Q1 2023 Allied Motion Technologies Inc. Earnings Call
Good day and welcome to the Allied motion technologies first quarter fiscal year 2023 financial results conference call.
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I would now like to turn the conference over to Craig's Mahalik Investor Relations. Please go ahead.
Yeah. 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 deck, Rosella, our chairman, President and CEO and Mike Leach, our Chief Financial Officer.
Nick and Mike are going to review, our first quarter 2023 results and provide an update on the company's strategic progress and outlook after which we'll open up for Q&A.
Should have a copy of the financial results were released yesterday after the market close if not you can find it on our website at Allied motion Dot com along with the slides that accompany today's discussion.
If you're reviewing those slides please turn to slide two for the Safe Harbor statement.
You are aware, we may make forward looking statements on this call during the formal discussion as well as during the Q&A. These.
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 findings.
Find these documents on our website or at SEC Gov.
I want to point out as well that during today's call will 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 three and I'll turn it over to Victor to get there.
Okay.
Thank you Craig and welcome everyone.
We delivered record sales in the quarter further strengthens 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.
First quarter revenue of $145 5 million 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 the industrial automation oil and gas <unk> and material handling.
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 markets 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 first quarter.
On an adjusted basis, our earnings per share were 55 cents up 53% from 36 cents per share last year.
Given the strong earnings performance, we generated solid cash from operations, which help 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.
Yeah.
Overall 2023 is off to a strong start we expect our investments in technology and solutions to continue to yield results and overtime drive an enhanced margin profile.
With that let me turn it over to Mike for a more in depth review of the financials Mike.
Thank you <expletive> as a reminder, our results include the acquisitions completed during the second quarter of 2022.
Starting on slide four we provide some details regarding our top line.
First quarter revenue increased 27% for $30 8 million to $145 5 million.
The unfavorable impact of exchange rate fluctuations on revenue was $3 3 million in the quarter exclude.
Excluding FX revenue was up 30% and organic revenue growth was 25%.
As highlighted aerospace and defense grew 125%.
Industrial market sales were up 38% and medical was up 11% in the quarter.
<expletive> reviewed the specific end market drivers behind each of these growth markets.
Sales through 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 the agricultural vehicles.
Power sports is still the largest component within vehicle and saw a modest growth year over year.
Slide five 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.
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&D and medical growth.
Vehicle market growth was up slightly on a 12 trailing 12 month basis as truck and commercial automotive demand more than offset the.
The weaker agricultural vehicle demand.
As highlighted on slide six.
Our first quarter gross margin was 31, 5% up 230 basis points from the prior year period.
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.
Can see the progress we are making by executing our strategy and the annualized chart on the right as we achieved the trailing 12 months gross margin level of 31 point.
8% up from 30% in 2021.
Moving on to slide seven the first quarter operating income more than doubled to talk to $11 4 million or seven 8% of sales, which was up 410 basis points.
Operating costs and expenses as a percent of revenue were 23, 7%.
Down 170 basis points.
Which reflected the operating leverage obtained from strong revenue growth along with consistent utilization of a S. T. R. Lean toolkit in all aspects of our business.
Okay.
On slide eight 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 he believes provides a better understanding of our earnings power.
Adjusting for the noncash amortization of intangible assets, which reflects the company's strategy to grow through acquisition as well as organically.
Net income increased 152% to $6 3 million or 39 cents per diluted share and on an adjusted basis net income was $8 9 million or 55 per diluted share up 53%.
The effective tax rate was lower in the quarter at 23, 2% due to discrete tax benefits.
We expect our income tax rate for the full year 2023 to be approximately 25% to 27%.
Yeah.
Adjusted EBITDA increased 47% to $19 million or 13, 1% of revenue, which was up 190 basis points from the first quarter of 2022 will.
We use adjusted EBITDA as an internal metric and believe it is useful in determining our progress and operating performance.
Slide nine and 10 provide an overview of our balance sheet and cash flow.
In the first quarter, we made a $6 two 5 million deferred payment for prior acquisition, which was reflected in our cash position at quarter end.
Total debt was approximately $237 million up 1 million from year end 2022.
Debt net of cash was about a 200 million $211 million or 47, 9% of net debt to capitalization.
Our bank leverage ratio was three three times.
We generated $3 6 million of cash from operations, which reflected higher net income and lower levels of inventory.
The first quarter is typically a higher cash consumption period. So we are pleased with our cash generation, which compares with the cash usage of $13 4 million in the prior year.
Based on our cash flow projections, we expect to continue to drive strong cash flows this year consistent with historical trends.
First quarter capital expenditures were $3 6 million and were largely focused on new customer projects. We.
We expect 2023 capex to range between 18 million and $23 million.
Inventory turns improved to three two times in the first quarter compared with two nine times last year. Our teams continued to manage our inventory 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.
With that I'll now turn the call back over to <expletive>.
Thank you Mike.
Slide 11 shows our orders and backlog levels.
First quarter orders of approximately $123 million, resulting at a book to bill ratio of <unk>, eight five times and backlog of approximately $309 million.
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.
It decreased from the sequential fourth quarter of 2022.
Given the loosening of some supply chain constraints.
Given the improvements in 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 one.
The time to convert the majority of backlog to sales is still within the next six to nine 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 it rolls for defense applications and expect our overall A&D business to benefit as we further leverage recent acquisitions.
Medical markets have trended away from the pandemic related sales to a more normalized sales environment environment focused on surgical and instrumentation related end markets.
And lastly, we are anticipating modest growth within our vehicle markets as the supply chain improves and demand schedules from our automotive customers continue to firm up for 2023 and 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&A pipeline is 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 in <unk> within our targeted markets.
With that operator, let's open the line for questions.
Yeah.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
The first question today comes from Greg Palm with Craig Hallum Capital Group. Please go ahead.
Yeah. Good morning, everybody. Thanks for taking the questions.
Maybe just starting off with the commentary around you know pockets of weakness would be helpful. Just to get a little bit more color on you know, whether that's you know certain customer driven whether it's certain end markets, whether it's kind of broad based across the geographies you mentioned, yeah I'll will start there. Thanks.
Yeah.
It's fairly broad based Greg.
We do see it.
Just a little more predominantly and again this is on the order 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 of flow through.
But I would also describe it is sporadic I think.
We'll bounce from one month being really strong surprising orders and then one month being quite low so.
But then you compare that to six months ago 12 months ago, I think mostly supply chain driven right. We're seeing a lot lot more a lot higher orders just because of that and what we've got going on is also a compression of those supply chain lead times and again, our expectation we've talked about this over over time that we will we expect to see.
This book to Bill flipped a little bit simply driven by our lead times and proven.
Okay.
And do you get the sense on whether it's you know.
B Destocking units you know for you know inventory normalization purposes, and I guess have you seen cancellations altogether as part of that.
Softness in orders.
Thank you.
The first part of Thats more correct more accurate and that you are seeing some adjustments so.
Yes.
Now is the lead times are starting to come back to more normal levels in materials are flowing you are seeing some adjustments or some schedules.
We fully expected that.
And it is occurring 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 the energy cost.
The impact on.
Planned <unk>.
<unk> sales in releases into that eastern Europe market.
But overall.
We are holding up quite well in many areas and while we hear about the expected reductions.
We continue to see some strength as well.
Cancellations are rare.
<unk> is a rare.
Okay.
Makes sense.
And then you know just in terms of the kind of the capital allocation strategy you know big Big Your you know for acquisitions in 2022, and I know we've talked about a you know a robust pipeline does the current environment.
And your you know I guess desire to pay down debt here does that does that change your thinking around M&A you know in the near term or does an environment. Like this maybe you know I mean, theres some opportunities that could come out just based on valuations coming in.
Yes, I think youre, 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 add in the future here. So some things.
Our opening up valuations are have declined.
While we expect strong cash flow and the ability to pay down debt. This.
This year, we also feel that we're in a position to be selective.
These acquisitions that are <unk>.
Really enhances our value to us strategically and that's where we are we're really looking at it from a strategic standpoint, and if you asked us if we 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 good.
Bart.
We're focused.
<unk> focused on paying down debt. We're also focused on a couple of opportunities that are out there that we think would.
Add some good strategic value to our overall portfolio and platform.
Understood.
I will leave it there are supposed to work thanks.
Thank you Greg.
As a reminder, if you would like to ask a question. Please press Star then one key joined into the question queue.
Your next question comes from Paul Jackson Northland Securities. Please go ahead.
Thank you.
Yes, my congratulations on a very solid quarter.
Thank you Ted.
I have a few questions.
More around the financials, so starting on gross margins you can comment.
Comment on.
And your question is in your presentation at your long term goal is to see about a percentage point increase in margin.
On an annualized basis at least relative to my expectations for the first quarter margin wise.
A little more robust than I might have expected.
Fair to assume that you would see that kind of a 1% increase across the year for 2023 and that we would be looking for your gross margin for the full year to be somewhere north of 32%.
Well, yes, a couple of things I, just want to make a comment about here I think.
We made some.
Statements and we followed them up in conference calls talk about.
The gross margin and overall operating profit improvement so.
Yes, we are focused on both we are focused on the <unk>.
Gross margin improvement.
I think the bigger picture, we're really looking at this as a combination of gross margin and operating margin improvement.
And we do feel comfortable that the.
The actions that we're taking right now.
We'll allow us to achieve what we have stated.
So I think.
But I do want to put it in context that we I'll keep repeating it so.
To make sure that it.
Not confused.
We may have added to the confusion, but it's really about the combination of those two.
<unk> brings us several opportunities there are some synergies that we can certainly realize that we're working on.
And in addition to that we.
We're very focused on the solutions that sales and leveraging the opportunities we have to.
And bring in.
New orders with higher gross margins that well.
Actually allow us to realize what we stated in our goals.
So I hope that helps.
Sure.
Second question.
Yes.
The revenue was.
To my eye quite strong enough in the first quarter.
Can we expect to see you build upon that in the second quarter, we'd kind of see.
Sequential.
Sequential growth on the top line.
Second quarter versus yes.
Yeah, Great question. So a couple of things occurred as you would notice that's a very strong increase for all of our first quarter of last year.
And in our backlog that has increased substantially.
We've had supply chain constraints, we've had long lead times that we've been dealing with.
So we had some I'll call it some pent up demand in.
Past due items that we needed to clean up here is supply chain started to flow and we did see some of that in Q1.
So I'd say too.
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 Q2.
We will not build off of that Q1 cleanup, let's so let's call it.
And that resulted in the sales we do expect that.
We will be solid will be strong, but I wouldn't go back to.
Historical data and say well you guys really jump from Q1 to Q2 in Q3 I think we've seen.
Q1.
Well, we picked up and cleaned up some things that are.
The supply chain constraints, where we were able to do so.
I don't know if I got it thank you.
I'm, sorry, I interrupted.
I was just going to say I don't think the crescendo will be.
As steep as it traditionally has from a seasonality standpoint, 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 would be as pronounced as it.
It's been in the past.
So is it fair enough maybe think of.
<unk>.
Taking.
Second quarter.
Putting it into more of a normalized I mean for lack of a I'm not putting these were I'm putting words in your mouth.
Recognizing that you're not expecting to grow something like basically kind of reset a second quarter to what would be.
Our normalized level and then let the rest of the year kind of flow through from that is that kind of good way to think about the remainder of the year.
Well I think maybe the better way to look at it although.
Although that's fine I think it's the adjustment of the first quarter revenues for the past do catch up.
That if you if you were to factor those out and say where would they have fallen some of those would have fallen in Q2.
So.
One.
We enjoyed some success there because I've had some loosening of supply chain and demand is still there and strong and so I would so it's more about adjusting.
Q1, and saying some of Q2 sales were accelerated into the Q1 and Q1.
Was a little bit higher based upon some cleanup.
Okay. That's helpful would be the best way to look at it.
I've got two more questions and I'm going to get out of line now or just about financials.
Yes.
You did.
Had a little bit higher on the G&A then.
<unk> thought.
Is there anything in there on that.
Should be aware about is there anything in there that's maybe one offish or.
That was pushed there because.
Strengthen the top line in the first quarter and that I should take into account as we think about the rest of the year.
Well I think first I would point to incentive compensation.
And.
And the performance in Q1, certainly impacts that.
So that's probably the larger largest driver of G&A.
Being up.
So that that will obviously be dependent on performance for the rest of the year as well in terms of that trend continues.
Yes.
Lots of things that we're accruing for.
We do have an investor day planned for the first time here in August and.
We are beginning to.
Our crew for those expenses, we're going to see there we've had a little bit more active trade show participation. This year.
So again, we're recognizing on an and.
Annualized basis, and not just the expensing it debt.
When it occurs so some of those things that are in Q1.
We're preparing for events that we know are going to be happening through the rest of the year. So as Mike stated that although I would tell you. Some of these other planned events that are coming that.
A bigger push on the marketing side of it and some expansion in that area trade.
Tradeshow opportunities.
And.
Investor Day.
Okay.
And then my last topic of questioning is just a quick discussion with regards to.
Your forward view with regards to working capital and kind of how you see.
How youre working capital trending as we kind of roll through this year I guess, what im getting at is how should we think about your receivable levels your inventory or payables.
Anything in there that jumped out with regards to the first quarter. It just kind of wanted to circle back to it.
It's a pretty it's a driver of your operating cash flow and free cash flow.
Sure. It's certainly it's a focus of the organization. This year I think we've talked about that in the past from a real critical issue standpoint.
Q2, and Q3, usually is about working capital conversion for us rate is.
As the.
Seasonality drives consumption.
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 term turns and.
Managing that closely and I think the supply chain environment allows us to do that much better than it has in the past couple of years, So again I would call.
Stable with improvement is how I would look at that for Q2 and Q3 debt to.
To support the higher levels of businesses that I was very very encouraged by the improvement in inventory turns right to me that's the that's the key item.
Well, it's funny I was going to ask us.
Really nice.
Turn it pickup or 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 can see turns back towards sort of pre pandemic levels, maybe not this year, but by next year.
Yes, I think that's certainly the intent and what we're trying to drive again the change the move from two nine to $3 two.
<unk> is a good portion of that though right if with the sustaining that and get them to continue to drive it leveraging the higher volume.
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.
Okay.
Or have you been others in terms of the nature of what we're producing whether the lower volume products are higher volume products.
There's a lot that go into that in and certainly we're not out of the woods from the supply chain standpoint, we're certainly describing it is better but the reality is right. We're still fighting Belleville battles and there is an inflationary aspect as well from a cost standpoint, that's that'll be headwinds to that as well.
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 at one of our all all hands on deck GM meetings. This year and certainly was a strong emphasis and focus on our entire team is focused on it and we have some great tools on our ASD toolkit that provides them opportunity to just do it.
Most importantly, Mike's mentioned it I'll just reemphasize it.
In supply chain.
As the supply.
<unk> chain crunches occurred in the past it only took a couple of parts that drove your inventory ended up couple of parts missing that would drive your inventory up and as those.
<unk> start to flow then we're able to consume that.
Rest of that inventory that was sitting there.
That couldnt move because of a few parts that were stragglers and getting them in and again that has a lot to do with being able to ship past dues as well so I would say.
A real focus on the company huge emphasis on that area. We realize that there is quite a bit of capital tied up in our entire team knows that it 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.
Improvement in I think everybody can do the calculation and our working capital turns 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 do 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 there's there's great opportunities ahead, our team is well focused understands the opportunity.
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 alright. So a great question I think.
It is a focus we will be focused on it and we will see continued improvement.
Great again.
Again, I'm done final questions about Atlanta, really really nice quarter congratulations on that.
Thanks again, thanks Ed.
Once again, if you would like to ask a question. Please press Star then one to be joined into the question queue.
This concludes our question and answer session I would like to turn the conference back over to management for any closing remarks.
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 Hallum 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 second quarter 2023 results.
Thank you for your participation and have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
[music].