Allient Q1 2023 Earnings Call Transcript

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May 4, 2023

There are 6 speakers on the call.

Operator

Day, and welcome to the Allied Motion Technologies First Quarter Fiscal Year 2023 Financial Results Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Craig Mychajluk, Investor Relations.

Operator

Please go ahead. Yes.

Speaker 1

Thank you, and good morning, everyone. We certainly appreciate your time today as well as your interest in Allied Motion. Joining me on the call are Dick Risela, our Chairman, President and CEO and Mike Leach, our Chief Financial Officer. Nick and Mike are going to review our Q1 2023 results and provide an update on the company's strategic progress and outlook, after which we'll open up for Q and A. You should have a copy of the financial results that were released yesterday after the market closed.

Speaker 1

If not, you You can find it on our website atallidemotion.com along with the slides that accompany today's discussion. If you're reviewing those slides, please turn to Slide 2 for the Safe Harbor statement. As you are aware, we may make forward looking statements on this call during the formal discussion as well as during the Q and A. These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from what is stated on today's call. These risks and uncertainties and other factors are discussed in the earnings release as well as with other documents filed by the company with the Securities and Exchange Commission.

Speaker 1

Find these documents on our website or atsec.gov. I want to point out as well that during today's call, we'll discuss some non GAAP measures, which we believe will be useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliations of non GAAP to comparable GAAP measures in the tables accompanying the earnings release and slides. With that, please turn to Slide 3, and I'll turn it over to Dick to begin.

Speaker 1

Dick?

Speaker 2

Thank you, Craig, and welcome, everyone. We delivered record sales in the quarter, further strengthened our margin profile and achieved a measurably improved bottom line. This level of performance speaks to the ability of our entire team to execute our strategy at a very high level as well as our market diversification, particularly within industries that demand precision controlled motion solutions. 1st quarter revenue of $145,500,000 was up 27% and reflected higher demand across most targeted markets along with impressive organic growth of 25%, the highest level in recent history. Of note was the strength within our industrial vertical with strong end market demand in industrial automation, oil and gas, HVAC and material handling.

Speaker 2

Aerospace and Defense markets also grew substantially during the quarter due to organic growth, incremental demand from acquisitions and defense program timing. And our medical market saw double digit growth from higher demand within surgical related markets and medical mobility. Equally important was the continued strengthening of our gross margin, which reflects the higher volume, including more technology solutions based sales and margin accretive acquisitions. This translated into strong operating leverage as operating income increased 167% and net income more than doubled over last year's Q1. On an adjusted basis, our earnings per share were $0.55 up 53% from $0.36 per share last year.

Speaker 2

Given the strong earnings performance, we generated solid cash from operations, which shall offset what is typically a higher cash consumption quarter. Our orders and backlog were both down sequentially, which was not unexpected given the improving supply chain and macro environment. I will talk to this performance later in the presentation. Overall, 2023 is off to a strong start. We expect our investments in technologies and solutions to continue to yield results and over time, drive an enhanced margin profile.

Speaker 2

With that, let me turn it over to Mike for a more in-depth review of the financials. Mike?

Speaker 3

Thank you, Dick. As a reminder, our results include the acquisitions completed during the Q2 of 2022. Starting on Slide 4, we provide some details regarding our top line. 1st quarter revenue increased 27% were $30,800,000 to $145,500,000 The unfavorable impact of exchange rate fluctuations on revenue was $3,300,000 in the quarter. Excluding FX, revenue was up 30% and organic revenue growth was 25%.

Speaker 3

As highlighted, Aerospace and Defense grew 125%, industrial market sales were up 38% And medical was up 11% in the quarter. Dick reviewed the specific end market drivers behind each of these growth markets. Sales for the distribution channel were about 4% of total and increased 10% during the quarter. One market that declined was vehicle as higher commercial automotive demand was more than offset by lower demand within agricultural vehicles. Powersports is still the largest component within vehicle and saw modest growth year over year.

Speaker 3

Slide 5 shows the change in our revenue mix by market on a trailing 12 month basis and the drivers behind that change. Industrial continues to be strong and remains our largest market, making up 40% of our total TTM sales. Solid organic growth and contributions from recent acquisitions contributed to this performance as well as the A and D and medical growth. Vehicle market growth was up slightly on a trailing 12 month basis as truck and commercial automotive demand more than offset The weaker agricultural vehicle demand. As highlighted on Slide 6, our first quarter gross margin was 31.5%, up 2.30 basis points from the prior year period.

Speaker 3

Higher volume, margin accretive acquisitions And pricing more than offset remaining global supply chain constraints and higher material and labor costs. Consistent with our stated objectives, you can see the progress we are making by executing our strategy in the annualized chart on the right as we achieved a trailing 12 month gross margin level of 31.8%, up from 30% in 2021. Moving on to Slide 7. The 1st quarter operating income more than doubled to $11,400,000 were 7.8 percent of sales, which was up 4 10 basis points. Operating costs and expenses as a of revenue were 23.7 percent, down 170 basis points, which reflected the operating leverage obtained from strong revenue growth along with consistent utilization of AST, our lean toolkit in all aspects of our business.

Speaker 3

On Slide 8, we present GAAP net income and adjusted net income along with our adjusted EBITDA results. Our net income and diluted EPS have been adjusted for certain items, which we believe provides a better understanding of our earnings power, inclusive of adjusting for the non cash amortization of intangible assets, which reflects the company's strategy to grow through acquisition as well as organically. Net income increased 152 percent to $6,300,000 or $0.39 per diluted share. And on an adjusted basis, net income was $8,900,000 or $0.55 per diluted share, up 53%. The effective tax rate was lower in the quarter at 23.2% due to discrete tax benefits.

Speaker 3

We expect our income tax rate for the full year 2023 to be approximately 25% to 27%. Adjusted EBITDA increased 47 percent to 19,000,000 were 13.1 percent of revenue, which was up 190 basis points from the Q1 of 2022. We use adjusted EBITDA as an internal metric and believe it is useful in determining our progress and operating performance. Slide 9 and 10 provide an overview of our balance sheet and cash flow. In the first quarter, we made $25,000,000 deferred payment for a prior acquisition, which was reflected in our cash position at quarter end.

Speaker 3

Total debt was approximately $237,000,000 up $1,000,000 from year end 2022. Debt net of cash was about $211,000,000 or 47.9 percent of net debt to capitalization. Our bank leverage ratio was 3.3 times. We generated $3,600,000 of cash from operations, which reflected higher net income and lower levels of inventory. The Q1 is typically a higher cash consumption period, So we are pleased with our cash generation, which compares with the cash usage of $13,400,000 in the prior year.

Speaker 3

Based on our cash flow projections, we expect to continue to drive strong cash flow this year consistent with historical trends. 1st quarter capital expenditures were $3,600,000 and we're largely focused on new customer projects. We expect 2023 CapEx to range between $18,000,000 $23,000,000 Inventory turns to meet customer demand while combating sourcing and lead time challenges. Our DSO saw a slight bump up to 55 days. This is largely due to timing and mix of customers.

Speaker 3

With that, I'll now turn the call back over to Dick.

Speaker 2

Thank you, Mike. Slide 11 shows our orders and backlog levels. 1st quarter orders of approximately 123,000,000 resulted in a book to bill ratio of 0.85 times and backlog of approximately 309,000,000 While we are seeing some pockets of weakness in Europe, our overall demand outlook is positive with a healthy backlog to support our growth. Our backlog was up 7% over the prior year period, but decreased from the sequential Q4 of 2022 Given the loosening of some supply chain constraints, given the improvements in the supply chain, we are making good inroads to reduce our lead times at our backlog as we accelerate shipments of several long lead products. Over the next couple of quarters, We do expect our backlog to decline slightly as our book to bill ratio stabilizes around 1.

Speaker 2

The time to convert the majority of backlog to sales is still within the next 6 to 9 month window. Turning to slide 12 for our outlook. We remain well positioned for success through a wide range of economic environments. Demand is expected to continue at relatively strong current levels within our industrial markets, which should continue to benefit from our increased market presence around Industrial Automation and Material Handling as well as Oil and Gas. We are making solid roles with defense applications and expect our overall A and D business to benefit as we further leverage recent acquisitions.

Speaker 2

Medical markets have trended away from the pandemic related sales to a more normalized sales environment focused on surgical and instrumentation related end markets. And lastly, we are anticipating modest growth in our vehicle markets as the supply chain improves and demand schedules from our automotive customers continue to firm up for 2023 beyond. An area of focus beyond our margin objectives is driving cash conversion and paying down debt this year as we look to reload for future opportunities. We are still actively grooming potential acquisitions and building out our M and A pipeline as a key element of our overall growth strategy. We started the year on a strong note and while a heightened level of uncertainty remains, we believe we can continue to execute our strategy and capitalize on the many growth opportunities and tailwinds within our targeted markets.

Speaker 2

With that, operator, let's open the line for questions.

Operator

We will now begin the question and answer session. The first question today comes from Greg Palm with Craig Hallum Capital Group. Please go ahead. Yes.

Speaker 4

Good morning, everybody. Thanks for taking the questions. I guess maybe just starting off with the commentary around pockets of Yes. It would be helpful just to get a little bit more color on whether that's certain customer driven, whether it's certain end markets,

Speaker 3

I think it's fairly broad based, Greg. We do see it, I guess a little more predominantly, and again, this is on the order of basis that we're talking about is in Europe, It's a little more pronounced in the industrial markets in Europe, particularly like in Germany. So I would tell you, it's mostly macroeconomic driven. Obviously, we do have some specific customers that have been impacted by the Ukraine conflict as well that we've seen flow through. But I would also describe it as sporadic.

Speaker 3

I think we'll bounce from 1 month being really strong surprising orders and then one Month being quite low. So but then you compare that to 6 months ago, 12 months ago, I think mostly supply chain driven, right? We were seeing a lot more a lot higher orders just because of that. And what we've got going on is also A compression of the supply chain lead times and again our expectation we've talked about this over time that we expect This book to bill flip a little bit simply driven by lead times in Proven.

Speaker 4

And Do you get the sense on whether it's maybe destocking units for inventory normalization And I guess have you seen cancellations altogether as part of that softness in orders?

Speaker 2

I think the first part of that's more correct, more accurate in that you are seeing some adjustments. So Again, people had built in longer lead times through the supply chain issues. And now as the lead times are starting to come back to more normal levels and materials are flowing. You are seeing some adjustments of some schedules, okay? We fully expected that and it is occurring.

Speaker 2

And I would emphasize what Mike said. In Europe, there has been some Remaining instability based upon Ukraine crisis, the impact on Let's call it energy cost, the impact on planned product sales and releases into that Eastern Europe market. But overall, we are holding up quite well in many areas. And while we hear about Expected reductions, we continue to see some strength as well. Cancellations are rare.

Speaker 4

Okay. Makes sense. And then just in terms of the Kind of the capital allocation strategy, big, big year for acquisitions in 2022. And I know we've talked about a robust pipeline. Does the current environment and your, I guess desire to pay down debt here, does that change your thinking around M and A in the near term?

Speaker 4

Or does An environment like this maybe mean there's some opportunities that could come out just based on valuations coming in?

Speaker 2

Yes, I think you're absolutely correct. I mean, so we always have to be ready because their Valuations have come down and we are seeing some opportunities. So we do have to be Ready because there are some strategic areas out there that we felt that we're looking at and we would like to And in the future here, so some things are opening up, valuations are have declined. While we expect strong cash flow and the ability to pay down debt this year, We also feel that we're in a position to be selective, pick these acquisitions that Really enhance our value to us strategically and that's where we are. We're really looking at it from a strategic standpoint.

Speaker 2

And if you asked us, if we were seeing something major come across that maybe changes what we would like to do then We would have to be creative and figure out a way to get it done. But right now, I think we're in a good spot. We're focused on paying down debt. We're also focused on a couple opportunities that are out there that we think would add some good strategic value to our overall portfolio and platform.

Speaker 4

Understood. I will leave it there. Best of luck. Thanks.

Speaker 2

Thank you,

Operator

Your next question comes from Ted Jackson with Northwire Securities. Please go ahead.

Speaker 5

Thank you. Dick, Mike, congratulations on a very solid quarter.

Speaker 2

Thank you, Ted. Thanks, Ted.

Speaker 5

I have a few questions, more around the financials. So starting with gross margins, you commented in your press release in your presentation that your Long term goal is to see about a percentage point increase in margin on an annualized basis. At least relative to my expectations, The Q1 margin was a little more robust than I might have expected. Is it fair to assume that you would see that

Speaker 1

kind of 1% increase

Speaker 5

across the year for 2023? And then For the full year to be somewhere north of 32%.

Speaker 2

Well, yes, it's a couple of things. Just want to make a comment about here and I think We made some statements and we followed them up in conference calls to talk about the gross margin and overall operating Profit improvement. So yes, we are focused on both. We are focused on the gross margin improvement. I think in the bigger picture, we're really looking at this as a combination of gross margin and operating margin improvement.

Speaker 2

And we do feel comfortable that the actions that we are taking right now will allow us to achieve what we have stated, okay? So I think but I do want to put it in context that we and I'll keep repeating it, so Yes. To make sure that it's not confused and that we may have added to the confusion, but it's really about the combination of those AST brings us several opportunities. There are some synergies that we can certainly realize that we're working on. And in addition to that, we are very focused on the solution set sales and leveraging the opportunities we have to Bring in new orders with higher gross margins that will actually allow us to realize what we stated in our goals.

Speaker 2

So I hope that helps.

Speaker 5

Sure. Second question, the revenue To my eye, quite strong in the Q1. Do we expect to see you build upon that in the Q2? Are we going to see a Sequential growth on the top line in 2nd quarter versus 1st?

Speaker 2

Yes. Good question. So a couple of things Kurt, as you noticed that's a very strong increase from our Q1 of last year. We've had a backlog that's increased substantially. We've had supply chain constraints.

Speaker 2

We've had long lead times that we've been dealing with. So we had some, I'll call it some pent up demand and past due items that we needed to clean up here as supply chain started Flow and we did see some of that in Q1. So I'd say to set expectations In the proper manner is that we would normally see a nice crescendo from Q1 to Q2 and so forth. We think Q1 represents some of the cleanup, I'll call it, and Q2 We'll not build off of that Q1 cleanup, let's call it, and that resulted in the sales. We do expect that We'll be solid, we'll be strong, but I wouldn't go back to historical data and say, well, you guys really jumped from Q1 to Q2 and Q3.

Speaker 2

I think we've seen Q1, we picked up and cleaned up some things that Because of supply chain constraints, we were able to do so.

Speaker 5

I don't think I'm listening to you. I'm sorry to interrupt you,

Speaker 2

go ahead.

Speaker 5

I was just going to say,

Speaker 3

I don't think the crescendo will be as steep as it traditionally is from a Seasonality standpoint, right. I think we've enjoyed some of that already here in Q1. And while we do expect benefit of some seasonality, I just don't think it'd be as pronounced As it's been in the past, Ted.

Speaker 5

So is it fair to maybe think of taking 2nd quarter and putting it sort of into more of a normalized, I mean, for lack of I'm not putting these words in your mouth, but I'm recognizing that I'm not expecting to agree with them, but like basically kind of reset a second quarter to what would be A normalized level and then let the rest of the year kind of flow through from that. Is that kind of the way to think about sort of the remainder of the year?

Speaker 2

Well, I think maybe the better way to look at it, although that's fine, I think it's the adjustment of the Q1 revenues for the past due Catch up that if you were to factor those out and say where would they have fallen, some of those would have fallen in Q2. So Q1, we enjoyed some success there because I had some loosening of supply chain and demand still there and strong. And So I would so it's more about adjusting Q1 and saying some of Q2 sales were It would be the best way to look at it.

Speaker 5

I have 2 more questions and I'm going to get out of line. I mean now are just about financials. You did have a little bit higher on the G and A than I might have Bhaunt, is there anything in there that I should be aware about? Is there anything in there that's maybe one offish or That was pushed there because of the strength in the top line in the Q1 that I should take into account as I think about the rest of the year.

Speaker 3

I'll take first, I would point to incentive compensation Yes, the performance in Q1 certainly impacts that. So that's probably the largest driver of G and A Being up. So that will obviously be dependent on performance for the rest of the year as well in terms of that trend continues.

Speaker 2

Yes. And there's a couple other things that we're occurring for. We do have an Investor Day planned for the first time here in August and We're beginning to accrue for those expenses we're going to see there. We've had a little bit more active trade show participation this year. And Again, we're recognizing on an annualized basis and not just expensing it that when it occurs.

Speaker 2

So there's some of those things that are in Q1 That we're preparing for events that we know are going to be happening through the rest of the year. So as Mike stated that, Plus I would tell you some of these other planned events that are coming that bigger push on the marketing side of it and some expansion in that area, trade show opportunities and Investor Day.

Speaker 5

Okay. And then my last kind of topic of questioning is just a quick discussion with regards Your forward view with regards to working capital and kind of how you see your working capital trending as we And roll through this year, I guess what I'm getting at is, how should we think about your receivable levels, your inventory, your payables? I mean, it's not like Was there anything in there that jumped out with regards to the Q1? I just kind of want to circle back to it because I mean it's a pretty it's a driver of your Operating cash flow, hence your free cash flow.

Speaker 3

Certainly, it's a focus of the organization this year. I think we've talked about that In the past from a critical issue standpoint, Q2 and Q3 usually is about working capital conversion for us, right, As the seasonality drives consumption and turns tend to improve. So Again, I think we saw part of that in Q1 given the higher volume. And again, despite the fear or The mere fact that we intend to generate a fair amount of cash this year, it's going to be driven by continued improvement in those working capital And managing that closely and I think the supply chain environment allows us to do that much better than it has the past couple of years. So Okay.

Speaker 3

I would call it stable with improvement is how I would look at that for Q2 and Q3 to support the higher levels of businesses. But I was very, very encouraged By the improvement in inventory returns, right? To me, that's the key item.

Speaker 5

Well, it's funny that I was going to You had a really nice turn and pick up our improvement in the turns. Is that something that we would expect to see As we roll through this year and going forward, is there a chance that we could see turns get back Towards sort of pre pandemic levels, maybe not this year, but by next year?

Speaker 3

Yes, I think that's certainly the intent and what we're trying to drive. Again, the move from 2.9 to 3.2 It's a good portion of that though, right? If we sustaining that and again continue to drive it, leveraging the higher volume Gets us a lot of the way there relative to I think we've talked in the past about those pre pandemic levels. So Again, it's also driven by what markets are more heavy than others in terms of The nature of what we're producing, whether they're lower volume products or higher volume products, and there's a lot that go into that. And certainly, we're not

Speaker 1

Out of the woods from the supply

Speaker 3

chain standpoint, we're certainly describing it as better. But the reality is right, we're still fighting battles And there's an inflationary aspect as well from a cost standpoint that's that'll be headwinds to that as well.

Speaker 2

Yes, I can add some more to that, Todd. I think it's a great area to focus on. And I can tell you that we had one of our All hands on deck GM meetings this year. It certainly was a strong emphasis and focus and our entire team is focused on it. We have some great tools on our ASD toolkit that provides some opportunities to it.

Speaker 2

But most importantly, Mike's mentioned it and I'll just reemphasize it, is supply chain. And as the supply chain crunches occurred in the past, it only took a couple of parts That drove your inventory up, couple parts missing that would drive your inventory up. And as those parts start to flow, then we're able to Consume the rest of that inventory that was sitting there that couldn't move because of a few parts that were stragglers and getting them in. And again, that had a lot to do with been able to shift past dues as well. So I would say, real focus on the company, Huge emphasis on that area.

Speaker 2

We realized that there's quite a bit of capital tied up and our entire team knows that and is working on it. Supply chain is improving. It's clearly improving and lead times are coming down and that's all very encouraging signs. So to get back to where we were, it's a significant improvement and I think everybody can do the calculation in our working capital returns And what it does for our ability to generate cash and pay down that debt and put us in a position to continue the growth story here and Due to those strategic acquisitions that have been certainly helpful on our top line, margin expansion, as well as Giving us the ability to create more strategic solutions. So I would tell you, we're excited about it.

Speaker 2

There's great opportunities ahead. Our team is well focused, understands the opportunity and just would love to see us get back to a normal operating environment where we can just Do what we could pay to do, so rather than scramble. All right. So a great question. I think It is a focus.

Speaker 2

We will be focused on it and we will see continued improvement.

Speaker 5

Great. Again, I'm done with questions, but it was a really, really nice

Operator

This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.

Speaker 2

Well, thank you everyone for joining us on today's call and for your interest in Allied Motion. For those of you that are interested, we will be participating in person at the Craig Hall institutional investor conference in Minneapolis on Wednesday, May 31. Otherwise, as always, please feel free to reach out to us at any time and we look forward to talking with all of you again after our Q2 2023 results. Thank you for your participation and have a great day.

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