Allient - Q1 2024

Transcript

Operator (participant)

Greetings and welcome to Allient first quarter fiscal year 2024 financial results conference call. At this time, all participants are on a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Craig Mychajluk, Investor Relations. Thank you. You may begin.

Craig Mychajluk (Investor Relations Contact)

Thank you, and good morning, everyone. I appreciate your time today as well as your interest in Allient Inc. I'm Dick Warzala, President and CEO, and Jackson Trostle, our Corporate Controller. We're going to review our first quarter 2024 results and provide an update on the company's strategic progress and outlook, after which we'll open up for Q&A. Copy of the financial results that were released yesterday after the market closed. If not, you can find it at our website at allient.com along with the slides that accompany today's discussion. If you have no slides, please turn to slide two for the Safe Harbor statement. Moreover, we may make forward-looking statements on this call during the formal discussion as well as during the Q&A.

We provide future events that are subject to 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 are discussed in the earnings release documents filed by the company with the Securities and Exchange Commission. You can find documents on our website or at sec.gov. As well, that during today's call we will discuss some non-GAAP measures, which we believe will be useful in evaluating our performance. We'll share the presentation of this additional information in isolation and substitute for results prepared in accordance with GAAP. We'll provide reconciliations of non-GAAP measures in the tables accompanying the earnings release and slides. Slide three, and I'll turn it over to Dick to begin.

Dick Warzala (President and CEO)

Thank you, Craig, and welcome, everyone. Before delving into the quarter discussion, I'd like to provide an update on our ongoing search for a new CFO. The process has been productive, yielding a pool of high-caliber candidates, and we anticipate welcoming an external candidate on board very soon. Given the timing, Mike graciously agreed to extend his tenure as CFO into the end of June, which will facilitate a smooth transition of his duties. Due to prior planned commitments, Mike couldn't join us on today's call, and Jackson Trostle will be filling in for him. I would like to take this moment to extend my heartfelt wishes to Mike as he embarks on his retirement. Throughout his tenure, Mike has been an outstanding partner and has played a key role in establishing the framework necessary for us to support the levels of growth we've achieved over the years.

Under his leadership, he has also cultivated a strong supporting team, laying a solid foundation for our continued success in the future. I would also like to express gratitude to two other individuals for their guidance and support over the years. James Tanis, a Director since 2014, has chosen not to stand for reelection, resulting in a reduction of our board size to six members after yesterday's annual meeting. Jim's steadfast dedication, insightful guidance, and invaluable contributions have left an indelible mark on our company's trajectory. Similarly, I extend sincere appreciation to Joseph Kubarek for his over 12 years of service to Allient, including as Secretary and Corporate Counsel. Joe has been a constant force over the years, and his guidance has been instrumental in supporting our needs as we executed numerous acquisitions and realized excellent organic growth over the years.

On behalf of the entire Allient family, I extend our sincerest thanks to these three individuals for their unwavering commitment and contributions. Now, let's turn our focus to the results. The past quarter has been a testament to our resilience and adaptability. Moreover, our commitment to operational excellence and cost management has bolstered our margins and fueled bottom-line growth along with strong cash flow generation. Given improved lead times, customer order patterns are normalizing to a pre-pandemic environment, and excess supply is being taken out of the channel, which has had an impact on our order rates, which I will review later in the presentation. Demand from our end markets was mixed, reflecting the various states of supply normalization within each market, with some pockets of weakness in Europe. Our top line came in at nearly $147 million for the quarter.

On the plus side was our vehicle markets, which continued to benefit from the ramp of automotive programs and industrial markets, which has increased at least double digits for each of the last 12 straight quarters, largely driven by industrial automation projects and power quality solutions. This market has also benefited from the improved supply chain and acquisitions. We reviewed the acquisition of SNC Manufacturing on our last earnings call as we completed the transaction in early January. SNC is a well-established company with locations in the U.S., Mexico, and China, and their offerings are complementary to our current power quality capabilities. While SNC has some medical and A&D business, the vast majority of their revenue will show up within our industrial bucket.

As a reminder, this was our first tuck-in acquisition in support of our power technology pillar, and we are excited about the synergies that are developing as a result. We saw margin expansion across the board, with gross margin up 80 basis points, operating margin up 40 basis points, and Adjusted EBITDA margin up 60 basis points. Overall, net income per diluted share increased 8% to $0.42 a share, and on an adjusted basis, net income per share was $0.58, up 5% for the quarter. Stronger earnings combined with improved working capital led to cash generation of $9.2 million, a record level for a first quarter. With that, let me turn it over to Jackson for a more in-depth review of the financials.

Jackson Trostle (Corporate Controller)

Thank you, Dick. Starting on slide four, we highlight our top line. First quarter revenue increased 1%, or $1.2 million, to $146.7 million.

The impact of foreign currency exchange rate fluctuations was favorable, $0.2 million. Sales in our vehicle markets increased 12% during the quarter, driven by the anticipated escalation of certain automotive programs. Partially offsetting this growth was the continued decline in demand for agricultural vehicles, given the softness in Europe stemming from geopolitical tensions, notably the Ukrainian conflict. Industrial markets were up 10%, lifted by recent acquisitions and heightened end-market demand within industrial automation, electronics, and power quality solutions, particularly those for the HVAC markets. A&D sales saw a decline of 22%, primarily attributed to the timing of certain space industry initiatives. We did see an uptick in defense demand throughout the quarter, which helped to offset somewhat and mitigate the impact of this timing.

Medical markets also saw a decline, primarily due to the persistent softness in medical mobility products and solutions, a trend that has persisted over the past few years. Slide five shows the shift in our revenue mix across markets over the trailing 12 months and the catalysts for each change. Industrial maintained its position as our largest market and was 45% of TTM sales, a noteworthy expansion of 500 basis points. The robust 25% growth in the industrial vertical mimics the trends from the recent quarter and reflected the improvements in the supply chain environment, which facilitated the delivery of long lead projects. Vehicle market revenue was up 7% on a TTM basis and reflected the same demand drivers as the recent quarter and also included higher demand for power sports. Similarly, aerospace and defense, as well as medical sales demand, also had similar drivers as the first quarter.

Lastly, sales through the distribution channel, which are a small component of total sales, were up 4% for the TTM period. As highlighted on slide six, gross margin expanded 80 basis points to 32.3% for the quarter on higher volume, favorable mix, and pricing, along with a continued emphasis and usage of our lean toolkit throughout the organization. These impacts were more than offset by elevated raw material costs and remaining supply chain disruptions. Moving to slide seven for our operating performance, you will notice we had an increase in engineering and business development costs for the quarter, which largely reflected recent M&A activity. Helping partially offset this was lower general and administrative costs, which were 40 basis points lower as a percentage of sales year-over-year. Overall, operating income increased 6% to $12.1 million, or 8.2% of revenue, a 40 basis point improvement.

On slide eight, 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. First quarter net income increased 9% to $6.9 million, or $0.42 per diluted share, and on an adjusted basis was up 7% to $9.5 million, or $0.58 per diluted share. The effective tax rate was 21.8% in the first quarter of 2024. We expect our income tax rate for the full year 2024 to be approximately 21%-23%. We use adjusted EBITDA as an internal metric and believe it is useful in determining our progress and operating performance. Adjusted EBITDA increased 5% to $20.0 million, or 13.7% of revenue, up 60 basis points.

Slides nine and 10 offer a snapshot of our cash flow and balance sheet. Notably, we experienced a robust cash-generating quarter, amounting to $9.2 million of operating cash flows, marking a significant increase from the $3.6 million in the prior year's first quarter. This achievement is particularly noteworthy considering that the first quarter is traditionally a higher operating cash consumption period. The year-over-year increase was attributed to elevated net income and enhanced management of working capital. Our projections indicate a sustained momentum in driving strong cash flows, aligning with our historical trends. Capital expenditures for the quarter were $3.0 million and largely focused on new customer projects. We expect 2024 capital expenditures to be in the range of $13 million-$17 million. Increase in cash utilized for investing activities during the first quarter of 2024 was primarily attributed to the acquisition of SNC.

Additionally, the investing activities for both the first quarters of 2024 and 2023 included a deferred payment of $6.25 million related to a prior acquisition. Inventory turns were 3.0x, and our DSO was at 55 days for the quarter. Total debt was approximately $240 million, up from year-end 2023 due to the SNC acquisition. Debt net of cash was about $209 million, or 43.9% of net debt to capitalization. Our bank leverage ratio was 2.89x. Reducing debt remains at the top of our priorities regarding the use of capital. Lastly, we recently extended the maturity of our existing $280 million revolving credit facility for five years to 2029. Borrowings for the revolving facility bear interest on a sliding scale rate based on leverage of 1.25%-2.5% over SOFR.

In addition, for added flexibility into lock-in favorable rates, we entered into a $150 million fixed-rate private shelf facility, under which $50 million of borrowings occurred on March 21st, 2024. The fixed-rate $50 million debt bears interest at 5.96% and will mature in March 2031. With that, I will now turn the call back over to Dick.

Dick Warzala (President and CEO)

Thank you, Jackson. Slide 11 shows our orders and backlog levels. As discussed on previous calls, the shift in our backlog reflects ongoing enhancements within our supply chain environment. These improvements have facilitated the shipment of several long lead industrial projects as demand returns to a more normalized pre-pandemic level, with customer ordering patterns adjusting accordingly, as reflected in our book-to-bill. The year ahead will undoubtedly pose challenges as we continue to adapt to these evolving dynamics. However, this presents an opportunity to optimize our working capital and bolster cash flow. It is also important to stress that there are exciting initiatives on the horizon as we progress through 2024, and we are strategically positioning our organization to capitalize on significant opportunities across our targeted verticals. That leads to the highlighted actions on Slide 12. Our strong commitment to our strategy guides all of our key decisions.

With the unveiling of our new strategic model, Simplify to Accelerate Now, we embark on a journey aimed at refining our organizational structure, eliminating redundancies, and optimizing our operations. In pursuit of sustained earnings growth and increased cash generation, our teams have identified key strategic actions for this year and into 2025. Realigning and rationalizing our footprint represents the largest opportunity but also the most complex. This includes the consolidation of our brands under the Allient banner to include our motion, controls, and power technologies. By doing so, we ensure a more cohesive approach to foster improved market and customer alignment, enhance market clarity, and focus teams that can better serve our diverse global customers. Our commitment to simplicity extends to customer interactions with dedicated selling units and solution centers, offering specialized expertise and comprehensive system-level solutions.

We must eliminate complexity in processing orders and transactions and focus on speed of play to win new business. As a result, we aim to centralize customer entry points and leverage cutting-edge systems to automate processes to reduce transactional costs wherever possible. Internally, we want to foster a common business language facilitated by AST, our lean toolkit, ensuring seamless collaboration across all levels. By defining and supporting the needs of the business as a whole, we're driving out redundant costs and strengthening our foundation for future growth. And lastly, elevating our pace and reducing our product development time to market is expected to deliver tangible value and stands as a top priority. This means reducing the complexity of designs by taking smaller incremental steps and adapting as we move forward. By doing so, we enhance agility, responsiveness, and ultimately, customer satisfaction.

These initiatives are being implemented in phases, and some are still being fully vetted. While we expect benefits in 2024, ongoing improvements will be realized over the next 2+ years and will be offset by certain one-time costs to implement. Ultimately, we expect our executed actions to result in a more cost-effective leveraging of our resources and to provide us with a $10 million+ million dollar effective improvement in EBITDA over this time frame as actions are implemented and gain traction. We believe our efforts and actions are consistent with and will support our goal of achieving 100 total basis point improvement of annual margin, which will come from a combination of both gross margin expansion and operating expense reduction.

During 2023, it is important to note that we enjoyed elevated shipments in certain markets as the supply chain normalized and our customers accepted shipments for orders placed during the height of when lead times were being extended. In 2024, we expect this normalization to have a $30 million-$40 million headwind on our top line, which will be mostly offset by the SNC acquisition. While the SNC acquisition will help offset the top line, it will not fully offset the pull-through incremental margin we had enjoyed as a result. Ultimately, the impact of our cost reduction and profit-enhancing activities will help offset the bottom-line pressures that are expected to persist for the near term. In support of our strategic goals as a company, we will aggressively and proactively adjust the organization as required to ensure we establish a sound and strong foundation for the future.

In closing, I want to reiterate our unwavering enthusiasm and confidence in the trajectory of our company. As we look ahead, we are energized by the myriad of opportunities that lie before us. With a firm commitment to innovation, new product development, and operational excellence, we are primed to capitalize on these projects and further elevate our performance over the long term. As we embark on the journey ahead, rest assured that our vision, strategy, and determination will continue to drive our success in the coming year and beyond. With that, operator, let's open the line for questions.

Operator (participant)

Thank you. At this time, we'll be conducting a question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. Our first question comes from Greg Palm with Craig-Hallum Capital Group. Please proceed with your question.

Greg Palm (Senior Research Analyst)

Thanks. Good morning, everyone. Congrats on a lot of progress here in the quarter, so job well done.

Jackson Trostle (Corporate Controller)

Thank you, Greg.

Greg Palm (Senior Research Analyst)

I guess starting off with a little bit more kind of color on what you're seeing out there in various end markets, geographies. Is it stable relative to where we were at a couple months ago? Any notable changes you want to highlight or call out?

Dick Warzala (President and CEO)

Yeah. Well, I would say, to you, that there's more clarity on what we expect to see here in the coming months ahead. And I think, certainly, we pay very close attention to the performance of our customers. And as we've seen and are hearing from them, they're expecting that organic growth rates will be down, which certainly would reflect on our organic growth. I mean, the impact would be relatively pretty similar to what we see there. So I would say, to you, that yes, that there are certain markets that are having some challenges. I do think it's still a part of the normalization of demand as commitments for orders that have been placed months ago are being fulfilled, and inventories are full, panels full.

Now we'll have to see when that will start to return to a full normalization, meaning that the consumption is increasing or at least leveling out to the point of where those inventory reserves are being consumed and then replenished. I'll say that's primarily in the industrial markets, Greg.

Greg Palm (Senior Research Analyst)

Okay.

Dick Warzala (President and CEO)

Go ahead. You have a question. Go ahead.

Greg Palm (Senior Research Analyst)

Well, I was just going to ask, to you, you mentioned inventory levels. Do you have a sense on where kind of inventory levels are? I mean, I know it varies across customer bases, but just in general, and should we just assume that Book-to-Bill is going to run below one in the near term as a result of what you're saying?

Dick Warzala (President and CEO)

Yeah. It may be below one in the near term, but I think we are going to see that that gap is closing. We are starting to see some encouraging signs that there is business that is now orders are being released that hadn't been released for a while, which was resulting in the negative book-to-bill. But I would say, to you, that there's definitely improvement in that area. So there's some encouraging signs coming in the near term.

Greg Palm (Senior Research Analyst)

Yep. Yep. Makes sense. And then, I guess just lastly, thinking about some of the operational improvements that you're making specifically around the Simplify to Accelerate Now strategy, do you feel like you got some of that benefit in Q1, or is that still to come? And can you give us any more color around the timing? I know you mentioned $10 million when it's all said and done, but when should we see that sort of full run rate of cost improvements?

Dick Warzala (President and CEO)

Okay. For your first question, have we seen any impact of that in the first quarter? The answer would be no. When will we start to see it? There's been a very comprehensive review of all operations, looking at all areas of cost and so forth and expenses. We are working through the details, and we've identified, certainly, some major opportunities for us that will begin very shortly. I would say, to you, without providing any more details, it's a complete rationalization of where we are moving forward on actions that I would have said, to you, that without COVID, we would have seen some optimization already and the supply chain crisis. We are beginning to move forward. Part of the process is not just to look at reducing cost, but how can we align much better to service our customers? I think that's key.

It's critical because we've built the basis of business in different markets, and we think we can better service those markets and gain additional market share. So there's opportunities to increase the EBITDA generation, profit generation from improved business levels by leveraging the synergies we have in place. And there's also opportunities by restructuring and realigning to be more focused on markets that we serve and create an expertise that better services our customers. Those will start in Q2 and will continue throughout the year. That's what I would say, to you. Again, with some of the actions, there will be some one-time costs. We'll be very clear on what those are as we identify and we relay it to the marketplace. But I think that's about as much as I can cover right now without giving you more specifics, which we're still working on.

Greg Palm (Senior Research Analyst)

Yeah. Understood. No, that's helpful as it is. All right. We'll leave it there. Thanks.

Dick Warzala (President and CEO)

Thank you, Greg.

Operator (participant)

Our next question is from Gerry Sweeney with Roth MKM. Please proceed with your question.

Gerry Sweeney (Managing Director)

Hey, Dick. How are you doing? Thanks for taking my call.

Dick Warzala (President and CEO)

Good, Gerry. How are you?

Gerry Sweeney (Managing Director)

Good. Not quite a repeat of Greg's question, but curious as to demand, how much of it is, I think, order normalization versus maybe fiscal tightening in the U.S. and in certain other countries? I'm not sure if the economy's slowing down. I'm just curious if you would have any thoughts on delineating between the two.

Dick Warzala (President and CEO)

Yeah. I would say, Tia, that as we've watched the book-to-bill ratio, we've watched our backlog and look at the markets, both geographic and the vertical markets, it wasn't unexpected. I think we've talked about it for several quarters, that yeah, that it really was going to happen. And I think, typically, as I look at our business and we pay attention to what's happened with our customers, okay, we typically lag that. And where we've seen some reduction in demand for our end customers, we held up. And as we're looking at what their forecasts and projections are for the near term, I think we're modeling in that we're going to follow that. But as I said, I wanted to make the point that that gap of the negative book-to-bill ratio is closing.

We've seen some encouraging signs where certain projects and certain where we've expected to begin resuming deliveries on certain projects, it is happening. Europe is still a question mark, especially Germany, where they're talking about major reductions in demand and so forth throughout the economy. That's the one area that we're still watching closely. Although we'll have to say other parts of Europe, we're, again, starting to see that same trend where the order patterns or delivery, I'll say shipments patterns, are improving. So it's going to be pretty telling here in the next couple quarters. Have we bottomed out? Have we normalized inventories? Are we now starting to supply to real demand, not filling channels and so forth?

Gerry Sweeney (Managing Director)

Got it. I do know that you had spoken about order normalization for some quarters. It sounds as though it's tracking as expected, but there are some pockets that it's still a little bit of wait and see. Is that a fair summation?

Dick Warzala (President and CEO)

It is. Again, as I mentioned in the conference call here, the headwind that we faced, I mean, it was a real interesting one because we received orders and multiple-year orders where supply chain could not supply key components. And I know our customers honored the deliveries. When the supply chain opened up, we were able to get components. It certainly elevated the shipments from last year, which were depressed from the prior year and will have an impact into this year, as I mentioned.

So if we think about that demand, and as the questions I can anticipate may be coming here, is we said that we have this headwind of topline, and that was incremental topline based upon existing base of business and offset by the acquisition of SNC, which, of course, comes in as a full company with fully loaded expenses and operating costs and so forth. So it's not the same profit generation from an incremental standpoint, right? We've got a full business, but we're bringing that same level of business through. But the profits can't be expected to be the same because of an incremental demand.

Gerry Sweeney (Managing Director)

Sure. Understood. Just one more for me, then I'll jump in line. Inventories, turnovers, DSOs, what is the target, or what would be more of a normalized level? You had in the slide deck, it was 2022, 2023, and I think 2024. But we had COVID, and you also have a bunch of acquisitions since that timeframe. I'm just curious if you sort of have a target where you want to take that and where sort of working capital.

Dick Warzala (President and CEO)

We'll let Jackson answer that.

Jackson Trostle (Corporate Controller)

Sure. And I would say it wouldn't be accurate to say, "We'll revert back to exactly where we were pre-COVID," because a portion of the business has changed along with our acquisitions since then. In the DSO range, I'd say based on our customer mix, there should be improvement, but I wouldn't expect it to be below 50 in the near term. And inventory turns, we're driving towards, I'd say, in the 3.5 range at the end of this year into the first quarter of next year would be our expectation and certainly driving to find opportunities to even exceed that internally where we can. Got it. I appreciate it.

Gerry Sweeney (Managing Director)

Thank you very much. Pleasure meeting you, Jackson. Thanks.

Dick Warzala (President and CEO)

Thank you, Gerry.

Operator (participant)

Our next question comes from Ted Jackson with Northland Securities. Please proceed with your question.

Ted Jackson (Managing Director and Senior Equity Research Analyst)

Thanks. Good morning.

Dick Warzala (President and CEO)

Good morning, Ted.

Ted Jackson (Managing Director and Senior Equity Research Analyst)

Dick, I want to auger into kind of the efforts you're making with regards to kind of restructuring operations and business. I have a few questions around that. I want to start with the brand consolidation. So if I understood you correct, are you eliminating all the different brands from the various acquisitions, and everything's going to Allient? And then am I understanding that you're going to centralize a lot of operations for that across those businesses? And so the reason I ask that is going back into your M&A. In the past, it seemed to me that the strategy for Allient was to buy great, smaller companies that kind of fit within your world, give them the resources to grow their businesses, usually kind of keep the management team in place, and really kind of let them run it.

When I listen to what you're doing - and I'm not criticizing it because, honestly, I actually approve of it - but is it a change in kind of the strategy, and how do you see that impacting your ability to bring in acquisitions? Because I would think that for many of your targets, if they can have you own them and they still get to run it, that that's kind of an attractive proposition for them. So that's my first question, and I have a couple more behind it.

Dick Warzala (President and CEO)

Sure. There's a lot of questions in that first question, Ted. So let me go ahead and tackle them here. Yeah. All right. So first off, the parent company named Allient. Ted, you've joined in as an analyst for us within the last two-three years. If you go back in time when we began the roll-up in the motion side of the business and how we handled brands under Allied Motion, you will see that we took a logical approach to changing the names over time. And so there are some that have been fully changed, and we're companies with separate names, but smaller. Not necessarily they had some brand recognition, but it was a limited customer base. So they were rolled into Allied Motion and basically Allied Motion and a location, for example, Tulsa, Stockholm, Dordrecht, etc.

As we moved forward, there were certain reasons as we acquired other companies to maintain the individual brands a little longer. We do realize as a company that we want to compete as a company, and that's our strength. By coming out with a new brand, a new name, Allient, say, connecting what matters, leveraging all of our pillars, we've been working hard to identify within the vertical markets. That gets into some of the realignment that I'm talking about we'll discuss further here. The opportunity to bring multiple technologies from the different pillars into the vertical markets as a solution as one company. There are many reasons for doing that. But if you don't do that, then what happens is each entity gets treated as an individual company.

If you want to get qualified with larger customers and open up the door for multiple products, it becomes very difficult and very restrictive. So having a company, not just the name, but a company that has a quality management system that has an outlook on all of the corporate initiatives that's consistent with what we're portraying as a corporation, which creates an image for a more powerful, more capable company that is going to focus on the verticals that can truly drive growth and provide better support, that's the reason. And it will still be a logical approach. It's not an overnight change. But as you'll see, we're introducing the parent at trade shows. We're changing literature. We're changing websites. We're doing all of that work behind the scenes. But it's a slow migration to ultimately get it to Allient.

With regard to the individuals within the companies, you're absolutely correct. One of the first questions I receive at every single acquisition post-acquisition meeting is, "What's going to happen to our name?" We basically say that we will keep a brand. For us, in order to be more cost-effective from the operating expense standpoint, we need to merge some of this together in terms of having all these individual entities, having tax returns, having all the reporting that's necessary, the audits that are necessary if you keep these independent. We're bringing them together, and we're doing that now. We're putting logical groups of companies together. We're retaining management. We're retaining key individuals.

What we're doing, though, is saying, "Hey, listen, there's a better way to operate as a combined entity to get the power and the strength of the corporation out there, to leverage that, and to bring everything we have that is possible to bring a more complete solution into the verticals and satisfy our customers. Do it with a higher level of expertise and focus." So I see no issue with us acquiring companies and looking at our brand strategy over time. We'll have brands as products, but we'll have a company, one company that will support and service multiple brands, okay? Product brands, product lines, not companies. So we can simplify that whole side of our business. I think I've answered all your first question.

Ted Jackson (Managing Director and Senior Equity Research Analyst)

Yep. Yep. I mean, you get where I was going with it. It sounds like there is a shift in here. You're going to basically centralize a lot of kind of behind-the-scenes stuff with regards to, like you said, basically a lot of the stuff in the G&A. I am curious with it, how does it play? I mean, a lot of the different sort of entities within Allient had independent, standalone sales efforts. What are you doing on that front? Or is it too early to ask that question?

Dick Warzala (President and CEO)

No, no, that's certainly a fair question. That's one of the things that we leverage very quickly is that there isn't one Allient sales force. There will not be one Allient sales force. So make that very clear. I think while we can leverage many of the products in a solution in certain markets to certain customers, we're still going to have that demand that comes from discrete products to certain customers in certain markets by pillars. So that structure is already in place. What we're doing is enhancing that. When I say enhancing it, I mean, for example, if we take defense vehicles, okay? We sit there and we go through our strategy session, and we determine, "Okay, what are we selling into this market? Okay?

What applications and how many different applications are we servicing within, let's just call it, a defense vehicle?" And we find that it's very significant and things that maybe the team wasn't aware of. But now we're better prepared to have a customer-facing team that's totally knowledgeable of everything we can bring to bear, have the support, engineering support, application engineering support, and they can reach into the company, take an order from a customer for everything we're going to supply in one time. That's where the opportunity really lies. And then if you think about if we maintain the way we did it in the past, these customers are placing individual orders at different locations. They all have to be entered. They all have to be invoiced. They all have to be tracked and so forth. And it becomes complicated to do business with us.

It's like dealing with not one company, but multiple companies. That's the one complaint that we would hear. Yes, you're calling yourself one name, but you're not acting as one name. That's part of the change. From a transactional standpoint, the changes that we're looking at is say, "Okay, internally getting the IT systems in place that can support a structure. An order comes in. It's placed for an end-user part number. Let's call it X. And that X has many different components and subassemblies coming from multiple locations within Allient. We take that order. We drive demand one time throughout the company. We ultimately ship the product.

We invoice once, and we have one receivable, and we drive the revenue recognition and the profit recognition back into the specific TUs." So it sounds like it is a tremendous simplification of the duplicative process we have to deal with one customer shipping many products with different customer service facing units facing to the customer and all the transactional processing we have to go through. So that's some of that simplification we're talking about, but it's also a true alignment of the expertise and digging deeper into those applications and supporting it with everything we have available, okay? So there's work there. We talked about systems in order to be able to do this, connecting those systems. Not everybody's on the same computer system, but that process continues to move forward. But when that occurs, it really simplifies.

It's a transaction that occurs electronically, not manually each time as some of it is today.

Ted Jackson (Managing Director and Senior Equity Research Analyst)

Well, now, I think you answered one of my next questions, which was, it sounds like with this reorganization, if you would, of process, that there is that you'll be going through a consolidation of kind of back-office systems and such. And does that assume this involves possibly new ERP, like a standardized ERP and CRM systems and things along those lines? And you're in the process of kind of mapping that out. And having gone through that in my operational days, it's clearly a multi-year project to kind of map that out and get it in place and get it into your solutions. You got to be really careful with it. I mean, is that what I'm hearing from you?

Dick Warzala (President and CEO)

Well, we need to be clear. We've been doing that, okay? That's been ongoing for multiple years now. And we have converted the vast majority of the acquisitions onto a common system, the vast majority. Some of the smaller ones, I think, is where the real benefit is to be derived is we're adding capabilities that didn't even exist. So that process has been ongoing. It continues. And we have a really good team. That was how I started my career in that area. And we have a really good team that from starting the project to executing and getting it implemented is a very short period of time. And it's been done successfully over and over and over. So we're not starting now. We're well along the way, and we're completing. I'll say we're in the final phases of completing the conversion and the cutover to a common system.

It won't be all. I do have to be clear. We do operate very well internally here using Hyperion or HFM to consolidate and create business reports for us because there are systems that are deeply rooted in certain companies that you just can't rip out. So where we can, and we're already well down that path, have been doing it, and it's been done successfully. And I'll call it in the later innings here of where we're at the point of getting close to getting there. They're never done, but getting close to the point of getting the identified systems up and converted and running as a company.

Ted Jackson (Managing Director and Senior Equity Research Analyst)

Well, I think it's going to be an exciting journey. And I've been through some of that stuff before. And I will tell you, it's pretty interesting beyond your stuff you're doing to organize the business to be more effective with regards to customer-facing. When you get in and you start getting into cost improvements and cost-saving stuff, it's much easier to make a dollar by saving a dollar than it is by going and selling stuff to make a dollar. Does that make sense to you? And I applaud you for going at it. And I look forward to hearing about the progress in the years to come. And I'll step out of line. Thanks.

Dick Warzala (President and CEO)

Sounds great. Thanks, Tedd. Yeah. I think just to add to the back end of that is the reasons for doing this is also to establish the foundation for the next level of growth in the company. We feel that the time is right. We've had several and many acquisitions. We did it at a fast pace. It's the time to bring those together and to establish this really strong base and foundation so we can move into the next level of growth that we expect within the company. That's the other important part of this as well. Thanks for all your comments and questions. I appreciate it.

Operator (participant)

Our next question comes from Brett Kearney with American Rebirth Opportunity Partners. Please proceed with your question.

Brett Kearney (Managing Member)

Hi. Good morning, Dick and Jackson. Thanks for all the insights you've shared thus far on the call this morning.

Dick Warzala (President and CEO)

Yeah. Good mornings.

Brett Kearney (Managing Member)

I had a question on your growing power technology pillar. Can you help us think about either magnitude or potential runway you're seeing for some of your solutions there going into the fast-evolving data center market, as well as your ability to supply that I think the SNC manufacturing acquisition unlocks for the TCI business?

Dick Warzala (President and CEO)

Yeah. That's a great question. And you want to talk about one of the exciting opportunity areas for us and highlights? I mean, you've identified it. The combination of TCI and SNC and the opportunity for us with the management teams to look at the true synergies that these combined entities can bring, it's extensive, and it's exciting. And you hit it as far as data centers and the ongoing demand and need for that, certainly, that's not going away. That will continue to explode over the years ahead. So the second thing you asked about or you mentioned was the ability to supply. Certainly, anyone following the industry has seen lead times have extended. They still have supply chain issues in that market for certain materials, which have caused orders that can be placed for 12 or 24 months out still.

For us, the expanded footprint that these operations bring together, the Mexican facility that's well-established for SNC, that's something that's being leveraged immediately. It is resulting in our ability to service customers and supply. We were capacity-constrained. That's been unleashed. It's happening quickly. I can only say I compliment the teams in Wisconsin and Mexico and China and so forth for their efforts here to ensure that it happens as quickly, as efficiently as possible. That's actually happening. That's a great question. One of the bright spots and bright opportunities for the future, the synergies there are extensive. Literally, the opportunity to create this one-company approach to the market exists with the combination of those two.

Brett Kearney (Managing Member)

Excellent. Thanks so much, Dick.

Dick Warzala (President and CEO)

Thank you, Brett.

Operator (participant)

We have reached the end of the question and answer session. I'd now like to turn the call back over to management for closing comments.

Dick Warzala (President and CEO)

Thank you, everyone, for joining us on today's call and for your interest in Allient. We will be participating in the Craig-Hallum Investor Conference on May 29 in Minneapolis. Otherwise, as always, please feel free to reach out to us at any time. We look forward to talking with all of you again after our second quarter 2024 results. Thank you for your participation, and have a great day.

Operator (participant)

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