Hello, and welcome to the EnPro Q4 2022 earnings conference call and webcast. [Operator Instructions] 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.

Thank you, Kevin, and good morning, everyone. Welcome to EnPro's fourth quarter and full-year 2022 earnings conference call. I'll remind you that our call is being webcast at EnProindustries.com, where you can find the presentation that accompanies this call. With me today is Eric Vaillancourt, our President and Chief Executive Officer; and Milt Childress, Executive Vice President and Chief Financial Officer. An important reminder that the fourth quarter and full-year 2022 results we will be discussing today, reflect the continuing operations of EnPro. In the third quarter, we determined our former Engineered Materials segment to be a discontinued operation, and we completed the divestiture of its remaining components, GGB and GPT, in November of last year, and in January 2023, respectively. All financial data has been recast to reflect our go-forward portfolio comprised of the Sealing Technologies and Advanced Surface Technologies segments. During today’s call, we will reference a number of non-GAAP financial measures. Tables reconciling the historic 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, including our most recent Form 10-K and Form 10-Q. Also note that during this call, we will be providing full year 2023 guidance, which excludes unforeseen impacts from these risks and uncertainties, as well as changes in the number of shares outstanding, impacts from future acquisitions, dispositions and related transaction costs, restructuring costs, incremental impacts of inflation, geopolitical variable and trade tensions on market demand and costs subsequent to the end of the fourth quarter, the impact of the foreign exchange rate changes subsequent to the end of the fourth quarter and interest rate increases differing from assumptions outlined in guidance. 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?

Thanks, James, and good morning, everyone. Thank you for joining us today as we review our results for the fourth quarter and full year 2022, and provide a business update that includes our outlook for 2023. Before I get started this morning, I would like to celebrate Bernard Burns on his retirement from a Board of Directors. His service over the past 11 years has been invaluable to our company, our people, and our go-forward strategy. We wish Bernard the absolute best. We are also pleased to announce that Ron Keating will be joining our Board of Directors, and look forward to his future contributions to our company. 2022 was an outstanding year as we continue down the path of driving EnPro forward and delivering on our commitments to shareholders, customers, and our people. We further optimized our portfolio by exiting the Engineered Materials segment, which we officially completed last month. We now have a streamlined portfolio of high-margin businesses that compete in diverse markets where we have technological and applied engineering advantages. In 2022, our optimized portfolio - focused portfolio resulted in a robust organic sales growth and adjusted EBITDA margin expansion of more than 400 basis points. We achieved these results despite the many challenges that we and others continue to face, such as inflationary pressures, supply chain constraints, macroeconomic and geopolitical variability, a tight labor market, and increasing interest rates. We are proud of how our teams continue to demonstrate resilience by advancing our strategic pillars to differentiate EnPro as a leading industrial technology company. We will now build on our momentum as we empower technology with purpose and grow profitably and responsibly well into the future. I'll now turn to the highlights for EnPro’s full year 2022, and then Milt will jump to share more details…

Thank you, Eric, and good morning, everyone. EnPro's fourth quarter capped off a strong year for our company, as reported sales at $271.9 million in the quarter increased 27.8% year-over-year. Organic sales increased 14.8%, driven, as Eric mentioned, by strong demand in most major end markets and strategic pricing actions. Adjusted EBITDA of $53.4 million increased more than 39% compared to the prior year period. And adjusted EBITDA margin of 19.6% increased 160 basis points year-over-year. Volume growth, strategic pricing actions, operational efficiencies, and the sustained benefits of our portfolio optimization, were partially offset by higher incentive compensation costs driven by strong share price performance during the period, inflationary raw material and wage expenses and late quarter weakness in the semiconductor capital equipment market that affected volume and mix. Corporate expenses of $15.6 million in the fourth quarter of 2022, were down from $27.8 million a year ago, driven primarily by the absence of acquisition-related expenses experienced last year, partially offset by $2.4 million of increased incentive compensation expense that resulted mostly from the rise in our share price during the quarter. Adjusted diluted earnings per share of $1.47, increased more than 48% compared to the prior year period, with growth in operating income more than offsetting higher interest expense resulting from higher debt balances, higher interest rates, and a reduced benefit from net investment hedges compared to the fourth quarter of 2021. Moving to a discussion of segment performance, Sealing Technologies’ sales of $156.9 million, increased 9% over the fourth quarter of 2021. Sales increased organically 13.4%, driven by successful pricing strategies, and strong volume in the aerospace, general industrial, heavy duty truck, and food and pharma markets. For the fourth quarter, adjusted segment EBITDA increased more than 32% over prior year, with an adjusted segment EBITDA margin over…

Again, 2022 was an outstanding year for EnPro. We executed well and continued optimizing our portfolio as promised. With the divestiture portion of our portfolio optimization efforts complete, we enter 2023 with a streamlined portfolio of market-leading businesses that safeguard critical environments, and meet the mission-critical needs of our customers. Our businesses operate in attractive end markets where we are well positioned for growth through our enduring technological advantages. I'd like to take a moment to thank all of our colleagues across EnPro for your dedication and terrific performance. Your hard work continues to be the foundation of our success. Thank you again for joining us today. We appreciate your interest in our company, and now open the line to questions.

[Operator Instructions] Our first question today is coming from Jeff Hammond from KeyBanc Capital Markets. Your line is now live.

Hey, good morning, everyone. So, just to dig in on the semi softness, just maybe you can give us a little better picture of kind of where you're seeing it. Is it cleaning and coating? Is it the legacy business? Is it somewhere else? And then I'm just trying to understand kind of the margin bridge from 3Q to 4Q, pretty steep drop and how much of that is kind of mix in this absorption issue versus kind of investments for the long-term. Thanks.

Eric, do you want me to jump in on that and then you please come in with some color? So, yes, if you look at the fourth quarter, Jeff, we did see some of the downturn late in the quarter in the semiconductor industry, affected us more in certain parts of our company than it did others. Some of our higher margin coatings business was affected. Some of the precision machining business was affected, and the - which, when something happens fairly quickly, essentially all your cost in the short-term or fixed costs. And so, the degradation and margins that you saw from Q3 to Q4 in AST is largely a function of both the mix and the inability to adjust cost structure given a fairly abrupt change in the market dynamics. So, other parts, our cleaning solutions business continued to perform well in the quarter. Our legacy, were continuing to work off a strong backlog. So, yes, we saw it in pockets, not across the board. So, I think that addresses most of your questions. I will note that we have taken action on the variable costs. So, you will see that, and we'll be able to talk more specifically about that on our next earnings. call.

Yes, the only other piece is just investment that might not have been capitalized around kind of growth opportunities. I don't know if that stepped up in 4Q.

Yes. It was probably - it’s starting to step up more and more as we progress with the expansion in the Southwest. So, it was probably in the $1 million, $1.5 million range in the quarter. And then looking ahead to next year, I suspect we're going to be up in kind of mid-single digits from an operating expense standpoint. And perhaps I would gauge it as sub $10 million on the capital side as we continue to upfit. There'll be more investment to come beyond 2023.

Okay. And just maybe level-set us on where you think margins are for AST in that flat to down five. And with some of the adjustments you make to the cost structure versus kind of the investments, you did 30 this year. Is that a good line set or are we closer to 28, or just maybe a little more color on that end?

Yes. Well, here's what I would say. It’s a tale of kind of two cities, which is really a positive for us in terms of stability. And I know you're asking about AST, but first of all, to say we're entering the year in sealing in a great position. We expect strength - continued strength in the first half of the year, and then we'll see what the economy gives us in the second half, but we'll adjust accordingly there. And then AST, as we're looking at it now, it's the opposite, the reverse. So, we're entering into 2023 with volumes still being down, and then we're expecting that to stabilize and then to resume growth. And the long-term outlook, as you know, is very positive for this segment. But we expect growth to assume in 2023 and the second half. And so, your question about volume is going to be largely - excuse me, on margin, is just going to be largely a question of volume and what kind of volume decline do we see in the first half, and then how do we bounce back in the second half? I know I didn't give you a specific number, but that's kind of the color around that.

Jeff, it's Eric. Let me give you some color on the backlog and maybe that'll help, and maybe it'll provide more clarity, or maybe even a little less because it's uncertain to us as well. If you look at sealing, overall, the backlog is up, both in near-term compared to last year at this time, and also the backlog, what I call longer-term, over 12 months. So, it's up in both places. If you look at AST, that's also true. So, our backlog is stronger December 31 of ‘22 than December 31 of 2021. It's also stronger in the near-term and the long-term. So, our business foundation is still very, very strong. There's a lot of uncertainty in the macroeconomic environment. And if you look at the sequential fall-off from fourth quarter to first quarter, it's also normal. So, we don't have a lot of visibility in a lot of our businesses short-term, and that's the hesitation, I think, to give you a more precise number at the moment.

Okay. And then just on the last one, AST second half recovery, is that an expectation or a forecast that the semiconductor market recovers, or is that a function of some of this backlog visibility that you have in hand or some of the growth opportunities here in the US?

It's a function of all of it, but primarily our assumption is aligned with what we're seeing from industry experts as you are in second half recovery.

Yes. And it’s supported by our backlog and what we're hearing from customers at this point.

Yes. We do expect to outperform the market. So, if you look at Gartner or others, we expect to be much stronger than that, but that's the only visibility we have at the time.

Okay. Thank you.

Thank you. Next question is coming from Steve Ferazani from Sidoti & Company. Your line is now live.

Good morning, everyone. Appreciate all the detail on the call this morning. Why don't I dig into the other segment, the sealing side, which reported another really strong quarter. Sounds like some of your larger end markets continue to look healthy. Some look like they can be healthy through 2023, if you look at some of the industry forecasts. I'm trying to get a sense on the load of mid-single-digit growth. I guess, in terms of 4Q and then as you're looking out to next year, how much of that's spend has been and will continue to be pricing, and how sticky that pricing can be? For instance, is your pricing up mid-single-digit so that you only need flat volume, or can you give us a sense of price versus volume there?

I would say our pricing is very, very sticky. So, it typically doesn't change much. We do have some surcharge, but then we don't leverage that either. So, that will go up and down and adjust as freight does as an example. So, I would say it's a mixture of price. We have some carryover from last year certainly, and we'll also always have pockets for price increases in detail, customer product line by product line. But I don't see a lot of broad-based price increases at this point. So, I would say less price than we've had in the last year, certainly, and similar organic growth

And Steve, just for quarter four, I would say in sealing, price versus volume was probably largely equal, a little bit heavily weighted - a little bit more heavily weighted toward price in the quarter four results.

So, if we play that out over next year, you're looking at, at least low single-digit growth just on price alone, right? I'm just trying to think about why that couldn't be higher if those - some of those end markets hold up through 2023 and obviously second half is second half.

Yes, it's certainly possible. It's largely going to be based on the macro outlook or versus what actually happened in the second half this year. So, it's entirely possible. Yes, you're right, Steve.

So, to say we have a little caution around quarter four, around the second half. And then if you just kind of look at the current demand trends, we're entering very strong position in sealing.

The guidance on net interest expense of 40 million, it looked like it was about 10 million in the quarter. We know there'll be some further interest hikes on your variable, but that $40 million guidance, s that assuming anything on debt repayments?

No, we're - at this point, we are preserving our balance sheet and our cash position just to see how the first half of the year plays out. And then when we get to the first half, we'll have a better idea for the outlook for the second half. And so, we're just being very cautious and we want to preserve capital in this uncertain environment as much as we can. Now, I think it's likely as we get to the second half of the year, that we'll reassess, and depending on what our opportunities we see for investment in the business and what our capital needs are, whether it's inorganic or organic, it’s possible that we could choose to pay down some of our term debt. We're totally out of our revolver. We paid off all of our revolver balance. So, the only debt we have outstanding besides our senior unsecured notes, are some term debt, and we can prepay that without penalty any time.

And then, Steve, just a note, remember in the September quarter, one of our net interest expense hedges had matured and we collected cash during that time. And just for quantification purposes and modeling, that saved us about $5 million in interest expense last year that we do not expect to recur this year.

And the reason for that, just as a reminder, the net investment hedge was tied to our euro-denominated portion of equity in our company. And obviously, with a lower European presence now, it's not appropriate to carry the same thing. And we got some significant benefits from the - we still have a tranche of the net investment hedge in place, but the larger of the two that we had matured, as James mentioned,

Did you offer CapEx guidance for this year?

I did not, but we do expect it to be up considerably from prior year. And part of that is, it's very intentional on on our part. We've seen - I'm going to - Eric can jump in here in a minute, but we have seen a number of opportunities that are emerging at our business to drive projects that are going to be good shareholder value-creating opportunities. And we were hampered over the past couple of years from just getting people in our facilities because of the pandemic. And so, as we're coming out of that, we're identifying more good investment opportunities.

Yes. With COVID, we just couldn't get people in the plants to do the work. We have a lot of automation opportunities that we're going to take advantage of this year that'll have shareholder return for this year, some of it this year, and of course later on as well.

Yes, and I would gauge it being closer excluding the Arizona project. I would put brackets of 3%, 3.5% of sales. And then if you include the upfitting in Arizona, we could get up to close to 4% of sales in that range.

It’s our normal target. We've just underspent the last couple of years.

Yep, understood. You went a little bit through the goodwill impairment on Alluxa. It sounds like a significant portion, but not all was related to higher interest rates. Can you give us a sense of how Alluxa's performing versus your expectations when you closed that acquisition?

Well as, as we indicated it when discussing the goodwill impairment, we did reduce our cash flow projections going out, but it's still very kind of - the company is strategically in just - in an outstanding position. They compete at the highest end in optical filters. They take on the most demanding applications. It's consistent with what we do as a company as EnPro, around our company. And as I mentioned in my prepared remarks, the outlook is still for low double-digit - I mean, excuse me, low single-digit to - excuse me, high single-digit to low double-digit growth for the foreseeable future. So, yes, those are my comments on the business itself.

The business overall is very strong. Basically, we got a little bit behind with COVID. COVID came in some work slowed down, but we're accelerating again and like what we go in the future. It's a great business.

Thanks, everyone. Appreciate the commentary.

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 or closing comments.

Thank you very much for your time today. Have a terrific rest of your day.

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.