ESCO Technologies Inc (ESE) 2012 Q1 法說會逐字稿

Good day, and welcome to the ESCO Technologies first quarter 2012 conference call. As a reminder, today's conference is being recorded. With us today are Vic Richey, Chairman and CEO and Gary Muenster, Vice President and CFO. And now to present the forward-looking statement, I would like to turn the call over to Kate Lowrey, Director of Investor Relations. Please go ahead, ma'am.

Thank you. Statements made during this call regarding the timing and amounts of fiscal 2012, 2013 and beyond expected results, including sales, cash flow, EPS and profit, the timing and certainty of developments in connection with the SoCalGas project, renewal of our credit facility, spending on the smart grid initiatives, future growth opportunities, success in domestic and international markets and other statements 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 is an exhibit to the Company's Form 8-K filed today.

We undertake no duty to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. 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 first quarter and fiscal 2011 results press release issued today and found on the Company's website at www.escotechnologies.com under the link Investor Relations. Now I will turn the call over to Vic.

Thanks, Kate. Before I give my prospective of the quarter, I will turn it to Gary for a few financial highlights.

Thanks, Vic. As noted in the release, we reported EPS of $0.19 in Q1, which is slightly better than our original internal plan which drove our guidance in November. This increase from plan would have been even higher had our effective tax rate not been impacted by the loss of a state tax benefit which negatively impacted the first quarter by $0.02 a share. The EPS decrease from prior year, which was clearly expected, was driven by significantly lower sales in the USG segment resulting from the wind down of PG&E Gas, New York City Water, and CFE in Mexico.

On the sales front, we are pleased to report that consolidated sales only decreased by $7 million, or 4%, in spite of the $23 million sales decrease at Aclara. Filtration sales increased $7.5 million, or 21% with every operating unit within this segment showing significant growth. Both Crissair and TEQ reported 33% sales increases followed by VACCO at 18% and PTI at 12%. We expect continued strength in Filtration for the balance of the year. Test sales also increased $7.5 million, or 23%, as several large chamber projects were completed in the quarter. While USG sales decreased as expected, we did have a few bright spots in the group as co-op sales increased 42% in Q1 compared to Q1 of the prior year and Doble sales increased over 5% in Q1 versus Q1 of '11. The sales increases were consistent with our plan and are encouraging given that our first quarter is normally the lightest quarter for co-ops in Doble.

During the quarter, we also improved our gross margin from 39% to 39.4%, despite significantly lower sales of higher margin products sold to PG&E in New York City in the prior year. SG&A increased $5 million compared to the prior year and I remind you that in 2011, we increased our annual investment in smart grid initiatives at Aclara and Doble by approximately $10 million. As I noted at this time last year, our Q1 fiscal '11 spend rate on these initiatives was not yet fully ramped up and was more back half weighted. As a result, the prior year Q1 SG&A does not reflect the full run rate impact of these costs which are now being compared to the amounts in 2012. As we move through the balance of '12, we do not anticipate such large growth in SG&A when compared to 2011 on a quarterly basis. As a result of the lower at Aclara sales and the impact of the higher SG&A, our EBIT obviously decreased from prior year. While lower than 2011, Q1 FY '12 EBIT was well above plan.

VACCO and Doble were the biggest contributors as both reported EBIT margins greater than 20%. Entered orders clearly were the highlight of the quarter as we booked $204 million of new business. This resulted in a consolidated book-to-bill of 133% with all three segments showing well over a 1 to 1 ratio. USG had a great quarter in orders, highlighted by the additional $33 million of business with SoCalGas, which brings the total firm orders to $53 million with this customer, an additional order worth $6 million with PG&E Gas and $32 million of additional co-op orders. As a result of these orders, backlog increased $51 million, or 14% from the start of the year, which provides added confidence in our outlook for the back half of the year.

On the cash flow and balance sheet front, we did use cash in the first quarter, and while this was disappointing, it was mostly timing related and several large customer receipts expected in late December were received the first week of January. Through the end of January, we are on track with our cash flow projections year to date. You will see that at quarter end we reclassified our outstanding debt balance as current since our credit facility expires in 2012. We are in the process of refinancing the existing credit facility, and we expect to be wrapped up well in advance of its expiration. Our bank group is very supportive of our strategic plans, and we don't anticipate any problems with future liquidity or strategic growth.

As noted in the release, we reiterated our outlook for fiscal '12 and '13, and we continue to expect both sales and EPS to grow as previously communicated. Also consistent with our November discussion, 2012 remains back half weighted with a 30%-70% relationship. As a reminder, 2012 growth is expected despite a significant sales decrease at PG&E, New York and CFE and 2013 growth is expected to be significant when compared to 2012. I will be happy to address any specific questions during the Q&A, and now I will turn it back over to Vic.

Thanks, Gary. I think Gary covered most of the operating highlights, so I will be brief in my commentary about the quarter and my focus will be on the outlook for the future. I'll start by saying that I am pleased, as well, with our first quarter operating results as we came in better than our internal plan with the exception of cash. Entered orders represented the best first quarters in our history. This gives me a solid base of confidence in our outlook for the balance of the year. It was great to see the strength in Filtration, Test and Doble where the sales growth and operating results were outstanding. Significant contributions at this group continue to reinforce my confidence we are making the right investments and that we are continuing to expand our market share in our targeting end markets.

While Gary mentioned SoCal additional business, I'll add a few comments around the overall project. First of and most importantly, our relationship with this customer is very strong, and they view Aclara as a valuable partner on their AMI project. This is confirmed by $53 million of SoCalGas business booked to date. In addition, recent discussions with SoCal senior project executives validated this sentiment, as I was told that SoCal remains excited about the project as is fully committed to its success. While the interveners have added some complexity, SoCal remains confident that this can resolved favorably. While SoCal is a big part of our growth over the next few years, all of our businesses will continue to contribute to our success. Doble, ETS-Lindgren and our Filtration businesses all enjoyed leadership positions in their respective end markets, which contributed significantly to their strong performance in the first quarter, and these businesses position us to continue this performance in the future.

Our outlook for the remainder of '12 remains unchanged and our projections for significant growth to '13 remain solid. I'm pleased to show this growth this year, and I appreciate the fact that not everyone in the AMI industry is experiencing the same near-term growth prospects. We are in a fortunate position to be able to project significant growth over the next 2 to 5 years across all three business segments, and I continue to be enthusiastic and optimistic about the opportunities ahead of us, both domestically and internationally. I'm convinced that our three segment strategy and end market [adversity] remains the strength that differentiates us in our market and allows us multiple paths to grow and weather economic uncertainties today and in the future.

On the M&A front, we are seeing opportunities to supplement our organic growth by acquisition. And while our primary focus remains in USG, we continue to see attractive options across all three platforms. We will continue to be prudent and disciplined, and with today's favorable credit market, we can afford to remain aggressive. So in summary, we remain in a solid operating position across the Company with ample opportunities for growth, and we will continue prudently investing in the business to ensure long-term success. So, I will now be glad to answer any questions.

Thank you. (Operator Instructions). We will pause for just a moment to give everyone an opportunity to signal for a question. Ad we will now take your first question from Steve Sanders with Stephens Incorporated.

Good afternoon, guys.

Hey, Steve.

Just a question on moving 1Q to 2Q. So, you're sticking with your 30% first half, we can obviously do the math on that. Is it primarily the co-op orders that will turn quick? Or is it broad-based sequential strength in the business? Maybe talk about that a little bit.

I see a couple of things. We've got a good bit of backlog that would normally be delivered in the second quarter in any case and in the second half. And co-op orders are certainly developing. We'll start delivering some SoCal in the last quarter, and then it's just a matter of -- we are seeing strength across all three business segments and effectively our book to bill was 133%. I think that gives us a lot of confidence going into the second half of the year.

Okay, and Gary, can you talk a little bit about kind of 1Q to 2Q for the segments.

Yes, I would say, Steve, if you look at Filtration, we came in Q1 at about $43 million. It should be slightly higher because that is kind of a steady state business. In the Test business, we should see a significant increase there, close to somewhere in the neighborhood of 35% to 40% on sales going up from roughly $40 million to over $50 million.

And then in the USG group where we did about $70 million, that should go up somewhere in the neighborhood of $8 million to $10 million. And a big driver of that Vic didn't point out is on the PG&E Gas business that we booked the $6 million. Majority of that will ship in Q2 because that is kind of just their kind of annual run rate, so that is a nice pickup to the second quarter. So, and corporate's cost should be the same. So, if you roll that through, you should be able to see why we are thinking 30% relationship in the first half.

Okay, and then obviously nice to see the follow-on order from SoCalGas. Vic, you did mention the interveners adding some complexity. From where you sit, has SoCal changed their schedule at all due to the involvement of some of the consumer groups out there?

No, not at all. And in fact, I would say that the fact that they placed this larger order is a strong signal to us and to others. And so their schedule hasn't been impacted at all as a result of that.

Two quick ones and then I will get out of the way. It looks like the Test margins were depressed, even at this revenue level. So, if there is any color there, it would be helpful. And then the last one is just, Gary, what is your thinking on the cost of the debt when you redo that here over the next quarter or two?

Yes, I will address it first. It's (technical difficulty) Talk about mix all the time, but in that test business, that is the business that gets most impacted by the mix that we have. So, we had a much larger percentage of the business in the first-quarter that were chambers and, you know, the pass-through and things come with that. So, the margins were depressed as a result of the mix and having more chambers and less of the small chambers and the components going through the first quarter. We see the same projection for the year that we saw before, so it is really just the timing of those sales.

Yes, and Steve, on the cost of the debt that we are in the process of negotiating, obviously, we're not going to capture that LIBOR plus 47 basis points that we are sitting on now, but I think, universally, everyone will say that this is a great time to be in the credit markets because the kind of churn that was there over the last 6 or 7 months isn't there. So we are looking at LIBOR plus 100 to 150, depending on where our leverage ratio is. And I'll also point out that absent an acquisition, we should be able to significantly pay down the debt balance this year. So, by the time you get to the second half of the year, these things -- we are not ready to sign today, but certainly within the next couple months we will have this locked down. But we will have the debt balance paid down enough that the differential in the higher LIBOR plus spread should offset itself in the back half of the year. So, we don't see anything problematic. And should we be successful in some of these M&A transactions we're looking at, the debt's not going to be that much more from a cost perspective than the numbers I just said.

Okay. Thank you very much.

And we will now go to John Quealy with Canaccord Genuity. Mr. Quealy, your line is open.

Hi, guys, this is Mark Siegel for John. My first question, wanted to talk about longer-term growth rates in Filtration and Test. In the past you have talked about those businesses being sort of mid single-digit growers, right now clearly those businesses are outperforming. So, could you perhaps talk a bit longer term? Are those numbers still valid or are you seeing a sort of material change in those businesses?

What we said today, I mean, I would project that we're probably going to be a little bit higher than that. I think they'll still be single digits over time, but more upper single digits than the mid single digits. On the aerospace side, we are seeing -- we're at the front end of a pretty significant ramp, I think, in the overall aerospace business.

And then as far as what we're seeing in the Test business, it's really been driven by two things. Just our position in the wireless market. And as we've entered the systems market, we are projecting a little bit stronger growth in that area than what we have seen in the underlying business. And then the other piece of it, just what we're seeing in Asia. We've got a much stronger ramp up in India than what we had anticipated, and that is kind of a lot of small numbers. Certainly, we've had a lot more success there in the first couple of years then we thought we were going to have. And then our China business continues to really rock along very nicely.

Okay. And then on the utility solutions side of things, clearly we are seeing an increased emphasis on transformer monitoring in substation automation. You guys have introduced some new products at Doble and made some progress in new geographies there as well. Can you talk about how those initiatives are tracking? Are they tracking ahead of plan, and just what your thoughts are there?

I'd say it's a little bit of a mixed bag. They're not behind plan, I would say, so they're either on plan -- and we're talking about full introduction early next year, late this year. And in a couple of projects are actually ahead of plan. So, I feel good about the progress that we have made there, and we've got really good technical teams at Doble, and they have been making good progress there. On the international expansion, that is always a little bit tougher than you think it's going to be. So, I would say we are on plan and maybe a little bit behind plan there, but nothing significant. I would say that the Doble businesses is performing as expected or just a little bit better.

Okay, and just lastly, in prior calls you guys have talked about some international smart metering opportunities and sort of focusing in on Brazil and Mexico. Can you provide us any update there?

I guess of two things I would say there, with Mexico we have our -- the (inaudible) deployed now, it's working very well. We hope to have another order there in the not-too-distant future, but we don't have a firm timeframe on that. But I would say the biggest news there is the product is in place, it's working very well, the customer is very happy with it. As far as Brazil, we opened an office there fairly recently and a lot of conversations there. We continue to remain excited about that market. I think the uncertainty there is when it's going to unfold. I do think it will unfold, and a lot of people have an opportunity for success there. Ourselves included, just because some of these technologies we have deployed there.

Great. Thanks a lot.

And we will go next to Craig Irwin with Wedbush Securities.

Good evening, gentlemen. Congratulations on the booking from SoCalGas.

Thanks.

First thing I wanted to focus on a little bit was the momentum in the muni and co-op market. Obviously, 42% growth is a tough hurdle to match every quarter, but you had some pretty solid growth there last year, and you talk about the overall momentum in those customers and whether or not there is something specific that contributed to the very strong growth this quarter or if you really are seeing a significant improvement in business trends there.

Yes, you know, I wouldn't say a really good 42% have recorded, and a lot of it is what we are comparing it to. But we do view our opportunities in the co-ops at least consistent with last year or a little bit better. I would say the two things -- the two major things we that have going for us there are, number one, we really have a very strong path to market working with HD supply. They've been a really good partner for us. I think they've continued to even improve their reach and their capabilities. So, as we've given more and more opportunity to them to sell our products, they've done a really good job, so that has been a big driver. And the other one is just introducing additional products to those customers so that the easiest customer to sell to us when you already have if they are happy, which I would say the vast majority of our co-op customers are. So, it's a matter of having a good channel to market and introducing opportunities to upsell existing customers at the co-ops.

Great. And the next thing I wanted to ask about was the gas AMI market, you've mentioned on prior calls that there are a number of utilities out there considering some pretty large installations. Maybe not as large as SoCalGas, but individually, each of them could be a pretty significant win for you guys. Can you give us an update on some of these projects and whether or not you expect the large amount of spending for pipeline integrity programs to maybe impact this or maybe benefit this throughout 2012?

Yes, I would say that we still are pursuing a number of those projects that remain in place. I think the customers are pursuing those. I'm obviously not going to get into specifics because to the extent that people aren't aware of and aren't in there, then I don't want to make them aware of then. But that market seems to continue to remain strong. As it relates to a some of these other issues that take money away, it's always a battle for capital expenditures, but about the same time SoCal has put it in their AMI system, they're also doing a significant upgrade to the safety of their pipeline. So, both of these things I do think a stand on their own. The AMI project can pay for itself. And so we haven't seen a lot of consumer, a lot of customers kind of backing away from this as a result of other priorities. That is something we always worry about in a capital business.

Great, great. Also wanted to ask about SG&A as we progress through the year. Can you maybe give us some color on sequential trends for SG&A and whether or not the significant revenue growth you are going to have to throughout the year is going to drive an increase in the variable SG&A contribution, or how should we be looking at this?

I think, Craig, for the second quarter you can kind of keep the dollars about where the first quarter is because it we don't see any growth there. And the one thing I want to point out on the incremental investment we made last year, some of that is outside costs where we are using contractors or subcontractors to facilitate the development of some of the more complicated hardware and software configurations, and we are pretty close to product launch on some of those things.

So, you are going to see it actually decrease in the back half of the year versus the first half. Not gigantically, but at a run rate at where we are at here in about $48 million. I think it would be fair to keep it there for Q2 and then step it down a little bit, maybe in Q4 put it down around $45 million or $46 million because that is when the incremental outside contractor costs basically are significantly reduced related to the product -- expected product launch date. So we are not laying people off, that is not what is driving it down obviously, it is external cost been eliminated through project completion which is where we will get the leverage again on the -- so we are going to have two levers, the sales growth in the back half and the -- which brings along margin improvement at the gross margin side, and a lower cost structure in G&A, which is where you are going to see the incremental EPS leverage realized in the back half.

Excellent. Another thing was hoping you might be able to update us on is the [scented] network, how trials there are going, whether or not you have further ongoing development or if there is specific customer interest you could maybe share with us.

I would say we have had a full court press with SoCal on that. The product is working well, we are getting the data throughput that we expected, we're getting the distance coverage that we expected, and -- but I would say that what we are really working towards is getting that system deployed. SoCal, I think once we do that, show it's working, then we will have some additional interest at other customers. As we have had, quite honestly, we have a limited number of people on that team, and they're 100% focused on SoCal today.

Thank you for taking my questions, and congratulations on the strong quarter.

Thanks, Ben.

And we will go next to Ben Schuman with Pacific Crest Securities.

Hi, guys, thanks for taking my questions. Can you just give us a sense of the average deal size in the Doble business? Is there any lumpiness there at all, and will the new products affect that at all?

There is not a lot of lumpiness, and if you remember the way that business works, about half of it are annual contracts that we have with customers. So, I would say we have a very good insight into that as we start the year and go through the year. So, that piece of it is always rock solid. Even in the economic downturn a couple of years ago, that still remains solid.

So, what you do see then is the hardware sales and service sales are the other piece of it. It has been very consistent, though, other than the one year. So, that is something where the average deal size, we are talking anywhere from $30,000 to $40,000 a test set. So, it's not something where one customer falls out and another one doesn't come in, it's not going have a huge impact on the business. So, it's not such large dollar items that you have the same type of impact with some of these large projects you do in a test business with the Aclara business.

Thanks, that's, very helpful. And can you give us an idea of how you see additional orders for SoCalGas coming in? Have we seen most what we are going to see in terms kind of the pre-volume deployment stuff, or do you expect additional big orders to trickle in this year if their plans remain on track?

I think if the plans remain on track, we will get some additional orders. They will probably be in the third or fourth quarter. But the current schedule we see would result in some additional orders, probably not to the same extent as what we have seen thus far, but we would get some.

Great. Thank you very much.

You bet.

And we will go next to Carter Shoop with KeyBank.

Good afternoon. So, when we look at your full year guidance, where do you see the most risk? So Gary, what one or two modeling assumptions do you think are at most risk here when you think about the year progressing here in the next three quarters?

I'll kind of walk you through each piece of it, Carter, because I think it will help on the, kind of the overall view. I think Filtration is pretty stable. I don't think we have a whole lot of risk there, and I think relative to, as Vic said, with the aerospace cycle at kind of the front end, I think we're pretty locked and loaded there. So, I don't see a whole lot of risk. Obviously, on the Test business, you run into a little bit of calendar risk. These are -- some of these chambers that we have the back half of the year are -- they're construction jobs, and they could move a month or two. So, if we are not fully completed with everything that is scheduled in September something could move to October. But that is really not something that is going to dramatically take guidance down if something did move out, and I think we have enough leeway in the projects that are in the back half of the year that we should have those locked in.

To Vic's point with I think Ben on the last call, that is pretty stable because of the service side of the business, these are long-term agreements where you book in a time and material commitment, so that is extremely steady state. Doble probably in a bad quarter would have $1.5 million of sales risk, and that again would be timing. So, if you took where they are at in Q1 and put $1 million, $1.5 million around that center point, that is their upside and their downside in the back half. So, the real risk comes I think comes from what we have modeled in the back half of the year for the Water business, which is obviously the most volatile -- or the most challenged right now. But fortunately, it's not a big piece of the business. So, I really don't want to go into specifics on what we have in there for Water, but I will say percentage of total revenue, it's not that significant. So, if our plan were to miss by 10% or 20%, it wouldn't be catastrophic, the number is that small. So, I think water softness is probably number one.

I think the gas projects that we're talking about that Craig had brought up, we don't have those modeled in revenue in this year, so that is not something we are concerned about. So, I would say on the downside we probably have $0.05 of risk and everything that we see as risky doesn't happen. And to the upside, we probably have $0.05 to $0.07 of upside if things accelerate. And as Vic said, if some of additional SoCal orders come through, that we can ship things. So, we feel pretty good, that's the nice part of this business. And looking at our backlog numbers, where we are at, we feel very comfortable that in the next, whenever we have seven or eight months left, that we are going -- in a pretty good spot around abandoned the risk and opportunity.

That's very helpful, and just to clarify, when you say downside risk of $0.05 and upside of $0.05 to $0.07, is that downside of $0.05 to the low end of guidance and $0.05 to $0.07 is the upside of guidance? Or is that relative to a number that you guys have that you are looking at in between the -- (multiple speakers).

I would say at the midpoint of the guidance.

At midpoint, okay. And then, what about the co-op business? Is that a risk as we move through the year? Obviously, the orders and the sales have been very strong. What about in the second half of the year? Is that a significant risk that we need to be worried about?

No, I would say that if anything, that's where some of our upside would potentially come from.

Okay.

Or recover some of the downside, as the case may be, but we feel pretty good about the co-op orders. A lot of those, since they've come in earlier than we anticipated, we do -- our guys do a good job of really understanding of where those are going to come from. A lot of them do go to existing customers to build out what we already have. The upsell customers or where HD had said, hey, we've got these things clearly identified, here is where the funding is. So, there's always risk, but that's -- I don't think that is a big risk for us today.

Okay, and going back to Water for a second, based on the lead times for some of the larger projects, I assume that you are not factoring in any large wins in the second half of the year. Does that mean you're working on a handful of small to medium-sized municipalities here that you are hoping to land?

That would be correct.

Okay, and then last question, on Test, obviously a big ramp here in 2Q. Is that a pretty sustainable level, or will we see a little bit of a drop down in the 3Q, 4Q timeframe?

I think you will see a little bit of a ramp down, probably somewhere between the value or the sales volume in Q1 and Q2. So, it's not going to be at the level of Q1. It's going to ramp up and then step down. And with the ramp ups driven on, there's two relatively large chambers that are kind of in the $4 million to $5 million each that are going to drive that Q2. And so it is going to step down, but not to the level of Q1 sales.

That is very helpful. Thank you.

We will go next to Sean Hannan with Needham & Co.

Thank you, good evening.

Hey, Sean.

So, if I could circle back to the Brazilian market, there was a question on that a little bit earlier. Was looking to see if you could elaborate a little bit for us. The dialogue that you have had with the utilities there, I think that you've talked about half a dozen, you've been in dialogue with two specifically that may appear a little bit more promising. Can you share with us perhaps what these utilities are looking to accomplish in terms of full deployment or targeted smaller deployments in the territory, say like a CFE type of approach? And then how would you look at the size of the opportunity from a point and perhaps a broad range dollar perspective?

I would say that Brazil, at least as we understand it today, will probably play out as something in between what we see in CFE and Mexico and what we've seen in the US. So, and what I mean by that is I think they'll be a little bit more aggressive once they make a decision and start deployment into what we've seen in Mexico where even though $20 million of deployment there is probably the largest AMI deployed in Mexico today, it's still not a huge deployment, obviously. But I also don't think Brazil is going to go in and say, okay, we're -- this utility of 4 million end points is going to go full out with this technology, and we are going to start tomorrow, and we're going to finish in five years. So, I think there's going to be something in-between those two approaches.

As far as what they are looking for, I think that's still being determined. They do -- have gone through some of the same pervasions as what we saw here as the, A, we just need automated AMR or we need full-scale AMI or that we need something in-between. So, I think they are still trying to figure that out, and that's one reason it hasn't moved more quickly as it has -- or as what we anticipated. The government is still involved making some decisions. My view is that they're probably going to end up again somewhere in-between. I don't think they need all of the -- some of the things that we're seeing at some of the US utilities, but they're probably going to want to do more than just read a meter. So, as a result of that, because of the technology that we have, the robustness of the technology and the capabilities that we have with the technology that we plan to deploy there and we've tested there, I think we are well positioned, both from a technology standpoint and being able to do it as well as the price points, to be able to do it economically.

That's helpful, Vic. And then just a follow-up on that, though, for at least the two major utilities that perhaps are going to be a little bit -- or looking a little bit more promising, can you give us a sense of when we aggregate the two, what we're looking at in terms of millions of endpoints or thousands of endpoints?

Well, I think once they get to full deployment, again, I think it's going to be over a long period of time. I mean, you are talking about over 10 million endpoints.

Terrific. And then if I could jump to the water side, is there a possibility -- can you discuss what you have been seeing out of the distribution agreement that you entered into with Global Water? Has there actually been any tangible traction since the announcement? Are some of the expectations that you have in the back half of the year actually tied to that agreement? And then any thoughts around the timing of when that sales channel could maybe be a little bit more meaningful to your revenues since the sheer reach of Global Water is pretty notable.

My understanding is that we have got a couple of wins through Global Water. I think like most of these agreements, it does take some time to get some real traction, you have to have some successes. We are not counting on a big change in the second half of the year. We still have our own sales force, we think it's going to be augmented by these guys, as well as continue to look for other distribution channels into that market. As you know, that is the most fragmented of all of the utilities that would be in the water markets, there's so many of the, a lot of small ones and so we look at a number of ways to go there. But I think we are off to a good start with Global, and while we are not counting on a huge amount from them in the second half, certainly we think we will start to get some traction by then.

That's great. Thanks very much.

And we will go next to Richard Eastman with Robert W Baird.

Yes, good afternoon. Gary, could you repeat the segmentation on the Filtration piece of the business? I think you had mentioned aerospace was up 12, which would I guess be PTI. And what did you say for Vacco and TEQ?

Are you talking about for Q1?

Yes, just kind of year-over-year.

Yes, Crissair and TEQ were both about 33% in revenue, Vacco was up 18% and PTI was 12%.

And then just -- I'm a little bit curious on the margins here. I guess the margin profile almost suggests a very Vacco heavy mix, and I'm a little bit curious. Is this a pretty sustainable run rate at the 19% level with the mix as you see it?

Yes, let me -- we keep TEQ in their obviously for legacy reasons, but TEQ is not banging out EBITs at the pure filtration level. So, PTI is basically sitting 19% to 19.5% on the EBIT side. Vacco, as you know, continues to kind of be in the mid-20s, and where we're really seeing tremendous strength is from Crissair which continues to incrementally step up. We did some really attractive things on the price side, and now that they've been around for a little over a year, we have our cost disciplines and our supply chain disciplines in place. So, their margin is fast approaching PTI.

So, TEQ is kind of in the low to mid teens, so obviously, they are below the group average. So, if you kind of split it between TEQ and the three filtration companies, filtration is at about 20.5% and TEQ is at about kind of a 14%. And then when you allocate it based on the revenue distribution, that is how you blend it out to the 19.1%. So, we are doing some things at TEQ to continue to get that up. But we don't see a 20% EBIT coming out of TEQ. So, if you think of filtration as kind of staying in the three companies together in that kind of 20% range and TEQ being in the 13% to 15% range, I think you can model it out over the balance of the year that when the volumes go up, we should get a little better leverage.

Yes, okay. All right, very good. And then could I just ask, on the USG business, can we just talk for a second or two? Was the co-op revenue number around 23? I was trying to do the math there quick.

24.

Yes, okay. And then the delta in -- of CFE, New York City Water and PG&E Gas would probably around minus $27 million or so. Does that sound right?

Yes, well, CFE was about $10 million, negative $10 million comp. We did a little over $3 million this year as we're winding down the phase 2 on that. And if you remember last year at this time, we were kind of crossing over the end of phase 1 in the start of phase 2. So last year, we did about $13.5 million at CFE. So incrementally, that is the biggest individual delta. And then PG&E Gas is about a $5 million negative comp and New York City is about $8.5 million. It went from about $9.2 million to about $300,000 because I think we're -- you never say done-done, but we're pretty close to done-done.

So, the short answer is I think you had about the right number.

Yes, okay. All right, that's all right. Make sure I have the (technical difficulties) (laughter). Have you seen any significant activity at Toronto?

It's just been steady state. As we run through that, it's not going as fast as we thought it was when we were originally ramping it up. But in the first quarter here we did about $2 million, so -- and that's about what they run -- quarterly run rate has been, so we are on track to kind of keep it at that $8 million-ish a year.

I am kind of looking at the Aclara RF, and I am trying to get the revenue number in there, and it seems like maybe that is $15 million or $16 million. I don't know if you still split the business like that, but.

Well, we group it together, it's a little lower than that.

Yes, okay, so, all right. And then just a question I had, Gary, I think you had mentioned this and Vic, you may have as well, but just given where the EBIT came in the quarter, the commentary was that was well above plan. And so your -- what was your EBIT assumption for the quarter?

Well, I mean, I wouldn't say well above plan, but we had it projected as being several cents lower than what we ended up doing.

Yes, okay. And that's the tax rate comment, okay.

Well no, that's plus the tax rate. So, I would say we did a couple cents better than what we had projected and then the tax rate. Had it not been for that, we would have been a little higher, was what we were trying to say.

Yes, okay. All right, thank you.

(Operator Instructions). And we will go next to Jeremy Hellman with Divine Capital Markets.

Hi, good afternoon, everybody.

Hi, Jeremy.

I am just trying to reconcile a couple things from some of the guidance oriented comments you made, just want to make sure I've got -- jotted down these numbers right. It sounds like Q2 over Q1, on a revenue basis, you are looking to be up somewhere $20 million, give or take. So, am I right at that first signpost on the road?

Yes, a little over $20 million.

Okay, so that would put your first half revenues in the, call it $325 million, $330 million range. And so then if I hold that 30% 70% first half/second half split, that would put the year-over-year, the full year revenue growth well past that low to mid single-digit number or growth rate that you are talking about. So, I'm just trying to reconcile that apparent disconnect.

I think what the disconnect is, when we talk about the split, it's really on the EPS. So, we are not talking about sales at 30% 70% but what we're looking for as far as earnings.

Right. Okay, well, there we go then, simple answer. Thanks, guys.

You bet.

That concludes today's questions. Now I will like to turn the call back to Mr. Vic Richey.

Okay, well, appreciate everybody's interest, and we will talk to you next quarter.

Thank you.

That concludes today's conference. Thank you for attending.