Q4 2019 Earnings Call

Good day, ladies and gentlemen, and welcome to the Eastern company's fourth quarter fiscal year 2019 earnings conference call. All lines have been placed on to listen only mode and the four will be opened for your questions and comments. Following the presentation. At this time it it's my pleasure to turn the floor, but your host for today Mr., Chris small sir.

The floor is yours.

Oh. Thank you good morning, and thank you everyone for joining us today.

Speaking today will be Easter is president and CEO guests black and our CFO John Sullivan after that we'll open the call for questions.

Please note that some of the information you will hear during our discussion today 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 inexpensive taxes and business outlook.

These forward looking statements are subject to risks and uncertainties that could cause actual results were trends to differ significantly from those projected these forward looking statements.

More information regarding these risks and uncertainties. Please refer under risk factors discussed in our form 10-K filed yesterday.

In addition, during today's call, we will discuss certain non-GAAP financial measures that we believe are useful.

Supplemental measures of Easter is performance. These non-GAAP measures should be considered in addition to and not as a substitute for we're in isolation from GAAP results.

That I'll turn the call Liberty got for opening remarks.

Thanks, Chris and good morning to those of you were joined us on the phone and those participating via the web.

We believe Easter its fourth quarter and full year numbers last Friday, and a full form 10-K yesterday afternoon.

Before John refused a detailed results with you.

I'd like to take a few minutes to reflect on our progress and take stock of where we are.

Especially as events are moving so fast these days.

I want to emphasize that we brought 29 team to were strong close and that we are on the right track to increase shareholder value by optimizing our portfolio businesses strengthening execution and keeping our balance sheet strong.

I am pleased with Easter is accomplishment in 2019 to call I just a few.

Our first our acquisition or big three precision in August was an important step towards our long term goal of building a larger stronger company.

Significant presence with key customers.

We completed a seamless integration of big three precision into eastern and just a few months.

And we're working with the management team to realize the full potential of this business.

Well already seeing some early synergies between big three precision and some of our other businesses.

The acquisition also made substantial contribution to our fourth quarter results and as I forecast at last quarter.

Was accretive for 2019 as a whole that's before transaction costs.

Second would be generating strong sales from new products.

Including for example, a new truck mirror, which we launched with a leading truck OEM that addresses some functionality concerns raised by the market, replacing a fixed mirror with the pivoting there.

We also introduced a new module toolbox latching system that will be available through dealerships and is branded as an OEM toolbox.

In total sales of new products accounted for 5% of our sales growth into fourth quarter of 2019 compared to sales in 2018.

And in the industrial hardware segment, new products represented 15% of sales gross.

Third.

Easter is cash flow from operations was exceptionally strong for both the fourth quarter and a full year.

In fiscal 2019, a full year, we generated 23 million <unk>.

Cash from operations, that's a 78% increase compared to the prior year.

Most of this improvement came from a reduction in our working capital.

As for better at matching inventory to demand as well as growth in net income adjusted for noncash charges.

Fourth.

We ended the year with a robust backlog totaling $72.2 million, which reflects both the acquisition of Bicsthree precision, but also very strong order flows that ever heard manufacturing.

Not all sales flow through our backlog and the importance varies across some of our different businesses.

We believe it's a relevant leading indicator of our overall growth.

That brings me to where we stand today.

There is obviously a significant amount of uncertainty in the macroeconomic environment as the result of the Corona virus.

And the financial impact that the measures to respond to it could have.

As a result of that Chinese new year holiday extension.

And the delayed opening up our own China locations and our suppliers.

Our businesses have been experiencing some supply chain disruptions in China.

Well the situation is obviously very fluid local conditions have improved in the last few weeks.

In southern China, we're operating at 95%.

<unk> Eastern China, where 60% this week and expect to be at 85% by the end of next week.

Our supply base in China is anywhere from 50% to 85%.

But even before to Corona <unk> issues surfaced in mid January we've been focusing a good deal ever attention on eastern supply chain really with an eye towards making structural changes that could help us reduce working capital and show our supply chains.

Our business philosophy has been to enhance the reliability and quality of our suppliers.

And free up cash flow.

Obviously these calls have taken on out an urgency but today situation.

At the moment, we're monitoring the situation closely and we're taking common sense actions to protect the health of our employees.

We're implementing the guidance offered by the CDC to keep our U.S. locations healthy.

And to the extent that our sales are adversely impacted into short term by a delay in shipments from China.

We believe that we can substantially make up the gap.

During the remainder of 2020 based on what we know today.

Got it from headwinds from the Corona virus.

Require a concerted effort, but we're very focused on this.

At the same time, we're looking beyond the immediate situation and working hard on developing new and innovative products for our customers in 2020.

Innovative solutions, whether components or packaging solutions that support our customers new product launches will help us offset demand child the man challenges.

In certain of our end markets like class a truck.

It's also important to remember that well, we're facing pressure and some of our markets eastern serves a wide diversity of customers across a broad range of industries.

Finally, we're very focused on maintaining our strong balance sheet.

Our book value grew by 9% 2019.

Our current ratio was 3.6, that's compared to 3.4 hundred 2018.

We have ample flexibility and capacity under our credit agreement.

As job will discuss momentarily we entered into a new credit agreements last August with very favorable terms.

With our acquisition of Big three precision successfully completed we are more committed than ever to identifying bolt on acquisitions that will further strengthen easterns presence in key markets and build relationships with our customers. This is a basic part of our business strategy.

And given the strength of our balance sheet, we are well positioned to take advantage of any opportunities that arise.

I'll now turn the call over to John.

To go over the details of our financial results I will come back at the end of this call.

Thank you guys. My remarks. This morning will focus primarily on Easterns results fourth quarter of 29 team. Our full year results are available in yesterday's 10-K filing and they're also summarized in last Friday's press release.

For the fourth quarter net sales increased 21% to 68.7 million from 56.6 billion a year earlier.

<unk> growth reflects the big three acquisition, which we acquired on August 32019.

Sales increased in the industrial hardware segment by 46% to 49.2 billion in the fourth quarter of 29 team from 33.7 billion a year earlier.

Moving big Threep decision sales decreased 3% due to lower sales to class eight trucks, and especially vehicles, partly offset by the impact of new product launches and stronger sales to military customers.

Sales in the security product segment decreased 13%.

After the fourth quarter 2018, as late your product launches didn't completely offset lower demand for commercial laundry payment products and point of sale security products as well as a lots of supply contracts for Medtronic padlock systems and our be door matches.

Sales in the middle product segment decreased 18% compared to sales in the fourth quarter 2018, silver mining products decreased 11%, while sampled industrial casting products decreased 30% as compared to fourth quarter 2018.

Sales were impacted by business combination between two customers and the filing for bankruptcy protection from one of the largest coal mines in the U.S.

Industrial castings were negatively affected by the lots of the customer suffered a foundry firemen 2018 and that temporarily sources products from our facility.

Cost of products sold in the fourth quarter of 2019 increase.

8.8 million or 21% from last year's fourth quarter increase was attributable to the big three acquisition.

Gross margin as a percent of sales remained comparable to 2018 at 26%.

Product development expenses as a percentage of sales in the fourth quarter 2019 decreased by 58% as compared to last years period.

Decrease relates to the closure of the Doe back route I'd Q developing operation and Bellingham, Washington in the second quarter 29 team as we adopted a leaner were approach to developing new vision products.

So in the Ministry of expenses in the fourth quarter 2019 increased 31% as compared to 2018 Perry.

Merely due to the victory precision acquisition.

I'll give you a quick summary of our balance sheet and careful highlights for the full year.

Our financial position strengthened in 2019 net cash provided by operating activities was 23 million in 2019 compared to 12.9 million in 2080.

We use 85.8 million and <unk> and 10.4 billion, we're investing activities in 2019 and 2018, respectively.

Included in 2019, the mouth is approximately 81.2 million for the big three acquisition.

It is in the 2018 amount is approximately 5 million for the acquisition of Logan.

The balance of 5.4 million in 3.6 million in 2019 2018, respectively was used to purchase fixed assets.

Capital expenditures for the year 2020 are expected to be and arrange performance.

In addition.

In 2019, we received approximately 67 million from financing activities, we refinanced an existing know for 19.1 million.

We used approximately 10.8 million for debt repayment and 2.8 million for dividend payments in 20 in August of 2019, we entered into a new credit agreement for 120 million Santander Bank as lead arranger, along with people, United and TD Bank of which we received 100.

People return portion and 20 million for revolving credit portion.

Proceeds of the term person we used to repay the remaining outstanding turned down approximately 19 million into terminated its existing credit facility and to acquire the big three precision.

Now I'll turn the call over to Chris for questions.

Sure John Operator, do we have many participants you have dialed into the questions.

On the phone lines. If he did have a question or comment well be star one on your telephone keypad again star one for any questions or comments from the phone.

And why you wait we do have a couple of questions that have come in via the webcast. So let's get to those first question will you continue to have one time charges.

Well the onetime charges are related to transactions.

And to restructuring costs of right now we have no plans on restructuring costs.

If we do make some small bolt on acquisitions, they would be transaction costs.

But they usually would be small.

Our second question what is the impact of the downturn in class eight trucks to the business.

Well class eight truck is obviously an important market for us.

And despite the downturn in that end market. We do believe we continue to grow our business because we sell in too many end markets and one to class eight truck market turns out we have the opportunity to take advantage of a growth with other customers in others.

Markets.

And at the same time, we are growing our share of programs in class a trucks. These are programs that have very long lead time, so we have ample visibility into the revenue ramp up there.

Okay. Then we have a third question what does it mean when your factory is that 60%.

Oh that person.

First both to the percent of employees that are back at work.

As well as the factories ability to meet demand Oh, there's a very close relationship between those two.

So at the end of next week, we anticipate that approximately 25% of employees of our East China factory.

We'll have passed the 14 day warranty period and that will be allowed to work which brings the factory.

Percentage up from the current 60% to 85%.

That's important to note that we do have other ways to meet our customers are worse, just because our factories operating at 60%, we can ship out of inventory or in some cases, we've got other production options.

Okay.

Operator, do we have any colors.

A question so far I do not have any questions from the phone line.

Okay.

It appears as though we have no further webcast question. So I'd like to turn the call back to got for closing remarks.

Thanks.

Well, thanks, everyone for joining us this morning, as you've heard a were very carefully monitoring and responding to the impact of their corona virus on our business.

While at the same time, we are steadfastly adhering to our road map to increase shareholder value by optimizing our portfolio of companies enhancing execution and keeping our balance sheet strong.

2020 marks eastern is hundred 60 threerd year.

And our 18th consecutive year are paying quarterly dividends.

And we look forward to another good year in 2020.

Thanks, again for joining us and your interest in the Eastern company.

Thank you would that we'll turn the call back to the operator.

Thank you, ladies and gentlemen that does conclude today's call. We thank you for your participation you may disconnect at this time and have a three day.

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