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spk09: Ladies and gentlemen, good morning and thank you for attending today's ultra industrial motions first quarter 2022 earnings call. My name is Sam and I will be the moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you'd like to ask a question, please press star one on your telephone keypad. It is now my pleasure to turn the conference over to your host, Ryan Flame from Sharon Merrill. Ryan, please proceed.
spk01: Thank you, Sam, and good morning, everyone, and welcome to the call. To help you follow management's discussion on this call, they will be referencing slides that are posted to the ultramotion.com website under events and presentations in the investor relations section. Please turn to slide three. During the call, management will be making forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are inherently uncertain, and investors must recognize that events could differ significantly from management's expectations. Please refer to the risks, uncertainties, and other factors described in the company's quarterly report on Form 10-Q, an annual report on Form 10-K, and in the company's other filings with the U.S. Securities and Exchange Commission. Except as required by applicable law, Ultra Industrial Motion Corp does not intend to update or alter its forward-looking statement, whether as a result of new information, future events, or otherwise. On today's call, management will refer to non-GAAP diluted earnings per share, non-GAAP income from operations, non-GAAP net income, non-GAAP adjusted EBITDA, non-GAAP operating income margins, non-GAAP adjusted EBITDA margin, non-GAAP organic sales, non-GAAP gross margin, non-GAAP operating working capital, non-GAAP net debt, non-GAAP free cash flow, and non-GAAP adjusted free cash flow. These metrics exclude certain items discussed in our slide presentation and in our press release under the heading Discussion of Non-GAAP Financial Measures. and any other items that management believes should be excluded when reviewing continuing operations. The reconciliations of ULTRA's non-GAAP measures to the comparable GAAP measures are available in the financial tables of the Q1 financial results press release on ULTRA's website. Please turn now to slide four. With me today are Chief Executive Officer Carl Christensen and Chief Financial Officer Todd Patriaca. I will now turn the call over to Carl. Carl?
spk03: Thank you, Ryan, and thank you for joining us today. We turned in a great quarter. We had record sales as our teams executed extremely well in spite of the continued supply chain challenges. Margins improved significantly when compared with the fourth quarter of 2021 as the pricing initiatives that we have been working on are now showing up in the P&L as we are working through the backlog of orders that had lower pricing. We closed a portion of the gap in the first quarter and expect to continue to close the gap through the balance of the year. We do expect to continue to experience high inflation due to commodity prices, logistics, and labor costs. We will take further pricing actions as necessary to offset inflation. Some of these cost increases are transitory, and once supply and demand balance out, we should experience additional margin improvement as commodity and logistics costs return to a more normal level. Of course, as the Fed raises interest rates to slow the overall economy, there is a risk that we could also experience a slowdown. However, our current incoming order rate certainly doesn't indicate any slowing. As we shared at our recent Investor Day, we believe there are vast opportunities ahead as we execute on our strategy to position Altra as a technology leader in power transmission and motion control solutions, and optimize our opportunities as a premier industrial company. Our first quarter performance validates the thesis that Altra is well positioned to deliver exceptional value for our shareholders in the quarters and years ahead. We have continued to demonstrate that by harnessing the Altra business system, we can drive growth, margin expansion, and strong cash flow through a range of market conditions. effectively deploy the cash we generate to accelerate new growth opportunities, retain a healthy balance sheet, and return capital to our shareholders, and build the team, culture, and systems necessary to repeat the process and create a perpetual flywheel for sustainable value creation. Turning now to slide five, I will start with a few highlights from the quarter. Todd will then get into more detail on the results along with an update on our guidance. Across the board, the Altra team once again did an incredible job of capitalizing on broad-based market demand and managing the business through a challenging environment. As a result, we delivered record-level quarterly sales of $512 million, up 8.4% from the prior year, and grew organic sales by nearly 8%. On a pro forma basis, excluding contributions from JVS, Q1 sales grew 13.6%, a strong indication of the underlying health of our transformed portfolio. At a macro level, while market headwinds continue to persist from several factors, including supply chain pressures, the war in the Ukraine, and lockdowns in China, we have observed a few positive developments worth noting. Our mitigation efforts for some supply chain issues are working, and labor staffing shortages, while still acute, are somewhat better. This has enabled us to improve shipments and on-time delivery performance. Our order rate in the quarter continued to be very strong, a testament to the power of Altra's portfolio of highly engineered and mission-critical solutions and the pent-up demand across the industrial markets. We ended the quarter with a book-to-bill ratio of 115%, and record backlogs across most of our businesses. This positions Altra to deliver a strong sales trajectory through the remainder of 2022 and beyond. The team also did an exceptional job leveraging ABS to mitigate the bottom line impact of market headwinds. In addition to capturing the Nook synergies, we have started to see the benefits from our pricing initiatives flow through during the quarter. These drove a 150 basis point sequential increase in adjusted EBITDA margin. As Todd will expand upon, we expect to continue to close the price-cost gap through the balance of the year. As we described during our investor day, we expect to be able to expand operating margins by 300 basis points by the end of 2024. The primary drivers of the margin improvement will be operating leverage on organic growth, pricing, supply chain cost reductions, both as demand and supply balance out generally, and through specific internal initiatives to reduce costs, such as PPV and VAVE. Continued synergy capture, productivity improvements by reducing waste in all aspects of the business through ABS, and by focusing on higher margin opportunities while deemphasizing opportunities with lower margins. We also delivered a strong earnings performance. Q1 net income was $44.8 million, or 69 cents per share, up 14 percent and 15 percent respectively from the prior year period. Non-GAAP net income grew to $59.6 million, or 91 cents per share, a new company record. This was up nearly 6% from the prior year. On a pro forma basis, excluding contributions from JVS from both periods, adjusted EPS of 78 cents was up more than 16% year over year. I would also like to highlight a few significant strategic milestones that we have achieved since the start of the year. We're making great progress actively managing the portfolio including tremendous progress integrating NUC Industries. The addition of NUC Industries has expanded our motion control and power transmission capabilities in the attractive aerospace and defense marketplace. In Q1, NUC was accretive to earnings and we remain on track to achieve our targeted cost synergies. NUC is an excellent example of how we are leveraging a refined approach to the three phases of the M&A cycle to be competitive in today's market while continuing to add shareholder value. One of the upside surprises regarding Nook was how great the Nook team is up and down the organization. We swiftly completed the sale of the Jacobs Vehicle System business, a significant milestone that has removed about $194 million of non-core cyclical business from our portfolio and improves our capital allocation optionality going forward. Leveraging the proceeds from JVS, we've paid down approximately $350 million of debt. Today, our net leverage stands at 2.3 times net debt to adjusted EBITDA, well within our target leverage range. Our capital allocation priorities have not changed, and returning capital to our shareholders remains one of our priorities. As announced earlier this week, we have raised our quarterly dividend from 8 cents to 9 cents and authorized a $300 million share repurchase program. We also remain committed to investing in profitable growth through high-return organic investments and by pursuing disciplined and accretive ultra-like M&A opportunities as they arise. On the organic growth side, We're leveraging our ABS tools to win in higher growth and markets and increase Altra's exposure to secular trends that will drive growth, like digitization and automation, the aging population, and sustainability. As an example, during the quarter, we landed our largest ever remote monitoring order from a large mine in China. Developing recurring revenue and integrating our technical expertise into the end user's problem solving is a key objective of our IoT initiative. On the M&A front, following the successful Nook Industries acquisition during the quarter, our businesses continue to actively build the funnel to find and nurture acquisition candidates that offer attractive market prospects and fit our defined ultra-light criteria. We will focus on businesses that design and manufacture highly engineered, mission-critical power transmission and motion control solutions, have high share positions in well-defined niches, and participate in markets with strong secular trends. During the quarter, we released our inaugural sustainability report. We have a long history of leveraging our core values in the ultra-business system to drive positive impact create business value across a range of ESG issues. I would like to thank ALTRA's ESG Task Force Board and the ALTRA team for contributing to deliver on this important milestone, our ESG journey. The materiality assessment that we completed last year was a key step forward as it helped us to identify the ESG issues that matter most for our business and our stakeholders. We leverage this effort to define Altra's new sustainability pillar framework, which includes delivering solutions through innovation, protecting the environment, reaching our full potential through teamwork, and operating with integrity. Going forward, we are focused on further enhancing our systems to collect and assess key ESG data and better quantify our impact. We are committed to being transparent about our progress and look forward to keeping our investors updated throughout the year. It is a great read, and I encourage everyone to visit our website and take a look at our corporate sustainability report. I'm extremely proud of all that we have accomplished so far this year. As Todd will expand upon shortly, today we are resetting our 2022 guidance to reflect the sale of JVS and the increase in working capital to support our ongoing efforts to manage market demand. We are also raising our 2022 guidance for our ongoing businesses to reflect very strong underlying demand. Notably, we expect to keep earnings consistent compared to the prior year despite a $194 million revenue reset related to the JVS divestiture. We expect Q2 to be similar to Q1 and have not substantially changed our view on the second half. Now turning to slide six for a review of the markets in more detail. Over the past several years, we have made tremendous progress transforming Altra's portfolio. Today, over 50% of our business is exposed to high growth markets with strong secular trends. On this morning's call, I will focus my market commentary on the six key end markets and our distribution business. Starting with factory automation and specialty machinery, which represents about 14% of our business and is driven by secular trends, including global digitization, industrial IoT, reducing the length of supply chains, and collaborative robots. In Q1, demand in robotics electronic assembly equipment, specialty machinery, and general factory automation machinery remained strong and sales were up high double digits compared to the prior year. We continue to expect 2022 to be another strong year in this market, given the positive long-term macro trends driving growth. Turf and garden, ag, and construction, which combined represent approximately 10% of our business, is driven by trends like increased infrastructure spending and global population growth. Here, we continue to perform well in Q1, growing high double digits year over year with all three segments up sequentially. Our outlook remains very positive for these markets in 2022 as the fundamental growth drivers in these markets appear to be strong. Moving on to material handling, which represents about 8% of sales, and is well aligned with trends such as e-commerce, electrification, and warehousing efficiency improvements. In Q1, sales were up double digits, driven by continuing strength across all key segments, including conveyors, forklifts, and vertical lifting systems. Long term, we remain positive about our growth prospects in material handling. Medical equipment, which was about 8% of our sales, is a very, very attractive long-term opportunity for Altra, driven by trends like the aging population and the growth of non-invasive and robotic surgeries. In Q1, sales were essentially flat year over year as medical capital equipment sales were strong, offsetting a decline in surgical solutions, which faced some pressure as a result of the COVID surges late in 2021 and the beginning of 2022. Surgical medical solution OEMs are adjusting inventory levels near term because of the drop in demand for elective surgeries due to the Delta and Omicron surges. We remain positive about the outlook for the medical market in 2022, given the anticipated easing of COVID restrictions and return to more normal levels of spending and investment, as well as favorable prior year comps as we progress through the year. Moving on to aerospace and defense, which combined is about 5% of sales. Both markets were down low single digits, reflecting lumpiness and timing. Bookings, however, remain very strong, and we remain positive on the outlook for our A&D business, which is an important bottom line contributor with a very attractive margin profile, a strong competitive position, and high barriers to entry. Renewable energy. which represents about 4% of sales, was down double digits versus Q1 last year, primarily due to a decline in China. Looking ahead, we continue to expect COVID and supply chain headwinds to affect bookings into the first half of 2022, followed by a rebound as the year progresses. Longer term, given the global sustainability movement and increasing demand for zero-carbon energy solutions, We continue to believe the renewables represents a very exciting growth play for Altra. And finally, distribution, which represents approximately 25 percent of sales, was up low double digits from Q1 last year and up single digits sequentially. Our sales in the distribution market continue to track in line with the general industrial economy. Our bookings and book-to-bill For the quarter, we're strong and we're anticipating a solid performance in this part of our business in 2022. Looking forward, we expect continued broad-based end market strength in 2022 with moderating growth as we go against tougher comps, the Fed raises interest rates, China expands shutdowns, and the war in Ukraine all stunt growth potential. As I said, we do not have much visibility into the second half, and therefore we have not changed our view on the second half in our improved guidance for the ongoing business. Now turning to slide seven. Looking ahead, we remain focused on executing on our strategy to optimize Altra's position as a premier industrial company and deliver strong and sustainable returns for shareholders. As we outlined at our investor day, This includes leveraging our technology differentiation and proven ultra-business system tools in strong secular markets to achieve 3% to 5% annual organic growth, actively managing the portfolio through disciplined M&A to drive further upside, delivering 300 basis points of margin expansion by 2024, and achieving consistent free cash flow conversion greater than 100%. Longer term, we have great conviction that we are setting Ultra up to be a true through-the-cycle compounder with the potential to achieve $3 billion in revenue by 2027. With that, I'll turn the call to Todd to take you through our financial performance details and guidance update.
spk04: Thank you, Carl, and good morning, everyone. Please turn to slide eight. Having entered 2022 with record backlog and solid underlying market demand, We achieved record sales in the first quarter. For the first time in Ultra's history, we eclipsed $500 million in revenue in a single quarter. Despite the persistence of supply chain and logistics issues stemming from the ongoing pandemic, Q1 sales were up over 8.4% year-over-year to $512 million. We ended the quarter with a book-to-bill ratio of 115% and again saw growth in our record-level backlog, now just shy of $900 million. These are positive indicators that sales throughout the remainder of 2022 will remain strong. Despite rising inflation, our pricing initiatives have been successful, and as a result, we continue to expect price costs will be back in alignment and margins will be at historic levels in the second half of the year. Gross margin was 35.2% compared to 36.4% for the same quarter a year ago. but our pricing initiatives drove a 160 basis point sequential improvement from the fourth quarter, which was much quicker than we originally anticipated. Taking a closer look at our top line performance, price contributed 375 basis points for the quarter, and FX had a negative effect of 180 basis points. In Q1 2022, overall organic sales growth was 7.9% compared with the first quarter of last year. The power transmission technology segments organic sales were up 17.1%. The year over year increase continues to demonstrate the resilience of our balanced portfolio of operating companies as well as the success of our ongoing pricing efforts within the segment. The automation and specialty segments organic sales were down 0.2% compared with the prior year. The decline was driven by the extremely challenging comps for our heavy duty truck market in China and the medical business due to heavy COVID-related sales into the ventilator market in the prior year. On a pro forma organic basis, excluding JVS, first quarter sales for ANS increased 8.5% overall year over year, again demonstrating the strong demand in the ongoing businesses. Turning to our organic sales performance by geography, organic sales were up 17.7% in Europe, and 13.4% in North America, with strength across most of our end markets. Organic sales in Asia and the rest of the world were down 18.3% year over year, mainly due to the Class 8 truck and wind markets in China. Pro forma Q1 2022, North America organic sales were up 13.9%, Europe was up 18.2%, and Asia and the rest of the world were up 1.2%. Moving on to our operating performance, non-GAAP net income from operations increased by 6.2 million from Q1 last year, or 7.4%, primarily due to volume leverage, partially offset by higher operating expenses due to inflation. Price lagged costs by approximately 40 basis points in the quarter. We have made progress in our pricing initiatives earlier than anticipated, and assuming no significant additional inflation, we expect to continue to close the price-cost gap over the remainder of the year. Non-gap adjusted EBITDA was 103.1 million for the first quarter, up 1.5% compared with Q1 last year, or 20.1% of net sales, down 140 basis points compared with Q1 last year. Excluding JVFs, pro forma adjusted EBITDA grew to 93.8 million, or 20.1% of net sales, down 30 basis points year over year. Non-GAAP operating margins are behind 20 basis points when compared with Q1 of last year. On a pro forma basis, though, when you exclude JVS, operating margins grew by 40 basis points year over year, demonstrating the power of the ongoing business at Altrum. Interest expense was down approximately 33% due to lower debt levels and more favorable pricing as a result of our November 2021 refinancing. Please turn to slide nine for a closer look at our balance sheet improvements cash flow and liquidity. Non gap free cash flow the quarter for the quarter was negative 42.7 million compared with 26.6 million in the year ago quarter. Working capital grew from year end 2021 by approximately $80 million reflecting growth in inventory and accounts receivable primarily driven by strong March sales which were up 25% when compared to the month of December 2021, and reflecting our investment in inventory to support the strong underlying demand. Capital expenditures during the quarter totaled $17.8 million, up 85% from the prior year quarter as we continued to invest in growth opportunities. We finished the quarter with $183.7 million of cash. Please turn to slide 10. Looking ahead, based on our current plans for debt paydowns and returning capital to shareholders, we expect to exit 2022 with leverage of approximately two to two and a quarter times on a net debt basis, well within our target range. As we outlined at our Investor Day, we have been evaluating alternative methods to return capital to shareholders while continuing dividend growth. Earlier this week, we announced that our Board of Directors have approved a new share repurchase program, The program authorizes the repurchase of up to $300 million of Altra common stock through December 31st, 2024. The resumption of Altra's stock repurchase program reflects the board and management's confidence in Altra's ability to continue generating free cash flow while positioning the company for future investments and growth, both organically and through M&A opportunities that align with our ABS strategy. Please turn to slide 11 for an update on our outlook for 2022. As we further our work in 2022, we remain confident in Altra's prospects for the year as we look to build on a very successful first quarter. We are encouraged by the team's resiliency and proactivity in addressing the challenges markets are facing in 2022. And while these continue, we have demonstrated our ability to control what we can control and capitalize on robust demand with a historic quarter for Altra. We look to continue leveraging our strong customer relationships to outperform our competitors in fulfilling customer needs in the quarters ahead. Today, we are resetting our 2022 guidance to reflect the sale of JVS and the increase in working capital to support our ongoing efforts to manage market demands. We are also raising our guidance for our ongoing businesses to reflect the very strong underlying demand. With that as background, our guidance for the full year 2022 is as follows. Including the JVS contribution in 2022, we expect annual sales in the range of $1.9 to $1.94 billion, gap diluted EPS in the range of $2.59 to $2.69, non-gap adjusted EPS in the range of $3.35 to $3.50, and non-GAAP adjusted EBITDA in the range of $388 million to $403 million. Excluding JVS in 2022, we expect annual sales in the range of $1.855 billion to $1.895 billion, GAAP diluted EPS in the range of $2.54 to $2.64, non-GAAP adjusted EPS in the range of $3.22 to $3.37, and non-GAAP adjusted EBITDA in the range of $379 million to $394 million. Notably, we expect earnings to be equal or higher compared to the prior year despite a $194 million revenue reset related to the JVS divestiture. For both scenarios, we are lowering our depreciation and amortization guidance to a new range of $95 to $100 million We are raising our capital expenditure expectations in the range of 50 to 55 million and adjusting normalized tax rate for the full year to be in the range of 22 to 23%. We are also lowering our adjusted non gap free cash flow range to 125 to 140 million to reflect our investment to support the strong demand we are experiencing. Please turn to slide 12. To help everyone better understand the ongoing business, we have provided a comparison of the 2022 pro forma guidance versus the pro forma 2021 results. As you can see, we expect to deliver double digit adjusted EPS and adjusted EBITDA growth in 2022 while growing the top line at high single digits to low double digits. This again is a strong demonstration of the underlying strength of our transformed portfolio and the power of the ultra business system. Now, please turn to slide 13. In addition to the previous slide, we have included a 2021 pro forma results table by quarter and full year to assist you in your ongoing analysis of Ultra. With that, I'll now turn the call back to Carl before we take your questions.
spk03: Thank you, Todd. And please turn to slide 14. We're extremely pleased with the progress we have made towards our goal of being recognized as a premier company And I would like to wrap up with a few key messages. First, with the sale of JVS, acquisition of Nook, and our organic growth initiatives, we are improving the underlying earnings power and exposure to markets with high secular growth. Second, Altra is executing on the strategy we discussed at our investor day last month and capitalized on our opportunities with a record-setting quarter. Our team is doing an exceptional job managing through the dynamic market environment. You see this on the bottom line as our pricing initiatives become apparent and on the top line as we continue to deliver exceptional bookings and sales growth. Third, we have strong convictions in our ability to expand margins, generate strong cash flow, and maintain a strong balance sheet. We believe that by allocating our capital prudently and wisely, we will become a market compounder. Finally, we recognize that the sale of JVS and the improvements we are working on complicate the outlook, so we have provided details and guidance to clarify the picture of the exceptional growth, operating margin expansion, and cash generation potential of the ongoing business. We look forward to sharing our progress throughout fiscal 2022, and with that, we will now open up the call for questions. Sam?
spk09: Thank you, Carl. We will now begin the Q&A session. If you'd like to ask a question, please press star one on your telephone keypad. And if you'd like to remove that question, please press star two. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. Our first question comes from Jeffrey Hammond of KeyBank Capital Markets. Jeffrey, your line is open.
spk07: Hey, good morning, guys. This is David Tarantino on for Jeff. Hey, David.
spk04: Hey, David.
spk07: All right. So clearly a pretty impressive step up in margins in ANS sequentially and obviously kind of a lot of moving parts going forward. And obviously price realization was kind of the main driver. But could you give us kind of some more detail on what you think specifically with ANS moving forward?
spk04: Yeah. So they made some great progress. strides in the price-cost gap, you're absolutely right. We continue to initiate additional pricing actions through the first quarter. We will continue to do pricing actions, as Carl mentioned, as we see costs continuing to rise. But ANS is experiencing extremely strong demand, and it's very broad-based across the Thompson and Cole Morgan businesses. The Portis gap, as Carl mentioned, you know, the medical sales were essentially flat, just up modestly. So we are feeling some pressures in that end market in the A&S segment. You know, we continue to expect that they will close the gap further on the gross profit line as we continue through the year.
spk07: Great. And then just switching gears maybe a little bit, could you give some color on the announcement of the share repurchase program, given it seems to kind of maybe depart from the M&A growth story outlined at the investor day?
spk04: Yeah, sure. You know, so we had historically, we had a share repurchase plan authorized by the board. It expired after we had completed the A&S merger and, And at the time, due to our leverage and our stated priorities of getting the leverage back into the leverage range, our target leverage range, we opted to not authorize a new share buyback program at that time as we did not feel it conveyed the right message and where we were going to be prioritizing our capital. We feel that now is the right time to do it. It gives us greater flexibility. Now that our leverage is down in the target range, and as Carl said, we are continuing to build our M&A funnel, and that will still remain a priority, but this gives us an option to deploy capital back to our shareholders if that's the right thing to do at the right time.
spk03: And I think if I outline our priorities in series, you know, our top priority is to invest in organic growth initiatives. Our next priority is to grow through M&A. Our third priority is to continue to pay down the debt. And fourth priority would be to return cash to shareholders. And we needed the optionality, you know, since we didn't have a current share buyback program, if there's a big dislocation in the stock price or there's a dislocation in the M&A environment because people aren't selling companies, we wanted the optionality to be able to execute turning stock. returning cash to shareholders.
spk06: Great, thank you.
spk09: Thank you for that question. As a reminder, to ask a question, it is star one, and to remove that question, it is star two. Our next question is from Jake Jarnago of Baird. Jake, your line is open.
spk08: Hey, good morning, Carl. Good morning. Um, yeah, it's filling in for my camera and again today. So question on, um, just kind of elaborate on your guidance and the approach to it. You know, for us, it looks like once you overage, you know, you have good visibility to two Q and then basically kind of maintaining conservative assumptions in the second half, you know, is that a fair assessment and then quantitatively or qualitatively, you know, what's the kind of price and volume assumptions may be embedded in your organic growth, which looks like it's around mid-single digits. So any color on those would be helpful.
spk03: I'll start with the philosophy, Jeff, and then Todd can get into the numbers. But you're exactly right. The visibility for the second half with the war in Ukraine, the shutdowns in China, the uncertainty about what's going to happen with the Fed and interest rates and big debate there. And then the supply chain issues, we just don't have the visibility to really predict how all that's going to impact. And if a couple of those things get resolved, it could turn out to be a whole lot better. So we felt it was more prudent just to maintain the outlook for the second half.
spk04: Yeah, so related to Q2, yeah, we would expect sort of similar growth rates that we saw in the first quarter. of this year. And quite frankly, when you look at it, we're getting back to what we used to see more traditionally, where we would do slightly more than 50% of our revenues in the first half of the year with a little bit of seasonality in the summer months with our European exposures. And as Carl said, we felt comfortable with that, leaving the back half of the year sort of in line with our original guidance from back in February, and with the visibility we have to Q2, you know, bumping the guide up as a result of the Q1 beat and the expected performance in Q2.
spk08: Got it.
spk03: And then, yeah, go ahead, Carl. No, just regarding price-cost, I think We made significant progress in Q1 as we worked through some of the order books that have been priced lower. And the price increase really started to take effect. We expect that to continue into Q2. And then some of it will bleed over into Q3 and Q4. But I hope by the end of Q2, we have the majority of it caught up. And that has the one caveat. that we don't see significantly higher inflation and have to go with another round of price increases because then we'll have to work through the orders that we have at the current pricing. So if inflation takes off again, that's the one caveat.
spk08: Got it.
spk03: Makes sense.
spk08: And then, yeah, I mean, ANS margins were really good this quarter. A lot of those end markets in there are automation, material handling, kind of the higher end of the spectrum in terms of, you know, electronics and drives and things like that, parts where we've heard supply chain is particularly sensitive and whackable in a way to put it. I guess, you know, are you guys, you know, you think you're managing better than, you know, maybe some peers in the area? You know, what's it kind of like on the ground there? You know, maybe that leads into, you know, kind of the strategic increases in working capital around there. I guess just maybe your approach there and what you're seeing on the ground.
spk03: Yeah, I think one thing we have, some of the positions with some of our businesses are really mission critical. And so in order to support those mission critical businesses, we worked with our customers to buy components at sometimes very elevated prices. And I think somebody that has more or less mission critical business probably didn't need or have to do that and didn't need to make the quick decisions on what to buy, when to buy it, how much to pay for it. And our team did an outstanding job getting out there and finding components that we needed to serve some of those industries, defense, medical in particular. So I'd say we executed extremely well. And I think I would attribute it to partly because of the nature of a customer base that we have, that we wanted to serve those very critical industries, and the customers supported it. So I think that's probably the number one reason.
spk04: Yeah, and, you know, we continue, you know, the working capital increase, you know, half of it is tied to inventory, and, you know, we've taken the position with the demand that And, you know, as Carl said, the nature of our products, that if we can get the inventory to help serve our customers, we're going to get it so that, you know, we can continue to protect and hopefully gain additional share as a result of us servicing our customers above and beyond.
spk08: Got it. Appreciate all the color. I'll jump back in the queue.
spk04: Thanks, Jake.
spk08: Thanks.
spk09: Thank you, Jake. It's a final reminder to ask a question. It is star one on your telephone keypad. We'll pause here very briefly for any remaining questions.
spk06: Okay, we have a follow-up question from Jake Jarnago of Baird.
spk09: Jake, please proceed.
spk08: Yeah, I guess I'll knock a few out here. I guess what you guys are hearing in channel inventory, you know, are they taking similar approaches to you guys in terms of, you know, kind of safety stack or, you know, are they still pretty normalized and still looking to obtain more?
spk03: I think my impression is that in some cases they are looking to, you know, based on the higher business levels and the longer lead times, put a little more inventory in place where where they deem it as relatively low risk or very difficult to get components. So I'd say there is definitely some spot inventory builds.
spk08: Got it. And then, you know, we've talked about this in the past, but, you know, it looks like book the bill is still, you know, implying that backlogs are, you know, growing a little bit sequentially, you know, going forward, you know, internally, are you expecting, you know, orders to, you know, potentially flip negative as we start lapping tough comps or, you know, is it right now it looks like, you know, we're still growing off the base, you know, inflation's obviously still contributing in that number, but, you know, kind of thoughts on how orders, you know, might cadence through the year and kind of outline some expectations there.
spk03: Yeah. I don't know when it's going to happen, but in prior recoveries, when there's been, you know, the, demand has outstripped supply and lead times get extended, then there is a period of time where the underlying demand is still really solid, but you see a dip in the order book for a period of time because the lead times are starting to come back in and starting to shorten up and the consistency of supply gets better. And so I anticipate we'll see the same thing. At some point, we'll see a decline in orders and people will panic and go, The world's coming to an end. It'll be like Chicken Little when, in reality, the underlying demand is still there. And the world's not coming to an end. So there'll be an overshoot. And then people will realize that the economy is still pretty solid or the industrial economy is still there. And it'll recover. So I think we've seen that in prior. I've seen it. I think I'm older than you, Jake. But I've seen it a few times in my life where people panic unnecessarily
spk08: Got it. Yeah, I think that's a pretty safe assumption. We don't have to run the math on the differences. And then just one last one here, more of a modeling question. Sequentially, you kind of answered this before on ANS, but are you expecting margins to follow basically a normal seasonal cadence year? And does that imply that margins can grow here on a sequential basis for ANS?
spk04: Yeah, we expect as they continue to work through their backlog that the margins will continue to expand and get back up to the more historic levels as we continue to work through various electronics complexities on the supply chain side and some of the higher cost materials and getting that pricing through. But that is our working expectation.
spk08: All right. Thanks, guys. I'll drop back in to see if anyone else is in.
spk09: Okay. Thanks, Jake. Thank you, Jake. The next question is from John Franzer of Sudoti. John, your line is open.
spk05: Good morning, guys. Good morning, guys. I apologize if you addressed this, but last quarter, if I recall, there was revenue deferred from the fourth quarter in 2022, and that was partial explanation for the book to bill. Is that still the case? Did you deliver on that deferred revenue and bookings are fundamentally solid or is there still a case of kind of this pushing to the right of the revenue?
spk03: No. When I look at the order book, my assumption is that there's still some portion of it is people trying to build inventories, trying to take account for longer lead times and just want to have things just in case. I think when you look at the shutdown of the Shanghai port, a lot of stuff is going out of Ningbo instead of Shanghai, but there's still going to be some supply disruption, so people are still concerned. And so there's a little bit of that, but right now I think we're at the point where most of the order book is truly the underlying demand and that is still exceeding our shipments by 15% or so. Our past due orders are not. We've gotten a better handle on our lead times, and our delivery performance is better. But I believe that the underlying demand is the bulk of our current order rate, and it is still in excess of our shipments. I don't know if that answers your question, John.
spk05: Got it. No, I'm really just kind of looking to see if you satisfied the demand that you pushed. We talked about in the fourth quarter and what the current scenario looked like. So it definitely answered the second part. But did you catch up on the stuff that was deferred in the fourth or no?
spk03: Well, I think the orders were in excess and we built past due backlog in the fourth quarter. So I wouldn't say we catch up. I'd say we held our own. kind of treading water where we are right now versus still continuing to sink. We're now back up to the surface and able to breathe. Fair enough.
spk05: And in regards to the realization of pricing and keeping it neutral, if you will, how far forward did we pull up the ability to recapture the price-cost problem?
spk04: Yeah, so price-cost, we still lagged about 40 basis points in the quarter, so we made some really good progress from where we were. We were about 100 basis points in Q4. It's primarily on the electronics side of things, and we've taken actions. We saw much better than we anticipated pricing flowing through in Q1, and we expect that to continue into Q2. And then as we work through the backlog and then in the back half of the year as we continue towards year end, get back up to ahead of the price cost and start contributing some additional margin.
spk05: Okay. Great, Todd. Thanks, guys, for taking my questions. I appreciate it.
spk04: Yeah. Thanks, John.
spk09: Thank you, John. The next question is from Jeffrey Hammond of KeyBank Capital Markets. Jeffrey, your line is open.
spk07: Hey, guys, I just wanted to follow up, just kind of wanted to see kind of what you're seeing maybe more near term from Europe. Pretty obviously good performance in Q1, but with the war impacting economies there, I'd love to hear kind of what you're seeing more near term.
spk03: Yeah, there's a few markets that are being impacted negatively, but surprisingly, it's not as bad as I would have thought. So a little bit of an impact and certainly more uncertainty, but right now the incoming orders are still very solid.
spk06: Okay, great. Thank you.
spk09: Thank you, Jeffrey.
spk03: Thanks, Dave.
spk09: There are no further questions waiting at this time, so I'll hand the call back over to Carl for closing remarks.
spk03: Okay, thanks, Sam. And thank you all for joining us today. We look forward to speaking with many of you in the weeks ahead, including next week's Oppenheimer Industrial Growth Conference, where Todd will be presenting on Tuesday, May 3rd at 1115. Unfortunately, I will be traveling and unable to attend, but I want to thank you again for your time, and this concludes today's call.
spk09: That concludes the ultra-industrial motion first quarter 2022 earnings call. Thank you all for your participation. You may now disconnect your lines.
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