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ESCO Technologies Inc. (ESE) Q1 2024 Earnings Call Transcript

ESCO Technologies Inc. (ESE)

Q1 2024 Earnings Conference Call

Company Participants

Kate Lowrey - Vice President of Investor Relations

Bryan Sayler - President & Chief Executive Officer

Chris Tucker - Senior Vice President & Chief Financial Officer

Conference Call Participants

Tommy Moll - Stephens

John Franzreb - Sidoti & Company

Jonathan Tanwanteng - CJS Securities

Presentation

Operator

Good day, and thank you for standing by. Welcome to the First Quarter 2024 ESCO Technologies Earnings Call. At this time all participants are in a listen only mode. After the speaker's presentation there will be a question-and-answer session. [Operator Instructions] 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.

And now, I would like to hand the conference over to our first speaker today, Kate Lowrey, Vice President of Invest 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 8-K to be filed. We undertake no duty to update or revise any forward-looking statements except if may be required by applicable laws or regulations.

In addition, during this call, the company may discuss some non-GAAP financial measures in describing the company's operating results. A reconciliation of these measures to the most comparable GAAP measures can be found in the press release issued today and found on the company's website at www.escotechnologies.com under the link Investor Relations.

Now, I'm going to turn the call over to Bryan.

Bryan Sayler

Thanks, Kate, and thanks to everyone for joining today's call. We really appreciate you taking time to get an update from ESCO this afternoon. We had a good start to the year, but before I talk to you about that, I would like to take a moment to thank one of our Directors who has retired this week. We had meetings with our Board over the last few days, and that represented the last time that Jim Stolze will participate as one of our Directors. Jim served on our Board for 25 years, and he really had a tremendous impact at that time. Jim came to the Board with deep financial experience, and ESCO really benefited that from adamantly over the years. He has a great mind for business and most importantly always operating with a high-level of integrity. His contributions to ESCO are too numerous to recall here. But suffice it to say that we are all going to miss him. So we offer our sincere thanks to Jim for his many years of service and wish him all the best in retirement.

With that, let me pivot over to some summary comments about the business. The results were a bit mixed between the different segments this quarter, but overall we delivered growth on the top line and the bottom line and saw another significant increase in backlog. Most importantly, we are still on track to deliver the full year commitments that we provided back in November.

In the quarter, sales grew by 6% and adjusted EBIT was up 8%, a solid start to the year. Two of the three segments delivered double-digit sales and adjusted EBIT growth. As we’ve been saying for a while now, our key end markets continued to have favorable dynamics and the drivers replaced for us to continue delivering meaningful organic revenue growth and margin expansion.

So before Chris gets into the financial details, I do want to offer some top level commentary about each of the business segments. First up is Aerospace& Defense, where we had a strong start to the year. Sales were up double digits as we continue to see good momentum from the aircraft components and navy businesses. Margins in the quarter increased nicely. So it’s good to see the growth translate to the bottom line for these businesses. Even with the strong sales and EBITD performance, we were even more encouraged by the continued order strength.

We booked significant Navy orders again, similar to the fourth quarter and have now built up a nice backlog in the Globe business after a few years of burning off Block V backlog. Additionally, we saw a big order growth from a commercial and defense aerospace businesses. It’s nice to see the momentum continued for that part of our business as well.

Next up is the utility group, which continued a strong quarterly performance. The breadth of our operating for the core utility markets continues to provide a solid foundation for continued growth. Offline products and services were a key driver of growth during the first quarter with the Phoenix product line, in particular delivering a great quarter. On the renewable side, we had a strong sales again, but the book-to-bill ratio was below 1.0 for the second quarter in a row. We now seen two quarters of moderating orders after a tremendous run up through June of 2023. Our backlog has come down a bit, but we are starting to see some good activity in the pipeline and feel good about the full year outlook for this business.

Finally, I will touch on the Test business where we did have a tough start to the year. Chris will go through the details in a minute, but we did see a sizable reduction in sales and EBIT during the first quarter. Overall, the business does still have good levels of backlog and we see a good pipeline of coming order activity. So longer term we still feel great about where the business is heading.

In the short-term, however, we are seeing project construction taking longer than planned and it’s reducing our ability to deliver revenue in the near-term. The project delays are not really on our end, but are more on the construction side of the business where jobsites are not ready for our product. And so the timing of revenue tends to get pushed to the right. This is mostly a U.S phenomenon and we are going to take some restructuring actions as we manage through a soft patch.

Margin improvement has been a key thing for us in the Test business over the past year and with the disappointing first quarter, it’s appropriate for us to take actions to take some cost out of the business. This will help us get -- this will help us out in the back half of FY ‘24. We mentioned on the November call, that we had just closed on the MPE acquisition. It’s an exciting deal for ESCO and for ETS-Lindgren and I’m happy to report that the integration between ETS and MPE is off to a good start and we remain excited about the long-term prospects with MPE as a margin enhancing product of our Test business.

To summarize, I would say 2024 is off to a good start. Really good performance at two of the three business and quick action underway at the third business to drive our long-term profitability objectives. Our outlook for 2024 is intact and we are working hard to deliver another record year.

Now I will turn it over to Chris, to go through the financial details of the first quarter.

Chris Tucker

Thanks, Bryan. Everyone can follow along on the chart presentation. We will start on Page 3, where we have the overall financial highlights for the first quarter. As you can see, we had a great quarter for orders with an increase of 28%, which resulted in record backlog of $848 million. The A&D businesses led the order growth which resulted in a first quarter consolidated book-to-bill ratio of 1.35.

Sales in the quarter were up over 6% which was comprised of 4% organic growth and a 2% impact from the CMT and MPE acquisitions. Adjusted EBIT was up 7.5%, adjusted EBITDA up over 7% and adjusted earnings per share up 3% in the quarter. Adjusted EBITDA margins increased by 20 basis points as increases from the A&D businesses were offset by declines from Test and Utility group.

Moving to Chart 4, we'll start with segment details. First with Aerospace & Defense, we really got off to a strong start here which was great to see, beginning with orders we achieved a 1.8 book-to-bill ratio as the Navy business received large orders on the Virginia Class submarine program This resulted in backlog of more than 560 million at December 31st, a record amount for this business.

Moving on to sales, overall growth was 14%, which was comprised of 10% organic growth and four additional points of growth from the CMT acquisition. The sales growth was led by strength from the commercial and defense aerospace, as well as the Navy business. Adjusted EBITDA margins in the quarter increased by 230 basis points as we saw nice leverage on the sales growth and favorable impacts from price, which were only partially offset by inflation and mix....

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