Greetings, and welcome to EnPro Industries Second Quarter 2022 Earnings Conference Call. [Operator Instructions]. It is now my pleasure to introduce your host James Gentile, Vice President, Investor Relations. Thank you..

Good morning and welcome to EnPro's Second Quarter 2022 Earnings Conference Call. I will 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. Before we begin today's discussion 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 impacts from the pandemic and related governmental responses and their impact on the general economy, as well as other risks and uncertainties that are described in our filings with the SEC, including our most recent Form 10-K and Form 10-Q.

Also during the call we will reference a number of non-GAAP financial measures. Tables reconciling these measures to the comparable GAAP measures are included in the appendix to the presentation materials. We do not undertake any obligation to update these forward-looking statements.

Also note during this call, we will be providing full year guidance which excludes changes in the number of shares outstanding, impacts from future acquisitions, dispositions and related transaction costs, restructuring costs, incremental impacts of inflation, geopolitical variables and trade tensions on market demand and costs subsequent to the end of the second quarter.

The impact of foreign exchange rate changes subsequent to the end of the second quarter, interest rate increases differing from assumptions outlined in guidance, impacts from the further spread of COVID-19 or other variants and environmental and litigation charges. And now I will turn the call over to Eric..

Good morning, everyone. It's my pleasure to provide an update on our second quarter results and outlook for the balance of 2022. I would like to take the opportunity to thank our colleagues for their hard work as we are reporting an outstanding quarter in a challenging macroeconomic and geopolitical environment. Now on to our second quarter highlights.

We delivered another strong quarter driven by continued organic growth and operating leverage across all 3 business segments. In the second quarter sales of $333.3 million increased 11.6% year-over-year with organic sales growth of 9.5%, about half of which was volume and other half price.

Our reported revenue growth was driven by solid demand in most of our end markets, the benefits from our strategic pricing actions and the addition of NxEdge which more than offset divestitures completed last year.

With inflation at 40-year highs, we have been nimble in our pricing initiatives which in most cases, offset rising raw material costs and wage inflation during the second quarter. Hats off to our supply chain commercial excellence teams for terrific execution in this difficult environment. We thank you for your hard work.

Our second quarter adjusted EBITDA of $82 million increased 43.4% year-over-year and we achieved a record adjusted EBITDA margin of 24.6%, a 540 basis point improvement from the prior year.

Our margin expansion was driven primarily by the addition of NxEdge, divestiture of lower-margin businesses and operating leverage on organic growth including strategic pricing initiatives. This is the second quarter in a row we have exceeded 20% adjusted EBITDA margins at first in our history.

Our strong momentum is a testament to the success of our transformation initiatives over the past several years. As you may remember, we finished 2019 with a 14% adjusted EBITDA margin. 3 short years later, the midpoint of our increased guidance range implies an adjusted EBITDA margin in excess of 20% for 2022.

We are proud of what we have achieved in reshaping our portfolio of businesses while solidifying our position as a leading edge industrial technology company. Our agile operating model has been a constant in our portfolio transformation allowing us to continue to drive growth even in this challenging environment.

A quick update on NxEdge, our most recent strategic acquisition. In the early going, NxEdge is more than meeting our expectations. As the teams are integrating seamlessly into the advanced surface technology segment. We are very pleased with the technological capabilities and process know-how NxEdge had brought to our customers and to our organization.

Our strong results continue to reflect the sustainable benefits of our strategy as we lead into our best growth opportunities while maintaining cost efficiency and purpose throughout EnPro.

We will continue to invest both organically and through strategic M&A in faster-growing markets where we have competitive advantages while maintaining robust aftermarket and recurring revenue streams across our portfolio.

Our performance and disciplined approach to capital allocation is translating into significant value for EnPro's stakeholders and we are confident that we are well positioned to build on this momentum. Now I will turn the call over to Milt for a deeper dive into our financial results for the second quarter..

As Eric noted our second quarter performance was robust despite the persistent headwinds we and many others continue to face. As reported second quarter sales of $333.3 million increased 11.6% year-over-year.

Positive momentum in the semiconductor, power generation, aerospace and food and pharma markets as well as the contribution from NxEdge more than offset the reduction in sales due to last year's divestitures and softness in European automotive market.

Organic sales for the quarter increased 9.5% compared to the second quarter of 2021 as a result of both volume increases and pricing initiatives. Adjusted EBITDA of $82 million increased 43.4% over the prior year period driven primarily by the addition of NxEdge and organic growth, including the impact of pricing initiatives.

Partially offset by the impact of divestitures completed in 2021 inflationary raw material costs and rising labor and travel expenses.

In addition adjusted EBITDA in the second quarter was positively impacted by a $2.8 million foreign exchange benefit from revaluation gains primarily on foreign cash balances due to a strengthening dollar and a $2.5 million reduction in incentive compensation accruals due mainly to the share price decline experienced during the second quarter.

Year-to-date revaluation gains from the stronger U.S. dollar totaled $4.5 million and share price-related incentive compensation reversals equaled $3 million. Second quarter adjusted EBITDA margin of 24.6% expanded 540 basis points year-over-year.

Excluding the impact of foreign exchange translation and currency-related revaluation of foreign cash balances and the share price driven incentive accrual changes in both periods. Adjusted EBITDA margin expanded 370 basis points over prior year.

Corporate expenses of $9.5 million in the second quarter decreased from $12.8 million a year ago driven primarily by the reduction in share price related incentive compensation accruals that are discovered.

Adjusted diluted earnings per share of $2.32 increased 49% compared to the prior year period driven by growth in operating earnings, offset in part by higher interest expenses compared to last year.

Moving to the discussion of segment performance sealing technology sales of $155.9 million decreased 4.1% versus the second part of last year as a result of the divestiture of polymer components business completed in September 2021. Organic sales grew 6.3% year-over-year.

Strategic pricing initiatives and strong demand in power generation, food and pharma and aerospace markets were the primary drivers of our quarterly performance in the segment. Adjusted segment EBITDA of $42.5 million was essentially flat compared to the prior year period due to the divestiture of the polymer components business.

Excluding the divestiture and foreign exchange translation, adjusted segment EBITDA increased 10%. Adjusted segment EBITDA margin expanded 120 basis points to 27.3% driven by the divestiture impact and by leverage on organic growth including strategic pricing that more than offset inflationary pressures on raw material and labor costs.

Turning now to advanced surface technologies. Second quarter sales of $121.5 million more than doubled from the prior year driven by the acquisition of NxEdge and continued strong demand in the semiconductor market. Organic sales increased 19.1% versus the prior year period.

Adjusted segment EBITDA increased more than 140% to $37.8 million compared to the second quarter of last year driven primarily by the NxEdge acquisition and strong organic sales growth.

Excluding the impact of NxEdge and foreign exchange translation, adjusted segment EBITDA increased 33.3%, reflecting strong operating leverage and an improved mix compared to a year ago. Our growth investments supporting semiconductor supply chain development in the United States continue.

As we've discussed on previous calls and we are encouraged by the long-term growth picture in our advanced surface technologies segment. In engineered materials, second quarter sales of $56.5 million decreased 29.4% compared to the prior year resulting from the CPI divestiture completed in December 2021.

Organic sales for the quarter increased 7.6% driven by strength in aerospace, oil and gas, and domestic automotive markets which more than offset weakness in the European automotive market and Covid related lie downs in China. Second quarter adjusted segment EBITDA decreased 26.9% over the prior year period as a result of the CPI divestiture.

Excluding the impact of the divestiture and foreign exchange translation adjusted EBITDA increased 13.6% compared to the prior year reflecting organic sales growth, including pricing initiatives and cost management. Turning to the balance sheet and cash flow.

In the first half of the year, we reduced borrowings by $136 million finishing the second quarter with $991 million in total debt and cash of $222 million. During the second quarter, we repatriated a total of $76 million in cash bringing our year-to-date total repatriation to $119 million. We expect to repatriate another $100 million by year-end.

At June 30, we had $294 million available for borrowing under our revolving credit facility. Our balance sheet remains in a healthy position and we have ample financial flexibility to execute against our strategic growth initiatives.

Free cash flow for the first 6 months of 2022 was $59 million up from $48 million in the prior year driven primarily by higher operating profits and lower capital expenditures. During the second quarter we paid a $0.28 per share quarterly dividend. For the first 6 months of the year, cash for dividend payments totaled $11.7 million.

Moving now to our 2022 guidance. Taking into consideration all the factors that we know at this time including current underlying demand and order patterns we now expect low to mid-double-digit revenue growth over our reported 2021 sales of $1.14 billion.

We are raising our adjusted EBITDA guidance to a range of $270 million to $280 million up from our previous guidance of $263 million to $275 million.

Further, reflecting the increase in our adjusted EBITDA outlook we now expect adjusted diluted earnings per share from continuing operations to be in the range of $6.80 to $7.30 using a normalized 27% tax rate.

As noted in my earlier remarks our strong first half adjusted EBITDA benefited from currency-related revaluation of foreign cash balances and accrual reductions related to the share price decline.

Excluding these impacts we forecast adjusted EBITDA to be modestly lower than the second half compared to the first half reflecting ongoing supply chain constraints, normal third quarter seasonality largely in our European exposed businesses and currency translation headwinds.

Overall, we are very pleased with our performance and encouraged by the outlook in this uncertain environment as backlog and order patterns remain constructive. Now I'll turn the call back to Eric for closing comments..

Thanks, Milt. Our performance demonstrates our team's ability to successfully execute on our strategic, financial, commercial and operational objectives. We are focused on building upon our differentiated and high-performance culture to deliver results in any environment.

We are committed to fostering a workplace that supports both physical and mental health and safety of our team. They can do what they do best, offer customers mission-critical, leading-edge products and solutions and safeguard critical environments and improve processes in a variety of secular growth markets.

Our team's performance is rooted not only in our operating model but in our culture that revolves around our values of safety, excellence, respect and our commitment to sustainability and diversity.

I am proud of how colleagues across our organization embrace our cultures and values and prioritize our business performance alongside personal and professional development. By doing so they are creating value for EnPro stakeholders including our shareholders, customers and communities. We greatly appreciate your interest in EnPro.

Our company is positioned well to execute even in an uncertain market. Now I'll open the line to questions..

[Operator Instructions]. Our first question comes from the line of Jeff Hammond with KeyBanc Capital..

Just any aberrations in the sealing margin? Obviously, very good performance. Is that really just truck pricing coming through and the timing there? Or maybe just elaborate..

[Indiscernible] turn there and talk a little bit about trucking. Jeff, a big driver for us in the quarter was the results we saw in power generation and aerospace that's in our metallic sealing part of sealing technologies. We had significant organic growth, volume growth. That business has been tied on all cylinders. So that was the primary driver.

I mean there were other drivers. But when we look at margin expansion of the segment that has been part of it..

It's overall good performance throughout the whole [indiscernible] segment. And in trucking, we talked about in the past for some headwinds in well to catch up the price. And I think we've got right now and so you're seeing the impact of that flow through the system.

And also some of the backlog has been shipped that had old pricing in place so you're seeing more leverage there..

And then clearly very good results in advanced surface technology. But just on semiconductor worries about pockets of slowing.

Just any impact from CapEx timing with key customers? And then maybe just give us a better sense of kind of either your customers or your exposure to consumer electronics which seems to be maybe more at risk versus kind of the high-performance compute and auto industrial which seems more resilient..

In general, we're more exposed to them not the memory side but to the logic side, Jeff. So we don't have as much exposure to the personal computer business. Also, it's important to keep in mind that basically 50% of our portfolio is recurring revenue.

We call it aftermarket or service business if you will from the cleaning, coating and refurbishment part. So it's not tied to the capital expenditure in a direct way. We expect our results to continue to be okay..

The feedback we're getting from customers is still generally constructive. There always are timing differences from quarter-to-quarter based a lot on supply chain other than us because the supply chain of other suppliers to big city companies affect our overall [indiscernible] with customers as well..

In general [indiscernible] move things out a little bit just because of the supply chain but they haven't canceled. There aren't many cancellations. Our backlogs are still really strong and still growing..

And then just again I mean, great performance and what's becoming maybe a more mixed macro picture.

Any crack you're seeing across the businesses that maybe we can't see in the overall results?.

I'm not sure I would call it a crack, Jeff. The one thing that we've seen is because our refineries are running full out they're not doing as many turnarounds. We're seeing that at [indiscernible]. There were several turnarounds postponed in the first quarter.

But later in the year I don't know if they'll happen later in the year as they're still running full speed if you will. But that's a good news, bad news scenario for us. The good news is they still have to do maintenance and it's more expensive when they do it. If you don't do the planned maintenance you do more expensive maintenance later.

And so I expect some of that maintenance will get moved into the third quarter. We've already into the first quarter of next year. That's also in our forecast but I don't see it having any material impact..

I really have anything to add other than macro events. We're watching gas supply come I don't rush on how that impacts the European economy. We have those factors that we had other companies..

Our next question comes from the line of Ian Zaffino with Oppenheimer..

On the guidance, can you guys just tell us what your assumptions are for the FX impact? Or maybe what the constant currency growth rate might be?.

So when we think about the foreign exchange translation our forecast is based on where the U.S. dollar has strengthened up until July. So what we would expect from a constant currency perspective is that we generally exclude translation impacts in our top line forecast overall but there will be a headwind in the back half.

And then assuming July rates hold included in our forecast probably hit us from an adjusted EBITDA perspective by about $1 million..

That's translation. So we're expecting an incremental roughly if 230 reps hold roughly 1 million headwind on translation compared to the first half of the year. We also on the transaction side highlighted the revaluation of foreign cash that gave us a tailwind in the first half of the year.

Since we don't predict currency changes we're assuming that that's neutral basically for the balance of the year. And so that was a benefit as we mentioned in the first half by about $4.5 million. So when you think about currency and you think about H1 versus H2, you have to think about both of those components..

And then just speaking on international.

In Europe can you just maybe give us kind of a flavor of what you're seeing there, maybe some of the better businesses and then maybe some of the other businesses that have been impacted more, just given kind of Russian Ukraine and the geopolitical landscape there?.

Our biggest European exposure resides in engineered materials by GGB. And we have seen some the volatility in the European auto market which does contribute a bit to GGB's profitability in the second half which is included in our forecast.

Other than that the smaller European exposure is largely in sealing technologies via Garlock and Technetics remain quite strong..

Our next question comes from the line of Steve Ferazani with Sidoti..

Wanted to ask about performance in engineered materials because obviously you had the impact from the slower European automotive production and even domestic hasn't been the expectation would be a significant ramp into the second half hopefully, and certainly into 2023. And then on aerospace getting better but potentially getting a lot better.

Given the leverage you have in that business, how are you thinking? And I know first half is typically better than second half.

But despite the European headwinds how are you thinking about that segment into the second half and then beyond?.

We do have [indiscernible] seasonality, Steve. We noted that earlier. And the first half of the year has been relatively strong because our domestic auto a lot smaller than European auto helped offset some of the weakness that we saw in Europe in the automotive industry. So we're encouraged by that.

It seems that some of the license issues are starting to loosen up a little bit. Particularly we're seeing it mostly under domestic auto part of our business. Aerospace is relatively small in this segment. It's more significant in the sealing segment but it does make a difference.

And we are seeing growth in aerospace and engineer that led to our strong results in the first half of the year. So yes, but we do have seasonality and we expect to see it again this year as we typically do with European holidays being pretty heavy in the third quarter. We usually see a dip in the third quarter in our European expense businesses..

When I think about the strength you're seeing in AST and then when you talked about the NxEdge acquisition last year. You talked about the benefits given the significant expected investment in the U.S. chip industry. After months, we finally saw the chip bill move forward.

How positive are you? And how much is that going to translate not near term but over the longer term for the growth in that business now that we see clear signs we're going to get that big investment in the U.S.

chip market?.

We certainly are hopeful to get a piece of that at some point with the chip set and we certainly play in that supply chain. We're going to continue to make investments. And the investment in the U.S. is certainly going to help us dramatically over time. But it's still a couple of years away, a year, 1.5 years away. Not immediate..

No, of course. When I think about the balance sheet which is continuing to improve, you're generating a ton of cash. What's your appetite for acquisitions? Obviously, you're still working through NxEdge.

What's the pipeline look like? And what are you seeing out there? And what's your appetite right now?.

We have a very active pipeline and we are certainly hopeful and working diligently at it every day to find ways to add value. And so we will take advantage of opportunities that are strategic as they come about. But at the same time we're comfortable where we are. So we don't any pressure to act, we'll be disciplined in our approach..

And just to highlight what we think we've already said several times on the call that in our existing portfolio with the moves that we've made, we felt we have significant upside particularly in our AST segment on the growth end..

There are no further questions. I'd like to hand the call back over to Mr. Gentile for closing remarks..

Thank you for your interest this morning and have a great day..

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation..