Enpro Inc. Q3 2025 earnings call

Thanks, Melissa, and good morning, everyone. Welcome to Enpro's third quarter 2025 earnings conference call. I remind you that our call is being webcast at enpro.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 Bruderik, Executive Vice President and Chief Financial Officer. During this morning's call, we will reference a number of non-GAAP financial measures. Tables reconciling historical non-GAAP measures to 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, including our perspectives for full year 2025 guidance that are not historical facts and considered forward-looking in nature. These statements involve a number of risks and uncertainties, including those described in our filings with the SEC. 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 financial results and provide an update on our strategic progress. We greatly appreciate your support. It certainly is an exciting time to be part of Enpro. After a brief discussion of our quarterly performance and acknowledgment of the hard work ongoing across the organization, I will turn the call over to Joe for a more detailed discussion of our third quarter results and current guidance perspectives for the balance of the year. Now on to our third quarter performance. Enpro reported organic sales growth of nearly 10% during the third quarter, with mid-single digit revenue growth year-over-year in sealing technologies and more than 17% top line growth at AST.

The strength of our business model was demonstrated again during the quarter with total Enpro adjusted EBITDA margin above 24%, which included increased operating expenses supporting both growth initiatives in both segments. Complementing the strong quarterly performance, we continue to advance Enpro 3.0 strategy with the Overlook Industries acquisition and our agreement to acquire Alpha Measurement Solutions, which we announced on October 13th. Both of these acquisitions will expand our capabilities in critical growth areas of the portfolio without the use of excess leverage. We closed our acquisition of Overlook on October 8th and expect the acquisition of Alpha to close during the fourth quarter of 2025 once required regulatory approvals are received and other customary closing conditions are satisfied. Alpha and Overlook are great examples of our ability to identify businesses that fit our strategic growth characteristics while meeting our stringent financial criteria.

Both businesses have significant technical competence, customer intimacy, and competitive differentiation while bringing strong business leadership, all characteristics reflective of an Enpro business. Alpha's portfolio of liquid sensing capabilities complements our existing gas stream solutions acquired with AMI, broadening our portfolio of sensing technologies and instrumentation for compositional analysis into key end markets such as industrial process control, water and wastewater, laboratory, and environmental monitoring. The sensing and measurement parameters brought together to further our compositional analysis strategy enable us to detect unwanted, oftentimes trace, compounds in a variety of processes, which in turn enable us to solve our customers' critical problems. Overlook specializes in engineering, design, and fabrication of single-use technologies and other critical componentry that expands our position in biopharmaceutical manufacturing. Overlook's capabilities expand into liquid dose biologics, a secular growth area that continues to expand as liquid single-use medicines are increasingly replacing those taken orally.

These medicines target a number of evolving areas in oncology, immunology, and dermatology, amongst many others, as the market is poised to accelerate over the next decade. Within our Garlock Hygienic Technologies business, Overlook furthers our technology expertise and customer intimacy by answering the industry's accelerating need for tailored single-use consumables as more stringent aseptic processing is essential to prevent contamination. Our business teams are continuing to identify acquisition targets that broaden our leading-edge capabilities and bring them into Enpro as we strategically expand our portfolio of critical products and solutions. I would like to thank those involved in the preparation and execution of these transactions as we are excited to begin integrating these bright new colleagues and successful teams into our organization.

Turning to our segment results for the quarter, in sealing technologies, sales increased 5.7%, highlighted by strength in aerospace and food and biopharma demand, firm aftermarket performance in general industrial and commercial vehicle markets, and strategic pricing initiatives. Solid performance in these areas more than offset persistent weakness in commercial vehicle OEM market and soft overall industrial demand in Asia and Europe. Sealing Segment profitability remained above 32%. In advanced surface technologies segment, sales increased more than 17%, led by growth in leading-edge precision cleaning solutions and improved demand for certain semiconductor tools and assemblies. AST segment profit increased double digits over the last year, though operating leverage was impacted by continued growth investments such as preparation for advanced chip production domestically and accelerating qualification work on new platforms and next node development. Slightly unfavorable mix was also a headwind, which Joe will discuss in greater detail in a moment.

Across Enpro, we continue to pursue targeted incremental capacity expansions in areas where we are winning, preparing to solve critical problems for our customers and investing in and expanding our differentiated capabilities. Our aim is to unlock the compounding features of our business model and drive value creation into the second year of our 3.0 phase and beyond. In sealing technologies, for example, we are currently expanding capacity and investing resources to support future growth in compositional analysis, aerospace, and commercial space applications. In commercial vehicle, we are making investments to support incremental market share gains with new products and expanding partnerships with key customers. We are readying our manufacturing processes to be well-positioned for the inevitable recovery of the current truck and trailer builds.

Across the Sealing Segment, our teams are making strides to identify new market opportunities and specify our process solutions for critical positions in higher growth markets, including life sciences, space, hydrogen, semiconductor, nuclear, energy storage, and digital infrastructure applications. Our teams are excited about these efforts as we expand our capabilities and reinvest in growth opportunities to drive long-term profitable growth in sealing technologies. AST is busy, and we'd like to acknowledge our colleagues for their hard work. In AST, we offer critical products and solutions, and our customers come to us to solve exacting problems that enable contamination control, efficient in-chamber environments, process and equipment protection, and economic yield optimization for semiconductor fabs. During the quarter, we experienced strong demand for our leading-edge precision solutions and some recovery in semiconductor tools and assemblies while pursuing stringent qualifications for next-generation platforms.

As we have said in recent quarters, we have been making disciplined investments in key areas of the business that will serve as growth platforms to support our long-term expectations for the segment. We continue to implement certain continuous improvement and optimization actions that can drive incremental margin expansion into a more robust overall semiconductor market recovery. As our pipeline continues to expand, we are well-positioned to deliver. The Enpro 3.0 strategy is proceeding as planned as we approach our second year, and we are excited about the many opportunities ahead. The business is positioned to drive mid-single digit revenue and growth in the sealing technology segment and high single digit, low double digit growth in AST over time. Our programmatic M&A strategy is an additive to these organic growth perspectives over our 3.0 planning horizon.

We are pleased with the Sealing Segment's ability to consistently generate profitability toward the high end of our targeted ranges over the past three years and expect this level of impressive performance to continue. For AST, the segment has demonstrated its ability to generate profitability in the high 20% to low 30% range in the past, and we are taking steps to unlock value inherent within the segment and deliver more consistent performance at these levels. As we continue to invest in the areas where we are strongest while implementing our playbooks to continuously optimize performance over time. Before I pass the call over to Joe to discuss our results in more detail, I want to thank everyone at Enpro for your valuable contributions to our company, and I encourage each of you to continue investing in your personal and professional growth as we work toward delivering the critically important solutions to our customers. Joe.

Thank you, Eric, and good morning, everyone. We are very pleased with our performance so far this year. Now let's get into the details of our third quarter results. In the third quarter, sales of $286.6 million increased nearly 10%. We saw continued strong sealing technology performance overall and more than 17% year-over-year sales growth at AST, even as some of our markets remained choppy. Third quarter adjusted EBITDA of $69.3 million increased 8% compared to the prior year. Adjusted EBITDA margin of 24.2% was down slightly from last year. Ongoing investments in people and processes across the company to support future growth, as well as unfavorable mix in AST, absorbed the benefits from operating leverage during the quarter. Our corporate expense of $10.2 million in the third quarter of 2025 was essentially flat compared to last year.

Adjusted diluted earnings per share of $1.99 increased more than 14%, largely driven by the factors that drove the adjusted EBITDA improvement year-on-year and lower net interest expense. Moving to a discussion of segment performance, sealing technology sales increased 5.7% to $178.2 million. Strength in aerospace and food and biopharma applications, firm aftermarket demand in domestic general industrial and commercial vehicle markets, and strategic pricing more than offset persistent weakness in commercial vehicle OEM markets. Nuclear orders were impacted by political uncertainty in France, which influenced funding and procurement and is expected to be temporary. Industrial demand in Europe and Asia was also tepid during the third quarter. Aftermarket sales comprised 65% of total segment revenue year-to-date. For the third quarter, adjusted segment EBITDA margin remained strong at over 32% despite growth investments mentioned previously. Segment profitability remains at the high end of our targeted range.

We are excited about the number of drivers of long-term growth and value creation in sealing technologies as we focus on expanding opportunities through growth investments and strategic acquisitions. On the topic of strategic execution in sealing, we are delighted to have found two great businesses in our recently announced transactions. We welcome the Overlook team into Enpro and are excited to begin working with our new Alpha colleagues once that deal closes, which we expect to occur in the fourth quarter of 2025. As Eric talked about in detail earlier, these two organizations advance our capabilities in key growth areas of the Enpro portfolio and have all the hallmarks of an Enpro business. On a combined basis, we expect both businesses to achieve high single to low double digit revenue growth rates at margins that meet or exceed our core.

As well, we are excited to assist these talented teams to expand their reach and execute their respective growth strategies as they become part of our team to contribute to our value creation trajectory. Turning now to the advanced surface technologies segment, third quarter sales of $108.5 million were up 17.3% year-over-year. We saw an acceleration in certain areas of AST, including in precision cleaning solutions tied to advanced node chip production, supporting applications such as artificial intelligence and high bandwidth memory. However, demand for capital equipment remains choppy, with pockets of strength observed for certain lower margin semiconductor tools and assemblies during the quarter. For the third quarter, adjusted segment EBITDA increased more than 13% and adjusted segment EBITDA margin was 20.1%. Operating leverage on sales growth was offset primarily by increased operating expenses supporting growth initiatives and the mixed impact of increased sales for certain semiconductor tools and assemblies.

There are several factors underlying AST performance currently that we expect to continue into 2026. We see momentum in our advanced node-facing precision cleaning solutions business. Consistent with that, we are seeing accelerated timelines for leading-edge node production, which have caused the need for increased labor investment in both Taiwan and the United States to meet the qualification demands for our customers well ahead of time as demand for advanced node chips accelerates. These actions position us very well for growth into 2026 and beyond. At the same time, we are making considerable progress on new platforms and technological advancements for leading-edge processes in our pipeline, which is leading to additional qualification activities ahead of revenue generation and necessary to answer the exacting requirements of our customers. Semiconductor industry dynamics continue to evolve, and regionalization of supply chains proceeds.

In partnership with our customers, demand is shifting for certain legacy product lines from the United States to Southeast Asia. As we have mentioned before, we have expanded our capacity in that region over the past two years to support our customers on a number of platforms. In connection with this demand shift, $12 million of equipment supporting legacy platforms, or approximately 3% of total AST revenue, was produced and sold year-to-date in 2025 ahead of these transitions, which we do not expect to recur in 2026. Finally, near-term demand dynamics continue to be choppy in the third quarter, which will continue in fourth quarter and into the first half of 2026. Although we are seeing signs of capital spending supporting leading-edge semiconductor capacity expected to accelerate into the back half of next year.

These signals of a significantly improved demand environment are supported by secular technology transitions, driving the need for more advanced logic, artificial intelligence, and high bandwidth memory capacity. Over the mid and long term, our new platform pipeline remains robust and underscores our high single to low double digit revenue growth expectations for the segment. Again, we expect segment margins can achieve 30% over time as new platforms begin to season from the investments we have made over the last two years. The market resumes a more consistent trajectory, and continuous improvement initiatives take hold. Turning to the balance sheet and cash flow, our balance sheet remains strong. At the end of the third quarter, our net leverage ratio stood at 1.2x trailing 12-month adjusted EBITDA. Following the completion of the transactions announced in October, we expect to exit 2025 at a net leverage ratio of around 2x.

We generated $105 million in free cash flow year to date versus $83 million last year. Higher net income and lower interest payments were the primary drivers of the year-over-year increase. Also, we continue to expect capital expenditures to be around $50 million this year as we invest in future growth opportunities across the company at accretive margin and return thresholds. Finally, our strong balance sheet and cash generation provide us with ample liquidity to make these investments while continuing to return capital to shareholders. In the third quarter, we paid a $0.31 per share quarterly dividend, with year-to-date payments totaling $19.7 million. We also have an outstanding $50 million share repurchase authorization expiring in October 2026.

We are pleased with the consistent free cash flow generation and look to reinvest in organic growth opportunities across the business while continuing to pursue strategic acquisitions that fit our rigorous financial objectives and expand our leading-edge capabilities. Moving now to guidance. We are updating our previous full year 2025 guidance ranges to the high end and now expect total Enpro revenue growth of 7%-8%, adjusted EBITDA in the range of $275 million-$280 million, and adjusted diluted earnings per share to be in the range of $7.75-$8.05 per share. The anticipated partial quarter contribution from the two acquisitions announced in October is included in this range. We previously expected revenue growth of 5%-7%, adjusted EBITDA in the range of $270 million-$280 million, and adjusted diluted earnings per share in the range of $7.60-$8.10. The normalized tax rate used to calculate adjusted diluted earnings per share remains at 25% and fully diluted shares outstanding are currently 21.3 million.

As we shared in our October announcement, the contribution from the acquisitions of Alpha and Overlook should contribute more than $60 million in revenue and $17 million-$18 million in adjusted EBITDA in 2026, all included in the sealing technology segment. In sealing, we continue to expect strong performance year-over-year in the fourth quarter. The end market drivers underlying our guidance ranges remain largely the same. We expect continued strength in aerospace and food and pharma markets and a firm domestic aftermarket in general industrial and commercial vehicle. The commercial vehicle OEM markets are expected to remain at a low point for the balance of the year. We also expect slight variability in nuclear orders to continue based on near-term political uncertainty in France compared to our previous delivery schedules for the fourth quarter.

In AST, we expect a sequential deceleration in sales growth for the fourth quarter, given the continued choppiness in overall semiconductor equipment spending, the previously mentioned regional transitions underway, as well as the accelerating qualification work on new platforms ahead of revenue. Overall, for the year, we still expect Sealing Segment profitability at the high end of our range of 30% ±250 basis points, while AST segment profitability should finish slightly above 20%. Total Enpro adjusted EBITDA margin is expected to finish 2025 above 24%. We are excited to continue executing our value creating strategy into 2026 and beyond and look forward to our discussions with you all in future quarters. I will now turn the call back to Eric for closing comments.

Thanks, Joe. We'd like to thank our colleagues across Enpro for their inspiring work and dedication. We are also excited to welcome our new colleagues from Alpha and Overlook to the organization. We are pleased with our performance so far in 2025 and are confident that we are taking the right steps to build on our Enpro 3.0 momentum. We are delivering on our growth targets in the first year of our strategy while empowering our team's personal and professional development and creating differentiated value for our customers and shareholders. Thank you for your interest in Enpro. We now welcome your questions.