Teledyne Technologies Incorporated (TDY) Earnings Call Transcript & Summary

Good afternoon. I'm Greg Konrad, Senior Vice President of Equity Research, Aerospace and Defense at Jefferies. And welcome to the 2021 Jefferies Industrial Conference, virtual, of course. Very excited to have Teledyne and Jason VanWees, Executive Vice President of Teledyne with us today. We'll go through about 25 minutes of questions in a fireside format. And obviously, there's a lot of exciting things going on with Teledyne. They recently closed on the acquisition of FLIR back in May, and then that will kind of be a basis of some of these questions. And Jason, thank you for being here today.

Maybe just to start, you're coming off a very solid quarter, 10% organic growth, 6.5% organic growth expected for the year. Where is the risk and opportunity as we progress through the second half? Where is there maybe momentum versus some conservatism just given, let's say, limited visibility?

Yes. Well, in terms of the growth rate in Q3 is going to look a lot like Q2. Again, a little bit easy comps for not just us but everybody, right, in the middle of the year here 2021 versus 2020. In terms of opportunities, I think we've always taken a pretty conservative view with regard to the short-cycle businesses. And that's largely the Instrumentation segment and then legacy Teledyne, Digital Imaging and even the FLIR portfolio kind of out of the box here, we didn't want to overpromise and underdeliver. That said, that was the principal reason why we upped the growth target from January to April and then from April to July, was really in the strength of Instrumentation, but more specifically test and measurement, a bit on the environmental side, but really Digital Imaging, where I think we started this year saying it would grow 10% organically. Then I think we revised it to around 11%. And now we're thinking it's going to grow probably about 12%. That's the legacy Teledyne Digital Imaging. But like I said, we kind of didn't promise more than that despite building backlog for Q3, Q4. So if there's going to be upside, I think it's going to be outperformance in the short cycle where, again, we were a little bit conservative. Just with COVID Delta variants, supply chain, I mean, we fared pretty well during all of this, like you said, the 10% year-on-year. But the short-cycle businesses where we're always conservative. I think there's reason to believe that we might be able to outperform. We tend not to guide at the midpoint, if you will. We've hit our numbers in every quarter except 3 in the 22 years, I've been here, and that includes the 2001 recession and COVID. So we're pretty good with doing that. So I think that's the area for outperformance risk. Now sitting here in August, I don't want to say there's no risk. There's always risk. But there's not that much time left to the year. So I think we're pretty balanced, and I think we're going to be pretty accurate where the numbers are going to come out. If there are risks, I mean I have to say a little bit of risk of FLIR. It's new. It's our first full quarter under the belt here in Q3. We think we got it dialed in. We think we've got -- the costs have been cut radically. So I think it will deliver on the profit performance if the sales come, and they have the backlog. So it's really kind of an execution issue, which I don't think will be an issue, but you asked me to pick a risk so I'll make that one. And I think there's some risk, but we fared quite well on supply chain and inflation. I don't think anyone's immune from it. We probably had a few slips in Q2 into Q3. And when September comes around, there might be risk few slips from Q3 to Q4, just on supply chain. But again, we haven't faced inflationary pressure that we haven't been able to pass on. So I don't think there's a margin issue. And we fared a little bit better on supply chain availability. It's -- when you have a backlog, you can leverage and you're also a supplier to the semiconductor industry as well as a customer, that gives you an opportunity to maybe move up the queue a little bit. That said, we had a few slips. That's -- we're not perfect. But I think we've got that into the outlook, too. So sorry, long answer.

That's helpful. And just on FLIR, it's only been a little bit over 2.5 months since the close. I mean, what's been accomplished so far? What is in front of you? How are you thinking about integration? And then maybe any positive surprises so far? You did pull forward the synergy number a little bit. Just kind of what's going on there?

Yes. So in terms of -- I got to say from the beginning, I mean, we're very, very pleased with the acquisition, very excited. I mean it had a great almost even too good Q2 because we got 8.5 weeks of revenue equivalent sales with kind of 6 weeks or 6 costs. So I mean it had a great performance out of the block. But the underlying business is virtually on any metric, people, the factories, the technology. And they brought $900 million of backlog, $928 million to be specific, as of the closing date. We're really excited. And to your point, we upped the synergy target a bit from $80 million to $100 million. But probably more significantly, we moved that $80 million number to the left from 3, 4 years hence to the end of next year. So again, maybe a little bit cautious. Don't expect $80 million of savings on a full year P&L necessarily in 2022, but maybe relative to their GAAP 2020 performance, maybe $55 million, maybe $60 million of incremental EBIT or EBITA, if you will, in 2022. In terms of what's working there right now, I mean, their commercial businesses are doing great, and that's 75% of the company. Defense is very important for them, as it is for us. But in the 10-Q, we filed on Friday, we see that the U.S. government business is only 25%. So both companies and now the combined company are fundamental, high-tech industrial but with stable backbone of defense. And I could always nitpick here in there and say there's one division that needs a little bit of TLC and some quicker new product development. But by and large, we're exceptionally happy. And like I said, we cut and we cut pretty deep in terms of the cost. It's not all people. I mean people's part of it, corporate office is part of it. The corporate office itself in Arlington was fully vacated July 12. That doesn't exist anymore. So things are going well. But this is the first full quarter. So let's be a little bit conservative in the short term, but it's been very, very good so far.

I mean the word conservative and Teledyne always go together well. So I mean this is a bit of a loaded question, but it's one I get all the time I mean, how do you think about the structural growth rate of Teledyne? How do you think about a normalized growth rate and kind of the annual margin opportunity? And kind of with that, does that change with the FLIR acquisition given it is such a large part of sales?

Yes. So well, the simple answer is it doesn't change with FLIR with one exception in -- it kind of really doesn't matter because we don't really have year-on-year comps for FLIR. But 2021 is kind of a unique year, where we, Teledyne legacy, like most companies, we had COVID headwind in 2020, and now we have sort of COVID tailwind with easy comps. Where FLIR was unique and it had the opposite, where it had COVID tailwind in 2020 because they sold quite a large amount of cameras, probably $125 million, for skin temperature screening, I think the Amazon fulfillment center, Disneyland or something like that or a large corporate client. There was a lot of that, and now they have to lap it. So 2020 is kind of a peculiar year where, yes, we're guiding to 6.5% for stand-alone Teledyne. For FLIR, we're basically guiding flat, if there were to be organic. But what that really is, they kind of grow 6% everywhere else because it's $125 million of revenue on a $1.9 billion base. Other than skin temperature screening, they kind of grow this new amount in the balance of the portfolio. So if you sort of say, what does that look like over time? Kind of what I tell people is, and you probably shouldn't be surprised, most Januaries for Teledyne look like -- again, this year was an exception because of easy comps. Most Januaries has looked like kind of a 3% to 5% organic guide. And when the economy is good or there's no hole to fill, like 2017, 2018, that gets revised up, and we do 7% or even 8%. This year, we're at 6.5%, and hopefully, we topped that 7%. Like we're at 7%, when there's no hole to fill, when things are going well. But we always start conservative to the point you made on the last question. With FLIR in the portfolio, once we get through this little COVID aberration, it doesn't really change anything or doesn't add much to growth, but it certainly doesn't dilute it either going forward.

I mean -- and with that, we're only about halfway through 2021. But I mean, how are you thinking about next year? If I look around estimates, there's a high level of variability because I think there are quite a lot of variables. There's probably some difference across estimates around incremental contribution from FLIR. The ongoing support for elevated growth continuing into next year and even just kind of around baseline operating margins for 2021 as kind of a baseline to expand on. I mean, how does this all play into kind of next year? I mean if I want to be really blunt, I would say, is my -- how accurate it's my estimate for next year? But just kind of thinking about the pieces.

I think, I mean there's been at least a little bit of a narrowing of the consensus the last -- just the last week because there was a peculiar time. And it truly was peculiar for us between May 14, when we closed the acquisition and earnings last week was the only time in the 2 decades I've been there was no Teledyne outlook. I mean we've never suspended guidance for a recession or COVID. And so yes, people are kind of all over the map. GAAP, non-GAAP, FLIR for the whole year or FLIR just on a consolidated basis, FLIR on a pro forma basis, going back to January, it was a little bit of a mess. I think things have narrowed a bit. So I think the swath of all possible outcomes is both from an actual performance but even from a consensus number has narrowed a bit. But it's a little bit of an excuse here, but I'd say it's still early. We've got -- fundamentally, everything's going pretty well, not just the sales and we mentioned the growth. But every quarter now, I think for 4 or 5 quarters, we built backlog. FLIR is going well, especially well on the cost side. We brought the synergy target forward. But L.A. County, just put the mask mandate back on, and San Francisco and the Bay Area followed, so -- sitting out here in California. So who knows, let's be a little cautious. I would say the most likely event is the January guide, is probably going to be a little bit lower than sort of the current sell side, looks like the current sell side. I figure where you are, Greg, but maybe not...

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Yes. I mean on the top line -- I mean, I think just there's one number out there that's, I think, a little bit overly aggressive. But most people are kind of sitting at sort of like a repeat of this year's organic growth, maybe 6% or so, which I don't want to say that's high. But on the other hand, I think unless things are really, really chugging along in January, we'll probably be conservative like we usually are so that we can raise in the later years. So maybe we'll come in a little bit more conservative on the top line. In terms of earnings, it's definitely premature. We've only had FLIR in the publicly reported numbers for 6 weeks. So I'd say stay tuned to Q3, Q4. And the underlying margins of the Teledyne legacy businesses are, I'd say, consistent with what's in the outlook. But stay tuned on FLIR. We'll have to see how we execute this year. So...

No. That's fair. And then, I mean, maybe just digging a little bit more into the pieces of the portfolio, just starting with Instrumentation. What are you seeing in broader oil and gas within marine? I mean it seems like orders have spiked up. And then also, I think people forget that majority of that business is not oil and gas. How are you thinking about marine in light of maybe the better recent order outlook?

Yes. So just to sort of size it for everybody's benefit. So in the Instrumentation, call it this year basis, [11 60] or so, $1.1 billion, $1.16 billion of sales. Marine's about $435 million. And of marine, energy, which is volatile and at a trough, is only about $150 million on an annual basis. So it can be volatile, but at the current level, it's 3% of pro forma sales. It's not that much. That said, it's finally going to start going the right way in Q3, Q4. So that's good news. And you're right. I mean book-to-bill for that marine subset was 1.13 in Q2, and we probably haven't had a backlog build like that in probably 6 or 7 quarters. So that was nice to see. But again, it's relatively small in the grand scheme of things. But when it ceases being a hole to fill, not only do you get a little bit of incrementals, but what you really see then is the test and measurement and the environmental, that's been really strong in the last 2, 3 quarters, you're going to see that shine through even more. Because you don't have to fill negative comps in marine, which is what happened in Q1 and Q2. You had negative comps on that $435 million for the other $600 million of the segment, had to fill that hole, and that hole doesn't need to be filled anymore. So we're expecting a reasonable growth in Instrumentation in Q3, Q4. Again, comps are a little bit easier, but it should be finally going to show through on the margin and the growth with T&M and environmental, which we didn't talk about, that are doing great.