Thank you. Good afternoon, everybody. I am Ian Zaffino. I am the Equity Research Analyst covering Enpro. Thank you, everybody, for joining our industrial conference today. With me from the company will be Joe Bruderek and also James Gentile. Joe is the CFO, and James is the Vice President of Industrial Relations. With that, guys, thanks for joining us, and we appreciate you being here.
Pleasure, Ian. Thank you.
I think let's just kind of take a step back, not that we move forward yet, but give us a sense of who Enpro is, what you guys do, what your specialties are, and then we'll kind of dive in from there.
Okay, sounds good. Thank you, Ian. Yeah, Enpro is a fantastic company, and I'm very happy to kind of represent the company and our 3,400 world-class colleagues out there. I thought maybe I'd give a little overview of kind of where we are. Earlier this year, we introduced Enpro 3.0, which we're incredibly excited about, and which is the next phase of our value creation journey as far as Enpro goes. I'll talk a little about Enpro 2.0, which was kind of the last phase of value creation, really begun in earnest about 5 or 6 years ago. We embarked out of a period of kind of cleaning up some of the historical environmental liabilities and really unleashed a period of significant value creation. We transformed the portfolio in a pretty remarkable way during that period and set out on a path of margin expansion.
We were able to expand margins about 1,000 basis points during that period and expand our overall market cap by almost two and a half X or so. During that period, we divested a number of businesses that were a little heavier in nature, lower growth profile, lower margin profile. Good businesses just didn't meet where we're going as far as an Enpro strategic assessment goes. We used the proceeds of that to invest in a number of higher growth, higher margin, higher return businesses. We took a growth node that we had in the semiconductor industry and really built upon that, building out a strong position in the semi space and turned that business into what is now the Advanced Surface Technologies,. Enpro 2.0, margin expansion, portfolio optimization, incredibly successful, yielding very, very strong returns for the company.
Earlier this year, I talked about we embarked on what we call now Enpro 3.0, which is all about accelerating growth, personal and profitable growth for our employees and the company. We have the portfolio that we want. We have a very strong sealing technologies business, which is about two-thirds of our revenue, consistent strategic theme around small percentage of customer spend, but absolutely critical to their end process, providing some sort of critical safety function, whether it be physical safety, process safety, and very well positioned in their end markets. World-class businesses in our sealing portfolio, Garlock, Stemco, and Teknetics, and a recent addition in AMI, all have that consistent strategic theme, a very strong margin generation, and good cash flow profiles. The other third of our business, Advanced Surface Technologies,, this is the newer part of the Enpro portfolio.
We've been able to create a vertically integrated portfolio of products and capabilities around the semiconductor industry, really around critical in-chamber tools within the semiconductor manufacturing capability. We have the ability to prototype, engineer, machine, produce critical in-chamber tools, and then service the aftermarket there with cleaning capability, coating, refurbishment. That part is a little bit newer to the Enpro portfolio and has the similar sort of margin expansion opportunities that we've been able to successfully execute in sealing, and those same capabilities exist in AST. We're really excited about the portfolio we have. We've recently laid out our growth algorithm as well.
In sealing, we have the portfolio that can grow at least mid-single digits organically over time with our key positions in space, aerospace, food and pharma, test and measurement now kind of leading the charge there on top of really strong positions in general industrial and commercial vehicle spaces. Mid-single digit growth over a period of time in sealing. In AST, which is predominantly semiconductor, having the ability to high-single digits, low-double digits over a period of time off the position we're in now. All together, Enpro growing mid-single digits at minimum, generating double-digit profit capabilities over that time and generating a significant amount of cash. We'll be able to then supplement the organic piece.
We have about $1.5 billion worth of capital to deploy into M&A and the strategic acquisitions that meet that theme that I talked about and the return and margin profiles that are so critical for us, all while keeping our balance sheet very, very healthy and conservative at around two-2.5 times leverage from a net perspective. We're incredibly excited about Enpro 3.0. We're off to a good start there. Our team's really excited. We're kind of generating a lot of enthusiasm. It's just additive to what we've been doing from margin expansion and running really good, high-quality businesses. Now it's all about putting our foot on the gas and accelerating that and just in this next phase of value creation.
I just wanted to give a little bit of overview of kind of where we are and what we're excited about. Ian, happy to take some questions.
Yeah, no, I think that's very helpful. If anyone has any questions, please put it in the chat or send me an email at ian.zaffino@opco.com. Now, Joe, I guess let's ask kind of the question of the day, right, is tariff exposure. Can you just give us a sense of where you're exposed to tariffs and then what you're doing about it?
Yeah, the direct tariff cost exposure for us is very minimal and manageable. We just had our earnings call on Tuesday, and we kind of talked about that. For the most part, our supply chain is pretty local and very in region for region. We're about 70% North America based as a company. Our supply chain is very much localized. We spent a lot of time, and our supply chain team has done a fantastic job over the course of the last five years or so, really after the last set of China tariffs that went in place in 2008 timeframe, really diversifying our supply chain, localizing it, and preparing for an environment like this where there may be a little bit more trade restriction. The impact is very minimal for us.
We have a little bit of production in China that makes its way to the U.S., a little bit of raw material spend in China that makes its way to the U.S., some isolated movements both from a raw material perspective and from an intermediate perspective. It is extremely minimal overall for us. We talked about single-digit million type of gross exposure, and we have a number of levers at our disposal to kind of offset that impact and even potentially take advantage of areas where we may benefit from the current market environment. That is on the direct side. The macroeconomic environment still to be determined, a lot of uncertainty out there. Enpro historically has held up quite well during periods of downturn. We have a heavy aftermarket component. About two-thirds of our sealing business is aftermarket. About a third of our AST business is aftermarket.
We have a heavy aftermarket component, which tends to operate quite well even in a recessionary type environment if that were to play out.
Gotcha. Okay. That's helpful. Let's just dive in a little bit more into Enpro and who you guys are. How do the businesses, call it the sealing business, how does that compare to the broader manufacturing comp set? Same thing on AST, how does that kind of compare to the broader semi players out there?
Yeah. If you think about sealing, I talk about the consistent theme of what makes an Enpro business, of what makes an Enpro sealing business so that, again, small percentage of customer spend, absolutely critical to their end process, providing some sort of critical safety function. We have a long history of having specified positions in these spaces. I mean, Garlock's been around over 100 years, Stemco multiple decades, Teknetics has a history of performing over multiple decades. We have a very entrenched position in our end markets. We have a heavy install base and hence the strong aftermarket position. We tend to be the performance and technical leader in our spaces. We're not competing on price or have a significant competitive offset to a lot of what we do.
In Garlock, in a lot of specifications in the industries that we participate in, it's Garlock or other equivalent, which Garlock is the name in that space. We tend to lead with performance and safety and not price cost. We're definitely a premium player against all of those in all those industries. These are world-class businesses, 30+% EBITDA margins, very entrenched position with a heavy aftermarket. There's not a significant deviation as far as the range of margin profile that we have in all of those spaces, including in the commercial vehicle business. These are high-class businesses with tremendous leadership teams. On the AST side, like I said, over the course of the last phase of Enpro, we put together this vertically integrated portfolio of offerings.
We built upon leading positions in the individual businesses that we had and created this cohesive portfolio. The purpose is really to be a critical partner for that in-chamber environment. We have the ability to produce critical in-chamber tools that are kind of like the heart and lungs of the in-chamber environment, things like gas dispersion equipment, temperature control, wafer control as far as the pedestal and the flexible components within that, and then have the ability to service the aftermarket from a precision cleaning, coating, refurbishment. We can manage the entire lifecycle of those in-chamber tools.
That's a unique offering, a very unique offering, obviously led with incredible performance and precision, but also being a critical partner there and one partner in that value chain to the critical OEMs where we can provide that entire lifecycle of those tools, whether it be in some of our leading positions in Taiwan, in Singapore. Now, as there's a significant move to onshoring into the U.S. and building out leading-edge capability, we have a unique position to offer that full scope of capability in the U.S. We're really the only player that has that full lifecycle capability in the U.S. as more and more infrastructure gets built out.
Okay. Thank you for that. That's very helpful. Maybe if we could just isolate sealing technologies here and then maybe just give us a little bit more in depth of what they do, what end markets are they going after, what's really the growth drivers there, and maybe you could just kind of talk to us in general about the business. Thanks.
Yeah, sure. I mentioned the strategic theme around what makes those businesses and why they're so successful. You think of from an end market exposure standpoint, we have general industrial, which is made up of a number of individual end markets. Think chemical, other industrial processes, a little bit of pulp and paper, and other miscellaneous small end markets that kind of make up a general industrial bucket. That is predominantly in Garlock. We are providing critical safety seals and gaskets to those industries. The next largest end market exposure is commercial vehicles. This is Stemco, where we provide a critical function in the wheel assembly for trailers.
As heavy trucking and heavy trailers are moving goods around the country, we're providing a critical safety feature in the wheel assembly of holding the wheel in place so that wheels are not coming loose as trucks are being moved and trailers are being moved around the country. Again, fits that strategic theme. We're a leader in that space as far as performance and engineering capability. That's our second largest end market. We have a number of really good positions that are kind of in that 5%-8% of total Enpro revenue that are in commercial aerospace, space exploration, food and pharma, sustainable power generation. Think nuclear. We are the reference of record for the nuclear industry on all Western-designed nuclear power plants in the world where we're making cask seals and seals for reactor pressure vessels there.
All of those positions will be kind of leading the charge from a growth perspective when you think about overall sealing. When I talked about sealing in the mid-single digit range, those positions that we have that are kind of 5%-8% overall Enpro revenue, they're going to be leading the charge from a growth capability. There are also areas that we're focused on for adding with inorganic capabilities. Continue to extend our capability offering, use our capacity to build out those positions. They're going to tick up our growth rate, be accretive to overall Enpro and segment margins, and just continue to add on to our leading positions there. We're excited about those growth nodes within sealing, and it's a key part of our focus around Enpro 3.0.
Okay. Good. Thank you. If we could kind of do the same exercise on the AST side, maybe help us understand what the product portfolio is. Where does the business sit in kind of the semi value chain? How do we think about your exposure inside that chain, whether it's advanced nodes, leading edge, and any exposure to AI or non-AI?
Sure. You think about the value chain within semiconductor, right? You have the fabs and IDMs, people like TSMC, Intel, Samsung, etc. They're the end producers of semiconductor chips. All the equipment suppliers that are building chambers that produce the equipment are then selling to those fabs and IDMs. These are people like Applied Materials, LAM, ASM, ASML. We're a component manufacturer and service provider to those OEM partners. We have a relationship both with the OEM itself and the end chip manufacturers, the IDMs or the foundries. We have the ability to, like I said, make parts and make and engineer and manufacture critical tools. Things like gas dispersion equipment, heat control, pedestals that hold the wafer in place, and other critical components within that chamber environment.
It's still an overall small percentage of overall customer spend, but providing a very critical function both on performance and tolerance management and yield for what the end production looks like within the semiconductor chip manufacturing process. We also then have the capability to service the aftermarket. As those tools need to be turned over, they may come out of service. We have the ability to coat those, recoat them, refurbish them, clean them, almost return them back to original condition, which then helps extend the life of those tools through the entire lifecycle of the chamber. On the precision cleaning side, which is really leading the charge, as the semiconductor capital equipment side of the business has been through a little bit of a down cycle the last couple of years, the precision cleaning component has grown through that entire time period.
The reason why is because we're all leading edge there. As production has moved down node from 5 nanometer, 4 nanometer, 3 nanometer, we're very well positioned to capture business in that incredibly critical environment. As you move down node and you're now producing a 3 nanometer, the environment is that much more critical to get tools back into very strong original condition that can improve yield performance. We're participating very, very well in that cleaning component of the leading edge nodes. There in precision cleaning, we're all leading edge. We've replicated capability that we've had traditionally in Taiwan. We have a facility in California where we've been able to demonstrate copy exact to get the same level of critical performance in Taiwan, in California.
We are doing the same thing with our new facility in Arizona, which is a really critical growth investment for us to partner with the key capacity as it gets put in place in Arizona and brought to the U.S. and increasing magnitudes there. We have been able to replicate that performance in our in-qualification process right now in Arizona. It is going to be a key growth node for us going forward. I talked about that being a really critical component to have the full lifecycle of processes and capabilities all within the U.S. We have multiple facilities on the West Coast, also in Boise, Idaho. We have a process capability in Florida and now in Arizona where we can kind of keep the entire lifecycle of those tools within the Enpro family and be a better partner for those OEM providers and foundry manufacturers.
Okay. Thanks. Maybe can you maybe talk about the investments the company's made in the AST segment and maybe also in this conversation talk about onshoring a little bit, especially in Arizona, what's going on there? Thanks.
From an inorganic standpoint, I'll go back to how the AST portfolio really was put together. If you think about what is our sealing business, a lot of our businesses were growth offshoots from the core component of our sealing capability. Garlock is a foundation of Enpro. A lot of the growth nodes have come out of that business over time. Teknetics was one of those where we built out a capability that we had in aerospace. Along with that, we had this kind of niche position for Edgewell de Bellows that went into the semiconductor process. As we were going through the portfolio transformation and divesting some of the previous components of the business, we had this really important strategic growth node that we were getting good traction on within semiconductor and identified that as a key growth area for the company.
We used a lot of the proceeds from our divestitures and added on to our capability that existed there within Teknetics. We bought LeanTech, which was the precision cleaning component that I talked about with a historically strong position in Taiwan, and then expanded that into California and Arizona that I just mentioned. We bought NexEdge, which was a really critical acquisition in the 2022 timeframe, which then brought us not only tool manufacturing capability, but really strong coatings expertise and technology. That was a critical add to the AST portfolio. That really rounded out the semiconductor offering that we have now. We also bought Alluxa, which is a fantastic optical filter and optical coatings business, which brought us additional coatings understanding and capability. There is a semi component to that, but it is predominantly non-semi within the AST portfolio.
We added on inorganically over time and really rounded out the portfolio that we have today. On top of that, over the last few years, we've been busy investing behind organic growth opportunities. I talked about Arizona, which is a critical facility and capability for us. We've built out phase one of Arizona, which is leading the way with precision cleaning to support the capacity build-out from the customer base there. We have phase two and phase 3 capability down the line to invest in future precision cleaning, but also into other areas of expertise that we have that can augment our offering there locally in the Arizona area.
We've also added and invested behind other areas of growth, whether it be traditional offerings from a regional perspective to make sure that we can generate the same level of performance in partnership with our OEM customers in Idaho that we can in Singapore and build out to that position. We've also added additional capability in Taiwan to build out to our historically strong position there. We're continuing to add new capability and diversification efforts across our AST portfolio. We're going to spend $50 million in CapEx this year. About two-thirds of that is going into AST, and three-quarters of that overall is going to support growth and productivity. A lot of those are behind areas that I just mentioned to continue to participate in outsized growth within semi.
Okay. Thank you. If we can maybe circle back to sealing. You spent a lot of time on AST, and I know sealing is two-thirds of your business. How are you doing from Power Gen has been a big area of kind of talk these days. How is that end market? What are you seeing there? Maybe also talk about some of the market share gains you've made, particularly in space and some other areas. What was driving that, and how do you think that's going to be going forward?
Yeah. You asked about sustainable power generation. We have an excellent capability in France that really leads the way for us for our nuclear position. We are the reference for seals within nuclear reactors in the Western part of the world and pretty much have a strong, strong leading position for all nuclear reactors. Here we make seals for reactor pressure vessels and for cask sealing of spent nuclear fuel. We have a very strong initial OEM position, and then there's a heavy aftermarket component on just replacement of those seals over time that are on a replacement cycle. It's a very steady business with good growth drivers. It's about 7% of our overall Enpro portfolio. As nuclear continues to be part of the energy solution for the world, that's going to continue to be a tailwind for us in that space.
We're also participating in a lot of leading-edge technology there. ITER, which is representing a group of about 30 countries that are leading the way as far as nuclear fusion being a solution going forward. We're an innovation and technology partner as part of that effort. We also have some activity going on in small modulars. And that's another area where position. It's a good growth driver for us leading the way. It's going to grow nicely as part of our overall sealing portfolio. Space and commercial aerospace is another area that's been doing very well. Our commercial aerospace business was up 20% in the first quarter year over year. We have multiple capabilities within the commercial aerospace space around seals for fuel injection systems, for in-cabin controls, whether it be airflow, temperature control, engine propulsion system.
We have a number of offerings there. We are really focused on being the supplier of choice that leads with performance and is there to serve customer problems. We want to be the first partner that a customer goes to to solve an individual issue or for a new design. Our commercial teams have been executing extremely well there, and we are leading with technology that is differentiating us, and we just continue to see our ability to execute well and outperform. On the space side, we are well positioned with all the leading space exploration firms, and we pretty much have content on every satellite launch that happens in the U.S. As that market continues to grow and the number of satellite launches increase every year, we are participating there.
We have a number of these kind of growth areas within the sealing business that we expect to continue to perform well and drive growth for us.
Okay. Can we just talk about maybe the capital allocation priorities of the company? I know you did a recent acquisition of AMI and ceilings. Maybe talk about that as well, but then also just kind of capital allocation, including.
Yeah. The acquisition that you were referencing, Ian, that was Advanced Micro Instruments. So AMI, this was our movement into the test and measurement space, and then more specifically compositional analysis. This is an area that we studied for quite some time and a profile of targets that we reviewed for a number of years. We identified AMI specifically as a strong player in that space because they met a lot of our strategic themes and financial criteria. I talked about small percentage customer spend, absolutely critical to the process. They fit that very well. Accretive margins to overall sealing and overall Enpro and with a strong management team, a great culture that kind of fit all of our criteria. We have very strict criteria on what it means to be an Enpro business. Our pipeline is very full for acquisition targets, and we review them on a regular basis.
We're extremely disciplined with allocating capital to M&A. We have capacity, but we have the ability to be patient and very prudent as far as the types of businesses that we're going to invest in. I would expect it to be in that theme that I talked about, in areas within sealing that are in these growth nodes of certain end markets that I talked about. Within AST, the surface technology component of AST is another area that we're going to be active in exploring for M&A opportunities. Our semiconductor business is going to outpace the growth for the rest of the company overall, just naturally, given the areas that we're investing organically and the nature of that end market. We'd like to keep some balance in the portfolio and kind of keep the semiconductor exposure into that sort of 25% or less standpoint.
We're going to continue to deploy capital into M&A and these other areas to continue to keep some balance in the portfolio. Our priority from a capital allocation standpoint continues to be investing behind critical growth areas and then deploying M&A. With that growth algorithm that I mentioned earlier, we have about $1.5 billion capability over the next five years with a conservative view of about a two-times leverage balance sheet to deploy into M&A. We have the ability to supplement our growth rate and continue to drive outsized performance with M&A being a critical area. We have our return to shareholders through our dividend. We've increased our dividend 10 years in a row. We just did so again coming into 2025. That continues to be a critical component of our capital allocation.
Organic growth and inorganic growth through M&A continue to be our priorities.
Okay. I guess we have just one minute left. If there is anything that you wanted to add that I did not ask that you think investors would appreciate or think was valuable, just go ahead.
Yeah. I'll just add on our earnings call this week, Eric talked about our focus around developing leaders within Enpro. The personal growth and career growth that's part of the accelerating growth within Enpro 3.0. It really is to create agile leaders that are going to drive the company forward and have the capability to deliver regardless of the end market environment or the general macroeconomic environment. That's what we're focused on. We have the ability and the focus to deliver no matter what the end market conditions are. Tariffs are the topic of today, but next week it could be something else. A year from now, it could be something else. Enpro is focused on delivering in any environment and continuing to control what we can control. We think we're going to hold up better than most.
We are focused on delivering Enpro 3.0, growing and continuing to provide good, strong returns.
This is great, Joe. Thank you very much, James. Thank you very much.
Great. Thank you, Ian. Thank you, everyone.