Looks like we're ready to go. Good afternoon, everyone. My name is John Franzreb. I'm an analyst here at Sidoti & Company. Our next presentation for the day is ESCO Technologies, ticker ESE. For those who are 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 Bryan Sayler, CFO Chris Tucker, and Vice President of Investor Relations, Kate Lowrey. Following the presentation, there will be time for Q&A. If you have a question, please utilize the Q&A icon to submit the questions, and I'll present it to management. With that said, thank you, everybody, for being here. The floor is yours.
All right. Thank you, everyone, for taking some time to meet with us to talk about the business. We'll start on slide three here. 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. We operate in aerospace and defense, utility solutions, and RF test and measurement. We've had really a couple of pretty good years here, and 2024 was the best year in the history of our business. We like to say the best is yet to come. Our sales were over $1 billion for the first time. We saw very significant growth in earnings per share, entered orders, and backlog. Good momentum in the business as a whole.
We have every reason to believe that that's going to continue into the future. As you think about those three segments, you can see here that the aerospace and defense segment is the largest of our segments. Looking at the right, you can see that the utility solutions group business has the highest overall margin rates. Just to kind of take a moment to talk a little bit about our strategy as a business. 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. There's nothing particularly insightful here. I want you guys to understand that we take this very, very seriously.
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. 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. I think we've been largely successful in accomplishing that objective. A big piece of this is by building out our team. 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.
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. 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. 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. 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.
You have got to manage your working capital effectively. We are doing that through a continuous process of improvement focused on operational excellence. I would say we are early innings on this particular bullet. I think in the years to come, you are going to see a lot more there. Of course, adding on to that organic story in the first four bullets, we do supplement that growth with strategic acquisitions. We are careful to focus those acquisitions on existing markets that we think we understand and places where we think our engineering expertise, our operating model can actually, combined with the acquired business, generate better value. If we do all those things, we think that we will have better than average market growth, increasing returns, and a premium valuation for the stock price. Thinking about the business today, we feel like we are 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. In aerospace and defense, the commercial aerospace business is an area that's growing rapidly. The various carriers 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. That's having a positive impact on our ability to grow. On the Navy side, build rates are projected to be increased, not quite double the rate of submarine manufacturing that we have today, but close to double. Over the next five, 10, 15 years, that's going to have a very positive impact on the growth rates for the Navy business overall.
In our utility solutions area, we're seeing unprecedented forecasted growth and fundamental demand for electricity. 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. Our test business is really a technology-driven business. We focus on RF energy. That's a business that will grow in align with consumer electronics, aerospace, and defense. There are 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. 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. 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. The first segment we want to talk about is aerospace and defense. 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. These are things like check valves and hydraulic valves and hydraulic filters, things like that. 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. It absorbs sonar energy. 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. There is a piece of that that is focused on more industrial applications. This is a business that has been growing quite nicely from the pandemic period of time. Our overall aerospace business is growing. We project over the next five years or so that it is going to grow in the kind of 7%-9% range. Our Navy business is growing a little bit faster than that, really a double-digit kind of a growth rate. Our space business has been kind of flat to the prior year.
We have seen increases in our adjusted EBITDA margins. We are making good progress in this part of our business. Let's go to the next slide. We announced in July last year a significant acquisition that is focused on our Navy components business. SM&P is a subsidiary of Ultra Electronics, which in turn was owned by Cobham. SM&P is both a U.S. and a U.K. business. They are focused on stealth aspects of the ship. Unlike our existing business, which focuses on acoustic energy, SM&P focuses primarily on magnetic signature, electromagnetic, and RF signature. 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. They also make more in our U.K. facility power management systems. In the U.K.
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. 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 U.K. 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. 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. That is going to have a significant impact. We 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. The fundamental demand for commercial aircraft is really there. Military Aero has, of course, got a lot of demand these days. That was a business that was very stable through the pandemic. We believe it's going to continue to do so into the future. Of course, our submarine business is where there's a lot of growth. 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. 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%. We anticipate that the shipyards will be able to get to something like 2% in a couple of years and then potentially to 2.5% by 2030. Of course, that'll have a very positive impact on our business. Over on the U.K. side, they're building the next-generation fast-attack submarine, which will become the platform that will be the foundation for the AUKUS business. We presently have a lot of content on Astute-class and the Vanguard replacement, which is their ballistics missile submarine. This is a great business and one that we're really, really excited about.
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. What we're seeing is right now unprecedented levels of forecast demand driven by a wide range of things. We'll get to this in a minute, but it's driven by electrification of everything. It's driven by an aging infrastructure. What we do here is we make systems and solutions that allow utilities to evaluate their existing assets to determine their current condition. Many of these assets are 30, 40, even older than that. 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.
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. 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. 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. 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-10 years to really add new throughput capacity. That is 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. 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 Subpart 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. That's been a nice growing part of our business over the last few years. In healthcare, we do a lot for MRI systems. We build systems in hospitals. There may be a photo coming up about that. You can see that this is a business that's got a broad range of markets that it plays into. We've been—it's had good, it was probably our best performer from the pandemic.
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 were able to kind of improve the performance of that business. We're starting to see recovery in 2025. 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. That has 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 are also seeing a lot of international growth. Last year, we did a small acquisition in the U.K., which expanded our ability to provide electromagnetic pulse systems and extended our reach into international markets. Just to kind of summarize before we go into Q&A, listen, we feel like we are 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 costs 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. 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. 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. 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.
With that, we'll move to the Q&A. I think we've got a photo of one of our MRI systems. Yeah, this will give you an idea of the kind of systems we build in the medical space.
Thank you for that. If anybody has a question, please feel free to put it in the Q&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 biggest business here, aerospace and defense. Kind of hard not to ignore 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?
Yeah.
I would say, first of all, that 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. Listen, it's not fun to go through what they're going through right now, but we think that they're on the mend 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. We have always put a little bit of a discount on that.
Having said that, we do believe that the new management team is righting the ship and that they will continue to grow those growth rates. We think that's going to be really good for ESCO as we move forward.
Got it. Can you just talk about what triggered the strategic review of the space business?
In 2023, when we kind of put the new management team here together, we revamped our overall strategic review process. During the course of that, we identified that, listen, there's a lot of really positive things that are going on in the space market, but most of those things are going on in 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.
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. The plan that was presented to us would require significant investment in order to be able to take those technologies and commercialize them. 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. We made the decision just very simply that we've got three other businesses that have higher fundamental growth rates, higher margins. We just felt like there were better places to put our money.
We were honest with that management team and told them that we were going to be focused on aircraft, navy, and our utility businesses. Once we were able to get 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 SMMP. That process is in flight. 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, we may keep it. I would say that we're more likely than not to continue a sale.
The audience wants to stick with the A&D side of the business here.
We'll start with the question about, we'll call it locally. Do you see any major changes in defense spending now with the new administration?
Yeah, I would say that we get that question a lot. We get it in the context of Doble 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. If you look at what the Senate has talked about, they would like to see us increase $150 million a year of defense spending and focusing that on shipbuilding, defense industrial base, which are all positives for us.
Meanwhile, over in the U.K., 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 SMMP acquisition. 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.
Another question on defense is on the other side of the pond. With the recent developments in Europe more likely to fill its own defense needs and America being seen as a less reliable supplier, what are the risk and opportunities that you see as that shift occurs to develop new systems, be they aircraft, missiles, detection, or intelligence?
Yeah, we do think that there could be M&A opportunity for us there.
Our existing business does do a fair amount of work in Europe as part of the Airbus ecosystem. On the defense side, we do work with people like Leonardo and others there. 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. You got to remember that a lot of what they spend money on is actually buying U.S. goods. F-35 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.
There ar e things that are being shared between the U.S., the U.K., and Australia, but not necessarily with NATO and allied nations. I do think there's some opportunity there, and we'll certainly be paying close attention to that. That's probably more of an M&A play for us than it would be an organic investment.
Okay. Let's switch the narrative here to the utility side of the business. It seems like there's significant opportunity that everyone's talking about in the utility market. 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 the utility market?
Yeah, 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. 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. Those are kind of at risk. 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. In that environment, renewables developers are definitely pacing themselves.
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 20% and 30% 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. Without the tax credits, wind and solar will continue to be a valuable and growing market. Do not forget, a lot of the regulation of regulated utilities is actually done at the state level and not the federal level. Most of the utilities we talk to would like to have a balanced portfolio that would consist of wind, solar, and combined cycle gas.
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. The good news for 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. We're seeing really unprecedented amounts of growth there. What's happening is that for multiple reasons, you're seeing significant increases in the load growth. Utilities are really having to deal with that by investing in their existing infrastructure. That's been significantly underinvested over the last 20 or 30 years.
The challenge they have is that because of permitting restraints and apparatus restraints, they really cannot build new capacity fast enough. They have to figure out how to get more out of what they already have. That is really where our business plays. 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 is 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. 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 is the kind of trend that you should expect to see throughout this year.
Great clarity.
We've got a little bit into overtime here. Any closing comments?
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.
Thank you very much. Thank you for presenting today, and hope everybody has a great balance of the day.
Thanks, everyone.