Q3 2023 ESCO Technologies Inc Earnings Call
Good day, and thank you for standing by.
To the third quarter 2023.
Nowadays earnings 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 to ask a question. During the session you will need to press star one one on your telephone you will then hear an automated message that your hand is raised to withdraw your question. Please press star one one again please.
Please be advised that today's conference is recorded.
On the call today, we have Brian sailor, President and CEO , Chris Tucker Senior Vice President and C. F O.
Now I would like to turn the.
The conference over to our first speaker today, Kate Lowery, Vice President of Investor Relations K, you may now have the floor.
Thank you.
Statements made during this call, which you're not strictly stork or 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 an actual results may differ materially from those projected and forward looking statements.
<unk> uncertainty that exists in the company's operations in business environment, including but not limited to the risk factors referencing the company's press release issued today, which will be included I think it's a bit to the company form 8-K to be filed.
No duty to update and revise any forward looking statements, except if need be required by applicable laws regulations.
During this call the company May discuss some non-GAAP financial measures in describing the company's operating results. The reconciliation of these measures to the most comparable GAAP measures can be found in the press release issue today.
Found on the company's website at Www Dot technologies Dotcom under the link Investor Relations now I'll turn the call over to Brian .
For joining today's call. We really appreciate you taking some time to get an update from this afternoon.
Have gone really well from the first three quarters.
Two dropped all of you about that before you.
I'd like to take a moment to thank all of our employees.
Wrapped up a number of strong quarters.
<unk> top and bottom line growth.
Richard roller, but it takes a dedicated and capable team to truly deliver all these positive industry.
Hasn't been easy over the last few years with our teams continue to show real commitment.
First.
First of all I'd have a chance in July that most of our operating location.
It's always energizing the fever.
The witness firsthand.
Success with their achieving.
The teams across the world are very engaged in the winter. So it's fun to be in a strong culture like that and again I just want to thank so everyone at <unk> for their tremendous effort and support.
Let me pivot over to the quarterly results.
We had a really great third quarter with strong sales and earnings growth sales increased nearly 14% during the quarter with positive trends continuing in most parts of our business on top of that we are nice margin expansion, which ultimately led to adjusted earnings per share growth of over 20 per.
Sir.
We are very happy with this performance and I'm excited that we have continued to exceed expectations through the first three quarters of FY 23.
We have over $700 million a backlog now so the outlook going forward remains positive we did see ordered drop compared to the prior third year of the third quarter of last year.
Chris will take us through those details.
<unk>, but that's mostly an issue of timing and due to the lumpy nature of multiyear orders for certain parts of our business.
Date are booked a dell ratio in over 100 per cent and we are optimistic about our growth outlook as we look beyond 2000 2003.
Before it gets into the financial details I did want to offer some top level of commentary about each of our business segments Star.
Starting with the area, where we had a solid quarter.
Sales were up double digit.
As we continue to see good momentum in the commercial and defense aerospace businesses. The aircraft components goodness, certainly led the growth this quarter for AMD.
The team to execute it very well, but this continues to be the part of our business with the most challenges from a supply chain perspective.
Continues to constrain the potential growth and contribute to some ask you backlog.
The teams continue to manage this aggressively and we're delivering on the grow but the challenge is industrywide persists.
Order for aerospace and defense work down in the quarter, but again, that's mostly a timing issue with some large multiyear orders booked in Q3 of the prior year. The outlook your remaining solid with Navy commercial and military aerospace all expected to drive future growth.
Next up is utility group, which had a really great quarter.
Revenue growth was up over 30% in the quarter and adjusted EBITDA grew by more than 50%. This.
This business has seen a nice burst of growth of 2023.
The core utility customer base continues to invest in their infrastructure and we're seeing broad growth across all of our product lines with protection testing physician monitoring and offline assessing all deliberate good grow while the renewable side growth continues to exceed even our expectation.
2023 will be a phenomenal year for NRG the inflation reduction access provided long term visibility for renewable infrastructure Buildouts and are you <unk> that both global NRG are beginning to see benefits from that activity on the supply chain side, we've seen a big improvement at USC.
And while our backlogs are elevated very little of that is past due.
Finally, I'll touch on the desk business, where we saw a sales decline again in the third quarter, which was in line with what we've described during our last conference call. We've seen flattish results domestically as growth paused over last year strength from power lines filters and test and measurement projects. Additionally, we seen condition <unk>.
Venue weakness in China, where business was significantly impacted as the economy opened back up after the pandemic.
Unfortunately, we have not seen business pick up much since that time.
Team here continues to do a great job and increased our EBIT dollars of the <unk>.
Third quarter, despite the lower sales volume. This is good performance and positions as well to capture additional grow as these markets start to recover in the future. So to summarize I would say it's been a great nine months to start 2023, it puts us on a good path overall as we drive to deliver on.
Targets for the full year, which we are increasing again this quarter. So now I'll turn it over to Chris to give some more financial highlights on the third quarter.
Thanks, Brian .
Everyone can follow along with the chart presentation will start on page three where we have the overall financial highlights.
As you can see we had another great quarter will say sales up over 13% ajar.
Adjusted EBIT up over 24% and adjusted earnings per share over 22%.
We will go through the segment details in a minute, but on the sales side utility solutions group delivered exceptional sales growth of over 30%.
In Aerospace and defense was also strong at 12% growth.
Orders were down in the quarter, you can see they drop by 16% to $213 million.
Again I will cover this in the segment details, but we had some tough comparisons with large items booked last year.
The good news is that backlog still stands at over $700 million as of June 30th.
Moving onto chart for will start to get into the segment details beginning with aerospace and defense.
Starting with orders you can see the orders in the third quarter were down over 25%.
We had some large orders in the space business last year, which was a key driver to the decline.
On the sales side, we're up 12% with organic sales up 8% and the CMT acquisition, adding four points of growth.
The commercial and military aerospace businesses, where the key drivers to the overall growth and we continue to see good momentum there.
Adjusted EBIT was up four 5% in dollar terms and margins were down 150 basis points as improvements from the commercial and military aerospace businesses was offset by margin erosion on some space development contracts.
Next is sharp five and utility solutions group.
Here the performance was exceptional orders were up 15% with the renewable renewables business, leading that growth sale.
Sales were up nearly 34% and as you can see on the chart. The Doble services offline testing protection testing and condition monitoring product lines all contributed.
On the renewable side within RG, we once again saw explosive growth 45% in the quarter.
The top line performance for this group overall converted to a nice margin expansion with adjusted EBITDA 330 basis points. This.
This improvement was driven by leverage on the higher sales growth.
And favorable impacts from price increases, which more than offset inflationary headwinds.
Next is sharp six where we have the test business.
Bit of a mixed story here you can see orders were down nearly 35%.
A big drop his last year, we had a significant order we had significant order activity for test and measurement orders, which did not repeat this year.
We have also seen continuing weakness in China is the overall pace of business has been slow since the reopening free COVID-19 earlier in the fiscal year.
Sales were down 7%, but the good news here was it.
Was margins as EBIT increased 3.5%, even though in the lower sales. This is a margin improvement of 150 basis points driven by cost reduction efforts as well as price increases.
Next is chart seven in our cash flow highlights.
We did see operating cash flow improvement in the third quarter compared to our first two quarters, but we are still running behind last year's operating cash flow amount of $42 million working capital increases from accounts receivable inventory and contract assets have been a cash headwind and we've also seen sizeable negative cash impact from higher taxes.
Paid in interest paid.
Capital expenditures are down approximately approximately $9 million a year to date.
You'll recall that last year, we had a building purchases NRG and that's the main driver of this year's decrease.
Acquisition spending is relatively flat with Nico acquired in fiscal 2002, and CMT acquired in fiscal 2003.
And lastly, a share repurchase where we completed just over $12 million in buybacks this year compared to approximately $20 million through the first nine months last year.
And the last chart as our guidance chart.
You can see here that we are projecting adjusted earnings per share growth in the range of 13% to 15%.
We put our initial guidance out in November of last year of 345 to 360 per share.
In the mid point of our guidance has gone up each quarter since then.
We are now looking at a range of 362 to 368.
Good double digit growth for the year coming coming after 24% adjusted earnings per share that we delivered in fiscal 2002.
This represents too strong years for ESCO and we are excited not only about the strong years and 22 and 23, but what comes next in 24 and beyond.
So that concludes the financial update and now I'll turn it back over to Brian .
Thanks, Chris.
Since I touched on a number of my thoughts earlier I will just offer a few more comments before we got you on a <unk>.
The numbers for Chris So obviously add right 2023, with a very strong financial performance.
The company is operating at a high level and we continue to have confidence has we left in the future. We serve very strong and markets with well established customers. We have great teams here at corporate and out of the businesses around the world. This form the powerful combination and we're excited about what's next brasco.
Before Q&A I did want to mention that we recently published R. E. S. G report covering our 2022 activities.
Can find this on the corporate citizenship section of our website I would encourage you to go out and take a look at the report it's got a lot of good information on <unk> ESG program. Overall. It also has a nice profile of our NRG business and their capabilities about helping to enable renewable energy. The team here for a lot of work into the report and we hope that you find it.
His fault so with that we can start the Q&A.
Thank you we will know conduct a question and answer session. As a reminder to ask a question. Please press star one line on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one line again.
Standby as may compile the Q&A roster.
Our first question comes from Jonathan <unk> at C. J S. Please go ahead.
Hi, Good afternoon, it's Pete Lucas for John .
Can you talk a bit more about the Virginia class timing shift and does that impact when you expect to generate earnings and revenue from those owners.
Sure.
So what's happening right now on Virginia classes, there is a multiyear procurement process that's in place.
We do expect that that's going to say.
Few more months, we would expect to get some blocked.
Last five.
Expansion orders.
In the near term probably within the fourth quarter.
And then we expect to see a pretty significant tranche of as many as 12, Virginia class submarines sometime.
Perhaps early next year.
We are in a really good position on that projected. So we don't think it's going to have any impact on our ability to generate earnings we might get a modest expansion based upon.
Some additional aspects of the submarines that they're going to be adding going forward.
Ah very helpful. Thanks, and then jump into the supply chain issues.
Can you give us a little more color on note is that your internal throughput your suppliers are parallel downstream partners, where you're seeing the biggest issues there.
Well until we were always talking about the aerospace and defense business here in <unk>. The rest of our business seems to have largely recovered within the aerospace and defense industry is an industrywide challenge right now with regard to supply chain.
Biggest issue is is that lower tier suppliers are struggling and that has a cascade effect, we're not able to replace suppliers very easily.
In this industry is so that kind of puts us in a position where we have to wait for a product rather than swapping about silver and utility segment. For example, we were able to redesign.
Circuit boards to swap out components for a different or more available type of memory, Jeff or something like that we don't have that luxury over in aerospace and defense.
The good news is we are making good progress and we are driving the growth.
But this is really an industry wide challenge that many companies are facing and this is a big topic of discussion at the Paris Airshow back in June .
I would say the industry consensus as I said, several more quarter to really unwind the challenge.
Okay.
And last one for me just an update on the M&A environment, what it looks like a relatively is it more or less attractive compared to the past couple of quarters.
And of acquisitions aren't out there kind of talk about the priority in terms of capital allocation.
Yeah. So so the good news is it's improving.
We're seeing more opportunities presently than we have for the last couple of quarters and.
Based on our market research and intelligence, we are seeing more opportunities that will be coming to market. Later. This year. We do have a couple of good programs that we're engaged on but I don't have I don't think we're close to getting anything done we certainly don't want to comment on any details but.
But we feel pretty good about our opportunity to get some investment done in the near term.
Very helpful. Thanks, I'll jump back in the queue.
One moment for our next question.
Our next question comes from Tiny Mall at Stephens, Inc. Please go ahead.
Good afternoon, Thanks for taking my questions.
Hey, Tommy Tommy.
Brian I wanted to start on the side of the business what if any update can you provide from your review of that segment and then specific to commercial where the growth rates continue rather elevated levels. If you. If you look at the build plans and the content that you have respect and is.
Is there any reason to think that the growth momentum and the double digit range, even if it's at a moderating right from this year is unreasonable through your planning horizon [noise].
So so listen the build right from Airbus and Boeing in particular continue to accelerate and we're seeing a lot of that benefit and are aircraft businesses.
And.
We feel like we're responding well for that and that we should have growth rates that are in the high single digits.
Over the next year or two maybe maybe a touch higher.
In the shorter term.
The biggest challenge for us will be continuing to work through the supply chain.
Peace.
And we continue to make progress there.
But in order to keep piling up and.
So we feel pretty good about that.
Businesses added.
And then in terms of your.
Review of the AMD portfolio, Brian any update you can provide there.
Listen first of all we've got some great businesses. There. We we don't have any strategic announcements to make today I think all of our businesses are performing well we.
We do think that there are opportunities to expand on our position and.
And some of those places, particularly navy.
Merkel aerospace and we're looking at ways to do that.
Fair enough. Thank you.
I'll also wanted to ask about.
Utility or really doable specifically.
Another quarter with the <unk>.
Presses growth rate in the third quarter.
It feels like you've hit a good.
Operating cadence post pandemic, where there were some.
Some rough quarters, there what is favorably changing.
In terms of the underlying demand there and then if you take a step back.
Pre pandemic, even a number of years pre pandemic Brian .
I think it's fair to say that was probably a high single digit kind of market opportunity.
To go. After then there were some years leading into the pandemic where that dipped a little bit.
Does it feel like.
In terms of the the outlook going forward there has been a reacceleration in terms of the growth rate of that opportunity.
Yeah, I would say that.
So utilities.
Large I think it's really dawned on people that.
In order to facilitate this clean energy transition we've got it made.
Enormous.
Investments.
Grid infrastructure.
And I think that that is a big big driver and the general.
Filled out that we're seeing.
I do think that the inflation reduction at the infrastructure Act before that have both had a very positive.
Back at.
And what's the most positive about is not the fact that it's short term money, it's long term money.
Got a 10 year runaway here, where.
Which is giving folks a lot of confidence to go ahead and make big capital investments and that's really fundamentally healthy for our business.
In addition to that I think that.
Folks are <unk> and his ability space are realizing that they really need to get smarter about how to handle these assets.
So the best that we made a number of years ago.
Heavy investments and both inorganic and organic development of our condition monitoring.
Capabilities is really helping us there.
Some of the new.
Products that we.
Talked about the last couple of years are really starting to get some traction.
So yeah, I'd say, we're in a pretty sweet spot their overall the renewable side.
I mean that.
Business has been lighter than air this year, it's been very differ.
Difficult.
For us to predict exactly what would happen except for every time, we pick up the phone it's more good news so.
That's been that's been a fun story via part of.
I guess the bigger question is okay, where we go from here.
The reality is that.
In order to facilitate this this transition.
There is a lot more investment that needs to be made.
And I mean in terms of trillions of dollars.
And worldwide and we will we will certainly benefit as those kinds of investments are made.
I appreciate the insight Bryan I'll turn it back.
Next time.
One moment for our next question.
Our next question comes from John <unk> at Fidelity and company go ahead.
Good afternoon, guys. Congratulations on a great color and thanks for taking my questions.
I'd like to start in the test side of the business you've.
Kind of characterize that businesses coming out of Covid China's been in it.
You just getting the door.
China seems to be weakening in and of itself.
Can you talk a little bit about what your expectations are and test in China in the coming quarters and has a competitive landscape change in light of that demand environment.
Yeah, I would say that the first business as a whole.
Yes. This is our strongest business through the Covid period.
While other parts of our business were.
Softening up.
Business was really strengthening and growing and fortunately they've been able to kind of maintain that higher level of overall revenue.
China has been.
A little bit of a challenge for us. This year, we had exceptional year last year. So on a comparison basis I think our China businesses down very very significantly year over year.
The.
Yes.
We're still making money over there we're still building products, but the.
The level of demand that we're seeing from customers and our ability to get out on a job sites.
<unk> is a little bit impaired we do not believe that that is a competitive landscape difference. We think that that's a difference in the fundamentals of the Chinese economy, and I think that's been borne out by what we're seeing them as we read about what's going on overall in China.
So.
The good news is it's a relatively small part of our overall business.
<unk>.
A reasonably.
Reasonable subset of the of the test and measurement business means.
Meanwhile, here in North America.
The business has kind of been flattish.
And what we're seeing a there is a little bit of a transition probably more EMC in.
That sort of work and little less of the wireless activity.
Continue to see activity with easy and that sort of thing what's.
What's been interesting for us this year as our European business has been quite strong.
And that's driven probably a little bit by some of the security staff. We're seeing yeah, we've got a big presence in Finland, and they're joining NATO has been a positive.
But.
So overall and we still continue to be optimistic about this business.
But we're kind of moving along sideways at this upper end of our of our revenue over the last several years.
Got it got it that's actually helped a lot.
And going back to your utility comments.
To be sure the renewable markets, but doing well, but more the tradition utility spend.
Uhm it sounds like you're enthusiastic about the slope of that business going forward.
Can you talk a little bit of what you're seeing as far as traditional utility spending.
Is it pent up demand, it's coming back with you really see a fundamental.
Long term shift and a demand cycling the utilities.
Well I think it would be wrong for me to say there is there was there was no pent up demand because.
During the periods of time and he was talking about a couple of years ago during.
During the pandemic the way utilities operate as a cat.
Hey, guys took a hands off approach and say, hey, listen we got maximize uptime generation and make sure we keep the lights on.
Not mess around too much and then as we came out of the pandemic of a lot of that.
Activity had to be made up for I think we are largely past that now.
And I do think there has been a shift in the way to utilities think about particularly about more advanced techniques.
We've got new products that are able to satisfy their requirements for digital testing. We've got products now there. He asked for this condition monitoring peace, we're seeing a lot of activity in those areas and listen utilities.
R.
They are recognizing the fact.
If you do the math and all these net zero targets and even if you cut them in half and say that there.
We're not going to achieve by.
By 2030, or 2040 year 2050, as as has been stated.
It's still points to enormous amounts of growth the electric vehicle build out.
And of itself is an enormous demand driver for utilities and what they see their revenue streams that they can capitalize on but they've got to be able to deliver the services, so they're making the necessary investments now.
Fair enough and and just one last question.
<unk> my understanding is that some of the lower tier suppliers. There was actually a search for alternative suppliers. They might've required some new certifications in the process.
I think I'm, making.
Is that not the case or is it just going slower than expected.
Can you just the inquiry there would be helpful.
Well, it's going slower than expected and I think.
And I think when you think about it as an industry wide phenomenon. So just think about the people that are actually doing those recertifications there'll be inundated by requests.
Right Yeah, it's it's very.
Very conservative industry that.
Very changed diverse.
So and a lot of cases, we really are put in a position where we don't have many choices I mean, we have definitely designed.
Nine changes and we've made.
We've made changes to the material certifications and that sort of thing.
I think the other thing I would I would point out is if we look at our past due backlog.
It's a small number of parks and programs that are driving a large piece of this.
Of this overall past due.
The the meat and potatoes steps that are going into <unk>.
737, 83, 2000 and that sort of thing most of that is running along nicely.
But a lot of our other programs.
Wherever you are seeing a lot of the past year.
Mmk great.
That helps a lot. Thank you very much crime and those are the best.
Program.
Quantities and so the justification for going through a recertification program is less.
Less obvious.
Thank you.
One moment for our next question.
Our next question is from tiny mall at Stephens, Inc. Your line is open.
Tiny mall your line is open.
Yes, I just wanted to make sure we hit on utility margin today. So thanks for calling back letting me back in here.
On an adjusted EBIT basis, you just reported.
3%, which is the ZIP code, where you've been before if you go back far enough in history, but.
More recently you haven't been there on a sustained basis. So I'm curious if there's anything one time.
Favorable and this quarter or if some of the recent margin improvement their fields like a more sustainable basis that you can operate out thanks.
Yes, Tammy I wouldn't say there was anything, particularly one time and there again.
We're just kind of.
Obviously, driving really nice leverage on the big growth.
I think we did see a little bit of favorable mix that was kind of unfavorable earlier in the year. So that helped us slightly but then again, it's more just kind of price and cost management and those kinds of things so.
Listen, we're not going to be there every quarter at that level, but obviously you were looking to drive back to the historical peaks as we as we go into 24 and beyond so.
That's kind of how to answer it really nothing special good.
Good leverage and we feel confident about the ability to drive the margins up as we go forward.
That's helpful. Thank you Chris that's all for me.
Thank you.
I am showing no further questions at this time.
I would now like to turn the conference back to President and CEO , Brian Taylor.
Ah closing Rebecca otherwise, yeah, thanks to everyone and good to talk to you in this quarter and we'll look forward to talking to you again next quarter.
Thank you.
Thank you. This concludes today's conference call.
Thank you for participating you may now disconnect.
Okay.
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Good day and thank you for standing by welcome to the third quarter 2023, ESCO technologies earnings call. At this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session to ask a question. During the session you will need to press star one one on your telephone you will then hear an audit made it message that your hand is raised to withdraw your question. Please press star one one again please.
Please be advised that today's conference is recorded.
On the call today, we have Brian Saylor, President and CEO , Chris Tucker Senior Vice President and CFO and now I would like to turn the conference over to our first speaker today, Kate Lowery, Vice President of Investor Relations. Kate you May now have the floor.
Thank you Steve.
Statements made during this call, which are not strictly stork, all our 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 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 may be required by applicable laws or regulations in.
In addition, during this call the company May discuss the 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 .
Thanks, Kate and thanks, everyone for joining today's call. We really appreciate you taken some time to get an update from ESCO. This afternoon.
<unk> has gone really well through the first three quarters and I'm excited to talk to all of you about that but before I do.
I'd like to take a moment to thank all of our employees ESCO is wrapped up a number of strong quarters with impressive top and bottom line growth. Our industries are growing but it takes a dedicated and capable team to truly deliver on these positive industry trends. It hasnt been easy over the last few years.
But our teams continue to show real commitment and dedication are Chris and I had a chance in July to visit most of our operating locations and it's always energizing to see the teams in action and to witness firsthand. The success that they are achieving the teams across the world are very engaged in the awareness. So it's fun.
And to be in a strong culture like that and again I just want to say thanks to everyone at <unk> for their tremendous effort and support with that let me pivot over to the quarterly results.
We haven't really great third quarter with strong sales and earnings growth sales increased nearly 14% in the quarter with positive trends continuing in most parts of our business on top of that we had nice margin expansion, which ultimately led to adjusted earnings per share growth of over 20 <unk>.
<unk>.
We are very happy with this performance and excited that we have continued to exceed expectations through the first three quarters of FY2023.
We have over $700 million of backlog now so the outlook going forward remains positive we did see orders dropped compared to the prior year third quarter of last year.
Kris will take us through the details in a few minutes, but thats, mostly an issue of timing and due to the lumpy nature of multiyear orders for certain parts of our business.
Year to date, our book to Bill ratio was over 100% and we're optimistic about our growth outlook as we look beyond 2023.
Before Chris gets into the financial details I did want to offer some top level commentary about each of our business segments.
With AMD, where we had a solid quarter.
Sales were up double digits as we continue to see good momentum in the commercial and defense aerospace businesses. The aircraft components business certainly led the growth this quarter for AMD with <unk>.
<unk> executed very well, but this continues to be the part of our business with the most challenges from a supply chain perspective.
This continues to constrain the potential growth and contribute to some past due backlog.
The teams continue to manage this aggressively and we're delivering on the growth, but the challenges industry wide persists orders for aerospace and defense were down in the quarter, but again, that's mostly a timing issue with some large multiyear orders booked in Q3 of the prior year. The outlook here remains solid with Navy.
Commercial and military aerospace all expected to drive future growth.
Next up is the utility group, which had a really great quarter revenue growth was up over 30% in the quarter and adjusted EBIT dollars grew by more than 50%. This business has seen a nice burst of growth in 2023.
Core utility customer base continues to invest in their infrastructure and we are seeing broad growth across all of our product lines with protection testing condition monitoring and offline testing all delivering good growth on the renewable side growth continues to exceed even our expectations 2023.
We'll be a phenomenal year for NRG, the inflation reduction assets provided long term visibility for renewable infrastructure build outs and our USG team that both global and NRG are beginning to see benefits from that activity on the supply chain side, we've seen a big improvement at USG and while our bag.
Backlog for elevated very little of that is past due.
Finally, I will touch on the test business, where we saw sales decline again in the third quarter, which was in line with what we described during our last conference call. We've seen flattish results domestically as growth caused over last year's threat from power line filters and test and measurement projects. Additionally, we've seen conditions.
<unk> weakness in China, where our business was significantly impacted as the economy opens back up after the pandemic and.
Unfortunately, we have not seen business pick up much since that time. The team here continues to do a great job and they increased our EBIT dollars in the third quarter. Despite the lower sales volume. This is good performance and positions us well to capture additional growth as these markets start to recover in the future.
So to summarize I would say, it's been a great nine months to start 2023.
It's us on a good path overall as we drive to deliver on our targets for the full year, which we are increasing again this quarter. So now I'll turn it over to Chris to give some more financial highlights on the third quarter.
Yes.
Thanks, Brian .
Everyone can follow along with the presentation, we will start on page three where we have the overall financial highlights.
As you can see we had another great quarter with sales up over 13% adjusted EBIT up over 24% and adjusted earnings per share up over 22%.
We will go through the segment details in a minute, but on the sales side. The utility solutions group delivered exceptional sales growth of over 30% and aerospace.
And defense was also strong at 12% growth.
Orders were down in the quarter, you can see they dropped by 16% to $213 million.
Again I will cover this in the segment details, but we had some tough comparisons with large items booked last year.
The good news is the backlog still stands at over $700 million as of June 30.
Moving onto chart four we'll start to get into the segment details beginning with aerospace and defense.
Starting with the orders you can see the orders in the third quarter were down over 25%. We had some large orders in the space business last year, which was a key driver to the decline.
On the sales side, we are up 12% with organic sales up 8% and the CMT acquisition, adding four points of growth.
The commercial and military aerospace businesses were the key drivers to the overall growth and we continue to see good momentum there.
Adjusted EBIT was up four 5% in dollar terms and margins were down 150 basis points as improvements from the commercial and military aerospace businesses was offset by margin erosion on some space development contracts.
Next is sharp five in utility solutions group.
Here. The performance was exceptional orders were up 15% with the renewables renewables business, leading that growth sales were up nearly 34% and as you can see on the chart. The Doble services offline testing protection testing and condition monitoring product lines all contributed on there.
Innumerable side within RG, we once again saw explosive growth 45% in the quarter.
The topline performance for this group overall converted to a nice margin expansion with adjusted EBIT up 330 basis points.
This improvement was driven by leverage on the higher sales growth and.
And favorable impacts from price increases, which more than offset inflationary headwinds.
Next chart, six where we have the test business.
Bit of a mixed story here you can see orders were down nearly 35%.
A big drop is last year, we had a significant order we had significant order activity for test and measurement orders, which did not repeat this year we.
We are also seeing continuing weakness in China as the overall pace of business has been slow since the reopening from Covid earlier in the fiscal year.
Sales were down 7%, but the good news here was it.
Was margins as EBIT dollars increased three 5% even on the lower sales. This is a margin improvement of 150 basis points driven by cost reduction efforts as well as price increases.
Next chart seven and our cash flow highlights we did see operating cash flow improvement in the third quarter compared to our first two quarters, but we are still running behind last year's operating cash flow amount of $42 million.
Working capital increases from accounts receivable inventory and contract assets have been a cash headwind and we've also seen sizable negative cash impact from higher taxes paid and interest paid.
Capital expenditures are down approximately approximately $9 million year to date Youll.
Youll recall that last year, we had one building purchase at NRG and Thats. The main driver of this year's decrease.
Acquisition spending is relatively flat with nikko acquired in fiscal 'twenty, two and CMT acquired in fiscal 'twenty three and.
And lastly is share repurchase where we completed just over $12 million in buybacks this year compared to approximately $20 million through the first nine months last year.
And the last chart is our guidance chart.
You can see here that we are projecting adjusted earnings per share growth in the range of 13% to 15%.
We put our initial guidance out in November of last year of $3 45 to $3 60 per share in.
And the midpoint of our guidance has gone up each quarter since then.
We are now looking at a range of $3 62 to $3 68.
Good double digit growth for the year coming coming after 24% adjusted earnings per share that we delivered in fiscal 'twenty two.
This represents two strong years for ESCO and we're excited not only about the strong years in 'twenty two 'twenty three but what comes next in 'twenty four and beyond.
So that concludes the financial update and now ill turn it back over to Brian .
Thanks, Chris.
I touched on a number of my thoughts earlier I will just offer a few more comments before we go to Q&A.
You saw the numbers for Chris So obviously, a great 2023 with very strong financial performance.
The company is operating at a high level and we continue to have confidence as we look to the future. We saw a very strong end markets with well established customers. We have great teams here at corporate and out of the businesses around the world. This forms a powerful combination and we're excited about what's next for <unk>.
<unk> I did want to mention that we recently published our ESG report covering our 2022 activities you can find this on the corporate citizenship section of our website I would encourage you to go out and take a look at the report it's got a lot of good information on ESG program. Overall. It also has a nice profile of our <unk>.
Our <unk> business and their capabilities about helping to enable renewable energy the team here for a lot of work into the report we hope that you find it useful.
So with that we can start the Q&A.
Yes.
Thank you we will now conduct the question and answer session. As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again please.
Please standby as we compile the Q&A roster.
Our first question comes from Jonathan <unk> at CJS. Please go ahead.
Hi, Good afternoon, it's Pete Lucas for Jon can.
Can you talk a bit more about the Virginia class timing shift and does that impact when you expect to generate earnings and revenue from those orders.
Sure.
So what's happening right now on Virginia class as there's a multiyear procurement process in place.
We do expect that that's going to say a few more months, we would expect to get some.
Block five.
<unk> expansion orders.
In the near term probably within the fourth quarter and.
And then we expect to see a pretty significant tranche of as many as 12, Virginia class submarines at sometime perhaps early next year.
We are in a really good position on that projected so we don't think its going to have any impact on our ability to generate earnings we might be a modest expansion based upon some additional aspects of the submarines that theyre going to be additive going forward.
Very helpful. Thanks, and then jumping to the supply chain issues.
Give us a little more color on though.
Is it your internal throughput your suppliers are parallel downstream partners, where youre seeing the.
Biggest issues there.
Well, so we were really talking about the aerospace and defense business here at <unk>. The rest of our business seems to have largely recovered within the aerospace and defense industry is an industry wide challenge right now with regard to supply chain.
The biggest issue is that lower tier suppliers are struggling.
That has a cascade effect, we're not able to replace suppliers very easily.
In this industry and so that kind of puts us in a position where we have to.
<unk> for our products rather than swapping them out yet so over in the utility segment. For example, we were able to redesign.
Circuit boards to be able to swap out components for our dividend more available type of memory, Jeff or something like that we don't have that luxury over in aerospace and defense.
The good news is we are making good progress and we are driving the growth.
But this is really an industry wide challenge that many companies are facing and this is a big topic of discussion at the Paris Air show back in June .
I would say the industry consensus is.
Several more quarters to really unwind the challenge.
Okay.
And last one for me just an update on the M&A environment, what it looks like a relatively is it more or less attractive compared to the past couple of quarters.
If acquisitions arent out there kind of talk about the priority in terms of capital allocation sure. Yes. So the good news is it's improving.
We're seeing more opportunities presently than we have for the last couple of quarters.
And.
Based on our market research and intelligence, we are seeing more opportunities that will be coming to market. Later. This year. We do have a couple of good programs that were engaged on but I don't I don't think were close to getting anything done.
We certainly don't want to comment on any details, but but we feel pretty good about our opportunity to get some investment done in the near term.
Very helpful. Thanks, I'll jump back in the queue.
One moment for our next question.
Our next question comes from Tommy Moll at Stephens, Inc. Please go ahead.
Good afternoon, and thanks for taking my questions.
Hey, Tommy Tommy.
Brian I wanted to start on the A&D side of the business what if any update can you provide from your review of that segment and then specific to commercial where the growth rates.
<unk> rather elevated levels.
You look at the build plans and the content that you have specced in.
Are there any reason to think that the growth momentum in the double digit range, even if it's at a moderating rate from this year is unreasonable through your planning horizon.
Yeah.
So listen the build rate from Airbus and Boeing.
In particular continue to accelerate and were seeing a lot of that benefit in our aircrafts businesses.
And.
We feel like we're responding well to that and that we should have growth rates that are in the high single digits.
Over the next year or two maybe maybe a touch higher than that.
The shorter term.
The biggest challenge for us will be continuing to work through the supply chain.
Piece.
And we continue to make progress there but.
But the orders keep piling up and so.
So we feel pretty good about where that business is headed.
And then in terms of your <unk>.
A review of the A&D portfolio, Brian any update you can provide there.
Listen first of all we've got some great businesses there.
We don't have any strategic announcements to make today I think all of the businesses are performing well, we do think that.
There are opportunities to expand on our position.
Some of those spaces in particular in AAV.
In commercial aerospace and we're looking at ways to do that.
Fair enough. Thank you.
I also wanted to ask about.
Utility or really doble specifically.
Another quarter with <unk> and.
Impressive growth rate in the third quarter.
Feels like you've hit a good.
Operating cadence post pandemic, where there were some.
Some rough quarters, there what is favorably changing.
In terms of the underlying demand there and then if you take a step back.
Pre pandemic, even a number of years pre pandemic Brian .
I think it's fair to say that was probably a high single digit kind of market opportunity.
To go after than there were some years, leading into the pandemic where that dipped a little bit.
Does it feel like.
In terms of the.
Outlook going forward Theres been a reacceleration in terms of the growth rate of that opportunity.
Yes, I would say that.
So utilities.
Large I think it's really dawned on people.
In order to facilitate this clean energy transition.
Got it.
Enormous.
Investments.
Grid infrastructure.
And I think that that is a big big driver in the general.
Build out that we're seeing.
I do think that the inflation reduction at the infrastructure Act before that have both had a very positive.
<unk>.
The most positive of that is not the fact that it's short term money. It's long term money, we've got a 10 year runway here where.
Which is giving folks a lot of confidence to go ahead, and make big capital investments and Thats really fundamentally healthy for our business.
In addition to that I think.
Folks are visibility space are realizing that they really need to get smarter about how to handle these assets.
The bet that we made a number of years ago on.
Heavy investment in both inorganic and organic development of our condition monitoring.
Mobility is really helping us there.
Some of the new.
Products that we.
As <unk> talked about for the last couple of years are really starting to get some traction.
So, yes, I would say, we're hitting a pretty sweet spot there over on the renewable side.
Yes.
That business has been lighter than air this year, it's been a very.
Difficult.
For us to predict exactly what will happen except for every time, we pick up the phone it's more good news.
That's been that's been a fun story to be a part of.
I guess the bigger question is okay, where do we go from here.
The reality is is that.
In order to facilitate this transition.
There is a lot more investment that needs to be made.
And I mean in terms of trillions of dollars.
Worldwide.
We will we will certainly benefit as those kinds of investments are made.
I appreciate the insight, Brian I'll turn it back.
Thanks, Tom.
One moment for our next question.
Our next question comes from John <unk> at Sidoti and company go ahead.
Good afternoon, guys and congratulations on a great quarter and thanks for taking my questions.
I'd like to start in the test side of the business.
You've kind of characterized that business is coming out of Covid China's been a an issue just getting in the door.
Now, China seems to be weakening in and of itself.
Can you talk a little bit about what your expectations are in test in China in the coming quarters and has the competitive landscape changed in light of that demand environment.
Yes, I would say that.
<unk> business as a whole.
This was our strongest business through the Covid period.
While other parts of our business were.
Softening up.
This business was really strengthening and growing.
Fortunately <unk> been able to kind of maintain that higher level of overall revenue.
China has been a little bit of a challenge for us. This year, we had exceptional year last year. So on a comparison basis, yes, I think our China business is down very very significantly year over year.
The.
Yes.
We're still making money over there we're still building product but.
The level of demand that we're seeing from customers and our ability to get out on the job sites still.
Still is a little bit impaired we do not believe that that is a competitive landscape difference, we think that thats a difference in the fundamentals of the Chinese economy, and I think that's been borne out by what we're seeing and as we read about what's going on overall in China.
No.
Good news is it's a relatively small part of our overall business.
It's up.
A reasonably a reasonable subset of the of the test and measurement business.
Meanwhile, here in North America.
The business has kind of been flattish.
And what we're seeing if there is a little bit of a transition and probably more EMC in.
That sort of work and a little less of the wireless activity.
Continue to see activity with EV and that sort of thing whats been interesting for us this year as our European business has been quite strong.
And thats, driven probably a little bit by some of the security stuff. We're seeing we've got a big presence in Finland, and they're joining NATO has been a positive.
But so overall listen we still continue to be optimistic about this business.
But we're kind of moving along sideways at this kind of upper end of our of our revenue over the last several years.
Got it got it that's actually helped a lot.
And going back to utility comments.
To be sure the renewables markets doing well, but more the traditional utility spend.
It sounds like you're enthusiastic about the slope of that business going forward.
Can you talk a little bit about what you're seeing as far as traditional utility spending.
Is it pent up demand that's coming back would you really see a fundamental.
Long term shifts in the demand cycle on the utility side.
Well.
I think it would be wrong for me to say there is there was there was no pent up demand because.
During the period that Tommy was talking about a couple of years ago during the pandemic the way utilities operated.
Ill take a took a hands off approach and say hey, listen we've got to maximize uptime and generation and make sure we keep the lights on and not mess around too much and then as we came out of the pandemic a lot of that.
<unk> activity had to be made up for I think we're largely past that now.
And I do think there has been a shift in the way the utilities think about particularly about more advanced techniques.
We've got new products that they are able to satisfy their requirements for digital testing. We've got products now that are enhanced for this condition monitoring fees, we're seeing a lot of activity.
Those areas and listen utilities.
Are.
They are recognizing the SaaS.
If you do the math on all of these net zero targets and even if you kind of in half and say that there were.
We're not going to achieve them by.
By 2030, or 2040 or 2050 as has been stated it still points to enormous amounts of grow the electric vehicle build out.
And that of itself is an enormous demand driver for utilities and what they see their revenue streams that they can capitalize on but they've got to be able to deliver the services. So they are making the necessary investments now.
Fair enough and just one last question.
My understanding is that some of the lower tier suppliers. There was actually a search like alternative suppliers that might be required some recertification in the process.
We've been making.
Is that not the case or is it just going slower than expected.
Can you just little clarity there would be helpful.
Well, it's going slower than expected and I think.
And I think when you think about it as an industry wide phenomenon. So just think about the people that are actually doing those re certifications theyre being inundated.
Right.
A very conservative industry that is very change averse.
So and a lot of cases, we really are putting a position where we don't have many choices I mean, we have definitely design.
<unk> changes and we've made.
We've made changes to material certifications and that sort of thing.
I think the other thing I would point out is if we look at our past due backlog.
It's a small number of parts in programs that are driving a large piece of this.
This overall past due.
The medium Takeda stuffs that are going into <unk>.
737, <unk> hundred 20, and that sort of thing most of that is running along nicely.
But there are a lot of our other programs.
Where youre seeing a lot of the past.
Okay, great that helps a lot. Thank you very much Brian .
The program smaller quantities and sell the justification for going through a recertification program is less.
Less obvious.
Great. Thank.
Thank you.
One moment for our next question.
Our next question is from Tommy Moll at Stephens, Inc. Your line is open.
Tommy Moll your line is open.
Yes, but I just wanted to make sure we hit on utility margin today. So thanks for letting me back letting me back in here on.
On an adjusted EBIT basis, you just reported.
<unk>, 3%, which is the Zip code.
You've been before if you go back far enough in history, but.
More recently you haven't been there on any sustained basis. So I'm curious if there's anything onetime.
Favorable in this quarter or if some of the recent margin improvement there feels like a more sustainable base that you can operate out thanks.
Yeah, Tammi I wouldn't say there was anything, particularly one time in there again.
We're just kind of obviously driving really nice leverage on the big growth.
I think we did see a little bit of favorable mix that was kind of unfavorable earlier in the year. So that helped us slightly but then again, it's more just kind of price and cost management and those kind of things so.
We're not going to be there every quarter at that level, but obviously, we're looking to drive back to the historical peaks as we as we go into 'twenty four and beyond so.
That's kind of how I'd answer it really nothing special.
Good leverage.
We feel confident about the ability to drive the margins up as we go forward.
That's helpful. Thank you Chris that's all from me.
Thank you.
I am showing no further questions at this time.
I would now like to turn the conference back to President and CEO , Brian Taylor.
Our closing thanks, everyone.
Thanks, everyone and good to talk to you this quarter and we will look forward to talking to you again next quarter.
Okay.
Thank you.
Thank you. This concludes today's conference call.
Thank you for participating you may now disconnect.