Eastern Q3 2023 Earnings Call Transcript

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November 8, 2023

There are 5 speakers on the call.

Operator

Greetings, and welcome to The Eastern Company's Third Quarter Fiscal Year 2023 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Ernie Hawkins, Corporate Controller at The Eastern Company.

Operator

You may begin.

Speaker 1

Good morning, and thank you, everyone, for joining us this morning for a review of Eastern's results for the Q3 of 2023. With me on the call are Eastern's President and CEO, Mark Hernandez and Eastern's CFO, Nicholas Vlijos. We issued an earnings press release yesterday after the market closed. If anyone has not yet seen the release, please visit the Investors section of the company's website, www.easterncompany.com, where you will find the release under Financial News. Please note that some of the information you will hear during today's call will consist of forward looking statements about the company's future financial performance And business prospects, including without limitation, statements regarding revenue, gross margin, operating expenses, Other income and expenses, taxes and business outlook.

Speaker 1

These forward looking statements are subject to risks and uncertainties that could cause actual results or trends to differ significantly from those projected in these forward looking statements. We undertake no obligation to review or update any Forward looking statements to reflect events or circumstances that occur after the call. For more information regarding these risks and uncertainties, Please refer to risk factors discussed in our SEC filings, including Form 10 ks filed with the SEC on March 14, 2023 for the fiscal year 2022 and Form 10 Q filed with the SEC on November 7, 2023. In addition, during today's call, we will discuss non GAAP financial measures that we believe are useful as supplemental measures of Eastern's performance.

Speaker 2

These non GAAP measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. A reconciliation of each of the non GAAP measures discussed during today's call to the most directly comparable GAAP measure can be found in the earnings press release. With that introduction, I'll turn the call over to Mark. Thank you, Ernie. Good morning to those who have joined us by phone and those participating via the web.

Speaker 2

As is our practice, I'm going to begin today's call with some high level observations about our performance and market conditions during the past quarter. I'll then turn the call over to Nick, who will provide more detailed review of the quarter's financial results. After that, I'll come back and update you on the progress we've made with various additional activities to transform Eastern's operations and enhance shareholder value. All of these build on 4 basic pillars I've described to you in earlier calls: disciplined operations, effective capital allocation and utilization, A strong commercial business focus and value adding acquisitions. Today, I'm pleased to announce the 2nd consecutive quarter of improved financial performance with the improvements in working capital, margin And earnings per share from continuing operations.

Speaker 2

We've been moving ahead quickly with the implementation of our operational improvement plan and cost reduction efforts. And as we expected, these results became increasingly evident as the year progressed. All of these all of the changes we've been making are based on a ground up review of Eastern's businesses, products And markets that we undertook shortly after I became CEO in late January. I'm delighted that our improvement initiatives are making so much progress. And just as important, I remain confident that our team's hard work will become more apparent in coming quarters.

Speaker 2

Let's take a quick look at some key developments. For the 9 months ending September 30, 2023, cash flow from operations increased by almost 20,000,000 dollars compared to the same period in 2022. As Nick will discuss in more detail, our balance sheet continues to strengthen due to our operational improvements, Enabling us to pay down another $5,000,000 in debt during quarter 3 and positioning us well for the future On a sequential basis, our gross margins continue to rise, Reaching 25% in this year's Q3 from 22% in the Q2 of 2023 and Helping us achieve earnings per share of $0.49 from continuing operations. Our unwavering commitment to disciplined operations and commercial Business focus drove this result. Over the past 9 months, we systematically worked on resetting our commercial relationships to those that are mutually beneficial.

Speaker 2

We completed this initiative in the Q3 and now have fully transitioned to our new commercial structure for our legacy products. We believe establishing a sound foundation for earnings growth earnings and growth in the future. As I mentioned in our Q2 call, We expected some headwinds from macroeconomic factors in the Q3 and also saw a pause in orders related to new product launches in the automotive industry. In addition, the global supply chain finally returned to pre pandemic state. Our customers reduced the number of excess orders they have previously placed as a cautionary measure.

Speaker 2

Nonetheless, our backlog increased 4% year over year as of quarter end. In addition, More recently, with the fears of deep recession put to rest, the automotive market has strengthened along with Eastern's order flow. And we expect 2023 to end on a solid note for our company. With that backdrop, I'll turn the call over to Nick.

Speaker 3

Thank you, Mark, and good morning, everyone. I'll provide a quick review of the quarter's financial results. Net sales from continuing operations declined 8% to $65,600,000 from $71,600,000 in the Q3 of 2022, Primarily due to lower demand for truck accessories and returnable transport packaging products. Price increases And sales of new products contributed 6%. New products included various truck mirror assemblies, rotary latches, D rings and mirror cams.

Speaker 3

Price increases primarily reflect our program to recover increases in raw material and freight costs. Gross margin as a percentage of sales was 25% in the Q3 compared to 23% in last year's period End up from 22% in the Q2 of 2023. The quarter over quarter increase reflected improved price cost alignment, particularly with respect to increases in raw material costs. As a percentage of net sales, product development expenses were 2.2 compared to 1.4 percent for the Q3 of 2022. Selling, general and administrative expenses were 9,700,000 Compared to $10,100,000 for the Q3 of 2022, a decrease of $400,000 or 4%, primarily due to lower legal, professional selling costs and payroll related expenses.

Speaker 3

Other income decreased $1,300,000 to negative $100,000 in the Q3 of 2023 Compared to the corresponding period in 2022, this decrease primarily reflected unfavorable pension cost of $300,000 in this year's Q3, while in the prior year period, the company had a favorable pension cost adjustment of $400,000 and a gain on the sale of our corporate office building for 600,000 Net income from continuing operations for the Q3 of 2023 was 3,100,000 or $0.49 per diluted share compared to $4,500,000 or 0.72 dollars per diluted share for the comparable period in 2022. Adjusted EBITDA from continuing operations,

Speaker 4

A

Speaker 3

non GAAP measure for the Q3 of 2023 was $7,000,000 compared to $7,700,000 for the Q3 of 2022. During the 1st 9 months of 2023, we increased our cash flow from operations by $19,600,000 when compared to the same period in 2022. The improvement reflects a reduction in cash used to working capital, primarily a $4,000,000 decrease in inventory. By comparison, last year cash was used to ensure the availability of inventory to meet customer demand in light of the supply chain constraints. With this cash flow, we paid down more than $5,000,000 of debt during the Q3 and year to date more than $15,000,000 A record level of debt paid out for Eastern.

Speaker 2

At the end of the

Speaker 3

third quarter, our senior net leverage ratio was 1.8 5 to 1, down from 1.95 at the end of the second quarter. In addition, we invested $4,700,000 in capital expenditures paid dividends of $2,100,000 in the 1st 9 months of 2023. For the Q3, cash flow from operating activities was $5,700,000 compared to $2,200,000 For last year's Q3, as a result, inventory turnover improved to 3.5 compared to 3.2 for last year's period. That completes my financial review. I'll now turn the call back to Mark.

Speaker 2

Thanks, Nick. There are a few more points I'd like to bring to everyone up to date on our business. 1st, As I've mentioned on earlier calls this year, to become more efficient and optimize performance, we've been taking a close look at every aspect of our operations of our 3 divisions. Where needed, we've also been making tough decisions and taking action steps. For example, we recently brought in new managers to lead Big 3 Precision Products.

Speaker 2

The new division President and its new General Manager have the right mix of experience in driving manufacturing performance Inefficiencies to strengthen Big 3's existing business and take fuller advantage of opportunities in custom returnable packaging and blow mold tools. 2nd, the integration of SureFlex, a manufacturer of tractor trailer electric cable connection cables and assemblies. We proceeded smoothly has proceeded smoothly since we acquired the assets in the company last June. As a reminder, We acquired these assets to vertically integrate our trailer hose business and expand Velvac's production capabilities. We are now positioned to achieve cost efficiencies by producing additional products in house.

Speaker 2

Although by itself, The SureFlex acquisition was not big enough to move the needle. It's a good indicator of our future strategy and approach. One additional point of information before we open the floor to questions. As I mentioned in our Q2 call, we have started to expand our Investor Relations activities. Next week, we'll participate in the Sidoti conference, which is focused specifically on smaller micro cap companies and the institutions We'll issue an advisory announcement soon about the conference, so you can look for the details on our IR website in just a day or 2.

Speaker 2

I hope you're listening to our webcast at the conference on Wednesday, November 15. We'll also hold virtual 1 on 1 meetings with buy side, so we can inform them of our new business strategy and improve financial results Eastern is generating. Now let's proceed to questions. Operator, can you please give the instructions to the investors who have joined via the conference call on how to enter a question?

Operator

Certainly, at this time, we will be conducting a question and answer session.

Speaker 2

Thank you. We'll now address the questions via the web first and then return to the telephone questions.

Speaker 1

First question from the web, your debt pay down has certainly been strong this year. Do you expect that to continue going forward? And at approximately what rate?

Speaker 2

So, yes, I'll take the first part of this and then Nick, you can answer. What we anticipate is working on continuous flow operations, so that meaning that our performance is consistent quarter over quarter. That should yield our ability to continue to pay down debt. Our disciplined operations is focused on just that, So that we don't have variation in quarter over quarter performance going forward. So we anticipate that The debt pay down will continue at this rate or higher based on our how we're performing Going forward, Nick, do you have anything to add?

Speaker 3

I think you summed it up well, Mark.

Speaker 1

Next question. Mark mentioned 4 pillars on which Eastern strategy and deployment are based. Please remind us what those principles and the most important elements are.

Speaker 2

So the 4 pillars are, I mentioned earlier in this call, is disciplined operations, making sure that we do everything every day to run our businesses, Looking at every dollar, capturing every dollar and selling all our products in a timely fashion. That's pillar 1. Pillar 2 is capital utilization and allocation, Looking at how we spend our capital within our businesses and trying to reduce it to become more efficient company. And secondly, we're investing our CapEx In projects that have high rates of return and return value to Eastern. Our 3rd pillar is Strong commercial business focus.

Speaker 2

This is where we're working with our customers and the relationships that we have with customers, like I said earlier, so that's mutually beneficial. We don't want to take advantage of anybody, but we also don't want people to take advantage of us. So we're going to price appropriately and we're going to Be good stewards of our business going forward. And then lastly, if we do the first three correctly, and we have been, is value added acquisitions. We will move forward on value added acquisitions in 2024, things that make sense for us that That can allow us to vertically further vertically integrate our businesses and reduce our cost structures, with the hopes of growing the business not the hopes With the intention of growing the business so that we can further add on a larger acquisition in the future.

Speaker 1

Thanks, Mark. Do you expect further growth in gross margin in Q4 and beyond?

Speaker 2

Yes. Like I said, the pricing initiative and Customer resetting was complete in the Q3. However, the impacts of all that work haven't fully been implemented This year, and that's purely on legacy products that are going to flow through in the next quarter and into the beginning of next year. I just want to keep in mind that our new products, the stuff that we're quoting today has a different standard by which we're quoting and the businesses that we the Business that we generate from those new programs are at a significant increase of our gross margins going forward.

Speaker 1

Okay. How much of the improvement in gross margin came from a normalizing supply chain environment And lower raw material prices versus the pricing actions that we've been taking as a result of the new program.

Speaker 2

I would to put a number on, I would say 90% came from the resetting of our commercial relationships And 10% was fixing the costs, the logistics costs and dealing with raw material going forward. So We've transitioned ourselves and we're in a much better position going forward to not get not stumble on Macroeconomic conditions with our customers going forward. Okay. Thank you, Ernie. Operator, are there any questions on the conference call?

Operator

Yes, we did have one question come in. And our question That we have in queue is coming from Ross Davidson from Benetton Company. Ross, your line is live.

Speaker 4

Hey, Mark. Hey, Nick. Thanks for taking the question. Just kind of continuing on the theme of gross margin, maybe just more high level. Is there anything about this quarter's gross margin figure, Which was great to see and clearly shows your strategy is having effect.

Speaker 4

Is there anything about it that we should interpret or had Sort of a one time benefit like any catch up or anything like that, that would make this level of gross margin unsustainable, notwithstanding sort of other changes that might be happening?

Speaker 2

Well, Ross, when we undertook this, we kind of went through the pricing side and the commercial Reset of our relationships, that is a one time foundational Pillar that we've built on, but we're going to build on that going forward with the new programs that we do launch. So I don't think it's a one time thing. One thing that Help us with the gross margin that probably is a one time is the resetting of our supply chain. Clearing out the precautionary orders That we're bottlenecking our inventory levels and reducing our ability to our operations' ability to return Earnings to our company. So we'll move forward with that.

Speaker 2

That's a one time thing, but it was small in comparison to the other commercial aspects that we're doing. And then the future growth of new programs and how we're pricing and how we're positioning ourselves going forward will add other values. Now on the cost side, We're going through all our costs because material expenditures are the single largest Item that we expense, and so we're going through a rapid analysis of what our cost side is and seeing if we can do more Do better with the One Eastern strategy for all our direct material procurement and our indirect material expenses.

Speaker 4

Got it. Okay. And so it sounds like the rate of I mean, clearly the rate of change can't stay the same forever, I get that. But like the level you're at, There's nothing super unusual, it sounds like. There's no reason to believe it can't be sustainable.

Speaker 4

Is that fair sort of summary?

Speaker 2

We're always trying to move forward. I mean, I have an internal objective of 30% gross margin. Will we ever get there? I don't know. We're going to try though.

Speaker 2

And with the pursuit of that aspirational target, we hope to not backslide and always move forward with our gross margin

Speaker 4

Actions. Got it. Got it. Thank you. And then just on the backlog, you talked about the increase year over year.

Speaker 4

It seemed like a bit even Bigger increase sequentially about $14,000,000 Can you remind me is that is some of that a seasonal effect or is that showing us some sort of A little bit of a rebound happening in sales potentially?

Speaker 2

The way I look at it, Ross, is that it's a rebound. We did the middle of the year was We saw quite a bit of softening or delayed in orders coming in. And now with the program launches, they haven't changed the end dates of these program launches. They basically snow plowed a lot of the demand and that's what we're seeing with the building of our backlog because they're releasing orders to us because they haven't changed their launch dates. We see that as a positive going forward into 2024.

Speaker 4

Got it. Okay. Well, that's encouraging. I mean, you mentioned that just one more thing. I mean, you mentioned the fears of a deep recession put to rest and sort of being an encouraging sign going towards the end of the year.

Speaker 4

I mean, truck manufacturing does seem like it's held up really well. Auto, motor vehicle seems a little bit more challenged. Anything else you can say about sort of the current environment in terms of what you're seeing with your customers?

Speaker 2

Yes. So the ACT who does the truck market analysis is predicting some softening of the Class 8 market. However, that's more than made up for with medium duty segment. So we think the commercial vehicle space will still be Strong going in or at least equal to what it was this year. The commercial vehicle space has been limited by suppliers, particularly on frame rails.

Speaker 2

As they work through that bottleneck of supply, we have indications that all the OEMs want to produce more in 2024 than they did in 2023. On the automotive side, yes, the turmoil of the last few months in the automotive industry has caused The automotive companies to take a pause on how they move forward with their program launches, but they like I said, they haven't changed their dates. And The forecast for 2024 for program launches is substantially higher than it was in 2023. We look at those as positive indicators going forward For 2023 in the automotive sector. Okay.

Speaker 4

That's great. That's really helpful. I appreciate all the color. Thank you.

Operator

Thank you. There were no other questions from the lines at this time. I would now like to hand the call back to Mark Hernandez for closing remarks.

Speaker 2

Okay. Thanks, operator. Thanks again for joining us today. You have heard our strategy and focus on bringing positive changes and improvements improved results in 2023, establishing a sound foundation for the future. Going forward, we remain committed to drive earnings, cash flow, paying down debt and when appropriate pursuing M and A opportunities to accelerate our objectives.

Speaker 2

We look forward to sharing more evidence of our progress with you after the Q4. If you would like more information in the meantime, please reach out to us. Thank you.

Operator

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

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Earnings Conference Call
Eastern Q3 2023
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