Q1 2023 ESCO Technologies Inc Earnings Call
Good day and thank you for standing by welcome to the first quarter 2023, ESCO Technologies earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session.
I ask a question at that time, Please press star one on your telephone.
Please be advised for today's conference call is being recorded.
On the call today, we have Brian Taylor, President and CEO , Chris Tucker Senior Vice President and CFO and now I would like to hand, the conference over to our first speaker today, Kate Lowrey, Vice President of Investor Relations. Kate you now have the floor.
Thank you statements made during this call which are not strictly historical are forward looking statements within the meaning of the safe Harbor provisions of the federal Securities laws. These statements are based on current expectations and assumptions and actual results may differ materially from those projected in the forward looking statements due to risks and uncertainties that exist in the company's operations and business environment.
Including but not limited to the risk factors referenced in the company's press release issued today, which will be included as an exhibit to the company's form 8-K to be filed we undertake no duty to update or revise any forward looking statements, except as maybe required by applicable laws or regulations.
During this call the company May discuss some non-GAAP financial measures in describing the company's operating results. A reconciliation of these measures to the most comparable GAAP measures can be found in the press release issued today and found on the company's website at Www Dot ESCO technologies Dot com under the link Investor Relations now I'll turn the call over to Brian .
So thanks to everyone for joining today's call, it's really great to beyond the call for the first time as CEO here at ESCO, our year is off to a great start and I'm excited to talk about the financial results, but before that I'd like to say a few words on the transition to my new role overall.
<unk> has gone very smoothly I have been able to relocate here to Saint Louis with my family, We love it here.
Really hit the ground running as the new calendar year got started and I've had a chance to go out and visit every subsidiary at least once a few a couple more of them more than once so pretty busy start to the year, but an exciting one for me personally I'm really energized to be on the new role.
<unk> Board of directors continue to be very supportive of me in the role and we just finished up set of board meetings last week, where we were able to take the directors out of business.
The factories at a few of our subsidiary sites.
The business, there's a lot of really cool things going on and we have some really nice capabilities that it was fun.
The board of directors to kind of get a closer look at that.
I want to thank the board and I want to thank.
Vik for their ongoing support of <unk>.
<unk> dedication continues to be crucial to our overall success.
With that let me pivot over to the quarterly results.
We have a really great start to fiscal 2023 with all three of our business segments posting nice increases in both sales and earnings across the company. We continue to see favorable dynamics in the markets that we serve.
We have really strong businesses that are serving very healthy end markets. So our outlook remains positive. So having said that we still see some challenges.
All of us have seen headlines, indicating improvements and supply chain conditions and while we've seen some relief on the raw material side availability of skilled labor continues to be a significant challenge due to the technical nature of <unk> product portfolio of the labor shortage continues to be a drag.
And overall on our overall growth, particularly at our utility solutions group.
Our operating leadership at each of those businesses is managing through the challenges effectively as they have been for the past year or so but it is important to understand that we continue to face a pretty difficult environment.
The good news is that the underlying demand for our products and services continues to be very strong our first quarter ending backlog of $718 million represents an increase of more than 12% compared to the prior to the prior year first quarter for.
So 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 our business segments.
Let's start with aerospace and defense, where we had another great quarter sales increased by 18% and adjusted EBIT dollars were up by over 25%.
It's been exciting to engage with these businesses since taking my new role and Theres a lot of exciting things are happening across the platform. The commercial aerospace business continues to see robust demand environment, while Navy and space business are really working on some important programs. These businesses are newer to me, but we're really fortunate to have <unk>.
<unk> management teams with deep knowledge about those industries and they are really showing me the ropes as I get used to the new role.
Also as you probably saw the press release, we did close on an acquisition for this group on February one.
CMT materials will now be part of our global business, which is based in the Boston area. We are excited to welcome CMT and their employees to the <unk> family.
<unk> with them exciting technologies and capabilities, which will strengthen our naval offerings and provide <unk> exposure exists of anticipated growth in the unmanned submersible vehicle market as it matures.
Next is the utility group, where we had a strong quarter revenue growth was nearly 12% and adjusted EBIT margins expanded from 21, 8% to 22, 7%.
Core utility business continues to be solid as our customer base invest in their infrastructure and we can continue to see backlog grow on the renewable side. The growth continues to exceed expectations. As most of you know 2021, and 22 were both 20% plus years of growth for NRG, but the growth story.
He remains intact as we look forward.
NRG has certainly benefited from a strong market, but I'm, particularly pleased by the results from new product developments and utility scale solar.
I mentioned before the component supply issues have been have improved a bit compared to prior year, but shortages do impact our operations and this has been pretty noticeable over on the utility side. Our teams are aggressively addressing the issue we are making some progress, but we expect that to take another quarter or so to resolve.
Lastly, let's touch on the test business, where we had a nice quarter of sales growth and EBIT margin expansion Q1 sales were up by 19% and EBIT was up over 35%. So a really good quarter for the test business as you saw in the press release orders did decline in the <unk>.
Segment compared to the first quarter of the prior year overall, we think the outlook is still positive and you should remember that.
We had outlined lower growth expectations for task. When we gave our initial guidance back in November for Q1 in particular, we had some exceptionally high orders in the prior year related to power filters as well as test and measurement products in the U S and China.
That activity did not repeat during Q1 of this year. So our orders came in as expected.
So to summarize across the overall business. It really is a great start for <unk> this year.
We're on a good path as we look forward to achieve the guidance that we gave you back in November all three businesses delivered nicely and our backlog positions really positions us well for the balance of 2023. So now I'll turn it over to Chris to give you some more financial highlights on the first quarter.
Thanks, Brian everyone can follow along on the chart presentation, we'll start on page three where we have the overall financial highlights.
As Brian mentioned, we had a great quarter and this chart illustrates that very well sales were up over 16% adjusted EBIT up over 31% and adjusted EPS was up over 30%.
Another strong growth quarter for ESCO.
Orders growth in the quarter was 2% we will get into those details in a moment, but we did see good growth in two of our three business segments on the orders line.
Overall, the order trends have remained robust and our December 'twenty two backlog of $718 million is a record and demonstrates the strength of the overall business.
Next on chart four we will get into the segment results, starting with aerospace and defense.
Solid performance continues here with sales up 18% and adjusted EBIT up 25%.
Margins expanded by nearly a full point to 15, 3%.
The ongoing commercial aerospace recovery led to sales growth as we saw increases of 30% from this market.
Beyond that we still saw good growth from other parts of the business with defense Aerospace Navy and space all up more than 10%.
Orders were also good with growth of 8% driven by Navy and commercial aerospace strength.
The next business is on chart five utility solutions group, where we also had a very strong start to the year.
Sales growth growth was 12% with high levels of activity from the electric utility customer base and explosive growth from the renewables business.
Adjusted EBIT margins were up <unk> nine points as we did see favorable leverage on the sales increase.
Orders were very strong in the quarter with growth of 21%.
The core utility space delivered order growth of 18% and saw strength on a global basis.
The renewables business continues to deliver exceptional growth at 35%.
Backlogs at $137 million are elevated in part due to supply chain challenges mentioned by Bryan previously.
The final segment will talk about his test on the next chart.
Another strong quarter for this group with sales up 19% and EBITDA up 36% really nice margin expansion here as we saw solid leverage on the volume increases.
Orders did drop by 24% during the quarter you see on the chart that we had more than $20 million of large bookings last year for power filters and product project activity that did not repeat in this year's first quarter.
Overall, the book to Bill in Q1 of fiscal 'twenty three we're still at a one point out and the orders were in line with projections at the beginning of the quarter.
So we still feel good about the 'twenty three outlook for the test business.
The next chart chart seven is our first quarter cash flow highlights.
Operating cash flow declined by almost $11 million during the first quarter.
Working capital was unfavorable in the quarter with inventory and accounts payable driving an unfavorable impact compared to last year's first quarter.
Capital spending was down just over $9 million in the quarter compared to last year and acquisition spending dropped by nearly $16 million as there were no deals closed in Q1 this year and last year had the <unk> acquisition and the A&D group.
On share repurchases, we completed just over $4 million in this quarter compared to $10 million in the prior year quarter.
Chart eight is our guidance.
The full year outlook does remain intact, we did take out the lower end of the range Youll recall that the prior guidance was $3 45 to $3 60 per share on an adjusted basis, we have tightened that up to $3 50 to $3 60 per share in the current outlook.
For the second quarter, we expect a range of 68 to <unk> 74 per share on an adjusted basis.
The outlook for the second quarter reflects a somewhat lower forecast in the test business as they manage ongoing disruptions in China due to COVID-19 policies.
We view this as a timing issue and as mentioned above we see the test forecast for the full year is still intact.
That concludes.
<unk>, the financial update and now ill turn it back over to Brian .
Thanks, Chris.
Touched on a lot of my thoughts earlier, but I do have a couple more comments before we move to Q&A.
You saw the numbers, Chris So obviously, a great start to the year for ESCO with strong financial performance. This is really a great company. We are operating in healthy end markets and serving some really great customers that want to take a moment to thank all of our employees across the company as I mentioned before I've had a chance to visit all of our subsea.
The aerie location since taking over and everybody has really been welcoming and I really appreciate that but more importantly that everybody is very busy.
And they're working really hard.
We're managing a number of challenges that could put a loss training our people and I'm really grateful for their dedication and for their efforts. So with that we can start the Q&A.
Thank you again, ladies and gentlemen, if you'd like to ask a question. Please press star one one on your Touchtone telephone again to ask a question. Please press star one one our first question comes from Tommy Moll of Stephens. Your line is open.
Good afternoon.
Hi, Tommy.
So I wanted to start on the revenue outlook.
Just comparing the guidance that you gave last quarter in the quarter you just reported if I just go through the segments.
For A&D I think it was 10% to 13 <unk>.
Year on year, USG $5 to seven 3% to five those were kind of the ranges you gave us last quarter and.
In each of the three segments you blew way above the high end of the range in the first fiscal quarter.
So is there some cause for a big deceleration in growth as you go through this year.
Or are those ranges potentially biased higher after what you just reported in the first quarter.
Yes, Tommy I would say this is Chris I would say that we're probably biased towards the higher end of the ranges I wouldn't say, we would redo the ranges.
I would say youre, absolutely right, we kind of expected the growth to be a little bit more front end centered as we came into the year with our backlog position.
Certainly Q1 was a little better than we planned.
But it's consistent with our overall plan that we're still going to get growth in the balance of the year, but the growth will moderate from those first quarter levels.
And then is that moderation more just timing of backlog or comps or is there something underlying that.
Anticipate to decelerate as you go through the year.
Yes, I would say really more just comps if you look at last year. Our again, our growth was a little lower in the first half and then we had really strong double digit growth on an organic and reported basis last year in the third and fourth quarter. So can you just come into tougher comps, we still have as you know high levels of backlog and a good outlook, but yes.
It's hard to get those big double digit growth when you got comps like that coming in this year.
Yes understood.
I wanted to pivot to commercial Aero, where you reported.
I think it led the segment.
And I'm just curious what inning it feels like we're in in this recovery.
Some strong several good quarters together in a row here youre going to start lapping over those.
Does it still feel like early innings or any context, you could provide would be helpful.
Yeah.
Yes, I would say.
Honestly tammi its a little hard to say, what we would say is that we feel like the recovery still has legs.
As far as what inning we're in.
If you look out a couple of years of kind of industry projections, they still have pretty robust double digit growth expectations, just kind of in the build rates. If you look at kind of.
<unk> single aisle dual IL type forecast.
The industry is still struggling to kind of ramp up.
Throughout 2002, and now in 'twenty three the build rates arent quite where the Oems want them and so all of that tells us that we should still see some pretty good runway in front of us.
And again, it's hard for me to say what inning I don't know if were to the middle of the game yet I'd say, we're maybe not to the middle of the game yet, but we've got we do feel pretty good that the outlook is still pretty robust there.
The earnings things thrown us off.
Feel pretty good about the overall growth.
Each of the major Oems are ramping up I think there is some question as to how quickly and how effectively they are going to be around it will ramp up because the commercial aerospace are still a fair amount of supply chain disruption.
Across the board. So yes, they are struggling to get back to where they want to be.
But there is certainly underlying strength in the overall segment.
I appreciate the insight and I'll turn it back thank you.
Thank you.
Thank you again, ladies and gentlemen, if you'd like to ask a question. Please press star one on your touch tone telephone.
One moment please.
I'm showing no further questions at this time I will turn the call back over to management for any closing remarks.
One moment it looks like we do have a question. Our next question comes from Tommy Moll. Your line is open.
Hello again.
Start thinking that would be in the back of the queue. So either jumped in front of someone or we can just have a conversation the four of us today, but.
While there is more question looks like so go ahead okay.
Well I'll just I'll just add one follow up I was going to wait till the end of the call for it but just on <unk>.
Cash flow.
And Chris you called out some of the headwinds in the first quarter.
Sure.
I appreciate you don't provide.
Specific guidance on this issue, but is there any even qualitative or even better quantitative way you could frame the progression there or what kind of conversion might be reasonable to expect for the year just anything to help us.
Model would be helpful.
Yes, you are right I mean, we don't really give firm guidance here, what I would say is that we are typically seasonally low Q1 is always the low point for us this quarter no no doubt it'll be that'll be the case for this year as well.
We look at the free cash flow conversion for the full year I think we're trying to drive that into the 80% to 90% range Tommy to get quantitative on you.
That's maybe a little below where we've been for the last couple of years, but we've had.
Cash can kind of come in chunks of little bit so and we are investing a little bit in capital right now as well so that.
Counts against that against that ratio, but that's hopefully that kind of tells you where we are driving towards.
That's helpful.
Thank you I'll turn it back.
Operators still on do we have any.
Question.
Yes, I apologize John Sam <unk>. Your line is open hi.
Can you hear me.
Hi, John Hi, John Hi, Thanks for taking my question.
Curious what gives you the confidence that.
Kirk will come back going forward.
Some disruption in China are you getting indications of your customers are the norm can come back and make it into the year I know, sometimes it's a timing issue there I'm just getting a little more color on that.
Yes, we still feel pretty good about where the test business is we are going to have we have forecast. The second quarter is going to be adversely affected by the by the Covid stuff.
What's going on in China right now.
You have.
Several parts of the business are continuing to do quite well.
In terms of the underlying market demand, we have a huge backlog there that we're working through and so that gives us a high level of confidence by our ability to deliver the financials for the year.
Okay, great. Thank you.
Could you give us a little more color on CMT.
Just what kind of growth rates it had that.
That are on the line and kind of the synergies that you're expecting out of that business as usual and then sue.
The sub business.
Yes, so CMT is.
Mall business, we're not we're not going to expect that thats going to have a meaningful impact in FY2023.
But it's a business that has exposure to <unk>.
Some really interesting technologies that we think are really emerging for the navy and so we do expect that over over the two to five year timeframe that we're going to see substantial growth in that overall business.
Margins today are modest, but we are going to be integrating it into our below production facility is that we'll be able to take some cost out and really improve margins going forward.
Okay, great and are there more like that behind the <unk> pipeline look today.
So we have we have a pipeline.
I don't think I have anything imminent for you, but but we are constantly working on those things that we are developing additional opportunities.
As we speak.
Okay.
I was wondering if you could talk a little bit more about the constraints that you're facing both from a supply and labor perspective number one which one is actually.
The bigger issue for you right now.
Is it still supply.
Or do you see that improving and maybe related to the competition going forward and kind of.
If theres anything you can do it at that long to address that.
Yes, I think the bigger issue right now for US is the is the labor shortage.
FX has had a couple of different levels not only does it affect us directly but it also affects all of our suppliers so things like outside processing.
Pieces like that where they are struggling to get ramped back up to full speed.
We do have a couple of places with some discrete electronic components that are starting to cause some growth issues. So we're able to kind of maintain our original plans, but we're having a hard time scaling up to some <unk>.
<unk> that were some increased demand we're seeing in the marketplace and a couple of places, but we think thats going to resolve itself.
Three months.
But listen it's still challenging in everyday is a new adventure and when it comes to supply chain.
Okay got it Brian one last one for you.
You haven't been at that.
For about a month now and Im just wondering what high level thoughts you have about the direction of the company and kind of what you may be thinking about changing.
I know we've spoken before about that much.
<unk> talked to evolve it I'd love to hear kind of opportunity.
Well I won't be announcing any major strategic adjustments.
Dave.
First of all I.
We're in a great place.
As I said in my comments this is really a really.
<unk> business with great exposure to some growing end markets.
The biggest thing I think that with that we will be changing as trying to improve the amount of collaboration.
Interaction between the subsidiaries.
So thats something Thats already began we will be doing a kind of a strategic overall review over the next three months.
Kind of our normal strategic planning process occurs in April and so on.
We're making a few changes to some of the criteria that we're asking our our subsidiaries to look at the kind of open up the aperture just a little bit in terms of things that we would consider.
Both in terms of organic and inorganic activity and so so I don't have anything specific to announce and I probably wouldn't if I did.
But we're definitely going to make a few changes that we think are going to put us in a better position to kind of grow the business and expand our margins.
Got it if I could.
One more on their current I don't know if you answered this before I was trying to get into queue, but.
Any thoughts on capital and cash flow and kind of when you might see that moving positively.
Yes, yes, we did talk about that a little bit John I think obviously Q1 is typically our seasonal low point, we saw that again this year.
We're driving kind of that full year free cash flow conversion hopefully in the 80% to 90% range Thats kind of what we've targeted for the full year.
Predicated a little bit on capital continuing to increase a little bit. This year. We've got some some programs we're trying to invest in for capacity in our facilities and suffer around the corporation. So that's driving the capital a little higher this year, but that's that's kind of the framework, we're driving towards this year.
Okay, great. Thanks, guys.
Thank you Jonathan Thanks Johns.
Thank you again, ladies and gentlemen, if you'd like to ask a question. Please press star one on your Touchtone telephone one moment. Please.
Again to ask a question. Please press star one one.
I'm showing no further questions at this time I'd like to turn the call back over to management for any closing remarks.
Well listen everybody. Thanks, a lot for participating the call today, we're pretty excited about the direction, we're heading and we had a good quarter and we think we're going to have a good year or so.
We'll talk to you next time.
Thank you ladies and gentlemen, this does conclude today's conference. Thank you all for participating you may now disconnect have a great day.
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