ESCO Technologies Inc. (NYSE:ESE) Q2 2024 Earnings Call Transcript May 11, 2024
ESCO Technologies Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and thank you for standing by. Welcome to the Second Quarter 2024 ESCO Technologies Earnings Call. [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 Investor Relations. Kate, you now have the floor.
Kate Lowrey: Thank you. Statements made during this call which are not strictly historical are forward-looking statements within the meaning of the Safe Harbor Provisions of the Federal Securities Laws. These statements are based on current expectations and assumptions, and actual results may differ materially from those projected in the forward-looking statements due to risks and uncertainties that exist in the company's operations and business environment, including, but not limited to the risk factors referenced in the company's press release issued today, which will be included as an exhibit to the company's Form 8-K to be filed. We undertake no duty to update or revise any forward-looking statements except as may be required by applicable laws or regulations.
In addition, during this call, the company may discuss some non-GAAP financial measures in describing the company's operating results. A reconciliation of these measures to their most comparable GAAP measures can be found in the press release issued today and found on the company's website at www.escotechnologies.com under the link Investor Relations. Now I'll turn the call over. Bryan?
Bryan Sayler: Thanks, Kate, and thanks, everyone, for joining today's call. We appreciate you taking time to get an update from ESCO this afternoon. We are pleased with the second quarter results and are especially excited about the continued top-line momentum across our business platforms. Our sales were up by 9% over the prior year second quarter as our Aerospace, Navy and Utility businesses continue to see robust end-market dynamics. It's been busy over the last month as we work through our annual strategic planning process with each of our subsidiaries. This is a chance for us to step back and examine what's happening in our end-markets and to work on strategies to deliver above market organic growth. This year's sessions have been particularly energizing, as we've seen several long-term trends across the broader economy that support good growth profile as we move ESCO forward.
Chris will run you through all of the financial details on the second quarter, but before that I want to pass along a few highlights from the strategy reviews and give you some sense for some of the longer-term dynamics that we are seeing. Starting with Aerospace & Defense, we continue to very good about the outlook here. As you saw in the release, we still have high levels of backlog and the top line sales growth has been strong. The most exciting thing here is what remains in front of us. Our key markets are Commercial and Defense, Aerospace, Navy and Space. And while each of these have different drivers, fundamentally they all provide a great foundation for future growth. Commercial and Defense Aerospace customers are working to execute on long term build plans to increase build rates, which underpin a strong forecast for ESCO.
The Navy remains committed to ramping up submarine production in a manner that will drive significant growth for us. We are also involved in some early stage developmental projects with positive long term outlooks. We are driving for high single-digit organic growth from these businesses through the planning cycle. Next is the Utility Group where the outlook remains bullish. You don't have to look very deep into the headlines to find the growth drivers here. An aging electric grid, increasing power demand from technology and industrial investments in the U.S., and decarbonization goals around the world are driving the need for even more electrification. At ESCO, we have a very well established diagnostic instrumentation business in Doble that is positioned to capitalize on these market factors and deliver continued excellent results.
Additionally, our capabilities in the renewables market have already delivered tremendous results for ESCO and there's more to come. These businesses are highly focused on new product and technology roadmaps to continue meeting customer needs while maintaining our lead in these growing markets. Finally, I'll touch on the Test business. As we discussed last quarter and as you can see from the press release, Test got off to a tough start to the year in Q1 and although the revenue softness continued in Q2, the business was able to deliver sequential growth and return to double digit profitability. It's never fun to go through these kinds of business cycles, but the team is really doing a great job of managing through the current challenges. We've been quick to get cost out of the business and we are well positioned as growth returns.
We had a great strategy review at this team and the long term outlook is bright. This business has broad and tested measurement capabilities that apply to a number of end markets, and we certainly expect growth to return in 2025 and beyond. While our primary focus is on organic growth and driving strategies to grow our existing business faster than the markets they serve, while improving operational effectiveness and expanding returns, we are seeing increased opportunities to add to the business through strategic acquisitions which increase our exposure to our existing long term growth markets. Hopefully that gives you a flavor of the things that we've working on over the past month and a sense of the excitement that we have for the future.
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As we pivot back to the quarter, I'll turn it over to Chris now, and he will go through the specifics for the great quarter that we just announced.
Chris Tucker: Thanks, Bryan Everyone can follow along on the chart presentation. We will start on Page 3 where we have the overall financial highlights of the second quarter. Overall, as Bryan mentioned, the quarter was strong. Starting with orders, you can see there was a 5% reduction in orders compared to last year's second quarter, but the pace of business remains good and we finished the quarter with $838 million of backlog which is nearly $100 million higher than March 31 of last year. Sales in the quarter were up 9% with organic growth of 8% and 1% from the MPE acquisition. Two of the three segments delivered double-digit sales growth in the quarter. The sales performance translated to strong earnings growth with adjusted EBIT up 130 basis points to 13.5% and adjusted earnings per share up 24% to $0.94.
Moving to Chart 4, we will start on the segment details beginning with Aerospace & Defense. These businesses continue to deliver strong results. Beginning with orders we achieved a 4% order growth in the quarter and finished with $562 million of backlog, which represents an increase of $78 million since the beginning of the fiscal year. Moving on to Sales. Overall growth was 16% which was all organic. The sales growth was led by strength from the Commercial and Defense Aerospace businesses which were up 14% and 20% respectively. The Navy businesses were also very strong in the quarter, delivering 32% growth. Adjusted EBIT margins in the quarter increased by 80 basis points as we saw nice leverage on the sales growth and favorable impacts from price which were partially offset by inflation and mix.
On Chart 5, we have the Utility Solutions Group. We had another great quarter here with orders. Orders were down in the quarter which was driven by modest reductions at Doble and a larger decline at NRG. The Renewables business saw exceptional order growth through June 30 of last year, as strong industry dynamics and government incentive programs spurred customer orders. Since then, the order pace has moderated and the business has burned down backlog. We are starting to see increasing order pipeline activity in the Renewables business and we expect to see order growth return as we move beyond the third quarter. Sales for USG were up 10% in the second quarter, with double digit increases for Doble and NRG. For Doble, we saw strong growth on the services side of the business and for NRG we continued to see nice growth from solar.
Adjusted EBIT margins were up 230 basis points as the business experienced favorable mix, nice leverage on sales growth, and price increases which more than offset inflationary impacts. Next is Chart 6 where we have the Test business. Orders here decreased 21% compared to last year's second quarter. This was driven by lower orders from the U.S. wireless market and delays on a few large projects which are expected to be booked in the third quarter. Despite the orders drop in the second quarter, you can see the backlog has still grown since the beginning of the year. This business continues to see good levels of activity, but as we mentioned last quarter, the timing to execute on some projects has been pushed out by customers which is also driving lower sales levels.
On the sales line, the business was down 8% with organic sales dropping by 12% and the MPE acquisition adding 4 points of growth. The largest declines came in the U.S. where we saw reductions in wireless filters and acoustic product lines. Adjusted EBIT margins declined to 12.2% in the quarter as cost reduction efforts were not able to offset deleverage on the sales drop. We have executed a plan to take cost out of this business and this helped drive a nice sequential increase in profitability during the second quarter. We expect this sequential improvement to continue as we move through fiscal 2024. On Chart 7, we have the cash flow highlights. We continue to show favorability to last year with $19 million of operating cash flow so far this year compared to a cash use of $5.5 million last year.
Favorability in accounts receivable was the main driver of the year-to-year improvement in operating cash flow. Capital spending in the first six months did increase driven by investments from the Aerospace & Defense businesses where we are working to increase capacity and productivity to support the robust demand outlook. You can also see that we had acquisition spending in both years, with MPE this year at just over $56 million, while last year we had the CMT acquisition for approximately $18 million. We have completed $7 million of stock buybacks through March 31st of 2024, which compares to $12 million that was done through the first six months of last year. The last chart today is number 8 which is our 2024 guidance. The outlook for the full year remains unchanged and we remain on track to deliver adjusted earnings per share in the range of $4.15 to $4.30, which represents a growth range of 12% to 16%.
This remains predicated on sales growth in the range of 7% to 9%. 2024 is shaping up to be another record year as we push to deliver revenue of more than $1 billion for the first time in ESCO history, and we push for a third year in a row of double-digit growth in adjusted earnings per share. That concludes the financial update. Now I'll turn it back over to Bryan.
Bryan Sayler: Thanks, Chris. Obviously, we delivered a very good Q2. The teams here at corporate and across our business segments did a great job in delivering exceptional top line and bottom line growth. There are always challenges when executing programs inside of business and I continue to be impressed by the commitment and dedication shown by our employees around the world. As always, I want to thank them for their hard work and dedication, which resulted in another solid quarter for ESCO. To close we have entrenched market positions across growing end markets that we serve and remain on track to deliver our 2024 commitments for a third record year in a row. That concludes the opening remarks and we can open up the question and answer session.
