Q4 2022 ESCO Technologies Inc Earnings Call
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Good day, and thank you for standing by welcome to the fourth quarter 2022 ESCO.
Excuse me technologies earnings call at this time, all participants are in a listen only mode. After the speaker's presentation. There will be a question answer session to ask a question. During the session you will need to press star one on your telephone you will then hear an automated message advising your hand is raised.
Today's call is being recorded.
On the call today.
He has Vic Richey, chairman and CEO , Chris Tucker Senior Vice President and CFO , and Brian Saylor, President utility solutions group.
And I would like to turn the conference over to your first speaker today, Kate Lowery, Vice President of Investor Relations Kate.
This was.
Thank you statements.
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 as maybe required by applicable laws or regulations. In addition, during this call. The company may discuss some non-GAAP financial measures in describing the companys operate.
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 are still technologies Dot com under the link Investor Relations now I will turn the call over to Vic.
Kate and thank you everyone for joining today's call. We've got a lot a lot to cover today, but I want to start off by introducing everybody to Brian sailor.
Now you have all seen our press release from September 12, and also the commentary from the release we issued today.
Brian you're about to take over as CEO on January one and is joining us on today's call.
I really feel good about our transition plan.
We thought this call it'd be a good chance for Brian to say, a few words and discharge engaged in our quarterly earnings process.
Now, let me turn it over to Brian for a brief introduction.
Thanks, Nick and Hello to everyone on the call today.
We are grateful to have a chance to talk to all of you.
I know you've seen the details from the press release, but I am excited.
It has to be taken this step.
ESCO for over 25 years Vik.
Rick and the team here have built a tremendous company during his time as CEO I know I speak for the entire team when I say that we're all very thankful for his contributions over a 37 year career at ESCO. The company is in a very strong position and I'm looking forward to engaging with the teams around the company.
As we work to continue our momentum and drive the growth of our business forward I'd also like to thank the board of directors for the confidence that they are showing by placing me in this role and I'm very eager to get started.
On a personal note I am currently in the process of relocating to the St. Louis area as we speak and we will certainly be ready to hit the ground running.
Running by January one.
I also look forward to engaging with all of you in the investment community once I get established here in St. Louis I'll work with Kate and Chris to set up some investor outreach there'll be lots of focus on as I take over and certainly meeting with investors will be a big priority so with that I'll turn it back over to Vic.
Okay, great. Thanks, Brian , Let me say again X value them for that.
Transition, we have in front of us.
As most of the utmost respect for Brian and a full board is very confident as he takes over our succession planning process was rigorous and Brian is the right leader to move us forward Congratulations Brian .
With that let me dividend of the quarterly results, we really had a tremendous finish to the year and a lot of ways. This was a very challenging year, you've all heard a lot about the ongoing supply chain and labor challenges at ESCO, we felt those pressures throughout the year.
So it was tough sledding for much of the year.
That makes it very gratifying to be on the call today announcing these record results for the full year, we achieved many records sales of $858 million adjust.
Adjusted EPS of $3 21, a share operating cash flow of $135 million and a year end backlog of $695 million.
All record amounts.
We have meaningfully improved financial contributions from all three segments and tremendous effort spot thousands of employees around the company our portfolio of businesses all have strong market positions, which is very evident from the numbers, we put up this year.
Across the company, we've seen favorable end market dynamics, and we feel really good about the long term outlook for all three business platforms Chris.
Chris will get into some of the financial details in a few minutes, but I did want to offer some top level commentary about each of the business segments sorry.
Starting with A&D, where we had a great quarter sales increased 30% and adjusted EBIT dollars were up over 60%.
This business had a few tough years with big negative impacts from the pandemic 2022 represented a nice year of recovery for A&D, but we think the recovery still has room to run the.
The commercial aerospace markets have led to recovery with Pts.
Chris There and made a seen a significant order increases we also have sizeable navy space and defense aerospace businesses in A&D and those markets were also strong.
This business is nicely diversified across different aerospace and defense markets and we see good momentum as we move into 2023.
<unk> utility group, we also had a strong quarter. This business was a little uneven in 2021 coming out of the pandemic to over the last three quarters of fiscal 2022, we've really seen our business stabilize and strengthen.
It's clear that the North American utility customers have started spending again as they work to bolster capacity and to improve their infrastructure. Additionally, the renewable space continues to be a bright spot for us and NRG has now delivered two years in a row of sales growth in excess of 20% the.
The other exciting thing for the utility group as some of the new product launches that Brian and the team has completed in particular, the new callisto or non dissolved gas analyzer is a very exciting new product is gaining good momentum in the market place.
The supply chain issues have been difficult here, especially given your electronic components involved.
Teams have continued to work these issues and we were able to deliver really strong growth in 2022.
Lastly, let's touch on the test business, where we had a nice quarter sales growth and EBIT margin expansion Q4 sales were up 8% for test a good number given the significant growth we posted over the last several quarters. This business also has diversity in end markets and we have seen strength across several different.
Markets with healthcare Telecom automotive and data center customers, all having high level of activity in 2022.
Other good news for test in Q4 was a margin expansion an EBIT margin of 17% in Q4 is really great number for this business and I know the team is focused on continuing to drive margin improvement as we move forward to.
To summarize a bit it.
It really was a good year for <unk> on a number of fronts.
Beginning of the year, we gave earnings per share guidance of $3 10 to $3 20 a share.
When they got US was delivered there was not an expectation that supply chain and labor challenges will be with us all year.
That is really one of the reasons, we feel so good about the year, we slightly exceeded EPS range in spite of the headwinds that were well beyond what we anticipated. It is a big Testament to our employees across the company and always.
I'm very thankful for the tremendous effort to deliver this record year.
Now I'll turn it over to Chris.
Sure.
Thanks, Nick.
We have done in the last few quarters, we're going to use the chart presentation to walk through the financial results.
Starting on chart three we have the overall financial highlights for the fourth quarter.
Vic mentioned, we had a great quarter and this chart chart illustrates that very well sales were up nearly 25%.
Adjusted EBIT was up over 50% and adjusted EPS was up over 42% a great growth quarter for ESCO.
It does show orders down approximately 5% that is a function of last year's fourth quarter acquisition of <unk> in Phoenix. The acquired backlog came through as orders last year. So it makes for a pretty tough comparison.
Overall, the order trends have remained robust and our record year end backlog of $695 million.
The strength of the business.
The last thing I wanted to highlight on this chart with organic sales growth of 19% two of the three business platforms grew at over 20% organically to drive this very strong finish to 2022.
Next on chart four we will get into segment results.
Starting with A&D.
Great finish to the year here as well with nearly 30% sales growth and EBIT margins up over four points.
Commercial aerospace recovery led the sales growth as we saw sales increase by 50% in this market.
This was led by our <unk> and Mayday subsidiaries.
Beyond that we still saw explosive growth from other parts of the business with defense Aerospace Navy and space all up more than 20%.
The teams here have been managing a number of supplier and labor challenges. So it was great to see them work through those issues and deliver this quarter.
On the next chart, we have the utility solutions group, where we also had very strong sales performance.
Organic sales growth was 21% overall with high levels of activity from electric electric utility customer base and the renewables business.
EBIT margins were down six tenths of a point is we did see some unfavourable mix here, but EBIT dollars were up 33%.
The acquisition impact was favorable in the quarter with ultimate <unk>, and Phoenix, adding 16 points of growth.
Going forward these businesses will be folded into the base company.
We are very excited about the progress made with both acquisitions during our first year as part of ESCO.
The last segment to talk about is test a good finish to the year for this group with sales up 8% and EBIT margins up one seven points really nice margin expansion here as we saw solid leverage on the volume increase and we also saw good impacts from pricing actions.
Orders did drop for test during the quarter last year in Q4, we saw significant orders in the power filter product line. So that is the main driver of the decrease.
Still have a 19% increase in backlog compared to prior year and so the business has some nice runway as we move into 'twenty three.
Next on chart, seven and take a snapshot of the full year results.
You saw in the press release, it was a record year for ESCO on many fronts.
Sales performance was strong with a 20% increase driven by 13% organic and 7% from recent acquisitions.
Adjusted EBIT margins expanded by <unk> eight points and adjusted EPS was up 24% as we saw favorable impacts from volume leverage price and cost reductions, which more than offset the inflationary impacts of material and labor.
Orders were up over 20%, resulting in $695 million year end backlog with good growth from all three segments.
Chart eight has the cash flow highlights.
Operating cash flow increased to $135 million a great result, as we had lagged on cash flow through the first three quarters.
Capital spending was up just over $5 million and acquisition spending dropped significantly.
With 2021, including ATM also Nova in Phoenix, While 2022 included only the Nico acquisition.
We did restart a share repurchase program in 2022, and we're able to buy back $20 million worth of stock during the year.
Chart nine has full year highlights for each of the segments not going to redo every number here obviously for US. This is a really good looking chart with lots of arrows pointing in the direction.
Double digit increases of sales and EBIT for all three business segments. So 2022 was really a good year of recovery for both A&D and USG. After the pandemic hit negatively impacted those businesses in 2020, one and then for test we really had continued growth after good performance throughout the pandemic period.
The last chart will be our guidance for 2023.
We are expecting another year of growth in 'twenty, three with sales growth of 6% to 8% and adjusted EBIT dollar growth of 10% to 15%.
In the press release, we detailed the growth expectations by segment, we expect A&D to lead the sales growth with low double digit growth.
Followed by USG with mid single digit growth.
And test expecting low single digit growth.
From an EPS perspective, we are planning for growth in the range of 8% to 12%.
Slightly lower than the EBIT growth as we expect the increases in interest expense given the current interest rate environment.
Overall, we are looking at another year of nice growth after the great year, we had in 2022.
That concludes the financial update and now ill turn it back over to Vic.
Thanks, Chris since that touched on quite a few of my thoughts earlier my commentary I'll just offer a few more comments before we move into Q&A you saw the numbers from Chris, but obviously, a great year for ESCO with and I'll say this for the last time record financials on a number of fronts, even better than that to continued growth as being a projected as we go into next year.
<unk> so the growth isn't over for ESCO and we feel that the momentum is strong heading into 2023. The company is on very solid footing and it's a good time for the leadership transition we discussed earlier.
Brian is more than capable and I know he'll do a great job as you move to the CEO role.
Been a real honor for me to be the CEO at escrow for the last 20 years and I've really enjoyed my interactions with investors we've made a deal over that time.
With that we can start Q&A.
Thank you as a reminder, if you would like to ask a question. Please press star one on your telephone.
While we compile the Q&A roster.
Our first question will be coming from <unk>.
John Tang Wang.
C. J S Securities Your line is open.
Hi, guys. Thanks for taking my questions.
First of all congrats on your semi retirement and Brian on your promotion and look forward to working with you.
And you guys had mentioned on the call, but congrats on a successful <unk> launch I know you've got parts on that.
Okay.
Much.
My first question I was wondering if you could break out what the true year over year, I guess order or bookings changes would have been if you normalize for the impact of Phoenix and <unk> business.
Because if you put all of that backlog into once I don't know if you could break out what it would look like just with that that single quarters with orders in those businesses.
Yes, it was worth about $25 million, John a backlog that came in last year in Q4. So we can do that math real quick but.
That would be impacting the prior year numbers.
Okay, we can do that separately.
I guess the other question is.
Especially with the test order coming down I know you mentioned that last year, there was an unusual timing item but.
Is there any chance that you might be seeing.
Demand slowdown in any way shape or form just based on the.
The headwinds you're seeing in mobile devices and a lot of your customers in the wireless business is there.
Yes, I mean I think that.
I wouldn't say, we would call it a slowdown from kind of broad economic impacts or anything I would say that that that power filter business was really seeing explosive growth a year ago that was driven by some specific data center build outs and things that are going on that has moderated a little bit I think as that whole again supply chain.
Works to kind of get the get the data center build outs done its just taken a little longer. So we're seeing that work stretch out a little bit we're able to keep up with demand, but other parts of the supply chain arent. So we've seen that order book kind of slow down a little bit.
And I wouldn't say, we see any kind of broad weakness beyond that we are still seeing some good activity on automotive.
Same with some of the telecom stuff.
So we feel good there, but we are.
We're also just in general coming up against higher comps and Thats why if you look at the guidance, we kind of had a lower growth expectation into them.
Relative to the other two segments.
So fundamentally.
Just kind of.
As they've gotten this much bigger this much faster, we expect the growth to be a little bit more moderate going forward Vik I don't know if you have anything else to add yes, I think it's all good I would agree with everything you said just back to the data centers for a minute I mean, I think the long term opportunity there is great.
No sign that that's going to slow down if anything I think it will continue to accelerate but as Chris alluded to part of the problem was just people's ability to get the centers built.
<unk> done any type of construction over the past year knows it's hard to get concrete it's hard to get steel has already had a lot of those basic things as well as just getting the people to come to the orders that we're.
Look I think the business as you know that's the one business was not impacted during COVID-19 and so they continue to grow and I think they will.
And in orders we had this past year were.
A record.
Probably $60 million. So it's been a good year for those guys.
Got it thanks for that color and then just to maybe follow on a little bit with that just your general observations of the supply chain, how much better at getting and how much more room.
How much more I guess you wanted to catch up before you feel comfortable with the supply and timing thats out there.
It's a little spotty I would say, it's better than it was last quarter.
I'd say the place where we probably still have some issues. We still have some issues on a component side and outside processing that a couple of businesses the A&D businesses.
<unk> been a bit of a challenge because most of those outside processors are very small businesses and I think some of them.
As.
Particularly the commercial aerospace business has picked back up a lot of them have had a hard time keeping up with.
With that growth and so I'd say, there, but it certainly is getting better.
The other challenge, though right now that is not getting betters workforce availability. So that's an area, where I think everybody is continuing to struggle a bit.
Got it thanks, I'll jump back in queue.
Okay.
Thank you for your questions.
Again, if you would like to ask a question. Please press star one on your telephone.
One moment I believe we have a follow up question.
John one moment.
John Your line is open you can go ahead.
Great. Thanks.
I was wondering if you could talk about the unfavorable mix you saw and you see kind of what went into that and what you're expecting out of that business as you go forward.
Yes. The main the main driver there was the security business that we have we call. It the duck Duck E business as the acronym there, but thats a business, where we sell hardware kind of upfront and then we get kind of a service revenue stream over over multiple years on that.
So as that hardware it goes out that's a little bit lower margin I.
I would say a fair bit lower margin.
<unk> is a high gross margin business. So it is still kind of mid thirty's, but well below the overall average there.
So that was really the main driver we saw a lot of growth in that business with those hardware shipments in Q4 was that was a pretty big driver of the growth and so that was the number one factor.
Yes, the good news with that business so.
You usually get the cash upfront. So one reason our cash was as good as it was this year was largely driven by.
Payments on those those contracts.
Got it that makes sense.
I was wondering also if you could talk a little bit more about your capital allocation priorities going forward, obviously rates are going higher.
Help me think about the M&A pipeline versus repurchases.
The use of cash is.
Looking ahead.
Yes, I think I would say pretty consistent framework.
Framework that we're looking at as we head into 'twenty three John .
As we said, we did about $20 million of share repurchases in 'twenty two.
We will probably target a similar amount for 'twenty three as we kind of get that program going again, but obviously the acquisitions as kind of the key piece there if we see something bigger than we would maybe dial back.
To me I think the pipeline is okay. We are seeing some things come through a little bit right now on the deal side.
Again, I wouldn't characterize it as.
Totally stuffed pipeline or anything, but we do have a little bit of activity there.
Okay great.
Just a question on the EPS guidance for next year, what's the implied interest expense or interest rate that youre using to arrive at that.
So on average for 'twenty, two we had about 2% interest rate and we're looking at something more.
And the six six plus range for next year.
There will be a little bit better than that in Q1 for some of the <unk>.
Three and six month money, we had locked up coming into the quarter, but.
But overall as we get through the year, we're expecting it to be six plus.
Okay fair enough.
And then just.
I was wondering as you look at the A&D business.
It seems like that Theres been a fairly good recovery that you've mentioned.
What's the limit for that business as you get towards a full recovery, maybe widebody returns international travel returns how much better can it be then it was I guess before the pandemic I know you've taken share.
Through the past three years, just help us understand what the upside is that as we get through a full recovery.
Well I think we would say we feel like it's we had a.
A couple of pretty tough years, and this was a nice kind of recovery, but we still have some legs to go there I mean, I think it was <unk>.
Certainly kind of.
Single aisle driven platforms that are that are kind of driving a lot of the sales growth that we put up this year.
And I think even with some of our businesses like Chris There and made a if you compare them back to the 19 levels Theyre just they still got a fair bit to go to get there and how their order books have been pretty good, but it's been a little bit slower to materialize on the sales line.
And so the double aisle stuff is again I think still out in front of us from a sales perspective.
And that we expect to kind of carry on for.
Okay.
You are talking to years, there I think before you get back to kind of prior peaks.
As far as the overall single aisle. The other thing I would say about that is if you hear kind of a lot of the commentary from the big Oems out there I think theyre generally not quite to the build rates, we're trying to get to so if you look at those forecast again, though still show pretty nice growth out over the next coming years, yet another way to think about it as we were.
Really ramping that business up.
When the pandemic hit I mean, we had the best first quarter, we've ever had and then the pandemic hit and kind of the bottom fell out. So I think if you go back and look at pre pandemic I mean, I think when it gets back to full recovery will be above that in addition to just do that.
Kind of abnormal growth I mean, we have.
Some additional projects, particularly on the space side.
And one in Navy side with Westland has really recovered nicely. So I think that longer term target five years from now I'm talking about a company that over the next couple of years I think we'll get back above the levels that we have going into the pandemic.
Okay, Great and then the same kind of question on the just the USG business our utility customers at the.
Back towards where they were pre pandemic or is there more room to grow and kind of how much.
Yes.
Yes, I think the quick answer there as the domestic business.
Kind of back I think they are kind of back to the level. They were previously.
The European business is still not back in the Asian business. So I think we will see some growth there over the next couple of years and then as I had mentioned in my prepared comments, we have had some.
Some new product developments, which I think will add a little upside as well.
Sure.
Understood. Thank you everyone.
Thanks, John .
Okay.
Thank you for your question. Your question as a reminder, if you would like to ask a question. Please press star one on your telephone.
I'll be prepare for our next question.
And our next question will be coming from John <unk> of Sidoti. Your line is open.
Good afternoon, guys and thanks for taking the questions.
Just.
Curious about the.
Pricing versus cost equation, how much of headwinds is higher inflationary costs still impacting you and when do you expect to maybe be an equilibrium with price increases kind of matching up to those higher input costs.
Yes.
Yes, I would say by the fourth quarter, we kind of got ahead of that a little bit I think you saw that in the test margins I think you saw that in the A&D margins as well.
Even in the utility side I think we've done a good job on the price there to stay in front, but we talked about some of the mix issues. There earlier that caused the margins to hold back a little bit. So so we would say in general that we feel like we've priced pretty well.
And we were kind of favorable on that equation right now John .
Great.
Think about the cadence of revenue for this year is it.
How heavily weighted into the second half of 2020 relative to the first half as far as orders deliveries and timing.
Yes, I would say the sales growth is.
A little bit more.
It's not Super back end loaded from a growth perspective, if you look at the year over year growth.
So because of the backlog we're coming in with.
But from a margin and EBIT perspective, it's a little more backend loaded but fundamentally.
We think the.
The sales growth will be pretty pretty even little lower Q1, and a little higher Q2, Q3, and then maybe the lower Q4 something like that.
Got it and just on the balance sheet, why not be more aggressive in paying down debt and the higher interest rate environment.
Yes.
Honestly and what you see in the September financials, there we.
We had some we had really strong cash flow really late in the year. So we ended up with pretty high cash and we will hire that we've already kind of fixed a lot of that here since we started fiscal 'twenty three.
And yes, we're definitely going to be managing the debt.
Pretty aggressively given the interest rate environment as we move forward.
Okay. Thanks for taking my questions congratulations guys.
Thank you. Thank you.
Yes.
Thank you for your question. This concludes the Q&A session I would like to turn the call back over to Vic Richey, Chairman and CEO for closing remarks go ahead Sir.
Okay. Thanks, so much for everybody joining us.
Look forward to Brian and Chris talking to you next quarter.
Sure.
Okay.
This concludes.
Okay.
This concludes today's conference call. Thank you and you may all disconnect have a great Mr. <unk>.
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The conference will begin shortly to raise Johan during Q&A you can dial one one.
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