ESCO Technologies Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
February 6, 2025
Skip to Participants
Operator

Good day and thank you for standing by. Welcome to the First Quarter twenty twenty five ESCO Technologies Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. You will then hear an automated message advising your hand is raised.

Operator

Please be advised that today's conference is being recorded. On the call today, we have Brian Saylor, President and CEO Chris Tucker, Senior Vice President and CFO. And now, I would like to hand the conference over to our first speaker today, Kate Lowery, Vice President of Investor Relations. Kate, you now have the floor.

Kate Lowrey
VP-IR at ESCO

Thank you. Statements made during this call, which are not strictly historical, are forward looking statements within the meaning of the Safe Harbor provisions of the federal securities laws. These statements are based on current expectations and assumptions, and actual results may differ materially from those projected in the forward looking statements due to risks and uncertainties that exist in the company's operations and business environment, including, but not limited to, the risk factors referenced in the company's press release issued today, which will be filed in an exhibit to the Forms eight K to be filed. We undertake no duty to update or revise any forward looking statements except as may be required by applicable laws or regulations. In addition, during this call, the company may discuss some non GAAP financial measures in describing the company's operating results.

Kate Lowrey
VP-IR at ESCO

A reconciliation of these measures to the most comparable GAAP measures can be found in the press release issued today and found on the company's website at www.escotechnologies.com under the link Investor Relations. Now, I'll turn the call over to Brian.

Bryan Sayler
President & CEO at ESCO

Thanks, Kate, and thanks, everyone, for joining today's call. Our year got off to a great start in Q1 with continued momentum across our served markets and strong execution by our teams driving positive results across our businesses. Before getting into details about the business, I do want to take a moment and say thank you to our employees for their ongoing efforts. Our company consists of over 3,000 team members and our success is not possible without their dedication and commitment to our customers around the world. I appreciate everyone's efforts, which are clearly paying off.

Bryan Sayler
President & CEO at ESCO

I also want to mention our Southern California based employees who have experienced some unsettling moments over the past month with the major wildfires in the area. While none of our people suffered injury or catastrophic losses, we did have some folks experience evacuation orders and general disruption. We remain focused on supporting our employees as needed, and we appreciate their ability to work through these challenging conditions. Chris will run you through all of the financial details for the quarter. But before we get to that, I want to give you a few comments on each of our segments.

Bryan Sayler
President & CEO at ESCO

Starting with Aerospace and Defense, we remain very positive regarding the long term outlooks for these markets. Production rates across both our Navy and Aerospace end markets continue to ramp up to meet customer demand. Overall, A and D delivered 20% revenue growth and margin improvement in the quarter. Navy sales were particularly strong as they were up $13,000,000 or 56% over the prior year. Fundamentally, our customers in the commercial aerospace and navy markets continue to ramp up production, and we are focused on supporting those efforts.

Bryan Sayler
President & CEO at ESCO

Underlying demand in both of these areas is very strong, and we think the outlook remains quite positive for 2025 and beyond. Before jumping to the next business, I do want to quickly address the status of the SMNP acquisition and the previously announced strategic review of our space business at VAACCO. On the SMNP deal, as previously discussed, the closing of the transaction is subject to regulatory approval in The U. S. And The United Kingdom.

Bryan Sayler
President & CEO at ESCO

The U. S. Closing conditions have been met, and we're now in the final stages of The UK Government assessment. We've had good dialogue with The UK regulators and we're hopeful that this process will be concluded in the near term. Our current expectation would be to close the transaction in the remaining months of fiscal Q2 or in early Q3.

Bryan Sayler
President & CEO at ESCO

Regarding the strategic review at VAACCO, first of all, business performance has improved as we've effectively dealt with the challenges from fixed price development contracts. Order input is very good and outlook for the business is improving. The company operates two distinct but related product lines today, Space and Defense. As this review has evolved, we have determined that splitting these two product lines into two separate businesses is not feasible. As a result, we are now in the process of evaluating whether to retain or sell the entire VACCO business.

Bryan Sayler
President & CEO at ESCO

This process is moving along well, and we anticipate being able to provide a more definitive path forward by our next earnings announcement in May. Switching businesses now, let's talk about the Utility Group, which had an outstanding quarter. Our core Utility business at Doble delivered double digit orders and revenue growth and significant margin expansion as they continue to see end market strength related to utilities needing to maintain and extend the life of their existing assets. NRG's revenue was lower in Q1 as we saw some moderation on renewable projects coming off of record revenue in 2024. The market conditions across the utility landscape are somewhat dynamic right now, but we feel strongly that ESCO is well positioned for the long term.

Bryan Sayler
President & CEO at ESCO

We are seeing strong investments from the utilities, while the renewables markets have drifted a bit given the uncertain status of tax incentives put in place by the prior administration. We would expect any softness on renewables to be more than offset by our regulated utilities business on the Doble side. The dynamics driving overall power demand remain in place and as that demand is satisfied, we expect it to result in a positive growth story for ESCO's Utility Solutions Group. Finally, I'll touch on the Test business, which had a really strong start to the year with orders up over 40% and double digit organic sales growth. As we have discussed in recent quarters, Test has been working through some business cycle challenges related to the next phase in wireless development and a complex environment in China.

Bryan Sayler
President & CEO at ESCO

The team has taken the right steps here to protect the business for the long term and we are seeing some good growth beyond that wireless market. So I would say that the business here has stabilized and we feel good about our trajectory as we move further into 2025. In summary, 2025 is off to a great start for ESCO with really good performance in all three business segments, which has enabled us to outperform in the quarter and raise our guidance for the full year. With that, I'll turn it over to Chris to run you through the financial details of the quarter.

Chris Tucker
Senior Vice President and Chief Financial Officer at ESCO

Thank you, Brian. Everyone can follow along on the chart presentation. We will start on Page three, where we will discuss the change to adjusted earnings per share reporting. As stated in the earnings release, our adjusted earnings per share will now reflect an add back of all acquisition related amortization. The table at the bottom of the page shows the impact, which was $0.14 in the prior year first quarter and $0.15 in this year's first quarter.

Chris Tucker
Senior Vice President and Chief Financial Officer at ESCO

The bar graph to the right shows that on the new basis, we achieved $1.07 of adjusted EPS in the quarter, which was nearly 41% above last year's first quarter. The $1.07 per share would compare to a range provided back in November of $0.83 to $0.9 per share. So we were able to come in nicely ahead of plan during the quarter. Moving on to Chart four, we have the overall financial highlights of

Chris Tucker
Senior Vice President and Chief Financial Officer at ESCO

the first

Chris Tucker
Senior Vice President and Chief Financial Officer at ESCO

quarter. Orders were down in the quarter as we experienced some large Navy orders during the prior year first quarter, but overall our book to bill was 111% and we finished the quarter with backlog of $9.00 $7,000,000 a record amount. Sales in the quarter were up 13%, which was all organic. Additionally, adjusted EBIT margins increased by two fifty basis points to 15.3%. Importantly, during the first quarter, we saw all three reporting segments deliver sales growth and adjusted EBIT margin improvement.

Chris Tucker
Senior Vice President and Chief Financial Officer at ESCO

Lastly, and as noted on the prior chart, adjusted earnings per share increased by 41% during the first quarter. Next, we will go through the segment highlights starting with the Aerospace and Defense. Orders were down in the quarter. This is where we had the large Navy orders a year ago, which created a tough comparison. However, book to bill was still above 100% and the business continues to enjoy record backlog levels of over $600,000,000 The sales performance in the quarter was terrific with nearly 21 growth.

Chris Tucker
Senior Vice President and Chief Financial Officer at ESCO

The growth was led by commercial aerospace and navy. Margins were good with adjusted EBIT margins up 130 basis points and adjusted EBIT dollars up nearly 30% as we saw good leverage on the growth offset by some unfavorable mix. Next on chart six is the Utility Solutions Group. We also posted a great quarter here. Orders growth was strong at over 16% with both Doble and NRG delivering double digit order growth.

Chris Tucker
Senior Vice President and Chief Financial Officer at ESCO

On the sales side, growth was 4%, which was driven by 12% growth at Doble. Sales were down at NRG, where the business has seen some moderation over the last few quarters. Profitability was very strong for this business as we leveraged the growth at Doble and also experienced favorable product mix, which helped drive the adjusted EBIT margins to 23.6% in the quarter. Next, we will cover Test, where we saw a nice start to the year, especially when comparing to the challenging results we had last year in the first quarter. Order growth was excellent at over 40% and it was pretty broad based with E and C test and measurement, A and D, medical and industrial shielding all fueling the increase.

Chris Tucker
Senior Vice President and Chief Financial Officer at ESCO

Sales were up over 13% as we saw nice growth from The U. S. And European markets as well as good performance at MPE. Margins rebounded nicely as volume growth and benefits from last year's cost reductions efforts drove the first quarter adjusted EBIT margins 10.6%. Next is chart eight where we have the cash flow highlights.

Chris Tucker
Senior Vice President and Chief Financial Officer at ESCO

The year got off to a strong start on operating cash flow, which was $34,000,000 compared to $9,000,000 in the prior year. Cash collections were strong in the quarter and that was the main driver of the improved cash performance. Capital spending was $2,600,000 less than last year and we had zero acquisition spend during this year's first quarter. So we delivered big improvement in free cash flow and saw our debt to EBITDA leverage ratio drop to 0.4 times. The next chart will discuss our full year earnings guidance.

Chris Tucker
Senior Vice President and Chief Financial Officer at ESCO

First on chart nine, where we show the impact of the acquisition amortization on full year and quarterly numbers from last year. You can see in the first table that our guidance in November was $4.7 to $4.9 per share And adding back the full year impact of acquisition amortization of $0.6 per share, the old guidance becomes $5.3 to $5.5 per share. Operationally, we are increasing the guidance by $0.25 per share at the low and high end of the ranges for an updated range of $5.55 to $5.75 per share. Second quarter guidance is for $1.2 to $1.3 per share. And the bottom of the table on this page is for your reference and shows the acquisition amortization impact by quarter for FY 2024.

Chris Tucker
Senior Vice President and Chief Financial Officer at ESCO

My last chart discusses the fiscal twenty twenty five guidance. You can see our sales guidance is unchanged at 6% to 8% growth. And with our increased earnings per share guide, we are now targeting 16% to 21% growth in adjusted EPS when compared to 2024%. The graphs at the bottom of the page show growth trends since 2021, which have been strong. We also want to be clear here, this guidance excludes the impact of the pending SM and P acquisition and it also excludes the impact of the strategic review process at VAACCO.

Chris Tucker
Senior Vice President and Chief Financial Officer at ESCO

Both of these items could have significant impacts on our outlook and we will provide updates on those items and their impacts when the timing is more certain. That concludes the financial portion of

Chris Tucker
Senior Vice President and Chief Financial Officer at ESCO

the call. And now I'll turn it back over to Brian.

Bryan Sayler
President & CEO at ESCO

Thanks, Chris. So as you heard, we're off to a great start for the year. We're excited about the ability to increase our full year outlook and we're excited about some of the portfolio moves that are being actively worked on.

Bryan Sayler
President & CEO at ESCO

ESCO's future remains bright and we continue to see a path for value creation and enhancement as we move forward. The impacts of this are starting to come through in our results and we're confident that there's more to come. Before we go to questions, I would like to take a moment to recognize one of our long term directors, Lee Olivier, who retired this week. Lee served ESCO's shareholders for over ten years on the board and applied his decades of experience in electric utilities as our principal strategic advisor as we built out our utility solutions business over the past decade. Over those years, I personally benefited from Lee's industry knowledge, his business acumen and his encouraging and upbeat disposition.

Bryan Sayler
President & CEO at ESCO

On behalf of ESCO's Board and our shareholders, we wish Lee all the best in a long and healthy retirement as he continues his quest to catch every kind of fish there is. Lee, you will be missed. With that, we're done with the prepared remarks and we can turn it over to Q and A.

Operator

And our first question comes from Tommy Mould with Stephens. Your line is open.

Tommy Moll
Managing Director at Stephens Inc

Good afternoon and thanks for taking my questions.

Bryan Sayler
President & CEO at ESCO

Hi, Tommy.

Tommy Moll
Managing Director at Stephens Inc

Brian, I wanted to start on Doble.

Bryan Sayler
President & CEO at ESCO

Sure.

Tommy Moll
Managing Director at Stephens Inc

Revenue was up double digits, but your book to bill this quarter was still well north of one. So any context you could give, was there some calendar year end tailwind here? Are there some drivers that are maybe more durable?

Tommy Moll
Managing Director at Stephens Inc

Just any kind of context would be helpful.

Bryan Sayler
President & CEO at ESCO

Well, I think the fact that we took up our full year guidance is probably as a tell that we think this is not a one time event. This is we're heading in the right direction here. What we would say about utilities generally is that they are really making a lot of capital investments right now, anticipating broad increases in electricity demand that are driven by multiple different aspects and reshoring electric vehicles, electrification of home heating, data centers, AI. I mean, there's just a wide range of things driving broad based energy demand and we're benefiting as they need to make investments in maintaining and maximizing the throughput of their existing assets and making investments in generation transmission and distribution.

Tommy Moll
Managing Director at Stephens Inc

Thank you, Brian. Second question I wanted to ask is really a two part on the guidance for the full year. On the revenue side, you reaffirmed the range and then raised on EPS. And so the two parts here, one is where are you getting the better than previously expected margin from if you had to pick one or two places? And then in terms of the revenue, you updated this on the total company, but just at the segment level versus your prior outlook, is there anything you might want to call out?

Tommy Moll
Managing Director at Stephens Inc

I was thinking in particular utility, maybe some increased headwinds there on the NRG side, but I'll let you do the talking there.

Chris Tucker
Senior Vice President and Chief Financial Officer at ESCO

Yes. I would say, essentially, Tommy, if you look at the first quarter, where obviously we had a pretty nice beat. On the margin side, we did have some good margin upside in the quarter at A and D. We are starting to get into some of that past due backlog and see that move a little better. And so that flowed through.

Chris Tucker
Senior Vice President and Chief Financial Officer at ESCO

And then also on the utility side, you mentioned doable. We had particularly good mix there in the quarter on some of the kind of legacy protection testing and offline testing product sales. Those are kind of some of our highest margin things and we had good results there. And I think fundamentally as we looked out the balance of the year, we still feel good about how we had those loaded in. We didn't think anything that happened in the first quarter should reduce those out quarters.

Chris Tucker
Senior Vice President and Chief Financial Officer at ESCO

And so you kind of see that first quarter performance flowing through. On the sales side, yes, I mean, we're pretty consistent. You're right. I think if we see any upside on the doughable side from a sales perspective, we would say we might see a little softness on the renewable side that would offset it from a revenue perspective. But again, from an EBIT side, we're in good shape there.

Chris Tucker
Senior Vice President and Chief Financial Officer at ESCO

And again, maybe a little bit of upside to the year just because of the first quarter performance. So that's really kind of how I would frame all that up. I think the sales outlook for test remains consistent. It really firmed up, I would say, nicely in the first quarter because the orders at test were so good. So that made us feel good about the outlook for the rest of the year there.

Chris Tucker
Senior Vice President and Chief Financial Officer at ESCO

And then A and D, again, I think we're plugging along pretty well there and feel good about that outlook as well.

Tommy Moll
Managing Director at Stephens Inc

Thanks, Chris. I'll turn it back.

Operator

Thank you. Our next question comes from Jon Tanwanteng with CJS Securities. Your line is open.

Jonathan Tanwanteng
Managing Director at CJS Securities

Hi. Thank you for taking my question. Brian, you mentioned that you were seeing improving demand at VAACCO. I was wondering if you could delineate if you're seeing that in space or navy. I'm guessing it was navy, but I don't know if you have the same thing going on in space.

Bryan Sayler
President & CEO at ESCO

Yes. Yes, a little bit more Navy than space. I mean, you're probably aware that there's a large amount of procurement going on, on the submarine front. We definitely are starting to see our share of that in line with what we've talked about in the past. And but there is some space business coming through for us.

Bryan Sayler
President & CEO at ESCO

So the business is really doing well. As I said in my comments, we're kind of past the fixed price development contracts problems and the outlook is definitely improving there.

Jonathan Tanwanteng
Managing Director at CJS Securities

Okay, great. And then just can you just characterize the strong test orders in the quarter? Was it broad based? Was there more of any one sector strong than the other or maybe there are large projects in there? It's kind of unusual to see that strong of a Q1 order pattern, I think.

Bryan Sayler
President & CEO at ESCO

Yes. I would say it was very broad based with the exception of wireless. We got good orders in Europe. We got good orders in The U. S.

Bryan Sayler
President & CEO at ESCO

We even saw a turnaround and some improvement in China. A lot of magnetic compatibility testing, which as you know kind of is a regulatory driven piece. Got a lot of wireless not wireless, medical activity. And we're starting to see a resumption of the electro the EMP filters that are typically going to data centers. So we got a couple of those.

Bryan Sayler
President & CEO at ESCO

And we saw an investment in a large EMP protected control center for a utility in The U. S. So I would say aerospace and defense is coming through for us as the electronic warfare stuff kind of drives a little activity there. So pretty broad based. The wireless thing is kind of trundling along, I think at a pretty sustainable level, but that's not likely to improve substantially until we get a little bit of clarity about where the six gs technology is going to hit.

Jonathan Tanwanteng
Managing Director at CJS Securities

Okay, great. Thank you. And then just any update on the M and A environment. Are you hence full with closing SMNP or is there other stuff in the pipeline and is it actionable?

Bryan Sayler
President & CEO at ESCO

Yes, I would say we are strongly prioritizing closure of SMNP and then our strategic review at VAACCO. But we still have the capacity to look at other opportunities and we're seeing some interesting things there, but I would not say that anything is imminent. So my guess is that you would probably see us close out those first two actions before you see any new action that manifests itself.

Jonathan Tanwanteng
Managing Director at CJS Securities

Understood. Thank you.

Operator

Thank you. Our next question comes from Tommy Moll with Stephens. Your line is open.

Tommy Moll
Managing Director at Stephens Inc

Hello again.

Bryan Sayler
President & CEO at ESCO

Hi, Tommy.

Tommy Moll
Managing Director at Stephens Inc

Brian, we'll wait until May to get the full update on VAACCO. But if you're able to give us any insight quantitative or qualitative, what the implication would be if you pulled VACO out of your A and D segment on the margin?

Bryan Sayler
President & CEO at ESCO

It would be strongly accretive to margins for the A and D and for ESCO.

Tommy Moll
Managing Director at Stephens Inc

Okay.

Tommy Moll
Managing Director at Stephens Inc

Thank you. That points us in the right direction. And then maybe a follow-up question for Chris here. You made a comment about working through some of the past dues in A and D. If you could give us a sense of what inning you're in there and any implications for working capital going forward would be helpful.

Tommy Moll
Managing Director at Stephens Inc

Thanks.

Chris Tucker
Senior Vice President and Chief Financial Officer at ESCO

Yes. I think I would say that it's really kind of two main businesses there right now on the commercial aircraft side, which is our PTI and Chris Air businesses. I would say we're probably to the fifth or sixth inning there if I tried to kind of put it in that framework. And I do think you're already starting to see some benefits from working capital there come through the numbers. You saw the good cash in the quarter.

Chris Tucker
Senior Vice President and Chief Financial Officer at ESCO

We did have an inventory build in the quarter, but it was less than what we had in the first quarter last year. And it really wasn't in aerospace and defense. That inventory build was kind of elsewhere in the company. So I think and you saw us liquidate receivables from the strong fourth quarter. So I think you're starting to see the benefits there.

Chris Tucker
Senior Vice President and Chief Financial Officer at ESCO

Obviously, we're highly focused on continuing to drive high cash flow conversion. And it was nice to start off the first quarter that way because normally we don't always see that in the first quarter. But anyway, back to your original question, yes, we're getting towards the mid to late innings hopefully on the past dues and it's nice to see the good progress there.

Tommy Moll
Managing Director at Stephens Inc

Thank you, both. I'll turn it back.

Operator

Thank you. Our next question comes from John Tanwanteng with CJS Securities. Your line is open.

Jonathan Tanwanteng
Managing Director at CJS Securities

Hi, thank you. Just a quick follow-up from me. Could you provide an update on SMNP, the performance of the business and kind of what you're seeing there? I think when you announced the agreement acquired a while back, you had been pretty excited about the revenue opportunities. I'm wondering if those are playing out as expected and kind of what the expectation is today?

Bryan Sayler
President & CEO at ESCO

Yes, I would say that we're told that 2024 performance was in line with expectations and their commitments. We can't get into much more detail than that. But we're pretty optimistic about where they stand. We have a pretty good idea of what's going on with the Navy and the major indirectly with the major shipbuilders and that's all encouraging stuff as

Bryan Sayler
President & CEO at ESCO

well.

Jonathan Tanwanteng
Managing Director at CJS Securities

Okay, great. Thank you.

Operator

Thank you. One moment for our next question. Our next question comes from Josh Sullivan with Benchmark. Your line is open.

Josh Sullivan
Managing Director at The Benchmark Company LLC

Hey, good evening.

Bryan Sayler
President & CEO at ESCO

Hey, Josh.

Josh Sullivan
Managing Director at The Benchmark Company LLC

Just curious what you guys have been seeing as far as Boeing strike coming to a resolution? And I mean, if you don't want to talk specifically

Josh Sullivan
Managing Director at The Benchmark Company LLC

about

Josh Sullivan
Managing Director at The Benchmark Company LLC

a customer, just generally what you're seeing in the OEM supply chain as we look at a re ramp here in 2025 and beyond?

Bryan Sayler
President & CEO at ESCO

Well, if you're in the aircraft business, you can't not talk about Boeing. So we're comfortable talking about it. Listen, we're happy that they were able to get the strike resolved. We did see them begin the process of kind of doing a little bit of rescheduling of their backlog. We have two of our businesses are really tied directly to that OEM work.

Bryan Sayler
President & CEO at ESCO

The third business is closer to the production piece, and we've already started to see a little bit of recovery there. We were able to kind of manage around that pretty effectively in Q1. I've got some good aftermarket activity. So we feel pretty good about that. We are I guess the way our forecast lays out is we're pretty modest about build rates from Boeing this year.

Bryan Sayler
President & CEO at ESCO

We're still going to see good growth overall in our business. And we're counting on Boeing getting into growing their build rate second half of this calendar year and starting to get into next year. That's really going to begin to drive a lot of positive things for our aircraft businesses.

Josh Sullivan
Managing Director at The Benchmark Company LLC

Got it. And then maybe just one on the defense side, just with the larger sub builds contracts, build negotiation. What does the pull look like through the supply chain at this point from your perspective?

Bryan Sayler
President & CEO at ESCO

I'm sorry, what does the what look like?

Josh Sullivan
Managing Director at The Benchmark Company LLC

Just on the general pull on submarines and surface ships?

Bryan Sayler
President & CEO at ESCO

Yes. I mean, generally positive. I mean, they're listen, it's taken them longer to get up to the desired build rates that Congress has set for them. But they're definitely making steady workmanlike progress on that. We're continuing that business for us is continuing to grow.

Bryan Sayler
President & CEO at ESCO

We have seen over the last year, we've seen some expansion of our shipset content there, which has been favorable for us. As far as the contracting goes, there's been a little bit of a slowdown there. Some of that might be Congress related, some of that might be Navy related, some of that might be shipbuilder related, but they are no change in the overall commitment from an orders perspective, but the timing has kind of shifted out by a quarter or so.

Tommy Moll
Managing Director at Stephens Inc

Got it. Thank you for the time.

Operator

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Brian Saylor for closing remarks.

Bryan Sayler
President & CEO at ESCO

All right. Well, listen, everyone. Thanks for taking some time to hear from ESCO. We're we continue to be excited about the outlook and look forward to talking to you in May about another good quarter.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

Analysts
    • Kate Lowrey
      VP-IR at ESCO
    • Bryan Sayler
      President & CEO at ESCO
    • Chris Tucker
      Senior Vice President and Chief Financial Officer at ESCO
    • Tommy Moll
      Managing Director at Stephens Inc
    • Jonathan Tanwanteng
      Managing Director at CJS Securities
    • Josh Sullivan
      Managing Director at The Benchmark Company LLC
Powered by Quartr
Earnings Conference Call
ESCO Technologies Q1 2025
00:00 / 00:00

Transcript Sections