Greetings. Welcome to EnPro's Second Quarter 2023 Earnings Conference Call. Please note this conference is being recorded. It is now my pleasure to turn the conference over to James Gentile, Vice President of Investor Relations. Mr. Gentile, you may begin.

Thanks, Rob, and good morning, everyone. Welcome to EnPro's Second Quarter 2023 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. 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 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. Also note, during this call, we'll be discussing our full year 2023 guidance which includes 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, subsequent to the end of the second quarter, the impact of foreign exchange rate changes subsequent to the end of the second quarter and interest rate increases differing from the 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, the President and Chief Executive Officer. Eric?

Thanks, James, and good morning, everyone. We are pleased to have delivered another solid quarter with total adjusted segment EBITDA margins of 29%. Our optimized portfolio is showing balance as strong performance in Sealing Technologies roughly offset weakness in AST that was driven by ongoing headwinds in semiconductor markets. Consistent with our strategic priorities, we will continue to invest in multiple growth and productivity opportunities that will build upon our strong foundation as we position EnPro for long-term growth and value creation. In the second quarter, sales were essentially flat year-over-year with organic sales up slightly. We saw steady demand in several of our Sealing Technologies markets with strong profitability in Q2 and year-to-date. In AST, based on recent customer feedback and overall market forecasts, we now anticipate the expected recovery in our semiconductor markets to begin in 2024. We continue to invest in various growth sectors in AST as the semiconductor industry is expected to roughly double to $1 trillion by 2030, and our positioning on the leading edge will continue to serve us well as the industry recovers. In the meantime, we continue to successfully execute in AST as evidenced by the year-to-date adjusted segment EBITDA margins exceeding 25%. In Sealing Technologies, we delivered fantastic results with strong operating leverage and price realization in each of the businesses. In particular, we saw incremental strength in our aerospace and nuclear energy markets as well as strong volume and profit performance in our commercial vehicle markets. The performance improvement in recent years through the Sealing segment is nothing short of remarkable as year-to-date Sealing segment margins exceeded 30%. Our results demonstrate the balance of EnPro's optimized growth portfolio. We are well positioned to outperform across a variety of macroeconomic and industry backdrops over the long term, attributed to our focus on innovation and continuous improvement as well as technology and applied engineering advantages. The resilience of our portfolio of businesses is enduring and our well-capitalized balance sheet and strong free cash flow generation enable continued opportunities to invest in growth and build upon our strong foundation. Now I'll hand the call over to Milt to discuss our financial results in more detail. Milt?

Thanks, Eric. As Eric noted, we had another solid quarter of execution. Reported sales of $276.9 million in the second quarter were flat year-over-year and organic sales were up slightly despite the reduction in sales due primarily to weakness in semiconductor markets. Strong demand across aerospace, nuclear, and commercial vehicle markets, in addition to pricing actions, largely offset a reduction in sales in semiconductor and optical filters. Adjusted EBITDA of $64.9 million decreased 11.9% over the prior year period, and adjusted EBITDA margins in the second quarter were 23.4% down from 26.6% from a year ago. Total adjusted segment EBITDA was relatively flat year-over-year. The declines in total adjusted EBITDA and adjusted EBITDA margins resulted from two specific factors that in the aggregate adversely affected the year-over-year comparison by $9 million. $7 million of the $9 million was from share price-driven incentive compensation expense and $2 million from the favorable impact of currency on foreign cash balances a year ago. To elaborate a bit on the $7 million swing related to incentive compensation, we incurred approximately $4 million of incremental incentive compensation expense in the quarter driven by the 29% rise in our share price during the second quarter. In the second quarter of last year, we benefited from an approximate $3 million reduction in incentive compensation expense driven by a 16% decline in our share price. Variability from these two factors will lessen over time. The share price-driven volatility will roll off gradually over the next 18 months as a result of a change in our long-term incentive compensation plan. Effective with the 2023 plan, the relative TSR incentive component will be paid in shares rather than cash, which will eliminate the fluctuation in expense from share price changes. The currency exposure on foreign cash has been eliminated in all material respects as a result of repatriation of significant overseas U.S. dollar holdings. Corporate expenses of $15 million in the second quarter of 2023 increased from $9.4 million a year ago, driven primarily by the share price-related incentive and increased incentive compensation expense that I just described. Adjusted diluted earnings per share of $1.83 decreased 10.7% or $0.22 per share compared to the prior year period. The higher share price-related incentive compensation expense and last year's currency-related benefit combined for a $0.32 per share negative impact. Moving to a discussion of segment performance. Sealing Technologies sales of $176.7 million increased more than 13%, driven by strong demand in aerospace, nuclear energy, and commercial vehicle markets, along with a positive impact from pricing. In the quarter, we continued to see firm demand in our general industrial markets. Excluding the impact of the business divested in the fourth quarter of 2022 and foreign exchange translation, sales increased 13.9%. For the second quarter, adjusted segment EBITDA of $56.2 million increased more than 27% and adjusted segment EBITDA margin expanded 350 basis points to just under 32%. Strong volume growth and favorable mix, particularly in our aerospace and nuclear businesses, solid demand and operational efficiencies in our commercial vehicle business, and effective pricing strategies across the segment were the primary drivers of performance. Excluding the impact of the divestiture and foreign exchange translation, adjusted segment EBITDA increased more than 28% compared to the prior year period. Turning now to Advanced Surface Technologies. Second quarter sales of $100.3 million decreased 17.4% driven by the current slowdown in semiconductor markets and, to a lesser extent, lower optical filter sales. Excluding the impact of foreign exchange translation, sales decreased 17% versus the prior year period. For the quarter, adjusted segment EBITDA decreased 36.2% to $24.1 million driven by the decline in volume and unfavorable mix and to a lesser extent, the earnings impact of growth investments. Excluding the impact of foreign exchange translation, adjusted segment EBITDA decreased 35.7%. For the second quarter, we achieved an adjusted segment EBITDA margin in AST of 24%, a strong result in light of the current weakness across the semiconductor supply chain. One brief update on our participation in the U.S. Semiconductor expansion. We continue the staged upfit of the building we purchased in Arizona and are seeking CHIPS Act support which would help us build out a state-of-the-art semiconductor facility on an expedited basis. Turning now to the balance sheet and cash flow. We ended the quarter with a net leverage ratio of 1.5x. Subsequent to the end of the second quarter, in late July, we repaid our Term Loan A-1 of $133.7 million with available cash. Taking this into account with pro forma cash and short-term investments exceeding $275 million and nearly full availability under our $400 million revolving credit facility, we have ample financial flexibility to execute on our long-term strategic growth initiatives. Our foundational portfolio has generated significant free cash flow. For the first six months of 2023, free cash flow was more than $66 million, up from $56 million for the same period in the prior year. The year-over-year increase in free cash flow was driven by strong cash generation across the company and lower cash taxes paid in the period which more than offset higher net interest payments and higher capital spending to support growth and efficiency projects. During the second quarter, we paid a $0.29 per share quarterly dividend and for the first six months of the year, dividend payments totaled $12.2 million. One additional note before moving to guidance. Second quarter results of Alluxa were below our expectations, which required us to perform an interim test of Alluxa's goodwill for impairment. Based upon the results of an updated analysis, we determined that the remaining balance of goodwill attributed to Alluxa was impaired and a noncash impairment charge of $60.8 million was recognized in the quarter. Acquired in the fourth quarter of 2020, Alluxa is a leading provider of optical filters with differentiated optical coating capabilities to solve customers' most demanding needs in a variety of leading-edge applications. The business remains on solid footing with expectations of high single-digit organic growth over a multiyear period and with adjusted EBITDA margins well exceeding AST segment and total company averages. Moving now to our 2023 guidance. We expect revenue to be relatively flat compared to last year and adjusted EBITDA to be in the range of $248 million to $256 million. The decline at the top end of the adjusted EBITDA range is due primarily to the impact of the $4 million share price-related incentive compensation expense in the second quarter as discussed earlier. We are raising adjusted diluted earnings per share guidance to a range of $6.70 to $7.10 due primarily to the repayment of a portion of our long-term debt noted earlier and higher interest income on cash balances. Our latest net interest expense view for 2023 is $32 million to $34 million which is down from our previous assumption of $35 million to $40 million. Compared to expectations a quarter ago, we expect stronger full year results in Sealing Technologies offset by lower results in Advanced Surface Technologies. As Eric mentioned, based on customer input and updated market forecasts, we now anticipate the inflection point in semiconductor markets to move from the fourth quarter of this year to 2024. In Sealing Technologies, we had exceptional mix benefits in the first half that we expect will moderate in the second half. Thanks for your time today. And now I'll turn the call back to Eric for closing comments.

Thank you, Milt. Our teams continue to execute at a high level and remain steadfast in driving our strategic priorities forward and delivering for our customers. Looking ahead, in Sealing, we look to continue building on our momentum and we are proceeding with investments in critical new product development and value-added efficiency improvements while prudently considering acquisitions that will broaden our strong technology and market positions over time. In AST, we continue to execute very well as we navigate through the current demand headwinds in semiconductor, which as noted, we anticipate will abate in 2024. Over a multiyear period, we continue to expect strong organic growth and are well positioned to capitalize on a variety of exciting opportunities using our technological advantages to deliver comprehensive solutions for our customers. As I'm grateful to share every quarter, I am proud of our team and our many accomplishments as we continue to do what we said we would do, execute on our multiyear strategy to drive EnPro forward as a leading industrial technology company while empowering technology with purpose. Thank you for joining us today. We appreciate your interest in EnPro, and I'll open the call to align for questions. Thank you.

Our first question comes from Jeff Hammond with KeyBanc Capital Markets.

Just wanted to get a little more color on where specifically you're seeing incremental softness in semiconductor or AST? Maybe help us with the shape of the second half. Is 2Q still kind of the bottom? And then just expand on the Alluxa write-down. I think this is the second one. It just doesn't seem that far off from kind of how you've been thinking about the business over the long term.

I'll start...

Yes, I'll start, Jeff. So first of all, when you look at, I guess, what's changed from a quarter ago, as we mentioned in the guidance comments earlier, there's been a slight shifting to the right in expectations for the inflection point in semiconductor, and that's not our view. It's just industry data that you'll see from large semiconductor companies that have reported. And so the moderation for us in the second half of the year is just reflecting that. The comments on Alluxa, the situation with Alluxa is some of the dynamics with inventory destocking that have affected the semiconductor industry have had an impact on a number of the markets that Alluxa is serving also, and semiconductors have been one of the largest single markets for the optical filter business as well, as we've mentioned in the past. And so it's a really good business, but our expectations for growth this year for that business is relatively flat compared to at the time we did our previous goodwill impairment, we were expecting some stronger bounce back this year. So we just recognized that and we kind of dealt with it, and we determined that the balance of the goodwill is impaired. We get that behind us, and we'll see good growth in that business in 2024 and beyond.

Okay. Regarding Sealing, I believe you had anticipated a slowdown there, with double-digit growth in the first half. How do you view organic growth in Sealing? It appears that the areas you mentioned that are positively impacting the mix are still performing well. What factors are leading to a less favorable mix for the second half?

Yes, Jeff, it's Eric. We're just expecting some softness in general industrial. Our book-to-bill is still strong. But at the same time, all the leading indicators we hear about continue to be a little bit softer when we look at freight. I have always looked at FTR. Their ton miles continue to be down a little bit. And so we're expecting some softness in our general industrial over time. The other businesses, we still expect to be strong.

I would like to mention that regarding our nuclear shipments, the timing and order sequence is determined by rate patterns, and there is no significant change in our overall outlook. We anticipate a stronger first half of the year for nuclear shipments compared to the second half, which presents a mixed situation. Additionally, we expect some leveling off in the general industrial market. Looking at the second half of the year, considering the current insights on semiconductor recovery, we foresee the third and fourth quarters to be fairly consistent. Previously, we indicated that we expected Q2 and Q3 to be the low points, with some recovery in Q4. That’s the key point I wanted to highlight regarding the sequencing of Q3 and Q4.

But for the year, we probably expect total segment margins to approximate 25% plus or minus a little bit.

In AST.

In AST.

And that comment about the balanced 3Q, 4Q's AST as well, not a total company.

That's total company. If you look at total company Q3 and Q4 being relatively split equally for the second half of the year.

Our next question is from the line of Steve Ferazani with Sidoti & Company.

Appreciate all the color on the call. In terms of the performance on Sealing, can you break that out a little bit in terms of the margin, strength of volume pricing mix.

In the second quarter, the Sealing segment experienced organic growth of approximately 14%. This growth was driven by about 60% from year-over-year pricing and around 40% from volume, indicating a strong organic volume growth. Specifically, that accounts for roughly 5.5% volume growth in the Sealing segment. Regarding the mix, I don't have much to add beyond what I mentioned yesterday or in response to Jeff's question. Looking ahead to the second half, we anticipate that some of the favorable mix, particularly in nuclear, may soften. Additionally, in the second half, we will be catching up on pricing, which means the year-over-year impact of pricing will decrease compared to the first half.

Say, if we expect slowdowns as we get into next year, and I know it's a little bit earlier, and it's potentially on commercial transportation. I know you have a significant aftermarket. I'm trying to get a feeling for how much your pricing you think sticks as inflationary pressures ease, if we see some of your markets slow.

Specifically, the heavy-duty trucking or overall?

Both, if you could.

Heavy-duty trucking looks stable, and I believe Garlock and Technetics will maintain their position. There’s no indication that we will see a decline in that area. Generally, we manage to sustain our margins well. While there may be some additional pressure from OEMs in the heavy-duty truck segment, our aftermarket is expected to improve. So, I anticipate that we will retain most of our margin, although it might be slightly challenging with OEMs, it shouldn't be significant.

Great, I appreciate it. Milt, you mentioned the update on the Arizona facility, but your audio was breaking up a bit for me. Could you repeat that? It seemed like you were trying to speed up the progress.

Yes, well, the major point was we're pursuing Chips Act support in order to expedite the up-fitting of the facility that we purchased last year.

Any reason to expedite it? Do you expect any kind of benefit from the build out faster? Or do you just want to get it done ahead of time?

Well, we're coordinating with our customers and we're just wanting to do everything we can to make sure that we're ready for that. And Chips Act support, obviously, would be helpful in that process.

Great. I have one more question. Clearly, cash flow has been very strong, and it seems you're nearing a 100% conversion rate with improved receivables collection. The balance sheet looks solid, so how do you plan to maintain that conversion rate? Additionally, what are your thoughts on cash usage aside from debt repayment?

Yes. We anticipate that we'll stay on pace in the second half of the year from a cash flow perspective compared to the first half. So yes, we're going to be at or at least it will be in the same ZIP code or vicinity as adjusted net income. So a really strong conversion rate, which is a good characteristic of our new foundational portfolio. It's one of the things that we had in mind as we were looking at reshaping our portfolio over the past few years, a more dependable and stronger cash flow-generating company.

What are the expected uses of cash regarding the timing of debt repayments based on your guidance and any other anticipated cash uses?

Yes. I mentioned earlier that after the quarter ended, we repaid our Term Loan A-1, which was due in September 2024. We chose to use our cash position to pay that off. The remaining term debt is due in 2026, and for liquidity reasons, we found no need to pay that down. Currently, we do not expect to pay down any additional debt; our focus is on investing for growth. We are consistently assessing options for investing capital in our businesses to support growth as well as exploring potential inorganic opportunities.

At this time, we've reached the end of the question-and-answer session. I'll turn the call over to Mr. Gentile for closing remarks.

Have a great day, everyone. Thanks for your interest in EnPro.

This will conclude today's conference. Thank you for your participation. You may now disconnect your lines at this time.