Nortech Systems Incorporated (NASDAQ:NSYS) Q3 2023 Earnings Call Transcript

Nortech Systems Incorporated (NASDAQ:NSYS) Q3 2023 Earnings Call Transcript November 11, 2023

Operator: Greetings. Welcome to Nortech’s Third Quarter 2023 Earnings Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Alan Nordstrom, Acting CFO at Nortech. Alan, you may begin.

Alan Nordstrom: Alright. Thank you, Paul. I’d like to welcome everyone to today’s conference call. Jay will begin today’s call with a review of our operations, recent developments and business outlook. We now review Nortech’s third quarter 2023 financial results before handing it back over to Jay for his closing comments. Then we’ll open up the call for your questions. Please note that we’re still working through the final steps with our independent auditors, and we will file the Form 10-Q when those steps have been completed. But before we continue, please note that statements made during this call and Q&A session may be forward-looking regarding expected revenue, 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-Q may be amended or supplemented. The statements made during this conference call are based upon information known by Nortech as of the date and time of this call, and we assume no obligation to update the information in today’s call. You can find Nortech’s complete safe harbor statements in our SEC filings. And with that, I’ll turn it over to you, Jay, for your opening comments.

Jay Miller: Thank you, Alan, and good afternoon, everyone. We’re glad you could join us today. As usual, I’d like to start by thanking our more than 750 employees worldwide for their dedicated efforts. These people are truly Nortech’s most important competitive advantage. Our team members work hard every day to deliver the mission-critical electrical components, higher level assemblies, complete finished products and engineering services our customers rely on. Today, I’d like to especially recognize team members at our two international facilities. Alan and I are speaking to you from Nortech’s facility in Monterrey, Mexico, about 1,500 miles south of our Minneapolis headquarters. This week, we held our quarterly Board of Directors meeting here, and it’s been a great opportunity for our Board to see our Monterrey team in action.

Our 77,000 square foot facility here opened in 2018, newly built and outfitted to our specifications for additional engineering resources and enhanced manufacturing workflow. Nortech has operated in Mexico since 2002. Our other international team members are in Suzhou just left of Shanghai and the Eastern Coast of China, where it’s already Thursday morning. They are about 6,800 miles away from Nortech’s headquarters. This facility opened in 2016 and encompasses 60,000 square feet. By the way, Nortech first started in China in 1999 with an operating partnership. We are very proud – we were very proud to announce last month in our Suzhou facility recently received Class II Medical Device certification from China’s National Medical Products Administration for serving the Asian market.

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Q&A Session

Our Suzhou team members worked very hard to achieve this prestigious certification, which ensures the highest level of safety and effectiveness. This is a shining example of how Nortech’s reputation for superior quality and customer service continues to grow around the world, thanks to our employees’ efforts. This is a significant achievement for Nortech and our medical customers in the Asia-Pacific region, both existing and potential, with China as the largest market. According to our McKinsey report published earlier this year, China’s growing medtech market could more than double by 2030, with 9% annual spending increases expected this decade under the government’s Healthy China 2030 plan. Health care spending as a percentage of GDP in China is on track to match that of some developed European countries.

For Nortech, I should add the medical market is our largest and fastest growing. Over the past 5 years, our medical revenue rose nearly 70% to $76 million in 2022, accounting for 57% of our total revenue last year. This was up from $45 million or 40% of total revenue in 2018. Meanwhile, we continue to see steady long-term growth with our defense and industrial customers. Turning next to our third quarter results. Our team’s focused execution across China, Mexico and the U.S. helped Nortech increase our gross margin sequentially and maintain EBITDA levels in the third quarter. As previously discussed on these calls, we anticipate customer demand levels will sometimes fluctuate based on factors like inventory adjustments and other timing issues.

We saw this influence in third quarter revenue as a few customers requested that we delayed shipments to them while they were working through inventory they built up during the COVID pandemic. From our ongoing dialogue with these customers, we expect to be – the issue to be resolved in the near term. In the third quarter, year-over-year comparisons were also challenging because the prior year period set all-time quarterly margin records as we saw the benefits of implementing significant pricing actions ahead of material cost increases. However, that situation has since normalized a bit with gross margins consistently running in the mid-teens. For this recent third quarter, our backlog levels remained healthy. We continue to find promising opportunities with the diverse array of medical, industrial and defense customers, including many Fortune 500 companies.

One indicator of this positive momentum is the fact that our trailing 12-month revenue increased more than 5% from the prior trailing 12-month period. Given all these factors, we expect to finish 2023 strong. The U.S. economy seems to be gradually improving. Economists recently surveyed – surveyed by the Wall Street Journal lowered their forecasted probability of recession within the next year and raise GDP outlook. Consequently, we remain guardedly optimistic about the end of 2023, our 2024 business outlook and long-term prospects beyond 2024. We believe that Nortech’s future is bright. This confidence comes from the combination of our diverse customer base, solid financial platform and hard-working team members. Now I’ll turn it over to Alan for a more in-depth look at our third quarter and 9-month financials.

Alan?

Alan Nordstrom: Thank you, Jay. In the next few minutes, I’ll provide certain details of our financial performance in the 2023 third quarter, but I also encourage you to review our latest Form 10-Q when filed as it contains far more information about our business operations and financial performance than we will cover on this call. As we pointed out in the past, we believe that our individual quarters can be affected by outside factors. These not include timing fluctuations, customer shipment and supply chain issues. Any of these during a given reporting cycle could temporarily disrupt our momentum. Consequently, we believe it is more appropriate to review our business on a 12-month basis rather than a strict calendar fiscal year.

This approach will help normalize these potential anomalies and offer a better gauge of our strategy’s long-term success. So switching to our third quarter financial performance. As Jay noted earlier, we have anticipated the demand levels to fluctuate as customers work through inventory. We saw this influenced third quarter revenue levels. However, we expect this issue to get resolved in the near term. Also, the year-over-year decline largely results from last year’s record high third quarter revenue levels that were boosted by significant pricing actions in the period ahead of material cost increases. Yet, we see sustained year-over-year backlog levels, sequential 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 third quarter financial performance.