ESCO Technologies Inc. Q2 2023 Earnings Call
Good day and thank you for standing by welcome to the second quarter 20, twenty-three ethical technologies earnings call.
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The call today, we have Brian Sailor President C E O, Chris Tucker Senior Vice President is C F O.
And now I would like to have accomplished all the talk first speaker today K Laurie Vice President of Ingesta Relations K you not have the floor.
[laughter]. Thank you [laughter] statements made during this call which are not strictly just porical are forward looking statements within the meaning of the safe Harbor purposes.
Federal Securities Laws. These statements are based on current expectations and assumptions an actual results may differ materially from those projected in the forward looking statements.
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 under could take no duty to update or revise any forward looking statements, except us mirror, maybe required by applicable laws and regulations and.
In addition, during this call the company May discuss some non-GAAP financial measures in describing the company's operating results. A reconciliation of these measures to their most comfortable GAAP measures can be found in the press release issued today and found on the company's website Www Dot F go technologies Dot com under the link Investor Relations now I'll turn the call over to Brian.
Thanks case, and thanks, everyone for joining today's call.
We appreciate all of your taken time to get an update on that let's go this afternoon.
So our near us off to a greater start and I'm pleased to speak with all of you about our second quarter results. The first six months of fiscal 2023 have gone well and we're pleased with the outlook remains robust as we look forward before.
Before I drop into the otherwise for the quarter I do Wanna take a moment to all of our employees.
Let's go has delivered strong results over the last year and a half and are talented and dedicated employees. So I've got a <unk>.
Central to these outcomes.
Business has been very good, but we continue to experience a challenging operating environment supply chain performance has steadily improved but it's not quite delivery with the efficiency that we experienced pre pandemic. We also see challenges at a number of locations related to getting up to full staff visa.
These issues do create extra burdens for our operating teams across the company and I appreciate everyone's extra efforts to help the company to death.
Prove that we continue to drive growth with that let me put that into the quarterly results were.
We had a really strong second quarter with good sales and earnings growth.
Even more exciting is the continued strength that would strike that we're seeing with orders a backlog all three of our segments at both the bill ratio is in excess of 100 per cent and we finished the quarter was $741 billion a backlog.
Represents a 70 million dollar increase over March 2022, $46 million inquiries from September of 2002.
It's clear that we serve a dynamic customer base.
Hi growth industries.
<unk> has the right products right services for the right markets. This a powerful combination that gives us confidence in our future.
Chris won't get into some of the financial details with a few minutes, but I do want to offer some top level commentary about each of the operating segments.
Starting with aerospace and defense, where we had another great quarter sales increased by 17%.
And adjusted EBITDA grew up by over 35%.
As you all know ESCO has a broad collection of product lines here and we are continuing to benefit from robust market conditions growth continues to be driven by commercial aircraft recovery, but we're also seeing good activity of military aircraft, maybe businesses as well.
The operating challenges that we see across ESCO are most pronounced space in the bedroom.
S go supply chain performance is improving we still have passed due backlog issues, which are primarily the result of industrywide supply chain instability.
The teams continue to work the issues aggressively and we will continue to see strong sequential growth in our revenues, but we do not expect full resolution of past few backlog in the near term.
Next up is the utility group, which also had a strong quarter revenue growth would go over 23 per cent in the quarter and adjusted EBITDA margins expanded by 13 basis points to 17.8%.
The core utility business continues to be solid.
Customer base invested electric infrastructure, and we continue to see our backlog as grow in particular, we're seeing strong orders and sales activities from our condition monitoring product lines. This is a trend that we anticipated as utility customers continue to push for high reliability by monitoring that are critical assets.
Real time.
The renewable side, our growth continues to exceed our expectations with particular strength and solar resource monitoring too.
2023 looks to be the third year in a row, a sales growth in excess of 20% for NRG.
The U S G as a good story for us.
We built a great team, we've expanded our product offerings, and both utilities and renewables market spaces, and we're performing well for our customers all of which is driving above market growth.
Utility solutions group has made investments in inventory in order to protect our customer commitments as we manage through supply chain challenges. We expect with these investments will moderate as we move forward in inventory will start to burn down in the second half of 2023.
Finally, I will touch on the test business, where we did see a bit of a drop in sales and EBIT in the quarter.
Test business has been tremendous growth over the last few years and Q1 was strong as well we mentioned during our earnings call. In February . So this business was expected to be weaker and Q2, driven mostly by by lower activity in China.
It did come to pass as we experienced significant disruptions as the economy opened up posts pandemic.
Yeah, and sales were down by 9% and <unk>.
Margins came in at 14.2%.
Business did see a book to bill ratio of 109% overall the backlog situations here is good so while we could see another soft quarter of Q3, we expect a sales growth returns by Q4.
So to summarize it's been a great start to the year for ESCO with two really strong quarters. We're on a good path overall as we drive to deliver our targets for the full year, Chris will provide some additional detail in a minute, but we are increasing before your outlook again this quarter.
Now I will turn it over to Chris to give some more financial highlights on the second quarter.
Thank you Brian .
Everyone can follow along on the short presentation, we will start on page three where we have the overall financial highlights.
But Brian mentioned, we had a great quarter in this chart illustrates that very well.
Sales were up nearly 12% adjusted.
Adjusted EBIT was up over 21% and adjusted EPS was up over 17%.
Another great quarter of overall growth <unk>.
Orders growth in the quarter was over 6% in the once again finished with record backlog at $741 million.
We had seven cents of adjustments to EPS in the quarter. The biggest driver there was additional costs related to our CEO transition with the <unk> add back for that we had an additional two cents added back for one time purchase accounting amounts related to the CMP acquisition that we announced in February .
And another penny related to the restructuring charges in the quarter.
If we go to the next chart for we will get into segment results, starting with aerospace and defense.
His business really had a strong quarter delivering 17 for sales growth or 17% sales growth overall.
Organic sales growth was 14% and the CMP acquisition added another three points of growth.
Adjusted EBITDA were up 35% and margins improve by 270 basis points compared to the prior year quarter.
Dynamics are solid across the entire segment, but we've seen notable strength from the commercial aerospace business, where sales grew 27% in the quarter.
Backlog ended at $435 million for this segment with the CMP acquisition, adding $7 million an acquired backlog.
We've continued to battle operating challenges in this group, which is led to higher than normal levels of past due backlog and increased working capital levels as well.
Teams are working this aggressively and we have seen some improvements but overall, we expect these conditions to persist as we move forward.
Also wanted to comment on EBIT margin for this group.
Really great performance to get adjusted margins up to $19, 8% in the quarter.
Obviously, we are seeing nice leverage on the increase volumes and we've also seen good execution on price increases, which more than offset material inflation during the quarter.
Next on sharp five does the utility solutions group or we also had a very strong quarter sales.
Sales growth was 23% with doable and an argy, both posting double digit growth.
Jested EBIT margin went from 17.7% in the prior year quarter to 17.8% this year.
The flow through on the sales increase was held back somewhat by unfavorable mix and increased costs for travel in in person customer events.
Orders were down 2% in the quarter, which was driven by comps to the prior year when we booked a large multiyear order for adorable Universal controller enterprise customer.
Even with the orders down in the quarter. The business still finished with backlog of $143 million, which is up more than 20% compared to March of 22.
We are seeing high levels of business activity here and both the core utility customer base as well as the renewables markets.
And we continue to have a very favorable longterm outlook for the utility solutions group.
The last segment will talk about his test.
Which did experience a bit of weakness in the second quarter. This.
This result was expected and we had mentioned this during the earnings call last quarter weakness in China was the main driver here as we saw significant disruption to the business is China's shifted from zero Covid approach.
Margins did drop in the quarter, but still came in at 14.2%, which is a solid result.
Orders were flat to prior year second quarter and the book to Bill ratio was 1.09.
So the business still has a healthy backlog.
As we move forward, we expect the third quarter here there'll be a bit soft and we would anticipate growth to return by the fourth quarter.
Chart seven has year to date cash flow highlights.
Cashews by operating activities was $5.5 million during the first six months.
Working capital was unfavorable in the first six months with accounts receivable inventory and accounts payable all drive driving unfavourable impacts to operating cash flow.
Capital spending was down just over $10 million, an acquisition spending increased by $2 million.
On share repurchases, we have completed just over $12 million. So far this year comparably compared to nearly $18 million in the prior year period.
I did want to provide a little commentary on full year operating cash flow expectations. We.
We don't generally provide guidance for operating cash flow, but given the worst the week first half we wanted to state that the expectation for operating cash flow is that it will improve in the second half, but the full year will be down approximately 20% to $30 million compared to fiscal 2002.
This is mostly driven by the timing of milestone payments received in 2022 that don't repeat in 2003.
As well as cash payments for taxes, which will be significantly higher in 2003 compared to 22.
Chart eight is our guidance for earnings per share.
The full year outlook has been increased you'll recall that the prior guidance was 350 to 360 per share on and adjusted basis, we have increased that to 355 to 365 and the current outlook.
As we mentioned in the press release, the full year guidance is based on sales in the range of $930 million to $950 million.
For the third quarter, we expect a range of 96 cents to one dollar one per share on and adjusted basis.
That concludes the financial update and now I'll turn it back over to Brian .
Thanks, Chris I touched on quite a few of my thoughts earlier in my commentary, but I will offer just a few more comments before we moved to the Q&A session.
You saw the numbers compressed so obviously a great start to the year for ESCO with strong financial performance of.
The company is operating at a high level and our outlook for the future continues to improve.
Our portfolio of businesses provide critical solutions for markets with long term high growth characteristics and whether it's strength from aircraft components continued momentum for utility customers or success on Navy programs.
Number of positives and we're excited about our prospects going forward.
Lastly, before Q&A I do want to say thank you.
<unk> once again as you all know liquid the CEO here for over 20 years.
Mentioned in the press release that he will fully retire effective June 30th and will no longer be a member of our board or an employee of the company.
Vick has been extremely supportive of me throughout my career throughout this transition.
Ford has managed a very orderly transition from that to myself in the process has been very smooth.
He is looking forward to the next phase of his life and we are very grateful for his significant contributions over the years as I said before this is a great time Castillo and we're really excited about our future did play a huge role in building the foundations here and we wish him all the best in his retirement.
So with that we will open it up for questions and answers.
Thank you.
We will we will conduct a question and answer session.
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John slang, France.
From Sidoti and company John Your line is now.
Good afternoon, guys and thanks for taking my questions.
I'd like to start with the <unk>.
Supply chain issues and the bottlenecks can you use a little color of what the issues are and maybe when you expect them to be resolved.
Sure.
So I'll give you an example from aerospace.
Aerospace and defense side, I mean, I think there is two two different types of phenomenon that are occurring there. The first one is that.
The course of the pandemic the supply chain.
<unk> efficient and a lot of small players.
When.
When they reduced their build rates.
Cut back on personnel a lot of those smaller businesses had to give up some people, they're having a really hard time.
Building themselves back office. So these are things like outside process and whatnot.
And so those guys are really struggling.
We are limited in our ability to replace them in some cases because of the special qualifications and certifications that are required on specific parts. So that does kind of slow things down.
Another big area for Us as we do have a lot of customer directed.
Materials that we'd have to purchase.
Per the customer's direction things like castings, and whatnot and in some cases, those casting suppliers and others.
Are receiving direction from our customer to prioritize other work so but we do think it is going to take several quarters to work through that now having said that I want to be clear, we're making good progress on this front and you will you should expect to see a good growth.
Sequentially at our revenues as we move forward.
Okay that helps thank you and and.
In regards to test.
Why is China is still an issue and it also seems like there was some weakness in the quarter here in the states.
Maybe it was a thoughts on when tests can finally turnaround being that I kind of figured post COVID-19 related issues, we really be relatively fall in the rear view mirror by now.
Yeah.
In China. The issue is not so much that people are sick I mean, we did have about slash 90% of our employees that.
Were effected over the last couple of quarters.
But the real issue now is that as we as they begin to reopen not all of their customer sites are excited about having.
Outsiders come in and so that's kind of slowing down we do have a pretty good backlog over there.
Factory is up and running at full blast, but we're not able to recognize all the revenue until we get on site and complete the work.
Domestically I think it's really more of a comparison issue.
We had a record of 2022.
Really really robust remember the test business does not experienced the same kind of decline during the pandemic and a lot of other businesses that they were running a gun in the entire time and saw substantial growth.
While while I think on a year over year basis, we're seeing a little bit of a decline their business is still doing very very well.
Got it at.
Just one last question.
USG mentioned the unfavorable mixed you expect any kind of mix shift as the year progresses or should we kind of baked <unk> into the margin profile a go forward basis.
No I think it will I think it's I think it's going to normalize as we get into the second half of the year I mean, we do we do see.
A lot of activity.
We've had a number of our highest margin dive product lines that were although that restrained for shipping reasons and that sort of thing but.
But we expect that that will normalize through the second half of the year.
Okay. Thanks, guys I'll get back into Q.
Thanks, John .
Thank you so much for that John and please remember anyone to ask a question. Please post Taiwan one on your telephone.
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Two and ask a question. Please are one one again.
Alright, well I'm I'm, calling next question. Our next question comes from the line.
Sean <unk>.
C J S y.
Your.
Your line is now.
Hello.
Yeah, I've got a job.
Hi, This is Ross kesselman.
Associate <unk> standing in for John .
Thanks for taking the time to hear my question I'm looking at the guidance you only raised by the amount that you'd be five does this mean that the Q1 strength was a one off and you don't expect similar mentum going forward or just building a bigger cushion or these other are there other kind of waste interpret it.
I would say that.
We're not trying to build a cushion or anything.
The second half I mean, it's still has good growth characteristics.
So it's not really like it's backing off per se. It's.
So you're right the second quarter kind of flows to the year, but we still see good growth dynamics in the full year outlook and that's that's what's embedded in the 355 to 365.
Thanks said she'll color if I can sneak in one follow up can you talk about the aftermath of the double conference and if you're seeing the types of engagement you want to see versus a pre COVID-19 how much of the strength in his <unk> his recovery and how much of his it is new business such acquisitions or infrastructure.
You're spending make each way to the utilities and renewables.
Well, that's a great question that a lot of things I'm really excited about is that.
I had a chance to go double conference again this year.
And we were back up to normal attendance, which is a strong indicator that the utility to kind of gotten past the television.
Throughout the developed a last year, there was tricking people from traveling and that sort of thing.
But listen I think a lot of the activity. We're seeing now is actually new activity I think a lot of pent up demand that we may have seen during the pandemic is kinda behind us.
We're seeing very very robust investments.
Utilities are available customers some of that is stimulated by.
<unk> reduction act of the infrastructure.
Bill that were passed in the last few years, but really if you think more fundamentally when you look at all those net zero targets that are coming out from governments and industry.
That all points to have very substantial requirements that is at risk. These built out more more wholesome way and so what we're seeing is a lot of that.
Would say the early parts of that investment coming coming to fruition.
Thank you for answering my questions.
In the queue.
Thank you so much for that.
Alright.
Mmm.
Okay next.
Next question again comes from the line.
Sean.
France.
<unk> and company, one moment, while you're lying.
Okay.
Ask a question about.
I just asked the question about the the cash flow.
I mean, we have a cash outflows just from the $15 million operating cash on the first half.
And you suggested that it be only down $20 million to $30 million, but certainly suggest.
Really good cash collections in the second half what's driving that.
Yeah, I think I think mainly if you look at their receivables impact in the first half of the year.
We saw receivables build a fair bit, especially when compared to last year, when they actually went down a little bit.
We see that a little bit in the air and Aerospace and Defense group, where we just have sales growth.
We expect that to come in through collections in the second half and then also in the tests business, we had a little bit of a build in receivables there kind of some some business mix issues going on with project versus more.
Kind of product shipments.
So that hurt us in the first half, but again, we expect those collections to come in strong in the second half.
So we feel good about that and then we also have.
Some of the big either project businesses, just the timing of when we receive some of the customer funding on those projects for for different milestones and such as kind of weighted towards the back half and so that's the other kind of key driving it there.
Okay and anything on your inventory fine because I noticed the inventory.
Relative to your rent is picked up a bit.
Yeah. It has I mean, I would say that we're probably not going to flush quite as much inventory out as we come to year end as what you may be you've seen from us in the past.
That's one of the reasons that we're kind of talking about the.
The past due backlog sticking with us a little bit longer as we move forward, that's going to drive some more inventory there.
So you'll see that maybe moderate down a little bit, but not a huge flash because we're still going to be working some of these issues as we as we crossed into the next fiscal year.
Great. Thank you that that's actually very helpful. I appreciate the additional color.
You bet. Thank you John .
Alright.
Thank you so much for that.
Our next question comes from the line again, John <unk> and I'll find something your last name wrong with C. J S. One moment, while you're lying.
Alright your line of <unk>.
Hi, again, thanks for taking more time to answer my questions can you talk about the uplift from the Columbia program in terms of magnitude and frequency of deliveries will it be similar to Virginia, where you have a big delivery every year in the fourth quarter.
I do think we're going to get a lift from from.
But I don't think we're far enough along to know, whether that's gonna, which quarter, that's going to typically come in each year don't forget that.
That part of our business.
Recognizing our revenue.
Cost accumulation basis, rather than.
Delivery basis, and so that will smooth out the way that that looks from a revenue perspective, where I think you're going to see it does look lumpy is on the cash side.
We get very large payments.
As milestones are achieved and so that will be very much much more lumpy and I think on the orders side, you should expect it to be a little bit lumpy on the orders I bet from a revenue perspective, it should be a little smoother ramp.
Got it thank you for that additional color.
All the questions I have thank you.
Thank you.
Alright, thank you so much.
Alright.
At this time no further questions.
I would now like to turn it back over to Brian sailor for closing remarks.
Well listen thanks, everyone for taking time to chat with us.
Cited about our business.
And we're looking forward to talking to you again next quarter.
Alright. Thank you. So thank you so much for your participation in today's conference. This does that conclude the program. He may now disconnect.
Mmm.
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