Greetings, and welcome to the EnPro Industries, Inc. Q4 and Full Year 2024 Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. If anyone requires operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. 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.

Thanks, Kevin, and good morning, everyone. Welcome to EnPro Industries, Inc.'s fourth quarter and full year 2024 earnings conference call. I will remind you that our call is being webcast at enpro.com, where you can find the presentation that accompanies this call. Joining 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 historical 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 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-Ks. Also note that during this call, we will be providing full year 2025 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?

Thank you, James, and good morning, everyone. Thank you for joining us today as we review our results for the fourth quarter and full year 2024 and provide a business update that introduces our outlook for 2025. Before we get started, I would like to thank our colleagues across the company for delivering another great year of results. I very much appreciate all of your hard work and the remarkable contributions that you make each day to enable our company's success. I look forward to continuing our work together as we empower technology with purpose and create opportunities for each of us to flourish and thrive. Now on to our results. EnPro Industries, Inc. performed well in 2024, executing effectively despite persistent weakness in semiconductor capital equipment demand and a sharp decline in commercial vehicle OEM sales. Excellent performance across the Sealing Technologies segment offset an overall soft demand environment in AST, which drove improved bottom-line results year over year. Thanks to the inherent balance and quality of the EnPro Industries, Inc. portfolio, and the resilience of our business model, we generated strong free cash flow in 2024 and ended the year with a net leverage ratio of 1.6 times, well within our desired range. In Sealing Technologies, our excellent performance and efficient operations drove an adjusted segment EBITDA margin over 32% for the year. We are very pleased with the strength of the segment and how our teams are positioning the businesses to drive above-market growth by leveraging our applied engineering capabilities and specification positions to deliver important solutions to our customers in areas where we have clear technology and process advantages. Our efforts to improve in valve sealing technologies to position the segment for world-class performance have unlocked significant value. In 2019, we embarked on our portfolio optimization…

Thanks, Eric, and good morning, everyone. In the fourth quarter, sales of $258.4 million increased 3.7%, and organic sales increased 1.2%. The increase was primarily driven by strong sales performance in the Sealing Technologies segment and a recovery in European general industrial and food and pharma demand, as well as strategic pricing initiatives and the addition of AMI, which more than offset slower sales tied to wafer fab equipment at AST and a sharp decline in commercial vehicle OEM demand. Fourth-quarter adjusted EBITDA of $58.2 million increased 24%, and the adjusted EBITDA margin of 22.5% expanded 370 basis points year over year. Positive mix in both segments, the addition of AMI, the benefits of cost mitigation actions, and lower corporate expenses were the primary drivers of this year-over-year improvement. Corporate expenses of $13.4 million were down from $14.7 million in the fourth quarter of 2023, primarily due to the decrease in long-term incentive compensation expense related to cash-settled share-based rewards tied to share price performance compared to last year. Adjusted diluted earnings per share of $1.57 increased 32% compared to the prior year period, largely driven by the factors increasing adjusted EBITDA. Moving to a discussion of segment performance, Sealing Technology sales were $163 million in the fourth quarter, an increase of 11% from the prior year period. Strong demand in aerospace and nuclear markets, strategic pricing actions, the addition of AMI, and a recovery in food and pharma and European general industrial markets more than offset continued weakness in commercial vehicle OEM and Asian industrial markets. Organic sales increased 6.7%. For the fourth quarter, adjusted segment EBITDA increased nearly 32% from the prior year period, with adjusted segment EBITDA margin expanding almost 500 basis points to 31%. Positive mix, strategic pricing, improved volume, and the addition of AMI contributed…

Thank you, Joe. As we enter 2025, we are energized and working hard to deliver another year of strong results for our customers and shareholders. We continue to operate the business with balance in an effort to achieve excellent financial results in a variety of economic environments. Our value-creating strategy remains unchanged, and we continue to invest in areas where we are strongest while considering strategic acquisitions that build upon our leading-edge capabilities. I want to again thank our dedicated colleagues across the company who are the driving force for our company's success. We believe we have built a clear path to achieve our vision of EnPro 3.0. Thank you for joining us today. There's no better time to be a part of EnPro Industries, Inc., and we now welcome your questions.

Thank you. I will now be conducting your question and answer session. Our first question is coming from Jeff Hammond from KeyBanc Capital Markets. Your line is now live.

Hey, good morning, gentlemen.

Morning, Jeff.

Good morning, Jeff.

We'll start with the sixty-four thousand dollar question. Semiconductor, you know, kinda just wanted a better you think you said mid to high single-digit growth for AST. So just trying to better get a sense of what you're assuming for, you know, WFE or wafer starts and when you think see an inflection or if the growth is really just all kind of, you know, outgrowth and leading-edge focus.

I think it is mostly outgrowth and leading-edge applications, but I also see you're getting to some degree of the law of small numbers. That's just gone down so much. There's room to improve at this point. Also, a little bit of market share gain in there. We can look at our funnel and see some programs we've won. To give us some confidence we'll get to those numbers by the end of the year. I'm not looking for strong market recovery. Expect to be quite choppy throughout the year.

Yeah. Jeff, I think when you look at a lot of the industry sources, they're kinda saying low to mid-single digits. You know, it varies depending on where you're exposed and, you know, how much China exposure you have or versus non-China. But that's sort of what we're expecting, you know, low growth in WFE overall for the market in 2025 and then, you know, the investments that we've made in growth initiatives that we have, especially on leading-edge applications to kinda outperform and that drives our overall kind of forecast for 2025.

Okay. And then just how should we think about ASR sequentially? You know, you kind of ramped through 2024. I don't know if you know, you stepped back down or if the fourth quarter is kind of the new run rate to think about.

Yeah. I think it's gonna be choppy, you know, for the first half a little bit again. We could see a little bit of step back to be slightly flat to slightly down. You know, in the first half, but not materially. We do think it will be second half slightly stronger than the first half overall for AST. So you could see some choppiness quarter to quarter, but I don't think you know, we're gonna see a material step down in any way. You know, we've invested behind all the growth investments. Arizona, as we talked about, had some initial revenue in the fourth quarter. You know, that testing revenue and qualification work will continue in 2025. But the reality is that that will be mostly spending ahead of demand for now. We see that ramping up a little bit through 2025, but materially production volume coming in 2026. And even beyond that as our key customers kinda ramp their volume. But, you know, it's another year of strong growth investments for us, behind AST. And then, you know, scaling with our customers as they grow.

Okay. And then last one, just a lot of news flow on tariffs, so I know it's pretty new, but just how are you thinking about, you know, and how have you built, you know, tariff risk into the guide. Maybe just talk about any pricing actions you're considering and maybe just remind us of kind of any sourcing footprint, you know, China, Mexico, Canada.

Sure. So most of our sourcing is done in region.

And the largest part of our supply chain is actually source-directed by the customer. So the areas where we have exposure, we have three product lines, one small one in Mexico, one small one in Canada, then another one again, small volume out of China. Altogether, it wouldn't be material. And I also think it will be some offsets in the U.S. if and when the tariffs are enacted, depending on how much they are. But we've already got price plans in place and we'll also use, in some cases, we call them surcharges to capture them immediately. And so we can also adjust as the administration sorts out what they're doing. So we will capture most of the price and in any event, in the worst-case scenario, it wouldn't be material.

And the customer-directed, you know, sourcing, is that, you know, or does that have pass-throughs for tariffs?

We buy it at a net cost. Whatever price we get it from them at their net cost, so that tariffs would be included in there. And we would go from that point, Jeff. It would be in the base, if you will. It wouldn't affect us.

Okay.

The customers are specifying it.

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

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

Good morning, everyone. Appreciate all the detail on the call. I was actually a little positively surprised by your AST margins quarter given I know you were going through that certification process. I assume there would have been a sequential decline actually had a sequential increase. Given the costs associated with that, was it just much better mix this quarter? Can you walk us through how you got to that sequential increase despite the certification process in Arizona?

Yeah. Good morning, Steve. Yeah. We talked, as you mentioned in the last quarter about, you know, the qualification work that we're accelerating and pulling from 2025 into 2024. We did all that and, frankly, it went as according to plan. So we did see a little bit higher cost in the fourth quarter than, you know, we originally intended. But, you know, we did see positive mix, especially on leading-edge work, both in Taiwan and in the U.S. That drove favorable mix. Volume was pretty strong through the back half of the year or back half a quarter. And so that favorable mix ticked our margins up a couple of points. More favorable than we expected even going into the fourth quarter.

As you expect the solutions to be the stronger side in 2025, and that's the better margin where it appears to be the better margin side, is there any reason to think you can get above low 20s in 2025 on the margin side?

You're right in the fact that we do see the solution side to be stronger and that, you know, will kick our growth rate up a little bit through the year. But we continue to invest in the work in Arizona and in other opportunities for growth that are gonna really pay off in 2026 and beyond. So we're still investing ahead of demand. In the Frank, we're investing a little bit more than we did in 2024. So, you know, if overall volume growth is a little stronger than we're talking about and we're on the higher end of our overall revenue guide, I think we could see margins pick up a little bit. But the reality is they'll probably be, you know, in the same range as we saw, above 20%. In 2025.

Okay. That's helpful. On the sealing side, I wanna ask the tariff question in a different way. We've seen some markets, maybe the spending on the industrial side, slow down given general uncertainty, Europe and other places being concerned about what might be coming. I know a lot of your stuff on sealing is mission-critical. But have you seen any kind of a slowdown given the uncertainty in the world?

Short answer is no. We really haven't seen any slowdown at all.

Okay. Fair enough. Last one on that the much higher CapEx next year. Anything specific you wanna highlight? And it looks like some stuff probably pushed out at 2024. Given how low that number came in. Is that fair?

Yeah. That's right, Steve. I mean, as we talked about, we lowered our CapEx number as we moved through the year. A lot of the projects that, not Arizona, but other growth investments that we're making in additional capabilities both geographically and from a technology standpoint, kinda getting off the ground a little bit in 2024, and so as we refined the scope, laid out our engineering plans on that, you know, they were a little bit paced through the year. To start later than originally expected, so that's gonna push into 2025. Those projects are often going now. We're in execution mode. So we do feel a little bit higher, you know, confidence in our ability to spend at that level. And we did talk about we got probably our eyes got a little bit ahead of our stomach in 2024 a little bit, but we're off and running in those projects and, you know, the $40 to $50 million is probably our normal capacity to spend.

Okay. Okay. Great. Thanks, everyone.

Our next question is coming from Ian Zaffino from Oppenheimer. Your line is now live.

Hey, good morning. This is Isaac Sellhausen on for Ian. Thanks for taking all the questions. And also on the details on the EnPro 3.0 phase, I guess on AST, what would be sort of the steps or high-level thinking to get to the 30% EBITDA margins versus around 20% plus today? I guess the main drivers as far as, like, top-line growth or operational improvements or contributions from the Arizona facility? Thanks.

Yes. It's our investments that we've been making the last number of years and we've had technology will start to pay off over time. In 2026, as Joe started to ramp up there. But in addition, there'll be some market share gain along the way and then a bunch of operational improvements. So when you look at it, it's the same as we ran in the sealing playbook. So we say it's an overnight success, but as you saw earlier in the script, it was from 2019 to today we've improved about 1,000 basis points. So it's a little bit of everything. It's a little bit of 80/20. It's a little bit of customer mix. It's a little bit of share gain, and it's a little bit of leading-edge technologies. They, of course, have a little higher margins.

There's no doubt, Isaac. The majority of that will come from, you know, just growth whether it be market recovery or, you know, outsized growth that we're driving through our strategic positioning, but there will be a decent element from the continuous improvement and other operational programs that we're driving now that will take effect over a multi-year period that'll clearly be part of the algorithm to get to that 30% sustainably.

Okay, great. Thank you. And then just a quick follow-up on the semi-cap equipment side. Maybe if you could find any kind of details you could give with the conversations you've had with customers and maybe sort of how they're thinking about growth beyond 2025 or into 2026? Thanks.

Yes. So that I guess the best way to, I mean, conversation with customers, what they're saying is basically choppy 2025, and 2026 is too far ahead to have a great look at it right now. And the customers are hesitant as we are to say anything more than that because we've been saying now that it'll be coming back in six months now for two years. I don't know if we have more visibility than that. So I think Gartner is probably as good a reference as anybody right now, and our customers are fair amount of uncertainty. Still with what's going on with the U.S. situation, let's say.

Okay. Understood. Thank you. 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.

That's all today. Thank you for your interest in EnPro Industries, Inc.

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.