Q1 2024 Nortech Systems Inc Earnings Call
Operator: Good afternoon, ladies and gentlemen, and welcome to the Nortech Systems Incorporated first quarter 2024 earnings conference call. With me on the line today are Jay Miller, President and Chief Executive Officer, and Andrew LaFrence, Chief Financial Officer and Senior Vice President of Finance. All lines have been placed on a listen-only mode, and the call will be open for questions and comments following the management presentations. At this time, it is my pleasure to turn the call over to Andy LaFrence.
Good afternoon, ladies and gentlemen, and welcome to the North Tech systems incorporated first quarter 2024 earnings Conference call.
Jay Dean Miller: With me on the line today are J, Miller, President and Chief Executive Officer, and Angela brands, Chief Financial Officer, and senior Vice President of Finance.
Speaker Change: All lines have been placed on a listen only mode and the call will be open for questions and comments following the management presentation.
Speaker Change: At this time it is my pleasure to turn the call over to Andy Lee brands.
Andrew D.C. LaFrence: Thank you, Matthew. I'd also like to welcome everyone to today's conference call. Jay will begin the call with a review of our operations, recent developments, and business outlook. Then I will review Nortech's first quarter 2024 financial results before turning it back over to Jay for his closing comments. Then we will open up the call for your questions. Before we continue, please note that statements made during this call may be forward-looking statements regarding expected net sales, earnings, future plans, opportunities, and other company expectations.
Speaker Change: Thank you Matthew I'd also like to welcome everyone to today's conference call Jay will begin the call with a review of our operations recent developments and business outlook.
Speaker Change: Then I will review <unk> first quarter 2024 financial results before turning it back over to Jay for his closing comments, then we will open up the call for your questions.
Jay: Before we continue please note that statements made during this call may be forward looking statements regarding expected net sales earnings future plans opportunities and other company expectations.
Jay: These estimates plans and other forward looking statements involve unknown and known risks and uncertainties that may cause actual results to differ materially from those expressed or implied on this call. These risks, including those that are detailed in our most recent Form 10-Q, maybe amended or supplemented the statements made during this.
Speaker Change: Conference call are based on information known by Nortek as of this date and time on this call and we assume no obligation to update the information in today's call.
Speaker Change: Could find north, Texas complete safe Harbor statements in our SEC filings.
Andrew D.C. LaFrence: These estimates, plans, and other forward-looking statements involve unknown and known risks and uncertainties that may cause actual results to differ materially from those expressed or implied on this call. These risks, including those that are detailed in our most recent Form 10-Q, may be amended or supplemented. The statements made during this conference call are based on information known by Nortech as of this date and time of this call, and we assume no obligation to update the information in today's call. You can find Nortech's complete Safe Harbor statements in our SEC filings. And with that, I turn it back over to Jay for his opening comments. Jay, thank you.
Speaker Change: And with that turn it back over to Jay for his opening comments Jay.
Jay Dean Miller: Thank you, Andy. And good afternoon, everyone.
Speaker Change: Thank you Andy and good afternoon, everyone. We're glad you can join us today.
Jay Dean Miller: We're glad you can join us today. In the first quarter of 2024, we extended our reporting of solid operating results, notably by improving margins and managing expenses. During the first quarter, I met with hundreds of Nortech employees to share our appreciation of their efforts and our results on behalf of the management, board of directors, and shareholders. Everything starts and ends with how our employees live Nortech's values of teamwork, excellence, commitment, innovation, and integrity every day.
Jay: First quarter of 2024, we extended our reporting a solid operating results, notably by improving margins and managing expenses.
Jay: During the first quarter I have met with hundreds of north tech employees to share our appreciation of their efforts and our results on the behalf on behalf of the management board of directors and shareholders.
Speaker Change: Everything starts and ends with how our employees live nor tax values of teamwork excellence commitment innovation and integrity every day.
Jay Dean Miller: It is very clear to me that our employees are living these values, and we would not have delivered our first quarter 2024 financial results without our team members' continued outstanding contributions. Once again, the whole Nortech team deserves our sincere appreciation.
Speaker Change: It is very clear to me that our employees are living these values and we would not have delivered our first quarter 2024 financial results without our team members continued outstanding contributions once again, the whole nortek team deserves our sincere appreciation.
Jay Dean Miller: Touching briefly on our financial results now, we posted net sales of $34.2 million for the first quarter, along with continued improvements in gross margin. We work carefully with our customers as strategic partners to adjust pricing as needed to reflect market conditions and supply chain realities. Our EBITDA levels were also solid at $1.6 million for the first quarter.
Speaker Change: Touching briefly on our financial results now we posted net sales of $34 2 million for the first quarter along with continued improvements in gross margin.
Speaker Change: We worked carefully with our customers as strategic partners to adjust pricing as needed to reflect market conditions and supply chain realities.
Our EBITDA levels were also solid at $1 6 million for the first quarter.
Jay Dean Miller: In the 12 month period ended March 31, 2024, we generated $8.1 million of EBITDA. Overall, we are seeing a shift in customer ordering activities wherein they are seeking to shorten their ordering times, which is requiring us to work on different strategies to stock inventories and work with vendors to have ready-to-pick parts on hand. We believe this is an expected evolution of supply chain management given the normalization of supply chains and focus on nearshoring strategies.
Speaker Change: In the 12 month period ended March 31, 2024, we have generated $8 $1 million of EBITDA.
Speaker Change: Overall, we are seeing a shift in customer ordering activities wherein they are seeking to shorten their ordering times, which is requiring us to work on different strategies to stock inventories and work with vendors to have ready to pick parts on hand.
Speaker Change: We believe this is an expected evolution of supply chain management, given the normalization of supply chains and focus on near shoring strategies.
Jay Dean Miller: We recently hired a new global leader in supply chain management to lead this initiative. We are also noting, similar to many other contract manufacturers, recent reduced visibility to bookings in the next several quarters as compared with order patterns in the prior year quarters as customers are bouncing their inventories and therefore deferring the placement of some orders.
Speaker Change: We recently hired a new global leader in supply chain management to lead this initiative.
Speaker Change: We are also noting similar to many other contract manufacturers recent reduced visibility to bookings in the next several quarters as compared with order patterns in the prior year quarters as customers are balancing their inventories and therefore deferring the placement of some orders.
Jay Dean Miller: Earlier today, we announced our plan to consolidate our Minnesota facilities to optimize our operating expense structure and plant capacity utilization to increase the efficiency of our operations, part of our strategy to continue to improve the bottom line and direct our future capital expenditures. Specifically, we are closing our Blue Earth Minnesota production facility by the end of 2024. We will be shifting wire and cable assembly and system level assembly manufacturing to Nortech's Bemidji, Minnesota location. All of the Blue Earth employees are being extended job offers at our other Minnesota facilities. We are very hopeful that we can keep all of the Blue Earth employees in the Nortech family.
Speaker Change: Earlier today, we announced our plan to consolidate our Minnesota facilities to optimize our operating expense structure and plant capacity utilization to increase the efficiency of our operations.
Speaker Change: Part of our strategy for continuing to improve the bottom line and direct our future capital expenditures.
Speaker Change: Specifically, we are closing our blue Earth, Minnesota production facility by the end of 2020 for.
Speaker Change: We will be shifting wire and cable assembly and system level Assembly manufacturing to North, Texas, <unk>, Minnesota location.
Speaker Change: All of the Blue Earth employees are being extended job offers at our other Minnesota facilities. We are very hopeful to keep all of the blue us employ employees in the North Tech family.
Jay Dean Miller: In addition, we are reducing the square footage of our Maple Grove, Minnesota headquarters and engineering facility by almost 30%. This reduction reflects our current and future space needs, which have been heavily influenced by the company's hybrid remote work arrangements. Andy will speak in more detail on the impact of these facility optimization activities. Our three-tier global strategy of manufacturing in the U.S., Mexico, and China gives Nortech's customers flexibility in improving their own competitiveness.
Speaker Change: Further we are reducing the square footage of our Maple Grove, Minnesota headquarters and engineering facility by almost 30%.
Speaker Change: This reduction reflects our current and future space needs.
Speaker Change: Which we have been heavily which had been heavily influenced by the company's hybrid group remote work arrangements.
Speaker Change: Andy will speak in more detail on the impact of these facility.
Speaker Change: <unk> activities.
Our three tier global strategy of manufacturing in the U S, Mexico, and China gives nor text customers flexibility and improving their own competitiveness we.
Jay Dean Miller: We can move production around based on factors like cost, operational requirements, quality control, and intellectual property management. Our customer teams and engineering and design engineers evaluate each customer's needs to determine the most suitable location, which may also change over the course of a product flight. In terms of China, as I mentioned in past calls, much of our production work there is built country for country, a nearshoring approach to better serve our customers in the global market, including reduced shipping and cost time.
Andy Lee: We can move production around based on factors like cost operational requirements quality control and intellectual property management.
Andy Lee: Our customer teams in engineering and engineers evaluate each customers needs to determine the most suitable location, which may also change over the course of our products lifetime.
In terms of China as I mentioned in past calls much of our production work. There is built in country for country or near shoring approach to better serve our customers in the global market, including reduced shipping and cost times.
Andrew D.C. LaFrence: Next, I will turn it over to Andy for a more in-depth look at our financial results. Andy. Thank you.
Andy Lee: Next I will turn it over to Andy for a more in depth look at our financial results Andy. Thank.
Andrew D.C. LaFrence: Thank you, Jay. The next few minutes will provide certain details of our financial performance in the first quarter of 2024, but I would encourage you to review our press release issued earlier this morning and our latest filings this week with the U.S. Securities and Exchange Commission as they contain far more information about our business operations and financial results than we will cover on this call. As a continued theme, we have historically noted that our individual quarterly performance can be affected by outside factors. These might include timing fluctuations, including seasonal fluctuations, customer shipments, and supply chain issues.
Andy Lee: Thank you Jay and the next few minutes ill provide certain details of our financial performance in the first quarter of 'twenty 'twenty four but I would encourage you to review our press release issued earlier. This morning in our latest filings. This week with the U S Securities and Exchange Commission as they contain far more information about our business operation.
Speaker Change: And financial results then we will cover on this call as a continuing theme. We have historically noted our individual quarterly performance can be affected by outside factors is my include timing fluctuations and Clinton seasonal fluctuations customer shipments and supply chain issues any of these could materially impact.
Andrew D.C. LaFrence: Any of these could materially impact a particular quarter, either positively or negatively. Consequently, we believe it is more appropriate to review our business on a 12-month basis rather than focusing on quarterly performance. This approach will help normalize these potential anomalies and offer a better gauge of our strategy's long-term success.
Speaker Change: In particular quarter, either positively or negatively.
Speaker Change: Currently we believe it is more appropriate to review our business on a 12 month basis, rather than focusing on quarterly performance. This approach will help normalize these potential anomalies and offer a better gauge our strategies long term success. So today, while focus most of my comments on the first quarter results I will provide some compare.
Andrew D.C. LaFrence: So today, while I'll focus most of my comments on the first quarter results, I will provide some comparisons for the 12-month period ended March 31, 2024 and compared with the same period ended March 31, 2023. As of March 31st, 2024, we did see sustained year-over-year nine-day backlogs, and for the quarter, we realized gross margin improvement, as well as increased levels of net income, as compared with the first quarter Net sales for Q1 2024 totaled $34.2 million.
Speaker Change: <unk> for the 12 months period ended March 31, 2024, and compared with the same period ended March 31 2023.
Speaker Change: As of March 31, 2024, we Didnt did see sustained year over year, 90 day backlogs and for the quarter, we realized gross margin improvement as well as increased levels of net income EBITDA as compared with the first quarter of 2023 net sales for Q1 'twenty 'twenty four is totaled 34.
Speaker Change: 2 million. This represents a one 9% decrease from net sales of $34 9 million in the first quarter of 2023.
Andrew D.C. LaFrence: This represents a 1.9% decrease from net sales of $34.9 million in the first quarter of 2023. Nortech's first quarter net sales performance was driven by year-over-year growth in the aerospace and defense category, offset by decreases in medical and industrial. For the quarter, the medical market was down by $1.1 million, or 5.1%, as compared with the same quarter in 2023, with the majority of the decrease coming from medical component products. For the quarter, net sales from the aerospace and defense category totaled $5.9 million, a 44.9% increase from the prior year quarter. And that sales from Nortech's industrial category were down $8.1 million or 14.8% from the prior year quarter.
Speaker Change: <unk> first quarter net sales performance was driven by year over year growth in the aerospace and defense category.
Speaker Change: Set by decreases in medical and industrial for the quarter, the medical market was down by $1 $1 million or five 1% as compared with the same quarter in 2023 with the majority of the decrease coming from medical opponent products.
Speaker Change: For the quarter net sales from the aerospace and defense category totaled $5 $9 million of 44, 9% increase from the prior year quarter.
Speaker Change: And that sales from nor Tex industrial category.
Speaker Change: Down $8 $1 million.
Speaker Change: Or 14, 8% from the prior year quarter.
Andrew D.C. LaFrence: First quarter 2024 gross margin totaled $5.4 million or 15.9% of net sales compared with gross profit of $5.5 million or 15.7% of net sales in the same prior quarter. First quarter operating expenses totaled $4.3 million, a 3.1% decrease from the first quarter 2023 operating expenses of $4.4 million. As a result of our performance in the first quarter of 2024, we realized net income of $765,000, or $0.26 per diluted share, compared with $681,000, or $0.23 per diluted share, in the same quarter of 2023.
Speaker Change: First quarter of 2020 for gross margin totaled $5 $4 million or $15, 9% of net sales compared with gross profit of $5 5 million or 15, 7% of net sales in the same prior year quarter.
Speaker Change: First quarter operating expenses totaled $4 3 million or three 1% decrease from the first quarter 2023 operating expenses of $4 4 million.
Speaker Change: As a result of our performance in the first quarter of 'twenty 'twenty four we realized net income of 765000 or 26 cents per diluted share compared with 681000 or 23 cents per diluted share in the same quarter of 2023.
Andrew D.C. LaFrence: As Jay discussed in his comments, our board of directors yesterday approved two actions to facilitate our optimization of our North American facilities footprint. First, we announced the closure of our Blue Earth facility by the end of 2024. The decision to close our Blue Earth facility was not without much forethought and deliberation. While we're closing this facility, our commitment to all of our Blue Earth employees will continue through the offering of employment at another Nortech facility in Minnesota. We hope that all of our Blue Earth employees will continue with Nortech.
Speaker Change: As Jay discussed in his comments our board of directors yesterday approved two actions to facilitate our optimization of our north American facilities footprint.
Jay: First we announced the closure of our Brewer facility by the end of 2024 decision to close our buhler facility was not without much forethought and deliberation.
Speaker Change: I will be closing this facility our commitment to all of our Blue Earth with employees will continue through offering of employment at another north Tech facility in Minnesota.
Speaker Change: We hope that all of our Blue Earth employees will continue with Nortek.
Andrew D.C. LaFrence: We estimate the Blue Earth closing result in a restructuring charge of $1 million to $1.1 million in the last three quarters of 2024. These expenses include estimated non-cash impairment charges of $400,000, with the remaining costs consisting of payments to move equipment, shut down the Blue Earth facility, and employee retention. We expect to pay SESANGI all of the cash restructuring costs in 2024. Second, we have signed an amendment to our Maple Grove, Minnesota lease to reduce our square footage by approximately 30% while repositioning the retained space to better serve our needs for the next several years.
Speaker Change: We estimate the Blue Earth closing will result in a restructuring charge of $1 million to $1 $1 million in the last three quarters of 2024.
Speaker Change: As expected expenses include estimated noncash impairment charges of 400000 with the remaining costs consisting of payments to move equipment shutdown, the blue Earth facility and employee retention, we expect to pay substantially all of the cash restructuring costs in 2024.
Speaker Change: Second we have signed an amendment to our Maple Grove, Minnesota lease to reduce our square footage by approximately 30% while repositioning the Canadian retail space to better serve our needs for the next several years.
Andrew D.C. LaFrence: We expect to realize annual savings starting in 2025 of at least $1.6 million related to these two consolidation activities. Moving to the cash flow statement first, for the quarter ended March 31, 2024, net cash provided by operating utilities totaled $2.8 million as compared with $1.7 million for the same period in 2023. As noted in our press release distributed this morning, we use earnings before interest, tax, depreciation, amortization, or EBITDA as a key performance indicator to manage your business.
Speaker Change: We expect to realize annual savings starting in 2025 of at least $1.6 million related to these two consolidation activities.
Speaker Change: Moving to the cash flow statement first for the quarter ended March 31, 2024, net cash provided by operating activities totaled $2 $8 million as compared with $1 $7 million for the same period in 2023.
Speaker Change: As noted in our press release distributed this morning, we use earnings before interest tax depreciation and amortization or EBITDA as.
Speaker Change: As a key performance indicator to manage our business in the press release, we have provided a reconciliation of our financial performance determined in accordance with U S. Generally accepted accounting principles and EBITDA.
Andrew D.C. LaFrence: In the press release, we have provided a reconciliation of our financial performance determined in accordance with the U.S. Generally Accepted Kind Principles and EBITDA. For the quarter ended March 31st, 2024, EBITDA increased 5.1% to $1.637 million, as compared with $1.558 million for the same period in 2023. This increase is largely due to improved gross margins and operating expense management. Turning to the balance sheet, as of March 31st, 2024, cash and cash equivalents totaled $4 million, up from $1.7 million as of December 31st, 2023. The fluctuation in cash balances reflects the timing of cash receipts and expenditures, as well as line of credit borrowings.
Speaker Change: For the quarter ended March 31, 2024, EBITDA increased five 1% to $1 six $3 7 million as compared with 1.558 million for the same period. In 2023. This increase is largely due to improved gross margins and operating expense management.
Speaker Change: Turning to the balance sheet as of March 31, 2024, cash and cash equivalents totaled $4 million up from $1 $7 million as of December 31, 2023, the fluctuation cash balances reflects timing of cash receipts and expenditures as well as line of credit borrowings.
Andrew D.C. LaFrence: We extended, excuse me, we ended the first quarter of 2024 with $8 million of borrowing capacity under our line of credit. Counts receivable as of March 31st, 2024 were $16.1 million, down from $19.3 million as of December 31st, 2023. This is in line with our strong fourth quarter sales and the expected timing of customer payments. Inventories were $23 million as of March 31st, 2024, as compared with $21.7 million as of December 31st, 2023.
We extended.
Speaker Change: We ended the first quarter of 2024 was $8 million of borrowing capacity under our line of credit.
Speaker Change: Accounts receivable as of March 31st 2024 were $16 1 million down from $19 3 million as of December 31, 2023. This is in line with our strong fourth quarter sales and the expected timing of customer payments inventories were 23.
Speaker Change: $3 million as of March 31, 2024, as compared with $21 seven as.
Speaker Change: Of December 31, 2023.
Andrew D.C. LaFrence: Our contract asset, which represents revenue earned but not yet billed to customers, decreased slightly to $14.2 million as of March 31st, 2024, as compared with $14.5 million at the end of 23. This decrease reflects the timing of customer shipments.
Speaker Change: Our contract asset, which represents revenue earned but not yet billed to customers decreased slightly to $14 $2 million as of March 31st 2024, as compared with $14 5 million at the end of 'twenty. Three this decrease reflects the timing of customer shipments as a reminder, the.
Jay Dean Miller: As a reminder, the majority of our net sales are generated from products manufactured specifically for a customer's unique application, and as such, we recognize revenue in accordance with U.S. generally accepted accounting principles as we produce those products. Additionally, as we also disclosed in our press release issued earlier today, we have presented non-GAAP results, including twirling 12-month financial data in EBITDA. For the twirling 12-month period ended March 31st, 2024, net sales were $138.7 million, as compared with $138.3 million for the same 12-month period ended March 31st, 2023.
Speaker Change: The majority of our net sales are generated from products manufactured specifically to a customer's unique application and as such we recognized revenue in accordance with U S. Generally accepted accounting principles as we produce those products.
Speaker Change: As we also disclosed in our press release issued early today, we have presented non-GAAP results, including trailing 12 month financial data.
Speaker Change: EBITDA for the trailing 12 months period ended March 31, 2024, net sales were $138 $7 million as compared with $138 3 million for the same 12 month period ended March 31, 2023. In addition, EBITDA for the 12 months period ended March.
Jay Dean Miller: In addition, EBITDA for the 12-month period ended March 31st, 2024, with $8.1 million, as compared with $6.7 million for the 12-month period ended March 31st, 2023. As we stated in March, our top financial priorities for 2024 remain unchanged. First, we are extremely focused on continuing to strengthen our balance sheet. Next, we will take further advantage of opportunities to align our operations and infrastructure with the market demand that we are seeing to deliver sustainable EBITDA growth, as well as drive improvements in free cash flow. Coupled with disciplined lean operation, execution, expense management, and R&D innovation, we believe Nortech can deliver on our objectives. With that, I will turn it back over to Jay for his closing comments.
Speaker Change: <unk> 31, 2024 was $8 $1 million as.
Speaker Change: With $6 seven.
Speaker Change: For the 12 month period ended March 31 2023.
Speaker Change: Yeah.
Speaker Change: As we stated in March our top financial priority is for 'twenty 'twenty four remain unchanged first we are extremely focused on continuing to strengthen our balance sheet.
Speaker Change: Next we will take further advantage of opportunities to align our operations and infrastructure with the market demand that we're seeing to deliver sustainable EBITDA growth as well as driving improvements in free cash flow, coupled with disciplined lean operation and execution expense management and R&D innovation, we believe Norton.
And deliver on our objectives.
Speaker Change: That I will turn it back over to Jay for his closing comments Jay.
Jay Dean Miller: Thanks, Andy. Before we open the call to your questions, I want to touch on three related areas that together serve our customers and help advance Nortech's corporate stewardship, our engineering, expertise, product innovation, and sustainability plans. For engineering expertise, we have a dedicated engineering services team that is focused on enhancing manufacturability and serviceability, supply chain risk mitigation, and cost efficiency for our customers. Early in this call, I mentioned the benefits of our three-tier cost structure across the U.S., Mexico, and China and how we can quickly adapt our global resources to fit our customers' changing needs.
Thanks, Andy before we open the call to your questions I wanted to touch on three related areas that together serve our customers and help advance <unk> corporate stewardship, our engineering.
Jay: <unk> expertise product innovation and sustainability plans.
Jay: For engineering expertise, we have a we have a dedicated engineering services team that is focused on enhancing manufacture ability and serviceability supply chain risk mitigation and cost efficiency for our customers.
Andy Lee: Early in this call I mentioned the benefits of our three tier cost structure across the U S, Mexico and China and.
Speaker Change: And how we can quickly adopt our glue.
Speaker Change: Global resources to fit our customers' changing needs.
Jay Dean Miller: Nortech's engineering capabilities also further our research and development activities with advancements like the Expanded Beam Extreme Fiber Optic Technology, or EBX, that we announced in January. EBX is designed for digital data transmission and offers improved speed and reliability when compared to traditional copper. At the simplest level, the vast majority of Nortech's products provide digital connectivity solutions that transmit data and power in various applications. As you may know, the Internet of Things, or IoT, integrates a variety of electronic components such as microcontrollers, sensors, actuators, and connectivity modules.
Speaker Change: <unk> engineering capabilities also further our research and development activities with advancements like the expanded beam extreme fiber optic technology or <unk> that we announced in January.
Speaker Change: <unk> is designed for digital data transmission and offers improved speed and reliability when compared to traditional copper.
Speaker Change: At the simplest level the vast majority of <unk> products provide digital connectivity solutions that transmit data and power and various applications.
Speaker Change: As you May know the internet of things or Iot integrates a variety of electronic components, such as Microcontrollers sensors actuators and connectivity modules used components in turn enable Iot connected devices to collect parse transmit and receive data.
Jay Dean Miller: These components, in turn, enable IoT-connected devices to collect, parse, transmit, and receive data. More and more today, that data is being evaluated and analyzed using human intelligence and combined artificial and human intelligence for improved performance and data management for our customers, as well as for their customers. More data needs, uh, uh, more data needs better data pipelines.
Speaker Change: More and more today that data is being evaluated and analyzed using human intelligence and combined artificial and human intelligence for improved performance and data management for our customers as well as for their customers.
Speaker Change: More data needs.
More data needs better data pipelines, and that's where north Tech comes in technology like our <unk> smart cables helps collect and distribute this day. This date, a faster more cost effectively and more securely across these desiccated networks, we see strong opportunities for growth for example, industrial Iot App.
Jay Dean Miller: And that's where Nortech comes in. Technology like our EBX smart cables helps collect and distribute this data faster, more cost effectively, and more securely across these sophisticated networks. We see strong opportunities for growth. For example, industrial IoT applications are expected to experience impressive double-digit annual growth from 2023 to 2030, according to Fortune Business Insights.
Speaker Change: Applications are expected to experience impressive double digit annual growth from 2023 to 2030, according to fortune business insights.
Jay Dean Miller: Our pivot to more fiber optic technology improves product performance for our customers by offering unparalleled speed and reliability. It also aligns with our sustainability goals, which we share with many of our customers. When compared with traditional copper, fiber optics offer significant environmental benefits during both production and operation, including improved energy efficiency and less material usage while decreasing the carbon footprint of the complex cables we manufacture. For example, aerospace and defense customers are adopting fiber optic technology due to these key advantages, including reduced size, weight, and power requirements, immunity to electromagnetic interference, and greater durability in harsh environments. Harsh environments, of course, are very common in aerospace and defense applications.
Speaker Change: Our pivot to more fiber optic technology improves product performance for our customers by offering unparalleled speed and reliability.
Speaker Change: It also aligns our aligns with our sustainability goals, we share with many of our customers.
Speaker Change: When compared with traditional copper fiber optics offer significant environmental benefits during both production and operation, including improved energy efficiency and less materials usage, while decreasing the carbon footprint of the complex cables we manufacturer.
Speaker Change: For example, aerospace and defense customers or adopt adapting fiber optic technology due to these key advantages reduced size weight and power requirements immunity to electromagnetic interference and greater durability and harsh environments.
Speaker Change: Harsh environments of course are very common in aerospace and defense applications Nortek.
Jay Dean Miller: Nortech has a proud history of serving these customers' unique needs dating back roughly 30 years. It's the smallest of our three core markets by net sales, but very important to our diversification. Our contributions to our national defense are also a source of great pride for Nortech employees. The majority of our aerospace and defense cables are still the traditional black, rounded, and molded type common for defense systems such as shipboard missile launchers for the Navy.
Speaker Change: Proud history of serving these customers unique needs dating back roughly 30 years, it's the smallest of our three core markets by net sales, but very important to our diversification.
Speaker Change: Our contributions to our National Defense are also a source of great pride for North Tech employees.
The majority of our aerospace and defense cables are still the traditional black rounded and molded type common and legacy defense systems, such as shipboard missile launches for the Navy Blue.
Jay Dean Miller: But we are looking to the future with fiber optics and evolving along with our customers. In closing, we are excited about technological developments across all of our markets and expect them to support our long-term sales momentum, aided by stabilization, supply chain, and customer orders. Last month IPC cited an improved outlook among global electronics manufacturers with stronger demand and shipments reported in January. Our progress over recent quarters confirms that outcome. Now we open the call to your questions. Matthew, go ahead and open the lines. Everyone at this time will be conducting a question and answer session.
Speaker Change: But we are looking to the future with fiber optics and evolving along with our customers.
Speaker Change: In closing we are excited about technological developments across all of our markets and expect them to support our long term sales momentum aided by stabilization supply chain and customer orders.
Speaker Change: Last month, IPC cited improved outlook improving outlook, among global electronics manufacturers with stronger demand and shipments reported in January.
Speaker Change: Our progress over recent quarters confirms that outlook.
Speaker Change: Now we will open the call for your questions.
Speaker Change: Matthew go ahead and open the lines.
Operator: Certainly. Everyone at this time will be conducting a question and answer session. If you have any questions or comments, please press star 1 on your phone at this time. We do ask that while asking your question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality.
Matthew: Certainly everyone. At this time, we'll be conducting a question and answer session. If you have any questions or comments. Please press star one on your phone at this time.
Matthew: We do ask that while posing a question. Please pickup your handset if you're listening on speaker phone to provide optimum sound quality.
Matthew: Once again, if you have any questions or comments. Please press star one on your phone.
Speaker Change: Please hold while we poll for questions.
Operator: Once again, if you have any questions or comments, please press star one on your phone. Please hold while we poll for questions. Thank you. Once again, everyone, if you have any questions or comments, please press star, then one on your phone. Please hold while we poll for questions. Thank you. Your first question is coming from Aaron Salland from Marion Road Capital Management. Your line is live.
Speaker Change: Thank you once again, everyone. If you have any questions or comments. Please press star then one on your phone. Please hold while we poll for questions.
Aaron <unk>: Thank you. Your first question is coming from Aaron <unk> from Merion Road Capital Management. Your line is live.
Aaron <unk>: Okay.
Operator: Hello, Aaron. Go ahead, Aaron. Can you hear us?
Hello, Aaron go ahead, Aaron can you hear us.
Aaron <unk>: Once again, Aaron selling your line is ready.
Aaron Salland: Hey, sorry, I was on mute. Basically, that's all right. We figured. As far as the Blue Earth closure goes, you guys own that facility, correct? We do. Are you going to put that up for sale?
Aaron <unk>: Hey, sorry, I was on mute.
Aaron <unk>: Thank you.
Speaker Change: Alright, we figured.
As far away.
As far as the Blue Earth closer goes.
Speaker Change: That's the one episode you're correct.
Speaker Change: We do.
Speaker Change: Are you going to put that up for sale.
Jay Dean Miller: Yes, we will. Once we move operations out of Blue Earth and up to Bemidji, we will put that on the market.
Speaker Change: Yes, we will once we move operations out of Blue Earth. It up to <unk>, we will put that on the market.
Jay Dean Miller: Can you say how that facility compares to the Bemidji and Manicato facilities that you sold a few years ago?
Speaker Change: And can you say how that.
Speaker Change: How that facility compared to the.
Speaker Change: The major and minor cotton Mankato facilities that you sold a few years ago.
Jay Dean Miller: Yeah, so it's an older facility, it happens to be larger, it's quite a bit less efficient, if you will. And as we've seen a shift in the global market, we've seen a shift of business out of Bemidji, for example, to Mexico. Bemidji, by the way, is a plant that is certified for aerospace defense. And it just made sense, with a newer, more efficient facility in Bemidji to move operations and, hopefully, as many of our really, really good people as possible up to Bemidji.
Speaker Change: Yes, so it's a it's an older facility it happens to be larger it's quite a bit less efficient if you will.
And as we've seen a shift in the global market.
Speaker Change: We've seen a shift of business.
Speaker Change: Out of Bemidji for.
Speaker Change: For example, two to Mexico of the mid <unk> by the way is a plant that is certified for aerospace and defense.
Speaker Change: And it just made sense with a newer more efficient <unk>.
Speaker Change: <unk> facility in the mid <unk> to move operations and hopefully as many are really really good people as possible optima imaging.
Jay Dean Miller: Okay, yeah, it makes sense. And then, I guess, when I look out 12 months from now, just given the earnings of the company and any sort of cash coming in from a real estate sale, it looks like you should be net cash positive by the end of the year. What are your anticipated priorities for using cash going forward?
Speaker Change: Okay, Yeah that makes sense and then as far as like the I guess when I look out 12 months from now just given the earnings of the company and Andrew.
Speaker Change: Any sort of cash coming in from a real estate fell.
Speaker Change: It looks like you should be net cash.
Andrew: Positive by the end of the year.
Speaker Change: What are your.
Speaker Change: The anticipated priorities for uses of cash going forward.
Jay Dean Miller: Well, as you might imagine, there are a number of things we do. It's nice to have the credit to pay down a line of credit, especially with interest rates a little bit higher. But we're also innovating and investing in taking good care of our employees, both in terms of benefits and the environment. We're going to invest in our plants, our existing plants. It's part of the reason we're moving to Bemidji is we have made some significant investments in that plant to make it a lot more sustainable and, and more employee-friendly, if you will.
Speaker Change: Well it is as you might imagine there's a number of things we it's nice to have the credit to pay down our line of credit, especially with interest rates a little bit higher but we're also innovating. We're also investing in taking good care of our employees both in terms of.
Speaker Change: <unk>.
Speaker Change: The environment, we're going to invest in our our plants our existing plants as part of the reason, we're moving to <unk> as we have made some significant investments in that plan to make it a lot more sustainable and more employee friendly if you will and we expect we will continue to do that.
Jay Dean Miller: And we expect we will continue to do that, as well, along with continuing to fund our innovations. We talked about EBX, and we expect to keep pushing the envelope in terms of fiber optic technologies for our customers in the future.
Speaker Change: As well along with continuing to.
Speaker Change: Fund our innovations we talked about <unk>, we expect to keep pushing on pushing the envelope in terms of fiber optic technologies for our customers in the future.
Okay.
Jay Dean Miller: Um, and then do you have any sense as far as where working capital or inventory levels stand with some of your customers? I know in the queue there was mention of like destocking in the industrial and medical divisions. But do you have any insight into kind of like where we are in that cycle?
Speaker Change: Yeah.
And then Jimmy.
Speaker Change: As far as where working capital or inventory levels down to some of your customers I know.
Speaker Change: In the in the Q there was mention of like Destocking at.
Speaker Change:
At the industrial and medical Division, but.
Speaker Change #100: Do you have any insight into kind of like where you are in that cycle.
Jay Dean Miller: Aaron, I think, as many contract manufacturers have seen, that it's kind of across the board. And the way I would characterize it, you've got some customers in the medical advisory, in particular, where you know they're level setting their inventories. I would also say, you know, we have some customers that are in a transition where they're at the end of the life of one version going to their next version, and so, given the diversity we have in our portfolio of customers in those two segments, it's really kind of a mixed bag.
I think as many.
Speaker Change #100: Contract manufacturing, we've seen that.
Speaker Change #100: It's kind of across the board.
Speaker Change #101: The way I would characterize as you've got some.
Speaker Change #102: Customers in the medical device area in particular, where their level setting their inventories I would also say we have some customers that are in transition where they're at end of life of one.
Version going to their next version and so it's really given our.
Speaker Change #103: Diversification, we have in our portfolio of customers in those two segments, it's really a kind of a mixed bag.
Jay Dean Miller: We do think that what is happening is going back to more 2020-2021 sort of buying habits where we see shorter lead times and less bookings, and we're just working our way through that with our customers right now to get better clarity on what the second half of 2024 is going to look like.
Speaker Change #104: We do think that's what what is happening is going back to more 2000, 22020 ones, who are buying habits, where we see shorter lead time and less bookings.
Speaker Change #104: And we're just working our way through that with our customers right now.
Speaker Change #105: It gives better clarity to what the second half of 2024 is going to look like.
Jay Dean Miller: Got it. And as far as A and B go, really, really strong growth there. Are there any kind of projects or subsectors that you can point to that have kind of driven that?
Speaker Change #105: Got it.
Speaker Change #105: And as far as far as <unk> goes really really strong growth there.
Speaker Change #106: Are there any.
Speaker Change #107: Kind of like <unk>.
Speaker Change #107: Projects or like.
Speaker Change #107: Sub sectors that you can point to that.
Speaker Change #107: Has kind of driven that.
Jay Dean Miller: We, we don't really get into that sort of granularity. We keep our commentary at the segment level. So, I don't know that we have traditionally done that.
Speaker Change #108: We don't really get into that sort of granularity, we keep our commentary at the at the segment level.
Speaker Change #107: So.
Speaker Change #109: I don't know that we haven't done that traditionally and as you might imagine a lot of this stuff is pretty confidential too. So we typically don't share that level of information.
Jay Dean Miller: As you can imagine, a lot of this stuff is pretty confidential, too, so we typically don't share that level of information.
Aaron Salland: Yep. Okay. Fair enough.
Speaker Change #110: Yes, Okay fair enough and then the last one I know you don't necessarily manage the business like this.
Aaron Salland: And then the last one, I know you don't necessarily manage the business like this, but just when I'm looking at the margin for the quarter versus last quarter, I think, you know, obviously, a lot of variation between the two. Is there anything that you can point to as far as why Q4 was just so high relative to where it has been? And then, you know, why has it kind of come back down to like more of a normal level this quarter?
Speaker Change #111: But just when I'm looking at the margin for the quarter.
And versus last quarter I think.
Speaker Change #112: We see a lot of variation between the two.
Speaker Change #113: Is there anything that you can point to as far as why Q4 was so high relative to where where it has been and then why it's kind of coming back down until like more of a normal level this quarter.
Jay Dean Miller: Yeah, you know, we do have quarters where the mix of products is a factor where we will just be shipping a range of products that are just higher margins, as opposed to other quarters where we may ship a range of great products that just happen to be a little bit lower margin. So some of that is just the mix.
Speaker Change #113: Yes.
Speaker Change #114: Do have quarters, where oftentimes, it's it's mix of product is a factor.
Speaker Change #115: We will just be shipping.
Our range of products that are just higher margin.
Speaker Change #115: As opposed to other quarters, where we may ship a range of great products. They just happened to be a little bit lower margin.
Jay Dean Miller: I think the general trend that you have seen, I mean, we expect to continue to improve our margins going forward. It was part of the reason we talked about these 12-month periods, because that gives you a better sense of where the business is trending, as opposed to quarter to quarter. Because, you know, clearly, on a gross margin basis, the fourth quarter was quite a bit stronger than the first quarter. You know, we also tend to be a little bit, we tend, if you look at our history, we tend to have stronger fourth quarters, and the more revenue we have, typically, the higher our gross margins as well.
Speaker Change #115: So that some of that is just mix I think.
Speaker Change #115: The general trend that you have seen I mean, we expect to continue to improve our margins going forward.
Speaker Change #116: The reason, we talk about that.
Speaker Change #116: These 12 month periods, because that gives you a better sense of.
Speaker Change #116: Where the business is trending as opposed to quarter to quarter because clearly.
Speaker Change #116: Clearly in a gross margin basis fourth quarter was quite a bit stronger than first quarter.
Speaker Change #117: We also tend to be a little we tend to if you look at our history, we tend to have stronger fourth quarters in the more revenue we have typically.
Speaker Change #117: The higher our gross margins as well.
Jay Dean Miller: I would add to that, Aaron, two comments. Clearly, with revenue kind of levels, you know, you see, changes in operating leverage related to fixed costs are impactful. And the other thing that you would note in the Q is that we did record an adjustment for $178,000 for some Mexican retirement benefits that hit gross margin. So that had some impact on the quarter's margin as compared with Q4 as well.
Speaker Change #118: I would add to that an errand to Collins coli was rare.
Speaker Change #119: Revenue kind of levels you see.
Speaker Change #119: Changes in operating leverage related to the fixed cost is impactful and the other thing that you would note in the Q is that we did required an adjustment for $178000 for some Mexican retirement benefits that hit hit gross margin.
So that had some impact on the quarter's margin as compared with Q.
Speaker Change #119: Q4 as well.
Speaker Change #120: Got it alright.
Aaron Salland: Alright, well, thanks for taking my questions. Nice work, and keep it up.
Speaker Change #121: Alright, well thanks for that.
Speaker Change #122: Taking my questions and nice work and keep it up.
Jay Dean Miller: Thanks, Aaron. Aaron, good to talk to you. Thank you. Thank you. Once again, everyone, if you
Speaker Change #122: Thanks, Sharon and good shot you. Thank you.
Operator: Thank you. Once again, everyone, if you have any questions or comments, please press star and then one on your phone. Please hold while I pull for questions. Thank you. There are no further questions in the queue. I will now hand the conference back to our host for closing remarks. Please go ahead.
Speaker Change #123: Thank you once again, everyone. If you have any questions or comments. Please press star then one on your phone. Please hold while we poll for questions.
Speaker Change #124: Thank you there are no further questions in the queue I will now hand, the conference back to our host for closing remarks. Please go ahead.
Operator: Thank you very much, Matthew. And thanks to everyone for joining us today. We look forward to talking with you in August when we report our second quarter 2024 results. Again, thank you and goodbye.
Speaker Change #124: Thank you very much Matthew and thanks to everyone for joining US today, we look forward to talking with you in August when we report our second quarter 2824 results again, Thank you and goodbye.
Operator: Thank you, everyone. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.
Speaker Change #125: Thank you everyone. This concludes today's event you may disconnect at this time and have a wonderful day. Thank you.
Speaker Change #125: You for your participation.