Q2 2023 Allied Motion Technologies Inc Earnings Call
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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 should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone and to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Mr. Craig Mahalik Investor Relations. Please go ahead Sir.
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. Our deck was al <unk>, our chairman, President and CEO and Mike Leach, our Chief Financial Officer.
I'll review, our second quarter 2023 results and provide an update on the company's strategic progress and outlook after which we'll open it 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.
As you are aware, we may make some forward looking statements on this call during the formal discussion as well as during the Q&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.
You know I'd like to start the call with some off script comments as I have something I would like to relate to everyone.
Sadly <expletive> Smith, our former CFO.
And chairman of the Board I'll.
Passed away this past Sunday after off refilled this.
<expletive> was the first one that brought me into allied at that time halfway.
Two years ago and for that I will forever be grateful.
It was a great friend partner and exhibiting the highest levels of honesty integrity.
And willingness to do what was right for the company.
Beyond that <expletive> was a family man.
And family always came first.
Our thoughts and prayers go out to <expletive> and his family.
And peace <expletive>.
We will.
Issue will not be forgotten.
Now I'll start with the.
Okay.
Script as we have written here.
First off we continue to successfully execute our strategy, while 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% topline growth reflected strength in each of our four targeted markets highly.
Highlighted by continued strong demand with our industrial markets, which increased 39% over last year's second quarter.
What drove our industrial strength with industrial automation projects.
Our quality solutions for oil and gas and HVAC.
And continued demand for material and deal 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.
Vehicle market sales increased 7% due to the 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 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 million with a margin of eight 2%.
Which was up 210 basis points.
Given the improved operating performance net income per share increased 45% to <unk> 42 per share on an adjusted basis net income per share.
Up to 58 per share.
Yeah.
We generated significant cash from operations of $13 7 million and reduced our debt balance by $9 4 million during the quarter.
Our orders were up sequentially further emphasizing demand in the market, while our backlog was down since the first quarter due to continued improvements within the supply chain.
I will talk about this performance later in the presentation.
The first half of 2023 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 <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.
Second quarter revenue increased 20% or 24 million to a record $146 8 million.
The unfavorable impact of exchange rate fluctuation on revenue was <unk> 4 million in the quarter.
Organic revenue growth was 17%.
<expletive> touched on the quarterly sales highlights for our targeted markets and end market demand.
One other sales channels, which is still a small component of our total as distribution, which has continued to see solid growth and was up 17% in the quarter.
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 up 41% of our total TTM sales.
The 40% growth in the industrial space is 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 subvert substantial growth and performance in A&D.
Medical growth has benefited from the gains in the medical mobility market.
In vehicle market revenue was up slightly on a trailing 12 month basis as commercial automotive power sports and truck demand more than offset weaker agricultural demand in eastern Europe , driven by current geopolitical events.
As highlighted on slide six our second quarter gross margin was 31, 3% down a 110 basis points from the prior year period.
Higher volume was more than offset by unfavorable mix and remaining global supply chain disruptions.
Consistent with our stated objectives.
You can see the progress we are making by executing our strategy and the annualized chart on the right of slide six.
Moving on to slide seven you can see the results of our strong revenue growth and the leverage inherent in our operations in the second quarter operating income increased 60% to a record 12 million or eight 2% of sales, which was up 210 basis points.
Operating costs and expenses as a percent of revenue or 23, 2% down 310 basis points.
On slide eight we present GAAP net income and adjusted net income along with our adjusted EBITDA results, our net income and fully diluted EPS had been adjusted for certain items, which we believe provides a better understanding of our earning power inclusive of adjusting for the noncash amortization of intangible assets, which reflects the company's strategy.
You to grow through <unk> acquisitions, as well as organically.
Okay.
Net income increased 48% to $6 8 million or <unk> 42 cents per diluted share.
On an adjusted adjusted basis net income was $9 5 million or <unk> 58 per diluted share up 21%.
The effective tax rate was 23, 9% in the quarter due to discrete tax benefits in geographic mix.
We adjusted our expected income tax rate for the full year 2023 down slightly to be approximately 24% to 26%.
Uh huh.
Adjusted EBITDA increased 26% to $20 4 million or 13, 9% of revenue, which was up 70 basis points from the second quarter of 2022.
We use adjusted EBITDA as an internal metric and believe it is useful in determining our progress and operating performance.
Slides nine and 10 provide an overview of our balance sheet and cash flow.
As a reminder, in the fourth quarter, we made a 6.25 million deferred cash payment for a prior acquisition.
As reflected in our cash position at the end of the second quarter.
Total debt was approximately 228 million down $8 3 million from year end 2022.
Net of cash was about $203 million or 46, 2% of net debt to capitalization.
Our bank leverage ratio was 3.06 times.
We generated $17 3 million of cash from operations year to date, a significant increase from cash usage during the prior year period.
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 1 million and were largely focused on new customer projects.
Due to project timing, we adjusted our 2023 capex expectations to now range between $16 million and $20 million down from $18 million to $23 million.
Inventory turns improved to three three times in the second quarter compared with under three times last year.
Our DSO was stable at 55 days, largely reflecting timing and mix of customers.
I'll now turn the call back over to Vic.
Thank you Mike.
Turning to slide 11 shows that our orders and backlog levels.
In the second quarter orders of approximately $137 million, resulting in a book to bill ratio of point Nymex.
And the backlog of nearly $300 million.
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 first quarter of 2023, reflecting continued improvements in the supply chain as we reduced 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 one.
The time to convert the majority of backlog to sales is within the next nine months.
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 inquiries with the ability to leverage our comprehensive product portfolio to develop solutions for several new and emerging applications.
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.
Supply chain continues to improve and demand schedules from our customers ramp up this year and beyond.
As we demonstrated this quarter.
<unk> cash conversion and paying down debt is a focus.
We will continue to focus these efforts as debt reduction will support our planned M&A activities.
On that note, we are actively grooming potential opportunities as we build out our M&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.
Yeah.
Before we open up for Q&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 23rd.
Yeah that will kickoff at 11, a M eastern and will culminate with us ringing the NASDAQ closing bell.
Investor Day will be a great opportunity for you to hear more about our company and the actions we are taking to number one.
Expand our available markets to further strengthen and grow our market share three.
Leverage our global manufacturing and engineering capabilities to ensure we achieve our goals and objectives.
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. Thank you. We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
If you're using a speakerphone please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw. Your question. Please press Star then two 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.
Thanks, Good morning, everyone, Oh, sorry to hear the news about <expletive> so condolences to his family and and and all of you. So.
I guess.
Maybe we can just start by kind of just recap and what you're seeing out there you know it sounds like maybe a little bit of softening in certain verticals or geographic area. So maybe it was just a little bit more color on kind of real time, what youre seeing and then we cannot go from there.
Oh.
Sure I would say to you that overall I mean.
We were certainly well prepared that.
The order intake over the last.
A couple of years here.
Somewhat inflated and that is the supply chain started to.
Normalized that we would expect to see some.
Adjustments to schedules and so forth and thats, probably incoming orders would decrease.
We have experienced some of that on any 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 that.
Well there'll be some ups and downs in markets I think we've covered those markets, where we see we have some concerns.
No Mike mentioned inland some geopolitical concerns and so forth, but on the other hand, we still see very strong.
Opportunities here for us to continue at the levels, 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've put up here for the quarter were quite strong in.
Exhibited very strong growth and as we said during the conference call. We feel confident that we can continue doing so into the future.
And I know you've talked about some of that elevated order activity you know in the past quarters or past two years do you have a sense of what kind of inventory levels are or I mean is that a concern you know what at customers or some customers or just do you feel like you're there aren't a pause.
<unk>, where it's just more of a real time demand thing.
It varies by customer I mean, some customers were more conservative than others in place demand for longer periods of time just to mature they are in the pipeline.
And we're seeing some adjustments based upon that but I would just say to you that.
No we haven't.
Really excellent communication.
With our blanket customers and there are some reshuffling, but it's it's.
Something we would've 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.
So I would say to you that.
As expected when we come out of these things.
The normal historical trends.
You know supply chain shortages and longer lead times and.
Orders are being entered much earlier based upon the forecast we have experienced the same thing, but I would also I have to say that.
Is certainly not as drastic as we had seen and surpass that.
<unk>.
Understood.
Operationally, our another good quarter, where you saw it.
Solid margins good operating leverage I know you've talked about gross margin expansion on an annual basis. I think you have targeted 100 basis points.
Are you still comfortable with that and in light of some of your comments on a more muted sort of demand volume outlook or do you still think there's you know ways that you can.
It takes some cost out and I'm. Just curious are you still seeing or incurring some of the elevated supply chain cost that we've been talking about over the past year or are those basically ended at this point.
No I think well get a couple of questions here first off let's.
All right.
We've stated that our goal was to increase increased gross margin and.
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 well that's that's really.
What we will focus on in the future is that the combination of gross margin and operating margin improvements will get us the 100 basis points for you. Okay. So, let's I think let's make sure that we state that we're clear on that going forward.
Operating margin is.
It is always a challenge based on mix and that's.
What sometimes difficult quarter to quarter or year over year to really look at so depending on it.
Obviously as you know the mix of our products.
Just on certain markets and certain products sold that margins will be lower than.
Yeah.
Opposite to that I mean, we have plus 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.
I think let's level set and say Hello.
We are going to proceed here.
It is meeting our commitments for 100 basis points improvement.
Combination of gross margin and operating margin.
Okay.
It makes sense to me.
I think I'll leave it there thanks and best of luck.
Thank you Greg.
The next question will come from Ted Jackson with Northland Securities. Please go ahead.
Thanks, very much congrats on a very solid quarter guys.
Thanks Pat.
So a couple of questions.
One just kind of.
Following up on the prior kind of Q&A and commentary I understand yes.
Fly changed normalizing out in some.
Floating around with.
If you wouldn't have to crush of orders and shipments, but you also feel pretty confident that youre going to be able to continue to show growth.
<unk> basis in the second half of the year is that what I picked up from all of that dialogue.
Yeah, I mean, I think from an organic growth standpoint.
We're.
Certainly confident that we can continue to grow okay. What I would comment that I just want to clarify is that.
In the past you would see.
So more more seasonality.
And our business quarter over quarter and based on what we're seeing.
And based on.
Backlog that had some items that sat and theyre waiting for supply chain to free up and ship I think we're saying, we're seeing more of a normalized quarter over quarter.
Shipment rate and then we see that going forward the fourth quarter.
Well, let you know as we get closer because that's always been a crap shoot for us in the past and based upon.
What happens with our customers but.
But really what we're seeing is more stability less less cyclical shipments.
And a quarter over quarter.
Europe .
Tendency to be lower in Q3.
Buddy.
Countries shut down.
Multiple weeks in August so that's.
July and August .
We do see some weakness there.
I guess I would say to you and to everyone else is that.
The expectations of the cyclicality that we saw seasonality we saw in the past it's gotta be viewed it.
Right.
Okay.
To kind of help clarify a little bit with regards to backlog. If we were if you look in your backlog how much of your backlog ships in third quarter.
Well I would say to you that the.
Here's the when we say what's in our backlog in our reported backlog because.
We always have in our backlog, which have firm release dates or production days. So it varies by customer.
We have depending on the lead times that we have so when they release, we'll call. It a plan to order or forecasted order too.
For production date, that's officially goes into our backlog.
We don't see those those are.
Pretty much book and ship within a very short period of time and pretty much wash out here in the quarter. So the answer to your question.
For third quarter.
95% plus is that our backlog if you would consider as well the blanket orders that will come and go within the quarter. Okay. So it's you know it's pretty much locked in.
Third quarter at this point, yeah, the dynamic of our backlog Hasnt changed right. We've stated that it's.
What's in the backlog would most of it will ship within the next six to nine months.
Okay, and then shifting.
Shifting over just out of curiosity I know.
Rockwell as a distribution channel for you and Dave reported results.
Earlier in the week.
Honestly they had.
Some difficult performance in the stock as well.
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 that caused a little bit of it.
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 we need to think about on that front.
Not really.
Okay.
And then <expletive>.
The last.
We'll probably maybe three press releases, it's been pretty consistent and with regards to discussion about Europe and certain kind of softness in 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 you know first quarter or is it just a continuation of kind of the same kind of generalized beliefs. If you would.
That affected the region because of the framework.
Yeah, what I would say to you is this is that.
Surprisingly the.
Booking.
Bookings in quarters, one two and so forth.
Upon what we had expected.
In Europe , there's some impact on it so forth and we've really worked to a great magnitude we have seen some additional softness in the bookings levels, but there is still strong backlogs to work off of it so.
No.
Energy prices, Ukraine War, I think are still impacting and you've got Oh.
But the reality is the bookings have remained strong orders were placed there has been a little bit of softness here over the last few months that we've noticed that but again too.
This holiday season in Europe .
Oh.
That's a hard one to predict.
Yes, youre 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 youre seeing within there and it's offset some of the AG side of things, which clearly as you know from the small AG equipment market, but in the commercial vehicle side of the equation, there's clearly been some.
Call it.
Poor demand pull through because of emission rule changes and stuff.
Even that.
Market dynamic how do you see that part of your vehicle business performing as we roll out of 'twenty three.
In 2024, and maybe you could give a little color with regards to the.
Exposure within that line item in the commercial vehicle market as well.
Relative to.
The aggregate.
Sure well I mean without going into specifics about.
Okay.
Okay.
Percentage of sales.
Overall, we talk about the overall vehicle market I would say to you that the impact on us commercial automotive.
It's not really significant okay.
We have seen increase we have seen the volume the demand going up.
Where are we talk about the offset.
I will say at this point.
Much greater magnitude, which will mute some of that growth.
The agriculture equipment.
Brad that we were working with our Oems and Eastern Europe , which were essentially shut down.
So until.
That has a greater impact on us.
The reduction.
Their level of shipments there versus commercial automotive ramp up.
Oh.
We would gladly substitute and swap those two and see that demand for.
Culturally equipment, and construction equipment, and so forth and back and Eastern Europe go back to what the expected levels were.
Italy, let's say a slower growth on automotive or we'd be perfectly happy with that.
The impact would be when we talk about mix and so forth the margins that would definitely have a positive impact favorable due to the company.
I'd, just say to you that the diversification of the company is whats really our strength.
And while some markets are experiencing a little softness our other markets are growing.
That is our intention to continue to do that in the future and we've always said that we like.
The benefits of the audit the commercial automotive market and that the core unit volume.
Disciplined teachers use the zero defect mentality.
The positive impacts on overall cost in other areas that that can bring but we also don't want to be over weighted in that area.
Yes.
Do enough to realize those benefits, but let's make sure that you know.
We don't get overweighted.
So I hope that helps you understand the answer to your question, we have seen an increase.
And I think we'll continue to see increases.
The offset is.
More powerful than the increase that we see in that market.
And the indexes are coming from the new programs that we have been discussing for the last couple of years correct, Yeah. There Kevin.
Yes.
Super helpful.
I'll get out of line and I look forward to seeing you guys in New York later in the month.
Alright good.
Yeah.
Again, if you have a question. Please press Star then one our next question will come from Brett Kearney with Gabelli funds. Please go ahead.
Hi, guys. Good morning, Thanks for taking my question.
Morning, Greg.
Yeah, I was going to follow up on the.
The vehicle New program awards, you've kind of covered it Tom 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.
Mind us.
Kind of a ramp schedules there and then also.
The customers and products you're supporting there.
On some of the new programs seem to be that products that seems to be.
Growing nicely globally, maybe opportunities if you guys perform there as you have done historically, you know longer term with some of these customer relationships you've developed.
Yes, I mean, those programs were all delayed.
<unk> comes in.
So they definitely were pushed and I would tell you that we look at the original forecast that.
That we were provided for programs in let's say without COVID-19 and without supply chain.
Probably two years behind.
So nothing has changed in terms of what we expect our annual revenue base to be in that area.
The programs are moving forward.
The matters that they were pushed out.
The ramp up was delayed but it's clearly.
Ramping up okay. So I would tell you that in next year will be at it.
Yeah, 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.
Yeah.
Excellent Okay, and then I think I'm just last one you know we've covered the topic of destocking across the industrial channel.
Maybe we've heard from some folks that there is some inventory adjustments taking place on the medical OEM side. It seems like you know the application that you guys are on there kind of insulate you, but maybe what you are seeing positives and negatives on the medical side of the business.
Yes, I mean, I would I would tell you that.
That's one that has been of course Youll go back through the Covid time, and you take a look at what the products. We're shipping during COVID-19 and those that were not shipping.
We sat here I think within the last within the past year year, and a half that kind of normalized back to.
We'll call it a normal period of time, a non COVID-19 period of time.
Yeah.
We are.
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.
They are tracking nicely.
Uh huh.
The.
So were up 3% overall.
Year over year, and I would say to you that.
There may be some correction going on and maybe the growth rate should be higher.
Yeah.
Certainly the drag on our overall growth rate that we've seen for the company that in some other areas, but any other hand, it's been stable and I think it's pretty steady it's probably.
There's restocking.
<unk>.
We're not really seeing it.
Alright so.
Thats occurring, but we're not seeing it.
Excellent. Thanks, so much.
Okay.
This.
<unk> our question and answer session I would like to turn the conference back over to management for any closing remarks. Please go ahead.
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 to talking to all of you again after our third quarter 2023 results.
In addition to the Investor day at NASDAQ. Please join us at the Northland Capital Markets Conference on September 19, and Minneapolis.
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.
Yes.
Yes.
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