ESCO Technologies Inc (ESE) 2004 Q1 法說會逐字稿

Good day. Welcome to the ESCO first quarter conference call. Today's call is being recorded today. Today with us is Victor Richey, and Gary Muenster, VP and CFO.

To present the forward-looking statements, I will turn the call over to Ms. Pat Moore, Director of Investor Relations.

Thanks. If you don't have the press release, call and request a copy or check our website.

The forward-looking statements, statements made during this conference call regarding the results and timing of full closures, consolidations, relocations, divestitures and real estate sales, the associated costs and resulting savings to be achieved, future fiscal 2004 revenues, EBIT and gains and charges, contribution from new products, and other statements that are strictly historical are forward-looking statements within the meaning of the Safe Harbor provisions of the federal securities laws.

Investors are cautioned that such statements are only prediction and speak only as of today's call.

The results may differ materially from those projected in the forward-looking statements due to the risks and uncertainties that exist in the company's operations and business environment, including but not limited to the risk factors referenced in the press release as an exhibit to the company's form-K both filed today.

The company disclaims any intent or obligation to update these forward-looking statements. In addition, during this call, the company may discussion non-GAAP financial -- a reconciliation of these measures to their most comparable measures can be found in the company's Form 8-K and at our website at www.escotechnologies.com under the links Investor Relations, financial records and S.E.C. filings.

I'll now turn the call over to Vick Richey.

Thanks, pat. I'll have Gary review our results, after which I have a few comments and we'll be glad to answer any questions you have.

Gary?

Good afternoon. I assume that all of you have had a chance to review this morning's release.

I would like to point out there's a typo on exhibit 5 on the balance sheet. Other current liabilities should be 62 million .526, instead of the 65 .526. I apologize for any inconvenience.

We're nearing the completion of our repositioning activities, which we began last year. We have presented this quarter's results in a manner consistent with the detail presented in our previous communication.

The only remaining items called out separately in this release is the exit and relocation of our Puerto Rican operation.

Rather than recap the financials, I will provide a few brief highlights.

Overall, our results were consistent to slightly better than our expectation. We reported earnings per share of 50 cents from continuing operations, and 54 cents on an operational basis.

Our discontinued operations resulted in a loss of four cents per share. With the runoff of the PPL contract, consolidated sales decreased approximately 2 million from the prior year, including the 10 million decrease in PPL sales year over year.

Sales to co-op customers continue to be strong, and entered orders for AMR products were approximately 26 million in the current period. Our balance sheet remains very strong, with $37 million of cash and minimal debt.

During the quarter, we generated approximately 9 million of free cash flow, and on the working capital front, inventory grew slightly during the quarter to support near-term delivery requirements of the test business, and due to safety stock requirements to satisfied our customers during the final stages of Filtertek's move from the Puerto Rican facilities to Juarez.

As a reminder, we're no longer allocating the management feet to the operating units. In previous years the allocations was 2.5% of the segment's net sales and obviously we have presented the prior year amounts in a comparable manner.

Finally, on the governance front, we continue to work diligently on the implementation of the 404 certification requirements of Sarbanes-Oxley and feel we are in excellent shape to be in full compliance well before the required deadline.

I'll be happy to address any specific financial questions during the Q&A.

Now I'll turn it back over to Vick.

Thanks, Gary. As Gary mentioned, our first quarter results were consistent with the expectations we had as we entered the quarter. Again, our diversity of products and markets has served us well. [inaudible] communication sales were down as a result of lower sales of PPL, our test results were strong, offsetting much of this downturn.

Our orders were solid across all segments of the business and cash flow was a bright spot for the quarter. Our repositioning activities remain essentially on track. We should be out Puerto Rico on schedule by the end of March.

The only change to what I previously communicated as it relates to these actions is our current view is the divestiture of MicroSep which may extend beyond the end of the second quarter.

Given the confidentiality obligations applicable to the negotiations, it would be inappropriate for me to provide additional details at this time. However, I think what's important to the shareholders is we are confident in completing the transaction and at a value which meets or expectations.

As I mentioned in our press release, we did sign a $2.3 million phase 1 contract with Idaho Power for the deployment of our TWACS system.

While the dollar value of this contract is not large, we are encouraged that another IOU has chosen to deploy the system. The final deployment and evaluation schedule has not been completed, but we do not expect additional sales to Idaho in '04 beyond phase 1.

The AMR market, both for co-ops and IOUs continues to look strong. We've talked about the expected improvement of our test segment in past communications.

Our first quarter results are a significant first step. The strength of the business is demonstrated across product segments, but in particular we're encouraged by our Asian initiatives which are beginning to get some real traction.

I also want to take a minute and tell you about our activities related to corporate governance and independence. Our lead director Don [Trowse] also chairs our nominating and corporate governance committee which meets in conjunction with all board meetings. Six of our eight board members are independent directors.

Members of our audit and finance, human resource and compensation, and nominating corporate governance committees are all independent directors. You can now find a comprehensive collection of our corporate governance guidelines on our website.

Moving to the remainder of '04, we did narrow our expected EPS range for the first half, and our full-year outlook remains unchanged. Our priorities for '04 are clear. We must complete our repositioning activities, meet our financial commitments and position the business for significant future growth.

This growth falls into two categories, organic and acquisition-related. We can continue to invest in the organic growth of our current business.

In communications, we're working on additional functionality, more flexible software to continue to support our current and future customers and to further differentiate our product.

In filtration, our focus is on new products, some of which will be coming on line in the second quarter, and some of which are longer initiatives. In test, growth is expected to come from a mixture of new product development and market penetration particularly outside of the US.

On the acquisition front, we continue to look for good fit acquisitions to add to our current offerings. As I previously mentioned, our primary focus is to expand our product offering in the AMR space and in particular to gain further access to the gas and water markets.

Additionally, we're focusing on penetrating the medical device market through our filtration segment. The growth rates and margin opportunities are very attractive in these markets.

In summary, my view is that we had a solid quarter. We met our expectations. We made forward progress on our repositioning initiatives and we're making headway on our efforts to grow the business in the future.

I'd now be glad to answer any questions you may have.

[OPERATOR INSTRUCTIONS] Our first question will come from James Gentile with Sidoti.

Good afternoon, gentlemen. I have a couple questions regarding the communications revenue breakdown. First and foremost, the Idaho $2.3 million contract, you obviously said you're not expecting any further sales for F'04, but is 2.3 million going to be spread out throughout the remaining three quarters of F '04 or will it pretty much be a March quarter event?

It will be spread out through the year.

Okay. Is there any particular reason why they didn't decide on a larger portion of their contract, that you can tell us?

Well, I was asked by Idaho Power to refer any questions about the contract back to them.

Okay.

I need to respect that.

That's fair.

There's an individual there, Larry Spencer, who's their director of Investor Relations, and they just ask that we refer any specific questions to him.

Great. According to the website, there's about $750,000 residential and commercial end points in that market. Is it the hope this is more like a Puerto Rico-style deployment where this will take a longer time and you'll be sort of incremental growth year over year?

Well, again, I really --

You don't want to comment at all?

I prefer not to.

That's cool. No problem.

I want to get off on the right foot with the customer, you know?

I hear you. No problem. I don't want to press that issue. The PP & L revenue that I expected in my model was a bit lower than what you reported in the December quarter. Can you tell us what that's going to be over the next couple quarters until it runs out?

James, it will be relatively consistent with the volume that you've seen in the first quarter there.

Okay. It seems like the sum of the entire PP & L contract, if I did that, was a bit more than $112 million.

If you remember, we booked about a $3 million order last year, so the new sum is around 115, and that helps out.

Fantastic. And then Comtrak was a bit weaker year on year. Were you expecting that run rate or will you see it trend upward?

It should trend back up. What's going on with that is we're doing an upgrade to some of the security software, virus protection and so forth.

While we're doing that, we stop making deliveries until we get that incorporated. We don't expect that level for the year, certainly.

I think it will be similar to that in the second quarter, though.

Then, finally, the other utility, the remaining Wisconsin, Florida, Puerto Rico deployments, can you give us insight into the amount of revenue you booked in that segment of the business this.

Everything that we booked in the quarter was related to co-op business.

So there was no smaller IOU deployments then. Then just one final thing, switching to filtration, in your 10-K, there was language about much of your filtration system being driven by long-term-related contracts.

I was wondering if you can perhaps give us any insight into how much of your annual, you know, figure if you're at a $45 million revenue run rate, how much of that is tied to contracts, versus just a just in time manufacturing type of situation?

The majority of that business has some type of a long-term contract slant to it, if you will. That's not to say that the contract says every month you're going to deliver X, but we're under contract to deliver as required.

So, most of the contracts aren't for specific amounts on specific dates. Rather, they're kind of long-term agreements that we deliver against.

And the positive language regarding the second half of the filtration sales expectation, is that driven by which products and which end markets? And why are you so excited about the second half?

Our book-to-bill has been pretty strong so far, so we expect that will manifest itself in the second half.

Also, James, we'll be completely out of the Puerto Rican facilities, so obviously we're running the dual facilities between there and Juarez, once we completely exit the Puerto Rican operation, that will improve the margin substantially in the second half.

Moving on, we'll hear from Steve Sanders with Stephens.

Good afternoon. A question on the test side, you commented about favorable outlook on Asia. Can you provide more detail on what that represents, and then sort of characterize your test outlook comments as still a pretty broad tailwind or sort of a leveling off in the overall business, but Asia providing some up side?

Yeah. The full year, I think is going to be more representative of kind of the run rate we saw in the first quarter. As far as where that's coming from, it's really across the business.

We have seen a good bit of strength in the medical business to continue in the medical business. We've gotten some good governmental odds on our state department-type sales. The test and measurements has been strong as well. It has been across the full range of the business.

Okay. And then your comments on the mix in the filtration piece, negative impacting margins, could you just provide a bit more color there?

Yeah. We have a couple of contracts, or one large contract, actually, that we deliver a good bit again in the first quarter and I guess we will throughout the year, actually, it has a lower gross margin than the rest of the businesses in that aerospace business. So that mix has pulled the margin down some.

Okay. Then your commercial aviation piece of filtration, there was a comment about it being a little weak. Again, sort of a big-picture comment, is that stabilizing? Is it more your particular segments that are still feeling some pain there? Any signs of improvement?

I would say it will stabilize. I think we have bottomed out there, but it has continued to be weak over the past year, actually probably the last two years, but I do think it's bottomed out.

I don't think we're being impacted any more than anybody else in the commercial aerospace side. It's not our particular products. It's just a general market trend.

One last question. Gary, it looks like if I strip out SecurVision and PP & L, the backlog increased sequentially. Does that sound like a ballpark number?

Yes, you're in the range.

Thank you.

Moving on we'll hear from Richard Eastman with Robert W. Baird.

Good afternoon. Is there a currency number that you can give you that impacts on the top line?

In the aggregate, Rick, it's about $1.5 million, on the filtration side, obviously with the filler tech's European content, it was in the nail of a million two.

Okay. Then, also, could you just talk a bit to the test business and some of the initiatives you've taken to set up a firmer base in Asia? How big is that and what kind of dollars or growth could we expect over the next 12 months?

It's still a relatively small business. It's probably $5 million or so for the year, but that's up a good bit over last year, and we're getting our feet wet over there, and having some good progress. We think that can grow at a pretty significant rate.

But what we have specifically done is set up a manufacturing facility in chin ooh, primary to service the medical business. There's 60,000 hospitals in China, so it's a good place to be.

You need to be close to that customer, because not only do we provide the material, but also we provide the local installation, so it made a lot of sense for us to be close to that market.

We're shipping product from China into India, and our long-term view would be to service that part of the world from that facility. We also opened a sales and service engineering office in Japan this last year, and have been servicing primary test and measurement market there.

We're also shipping some of our product component product in particular out of Boston through Japan and selling it in Japan.

When I look at the test-op profit at 8.8%, it's a good number. The incremental margin is like 16%, which doesn't seem as high as it should be. Is that partially carrying these two facilities? 4 or did you run any restructuring costs through that number?

Part of it is I hate to say mixed, but it is. I think I've talked to most everybody about this in the past but if you look at the mix of the business, we get a much higher gross margin on our component business than we do on the chamber part of the business.

So we have more chamber sales in the first quarter than we've had in some of the other quarters, so that mix is a result in a lower margin than I might anticipate with a higher level sales.

We should look for that to go up, even carrying these costs?

Sure.

As we go forward. One other thought. We had taken about 700,000 in Puerto Rico this quarter. We should look for five to seven hundred in the next quarter as well?

You're in the ballpark. I think we calibrated in the last release about a 1.5 million total, and we've burned up about half of it.

Was there any cost associated with the test facility in the U.K.?

Very nominal. I would think if there's any in the second quarter, it would be nominal as well.

One last question -- this time I mean it -- if our cash position is at about 37 million, free cash flow in Q1 was obviously pretty impressive, if we in the next three quarters if we could pick up another $30 million of free cash flow, at some point we sell MicroSep, get something for that and eventually the Puerto Rican building, do we have a shot at 90 or 100 million of cash by year-end?

Obviously the math adds up to close to 9 on million, and as Vick mentioned, we certainly are looking for opportunities on the acquisition front, but exclusive of that, the simple math you laid out gets you close to 90 million without spending anything on extraordinary items.

It's fair to run out the first quarter's free cash flow for the balance of the year?

I think it was a bit unique in the first quarter just because of the some of the timing in the PPL, and we collected a lot of the cash out there. It's not going to be dramatically less than that, but I don't think it would be fair to multiply it out across the year. It won't be a big drop, though.

Very good. Thank you.

We'll hear from Patrick Forkin.

Good afternoon. EBIT margins look like it's back up to shy of 9%. Is that your target, or is that a pretty good number to use for the balance of the year here?

I think what we said in our last release is certainly we're looking for expansion on that. I think when you look at some of the volume we're anticipating in the second half of the year, the margin will pull up along with that.

I think what was in the November release was in the neighborhood of 11 to 13 percent and it looks very positive to be on track for that.

What kind of ramp-up are you looking for that, Gary?

I think the second quarter will still be a bit soft, and then I think you'll see a significant spike in the third, and then it will kind of normalize itself. Third and fourth will be consistent and first and second will be consistent.

Okay. Then, Vick, on the acquisition side, or Gary, you mentioned you're looking at some things. Any comments on which end of the business that relates to?

I think it's still consistent with what we put on the in the last pre release. Certainly, the best growth opportunity for us I think is on the communications sides and the margins there are obviously very attractive.

We continue to look there. Secondarily on the medical device side, those are probably the two primary focus. Those are two areas we're probably spending the most time on today.

Okay. Last question, on the AMR side, with respect to sort of the landscape out there, large IOUs similar to a PP & L, the number of active proposals that are out there, I mean, would you characterize that as two or three, or something in excess of that?

I don't really want to get into specific numbers, but I mean, as I said at the last conference call, and my view hasn't changed, it's probably as strong as we've seen it for a while.

Okay. Thank you.

That concludes the question-and-answer session, I'll turn the conference over.

Thank you all for your interest, and I look forward to talking with you next quarter.

That does conclude today's teleconference. Thank you, and have a great day