Q4 2024 ESCO Technologies Inc Earnings Call
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Speaker Change: Good day and thank you for standing by. Welcome to the fourth quarter 2024 ESCO Technologies Earnings Call. At this time, all participants are in a listen-only mode.
Speaker Change: 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 11 on your telephone. You will then hear an automated message advising your hand is raised.
Speaker Change: To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded.
Speaker Change: Will be included as exhibit to the company's form 8-K filed 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 the most comparable GAAP.
Speaker Change: Measures can be found in the press release issued today on the company's website at Www Dot ESCO technologies Dot com under the link Investor Relations.
Speaker Change: Thanks, Keith and thanks to everyone for joining today's call.
We are happy to give you an update as we close out another great year at ESCO.
Speaker Change: We're pleased with our fourth quarter and fiscal 2024 results, we hit a significant milestone this year with orders and sales both eclipsing $1 billion. This is a great achievement.
Speaker Change: But we feel like Theres still a lot of momentum in our business and in the markets. We serve so while we feel great about 2024, we feel even better about the future Chris.
Speaker Change: Chris will run you through all of the financial details for the quarter of the year, but before we get to that I want to give you a few comments on each of the segments, starting with aerospace and defense. We continue to have a strong outlook here.
Speaker Change: You saw in our release, we finished the quarter with record backlog of just over $600 million.
Speaker Change: The backlog growth in 2024 was substantial on continuing strength from commercial and military aerospace as well as continued strength of Navy orders at Vacco and globe, notably we did make progress during the year on reducing back past due backlogs that's been a big focus for us.
Speaker Change: Our teams and it's nice to see that start to move in the right direction.
Speaker Change: Probably an anticipation of some questions we might get later I'd like to address the Boeing strike we.
Speaker Change: We did not see any impact in our fourth quarter and now that the strike is resolved we do not anticipate any financial impacts to 2025, there could be some movement between quarters as the business ramps up and things are rescheduled, but whats. The overall backlog strength that we have we anticipate that the outlook for two.
Speaker Change: 25 can remain intact.
Speaker Change: Next is our utility solutions group, where we had another good quarter and also another year of nice topline growth and margin improvement.
The sales growth here, it ticked up a bit when compared to the third quarter and we were happy to see the margin expansion that the team delivered taking a second to parse out the different markets here, we see ongoing market strength on the regulated utility side of our business. The customer base here continues to increase capital spending forecasts.
Speaker Change: In order to meet demand for increased electricity electricity.
Speaker Change: They also have to be sharply focused on running their current assets as efficiently as possible. These are both good trends for our global business on the renewable side. The team delivered really nice orders and sales growth in the fourth quarter.
Speaker Change: We are still positive on our outlook here as we feel renewables will continue to have a role to play as overall demand for electric power increases.
Speaker Change: Finally, I'll touch on our test business, we're really happy with how the year.
Turned out we saw a nice sequential improvement from the business as we move through the year certainly the growth here is less than our other two businesses, but the team responded quickly when the business softened up at the beginning of the year.
Speaker Change: We saw profitability recover and we also saw sales increased sequentially as each quarter progressed. The good news is that we've seen strong activity from our medical and industrial shielding customer segments of the business and when the key wireless markets begin to recover the team will be ready to capitalize on that activity.
Speaker Change: With that I'll turn it over to Chris to run you through the financial details for the quarter.
Thanks, Brian.
Chris: You can follow along on the chart presentation, we will start on page three where we have the overall financial highlights of the fourth quarter.
Chris: Starting with orders, where you can see we had a decline of 15% in the fourth quarter. We will go through the segment details in a moment, but the decline was driven by the aerospace and defense group, which had a tough comp with high Navy orders in last year's fourth quarter and it should be noted that we ended the year with record backlog of $879 million.
Chris: <unk>.
Chris: Sales in the quarter were up nine 5%, which was comprised of eight 5% organic growth and one point of growth from the MGE acquisition.
Chris: Adjusted EBIT margins were up 130 basis points to 17, 4% with margin increases from all three segments.
Chris: Adjusted EPS was $1 46 per share an increase of 17%.
Chris: Guidance was for $1 38 to $1 48 per share, which excluded potential profit erosion from the vacco space business, a 15% to 21 per share.
Chris: The actual erosion was at the high end of the range or unfavorable 21 per share.
Chris: So it was great to close the quarter at $1 46 per share on an adjusted basis inclusive of the issues in our space business.
Chris: Next chart, four which covers the aerospace and defense business.
As mentioned previously we had tough comparisons to last year's fourth quarter orders. So we show a sizable drop.
But you can see at the bottom right of the chart for the year. We ended with backlog of just over $600 million an increase of 24%. So certainly we still have good momentum inside of the business.
Chris: Sales in the quarter were up 16% tremendous growth for Navy commercial and defense Aerospace adjusted EBIT was also quite good improving 160 basis points to 19, 4% of sales.
Chris: Really good performance across the group that was able to more than offset the project profitability issues mentioned previously and the vacco space business.
Moving on to chart five we have the utility solutions group.
Chris: A really solid quarter here with orders up 2% sales up 6% and adjusted EBIT up 70 basis points to 26, 4% of sales.
Total sales growth was 6% as we saw continued growth in service offerings and condition monitoring products.
Chris: Additionally, the renewables business had a strong quarter with sales growth of 9%.
Chris: The sales growth overall helped drive the margin improvement. So it was a good close to another strong year for the utility solutions group.
Chris: Next chart six and the test business.
Chris: Overall, it was a really nice quarter for test orders were down eight 5%, but.
Chris: But backlog ended at $159 million, which is a slight increase compared to September of 2023.
Chris: Importantly, we saw sales growth and adjusted EBIT improvement in the quarter.
Sales were up 4% with organic sales down slightly and the MGE acquisition, adding approximately five points of growth.
Chris: Margins increased by 80 basis points to 18, 3% a really nice result, as the team's quick action earlier this year on cost reductions to help mitigate the impact of lower volumes.
We have been watching for sequential improvements in this business throughout 2024 in the fourth quarter continued that trend nicely.
Chris: Moving on to chart, seven which summarizes the full year financial highlights.
Chris: It was another record year for ESCO and this chart illustrates that very nicely all the bar charts across the top of the page here show really nice trends with orders up 10% sales up over 7% adjusted EBIT up 14% and adjusted earnings per share up 13%.
Chris: The order growth was led by the Navy and the aircraft component businesses and ending backlog was up over $100 million or 14% compared to prior year end.
Chris: For sales growth was led by aerospace and defense with a 14% increase.
Chris: The utility solutions group was also quite strong with an increase of 8%.
Chris: Coming after two strong years in 'twenty, two and 'twenty three for that group.
Chris: Notably sales exceeded 1 billion for the first time in <unk> history.
An important milestone that we are excited to build on.
Chris: Profitability metrics were strong with good margin improvements from A&D and utility, which were somewhat offset by drop for the test business.
Chris: Next chart eight with cash flow highlights.
Chris: We finished the year very well and operating cash flow in the full year came in at over $127 million. This was a substantial increase from last year as earnings growth and working capital performance drove the increase.
Chris: Capital spending finished the year at just over $36 million with the increase primarily from the A&D businesses, who are investing to support their strong growth outlooks.
Chris: <unk> spend increase this year with the MGE transaction being a bit larger than the CMT deal that was closed in 2023.
Chris: And share repurchases moderated somewhat compared to 2023 were $8 million in 2024.
Chris: The final chart will be our guidance chart for 2025, you can see from the chart at the bottom that we've had a nice trend in sales and earnings over the last couple of years and we expect that to continue this year with sales growth in a range of 6% to 8% and adjusted earnings per share growth in the range of 12% to 17%.
Chris: By segment, you can see we expect high single digit sales growth for the A&D and USG segments next year.
Chris: <unk> test the growth is a bit more subdued at 3% to 5% as we expect growth for medical and industrial customers to be somewhat offset by continued softness in the wireless market.
Chris: We are driving for double digit growth in both EBIT and EBITDA for 2025 and that gets us to the full year adjusted EPS range of $4 70 to $4 90 per share.
Chris: Also for the first quarter, we expect adjusted earnings per share in the range of 68 to 75.
Chris: Lastly, I want to be clear that this guidance is based on how the company is currently configured that means no impact from the <unk> acquisition and no impact from the strategic review of the space business at Vacco.
Chris: We are hopeful that the SMP acquisition can close in our fiscal second quarter, but since the timing is uncertain, we will wait and provide an update and updated outlook after closing.
Speaker Change: That concludes the financial portion of the call and now I'll turn it back over to Brian.
Brian: Thanks, Chris So as you can see we had another good quarter and are looking at another year of double digit earnings growth with record backlogs. We continue to feel great about the long term prospects for ESCO.
Brian: Before I move into Q&A I wanted to give a quick update on the signature management and power acquisition that we announced back in July Chris.
Brian: Chris touched on this a minute ago, but I want to let everybody know that we have completed the required regulatory filings in both the United States and the United Kingdom and as was mentioned in the press release conditions for closing in the U S have been met we're still waiting on securing the UK approvals and are optimistic that this process will be.
Brian: <unk> in the near term.
Brian: Timing is always hard to predict on these things, but we're hopeful they're getting a deal done in our second fiscal quarter and will keep you all updated as we get news on that front as I said last quarter on this call signature management power is a very exciting deal for ESCO as we bring on a talented group of employees that expand our capabilities.
Brian: <unk> to serve the growing Navy Navy market in the U S and in the UK that concludes the opening remarks, and we can open up the lines for question and answer period.
Speaker Change: Thank you as a reminder to ask a question you will need to press star one on your telephone to remove yourself from the queue. You May press Star one again, please standby, while we compile the Q&A roster.
Speaker Change: Our first question.
Speaker Change: Comes from the line of Tommy Moll of Stephens, Inc.
Speaker Change: Your question please Tommy.
Good afternoon, and thank you for taking my question.
Speaker Change: Hey, Tommy.
Speaker Change: Brian I wanted to start on the A&D outlook, you provided for the 7% to 9% growth in the coming fiscal year.
Brian: You mentioned on Boeing that there shouldnt be any big impact for the full year, but I also suspect that you may have some conservatism embedded in there.
Brian: Given the state of play so if theres anything you can do to unpack here commercial Aero assumption.
Speaker Change: That would be helpful. Thank you.
Speaker Change: Well, yes, so I would say that we've always been prudent to forecast at a bill rate, that's a little bit less than the published build rates that.
Speaker Change: That Boeing puts out.
Speaker Change: And frankly thats because historically.
Speaker Change: They have been underperforming that a little bit.
Speaker Change: I think there is impact.
Speaker Change: There could be some impact on the Boeing specific contracts this year, but we feel confident that we'll be able to offset that with with work from other customers two of our businesses did work down their past due backlog. So we're running a little bit closer to the to their requirements at this point.
Listen we're rooting for the guys at Boeing we think theyre going to get this.
Speaker Change: Squared away with the.
Speaker Change: Strike behind US I think that the path is clear to see good growth this year.
Speaker Change: And we would expect to see significant growth in the years to follow.
Speaker Change: Thanks, Brian and Chris I wanted to.
Back to your comments about what the fiscal 'twenty five guidance ex.
Speaker Change: Excluded.
Speaker Change: Helpful context, specifically on the SMP.
Speaker Change: It's excluded for now, but presuming you close in fiscal second quarter at some point, you will need to adjust and I just want to make sure. We're prepared with whatever information you can provide originally.
When the deal was announced you indicated it would be accretive in the first year, excluding the one timers and excluding the.
Speaker Change: M&A amortization.
Speaker Change: So I guess, it's a two part question there.
Speaker Change: Do you anticipate that when you do update guidance he'll do it accordingly, excluding both of those items.
Speaker Change: One and then point to Chris.
Speaker Change: You will have only a partial year impact from the asset once you pull to them.
Speaker Change: And so if there is anything noteworthy in terms of the seasonality there that we should be prepared for it might be worth mentioning as well. Thank you.
Tommy: Yes, I would say Tommy will definitely when we give you the updated guide inclusive of the acquisition will break down the components there so you'll understand.
Tommy: Kind of the acquisition amortization and other sizable impacts on the outlook.
Tommy: As far as seasonality.
Tommy: No. We don't there's nothing there I would highlight right now and again, if there if we need to kind of flag that for you whenever we do give guidance that there's going to be a ramp through what's left of the year or any other unusual dynamics.
Tommy: We'll certainly let you guys know about that as we as we issued the guide, but we don't have anything to flag there today.
Speaker Change: I resisted asking.
Speaker Change: If you'd like to adjust any of your underwriting assumptions post election, but we'll just sit tight and see how it goes.
Speaker Change: Yes.
Speaker Change: I'll step back thanks.
Speaker Change: Asked and answered.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Thank you.
Next question comes from the line of John France ramp.
Speaker Change: Sidoti <unk> company. Your question please John.
John France: Good afternoon, everyone and thanks for taking the questions.
John France: John I could pivot over to the test business.
Speaker Change: Assumptions of 3% to 5% growth is there any expectations there.
Speaker Change: Better results in China.
Speaker Change: Got it and that outlook.
Speaker Change: Yes.
Speaker Change: We have not yet embedded significant improvement in China, I think we're yes.
Speaker Change: Things are still I would say relatively uncertain over there. So no we have not baked in a big a big turnaround or anything like that there. We think it's going to be steady as it goes.
Speaker Change: Longer term I think there is an opportunity for some improvement there, but we haven't baked that in the forecast at this time.
And.
Speaker Change: With an administration change question out there.
Utility and and.
Speaker Change: NRG whats the thought process of maybe a less friendly.
Speaker Change: Administration towards renewable energies, how do you kind of think about that on a go forward basis.
Sure sure well listen we start by thinking about the underlying market demand.
Speaker Change: Which is steadily increasing.
Speaker Change: And so regardless of policy the market is requiring more electrification more build out of generation and more build out of transmission. So alright.
Speaker Change: We think of that.
Speaker Change: That's really reflected on the regulated utility side of our business, what we're seeing as we watch what our customers are doing from a capital investment perspective, they are steadily increasing.
Speaker Change: Those investments.
Speaker Change: And as we as we watch that I think youre seeing a more balanced approach from them with a good mix of new gas assets, new solar assets and in some cases, some wind assets.
Speaker Change: <unk>.
Speaker Change: The renewable side I think there is a little bit of a threat that the incentives that are in place with the IRS.
Speaker Change: Could be diminished, but we do think that renewables will have a role to play in the meantime.
Speaker Change: Most imperative thing for our customer base is really to get the most out of the assets that they already have.
Speaker Change: And that really plays very very well to our utility solutions group story.
Speaker Change: And we anticipate continued growth in all of those markets, regardless of what the policy changes might be.
Speaker Change: I tend to agree and just a question on the on.
Speaker Change: On the adjustments.
Speaker Change: What line items that are coming out of the debt refinancing and restructuring and ao coming out of SG.
Speaker Change: SG&A or is there a mix there in SG&A and cost of goods. So.
Yes, there is a mix and actually the debt financing.
Speaker Change: Hit the interest expense line, so we had to pay.
Speaker Change: For our.
Speaker Change: Revolver backstop and for kind of a bridge loan to kind of show our committed financing when we announced the acquisition. So those those items were worth about $3 million and hit the interest line.
Speaker Change: And then on the restructuring side Thats going to hit <unk>. So that comes in at the EBIT line. So those were the two main places where you saw the adjustments come in this quarter.
Speaker Change: Great. Thanks for that I appreciate it I'll get back in scale.
John France: Alright, Thanks John.
John France: Thank you.
Speaker Change: Our next question comes from the line of Jon Commenting C. J S.
Western please John.
Speaker Change: Hi, good afternoon. Thank you for taking the questions and really nice performance with even with the space headwind that you had.
If I could ask us to dig a little bit more into that do you think you've completely run through all the issues. There in the Q1 should be a clean quarter.
Speaker Change: Or is there more to work through number one and number two what are the prospects for the business.
Speaker Change: Where are you in the strategic review.
Sure sure.
Speaker Change: Well listen we've been making really steady progress on these.
Speaker Change: Trouble development fixed price development contracts, we've been working through.
Speaker Change: A few of those are behind US now we still got a couple that were.
Speaker Change: That we're working on but the good news is is that we're actually delivering product now and so we have a solid basis for really being able to estimate the cost on a go forward basis and so we've adjusted all of the EIC is accordingly, so we're no longer anticipating what what's it going to take to develop the thing went out.
Now working on what's the cost to produce product and it's a little bit higher than we had originally estimated and thats why the EAC had to be adjusted so I would never tell you that there is zero risk, but we do believe that the risk is that largely mitigated.
Speaker Change: As to your second question, we did take a really deep look at the business throughout the most recent quarter with a view towards what would it take to split the business up into two and frankly, we came to the conclusion that we can't do that economically or efficiently.
Speaker Change: And so now really the question is.
Speaker Change: What are our options going forward and we're considering whether we would sell the entire vacco business.
Speaker Change: We don't have an answer to that question today, but we believe that.
By the time, we get back together with you in February we should have an answer to that question would be able to communicate what our plans will be going forward.
Speaker Change: Okay great helpful. Thank you.
Speaker Change: Okay, and maybe just to add onto that administration question is there is there a little bit more risk tobacco space with the administration change and kind of how it might supported NASA or private contractors that are out there.
Speaker Change: I would say in the very long term.
Speaker Change: There could be some risk I mean, we.
Our backlog is really solid for.
Speaker Change: Really for a few years to come.
But I'm a very long term I think there could be some some risk to the SLS program.
Speaker Change: Okay, great. Thank you.
Speaker Change: Thank you once again to ask a question. Please press star one one on your telephone.
Speaker Change: Our next question comes from the line of Josh Sullivan of the Benchmark Company. Please go ahead Josh.
Josh Sullivan: Hey, good evening.
Speaker Change: Hi, Josh.
Speaker Change: Just as far as the A&D outlook for 'twenty five what are you assuming on the aftermarket growth side.
Speaker Change: The conversation around momentum transitioning from aftermarket OEM.
Speaker Change: I'm just curious about what you are baking into 25 there.
Speaker Change: Sure sure.
So as you know the Navy part of our business doesn't have a substantial aftermarket. So we're really talking primarily about commercial and military aerospace.
Speaker Change: The.
Part of our business that has the biggest exposure here would be our PPI business, where we make the other aftermarket filters that go on things like Blackhawk helicopters and things like that and then our mayday business, where we build.
Speaker Change: Bushings that are used in the rebuilds and maintenance of landing gear systems and that sort of thing.
Speaker Change: We are putting on are pretty.
Speaker Change: Significant effort to grow those pieces of business and we do anticipate that we'll have some success as an example, just an anecdote.
Speaker Change: 787 aircraft are kind of getting to that age where they need to have a full rebuild of their landing gear systems and we're targeting that that's a pretty significant ship set content for us each time one of those happens we've already won a few of those and we think that that's going to be a big driver for the for the <unk> business.
Speaker Change: Got it.
Speaker Change: And then maybe jumping over the naval side of the outlook.
Speaker Change: There seems to be an issue with some of the largest shipbuilders just getting the labor they need.
Speaker Change: Negotiating with the Pentagon for higher wages.
Check the talent that they need.
Speaker Change: From a supplier perspective.
Speaker Change: It seems like the suppliers that have longer lead times are weathering the issues little bit easier than others. Just curious maybe if youre seeing any impact of that right now or whether you kind of fall into that group with some longer lead times.
Speaker Change: Not as big of an issue.
Speaker Change: Yes, we're not seeing any any.
Speaker Change: The impact at this point, what we're being told is to go as fast as we can.
We are not yet.
Speaker Change: We have not been building at the rate that they are targeting so so you should anticipate some acceleration in our.
Speaker Change: And our bill rates that'll be reflected in revenues going forward.
Speaker Change: We are seeing some backfill opportunities and things like that that could be meaningful on the on the Navy side, Theres always navy spares and that sort of thing.
Speaker Change: But listen we don't believe that Theres any reason that you will see a slowdown in our business as a result of some of the things you might be hearing from the primes right now.
Speaker Change: Yes.
Speaker Change: And then just one last one just on the S&P acquisition I mean, what is the big large temple.
Speaker Change: Get over it.
Speaker Change: The deal at this point anything we should be watching out for now so you may be aware that in the United Kingdom.
Speaker Change: Back in 'twenty, one or 'twenty, two they implemented a new law.
Speaker Change: The <unk>.
Speaker Change: National Security Infrastructure Act and that requires them to do a comprehensive and detailed strategic review.
Speaker Change: Any acquisition that has national security implications and obviously as a submarine.
Speaker Change: Builder.
This certainly is an implied there so they they normally will take.
Speaker Change: At least 30 business days.
Speaker Change: After receiving our inputs, we've had a back and forth with them, we're kind of in a period now where I think that they are reviewing.
Speaker Change: Our responses to them and we would anticipate hearing from them in the next probably 30 days.
Speaker Change: They do have a unilateral right to extend that.
Speaker Change: That review periods. Additionally, and so nothing out of the ordinary here.
Speaker Change: We don't anticipate there being a problem, but it's kind of moving forward.
Speaker Change: Well it feels to us like kind of normal bureaucratic pace.
Speaker Change: Great. Thank you for the time.
Speaker Change: Thank you I would now like to turn the conference back to Brian Sailor for closing remarks, Sir.
Well listen everyone. Thanks for the update we're really excited about the prospects for our business I want to extend.
Speaker Change: Our thanks to our entire worldwide team of employees, who have worked really hard to make these results and are going to continue to work hard to build our business into the future.
Speaker Change: Thanks, a lot for the time today.
Speaker Change: Yes.
Speaker Change: This concludes today's conference call. Thank you for participating you may now disconnect.
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