Good day, and thank you for standing by. Welcome to the Fourth Quarter 2023 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.

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'll turn the call over to Bryan.

Thanks Kate, and thanks to everyone for joining today's call. We appreciate each of you taking time to get an update on ESCO this afternoon. We had a very strong year and I'm excited to tell you all about it. With that, let me pivot to some summary comments on the business. We finished the year strong, and as you saw in the press release, closed the year with record results on a number of measures. Sales, adjusted earnings per share, entered orders, and ending backlog were all record levels in 2023. Sales grew by 11.5% and adjusted EBIT was up 17%. So it was great to have double digit growth once again for both sales and earnings. As we've been saying for a while now, our key end markets continue to have favorable dynamics and as you can see -- you can see that coming through in the financial results. Also of note was full year orders exceeding $1 billion in 2023. This is a significant milestone for the company. And with a record backlog of $772 million at year-end, we feel great about the outlook for ESCO going forward. Before Chris gets into the financial details, I do want to offer some top level commentary about each of the business segments. Starting with aerospace and defense, where we had a good year. Sales were up double digit as we continue to see good momentum in the commercial and defense aerospace businesses. We did see margin compression here again in the fourth quarter, and that was driven by margin erosion on a number of space development contracts. As we went through the quarter, several technical issues arose on these programs, leading to increased cost estimates, which in turn reduced our overall profitability. We are working aggressively to fix these…

Thanks, Bryan. Everyone can follow along the chart presentation. We will start on Page 3, where we have the overall financial highlights of the fourth quarter. As you can see, we had a great quarter for orders with an increase of 39%, which resulted in record backlog at year end. All three businesses had good order results with A&D being particularly strong. Sales in the quarter were up over 6%. Adjusted EBIT dollars were up 3%. And adjusted earnings per share were also up 3%. We will go through the segment details in a minute, but on the sales side, the utility solutions group delivered exceptional sales growth, while A&D had more modest growth and the test business was down. Overall, margins declined in the quarter. Two of the three businesses had margin increases, but declines at A&D led to an overall reduction. Moving to Chart 4, we'll start now on the segment details beginning with A&D. Starting with orders, you can see that they've increased significantly to over $177 million in Q4. Navy orders at Globe and VACCO were a key driver of the increase, but we continue to see strength from the aircraft component businesses as well. On the sales side, organic sales were flat and the CMT acquisition added 3 points of growth. Defense aerospace led the growth, followed by Navy and commercial aerospace. Space sales declined significantly. The space decline is driven by margin erosion on a number of development contracts. This is the issue Bryan mentioned in the overview, and it is also the driver of the down EBIT dollars and margins for A&D in the quarter. Outside of the space business, we saw some very good increases in profitability from the aircraft component businesses. On Chart 5, we have the utility solutions group. Orders…

Thanks, Chris. Since I touched on quite a few of my thoughts earlier in the commentary, I'd just like a couple more comments before we move into the Q&A. So you saw the numbers from Chris. Obviously, a great 2023 and a strong outlook for 2024. The company is really operating at a high level and we continue to have confidence as we look to the future. We serve strong end markets with well-established customers. We've got great teams both here at corporate and out at the businesses around the world. This forms a powerful combination and we're excited about what's next for ESCO. Before jumping into Q&A with you, I do want to take a moment and -- to say thank you to all of our employees. ESCO has racked up another strong year, and that's really a testament to the skill and tenacity of our employees. Our industries are growing, and no doubt, it helps to serve markets and have positive dynamics. But there's always challenges when executing inside the business, and I continue to be impressed by the commitment and dedication shown by our employees around the world. I'd also like to thank our board of directors. We just finished up meetings over the last few days with the board, and we really appreciate their support and commitment to ESCO. It feels great to close out my first year end as CEO and be talking about record results, but it's only because of the efforts of a number of people including all of our employees and the board. So with that, we can start the Q&A.

Thank you. [Operator Instructions] Our first question comes from the line of John Franzreb from Sidoti. Your line is open.

Good afternoon, everybody, and thanks for taking the questions. I'd like to start in Test in China. Can you talk a little bit about how the demand profiles change with ongoing weakness in China? Any thoughts about maybe resetting your footprint there or readdressing what you can do elsewhere with the capacity in China becoming available?

Sure. Listen, what we're seeing in China right now is, we still have a fair amount of backlog there, but we're still having a hard time getting on job sites. It feels like the construction industry over there is still a little bunged up. New orders have been somewhat soft. We're still a meaningful business over there, and we're still making money. We have not given any thought to changing our footprint at this time. We think we have an appropriately sized cost structure there for a business that could be quite a bit smaller. The biggest challenge we have though is that, we had an incredible year last year. So from a comparables basis it really is a big deceleration. The good news though is that, we have seen strength over in Europe and unfortunately it just wasn't quite enough to offset what we saw in China.

Alright, fair enough. And just switching to A&D, the last quarter you had some supply chain issues, so two questions in A&D. Are those all been resolved? If you said it, I'm apologize, I missed it, but also given the backlog profile, is it going to require additional staffing as that continues to ramp up and those orders [indiscernible] orders continue to come in?

Yeah, so as far as the supply chain issues company-wide, the good news is, we have resolved them almost entirely in the utility group. We're still having some modest issues in the test group. But what we're really continuing to see challenges is in our aerospace and defense Group, particularly out in Southern California. There's a couple of different components to that. One would be the material availability. That is improving pretty significantly. The second piece being the outside processing. That has improved with longer lead times. The one that I think we're still having some problems is on staffing our facilities with qualified personnel. I think we just -- we’re out there a few weeks ago, we went through the numbers and we're probably about 85% staffed at our facilities out there and we're struggling with competition for labor and so we need machinists and we need a qualified assembly and test type people. So that's probably restraining us a little bit more than the material availability is at this time.

Okay. And just one last question. I'll jump back into queue. By my calculations, you had a real good free cash flow quarter for the fourth quarter. I know for the full year wasn't what you expected, but is there any reason we can go back to normal free cash flow conversion in fiscal 2024?

Yes, John, we are anticipating that 2024, we would have a more normalized cash flow conversion. So that's obviously something we're very focused on as we work all of our subsidiary plans, and that's absolutely what we're looking to do.

Great. I'll get back into queue. Thank you.

Thanks, John.

Thank you. One moment for our next question. And our next question will come from the line of Jon Tanwanteng from CJS Securities. Your line is open.

Hi. Good afternoon, and thank you for taking my questions. And Bryan, congrats on capping off a pretty strong year. My first one is just on NRG. I was wondering what's driving the growth outlook there, just given the headwinds that we've seen publicized across the renewable sector? Is that just working down your backlog or are you seeing order strength in the pipeline?

Well, so we had an incredible fourth quarter in the prior year and first three quarters of this year. So we did see, from an order's perspective, a little bit of a deceleration in the fourth quarter. That does appear to be picking back up in October and November. So we're keeping our eye on it, but we're not overly concerned. As you see from the numbers here, we were able to kind of work down our backlog a little bit. It's more of a book and ship type of a business, so having too much backlog can be a challenge there in terms of our ability to compete and deliver. But listen, that business is doing very, very well. And they've had incredible margin expansion in addition to the overall revenue growth. So we still feel pretty good about renewables in general. I think one thing that you see a lot in the news these days is discussions about electric vehicle and offshore wind markets kind of having challenges. We don't really have a lot of exposure to either of those markets. We're typically in the onshore wind and utility scale solar, and those seem to be going pretty well right now.

Okay, great. Thanks for that color. I was wondering if you could go a little bit more into the details of the space issues that you had in the quarter. Is that a one-time issue that you're facing or is it going to be sustained? Kind of what do you see in your near-term planning for that business?

Sure. Well, so listen, the space business, first of all, it's a small part of our overall business. But we have a number of contracts that are for very complicated development programs. These are -- meaning, we are doing effectively research and development to develop these things. And unfortunately, they were firm fixed contracts. And we've had some technical challenges there that we're working through. We think that we have our arms around it, but there is a little bit more risk there, because we do not have these projects completed. And until you've got it up on the test stand and you've actually got it to pass the test, you really can't declare victory. What led to the challenge, really, I think, is through the COVID moment, we've had some turnover in that business. We lost some key engineers. We've had to hire new ones. And so, we're going through a little bit of a learning curve there. But we do think that we're going to get through it. The good news is, the rest of the A&E segment and the rest of our business overall has been able to more than compensate for the challenges we've had in the space segment.

Okay, great. That's good to hear. Can you talk a little bit more about MPE, the evaluation that you paid for and the accretion you're expecting for next year?

Sure. Listen, MPE is a business that we've known for a number of years. They're very solid. They build RF filters for electromagnetic pulse applications. As you know, that's one of the big growing areas that we're kind of targeting. What's attractive about it to us is that, they have a broader range of products. So in addition to doing facility filters, which we do at ETS-Lindgren, they also build component filters that go into military systems and other kinds of systems that require protection from electromagnetic pulse. That's becoming a big market now because as you look at some of the things that are happening in critical infrastructure, both in the energy space and data centers and that sort of thing, that's become more and more of an issue that people are trying to address. What's interesting about -- so we did spend about $57 million for this business. We expect it to add about $10 million to $15 million of revenue for us in fiscal 2024. And we're not really going to talk a lot about the margin, other than to say that we think that it will enhance the overall margins for the test segment. So we think it's going to be accretive both at the revenue line and at the margin line for our overall test segment.

Yes, the other thing I would say, Jon, from an overall EPS perspective, we expect it to be – it’s incorporated into our 410 to 430 outlook. And we would expect it to be pretty close to break even. Could be some slight dilution or slight accretion based on how the overall -- we don't have full visibility yet to what amortization will be in some of that. And when I say it'd be close to breakeven from an accretion perspective that would also exclude the one-time inventory step-up charges we always kind of adjust those out, but -- so anyway from an overall EPS perspective we expect very little impact in the year.

Okay, good. But that's including the cost of either financing that we are paying for it.

Correct.

Okay, got it. Understood. Great. Thank you guys. I'll jump back in queue.

Thank you.

Thank you. [Operator Instructions] And next we'll have a follow-up from the line of John Franzreb from Sidoti. Your line is open.

Yeah, I'm just a little curious about what's behind the lower power filter sales that you saw in test. Can you provide some color on that?

Sure. There's a couple of factors there. So we have about -- so primarily, the biggest driver for that last couple years has been in data center applications. That would be the one place where we think we might be seeing a little bit of a deep docking effect. We had one of our customers that had bought quite a lot of filters last year, and we think that they're kind of completing their inventory this year. We think that's going to resume before too long.

Okay. I just wanted to get a handle on that.

Yes.

That's it. Okay. Thank you very much.

Thank you.

Thank you. One moment for our next question. Our next question will be a follow-up from the line of Jon Tanwanteng from CJS Securities. Your line is open.

Hi, thanks. I just wanted to dig a little bit more into the strength you guys saw in the USG business. Did you meaningfully outperform your internal expectations there in either Doble or NRG or did you pull anything in from future quarters?

Yes, we meaningfully outperformed our internal expectations and we feel really good about that business going forward. All the information that we have is that utilities are making substantial investments in their infrastructure. And we are -- we made a lot of -- as you know, we made a lot of acquisitions and a lot of organic product development over the last six or seven years that has really positioned us in an almost ideal way to take advantage of that kind of infrastructure build out. So, yes, we feel like we've got a really good forward path here.

Yes. And John, I would say it wasn't the result of a big pull in or anything. We just saw demand strong as we came through the quarter. And obviously, you saw Q2, Q3 were also very strong. So we just kind of hit -- we kind of kept going that way and that's what drove it.

Have your order run rates in that business been roughly similar to what you saw in Q4, heading into Q1?

I mean, we're always going to be a little bit lower in Q1, but as Bryan said, I mean, you saw the full year outlook there and I think we still feel good about the overall trends there in kind of the near to midterm. So yes, I think we're kind of, I would say, chugging right along.

Great. Thank you for the color.

Thank you. And I'm not showing any further questions in the queue at this time. I would now like to turn it back to Bryan Sayler for any close remarks.

Well, listen, thanks for taking the time to [indiscernible]. We're very excited about our 2023 results, but we're even more excited about our outlook for 2024, and we'll look to talk to you in three months.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.