Nortech Systems Incorporated
Q4 2023 Earnings Call Transcript

Published: 20 Mar 2024

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to the Nortek Systems Incorporated Fourth Quarter and Full Year 2023 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 presentation. At this time, it is my pleasure to turn the call over to Andrew LaFrence.

[Andrew LaFrence:]

Thank you, John. 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 fourth quarter and full year 2023 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. 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-K filed today, may be amended or supplemented. The statements made during this call are based upon information known by Nortech as of the date and time of this call, and we assume no responsibility or obligation to update the information in today's call. You can find Nortech's complete Safe Harbor statement in our recent SEC filings. And now with that, I'll turn the call over to Jay for his opening comments.

[Jay Miller:]

Thank you, Andy, and good afternoon, everyone. We're glad you could join us today. Since this is Andy's first conference call with Nortech, I'd like to take a minute and officially welcome him. Andy joined us in December as CFO and Senior VP of Finance, bringing a wealth of knowledge and experience. He's held C-suite positions with several public and private companies, and has served on a number of corporate and non-profit boards. Andy also spent a number of years on the audit side as a partner at KPMG. Nortech is very fortunate to have Andy on the team. Along with overseeing Nortech's financial operations, Andy will assist our leadership team and Board of Directors with strategic planning. As I've mentioned on past calls, strategic planning at Nortech is an ongoing iterative process integrated into our DNA. Our strategic plan is not something we just dust off every three years before filing it away. We work on it diligently every year and take the process very seriously. Foundational to Nortech's strategic planning is an employee first mindset. Our employees are our most valuable assets and Nortech's strategic plan reflects that. We would not have delivered our strong 2023 financial results with our team members' outstanding contributions and the whole Nortech team deserves our sincere appreciation. While financial and operational improvements are measured on income and cash flow statements, balance sheets and spreadsheets, it's much harder to quantify Nortech's culture and values. But the whole team creates the right environment, where such quantitative improvements can be realized. Everything starts and ends with how our employees live out Nortech's values of teamwork, excellence, commitment, innovation and integrity every day. Touching briefly on our financial results now. We posted record net sales for the fourth quarter and the fiscal year 2023, 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 $3.2 million for the fourth quarter and $8 million for the year. Overall, we're seeing encouraging normalization trends in supply chain and customer ordering practices, factors that had influenced our unusually high backlog levels a year ago. While we're not completely back to what was considered normal, we believe these situations have mostly stabilized. In supply chain dynamics, the concept of near shoring is gaining attention recently. According to a January article by the Global Electronics Trade Association, IPC, last year Mexico surpassed China for the first time in 20 years by contributing the highest percentage of U.S. Imports from any country. We have seen this trend at Nortech as well. Our three tiered global strategy of manufacturing in the U.S., Mexico and China gives Nortech customers flexibility in improving their own competitiveness. We can move production around based on factors like cost, operational requirements, quality control and intellectual property concerns. Our customer teams and engineers evaluate each customer's needs to determine the most suitable location, which may also change over the course of a product's life cycle. In terms of China, as I mentioned on past calls, much of our production work there is built in country for country, a near shoring approach to better serve our customers in the global market, including reduced shipping costs. To support Nortech's global operations, including our work with large multinational customers, we started a commercial banking relationship with Bank of America in 2017. We appreciate the flexibility this line of credit has provided as well as the endorsement of our strategic direction by a world banking leader. Recently, we made a change to the structure of that agreement in order to better support our operational needs. Andy will give you more details in a few minutes. On a final note, I'd like to recognize an important transition in our executive team. Congratulations and thank you to Curt Steichen, who retired late last year after nearly 20 years at Nortech, most recently a Senior VP of Business Operations. During his tenure, Curt played a key role in Nortech's growth both the expansion of our full service solutions offerings and significant increase in our medical market sales. Stepping into Curt's role is Corey Hancock, who joined us last spring as Vice President of Sales and Business Development. Previously, Corey is with Benchmark Electronics for nearly 24 years, most recently as Vice President of Strategic Accounts. Benchmark is a recognized world leader in our industry, operating multiple facilities across the Americas, Asia and Europe. They were the 13th largest EMS provider in 2022. Given that background and his ability to build and lead sales teams, we are very pleased to have Cory join our leadership team. Next, I'll turn it over to Andy for a more in-depth look at our financial results. Andy?

[Andrew LaFrence:]

Thank you, Jay. First, I'd like to acknowledge the tremendous team at Nortech. When I started in early December, I had very high expectations based upon my interview process. I can report that, our leadership team, employees and culture are top notch. In the next few minutes, I will provide certain details of our financial performance in 2023, but I would encourage you to review our press release and recently filed Form 10-K as it contains more information about our business operations and financial performance that we will cover on this call today. As we have pointed out in the past, we believe that our individual quarters can be affected by outside factors. These might include timing, fluctuations, customer shipments and supply chain issues. Any of these could materially impact a particular quarter either positively or negatively. Consequently, we believe it's more appropriate to review our business on a 12 month basis rather than focusing on quarterly performance. This approach will help to normalize these potential anomalies and offer a better gauge of our strategy's long-term success. Today, I'll focus most of my comments on our full year results. As Jay noted earlier, in 2023, we anticipated demand levels to fluctuate as customers continue to work through their respective inventories. We saw this influence in the third quarter net sales levels. However, we were pleased to see this issue begin to resolve in the fourth quarter. Our year-over-year increase in fourth quarter net sales help us to drive nearly 4% increase in net sales for all of 2023 from the prior year. Additionally, we did see sustained year-over-year 90 day backlog levels, gross margin expansion and solid levels of net income and EBITDA. In the balance of my comments, I will review key areas which drove our 2023 financial performance. They include

[Jay Miller:]

Thanks, Andy. Before we open the call to your questions, I'm going to touch on three related areas that together serve our customers and help advance Nortech's corporate stewardship

[Operator:]

[Operator Instructions] And we do have a question coming from Thor Mickelson, Private Investor. Thor, please proceed. Thor, your line is live.

[Unidentified Analyst:]

Jay and Andrew, congratulations on a great quarter. We really appreciate that. Thank you. This is a question for Jay. Congratulations, Jay, on your five year anniversary with Nortech. As a shareholder, I'm delighted for your tenure at Nortech. Could you please briefly comment on what you've seen Nortech accomplished in these last five years, your perspectives on that and where you see Nortech going now?

[Jay Miller:]

Yes. Thank you, Thor. That's a really good question and I appreciate it. Look, the business has changed quite a bit in the past five years, but what has not changed is the dedication and the focus of the employees here. We have great employees. We have great customers. We have great supplier, partners. And candidly, it was for those reasons why I took the job to begin with. Now we've gotten a lot more disciplined about managing our balance sheet. We've done a lot as you've seen. We've done a lot of cleanup of our balance sheet over the past five years. And now we're much more on a growth trajectory. Our expectation is that, we will take it from here. Our expectation is we'll continue to grow the top-line and candidly we'll grow the bottom-line faster. And I'm very confident this team can do that. I mentioned in my remarks, our strategic planning process, which we take very, very seriously and we execute very, very -- we're very focused on the execution of that plan. We very seldom if ever deviate from our strategic plan. Now plans are never perfect and we have to make adjustments along the way, but this team has proven that, it can make great adjustments along the way to deliver good top-line growth and really good bottom-line growth. Look, I'm thrilled with how things have gone. If I look back at where I thought we would be five years from the time I took this business, clearly, I don't think we I would have thought we would have made this much progress. And I didn't know anything about COVID and we didn't predict a global supply chain crisis. The fact that this business has done so well through COVID, in fact, gotten stronger through COVID in a lot of ways and manage the global supply chain crisis as gracefully as it has. I can't tell you, I couldn't be any more proud of the people at Nortech for what they've done. Thanks for the question.

[Unidentified Analyst:]

This may be a question for Andrew or Jay jump in. But, looking at the gross margin, if I'm reading that correctly, I'm seeing there's a 300 basis point improvement over the last quarter. And I see generally your operating expenses have been well controlled. Could you comment on what drove, if that's correct, what drove and what's been driving you mentioned last quarter you were expecting improved gross margins. Is there something happening there?

[Andrew LaFrence:]

Yes. It's a really good question, Thor. A combination of things that really drove it. One is just an increase of revenue covering our fixed cost structure was helpful. As we did note in earlier calls, we have been really hyper-focused on costs and also customer relationships and making sure that, we are sending those costs back to customers when we've had supply costs. I think it's a combination of us getting in front of some historical cost curves. But as importantly, understanding the leverage of the business, especially a couple of years out here from some consolidation of our plants. It really just was everybody was operating well. We had a minor mix improvement as well in the fourth quarter, but the team, John Lindeen's team just operated very, very well and executed.

[Unidentified Analyst:]

And do you think that's sustainable? I mean, you've been doing a path here, but is that continuous?

[Andrew LaFrence:]

Jay had a very important concept here is that, since he's been here, there's been continuous improvement in terms of the stability of the balance sheet and the performance metrics. One of the things that's really become important for us is our ability to manage this business. We will continue to look for opportunities to expand the margin. We are -- as you well know, also the other side of the curve here, where we are starting to see some limited cases of deflation and some of our costs, but we'll keep in front of those, make sure we manage our customer relationships so that, we can eventually continue to drive more volume through the facilities, which is really the key to drive those margins up.

[Unidentified Analyst:]

Maybe just one last question. I was surprised Jay you talked about improved sales. I've not heard you talking a lot about sales as much, but you're seeing some improved sales and it looks like your backlog is improving. A lot of other operators are seeing challenges brewing off inventory. You're seeing perhaps inflection point here?

[Jay Miller:]

Yes. I mean, we've seen that too by the way and Andy touched on that. I think we both touched on that in the remarks. I mean, we've seen our backlog kind of normalize. Candidly, we expected our backlog would have, when I say normalized, gotten back to a more regular level. It obviously took off and went up quite a bit during COVID, and as we were experiencing global supply chain crisis. But actually, we've seen a little less of that, I'll use quotes, normalization than we expected. Look, I think we have proven that we can execute better than most of our competitors. We have challenges. We face challenges every day, but we manage those challenges pretty darn well. And it is our expectation that we're going to close more business, not only from existing customers, but also from a number of new customers, which we have been reasonably successful at doing. I'm very proud of the business development team. I'm very proud as I mentioned in the comments that, we transitioned so gracefully from Curt Steichen to Cory Hancock that went even better than I could have imagined and that team is doing a great job right now. Of course, we expect more out of them moving forward.

[Unidentified Analyst:]

Thank you so much. Congratulations.

[Jay Miller:]

Yes. Thank you, Thor.

[Operator:]

[Operator Instructions] It looks like we have no further questions in queue. I'd like to turn the floor back to Jay Miller for any closing remarks.

[Jay Miller:]

Thank you, John, and thanks to everyone for joining us today. We look forward to talking to you in May, when we will report our first quarter 2024 results. Again, thank you and goodbye.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.