Q4 2023 ESCO Technologies Inc Earnings Call

November 16, 2023

Speaker 1: Oh

Okay.

Speaker 2: day and thank you for standing by. Welcome to the fourth quarter 2023 ESCO technologies earnings.

Good day, and thank you for standing by and welcome to the fourth quarter 2023 ESCO technologies earnings call. At this time, all participants are in a listen only mode.

Speaker 2: 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 need to press star one one on your telephone. You will then hear an automated message advising your hand is.

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 on your telephone you didn't hear an automated message advising your hand is race to withdraw your question. Please press star. One again, please be advised that today's conference is being recorded on the call today, we have Brian Taylor President.

<unk> CEO, Chris Tucker Senior Vice President and CFO and now I would like to hand, the conference over to your first speaker today Kate Laurie.

Speaker 2: And now, I would like to hand the conference over to our first speaker today, Kate Laurie, Vice President of Investor Relations. Kate, you know how this works.

As president of Investor Relations, Kate you now have the floor.

Speaker 3: 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 Security

Thank you statements made during this call, but you're 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.

Speaker 3: 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 8K today.

Xyrem, including but not limited to the risk factors referenced in the company's press release issued today, which will be included as an exhibit to the company's form 8-K to be filed we undertake no duty to update or revise any forward looking statements, except as maybe required by applicable laws or regulations. In addition, during this call. The company may discuss non-GAAP financial measures.

Speaker 3: We undertake no duty to update or revise any forward-looking statements, except as may be required by applicable laws or regulations. 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 the most comparable GAAP measures can be found in the press release issued today and found on the company's website at www.escotechnologies.com under the link investor relations. Now I'll turn the call over to Brian .

Describing the company's operating results a reconciliation of these measures to their most comparable GAAP measures can be found in our 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.

Speaker 4: Thanks, Kate, and thanks to everyone for joining today's call. We appreciate each of you taking time to get an update on ESCO this afternoon.

Thanks, Dave.

Thanks to everyone for joining today's call and we appreciate each of you taking time to get an update on <unk>. This afternoon.

Speaker 4: We had a very strong yield, and I'm excited to tell you all about it. With that, let me pivot to some summary comments on the business.

We had a very strong year.

I'm excited to tell you all about it.

With that let me pivot to some summary comments on the business.

Speaker 4: We finished the year strong, and as you saw in the press release, closed the year with record results on a number of measures. Sales, adjusted earnings per share, entered orders, and ending backlog were all record levels in 2023. Sales grew by 11.5%, and adjusted EBIT was up 17%. So it was great to have double-digit growth once again for both sales and earnings.

We finished the year strong and as you saw in the press release closed the year with record results on a number of measures sales adjusted earnings per share entered orders and ending backlog were all record levels. In 2023 sales grew by 11, 5% and adjusted EBIT EBIT was up.

17%. So it was great to have double digit growth once again for both sales and earnings as.

Speaker 4: As we've been saying for a while now, our key end markets continue to have favorable dynamics, and as you can see, you can see that coming through in the financial results. Also of note was full year orders exceeding $1 billion in 2023. This is a significant milestone for the company, and with a record backlog of $772 million at year end, we feel great about the outlook for ESCO going forward.

As we've been saying for a while now our key end markets continue to have favorable dynamics and as you can see you can see that coming through in the financial results. Also of note was full year orders exceeding $1 billion. In 2023. This is a significant milestone for the company and with a record.

Backlog of $772 million at year end, we feel great about the outlook for ESCO going forward.

Speaker 4: Before Chris gets into the financial details, I do want to offer some top-level commentary about each of the business segments.

For Chris gets into the financial details I do want to offer some top level commentary about each of the business segments, starting with aerospace and defense, where we had a good year sale.

Speaker 4: starting with aerospace and defense, where we had a good year. Sales were up double digits as we continue to see good momentum in the commercial and defense aerospace business.

Sales were up double digits as we continue to see good momentum in the commercial and defense Aerospace businesses. We did see margin compression here again in the fourth quarter and that was driven by margin erosion on a number of space development contracts as we went through the quarter or several technical issues arose on these programs leading to increased.

Speaker 4: We did see margin compressions here again in the fourth quarter, and that was driven by margin erosion on a number of space development contracts.

Speaker 4: As we went through the quarter, several technical issues arose on these programs, leading to increased cost estimates, which in turn reduced our overall profitability.

Cost estimates, which in turn reduced our overall profitability. We are working aggressively to fix these issues and minimize the risk in our space business as we move forward, but on the bright side, we had very strong orders in Q4.

Speaker 4: We are working aggressively to fix these issues and minimize the risk in the space business as we move forward.

Speaker 4: But on the bright side, we had very strong orders in Q4 in the A&E group, with particularly strength from Navy orders at Globe and BATCO. And overall, the outlook here remains strong, and we are positioned well.

The group with particular strength from Navy orders at Globe, and Vacco and overall the outlook remains strong and we are positioned well to take advantage of the growth that we're seeing in both Navy and aircraft markets next as the utility group, which had an exceptional year in 2023.

Speaker 4: to take advantage of the growth that we're seeing in both Navy and aircraft markets.

Speaker 4: Next is the utility group, which had an exceptional year in 2023. For the year, we had 23% sales growth and significant margin expansion.

For the year, we had 23% sales growth and significant margin expansion. The core utility customer base continues to invest in infrastructure and our portfolio of businesses operating out of the doble umbrella are well positioned to capitalize on this trend we are seeing broad growth across most product lines.

Speaker 4: The core utility customer base continues to invest in infrastructure, and our portfolio of businesses operating under the global umbrella are well-positioned to capitalize on this trend.

Speaker 4: We are seeing broad growth across most product lines with protection testing, condition monitoring, and offline testing all delivering good growth. On the renewable side, growth continues to exceed expectations.

<unk> with protection testing condition monitoring and offline testing of all delivered good growth on the renewable side growth continues to exceed expectations 2023 was a phenomenal year for NRG, we did see NRG orders a little softer in Q4, and that's something we're keeping an eye on.

Speaker 4: 2023 was a phenomenal year for NRG. We did see NRG orders a little softer in Q4, and that's something we're keeping an eye on. But this business still has high backlogs compared to historic levels, and we continue to expect to see good growth in 2024.

But this business still has high backlogs compared to historic levels and we continue to expect to see good growth in 2024, finally, I will touch on the test business, where we saw a sales decline in the fourth quarter. So overall the business finished the year down by 3% as strength in Europe.

Speaker 4: Finally, I'll touch on the test business, where we saw a sales decline in the fourth quarter. So overall, the business finished the year down by 3%, as strength in Europe could not offset weakness that we saw in China.

Could not offset weakness that we saw in China, we've seen flattish results domestically as growth paused after last year's strength from power filters and test and measurement projects. The good news for test is that we did increase EBIT margins in 2023 in spite of reduced sales we do have.

Speaker 4: We've seen flattest results domestically as growth paused after last year's strength from power filters and test and measurement projects.

Speaker 4: The good news for TASC is that we did increase EBIT margins in 2023 in spite of reduced sales.

Speaker 4: We do have some exciting news with an acquisition that we've just closed in the test business. As you saw in the press release, we just closed on MPE Limited this week.

Some exciting news with an acquisition that we just closed in the test business as you saw in the press release, we just closed on MTBE limited this week.

Speaker 4: Chris has a chart on the MPE coming up, but it has a real nice fold-in for tests, and we expect it to enhance both the growth and profitability characteristics of the test segment.

Chris has a chart on the MTBE coming up but it has a real nice fall down for test and we expect it to enhance both the growth and profitability characteristics of the test segment. We're very excited to welcome the <unk> team to the <unk> family and we're excited about what they bring to the company so to summarize.

Speaker 4: We're very excited to welcome the MPE team to the EBSCO family and we're excited about what they bring to the company.

Speaker 4: So to summarize, I would say 2023 was a great year. ESCO has had two consecutive years of double-digit growth in both sales and earnings. Even better is we don't think the growth is done. And as you'll see from Chris, we have a strong outlook for 2024. The company is performing well, and we're excited about our future. So now I'll turn it over to Chris for some financial highlights on the fourth quarter of this year.

I would say 2023 was a great year Ensco has had two consecutive years of double digit growth.

Both sales and earnings even better is we don't think the growth is done and as Youll see from Chris We have a strong outlook for 2024. The company is performing well and we're excited about our future. So now I'll turn it over to Chris.

For some financial highlights on the fourth quarter of this year.

Thanks, Brian.

Speaker 5: Everyone can follow along the chart presentation. We will start on page 3 where we have the overall financial highlights of the fourth quarter.

Everyone can follow along the presentation. He will start on page three where we have the overall financial highlights of the fourth quarter.

Speaker 5: As you can see, we had a great quarter for orders with an increase of 39%, which resulted in record backlog at year end.

As you can see we had a great quarter for orders with an increase of 39%, which resulted in record backlog at year end.

Speaker 5: All three businesses had good order results with A&D being particularly strong.

All three businesses had good order results with A&D being particularly strong.

Speaker 5: Sales in the quarter were up over 6%, adjusted EBIT dollars were up 3%, and adjusted earnings per share were also up 3%.

Sales in the quarter were up over 6%.

Adjusted EBIT dollars were up 3% and adjusted earnings per share were also up 3%.

Speaker 5: We will go through the segment details in a minute, but on the sales side, the utility solutions group delivered exceptional sales growth while A&D had more modest growth and the test business was down.

We will go through the segment details in a minute, but on the sales side. The utility solutions group delivered exceptional sales growth, while A&D had more modest growth in the test business was down <unk>.

Speaker 5: Overall, margins declined in the quarter. Two of the three businesses had margin increases, but declines at A&D led to an overall reduction. Moving to chart four.

Overall margins declined in the quarter two of the three businesses had margin increases but declines in A&D led to an overall reduction.

Moving to chart four.

Let's start now on the segment details beginning with A&D, starting with orders you can see that they increased significantly to over $177 million in Q4.

Speaker 5: Starting with orders, you can see that they've increased significantly to over $177 million in Q4. Navy orders at Globe and VACA were a key driver of the increase, but we continue to see strength from the aircraft component businesses as well.

Navy orders at Globe in tobacco were a key driver of the increase but we continued to see strength from the aircraft component businesses as well.

Speaker 5: On the sales side, organic sales were flat and the C&P acquisition added three points of growth.

On the sales side organic sales were flat in the CMT acquisition added three points of growth.

Speaker 5: Defense Aerospace led the growth, followed by Navy and Commercial Aerospace.

Defense Aerospace led the growth followed by Navy and commercial aerospace.

Speaker 5: Space sales declined significantly. The space decline is driven by margin erosion on a number of development contracts. This is the issue Brian mentioned in the overview, and it is also the driver of the down EBIT dollars and margins for A&D in the quarter.

Space sales declined significantly the space decline was driven by margin erosion on a number of development contracts. This is the issue Brian mentioned in the overview and it is also the driver of the down EBIT dollars and margins for A&D in the quarter.

Speaker 5: Outside of the space business, we saw some very good increases in profitability from the aircraft component businesses.

Outside of the space business, we saw some very good increases in profitability from the aircraft component businesses.

On chart five we have the utility solutions group.

Speaker 5: Orders were up 11% with the utility business at Doble driving the increase.

Orders were up 11% with the utility business at Doble driving the increase the.

Speaker 5: The renewables orders at NRG were down in Q4 after the first three quarters experienced growth rates above 30 percent.

The renewables orders at NRG, we're down in Q4 after the first three quarters experienced growth rates above 30%.

Speaker 5: Obviously, we'll continue to monitor the renewables business going forward, but we expect good growth there as we move into 2024.

Obviously, we will continue to monitor the renewables business going forward, but we expect good growth there as we move into 2024.

Speaker 5: Sales in the quarter were up over 22%, and as you see on the chart, the double protection testing product lines were the key drivers.

Sales in the quarter were up over 22% and as you see on the chart. The Doble protection testing product lines were the key driver.

Speaker 5: On the renewable side with NRG, we once again saw explosive growth, 69% in the quarter as the business reduced backlog after a significant build through the first three quarters.

On the renewable side within our G. We once again saw explosive growth, 69% in the quarter as the business reduce backlog after a significant build through the first three quarters.

Speaker 5: The top line performance converted to nice margin expansion with adjusted EBIT up 200 basis points.

The top line performance converted to nice margin expansion with adjusted EBIT of 200 basis points.

Speaker 5: This improvement was driven by leverage on the higher sales growth and favorable impacts from price increases.

This improvement was driven by leverage on the higher sales growth and favorable impacts from price increases.

Speaker 5: On chart six, we have the test business, where orders increased 9% compared to last year's fourth quarter.

On chart six we have the test business, where orders increased 9% compared to last year's fourth quarter.

Speaker 5: On the sales line, we did see a reduction of 8% as we continue to see weakness in China and also some softness in the domestic power filter sales.

On the sales line, we did see a reduction of 8% as we continue to see weakness in China and also some softness in the domestic power filter sales.

Speaker 5: EBIT dollars declined nearly 6%, but the EBIT margins did increase from 17% to 17.5%, a good result on profitability given the drop in sales volume.

EBIT dollars declined nearly 6%, but EBIT margins did increase from 17% to 17, 5% a good result on profitability given the drop in sales volumes.

Speaker 5: On chart 7, we have a few details on the MPE acquisition.

On chart seven we have a few details on the MGE acquisition.

Speaker 5: This closed last week on November 9th, and Brian did preview this a bit, but a real nice tuck-in deal for the test business. MPE is a UK-based business that specializes in electronic filters. These can be whole facility filters or component filters embedded in military or other critical applications.

This closed last week on November 9th and Bryan Bryan did preview this a bit but a real nice tuck in deal for the test business <unk> is a U K based business that specializes in electronic filters. These can be whole facility filters or component filters embedded in military or other critical applications.

The business has a good sales presence in Europe, and the U S. While adding high margin component content to our existing test platform.

Speaker 5: We're excited to have MPE on board and feel they will be a great addition to ESCO.

We're excited to have <unk> onboard and feel they will be a great addition to ESCO.

Speaker 5: On chart eight, we have key measurables for the full year. As Brian mentioned earlier, it's another record year for us in 2023, and this chart shows that trend nicely. Orders increasing to up over $1 billion, sales up 11.5% to $956 million, a nice improvement in adjusted EBIT margins, and adjusted earnings per share up over 15%. Next is chart seven.

On chart eight we have key measurable for the full year as Brian mentioned earlier, it's another record year for us in 2023, and this chart shows that trend nicely orders increasing to up over $1 billion sales up 11, 5% to $956 million.

Nice improvement in adjusted EBIT margins and adjusted earnings per share up over 15%.

Next is short in line with our full year results by segment.

Speaker 5: The sales momentum in 2023 really came from the A&D and USG businesses while test was down slightly for the full year. For A&D sales, the key driver was commercial and military aerospace, which delivered 19 and 32 percent growth, respectively.

The sales momentum in 2023 really came from the A&D and USG businesses, while tests was down slightly for the full year for A&D sales. The key driver was commercial and military aerospace, which delivered 19% and 32% growth respectively.

Speaker 5: For utility, there was broad-based growth, with condition monitoring, protection testing, and renewables leading the way.

For utility there was broad based growth with condition monitoring protection testing in renewables, leading the way.

Lastly for test the full year decline was driven by volume drops in China, which were not offset by strength in Europe.

Speaker 5: On the margin side, USG led the way with a margin increase of 160 basis points. TESS was also able to increase margins in spite of the reduced sales. Lastly, A&E margins fell as strong performance from the aircraft component businesses was offset by challenges in the space business.

On the margin side USG led the way with a margin increase of 160 basis points.

<unk> was also able to increase margins in spite of the reduced sales lastly, A&D margins fell as strong performance from the aircraft component businesses was offset by challenges in the space business.

The last chart on 2023 is number 10, where we have the cash flow highlights.

Speaker 5: The operating cash flow dropped to approximately $77,023,000. Cash flow continued to be a challenge.

The operating cash flow dropped to approximately $77 million in 'twenty three.

Cash flow continued to be a challenge throughout the year.

Speaker 5: The biggest challenges were with the A&D business, where we continue to see elevated levels of past-due backlog. This tied up more cash and working capital and was the key driver of the cash decline in 2023.

The biggest challenges where with the A&D business, where we continue to see elevated levels of past due backlog.

This tied up more cash and working capital and it was the key driver of the cash decline in 2023.

Speaker 5: You can also see we had unfavorable cash impacts from increased tax and interest payments during the year.

You can also see we had unfavorable cash impacts from increased tax and interest payments during the year.

Speaker 5: Capital expenditures were down by approximately $10 million during 2023. You'll recall that last year we had a building purchase at NRG, and that's the main driver of this year's decrease.

Capital expenditures were down by approximately $10 million during 2023, Youll recall that last year, we had a building purchase at NRG and Thats. The main driver of this year's decrease.

Speaker 5: Acquisition spending was up approximately $7 million, with NECO acquired by PTI in fiscal 2022 and CMT acquired by Globe in fiscal 2023.

Acquisition spending was up approximately $7 million with Nikko acquired by <unk> in fiscal 2022, and CMT acquired by Globe in fiscal 2023.

Speaker 5: Lastly, a share repurchase, where we completed just over $12 million in buybacks this year compared to approximately $20 million last year.

Lastly is share repurchase where we completed just over $12 million in buybacks this year compared to approximately $20 million last year.

The last chart is our 2024 guidance.

Speaker 5: You can see on the graphs at the bottom of the chart that we've had two strong years of growth in 22 and 23, and the outlook for ESCO remains strong as we expect to deliver another double-digit earnings increase for 2024.

You can see on the graphs at the bottom of the chart that we've had two strong years of growth in 'twenty, two and 'twenty three.

And the outlook for <unk> remains strong as we expect to deliver another double digit earnings increase for 2024.

Speaker 5: For sales, we expect an increase in the range of 7% to 9%. The sales growth forecast is.

For sales, we expect an increase in the range of 7% to 9%.

The sales growth forecast is balanced by business.

Speaker 5: with A&D both projected to grow in the 8 to 10 percent range. The test range includes the impact of

With A&D, both projected to grow in the 8% to 10% range.

The test range includes the impact of the MGE acquisition.

Speaker 5: USG is expected in the 6 to 8 percent range. All solid numbers after two good years of growth in 22 and 23. You can see from the chart that we are projecting adjusted earnings for share growth in the range of 11 to 16 percent.

USG is expected in the 6% to 8% range all solid numbers. After two good years of growth in 'twenty, two and 23, you can see from the chart that we are projecting adjusted earnings per share growth in the range of 11% to 16%.

For a range of $4 10 to $4 30 per share this would be the third year in a row of double digit growth in adjusted earnings per share for ESCO.

As is typically the case, we expect the business to ramp sequentially as we move through the year and we expect Q1 earnings per share to be in a range of <unk> 64 to <unk> 70 per share.

That concludes the financial update and then I'll turn it back over to Brian.

Thanks, Chris.

I touched on quite a few of my thoughts earlier in the commentary I was just like a couple of more comments before we move into the Q&A. So you saw the numbers from Chris Obviously, a great 2023 and <unk>.

<unk> outlook for 2024.

The company is really operating at a high level and we continue to have confidence as we look to the future with.

Serve strong end markets with well established customers. We've got great teams, both 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 ESCO before jumping into the Q&A with you I do want to take a moment and let's say thank you to all of our employees.

Speaker 4: ESCO has racked up another strong year, and that's really a testament to the skill and tenacity of our employees. Our industries are growing, and no doubt it helps to serve markets and have positive dynamics. But, you know, there's always challenges when executing inside the business, and I continue to be impressed by the commitment and dedication shown by our employees around the world. I'd also like to thank our board of directors. We just finished up meetings over the last few days with the board, and we really appreciate their support and commitment to ESCO.

You'll have wrapped up another strong year and Thats really a testament to the skill and tenacity of our employees. Our industries are growing and no doubt it helps to serve markets that have positive dynamics.

There's always challenges when executing inside the business and I continue to be impressed by the commitment and dedication shown by our employees around the world I would also like to thank our board of directors. We just finished up meetings over the last few days with the board and we really appreciate their support and commitment to our scale.

Speaker 4: It feels great to close out my first year end as CEO and be talking about record results. But it's only because of the efforts of a number of people, including all of our employees and the board. So with that, we can start the Q&A.

It feels right to close out my first year as CEO.

You are talking about record results, but its only because of the efforts of a number of people, including all of our employees and the board.

With that we can start with Europe.

Speaker 2: Thank you and as a reminder to ask a question you need to press star 11 on your telephone And wait for a name to be announced And to withdraw your question, please press star 1 1 again Please stand by while you apply the q&a roster

Thank you and as a reminder to ask a question you will need to press star one on your telephone and wait for a name to be announced and to withdraw. Your question. Please press star one again.

Please standby or part of the Q&A roster.

One moment for our first question.

Speaker 6: question comes the line of John Franzreb from Sudoti. Your line is open. Good afternoon everybody and thanks

Our first question comes from the line of John <unk> from Sidoti Your line is open.

Good afternoon, everybody and thanks for taking the questions.

Scott.

Speaker 6: starting tests in China. Can you talk a little bit about how the demand profiles change with ongoing weakness in China? Any thoughts about maybe resetting your footprint there or readdressing what you can do elsewhere with the capacity in China becoming available?

Certain tests and test in China.

You talk a little bit about how the demand profile has changed.

Ongoing weakness in China.

Thoughts about maybe resetting your footprint there are re addressing what you can do elsewhere with the capacity in China, becoming available.

Speaker 4: Sure. So, listen, what we're seeing in China right now is it's, we still have a fair amount of backlog there, but we're still having a hard time getting on job sites. It feels like the construction industry over there is still a little bunged up. You know, new orders have been somewhat soft. You know, we're still, we still have a meaningful business over there, and we're still, you know, making money.

Sure.

Listen what we're seeing in China right. Now is we still have a fair amount of backlog there, but we're still having a hard time getting on job site. So it feels like the construction industry over there is still a little bummed out.

New orders have been.

Somewhat soft.

We're still we still have a meaningful business over there and we're still making money.

Speaker 4: We have not given any thought to changing our footprint at this time. We think we have an appropriately sized cost structure there for a business that could be quite a bit smaller. The biggest challenge we have, though, is that we had an incredible year last year. So from a comparables basis, it really is a big deceleration.

Have not given any thought to changing our footprint.

At this time, we think we have an appropriately sized cost structure there.

For our business it could be quite a bit smaller the biggest challenge. We have though is that we had an incredible year last year. So from a comparable basis. It really is a big deceleration.

Speaker 4: The good news, though, is that we have seen strength over in Europe , and, unfortunately, it just wasn't quite enough to offset what we saw.

News, though is that we have seen strength over in Europe, and Unfortunately, just wasn't quite enough to offset what we saw in China.

Speaker 6: All right, fair enough. And just switching to A&D, last quarter you had some supply chain issues, so two questions in A&D. Have those all been resolved? If you said that, I apologize, I missed it. But also, given the backlog profile, is it going to require additional staffing as that continues to ramp up and those orders, the submarine orders continue to come in?

All right fair enough and just switching to A&D less quota.

Had some surprises some supply chain issues some questions in <unk>.

Those all been resolved if you set it impacts apologize if I missed it but also given the backlog profile is it going to require additional staffing as that continues to ramp up and those orders are suddenly notice continued to come in.

Speaker 4: Yeah, so as far as supply chain issues, company-wide.

Yes, so as far as the supply chain issues company wide. The good news is we have resolved them almost entirely in the utility group.

Speaker 4: The good news is we have resolved them almost entirely in the utility group.

Speaker 4: We're still having some modest issues in the test group.

We're still having some modest issues.

Speaker 4: But what we're really continuing to see challenges is in our aerospace and defense group.

The test script, but what we're really continuing to see challenges in our aerospace and defense group, particularly out in southern California.

Speaker 4: particularly out in Southern California. There's a couple of different components to that. One would be the...

Before and yet there is a couple of different components to that one would be the.

Speaker 4: material availability, that is improving pretty significantly.

Material availability of that is improving pretty significantly.

Speaker 4: The second piece being the outside processing. That's, that has improved with longer lead time.

<unk> piece being the outside processing.

That has improved with longer lead times.

Speaker 4: The one where I think we're still having some problems is on staffing our facilities with qualified personnel. I think we just were out there a few weeks ago, we went through the numbers and we're probably about 85% staff.

One that we're I think we're still having some problems as on staffing our facilities with qualified personnel.

We're out there a few weeks ago, we went through the numbers that we are probably about 85% staffed.

Speaker 4: At our facilities out there and we're struggling with competition for labor. And so, you know, we need machinists and we need, you know, a qualified assembly and test type people. So that's probably restraining us a little bit more than the material availability as a whole.

At our facilities out there and we're struggling with competition for labor and so yes, we need machinists and we need a qualified assembly and test type people, so thats, probably restraining us a little bit more than the material availability is at this time.

Speaker 6: OK, and just one last question. I'll jump back into Q. By my calculations, you had a real good free cash flow quarter for the fourth quarter. I know for the full year wasn't what you expected, but is there any reason we wouldn't go back to normal free cash flow conversion in fiscal 2024?

Okay, and just one last question I'll jump back into queue.

By my calculations, you have a real good free cash flow quarter for the fourth quarter.

And also on a full year wasn't what you expected, but is there any reason we wouldn't go back to normal free cash flow conversion in fiscal 2024.

Speaker 6: Yeah, John , we are anticipating that 24, we would have a more normalized cash flow conversion. So that's obviously something we're very focused on as we work all of our subsidiary plans. And that's absolutely what we're looking to do. Great, I'll get back to you. Thank you.

Yes, John we are anticipating the 'twenty four we would have a more normalized cash flow conversion. So that's obviously something we're very focused on as we work all of our subsidiary plans and that's absolutely what we're looking to do.

Great ill get back into queue. Thank you.

Thanks, Sean.

Thank you one moment for our next question.

Speaker 2: And our next question will come from the line of John Tang-Wen Tang from CJS Securities. Your line is open.

And our next question comes from the line of Jon <unk> from CJS Securities. Your line is open.

Speaker 7: Hi, good afternoon and thank you for taking my questions. And Brian , congrats on capping off a pretty strong year. My 1st, 1 is just on energy. I was wondering what's driving the growth outlook there. Just given the headwinds that we've seen publicized across the renewable sector. Is that just working down your backlog? Or are you seeing order strength in the pipeline?

Hi, good afternoon, and thank you for taking my questions and Brian Congrats on capping off a pretty strong year.

My first one is just on NRG I was wondering what's driving the growth outlook. There just given the headwinds that we've seen published signs across the renewable sector is that just working down your backlog or are you seeing order strength in the pipeline.

Speaker 4: Well, so we had an incredible fourth quarter in the prior year and first three quarters of this year. So we did see, from an order's perspective, a little bit of a deceleration in the fourth.

Well, so we have incredible.

Quarter in the prior year and first three quarters of this year. So we did see from an orders perspective, a little bit of a deceleration.

In the fourth quarter that does appear to be picking back up in October and November so we're keeping our eye on it but we're not overly concerned as you see from the numbers here, we were able to kind of work down our backlog a little bit that's more of a book and ship type of a business so having too much backlog can be.

Speaker 4: That does appear to be picking back up in October and November . So, you know, we're keeping our eye on it, but we're not overly concerned. As you see from the numbers here, we were able to kind of work down our backlog a little bit. It's more of a book and ship type of a business. So, you know, having too much backlog can be a challenge there in terms of our ability to compete and deliver.

A challenge there in terms of our ability to compete and deliver.

Speaker 4: But listen, that business is doing very, very well. And, you know, they've had incredible margin expansion in addition to the overall revenue growth. So we still feel pretty good about renewables in general. I think one thing that you see a lot in the news these days is discussions about, you know, electric vehicle and offshore wind markets kind of having challenges.

But listen that business is doing very very well and they've had incredible margins expansion. In addition to the overall revenue growth. So we still feel pretty good about renewables in general I think one thing that you see a lot in the news these days as discussions about.

Electric vehicle and offshore wind markets kind of Havent challenges, we don't really have a lot of exposure to either of those markets, where typically in the onshore wind and utility scale solar and those seem to be going pretty well right now.

Speaker 4: We don't really have a lot of exposure to either of those markets. We're typically in the onshore wind and utility-scale solar. And those seem to be going pretty well right now.

Speaker 7: Okay, great. Thanks for that color. I was wondering if you go a little bit more into the, into the details of the space issues that you had in the quarter. Is that a, is that a 1 times issue that you're facing? Or is it going to be sustained? Kind of what what do you see in your near term planning for that?

Okay, great thanks for that color.

I was wondering if you go a little bit more into the details of the space issues that you had in the quarter.

Is that is it a one times.

The issue that you're facing or is it going to be sustained.

Kind of what do you see.

And your near term planning for that business.

Speaker 4: Sure, sure. Well, so listen, the space business, first of all, it's a small part of our overall business. But we have a number of contracts that are for very complicated development programs. These are meaning we are doing effectively research and development to develop these things. And unfortunately, they're firm-fixed contracts.

Sure sure well, so listen the space business first of all.

A small part of our overall business.

But we have we have a number of contracts that are for very complicated development.

Development programs. These are meaning we are doing effectively research and development to develop this makes it. Unfortunately there are firm contracts.

Contracts.

Speaker 4: And we've had some technical challenges there that we're working through. We think that we have our arms around it, but there is a little bit more risk there because we do not have these projects completed. And until you've got it up on the test stand and you've actually got it to pass the test, you really can't declare victory.

And we've had some technical challenges there that we're working through.

We think that we have our arms around it but there is a little bit more risk there because we do not have these projects completed and until you've got enough on the test stand and you've actually got to pass the test you really cant declare victory.

Speaker 4: You know, what led to the challenge really, I think, is, you know, through the COVID moment, we've had some turnover in that business. We've lost some key engineers. We've had to hire new ones. And so we're going through a little bit of a learning curve there. But we do think that we're going to get through it. The good news is the rest of the A&E segment and the rest of our business overall has been able to more than compensate for the challenges we've had in the state.

What led to the challenge is really I think through the Covid moment, we've had some turnover in that business. We lost some key engineers we've had.

Higher new ones and so we're going through a little bit of a learning curve there, but we do think that we're going to get through it. The good news is the rest of the A&D segment and the rest of our business overall has been able to more than compensate for the challenges we've had in the space segment.

Speaker 7: Okay, great. That's good to hear. Can you talk a little bit more about the valuation that you paid for and the accretion that you're expecting for next year?

Okay, great that's good to hear.

Can you talk a little bit more about MP the valuation.

Did you pay for and the accretion that you're expecting for next year.

Speaker 4: Sure. Listen, MPE is a business that we've known for a number of years.

Sure.

Listen the NPS.

Business that we've known for a number of years.

Speaker 4: They're very solid, they build RF filters for electromagnetic pulse.

They are very solid as they build.

RF filters for electromagnetic pulse applications as you know thats one of the the big growing areas that were kind of targeting.

Speaker 4: applications. As you know, that's one of the big growing areas that we're kind of targeting. They have more, you know, what's attractive about it to us is that they have a broader range of products. So in addition to doing facility filters, which we do at ETS Lindgren,

Have more what's attractive about it to us is that they.

They have a broader range of products. So in addition to do a facility filters, which we do at Etfs linger and they also sell component filters that go into military systems and other kinds of systems that require protection from electromagnetic pulse, that's becoming a big market now because.

Speaker 4: They also build component filters that go into military systems and other kinds of systems that require protection from electromagnetic pulse.

Speaker 4: that's becoming a big market now because as you look at some of the things that are happening in critical infrastructure, both in the energy space and data centers and that sort of thing, that's become more and more of an issue that people are trying to address.

As you look at some of the things are happening at critical infrastructure, both in the energy space and data centers and that sort of thing.

More and more of an issue that people are trying to address.

Speaker 4: What's interesting about, so we did spend about $57 million for this business. We expected to add about $10 to $15 million of revenue for us in fiscal 24. And we're not really going to talk a lot about the margins, other than to say that we think that it will enhance the overall margins for the test segment. So we think it's going to be accretive both at the revenue line and at the margin line for our overall test.

What's interesting about it so we did spend about $57 million for this business, we expect it to add about $10 million to $15 million of revenue for us in fiscal 'twenty, four and we're not really going to talk a lot about the margins other than to say that we think that will enhance the overall margins for the test.

So we think it's going to be accretive both at the revenue line and at the margin line for our overall test segment.

Speaker 5: Yeah, I think I would say, John , from an overall EPS perspective, you know, we expect it to

Yes, the other thing I would say John from a overall EPS perspective.

We expect it to be.

Speaker 5: You know, it's incorporated into our 410 to 430 outlook.

It's incorporated into our 14% to $4 30 outlook.

Speaker 5: And we would expect it to be, you know, pretty close to break even. Could be some slight dilution or slight accretion, you know, based on kind of how the overall, we don't have full visibility yet to what amortization will be and some of that. So, and that, when I say it'd be kind of close to break even from an accretion perspective, that would also exclude the one-time inventory step-up charges. We always kind of adjust those out. But, so anyway, from an overall EPS perspective, we expect very little impact in the year.

And we would expect it to be pretty close to breakeven could be some slight dilution or slight accretion.

Based on kind of how the overall, we don't have full visibility yet to what amortization will be in some of that so.

And that when I say it would be kind of close to breakeven from an accretion perspective that would also exclude the one time inventory step up charges, we always kind of adjust those out but.

So any way from an overall EPS perspective, we expect very little impact in the year.

Speaker 7: Okay, good, but that that's including the cost of either.

Okay, great, that's including the cost of financing of them are paying for it.

Speaker 7: Um, correct. Correct. Yeah. Okay. Got it. Understood. Great. Thank you guys. I'll jump back in queue.

Correct, yes.

Okay got it.

Great. Thank you guys I'll jump back in queue.

Thank you.

Speaker 2: Thank you. And as a reminder, that's star 11 for questions, star 11.

Thank you.

And as a reminder, that's Tom one for questions on one on one.

One moment for our next question.

Speaker 2: And next, we'll have a follow-up from the line of John Franzreff from Sudoti. Your line is open.

And next we will have a follow up from the line of John <unk> from Sidoti. Your line is open.

Speaker 6: Yeah, I'm just, I'm a little curious about what's behind the lower power filter sales that you saw in test. Can you provide some color on that?

Yes, just a little curious about what's behind that lower power filter sales that you saw in test.

Can you.

Provide some color on that.

Speaker 4: Sure. There's a couple of factors there. So we have about, so primarily a lot, you know, the biggest driver for that the last couple of years has been in data center applications. You know, that would be the one place where we think we might be seeing a little bit of a deep docking effect.

Sure.

Couple of factors there.

So we have we have about so primarily the biggest driver for that but the last couple of years has been.

In data center applications.

Yes that would be the one place where we think we might be seeing a little bit of a destocking effect.

Speaker 4: You know, we had one of our customers that had bought quite a lot of filters last year and we think that they're kind of depleting their inventory this year. We think that's going to resume before.

We had one of our customers that had bought quite a lot of filters last year, and we think that they are kind of working to depleting their inventory. This year, we think thats going to resume before too long.

Speaker 8: Okay, I just wanted to get a handle on that. Yeah, that's it. Okay. Thank you very much. Thank you. Thank you.

Okay, I just wanted to get a handle on that.

Yes, that's it.

Okay. Thank you very much thank you.

Thank you.

For our next question.

Speaker 2: Our next question will be a follow-up from the line of John Tanwangtang from CJS Securities. Your line is open.

Our next question will be a follow up from the line of Jon <unk> from CJS Securities. Your line is open.

Speaker 7: Hi, thanks. I just wanted to dig a little bit more into the strength you guys saw in

Yes.

Hi, Thanks, So I just wanted to dig a little bit more into the strength you guys saw in the <unk> business.

Speaker 7: Did you meaningfully outperform your internal expectations there and either double or energy or did you pull any?

Did you meaningfully outperform your internal expectations, there in either double or in Nigeria, or did you pull anything into future quarters.

Speaker 4: Yes, we meaningfully outperformed our internal expectations and, you know, we, we, we feel really good about that business going forward. You know, that all of the information that we have is that utilities are making.

Yes.

Meaningfully outperformed our internal expectations and.

We feel really good about that business going forward.

All of the information that we have is that utilities are making substantial investments.

Speaker 4: We made a lot of acquisitions and a lot of organic product development over the last six or seven years that has really positioned us in an almost ideal way to take advantage of that kind of infrastructure build-out. We feel like we've got a really good forward path.

Their infrastructure.

We are we made a lot of as you know we made a lot of acquisitions and a lot of organic product development over the last six or seven years that has really positioned us almost ideal way to take advantage of that that kind of infrastructure build out and so yes. We think we feel like we've got really good.

For passenger.

Speaker 9: Yeah, and John , I would say we, you know, wasn't the result of a pull in or anything. We just saw demand strong as we came through the quarter. And, you know, obviously you saw QQ Q3 were also very strong. So we just kind of hit, you know, we kind of kept going that way. And that's what drove it.

Yes, John I would say it wasn't the result of a pull in or anything we just saw demand strong as we came through the quarter and obviously you saw Q2 Q3. We're also very strong so we just kind of it.

We kind of kept going that way and that's what drove it.

Speaker 7: Have your order run rates in that business been roughly similar to what you saw in Q4, heading into Q4?

Have your order run rates in that business being roughly similar to what you what you saw in Q4.

Heading into the into Q1.

Speaker 9: I mean, we're always going to be a little bit lower in Q1, but I, as Brian said, I mean, you saw the full year outlook there, and I think we still feel good about.

I mean, we're always going to be.

Little bit lower in Q1, but as Brian said I mean, you saw the full year outlook, there and I think we still feel good about.

Speaker 9: the overall trends there and kind of the near to midterm. So, yeah, I think we're kind of, I would say, chugging right along.

The overall trends, there and kind of the near to mid term. So so yes, I think we're we're kind of I would say chugging right along.

Great. Thank you for the color.

Thank you Pam.

Speaker 2: Thank you. And I'm not showing any further questions in the queue at this time. I would now like to turn it back to Brian Saylor for any closing remarks.

And I'm not showing any further questions in the queue. At this time I would now like to turn it back to Brian Taylor for any closing remarks.

Speaker 4: Well, listen, thanks for taking the time to work. We're very excited about our 2023 results, but we're even more excited about our outlook for 2024. and we'll look to talking to you in 3 months.

Well listen thanks for taking the time to wherever we're very excited about our 2023 results, but we're even more excited about our outlook for 2024, and we will look to talking to you in three months.

Speaker 2: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.

Thank you for your participation in today's conference. This does conclude the program you may now disconnect everyone have a great day.

Thank you.

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Speaker 2: ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? Good day and thank you for standing by. Welcome to the fourth quarter 2023 ESCO Technologies Earnings Report.

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Good day, and thank you for standing by and welcome to the fourth 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 this session you will need to press star one on your telephone.

Automated message advising your hand is raised to withdraw your question. Please press star one again, please be advised that today's conference is being recorded on the call today, we have Brian singer present.

Speaker 2: To withdraw your question, please press star 101 again. Please be advised that today's conference is being recorded. On the call today, we have Brian Saylor, President and CEO , Chris Tucker, Senior Vice President and CEO .

<unk> and CEO, Chris Tucker Senior Vice President and CFO and now I would like to hand, the conference over to your first speaker today, Kate Lori <unk>, Vice President of Investor Relations Kate How this war.

Speaker 2: And now I would like to hand the conference over to our first speaker today, Kate Laurie, Vice President of Investor Relations. Kate, you know how this works.

Speaker 3: 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 Security Commission. 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 Security

Thank you.

Statements made during this call, but you 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 by.

Speaker 3: We undertake no duty to update or revise any forward-looking statements, except as may be required by applicable laws or regulations. 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 the most comparable GAAP measures can be found in the press release issued today and found on the company's website at www.escotechnologies.com under the link Investor Relations. Now I'll turn the call over to Brian .

We undertake no duty to update or revise any forward looking statements, except as may be required by applicable laws or regulations. In addition, during this call. The company may discuss non-GAAP financial measures in describing the company's operating results. A reconciliation of these measures to their most comparable GAAP measures can be found in our press release issued today and found on the company's website at.

PW Dot ESCO technologies Dot com under the link Investor Relations now I'll turn the call over to Brian.

Speaker 4: Thanks, Kate, and thanks to everyone for joining today's call. We appreciate each of you taking time to get an update on ESCO this afternoon.

Thanks, Kate and thanks to everyone for joining today's call.

We appreciate each of you taking time to get an update on <unk>. This afternoon.

Speaker 4: We had a very strong year, and I'm excited to tell you all about it. With that, let me pivot to some summary comments on the business.

Had a very strong year.

I'm excited to tell you all about it.

With that let me pivot to some summary comments on the business.

17%. So it was great to have double digit growth once again for both sales and earnings.

Speaker 4: As we've been saying for a while now, our key end markets continue to have favorable dynamics. And as you can see, you can see that coming through in the financial results. Also of note was full-year orders exceeding $1 billion in 2023. This is a significant milestone for the company, and with a record backlog of $772 million at year end, we feel great about the outlook for ESCO going forward.

Backlog of $772 million at year end, we feel great about the outlook for <unk> going forward.

Speaker 4: Before Chris gets into the financial details, I do want to offer some top-level commentary about each of the business segments.

<unk> gets into the financial details I do want to offer some top level commentary about each of the business segments, starting with aerospace and defense, where we had a good year sale.

Speaker 4: starting with aerospace and defense, where we had a good year. Sales were up double digit as we continue to see good momentum in the commercial and defense aerospace business.

Speaker 4: We did see margin compressions here again in the fourth quarter, and that was driven by margin erosion on a number of space development contracts.

Speaker 4: As we went through the quarter, several technical issues arose on these programs, leading to increased cost estimates, which in turn reduced our overall profitability.

Cost estimates, which in turn reduced our overall profitability. We are working aggressively to fix these issues and minimize the risk in our space business as we move forward.

Speaker 4: We are working aggressively to fix these issues and minimize the risk in the space business as we move forward.

Speaker 4: But on the bright side, we had very strong orders in Q4. And the ANV group was particularly strength from Navy orders at Globe and BATCO. And overall, the outlook here remained strong. And we are positioned well.

On the bright side, we had very strong orders in Q4.

Group with particular strength from Navy orders at Globe, and Vacco and overall the outlook here remains strong and we are positioned well to take advantage of the growth that we're seeing in both Navy and aircraft markets next as the utility group, which had an exceptional year in 2023 for the year.

Speaker 4: to take advantage of the growth that we're seeing in both Navy and aircraft markets.

Speaker 4: Next is the utility group, which had an exceptional year in 2023. For the year, we had 23% sales growth and significant margin expansion.

We had 23% sales growth and significant margin expansion the core utility customer base continues to invest in infrastructure and our portfolio of businesses operating out of the doble umbrella are well positioned to capitalize on this trend we are seeing broad growth across most product lines.

Speaker 4: We are seeing broad growth across most product lines, with protection testing, condition monitoring, and offline testing all delivering good growth. On the renewable side, growth continues to exceed expectations.

With protection testing condition monitoring and offline testing of all delivered good growth on the renewable side growth continues to exceed expectations 2023 was a phenomenal year for NRG, we did see NRG orders a little softer in Q4, and that's something we're keeping an eye on but this is.

Still have high backlogs compared to historic levels, and we continue to expect to see good growth in 2024, finally, I'll touch on the test business, where we saw a sales decline in the fourth quarter. So overall the business finished the year down by 3% as strength in Europe could not.

Not offset weakness that we saw in China, we've seen flattish results domestically as growth paused after last year's strength from power filters and test and measurement projects. The good news for test is that we did increase EBIT margins in 2023 in spite of reduced sales we do have some.

Speaker 4: We've seen flattest results domestically as growth paused after last year's strength from power filters and test and measurement projects.

Speaker 4: The good news for TASC is that we did increase EBIT margins in 2023 in spite of reduced sales.

Speaker 4: We do have some exciting news with an acquisition that we just closed in the test business. As you saw in the press release, we just closed on MPE Limited this week.

Exciting news with an acquisition that we just closed in the test business as you saw in the press release, we just closed on MTBE limited this week.

Speaker 4: Chris has a chart on the MPE coming up, but it has a real nice fold-in for tests, and we expect it to enhance both the growth and profitability characteristics of the test segment.

Chris has the chart on the MTA coming up but it has a real nice fall than forecast and we expect it to enhance both the growth and profitability characteristics of the test segment. We're very excited to welcome the <unk> team to the <unk> family and we're excited about what they bring to the company so to summarize.

Speaker 4: We're very excited to welcome the MPE team to the EBSCO family and we're excited about what they bring to the company.

I would say 2023 was a great year Ensco has had two consecutive years of double digit growth.

In both sales and earnings even better is we don't think the growth is done and as Youll see from Chris We have a strong outlook for 2024. The company is performing well and we're excited about our future. So now I'll turn it over to Chris.

For some financial highlights on the fourth quarter of this year.

Thanks, Brian.

Speaker 9: Everyone can follow along the chart presentation. We will start on page 3 where we have the overall financial highlights of the fourth quarter.

Everyone can follow along the presentation, we will start on page three where we have the overall financial highlights of the fourth quarter.

Speaker 9: As you can see, we had a great quarter for orders with an increase of 39%, which resulted in record backlog at year end.

As you can see we had a great quarter for orders with an increase of 39%, which resulted in record backlog at year end.

Speaker 9: All three businesses had good order results with A&D being particularly strong.

All three businesses had good order results with A&D being particularly strong.

Speaker 9: Sales in the quarter were up over 6%, adjusted EBIT dollars were up 3%, and adjusted earnings per share were also up 3%.

Sales in the quarter were up over 6%.

Adjusted EBIT dollars were up 3% and adjusted earnings per share were also up 3%.

Speaker 9: We will go through the segment details in a minute, but on the sales side, the utility solutions group delivered exceptional sales growth while A&D had more modest growth and the test business was down.

Speaker 9: Overall, margins declined in the quarter. Two of the three businesses had margin increases, but declines at A&D led to an overall reduction. Moving to chart four.

Overall margins declined in the quarter two of the three businesses had margin increases but declines in A&D led to an overall reduction.

Moving to chart four.

Let's start now on the segment details beginning with A&D Star.

Speaker 9: Starting with orders, you can see that they've increased significantly to over $177 million in Q4. Navy orders at Globe and VACA were a key driver of the increase, but we continue to see strength from the aircraft component businesses as well.

Starting with orders you can see that they increased significantly to over $177 million in Q4.

Navy orders at Globe, and Vacco were a key driver of the increase but we continued to see strength from the aircraft component businesses as well.

Speaker 9: On the sales side, organic sales were flat and the C&P acquisition added three points of growth.

On the sales side organic sales were flat in the CMT acquisition added three points of growth.

Speaker 9: Defense aerospace led the growth, followed by Navy and commercial aerospace.

Defense Aerospace led the growth followed by Navy and commercial aerospace.

Speaker 9: Space sales declined significantly. The space decline is driven by a margin erosion on a number of development contracts. This is the issue Brian mentioned in the overview, and it is also the driver of the down EBIT dollars and margins for A&D in the quarter.

Speaker 9: Outside of the space business, we saw some very good increases in profitability from the aircraft component businesses.

Outside of the space business, we saw some very good increases in profitability from the aircraft component businesses.

On chart five we have the utility solutions group.

Speaker 9: Orders were up 11% with the utility business at Doble driving the increase.

Orders were up 11% with the utility business at Doble driving the increase.

Speaker 9: The renewables orders at NRG were down in Q4 after the first three quarters experienced growth rates above 30 percent.

The renewables orders at NRG, we're down in Q4 after the first three quarters experienced growth rates above 30%.

Speaker 9: Obviously, we'll continue to monitor the renewables business going forward, but we expect good growth there as we move into 2024.

Obviously, we will continue to monitor the renewables business going forward, but we expect good growth there as we move into 2024.

Speaker 9: Sales in the quarter were up over 22%, and as you see on the chart, the double protection testing product lines were the key drivers.

Sales in the quarter were up over 22% and as you see on the chart. The Doble protection testing product lines were the key driver.

Speaker 9: On the renewable side with NRG, we once again saw explosive growth, 69% in the quarter as the business reduced backlog after a significant build through the first three quarters.

On the renewable side within our G. We once again saw explosive growth, 69% in the quarter as the business reduce backlog after a significant build through the first three quarters.

Speaker 9: The top line performance converted to nice margin expansion with adjusted EBIT up 200 basis points.

The topline performance converted to nice margin expansion with adjusted EBIT of 200 basis points. This.

Speaker 9: This improvement was driven by leverage on the higher sales growth and favorable impacts from price increases.

This improvement was driven by leverage on the higher sales growth and favorable impacts from price increases.

Speaker 9: On chart six, we have the test business, where orders increased 9% compared to last year's fourth quarter.

On chart six we have the test business, where orders increased 9% compared to last year's fourth quarter.

Speaker 9: On the sales line, we did see a reduction of 8% as we continue to see weakness in China and also some softness in the domestic power filter sales.

On the sales line, we did see a reduction of 8% as we continue to see weakness in China and also some softness in the domestic power filter sales.

Speaker 9: EBIT dollars declined nearly 6%, but the EBIT margins did increase from 17% to 17.5%, a good result on profitability given the drop in sales volume.

EBIT dollars declined nearly 6%, but EBIT margins did increase from 17% to 17, 5% a good result on profitability given the drop in sales volumes.

Speaker 9: On chart 7, we have a few details on the MPE acquisition.

On chart seven we have a few details on the MGE acquisition.

Speaker 5: The business has a good sales presence in Europe and the US while adding high-margin component content to our existing test platform.

Business has a good sales presence in Europe, and the U S. While adding high margin component content to our existing test platform.

Speaker 5: We're excited to have MPE on board and feel they will be a great addition to ESCO.

We're excited to have <unk> onboard and feel they will be a great addition to ESCO.

Speaker 5: On chart 8, we have key measurables for the full year. As Brian mentioned earlier, it's another record year for us in 2023, and this chart shows that trend nicely. Orders increasing to up over $1 billion. Sales up 11.5% to $956 million. A nice improvement in adjusted EBIT margins and adjusted earnings per share of over 15%. Next is chart 8.

A nice improvement in adjusted EBIT margins and adjusted earnings per share up over 15%.

Next chart nine with our full year results by segment.

Speaker 5: For utility, there was broad-based growth with condition monitoring, protection testing, and renewables leading the way.

The utility there was broad based growth with condition monitoring and protection testing in renewables, leading the way law.

Speaker 9: Lastly, for tests, the full-year decline was driven by volume drops in China, which were not offset by strength in Europe .

Lastly for test the full year decline was driven by volume drops in China, which were not offset by strength in Europe.

Speaker 5: On the margin side, USG led the way with a margin increase of 160 basis points. TESS was also able to increase margins in spite of the reduced sales. Lastly, A&D margins fell as strong performance from the aircraft component businesses was offset by challenges in the space business.

On the margin side USG led the way with a margin increase of 160 basis points test was also able to increase margins in spite of the reduced sales lastly, A&D margins fell as strong performance from the aircraft component businesses was offset by challenges in the space business.

Speaker 9: The last chart on 2023 is number 10, where we have the cash flow highlights.

The last chart on 2023 is number 10, where we have the cash flow highlights.

Speaker 5: The operating cash flow dropped to approximately $77 million in 23. Cash flow continued to be a challenge.

The operating cash flow dropped to approximately $77 million and 23.

Cash flow continued to be a challenge throughout the year.

The biggest challenges where with the A&D business, where we continue to see elevated levels of past due backlog.

This tied up more cash and working capital and it was the key driver of the cash decline in 2023.

Speaker 9: You can also see we had unfavorable cash impacts from increased tax and interest payments during the year.

You can also see we had unfavorable cash impacts from increased tax and interest payments during the year.

Capital expenditures were down by approximately $10 million during 2023, Youll recall that last year, we had a building purchase at NRG and Thats. The main driver of this year's decrease.

Speaker 5: Acquisition spending was up approximately $7 million, with NECO acquired by PTI in fiscal 2022 and CMT acquired by Globe in fiscal 2023.

Acquisition spending was up approximately $7 million with Nikko acquired by <unk> in fiscal 2022, and CMT acquired by Globe in fiscal 2023.

Speaker 5: Lastly, a share repurchase, where we completed just over $12 million in buybacks this year, compared to approximately $20 million last year.

Lastly is share repurchase where we completed just over $12 million in buybacks this year compared to approximately $20 million last year.

The last chart is our 2024 guidance.

You can see on the graph at the bottom of the chart that we've had two strong years of growth in 'twenty, two and 'twenty three and the outlook for <unk> remains strong as we expect to deliver another double digit earnings increase for 2024.

Speaker 5: For sales, we expect an increase in the range of 7% to 9%. The sales growth forecast is.

For sales, we expect an increase in the range of 7% to 9% the.

Sales growth forecast is balanced by business with.

Speaker 9: with A&D both projected to grow in the 8 to 10 percent range. The test range includes the impact of

With A&D, both projected to grow in the 8% to 10% range.

Test range includes the impact of the MGE acquisition.

Speaker 5: USG is expected in the 6% to 8% range. All solid numbers after two good years of growth in 2022 and 2023. You can see from the chart that we are projecting adjusted earnings for share growth in the range of 11% to 16%.

<unk> is expected in the 6% to 8% range all solid numbers. After two good years of growth in 'twenty, two and 23, you can see from the chart that we are projecting adjusted earnings per share growth in the range of 11% to 16%.

Speaker 9: for a range of $4.10 to $4.30 per share. This will be the third year in a row of double-digit growth in adjusted earnings per share for ESCO.

For a range of $4 10 to $4 30 per share this would be the third year in a row of double digit growth in adjusted earnings per share for ESCO.

Speaker 5: As is typically the case, we expect the business to ramp sequentially as we move through the year and we expect Q1 earnings per share to be in a range of 64 cents to 70 cents per share.

As is typically the case, we expect the business to ramp sequentially as we move through the year and we expect Q1 earnings per share to be in a range of <unk> 64 to <unk> 70 per share.

Speaker 4: That concludes the financial update, and now I'll turn it back over to Brian . Thanks, Chris. Since I touched on quite a few of my thoughts earlier in the commentary, I'd just like a couple more comments before we move into the Q&A. So you saw the numbers from Chris, obviously a great 2023 and a strong outlook for 2024. You know, the company is really operating at a high level, and we continue to have confidence as we look to the future.

That concludes the financial update and then I'll turn it back over to Brian.

Thanks, Chris.

Touched on quite a few of my thoughts earlier in the commentary I was just like a couple of more comments before we move into the Q&A. So you saw the numbers from Chris Obviously, a great 2023, and a strong outlook for 2024.

Company is really operating at a high level and we continue to have confidence as we look to the future. We serve strong end markets with well established customers. We've got great teams, both here at our corporate and out of the businesses around the world. This forms a powerful combination that we're excited about what's next for ESCO before jumping into the Q&A with you.

Speaker 4: We serve strong end markets with well-established customers. We've got great teams, both here at corporate and out at the businesses around the world. This forms a powerful combination, and we're excited about what's next for us.

Speaker 4: Before jumping into Q&A with you, I do want to take a moment and say thank you to all of our employees.

I do want to take a moment and let's say thank you to all of our employees.

Speaker 4: ESCO has racked up another strong year, and that's really a testament to the skill and tenacity of our employees. Our industries are growing, and no doubt it helps to serve markets that have positive dynamics. But, you know, there's always challenges when executing inside the business, and I continue to be impressed by the commitment and dedication shown by our employees around the world. I'd also like to thank our board of directors. We just finished up meetings over the last few days with the board, and we really appreciate their support and commitment to ESCO.

ESCO has wrapped up another strong year and Thats really a testament to the skill and tenacity of our employees. Our industries are growing and no doubt it helps to serve markets that have positive dynamics, but yes. There is always challenges when executing inside the business and I continue to be impressed by the commitment and dedication shown by our employees around the world.

I'd also like to thank our board of directors. We just finished up meetings over the last few days with the board and we really appreciate their support and commitment to our scale and feel free to close out my first year as CEO.

Speaker 4: It feels great to close out my first year in as CEO and be talking about record results. But it's only because of the efforts of a number of people, including all of our employees and the board. So with that, we can start the Q&A.

<unk> been talking about record results, but its only because of the efforts of a number of people, including all of our employees and the board.

That we can start with you okay.

Thank you and as a reminder to ask a question you will need to press star one on your telephone.

Finance be announce and to withdraw your question. Please press star one again, please standby or part of the Q&A roster.

One moment for our first question.

Speaker 6: question will come from the line of John Franzreb from Sudoti. Your line is open. Good afternoon, everybody, and thanks.

Our first question comes from the line of John <unk> from Sidoti Your line is open.

Good afternoon, everybody and thanks for taking the questions.

Scott.

Certain tests and test in China.

Can you talk a little bit about how the demand profiles change.

Ongoing weakness in China, any thoughts about maybe resetting your footprint there are redressing.

What you can do elsewhere with the capacity in China.

Available.

Sure So listen what we're seeing in China right. Now is we sell a fair amount of backlog there, but we're still having a hard time getting on job site. So it feels like the construction industry over there is still a little bummed out.

New orders have been.

Somewhat soft.

We're still we still have meaningful business over there and we're still making money.

We have not given any thought to changing our footprint.

At this time, we think we have an appropriately sized cost structure there.

For our business it could be quite a bit smaller the biggest challenge. We have though is that we had an incredible year last year. So from a comparable basis. It really is a big deceleration.

Speaker 4: The good news, though, is that we have seen strength over in Europe , and, unfortunately, it just wasn't quite enough to offset what we saw.

Good news, though is that we have seen strength over in Europe.

Unfortunately, just wasn't quite enough to offset what we saw in China.

All right fair enough and just switching to A&D less quota.

<unk> had some surprises some supply chain issues some questions in.

Are those all been resolved.

<unk> powered hasnt domestic but also given the backlog profile is it going to require additional staffing as that continues to ramp up and those orders are suddenly notice continued to come in.

Speaker 4: Yeah, so as far as supply chain issues company-wide.

Yes, so as far as the supply chain issues company wide.

Speaker 4: The good news is we have resolved them almost entirely in the utility group.

Good news is we have resolved them almost entirely in the utility group.

Speaker 4: We're still having some modest issues in the test group.

We're still having some modest issues.

Speaker 4: But what we're really continuing to see challenges is in our aerospace and defense group.

And the test script, but what we're really continuing to see challenges in our aerospace and defense group, particularly out in southern California, There's a couple of different components to that one would be the.

Speaker 4: particularly out in Southern California. There's a couple of different components to that. One would be the...

Speaker 4: material availability, that is improving pretty significantly.

Material availability of that is improving pretty significantly.

Speaker 4: The second piece being the outside processing. That's, that has improved with longer lead time.

Piece being the outside processing.

That has improved with longer lead times.

Speaker 4: The 1 that where I think we're still having some problems is on staffing our facilities with qualified personnel. Yeah, I think we just were out there a few weeks ago. We went through the numbers and we're probably about 85% staff.

One that we're I think we're still having some problems as on staffing our facilities with qualified personnel.

We're out there a few weeks ago, we went through the numbers that we are probably about 85% staffed.

Speaker 4: At our facilities out there and we're struggling with competition for labor And so, you know, we need machinists and we need, you know, a qualified assembly and test type people So that's probably restraining us a little bit more than the material availability is

Okay, and just one last question I'll jump back into queue.

By my calculations, you had real good free cash flow quarter for the fourth quarter.

And also on a full year wasn't what you expected, but is there any reason we wouldn't go back to normal free cash flow conversion in fiscal 2024.

Great ill get back into queue. Thank you.

Thanks Scott.

Thank you one moment for our next question.

Speaker 2: And our next question will come from the line of John Tanguanting from CJS Securities. Your line is open.

And our next question comes from the line of Jon <unk> from CJS Securities. Your line is open.

Speaker 7: Hi, good afternoon, and thank you for taking my questions. And Brian , congrats on capping off a pretty strong year. My 1st, 1 is just on energy. I was wondering what's driving the growth outlook there. Just given the headwinds that we've seen publicized across the renewable sector. Is that just working down your backlog? Or are you seeing order strength in the pipeline?

Hi, good afternoon, and thank you for taking my questions and Brian Congrats on capping off a pretty strong year.

My first one is just on NRG I was wondering what's driving the growth outlook. There just given the headwinds that we've seen publicized across the renewable sector is that just working down your backlog or are you seeing order strength in the pipeline.

Speaker 4: Well, so we had an incredible fourth quarter in the prior year and first three quarters of this year. So we did see, from an orders perspective, a little bit of a deceleration in the fourth quarter.

Well, so we are incredible.

Our quarter and the prior year and first three quarters of this year. So we did see from an orders perspective, a little bit of a deceleration.

In the fourth quarter that.

It does appear to be picking back up in October and November so we're keeping our eye on it but we're not overly concerned as you see from the numbers here, we were able to kind of work down our backlog a little bit more of a book and ship type of a business. So I haven't seen much backlog can be a challenge there in terms of our ability to compete and deliver.

But most of that business is doing very very well and they've had incredible margins expansion. In addition to the overall revenue growth. So we still feel pretty good about renewables in general I think one thing that we see a lot in the news these days as discussions about.

Speaker 4: We don't really have a lot of exposure to either of those markets. We're typically in the onshore wind and utility-scale solar. And those seem to be going pretty well right now.

Speaker 7: Okay, great. Thanks for that color. I was wondering if you go a little bit more into the into the details of the space issues that you had in the quarter. Is that a is that a 1 times issue that you're facing? Or is it going to be sustained? Kind of what what do you see in your near term planning for that?

Okay, great thanks for that color.

I was wondering if you go a little bit more into the details of the space issues that you had in the quarter.

Is that is it a one times.

The issue that you're facing or is it going to be sustained.

Kind of what do you see.

Your near term planning for that business.

Sure sure well, so listen the space business first of all.

Small part of our overall business, but we have we have a number of contracts that are for very complicated development.

<unk> programs. These are meeting we are doing effectively research and development to develop these negative. Unfortunately, there are firm fixed.

Contracts.

And we've had some technical challenges there that we're working through.

We think that we have our arms around it but there is a little bit more risk there because we do not have these projects completed and I would tell you that up on the test stand and you've actually got to pass the test you really cant declare victory.

What led to the channel is really I think is through the Covid moment, we've had some turnover in that business. We lost some key engineers we've had.

Speaker 7: Okay, great. That's good to hear. Can you talk a little bit more about MPE, the valuation that you paid for and the accretion you're expecting for next year?

Okay, great that's good to hear.

Can you talk a little bit more about MP the valuation that.

So you pay for and the accretion that you're expecting for next year.

Speaker 4: Sure. Listen, MPE is a business that we've known for a number of years.

Sure.

Listen the NPS.

A business that we've known for a number of years.

Speaker 4: They're very solid. They build RF filters for electromagnetic pulse.

They're very solid as they build.

RF filters for electromagnetic pulse applications as you know thats one of the the big growing areas that were kind of targeting.

Speaker 4: applications, as you know, that's one of the big growing areas that we're kind of targeting. They have more... What's attractive about it to us is that they have a broader range of products. So in addition to doing facility filters, which we do at ETS Lindgren.

Have more what's attractive about it to us is that they have a broader range of products. So in addition to do a facility filters, which we do at Etfs linger and they also sell components offers that go into military systems and other kinds of systems that require protection from electromagnetic pulse.

Speaker 4: They also build component filters that go into military systems and other kinds of systems that require protection from electromagnetic pulse.

Speaker 4: That's becoming a big market now because as you look at some of the things that are happening in critical infrastructure, both in the energy space and data centers and that sort of thing, that's become more and more of an issue that people are trying to address.

That's becoming a big market now because as you look at some of the things are happening at critical infrastructure, both in the energy space and data centers and that sort of thing that's become more and more of an issue that people are trying to address.

Speaker 4: What was interesting about, so we did spend about $57 million for this business. We expected to add about $10 to $15 million of revenue for us in fiscal 24. And we're not really going to talk a lot about the margins, other than to say that we think that it will enhance the overall margins for the test segment. So we think it's going to be a creative both at the revenue line and at the margin line for our overall test.

What's interesting about it so we did spend about $57 million for this business, we expected to add about $10 million to $15 million of revenue for us in fiscal 'twenty four.

We're not really going to talk a lot about the margins other than to say that we think that will enhance the overall margins for the test segment. So we think it's going to be accretive both at the revenue line and at the margin line for our overall test segment.

Speaker 5: Yeah, I think I would say, John , from an overall EPS perspective, you know, we expect it to be.

Yes, the other thing I would say John from a overall EPS perspective.

We expect it to be.

Speaker 5: You know, it's incorporated into our 410 to 430 outlook.

It's incorporated into our 14% to $4 30 outlook.

And we would expect it to be pretty close to breakeven could be some slight dilution or slight accretion.

Based on kind of how the overall, we don't have full visibility yet to what amortization will be in some of that so.

And that when I say it would be kind of close to breakeven from an accretion perspective that would also exclude the one time inventory step up charges, we always kind of adjust those out but.

So any way from an overall EPS perspective, we expect very little impact in the year.

Speaker 7: Okay, good, but that that's including the cost of either.

Okay, great that's including the cost of the financing of them are paying for it.

Speaker 7: Um, correct. Correct. Yeah. Okay. Got it. Understood. Great. Thank you guys. I'll jump back in queue.

Correct correct.

Okay got it understood great. Thank you guys I'll jump back in queue.

Thank you.

Speaker 2: And as a reminder, that's star 11 for questions, star 11. One moment.

Thank you.

And as a reminder, that's Tom one for questions are 111.

One moment for our next question.

Speaker 2: And next we'll have a follow up from the line of John Franzreb from Sidoti. Your line is open.

And next we will have a follow up from the line of John <unk> from Sidoti. Your line is open.

Speaker 6: Yeah, I'm just a little curious about what's behind the lower power filter sales that you saw in test. Can you provide some color on that?

Yes, just a little curious about what's behind that lower power filter sales that you saw in test.

Can you.

Provide some color on that.

Speaker 4: Sure, there's a couple factors there. So we have about, so primarily, the biggest driver for that last couple years has been in data center applications. That would be the one place where we think we might be seeing a little bit of a de-stocking effect.

Sure.

Couple of factors there.

So we have we have about so primarily a lot. We are the biggest driver for that but the last couple of years has been.

In data center applications.

Yes that would be the one place where we think we might be seeing a little bit of a destocking effect.

We had one of our customers that had bought quite a lot of filters last year and we think that they are kind of working depleting their inventory. This year, we think thats going to Brazil before too long.

Speaker 8: Okay, I just wanted to get a handle on that. Yeah, okay. Thank you very much. Thank you. Thank you.

Okay, I just wanted to get a handle on that.

Yes, that's it.

Okay. Thank you very much thank you.

Thank you.

For our next question.

Okay.

Speaker 2: Our next question will be a follow up from the line of John Tenwanting from CJAS Securities.

Our next question will be a follow up from the line of John <unk> from CJS Securities. Your line is open.

Speaker 7: Hi, thanks. I just wanted to dig a little bit more into the strength you guys saw in

Yes.

Hi, Thanks, So I just wanted to dig a little bit more into the strength you guys saw in the USC business.

Speaker 7: Did you meaningfully outperform your internal expectations there and either double or energy or did you pull any?

Did you meaningfully outperform your internal expectations, there in either double or in Nigeria, or did you pull anything into future quarters.

Speaker 4: Yes, we meaningfully outperformed our internal expectations and, you know, we, we, we feel really good about that business going forward, you know, that all of the information that we have is that utilities are making.

Yes.

Meaningfully outperformed our internal expectations and.

We feel really good about that business going forward.

All of the information that we have is that utilities are making substantial investments in their infrastructure.

Speaker 4: substantial investments in their infrastructure and you know, we are, you know, we made a lot of, as you know, we made a lot of acquisitions and a lot of organic product development over the last six or seven years that has really positioned us in an almost ideal way to take advantage of that kind of infrastructure build out. And so yeah, we think we feel like we've got really good, you know, forward now.

For passenger.

Speaker 5: Yeah, and John , I would say we, you know, wasn't the result of a pull in or anything. We just saw demand strong as we came through the quarter. And, you know, obviously, you saw qq Q3 were also very strong. So we just kind of hit, you know, we kind of kept going that way. And that's what drove it

Yes, John I would say it wasn't the result of a pull in or anything we just saw demand strong as we came through the quarter and obviously you saw Q2 Q3. We're also very strong so we just kind of it.

We kind of kept going that way and thats what drove it.

Speaker 7: Have your order run rates in that business been roughly similar to what you saw in Q4?

Have your order run rates in that business being roughly similar to what you what you saw in Q4.

Heading into the into Q1.

Speaker 5: I mean, we're always going to be a little bit lower in Q1, but I, as Brian said, I mean, you saw the full year outlook there, and I think we still feel good about.

I mean, we're always going to be.

Little bit lower in Q1, but as Brian said I mean, you saw the full year outlook, there and I think we still feel good about.

Speaker 11: the overall trends there and kind of the near to midterm. So yeah, I think we're kind of, I would say, chugging right along.

The overall trends, there and kind of the near to mid term. So so yes, I think we're we're kind of I would say chugging right along.

Great. Thank you for the color.

Speaker 2: Thank you. And I'm not showing any further questions in the queue at this time. I would now like to turn it back to Brian Saylor for any closing remarks.

Thank you Adam.

And I'm not showing any further questions in the queue. At this time I would now like to turn it back to Brian sailor for any closing remarks.

Well listen thanks for taking the time to wherever we're very excited about our 2023 results, but we are even more excited about our outlook for 2024, and we will look to talking to you in three months.

Speaker 2: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.

Thank you for your participation in today's conference. This does conclude the program you may now disconnect everyone have a great day.

Q4 2023 ESCO Technologies Inc Earnings Call

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