Q2 2024 ESCO Technologies Inc Earnings Call

May 9, 2024

Okay.

Good day, and thank you for standing by.

Operator: Good day, and thank you for standing by. Welcome to the second quarter 2020 ESCO Technology Zonings Call. At this time, all participants are on a listen-only basis. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised.

Operator: Welcome to the second quarter 2020, full eschar technology signings call.

Operator: At this time all participants are in a listen only mode.

Operator: After the Speakers' presentation, there'll be a question and answer session.

Operator: To ask a question. During this session you will need to press star one on your telephone.

Operator: You adventure and automated message of icing your head is right.

Operator: Two of your question. Please press star one again.

Operator: To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. On the call today, we have Bryan Sayler, President and CEO; Chris Tucker, Senior Vice President and CFO. Now, I would like to hand the conference over to our first speaker today, Kate Lowrey, Vice President of Investor Relations. Kate, you now have the floor.

Operator: Please be advised today's conference is being recorded.

Kate Lowrey: On the call today, we have Brian Saylor, President and C are Chris Tucker Senior Vice President and CFO.

Operator: And now I would like to hand, the conference over to also speak of today, Kate Lowrey, Vice President of Investor Relations. Kate you now have the floor.

Kate Lowrey: Thank you. Statements made during this call, which are not strictly historical, are forward-looking statements within the meaning of the safe harbor provisions of the federal securities laws. These statements are based on current expectations and assumptions, and actual results may differ materially from those projected in the forward-looking statements due to risks and uncertainties that exist in the company's operations and business environment, including but not limited to the risk factors referenced in the company's press release issued today, which will be included as an exhibit to the company's Form 8K to be filed.

Speaker Change: Thank you.

Kate Lowrey: 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 their 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 it is time to call Bryan.

Kate Lowrey: Statements made during this call, which are not strictly historical are forward looking statements within the meaning of the safe Harbor provisions of the federal Securities laws.

Kate Lowrey: Payments 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 factor.

Kate Lowrey: <unk> 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.

Bryan: In addition, during this call the company May discuss some non-GAAP financial measures in describing the company's operating results. A reconciliation of these measures to their most comparable GAAP measures can be found in the press release issued today and found on the company's website at Www Dot ESCO technologies Dot com under the link Investor Relations now I'll turn the call over to Brian.

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

Bryan H. Sayler: Thanks, Kate. And thanks, everyone, for joining today's call. We appreciate you taking time to get an update from ESCO this afternoon. We are pleased with the second quarter results and are especially excited about the continued top line momentum across our business platform. Sales were up by 9% over the prior year's second quarter, as our aerospace, Navy, and utility businesses continue to see robust end-market dynamics. We've been busy over the last month as we work through our annual strategic planning process with each of our subsidiaries.

Bryan H. Sayler: Appreciate you taking time to get an update from <unk>. This afternoon.

Bryan H. Sayler: We are pleased with the second quarter result, and are especially excited about the continued top line momentum across our business platforms.

Bryan H. Sayler: Sales were up by 9% over the prior year second quarter as our aerospace maybe a utility businesses continue to see robust end market dynamics.

Bryan H. Sayler: It's been busy over the last month as we worked through our annual strategic planning process with each of our subsidiaries. This is a chance for us to step back and examine what's happening in our end markets and to work on strategies to deliver above market organic growth. This year sessions have been particularly energized.

Bryan H. Sayler: This is a chance for us to step back and examine what's happening in our end markets and to work on strategies to deliver above-market organic growth. This year's sessions have been particularly energizing as we've seen several long-term trends across the broader economy that support a good growth profile as we move ESCO forward. Chris will run you through all of the financial details of the second quarter, but before that, I want to pass along a few highlights from the strategy reviews and give you some sense of some of the longer-term dynamics that we are seeing.

Bryan H. Sayler: As we've seen several long term trends across the broader economy that support good growth profile as we move outs go forward.

Bryan H. Sayler: Chris will run you through all of the financial details of the second quarter, but before that I want to pass along a few highlights from our strategy reviews that gives you some sense for some of the longer term dynamics that we're seeing.

Bryan H. Sayler: Starting with aerospace and defense, we continue to feel very good about the outlook. As you saw in the release, we still have high levels of backlog, and top line sales growth has been strong. The most exciting thing here is what remains in front of us. Our key markets are commercial and defense aerospace, the Navy, and space. And while each of these has different drivers, fundamentally, they all provide a great foundation for future growth.

Bryan H. Sayler: Starting with aerospace and defense, we continue to feel very good about the outlook here as you saw in the release, we still have high levels of backlog and the top line sales growth has been strong. The most exciting thing here is what remains in front of us our key markets, our commercial and defense aerospace.

Bryan H. Sayler: Navy and space and while each of these have different drivers fundamentally they all provide a great foundation for future growth commercial and defense aerospace customers are working to execute on long term build plans to increase build rates, which underpinned our strong forecast for ESCO.

Bryan H. Sayler: Commercial and defense aerospace customers are working to execute on long-term build plans to increase build rates, which underpin a strong forecast for ESCO. The Navy remains committed to ramping up submarine production in a manner that will drive significant growth for us.

Bryan H. Sayler: The Navy remains committed to ramping up submarine production in a manner that will drive significant growth for US. We're also involved with some early stage developmental projects with positive long term outlooks, we are driving for high single digit organic growth from these businesses through the planning cycle.

Bryan H. Sayler: We are also involved in some early-stage developmental projects with positive long-term outlooks. We are driving for high single-digit organic growth from these businesses through the planning process. Next is the utility group, where the outlook remains bullish. You don't have to look very deep into the headlines to find the growth drivers. An aging electric grid, increasing power demand from technology and industrial investments in the U.S., and decarbonization goals around the world are driving the need for even more electrification.

Bryan H. Sayler: Next is the utility group, where the outlook remains bullish.

Bryan H. Sayler: I'll have to look very deep into the headlines defined the growth driver here on aging electric grid, increasing power demand from technology and industrial investments in the U S and de carbonization goals around the world are driving the need for even more electrification.

Bryan H. Sayler: At ESCO, we have a very well-established diagnostic instrumentation business at Doble that is positioned to capitalize on these market factors and deliver continued excellent results. Additionally, our capabilities in the renewables market have already delivered tremendous results for ESCO, and there's more to come. These businesses are highly focused on new product and technology roadmaps to continue meeting customer needs while maintaining our lead in these growing markets. Finally, I'll touch on the test.

Bryan H. Sayler: <unk>, we have a very well established diagnostic instrumentation business at Doble that is positioned to capitalize on these market factors and deliver continued excellent results. Additionally, our capabilities in the renewables market have already delivered tremendous results for ESCO and Theres more to come these businesses are highly.

Bryan H. Sayler: Focus on new product and technology Roadmaps to continue meeting customer needs, while maintaining our lead in these growing markets.

Bryan H. Sayler: Finally, I'll touch on the test business as we discussed last quarter and as you can see from the press release tests got off to a tough start to the year at Q1 and although the revenue softness continued in Q2, the business was able to deliver sequential growth and returned to double digit profitability.

Bryan H. Sayler: As we discussed last quarter, and as you can see from the press release, TESS got off to a tough start to the year in Q1, and although revenue softness continued in Q2, the business was able to deliver sequential growth and return to double-digit profitability. It's never fun to go through these kinds of business cycles, but the team is really doing a great job of managing through the current challenges. We've been quick to get cost out of the business, and we are well positioned as growth returns.

Bryan H. Sayler: Never fun to go through these kinds of business cycles, but the team is really doing a great job of managing through the current challenges we have been quicker to get cost out of the business and we are well positioned as growth returns. We had a great strategy review of this team and the long term outlook as Brian This.

Bryan H. Sayler: We had a great strategy review with this team, and the long-term outlook is bright. This business has broad test and measurement capabilities that apply to a number of end markets, and we certainly expect growth to return in 2025 and beyond. While our primary focus is on organic growth and driving strategies to grow our existing business faster than the markets they serve while improving operational effectiveness and expanding returns, we are seeing increased opportunities to add to the business through strategic acquisitions, which increase our exposure to our existing long-term growth market.

Bryan H. Sayler: This business has broad test and measurement capabilities that applies to a number of end markets and we certainly expect growth to return in 2025 and beyond.

Bryan H. Sayler: While our primary focus is on organic growth and driving strategies to grow our existing business faster than the markets. They serve while improving operational effectiveness and expanding return we are seeing increased opportunities to add to the business through strategic acquisitions, which increased our exposure to our existing long term growth.

Bryan H. Sayler: Market.

Bryan H. Sayler: Hopefully, that gives you a flavor of the things that we've been working on over the past month and a sense of the excitement that we have for the future. As we pivot back to the quarter, I'll turn it over to Chris now, and he will go through the specifics for the great quarter that we just announced. Thanks, Bryan. Everyone can follow along on the chart presentation.

Bryan H. Sayler: Hopefully that gives you a flavor of the things that we've been working on over the past month and a sense of the excitement that we have for the future.

Bryan H. Sayler: As we pivot back to the quarter I'll turn it over to Chris now and he will go through the specifics for the great quarter that we just announced.

Chris: Thanks, Brian.

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

Christopher L. Tucker: We will start on page 3, where we have the overall financial highlights of the second quarter. Overall, as Bryan mentioned, the quarter was strong. Starting with orders, you can see there was a 5% reduction in orders compared to last year's second quarter, but the pace of business remains good, and we finished the quarter with $838 million of backlog, which is nearly $100 million higher than March 31st of last year. Sales in the quarter were up 9%, with organic growth of 8% and 1% from the MPE acquisition.

Christopher L. Tucker: Overall as Brian mentioned in the quarter was strong.

Christopher L. Tucker: Starting with orders you can see there was a 5% reduction in orders compared to last year's second quarter.

Christopher L. Tucker: But the pace of business remains good and we finished the quarter with $838 million of backlog, which is nearly $100 million higher than March 31 of last year.

Christopher L. Tucker: Sales in the quarter were up 9% with organic growth of 8% and 1% from the MGE acquisition.

Christopher L. Tucker: Two of the three segments delivered double-digit sales growth in the quarter. Sales performance translated to strong earnings growth with adjusted EBIT up 130 basis points to 13.5% and adjusted earnings per share up 24% to 94 cents. Moving to chart four, we will start with the segment details, beginning with aerospace and defense.

Christopher L. Tucker: Two of the three segments delivered double digit sales growth in the quarter.

Christopher L. Tucker: The sales performance translated to strong earnings growth with adjusted EBIT up 130 basis points to 13, 5% and adjusted earnings per share of <unk> 20, 24% to 94.

Christopher L. Tucker: Moving to chart four we will start on the segment details.

Christopher L. Tucker: Beginning with aerospace and defense.

Christopher L. Tucker: These businesses continue to deliver strong results. Beginning with orders, we achieved 4% order growth in the quarter and finished with $562 million in backlog, which represents an increase of $78 million since the beginning of the fiscal year. Moving on to sales, overall growth was 16%, which was all organic. Sales growth was led by strength from the commercial and defense aerospace businesses, which were up 14% and 20%, respectively. The Navy businesses were also very strong in the quarter, delivering 32% growth. Adjusted EBIT margins in the quarter increased by 80 basis points as we saw nice leverage on the sales growth and favorable impacts from price, which were partially offset by inflation and mix.

Christopher L. Tucker: These businesses continued to deliver strong results beginning with the orders we achieved a 4% order growth in the quarter and finished with $562 million of backlog, which represents an increase of $78 million since the beginning of the fiscal year.

Christopher L. Tucker: Moving onto sales overall growth was 16% which was all organic.

Christopher L. Tucker: The sales growth was led by strength from the commercial and defense aerospace businesses, which were up 14% and 20% respectively.

Christopher L. Tucker: The Navy businesses were also very strong in the quarter delivering 32% growth.

Christopher L. Tucker: Adjusted EBIT margins in the quarter increased by 80 basis points as we saw nice leverage on the sales growth and favorable impacts from price, which were partially offset by inflation and mix.

Christopher L. Tucker: On chart five we have the utility solutions group.

Christopher L. Tucker: On Chart five, we have the utility solutions group. We had another great quarter here with orders, but orders were down in the quarter, which was driven by modest reductions at Doble and a larger decline at NRG. The renewables business saw exceptional order growth through June 30th of last year as strong industry dynamics and government incentive programs spurred customer orders. Since then, the order pace has moderated, and the business has burned down backwards.

Christopher L. Tucker: We had another great quarter here with orders orders were down in the quarter, which was driven by modest reductions at doble and a larger decline at NRG.

Christopher L. Tucker: The renewables business saw exceptional order growth through June 30 of last year.

Christopher L. Tucker: Strong industry dynamics and government incentive program spurred customer orders.

Christopher L. Tucker: Since then the order pace has moderated and the business has burned down backlog.

Christopher L. Tucker: We are starting to see increasing order pipeline activity in the renewables business, and we expect to see order growth return as we move beyond the third quarter. Sales for USG were up 10% in the second quarter, with double-digit increases for Doble and NRG.

Christopher L. Tucker: We are starting to see increasing order pipeline activity in the renewables business and we expect to see order growth return as we move beyond the third quarter.

Christopher L. Tucker: Sales for USG were up 10% in the second quarter with double digit increases for Doble and NRG.

Christopher L. Tucker: For Doble, we saw strong growth on the services side of the business, and for NRG, we continue to see nice growth from solar. Adjusted EBIT margins were up 230 basis points as the business experienced favorable mix, nice leverage on sales growth, and price increases which more than offset inflationary impact. Next is chart six, where we have the test business. Orders here decreased 21% compared to last year's second quarter.

Christopher L. Tucker: <unk>, we saw strong growth on the services side of the business and for NRG, We continue to see nice growth from solar.

Christopher L. Tucker: Adjusted EBIT margins were up 230 basis points as the business experienced favorable mix nice leverage on sales growth and price increases, which more than offset inflationary impacts.

Christopher L. Tucker: Next chart, six where we have the test business.

Christopher L. Tucker: Orders here decreased 21% compared to last year's second quarter.

Christopher L. Tucker: This was driven by lower orders from the U.S. wireless market and delays on a few large projects, which are expected to be booked in the third quarter. Despite the orders drop in the second quarter, you can see the backlog has still grown since the beginning of the year. This business continues to see good levels of activity, but as we mentioned last quarter, the timing to execute on some projects has been pushed out by customers, which is also driving lower sales levels.

Christopher L. Tucker: This was driven by lower orders from the U S wireless market and delays on a few large projects, which are expected to be booked in the third quarter.

Christopher L. Tucker: Despite the orders drop in the second quarter, you can see the backlog is still grown since the beginning of the year.

Christopher L. Tucker: This business continues to see good levels of activity, but as we mentioned last quarter the timing to execute on some projects has been pushed out by customers, which is also driving lower sales levels.

Christopher L. Tucker: On the sales line, the business was down 8%, with organic sales dropping by 12%, and the MPE acquisition adding four points of growth. The largest declines came in the U.S., where we saw reductions in wireless filters and acoustic product lines. Adjusted EBIT margins declined to 12.2% in the quarter, as cost reduction efforts were not able to offset D leverage on the sales drop.

Christopher L. Tucker: On the sales line the business was down 8% with organic sales dropping by 12% and the MGE acquisition, adding four points of growth.

Christopher L. Tucker: The largest declines came in the U S, where we saw reductions in wireless filters and acoustic product lines.

Christopher L. Tucker: Adjusted EBIT margins declined to 12, 2% in the quarter as cost reduction efforts were not able to offset deleverage on the sales drop.

Christopher L. Tucker: We have executed a plan to take cost out of this business and this helped drive a nice sequential increase in profitability during the second quarter.

Christopher L. Tucker: We have executed a plan to take cost out of this business, and this helped drive a nice sequential increase in profitability during the second quarter. We expect this sequential improvement to continue as we move through fiscal 2024. On Chart 7, we have the cash flow highlights. We continue to show favorability to last year with $19 million of operating cash flow so far this year compared to a cash use of $5.5 million last year.

Christopher L. Tucker: We expect this sequential improvement to continue as we move through fiscal 2024.

Christopher L. Tucker: On chart seven we have the cash flow highlights.

Christopher L. Tucker: We continue to show favorability to last year with $19 million of operating cash flow. So far this year compared to a cash use of $5 5 million last year.

Christopher L. Tucker: Favorability and accounts receivable were the main driver of the year-to-year improvement in operating cash flow. Capital spending in the first six months did increase, driven by investments in the aerospace and defense businesses, where we are working to increase capacity and productivity to support the robust demand outlook. You can also see that we had acquisition spending in both years, with MPE this year at just over $56 million, while last year we had the CMT acquisition for approximately $18 million.

Christopher L. Tucker: Favorability in accounts receivable was the main driver of the year to year improvement in operating cash flow.

Christopher L. Tucker: Capital spending in the first six months did increase driven by investments from the aerospace and defense businesses, where we are working to increase capacity and productivity to support the robust demand outlook.

Christopher L. Tucker: You can also see that we had acquisition spending in both years with MPD. This year at just over $56 million, while last year, we had the CMT acquisition for approximately $18 million.

Christopher L. Tucker: We have completed 7 million of stock stock buybacks through March 31 of 2024, which compares to $12 million. It was done through the first six months of last year.

Christopher L. Tucker: We have completed 7 million stock buybacks through March 31st, 2024, which compares to 12 million that were done through the first six months of last year. The last chart today is number eight, which is our 2024 guidance. The outlook for the full year remains unchanged, and we remain on track to deliver adjusted earnings per share in the range of 415 to 430, which represents a growth range of 12 to 16 percent. This is still predicated on sales growth in the range of 7 to 9 percent.

Christopher L. Tucker: The last chart today's number eight which is our 2020 for guidance.

Christopher L. Tucker: The outlook for the full year remains unchanged and we remain on track to deliver adjusted earnings per share in the range of $4 15 to $4 30.

Christopher L. Tucker: Which represents a growth range of 12% to 16%.

Christopher L. Tucker: This remains predicated on sales growth in the range of 7% to 9%.

Christopher L. Tucker: 2024 is shaping up to be another record year as we push to deliver revenue of more than $1 billion for the first time in ESCO history, and we are aiming for a third year in a row of double-digit growth in adjusted earnings per share. That concludes the financial update, and now I'll turn it back over to Bryan. Thanks, Chris.

Christopher L. Tucker: 'twenty 'twenty four shaping up to be another record year as we push to deliver revenue of more than $1 billion for the first time in ESCO history, and we push for a third year in a row of double digit growth in adjusted earnings per share.

Bryan: That concludes the financial update and now ill turn it back over to Brian.

Bryan H. Sayler: Obviously, we delivered a very good Q2. The teams here at corporate and across our business segments did a great job of delivering exceptional top line and bottom line growth. There are always challenges when executing programs inside a business, and I continue to be impressed by the commitment and dedication shown by our employees around the world.

Bryan: Thanks, Chris obviously, we delivered a very good Q2.

Bryan H. Sayler: The teams here at corporate and across our business segments did a great job in delivering exceptional topline and bottomline growth.

Bryan H. Sayler: These challenges when executing programs inside of the business and I continue to be impressed by the commitment and dedication shown by our employees around the world as always I want to thank them for their hard work and dedication which resulted in another solid quarter for ESCO to close we are entrenched market positions across growing end markets.

Bryan H. Sayler: As always, I want to thank them for their hard work and dedication, which resulted in another solid quarter for ESCO. To close, we have entrenched market positions across growing end markets, and we serve and remain on track to deliver our 2024 commitments for a third record year in a row. That concludes the opening remarks, and we can open up the question and answer session. Thank you. We will now conduct the question and answer session. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.

Bryan H. Sayler: And that.

Bryan H. Sayler: We serve and remain on track to deliver our 2024 commitments for a third record year in a row.

Bryan H. Sayler: That concludes the opening remarks, and we can open up the question and answer session.

Speaker Change: Thank you.

Bryan H. Sayler: We will now conduct a question and answer session. As a reminder to ask a question. Please press star one on your telephone.

Bryan H. Sayler: Will your name to be announced.

Bryan H. Sayler: <unk>. Your question. Please press star one again please.

Operator: Please stand by as we compile the Q&A roster. Our first question comes from Tommy Moll of Sibbins Inc. Please go ahead. Good afternoon, and thanks for taking my question. I die.

Bryan H. Sayler: Please standby as we compile the Q&A roster.

Operator: Our first question comes from Tommy Moll Stephens, Inc. Please go ahead.

Thomas Allen Moll: Good afternoon, and thanks for taking my questions.

Thomas Allen Moll: All right.

Operator: Yes.

Operator: I wanted to start on DOBLE. I think orders were down slightly on a year-over-year basis, and revenues, if I'm doing my math correctly, were flattish on a quarter-over-quarter basis. And so the question would be if you could just give us an update on demand for that business right now. Thank you.

Thomas Allen Moll: I wanted to start on Doble I think orders were down slightly on a year over year basis revenues, if im doing my math correctly were flattish on a quarter over quarter basis.

Operator: And so the question would be if you could just give us an update on demand currently for that business. Thank you.

Speaker Change: Sure listen we still feel good about overall demand at Doble and.

Bryan H. Sayler: Listen, we still feel good about the overall demand at Doeble and we did have, you know, very good costs for orders in the prior year, but as you can see, we're moving the revenue up. We see good demand for our condition monitoring products and for services. We do have a pretty robust order pipeline, and we've already begun to see some progress here in the third quarter. And Tommy, this is Chris. I would also say, sequentially, the Doble sales were up from first quarter to second quarter; NRG was down slightly sequentially, but Doble was up inside of there.

Chris: We did have very good comps for orders in the prior year, but as you can see we're moving the revenue up.

Chris: And good demand for our condition monitoring products and for services.

Chris: We do have pretty robust order pipeline and.

Chris: Bharti have begun to see some progress here in the third quarter.

Bryan H. Sayler: Tommy This is Chris I would also say we sequentially. The doble sales were up from first quarter to second quarter.

Chris: NRG was down slightly sequentially, but doble was up inside of there.

Tommy: Thank you for clarifying there, Chris and I, just can't resist asking here, Brian you threw out a bogie high single digits. After your strategy review on the A&D side.

Bryan H. Sayler: Thank you for clarifying that, Chris. And I just can't resist asking here, Bryan, you threw out a bogeyman high single digits after your strategy review on the A&D side. Is there anything you want to use to frame the utility outlook after your review?

Tommy: There anything you want to use to frame the utility outlook. After your review.

Bryan: Yes, I would say, we're mid upper single digits over the planning horizon there.

Bryan H. Sayler: Yes.

Bryan H. Sayler: Those are markets that are growing very well and I think we've got strategies plans product development in place that's going to allow us to grow faster than those markets.

Speaker Change: Thank you Brian.

Christopher L. Tucker: And a quick one on test, Chris. I think I heard you say, "You're looking for sequential improvement as you go through this year. I presume that applies to revenue and EBIT. It looks like revenues have already bottomed and moved a little bit higher. But if you could just clarify what you meant, it would be helpful. Thank you. Yeah, that's right, Tommy. So we had a sequential sales and EBIT increase from Q1 to Q2. We would expect, you know, Q3 sales to be higher than Q2, and also margins to be higher than Q2. And then we would expect a similar dynamic in Q4.

Brian: Quick one on test, Chris I think I heard you say.

Tommy: Youre looking for sequential improvement as you go through this year I presume that applies the revenue and EBIT. It looks like revenue is already bottomed and moved a little bit higher but if you could just clarify what you meant there would be helpful. Thank you.

Christopher L. Tucker: So we're still looking for that business to kind of ramp up and get better as each quarter progresses. Thank you. I'll turn it back.

Christopher L. Tucker: Yes, that's right Tommy So we had a sequential sales and EBIT increase from Q1 to Q2.

Christopher L. Tucker: Would expect Q3 sales to be higher than Q2, and also margins to be higher than Q2, and then we would expect a similar dynamic is Q4. So we're kind of still looking for for that business to kind of ramp and get better as each quarter progresses.

Speaker Change: Thank you I'll turn it back.

Speaker Change: Thank you.

Speaker Change: Just a reminder to ask a question. Please press star one on your telephone and wait for your name.

Operator: Thank you. Just a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. And that's our next question, please. Our next question comes from John Tanwanteng of CJS Securities. Please go ahead.

Jonathan E. Tanwanteng: Aimed to be announced.

Jonathan E. Tanwanteng: Just a moment. So next question please.

Jonathan E. Tanwanteng: Our next question comes from John <unk>.

Jonathan E. Tanwanteng: CJS Securities. Please go ahead.

Operator: Hi, This is Justin on for John can.

Operator: Hi, this is Justin on behalf of John. Can you quantify how much risk there is at Boeing and whether they've communicated to you any changes in their needs? Sure. Listen, Boeing is clearly having a tough time of it, and we certainly look closely at the impact that Boeing might have both in the near-term and over the longer-term planning horizon during our strategic planning process. Our determination is that this is going to be a short-term problem that will work itself out over several quarters. Boeing's build rates are expected to remain modest for 2024 and begin ramping up in 2025.

Operator: Can you quantify how much risk there is at Boeing and if they have communicated to you any changes in their needs.

Speaker Change: Sure listen.

Operator: <unk>.

Operator: Boeing is clearly having a tough time of it and we certainly love to closely.

Operator: At the impact that Boeing might have both in the near term and over the longer term planning horizon during our strategic planning process.

Operator: Our determination is that this is going to be a short term problem that will work itself out over several quarters.

Operator: Build rates are expected to remain modest for 2024.

Operator: And begin ramping up in 2025, we are we are the signals that were receiving are to continue to produce at the rates that we've been contracted to do so we have seen a little bit of a falloff in new orders at one of our three.

Bryan H. Sayler: The signals that we're receiving are to continue to produce at the rates that we've been contracted to do so. We have seen a little bit of a fall-off in new orders at one of our three businesses that are serving the commercial aerospace side of Boeing. Nothing to be too concerned about, but definitely a noticeable change.

Bryan H. Sayler: Businesses that are serving the commercial aerospace side of Boeing.

Bryan H. Sayler: Nothing to be too concerned about that but definitely a noticeable change.

Bryan H. Sayler: The good news is that we're prepared to match their demand as needed, and we have the ability to kind of reallocate the capacity that would have been devoted to Boeing to other programs and to meet our projected growth targets. I'd end by saying, listen, a healthy Boeing is good for our industry, and once they can get past this current crisis, you know, we anticipate that that'll serve to raise our overall growth project. Alright, thanks for that. That's really helpful.

Bryan H. Sayler: The good news is that we are prepared to match their demand as needed and we have the ability to kind of reallocate that capacity that would have been devoted to Boeing to other programs.

Bryan H. Sayler: To meet our projected growth rates.

Bryan H. Sayler: Listen I'd end by saying listen a healthy Boeing is good for our industry.

Bryan H. Sayler: Once they can get past this current crisis.

Bryan H. Sayler: We anticipate that that will serve to raise our overall growth projections.

Speaker Change: Alright for that that's really helpful. And then one more if I could.

Operator: And then one more, if I could, should we read anything into the lower book to bill this quarter across the segments? And do you think there's any demand weakening or pushing out, or is it more the lumpy nature of orders? Well, I would say that in the test business, we've definitely seen lower orders in China and lower orders in wireless. So that would be, I would not put that in the lumpy category.

Operator: Should we read anything into the lower book to Bill this quarter across our segments and if you think theres any demand weakening of pushing out or is it more of the lumpy nature of orders.

Operator: Well I would I would say that the debt.

Operator: On the test business, we've definitely seen lower orders in China, and lower orders in wireless so that would be I would not put that in the lumpy category, okay, but I would say that.

Bryan H. Sayler: Okay, but I would say that, you know, renewables, maybe the global business, and certainly a lot of what's going on over in aerospace and defense, those are all pretty lumpy. You know, we have, as I said, a strong pipeline in all of those categories, and some of them are tracking some pretty large orders that would really, you know, make a big difference in terms of our book to bill. Yeah, and I would just add on, you know, especially aerospace and defense. I mean, it was still over 100%.

Bryan H. Sayler: Renewables.

Bryan H. Sayler: The doble business.

Bryan H. Sayler: And certainly a lot of what's going on over in aerospace and defense those are all pretty lumpy.

Bryan H. Sayler: We have as I said, we've got a strong pipeline in all of those categories and some of them are tracking some pretty large orders that would.

Bryan H. Sayler: That would really.

Bryan H. Sayler: Make a big difference in terms of our book to bills, yes.

Bryan H. Sayler: And that's after two quarters that were way over 100% as we had some pretty big Navy orders over the last prior six months. So, so, you know, really still pretty strong there, I'd say. That's great. I appreciate the color.

Speaker Change: Yes, and I would just add on.

Bryan H. Sayler: Especially aerospace and defense I mean, it was still over 100% and Thats. After two quarters that were way over 100% as we had some pretty big Navy orders over the last.

Bryan H. Sayler: There are six months, so really still still pretty strong there I'd say.

Speaker Change: That's great I appreciate the color. Thanks for taking my question.

Christopher L. Tucker: Thanks for taking the questions. Thank you. Thank you. Our next question comes from John Franzberg from Sudirte and Co. Please go ahead.

John Edward Franzreb: Thank you.

John Edward Franzreb: Our next question comes from John <unk> from Sidoti Inc. Please go ahead.

John Edward Franzreb: Good afternoon, guys and congratulations on the nice quarter.

Operator: All right, good afternoon, guys, and congratulations on another nice quarter. If I heard you properly in your prepared remarks, it sounded like you were getting pricing in utilities and tests. Can you talk a little bit about what kind of pricing you're pushing for? Yeah, I mean, generally, what we're getting in those places is still kind of in the three to four percent range. And we see that, you know, kind of ahead of inflationary, you know numbers, so we kind of try to track.

Operator: Greg if I heard you properly in your prepared remarks, it sounded like youre getting pricing.

Operator: And utility and test can you talk a little bit about what kind of pricing you're pushing for.

Operator: So I think that yes, I mean, I think generally what we're getting in those places is still kind of in the 3% to 4% range and we see that kind of ahead of inflationary numbers. So we kind of try.

Operator: Try to track, what we're seeing on the commodity materials side and as well in people inflation as well and we're kind of.

Operator: We're seeing on the commodity material side and as well as inflation as well, and we're kind of you know, we're still favorable on those measures as far as more price than cost. Got it. And coming back to the test segment, you mentioned that there were delays on a few large projects. I'm wondering if there is any common theme in those delays that you're seeing in your customers? Well, I think that there's been, as I said before, a general slowdown in the construction industry in terms of permits, being able to get some key raw materials, and I think labor availability has been a big issue.

Operator: We are still favorable on those measures as far as more pricing and cost.

Operator: Got it.

Operator: Coming back to the test segment, you mentioned that there has been delays on a few large projects.

Operator: I'm wondering is there any common theme in those delays that you're seeing in your customers.

Operator: Well I think that there is better.

Operator: I've said before there is a general slowdown.

Operator: <unk>.

Operator: The construction industry in terms of permitting.

Operator: Being able to get some key raw material and I think labor availability has been a big issue. So the buildings that we're waiting on a really large big projects and so.

Christopher L. Tucker: So the buildings that we're waiting on are really large, big projects, and so we are seeing some improvement there, but nothing like a return to normal. At this point, though, we believe that we have the access that we need to deliver significant sequential growth in the second half of the year. You know, the projects that are moved out the next year, we've kind of set those in the next year's plan now, and we anticipate that those will be executed on the revised schedule.

Christopher L. Tucker: We are seeing some improvement there.

Christopher L. Tucker: But nothing like a return to normal at this point, though we believe that we have the access that we need to deliver significant sequential growth in the second half of the year.

Christopher L. Tucker: Projects that are moved out to next year, we've kind of stepped out into next year's plan now and we anticipate that those will be executed on square on the revised schedule.

Christopher L. Tucker: I'm also hearing a lot about permitting but you expect everything to fall into fiscal.

Christopher L. Tucker: I'm also hearing a lot about permits, but do you expect everything to fall into fiscal 2024 still and not be pushed to the right of that? Yeah, I mean, we've already pushed a fair bit out to next year. That was kind of, you know, some of the reduction in the outlook for tests that we kind of did after the first quarter. And, yeah, we haven't seen that get worse, necessarily, but we also haven't seen it get better.

Christopher L. Tucker: 2020 for us still and not be pushed to remind you that.

Christopher L. Tucker: Yes.

Christopher L. Tucker: Yes, I mean, we've already pushed a fair bit out to next year that was kind of some of the reduction in the outlook for test that we did after the first quarter and yes, we haven't seen we haven't seen that get worse necessarily but we havent. We also haven't seen it get better and I would also just say John that.

Christopher L. Tucker: And I would also just say, John, that, you know, as far as some of the delays on orders and such, as Bryan mentioned, I mean, we do see a path to pretty big sequential improvement in orders as we go into Q3 versus Q4. And it looks like, you know, frankly, some of that might even happen in April, or has already happened in April, I should say. So, you know, we expect that to get better. But, again, a lot of those bigger orders that would be coming in now would likely be more, you know, kind of 25 revenue type things. Great, thanks for the color.

Christopher L. Tucker: As far as some of the delays on orders and such as Brian mentioned, I mean, we do see a path to a pretty big sequential improvement in orders as we go into Q3 versus Q4 and it looks like frankly, some of that might even happen in April so.

Christopher L. Tucker: So.

Christopher L. Tucker: It's happened in April I should say so.

Christopher L. Tucker: We expect that to get better, but again a lot of those bigger orders that would be coming in now and would likely be more kind of 'twenty five revenue type things.

Operator: And one last question, if I may. On the M&A front, can you kind of give us an update on targets and size and what kind of product lines you'd like to end? Maybe a little refresher would be helpful. Sure. Well, first of all, I would say that in the past, since our last call, we've seen a sharp increase in investment opportunities that kind of meet our target profile, if you will, and we're actively engaged in those processes. But we don't have anything to announce.

Speaker Change: Great. Thanks, Thanks for the color and one last question if I may on the <unk>.

Operator: M&A front can you kind of give us an update on targets and size and what kind of product lines, you would like to and maybe a little refresh it that'd be helpful.

Operator: Sure well first of all I would say that in the past since our last call. We've seen a sharp increase in the investment opportunities that meet our target profile. If you will and we're actively engaged in those processes. We don't have anything to announce we're not particularly close.

Bryan H. Sayler: We're not particularly close, but we are optimistic about our ability to get things done. When we talk about M&A, I think the first thing I want to remind you is that organic growth and operational execution are our primary focus, so we're not taking our eye off the ball there. Our organic growth profile over the planning horizon is really, really good. Having said that, several of those end markets that we talked about earlier have superior long-term growth characteristics. And those are the ones that we would be, you know, the most focused on.

Bryan H. Sayler: But we are optimistic about our ability to get things done.

Bryan H. Sayler: When we talk about M&A I think the first thing I want to remind you is that organic growth and operational execution are our primary focus.

Bryan H. Sayler: So we're not taking our eye off the ball there.

Bryan H. Sayler: Our organic growth profile over the planning horizon is really really good.

Bryan H. Sayler: Having said that several of those end markets that we talked about earlier.

Bryan H. Sayler: <unk> has superior long term growth characteristics and those are the ones that we would be the most focused on and that would be.

Bryan H. Sayler: And that would be, you know, commercial and military, aerospace, Navy, and electrification. Thank you guys, and I'll get back to you. Thank you. Thank you. I see no further questions at this time. I would now like to turn the conference back to Bryan. Thanks.

Bryan: Marshall and military Aerospace Navy and electrification.

Bryan H. Sayler: Great.

Bryan: Thank you guys and I'll get back into queue.

Bryan: Thank you.

Bryan H. Sayler: No, I think we're good. Good luck. All right. Well, thanks a lot, guys. We really appreciate you answering the questions or taking the quick questions with us. And we look forward to another good quarter. Thank you. Thank you. This concludes today's conference call. Thank you all for participating. You may now disconnect. Have a great day, everyone. ??? ??? ??? ??? ??? ??? [inaudible] ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? Good day, and thank you for standing by.

Bryan: I see no further questions at this time I would now like to turn the conference back to Brian.

Operator: Welcome to the second quarter 2020 ESCO Technology Zonings Call. At this time, all participants on the LISTEN Early, After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. You will then hear an automated message arising in your head as rain.

Operator: Okay.

Speaker Change: Okay. Thanks.

Kate Lowrey: I apologize I lost my place here now I think we're good.

Kate Lowrey: So thanks, a lot guys, we really appreciate.

Speaker Change: Answering the questions are taken a quick questions with us and we.

Speaker Change: Look forward to another good quarter.

Kate Lowrey: Thank you.

Kate Lowrey: Okay.

Speaker Change: Thank you. This concludes today's conference call. Thank you all for participating you may now disconnect have a great day everyone.

Kate Lowrey: Okay.

Kate Lowrey: [music].

Kate Lowrey: Okay.

Kate Lowrey: [music].

Kate Lowrey: Okay.

Kate Lowrey: [music].

Kate Lowrey: No.

Kate Lowrey: Yes.

Kate Lowrey: [music].

Kate Lowrey: Okay.

Kate Lowrey: Yes.

Kate Lowrey: [music].

Kate Lowrey: Okay.

Kate Lowrey: Yes.

Kate Lowrey: [music].

Speaker Change: Good day and thank you for standing by welcome to the second quarter 2020 for ESCO technologies earnings call. At this time, all participants are in a listen only mode.

Kate Lowrey: 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.

Kate Lowrey: <unk>, an automated message, but I see your hand is great too.

Kate Lowrey: To have Joel Your question. Please press star one once again.

Speaker Change: Please be advised that today's conference is being recorded.

Kate Lowrey: On the call today, we have Brian Taylor, President and CEO, Chris Tucker Senior Vice President and CFO.

Kate Lowrey: And now I would like to hand, the call center, if a job so to speak of today, Kate Lowrey, Vice President of Investor Relations. Kate you now have the floor.

Bryan H. Sayler: Thanks, Kate. And thanks, everyone, for joining today's call. We appreciate you taking time to get an update from ESCO this afternoon. We are pleased with the second quarter results and are especially excited about the continued top line momentum across our business platform. Sales were up by 9% over the prior year's second quarter, as our aerospace, Navy, and utility businesses continue to see robust end-market dynamics. We've been busy over the last month as we worked through our annual strategic planning process with each of our subsidiaries.

Speaker Change: Thank you.

Bryan H. Sayler: And it's made during this call which are not strictly historical are forward looking statements within the meaning of the safe Harbor provisions of the federal Securities laws. These statements are based on current expectations and assumptions and actual results may differ materially from those projected in the forward looking statements due to risks and uncertainties that exist in the company's operations and business environment, including but.

Bryan H. Sayler: Not limited to the risk factor 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 may be required by applicable laws or regulations.

Bryan H. Sayler: During this call the company May discuss some non-GAAP financial measures in describing the company's operating results. A reconciliation of these measures to their most comparable GAAP measures can be found in the press release issued today and found on the company's website at Www Dot ESCO technologies Dot com under the link Investor Relations now I'll turn the call over Brian.

Speaker Change: Thanks, Kate and thanks, everyone for joining today's call. We appreciate you taking time to get an update from <unk>. This afternoon.

Bryan H. Sayler: We are pleased with the second quarter result, and are especially excited about the continued top line momentum across our business platforms sale.

Bryan H. Sayler: Sales were up by 9% over the prior year second quarter as our aerospace maybe and utility businesses continue to see robust end market dynamics.

Bryan H. Sayler: Been busy over the last month as we've worked through our annual strategic planning process with each of our subsidiaries. This is a chance for us to step back and examine what's happening in our end markets and to work on strategies to deliver above market organic growth.

Bryan H. Sayler: This year's sessions have been particularly energizing as we've seen several long term trends across the broader economy that support good growth profile as we move outs go forward Chris.

Speaker Change: Chris will run you through all of the financial details of the second quarter, but before that I want to pass along a few highlights from our strategy reviews and give you some sense for some of the longer term dynamics that we're seeing.

Bryan H. Sayler: But before that, I want to pass along a few highlights from the strategy reviews and give you some sense for some of the longer-term dynamics that we are seeing. Starting with aerospace and defense, we continue to feel very good about the outlook. As you saw in the release, we still have high levels of backlog, and the top line sales growth has been strong. The most exciting thing here is what remains ahead of us.

Bryan H. Sayler: Our key markets are commercial and defense aerospace, the Navy, and space. And while each of these have different drivers, fundamentally, they all provide a great foundation for future growth. Commercial and defense aerospace customers are working to execute on long-term build plans to increase build rates, which underpin a strong forecast for ESCO. The Navy remains committed to ramping up submarine production in a manner that will drive significant growth for us.

Bryan H. Sayler: Maybe in space and while each of these have different drivers fundamentally they all provide a great foundation for future growth commercial and defense aerospace customers are working to execute on long term build plans to increase build rates, which underpinned our strong forecast for <unk>.

Bryan H. Sayler: We are also involved in some early stage developmental projects with positive long-term outlooks. We are driving for high single-digit organic growth from these businesses across the planet. Next is the utility group, where the outlook remains bullish. You don't have to look very deep into the headlines to find the growth drivers, such as the aging electric grid, increasing power demand from technology and industrial investments in the U.S., and Decarbonization Goals around the World driving the need for even more electrification.

Bryan H. Sayler: The utility group, where the outlook remains bullish you don't have to look very deep into the headlines defined the growth drivers here on aging electric grid, increasing power demand from technology and industrial investments in the U S and de carbonization goals around the world are driving the need for even more electric.

Bryan H. Sayler: Vacation at ESCO, we have a very well established diagnostic instrumentation business at Doble that is positioned to capitalize on these market factors and deliver continued excellent results. Additionally, our capabilities in the renewables market have already delivered tremendous results for ESCO and theres more to come.

Bryan H. Sayler: At ESCO, we have a very well-established diagnostic instrumentation business in Doleville that is positioned to capitalize on these market factors and deliver continued excellent results. Additionally, our capabilities in the renewables market have already delivered tremendous results for ESCO, and there's more to come. These businesses are highly focused on new product and technology roadmaps to continue meeting customer needs while maintaining our lead in these growing markets. Finally, I'll touch on the test.

Bryan H. Sayler: These businesses are highly focused on new product and technology Roadmaps to continue meeting customer needs, while maintaining our lead in these growing markets.

Bryan H. Sayler: Finally, I will touch on the test business as we discussed last quarter and as you can see from the press release test got off to a tough start to the year at Q1 and although the revenue softness continued in Q2, the business was able to deliver sequential growth and return to double digit profitability. It's never fun to go through these.

Bryan H. Sayler: As we discussed last quarter, and as you can see from the press release, TESC got off to a tough start to the year in Q1, and although revenue softness continued in Q2, the business was able to deliver sequential growth and return to double-digit profitability. It's never fun to go through these kinds of business cycles, but the team is really doing a great job of managing through the current challenges. We've been quick to get costs out of the business, and we are well positioned as growth returns.

Bryan H. Sayler: Lines of business cycles, but the team is really doing a great job of managing through the current challenges. We have been quick to get cost out of the business and we are well positioned as growth returns. We had a great strategy review of this team and the long term outlook is Brian.

Bryan H. Sayler: We had a great strategy review with this team, and the long-term outlook is bright. This business has broad test and measurement capabilities that apply to a number of end markets, and we certainly expect growth to return in 2025 and beyond. While our primary focus is on organic growth and driving strategies to grow our existing business faster than the markets they serve while improving operational effectiveness and expanding return, we are seeing increased opportunities to add to the business through strategic acquisitions, which increase our exposure to our existing long-term growth market.

Bryan H. Sayler: This business is broad test and measurement capabilities that apply to a number of end markets and we certainly expect growth to return in 2025 and beyond.

Bryan H. Sayler: With markets hope.

Bryan H. Sayler: Hopefully, that gives you a flavor of the things that we've been working on over the past month and a sense of the excitement that we have for the future. As we pivot back to the quarter, I'll turn it over to Chris now, and he will go through the specifics of the great quarter that we just announced. Thanks, Bryan. Everyone can follow along on the chart presentation.

Bryan H. Sayler: Hopefully that gives you a flavor of the things that we've been working on over the past month and a sense of the excitement that we have for the future.

Bryan H. Sayler: As we pivot back to the quarter I'll turn it over to Chris now and he will go through the specifics for the great quarter that we just announced.

Chris: Thanks, Brian.

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

Christopher L. Tucker: Overall as Brian mentioned in the quarter was strong.

Christopher L. Tucker: Starting with orders you can see there was a 5% reduction in orders compared to last year's second quarter.

Christopher L. Tucker: But the pace of business remains good and we finished the quarter with $838 million of backlog, which is nearly a $100 million higher than March 31 of last year.

Christopher L. Tucker: Sales in the quarter were up 9% with organic growth of 8% and 1% from the MGE acquisition.

Christopher L. Tucker: Two of the three segments delivered double digit sales growth in the quarter.

Christopher L. Tucker: The sales performance translated to strong earnings growth with adjusted EBIT up 130 basis points to 13, 5% and adjusted earnings per share up 22, 4% to <unk> 94.

Christopher L. Tucker: Moving to chart four we will start on the segment details.

Christopher L. Tucker: Beginning with aerospace and defense.

Christopher L. Tucker: Moving onto sales overall growth was 16% which was all organic.

Christopher L. Tucker: The sales growth was led by strength from the commercial and defense aerospace businesses, which were up 14% and 20% respectively.

Christopher L. Tucker: The Navy businesses were also very strong in the quarter delivering 32% growth.

Christopher L. Tucker: Adjusted EBIT margins in the quarter increased by 80 basis points as we saw a nice leverage on the sales growth and favorable impacts from price, which were partially offset by inflation and mix.

Christopher L. Tucker: On Chart 5, we have the Utility Solutions Group. We had another great quarter here with orders, but orders were down in the quarter, which was driven by modest reductions at Doble and a larger decline at NRG. The renewables business saw exceptional order growth through June 30th of last year as strong industry dynamics and government incentive programs spurred customer orders.

Christopher L. Tucker: On chart five we have the utility solutions group.

Christopher L. Tucker: We had another great quarter here with orders orders were down in the quarter, which was driven by modest reductions at doble and a larger decline at NRG.

Christopher L. Tucker: The renewables business saw exceptional order growth through June 30 of last year.

Christopher L. Tucker: Strong industry dynamics and government incentive program spurred customer orders.

Christopher L. Tucker: Since then the order pace has moderated and the business has burned down backlog.

Christopher L. Tucker: Since then, the order pace has moderated, and the business has burned down backwards. We are starting to see increasing order pipeline activity in the renewables business, and we expect to see order growth return as we move beyond the third quarter. Sales for USG were up 10% in the second quarter, with double-digit increases for Doble and NRG.

Christopher L. Tucker: We are starting to see increasing order pipeline activity in the renewables business and we expect to see order growth return as we move beyond the third quarter.

Christopher L. Tucker: Sales for <unk> were up 10% in the second quarter with double digit increases for Doble and NRG.

Christopher L. Tucker: For Doble, we saw strong growth on the services side of the business, and for NRG, we continue to see nice growth from solar. Adjusted EBIT margins were up 230 basis points as the business experienced favorable mix, nice leverage on sales growth, and price increases which more than offset inflationary impact. Next is chart 6, where we have the test business. Orders here decreased 21% compared to last year's second quarter.

Christopher L. Tucker: <unk>, we saw strong growth on the services side of the business and for NRG, We continue to see nice growth from solar.

Christopher L. Tucker: Next chart, six where we have the test business.

Christopher L. Tucker: Orders here decreased 21% compared to last year's second quarter.

Christopher L. Tucker: This was driven by lower orders from the U S wireless market and delays on a few large projects, which are expected to be booked in the third quarter.

Christopher L. Tucker: Despite the orders drop in the second quarter, you can see the backlog is still grown since the beginning of the year.

Christopher L. Tucker: On the sales line, the business was down 8%, with organic sales dropping by 12%, and the MPE acquisition adding four points of growth. The largest declines came in the U.S., where we saw reductions in wireless filters and acoustic product lines. Adjusted EBIT margins declined to 12.2% in the quarter. Its cost reduction efforts were not able to offset D leverage on the sales drop.

Christopher L. Tucker: On the sales line the business was down 8% with organic sales dropping by 12% and the MGE acquisition, adding four points of growth.

Christopher L. Tucker: The largest declines came in the U S, where we saw reductions in wireless filters and acoustic product lines adjusted.

Christopher L. Tucker: Adjusted EBIT margins declined to 12, 2% in the quarter as cost reduction efforts were not able to offset deleverage on the sales drop.

Christopher L. Tucker: We have executed a plan to take cost out of this business and this helped drive a nice sequential increase in profitability. During the second quarter. We expect this sequential improvement to continue as we move through fiscal 2024.

Christopher L. Tucker: On chart seven we have the cash flow highlights.

Christopher L. Tucker: We continue to show favorability to last year with $19 million of operating cash flow. So far this year compared to a cash use of $5 5 million last year.

Christopher L. Tucker: <unk> and accounts receivable was the main driver of the year to year improvement in operating cash flow.

Christopher L. Tucker: You can also see that we had acquisition spending in both years with NPA. This year just over $56 million, while last year, we had the CMT acquisition for approximately $18 million.

Christopher L. Tucker: We have completed 7 million of stock stock buybacks through March 31 of 2024, which compares to $12 million that was done through the first six months of last year.

Christopher L. Tucker: The last chart today's number eight which is our 2024 guidance the.

Christopher L. Tucker: The outlook for the full year remains unchanged and we remain on track to deliver adjusted earnings per share in the range of $4 15 to $4 30, which represents a growth range of 12% to 16%.

Christopher L. Tucker: This remains predicated on sales growth in the range of 7% to 9%.

Christopher L. Tucker: 2024, shaping up to be another record year as we push to deliver revenue of more than $1 billion for the first time in <unk> history, and we push for a third year in a row of double digit growth in adjusted earnings per share.

Bryan: That concludes the financial update and now ill turn it back over to Brian.

Bryan H. Sayler: Thanks, Chris. Obviously, we delivered a very good Q2. The teams here at corporate and across our business segments did a great job of delivering exceptional top line and bottom line growth. There are always challenges when executing programs inside a business, and I continue to be impressed by the commitment and dedication shown by our employees around the world.

Bryan: Thanks, Chris.

Bryan H. Sayler: Obviously, we delivered a very good Q2.

Bryan H. Sayler: The teams here at corporate and across our business segments did a great job in delivering exceptional topline and bottomline growth.

Bryan H. Sayler: And with that.

Bryan H. Sayler: We serve and remain on track to deliver our 2024 commitments for our third record year in a row that concludes the opening remarks, and we can open up the question and answer session.

Speaker Change: Thank you.

Bryan H. Sayler: We will now conduct a question and answer session.

Bryan H. Sayler: As a reminder to ask a question. Please press star one on your telephone.

Bryan H. Sayler: Your name to be announced.

Speaker Change: Joe Your question. Please press star one again.

Operator: Please stand by as we compile the Q&A roster. Our first question comes from Tommy Moll of Sibbins Inc. Please go ahead. Good afternoon, and thanks for taking my question. I die.

Speaker Change: Please standby you see compile the Q&A roster.

Operator: Our first question comes from Tommy Moll.

Thomas Allen Moll: <unk> Inc. Please go ahead.

Thomas Allen Moll: Good afternoon, and thanks for taking my questions.

Operator: Right.

Thomas Allen Moll: I wanted to start on Doble I think orders were down slightly on a year over year basis revenues, if I'm doing my math correctly were flattish on a quarter over quarter basis.

Operator: And so the question would be if you could just give us an update on demand currently for that business. Thank you.

Speaker Change: Sure listen we still feel good about the overall demand at doble.

Bryan H. Sayler: Listen, we still feel good about overall demand at Doeble, and we did have very good costs for orders in the prior year, but as you can see, we're moving the revenue up. We see good demand for our condition monitoring products and for services. We do have a pretty robust order pipeline, and we've already begun to see some progress here in the third quarter. And Tommy, this is Chris. I would also say that sequentially, Doble sales were up from first quarter to second quarter; NRG was down slightly sequentially, but Doble was up inside of there.

Chris: We did have.

Bryan H. Sayler: Very good comps for orders in the prior year, but as you can see we're moving the revenue up.

Bryan H. Sayler: Seeing good demand for our condition monitoring products and for services.

Chris: We do have a pretty robust order pipeline and.

Chris: <unk> already begun to see some progress here in the third quarter.

Bryan H. Sayler: And Tom This is Chris I would also say we sequentially. The doble sales were up from first quarter to second quarter.

Chris: NRG was down slightly sequentially, but doble was up inside of there.

Bryan H. Sayler: Thank you for clarifying that, Chris. And I just can't resist asking here, Bryan, you threw out a bogeyman, high single digits, after your strategy review on the A&D side. Is there anything you want to use to frame the utility outlook after your review?

Speaker Change: Thank you for clarifying there, Chris and I, just can't resist asking here, Brian you threw out a bogie high single digits. After your strategy review on the A&D side.

Tommy: Is there anything you want to use to frame the utility outlook. After your review.

Bryan: Yes, I would say, we're mid upper single digits over the planning horizon there.

Bryan H. Sayler: Yeah, I would say we're, we're, mid-upper single digits over the planning horizon there. You know, we listen. That's a, that's a, those are markets that are growing very well. And I think we've got strategies, plans, and product development in place that's going to allow us to grow faster than those markets. Thank you, Brian. And a quick one on test, Chris. I think I heard you say, "You're looking for sequential improvement as you go through this year. I presume that applies to revenue and EBIT."

Bryan H. Sayler: Yes.

Bryan H. Sayler: Those are markets that are growing very well and I think we've got strategies plans product development in place that's going to allow us to grow faster than those markets.

Speaker Change: Thank you Brian.

Bryan H. Sayler: A quick one on test, Chris I think I heard you say.

Speaker Change: Youre looking for sequential improvement as you go through this year I presume that applies a revenue and EBIT. It looks like revenue is already bottomed and moved a little bit higher but if you could just clarify what you meant there would be helpful. Thank you.

Christopher L. Tucker: It looks like revenues have already bottomed and moved a little bit higher. But if you could just clarify what you meant, it would be helpful. Thank you. Yeah, that's right, Tommy.

Christopher L. Tucker: So we had a sequential sales and EBIT increase from Q1 to Q2. We would expect, you know, Q3 sales to be higher than Q2, and also margins to be higher than Q2. And then we would expect a similar dynamic in Q4.

Chris: Yes, that's right Tommy So we had a sequential sales and EBIT increased from Q1 to Q2.

Christopher L. Tucker: Would expect Q3 sales to be higher than Q2, and also margins to be higher than Q2, and then we would expect a similar dynamic is Q4. So we're kind of still looking for for the for that business to kind of ramp and get better as each quarter progresses.

Christopher L. Tucker: So we're still looking for that business to kind of ramp up and get better as each quarter progresses. Thank you. I'll turn it back.

Speaker Change: Thank you I'll turn it back.

Christopher L. Tucker: Yes.

Speaker Change: Thank you.

Operator: Thank you. Just a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. One moment, please. Our next question comes from John Tanwanteng of CJS Securities. Please go ahead. Hi, this is Justin on behalf of John.

Speaker Change: Just a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced.

Justin: Just a moment. So next question please.

Justin: Our next question comes from John <unk>.

Justin: CJS Securities. Please go ahead.

Operator: Can you quantify how much risk there is at Boeing and whether they've communicated to you any changes in their needs? Sure. Listen, Boeing is clearly having a tough time of it, and we certainly look closely at the impact that Boeing might have both in the near-term and over the longer-term planning horizon during our strategic planning process. Our determination is that this is going to be a short-term problem that will work itself out over several quarters. Boeing's build rates are expected to remain modest for 2024 and begin ramping up in 2025.

Operator: Hi, This is Justin on for John can.

Operator: Can you quantify how much risk there is at Boeing and if they have communicated to you any changes in their needs.

Operator: Sure.

Operator: Boeing is clearly having a tough time of it and we certainly love to closely.

Operator: At the impact that <unk> might have both in the near term and over the longer term planning horizon during our strategic planning process. Our determination is that this is going to be a short term problem that will work itself out over several quarters.

Operator: Boeing build rates are expected to remain modest for 2024 and begin ramping up in 2025. We are we are the signals that were receiving are to continue to produce at the rates that we've been contracted to do so we have seen a little bit of a falloff in new orders.

Bryan H. Sayler: We are – the signals that we're receiving are to continue to produce at the rates that we've been contracted to do so. We have seen a little bit of a fall-off in new orders at one of our three businesses that are serving the commercial aerospace side of Boeing. Nothing to be too concerned about, but definitely a noticeable change. I'd end by saying, listen, a healthy Boeing is good for our industry, and once they can get past this current crisis, you know, we anticipate that that'll serve to raise our overall growth project. Alright, thanks for that. That's really helpful.

Bryan H. Sayler: One of our three.

Bryan H. Sayler: Businesses that are serving the commercial aerospace side of Boeing.

Bryan H. Sayler: Nothing to be too concerned about that but definitely a noticeable change.

Bryan H. Sayler: To meet our projected growth rates.

Bryan H. Sayler: I would end by saying listen a healthy Boeing is good for our industry.

Bryan H. Sayler: Once they can get past. This current crisis, we anticipate that that will serve to raise our overall growth projections.

Bryan H. Sayler: And then one more, if I could, should we read anything into the lower book to bill this quarter across the segments? And do you think there's any demand weakening or pushing out, or is it more the lumpy nature of orders? Well, I would say that in the test business, we've definitely seen lower orders in China and lower orders in wireless. So that would be, I would not put that in the lumpy category.

Speaker Change: Alright for that that's really helpful. And then one more if I could.

Bryan H. Sayler: Should we read anything into the lower book to Bill this quarter across our segments and if you think theres any demand weakening are pushing out or is it more of the lumpy nature of orders.

Bryan H. Sayler: Well I would say that the debt on the test business, we've definitely seen lower orders in China and lower orders in wireless so that would be I would not put that in the lumpy category, okay, but I would say that.

Bryan H. Sayler: Our renewables, maybe the doble business at.

Bryan H. Sayler: And certainly a lot of what's going on over in aerospace and defense those are all pretty lumpy.

Bryan H. Sayler: We have as I said, we've got a strong pipeline in all of those categories and some of them are tracking some pretty large orders that would.

Bryan H. Sayler: That would really.

Bryan H. Sayler: Make a big difference in terms of our book to bills, yes.

Bryan H. Sayler: Yeah, and I would just add on.

Bryan H. Sayler: Especially aerospace and defense I mean, it was still over 100% and Thats. After two quarters that were way over 100% as we had some pretty big Navy orders over the last.

Bryan H. Sayler: Prior six months, so we're really still pretty strong there.

Speaker Change: That's great I appreciate the color thanks for taking my questions.

Speaker Change: Thank you.

Operator: Thanks for taking my question. Thank you. Our next question comes from John Franzberg from Sudirte and Co. Please go ahead. Good afternoon, guys, and congratulations on another nice quarter. If I heard you properly in your prepared remarks, it sounded like you were getting pricing in utility and test.

Bryan H. Sayler: Our next question comes from John <unk> from Sidoti.

John Edward Franzreb: Please go ahead.

Christopher L. Tucker: Can you talk a little bit about what kind of pricing you're pushing for? Yeah, I mean, generally, what we're getting in those places is still kind of in the three to four percent range. And we see that, you know, kind of ahead of inflation. You know, numbers, so we kind of try to track what we're seeing on the commodity material side and as well as people inflation as well, and and and and we're kind of you know We're still favorable on those measures as far as more price than cost. Got it. And coming back to the test segment, you mentioned that there were delays on a few large projects. I'm wondering if there is any common theme in those delays that you're seeing in your customers.

John Edward Franzreb: Good afternoon, guys and congratulations on the nice quarter.

Christopher L. Tucker: Greg if I heard you properly prepared remarks, it sounded like you were getting pricing.

Christopher L. Tucker: And utility and test can you talk a little bit about what kind of pricing you're pushing for.

Christopher L. Tucker: So I think that yes, I mean, I think generally what we're what we're getting in those places is still kind of in the 3% to 4% range and we see that kind of ahead of inflationary.

Christopher L. Tucker: So we kind of.

Christopher L. Tucker: Try to track, what we're seeing on the commodity materials side and as well in people inflation as well and we're kind of.

Christopher L. Tucker: We are still favorable on those measures as far as more pricing and cost.

Speaker Change: Got it.

Christopher L. Tucker: Coming back to the test segment, you mentioned that there's been delays on a few large projects.

Christopher L. Tucker: I'm wondering is there any common theme and those delays that you're seeing in your customers.

Christopher L. Tucker: Well I think that there is better.

Bryan H. Sayler: Well, I think that there's been, as I said before, a general slowdown in the construction industry in terms of permits, being able to get some key raw materials, and I think labor availability has been a big issue. So the buildings that we're waiting on are really large, big projects, and so we are seeing some improvement there, but nothing like a return to normal. At this point, though, we believe that we have the access that we need to deliver significant sequential growth in the second half of the year.

Bryan H. Sayler: As I've said before there is a general slowdown.

Bryan H. Sayler: <unk>.

Bryan H. Sayler: Construction industry in terms of permitting.

Bryan H. Sayler: Being able to get some key raw material and I think labor.

Bryan H. Sayler: Availability has been a big issue. So the buildings that we're waiting on a really large big projects and so.

Bryan H. Sayler: We are seeing some improvement there.

Bryan H. Sayler: But nothing like a return to normal at this point, though we believe that we have the access that we need to deliver a significant sequential growth in the second half of the year.

Bryan H. Sayler: You know, the projects that are moved out the next year, we've kind of set those in the next year's plan now, and we anticipate that those will be executed on the revised schedule. I'm also hearing a lot about permitting, but do you expect everything to fall into fiscal 2024 still and not be pushed to the right of that? Yeah, I mean, we've already pushed a fair bit out to next year. That was kind of, you know, some of the reduction in the outlook for tests that we kind of did after the first quarter.

Bryan H. Sayler: <unk> moved out to next year, we've kind of set those into next year's plan now and we anticipate that those will be executed on scale on the revised schedule.

Bryan H. Sayler: I'm also hearing a lot about permitting but you expect everything to fall into fiscal <unk>.

Bryan H. Sayler: 2024, still and not be pushed to a variety of that.

Bryan H. Sayler: Yes, I mean, we've already pushed a fair bit out to next year that was kind of some of the reduction in the outlook for test that we did after the first quarter and yes, we haven't seen we haven't seen that get worse necessarily but we havent. We also haven't seen it get better and I would also just say John that yes.

Bryan H. Sayler: And, yeah, we haven't seen that get worse necessarily, but we also haven't seen it get better. And I would also just say, John, that, you know, as far as some of the delays on orders and such, as Bryan mentioned, I mean, we do see a path to pretty big sequential improvement in orders as we go into Q3 versus Q4. And it looks like, you know, Frankly, some of that might even happen in April, or has already happened in April, I should say. So, you know, we expect that to get better. But, again, a lot of those bigger orders that would be coming in now would likely be more, you know, kind of 25 revenue type things.

Bryan H. Sayler: As far as some of the delays on orders and such as Brian mentioned, I mean, we do see a path to pretty big sequential improvement in orders as we go into Q3 versus Q4 and it looks like frankly, some of that might even happen in April so.

Bryan H. Sayler: So.

Bryan H. Sayler: As happened in April I should say so.

Bryan H. Sayler: We expect that to get better, but again a lot of those bigger orders that would be coming in now and would likely be more kind of 'twenty five revenue type things.

Christopher L. Tucker: Great, thanks for the color. And one last question, if I may. On the M&A front, can you kind of give us an update on targets and size and what kind of product lines you'd like to end? Maybe a little refresher, that would be helpful. Sure. Well, first of all, I would say that in the past, you know, since our last call, we've seen a sharp increase in investment opportunities that kind of meet our target profile, if you will, and we're actively engaged in those processes. We don't have anything to announce.

Speaker Change: Great. Thanks, Thanks for the color and one last question if I may on the M&A front can you kind of give us an update on targets and size and what kind of product lines, you would like to and maybe a little refresh it that'd be helpful.

Speaker Change: Sure well first of all I would say that in the past since our last call we've seen a sharp increase in the.

Christopher L. Tucker: The investment opportunities that meet our target profile, if you will and we're actively engaged in those processes. We don't have anything to announce we're not particularly close but.

Bryan H. Sayler: We're not, you know, particularly close, but we are optimistic about our ability to get things done. You know, when we talk about M&A, I think the first thing I want to remind you is that organic growth and operational execution are our primary focus, so we're not taking our eye off the ball there. Our organic growth profile over the planning horizon is really, really good. Having said that, several of those end markets that we talked about earlier have superior long-term growth characteristics. And those are the ones that we would be, you know, the most focused on. And that would be, you know, commercial and military, aerospace, Navy, and electrification.

Bryan H. Sayler: But we are optimistic about our ability to get things done.

Bryan H. Sayler: When we talk about M&A I think the first thing I want to remind you is that organic growth and operational execution are our primary focus.

Bryan H. Sayler: So we're not taking our eye off the ball there.

Bryan H. Sayler: Our organic growth profile over the planning horizon is really really good.

Bryan H. Sayler: Having said that several of those end markets that we talked about earlier.

Bryan H. Sayler: Have superior long term growth characteristics and those are the ones that we would be most focused on and that would be <unk>.

Bryan H. Sayler: Marshall and military Aerospace Navy and electrification.

Bryan H. Sayler: <unk>.

Bryan H. Sayler: Great.

Operator: Great. Thank you, guys, and I'll get back into Q&A. Thank you, thank you. I see no further questions at this time. I would now like to turn the conference back to Bryan.

Speaker Change: Thank you guys and I'll get back into queue.

Bryan H. Sayler: Thanks. I apologize. I lost my place here. No, I think we're good.

Bryan: Thank you.

Bryan: I see no further questions at this time I would now like to turn the conference back to Brian.

Bryan H. Sayler: Yes.

Bryan H. Sayler: Okay.

Bryan: Okay. Thanks.

Bryan: I apologize I lost my place here now I think we're good.

Bryan H. Sayler: Well, all right. Well, thanks a lot, guys. We really appreciate you answering the questions or taking the quick questions with us. And we look forward to another good quarter.

Bryan: So thanks, a lot guys, we really appreciate.

Bryan: Answering the questions are taken a quick questions with us and we.

Bryan H. Sayler: Look forward to another good quarter.

Bryan: Thank you.

Bryan H. Sayler: Okay.

Operator: Thank you. Thank you. This concludes today's conference call. Thank you all for participating. You may now disconnect. Have a great day, everyone.

Bryan: Thank you. This concludes today's conference call. Thank you.

Operator: <unk> you may now disconnect have a great day everyone.

Q2 2024 ESCO Technologies Inc Earnings Call

Request a DemoDemo

ESE

ESCO Technologies

Earnings