Eastern Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 10, 2023

There are 5 speakers on the call.

Operator

Greetings, and welcome to The Eastern Company's First Quarter Fiscal Year 2023 Earnings Call. At this time, all participants are in a listen only mode and 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, Mr. Ernie Hawkins.

Operator

Sir, 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 Q1 of 2023. With me on the call are Eastern's President and CEO, Mark Hernandez and CFO, Nicholas Vlahos. We issued an earnings press release yesterday after the market closed. If anyone has not yet seen the release, I invite you to 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 May 9, 2023. In addition, during today's call, we will as non GAAP financial measures that we believe are useful as supplemental measures of Eastern's performance. These non GAAP measures should be considered in addition to and not as a substitute for or in isolation from GAAP results.

Speaker 1

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, I'll turn the call over to Mark.

Speaker 2

Thank you, Ernie, and good morning to those who've joined us by phone or participating via the web. It's a pleasure to speak with all of you today. I'm going to begin the call today with some high level observations about our Q1 performance.

Speaker 3

Then I'll turn

Speaker 2

the call over to Nick, who will take you through the detailed review of our financial results. After that, I will come back and share with you Many of the initiatives we have underway to improve our operational performance and enhance our return to our shareholders and the goals of this management When I accepted the appointment as Eastern's CEO 4 months ago, I saw a company with capable people in 3 promising businesses, each which faced a very challenging market environment. As you know, frequent supply chain disruptions and increases in freight and material costs were the order of the day in 2022. As a result of these severe headwinds, our businesses did not perform to their full potential and our 2022 financial results suffered. Clearly, we needed to immediately change the way we are running our business.

Speaker 2

To that end, During the quarter, we undertook thorough review of our businesses, products and began to implement an action plan consisting of several operational initiatives. We've set quantitative goals for these initiatives and are tracking performance to completion. I'm pleased to report that we began to see initial benefits of these operational improvement initiatives during the Q1. Inventory declined 11% from the end of the 4th quarter, particularly at Valvac and working capital as a percentage of sales declined to 22.1% from 26.1% for the 4th quarter as we flushed out a portion of our lower margin orders from our backlog. Supply chain bottlenecks are easy and raw material and freight costs are moderating.

Speaker 2

Our backlog at the quarter end was $72,000,000 compared with $85,800,000 as April 1, 2022, when backlog was artificially inflated because of supply chain constraints that delayed shipments. We continue to see pricing improvements at Valvac, which are resulting in addition of higher margin orders to our backlog. At Big 3, Dice order turnaround and order fulfillment. On the demand side, we continue to transition from old to new programs within our commercial vehicle and automotive customers and remain well positioned to capitalize on industry trends in electrification, digitization and automation. At Velvac, demand remains strong And we're receiving orders for new products introduced last year to serve several new truck mirror programs and orders on existing programs as commercial vehicle Customers get closer to producing that planned to programs as commercial vehicle customers get closer to producing that planned capacity.

Speaker 2

Eberhard's electromechanical business is gaining momentum and has won sizable orders. Big 3 Precision Products is generating increased activity and winning awards for returnable transport packaging solutions designed for new automotive model launches, primarily in the electric vehicle space. With that, I'll now turn the call over to Nick.

Speaker 4

Thank you, Mark, and good morning, everyone. Net sales from continuing operations increased 5% to $72,500,000 from $69,000,000 in the Q1 of 2022, reflecting increased shipments of truck accessories and automotive returnable transport packaging products. Returnable transport packaging sales benefited from new automotive product launches, including several electric vehicle launches. Sales of existing products increased 3.3%. Price increases and sales of new products contributed 1.7% in sales growth for the Q1 when compared to the Q1 last year.

Speaker 4

New products included various truck mirror assemblies, rotary latches, electronic latches and locks, D rings and mirror cams. Gross margin as a percentage of sales was 21%, unchanged from the Q1 of 2022, reflecting improved price cost alignment and the easing of some raw material and freight costs. Product development expenses were 1,400,000 up $200,000 reflecting increased investment in new products at Eberhard and Velvac. As a percentage of net sales, product development expenses were of 1.9% compared to 1.7% for the Q1 of 2022. Selling and administrative were $11,900,000 compared to $9,900,000 for the Q1 of 2022, an increase of $3,800,000 of the $2,000,000 year over year variance relates to one time severance expenses associated with the elimination of the COO position and the departure of our previous CEO.

Speaker 4

The remaining $200,000 increase reflects higher sales Other expense of $600,000 for the Q1 of 2023 includes $400,000 reflecting the final working capital adjustment related to the sale of the GreenWalt business. Net income from continuing operations was $600,000 or $0.10 per share compared to $2,700,000 or $0.43 per share for the Q1 of 2022. Adjusting for the severance expenses and working capital adjustment, net of tax, which totaled 1,600,000 or $0.26 per share. Adjusted net income from continuing operations was $0.36 per share. Adjusted EBITDA from continuing operations was $5,500,000 compared to $6,100,000 for the Q1 of 2022.

Speaker 4

Net cash provided by operating activities swung $10,400,000 to $6,900,000 compared to net cash used of $3,600,000 for the Q1 last year. The improvement reflects reduction in Cash used to support working capital, primarily a $7,200,000 decrease in inventory. By comparison, in the Q1 of 2022, cash was used to ensure availability of inventory to meet customer demands in light of supply chain constraints. As a result, inventory turnover improved 4x compared to 3.2x for the Q1 of last year. Operating cash flow was used primarily to fund capital expenditures of $1,200,000 repaid $4,900,000 of long term debt and paid dividends of $700,000 At quarter end, our net leverage ratio was 2.05, down from $2,760,000 at the end of the Q1 of last year and $2,270,000 at the end of fiscal 2022.

Speaker 4

Cash increased $2,900,000 to $13,100,000 at quarter end. That completes my financial review. I'll now turn the call back to Mark.

Speaker 2

Thank you, Nick. Our team strategy falls into 4 categories: disciplined operations that deliver consistent results, Strong commercial business focus, effective capital allocation and utilization and value adding acquisition. Our priority this year is to ensure that all facets of Eastern operations, our pricing strategy, cost structure, Working capital management meet profitability and return on invested capital thresholds that each business contributes to the building overall continues to contribute to building overall shareholder value. As you've heard during the Q1, we improved working significantly to a record low of 22.1 percent of sales. We're now sharpening our focus on profitability.

Speaker 2

With operations optimized, we will be in good shape to move forward with the 4th category of bolstering growth through acquisitions. As I mentioned in my opening remarks, our action plan and initiatives we're implementing this year are expected to have a quick impact on the company's financial performance and be apparent in our results in the second half of the year. I'll start with the review of the first category, disciplined operations that deliver consistent results. With more efficient operations, we'll be much better positioned to deal with market challenges and in addition to take advantage of growth opportunities. We're scrubbing the cost side of the business, making sure that the cost of goods sold and operating expenses meet internal profitability targets.

Speaker 2

Let me give you a couple of examples of initiatives we're implementing. We're addressing supply chain inefficiencies, reducing lead times from our agent suppliers and leveraging near shoring capabilities. We're also leveraging our operations to overcome labor shortfalls in the U. S. And taking steps to reduce manufacturing costs.

Speaker 2

Finally, we've implemented a hiring freeze throughout our businesses and we're cutting non essential expenses looking for ways to realize cost synergies across our three businesses. The second leg of our 4 pronged strategy is effective capital allocation and utilization. Here we're instilling disciplines in our working capital management process to improve utilization and enhance return on invested capital. We're allocating capital expenditures to projects that will generate highest return on investment. As part of our inventory reduction effort, we've calculated aspirational targets for turn rates.

Speaker 2

And as the great Vince Lombardi once said, perfection is not attainable, But if we chase perfection, we can catch excellence. The 3rd category is a strong commercial business focus. In this area, we are focusing on improving return on invested capital through pricing actions and margin discipline. During the Q1, we completed an evaluation of the margin of each product as part of our overall portfolio optimization exercise determined that we're missing opportunities to enhance margins through pricing and that we needed to change our approach. An example, we're engaging in conversations with our customers about contract terms, shifting the conversations to real time pricing model in order to ensure recovery costs driven by macroeconomic pressures.

Speaker 2

Going forward, bids on new business must meet predetermined return on invested capital and return on sales targets. We are also leveraging business growth opportunities from automotive sector in Mexico and the uplift opportunity led by the Australian off road and commercial vehicle markets. We're pursuing activities to reduce lead times by 50% in our mold business. Finally, Our strategy contemplates value added acquisitions. As we work to bring Easter's debt to EBITDA ratio down, we will continually be on the lookout for companies that fall into 2 different categories.

Speaker 2

Those that can be absorbed in one of our existing divisions to complement operations and second, those that will be added to the Eastern level and operated separately. Either way, we'll make sure that they augment income, EBITDA, return on capital employed, return on invested capital before we pursue them. In summary, I want you to take away from my remarks today is that we're laser focused on execution and creating value for our stakeholders. While we have many initiatives in process, we're not yet at a stage where we're prepared to share with you forward financial metrics. What I can share with you, however, is in my view what defines Excesso automotive OEM supplier, which is our ambition for Easter.

Speaker 2

Based on my 30 plus years in commercial vehicle space, I learned that Successful OEM suppliers proactively respond to changes in cyclical demand while returning 10% to 12% return on sales and working capital to sales ratios of less than 22%. In addition to focusing on execution, I want to bring cohesion and commonality to our organization. We can do that by sharing best practices and ideas across businesses and locations, crafting sets of common methods and optimizing processes in the pursuit of perfection. As a leader, I believe working together in a collaborative manner, Reaching out to our employees for input and then making decisions expeditiously and executing on those decisions. I'm asking employees to make changes in their business practices And I appreciate that this could be unsettling to an organization.

Speaker 2

Having said that, I'm seeing employees adopt these new business practices openly, And I sincerely want to thank them for accepting the challenge and working together to optimize Eastern operations. Finally, as you know, improvement business is not a race with a finish line. It's an ongoing continual process. No industry is static and customer needs are always changing. Unlike the baseball game bound by the rules of today for a 9 inning game, a A successful business is an infinite game, where we're not only playing today's game by today's rules, but we're looking forward to anticipate how the rules may change tomorrow.

Speaker 2

We continue to engage because we like to play the game. And the better we get at playing the game, the better our results will be in the long term. With that, I'd like to open up the floor for questions.

Operator

Thank you.

Speaker 1

Okay. Go ahead.

Speaker 2

Sorry, sir.

Operator

Thank you. At this time, we will be conducting a question and answer session.

Speaker 1

Okay. We do have a few questions submitted via the web, And we'll go over those now. First question, why did operating income adjusted for one time expenses declined quarter over quarter.

Speaker 2

I'll take that, Nick. In the Q1, we took the challenge of reducing working capital and lowering our working capital ratios. This action had additional effects, primarily around capitalized free. The reduction of inventory within recovering logistics Market caused us to recognize this value as an operating operational loss of income. The long term logistics market is stabilizing And we'll minimize the effect going forward.

Speaker 1

Okay. 2nd question, How much improvement in gross margin do you think is possible in 2023?

Speaker 2

Well, I can't give you an exact answer, but through our strategy, we intend to return historical margin performance to Eastern.

Speaker 1

And last question from the web. How should I measure success for Eastern in 2023 and longer term?

Speaker 2

I look at the longer term in 2023 in this way. Consistent and stable results quarter by quarter is our first objective, solidifying EBITDA and return on invested capital. In the future, it will be driven by EBITDA growth with solid underlying metrics.

Speaker 1

Okay. Operator, do you have any other questions on the line?

Operator

Yes, sir. We have a question from Ross with Banneton Capital. Sir, you may go ahead.

Speaker 3

Hi, Mark and Nick. Thanks for taking the question. Actually a quick follow-up on something you just said. Could you just explain a bit more, you said there's I think you said capitalized freight costs that were More, sort of one time in nature as you clean things up in they're in SG and A, is that where they are?

Speaker 2

No, there is cost of goods sold. And what happens is when the freight rates coming from Asia, particularly the container Costs were over $10,000 per container where we normally see about $3,000 per container. The freight is capitalized At the higher level. Therefore, when we reduce inventory, we have to reduce at the higher level, which hits our income, reduces our income.

Speaker 3

Okay. Okay. That makes sense. Sorry. Thanks for clarifying.

Speaker 3

And then the other question I wanted to ask was just around the growth rate. So Q1's growth rate and revenue specifically decelerated as a percentage compared to say Q4 or just all of last year. And it wasn't just price, it looks like volume decelerated too. Anything going on there that you could sort of provide some color around What's leading to the slowdown? You're obviously still seeing growth, but curious if there's sort of underlying dynamics, especially since it sounds like things are still Pretty robust in terms of demand and wins across the business.

Speaker 2

Yes. Last year, we were fighting the headwinds. We're Heavily into commercial vehicles. We're finding the headwinds as the commercial vehicle companies try to produce, but they were unable to supply chain constraints. Now those constraints are somewhat freed up, but the incremental the organic growth is not 10%.

Speaker 2

We're looking at Potential growth in revenues of 3% to 4% throughout this year.

Speaker 3

Yes. Okay. That makes sense. Thanks so much. Appreciate it.

Operator

Thank you. We currently have no further questions in queue. So I'll hand it back to Mr. Hernandez for any closing comments you may have.

Speaker 2

Thanks again for joining us today. To sum up today's discussion, I'm confident that our determined focus on disciplined operations, optimum capital utilization, Focused commercial business and value adding acquisitions will bring positive changes and improve results in 2023 and put us on a path for sustained growth. Our markets have many favorable trends we can leverage and we look forward to sharing our progress with you after the Q2.

Operator

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

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Earnings Conference Call
Eastern Q1 2023
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