Q3 2021 ESCO Technologies Inc Earnings Call
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Yeah.
Good day and welcome to the ESCO Q3 conference call today's call is being recorded with US today are Vic Richey, Chairman and CEO, Chris Tucker, Vice President and CFO and now the percent of forward looking statements I would like to turn the call over to Kate Lowrey director.
Of Investor Relations. Please go ahead.
Thank you the.
Statements made during this call regarding timing of recovery and growth of our end markets the amounts and timing of 2021 and beyond revenue impacts of Covid and Covid variant and recovery expected as a result of Covid vaccines for recovery in commercial aerospace adjusted EPS adjusted EBITDA cash shareholder value at the timing of Black box.
Every success in completing additional acquisitions the success in integrating acquired businesses. The result of cost reduction efforts the correction of production and inventory issues and other statements, 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.
Functions and actual results may differ materially from those projected in the forward looking statements.
Risks and uncertainties of 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.
Undertakes no duty to update or revise any forward looking statements, whether as a result of new information future events or otherwise. In addition during this call of the company may discuss the non-GAAP financial measures in describing the company's operating results. A reconciliation of these measures to their most comparable GAAP measures can be found in the press release issued today and found on the company's website at W.
W. W. Dot ESCO technologies Dot com under the link Investor Relations now I'll turn the call over to Vic Thanks, Kate and thanks, everyone for joining today's call before we jump for the details of the quarter just like the pick our employees across the company for the ongoing efforts to run the business with the ongoing challenges from Covid, we continue to see great.
Average and contributions from everyone across the company and for that very appreciative since the beginning of the pandemic. Our primary goal is remains the same provide a safe working environment and protect the health of our employees and today, we continue to encourage our staff to get fully vaccinated for the benefit of everyone.
There are a few challenges in the third quarter, but overall the company continues to perform well cash.
Cash generation year to date has been excellent we have teams focused on the working capital initiatives around the company and Theres still room for improvements as we move forward.
This can be of long term value creation tool for ESCO.
Our previous cost reduction actions, along with our enhanced focus on operational efficiency will benefit of ESCO going forward as our end markets continue moving toward a more normalized level of activity kind of car.
Confident that our disciplined approach to operating the business will result in continued success as we move into fiscal 2022.
While Chris will provide the financial details I'll offer some top level commentary to set the tone of.
Of our year to date A&D sales continue to be lower than prior year due to COVID-19 <unk> impact on the commercial aerospace our portfolio of diversity allowed us to mitigate this headwind as our year to day consolidated adjusted EBITDA margins are only down slightly compared to prior year to date margins. This performance.
This was driven by solid contribution from our other operating as a result of the favorable sales mix and meaningful cost reductions across the company.
From a segment level there are several positives to report.
Within A&D, we're seeing signs of recovery of the commercial aerospace as passenger boardings continues to increase and more airlines are adding idled the aircraft back into service.
Sales of our commercial aerospace customers were still down in the third quarter as the recovery in the sectors that have.
Bit slower than we anticipated.
U S. Domestic travel has picked up but it's still slightly below 2019 levels. Those of you have been through an airport lately of probably surprise, but this is what the the TSA statistics show it's important.
I understand the business travel remained soft and air travel in Europe, and overall international travel are still well below 2019 levels. The good news is that we're starting to see order activity increase in the third quarter and our overall A&D segment orders increased by more than 40% compared to last year's third quarter.
Additionally, our navy and space businesses remained strong and well funded and our outlook for near term growth opportunities continue to materialize in both of these areas.
Our test business continues to be steady we are of good order input on our global when the global basis, and we are actively managing of material inflation and transportation issues as they arise.
We expect test outlook to remain positive.
Driven by the strength of its served markets, including the <unk> medical and automotive.
Our USG business continues to outperform from a profitability perspective with year to date adjusted EBIT margins of 19, 4% compared to 15, 1% last year the.
For the renewables business at NRG has performed well in 2021 by the orders from durables utility customers had been a bit soft we.
We did see sales growth from <unk> of approximately 8 percentage of the quarter, but we have not yet seen demand return to <unk>.
The pandemic levels.
We feel great about the long term outlook for the USG business and are very excited about the announcements today regarding closing 2 acquisitions.
Our agreement to acquire <unk> had been announced back in May and we were able to get the deal closed in the July 29.
This business, bringing exciting new product offerings to our USG business and also significantly increases our global footprint. Additionally.
Additionally, we announced the day the purchase of Phoenix Technologies. This is also an exciting business that further enhances the product offering of our USG group and provides greater access to the commercial industrial markets.
<unk> had initial meetings with the teams for both of these businesses are very encouraged by the quality of the people and their enthusiasm for join ESCO.
We are confident these will be strong additions to ESCO and USG portfolio that will drive future sales and earnings growth.
So overall the fundamentals of our portfolio remains strong the second half sales outlook because of bad behind initial projections, but origin of started increase and we feel good about the growth outlook for 2022 and beyond now I'll turn it over to Chris.
Thanks Vic.
Start by briefly touching on a few comparative highlights.
Sales in the third quarter grew by 5% with A&D up 1, 8% USG of 12% and test growing 4.6%.
This has been the first quarter in 2021, where we saw sales growth from all 3 segments.
Adjusted EBIT margins were 12, 7% in the quarter compared to 14, 2% in the prior year quarter.
The margin decline was driven primarily by the operational efficiencies and inventory write offs of Westland, We had some commentary in the press release regarding Westland and we wanted to mention that here as well.
In the quarter, we did become aware of some issues of Westland They have experienced several challenges related to the new product development programs.
Which led to increased production cost and product quality issues.
No bad product the scent for build the customers, but we did have charges recorded in the quarter of $2.1 million and year to date charges of $4.4 million the.
The first and second quarter charges represent corrections to our previously reported financials and going forward. Our 2021 year to date numbers will be updated to reflect these amounts.
We have started work immediately to get the production issues fixed and to address cost issues within the business.
There are strong synergies between Westland and our globe subsidiary and we have already begun the work to bring these businesses together under 1 leadership structure.
We have a strong outlook for this business and are committed to driving significant improvements as we move forward.
Adjusted EPS came in at <unk> 67 per share in the quarter below prior year's <unk> 76 per share.
Adjusted pre tax dollars were down 2.5% compared the prior year Q3.
And we had an exceptionally low tax rate in prior year, Q3, which further reduced EPS.
Segment highlights in the quarter are as follows.
The A&D did see a return to sales growth in the quarter. The Navy business grew by over 20%, which more than offset declines in the commercial aerospace sales of approximately 10%.
While the commercial aerospace sales were down we did see the rate of the decline improved and we are seeing signs of the business is beginning to rebound.
<unk> for A&D were down driven by the issues of Westland.
USG saw growth of 12% in the quarter. The renewables business was very strong the.
The utility business did grow in Q3, but it has not returned of prepaying dependent make levels.
Adjusted EBIT margins were 18, 3% in Q3 compared to 14, 8% in the prior year Q3.
The strong improvement was driven by leverage on the sales growth and benefits from prior cost reduction activities.
The test business grew 4.6% in the quarter continued steady performance from this group margins were down in the quarter due to mix and timing issues.
Year to date operating cash flow was up over 40%. We continue to see great results from our focus on driving balance sheet improvements.
The teams across the company continue to work multiple strategies for operating capital improvement and the results of very good.
Some programs driving this performance include negotiating performance based payments in our A&D and test segments. This has had a significant impact as it oftentimes results in new orders being cash positive throughout the life of the contract.
Of the efforts include adjusting safety stock levels and extending payment terms.
Year to date, our adjusted EBITDA was nearly $91 million with the 17, 8% margin compared to 18% in the 2020 year to date.
Over the past year, we took several cost reduction actions across the company that have allowed us to hold margins during this down sales environment.
Examples here include closure and consolidation of facilities the move of manufacturing content to our Mexico facility and ongoing make buy programs.
Amortization of intangibles of interest expense decreased while tax expense as a percent of pre tax income increased in Q3 and year to date as we had several tax strategies implemented last year, which benefited the 2020 comparative rates.
Orders were good story in Q3 as the entered orders were strong we booked $203.8 million of new business in the quarter ended with the backlog of $539 million and our book to bill of 112%.
This represents 29% growth compared to prior year Q3.
Strength in orders came from all 3 segments with A&D orders, increasing 44%, USG, increasing 10% and test increasing 28%.
As we continue navigating through what we hope is the near end of Covid. Our number 1 focus remains the same increase.
The increasing in maximizing our liquidity to position us for future M&A growth.
An increase investment in new products and solutions we.
A strong balance sheet today and are excited about the recent acquisitions that Vic mentioned earlier.
We still have ample capacity for further acquisitions and we obviously continue to invest in the core business to enhance our organic growth profile.
Our significant cash generation. This year is a testament to this focus on liquidity.
We have delivered free cash flow conversion of 118% of net earnings for the first 9 months as mentioned above we have clear momentum in our working capital initiatives.
Did want to talk for a minute about the Q4 guidance in the release, we did provide Q4 guidance. This is the first quarter that has included guidance since Covid began.
The guidance for Q4 is a range of <unk> 73 to 78 per share.
The sales levels in Q4 or a key issue as we think about the guidance and this range is predicated on a sales level in the range of $190 million to $200 million.
And the last 3 months, we have reduced the Q4 sales outlook for the commercial aerospace businesses and also for the utility businesses.
The commercial aerospace backlogs are beginning to build but we see those more of as drivers for 2022 as opposed to Q4.
For the utility space, we are seeing some growth compared to prior year, but not for the levels. We had previously anticipated.
The long term outlook for both of these markets continues to be positive and we feel good about our positioning as we look towards 2022.
We also want to be clear that this outlook excludes any impact from the acquisitions that were announced today.
We will have sales in earnings impacts from those transactions, but theyre not yet quantified and are therefore not included in the guidance that is provided.
With that I'll turn it back over to Vic Thanks, Chris since that touched on quite a few of my thoughts earlier in my commentary I will just offer a few more comments before we move into Q&A.
As Chris mentioned, we are a little softer than planned here in the back half of the year for the commercial aerospace and doubles utility market. This doesn't change our long term commitment to these markets, we feel great about our end market exposure and our diverse portfolio allows us to manage through periods like this.
Outside of these markets, we see a lot of growth opportunities in A&D for the military Aerospace Navy and space end markets.
<unk> and the renewable energy market continued to drive very strong performance for our NRG business. The test business. He has a lot of opportunities for the telecom automotive and medical markets.
Just finished up of board meeting in Boston last week and they are in those meetings. We took the time to visit the Doble Anglo of operations, we had a great set of meetings and really exciting interactions with the teams at the operating use adobe or we get a full update of the USA segment. The team has made great progress updating the product line across the business from renewable.
Focused products at NRG to the new <unk>.
<unk> launch of Doble the true.
Good to see the innovation happen inside that business as our customers start spending again, we will be ready to support them.
This also provided a chance to update our board in Phoenix, and all of the Nova acquisitions Sacred firsthand see the excitement around these end of transactions at revisiting. The Doble headquarters we took the board the visit the globe facility. So the another great visit the team at Globe has done an exceptional job the driving tremendous growth with the navy surface.
Total treatment of product line the.
The team has worked very hard to master of difficult manufacturing process, Theyre really roll and its fun to see a winning team in action.
We are full of couple of days of boss and accomplishing all of this but it was time well spent.
Like to thank our board for their ongoing support and guidance so with that I think we're ready for some Q&A.
And at this time I would like to remind everyone in order to ask a question. Please press star 1 on your phone's keypad.
Again to ask a question. Please press star 1 on your telephone keypad.
First question will be coming from the line of primary unlock ranch by the steep with Stifel. Your line is open.
Hey, good afternoon, Thanks for taking my question.
Got it.
So I was hoping we could start on the M&A front, great to see the 2 deals get closed out the Nova in Phoenix This quarter.
We're just wondering if you could update us on you called out the 700 million balance of liquidity in the press release, maybe just what you're seeing in terms of what youre looking at in terms of end market exposure.
Geographies things like that valuations, where those might stand.
Any update on on the pipeline would be helpful.
Sure so as.
Im sure Youre hearing from a lot of other folks the M&A market is pretty.
Pretty active right now so we were able to get these 2 done.
There is a number of other things.
And we're looking at I would say the the multiples I think of settled out a little bit they are still private of a little higher than I would've anticipated in this environment, but we are seeing good opportunities. There I think we will continue to focus on our utility segment and our A&D segment.
As far as geographical of the great thing about particularly all of the Nova and to a lesser extent.
Phoenix, those guys as well and both of those have really good international content.
So that really is an area we've been working to improve for.
For a number of years. So if you look at kind of the breakout of Noble's current.
Sales of probably 85% of the U S and 15% out outside of the U S.
Look at all for Nova they're exactly the opposite so they have some sales in the U S. But 85% of their sales are in Europe and in Asia, and so that's really going to give us an opportunity to have a much bigger footprint outside of the U S.
The bill to sell some of their products here, we'll sell some of doble products there and so this is really a.
Great acquisition for Us say Phoenix.
More 50, 50, but the thing they bring us some international content, but it really is the new products a lot of there are more high voltage products and more applicable in some cases of the commercial and industrial markets versus in addition to the utility markets. So those to those of the kind of things will continue to look for.
Both on the.
Both on the utility side and on the A&D. If you remember I guess it was last quarter, maybe the quarter before we had a small drop in acquisition of 1 of our A&D business and we'll continue to look for those kind of opportunities as well.
That's great. Thank you will.
We look forward to more announcements to come.
I guess as a follow up switching to USG I.
I guess I was a little surprised to see the demand was still weak there are realized.
The Delta variant emerging.
Probably adding a little bit of uncertainty but.
If you could just talk to what you're hearing from customers, maybe what's holding back growth demand.
Any signs of that that'd be helpful. Thank you for sure.
It's a hard day and predict I'd say 1 of the biggest issues that we're seeing as well a couple of things I mean, the utilities till probably 90% of the people are working from home and so the people that we would be dealing with in any case and so.
It's just much more difficult to do business when people arent out there working.
To do the types of things that we're doing so that's been a little bit of a surprise to you. The other thing is there more and more worried about delivering electricity right. Now there is some of the other day. So a lot of the focus we see is on making sure that the.
They are able to deliver electricity.
And pay attention of those type of things that have taken a little bit of the focus of the testing of of the infrastructure, we think thats.
Yeah.
The point in time is going to happen as we've talked about before.
It's required that they do this type of test and it's also a good business to do this type of testing. So I think it's just a little bit everybody's kind of pulled their horns in a little bit it's important to remember, though I mean, it's not like we've stopped doing business. There I mean, our sales are down about 10% I think of so we've seen some impact we think it's going to pick up we thought it was honestly thought of is going to pick.
Before now, but we think as we go into 'twenty 2 coming off the slower base, we'll see some some some pretty good upside there.
Got it. Thank you very much I'll turn it back.
Thank you thanks.
Our next question of will come from the line of John France or of Sidoti. Your line is open.
Good afternoon, guys. Thanks for taking the questions.
Just to stick with USG the backlog those.
Up nicely in the quarter.
Is the timing issue that's going on there is it going to be recognized more of in the end of this calendar year as would be pushed back into next year, because just looking historically of its actually reasonably good backlog number for the business.
Yes, John it's a good test some of the a decent chunk of their orders that happened in the quarter were kind of some of their service contracts in their annual lease type type of activity.
Of that boosted the order number in the backlog number quite a bit but youll see the revenue for that kind of stretch out over a year. So those arent kind of book and ship type of product type of orders that that we see in the business a lot. So that's kind of the the.
Factor there that increased the backlog of little bit relative to kind of I was talking about the weaker sales.
Yeah, I'll just add a little.
To that if you look at <unk> business, you've got the.
Of the instrument sales, which is where we're seeing some softness but if you look at services has been strong or are all labs had been strong.
The leases.
That had been strong so it's really just 1 area of worse equipment buys and so Fortunately I think when it picks back up of it made great spot because as I mentioned in the common.
Commentary.
It's been a good bit of time and effort refreshing a lot of their products and so we think when we come out of this debt.
We're going to be at the head of a lot of and the reality of the provinces said this earlier, but we have not lost any business as they have it.
<unk> been buying at the same level as they had historically.
Okay fair enough and I guess similarly.
In the test side of the business when I look of the revenues.
On a sequential basis $48 million in June.
$40 million in March I was actually a little surprised that it was not an increased operating margin on that kind of of revenue growth is there something holding back the op margin contribution there in test.
Non of epic.
We've talked about the historically, maybe before you started following us.
We have to look at the test business of our as people look at you kind of look at it on the annual basis, because there's so much variability from quarter to quarter that you can be led to believe something is going on and maybe there's not very much of a project driven business and so the profitability from 1 quarter may be.
Significantly different it is from another quarter because that business has held up really nicely. This year I mean, we're kind of confident that on an annual basis or in the exactly what we expected to if not a little bit better. So it's it really is a lot of variability of dependent on mix and what projects are going through the backlog.
Through the sales channel in any given quarter.
Okay fair enough and I guess.
<unk>.
On the aerospace side of the business.
Any thoughts about what your customers' inventory looks like and how long will taken the accrued net inventory if you could sort of liberum.
I can probably answer the first half of the question better I can the second half.
I think the inventory levels are coming down certainly I think everybody has kind of taken the opportunity to towards their inventory down.
Until they got more confidence in their their build rates.
Of that can only last for so long and I think there is some if you read of what's going on in the industry in a broader base I think there is some concern by some of the larger.
Oems about the supply base being able to support the ramp when it does happen debt.
It should not be of concern for us.
Obviously with our financial capacity, we're in a position where we can ramp up quickly we can support the customers.
So I don't think thats going to be an issue, but the.
The exact timing of that is 1 reason, we're talking about the fourth quarter of like we're talking about it because as we looked at it going in.
The last time, we talked and we thought the risky a little bit more pickup in the fourth quarter third and fourth quarter than we did so it's still a little hard to predict now we've got a first look at 'twenty, 2 actually looks pretty good but we're going to get an update on that in September and so we'll be in a position of talk to you about that and talk about the assumptions. We have are in our plan at the.
Net time.
So I think as we get a little more time on this we'll get better insight into what their actual build rates are going to be they provide those of as they seem to be a little squishy right now, but hopefully is going to firm up here in the next 60 days or so.
Okay, and I guess, just 1 last question.
On the Westland and the production issues can you just I'm sorry can you some better color of whats going on there.
And you are not I wasn't quite sure based on the prepared remarks.
I'm, sorry, I didn't hear the kind of I didn't hear the very last part of your question.
For the last part of it.
Of the issues behind you or they are they done yet or the ongoing.
We've got our arms around those I don't think theres going to be any additional issues. We've got been through this.
Big level of detail, but I would say.
A number of things happened I mean, the we have some new product development. The kind of once you get out of control of the kind of got out of control.
<unk>.
The couple of products that we were ramping up on the.
New product developers always of the area, where you can have some concerns.
So we have some cost growth there we had some inventory that got built up the got ahead of us as well part of the issue was some pretty good business for us, it's a relatively small business and fair.
A fairly remote location. So we probably didnt have as much focus on that as we should.
We had.
Significant turnover in the financial group and so typically that would have been caused by the group and that we had like a complete turnover and a fairly small finance group the good.
News is as we mentioned before we didn't see any bad product out we didnt charge the customer for anything that we should have we've got it under control now and so there's still good business look I mean, it's a good business the end customers good old Navy business submarines and surface ships. So the end market is solid.
We had a.
We had some issues we've got those fixed and I think we'll be fine going forward.
Great. Thanks for the additional color I appreciate that.
You bet. Thanks.
And again, if you wish to ask a question. Please press star 1 on your telephone Keypad next question will be coming from the line of Tom Tomlinson with CJS Securities. Your line is open.
Hi, Good afternoon, guys and thank you for taking my questions.
Hey, guys just wanted to approach the.
The USG and double question from a different perspective.
We were all pretty sure that that business will come back, but I guess the question is.
It does it come back by the fall in the utility of usually do the maintenance.
Whereas the more going to be a spring of next year type of coverage when theyre going to be able to do it in the next cycle instead.
Well I think if you look of what happened last year.
Hesitate to say the city if you remember we had a pretty solid.
First quarter last year in total is probably certainly are the best quarter and so a lot of that was kind of pent up demand and utilities had funds that they wanted to deploy and so we're in a position certainly to provide debt for them as well.
The job honestly, it's really hard to predict right now but.
We certainly think debt given the low base for coming off of in this quarter, we should start since the pickup if not in the fourth quarter certainly the first part of next year.
Okay, great. Thanks for that and then.
With regards to the 2 acquisitions I was wondering if you could give us a sense of the growth potential across them.
You consider cross selling and synergies.
And also the synergies that you might be other get off from them I understand that.
Although none of them.
Europe, some maybe not as much but certainly from.
Phoenix, which is local.
Sure.
Ed.
We have.
We have pretty clear standard plans in place and we reviewed those before we made the acquisition of reviewed them as recently as last week and I think the real and I'd see the synergies really are probably more prevalent with all to know book because of the cross selling opportunities that we have from we really think we're going to be able to.
They've already got some decent growth projected now we didn't exactly the believe everything the center Sim.
We do think there is some pretty good growth there and I think getting the doble ne.
And they're in and the cross selling the will be able to do with our reps.
Across the World and we've done this before we'll be significant we did that with.
When we acquired.
The vanguard and.
Morgan Schaffer in others, and so they've done a good job historically of making sure that we get the best reps and are able to access those markets in the most effective way and I think that same thing will happen here in fact, I think of as I mentioned earlier, just because of their big footprint outside the U S. I think this will be even more important to us.
Okay, great. Thank you and then just on inflation I guess logistics I think you said you wouldn't be having much trouble supplying your customers, but I'm wondering if there's any cost that you may need to pass through and kind of if you are seeing some how are you dealing with it are the day customer correctly.
It takes some time to do that.
Yes, I think we're actually doing it in real time, so I know in.
And all 3 of the segments, we are actively working price programs.
And we've got price kind of happening in real time, almost in I would also say that for some of the project type businesses. The.
They think of it as they kind of roll the these cost increases into their cost database.
So is there.
Doing quotations and things like that that kind of got the latest look at what something is going to cost them. So they are able to kind of price those projects and those programs you know factoring in whatever increases we're seeing so generally I think we feel like we're in pretty good shape there.
Certainly inflation is in the headlines and we're all seeing it in dealing with it.
But we've been pretty proactive communicating around price from here out of the subsidiaries.
And quite frankly that will be a key thing we focus with everybody on next month when we go through our financial review processes and we set the 'twenty 2 numbers, we've got to make sure that we continue to drive those those price programs, but where we are today, we feel good about that.
Got it thanks for just last 1 for me.
On the cash flow you did a pretty good job converting into cash.
From earnings Im just wondering is there a <unk>.
Et cetera.
1 point that it brings it back down or is this more of a onetime permanent gain in cash.
Yes, I mean listen.
I think in my mind.
I think that the the balance sheet is a lever that we can kind of continue to work I think we've got room to run.
With the working capital initiatives I mean, I'm not sure we'll stay at 120 of 130% forever, but certainly we can drive.
A nice.
We want to be in that 100% plus range as we move forward and we want to drive our R. Over our turnover is higher than our ROTC is higher and thats kind of the the framework that I'll work with everybody on as we try to kind of drive this over the long term so.
I'm really excited about the work that we've done already but I think we've got I still feel like we're kind of in the early innings. There we've got more of the.
Got it thank you.
Thank you John.
And we have a follow up question comes from the line of John France, Rob Lowe Sidoti Your line is open.
Yes, I guess, just a follow up from some of John's questions.
What.
Was your projected debt level be at the end of the fourth quarter.
We're looking at a leverage ratio is still below 1.5 times from kind of of the point for 3 that we're at today or whatever so.
I was just curious how much drawdown of cash versus debt you were thinking about for the acquisition that's kind of what is going with that.
Well a lot of the cash.
A fair chunk of the cash on the balance sheet today, that's international and not real easy to deploy towards towards the the deal. So.
We work that separately to kind of get that cash back, but it is not available today as we close on those deals. So youll see most of that going on the debt side.
Okay, Alright, and I guess again.
John again.
I was wondering how much of unabsorbed cost of inflationary costs, you are forced to take.
<unk> in the third quarter, if you could call that out of it or was the price increases well match the was immaterial.
I would say immaterial I mean, we had a little bit of inflation called out by a few of the subs but.
But not enough to really move the needle. So overall of that was kind of a wash.
Jason Thanks for taking my follow ups.
You bet.
And again, if you wish to ask the question. Please press star 1 on your telephone keypad.
Okay, well listen I think we'll end the call now thanks, everybody for dialing in and I look forward to talking to you in the next call. Thank you.
Thanks, everyone.
Yes.
And this concludes today's conference call. Thank you everyone for your participation you may now disconnect.
Okay.
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Good day and welcome to the ESCO Q3 conference call today's call is being recorded with US today are Vic Richey, Chairman and CEO, Chris Parker, Vice President and CFO and now the per cent. The forward looking statements I would like to turn the call over to Kate Lowrey the rack.
For of Investor Relations. Please go ahead.
Thank you.
Net Tonight during this call regarding the timing of recovery and growth of our end markets the amounts and timing of 2021 and beyond revenue impacts of Covid and Covid variance and the property you expected that the result of Covid vaccines for recovery in commercial aerospace adjusted EPS adjusted EBITDA cash for shareholder value of the timing of blocks off the web.
Success in completing additional acquisitions the success in integrating acquired businesses the.
Results of the cost reduction efforts, the correction of production and inventory issues and other statements, 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 of <unk>.
And 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, whether as a result of new information future events or otherwise.
Addition, during this call of the company May discuss non-GAAP financial measures in describing the company's operating results. A reconciliation of these measures to their most comparable GAAP measures can be found in the press release issued today and found on the company's website at Www Dot ESCO technologies Dot com under the link Investor Relations now I'll turn the call over to Vic.
Kate and thanks, everyone for joining today's call before we jump of the details of the quarter I'd just like to thank our employees across the company for the ongoing efforts to run the business with the ongoing challenges from Covid, we continue to see great efforts and contributions from everyone across the company and for that very appreciated.
Since the beginning of the pandemic. Our primary goal is remaining the same provide a safe working environment and protect the health of our employees and today, we continue to encourage our staff to get fully vaccinated for the benefit of everyone.
There were a few challenges in the third quarter, but overall the company continues to perform well cash generation year to date has been excellent. We have teams focused on the working capital initiatives around the company.
The room for improvements as we move for this can be of long term value creation tool for ESCO.
Our previous cost reduction actions, along with our enhanced focus on operational efficiency will benefit of ESCO going forward as our end markets continued moving toward a more normalized level of activity and I'm confident that our disciplined approach to operating the business will result in continued success as we move into fiscal 2022.
While Chris will provide the financial details I'll offer some top level commentary to set the tone for our <unk>.
Year to date A&D sales continued to be lower than prior year due to COVID-19 <unk> impact on the commercial aerospace our portfolio of diversity allowed us to mitigate this headwind as our year to day consolidated adjusted EBITDA margins are only down slightly compared the prior year to date margins. This performed.
This was driven by solid contribution from our other operating as a result of of favorable sales mix and meaningful cost reductions across the company.
From a segment level there are several positives to report.
Within A&D, we're seeing signs of recovery of the commercial aerospace as passenger boardings continued increase in more of airlines are of adding the idled the aircraft back into service.
All of our commercial aerospace customers were still down in the third quarter as the recovery in the sectors that had a bit slower than we anticipated.
U S. Domestic travel has picked up but it's still slightly below 2019 levels. Those of you have been to an airport lately probably surprise, but this is what the the TSA statistics show it's.
It is important to understand the business travel remains soft and air travel in Europe, and overall international travel are still well below 2019 levels. The good news is we're starting to see order activity increase in of the third quarter and our overall A&D segment orders increased by more than 40% compared to last year's third quarter.
Additionally, our navy of space businesses remained strong and well funded and our outlook for near term growth opportunities continue to materialize and both of these areas.
Our test business continues to be steady.
We are of good order input on our global but when the global basis, and we're actively managing material inflation and transportation issues as they arise we expect test outlook to remain positive.
Driven by the strength of its served markets, including the <unk> medical and automotive are.
Our USG business continues to outperform from a profitability perspective with year to date adjusted EBIT margins of $19.4 per said compared to 15, 1% last year the.
For the renewables business at the NRG has performed well in 2021, while the orders from durables utility customers have been a bit soft we.
We did see sales growth from doble of approximately 8% of the quarter, we have not yet seen demand return to pre pandemic levels.
We feel great about the long term outlook for the USG business and are very excited about the announcements today regarding closing 2 acquisitions.
Our agreement to acquire <unk> had been announced back in May and we were able to get the deal closed in July of 29, this business, bringing exciting new product offerings to our USG business and also significantly increases our global footprint. Additionally.
Additionally, we announced the day the purchase of Phoenix Technologies. This is also the exciting business that further enhances the product offering of our USG group and provides greater access to the commercial and industrial markets.
<unk> had initial meetings with the teams from both of these businesses are very encouraged by the quality of the people and their enthusiasm for join ESCO.
We're confident these will be strong additions to ESCO and usg's portfolio that will drive future sales and earnings growth.
So overall of the fundamentals of our portfolio remains strong the second half sales outlook because of bad behind initial projections, but origin of started to increase and we feel good about the growth outlook for 2022 and beyond now I'll turn it over to Chris.
Thanks Vic.
Start by briefly touching on a few comparative highlights.
Sales in the third quarter grew by 5% with A&D up 1, 8% USG up 12% and test growing 4.6%. This.
This has been the first quarter in 2021, where we saw sales growth from all 3 segments.
Adjusted EBIT margins were 12, 7% in the quarter compared to 14, 2% in the prior year quarter.
The margin decline was driven primarily by the operational inefficiencies and inventory write offs at Westland.
We had some commentary in the press release regarding Westland and we wanted to mention that here as well.
In the quarter, we did become aware of some issues of Westland They have experienced several challenges related to the new product development programs.
Which led to increased production cost and product quality issues.
Mobile AD product will send the build the customers, but we did have charges recorded in the quarter of $2.1 million and year to date charges of $4.4 million.
The first and second quarter charges represent corrections to our previously reported financials and going forward. Our 2021 year to date numbers will be updated to reflect these amounts.
We have started work immediately to get the production issues fixed and to address cost issues within the business.
There are strong synergies between Westland and our globe subsidiary and we have already begun the work to bring these businesses together under 1 leadership structure.
We have a strong outlook for this business and are committed to driving significant improvements as we move forward.
Adjusted EPS came in at <unk> 67 per share in the quarter below prior year's 76 per share adjusted.
The adjusted pre tax dollars were down 2.5% compared to prior year Q3, and we had an exceptionally low tax rate in prior year Q3, which further reduced EPS.
Segment highlights in the quarter are as follows.
The A&D did see a return to sales growth in the quarter. The Navy business grew by over 20%, which more than offset declines in the commercial aerospace sales of approximately 10%.
While the commercial aerospace sales were down we did see the rate of decline improved and we are seeing signs that the business is beginning to rebound.
Margins for A&D were down driven by the issues of Westland.
USG saw growth of 12% in the quarter. The renewables business was very strong Utah.
For the utility business did grow in Q3, but it has not returned of prepaying dependent make levels.
Adjusted EBIT margins were 18, 3% in Q3 compared to 14, 8% in the prior year Q3.
The strong improvement was driven by leverage on the sales growth and benefits from prior cost reduction activities.
The test business grew 4.6% in the quarter continued steady performance from this group.
<unk> were down in the quarter due to mix and timing issues.
Year to date operating cash flow was up over 40%. We continue to see great results from our focus on driving balance sheet improvements the.
The teams across the company continue to work multiple strategies for operating capital improvement and the results of very good.
Some programs driving this performance include negotiating performance based payments in our A&D and test segments. This has had a significant impact as it often times results in new orders being cash positive throughout the life of the contract.
Other efforts include adjusting safety stock levels and extending payment terms.
Year to date, our adjusted EBITDA was nearly $91 million with the 17, 8% margin compared to 18% in the 2020 year to date.
Over the past year, we took several cost reduction actions across the company that have allowed us to hold margins during this down sales environment.
Examples here include closure and consolidation of facilities the move of manufacturing content to our Mexico facility and ongoing make buy programs.
Amortization of intangibles of interest expense decreased while tax expense as a percent of pre tax income increased in Q3 and year to date, because we had several tax strategies implemented last year, which benefited the 2020 comparative rates.
Orders were good story in Q3 has entered orders were strong we booked $203.8 million of new business in the quarter ended with the backlog of $539 million and of book to Bill of 112%.
This represents 29% growth compared to prior year Q3.
Strength in orders came from all 3 segments with A&D orders, increasing 44%, USG, increasing 10% and test increasing 28%.
As we continue navigating through what we hope is the near end of Covid. Our number 1 focus remains the same <unk>.
Increasing in maximizing our liquidity to position us for future M&A growth and.
The increase investment in new products and solutions, we have a strong balance sheet today and are excited about the recent acquisitions that Vic mentioned earlier.
We still have ample capacity for further acquisitions and we obviously continue to invest in the core business to enhance our organic growth profile.
Our significant.
Cash generation. This year is a testament to this focus on liquidity.
We have delivered free cash flow conversion of 118% of net earnings for the first 9 months as mentioned above we have clear momentum in our working capital initiatives.
Okay.
Didn't want to talk for a minute about the Q4 guidance in the release, we did provide Q4 guidance. This is the first quarter that has included guidance since Covid began.
The guidance for Q4 is the range of 73 to <unk> 78 per share.
The sales levels in Q4 or a key issue as we think about the guidance and this range is predicated on a sales level in the range of $190 million to $200 million.
And the last 3 months, we have reduced the Q4 sales outlook for the commercial aerospace businesses and also for the utility businesses the.
The commercial aerospace backlogs are beginning to build but we see those more of as drivers for 2022 as opposed to Q4.
If you could for the utility space, we are seeing some growth compared to prior year, but not to the levels. We had previously anticipated.
For the long term outlook for both of these markets continues to be positive and we feel good about our positioning as we look towards 2022.
We also want to be clear that this outlook excludes any impact from the acquisitions that were announced today.
We will have sales in earnings impacts from those transactions, but they are not yet quantified and are therefore not included in the guidance for this provided.
With that I'll turn it back over to Vic.
Thanks, Chris So as I touched on quite a few of my thoughts earlier in my commentary I'll just offer a few more comments before we move into Q&A as Chris mentioned, we are a little softer than planned here in the back half of the year for the commercial aerospace and doubles utility market. This doesn't change our long term commitment to these markets, we feel great about our end markets.
Exposure in our diverse portfolio allows us to manage through periods like this outside of these markets. We see a lot of growth opportunities in A&P for the military Aerospace Navy and space end markets divestments in the renewable energy market continued to drive very strong performance for our NRG business. The test business is a lot of opera.
<unk> for the telecom automotive and medical markets. We just finished up aboard many of the Boston last week and they are in those meetings. We took the time the visit the Doble and global operations, we had a great set of meetings and really exciting interactions with the teams at the operating years Adobe or we did a full update of the USG segment. The team has.
Made great progress update in the product line across the business for the renewable focused products at NRG for the new assay launch of Doble.
Great to see the innovation happen inside that business as our customers start spending again, it will be ready to support them.
This also provided a chance to update our board in Phoenix, and also Nova acquisitions Sacred firsthand see the excitement around these set of transactions at revisiting of the Doble headquarters, we took the board of the globe facility. So the net.
Other great visit the team of Globe has done an exceptional job the driving tremendous growth with the navy surface all treatment of product line. The team has worked very hard to master of difficult manufacturing process, Theyre really roll and its fun to see a winning team in action for a couple of days in Boston accomplishing all of this type of loss per share.
Like to thank our board for their ongoing support and guidance so with that I think we're ready for some Q&A.
And at this time I would like to remind everyone in order to ask a question. Please press star 1 on your phone's keypad.
Again to ask a question. Please press star 1 on your telephone keypad.
First question will be coming from the line of Cameron Lochridge, Steve with Stifel. Your line is open.
Hey, good afternoon, Thanks for taking my question.
Got it.
So I was hoping we could start on the M&A front, great to see the 2 deals get closed out the Nova in Phoenix This quarter.
I was just wondering if you could update us on you called out the 700 million gallons of liquidity in the press release, maybe just what youre seeing in terms of what Youre looking at in terms of end market exposure.
Geographies things like that valuations, where those might stand any any update on on the pipeline would be helpful.
Sure so as.
I'm sure you're hearing from the lot of other folks the M&A market is pretty.
Pretty active right now so we were able to get these 2 done.
Theres a number of other things that they were looking at I would say the the multiples I think of settle down a little bit they are still private of a little higher than I would've anticipated in this environment, but we are seeing good opportunities. There I think it will continue to focus on our utility segment and our A&D segment.
As far as geographical of the great thing about particularly all of the Nova and to a lesser extent.
Phoenix, the those guys as well and both of those have really good international content.
And so that really is an area, we're going to work and to improve for.
For a number of years. So if you look at kind of the breakout of <unk> current.
Sales of probably 85% in the U S and 15% out outside of the U S.
Look at all to know whether they are exactly the opposite so they have some sales in U S. The at 85% of their sales are in Europe, and the and in Asia, and so that's really going to give us an opportunity to have a much bigger footprint outside of the U S and we'll build of sell some of their products here most of some of the Doble Prada.
<unk> there and so this is really a.
Great acquisition for US say Phoenix is a little more 50.50, but the thing they bring us some international content, but it really some new products a lot of there is of more high voltage products and more applicable in some cases of the commercial industrial margins versus the addition to the utility markets. So as to those of the kind of things will.
Continue to look for.
Both on the.
You know both on the utility side and on the A&D. If you remember I guess it was last quarter, maybe a quarter before we had a small drop in acquisition of 1 of our A&D business and we will continue to look for those kind of opportunities as well.
That's great. Thank you well, we'll look forward to more announcements to come.
I guess it was the follow up switching to U S. G I.
I guess I was a little surprised to see the demand was still weak there I realized with the delta variant emerging.
Probably adding a little bit of uncertainty but.
If you could just talk to what you're hearing from customers, maybe what's holding back of that demand.
Any signs of that that'd be helpful. Thank you for.
Sure.
It's a hard day and predict I'd say 1 of the biggest issues that they were seen as well a couple of things I mean, the utility is still probably 90% of the people are working from home and so the people that we would be dealing with in any case and so.
It's just much more difficult to do business when people arent out there working.
To do the types of things that we're doing so that's been a little bit of a surprise to you. The other thing is of more and more worried about delivering electricity right. Now there is some of the other day. So a lot of the focus we see is on making sure that the.
They are able to deliver electricity.
The pay attention of those type of things they take a little bit of the focus of the testing of of the infrastructure, We think thats a.
A point in time is going to happen as we've talked about before.
It's required that they do this type of test and it's also a good business to do this type of testing. So I think it's just a little bit everybody has kind of pulled their horns in a little bit it's important to remember, though I mean, it's not like we've stopped doing business. There I mean your sales are down about 10% I think of so we've seen some impact we think it is going to pick up we thought it was the honestly thought was going to.
Pick up before now, but we think of as we go into 'twenty 2 coming off of slower base, we'll see some some some pretty good upside there.
Got it. Thank you very much I'll turn it back.
Thank you thanks.
Our next question of all come from the line of John French of Robert with Sidoti. Your line is open.
Good afternoon, guys. Thanks for taking the questions.
Just to stick with USG in the the backlog, though was really up nicely in the quarter.
It's a timing issue that's going on there is it going to be recognized more of in the end of this calendar year is to be pushed back into next year, because just looking historically, it's actually reasonably good backlog number for the business.
Yes, John it's a good test some of the a decent chunk of their orders that happened in the quarter were kind of some of their service contracts in their annual lease type type activity.
So that boosted the order number in the backlog number quite a bit but youll see the revenue for that kind of stretch out over a year. So those arent kind of book and ship type of product type orders that that we see in the business a lot. So that's kind of the the.
For the factor there that increased the backlog of little bit relative to kind of talking about the weaker sales.
Yeah, I'll, just add a little bit of that if you look at <unk> business you've got the.
The instrument sales, which is where we're seeing some softness that if you look at services has been strong or are all labs has been strong the.
As Chris that had been strong so it's really just 1 area of worse equipment buys and so Fortunately I think when it picks back up of it made great spot because as I mentioned in the commentary.
It's been a good bit of time and effort refreshing a lot of their products and so we think when we come out of this debt.
We're going to be able to have a lot of and the reality of that probably should have said this earlier, but.
We've not lost any business just as they have and haven't been buying for the same level they had historically.
Okay fair enough.
And I guess similarly.
For the test side of the business when I look at the revenues.
On a sequential basis $48 million in June and call it $40 million in March.
Actually a little surprised that it was not an increased operating margin on that kind of of revenue growth is there something holding back the op margin contribution there in test.
No and I think we've talked about the historically, maybe before you started following us but the thing we have to look at with the test business. Our ISP. The look at you kind of look at it on the annual basis, because there is so much variability from quarter to quarter that you can be led to believe something's going on of maybe theres not very much.
Project, driven business and so the profitability from 1 quarter may be.
Significantly different it is from another quarter that business has held up really nicely. This year I mean, very kind of confident that heat on the annual basis or in the exactly what we expected to if not a little bit better. So it's it really is a lot of variability of dependent on mix and what projects you're going through the backlog or through the sales channel in India.
Given quarter.
Okay Fair enough and then.
Yes.
On the aerospace side of the business.
Any thoughts about what your customers' inventory looks like and how long would taken the accrued net inventory if you could sort of liberum.
I can probably answer to the first half of the question better I can the second half.
I think the inventory levels are coming down certainly I think everybody just kind of taken the opportunity to towards their inventory down.
Until they got more confidence in their their build rates.
Of that can only last for so long and I think there are some if you read of what's going on in the industry in a broader base I think there is some concern by some of the larger.
Oems about the supply base being able to support the ramp when it does happen debt.
It should not be of concern for us.
Obviously with our financial capacity, we're in a position where we can ramp up quickly. We can support the customers. So I don't think thats going to be an issue, but the exact timing of that is 1 reason, we're talking about the fourth quarter like we're talking about it because as we looked at it going in.
Last time, we talked and we thought that we receive a little bit more pickup in the fourth quarter third and fourth quarter than we did so it's still a little hard to predict now we've got a first look at 'twenty, 2 actually looks pretty good but we're going to get an update on that of September and so we'll be in a position of talk to your bad debt and talk about the assumptions. We have are in our plan at the.
At time.
So I think as as we get a little more time on this we'll get better insight into what their actual build rates youre going to be they provide those 2 of them because they seem to be a little squishy right now, but hopefully is going to firm up here in the next 60 days or so.
Okay, and I guess, just 1 last question for him.
The Westland and the production issues can you just I'm, sorry give me some better color on what's going on there.
And you are not I wasn't quite sure based on the prepared remarks.
I'm, sorry, I didn't hear the I didn't hear the very last part of your question.
The last part of it.
The issue is behind you what are they are they done yet or are the ongoing.
No.
Got our arms around those I don't think theres going to be any additional issues. We've got the.
Through this.
Big level of detail, but I would say.
A number of things happened I mean, the we have some new product development. The kind of most of you got out of control of the kind of got out of control.
Sure.
The couple of products that we were ramping up on the.
New product developed as always of the area, where you can have some concerns.
So we have some cost growth there we had some inventory they've got built up that got ahead of us as well part of the issue was some pretty good business for us it's a relatively small business in.
Fairly remote location. So we probably didnt have as much focus on that is on US we should have.
We had <unk>.
Significant turnover in the financial group and so typically that would have been caused by the group in that we had like a complete turnover and a fairly small finance group.
The good news is as we mentioned before we didn't see any bad product out we didnt charge the customer for anything that we should have we got it under control now and so there's still a good business look I mean, it's a good business the end customers good old Navy business.
Submarines and surface ships. So the end market is solid we had.
We had some issues we've got those fixed and I think we'll be fine going forward.
Great. Thanks for the additional color I appreciate that.
You bet. Thanks.
And again, if you wish to ask a question. Please press star 1 on your telephone keypad.
Next question will be coming from the line of John Todd 1 thing with the CJ Securities. Your line is open.
Hi, Good afternoon, guys and thank you for taking my questions.
Hey, guys just wanted to approach the debt.
USG and double question from a different perspective, I mean, I think we were all pretty sure that that business will come back, but I guess the question is.
It does it come back by the fall in the utility of you usually do the maintenance.
Or is it more going to be a spring of next year type of recovery when they're going to be able to do it in the next cycle instead.
Well I think if you look of what happened last year.
The day to say this that if you remember we had a pretty solid.
First quarter last year in total is probably certainly are the best quarter and so a lot of that was kind of been our spend.
The demand in utilities had funds if they wanted to deploy and so we're in a position certainly to provide that for them as well.
Jonathan This is really hard to predict right now but.
We certainly think that <unk>.
Given the low base, we're coming off of in this quarter, we should start since the pickup if not in the fourth quarter certainly the first part of next year.
Okay, great. Thanks for that and then the.
Just with regards of the 2 acquisition I was wondering if you could give us a sense of the growth potential across them.
When you consider.
Cross selling and synergies.
And also the synergies that you might be able to get out from them I understand that.
And all of them.
In Europe, so maybe not as much but certainly from the.
The Phoenix, which is local.
Sure so.
We have.
We have pretty clear standard plans in place and we reviewed those before we made the acquisition of reviewed them as recently as last week and I think the real and I'd say the synergies really are probably more prevalent with all of the novo because of the cross selling opportunities that we have from we really think we're going to be able to.
They've already got some decent growth projected now we didn't exactly the leave everything they sit in their Sim.
We do think there are some pretty good growth there and I think getting the doble name in there and in the cross selling you will be able to do with our reps and <unk>.
Cross the world and we've done this before we'll be significant we did that with <unk>.
When we acquired.
Vanguard in.
Morgan Schaffer in others, and so they've done a good job historically of making sure that we get the best reps and are able to to access those markets in the most effective way and we take that same thing will happen here in fact, I think of as I mentioned earlier, just because of their big footprint outside the U S. I think this will be even more important to us.
Okay, great. Thank you and then just on inflation I guess logistics I think you said you wouldn't be having much trouble supplying your customers, but I'm wondering if there is any coffee and the need to pass through and kind of if you are seeing some how you're dealing with it are they being cut through correctly. It does take some time to do that.
Yes, I think we're actually doing it in real time, so I know in the.
And all 3 of the segments, we are actively working price programs.
And we've got price kind of happening in real time, almost in I would also say that for some of the project type businesses.
The way they think of it as they kind of roll the these cost increases into their cost database.
Is there.
Doing quotations and things like that they've kind of got the latest look at what something is going to cost of them. So they're able to kind of price those projects and those programs you know factoring in whatever increases we're seeing so generally I think we feel like we're in pretty good shape there.
And certainly.
Certainly inflation is in the headlines and we're all seeing it in dealing with it but.
But we've been pretty proactive communicating around price from here after the subsidiaries and quite frankly that will be a key thing we focus with everybody on next month. When we go through our financial review processes and we set the 'twenty 2 numbers, we've got to make sure that we continue to drive those those price programs, but where we are today, we feel good about that.
Got it. Thanks for that then just last 1 for me.
On the cash flow you did a pretty good job converting into cash.
From earnings I was just wondering is there a <unk>.
Etc outflow at some point that it brings it back down or is this more of a onetime permanent gain in cash.
Yes, I mean.
Listen I think in my mind.
<unk>.
I think that the balance sheet is a lever that we can kind of continue to work.
We've got room to run with.
With the working capital initiatives, I mean, I'm not sure. It will stay at a 120 of 130% forever, but certainly we can drive.
A nice.
We want to be in that 100% plus range as we as we move forward and we want to drive our Rover, our turnover is higher than our ROTC is hiring that's kind of the the framework that I will work with everybody on as we try to kind of drive this over the long term so.
I'm really excited about the work that we've done already but I think we've got I still feel like we're kind of in the early innings. There we've got more to do.
Got it thank you.
Thank you John.
And we have a follow up question comes from the line of conference Robyn with Sidoti Your line is open.
Yes, I guess, just the follow up from some of John's questions.
What.
Was your projected debt level be at the end of the fourth quarter.
We're looking at a leverage ratio is still below 1.5 times from kind of the point for 3 that we're at today or whatever so.
I was just curious how much drawdown of cash versus debt you were thinking about for the acquisition.
Kind of what is going on with that.
Well a lot of the cash.
We have a fair chunk of the cash on the balance sheet today, that's international and not real easy to deploy towards towards the the deal. So.
We work that separately to kind of get that cash back, but it's not available today as we close on those deals. So youll see most of that going on the debt side.
Okay, Alright, and I guess again on John again.
I was wondering how much of unabsorbed cost of inflationary costs, you are forced to take.
<unk> in the third quarter, if you could call that out of it or was the pricing increases now well matched the there was immaterial.
I would say immaterial I mean, we had a little bit of inflation called out by a few of the subs but.
But not enough to really move the needle. So overall that was kind of a wash.
Wow.
Thanks for taking my follow ups.
You bet.
Okay.
And again, if you wish to ask a question. Please press star 1 on your telephone keypad.
Okay, well listen I think we'll end the call now thank you everybody for dialing in and I look forward to talking to you in the next call. Thank you.
Thanks, everyone.
Sure.
And this concludes today's conference call. Thank you everyone for your participation you may now disconnect.