ALNT - NASDAQ

Greetings and welcome to the Allient Inc., Second Quarter Fiscal Year 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Deborah Pawlowski of Investor Relations for Allient. Please go ahead.

Thank you. Thank you, Joe, and good morning, everyone. We certainly appreciate your time today as well as your interest in Allient. Joining me on the call are Dick Warzala, our Chairman, President, and CEO; and Jim Michaud, our Chief Financial Officer. In fact, join me in welcoming Jim to his first earnings call with us. He just joined Allient on June 3rd of this year. Dick and Jim are going to review our second quarter 2024 results and provide an update on the company's strategic progress and outlook, after which we will open up the line 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 it on our website at allient.com, along with 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 forward-looking statements on this call during the formal discussion as well as during the Q&A. These statements apply to future events that are subject to risks and uncertainties, as well as other factors that could cause actual results to differ materially from what is stated on today's call. These risks and uncertainties and other factors are discussed in the earnings release as well as in 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 as well as the slides. With that, please turn to Slide 3, and I will turn it over to Dick to begin.

Thank you, Debbie, and welcome everyone. Before we delve into this quarter's discussion, I'm excited to be on the call with our new CFO, who, as Deb mentioned, has been with us now for just over two months. During this time, Jim has been intimately engaged with our team to gain an understanding of our processes and to support the advancement of our Simplify to Accelerate NOW strategy, especially given his experience with similar types of initiatives in his previous roles. As a financial leader in both multinational public and private companies, Jim brings an extensive background of establishing high-performing finance operations and transforming organizations, which makes him a valuable addition to our team. We're confident that Jim's contributions will be instrumental in helping to ensure we achieve our strategic goals. Moving on to the quarter, I am proud of the efforts of our team to address the market headwinds that we've had to face. While the quarter started off decently, we saw a significant shift in demand in June. This decline was broadly evident across most of our served markets, but was felt most acutely in industrial automation, where destocking continues, as well as the powersports market, which reflects a reduction in consumer demand. As you may have noticed, several public companies in similar markets have already reported their end-market demand challenges and, ultimately, a reduction in year-over-year revenue. I should also note that we believe the push-out in orders is the result of inventory adjustments, the extended level of higher interest rates -- especially with apparent reductions in not-so-distant future -- and political uncertainty. Our diversification does help somewhat, as we continue to benefit from the macro trends of electrification, energy conservation, and automation. Nonetheless, our actions to Simplify to Accelerate NOW could not be more timely. As we have discussed, we are on an accelerated path to reorganize to be more productive and drive stronger earnings power. And given current market conditions, our approximately $5 million in annualized savings realized to date are even more relevant. Our decremental margin reflects top-line softness, unfavorable mix, and inventory reserves. The mix impact included the replacement of higher-margin incremental industrial automation sales with lower-margin sales from our most recent acquisition. We expect our simplification process, combined with the implementation of our integration plans and the capacity gain with the acquisition of SNC will drive an improved margin profile in the future. As noted on Slide 4, our Simplify to Accelerate NOW plan is even more meaningful given the current market conditions. As we mentioned, we executed $5 million in annualized cost reductions in the second quarter, and we're working on implementing an additional $5 million in annualized cost savings in the second half of 2024. A key focus of the restructuring involves transferring specific production activities from various U.S. operations to our existing lower-cost facilities in Mexico. Additionally, we have reduced our workforce across most global operations to align with expected demand. Jim will further discuss the restructuring charges and inventory adjustments in the quarter related to these actions. While we are moving decisively to reduce our cost structure, we continue to implement programs aimed at driving future growth. We remain confident in our long-term strategy and the fundamental strength of our value proposition. With that, let me turn it over to Jim for a more in-depth review of the financials.

Thank you, Dick, and good morning, everyone. As this is my first earnings call with the company I want to start by expressing my gratitude for the warm welcome I've received from the team and for the opportunity to work with such a talented group. In my short time here, I've been impressed by the dedication and resilience of our team. I'm excited to be part of Allient and to contribute to our ongoing success. Today, I will provide an overview of our financial performance for the quarter, including key highlights in areas where we are focusing our efforts. Starting on slide 5 second quarter revenue of $136 million was down year-over-year by 7%. The impact of foreign currency exchange rate fluctuations was nominally unfavorable by $700,000. During the quarter, our vehicle markets experienced a 17% decline in sales, primarily driven by reduced demand in powersports and continued weakness in the agricultural vertical. These impacts were partially offset by increased demand in commercial automotive, thanks to the ramp up of new programs that we have won over the years. The industrial market saw a 3% decrease despite strengthened power quality sales notably to the HVAC and data center market and additional sales from our recent acquisition. These bright spots were counterbalanced by lower demand in industrial automation as Dick noted and within our pumps and material handling markets. Our medical markets also saw a decline, which was broad-based but primarily due to the persistent softness in medical mobility products and solutions, a trend that has persisted over the past few years. The bankruptcy of a large customer in this space has also had an impact on demand. In the aerospace and defense sector, sales declined primarily due to program timing within the space industry. However, we are seeing positive movement on the defense side with several notable opportunities that we are working. Slide 6 highlights the shift in our revenue mix across markets over the trailing 12 months along with the catalyst for each change. The industrial vertical maintained its position as our largest market, accounting for 46% of the total trailing months' sales, a notable expansion of 500 basis points. The 14% growth in the space industry reflects strong demand for power quality. On a trailing 12-month basis, industrial automation had benefited from supply chain environment improvements, but has recently fallen back as the industry resets with inventory levels. Vehicle market revenue remained flat on a trailing 12-month basis with higher demand in commercial automotive offset by lower demand in powersports and agriculture. Both the medical and aerospace and defense saw a decrease on a trailing 12-month basis, reflecting the same impacts as the past quarter. Lastly sales to the distribution channel, a small component of total sales accounted for 4% for the trailing 12-month period. As detailed on slide 7, gross profit was $40.7 million and gross margin was 29.9%. The 140 basis point decline was primarily due to under absorption on lower volume and unfavorable mix including the expected margin dilution from the SNC acquisition and $1.2 million in non-cash inventory reserves. Half of the inventory write-down was related to the bankruptcy, I mentioned earlier and the rest was mostly due to changes in projected demand. We believe our underlying business can command a higher margin profile, but we have to work in order to get there. On slide 8, you can see the lower gross profit. $1.5 million of restructuring and business realignment costs and higher engineering expenses impacted operating income resulting in income of $4.9 million and operating margin of 3.6%. Costs related to the restructuring were primarily severance. Operating costs and expenses were 26.3% of revenue, an increase of 320 basis points, of which 110 basis points were attributable to the restructuring costs. We are intensely focused on improving our profitability despite market conditions. Slide 9 shows net income was $1.2 million and earnings per diluted share was $0.07. Adjusted net income of $4.9 million or $0.29 per diluted share adjust for the non-cash amortization of intangible assets to address the accounting requirements of an innovative and acquisitive company. The effective tax rate for the quarter was 20.6%. We anticipate our income tax rate for the full year 2024 to be approximately 21% to 23%. We use adjusted EBITDA as an internal metric to gauge our progress and operating performance. Given margin pressures, adjusted EBITDA came in at $13.9 million or 10.2% of revenue. We believe this should be a mid-teen adjusted EBITDA margin business and our simplification actions are intended to get us there on a more consistent basis. Let me talk to cash generation and our balance sheet on slides 10 and 11. Year-to-date cash from operations was $17.4 million improved over the prior year, as working capital efficiencies and non-cash adjustment helped to offset lower net income. Capital expenditures for the first six months totaled $5.3 million. While we continue to invest in several growth opportunities, we are fine-tuning our plans to concentrate on high-potential high-value projects. Consequently, we have revised our 2024 capital expenditure forecast to range -- to a range of $11 million to $15 million down from our previous expectation of $13 million to $17 million. Inventory turns declined to 2.9x from year-end, while our days sales outstanding stayed flat at 56 days. Total debt of approximately $237 million increased from year-end 2023, due to the SNC acquisition. We paid down $3.3 million in the quarter. Debt net of cash was about $206 million representing 43.6% of net debt to capitalization. As defined in our credit agreement our bank leverage ratio was 3.29x. Our financial priorities are to strengthen cash conversion and reduce debt. With that if you advance to Slide 12, I will now turn the call back over to Dick.

Thank you, Jim. Orders increased 12% sequentially in the quarter driven by power quality projects and the ramp up of our commercial automotive programs. The sequential improvement in demand is somewhat encouraging, although there is an impact on orders as our customers continue to reduce inventory levels. Additionally, we are experiencing delays in the launch of certain projects which may be a result of the upcoming election and expected decrease in interest rates. Importantly, while we are getting some order push-outs order cancellations are minimal and being addressed appropriately. We expect the slowdown will extend through this year and into 2025. The decline in backlog is attributed to continued improvements within the supply chain, as lead times were reduced and we ship products that were in our backlog as a result of the previous market conditions. Our outlook is outlined on Slide 13. We are taking decisive steps to align our business with current market conditions. We anticipate the challenging environment to persist through the second half of 2024 with our annualized revenue run rate expected to fall below $500 million over the next few quarters. This projection reflects substantial inventory rebalancing by our customers, as the supply chain returns to normal, some market erosion and a relatively weak industrial automation environment. We expect that the reduction of uncertainties settling of lower interest rates and normalized inventories should go back to stronger revenues sometime in mid-2025. As we streamline our operations, we believe we can enhance customer service and strengthen our long-term competitiveness. Our goal is to make Allient easier to business with and accelerate our speed to market with new product innovations. This strategy is also expected to position us to better handle the current macroeconomic environment and industrial challenges. We aim to achieve our target of $10 million in annualized savings this year and to identify and execute further actions beyond this target to ensure we emerge as a stronger more resilient enterprise with higher earnings power. With that operator, let's open the line for questions.

Thank you. [Operator Instructions] And our first question comes from the line of Greg Palm with Craig-Hallum. Question

Yeah. Thanks. This is Danny Eggerichs on for Greg today. I guess maybe just digging into more what you saw and what you're seeing June the kind of significant fall off in demand. You said that was kind of weighted towards industrial automation and powersports. I guess as we've moved through July now and into early August, I guess how has that changed? Are you seeing some of that weakness spread across the other end markets or I guess just anything more you can give on end market geography what you're seeing quarter-to-date so far?

Sure, Danny. I would say to you that we see a continuation of what we experienced in June. And I think just to be clear, we had mentioned that we started the quarter quite well. April and May were relatively solid and then June was a significant drop off. We do expect that that will continue as we mentioned here through the remainder of the year and potentially into 2025. Looking at the incoming order rates and as you're asking to look out and what has occurred in July and so forth, there were some mixed signals. We did see a couple of encouraging signs that may be things will come back. But it's hard to gauge based on one month. And I would caution us to not get carried away that we did see a couple of positive signs there and that things were going to change drastically. So, sticking with what we've stated here the industrial automation the rebalancing that we saw for inventories and the impact it had especially on us and the other markets. And we didn't talk much about geographic markets, but certainly Europe was impacted. And again some mixed signals. So, it's -- for us right now our emphasis is going to be on getting the business, adjusted, readjusted, and aligned, to take cost out to become a more profitable company based on a lower cost base. That's really our focus and it will continue to be our focus this year and into next year.

Yes. I guess just based on that kind of mixed signals and it kind of sounds like maybe some uncertain visibility. I mean the $5 million -- or $500 million run rate through the second half and I think you even kind of said maybe over the next several quarters, but there's also a chance that maybe kind of the inventories return -- start returning in early 2025 before maybe normal run rates in mid-2025. So, I guess looking out into 2025 should we kind of expect gradual improvement starting early in the year before getting to more normalized levels or do you expect kind of that $500 million run rate to last into Q1 next year as well before starting to really improve?

Yes. I would say based on what we know today I would expect that to continue into Q1. And certainly if something changes there and we see some -- the dynamics of the market start to change, we certainly will keep everybody abreast of it. But saying that and running the business with I think the anticipation that that would be the case the $500 million annualized run rate it just makes it more important for us to continue to streamline to reorganize to make sure that we take the cost out and that's our focus and that will continue to be our focus. So, we mentioned also I would just say to you here we talked about in the second half of 2024 the additional $5 million. And I will tell you that's substantially already identified and will be fully executed very early here in the second half. Cost adjustments realigning the business just to be -- just not to take I guess the market swings and the uncertainties we talked about. Things could change and they could change pretty rapidly if certain things fall into place. But we're not running our business in that manner. We're running our business that we'll take control of what we can control and we'll get it done.

Sure. And on that added $5 million now $10 million of cost take-outs, I know you mentioned you're still looking for additional opportunities. Do you feel like there's some more levers to pull if things continue to worsen or stay at this kind of level for longer than you're expecting? Is there more cost take-outs just kind of buoy some of that profitability?

Yes. And it will have nothing to do whether markets continue to worsen or not. I mean there are -- we've taken a really hard look at everything and structure-wise and so forth and there are definitely some additional opportunities identified. It's just a matter of how much can we execute and get implemented in the short period of time.

Okay, great. I will leave it there. thanks.

Thank you, Danny.

And the next question comes from the line of Brett Kearney with American Rebirth Opportunity Partners. Please proceed.

Hi Dick and Jim. Good morning. Thanks for taking my question.

Good morning Brett.

Great to hear some of the new commercial vehicle awards ramping up. Curious with the puts and takes in the global economy what you're hearing from customers and some of the other recent new vehicle programs you've won? And kind of what customers are looking for in kind of pushing forward with those ramps as well?

Thank you, Brent.

Sure. So power sports, we would expect -- I mean and again, we pay attention to what our customers are saying in the market and what they see the trends and the future trends coming. So I would say to you that, that's certainly one that we expect to have weaker demand from and it's pretty much across the board. The industrial piece, is the wildcard. That -- we're taking a cautionary approach here. We're planning our business that it's not going to come back rapidly. But what I'd say to you, it has the potential as we get in the fourth quarter of this year, to return to certainly a much better level for us. And as far as the other markets go, I think, yes, overall, we see a decrease, but we mentioned already that the aerospace and defense, space applications, seeing an up-tick there and see in medical. So we're planning cautiously, and we're acting aggressively to make sure that the foundation just get stronger. And it needs to get stronger, to achieve the goals that we're not forgetting about that we've established for ourselves in the past of margin improvement. The geographic side of it, yes, Europe has seen a significant -- and I have to be careful, because as you know Ted, we play in pockets and niche markets and so forth. And while the overall market can be classified as industrial, you really got to look at the specifics of what is it that we do in industrial or vehicle, because as we mentioned, it's not automotive, it's agricultural and you can see the information out there in the downturn in the agriculture equipment markets and so forth. So I think as we look at that, and you say geographic other than where we've had some strengths in new programs kicking in and/or the acceleration of some others. The general market in Europe is down and it's down 8% to 10%. And that reflects some -- while we have some increases, we have further increases that go beyond the 8% to 10% in some specific markets. But we do -- again, I would say, this to you that we're starting to see some mixed signals there that perhaps is coming back. But I'll just repeat myself, we're going to plan cautiously and we're going to react really aggressively, to get the cost structure in line, where it should be to achieve the margins, we said, we were going to achieve, we've been talking about for the last couple of years.

Okay. My final question and just kind of probably makes logical sense. But given you have a full plate right now with a challenging macro backdrop, a fair amount of business restructuring going on, is it fair to assume that the growth -- the M&A side of the growth strategy is going to be set aside while you kind of get the ship right-sized and things battened down, or is it like are you still keeping a pretty active effort on that front? That's my last question.

It's fair to say that. I mean, we're focused on cash and we're focused on getting the debt paid down and so forth. So yes, I mean, we continue to identify and groom opportunities for the future. It's in the short-term here. We will -- it would have to be something totally exceptional and we'd have to go after it in a different way than what we've done in the past. So, our focus is on internal operations, continue to groom for the long-term, the acquisitions. But in the meantime, we're not aggressively going after things open in the market right now.

Okay. All right. Thanks for taking my question.

Thank you, Ted.

Thank you. This concludes our question-and-answer session. I'd like to turn the call back to Dick Warzala for closing remarks.

Thank you everyone for joining us on today's call and for your interest in Allient. 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 third quarter 2024 results in November. Thank you for your participation and have a great day.