Greetings, and welcome to the Enpro Q3 2024 Earnings Conference Call. [Operator Instructions] A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, James Gentile. Thank you. You may begin.

Thanks, Irene, and good morning, everyone. Welcome to Enpro's third quarter 2024 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. 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 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 this call, we will be providing full year 2024 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?

Thanks, James, and good morning, everyone. Thank you for joining us today as we review our third quarter results and updated outlook for the balance of 2024. Third quarter sales were up year-over-year and up slightly organically despite persistent softness in more than half of our served markets. Aftermarket or recurring revenue solutions comprise 54% of our revenue year-to-date, which provides underlying stability to our portfolio enables us to perform well in a variety of demand environments. Our results have been quite good even in the face of demand headwinds in certain large served markets. Overall, consolidated adjusted EBITDA margin was a healthy 24.6%, demonstrating the inherent strength and balance in the Enpro portfolio. Our teams are motivated and working hard, excited by our vision and our strategy for long-term growth. Our long-term vision is for revenue growth in the Sealing Technologies segment to be in the mid-single-digit range and AST to grow in the high single-digit range. Both segments have demonstrated the ability to generate 30% adjusted EBITDA margins, plus or minus 250 basis points, depending on the macroeconomic environment and mix. We plan on achieving this consistently by investing in a number of areas where we are strongest, while implementing our continuous improvement playbook that will optimize our performance over time. We would like to thank our colleagues across the company for their commitment to our core values of safety, excellence and respect while remaining motivated and agile as we provide critically important solutions to our customers. Now on to our third quarter performance. After my review, I will turn the call over to Joe for a more detailed discussion of our results and our revised outlook for the balance of the year. Operating performance in the Sealing Technologies segment was solid in the third quarter with 4.5%…

Thank you, Eric, and good morning, everyone. Let's now go into the details of our third quarter performance. In the third quarter, sales of $260.9 million increased 4% compared to the prior year, with organic sales up slightly. We saw strong Sealing Technologies performance overall and year-over-year sales growth at AST despite steep declines in commercial vehicle OEM and slow capital equipment sales in portions of our semiconductor business. Third quarter adjusted EBITDA of $64.1 million increased 11% compared to the prior year period. Adjusted EBITDA margin of 24.6% expanded 160 basis points, driven by strong performance in Sealing Technologies. Growth initiatives on new products and investments in our differentiated capabilities continued, along with ongoing continuous improvement discipline and supply chain efficiency. Corporate expense of $10.3 million in the third quarter of 2024, increased from $9.8 million a year ago. The increase was primarily due to an increase in share price-based incentive compensation expense, partially offset by lower current year annual incentive compensation accruals and lower professional expenses. Adjusted diluted earnings per share of $1.74 increased 10%, largely driven by the factors that drove the adjusted EBITDA improvement year-on-year. Moving to a discussion of segment performance. Sealing Technologies sales of $169 million increased 4.5% and organic sales were relatively flat. General industrial sales increased year-over-year, driven by a demand recovery in Europe and firm North American performance offsetting tepid Asian markets. In addition to our solid general industrial performance, growth in space and commercial aerospace applications, improved food and pharma sales and firm nuclear sales offset steep declines in commercial vehicle OEM revenue. Strategic pricing actions and the acquisition of AMI completed in January this year also contributed. Aftermarket sales comprised 63% of total segment revenue. For the third quarter, adjusted segment EBITDA increased 15%. Strategic pricing, continuous improvement initiatives,…

Thanks, Joe. While near-term pressures in semiconductor and commercial vehicle OEM demand caused us to adjust our full year view, our balanced portfolio generates attractive margins and cash flow returns. We are advancing numerous opportunities to further optimize Enpro operationally while investing in attractive opportunities to drive long-term high-margin growth. Our balance sheet is in great shape, and we continue to build upon the strong foundation that we have for driving long-term value creation. Every day, we deliver critical leading-edge solutions for our customers that safeguard critical environments and applications that meaningful impact our lives. Thank you again for joining us today. There is no better time to be part of Enpro. I'll now welcome your questions.

[Operator Instructions] The first question we have is from Jeff Hammond of KeyBanc Capital Markets. Please go ahead.

Hi. Good morning everyone.

Good morning, Jeff.

Good morning, Jeff.

So maybe just to start with semiconductor. We've kind of seen from peers that it's taking longer to inflect. Just wondering what you're seeing from an order funnel conversation with customers to kind of frame maybe early thinking on 2025. Is this kind of a slow bounce off the bottom? Or do we finally see more meaningful inflection?

Well, Jeff, the way I would describe it is still being choppy. As you said, maybe a slow rebound from the bottom. But at this point, it's just - people are just pulling in their horns a little conservative. We've looked at the announcements with some of the leading IDM or one of the leading IDMs in the third quarter to create a little bit of uncertainty, and our customers are just being cautious. So right now, our demand profile just keeps bouncing around a little bit.

Jeff, I was just going to add, yes, I mean, the build plans that we see from our key customers are just moving around. As Eric mentioned, a couple of the dynamics have caused our customers to kind of retrench on inventory a little bit and kind of wait out that uncertainty. So as things move into 2025, we kind of expect these conditions to remain through the beginning of the year. After that, we just don't have good visibility right now, into what the rest of the market will do.

I think, Jeff, just to add to it, we had a customer meeting. And at one point, they were happy with the inventory they had. And then as the quarter went on, I think they're doing a little bit more destocking based, on some recent customer news. And so there's a little bit more destocking than there was previously.

Okay. That's really good color. Shifting gears to Sealing. Maybe just level set us on your nuclear business, how big it is today? And just there's been kind of a lot of news flow around resurgence in nuclear, and some announcements around data centers and just wanted to understand better how you think you might participate in that resurgence.

Nuclear business for us is about 7% of sales. That's where it is today. It's obviously good for us. At the same time, it's not going to change our trajectory fundamentally. When you look at the average reactor in terms of the content we have, it's significant to us, but at the same time, it's not going to be significant to the portfolio to our nuclear business, it's good, but it's not going to create double-digit growth for Enpro or anything like that. So we have the seals for the reactor pretzel vessels and that while that's substantial, there's only two of them, and they buy two or three at a time, and they replace them every couple of years. So it's not going to be what you would consider a home run. So it's substantial and it's a good profitable business, and it's a great long-term solution. And as we get in the small modular reactors, there will be more and more of them. At the same time, I don't want people building in a huge increase for nuclear that's likely not going to be that for us. It will be consistent long-term steady growth that's very profitable.

When we think about the structure of the Sealing Technologies segment, I mean, nuclear and sustainable power generation are just one of many growth nodes that when we talk about the dynamism of the segment, we put together five or six kind of bumps singles and doubles that can kind of build that organic growth dynamic into that mid-single-digit range long term. And our teams are working really hard, to make sure that we deliver that level of performance, complemented by incremental strategic acquisitions that expand our capabilities to customers.

Okay. Thanks. I'll get back in queue.

The next question we have is from Steve Ferazani of Sidoti & Company. Please go ahead.

Good morning, everyone. I appreciate all the detail on the call this morning. I wanted to ask about part of the margin softening on ASTs related to increased spending for growth initiatives. And then I know, Joe, you mentioned expecting accelerated spending on the certification process in 4Q. Can you walk us through those two elements?

Yes. Thanks, Steve. So our progress in Arizona has gone quite well operationally, right? We've executed the build-out of that facility quite well and we're actually a little bit ahead of schedule there. So working with our key customers, we've accelerated the qualification for leading-edge node cleaning and so we can demonstrate Copy exact into that Arizona facility and we're kind of pulling that work into 2024, a little bit more than previously expected. So that's going to put a little bit of cost ahead of demand in 2025, into the fourth quarter. And that's why I said some of that is accelerating. Remember, this is just Phase 1 of the work we're doing in Arizona, and we're very excited by that, but we've accelerated some of the qualification work, and early returns are quite positive there. So we're just pulling some of that into 2024.

I said the other factors are we're implementing our operational excellence playbook in AST group. So what you're seeing is investment ahead of the value that will come later on. You're seeing it in terms of things like improving our inspection process, our cost of performance is lower. We've had some - recently some very significant innovation in both our optical business. And also our semiconductor business, where some automation has reduced inspection time from hours to minutes in some cases. And so things like that along with some little facility consolidation, moving some equipment around to get more of a positive flow throughout the factories. You saw the success of those initiatives in our Sealing Technologies businesses, and we're just getting started really on the AST platform. So all that takes extra investment ahead of the benefit that comes from it. At the same time, it's a slower time in the industry. And so, you've got a lot of people who are trying to say, trying to keep busy. We have been working on very meaningful projects. We don't get time to do when things are busy. And so, we have the cost of those initiatives without the benefit at this point. But those benefits will flow in over time. And as we said earlier, that business will rebound to be 30% EBITDA plus or minus a couple of 150 basis points, depending on the mix and volume at the time. So, we're still really excited about that business.

Great. And if I could just ask about the expected ramp on Arizona, the certification process, when you would expect to see meaningful revenue generation out of that operation?

Yes, I guess the best answer we could give you right now is you may have saw the press report, yesterday that talked about one of our key customers mentioning they're starting up a ramp on 4-nanometer sometime in the middle of 2025. And that would drive some of our volume at that time. But I don't expect full ramp personally until '26.

Yes. Okay. That's helpful. When you bought Alexa, you talked a lot about that being really customers came to Alexa because of their strong reputation for doing a very specific custom build which they didn't have to market themselves. Have you flipped that at all? Are you trying to more aggressively market the capabilities of Alexa now given the weak demand that's recent weak demand over the last multiple months?

We wouldn't have flipped it. We're still investing in the same places they were, and those opportunities are coming back now. As I said before in previous calls, they had a blip really because of COVID, people stopped traveling and started to stop doing new projects. Everybody is working from home. That just caused - it's like a snake swallowing a large animal. And so they had this bulge that went through, or this bulge that went through without something behind it. The pipeline is now very active and we've had some very significant customer wins in the last few months. And so that business is starting to improve dramatically.

There are several end markets that Alexa could be successful in, and they have a very diversified customer base. But some of the areas of strength are in free space communications, certain new space applications, semiconductor areas as well. So the outlook remains steady for Alexa for us, and they continue to be a top of the pyramid business in the industry.

Their life sciences, surgical applications have also taken up recently again.

Great. Last one from me. One, you lowered CapEx. Just what do you - what spending is not taking place? And then two, seeing some debt reduction, does that ramp up debt reduction if you're lowering CapEx?

Yes, Steve. So yes, as you said, we lowered our CapEx guide to $40 million. Frankly, we probably overestimated. Our ability to execute a little bit on CapEx going into this year. our capacity is probably more in the $40 million to $50 million range. At the same time, there's some really advanced work we're doing on gas dispersion equipment. And so our engineering teams have been working on that in multiple locations. And based on the innovation that's coming through that and some of the learnings, it's probably better to phase some of that over time, and it will ultimately result in a more advanced solution, a more optimized solution at the end. So even though some of that was a little bit ahead of ourselves, it will result in a better ultimate solution. Because we're going to phase some of that spending over multiple periods there. I think going forward, we're always going to prioritize organic investments, and prioritize investments in M&A from a capital allocation standpoint, and those are going to be our two primary areas that we're investing in. We're not at the current moment, looking to act on other legs of capital allocation, and the majority of our focus will be on organic and inorganic growth.

Yes. I mean we're going to generate well over $110 million of free cash flow in 2024, partially driven by the fact that we have a lower CapEx budget. And as we look forward, from a percentage of revenue perspective, we'd like to put about 3.5% to 4% of revenue to work in capital spending, two-thirds of, which will be focused on high-margin growth projects.

Great, that's helpful. Thanks everyone.

[Operator Instructions] The next question we have is from Ian Zaffino of Oppenheimer & Co. Please go ahead.

Hi. Great, thank you very much. I just wanted to drill down on AST a little bit more. Kind of where exactly are you seeing that weakness? Is it very leading edge or less so. And maybe what has kind of moved against you in that kind of spectrum? Thanks.

I think you said was it leading edge. I didn't hear the first part of your question.

Yes, exactly where are you kind of seeing the difference? Where are things weaker than you had expected? Is it kind of on the leading edge, non-leading edge? Exactly where is it?

The leading-edge cleaning and applications are very, very strong. And so everything leading edge, we're doing very well within our cleaning and refurbishment business and new product testing as well. On the legacy pieces and the capital equipment spending, which some of that does go to leading edge as well. So it's hard to break it out and say this much is leading edge and this much is trailing edge. That's where it's a little bit slower. They're still not - the factories still aren't fully utilized. And so when utilization rates go up, they'll buy more equipment. But that's the slowest piece of it. The rest of our services businesses and stuff is very strong.

Okay.

We also saw a little incremental weakness in coatings compared to certain - just the order flow is a little choppier than we had initially felt in that Q2 into this - throughout this quarter as well. And those tend to be shorter cycle product, and solution lines that just kind of move around a little bit.

Okay. And then as we look at like a return to growth in that space or the division, comps, definitely get a lot easier, I guess, in the first half of next year. Is that enough to kind of move back into, let's say, positive growth? Or do we really need to see like a big semi cap equipment rebound, or just cleaning solutions like enough to kind of get you back to positive growth? Thanks.

I mean, so we were up in AST sequentially 5%. We were up 3.5% year-over-year. This is the first material quarter of like those lower comps starting to lap. We are still seeing for Q4, just kind of a flattish from Q3 results from a top line perspective with a little bit of headwinds on the margin like we discussed in the guidance section. I think we're going to see a slow first half. But we're probably kind of still past the lowest point, because there are dynamics that should drive a little bit of growth. But in terms of that industry forecasted hockey stick type of acceleration that likely will not come to fruition, which actually kind of benefits us when we think about, balancing our costs with the intermediate demand outlook while still investing in those opportunities, for long-term growth.

Yes. I mean the first quarter, we've talked about of last year - of this year, represented the bottom for what we expected. And so, we've seen slight sequential improvement of demand quarter-over-quarter. It's just not as much as we originally expected. And so as we go into the fourth quarter and in the first and second quarter of last year. Our expectation is that we'll see year-over-year growth, we're just not seeing the sequential substantial improvement that was originally, predicted to come in the back half of this year.

Yes. Like over the next few quarters, it's just going to be choppy until some of these things kind of come to fruition. That's just the realistic situation at hand for us and many others.

Okay. Thank you very much guys.

We have a follow-up question from Jeff Hammond of KeyBanc Capital Markets. Please go ahead.

Hi guys. Maybe just an update on then AMI integration and just actionability in your M&A pipeline?

AMI acquisition is a home run by every standard. We're very thrilled with that. That team. Kevin and the team are doing an outstanding job culturally. Every aspect of that business has been just a home run, and we're very excited about it. In terms of actionability, we have a robust pipeline. We look at all the time. We literally look at opportunities every week. I don't think a week goes by we don't look at something. But we'll remain disciplined, and we're going to find another business similar to AMI, at some point here.

And it seems like things coming to market have kind of picked up. The activity has picked up through the second half quite a bit. So we're seeing more opportunities of things that we've been looking at closely over a softer period now coming to market. So the pipeline is really active, Jeff. And we've got a couple of things that we're really interested in. Nothing that's actionable yet, but we continue to look at key focus areas in Sealing Technologies for extension opportunities in food and pharma. And test and measurement, and other spaces that we're really interested. AMI is a really good model for the type of business that meets all of our Enpro criteria, both strategic and from a culture, and leadership perspective. So we've got a number of opportunities like that in our pipeline that, we're hopefully going to execute on here soon.

Yes. It's just more about timing rather than opportunity set in terms of availability of some of these assets.

Great. Thanks, guys.

At this time, there are no further questions. And I would like to turn the floor back over to James Gentile for any closing remarks.

Thank you for your interest today. Have a terrific day, and see you next quarter.

That concludes today's conference. Thank you for joining us. You may now disconnect your lines.