders for replacement cycles. And then this year, we kind of had the opposite effect. 1Q was very strong. Second quarter, we saw some timing just between 1Q and 3Q. So that's really a timing issue on nuclear. -- underlying demand is very strong. On the transactional FX, so the impact we're feeling here is in transactions that are in nonfunctional currency denomination. So we pointed to it most predominantly in AST, where we had $2.6 million in the quarter. Most of that impact is in Taiwan, where we're U.S. dollar functional, but we have certain local expenses that are in Taiwanese dollars, so predominantly salary and benefits, lease obligations and liabilities attached to income tax. The impact was less in Sealing, but we had a similar effect, right, with the weakening dollar overall, anywhere ranging from 5% to 12%, depending on the alternate currency, where we had expenses and liabilities tied to local currencies that were not U.S. dollar functional is where we felt that impact.

Q: Yes, that's one I wanted to come back to. So how should we think about incremental margins in AST into the second half? And do these FX headwinds, is that kind of onetime to the quarter? Or do they stay with us for a bit?

A: For the most part, the FX headwinds were impacted by the significant weakening of the U.S. dollar in the second quarter. So we don't expect that to continue, especially not in the magnitude that we saw in 2Q based on the revaluation of the payment out of liabilities. But AST should continue to leverage pretty well going forward. I mean we've invested in key growth areas behind geographical expansion, technology differentiation in different areas, including Arizona, Milpitas and Taiwan. And we've put in people expenses, OpEx associated with that. So as revenue comes associated with those growth investments, it should leverage pretty well as we move into the second half of this year and into the next.

Q: Just wanted to ask about the raise -- since you talked about the raised Sealing expectations, turn over to the raised AST expectations. You were talking now potentially low double-digit growth this year, which would indicate pretty strong second half growth. Is that an extension of what you were seeing in 2Q? Or you could talk a little bit about what you're seeing second half for AST?

A: Second half AST, we have a lot of investment that's gone on in the past. We're starting to get a little bit of that coming in now. As we said earlier, Joe mentioned, we have investments both in Arizona, Milpitas, California and Taiwan that are all coming out along with Singapore. So we're getting a little bit of benefit from that, that will accelerate over time. In addition, I would say a little bit of market recovery, although I wouldn't say it's significant. It's still very choppy in that regard. But overall, the business is healthy and getting better.

Q: I did want to ask about one comment you made in terms of Sealing growth. You mentioned compositional analysis. I know that comes out of the AMI acquisition from last year. Are you seeing any successes there yesterday -- lately? Can you sort of talk about how that market is developing for you since that acquisition?

A: It's been outstanding. They continue to have exceeded our growth expectations with both new customers and existing. That business has just been a home run. Outstanding leadership by Kevin out there. We're also investing in additional capacity expansion and new capabilities within AMI. So not only we're delivering on our existing capabilities and technologies, but there's more coming, right, with additional capacity and new technologies and new products that the team is launching.