Allient Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 3, 2023

There are 6 speakers on the call.

Operator

Good day, and welcome to the Allied Motion Technologies Second 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. Would now like to turn the conference over to Mr.

Operator

Craig Mychajluk, Investor Relations. Please go ahead, sir.

Speaker 1

Yes. 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 Lozella, our Chairman, President and CEO and Mike Leach, our Chief Financial Officer. Take a micron and I'll review our Q2 2023 results and provide an update on the company's strategic progress and outlook, after which we'll open it up for Q and A.

Speaker 1

You should have a copy of the financial results that were released yesterday after the market closed. If not, you can find it on our website at alliedmotion.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 some 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.

Speaker 1

These risks, 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. You can find these documents on our website or at spt.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. 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.

Speaker 1

With that, please turn to Slide 3, and I'll turn it over to Dick to begin. Dick?

Speaker 2

Thank you, Craig, and welcome, everyone. I'd like to start the call with some off script comments as I have something I would like to relay to everyone. Sadly, Dick Smith, our former CFO, CEO and Chairman of the Board, passed away this past Sunday after I've refilled this. Dick was the person that brought me into Allied at that time Hathaway 22 years ago and for that I will forever be grateful. Nick was a great friend, partner and he exhibited the highest levels of honesty, integrity and willingness to do what was right for the company.

Speaker 2

Beyond that, Dick was a family man and family always came first. My thoughts and prayers will go out to Dick and his family. Rest in peace Dick. We will miss you, but you will not be forgotten. Now I'll start with the script as we have written here.

Speaker 2

So First off, we continue to successfully execute our strategy by delivering record sales, double digit organic growth and strong operating leverage, which translated into a measurably improved bottom line and solid cash generation. Our 20% top line growth reflected strength in each of our 4 targeted markets, highlighted by continued strong demand with our industrial markets, which increased 39% over last year's Q2. What drove our industrial strength was industrial automation projects, Power quality solutions for oil and gas and HVAC and continued demand for material and vehicle handling systems. We also benefited by shipping some of the long lead projects that were in our backlog. Aerospace and Defense markets grew 11% during the quarter due to incremental contributions from acquisitions and defense program timing.

Speaker 2

Vehicle market sales increased 7% due to continued ramping of commercial automotive programs, partially offset by lower agricultural Vehicle demand in Europe. Lastly, medical markets were up 3% overall. Driving higher margins continues to be a focus. And while we saw some contraction in gross margin for the quarter, which was largely impacted by mix. We are seeing the leverage play out in our operating performance as we delivered record operating income of 12,000,000 With a margin of 8.2%, which was up 210 basis points.

Speaker 2

Given the improved operating performance, net income per share increased 45% to $0.42 per share. On an adjusted basis, net income per share with up to $0.58 per share. We generated significant cash from operations of $13,700,000 and reduced our debt balance by $9,400,000 during the quarter. Our orders were up sequentially, Further emphasizing demand in the market, our backlog was down since the Q1 due to continued improvements within the supply chain. I will talk about this performance later in the presentation.

Speaker 2

The first half of twenty twenty three has positioned us for a strong year. Our entire team is energized by the continued growth and operational successes throughout the company, and we expect to continue executing our strategy well into the future. With that, let me turn it over to Mike for a more in-depth review of the financials. Thank you, Dick. As a reminder, our results include the acquisitions completed during the Q2 of 2022.

Speaker 2

Starting on Slide 4, we provide some details regarding our top line. 2nd quarter revenue increased 20% for $24,000,000 to a record $146,800,000 The unfavorable impact of exchange rate fluctuation on revenue was 0 point $4,000,000 in the quarter. Organic revenue growth was 17%. Dick touched on the quarterly sales highlights for our targeted markets and end market demand. One other sales channel, which is still a small component of our total is distribution, which has continued to see solid growth and was up 17% in the quarter.

Speaker 2

Slide 5 shows the change in our revenue mix by market on a trailing on a 12 month basis and the drivers

Speaker 1

behind that change.

Speaker 2

Industrial continues to be strong and remains our largest market, making up 41% of our total TTM sales. The 40% growth in the industrial space was driven by the specific markets identified. A significant portion of our backlog reduction occurred with customers in our industrial markets as well. Solid organic growth, defense program timing and contributions from acquisitions contributed to substantial growth and performance in A and D. Medical growth has benefited from the gains in the medical mobility market and vehicle market revenue was up slightly on a trailing as commercial automotive, powersports and truck demand more than offset weaker agricultural demand in Eastern Europe driven by current geopolitical events.

Speaker 2

As highlighted on Slide 6, our 2nd quarter gross margin was 31.3%, Down 110 basis points from the prior year period. Higher volume was more than offset by unfavorable mix and remain global supply chain disruptions. Consistent with our stated objectives, you can see the progress we are making by executing our strategy in the annualized Chart on the right of Slide 6. Moving on to Slide 7, you can see the results of our strong revenue growth and the leverage inherent in our operations as 2nd quarter operating income increased 60% to a record $12,000,000 or 8.2 percent of sales, which was up 2 10 basis points. Operating costs and expenses as a percent of revenue were 23.2%, down 310 basis points.

Speaker 2

On Slide 8, we present GAAP net income and adjusted net income along with our adjusted EBITDA results. Our net income and fully 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 acquisitions as well as organically. Net income increased 48 percent to $6,800,000 or $0.42 per diluted share. And on an adjusted basis, net income was $9,500,000 or $0.58 per diluted share, up 21%. The effective tax rate was 23.9% in the quarter due to discrete tax benefits and geographic mix.

Speaker 2

We adjusted our expected income tax rate for the full year 2023 down slightly to be approximately 24% to 26%. Adjusted EBITDA increased 26 percent to $20,400,000 or 13.9 percent of revenue, which was up 70 basis points from the Q2 of 2022. We use adjusted EBITDA as an internal metric and believe it is useful in determining our progress and operating performance. Slides 9 and 10 provide an overview of our balance sheet and cash flow. As a reminder, In the Q1, we made a $6,250,000 deferred cash payment for our prior acquisition, which was reflected in our cash position at the end of the second quarter.

Speaker 2

Total debt was approximately $228,000,000 down $8,300,000 from year end 2022. Debt, net of cash, was about $203,000,000 or 46.2 percent of net debt to capitalization. Our bank leverage ratio was 3.06x. We generated $17,300,000 of Cash from operations year to date, a significant increase from cash usage during the prior year period. The increase reflects Higher net income and improved working capital due to stronger inventory turns.

Speaker 2

Based on our cash flow projections, We expect to continue to drive strong cash flow this year consistent with historical trends. Year to date capital Expenditures were $6,100,000 and were largely focused on new customer projects. Due to project timing, we adjusted our 2023 CapEx expectations to now range $16,000,000 $20,000,000 down from $18,000,000 to $23,000,000 Inventory turns improved to 3 point 3 times in the Q2 compared with under 3 times last year. Our DSO was stable at 55 days, largely reflecting timing and mix of customers. With that, I'll now turn the call back over to Dick.

Speaker 2

Thank you, Mike. Turning to Slide 11, shows that our orders and backlog levels in the 2nd quarter orders of approximately 137,000,000 Resulted in a book to bill ratio of 0.9x and a backlog of nearly 300,000,000 Although there continues to be some near term challenges with some pockets of weaknesses in Europe, we still See excellent long term opportunities for growth and value creation across our global platform. Our backlog decreased 3% from the sequential Q1 of 2023, reflecting the continued improvements in the supply chain as we reduce our lead times and accelerate shipments of several long lead products. As we mentioned last quarter, We expect our backlog to decline slightly over the coming quarters as our book to bill ratio drops below 1. The time to convert the majority of backlog to sales is within the next 9 months.

Speaker 2

Turning to Slide 12. Demand is expected to continue at relatively strong levels within our industrial markets, which should continue to benefit from our increased market presence around industrial automation, material handling and power quality solutions. On the defense side, we are experiencing a significant increase in queries with the ability to leverage our comprehensive product portfolio to develop Our medical markets have returned to a more normalized sales environment focused on surgical and instrumentation related end markets. And lastly, we are still anticipating modest growth within our vehicle markets as the supply chain continues to improve and demand schedules from our customers ramp up this year and beyond. As we demonstrated this quarter, driving cash conversion and paying down debt is a focus.

Speaker 2

We will continue to focus these efforts as debt reduction will support our planned M and A activities. On that note, we are actively grooming potential opportunities as we build out our M and A pipeline, a key element of our overall growth strategy. While uncertainty remains in the global markets, we have confidence that we can continue to successfully execute our proven strategy well into the future. Before we open up for Q and A, just a reminder for those of you that are interested, We will be hosting our inaugural Investor and Analyst Day at the NASDAQ on Wednesday, August 23. The event will kick off at 11 am Eastern and will culminate with us ringing the NASDAQ closing bell.

Speaker 2

The Investor Day will be a great opportunity for you to hear more about our company and the actions we are taking to number 1, Expand our available markets 2, further strengthen and grow our market share 3, leverage Global manufacturing and engineering capabilities to ensure we achieve our goals and objectives. And last but not least, Help you gain a better understanding how we plan to leverage our success in the past and continue to execute our proven process well into the future. Please visit our Investor Relations website for more details on the event. With that operator, let's open the line for questions.

Operator

Thank you. We will now begin the question and answer session. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Greg Palm with Craig Hallum Capital Group. Please go ahead.

Speaker 3

Thanks. Good morning, everyone. Sorry to hear the news about Dick. So condolences to His family and all of you. So I guess maybe we can just Start by kind of just recapping what you're seeing out there.

Speaker 3

It sounds like maybe a little bit of softening in certain Verticals or geographic areas. So maybe just a little bit more color on kind of real time what you're seeing and then we can go from there.

Speaker 2

Sure. I would say to you that overall, I mean, we were certainly well prepared that The order intake over the last couple of years here was somewhat inflated and as the supply chain started to Normalize that we would expect to see some adjustments to schedules and so forth and that probably incoming orders would decrease. We have experienced some of that. On the other hand, I think as noted by our 20% increase in revenues, We seem to be pretty well positioned and we are really not very concerned going into the future. What we probably will see Greg is There'll be some ups and downs in markets.

Speaker 2

I think we've covered those markets where we see we have some concerns and Mike mentioned them and some geopolitical concerns and so forth. But on the other hand, we still see some very strong opportunities here for us to continue at the levels where we've delivered here in the past. We may see less volatility quarter to quarter as we've diversified our portfolio more than what we had experienced in the past. But overall, I think the numbers we put up here for the quarter were quite strong and exhibited very strong growth. And As we said during the conference call, we feel confident that we can continue doing so into the future.

Speaker 3

And I know you've talked about some of that elevated order activity in the past quarters or past few years. Do you have a sense of what Inventory levels are I mean is that a concern at customers or some customers? Or do you feel like They're in a position where it's just more of a real time demand thing.

Speaker 2

It varies by I mean, some customers were more conservative than others and placed demand for longer periods of time just to ensure they were in the pipeline. And we're seeing some adjustments based upon that. But I would just say to you that we have a really excellent communication With our blanket customers and there is some reshuffling, but it's something we would have expected quite frankly. So I don't there's no concern on our part that business is going away or there's a major drop off into the future. We're just not seeing that.

Speaker 2

And so I would say to you that as expected when we come out of these things, this is the normal Historical trends of supply chain shortages and longer lead times and Orders being entered much earlier based upon forecast, we have experienced the same thing, but I would also have to say that It's certainly not as drastic as we had seen in some past adjustments.

Speaker 3

Understood. But

Speaker 2

it's customer by customer and really each of them manages their business a little bit differently and it really depends on them.

Speaker 3

Yes. Okay. Operationally, another good quarter where you saw Solid margins, good operating leverage. I know you've talked about gross margin expansion on an annual basis. I think you've targeted 100 basis points.

Speaker 3

Are you still comfortable with that in light of some of your comments on a more muted sort of demand volume outlook? Or do you still think there You know, ways that you can take some costs out. And I'm just curious, are you still seeing or incurring some of the elevated supply Chain costs that we've been talking about over the past year or have those basically ended at this point?

Speaker 2

No, I think, well, okay, a couple of questions First off, let's we stated that our goal was to increase gross margin And I think we've come back and stated as well that you've got to consider as part of the gross margin overall operating margin. So that's really what we will focus on in the future is that the combination of gross margin and operating margin improvements We'll get us the 100 basis points per year, okay. So let's I think let's make sure that we take that and we're clear on that going forward. Operating margin is always a challenge based on mix and that's what sometimes difficult for quarter to quarter or year over year to really look at. So depending on and obviously, as you know, the mix of our products Based on certain markets and certain products sold, the margins will be lower and Opposite of that, I mean, we have others that are much higher gross margin based upon, I'll call it, The IP involved in the markets we're serving as well as the content that we have in those in terms of a solution set.

Speaker 2

So let's I think let's level set and say, we are going to proceed here with meeting our commitments For 100 basis points improvement on a combination of gross margin and operating margin level, okay?

Speaker 4

Makes sense to me.

Speaker 3

I think I'll leave it there. Thanks and best of luck.

Speaker 2

Thank you, Greg.

Operator

The next question will come from Ted Jackson with Northland Securities. Please go ahead.

Speaker 5

Thanks very much. Congrats on a very solid quarter guys. Thanks.

Speaker 2

Thanks, Ted.

Speaker 5

So, a couple of questions. 1, just because following up on the prior And a Q and A and commentary. I understand supply chains normalizing out and some call it floating around with you if you would with regards Orders and shipments. But you also feel pretty confident that you're going to be able to continue to show growth On an organic basis in the second half of the year, is that what I picked up from all that dialogue?

Speaker 2

Yes. I mean, I think from an organic growth standpoint, we're certainly confident that we can continue to grow. Okay. What I would comment Just I think I want to clarify is that in the past you would see some more seasonality And our business quarter over quarter and based on what we're seeing and based on backlogs that had some items that sat in there waiting For supply chain to free up and ship, I think we're seeing more of a normalized quarter over quarter Shifting rate and then we see that going forward. Now Q4, we'll let you know as we get closer because that's always been a crapshoot for us in the past and based upon what happens with our customers.

Speaker 2

But really what we're seeing is more stability and less cyclical shipments in a quarter over quarter. Europe has Tendency to be lower in Q3. Many countries shut down for multiple weeks in August, so that's July August, so we do see some weakness there. But I guess I would say to you and to everyone else is that The expectations of the cyclicality that we saw or seasonality we saw in the past It's going to be muted.

Speaker 5

Okay. Just to kind of help clarify a little bit. With regards to backlog, If you look in your backlog, how much of your backlog ships in 3rd quarter?

Speaker 2

Well, I would say to you that the here's the when we say what's in our backlog and our reported backlog, because We only have in our backlog items which have firm release dates or production dates. So it varies by customer. We have depending on the lead times that we have, so when they release, we'll call it a planned order or forecasted order to a firm production date. That's when it officially goes into our backlog, but you really don't see those. Those are Pretty much book and ship within a very short period of time and pretty much washout in the quarter.

Speaker 2

So to answer your question, For Q3, 95% plus is in our backlog, if you would consider as well The blanket orders that will come and go within the quarter. Okay. So it's pretty much locked in the Q3 at this Yes. The dynamic of our backlog hasn't changed, right. We've stated that it's what's in the backlog would most of it will ship within the next 6 to 9 months.

Speaker 5

Okay. And then shifting over just out of curiosity, I Rockwell is a distribution channel for you and they reported results earlier in the week and honestly they had Some difficult performance in the stock as well. One of the things that impacted them during that quarter and probably really the only thing was that they put this new distribution center in place and it caused A little bit of a hiccup in terms of timing with regards to some revenues. And I was curious given your exposure to Rockwell, Is there anything within that that has played out for Allied Motion? And is there anything that we need to think about on that front?

Speaker 2

Not really.

Speaker 5

Okay. And then Dick, the last well, probably maybe 3 Press releases, it's been pretty consistent with regards to discussion about Europe and certain kind of softness and pockets of it if you would. With regards to this current quarter, is there any kind of relative shift with regards to that weakness relative to say Q1 or is it just a continuation of kind of the same kind of generalized beliefs If you would, that's affected the region because of the Ukraine war.

Speaker 2

Yes. What I would say to you is this, is that Surprisingly, the bookings in quarters 12 and so forth and based upon we had expected some In Europe, some impact on it and so forth, and we really weren't seeing that to a great magnitude. We have seen some Additional softness in the booking levels, but there's still strong backlogs to work off of. So Energy prices, the Ukraine war, I think are still impacting and you've got But the reality is the bookings have remained strong, orders replaced. There has been a little bit of softness here In the last few months that we've noticed, but again too, it's holiday season in Europe.

Speaker 2

So That's a hard one to predict.

Speaker 5

Yes. You're not the only one that has that problem. My last question is just on the vehicle business. You commented on the commercial vehicle business and the strength you're seeing within there and It's offset some of the ag side of things, which clearly is from the small ag equipment market. But in the commercial vehicle side of the equation, There's clearly been some call it forward demand pull through because of emission rule changes and stuff.

Speaker 5

Given that Market dynamic, how do you see that part of your vehicle business performing as we roll out of 2023 and Into 2024 and maybe you could give a little color with regards to the exposure within that line item that the commercial vehicle market is relative to Commercial vehicle market is relative to the aggregate.

Speaker 2

Sure. Well, I mean, we're not going into The specifics about what the percentage of sales overall, we talk about overall vehicle market. I would say to you that the impact on us for commercial automotive is not really significant, okay. We have seen increase. We have seen the volume and the demand going up.

Speaker 2

Where we talk about the offset, which I'll say is it is the much greater magnitude, which will mute some of that growth It is in the agricultural equipment and programs that we are working on with our OEMs in Eastern Europe, Which were essentially shut down. So until that has a greater impact on us in the reduction On their level of shipments there versus commercial automotive ramp up. So we would gladly substitute and Swap those 2 and see that demand for the agricultural equipment and construction equipment and so forth that impacted Eastern Europe Go back to what the expected levels were and have a, let's say, a slower growth on automotive, we would be perfectly happy with that. And the impact would be when we talk about mix and so forth and margins that would definitely have a positive impact favorable to the company. So I would just say to you that these are the diversification of the company is what's really our strength.

Speaker 2

And while Some markets are experiencing a little softness, our other markets are growing. And that is our intention to continue to do that in the future. And we've While we said that, we like the benefits of the commercial automotive market and that the core unit volume, The discipline that teaches you the 0 defect mentality and the positive impacts on overall Cost and other areas that, that can bring. We also don't want to be overweighted in that area. It's Let's do enough to realize those benefits, but let's make sure that we don't get over weighted.

Speaker 2

Okay. So I hope that helps you understand it. It's the answer to your question, we have seen an increase and I think we'll continue to see increases. But the offset is more powerful than the increase that we see in that market. And the ink does comment on the new programs that we have been discussing for the last couple of years.

Speaker 2

Correct. Yes, no comment.

Speaker 5

That's super helpful. So I'll get out of line and I look forward to seeing you guys in New York later in the month.

Operator

Our next question will come from Brett Kearney with Gabelli Funds. Please go ahead.

Speaker 4

Hi, guys. Good morning. Thanks for taking my question.

Speaker 2

Good morning, Brian.

Speaker 4

Yes, I was going to follow-up on The vehicle new program awards, you kind of covered it some in your prepared remarks and in the discussion right there. But just on whether those Program launches are still kind of on the original timetables. And maybe if you could remind us kind of the ramp schedules there? And then also the customers and products you're supporting there on some of the new programs seem to be That product set seems to be growing nicely globally. Maybe opportunities, if You guys perform there as you have done historically longer term with some of these customer relationships you've developed?

Speaker 2

Yes. I mean, those programs were all delayed through COVID. And so they definitely were pushed. And I would tell you that if we look at the original forecast that we were provided for programs and let's say without COVID and without supply chain, We're probably 2 years behind. So nothing has changed in terms of what we expect our annual Revenue base to be in that area.

Speaker 2

Programs are moving forward. It's just a matter that they were pushed out and the ramp up was delayed, but It's clearly ramping up, okay. So I would tell you that in next year, we'll be at what we stated for the new program Shipment levels will be at full level of what we've stated, okay. So they are moving forward and they're moving forward nicely.

Speaker 4

Excellent. Okay. And then I think just last one, we've covered The topic of destocking across the industrial channel. Maybe we've heard from some folks that there's some Inventory adjustments taking place on the medical OEM side. It seems like the applications you guys are on there Kind of insulate you, but maybe what you're seeing positives and negatives on the medical side of the business?

Speaker 2

Yes. I mean, I would tell you that that's one that has been of course, you go back through the COVID time and you take a look at what the Products we're shipping during COVID and those that we're not shipping, we said here, I think within the last within the past year or year and a half, they kind of normalize back to We'll call it a normal period of time, a non COVID period of time. So our instrumentation and our surgical equipment and all the other Surgical equipment that goes on when I say surgical, including oncology and surgical robotics and other surgical. I mean, they're tracking nicely. So we're up 3% overall year over year.

Speaker 2

And I would say to you that There may be some correction going on and maybe the growth rate should be higher. It certainly is a drag on our overall growth rate that we've seen for the company that in some other But on the other hand, it's been stable. And I think it's pretty steady. It's probably if there's restocking, We're not really seeing it, right. So I don't know where that's occurring, but we're not seeing it.

Speaker 4

Yes. Excellent. Thanks so much, Dick.

Speaker 2

Okay.

Operator

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

Speaker 2

Well, thank you everyone for joining us on today's call and for your interest in Allied Motion. As always, please feel free to reach out at any time and we look forward Talking with all of you again after our Q3 2023 results. In addition to the Investor Day at NASDAQ, Please join us at the Northland Capital Markets Conference on September 19 in Minneapolis. Thank you for your participation and have a great day.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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