ESCO Technologies Inc (ESE) 2012 Q4 法說會逐字稿

Welcome to the Q4 2012 ESCO Technologies earnings conference call. My name is Trish, and I will be your operator for today's call. At this time all participants are in a listen only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded.

I would now like to turn the call over to Kate Lowrey. You may begin.

Thank you. Statements made during this call regarding the timing, amounts and sources of fiscal 2013 and beyond expected results, including sales, orders, EBIT margin, EBIT, EPS, future growth, the cost savings and margin improvement resulting from restructuring efforts, 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 will be included as an exhibit to the Company's Form 8-K to be filed following this call.

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 press release issued today and found on the Company's website at www.escotechnologies.com under the link Investor Relations.

Now I would like to turn the call over to Vic.

Thanks, Kate. Our prepared remarks will be a bit shorter today than normal since we spoke 30 days ago. But before I give my perspective on 2013, I will turn it over to Gary for a few financial highlights to wrap up 2012.

Thanks, Vic. The clear highlight of fiscal 2012, as well as the few weeks subsequent to fiscal year-end, is the strength of our orders and the growth of our backlog. During 2012 entered $752 million of new business across the Company, resulting in a book to bill ratio of 109%. Our USG segment led the way with $380 million in orders and $62 million of backlog growth as of September 30.

Our largest customer, SoCalGas, awarded Aclara $75 million in orders during fiscal 2012 in preparation of their AMI rollout, which began on a small scale in October. Subsequent to fiscal year-end SoCal awarded an additional $41 million in orders, bringing the contract to date values to $135 million and over 1.5 million AMI devices and its related software and services.

We reported GAAP EPS of $0.65 in the quarter compared to $0.57 in Q4 the prior year. While Q4 did not come in where we had originally expected we are still pleased to see a 14% increase in EPS over prior year.

To wrap up the year I will provide a few brief overview comments on the segments. Filtration significantly outperformed expectations on both sales and EBIT throughout the year, and we expect this exceptional performance to continue in 2013. EBIT increased 100 basis points to nearly 20%, while sales increased 16% or $27 million with all four operating units showing meaningful growth.

Test sales were generally consistent with prior year, and EBIT was significantly lower for the reasons we have discussed previously. 2011 also included the most profitable chamber product in Test history, which furthered the difficult comparisons with 2012.

Test performance in 2012 resulting from cost overruns has been addressed through improved processes which will enhance project execution going forward, in addition to several significant cost initiatives being implemented to enhance its operating margin in fiscal 2013 and beyond. Our restructuring is moving forward as planned and we expect to have it wrapped up in the second quarter.

Doble continues to perform exceptionally well as evidenced by their EBIT margin of nearly 23% on increased sales. We continue to invest in the business, and in 2013 we are increasing our sales and marketing efforts to accelerate the sales of our recently introduced new products, software and services.

2012 was a transition year for Aclara, as we came off the two large contracts at PG&E and New York City, which had combined revenues of $42 million in 2011. This compares to $9 million in 2012 for a net decrease of $33 million, which is consistent with the net decrease at Aclara in 2012.

The COOP significantly outperformed expectations in fiscal 2012 resulting in the best sales year in their history, delivering over $112 million in revenue. The RF water business was softer than expected consistent with our earlier communications.

On the cash flow and balance sheet front during 2012 we generated over $53 million in cash from operations and ended the year with a net debt balance of approximately $85 million and leverage of 1.3 times at very favorable pricing.

On the buyback front we repurchased 150,000 shares through September 30, and an additional 270,000 shares in October, bringing the totals to 420,000 shares and $15 million spent.

Considering the strength of our current backlog, coupled with robust pipeline of identified new business opportunities within our AMI product lines, along with SoCal's deployment ramp over the next 12 months, 2013 sales and EPS growth is expected to be significant when compared to 2012.

I will be happy to address any specific financial questions during the Q&A, and now I will turn it back over to Vic.

Since Gary covered 2012's operating highlights my commentary will focus on the outlook for 2013 and beyond. I see a lot of positive things happen across the Company as we begin 2013, with the most significant being the much-anticipated October launch and the January ramp of the SoCal project.

We have been working diligently for the past year and a half to make sure we are well-positioned to provide SoCal with all the necessary products, software and services to make their AMI project a success. Our partnership remains strong and all parties are focused on making this project the state-of-the-art AMI deployment worldwide.

SoCal is not the only project that I'm excited about when thinking about the future and our growth prospects. The strength of our orders and resulting backlog obviously bodes well for the short-term, and I'm also excited about the size and quality of new business opportunities.

These potential new AMI opportunities give me confidence in our projected growth over the next several years as a supplement to the SoCal contribution.

Operationally Filtration was a clear winner in 2012, and I remain excited about 2013's outlook in this area. We are expecting sales to increase nearly $20 million, with corresponding margins consistent with those delivered in 2012. VACCO is a big driver of this increase, and is also our most profitable operating unit.

Filtration's results and its outlook, again, validate my belief that our multisegment approach is the correct strategy to create long-term shareholder value.

Doble is expected to grow its topline approximately 10% with EBIT margins in the low 20%'s. Despite the European slowdown we see real opportunities for Doble's international growth as South America and Asia have readily adopted Doble's solutions.

I am most pleased with Doble's engineering diligence and getting a number of new products and software solutions developed quickly and ready for prime time. Their new products, especially in the asset risk management area, have been well-received by the initial customers. We are excited about our future at Doble as the state-of-the-art products and software applications redefine proactive grid monitoring and predicted diagnostics.

Test is expecting sales growth in the low to mid-single-digits with a significant increase in operation EBIT, both in dollars and percentages. We expect the benefit of a partial year of cost savings in the second half of 2013 from the facility restructuring, as well as seeing savings from the cost reduction actions we implemented near the end of fiscal 2012.

Obviously, Aclara has the most significant impact on our growth and profitability going into 2013. While certain end markets can sometimes be difficult to predict, Aclara's sales and profit outlook for 2013 is strong. We feel we have better insight into this year than in the past due to the significant amount of business currently in our opening backlog.

I communicated our revenue build for 2013 in our previous call, and I believe that our earlier commitment is still valid. The bottom line is we anticipate Aclara's revenue to grow approximately $50 million in 2013, which includes identifiable incremental growth of $40 million from SoCal alone.

While there is always some risk in projecting the future, I feel confident that the forecast we have laid out is reasonable, prudent, achievable and gets us back on track to delivering our growth commitments.

To protect the downside to our longer-term outlook, and consistent with our culture of striving to be a best cost producer, we will continue reviewing our operating cost structure to see where we can improve efficiency. As we address these opportunities I am confident that we can protect and expand our operating margins and therefore supplement our expected EPS growth in the future.

On the M&A front we continue to see opportunities to supplement our organic growth by acquisition. And while our primary focus remains in USG, we continue to evaluate options across the Company. Our biggest challenge recently has been in bridging the valuation gap between sellers and what we deem fair value.

So, in summary, we remain in a solid operating position across the Company with ample opportunities for significant growth, and we will continue to prudently invest in the business to ensure our long-term success. I am convinced that our three-segment strategy and end market diversity remains a strength that differentiates us in the market and provides multiple paths to grow and weather economic uncertainties today and in the future.

I would now be glad to answer any questions.

(Operator Instructions). Zach Larkin, Stephens.

First off, it looks as if the restructuring in the Test segment is moving along a little bit more quickly than anticipated. I wonder if that is an accurate assessment? And just any additional color on how well things are moving along on that front would be great.

Yes, it is right on track or maybe a little bit ahead of schedule, but really good progress there. We have had a team in place for quite some time. We are going through the process you do -- we typically do now. And in building they had a little inventory so that as we make the transition and shut down on plant and move to the others there is always some disruption there. So we want to make sure that we protect our sales levels and deliver deliveries to customers, but it is looking good.

We are looking at some different alternatives on exiting that facility and how most economically to do that, but I think we have built the most conservative approach into our forecast.

But I would say so far, so good. Those things, as we mentioned several times, are always tough, but I would say the team working that is getting good cooperation from everybody involved. And I think we will be able to get that completed by the end of the second quarter.

Great, thanks for that. And then, also, obviously TEPCO is a big focal point out there as we move into 2013, but you have also talked about some other gas opportunities domestically. I wondered if you had any updates on when you think some potential awards or more public commentary might be coming out on any of the larger domestic awards?

Yes, I would think it probably is going to be second half of the year before we get any big movement on those. Fortunately, we have not made an assumption that those are going to have much, if any, impact in this year. So while we feel good about where we are positioned and how we are positioned with those, I think it will be at least the second half of the year before any of those are announced.

Thanks very much.

But that is the assumption we had in our forecast.

Great, perfect.

Ben Schuman, Pacific Crest Securities.

Looking at the segment guidance for 2013 I get to more like 12% or 13% topline growth. Do you guys view that as in the approximately 10% range or is there some disconnect there?

I think as we go across it, I think on the Filtration side I would put that in the 95% to 100% bucket. On the Test side, there is a little bit of risk like we had last year relative to some of these projects that can move a little bit to the right, so I think we are taking a little bit more cautious approach in the back half of the year there.

Doble, I think is pretty locked and loaded, but again, with the book and ship timing of the small water projects in Aclara, I think, again, it is prudent to take a conservative approach so we don't get ourselves caught up in the timing issues we had last year.

So I think for us to get to a 12% kind of growth you would have to have everything happen on plan, and that is probably not the right way to think about it, so I think somewhere a little closer to 10% is the right way to think about it, and that I think we will keep the risk properly calibrated.

Okay, and then how sustainable do you guys think the strength in the COOP market is heading into 2013? And do you have a sense of how much of that is upgrades of existing AMR systems versus greenfield deployments?

We have already -- projecting a lower volume as we talked about in the last call in 2013 versus 2012. We are looking more -- if you look at what we did in 2010 and 2011 that is more the level you're going to see in 2013. So we have already cut that back a little bit.

As far as the second half of your question, we are looking for some additional new customers this year, I would say a level consistent with what we have seen in the last couple years.

But at the same time the beauty of that business is we do have some upgrades of existing systems, selling new products, some replacement meters, things like that. So it is mix. I would say it is pretty consistent what we have seen in the past, other than 2012 which was an outlier in a good way with the COOP business.

Great, thanks.

John Quealy, Canaccord Genuity.

So maybe just two or three questions. First, on the numbers, Gary, for expectations into Q1, I know you gave us that $0.10 number. Does that include or exclude any restructuring charges?

Yes, that would be an operational number that will add back from the GAAP number to a restructuring number.

Okay.

That will kind of give you a timing of the $3 million or $3.5 million or so we talked about. Obviously, as Vic alluded to, the exit of the facility is obviously the most expensive part of it, because there is still a couple of years left on the lease. So for calibrating that on a quarter basis it would be probably one-third of that in the first quarter and two-thirds in the second quarter upon exit of the facility, so $1 million and $2 million sequentially in the quarter.

So the slightly less than 10% is the operational number, taking GAAP and adding back roughly $1 million of restructuring charges.

Okay, and if I can ask you in terms of front-half revenues versus back-half, if we focus on the front-half of 2013 roughly how would that compare with the front-half of 2012? Is that net number lower as year-on-year when we do the half versus half?

No, it should be generally consistent. The first quarter is going to be lower just because when you look at what we have relative to -- the first quarter last year fiscal 2012 was really strong in COOPs, and it is a little bit lower in the first quarter this year in COOPs, getting replaced a little bit with SoCal.

But I would say just first quarter to first quarter will be a little bit down, kind of consistent with the relationship of earnings. And then as you get towards the second quarter that is where you start to see the favorable comps, both in sales and EPS, because that is where SoCal -- we are calibrating it at this $55 million type thing.

And the ramp in Q1 is pretty small, because that is where they are doing the small trial thing, if you will, and then it kicks up in the Q2. So I think if you head a little bit down in the first quarter and then reasonably up in the second quarter sales and earnings, I think you'll be okay directionally.

Okay, great. And then, Vic, a follow-up for you. You talked about some new opportunities in Test, especially E&P and things like that. Can you just step back a little bit and give us some market sizing or potential revenue accretion that you guys think about in the next couple of years for some of these new emerging markets for RF?

Yes, it is a hard one to answer right now, because we don't know how quickly is going to develop, but -- and what we are really talking about here -- and EMP has been around for a long time and people have been concerned about it more from a military perspective than a civilian perspective, but what people have come to realize is that you have these huge data centers that can essentially be rendered useless if -- you know, through these type of activities.

And so what some large customers have started to look at that have these high-value data centers is they need to shield those. And by shielding them then they are able to project the data. So we have got a couple of opportunities that are very near term, which just those two opportunities are $7 million, $8 million.

And if you look at the number of large data centers around the country, and around the world for that matter, particularly around the US, because that is where a big concern is today, that could be a very large market. But I hesitate to give you specific numbers now because it is in early days and we have to see how quickly it is going to deploy. But it could be a significant uptick to that business.

Okay, and just lastly, a question on the COOP market. I know there has been finalized sort of late stimulus funding for the rural area. It seems like it is just getting finalized now. Is that any tailwind or headwind for you folks? Do you think you'll benefit at all from that or -- I know it is not a ton of money, but it seems to be pretty targeted? Thanks, guys.

Sure. We will know better after that really gets finalized. But, obviously, any additional money goes into COOPs. I think we are well-positioned to take care -- take advantage of.

Sean Hannan, Needham & Company.

So just to follow up on some of the comments around Doble, in a similar vein you had given some color, Gary, around how we think about Aclara as it moves through the year, considering at Doble we have some increased SG&A, particularly to fuel some of those new products, and then I think also to capitalize on some of those growth opportunities.

I am just trying to understand how will the puts and takes transpire for that business through the course of the year? And then I have a follow-up around Doble after that. .

Okay, from a revenue perspective, it is relatively flat. So if you put a quarterly deviation off there of $1 million or $2 million each quarter it is generally flat, because the mix looks really good this year, again, with a little bit more heavily weighted towards service than hardware. So we should have a run rate there in the ballpark of $30 million a quarter, again, give or take $1 million or $1.5 million around that.

Then as the margin moves around that, what I think you will see in Q1 when we put out the numbers there you will see what the investment level is. And, again, I'm not trying to say this was like two years ago when it was $10 million. That is not the calibration on this thing. But it is probably worth 1 point or 1.5 points relative to last year's kind of revenue.

And I think what you're going to see on that is as we launch these products -- we have said publicly seven or eight new products and 50 or 60 new software releases -- obviously, it is time to get people out in the field and push those products a little harder than our current distribution network.

So I think if you just ramped up the G&A a little bit compared to last year's quarterly profile, I think you will be okay. But from revenue keep it generally flat per quarter.

Okay, that is helpful. And then secondarily when you talked about there is a lot that is hoped for for 2013 on the service front, and just general growth that we will see within that business, can you help separate for us how much of that is really coming from continued penetration within the new markets versus the continued the launch around your new products and software. Thank you.

If you think about the service piece of the business, and again, we have got to -- I want to be clear about how we are talking about it, but we always save close to half of the business is these lease contracts that we have. And so some people consider that service, but really where we are seeing the growth, because we are already so heavily penetrated in that market with 95% market share basically -- so what we are seeing some additional growth are these kind of one-offs services where we go to customers and perform special types of tests and services for them, analysis. And so that is where we are really seeing the growth.

So I would say most of the growth we are seeing there are really with new customers and in new markets. So that is an over and above a new set of opportunities for us.

Okay, so we are talking about from a service and leasing standpoint that is -- there is really -- there is not necessarily a huge differentiation in terms of what is incremental domestically versus the new markets, but both will contribute?

I think the incremental piece is what Vic was referring to. When you have an existing customer who might be on a lease contract, say just $250,000, $300,000 a year, they will have these one-off special projects where you will go in and maybe do some forensic work on an asset that has failed in the field or things like that. And that is what Vic was alluding to on the domestic side. That is where the growth is going there from what I would call these one-off products projects that are more geared towards a specific application.

And then the more significant magnitude of the growth comes from new markets, meaning international and some of these new products, like the ARMS product where we are going into substations and doing monitoring there, or the dissolved gas analyzer, things like that, which are truly new products, but they're going into existing markets. We are going to customers who already have -- but that new product offering will increase our footprint within that specific customer.

Okay, thanks for refining that.

Richard Eastman, Robert W. Baird.

Gary, could you just give us -- how did the COOPs do in terms of revenue for the quarter?

Bear with me for a second.

And then I am just going to ask the same question on SoCalGas -- Just kind of fourth quarter.

All right, relative to the quarter on COOPs -- one thing we do here is generate a lot of paper, so bear with me for a second. All right, I apologize for that. So in Q4 on COOPs we did about $25 million, $26 million.

Okay.

And what was the second part, I'm sorry, SoCalGas?

SoCalGas must've been -- from your step-up comments on revenue must've been -- was it $8 million or something?

Yes, $8.5 million.

Okay, so we had that. So that explains, but when you talk about a $40 million of the $50 million increase for next year at Aclara that is the delta. If you did roughly $10 million this year, $40 million of the $50 million step-up comes from SoCalGas. So we are still expecting to bill $50 million to $55 million on SoCalGas next year.

Yes, right.

Okay. And then can I just ask in terms of CFE -- the phase 3 portion of that project -- you pulled that out of the plan, I presume?

I think we have got a small amount in the last half of the year.

Okay, but is that just pushed out and to the right of phase 3 there?

Right. We still think they're going to move forward with some additional product, but we are not assuming it is going to happen in the first half of the year.

Okay, and then just -- I guess the question I have -- when we talk about the say $50 million step-up at Aclara year-over-year, we will get $40 million or so out of SoCalGas. How do we replace, or what is in the plan to replace the fall-off on the COOP business, which I might be off some here, but that is probably about $30 million?

Yes, a good bit of that is additional water projects and then a small amount of additional gas projects as well.

Okay, so and that is maybe book and ship at this point -- or we don't have orders yet, right?

That is correct.

Okay. And then, Vic, is there any rebuild opportunity for Doble in the Northeast on the power infrastructure side, post Sandy?

Yes, I think once things settle down there may well be. I mean, obviously, those utilities are fully engaged right now. But I know we have reached out to the major utilities to let them know that we have personnel available to do that. But right now I think they really concentrated on getting back up and running. So if they do anything it would probably be December/January timeframe before we are able to do something there.

Okay, all right, very good. Thank you.

Nick Prendergast, BB&T Capital.

Just regarding your 2013 EPS quarterly progression, we always knew that SoCalGas was going to be back-end loaded, but I'm looking at this $0.10 Q1 guide, is maybe SoCalGas maybe more backend loaded than you originally believed or is following the patterns you guys always expected all along?

No, this is what we expected, because the plan has always been they were going to do what they call a 10-K, which is the launch of the first 10,000 endpoints starting in October. So they were going to start there and then do the major ramp-up in the second quarter. So we are not surprised by this at all.

That is really the biggest issue if you look at the $0.10 first quarter, and I am sure that caught some people off guard. But the reality is it is a very low sales quarter for us and we have got full SG&A for SoCal in there with a relatively low level of sales to support that. So what you'll see in the second quarter is a significant increase in sales, and obviously a significant increase in EBIT as well.

Okay, and just on your share repurchase authorization, how much do you have remaining on that?

We have another $85 million remaining.

All right, well, thank you.

(Operator Instructions). Craig Irwin, Wedbush Securities.

Most of the questions I have been asked and maybe asked again already. But the key question left that I don't think everyone has really touched on is 2014. You did just give us formal guidance for 2013. But as we look out to 2014 SoCal has given some pretty good color around what to expect. For your fiscal year my calculation is 1.32 million AMI units installed. Obviously, you're going to have some software and services, not so many collectors in there.

And as we look at Doble and the significant efforts that you are putting in place to diversify the product mix, and maybe grow that internationally, it looks like Doble could see some revenue acceleration, maybe some international growth contributing there.

Can you frame out for us a little bit about how we should see the overall business momentum in the different segments build up over the course of 2013 and whether or not this is likely to continue in 2014?

Yes, let me -- I would give you a general answer on that. Obviously, we are not ready to give guidance for 2014 just yet. But if you think about the overall business, Craig, I think you hit on it couple of major things. SoCal is currently projecting to have a higher level of deployment in 2014 than they did in 2013.

So if you assume the underlying business is going to remain solid then we are going to get a natural pickup from that. If we are able to land some of these projects in 2013 that we see out there, they're going to have some impact on 2013, but a larger impact on 2014. Doble, as you mentioned, we should see some growth there.

And then the other business of Filtration and Test are not as fast-growing business, but we will get an advantage of having a full year of savings from the restructure that we are doing at Test, so we should have from an EBIT perspective some incremental growth there.

And then I think we will continue to run a very successful Filtration business that will continue to add to that. So we should have a year, as we said here today in 2014 that should look better than 2013. And then if we are able to get some acquisitions done, that would add to that as well.

Okay, and then maybe you want to give a little more color on what you are prioritizing for acquisitions on the USG side?

We have got several areas that we look, but certainly having more product to put on the grid to make the grid more functional, smarter, I think would be good for us. We are always looking for additional technologies to bring to bear to do that.

I don't want to give any specifics about that, just because those are things that we would like to have rather than some of our competitors have. But they are generally things that we would be able to augment what we already have.

Great, thank you for taking my question.

Richard Eastman, Robert W. Baird.

Sorry, just a follow-up. Gary, did you imply $8.5 million was the revenue number for SoCalGas in the quarter or for the full year?

No, in the quarter. It is about $13.5 million for the year.

Okay.

A little higher, near $10 million.

Okay, and then just a quick question on the order flow out of SoCalGas. I'm a little bit confused, why do they keep issuing orders here? If we are looking for -- we must have a backlog there at something in the neighborhood of $75 million or so. Is that a 12-month ship cycle?

One thing, Ric, a lot of the orders up front were for software and so a lot of that was paid for upfront. And then we also have this -- basically a service support contract, which was around $40 million, that is in that backlog as well which delivers over the life of the project.

So there is a good piece of it that is either upfront or delivers over the life of the project, and so a lot of what is going on in these more recent buys are the endpoint of -- endpoint purchases.

But, again, you got to understand, they want to make sure that we understand exactly when they need what, because we have to get through a very complex logistical cycle, not only to build it, but then to get it to their warehouse -- to get it to their distributors, to get it to their warehouses, so they can be staged.

So we are happy that they're doing a little bit more up front, because it gives us a lot more time to plan and ensure that we are able to make the deliveries that we do.

I see. That makes sense. Great. Thank you again.

We have no further questions in queue at this time.

Okay, well thanks -- thank everybody for their attention. We will talk to you next quarter.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.