Q1 2025 ESCO Technologies Inc Earnings Call

February 6, 2025

Good day, and thank you for standing by.

Welcome to the first quarter 2025.

ESCO technologies earnings Conference call.

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

After the speaker's presentation, there will be a question and answer session.

To ask a question during the session you will need to press star one on your telephone.

You will then hear an automated message advising your hand is race.

Draw. Your question. Please press star one again.

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

On the call today, we have Brian Sailor press.

President and CEO.

Chris Tucker: Chris Tucker Senior Vice President and CFO.

Speaker Change: And now I would like to hand, the conference over to our first speaker today Kate.

Kate Lowrey, Vice President of Investor Relations, Kate you now have the floor.

Speaker Change: 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.

Speaker Change: And business environment, including but not limited to the risk factors referenced in the company's press release issued today, which will be filed as an exhibit to the form 8-K to be filed we undertake no duty to update or revise any forward looking statements, except as maybe required by applicable laws or regulations in.

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

Brian: Thanks, Kate and thanks to everyone for joining today's call are year got off to a great start in Q1 with continued momentum across our served markets and strong execution by our teams driving positive results across our businesses before getting into <unk>.

Details about the business I do want to take a moment.

Brian: And say, thank you to our employees for their ongoing efforts. Our company consists of over 3000 team members and our success is not possible without their dedication and commitment to our customers around the world I. Appreciate everyones efforts, which are clearly paying off I also want to mention our southern and <unk>.

Brian: <unk> based employees, who have experienced some unsettled moments over the past months with the major wildfires in the area.

Brian: None of our people suffered injury or catastrophic losses, we did have some folks experience evacuation orders in general disruption, we remain focused on supporting our employees as needed and we appreciate their ability to work through these challenging conditions.

Brian: Chris will run you through all of the financial details for the quarter, but before we get to that I want to give you a few comments on each of our segments.

Brian: Starting with aerospace and defense.

Brian: We remain very positive regarding the long term outlook for these markets production rates across both our Navy and aerospace end markets continue to ramp up to meet customer demand overall, A&D delivered 20% revenue growth and margin improvement in the quarter Nate.

Brian: Sales were particularly strong as they were up $13 million or 56% over the prior year funding.

Brian: Fundamentally our customers in the commercial aerospace and Navy markets continue to ramp up production and we are focused on supporting those efforts underlying demand in both of these areas is very strong and we think the outlook remains quite positive for 2025 and beyond before jumping into the next business I do.

Brian: Want to quickly address the status of the SMP acquisition and the previously announced strategic review of our space business at Vacco.

Brian: We estimate <unk> as previously discussed the closing of the transaction is subject to regulatory approval in the U S and the United Kingdom. The U S closing conditions have been met and we are now in the final stages of the UK government assessment, we've had good dialogue with the UK regulators and were helpful.

Brian: This process will be concluded in the near term our current expectation would be to close the transaction in the remaining months of fiscal Q2 or in early Q3.

Brian: Regarding the strategic review it back out first of all business performance has improved as we've effectively dealt with the challenges from fixed price development contracts order input is very good and outlook for the business is improving the company operates two distinct but related.

Brian: Product lines today space and defense as this review has evolved we have determined that splitting these two product lines into two separate businesses is not feasible. As a result, we are now in the process of evaluating whether to retain or sell the entire vacco business. This process is moving.

Brian: Along well and we anticipate being able to provide a more definitive path forward by our next earnings announcement in May.

Brian: Switching business is now let's talk about the utility group, which had an outstanding quarter.

Brian: Our core utility business had double delivered double digit orders and revenue growth and significant margin expansion as they continue to see end market strength related to utilities needing to maintain and extend the life of their existing assets Nrg's revenue was lower.

Brian: Q1, as we saw some moderation on renewable projects coming off of record revenue in 2024, the market conditions across the utility landscape are somewhat dynamic right now, but we feel strongly that <unk> is well positioned for the long term we are seeing strong.

Brian: Long investments from the utilities, while the renewables markets have drifted a bit given the uncertain status of tax incentives put in place by the prior administration, we would expect any softness on renewables to be more than offset by our regulated utilities business on the doble side the <unk>.

Brian: Dynamics driving overall power demand remain in place and that as that demand is satisfied we expect it to result in a positive growth story for <unk> utility solutions group.

Brian: Finally, I'll touch on the test business, which had a really strong start to the year with orders up over 40% and double digit organic sales growth as we have discussed in recent quarters test has been working through some business cycle challenges related to the next phase in wireless development.

Brian: And a complex environment in China. The team has taken the right steps here to protect the business for the long term and we are seeing some good growth beyond that wireless market. So I would say that the business here has stabilized and we feel good about our trajectory as we move further into 2025.

In summary, 2025 is off to a great start for ESCO with really good performance in all three business segments, which has enabled us to outperform in the quarter and raise our guidance for the full year with that I'll turn it over to Chris to run you through the financial details of the quarter.

Chris Tucker: Thank you Brian.

Chris Tucker: Everyone can follow along on the chart presentation, we will start on page three where we will discuss the change to adjusted earnings per share reporting.

Chris Tucker: As stated in the earnings release, our adjusted earnings per share will now reflect an add back of all acquisition related amortization.

Chris Tucker: The table at the bottom of the page shows the impact which was <unk> 14 in the prior year first quarter and 15 in this year's first quarter.

Chris Tucker: <unk> after the right shows that on the new basis, we achieved $1 seven of adjusted EPS in the quarter, which was nearly 41% above last year's first quarter.

Chris Tucker: $1 seven per share when compared to our range provided back in November of 83 to <unk> 90 per share.

Chris Tucker: So we were able to come in nicely ahead of plan during the quarter.

Chris Tucker: Moving on to chart four we have the overall financial highlights of the first quarter.

Chris Tucker: Orders were down in the quarter as we experienced some large navy orders during the prior year first quarter, but overall, our book to Bill was 111% and we finished the quarter with backlog of $907 million a record amount.

Chris Tucker: Sales in the quarter were up 13%, which was all organic.

Chris Tucker: Additionally, adjusted EBIT margins increased by 250 basis points to 15, 3%.

Chris Tucker: Importantly, during the first quarter, we saw all three reporting segments deliver sales growth and adjusted EBIT margin improvement.

Chris Tucker: Lastly, and as noted on the prior chart adjusted earnings per share increased by 41% during the first quarter.

Chris Tucker: Next we will go through the segment highlights starting with the aerospace and defense.

Chris Tucker: Orders were down in the quarter. This is where we had the large navy orders a year ago, which created a tough comparison.

Chris Tucker: However book to Bill is still above 100% and the business continues to enjoy record backlog levels of over $600 million.

The sales performance in the quarter was terrific with nearly 21% growth the growth was led by commercial aerospace and Navy.

Chris Tucker: Margins were good with adjusted EBIT margins up 130 basis points and adjusted EBIT dollars up nearly 30% as we saw good leverage on the growth offset by some unfavorable mix.

Next on chart six is the utility solutions group.

Chris Tucker: We also posted a great quarter here.

Chris Tucker: Orders growth was strong at over 16% with both global and NRG delivering double digit order growth.

Chris Tucker: On the sales side growth was 4%, which was driven by 12% growth at Doble sales.

Chris Tucker: Sales were down at NRG, where the business has seen some moderation over the last few quarters.

Chris Tucker: Profitability was very strong for this business as we leverage the growth of durable and also experienced favorable product mix, which helped drive the adjusted EBIT margins to 23, 6% in the quarter.

Chris Tucker: Next we will cover test, where we saw a nice start to the year, especially when comparing to the challenging results. We had last year in the first quarter.

Chris Tucker: Order growth was excellent with over 40%.

Chris Tucker: And it was pretty broad based with E&C test and measurement A&D and medical and industrial shielding all fueling the increase.

Chris Tucker: Sales were up over 13% as we saw a nice growth from the U S and European markets as well as good performance at MGE.

Chris Tucker: Margins rebounded nicely as volume growth and benefits from last year's cost reductions efforts drove first quarter adjusted EBIT margins to 10, 6%.

Chris Tucker: Next is <unk>, where we have the cash flow highlights.

Chris Tucker: The year got off to a strong start on operating cash flow, which was $34 million compared to $9 million in the prior year cash.

Chris Tucker: Cash collections were strong in the quarter and that was the main driver of the improved cash performance cap.

Capital spending was $2 $6 million less than last year, and we had zero acquisition spend during this year's first quarter.

Chris Tucker: So we delivered big improvement in free cash flow and saw our debt to EBITDA leverage ratio dropped to 0.4 times.

Chris Tucker: The next chart, we'll discuss our full year earnings guidance.

Chris Tucker: First on chart nine where we show the impact of the acquisition amortization on full year and quarterly numbers from last year.

Chris Tucker: You can see in the first table that our guidance in November was $4 70 to $4 90 per share and adding back the full year impact of acquisition amortization of <unk> 60 per share the old guidance becomes $5 30 to $5 50 per share.

Chris Tucker: Operationally, we are increasing the guidance by 25 per share at the low and high end of the ranges for an updated range of $5 55 to $5 75 per share.

Chris Tucker: Second quarter guidance is for 120 to $1 30 per share in the bottom of the table on this page for your reference and shows the acquisition amortization impact by quarter for FY 'twenty four.

Chris Tucker: My last chart discusses the fiscal 2025 guidance you can see our sales guidance is unchanged at 6% to 8% growth in.

Chris Tucker: And with our increased earnings per share guide, we are now targeting 16% to 21% growth in adjusted EPS when compared to 2024.

Chris Tucker: The graphs at the bottom of the page show growth trends since 2021, which have been strong.

Chris Tucker: We also want to be clear here. This guidance excludes the impact of the pending SMP acquisition and it also excludes the impact of the strategic review process at Vacco.

Chris Tucker: Both of these items could have significant impacts on our outlook and we will provide updates on those items and their impact when the timing is more certain.

Chris Tucker: That concludes the financial portion of the call and now I'll turn it back over to Brian.

Brian: Thanks, Chris So as you've heard we're off to a great start for the year.

Brian: We're excited about the ability to increase our full year outlook and we're excited about some of the portfolio moves that are being actively worked out.

Brian: <unk> future remains bright and we continue to see a path for value creation and enhancement as we move forward.

Brian: The impacts of this are starting to come through in our results and we're confident that theres more to come.

Brian: Before we go to questions I would like to take a moment to recognize one of our long term directors Lee Olivier who retired this week Lee served ESCO shareholders for over 10 years on the board and apply it has decades of experience in electric utilities as our principal strategic adviser.

Brian: As we built out our utility solutions business over the past decade.

Over those years I personally benefited from these industry knowledge his business acumen, and it's encouraging and upbeat disposition.

Brian: On behalf of <unk> Board and our shareholders, we wish Lee all the best in a long and healthy retirement as he continues his class to catch every kind of efficient areas.

Brian: You will be missed with that we're done with our prepared remarks, and we can turn it over to Q&A.

As a reminder to ask a question. Please press star one on your telephone.

Brian: Wait for your name to be announced.

Brian: To withdraw your question. Please press star one again.

Brian: Please standby, while we compile the Q&A roster.

Speaker Change: And our first question comes from.

Speaker Change: Tommy Moll with Stephens Your line is open.

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

Speaker Change: Hi, Tommy.

Speaker Change: Brian I wanted to start on Doble.

<unk> revenue was up double digits, but your book to Bill this quarter was still well north of one.

Speaker Change: So any context, you could give was there some calendar year end.

Speaker Change: Tailwind here are there some drivers that are maybe more durable just any kind of context would be helpful.

Speaker Change: Well I think the fact that we took up our full year guidance, probably as hotel that we think this is not a onetime event. This is we're headed in the right direction here.

Speaker Change: We would say about utilities generally is that they are really making a lot of capital investments right now.

Speaker Change: Anticipating.

Speaker Change: Broad increases in electricity demand that are driven by.

Speaker Change: Multiple.

Speaker Change: Different aspects.

Re shoring.

Speaker Change: Electric vehicles electrification of home heating.

Speaker Change: Data centers AI.

There's just a wide range of things driving broad based energy demand.

Speaker Change: And we're benefiting as they.

Speaker Change: Need to make investments in maintaining and maximizing the throughput of their existing assets.

Speaker Change: And making investments in generation transmission and distribution.

Brian: Thank you Brian.

Speaker Change: Question I wanted to ask is really a two part on the guidance for the full year.

Speaker Change: On the revenue side, you reaffirmed the range and then raised on EPS.

Speaker Change: And so.

Speaker Change: The two parts here, one is where you're getting the better than previously expected margin from if you had to pick one or two places.

Speaker Change: Then in terms of the revenue.

Speaker Change: You updated us on the total company.

Speaker Change: But just at the segment level <unk>.

Speaker Change: <unk>. Your prior outlook is there anything you might want to call out I was thinking in particular utility maybe.

Speaker Change: Maybe some increased headwinds there on the NRG side, but I'll, let you do the tuck in there.

Speaker Change: Yes, I would say.

Speaker Change: Essentially timing if you look at the first quarter. We're obviously, we had a pretty nice b.

Speaker Change: On the margin side, we did have some good margin upside in the quarter at A&D.

Speaker Change: We are starting to get into some of that past due backlog and see that move a little better.

Speaker Change: And so that that flow through and then also on the utility side you mentioned doble.

Speaker Change: <unk> had particularly good mix there in the quarter on some of the kind of.

Speaker Change: Legacy protection testing and offline testing product sales those are kind of some of our highest margin things and we had good results there and I think fundamentally as we looked at the balance of the year, we still feel good about how we had those loaded in we didn't think anything that happened in the first quarter should reduce those out quarters and so.

Speaker Change: You can kind of see that first quarter performance flowing through.

Speaker Change: On the sales side, yes, I mean, we're pretty consistent Youre right I think if we see any any upside on the doble side from a sales perspective, we would say we might see a little softness on the on the renewable side that would offset it from a revenue perspective, but again from an EBIT side. We're in good shape, there and again, maybe a little bit of upside to the year.

Speaker Change: Here, just because of the first quarter performance.

Speaker Change: So that's really kind of how I would frame all that up I think the sales outlook for tests.

Speaker Change: Remains consistent and it really firmed up I would say nicely in the first quarter because the orders a test were so good.

Speaker Change: That made us feel good about the outlook for the rest of the year there.

And then Andy again, I think we're plugging along pretty well there and feel good about that outlook as well.

Chris Tucker: Thanks, Chris I'll turn it back.

Speaker Change: Thank you again as a reminder to ask a question. Please press star one again that is star one to ask a question.

Speaker Change: Our next question.

Comes from.

Speaker Change: Jon <unk> with CJS Securities. Your line is open.

Speaker Change: Alright, Thank you for taking my question.

Speaker Change: Brian You mentioned that you were seeing improving demand at vacco I was wondering if you could delineate if youre seeing that in space or Navy I'm guessing it was maybe but I don't know if you are the same.

Speaker Change: Thing going on in space.

Speaker Change: Yeah, a little bit more Navy. Then then space I mean, you are probably aware that there is a large amount of procurement going on.

Speaker Change: On the submarine front.

Speaker Change: We definitely are starting to see our share of that.

Speaker Change: Line with what we've talked about in the past.

Speaker Change: And.

Speaker Change: But there is some some space business coming through for us. So the business is really doing well.

As I said in my comments, we're kind of past.

Speaker Change: <unk>.

Speaker Change: The fixed price development contracts problems.

Speaker Change: Outlook is definitely improving there.

Speaker Change: Okay, Great and then.

Speaker Change: Can you just characterize the strong test orders in the quarter.

Speaker Change: Was it broad based was there more of any one sector starting the other or maybe they are large projects in there.

Speaker Change: It's kind of unusual.

Speaker Change: The Q1 order pattern I think yes, I would say.

Speaker Change: It was very broad based with the exception of wireless.

Speaker Change: We've got good orders.

Speaker Change: Europe, we got good orders in the U S. We even saw a turnaround in some improvement in China, a lot of electromagnetic compatibility testing, which as you know kind of as a regulatory driven.

Speaker Change: Piece, you got a lot of wireless excuse not wireless medical activity and we're starting to see a resumption of the.

Speaker Change: Electromagnetism EMP filters that are typically go into data centers. So we got a couple a couple of those.

Speaker Change: And we saw an investment in a large.

Speaker Change: E&P protected.

Speaker Change: Control center for a utility in the U S. So I would say aerospace and defense is coming through for US is the electronic warfare stuff's kind of drives a little bit of activity there so pretty broad based.

Speaker Change: The wireless thing is kind of Trundling, along I think at a pretty sustainable level.

Speaker Change: But thats not likely to improve substantially until we get a little bit of clarity about.

Speaker Change: The <unk> technology is going ahead.

Speaker Change: Okay, great. Thank you and then just.

Speaker Change: Any update on the M&A environment are you are your hands full with closing S&P or is there other stuff in the pipeline.

Speaker Change: There's an extra one.

Speaker Change: Yes, I would say we are strongly prioritizing.

Speaker Change: Close a closure of SMP.

Speaker Change: And then our strategic review at Vacco, but.

Speaker Change: But we still have.

Speaker Change: The capacity to look at other opportunities and we are seeing.

Speaker Change: Some interesting things there, but I would not say that anything is imminent.

Speaker Change: So my guess is that you would probably see us close out those first two actions.

Speaker Change: Before you see any any new action that manifest itself.

Speaker Change: Understood. Thank you.

Speaker Change: Thank you. Our next question comes from Tommy Moll with Stephens. Your line is open.

Tommy Moll: Hello again.

Tommy Moll: Tommy.

Speaker Change: Brian will wait until may to get a full update on vacco.

Speaker Change: But if you are able to give us any insight quantitative or qualitative.

What the implication would be if you pulled back out.

Speaker Change: Of your A&D segment on the margin.

Speaker Change: It would be strongly accretive to margins.

Speaker Change: For the A&D Entresto.

Speaker Change: Okay.

Speaker Change: Thank you the point to send it in.

Speaker Change: In the right direction and then.

Speaker Change: Maybe.

Speaker Change: Follow up question for Chris Here, you made a comment about working through some of the past dues and A&D.

Speaker Change: If you could give us a sense of what inning youre in there.

Speaker Change: And any implications for working capital going forward would be helpful. Thanks.

Speaker Change: Yes, I think.

Speaker Change: I would say that it's really kind of two main businesses there right now in the on the commercial aircraft side, which is our PTA and Chris Air businesses.

I would say, we are probably to the fifth or sixth inning. There. If I tried to kind of put it in that framework and I do think youre already starting to see some benefits from working capital there come through the numbers you saw the good cash in the quarter. We did have an inventory build in the quarter, but it was less than what we had in the first quarter last.

Speaker Change: Year, and it really wasn't an aerospace and defense that inventory build was kind of elsewhere in the company.

Speaker Change: So I think and.

Speaker Change: You saw us liquidate receivables from the strong fourth quarter. So so I think youre starting to see the benefits there obviously.

Speaker Change: We're highly focused on continuing to drive high cash flow conversion and.

Speaker Change: It was nice to start off the first quarter that way because normally we don't don't always see that in the first quarter, but but anyway back to your original question, Yes, we're getting towards the mid to late innings, hopefully on the past dues.

Speaker Change: And it's nice to see the good progress there.

Speaker Change: Thank you both I will turn it back.

Speaker Change: Thank you.

Our next question comes from John <unk> Tang with CJS Securities. Your line is open.

Speaker Change: Alright. Thank you just a quick follow up for me.

Speaker Change: Could you provide an update on SMP for performance of the business and kind of what you're seeing there I think when you announced.

Speaker Change: We went to quiet a while back you had I'm pretty excited about the revenue opportunities I'm wondering if those are playing out.

Speaker Change: As expected and kind of what the expectation today.

Speaker Change: Yes, I would say that.

Speaker Change: We're told that 2024, our performance was in line with <unk>.

Speaker Change: Expectations and their commitments.

Speaker Change: Get into much more detail than that.

Speaker Change: But we're pretty optimistic about where they stand we have a pretty good idea of what's going on with the Navy and the major.

Speaker Change: Indirectly with the major shipbuilders and that's all encouraging stuff as well.

Speaker Change: Okay, great. Thank you.

Speaker Change: Thank you.

Speaker Change: One moment for our next question.

Josh Sullivan: Our next question comes from Josh Sullivan with benchmark Your line is open.

Josh Sullivan: Hey, good evening.

Speaker Change: Hey, Josh.

Speaker Change: Just curious what you guys have been seen as far as Boeing strike coming to a resolution and I mean, if you don't want to talk specifically.

Speaker Change: About a customer just generally what youre seeing in the OEM supply chain as we look at a re ramp here in 'twenty five beyond.

Speaker Change: Well if youre in the aircraft business, yet you can't not talk about Boeing.

Speaker Change: So we're comfortable talking about it listen we're happy that we're able to get the strike resolved.

Speaker Change: We did we did see them begin the process of kind of doing a little bit of rescheduling.

Speaker Change: All of their backlog.

Speaker Change: Two of our businesses are really.

Speaker Change: Tied directly to that OEM work, the third business is closer until that production.

Speaker Change: And we've already started to see a little bit of recovery there.

Speaker Change: We were able to kind of manage around that pretty effectively in Q1 I've got some good aftermarket activity.

Speaker Change: We feel pretty good about that we are I guess the way our forecast lays out is were pretty modest about.

Speaker Change: Build rates from Boeing this year, we're still going to see good growth overall in our business and we're counting on Boeing.

Speaker Change: Getting into.

Speaker Change: Growing their build rate.

Speaker Change: Half of this calendar year, it's starting to get into next year, that's really going to begin to drive a lot of positive things for our aircraft businesses.

Speaker Change: Got it and then maybe just one on the on the defense side.

Speaker Change: Just with the larger store builds.

Speaker Change: Next bill negotiation.

Speaker Change: What is the pool look like through the supply chain at this point from your perspective.

Speaker Change: I'm, sorry, what does that look like.

Speaker Change: Just on the general pull on all summary.

Yes, I mean generally positive I mean, there yeah listen, it's taking them longer to get up to the desired build rates that Congress has set for them.

Speaker Change: But they're definitely making steady workmanlike progress on that.

Speaker Change: We're continuing that business for us is continuing to grow.

Speaker Change: We have seen over the last year, we've seen some expansion of our ships at content, there, which has been favorable for us.

Speaker Change: As far as the contracting goes there's been a little bit of a slowdown there some of that might be congress related some of that might be navy related some of that might be.

Speaker Change: Shipbuilder related but they are.

Speaker Change: No no change in the overall commitment from an orders perspective, but the timing has kind of shifted out by a quarter or so.

Speaker Change: Thank you for the time.

Speaker Change: Thank you I'm showing no further questions at this time.

Brian Taylor: I would now like to turn it back to Brian Taylor for closing remarks.

Speaker Change: Alright, well listen everyone. Thanks for taking some time to hear from ESCO.

Speaker Change: We continue to be excited about the outlook and look forward to talking to you.

Speaker Change: May about another good quarter.

Speaker Change: This concludes today's conference call.

Speaker Change: You for participating you may now disconnect.

Speaker Change: Okay.

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Speaker Change: Good day, and thank you for standing by.

Welcome to the first quarter 2025.

Speaker Change: ESCO technologies earnings Conference call.

Speaker Change: 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.

Speaker Change: To ask a question during the session you will need to press star one on your telephone.

Speaker Change: You will then hear an automated message advising your hand is race.

Speaker Change: To withdraw your question. Please press star one again.

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

Speaker Change: On the call today, we have Brian Taylor.

Speaker Change: President and CEO.

Chris Tucker: Chris Tucker Senior Vice President and CFO.

Speaker Change: And now I would like to hand, the conference over to our first speaker today Kate.

Speaker Change: Kate Lowrey, Vice President of Investor Relations, Kate you now have the floor.

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

Brian: Details about the business I do want to take a moment and.

Brian: California based employees, who have experienced some unsettled moments over the past months with the major wildfires in the area.

Brian: Chris will run you through all of the financial details for the quarter, but before we get to that I want to give you a few comments on each of our segments.

Brian: Starting with aerospace and defense.

Brian: <unk> sales were particularly strong as they were up $13 million or 56% over the prior year funding.

Brian: Want to quickly address the status of the SMP acquisition and the previously announced strategic review of our space business at Vacco.

Brian: Estimate PDL as previously discussed the closing of the transaction is subject to regulatory approval in the U S and the kingdom. The U S closing conditions have been met and we are now in the final stages of the UK government assessment, we've had good dialogue with the U K regulators and we're hopeful.

Brian: This process will be concluded in the near term our current expectation would be to close the transaction in the remaining months of fiscal Q2 or in early Q3.

Brian: <unk> today space and defense as this review has evolved we have determined that splitting these two product lines into two separate businesses is not feasible. As a result, we are now in the process of evaluating whether to retain or sell the entire backup business. This process is moving along.

Brian: Well and we anticipate being able to provide a more definitive path forward by our next earnings announcement in May.

Brian: Switching business is now let's talk about the utility group, which had an outstanding quarter.

Brian: Our core utility business at Doble delivered double digit orders and revenue growth and significant margin expansion as they continue to see end market strength related to utilities needing to maintain and extend the life of their existing assets Nrg's revenue was lower.

Q1, as we saw some moderation on renewable projects coming off of record revenue in 2024, the market conditions across the utility landscape are somewhat dynamic right now, but we feel strongly that <unk> is well positioned for the long term we are seeing strong.

Brian: <unk> investments from the utilities, while the renewables markets have drifted a bit given the uncertain status of tax incentives put in place by the prior administration, we would expect any softness on renewables to be more than offset by our regulated utilities business on the doble side the <unk>.

Brian: Dynamics driving overall power demand remain in place and that it adds that demand is satisfied we expect it to result in a positive growth story for <unk> utility solutions group.

Brian: In a complex environment in China. The team has taken the right steps here to protect the business for the long term and we are seeing some good growth beyond that wireless market. So I would say that the business here has stabilized and we feel good about our trajectory as we move further into 2025.

Brian: In summary, 2025 is off to a great start for ESCO with really good performance in all three business segments, which has enabled us to outperform in the quarter and raise our guidance for the full year with that I'll turn it over to Chris to run you through the financial details of the quarter.

Chris: Thank you Brian.

Speaker Change: Everyone can follow along on the chart presentation, we'll start on page three where we will discuss the change to adjusted earnings per share reporting.

Speaker Change: As stated in the earnings release, our adjusted earnings per share will now reflect an add back of all acquisition related amortization.

Speaker Change: The table at the bottom of the page shows the impact which was <unk> 14 in the prior year first quarter and 15 in this year's first quarter.

Speaker Change: The bar graph to the right shows that on the new basis, we achieved $1 seven of adjusted EPS in the quarter, which was nearly 41% above last year's first quarter.

Speaker Change: The $1 seven per share when compared to our range provided back in November of <unk> 83 to <unk> 90 per share. So we were able to come in nicely ahead of plan during the quarter.

Speaker Change: Moving on to chart four we have the overall financial highlights of the first quarter.

Speaker Change: Orders were down in the quarter as we experienced some large navy orders during the prior year first quarter, but overall, our book to Bill was 111% and we finished the quarter with backlog of $907 million a record amount.

Speaker Change: Sales in the quarter were up 13%, which was all organic.

Additionally, adjusted EBIT margins increased by 250 basis points to 15, 3%.

Speaker Change: Importantly, during the first quarter, we saw all three reporting segments deliver sales growth and adjusted EBIT margin improvement.

Speaker Change: Lastly, and as noted on the prior chart adjusted earnings per share increased by 41% during the first quarter.

Speaker Change: Next we will go through the segment highlights starting with the aerospace and defense.

Speaker Change: Orders were down in the quarter. This is where we had the large navy orders a year ago, which created a tough comparison.

Speaker Change: However book to Bill is still above 100% and the business continues to enjoy record backlog levels of over $600 million.

Speaker Change: The sales performance in the quarter was terrific with nearly 21% growth the growth was led by commercial aerospace and Navy.

Speaker Change: Margins were good with adjusted EBIT margins up 130 basis points and adjusted EBIT dollars up nearly 30% as we saw good leverage on the growth offset by some unfavorable mix.

Speaker Change: Next on chart six is the utility solutions group.

Speaker Change: We also posted a great quarter here orders growth was strong at over 16% with both global and NRG delivering double digit order growth.

Speaker Change: On the sales side growth was 4%, which was driven by 12% growth at Doble sales.

Speaker Change: Sales were down at NRG, where the business has seen some moderation over the last few quarters.

Speaker Change: Profitability was very strong for this business as we leverage the growth available and also experienced favorable product mix, which helped drive the adjusted EBIT margin to 23, 6% in the quarter.

Speaker Change: Next we will cover test, where we saw a nice start to the year.

Speaker Change: Especially when comparing to the challenging results, we had last year in the first quarter.

Speaker Change: Order growth was excellent at over 40% and it was pretty broad based with E&P test and measurement A&D and medical and industrial shielding all fueling the increase.

Speaker Change: Sales were up over 13% as we saw nice growth from the U S and European markets as well as good performance at MGE.

Speaker Change: Margins rebounded nicely as volume growth and benefits from last year's cost reduction efforts drove the first quarter adjusted EBIT margins to 10, 6%.

Speaker Change: Next is <unk>, where we have the cash flow highlights.

Speaker Change: The year got off to a strong start on operating cash flow, which was $34 million compared to $9 million in the prior year.

Speaker Change: Cash collections were strong in the quarter and that was the main driver of the improved cash performance cap.

Speaker Change: Capital spending was $2 $6 million less than last year, and we had zero acquisition spend during this year's first quarter. So.

So we delivered big improvement in free cash flow and saw our debt to EBITDA leverage ratio dropped to 0.4 times.

Speaker Change: The next chart, who will discuss our full year earnings guidance <unk>.

Speaker Change: First on chart nine where we show the impact of the acquisition amortization on full year and quarterly numbers from last year.

You can see in the first table that our guidance in November was $4 70 to $4 90 per share and adding back the full year impact of acquisition amortization of <unk> 60 per share the old guidance becomes $5 30 to $5 50 per share.

Speaker Change: Operationally, we are increasing the guidance by 25 per share at the low and high end of the ranges for an updated range of $5 55 to $5 75 per share.

Speaker Change: Second quarter guidance is for 120 to $1 30 per share in the bottom of the table on this page is for your reference and shows the acquisition amortization impact by quarter for FY 'twenty four.

Speaker Change: My last chart discusses the fiscal 2025 guidance you can see our sales guidance is unchanged at 6% to 8% growth.

And with our increased earnings per share guide, we are now targeting 16% to 21% growth in adjusted EPS when compared to 2024.

Speaker Change: The graphs at the bottom of the page show growth trend since 2021, which have been strong.

Speaker Change: We also want to be clear here. This guidance excludes the impact of the pending SMP acquisition and it also excludes the impact of the strategic review process at Vacco.

Speaker Change: Both of these items could have significant impacts on our outlook and we will provide updates on those items and their impacts when the timing is more certain.

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 heard we're off to a great start for the year.

Speaker Change: We're excited about the <unk>.

Speaker Change: <unk> to increase our full year outlook and we're excited about some of the portfolio moves that are being actively worked out.

Speaker Change: Scott as future remains bright and we continue to see a path for value creation and enhancement as we move forward.

Speaker Change: The impacts of this are starting to come through in our results and we're confident that theres more to come.

Speaker Change: Before we go to questions I would like to take a moment to recognize one of our long term directors Lee Olivier who retired this week Lee served ESCO shareholders for over 10 years on the board and applied has decades of experience in electric utilities as our principal strategic adviser.

Speaker Change: As we built out our utility solutions business over the past decade.

Speaker Change: Over those years I personally benefited from lease industry knowledge his business acumen and is encouraging and upbeat disposition.

On behalf of <unk> Board and our shareholders, we wish Lee all the best in a long and healthy retirement as he continues his quest to catch every kind of fish there is.

Speaker Change: You will be missed with that we're done with our prepared remarks, and we can turn it over to Q&A.

Speaker Change: As a reminder to ask a question. Please press star one on your telephone.

Speaker Change: For your name to be announced.

Speaker Change: To withdraw your question. Please press star one one again.

Speaker Change: Please standby, while we compile the Q&A roster.

Speaker Change: And our first question comes from.

Speaker Change: Tommy Moll with Stephens Your line is open.

Speaker Change: Good afternoon, and thanks for taking my questions.

Speaker Change: Hi, Tommy.

Brian: Brian I wanted to start on Doble.

Brian: Revenue was up double digits, but your book to Bill this quarter was still well north of one.

Brian: So any context, you could give was there some calendar year end.

Brian: Tailwind here are there some drivers that are maybe more durable just any kind of context would be helpful.

Brian: Well I think the fact that we took up our full year guidance is probably as hotel that we think this is not a onetime event. This is we're headed in the right direction here, what we would say about utilities generally is that they are really making a lot of capital investments right now.

Brian: Anticipating.

Brian: Broad increases in electricity demand that are driven by.

Brian: Multiple different <unk>.

Brian: Aspects.

Brian: Re shoring electric vehicles electrification of home heating.

Brian: Data centers AI.

Brian: There's just a wide range of things driving broad based energy demand and we're benefiting as they need.

Brian: We need to make investments.

Brian: In maintaining and maximizing the throughput of their existing assets.

Brian: And making investments in generation transmission and distribution.

Brian: Thank you Brian.

Speaker Change: Question I wanted to ask is really a two part on the guidance for the full year.

Speaker Change: On the revenue side, you reaffirmed the range and then raised on EPS.

Speaker Change: And so.

Speaker Change: The two parts here, one is where you're getting the better than previously expected margin problem. If you had to pick one or two places.

Speaker Change: And then in terms of the revenue.

Speaker Change: You updated us on the total company, but just at the segment level versus your prior outlook is there anything you might want to call out I was thinking in particular utility maybe.

Speaker Change: Maybe some increased headwinds there on the NRG side, but I'll, let you do the tuck in there.

Speaker Change: Yes, I would say.

Speaker Change: Essentially timing if you look at the first quarter. We're obviously, we had a pretty nice b.

Speaker Change: On the margin side, we did have some good margin upside in the quarter at A&D.

Speaker Change: We are starting to get into some of that past due backlog and see that move a little better.

Speaker Change: And so that that flow through and then also on the utility side you mentioned doble.

Speaker Change: We had particularly good mix there in the quarter on some of the kind of legacy protection testing and offline testing product sales those are kind of some of our highest margin things and we had good results there and I think fundamentally as we looked at the balance of the year, we still feel good about how we had those loaded in we didn't think anything.

Speaker Change: That happened in the first quarter should reduce those out quarters and so you can kind of see that first quarter performance flowing through.

Speaker Change: Here, just because of the first quarter performance.

Speaker Change: So thats really kind of how I would frame all that up I think the sales outlook for tests.

Speaker Change: <unk> remains consistent and it really firmed up I would say nicely in the first quarter because the orders a test were so good.

Speaker Change: That made us feel good about the outlook for the rest of the year there.

Speaker Change: And then Andy again, I think we're plugging along pretty well there and feel good about that outlook as well.

Speaker Change: Thanks, Chris I'll turn it back.

Speaker Change: Thank you again as a reminder to ask a question. Please press star one one again that is star one to ask a question.

Speaker Change: Our next question comes from.

Jon: Jon <unk> with CJS Securities. Your line is open.

Speaker Change: Alright, Thank you for taking my question Brian.

Speaker Change: Thing going on in space.

Speaker Change: Yeah, a little bit more Navy. Then then space I mean, you are probably aware that there is a large amount of procurement going on.

Speaker Change: On the submarine front.

Speaker Change: We definitely are starting to see our share of that in line with what we've talked about in the past.

Speaker Change: And.

Speaker Change: But there is some some space business coming through for us. So the business is really doing well.

Speaker Change: As I said in my comments, we're kind of past.

Speaker Change: The.

Speaker Change: The fixed price development contracts problems and the outlook is definitely improving there.

Speaker Change: Okay, Great and then just.

Speaker Change: Can you just characterize the strong test orders in the quarter.

Speaker Change: Was it broad based was there more of any one sector starting the other or maybe they are large projects in there.

Speaker Change: <unk>.

Speaker Change: Kind of unusual to see that strong of a Q1 order pattern I think yes, I would say.

Speaker Change: It was very broad based with the exception of wireless.

Speaker Change: <unk>.

Speaker Change: We've got good orders.

Speaker Change: Europe, we've got good orders in the U S. We even saw a turnaround in some improvement in China, a lot of electromagnetic compatibility testing, which as you know kind of as a regulatory driven.

Speaker Change: <unk> got a lot of wireless excuse not wireless medical activity and we're starting to see a resumption of the <unk>.

Speaker Change: Electromagnetic the EMP filters that are typically go out of data centers. So we got a couple a couple of those.

Speaker Change: And we saw an investment in a large.

Speaker Change: E&P protected.

Speaker Change: The wireless thing is kind of Trundling, along I think at a pretty sustainable level.

Speaker Change: But thats not likely to improve substantially until we get a little bit of clarity about.

Speaker Change: The <unk> technology is going ahead.

Speaker Change: Okay, great. Thank you and then just.

Speaker Change: Any update on the M&A environment are you are you.

Speaker Change: Hence forward closing SMP or is there other stuff in the pipeline.

As an extra one.

Speaker Change: Yes, I would say we are strongly prioritizing.

Speaker Change: Close a closure of SMP.

Speaker Change: Our strategic review at Vacco.

Speaker Change: But we still have.

Speaker Change: The capacity to look at other opportunities and we're seeing some.

Speaker Change: Some interesting things there, but I would not say that anything is imminent.

Speaker Change: So my guess is that you would probably see us close out those first two actions.

Speaker Change: Before you see any any new action that manifests itself.

Speaker Change: Understood. Thank you.

Tommy Moll: Thank you. Our next question comes from Tommy Moll with Stephens. Your line is open.

Speaker Change: Hello again.

Speaker Change: Hi, Tommy.

Speaker Change: Brian will wait until may to get a full update on vacco.

Speaker Change: But if you are able to give us any insight quantitative or qualitative.

Speaker Change: What the implication would be if you pulled back out.

Speaker Change: Of your A&D segment on the margin.

Speaker Change: It would be strongly accretive to margins.

Speaker Change: For the A&D and fresco.

Speaker Change: Okay.

Speaker Change: Thank you the points.

Speaker Change: In the right direction and then.

Speaker Change: Maybe a.

Speaker Change: Follow up question for Chris Here, you made a comment about working through some of the past dues and A&D.

Speaker Change: If you could give us a sense of what inning youre in there.

Speaker Change: And any implications for working capital going forward would be helpful. Thanks.

Speaker Change: Yes, I think.

Speaker Change: I would say that it's really kind of two main businesses there right now in the on the commercial aircraft side, which is our PPI and <unk> businesses.

Speaker Change: I would say, we're probably to the fifth or sixth inning. There if I tried to kind of put it in that framework and I do think youre already starting to see some benefits from working capital there come through the numbers you saw the good cash in the quarter.

Speaker Change: We did have an inventory build in the quarter, but it was less than what we had in the first quarter last year and it really wasn't an aerospace and defense that inventory build was kind of elsewhere in the company.

Speaker Change: So I think.

Speaker Change: And you saw us liquidate receivables from the strong fourth quarter. So so I think youre starting to see the benefits there obviously.

Speaker Change: We're highly focused on continuing to drive high cash flow conversion and it was nice to start off the first quarter that way because normally we don't don't always see that in the first quarter, but but anyway back to your original question, Yes, we're getting towards the mid to later innings hopefully on the on the past dues.

Speaker Change: And it's nice to see the good progress there.

Speaker Change: Thank you Beth I will turn it back.

Speaker Change: Thank you our.

Speaker Change: Our next question comes from Jon <unk> with CJS Securities. Your line is open.

Speaker Change: Alright. Thank you just a quick follow up for me.

Speaker Change: To provide an update on SMN <unk> the performance of the business and kind of what you're seeing there I think when you announced the acquisition.

Speaker Change: <unk> acquired a while back you had been pretty excited about the revenue opportunities.

Speaker Change: And if those are playing out.

Speaker Change: Expected and kind of what the expectation today.

Speaker Change: Yes, I would say that.

Speaker Change: We're told that 2024 performance was in line with.

Speaker Change: Expectations and their commitments.

Speaker Change: Can't get into much more detail than that.

Speaker Change: But we're pretty optimistic about where they stand we have a pretty good idea of what's going on with the Navy and the major.

Speaker Change: Indirectly with the major shipbuilders and that's all encouraging stuff as well.

Speaker Change: Okay, great. Thank you.

Speaker Change: Okay.

Speaker Change: Thank you one.

Speaker Change: One moment for our next question.

Josh Sullivan: Our next question comes from Josh Sullivan with benchmark Your line is open.

Josh Sullivan: Hey, good evening.

Josh Sullivan: Hey, Josh.

Josh Sullivan: I'm just curious what you guys have been seen as far as Boeing strike coming to a resolution and I mean, if you don't want to talk specifically.

Speaker Change: Specifically about a customer just generally what youre seeing in the OEM supply chain as we look at a re ramp here in 'twenty five beyond.

Speaker Change: Well if youre on the aircraft business you can get not talk about Boeing.

Speaker Change: We're comfortable talking about it listen we're happy that they were able to get the strike resolved.

Speaker Change: We did.

Speaker Change: We did see them begin the process of kind of doing a little bit of rescheduling.

Speaker Change: Their backlog.

Speaker Change: Two of our businesses are really.

Speaker Change: Tied directly to that OEM work, the third business is closer until the production.

Speaker Change: And we've already starting to see a little bit of recovery there.

Speaker Change: We were able to kind of manage around that pretty effectively in Q1.

Speaker Change: Got some good aftermarket activity.

So we feel pretty good about that we are I guess the way our forecast lays out is.

Speaker Change: We're pretty modest about build rates from Boeing this year, we're still going to see good growth overall in our business and we're counting on Boeing.

Speaker Change: Getting into growing their build rate.

Speaker Change: Half of this calendar year, it's starting to get into next year, that's really going to begin to drive a lot of positive things for our aircraft businesses.

Speaker Change: Got it and then maybe just one on the on the defense side.

Speaker Change: Just with the larger sub builds contracts still in negotiation.

Speaker Change: What is the pool look like through the supply chain at this point from your perspective.

Speaker Change: I'm, sorry, what does that look like.

Speaker Change: Just on the general pull on all summary.

Speaker Change: Yes, I mean generally positive I mean, there yeah listen, it's taking them longer to get up to the desired build rates that Congress has set for them.

Speaker Change: But they're definitely making steady workmanlike progress on that.

Speaker Change: We're continuing that business for us is continuing to grow we have seen over the last year. We've seen some expansion of our ships at content, there, which has been favorable for us.

Speaker Change: As far as the contracting goes there's been a little bit of a slowdown there some of that might be congress related some of that might be navy related some of that might be.

Speaker Change: Shipbuilder related but they are.

Speaker Change: No no change in the overall commitment from an orders perspective, but the timing has kind of shifted out.

Speaker Change: Last quarter or so.

Thank you for the time.

Speaker Change: Thank you I'm showing no further questions at this time.

Brian Taylor: I would now like to turn it back to Brian Taylor for closing remarks.

Brian Taylor: Alright, well listen everyone. Thanks for taking some time to hear from ESCO.

Brian Taylor: We continue to be excited about the outlook and look forward to talking to you.

Brian Taylor: May about another good quarter.

Brian Taylor: This concludes today's conference call.

Brian Taylor: Thank you for participating you may now disconnect.

Q1 2025 ESCO Technologies Inc Earnings Call

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