ESCO Technologies Inc. (NYSE:ESE) Q1 2024 Earnings Call Transcript February 8, 2024
ESCO Technologies Inc. misses on earnings expectations. Reported EPS is $ EPS, expectations were $0.65. ESCO Technologies Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and thank you for standing by. Welcome to the First Quarter 2024 ESCO Technologies Earnings Call. At this time all participants are in a listen only mode. After the speaker’s presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. On the call today we have Bryan Sayler, 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 Lowrey, Vice President of Invest Relations. Kate, you now have the floor.
Kate Lowrey: 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 included as an exhibit to the company’s Form 8-K to be filed. We undertake no duty to update or revise any forward-looking statements except if 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. 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’m going to turn the call over to Bryan.
Bryan Sayler: Thanks, Kate, and thanks to everyone for joining today’s call. We really appreciate you taking time to get an update from ESCO this afternoon. We had a good start to the year, but before I talk to you about that, I would like to take a moment to thank one of our Directors who has retired this week. We had meetings with our Board over the last few days, and that represented the last time that Jim Stolze will participate as one of our Directors. Jim served on our Board for 25 years, and he really had a tremendous impact at that time. Jim came to the Board with deep financial experience, and ESCO really benefited that from adamantly over the years. He has a great mind for business and most importantly always operating with a high-level of integrity.
His contributions to ESCO are too numerous to recall here. But suffice it to say that we are all going to miss him. So we offer our sincere thanks to Jim for his many years of service and wish him all the best in retirement. With that, let me pivot over to some summary comments about the business. The results were a bit mixed between the different segments this quarter, but overall we delivered growth on the top line and the bottom line and saw another significant increase in backlog. Most importantly, we are still on track to deliver the full year commitments that we provided back in November. In the quarter, sales grew by 6% and adjusted EBIT was up 8%, a solid start to the year. Two of the three segments delivered double-digit sales and adjusted EBIT growth.
As we’ve been saying for a while now, our key end markets continued to have favorable dynamics and the drivers replaced for us to continue delivering meaningful organic revenue growth and margin expansion. So before Chris gets into the financial details, I do want to offer some top level commentary about each of the business segments. First up is Aerospace& Defense, where we had a strong start to the year. Sales were up double digits as we continue to see good momentum from the aircraft components and navy businesses. Margins in the quarter increased nicely. So it’s good to see the growth translate to the bottom line for these businesses. Even with the strong sales and EBITD performance, we were even more encouraged by the continued order strength.
We booked significant Navy orders again, similar to the fourth quarter and have now built up a nice backlog in the Globe business after a few years of burning off Block V backlog. Additionally, we saw a big order growth from a commercial and defense aerospace businesses. It’s nice to see the momentum continued for that part of our business as well. Next up is the utility group, which continued a strong quarterly performance. The breadth of our operating for the core utility markets continues to provide a solid foundation for continued growth. Offline products and services were a key driver of growth during the first quarter with the Phoenix product line, in particular delivering a great quarter. On the renewable side, we had a strong sales again, but the book-to-bill ratio was below 1.0 for the second quarter in a row.
We now seen two quarters of moderating orders after a tremendous run up through June of 2023. Our backlog has come down a bit, but we are starting to see some good activity in the pipeline and feel good about the full year outlook for this business. Finally, I will touch on the Test business where we did have a tough start to the year. Chris will go through the details in a minute, but we did see a sizable reduction in sales and EBIT during the first quarter. Overall, the business does still have good levels of backlog and we see a good pipeline of coming order activity. So longer term we still feel great about where the business is heading. In the short-term, however, we are seeing project construction taking longer than planned and it’s reducing our ability to deliver revenue in the near-term.
The project delays are not really on our end, but are more on the construction side of the business where jobsites are not ready for our product. And so the timing of revenue tends to get pushed to the right. This is mostly a U.S phenomenon and we are going to take some restructuring actions as we manage through a soft patch. Margin improvement has been a key thing for us in the Test business over the past year and with the disappointing first quarter, it’s appropriate for us to take actions to take some cost out of the business. This will help us get — this will help us out in the back half of FY ‘24. We mentioned on the November call, that we had just closed on the MPE acquisition. It’s an exciting deal for ESCO and for ETS-Lindgren and I’m happy to report that the integration between ETS and MPE is off to a good start and we remain excited about the long-term prospects with MPE as a margin enhancing product of our Test business.
To summarize, I would say 2024 is off to a good start. Really good performance at two of the three business and quick action underway at the third business to drive our long-term profitability objectives. Our outlook for 2024 is intact and we are working hard to deliver another record year. Now I will turn it over to Chris, to go through the financial details of the first quarter.
Chris Tucker: Thanks, Bryan. Everyone can follow along on the chart presentation. We will start on Page 3, where we have the overall financial highlights for the first quarter. As you can see, we had a great quarter for orders with an increase of 28%, which resulted in record backlog of $848 million. The A&D businesses led the order growth which resulted in a first quarter consolidated book-to-bill ratio of 1.35. Sales in the quarter were up over 6% which was comprised of 4% organic growth and a 2% impact from the CMT and MPE acquisitions. Adjusted EBIT was up 7.5%, adjusted EBITDA up over 7% and adjusted earnings per share up 3% in the quarter. Adjusted EBITDA margins increased by 20 basis points as increases from the A&D businesses were offset by declines from Test and Utility group.
Moving to Chart 4, we’ll start with segment details. First with Aerospace & Defense, we really got off to a strong start here which was great to see, beginning with orders we achieved a 1.8 book-to-bill ratio as the Navy business received large orders on the Virginia Class submarine program This resulted in backlog of more than 560 million at December 31st, a record amount for this business. Moving on to sales, overall growth was 14%, which was comprised of 10% organic growth and four additional points of growth from the CMT acquisition. The sales growth was led by strength from the commercial and defense aerospace, as well as the Navy business. Adjusted EBITDA margins in the quarter increased by 230 basis points as we saw nice leverage on the sales growth and favorable impacts from price, which were only partially offset by inflation and mix.
On Chart 5, we have the Utility Solutions Group. Here we delivered another great quarter for ESCO. Orders were down in the quarter, which Bryan mentioned, this was driven by modest reductions at NRG. The renewables business saw exceptional order growth through June 30th of last year, a strong industry dynamics and government incentive programs spurred customer orders. Since then, the order pace has moderated and the business has burned down backlog. Currently, we are starting to see increasing order pipeline activity in the renewables business, and we do expect to see order growth return as we move forward. On the sales side for USG, we had an increase of 17% in the first quarter and we had double-digit growth for both Doble and NRG. Adjusted EBITDA dollars increased by more than 10%, while the margins declined 150 basis points.
We did see favorable impacts from volume growth and price during the quarter, but they were more than offset by unfavorable mix and inflationary pressures. Next, we’ll go to Chart 6 and the Test business where we had orders decreased by 12% compared to last year’s first quarter. This was driven by lower orders in the U.S and some timing of getting new orders booked in China and Europe. On the sales line, we saw a reduction of 21%. All world areas experienced sales declines with the largest reduction coming in the U.S. Bryan mentioned this above, but we are seeing some delays in the U.S with getting projects executed and that has caused U.S sales to be lower than planned in the first two quarters of fiscal 2024. Adjusted EBITDA margins declined to 8.3% in the quarter as we significantly deleveraged on the sales volume drop and also experienced unfavorable mix.
We are executing a plan to take cost out of this business and expect to see sales and profitability trends improve as we get into the second half of the year. Next is Chart 7 where we have the cash flow highlights. We did have a positive swing in the first quarter. Cash flow as a cash use of $9 million in the first quarter last year, swung to a positive cash flow of $9 million in this year’s quarter. We saw favorable impacts in working capital from improved net contract assets as well as favorability from accounts payable and accrued expenses when compared to last year’s first quarter. Capital spending in the quarter did increase driven by investments from the Aerospace & Defense business. You can also see here where the MPE acquisition was just over $56 million and we had no share repurchases completed during the first quarter.
The last chart today is #8, which is our updated 2024 guidance. The outlook for ESCO remains strong. Starting with earnings, we are still tracking to deliver the adjusted earnings per share range that was communicated back in November. In fact, we have increased the bottom of the range from $4.10 to $4.15, and we have an overall range of $4.15 to $4.30 per share, which represents growth in a range of 12% to 16%. For sales, we expect an increase for the year in the range of 7% to 9%. The overall sales growth range is consistent with what we communicated in November, but we have seen some movement by business. We now expect the Aerospace & Defense group to grow in a range of 11% to 13%. We had communicated 8% to 10% for this business initially, but with a strong start to the first quarter and continued orders momentum, we have now increased this outlook.
For the Utility Group, the sales growth range is 6% to 8%. This is the same as what we communicated in November. And lastly, for Test, the range has dropped and we now expect growth in a range of 1% to 3%. The slower first half in project delays mentioned previously have reduced the growth outlook here. The Test range does include the impact of the MPE acquisition. For the second quarter, we expect adjusted earnings per share in a range of $0.85 to $0.90, which would represent growth in a range of 12% to 18% over last year’s second quarter. That concludes the financial update and now I’ll turn it back over to Bryan.
Bryan Sayler: Thanks Chris. Before jumping into the Q&A, I do want to take a moment to thank all of our employees. I do this on most calls because it’s important. Our teams are working very hard and their efforts are key to driving our results. Even when the results might fall a bit short, our teams continue to work the issues and take the hard actions to keep the business healthy and position for future growth. The commitment and dedication shown by our employees around the world continues to be impressive and I truly appreciate it. So to close, we’re on track to deliver on our 2024 commitments, which will result in our third record year in a row. That concludes the opening remarks and we can start the Q&A now.
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