Allient Inc (ALNT) 2018 Q1 法說會逐字稿

Thank you for standing by.

This is the conference operator.

Welcome to the Allied Motion Technologies First Quarter 2018 Financial Results Conference Call.

(Operator Instructions) And the conference will be recorded.

(Operator Instructions)

I would now like to turn the conference over to Deborah Pawlowski, Investor Relations for Allied Motion Technologies.

Please go ahead, ma'am.

Thank you, Claudia, and good morning, everyone.

We certainly appreciate your time today as well as your interest in Allied Motion.

Joining me on the call are Dick Warzala, our Chairman, President and CEO; and Mike Leach, our Chief Financial Officer.

Dick and Mike are going to review our first quarter 2018 results and provide an update on the company's strategic progress and outlook, after which we will open it up for Q&A.

You should have a copy of the financial results that were released yesterday after the market closed.

If not, you can find them on our website at www.alliedmotion.com.

You'll also find on the website, the slides that accompany today's discussion.

If you are reviewing those slides, please turn to Slide #2 for the safe harbor statement.

As you are aware, we may make some forward-looking 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.

These risks and uncertainties and other factors are provided in the earnings release as well as with other documents filed by the company with the Securities and Exchange Commission.

You can find these documents on our website or at sec.gov.

I want to point out as well that during today's call we will discuss some non-GAAP measures, which we believe will be useful in evaluating our performance.

You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP.

We have provided reconciliations of non-GAAP to comparable GAAP measures in the tables accompanying the earnings release and slides.

So with that, please turn to Slide 3 and I will turn it over to Dick to begin.

Dick?

Thank you, Debbie, and welcome, everyone.

We entered 2018 well positioned to deliver growth and increased profitability.

And our first quarter performance certainly reflects that as we continue to execute our strategic critical issues.

Revenue increased 25% to a record $76.6 million and operating margin expanded to 8.4%, which supported bottom line net income growth of 58%.

Orders were up 33% to a new record of $80.7 million and backlog grew 38% to $107.3 million, marking the fourth consecutive quarter reaching a new record level.

Regarding the top line, approximately 45% or $7 million of the growth was organic, with the balance split between the recent acquisition and a beneficial FX impact.

We had strong double-digit growth in almost all of our markets aided it by positive economic tailwinds and expanding opportunities for a broad range of both platform and custom critical motion control solutions.

Of note, our Vehicle market had improved sales for the second consecutive quarter, reflecting stabilization in the Power Sports market as well as the incremental contribution from the recent acquisition.

While there were some headwinds within our Vehicle market in 2016 and most of 2017, our success in expanding share in our other served markets has resulted in a more balanced revenue mix.

Our revenue diversification is creating a larger, more robust base of business to support continuous and sustainable organic growth well into the future.

During the quarter, distribution continued to grow at an impressive pace, although it is still a small contributor overall.

Adding new sales partners or Allied Solution Providers, we call ASPs for short, remains a priority and is going well.

We are on target to reach our goal of 20 by year-end.

Onboarding of ASPs takes time.

They must learn our products and understand how they integrate to provide solutions for our customers.

Nonetheless, we believe this channel to market has the potential to significantly expand our reach and enhance our growth prospects into the future.

Integration of the OE steering business for Maval is going well and we are working diligently to combine our capabilities to further strengthen our leading position in steering solutions.

As many of you know, this is a carve-out, so it will take some time to clearly strip the business out of its current environment and into a standalone operation.

We continue to expect it to be neutral to slightly accretive to earnings in 2018.

With that, Mike, let me turn it over to you for a review of the financials.

Thank you, Dick.

Please refer to Slide 4.

Fourth quarter revenue was $76.6 million, up 25% and still up an impressive 18% when excluding the impact of favorable FX.

Organic growth was a strong contributor to the increase.

Growth came across all of our served markets and reflects significantly higher sales to the Industrial/Electronics and Vehicle markets.

For the quarter, sales to U.S. customers were 53% of total sales compared with 54% in the prior year period.

Slide 5 shows the change in our revenue mix by market for the trailing 12 months ended March 31, 2018.

As we've talked about previously, past headwinds in the Vehicle market have reduced that market's revenue contribution.

However, we are beginning to see a nice rebound in the Vehicle market with measurable growth over the prior year quarter as well as the sequential fourth quarter of 2017

Revenue from the Maval acquisition is reflected directly in this market category.

Also, we made a slight change in how we categorize our material handling market sales, which resulted in a shift of some of the revenue from Vehicle to Industrial/Electronics.

The considerable growth in the Industrial/Electronics, Medical and A&D markets has helped diversify our revenue, expand our customer base and create greater opportunities for growth and strengthening of our revenue.

Within the other category is our distribution business that Dick mentioned.

Slide 6 provides detail on our operating performance.

First quarter gross profit was up to $22.6 million or 29.5% of revenue compared with 28.9% for the first quarter of last year.

The 60 basis point margin improvement was due to higher volume, which was somewhat offset by a lower margin contribution from the recent acquisition and a lack of leverage from FX revenue expansion.

Total operating expenses for the quarter were down 60 basis points to 21.1% of sales.

G&A expenses were 9.7% of sales and up 30 basis points primarily due to a higher incentive compensation and additional personnel to support our growth.

E&D and selling expenses were down 30 and 70 basis points, respectively.

As a result, operating income for the quarter increased 47% or $2 million to $6.4 million and our operating margin expanded 130 basis points to 8.4%.

Interest expense for the quarter increased $91,000 to $0.6 million as the company utilized additional debt to fund part of the Maval acquisition.

The effective tax rate in the quarter reflects recent tax reform and was 26.2% compared to 31% in the prior year period.

If you look at Slide 7, you can see our strong bottom line results, which are reflected in our commentary today.

Adjusted EBITDA was up 34% to $9.7 million.

Adjusted EBITDA margin expanded 80 basis points to 12.7% of sales.

We use adjusted net income and adjusted EBITDA as an internal metric and believe it is useful in determining our progress and operating performance.

These are non-GAAP measures, so please be advised to review our reconciliation and related disclosures in our release and at the end of our slides.

Slide 8 provides an overview of our balance sheet and cash flow.

The recent Maval acquisition was funded with debt, cash from operations and cash on hand, which is reflected in the numbers on the Slide.

Cash generated from operations was $1.7 million in the first quarter.

Debt, net of cash, was $50.4 million or 34.6% of net debt to capitalization, up from 30.1% at the end of 2017.

Capital expenditures of $2.2 million in the quarter included significant productivity and growth initiatives.

We continue to expect our fiscal 2018 CapEx to range between $13 million and $16 million as a higher level of spending is needed to support the significant project wins announced over the last year.

We think we are top performers on working capital.

Inventory turns remain consistent with 4.9x, though our DSO was 50 days up from 47.

The increase was expected given payment terms with certain large customers.

I'll now turn the call back over to you, Dick.

Thank you, Mike.

We'll now turn to Slide 9. With healthy end markets and favorable FX, the first quarter orders grew 33% to a record $80.7 million as I mentioned earlier.

We entered the second quarter with record level of backlog of $107.3 million, up nearly 7% over the sequential fourth quarter.

It is important to note that the Maval business is now included in these figures, but the $225 million in Vehicle market awards that we announced over the last year are not yet included.

We expect revenue from those awards to begin ramping in mid-2019.

Moving on to the last slide.

For those of you who might have not participated in our last earnings call, our focus remains consistent.

We have great momentum building off an increasingly diversified business foundation.

We are strengthening and refining our execution as we focus on consolidating our individual North American motor units into one unit, that is North American motors.

We are also consolidating the management of our operations in Watertown and Amherst, New York as well as our new acquisition in Twinsburg, Ohio; that is all of our nonmotor North American operations into our newly-formed North American Mechatronics unit.

Similar to North American Motors, our goal is to align sales, engineering and manufacturing with our target markets to increase market penetration.

For several years, we have been investing in our business and we'll continue to prudently do so to support our planned growth.

We remain focused on enhancing and developing the operational effect in this team and AST as we look to drive continuous improvement in all business areas.

Strategic acquisitions that promote our long-term growth objectives remain a key part of our overall strategy and our pipeline remains fairly robust with opportunities.

We still have plenty of dry powder and are well positioned financially, though as we've mentioned in the past, we will not stray from our consistent and prudent approach to any future acquisitions.

Our goal is to continue the rate of growth we have demonstrated over the last several years from a combination of acquisitions and organic expansion.

I can safely say that we are all optimistic about our process -- prospects for 2018 and beyond.

With that, operator, let's open the mic for questions.

(Operator Instructions) Our first question comes from Greg Palm with Craig-Hallum Capital Group.

So I guess I wanted to start off going back to the Q4 call and talking about the last quarter.

Revenue was up 18% year-over-year and I think discussion, if I remember right, revolved around growth coming from sort of trough levels and maybe not to extrapolate going forward and here we are in Q1 putting up what seems to be similar type of organic growth rate.

So I guess -- and that's off of much tougher comps.

So I guess my question is compared to maybe what you were seeing a few months ago, what do you think outperformed?

And just in terms of end markets, what is coming here from the strongest growth rates in the quarter?

Sure.

Well, first off, I'd say, Greg, that we talk about the economic tailwinds and they're clearly in play right now.

We're seeing order rates at a very high rate.

We're seeing acceleration of deliveries and demand and on the opposite side of that, we're seeing some risks there associated with extending lead times for key materials and components, which in fact could be related to customer concerns to make sure that they keep their customers happy and increasing demands on us now.

So you would normally see a mix of certain push-outs and pull-ins based upon adjusting of business, but right now the signals are clear that everyone is really going great guns and accelerating deliveries and demand.

So it really isn't in one area.

We're seeing it across the board.

And your sense is -- I mean it sounds like -- I mean this is not a sell-in sort of inventory stocking.

This is real demand from end customers, right?

Well, it's hard for me to predict whether it's real demand.

It is real demand, I mean to answer your question.

Whether or not there is concern from a customer standpoint that the supply base is tightening and they're increasing -- or accelerating shipments to make sure that they don't have an inventory situation, I mean a shortage of inventory.

That could be happening and I think you see signs of it in the electronic components marketplace where certain parts are in allocation again, deliveries are out 52 weeks.

So there may be some of that in there, but it's hard for us to judge at this time.

We don't see any signs that people are saying that we're just protecting our positions and we're building inventory.

They're truly consuming what we're sending them and using them to build their products, which they end up shipping to their customers.

So if that's going on, we have -- we don't have indication of it yet, but I wouldn't be surprised that somewhere down the road, a couple of quarters down the road, if you start to see -- if that did occur, adjustments starting to happen.

But right now, there are no indications for that.

Got it.

And in terms of the organic growth in the quarter, I'm just curious -- I remember last year about this time, we were talking about some new customers, some new kind of multisolution type programs that were going to ramp up sort of over this time.

This is not the big stuff that you press-released that's going to start in '19, but some other small stuff.

I'm just curious, is there any way to kind of bucket out in terms of the incremental revenue on an organic basis, how much is just from better end markets versus maybe some share gains, new customers, new programs that have been sort of ramping up?

I don't think we really have numbers to pull that out directly.

Do we, Mike?

Not directly, but I think clearly, a good portion is end market demand.

I mean we certainly are enjoying the successes that you referenced, Greg, nothing that we've issued a press release for, but certainly these multisolution wins continue to come along and develop and ramp up.

However, there has been a strong lift again from the end markets.

Sequentially, you talked about Q4 to Q1 and certainly, Vehicles was a strong part of that.

And I think we've talked before (inaudible) stabilization, and now we're seeing some rebound in those markets.

Yes.

And I would add to that, Greg -- I would add to that, that many of the projects that we've talked about, they continue to be in work -- work in progress and are shaping up their wins but they're -- they truly haven't come to full production yet.

So we have more opportunities and we continue to see a building pipeline of opportunities.

We watch that very closely.

We have a system internally that we use to monitor what type of activity are we seeing?

The lead counts coming in, the -- what's in the pipeline?

What's the weighted average of those?

And they continue to grow.

So -- and we do see that the multisolution opportunities also continue to grow.

And I think it is -- we're recognized in the market place that we're not just a motor company, that we are a electronics provider, we are a gearing provider and overall solution provider for Motion.

I think a lot of those wins are coming in the industrial markets that we're talking about.

The general move towards automation really has helped giving us traction in accomplishing some of those new wins.

That's great to hear.

Sounds like there's more to come.

I guess just lastly, on the onboarding of ASPs.

Can you just sort of talk about what that process entails?

And maybe how long from start to finish does it take to sort of ramp up a new distribution partner?

I would say it takes less time to ramp up a new distribution partner because of the selection process you're going through.

And when I say the selection processes, we're going out and we're finding qualified people.

We're not starting someone who has no motion -- or hiring someone or adding someone who has no motion experience.

These are all experienced companies, experienced with our types of products and our markets.

So what takes time is they do need to learn about what is that we offer and how our products can be applied to some of the challenges that they're faced with, but it's also that design and cycle time that takes time.

While there are cases where there are some end-user projects, which I don't call them projects, where it might be an automation activity for a certain segment of a factory.

Many times, they're working with OEMs as well and they have the same design and cycle time that we see in the rest of our business.

So it could take 2 to 3 years to really ramp up for OEM business while projects would happen quickly, more quickly.

I would say because of the product offering we have today and our continued product development efforts, our system type business is mostly custom critical, designed for end customers or OEMs as solutions.

And we don't necessarily have the range of packages with a combined electronics, motor, gearing feedback solution that would lend itself well to the end user distribution market.

But that is in development and that's something that we're striving to bring out.

So I wouldn't look at this any differently right now as I would look at our current business and it takes 2 to 3 years to really ramp up for OEM wins.

The next question comes from Dick Ryan from Dougherty.

Mike, in the commentary, you talked about lower margin contribution from the Maval acquisitions that partially impacted Q1.

Is that just during this carve-out or integration period?

Or is the profile of that product set gross margin's lower than the corporate?

Yes.

I think it's fair to say that the profile is lower than what our corporate norm is.

Okay.

Dick, let me just add a little bit to that.

That is correct, but we'll stress the fact that this acquisition was done to allow us to provide a more complete steering solution and its integrated systems that we're really approaching.

And we're approaching it in the same manner that we've approached the other parts of our business and looking at providing more value and solution to our customers.

So instead of them having 2 suppliers, or more than 2 suppliers providing the steering solution, they come to Allied now, and we put -- we add it altogether and the opportunity for the future is for us to be able to design integrated systems.

So that we are eliminating certain components and reducing cost and maybe adding more value for our end customer, in which case, the system sale is where we would look at bringing margins back in line with what we see to the rest of the company.

So we are clearly on a path as this is a component business right today.

The margins will be lower from this business, but over time here, it's a strategic acquisition to give us the ability to offer an integrated solution.

Okay.

And that dovetails into my next question, Dick.

You talked about the solution here and a broader perspective is the one Allied.

Can you give us a sense of what the solution pipeline is starting to look like with these maybe changes in your strategy to more of a solutions provider?

Sure.

I mean the strategy -- the change in the strategy, if we want to call it that, occurred several years ago when we recognized and I'll say early on in the process that when -- go back to the start of when Allied Motion became Allied Motion and it was no longer part -- we changed the name from Hathaway Corporation, which was a 2 segment or 2 element business where it had power process control business and motion and we became pure in motion.

And at the time when -- our vision was that we would add to the base of motors through acquisitions and over time, we would then begin to add other components to this product set that we had to offer and then we would find a way to design them together as integrated solutions.

So this goes right back to when we started the company, knowing that we would build a base around motors, that we would then surround the motor with other technology, for example, electronics and software and power devices and mechanical gearing and so forth, and feedback elements.

So -- and it's a continuation and in fact the largest opportunities that we are working on today are integrated solutions and that's the exciting part.

I think if you were to look at our -- we just -- we were at Hannover Fair in Germany last week.

We exhibited there and if you were to look at our -- go into our booth and take a look at the product offering, the solutions and offering we had, you would see that, that is really what we are now being able to bring to the marketplace is the integrated solution offering.

So -- and the majority of the major project opportunities are in that area.

Okay.

Great.

Can you maybe drill down into the Medical and maybe even the Aerospace & Defense?

In particular, what the kind of opportunity looks like there?

Have those markets -- have you made some additional headway into those markets?

Sure.

Yes.

We have.

I had said in the past -- we've talked about that we are really well known in the Medical robotics area and we are certainly the leader in the world for -- as a supplier to that industry for motion components, I'll call it.

And that then also has an offshoot from that as you start to look at prosthetics, you start to look at Industrial robotics, you start to look at wearable robotics, it all ties together and it's your technology that you're winning with.

And then applying that technology into other areas.

So having that experience in real critical applications in Medical robotics, for example, allows us to apply it in other areas, too.

And I think we continue to see great opportunities there.

There's also Medical -- I think we've mentioned to it in the past is that we look at it as Medical mobility and Medical instrumentation and those are 2 distinct, different markets that we're providing products to and we see growth in both.

And you have an aging population, you have more diagnostic testing, you have accelerated technology in terms of patient care and I think all of that is -- plays really well into our hands because we have a broad base of products that meets the specific needs of certain applications.

And so we don't make just one motor, we make many types of motors and that's what is allowing us to win.

Aerospace & Defense, there is work that's been done internally.

We have -- I will say we've acquired over time a fragmented base of Aerospace & Defense business, commercial aviation business and it's -- and, again, because of our broad base of products, it's many different types of technologies that are -- we're selling into those markets.

It tends to -- when you start talking about defense applications, there's definitely some exciting things occurring in the defense area and it's technology that's allowing it to be applied and as we know, you can talk about unmanned vehicles, you can talk about surveillance systems, you can talk about defense mechanisms and missile systems and those are the things that we do.

And again, as we consolidate internally to become a -- have a stronger core, we're seeing some good opportunities.

We're becoming, I'd say, a real good player in that market segment.

(Operator Instructions) Our next question comes from Brett Kearney with Gabelli & Co.

Just wanted to ask on the M&A front.

What you guys have seen valuation multiples come in at all?

Some of the private companies that you look at?

And then, I think your current net leverage even after the Maval acquisition is 1.5x.

Is there a range you'd be comfortable going up to, to complete maybe a larger acquisition here?

Yes.

First of all I think we're currently constrained by our credit agreements to maintain I think a max lever -- leverage ratio of 3.75x and frankly that's I think where we're, I would say, normally comfortable going to.

Certainly if the right opportunity came along, we would need to contemplate all access to the capital markets and including a leverage if something creative needed to be done.

But generally speaking, I would say that's the level we are comfortable at.

As far as multiples that we're seeing in the marketplace, there is no doubt that they are highly elevated, in many, many cases -- not just double-digit but strong double-digits of some of the things that we're looking at.

So obviously we'll remain diligent in our processes in terms of making sure anything that we target is a good fit for our strategic filter given what we have to contemplate regularly from a multiple perspective.

The next question is from Josh Goldberg with G2 Investment Partners.

Just some housekeeping questions on the numbers.

Can you give us a sense on the acquisition?

First, was it accretive or dilutive in the quarter?

I know you talked about being accretive for the year.

And roughly how much revenue do you think it added in the first quarter?

Yes.

Josh, thanks for your questions here.

We have chosen not to disclose what the revenue is from the acquisition.

And we're going to stick to that.

We've stated -- for competitive reasons we believe that, that's -- it's something we need to do.

As far as accretive or not accretive, I will say that it was slightly accretive.

Okay.

And was the majority of the revenue from this acquisition on the Vehicle segment?

Yes.

Okay.

In terms of the foreign currency, can you just help us understand which currencies you're most exposed to, just to monitor them for the rest of the year?

Sure.

It's predominantly the Euro but also Swedish krona and to a lesser extent, the Yuan in China.

Okay.

Just curious, your biggest customer, I know you usually record it in the Q. Can you tell us how much they were as percentage of revenue?

21.1%.

I think it's reflected in the K and it's roughly 20%.

Okay.

And the acquisition you made.

Is that a product that you're selling into that customer?

Possibly.

Okay.

Talk a little bit about, if you don't mind, as you're growing this year and obviously this has been a stronger start to the year -- in a more normalized environment when you're just seeing kind of where you're positioned right, are you comfortable that your company is a high single-digit, maybe low double-digit top line grower?

Well, I think we've stated that if you go back over time and I'm saying 15, 20 years, you'll see that this market, the motion control market, has exhibited about a 3% growth rate.

And it's -- the market is much greater than that now.

We're seeing double-digit growth in the market itself, so I would say to you that we expect to grow at least at the market growth rates, but with the active projects we have, we think we can do more than that and that's really what our target is, and our strategy is to double the organic market growth rates.

Got it.

Okay, great.

Just curious...

Let me just make sure that you understand that with this market, this is an electronics kind of industry.

So while the dollar values grow at those kind of rates, the volumes grow at a much more significant rate.

Right.

Of course.

I'm just curious, some years I guess your seasonality is that your fourth quarter is weaker than or similar to third quarter.

Do you expect, based on how you started the year and the orders, that you expect to grow every quarter this year from the March quarter?

I'll tell you that traditionally, we've had some seasonality.

We've had some dynamic changes the last couple of years that we've talked about with the vehicle market headwinds and change of ownerships of our customers and different behaviors relative to inventory builds or inventory drawdowns.

So it's very, very tough for us to kind of model where we expect to see it from a seasonality perspective.

I think penetration into some of the other markets that we have been successful at, has kind of flattened that seasonality curve out to some degree, but I'd be hard-pressed to go beyond that relative to our expectations given how much dynamic change we've seen in some of those markets.

And I guess just to kind of put a finer point on that, the fact that you had such a good order and backlog entering -- exiting March at least, do you expect the June quarter to be stronger?

Backlog is certainly an indication of our ability to deliver revenues.

So I think -- and understanding how our backlog really works and for sake of clarity, we've talked about this in the past.

We probably haven't talked about it in the last couple of years.

It's that our backlog is -- only contains items that have a firm shipping date and so if we have blanket orders, and we have many blanket orders from customers, we don't realize a booking until we are given a firm shipping date.

So everything that's in there has a firm shipping date and I will also say but qualify it to the extent that, that doesn't mean that we don't have some long-term -- longer-term orders in there.

We do.

And if they give us an order for a 1 year or 18-month delivery and it's a guaranteed delivery to meet those dates and quantities, that we will put it in our backlog, but that -- most of our backlog is really based upon frame orders and individual orders that have firm shipping dates.

That said, our largest customers have 6-week windows for which to change those orders as well.

So it's not uncommon for us to see some cycling up and cycling down significantly within a quarter.

Yes.

Some shorter even.

Right.

Just last one for me, can you give us investors just some comfort understanding your gross margin profile.

Obviously, you're a bigger company now than you were a few years ago.

You're still kind of in that 29%, 30% range.

The acquisition, I am sure, is holding you back a little bit.

But kind of as you look forward, maybe not in the next 2, 3 quarters, but maybe 12 to 18 months out, is there a chance that you'd have a more sustainable 30% to 32% gross margin?

Or this is a business that you know you're not going to be able to get much more margin leverage on the gross margin line?

No.

We believe we can.

And as we talk about some of the projects we're working on for multitechnology solutions, we believe that we can see some margin expansion over time.

Okay.

Any color on how much you can get?

No.

There are no further questions registered at this time.

I would like to turn the conference back over to the management for any closing remarks.

So thank you, everyone, for joining us on today's call and your interest in Allied Motion.

For those in the Minneapolis area, we will be presenting and available for investor meetings at the Craig-Hallum Conference on May 30.

In the meantime, please feel free to reach out to us at any time and we look forward to talking with you all again after our second quarter results.

Again, thank you for your participation and have a nice day.

This concludes today's conference call.

You may disconnect your lines.

Thank you for participating, and have a pleasant day.