Teledyne Technologies Incorporated (TDY) Earnings Call Transcript & Summary

Well, good morning, everyone. Thank you all for joining. My name is Adam Samuelson. I'm Senior Vice President on the Aerospace and Defense equity research team here at Jefferies. I want to welcome you all to the second day of our Annual Jefferies Industrials Conference here in New York. Today, we're lucky enough to have Teledyne and their Vice Chairman, Jason VanWees, here representing the company. So Jason, thank you for joining.

Maybe just to start at a high level for newer investors. How do you define Teledyne today portfolios and sensors, imaging, instrumentation, defense electronics, engineered systems and other and vertically integrated platforms from space to deep sea, probably missed a bunch of things in there as well. Kind of how do you -- how would you frame what Teledyne does and kind of why the model is differentiated?

Yes, sure. So again, Jason VanWees, Vice Chairman. I've been at Teledyne a little over 27 years as of last month. Principally, I'm responsible for M&A, capital allocation, I suppose, if you would like. And sometimes, people are left thinking that Teledyne is very complicated and some of that's my fault because I willing to tell everybody everything we do in every market we serve and vertical and things like that, which really isn't the case. I may sound count intuitive after 75 acquisitions that were actually a simpler company, but we are because virtually everything we bought has been a double-down acquisition in a market we're already in or our customer base, we already serve circa 1999, when I joined. So certain things have gotten larger and more material. But thematically, what we build, like we said, principally, we're a sensor business. That's where most of our companies grew out of imaging sensors, acoustic sensors. Over time though, we've grown in certain markets to be vertically integrated where we use our own sensors into cameras for applications ranging from machine vision, semiconductor wafer inspection, satellite imaging, things that looked down like space development agency programs or big science things that look out. James Webb Space Telescope, Hubble Space Telescope, Nancy Roman Telescope just launched recently. But again, we're still a merchant supplier of all those devices to any other market participants, sometimes our competitors, sometimes not. But again, in areas like on-demand systems, unmanned air, unmanned ground, unmanned subsea. We are vertically integrated in our complete system provider. But generally speaking, Teledyne is a sensor and subsystem company that in a few areas is vertically integrated and a system level company. Now Jefferies has covered the start of A&D for more than 2 decades. And I think that's still a big part of our business. It's about 35% of our sales is defense. Commercial aerospace, relatively small, but a good 5%. So we're still -- single largest end market is aerospace and defense, but that leads another 60% of the company that is really, call it, high reliability industrial markets. And those range from things like medical sometimes commercial space imaging, someone like a planet labs as opposed to a space development agency, as an example. So similar type markets, but they tend to be commercial rather. And again, high reliability, not commoditized. Those are things that we try to avoid. Most of the markets that we're in tend to be a little bit nichey as one would say, for the proverbial highly engineered product. Most of the competition are oligopolies. Sometimes we're #1, sometimes we're #2, maybe occasionally #3. But that's really Teledyne at the highest level, I would say.

That's a very helpful overview. Maybe we'll talk about kind of the recent performance, and we'll kind of dig into some of the individual businesses as we go. Maybe just start the second quarter was basically the strongest quarter in the company's history for orders, sales, operating profit, 9% organic growth, 1.23 book-to-bill, kind of demand environment seems like it's really picked up over the last 6 months. And just how much of that is a step up in backlog conversion versus kind of a real improvement in the underlying demand for across your end markets?

Well, a little bit of both. I mean, again, the backlog has continued to grow. I mean I think we've actually had 11 consecutive quarters of book-to-bill north of 1. So yes, on an absolute basis, Q2 was the highest, both in terms of the ratio and in terms of the absolute order inflow to get backlog of about $5 billion -- funded backlog, we don't do in the defense world, we don't report contract ceiling things that it's just fully funded order in backlog. But yes, you're right, it's 9% organic growth. I mean in the Digital Imaging segment, it was 11.9%. So that was the fastest. But in the other segment, it was good to mid- to high single digit to get to the 9% overall. Generally speaking, in the quarter, the fence business, which again, like I said, is about 1/3 of our sales, that was double digits for the company, but most of the high reliability industrial was maybe at worst kind of low single digit, most of them were sort of mid-single digit. A few pockets a little bit stronger, but that's why the average organic was not. Again, you had 1/3 of the company nice double-digit growth, probably more like 12% than the 10% on that 1/3, that's defense. But then you had a lot of sort of 3, 5, 7s on the commercial and industrial business. So it was a good quarter.

Yes. And with that, you raised your outlook for the year. I think it's about 7% organic growth in the guidance for the year. But relative to that first half with the 9% in the second quarter, it does imply some deceleration. And just love to hear kind of the framing and thought process around. Is that a view on end market slowing? Or is that just a view on you have short-cycle businesses that you don't have a lot of visibility to meaningful part of your business?

Is it's more of the latter. I mean, most of the backlog-driven businesses when we talk about the $5 billion of backlog the 11 consecutive quarters of book-to-bill north of 1 that's driven by the back of businesses, which is about half the company, but at least a little less than half the company that is intra-quarter book and ship and the order is usually 1 because you get the order, you ship it, you could grow, you could contract, but it doesn't really build or consume backlog. So maybe there's a little bit of conservatism and we did mention on the call that now, maybe there's sort of $30 million, $40 million of upside based on trends as a duly and to sort of split here I think the organic guidance was paid maybe closer to 6% and then the full year total growth closer to 7% because we have a few little bolt-on acquisitions, but acknowledge that, yes, there's probably a little bit of upside to that, just the way things were even trending in July. So -- and the sell side is a little bit higher than the guidance by just about that $30 million to $40 million, but totally accurate. But I'd say generally, we've been conservative. We try our best to under-promise and over-deliver. I think in the 27 years, 100-plus quarters have been there. We probably missed our own guidance I think 3x. So it's been a pretty good record. So again, it's not overly conservative, but I think we've tried to do a reasonable job of not guiding at the midpoint, say, maybe a lower quartile.

It was not my -- that was not my implication. So maybe we'll go by end market because I think that's a more -- just a broader -- better understanding for the investor community. We'll start in defense. And you said or so of your business is defense. If you can tie in the commercial space pieces of it, maybe that's 40 or so if you don't think about that.

Not maybe a little less but in that neighborhood.

In the high 30s rate -- growing at a high single-digit rate, maybe some pockets of double-digit demand, double-digit demand growth. Can you talk about the areas where you're seeing kind of that high single digit, low double-digit growth in space, unmanned systems, missile defense, electronic warfare, kind of -- and elsewhere and kind of where the opportunity lies for the company over the next couple of years?

Yes. So just to frame it. So defense last year was about $1.9 billion, $1.95 billion this year, it will be maybe 2,150. So overall, kind of 10-ish percent, if you will, on a 2026 basis. if you had to break down that $2.1 billion, a little more than that. The single biggest sector is unmanned systems. That's about $575 million on a 2026 basis, without getting to details if you had to break that down, there's probably $225 million of unmanned air systems. That will probably be up double digits or so this year. There's about $200 million that is components and subsystems, like I said, classic Teledyne to other people's union-demand surface vessels like you've probably seen some of the news about unmanned surface vessels and Strait of Hormuz or other parts of the Persian Gulf, those use our thermal components, so they see at night. We're not a system provider there, but we're a component supplier and unmanned surface. Then we also are a system supplier in unmanned subsea but the components and subsystems business that we sell to all of the above, that will probably be the fastest-growing thing this year, maybe even 20%. So that's maybe a couple of hundred million. And that also includes components and subsystems for counter unmanned air, Ironically, it's kind of the same type of imaging components you use for a counter unmanned that you designed unmanned. So yes, that is a theme, both counter unmanned and unmanned, both surface, subsea and air, that's probably the single fastest thing. But overall, that $575 million of on-demand systems will be up double digits, but you probably got 15%, maybe even 20% in that components and subsystems, which touches every part of the market. The next fastest you mentioned is the next largest rather, is space where this year will probably be about $450 million of revenue, almost exclusively sensors, some specialty radiation and semiconductors, but mostly imaging sensors in the Digital Imaging segment. One of the reasons why Q2 with nearly 12% organic growth. A little more than half of that is infrared imaging. Think space development agency, it was after Q2, but some of the initial awards for Golden Dome that happened in July. Those will use our sensors as an example. But we also make again the visible light sensors for both commercial and defense applications, specialty hyperspectral sensors for both defense, but also things like weather satellites, we give some of our equipment as well. And then probably the other parts you mentioned, I won't bring them down an exact revenue, but electronic warfare and infrared imaging systems that are non space that might be just sold for things like helicopters or sniper sites, for example, that's a big wedge, electronic warfare components. Again, we're not a system supplier there, another wedge again, probably one of the faster-growing things, but a little smaller for us is components and subsystems for missiles and munitions. There was a little press release today for a European order this morning. But that will probably grow from $200 million to $240 million, so it will probably be 20% this year, but that's a smaller wedge. And then finally, I'm manned subsea. So we actually untraditional business for Teledyne, but given our strength in the marine market and the unmanned subsea market, we actually make the current Navy SEAL delivery vehicle. Again, that may not be a typical Teledyne business. You might think of a Huntington Ingles or Lockheed. But given our strength in unmanned Subsea, we actually make a man subsea vehicle as well for Navy silicon.

Okay. No, that's helpful. Maybe just staying on the unmanned for a second. As you think about that kind of market growth that you were describing, maybe strongest, how do you think about the Teledyne offering a kind of whole systems offering and how that competes in the marketplace versus your customers on the component side and kind of where you're seeing what market intelligence you're getting from the customer demand you're seeing on that component side -- and how that maybe iterates, if at all, your own development curve on your own drugs?

Yes, just maybe sort of to classify our business. I mean, so I think we're -- I'd consider ourselves a relatively low-cost producer of drones, meaning the average ASP, just order of magnitude for a Teledyne drone would probably be in the $10,000 to $100,000 range. That's kind of what we would sell. We're probably not interested in being a system supplier for very low-cost drone dominance programs, $1,000, $2,000, things that may not even have a radio, they may be tethered, they may not have electronic countermeasures. Some of those may not even have infrared, they maybe daytime use. We're happy to sell infrared components to some of those folks, and we do, but we really don't want to be a system provider in our view, that kind of leans to the money and we avoid commoditized end markets. . But if you want a highly capable drone out of what I would think is a reasonably low cost, again, $10,000 to $100,000, where it does have stale, it does have a radio. It is GPS jam resistant. It can work in GPS-denied areas. If it is jammed. Not immune but very resistant to electronic warfare, where some of those low-cost drones can just be dropped relatively easily. So again, we're a low-cost producer, but we're not a system supplier at the very, very low cost. But we do pay components and are happy to do that. But again, we sold other people who would have also say low-cost components. So the people you would think aero environment, for example, is our neck of the woods and a very good customer. It has been for many years for the Switchblade family of drones as an example, or even their observation class Pumas, they're a customer of ours.

That's very helpful. And maybe before we move away from defense, you alluded to missiles ammunitions being kind of the smaller part of the wedge. It's also an area where you've seen some very large framework agreements by the -- by the DW and some of the key primes for things like PAC-3, AMRAAM, et cetera. those could see production growth 2, 3, 4x over the course of the next several years. Is that industrial base has expanded. How do we -- I mean, should we be thinking about that smaller piece of the wedge having kind of a much faster growth profile over the next couple of years? Or is there anything that we're missing?

No, I think it should be. Ironically, the 2 programs you mentioned. So AMRAAM is radar guided. And when I said we make electronic warfare rurban and pieces, we make it for AMRAAM. As an example, you mentioned PAC-3. So again, we don't make the missile. We don't make the radars. We make some components for radars, but the seeker that Boeing makes that's on the end of the Lockheed missile for PAC-3 of the Boeing seeker has sensors from Teledyne because you need those kind of components and such as [indiscernible]. PAC-3 and AMRAAM are actually some of the larger pieces of that 200 million going to 240 million, which, again, a lot of those awards that you mentioned were just really recently, there as post quarter end.

Right. Now this is all prospective still getting the funding sorted out with the Congress on the framework agreements, but I mean they need to make a lot more factories.

No, no. PAC-3, AMRAAM and even to a lesser extent because some components and subsystems for Tomahawk, things like that should be good business indeed. But then I also mentioned, it's not just missiles. It's a smaller way for us, a very high growth rate, but some of the larger webs like -- larger wedges like space, so the Golden Dome Awards didn't even happen until post quarter. And -- some of the strength in digital imaging, you mentioned the book-to-bill in Q2 in that segment it was over 1.4. And the single largest award in Q2 was a follow-on award to the award we got in December for a tranche 3 tracking layer from SDA. Because again, like I said, we only book -- we only book fully funded orders. We don't book contract ceiling. So those contracts were awarded. I think December 19. So in Q4, we got the sliver of an order for a tranche 3 tracking layer, but then we got follow-on awards for that in Q2. And then the Golden Dome, those didn't happen until July, right?

Okay. Maybe switching gears when you talked about digital imaging growth and some of that obviously is defense-related, but talk about the nondefense parts of the other digital imaging segment and kind of where you're seeing kind of any of the momentum there on the industrial, health care, et cetera.

Yes. One of the business we have that's kind of on the long end of the short cycle, so it does have a little bit of backlog component where the other short-cycle stuff, like I said this intra-quarter book and ship. But the specialty machine vision cameras that we make for things like semiconductor wafer inspection, again, sounds like a different market, but some of the sensors that can see microns and nanometers and above a wafer aren't that different from sensors that you may make to a space-based imaging platform. So what we make we make very sensitive sensors. And when you do that, one of the verticals that you serve is semiconductor mask and wafer inspection. We do machine vision cameras for still level in a bottle, but microns nanometers don't matter. In the other markets, they do matter. So that's kind of the long end of the short cycle. So you think key accounts like ASML or a KLA-Tencor as an example, a Lasertec in Asia of one of their competitors. That's been an area that's been getting better and good. But there has been increased revenue in that in Q2, probably double digits. There was -- that was a component of the 1.4. I think some of that was more space. But one of the components of that backlog growth was semiconductor mask wafer inspection on the commercial side. Most of the other commercial markets, again, like I said, they were positive, but health care was actually 8%, but let's call it, mid-single digits sort of the guidance on the year, just had an easy comp in Q2. Some of the electronic test and measurement business was 3% to 4%. So most of them were good. But yes, I don't pick a standout on the commercial side. I would say, machine vision cameras that are related to the semiconductor cap equipment was definitely a standout on the commercial side of the business. And to put that in perspective, that's maybe 200-or-so million on an annual basis. But trending higher than that right now.