Q4 2023 Allient Inc Earnings Call

Participants

Craig Mihalik; IR; Allient Inc

Richard Warzala; President & Chief Executive Officer; Allient Inc

Michael Leach; Chief Financial Officer, Senior Vice President; Allient Inc

Danny Eggerichs; Analyst; Craig-Hallum Capital Group

Gerry Sweeney; Analyst; ROTH Capital

Presentation

Operator

Good day and welcome to the airline, Inc. fourth quarter fiscal year 2023 financial results conference call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Mr. Craig Malik from Investor Relations. Please go ahead, sir.

Craig Mihalik

Good morning, everyone.
On the call are Dick Warzala, our Chairman, President, and CEO, our Chief Financial Officer. Mike are going to review our fourth quarter and full year 2023 results and provide an update on the company's strategic progress and outlook. We'll open up for Q and AC., the financial results that were released yesterday after the market closed. If not, you can find it at our website at Aliant.com, along with the slides that accompany today's discussion during those slides.
Please turn to slide 2 for the safe harbor statement. As you are aware, we may make forward-looking statements on this call during the formal discussion as well as during the Q&A 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, uncertainties and other factors discussed in the earnings release as well as with other documents filed by the company. These and Exchange Commission documents on our website, sec.gov, as well that during today's call, we will discuss discuss some non-GAAP measures, which we believe will be useful in evaluating our performance. 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 GAAP measures, both accompanying the earnings release and slides.
Please turn to slide 3, and I'll turn it over to Dick to begin.

Richard Warzala

Thank you, Greg, and welcome, everyone, for the backdrop of macro uncertainty and other challenges. The Elliott team once again delivered on a number of successes during the past year. This included the kickoff of our next stage of growth for the refined strategy that brought on a new corporate name and ticker and included the publishing of our inaugural sustainability report, which highlights our vision for an approach to corporate sustainability. We continue to execute our financial strategy with the support of 13% organic growth for the year, which is more than double the industry and key acquisitions, which I will speak to in a moment.
Our top line reached nearly $500 million, reflecting strong demand in industrial markets, largely driven by industrial automation projects and power quality solutions focused on the HVAC and oil and gas end markets. Also contributing to our overall growth was higher sales within aerospace and defense and vehicle markets.
On the margin front, we delivered on our expectations with a record annual gross margin of 31.7%, an operating margin of 7.3%, which was up 100 basis points for the year. This translated into stronger earnings. That also led to a record level of cash generation of 45 million that enabled us to reduce our debt while still investing in organic and inorganic initiatives. Overall, annual net income per diluted share increased 36% to $1.48 and on an adjusted basis, net income per share was $2.30, up 22% for the year.
On slide 4, we've highlighted our recent acquisitions. We reviewed here a motion on our last earnings call as we completed the transaction in September, while it is a relatively small acquisition, it was very strategic from an engineering perspective because it enhances both our application design and development efforts in support of our integrated motion solution strategy and advances our customer facing market strategy as we further expand our reach into our targeted market segments, in early January after the year closed, we brought on S&C manufacturing, which was our first talk with a tuck-in acquisition in support of our power technology pillar. They are a well established company with locations in the U.S., Mexico and China. Their offerings are complementary to our current power quality capabilities as they design and manufacture electromagnetic products for blue-chip customers and Defense Industrial Automation, alternative power generation and energy, which includes electric utilities and renewable energy. In addition to extending our capabilities in the clean power industry, S. and C. brings much-needed incremental low cost manufacturing capacity and expertise to further grow our power quality business.
From a financial perspective, S&C adds about $40 million in annual revenue and is expected to be accretive to earnings in year one. While their current margins are less than our stated goals, we are confident that we are well positioned to improve them over time.
In addition, we see several opportunities to leverage the resources within the power pillar and Elliot as a whole and to have a positive impact on sales and profits in the short term as well.
We welcome all employees of SNC to Alliance, and we look forward to a continued growth and success together in the future.
With that, let me turn it over to Mike for a more in-depth review of the financial.

Michael Leach

Thank you, Dick. Starting on Slide 5, we highlight our top line for the quarter and full year periods. Fourth quarter revenue increased 8% from nearly 10 million to 141 million. Excluding the favorable impact of foreign currency exchange rate fluctuations on revenue of $1.6 million, organic growth was approximately 6%. Industrial markets were up 23% in the quarter, benefiting from strong end market demand within Industrial Automation, vehicle handling and power quality solutions fully focused on the oil and gas and HVAC markets within our vehicle markets, our automotive customers began to ramp up their programs as expected. This past year, we also saw nice demand for powersports has helped drive the overall vertical up 17% in the quarter. Offsetting some of that growth continued to be lower demand with it within agricultural vehicles, given the softness in Europe, which was largely influenced by the Ukrainian conflict and DI sales were down just given the timing and resulting lumpiness around certain defense and space projects, along with customer-driven supply chain challenges within the vertical medical market declined due to softness in medical mobility, which has largely reflected a reduction in demand that we experienced during the last two years of those products, driven by specific customers Slide 6 provides details regarding our full year performance and shows the change in our revenue mix and the drivers behind each change. Industrial continues to lead the way it remains. Our largest market, making up 44% of total 2023 sales. That's an increase of 600 basis points from 2022 to 33% growth in industrial space, driven primarily by the same markets as fourth quarter and reflected continued improvements within the supply chain environment, which supported the shipping of some long lead projects, C&E verticals, better evaluate on an annual basis given program timing. And for the year, we grew low double digits due to this success in winning new defense projects and the ramping of other programs. We also benefited from positive commercial aircraft demand given overall improvements within the industry and vehicle market, revenue was up 2% and reflects same demand drivers as the fourth quarter medical sales were nearly flat as we continued to see a return to a more normalized sales environment focused on surgical and instrumentation related end markets. And lastly, sales to the distribution channel, which are a small portion of total sales were up 6% for the year.
As highlighted on Slide 7, gross margin expanded 40 basis points for the quarter and full year period on higher volume and favorable mix, along with the continued emphasis and usage of our lean toolkit throughout the organization. These impacts more than offset elevated raw material costs and remaining supply chain inefficiencies.
Moving to Slide 8 for operating performance, you'll notice that we had a sizable increase in business development costs for the quarter and full year period. These those expenses were in support of the recent acquisitions, an increase for our prior acquisition from the earn-out and some rationalization efforts around our manufacturing footprint to position us to drive stronger operating leverage in the future. On an annual basis, we did gain some operating leverage, which drove operating income growth of 34% to $42.3 million or 7.3% of sale, up 100 basis points.
On Slide 9, we present GAAP net income and adjusted net income, which we believe provides a better understanding of our earnings power, inclusive of adjusting for the non-cash amortization of intangible assets, which reflects the Company's strategy to grow through acquisitions as well as organically fourth quarter net income increased 18% to $4.3 million or $0.26 per diluted share and on an adjusted basis was up 31% to $9.1 million or $0.55 per diluted share included in the fourth quarter results is a tax benefit of $0.4 million, which reflected realization of certain NOLs and R&D credits and incentives for the full year net income increased 39% to 24.1 million or 1.48 per diluted share. On an adjusted basis, annual net income increased 25%, 37.5 million or $2.30 per diluted share. And the effective tax rate was 18.9% in 2023, which reflected a tax benefit from the fourth quarter due to realization of certain NOLs and R&D credits compared with an effective tax rate of 26.6% during 2022, we expect our income tax rate for the full year 2024 to be approximately 21% to 23%. We use adjusted EBITDA as an internal metric and believe it is useful in determining our progress and operating performance. Adjusted EBITDA increased 2% to $16.9 million or 12% of revenue for the year. Adjusted EBITDA increased 18% to $77.2 million or 13.3% of revenue, which was up 30 basis points.
Slides 10 and 11 provide an overview of our cash flow and balance sheet we generated 45 million of cash from operations for the year, which represented a record level for the company and a significant increase from the $5.6 million generated during the prior year period. The increase reflected higher net income and improved working capital management. Based on our cash flow projections, we expect to continue to drive strong cash flows consistent with historical trends. Annual capital expenditures were $11.6 million and largely focused on new customer projects. We expect 2024 capital expenditures to increase from this level be in the range of 16 to $20 million and inventory turns improved to 3.0 times compared with under three times last year. Our DSO was slightly elevated at 56 days for the year, largely reflecting timing and mix of customers. Total debt was approximately $218 million, down $17.1 million from year end 2022 debt net of cash was about $187 million or 42.6% of net debt to capitalization. Our bank leverage ratio was 2.8 times.
Lastly, we recently extended the mature maturity of our 280 million revolving credit facility for five 2029. Borrowings under the revolving facility will bear interest on a sliding scale rate based on leverage of 1.25% to 2.8% over silver.
In addition, Fred flexibility, we entered into a $100 million fixed rate private shelf facility with Prudential. The notes have a maturity date of no more than 10.5 years after the date of original issuance and may be issued through March 2027. Currently, there are no borrowings in those agreements with SAP.
I'll now turn the call back over to Vic.

Richard Warzala

Thank you, Mike.
Slide 12 shows our orders and backlog levels as we have discussed throughout the year. The change in backlog reflects the continued improvements within the supply chain environment, which has enabled the shipping of some longer lead industrial market projects. It led to customer order patterns patterns beginning to return to a pre-COVID-19 environment. There are a number of exciting programs that will play out as we move through 2024. And we are well situated as we realign the organization to support the significant opportunities that we are bidding across our target verticals. The upcoming year will have its challenges, given the changing dynamics of our backlog, which is expected to continue to rightsize for the next few quarters. This also presents the opportunity to reduce our working capital requirements and strengthen cash flow.
Turning to slide 13, we are intent upon creating stronger earnings power with our Synplify to accelerate strategy. 2024 is the year to drive out redundant costs, realign the organization to improve focus and efficiencies, rationalize our footprint and ultimately simplify our operating structure by rethinking how we operate. We believe we can accelerate our efforts to achieve top-tier financial performance. While some of the actions will take time to fully execute, there is a strong sense of urgency throughout the organization to deliver on our goals. Our simplified to accelerate strategy is moving forward by adding the word now to the end and is centered on three high-level strategic initiatives. First, realigning and rightsizing our footprint to better align with our markets and customers initiatives began in 2023 and are expected to continue with earnest throughout 2024 and beyond. Reinforcing lean principles throughout the Company to accelerate market margin expansion. Our AST toolkit is core to the continuing continuous improvement actions required within the company. And as we demonstrated this past year, we expect to continue to employ working capital initiatives and strong financial discipline to drive additional cash generation and delever the balance sheet in 2024. Overall, we are excited and confident in our future as we believe we are well positioned to drive our earnings power with our Synplify to accelerate now strategy and create additional value for all of our stakeholders.
With that, operator, let's open the line for questions.

Question and Answer Session

Operator

(Operator Instructions) Greg Palm, Craig-Hallum Capital Group.

Danny Eggerichs

Thanks. This is Danny acreage on for Greg today. Congrats on the good results guys like you, Danny. And I think I'd like to just kind of start out by maybe what you're seeing out there right now. On any poor day trends. Obviously, bookings kind of fell off a little bit in Q4 and you noted some momentum for inventory drawdown. So maybe just what kind of visibility do you have into this, you know, our trends, you don't have any kind of continue to offer those Q4 levels on and maybe how long you think some of those some of those trends should last for things your face of what.

Richard Warzala

I would say this year that the as we mentioned, we expect that over the next few quarters here we're going to continue to see some adjustments and it's a mixed bag. We while we have seen the hold on shipments or the delay of shipments, so inventories do get balanced properly at our customer level are also starting to see that where it was projected or certain demand to be pushed out, starting to now see some demand increasing and near state. And then there's a time timeframe. So I think it's as I said, it's a mixed bag. We overall believe that the lead time adjustments, the lead times a rate reductions and a better management of inventories throughout the whole supply chain, including our own, are certainly actions that are at the top of our list and as well as our customers. And at the next few quarters, we'll see some continued adjustment there. That's our that's our expectation.

Danny Eggerichs

Got it. That's helpful. Maybe just digging a little bit in more into this simplified to accelerate initiative. Any more color you could give there on what it what are you doing? Is there headcount reductions as part of that? Maybe like a wine now, um, do you think we'll see this in gross margin or OpEx or break that out? And I guess any way you can kind of quantify those impacts to the P&L as we move throughout the year?

Richard Warzala

Yes, sure. So I would just as a last statement in my prepared remarks, so we said the simplified to accelerate strategy, which actually started last year. Our own is gaining momentum within the company. But we added a very important word to the other that nets now and it's not the future. It's now, and I can't stress that enough to say that in everything we do. And as we start to look at all processes and operations and capacity and within the company, you can see complexity that needs to come out. So what I would say to you is that we had defined some activities and some actions that were pre-COVID that we would have undertaken. But given COVID, those resources were diverted into other directions, simply making sure we can get parts, satisfying customer demand, working overtime, getting a workforce in place and so forth. So I would just say that they have been delayed in the last year globally at our strategy session with our key leadership team, we absolutely said it's time now to get back onto those initiatives and wring some cost out of the out of our operations. So what you mentioned, I would say it's all of the above and nothing is sacred at this point to fail. We did eight acquisitions in a very short period of time, we we know we can do a better job of leveraging the capabilities and the footprint of these acquisitions and bringing teams together. We've got brands out there that need to be retired. We've got company names that need to be retired as we move forward to the one company in which we live. And we launched the Noonday last year with a new ticker and it's purposeful. I mean, we really have a unique situation with technology and products that we could lever into target verticals. So we further expansion and acceleration of those activities and a focus on making those those things happen. So that really is a it is an opportunity for us to look at how we're doing business, use our lean tool, Ali toolkit to help us on continuous improvement. And as I said, it's now it's not planning for the future. We have actions that are planned that we will execute and move forward on and our leadership team is engaged. So they will obviously the goal here is to approve, we make commitments to improving margins. This will absolutely help us achieve those goals.

Danny Eggerichs

Yes. So I guess that like you kind of said there that, that I guess 100 basis points of annual gross margin improvement kind of target that you have out there on. Does this does this do initiative work towards that? Or do you think you can get incremental expansion on top of that with this? Or how should we think about that?

Richard Warzala

Yes. Well, I think, listen, first off, we it's hard to adjust expectations or statements that have been made it a couple of years ago. We wanted to realize what the expectations are as far as 100 basis points margin improvement, including gross margin with our expectation, 50 basis points for both gross and from the operating expense side of the site let's make sure that that's clear. Our goal internally is to exceed what we state as public goals. This is not new in addition to or anything different than when we laid out our expectations for the improvements a few years ago.
This is lining right up with what we stated back then. So if in the while in the process, we see opportunities to do better.
We absolutely will, of course, but I think we'll stick with our stated objectives here for the 100 basis points improvement in operating margin with a combination of both gross and operating expense reduction?
Yes, one of the things I'll bring it up a little bit. I think, Danny, you even asked the question before is as we did all the acquisitions, you could see revenue line going up, but you also saw the SG. and E. expenses go up along with that, and that is correct.
And at some point I know you have some you have to leverage those increased costs to either grow contract revenues, earnings more or to find ways where you can realize some synergies and that percentage reduction should go down, you should actually see synergies there and start to leverage that.

Danny Eggerichs

That's helpful. I'll leave it there. Thanks.

Richard Warzala

Thank you.

Operator

Gary Sweeney, ROTH Capital.

Gerry Sweeney

Mike, thanks for taking my call. Mike, I think this is your last call. So congratulations as competitors last call. Welcome on the client area. It's Jerry, too, by the way that Gary raised. I know everyone there always hence the worse of it. How come I know we covered the simplified to accelerate. So I'm going to let that be for now. There's some fallout from that later today, but some don't.
And the just some random questions here. It is obviously lumpy. You've always talked about that but just curious, I'm looking at that on an annual basis, how much confidence you have say throughout 2024? That sounds as though there are some programs that are out there you feel relatively confident that that businesses is well positioned?

Richard Warzala

Yes. So absolutely. I think we've mentioned over several conference calls that the quoting activity has been extremely high. That didn't necessarily convert into orders, which was a little bit of a surprise. But we have seen that orders now coming in as to our expectation expectations that that or replenishment of certain materials that's needed by the defense markets. So we do have visibility on programs beginning to kick in and starting to accelerate at midyear and through the end of the year. And and some fairly significant programs out into the future. So it is beginning to kick in and I will state that it is our first what we would really say is our internally, we call it the Elliott market-specific selling unit, where we want to realize as much value as possible in these in that market. And we are backing it up by putting resources in place and having a strong focus on it. And I just mentioned, we just finished up a global leadership meeting here last week and to see the excitement as we bring our team together how much we really do from an independent unit standpoint and how much we can leverage. And when we bring a focus to it and have a central point of sale and contact and support the continued increase in value in a sale that we will see part of that process.
Also, as we talk about to Danny answer, ask the question earlier to some of the initiatives, but I would say specifically, it's in how we process how we handle orders. We have the acquisitions that we've done. We have different computer systems and the transactional costs are quite high because of the way it's being handled. And our whole goal is to simplify and to make one transaction drive it all the way through the system, have it happen automatically and to realign the revenues and profits into the right units who are contributing.
Sounds simple, sounds trivial, but as the organization has grown one of the things I wanted to be very cautious about when you hear this many times is big companies become cumbersome and they don't want to do business with their sister companies. We have to make sure that we do things differently and we prevent that from occurring and we could see it creeping in. And we think we've got a pretty good solution. And in the process, we're going to have a much better focus and we're going to drive cost out as well as aligning more from a system sale. So we think there's a lot of positives there that this will be moving forward this year. And it is a strong focus and it's based upon the demand that we're actually seeing in the market.
Just as an add-on to that, Jerry, my prepared remarks, I mentioned some supply chain inefficiencies within A. and D. of yes, there are suppliers who are customers that are holding up relief, if you will, of our products because they can be there. And if they're not in a position to produce at full capacity and obviously they're holding off on delivery of our products and they can marry them together for a full for a full system. So we are being impacted by that. We are excited about the programs that we previously discussed, like I said, some of that is being held a little hostage to certain supply chain constraints within that vertical.

Gerry Sweeney

Patrick, I'll take it a half a step back of John back to you with the simplified to accelerate. It sounded as though there is an opportunity not just for cost savings but or will say wallet share and have a larger solution into a customer and getting some of the acquired businesses to for lack of better term interact the mothership percent, right. Is that an absolute fair assessment?

Richard Warzala

Absolutely. And again, just use examples of in our business. One of the primary objectives, if you want to win in this business is to be first to market with a solution or to the customer with a solution. It a complex system does nothing but drag down and delay the process of getting to the customer with a solution. So in addition to adding efficiencies, looking at increased value in the sale. It looking at more efficient solutions for the customer at a larger scale. It is shortening the time to market from the time to make contact, but at the time that we present a solution to we want to be first, we need to be first being first, you will increase the top line.

Gerry Sweeney

Got it. That makes sense. That's voice, I'm acquisitions, right. Do you slow down acquisitions at this point? Is this sort of like, hey, I've made eight acquisitions in the last couple of years.

Richard Warzala

Yes, holding I answer yes, we think we need to do more work on making sure that everything that we've acquired is functioning and performing as expected. We have the most recent acquisition at SNC., we are very excited about that. I mean the off of the synergies that we see already and the opportunities there to leverage, they just happened to see the IPCIR. company up in Germantown, Wisconsin and SNC and Oshkosh are very close. They're complementary.
They're working extremely well as a team right now and are starting to leverage resources already for both organizations, which is very exciting times in all. And I do think that to the emphasis needs to be on that, not we're still grooming.
And if the opportunities may for stuff that we can't look the other way we'll still pursue.
But it's really more of an emphasis to answer your question on making sure we're making what we have work better.

Gerry Sweeney

Got it. So we're sort of the quintessential. You make some acquisitions, take a step back, optimize, drive cash flow that's going to start coming. Then in the background, there's still some acquisition opportunities, but don't reaccelerate as you exactly.
Okay.
That's it for me. I know we have a follow-up later, so I appreciate it.
Thank you, Greg, and thanks, Jerry again, again, if you have a question, please press star then one. This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks. Please go ahead.

Richard Warzala

Thank you, everyone, for joining us on today's call and your continued interest in LEO. We will be participating in the ROTH Conference on March 18th in Dana Point, California. 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 first quarter 2024 results.

Operator

Thank you for your participation, and have a great day at upcoming conferences.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.