Enpro Industries Q1 2026 Earnings Call - Accelerating Semiconductor Demand Drives Raised Guidance

Conference Operator, Conference Call Moderator: Greetings, and welcome to the Enpro first quarter 2026 earnings conference call. I will now turn the conference over to James Gentile, Vice President, Investor Relations. Thank you. You may begin.

James Gentile, Vice President, Investor Relations, Enpro Industries: Thanks, James Gentile, and good morning, everyone. Thank you for joining us today as we review Enpro’s first quarter of 2026 earnings results and discuss our improved outlook for 2026. I’ll remind you that this call is being webcast at enpro.com, where you can find the presentation that accompanies the call. With me today is Eric Vaillancourt, our President and Chief Executive Officer, and Joe Bruderek, Executive Vice President and Chief Financial Officer. During this morning’s call, we’ll 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. A friendly reminder that we will be making statements on this call, including our current perspectives for full year 2026 guidance 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. 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.

Eric Vaillancourt, President and Chief Executive Officer, Enpro Industries: Thanks, James. Good morning, everyone. Thank you for your interest in Enpro as we discuss our first quarter results, provide an update on strategic initiatives, and share our current views for the balance of 2026. Before we discuss our results for the first quarter, I would like to recognize our 4,000 colleagues across the company who are accelerating their personal and professional growth while contributing to Enpro’s strategic and financial successes. Momentum and excitement is showing up throughout the organization, and we are off to a strong start in the second year of Enpro 3.0. We are energized to continue providing critical products and solutions to our customers while driving significant enterprise value creation by unlocking compounding strengths of our portfolio. Our leading market positions, committed colleagues, and strong balance sheet support the continued execution of our multi-year value creation strategy.

After my update, I will turn the call over to Joe for a more detailed discussion of our results and drivers of our increased guidance for 2026. Now on to the highlights for the first quarter. We started 2026 off on the front foot with reported sales up nearly 11% year-over-year. Improving demand in semiconductor markets drove sales in the Advanced Surface Technologies segment up over 11%. Additionally, the contributions from the two businesses that we acquired in the fourth quarter, AlpHa Measurement Solutions and Overlook Industries, drove Sealing Technologies sales up 10.8%. Total company adjusted EBITDA increased nearly 13% to over $76 million at a margin over 25% for the first quarter.

We are pleased with these results, especially as we continue to invest in growth opportunities across the company at high margin return thresholds while accelerating investments in the development and growth of our colleagues. Throughout our organization, teams are excited to drive our Enpro 3.0 strategy forward. Our early progress shows the benefits we expect to unlock as we move into this phase of our strategy. We are confident that our proven excellent execution will allow us to continue to succeed in a variety of macroeconomic backdrops. In AST, positive trends across the segment’s portfolio of products and solutions are translating into strong performance. The slope of the demand curve has steepened with order patterns accelerating during the first quarter ahead of our expectations at the start of the year.

For us, execution is top of mind, and we began building inventory during the first quarter to ensure that we can effectively deliver for our customers and proactively manage potential capacity, supply chain, and labor constraints as demand increases. We are already seeing the investments we made in AST during the downturn beginning to bear fruit in the early stages of the recovery cycle. We expect these investments will position us well to capture opportunities from the acceleration of semiconductor capital equipment spending for the balance of the year and beyond. We also believe that our vertical integration model is a key differentiator for Enpro in the next phase of the semiconductor industry growth. As many of our new business wins are using more of our solutions to drive value for our customers, enhancing our specified position in critical in-chamber tools, including gas dispersion and wafer handling applications.

In addition, hard work to qualify and earn processor of record designations solidifies our position in leading-edge precision cleaning solutions, a business that is currently strong and accelerating. Our capacity expansions in Taiwan, California, and Arizona, both executed and ongoing, position us to participate in the rapid expansion of leading-edge chip production capacity supporting advanced computing and artificial intelligence. In Sealing Technologies, segment revenue of 10.8% was primarily driven by the first full quarter contribution from the acquisitions of AlpHa and Overlook completed in the fourth quarter of 2025, recovering nuclear solution sales and currency tailwinds. Commercial vehicle sales were down year-over-year below our expectations as demand remained slow, although we’re cautiously optimistic that we are nearing the bottom in commercial vehicle markets.

Aerospace sales and Sealing were flat year-over-year, reflecting a difficult year-over-year comparison in commercial aerospace, which was partially offset by continued acceleration and demand for products supporting space applications. Total Sealing segment orders were up double digits during the first quarter. Sealing Technologies segment profitability remained strong at 32.5%, with disciplined execution helping to offset continued growth investments, softness in commercial vehicle sales, and tepid general industrial demand internationally. Aftermarket sales represented 60% of Sealing segment revenue in the quarter. Integration is going well at AlpHa and Overlook. We are making the appropriate investments to fully integrate these businesses into Enpro and unlock additional growth opportunities. Our new colleagues are already finding ways to leverage Enpro network, including our sourcing, supply chain capabilities, and operational expertise, while delivering strong top-line growth during the first quarter.

Additionally, AMI, which we acquired in January 2024, continues to perform above plan. We expect the Sealing Technologies segment to continue to deliver continued best-in-class performance. Our growth priorities underpinning the Enpro 3.0 strategy remain unchanged and will guide our performance through 2030. For the long term, we are positioned to generate mid to high single-digit organic top-line growth with strong profitability and returns, complemented by capability expanding acquisitions that meet our rigorous strategic and financial criteria. We are targeting mid-single-digit organic growth in Sealing Technologies, while at AST, we are targeting at least high single-digit organic growth, with both segments capable of generating 30% adjusted segment EBITDA margins ±250 basis points through 2030.

Our cash flows allow us to maintain our strong balance sheet with a net leverage ratio currently at 1.9 times after taking into account the fourth quarter acquisitions of AlpHa and Overlook. Our first capital allocation priority is to reinvest in the business and our people while pursuing select strategic acquisitions that expand our leading-edge capabilities and meet our stringent criteria without the use of excess leverage to drive growth in line or above Enpro 3.0 goals. We are excited to deliver on our promises and continue to execute our strategic plan. Life is good at Enpro and the future is bright. Joe?

Joe Bruderek, Executive Vice President and Chief Financial Officer, Enpro Industries: Thank you, Eric, and good morning, everyone. Enpro started 2026 with strong results and consistent execution despite a dynamic macroeconomic environment. For the first quarter, sales of $303 million increased nearly 11%, supported by strong year-on-year revenue growth at AST of over 11%, the contributions from the recent acquisitions and steady overall performance in the Sealing Technologies segment. First quarter adjusted EBITDA of $76.4 million increased nearly 13% compared to the prior year period. Total company adjusted EBITDA margin of 25.2% expanded by 40 basis points year-over-year, driven by consistent performance in the Sealing Technologies segment and a nearly 20% increase in AST segment EBITDA, which includes expenses tied to growth investments, both executed and ongoing.

Corporate expenses of $13.7 million in the first quarter of 2026 increased from $11.3 million a year ago, primarily driven by higher incentive compensation accruals and $1.2 million in restructuring costs. Adjusted diluted earnings per share of $2.14 increased 13%, largely driven by the factors behind adjusted EBITDA growth year-over-year. Moving to a discussion of segment performance, Sealing Technologies sales increased 10.8% to $199 million. Growth was driven by the contributions from the AlpHa and Overlook acquisitions, a recovery in nuclear solution sales from the choppiness experienced last year, strength in compositional analysis applications, as well as strategic pricing actions. These gains more than offset soft commercial vehicle demand and slower general industrial sales internationally. Foreign currency translation was also a tailwind.

North American general industrial, aerospace, and food and biopharma sales were firm throughout the quarter. For the first quarter, adjusted segment EBITDA increased over 10%, driven by favorable mix, strategic pricing initiatives, contributions from AlpHa and Overlook, and foreign exchange tailwinds, partially offset by lower commercial vehicle volumes and investment in growth initiatives. Adjusted segment EBITDA margin was 32.5% and remained above 30% for the ninth consecutive quarter. Turning now to Advanced Surface Technologies. Sales for the first quarter were up over 11%, and orders during the quarter hit a clear inflection point. Demand for precision cleaning solutions tied to advanced node chip production is accelerating. In addition, our outlook for semiconductor capital equipment spending has improved, and we built inventory of key products during the first quarter to prepare for the expected increase in demand.

For the first quarter, adjusted segment EBITDA increased 18.5% versus the prior year period. Adjusted segment EBITDA margin expanded 140 basis points to 23.3%. Operating leverage on higher sales growth and higher production volumes as well as favorable mix were offset in part by $2 million of increased expenses tied to growth initiatives. Our number one priority is to serve our customers and remain agile as we enter this period of unprecedented demand for our semiconductor products and solutions. Moving to the balance sheet and cash flow. Our balance sheet remains strong, and we have ample financial flexibility to execute on our long-term organic growth initiatives and consider select acquisitions that align with our strategic priorities and deliver attractive returns.

We generated strong free cash flow in the first quarter, more than doubling from last year to $26.5 million, while capital expenditures increased nearly 40% to $13.1 million, largely supporting growth and efficiency projects. During the first quarter, we repaid $50 million in revolving debt, bringing our leverage ratio to 1.9 times trailing twelve-month adjusted EBITDA. We expect to continue generating strong free cash flow in 2026, with an unchanged capital expenditure budget of around $50 million this year as we continue to invest in the company at solid 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 first quarter, we paid a $0.32 per share quarterly dividend, totaling $6.9 million. We also have an outstanding $50 million share repurchase authorization. Moving now to our increased guidance. We are raising our total year 2026 guidance issued in mid-February and now expect total Enpro sales to increase in the 10%-14% range, up from 8%-12%. Adjusted EBITDA in the range of $315 million-$330 million, up from $305 million-$320 million previously. Adjusted diluted earnings per share to range from $8.85-$9.50, up from $8.50-$9.20.

The normalized tax rate used to calculate adjusted diluted earnings per share remains at 25%, and fully diluted shares outstanding are 21.3 million. In Sealing Technologies, shorter cycle order patterns remain solid as we enter our seasonally strong second quarter. As Eric mentioned, we are seeing double-digit order growth year-over-year, despite a slightly softer commercial vehicle outlook than previously expected. We expect mid-single-digit revenue growth, excluding the contributions from AlpHa and Overlook in the Sealing Technologies segment for the year. We are encouraged by positive order momentum in domestic general industrial, aerospace, food and biopharma, and compositional analysis, as well as smaller but improving pockets of earned growth in areas such as communications and data center infrastructure.

We expect these elements to support improved sequential sales performance in Sealing Technologies into the second quarter, while not factoring in any recovery in commercial vehicle markets in our improved guidance ranges. Finally, we expect Sealing segment profitability to remain towards the high end of our long-term target range of 30% ±250 basis points for the year. In the Advanced Surface Technologies segment, we are seeing significant order momentum, with strong acceleration in precision cleaning solutions and critical in-chamber tools. New platforms and capacity expansions that we have invested in will begin to generate revenue in the second half of 2026, with ramp schedules dependent on underlying volume into 2027 and beyond.

At this time, we expect AST revenue growth in the mid-teens range year over year, with segment profitability improving to a run rate close to 25% by the end of 2026 as capacity and supply chains align to meet elevated demand levels. Thank you for your time today. I will now turn the call back to Eric for closing comments.

Eric Vaillancourt, President and Chief Executive Officer, Enpro Industries: Thank you, Joe. We are excited to demonstrate our strength and agility as we continue to accelerate our personal and profitable growth in the second year of Enpro 3.0. Thank you all for your interest in Enpro. We’ll now welcome your questions.

Conference Operator, Conference Call Moderator: Our first question is coming from the line of Jeff Hammond with KeyBanc Capital Markets. Please proceed with your question.

Mitch Moran, Analyst, KeyBanc Capital Markets: Hey, everyone. Good morning. This is Mitch Moran for Jeff.

Joe Bruderek, Executive Vice President and Chief Financial Officer, Enpro Industries: Morning, Mitch.

Mitch Moran, Analyst, KeyBanc Capital Markets: Morning. Obviously, just really nice smart margin progression sequentially for AST. Could you help us just unpack a little bit how that inventory investment helped margins in AST? Separately, just could you help us understand the margin trajectory kinda through the balance of the year? Is that kind of a linear progression to that 25% you talked about? Thanks.

Joe Bruderek, Executive Vice President and Chief Financial Officer, Enpro Industries: Yeah. Thanks, Mitch. As you noted, we did see progression from the low 20s to 23 and change for the first quarter. The inventory build, which is really important as we head into, you know, significant demand in the second quarter and more specifically for the back half of the year, contributed about 150 basis points to the margin increase in the first quarter. We also saw, you know, precision cleaning continue to be very strong, tied to advanced node precision cleaning work both in Taiwan and the U.S., which helped margins. We’re also seeing a little bit of leverage on the revenue growth. You know, we expect to continue to build inventory a little bit in the second quarter.

It might be a little bit less than we had in the first quarter. You know, revenue increasing to offset, you know, any lower inventory build potentially in the second quarter. Margin’s relatively similar in the second quarter and then, you know, seeing incrementally throughout the second half pointing towards that roughly 25% run rate that we expect to exit the year at.

Mitch Moran, Analyst, KeyBanc Capital Markets: Great. That’s helpful. Maybe just to Sealing. I think orders were up double digits in the quarter. Could you just expand on the order activity you saw there, where you’re seeing it, if it’s concentrated or more broad-based? If you could just talk a little bit about your confidence in Sealing kind of picking up through the remainder of the year with a little bit slower start here. Thanks.

Eric Vaillancourt, President and Chief Executive Officer, Enpro Industries: Very confident in Sealing picking up throughout the year. Our order rate is very strong, actually in the first quarter and building throughout the quarter. We’re very positive on the year. Don’t have any concerns there. Very strong in North America, space, aerospace in general. General industrial in the U.S. is still pretty strong. Only areas of weakness really is general industrial and a little bit in Europe, a little bit in Asia, but it still doesn’t have any meaningful impact to our overall results.

Mitch Moran, Analyst, KeyBanc Capital Markets: Okay, great. Thanks for taking my questions.

Conference Operator, Conference Call Moderator: Thank you. Our next question is coming from the line of Steve Ferazani with Sidoti & Company. Please proceed with your question.

Steve Ferazani, Analyst, Sidoti & Company: Morning, everyone. Appreciate the detail on the presentation. Eric, you know, I understand commercial vehicles still being weak. Obviously, we’ve seen 3 or 4 months of much stronger Class 8 truck orders, obviously coming off of a significant trough. When would you start seeing that? Is that built in at all, that CV comes back at all in the second half?

Eric Vaillancourt, President and Chief Executive Officer, Enpro Industries: It’s not built into our projections at all, as we said in the script.

Steve Ferazani, Analyst, Sidoti & Company: Yeah.

Eric Vaillancourt, President and Chief Executive Officer, Enpro Industries: Although I am cautiously optimistic that it does start to pick up at the second half of the year. Keep in mind, the reason for the acceleration in truck orders is really to avoid the extra cost of pollution enhancements in the trucks. For right now, people are prioritizing trucks versus trailers, but that demand will normalize over time to roughly, if you look over a 20-year cycle, it’s about 250,000 units a year. We’re somewhere around 70 or 180 now. I expect, at the end of this year or beginning of next year, somewhere in that timeframe, you’ll start to see some momentum build. The ratio between trucks and trailers really doesn’t change much. We expect to have about 1.1 trailers per truck.

You would expect that to come back. The aftermarket business remains very strong.

Steve Ferazani, Analyst, Sidoti & Company: Got it. How are you feeling about the 2 acquisitions now with a quarter under your belt? I know that with Overlook, they had made some pretty significant capacity additions prior to the acquisition. In terms of those 2 businesses, do they require significant investments to grow moving forward, or how do you feel about them?

Eric Vaillancourt, President and Chief Executive Officer, Enpro Industries: Very, very strong. Very excited about them going forward. They don’t require significant investment. Overlook had made a pretty significant investment and moved into a new building or did move into a new building in the first quarter, but that was already ongoing before we closed on the business. It was just a move at this point. Most of the upfitting, all that was already done. Their backlog and their performance is really impressive. AlpHa continues to go well, we’re still excited about those businesses going forward.

Joe Bruderek, Executive Vice President and Chief Financial Officer, Enpro Industries: Yeah, I’ll just add, Eric, that the integrations are going well. I think the teams are joining our functional support. We’re helping where we can there. We’re already seeing some supply chain opportunities. In addition, you know, we’re making some smaller investments, but investments in their commercial organizations to help, you know, expand growth opportunities and enter a few new markets and new customers. We expect that’s an area that we can add value and help them grow over time.

Steve Ferazani, Analyst, Sidoti & Company: I think you mentioned in the script that AMI, since the acquisition was 2024, I believe, continues to outperform. In general, how are you thinking about that compositional analysis market?

Eric Vaillancourt, President and Chief Executive Officer, Enpro Industries: We love the space. We just would like to do more. We continue to have a very active pipeline, and we continue to look for the right opportunities to meet all of our criteria that are exciting. There’s several opportunities in our pipeline exciting, and more and more opportunities seem like they’re coming to market now. There’s more momentum in that space.

Joe Bruderek, Executive Vice President and Chief Financial Officer, Enpro Industries: Overall, if you take into consideration the compositional analysis growth perspective, we’re looking for kind of a minimum high single-digit organic top-line growth moving forward with incremental investments to expand end market positions and commercial expertise.

Steve Ferazani, Analyst, Sidoti & Company: Got it. That’s helpful. Just if I could get one more in terms of where you are with the various qualifying processes to meet advanced node production. Is there a lot more to go there?

Eric Vaillancourt, President and Chief Executive Officer, Enpro Industries: No. I don’t think it ever stops.

Steve Ferazani, Analyst, Sidoti & Company: Right

Eric Vaillancourt, President and Chief Executive Officer, Enpro Industries: let me start by saying that. No, Arizona is getting fully qualified now. I don’t know how much longer. It shouldn’t be long at all. At the same time, there’s new investments in Taiwan that are just starting. There’s new customers that are starting as well. I don’t think it ever ends. You know.

Joe Bruderek, Executive Vice President and Chief Financial Officer, Enpro Industries: 2 nanometer is gonna start to ramp at some point in the next little bit, and then you’re already trying to qualify 1.4.

Steve Ferazani, Analyst, Sidoti & Company: Wow.

Joe Bruderek, Executive Vice President and Chief Financial Officer, Enpro Industries: I wouldn’t say it stops. I think of that as continued investment.

Steve Ferazani, Analyst, Sidoti & Company: Got it. All right. Thanks, everyone.

Joe Bruderek, Executive Vice President and Chief Financial Officer, Enpro Industries: Thanks, Steve.

Conference Operator, Conference Call Moderator: Thank you. As a reminder, ladies and gentlemen, if you would like to ask a question at this time, please press star one on your telephone keypad. Our next question is coming from the line of Ian Zaffino with Oppenheimer & Co. Inc. Please proceed with your question.

Isaac Salzen, Analyst, Oppenheimer & Co. Inc.: Hey, good morning. This is Isaac Salzen on for Ian. Thanks for taking the questions. Just on the updated guidance, if you could unpack a little bit more on what has changed with regards to the outlook for the AST business. Maybe if you could parse out the demand drivers between cleaning, coating and the semi cap side. It sounds like visibility is a bit better in capital equipment.

Joe Bruderek, Executive Vice President and Chief Financial Officer, Enpro Industries: Good morning, Isaac. We’re clearly seeing increased order momentum and longer lead times, and, you know, demand is inflecting significantly sooner and higher than we expected coming into the year from an AST’s perspective. It’s coming from both. It’s coming from precision cleaning and semiconductor capital equipment in really all geographies. Our increased guidance is pretty much all driven by AST. Our teams are rallying around meeting the higher demand, working with our customers and the entire supply chain and all of our partners to kind of meet the overall industry demand. You know, the outlook is really bright for the rest of the year.

The second half is firming up, where, you know, when we had the call in February, we talked about we saw orders for the second half and really starting in the end of the second quarter. Well, the second quarter’s filling in nicely. We’re seeing some of that demand, you know, come a little sooner into the second quarter. The second half is clearly gonna be significantly increased over the first half, in the magnitude of, you know, double-digits increase second half versus the first half. You know, the industry is all talking about, you know, rallying to meet this higher demand and out through the end of 2026 and really into 2027. There’s tremendous optimism, and we expect to participate and even outperform what the market expects.

Isaac Salzen, Analyst, Oppenheimer & Co. Inc.: Okay. Great. Just as a follow-up, you know, on the margin outlook for both businesses, obviously sound, sounds like you guys are managing any kind of inflationary pressures just fine. Is there anything to call out maybe on the cost side with regards to whether it’s fuel or equipment? Yeah, that would be helpful.

Joe Bruderek, Executive Vice President and Chief Financial Officer, Enpro Industries: No, there really isn’t anything that’s gonna be meaningful from the supply side or cost side. Life is good. We do a very good job of managing that in general.

Isaac Salzen, Analyst, Oppenheimer & Co. Inc.: Okay. Great. Thank you.

Conference Operator, Conference Call Moderator: Thank you. We have no further questions at this time, so I would like to turn the floor back over to James Gentile for closing comments.

James Gentile, Vice President, Investor Relations, Enpro Industries: Thank you, everyone. We’re seeing strong momentum across Enpro and look forward to updating all of you when we report second quarter results in early August. Have a great rest of your day.

Conference Operator, Conference Call Moderator: Thank you. Ladies and gentlemen, this does conclude today’s teleconference. We thank you for your participation, and you may disconnect your lines at this time.