ESCO Technologies at Sidoti Small-Cap Virtual Conference: Strategic Growth Insights

On Wednesday, 19 March 2025, ESCO Technologies (NYSE: ESE) presented at the Sidoti Small-Cap Virtual Conference, highlighting a record-breaking year in 2024. The company reported sales surpassing $1 billion for the first time, alongside significant growth in earnings per share and backlog. CEO Brian Saylor emphasized a strategic focus on engineered products in technology-driven markets, while addressing challenges in the renewables sector and potential divestment of the space business.

Key Takeaways

• ESCO Technologies achieved over $1 billion in sales in 2024, marking a historic milestone.
• The company is focusing on strategic acquisitions, notably the SMNP acquisition, to enhance growth.
• Aerospace and Defense segment benefits from increased aircraft and submarine production rates.
• Utility Solutions segment faces challenges in renewables but sees growth in regulated utility infrastructure.
• Potential sale of the space business to concentrate on higher-growth areas.

Financial Results

• 2024 Performance:

- Sales exceeded $1 billion for the first time.

- Significant growth in earnings per share, entered orders, and backlog.

• Aerospace and Defense:

- Adjusted EBITDA margins increased.

• Utility Solutions:

- Q1 saw a 12% increase in the regulated utility business.

- Renewables business experienced a 20% reduction.

- Overall utility business grew 4.5%.

• SMNP Acquisition:

- Expected to be accretive to margins and growth rates.

Operational Updates

• Aerospace and Defense:

- Increased commercial aircraft build rates from 1,400 to 2,500 planes annually.

- U.S. Navy targets production of two Virginia class submarines and one Columbia class annually.

- Possible sale of the space business to focus on more profitable segments.

• Utility Solutions:

- Significant electricity demand growth due to aging infrastructure and electrification.

- Investment in existing infrastructure due to permitting and apparatus constraints.

• RF Test and Measurement:

- Recovery expected in 2025.

- Small acquisition in the UK to enhance electromagnetic pulse systems capabilities.

Future Outlook

• Aerospace and Defense:

- Continued growth anticipated with Boeing’s production increase and rising military demand.

• Utility Solutions:

- Flat performance expected in renewables; growth in regulated utility infrastructure.

• RF Test and Measurement:

- Recovery projected in 2025.

• Overall Growth:

- Positive growth outlook for 2025 with strategic portfolio adjustments.

Q&A Highlights

• Boeing:

- ESCO Technologies optimistic about Boeing’s direction and growth.

• Space Business:

- Considering sale due to lower growth and margin; decision based on valuation.

• Defense Spending:

- Anticipated increase in defense spending, focusing on shipbuilding and defense industrial base.

• Utility Solutions:

- Renewables projected to be flat; regulated utility business expected to grow.

For a detailed account of the conference call, refer to the full transcript below.

Full transcript - Sidoti Small-Cap Virtual Conference:

John Franzreb, Analyst, Sidoti and Company: Looks like we’re ready to go. Good afternoon, everyone. My name is John Franzreb. I’m an analyst here at Sidoti and Company.

Our next presentation for the day is ESCO Technologies, ticker ESE. For those not familiar with ESCO, ESCO is a manufacturer of a variety of products in the aerospace defense, utility and test markets. We are fortunate to have with us here today CEO, Brian Saylor CFO, Chris Tucker and Vice President of Investor Relations, Kate Lowrey. Following the presentation, there will be time for Q and A. With that said, thank you everybody for being here.

The floor is yours.

Brian Saylor, CEO, ESCO Technologies: All right. Well, thank you, everyone, for taking some time to meet with us to talk about the business. We’ll start on Slide three here. So if you’re not familiar with ESCO, ESCO is a business that operates broadly in industrial spaces in three segments. I’ll go into some detail on these a little bit later, but we operate in Aerospace and Defense, Utility Solutions and RF, Test and Measurement.

We’ve had a really a couple of pretty good years here and 2024 was the best year in the history of our business, but we like to say the best is yet to come. Our sales were over $1,000,000,000 for the first time. We saw very significant growth in earnings per share, entered orders and backlog. So good momentum in the business as a whole and we have every reason to believe that’s going to continue into the future. So as you think about those three segments, you can see here that the Aerospace and Defense segment is the largest of our segments.

And then looking at the right, you can see that the Utility Solutions Group business has the highest overall margin rates. So just to kind of take a moment to talk a little bit about our strategy as a business. And this is a strategy statement that we use internally with our teams. It’s something that we put in place in 2023 when we kind of reconstituted the management team here at ESCO. And there’s nothing particularly insightful here, but I want you guys to understand that we take this very, very seriously.

And the way we think about this is that we increase shareholder value by providing highly engineered products and solutions that do make the world more reliable, safe and secure. All of the businesses that we have are technology oriented. We want to be in businesses that have good long term growth trajectories in the underlying market and we want to be in businesses that will reward a precision solution with premium value. We want to avoid being in businesses that are more commodity in nature, and I think we’ve been largely successful in accomplishing that objective. A big piece of this is by building out our team and one of the things that we did a couple of years ago was kind of put out a common vision, mission, values throughout our business And we have made some substantial investments in kind of building out our HR function and really focusing more on collaboration between our various business units.

And we really do that through integrity, collaboration and a real sense of mission about what people are trying to do. One of the things that we do a lot of is we snap a line on what we think the underlying markets are growing and then we ask our teams to have strategies and critical actions that will then allow them to grow their top line revenue faster than the market that they’re in. And we do that through superior engineering, high quality and superior customer service. Now it’s not enough to just grow the business at the top line, you’ve also got to be really disciplined about making sure that you’re managing your productivity and your cost structure and you’ve got to manage your working capital effectively. And we’re doing that through a continuous process of improvement focused on operational excellence.

I’d say we’re early innings on this particular bullet, but I think in the years to come, you’re going to see a lot more there. And then of course, adding on to that organic story in the first four bullets, we do supplement that growth with strategic acquisitions. And we’re careful to focus those acquisitions on existing markets that we think we understand in places where we think our engineering expertise, our operating model can actually combined with the acquired business can generate better value. And if we do all those things, we think that we’ll have better than average market growth, increasing returns and a premium valuation for the stock price. So thinking about the business today, we feel like we’re in a really good position.

The portfolio that we have structured is taking advantage of a number of very large macro trends in terms of fundamental growth rates. I’ll get into more detail in each of the segments, but in Aerospace and Defense, the commercial aerospace business is an area that’s growing rapidly. The various carriers have or the various manufacturers have to increase their build rates from about 1,400 planes a year to about 2,500 planes a year in order to meet the long term projected demand. And that’s having a positive impact on our ability to grow. And then on the Navy side, build rates are projected to be increased, not quite double the rate of submarine manufacturing that we had today, but close to double.

And so over the next five, ten, fifteen years, that’s going to have a very positive impact on the growth rates for the Navy business overall. And then in our Utility Solutions area, we’re seeing unprecedented forecasted growth and fundamental demand for electricity. And that is really driving a significant amount of investment, particularly on the regulated utility side of our business. We’ll get into that a little bit more in a few minutes. And then our test business is really a technology driven business.

We focus on RF energy and that’s a business that will grow in line with consumer electronics, aerospace and defense. There’s a couple of different places there that we’re seeing better than average growth. We do have a very strong balance sheet, which has given us the firepower to do more acquisitions, and I think we’ll talk in a minute about a pretty significant one that we’re in flight on now that we expect to close in the near term. We have increased our focus on cost structure optimization and cash flow management, and we have added a dimension to our long term incentives focused on return on invested capital and trying to kind of back up our stated objectives with real performance measurements that drive behavior for our management teams across the entire business. So the first segment we want to talk about is Aerospace and Defense.

And just to kind of give you a little bit of insight, we really do three things here. We make a series of valves, manifolds and filtration products that go on Boeing and Airbus commercial airplanes and then on just about every U. S. Military aircraft. And these are things like check valves and hydraulic valves and hydraulic filters, things like that.

Our Navy we also build precision bushings that go into landing gear systems on commercial aircraft. On our Navy side, we are focused on stealth. We make exterior hull coatings which serve to make the submarine stealthy in the water, absorbs sonar energy. And then our space business makes a variety of valves and filters that are used on NASA spacecraft and on Lockheed, Northrop and Boeing satellite systems and that sort of thing. And then there’s a piece of that that’s focused on more industrial applications.

Five years or so that it’s going to grow in the kind of 7% to 9% range. Our Navy business is growing a little bit faster than that, really a double digit kind of a growth rate. And then our space business has been kind of flat to the prior year. But we have seen increases in our adjusted EBITDA margins and we are making good progress in this part of our business. Let’s go to the next slide.

So we announced in July a significant acquisition that is focused on our Navy Components business. SMNP is a subsidiary of Ultra Electronics, which in turn was owned by Cobham. And SMNP was focused, it’s both a U. S. And a U.

K. Business and they’re focused on stealth aspects of the ship. But unlike our existing business which focuses on acoustic energy, SMNP focuses primarily on magnetic signature, electromagnetic and RF signature. And so the way that they operate on the signature management side is they provide systems which serve to degauss the magnetic signature from the hull of the submarine or surface ships, and then they also make more in our UK facility, power management systems. And in The UK side, they actually make the hybrid electric drive that actually translates the power from the nuclear systems into the drive systems that move the ship through the water.

So this has been a this is really going to be a great acquisition for us. It does provide a lot of benefits to us. You can see at the bottom there, 90% proprietary business, adds a lot of exposure to the Royal Navy that we haven’t had before, does increase our exposure to surface ships both on The U. S. Side and The UK side.

We’re very excited about this. It will be accretive to our margins and our growth rates for both the Aerospace and Defense segment and ESCO as a whole. Next slide. So growth drivers here are really the commercial aircraft business. I mentioned earlier that they’re increasing their build rates from about 1,400 planes a year between the various players up to about 2,500.

And so that’s going to have a significant impact. We’ll get a lot of questions about Boeing. Boeing is making good progress on this front. Frankly, our business would be growing faster if Boeing was able to move more quickly as they try to increase their build rates. There’s the fundamental demand for commercial aircraft is really there.

Military Aero, of course, got a lot of demand these days. That was a business that was very stable through the pandemic. And so, we believe it’s going to continue to do so into the future. And then, of course, our submarine business is where there’s a lot of growth. And what’s happening there is that as the U.

S. Navy is replacing the LA class and Ohio class submarines with Virginia class and Columbia class, there’s a significant demand to move more quickly and they want to be at a rate of a minimum of two Virginia class per year and one Columbia class per year. Up to this point, we’re probably at about 1.3, and we anticipate that the shipyards will be able to get to something like a two in a couple of years, then potentially to 2.5 by 02/1930. And of course, that’ll have a very positive impact on our business. Over on The UK side, they’re looking to, they’re building the next generation fast attack submarine, which will become the platform that will be the foundation for the AUKUS business that we presently have a lot of content on Astute class and the Vanguard replacement, which is their ballistics missile submarine.

So this is a great business and one that we’re really, really excited about. So moving over to our Utility Solutions business. The Utility business is a great place to be right now. It’s driven really more by fundamental growth in electricity demand than it’s driven by anything else. And what we’re seeing is right now unprecedented levels of forecast demand driven by a wide range of things.

It’s driven by we’ll get to this in a minute, but it’s driven by electrification of everything. It’s driven by an aging infrastructure. And what we do here is we make systems and solutions that allow utilities to evaluate their existing assets to determine their current condition. And many of these assets are thirty, forty, even older than that. And what they’re trying to figure out how to do is how to meet that increased demand by driving more throughput through their existing assets.

And that’s not an easy equation because if they overdrive those systems, they can actually cause them to fail, which will ultimately result in less overall capacity. Let’s go to the next slide. I mentioned the market growth drivers. There is a significant increase in demand for electricity. It’s driven again by this aging infrastructure.

It’s driven by an increase in renewable energy that’s being added to the grid. It’s also being driven by a lot of reshoring of industrial capacity in North America. And then of course, added on to that, we have the whole data center story, the electrification of transportation, and in the Northeast electrification of heating, home heating and that sort of thing. So we think that that demand story is real. The AI piece of this is kind of an X factor on top of all of that, that’s a little bit more difficult for us to quantify.

But what we know is that utilities today are making investments in order to be able to meet the demands that they’re projecting over the next three to five years in an environment where it takes seven to ten years to really add new throughput capacity. And so that’s where Doble comes in and we enable them to get more out of what they already have. All right, next slide. We’ll talk about our test business. The RF test and measurement business is a technical business that’s focused on RF energy.

And what we do here is we measure, contain and control RF and acoustic radiated RF and acoustic energy. The biggest component of this business is electromagnetic compatibility testing. If you’ve ever turned over your device and seen the statement on the back that says this device complies with FCC Part 15, some Part J or CE mark, that’s the kind of testing that we provide in the consumer electronics space. In Aerospace and Defense, we provide a lot for electronic warfare, aircraft systems, drone systems. So that’s been a nice growing part of our business over the last few years.

In healthcare, we do a lot for MRI systems. So we build systems in hospitals. There may be a photo coming up about that. So you can see that this is a business that’s got a broad range of markets that it plays into. And we’ve been it’s had good it was probably our best performer from the pandemic, but we did take a little bit of a step back last year as the wireless business and kind of our China market both stepped back.

The good news is we took immediate action there and we’re able to kind of improve the performance of that business. And so we’re starting to see recovery in 2025. So moving on to the growth drivers here, aerospace and defense, you’re seeing a lot of activity in electronic warfare, particularly with drone systems. We provide a series of technologies around electromagnetic pulse protection, which would go into critical infrastructure systems for defense applications, energy systems and data centers for government projects. We do a lot of activity there and we are seeing some good growth there.

Our medical shielding business has been growing quite a bit. What’s happening there is that MRI systems are being upgraded. We actually play both on new facilities but also on upgraded facilities. We actually do a little bit better from a margin perspective on the upgrades, and so that’s been kind of a favorable thing for us this year. We are seeing more electronic content.

As you see, more and more wireless, more and more electronics in automotive, industrial applications, all of those are things that drive the kind of testing that we facilitate. We’re also seeing a lot of international growth. And then last year, we did a small acquisition in The UK, which expanded our ability to provide electromagnetic pulse systems and extended our reach into international markets. So just to kind of summarize before we go into Q and A. Listen, we feel like we’re in a really good place to take advantage of some major macro growth drivers.

We believe that we’re good, solid operators that are focused both on growing our market share in growing markets, but also on managing our cost and our working capital to be more efficient as an overall business. We think that the technology markets we’re in are sustainable for decades to come. And we are taking important strategic portfolio actions, which will serve to be accretive to our growth rates, accretive to our margins and also focus our portfolio on those high growth markets. We are seeing good year to year growth. We project good growth again in 2025.

And we have added this returns focus, which that’s an area where we would admit that we’ve probably underperformed as a business for the past decade or so. But that’s an area where we’re already beginning to see a lot of improvement and we believe that we’ll continue to see improvement moving forward. So with that, we’ll move to the Q and A. I think we’ve got a photo of one of our MRI systems. So this will give you an idea of the kind of systems we build in the medical space.

John Franzreb, Analyst, Sidoti and Company: Thank you for that. If anybody has a question, please feel free to put in the Q and A section. I’ll present it to management. Alternatively, you can also use the group chat, and I’ll pull from there and present it to management. Just want to start with the, the biggest business here, Aerospace and Defense.

Kinda hard not to ignore, you know, what’s going on with Boeing. You kind of pointed out the ramp should accelerate in coming years. What are you seeing as far as 2025 and your expectations for Boeing?

Brian Saylor, CEO, ESCO Technologies: Yeah. So, I would say, first of all, that we, you know, despite all of the challenges that Boeing has had, we’ve been able to manage, that pretty effectively. We’re one of their better suppliers in terms of on time delivery and quality. And listen, it’s not fun to go through what they’re going through right now, but we think that they’re on demand and they’re moving in the right direction. I think you saw that they had an investor call yesterday where they said they’re on track for the current quarter and we’re beginning to see some increases in the output from the business.

We have never fully adopted the projected build rates that they have published. We’ve always taken those as being a little bit aspirational. And so we have always put a little bit of a discount on that. Having said that, we do believe that the new management team is riding the ship and that they will continue to grow those growth rates, and we think that’s gonna be really good for ESCO as we move forward.

John Franzreb, Analyst, Sidoti and Company: Got it. And can you just talk about what triggered the strategic review of the space business?

Brian Saylor, CEO, ESCO Technologies: So in 2023, when we kind of put the new management team here together, we revamped our overall strategic review process. And during the course of that, we identified that, listen, there’s a lot of really positive things are going on in the space market, but most of those things are going on in the, what we would call, the new space or commercial space market. We have some really interesting and innovative technologies that could play very effectively in those markets, but the business that we own there today is really set up as a government defense contractor. They really cater to kind of the NASA ecosystem rather than the SpaceX and Blue Origin and that kind of new space market. And so the plan that was presented to us would require significant investment in order to be able to take those technologies and commercialize them.

So we would have either had to set up our own business to bring those things to market in a different manner or acquire an existing commercial space business. The multiples there are pretty high. And so we made the decision just very simply that we’ve got three other businesses that have higher fundamental growth rates, higher margins, and so we just felt like there was better places to put our money. And so we were honest with that management team and told them that we were going to be focusing on aircraft, navy and our utility businesses. And so once we were able to get a kind of a larger deal done on the navy side, we then decided to explore the potential for monetizing that business as a way of focusing the portfolio and reducing some of the debt that we’d be taking on from SMNP.

That process is in flight. And today, I would say that we’re more likely than not to be successful on selling the business. I want to be clear that if we don’t get a valuation that we believe is appropriate for the business that we may keep it. But I would say that we’re more likely than not to continue a sale.

John Franzreb, Analyst, Sidoti and Company: The audience wants to stick with the A and D side of the business here.

Brian Saylor, CEO, ESCO Technologies: Sure.

John Franzreb, Analyst, Sidoti and Company: We’ll start with the question about,

Brian Saylor, CEO, ESCO Technologies: we’ll call

John Franzreb, Analyst, Sidoti and Company: it locally. Do you see any major changes in defense spending now with the new administration?

Brian Saylor, CEO, ESCO Technologies: Yeah. I would say that we get that question a lot. Yeah. We get it in the context of Doge and some of the noise that you hear on a daily basis. I think if you separate the signal from the noise here, I think what you’re going to find is that fundamentally the new administration and their allies in Congress generally want to increase defense spending.

So if you look at what the Senate has talked about, they would like to see us increase $150,000,000 a year of defense spending and focusing that on shipbuilding, defense industrial base, which are all positives for us. Meanwhile, over in The UK, you’ve seen that the government there has mentioned that they’re going to increase spending to 2.5% of GDP moving to 3%. That’s very positive for us in light of our SMNP acquisition. So our assessment is while there’s a lot of noise there, the general trend is to increase defense spending across the board and focus that on the parts of defense that we’re pointed at.

John Franzreb, Analyst, Sidoti and Company: And another question on defense is on the other side of the pond. With the recent developments, and Europe more likely to fill its own defense needs, and American being seen as a less reliable supplier, what are the risks and opportunities that you see as that shift occurs to develop new systems, be they, aircraft, missiles, detection or intelligence?

Brian Saylor, CEO, ESCO Technologies: Mhmm. Yeah. So we do think that there could be M and A opportunity for us there. Our existing business does do a fair amount of work in Europe as part of the Airbus ecosystem. But on the defense side, and we do work with people like Leonardo and others there, so we do have a little bit of take there.

We think that generally increased defense spending in Europe is going to be favorable for us. But you gotta remember that a lot of what they spend money on is actually buying U. S. Goods. So F-thirty five aircraft, which is favorable for us, various missile systems, defense systems that are all good for us.

I would not think that it’s meaningful for our current Navy business. A lot of the technologies that we provide there are really going to remain proprietary inside the AUKUS platform. So there are things that are being shared between The U. S, The U. K.

And Australia, but not necessarily with NATO and allied nations. So I do think there’s some opportunity there and we’ll certainly be paying close attention to that. But that’s probably more of an M and A play for us than it would be an organic investment.

John Franzreb, Analyst, Sidoti and Company: Okay. Let’s switch the narrative here to the utility side of the business. Sure. It seems like there’s significant opportunity that everyone’s talking about in the utility market, but there’s also a side of the business that has some headwinds. Can you talk about the puts and takes that you’re seeing in renewables versus the demand profile in utility market?

Brian Saylor, CEO, ESCO Technologies: Yes. I would say that the renewables piece of the business is the one that we have seen some headwinds from the new administration and probably more importantly from the uncertainty that exists around the upcoming tax bill. So you may be aware that as part of the Inflation Reduction Act a few years ago, there were pretty significant incentives put in place for wind and solar generation in North America. And those are kind of at risk. And I think the smart money says that it’s very likely that the renewables tax credits are likely to be significantly reduced, if not completely eliminated, in order to pay for an extension of the Tax Cuts and Jobs Act and some of the other initiatives that the current administration is pushing forward.

So in that environment, renewables developers are definitely pacing themselves. And so what we’re projecting right now is that business for us is going to be kind of flat this year after about three years of really significant 2030% growth rates. The good news about renewables though is that the fundamental cost to build a wind or solar farm is highly, highly competitive with gas and other forms of generation. And so without the tax credits, wind and solar will continue to be a valuable and growing market. And don’t forget, a lot of the regulation of regulated utilities is actually done at the state level and not the federal level.

And most of the utilities we talked to would like to have a balanced portfolio that would consist of wind, solar, combined with combined cycle gas. And they would want the wind and solar to run all the time and they would want the combined cycle to be used primarily as a peaker to meet high demand areas. Now the good news for our the way our portfolio is constructed and all of last year when people would ask me, what does it mean if there’s a change, we believe that we’re kind of immune to this change because the money that’s not being spent over on the renewable side is really being spent on the traditional regulated utility grid infrastructure piece of the business. And we’re seeing really unprecedented amounts of growth there. And what’s happening is that for multiple reasons you’re seeing significant increases in the load growth.

And so utilities are really having to deal with that by investing in their existing infrastructure. And that’s been significantly under invested over the last twenty or thirty years. And so the challenge they have is that because of permitting restraints and apparatus restraints, they really can’t build new capacity fast enough. So they have to figure out how to get more out of what they already have. And that’s really where our business plays.

So So the best way to think about this is look at our first quarter, where we saw a 20% reduction in our Renewables business, and that’s about 20% of the overall Utility business. Meanwhile, we saw a 12% increase in our regulated utility business and that worked out to a 4.5% total growth rate. But because the margins in our regulated business are so much better than they are in renewables, that ended up being a significant improvement in our overall profitability for the segment. I think that’s the kind of trend that you should expect to see throughout this year.

John Franzreb, Analyst, Sidoti and Company: Great clarity. We’ve got a little bit into overtime here. Any closing comments?

Brian Saylor, CEO, ESCO Technologies: Listen, we feel really good about how we’ve constructed our portfolio. We feel like it’s well constructed to deal with a lot of the noise that you hear about in the news today. We’re a disciplined company that is we are making some changes to improve our overall performance and we think that that’s beginning to manifest itself in our financial results. We do think that these portfolio actions we’re taking will be accretive and will drive improved performance in the future.

John Franzreb, Analyst, Sidoti and Company: Thank you very much. Thank you for presenting today and hope everybody has a great balance of the day.

Brian Saylor, CEO, ESCO Technologies: Thanks, everyone.

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