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.

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?

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…

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…

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.

[Operator Instructions] Our first question comes from Tommy Moll of Stephens, Inc. Please, go ahead.

Good afternoon, and thanks for taking my questions.

Hi, Tommy.

I wanted to start on Doble. I think orders were down slightly on a year-over-year basis. Revenues, if I'm doing my math correctly, were flattish on a quarter-over-quarter basis. And so the question would be, if you could just give us an update on demand currently for that business. Thank you.

Sure. Listen, we still feel good about overall demand at Doble, and we did have very good costs for orders in the prior year. But as you can see, we're moving the revenue up, seeing good demand for our condition monitoring products and for services. We do have a pretty robust order pipeline and already begun to see some progress here in the third quarter.

And Tommy, this is Chris. I would also say we -- sequentially the Doble sales were up from first quarter to second quarter. NRG was down slightly sequentially, but Doble was up inside of there.

Thank you for clarifying there, Chris, and I just can't resist asking here, Bryan, you threw out a bogey high single digits after your strategy review on the A&D side. Is there anything you want to use to frame the utility outlook after your review?

Yes, I would say we're mid-upper single digits over the planning horizon there. Those are markets that are growing very well, and I think we've got strategies, plans, product development in place that's going to allow us to grow faster than those markets.

Thank you, Bryan. And a quick one on Test. Chris, I think I heard you say you're looking for sequential improvement as you go through this year. I presume that applies to revenue and EBIT. It looks like revenue has already bottomed and moved a little bit higher. But if you could just clarify what you meant there, it'd be helpful, thank you.

Yes, that's right, Tommy. So we had a sequential sales and EBIT increase from Q1 to Q2. We would expect Q3 sales to be higher than Q2 and also margins to be higher than Q2, and then we would expect a similar dynamic as Q4. So we're kind of still looking for that business to kind of ramp and get better as each quarter progresses.

Thank you. I'll turn it back.

[Operator Instructions] Just a moment for our next question, please. Our next question comes from Jon Tanwanteng of CJS Securities. Please go ahead.

Hi, this is Justin on for Jon. Can you quantify how much risk there is at Boeing, and if they've communicated to you any changes in their needs?

Sure. Listen, Boeing is clearly having a tough time of it, and we certainly look closely at the impact that Boeing might have, both in the near term and over the longer term planning horizon during our strategic planning process. Our determination is that this is going to be a short term problem that will work itself out over several quarters. Boeing's build rates are expected to remain modest for 2024 and begin ramping up in 2025. We are -- the signals that we're receiving are to continue to produce at the rates that we've been contracted to do. So, we have seen a little bit of a falloff in new orders at one of our three businesses that are serving the commercial aerospace side of Boeing. Nothing to be too concerned about, but definitely a noticeable change. The good news is that we're prepared to match their demand as needed, and we have the ability to kind of reallocate that, the capacity that would have been devoted to Boeing, to other programs to meet our projected growth rates. Listen, I'd end by saying, listen, a healthy Boeing is good for our industry, and once they can get past this current crisis, we anticipate that that will serve to raise our overall growth projections.

All right. Thanks for that. That's really helpful. And then one more, if I could. Should we read anything into the lower book-to-bill this quarter across the segments and if you think there's any demand weakening or pushing out or is it more the lumpy nature of orders?

Well, I would say that on the Test business, we've definitely seen lower orders in China and lower orders in wireless. So that would be -- I would not put that in the lumpy category. Okay. But I would say that renewables, maybe the global business, and certainly a lot of what's going on over in Aerospace & Defense, those are all pretty lumpy. We have, as I said, we've got a strong pipeline in all of those categories and some of them are tracking some pretty large orders. That would really make a big difference in terms of our book to bills.

Yes. And I would just add on, especially Aerospace & Defense. I mean, it was still over 100%, and that's after two quarters that were way over 100% as we had some pretty big navy orders over the last prior six months. So really still pretty strong there. I'd say.

That's great. I appreciate the color. Thanks for taking the questions.

Thank you.

Thank you. Our next question comes from John Franzreb from Sidoti and Co. Please go ahead.

Good afternoon guys, and congratulations on the very nice quarter. If I heard you properly in your prepared remarks, it sounded like you were getting pricing in Utility and Test. Can you talk a little bit about what kind of pricing you're pushing through?

You want to take that one?

Yes, I mean, I think generally what we're getting in those places is still kind of in the 3% to 4% range and we see that, you know, kind of ahead of inflationary, you know, numbers. So we kind of try to track, you know, what we're seeing on the commodity material side and you know, people, inflation as well. And we're kind of -- we're still favorable on those measures as far as more price than cost.

Got it. And coming back to the Test segment. You mentioned that there's been delays on a few large projects. I'm wondering, is there any common theme in those delays that you're seeing in your customers?

Well, I think that -- as I've said before, there's a general slowdown in the construction industry in terms of permitting, being able to get some key raw materials. And I think labor availability has been a big issue. So the buildings that we're waiting on are really large big projects. And so we are seeing some improvement there and -- but nothing like a return to normal. At this point, though, we believe that we have the access that we need to deliver significant sequential growth in the second half of the year. You know, the projects that are moved out to next year, we've kind of set those into next year's plan now, and we anticipate that those will be executed on the revised schedule.

I'm also hearing a lot about permitting. But you expect everything to fall into fiscal 2024 still and not be pushed to the right of that?

Yes, I mean, we've already pushed a fair bit out to next year. That was kind of some of the reduction in the outlook for Test that we kind of did after the first quarter. And yes, we haven't seen that get worse necessarily, but we also haven't seen it get better. And I would also just say, John, that as far as some of the delays on orders and such as Bryan mentioned, I mean, we do see a path to pretty big sequential improvement in orders as we go into Q3 versus Q4. And it looks like, frankly, some of that might even happen in April, so -- or has happened in April, I should say. So we expect that to get better. But again, a lot of those bigger orders that would be coming in now would likely be more kind of '25 revenue-type things.

Great. Thanks for the color. And one last question, if I may. On the M&A front, can you kind of give us an update on targets and size and what kind of product lines you'd like to end? Maybe a little refresher? That'd be helpful.

Sure. Well, first of all, I would say that in the past, since our last call, we've seen a sharp increase in the investment opportunities that kind of meet our target profile, if you will. And we're actively engaged in those processes. We don't have anything to announce. We're not particularly close, but we are optimistic about our ability to get things done. When we talk about M&A, I think the first thing I want to remind you is that organic growth and operational execution are our primary focus. So we're not taking our eye off the ball there. Our organic growth profile over the planning horizon is really, really good. Having said that, several of those end markets that we talked about earlier have superior long term growth characteristics, and those are the ones that we would be the most focused on, and that would be Commercial and Military, Aerospace, Navy and Electrification.

Great. Thank you, guys, and I'll get back into Queue.

Thank you.

[Operator Instructions] Thank you. I see no further questions at this time. I would now like to turn the conference back to Bryan.

Thanks. I apologize, I lost my place here.

I think we're good, look.

All right, so thanks a lot, guys. We really appreciate you answering the questions or taking the quick questions with us. And we look forward to another good quarter.

Thank you.

Thank you. This concludes today's conference call. Thank you all for participating. You may now disconnect. Have a great day, everyone.