Nortech Systems Incorporated (NASDAQ:NSYS) Q4 2023 Earnings Call Transcript

Nortech Systems Incorporated (NASDAQ:NSYS) Q4 2023 Earnings Call Transcript March 20, 2024

Nortech Systems Incorporated isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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.

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Q&A Session

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: First, our view of certain factors impacting our income statement. Second, selected items which influences Nortech’s cash statement. And lastly, a brief review of the balance sheet. As usual, if you have specific questions about these items or any of our quarterly or annual financial results, I will be happy to address them during our Q&A portion of this afternoon’s call. In Q4 2023, net sales totaled $36.1 million. This represents a 1.2% increase from the net sales of $35.6 million in the fourth quarter of 2022 and is up approximately 8% on a sequential quarterly basis.