Teledyne Technologies Incorporated (TDY) Earnings Call Transcript & Summary

Hi, everyone. We'll keep it going here. Next up, we have Vice Chairman, Jason VanWees with Teledyne. Jason, thanks for your time. I appreciate you being here with us today. I'll let you get started with your prepared remarks and then we'll jump into the Q&A. If anyone has questions, just you can submit them through the chat or you can e-mail me [email protected]. All right, Jason, go ahead.

Great. Thanks, Joe, and thanks for folks who joining us today. I'm just going to give a little bit of a background on Teledyne and given the theme of the conference, really talk about the specific products that we make for, call it, environmental compliance across the globe in addition to our own efforts in the ESG area. But maybe it's worth saying a little bit of background. Joe said I'm the Vice Chairman of Teledyne, I've been here almost 23 years. And the actual journey, if you will, on ESG while it's become clearly a more important theme in markets the last few years, it really goes back more than 2 decades for us. We'll maybe talk a little bit at some point about our acquisition strategy. But our very first acquisitions going back to 2001 were actually the companies that do trace chemical analyzers for ambient air and pollution monitoring, really built around the thesis of that would grow faster than traditional process chemical analyzers that really was the base of our business when I joined in that domain 2 decades ago. So a little bit just an overview of Teledyne. So who are we at the highest level. We say we're a sensor and decision support company. Well, what does that really mean? I mean, well, sensors for us means things like image sensors, that's in various wavelengths from medical x-ray to specialty sensors from space that look for pollution. I'll give some examples of that. Again, I mentioned trace chemical analyzers. That's another sensor we make that's for things like ambient air monitoring, emissions monitoring. We also make flow meters and wastewater samplers for things like wastewater based epidemiology. There was an article in the Wall Street Journal a few months ago about calling tracking COVID before people know it because it may be in wastewater in a community before people even know there may be an outbreak or infections. We make the wastewater samplers for wastewater based epidemiology. And of course, in addition to the sensors, we make instruments that carry those sensors. We make cameras that carry those sensors, and we make things like autonomous systems that carry the cameras and the sensors. So while we do sell sensors to third parties, we also are vertically integrated in subsystems and systems that actually carry those sensors and transmit actual information and data to our customers. Now I'll give some examples I've given the theme of the conference. Like I said, people actually say, where does the data when you see pictures of the earth, what is the concentration of gas in the Po Valley in Italy or the particulates that may be in an area, what is the temperature of the ocean? Is it an El Nino or La Nina year? What is the surface temperature by and large, more of those sensors globally come from us than anybody else. And this is just a list. I'm not going to read through all the various programs, but it's U.S. civil funded programs by NOAA, by NASA for weather monitoring, carbon monitoring, methane monitoring its European-funded programs by ESAP, again, for nitrous dioxide, ozone, sulfur dioxide. When you see those photographs of where is pollution, what's happening on the planet, when governments develop policy, for programs like this more often than all the sensors come from Teledyne. And again, that's both in the U.S., that's Europe, that's globally. Even the state of California is planning to launch a satellite called the California Carbon Mapper, we're providing the sensors for CO2 and methane to Caltech, which is making the instrument for that California Carbon Mapper. And we're proud of this. We actually have, and I'll talk maybe a little bit more later because there's occasionally some confusion given that Teledyne's long-term legacy has been in aerospace and defense, in space-based monitoring, more of our sensors right now are used for either big science like James Webb Space Telescope that look out into deep space, or they're for earth science like the satellites all listed on this page as opposed to, say, classified satellites. The civil component is significantly larger at the current time at the moment. And so that's from space, the space-based monitoring. But then you say, okay what's really happening on the ground? Well, we're the leading supplier in the U.S. and be it air monitoring equipment. If one were to look at a Yahoo! Weather app or whatnot, and you see air quality rating and you see, okay, a dominant pollutant, what may be the dominant pollutant? Is it PM2.5, well, that means dust particulate with a 2.5-micron diameter? Or is it ozone? Is it CO2? Again, the leading supplier of ambient air monitoring equipment that actually figures out, what are those dominant pollutant in a particular community or particular area is Teledyne. But it's not just U.S. I mean you see on the slides here on the lower left. We've shipped over 100,000 of these instruments to more than 100 companies across the globe. And that was the first acquisition we made in 2001 in a little more than 2 decades ago, was to participate in this market long before ESG became a common theme. And it's probably worth mentioning here, again, I mentioned our long-term legacy is in aerospace and defense, and that still is an important market for us. But the sole purpose of our Avionics business today which we refer to as aircraft information management is efficiency and safety of commercial air transport aircraft. That is our avionics business. Again, it monitors things like fuel efficiency, health of an aircraft, sometimes of monitors even in foreign countries pilot performance and safety. That is our Avionics business. And given the synergy with our avionics business and our environmental monitoring business, one of our more recent products is what's listed on the lower right there, which is actually monitoring the quality of air inside the cabinet of an aircraft. And we're just making some initial sales of that now. So again, if you're thinking about monitoring the actual environment from space on a global basis, the sensors come from Teledyne. If you're talking about air quality on the ground, if you're talking about wastewater-based epidemiology. And then even like I said, inside an aircraft, that's a new product we have for monitoring the cabin air quality for toxins inside and aircraft. Now I mentioned perhaps the temperature of an ocean at the surface, which is largely done from space. But what's really important for climatology and weather predicting is not just the temperature or solidity at the surface, but really at the entire water column from the surface of an ocean to deep sea. And again, if you say where does that data come from? What is the temperature and salinity, not just at the surface, but at the entire water column in the ocean, those data come from Teledyne. We make the autonomous underwater vehicles, what's shown there in the graphic in the middle, the little yellow submarine looking item, if you will, is a subsea glider. And between the gliders and floats right now, at any given time, there's actually thousands of those floating around the ocean that are bobbing from the surface to more than 1,000 meters below the surface collecting things like salinity of the water, the temperature of the ocean, which determines the density of the water and other parameters like be it ice melting, for example, or river run off into an ocean. But occasionally, they use for other applications like tracking the oil plume, when there's an oil leak, they have used our gliders for that or radiation monitoring in the ocean when there was the Fukushima disaster a few years ago, they've used our autonomous underwater vehicles to actually track those pollutants or risks as well. So it's -- we've been trying to tell this story a bit more really over the last 3 years in our annual reports and I think it was my fault as much as anybody that we really didn't get a lot of credit for it because we didn't have the "corporate social responsibility," the CSR report, we did publish our first one that really highlighted these products just in 2022 in February of this year. It also included the greenhouse gas emissions data, reduction targets data that I'll talk about in a moment. It included the workforce demographics, the safety data in that familiar format. So that was published earlier this year. I think there's still a little bit of confusion about what really is the Teledyne business? Are we really a defense company? Do we really have weapons exposure? The answer is very, very minimal. I'm a little bit frustrated Personally, I had an exchange just with Morningstar in the last 48 hours, where they say our weapons exposure is 19% because we sell to the U.S. government. And that's categorically not true. Our weapons exposure, and I'm happy to share details with any one offline in more detail and very specifically, but it's less than 5% of sales. Everybody should know that. Again, because most of our products are for defense. There are things like unarmed drones, standoff imaging, electronic countermeasures, missile defense. Again, there are some exposure to certain weapons programs, but it's very, very small as a percentage of total revenue. And my best estimate right now is about 4% of total sales. Again, other products that we make, we make a lot of cameras for safety applications, gas detection, leak detection, gas and flame detection for safety, hazardous gas detection. A lot of our cameras these days are used for applications like recycling. Our niche in imaging is we're good at making sensitive sensors and recycling is tricky. There used to be a time where everybody through green glass and the green glass been brown glass and the brown glass been clear in the clear, et cetera, et cetera, et cetera. And now everything all goes together. Well, that means it all has to be separated, and what is clear glass room clear plastic, those are tricky applications, and that's something that we're developing cameras for, and it's becoming an increasing part of our business because it's not that easy to actually separate that recycle bin, that's full of everything. And we're selling, again, specialty cameras that helped that sorting process. I will just briefly mention we did put a reduction target out there. And so what we said is we're going to reduce our greenhouse gas emissions divided by sales or million tons of carbon equivalent per $1 million of revenue, 40% from 2020 to 2040. We've got a pretty good head start on it. Again, we haven't published 2021 data yet. But at least with regards to Scope 2, our actual purchases of electricity full year 2021 relative to 2020, even though sales grew organically 8.2%, our actual electricity usage was down 1%. So at least with regard to the biggest part of Scope 2 is electricity. And year-on-year 2020 to 2021, we were actually down in terms of kilowatt hours, about 8.3% on an organic basis. So we've got a pretty good start. Again, we have to convert the actual kilowatt hours into million tons of carbon equivalent. We will be doing that, and we'll be assessing against Scope 1, but at least with regard to electricity, which is one of the biggest components of this, just in 1 year, we were down in terms of kilowatt hours, like I said, 8.3%. So we got a pretty good start on our 40/40 as we call it, initiative, just in the first year out of the box here, 2021, relative to 2020. And a lot of that was just facility footprint reduction, reducing the footprint, reduces the electricity. And again, we got a good start. I think it's an ambitious goal, but also a realistic goal. And again, we've -- in 1 year, we're about 8.3% at least on the Scope 2 on a kilowatt hour basis out of the box. I probably won't go through the rest of the slides here in extreme detail. I might highlight a few at the moment. But then I really want to given the theme of the conference, turn it over to Joe and others to ask anything about Teledyne specifically with regard to ESG or sustainability but or about our actual business, our actual products, the history, like I said, I've been here 2 decades, and it's been a very good journey in reshaping the portfolio progressively over time, not just in terms of end markets, but in terms of margins, earnings, cash flow. It's been an exciting journey. So just a few slides to highlight here. This is the overall makeup of our business. The guidance this year is about $5.5 billion of revenue. And you do see that U.S. government is about 24% of sales. But again, U.S. DoD is 19% of sales. The overwhelming majority of that is defense related, not offense or weapons. Again, that's less than 5%, my best estimate is 4%. Then the bulk of the company these days is that instrumentation and imaging, commercial imaging is actually the single largest business at the moment. And again, we're a global business shown on the right there. We actually sell more commercial products overseas balanced amongst all key regions, Europe, Asia and the U.S. Probably worth mentioning, I've gotten some questions on what is China exposure, is that a concern, either shutdowns on supply side or economy on supply side demand? China last year was about 6% of sales for Teledyne. So it's just a portion of that Asia Pac, even that's very balanced among China, Japan, Korea, Taiwan, Southeast Asia. Again, a lot of different end markets, very balanced across the portfolio and across geographies. Probably worth just spending 1 minute on the history of the company, we really were much more of an aerospace and defense company 22 years ago than we are today. Today, I mean, aerospace and defense is important, but commercial aerospace is about 3%, 4% of sales. Defense DoD that is, is about 19%. So an overwhelming commercial industrial business, obviously, is who we are today. And just maybe a quick commercial on the journey here in terms of margins. both gross margin EBITDA margin. And again, you can see maybe even on the lower right that international sales, we were very U.S.-centric aerospace and defense company 20 years ago. But that really hasn't been the case for the better part of the last decade. We've been a global commercial industrial business for the last 10 years, and we're trying to tell that story more and more, so people really understand. I think things are slowly changing. We were in the aerospace and defense gigs group throughout the last 2 decades, but that changed in June of last year. We're now in electronic instruments. So I think people are kind of rediscovering who we really are. when they look at our business and where we're categorized at S&P GICS, et cetera. There's still a little bit of confusion, I think, amongst the various ESG agencies. But that said, we're trying to get the story out. I think most recently is 2019, despite, like I said, this journey that's been 2 decades in the making. I think ISS had a 9 with 10 being the worst environment and 8 on social. Nothing's really changed that much in the last 2 years other than us telling the story. And today, I believe we're a 4 in environment and a 4 on social, down from 9 and 8 just 2 years ago. And again, we're just trying to get the story out because it's not been some magical change in the last year or 2. This has really been who we are for the better part of a decade. Again, we just try to make sure everybody knows. So again, that was a very quick overview and look at the past and the progress we've made both in terms of portfolio and margin, but I'm again more than happy to talk about anything ESG or anything financial or related to our business. Please feel free to ask.

Thanks, Jason. Yes. I mean you mentioned some of the frustration that you've had with the perception of the company's businesses and weapons and all this. I feel the same frustration as an analyst with Teledyne is our top pick and some of the discussions that we have around where you should fit in. And I think the FLIR acquisition probably generated some of this confusion, right? I think the perception around FLIR was very much that it was an aerospace company and how does that fold in? And maybe can you size some of these things for us? Just -- you mentioned weapons less than 5% of sales. But maybe if you have some buckets for some of the ESG positives that you talked about earlier with sensing and satellite and oceanographic and things like that. Maybe we could just put some numbers around some of those businesses, too, to give some people a sense of scale?

Sure. And I'll go ahead and turn my screen off here for a moment so people can be more up close. Yes. So in terms of just sizing some of those other businesses, but maybe I will address your FLIR question first. Part of the confusion was FLIR, especially before we acquired it. It had a very heavy narrative, all about defense, defense, defense. They opened a second corporate office in Arlington, Virginia. They were talking almost exclusively about defense. But the facts are the following: FLIR looked a lot like Teledyne, although they didn't message that as well. You can pull their 2020 10-K and their U.S. Government sales as a percentage of sales was 30%. At the time, Teledyne's was 26%. Now today because the commercial has grown faster, it's collectively 24%. So they were always a commercial industrial with a backbone of stable, long-cycle government. They were, again, primarily an imaging company, an observation company. They were a drone company with unarmed drones. But again, that really didn't come through. But the facts were, again, they were just like us, sort of 3/4 commercial, 1/4 government, and again, most of that government was search and rescue observation and in their drone portfolio at the time, all of the drones were dropped related to observation, both land and ground. So that's simply the facts. And again, you can kind of -- it's hard when you look at some of their immediate pre-deal investor materials, but the data is in the 10-K, and I just reiterated it. So I think that's worth mentioning. And to sort of get more granular on what kind of the size of these various businesses are. So the environmental instruments business at Teledyne, that's a stand-alone reported product line in our filings, that's in the neighborhood of about $450 million. And that, again, is the trace chemical analyzers for ambient air monitoring, for collisions monitoring, for clean water, wastewater. Again, it's about a $450 million business. In terms of marine, the actual smaller parts of marine where we make the autonomous underwater vehicles and specialty sensors and interconnects for the ocean, we do a little bit in defense there, things like unmanned autonomous vehicles, again, unarmed autonomous underwater vehicles. That's the smallest portion. The next smallest portion is offshore energy, but that's only 3% of sales, actually a little bit less today. The biggest part of that is sort of $460 million or so marine sensor and vehicle business is climatology, oceanography, ocean science, port survey, port construction, that's about $225 million of the $460 million. So again, that plus the $440 million gets you kind of the $700 million. The space-based monitoring. Collectively, that's about $300 million. Again, some of that is defense, but more of it's civil. Think about in the neighborhood of $150 million to $200 million of that is actually on the civil earth science or big science, again, like James Webb Space Telescope, which has been in the process the last few months and years. And so that gets you start getting close to $1 billion to some of those businesses, then the rest is how you want to define what is, call it, the S of ESG, I mean our medical business, kind of true clinical cancer radiotherapy, x-ray detectors, digital x-ray detectors, that's about $270 million. Again, kind of pure clinical cancer radiotherapy, dental, orthopedic surgery, I guess that's sort of not in the E bucket, but I would kind of put it in the S bucket. It's certainly life sciences. And then there's other parts of imaging that are true life sciences about $175 million. If you think about a researcher wanting to take a picture of what they're looking at through a microscope. Again, that's a nice Teledyne niche. It's tricky. It's a low light, high magnification. If you want to see a biological process, you might want to have a very, very fast frame rate camera as something is penetrating a cell wall for example. But that -- and things like ever gone to an ophthalmologist or a high-end optometrist and actually had a retinal scan that's called optical coherence tomography. We're the biggest supplier of sensors and cameras in that industry. So that's another couple of hundred million dollars. I guess, we kind of call it in the machine vision bucket, but it's really not what people may think of machine vision. It's really life sciences microscopy, spectroscopy and optical coherence tomography. And again, our Avionics business, the sole purpose of Teledyne Avionics is the efficiency and health of aircraft. Is that ESG or not? So I could kind of go on and on, but any way you want to cut it, there's very clear on the E side, call it, $1 billion of revenue. If you start doing things like safety for aircraft clinical, medical, microscopy, spectroscopy, you're probably in the neighborhood of $2 billion to $2.5 billion of total revenue that fall within that category of the $5.5 million.

Yes. Now as you think about whether it's -- you're an acquisitive company, new targets that you look at or new programs that you go after on the defense side, like -- or even as you evaluate existing products that some of your businesses may make, are there things that are just not worth the headache, in terms of like an ESG, like we have the technology that can work on this platform, but then I'm going to have to talk about why it's not an industry problem? Or like are you going through that still? Or are there things in your portfolio that maybe are small, but almost annoying for you to have to deal with from that standpoint?

There were some, I would say, been both with regard to organic development programs that we bid as well as acquisitions, I would say the view is much more of a, call it, a total stakeholder view, the lack of a better term. We're not going to be mergers for any one item, be it ESG or anything else. There's no dogma with gross margin of an acquisition target must be x. It's no. Can we get a good return, can we improve the business? So I'd say there's no single dogmatic approach to, again, either organic investment or acquisitions, again, be it either financial or ESG. That said, though, I mean, there has been some proactive pruning. We've leaned with our acquisitions much more commercial, much more industrial. We had no environmental business when I joined 2 decades ago, and I just said the environmental instruments business is $450 million or so. We had the only part of our Marine business that we had when I joined, was streamer cables for 1 customer for offshore oil exploration. That's all we did. So it was all energy, that's all we did in Marine. And now we have a $460 million business, the biggest part of which is oceanography climatology, port survey, et cetera. So again, I mean, again, there hasn't been a dogmatic approach, but we have moved that way for many, many years, and I think we'll kind of keep moving that way. Incidentally, one of the product lines that we made which was pure-play weapons exposure, it was only at its peak, maybe $20 million, $25 million a year, but we used to make a cruise missile. We used to make turbine engines for cruise missiles. We shipped the last one in March of 2021, and we closed the factory. That was end of life anyway. So again, it wasn't a dogmatic decision. But for what it's worth, one of the few things we made that was directly used in a missile application no longer exists in the portfolio.

So how do you -- as a company, you obviously have a lot of small businesses that you own. And as you develop the strategy here, how do you ensure that it's consistently applied across so many different varied businesses that have different KPIs, I'm sure, and different ways of thinking about it.

Well, the first time is probably worth me pushing back a little bit on so many little businesses. I think part of that is -- part of that is definitely my fault because I like to talk about all the various verticals that we serve. But it just so happens that, for example, in Specialty Imaging, we sell to lots and lots of verticals, but some of the very, very sensitive sensors that we make for earth science are designed in the same factories that will make very, very sensitive sensors for semiconductor mask and wafer. A few feet from space. It's not that different from microns and nanometers in semiconductor mask and wafers. So the verticals look complex, but the products are not nearly as complex and the facility footprint is not nearly as complex because it happens to be the same time the same facility, the same engineering team. And that's actually been -- I mean, I'll use FLIR as an example. One of the things we really liked about FLIR, but I think it was also a little bit underappreciated was that it was actually very discrete. I mean there were only about 6 facilities, all in excess of 100,000 square feet, I mean, some 200-plus thousand square feet that each generated hundreds of millions of dollars of revenue, and that was about $1.6 billion of the $1.9 billion of acquired revenue. So I think there's also been a proactive push to have more discrete businesses, have larger businesses, reduced the footprint that I mentioned earlier that actually resulted in, again, lower electricity usage despite growth in 2021 versus 2020. But again, I mean, it's always something. I mean, compliance, not just environmental compliance, export compliance. That's a huge part of running the business. I mean we're really proud of our record. We had some challenges. But as long as I've been here, we've never had a Foreign Corrupt Practices Act issue. On the Teledyne side, there's never been a consent agreement for export since U.K. Anti Bribery Act. There's never been a material weakness in financial reporting. We haven't had any of that. So I mean in terms of just complying again, not just with ESG, but all things compliance part of our record.

I know you're targeting Scope 1 and Scope 2 directly. How are you thinking about Scope 3, I assume that's pretty big part of it for you guys, given what you have to bring in. And particularly now in an environment where you're probably looking to add suppliers to diversify with supply chain challenges. How does that work its way into the thought process?

Yes. I mean, so right now, we're sticking with Scope 1, Scope 2. I mean, frankly, that's what -- it's more easy to monitor. It's what's required in certain jurisdictions. And we're not deemed and we're not a heavy polluter that may be required to do Scope 3. I don't want to say we'll never do it, but I think the goal right now is to keep doing Scope 1, Scope 2 reduce footprint where we can hit that 40/40 target. Again, I don't want to never say never, but I'd also be -- it would not be truthful to say that starting next year, we're going to have a very detailed rigorous Scope 3. That's -- we're not there yet. We're not there.

I think, unfortunately, we went quicker than I anticipated. I think we're at the end of our time here. I'll turn it over if there's any last like final closing remarks you want to make, but I'm glad we had this discussion. It comes up a lot with your company. I think it's good to kind of put some clarity around these things. So thank you for your time. And if there's any closing remarks you'd like to make. I'll turn it over to you.

No. Thanks, Joe. I would just say, I mean, we're trying to encourage a dialogue. I mean, on this front and frankly, others, I mean, there is still some confusion out there. We aren't very covered on the sell side. And the 2 most recent initiations on the sell side were both aerospace and defense analyst. So despite moving more and more commercial, despite having GICS change the sell-side skewed A&D even more so in the last 12 months. So I appreciate being at the conference and telling the story, and I'm happy to field any questions off-line from you or others. So...

Thanks, Jason. Appreciate the time. We'll talk soon.

All right, thanks. Bye.

Bye.