Q4 2020 Eastern Co Earnings Call

Good morning, ladies and gentlemen, and welcome to the fourth quarter of fiscal year, 2020 earnings call.

At this time, all participants have been placed on a listen only mode and the floor will be opened for questions and comments after the presentation and.

And it's now my pleasure to turn the floor over to your host Chris Moulton, Sir the floor is yours.

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

Speaking today will be eastern's, president and CEO, Gus Black and our CFO John Sullivan after that we'll open the call for questions. Please.

Please note that some of the information you'll 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 and expense taxes and business outlook. These forward looking statements are subject to risks and uncertainties that could cause actual results.

For trends to differ.

Significantly from those projected and these forward looking statements for more information regarding these risks and uncertainties. Please refer to risk factors discussed in our form 10-K, we filed yesterday. In addition during today's call. We will discuss non-GAAP financial measures that we believe are useful as supplemental measures of eastern performance. These non-GAAP measures should be considered and addition to.

To and not as a substitute for or in isolation from GAAP results with that I'll turn the call over to Gus for opening remarks.

Thanks, Chris and good morning for those of you who have joined us on the phone and those participating via the web.

We really eastern <unk> fourth quarter and full year numbers on the form 10-K, this morning and.

And before John Sullivan and reviews, the detailed results with you.

I wanted to take a few minutes to reflect on the year.

I'd like to begin once again by thanking each and every one of our people.

Their resilience throughout 2020 was truly exemplary and their tireless work and protecting the health and safety of colleagues.

Sure and continuous operation of our facilities.

And serving our customers and giving back to communities deserves to be recognized.

And just because of the exceptional people.

We are able to overcome the challenges of 2020 and earn.

Now and a strong position.

We're also proud of how we executed on each part of our strategy.

We acted quickly to deliver results and the face of unprecedented turmoil.

We strengthened our portfolio of businesses through several divestitures and one acquisition.

And we preserve our balance sheet by generating exceptional cash flow from operations, which were used to accelerate our debt reduction.

During the COVID-19 pandemic, we took three steps to continue our strategy of strengthening our portfolio of businesses.

First.

We acquired helium based in Ontario, Canada.

<unk> is a leading supplier of globals and change parts predominantly serving the consumer packaged goods market.

And we have already seen its complementary products and capabilities driving significant synergies and <unk>.

Creating value through share knowhow, and strong relationships across and even broader customer base.

The only kitsap part of Big three precision mold services subsidiary and it's been fully integrated into its operations.

Second.

In March we combined our Eberhard manufacturing and Illinois lock company into a single company that.

And we believe will be a leader and the access and security hardware.

And our view.

This combination increases critical mass and our target markets and accelerates growth and optimizing our manufacturing footprint.

We increased critical mass because at the heart and Illinois lock call on similar customers and some cases, the same customers and we do.

And now have more to offer these customers.

We're going to accelerate growth.

Mediately because we now have one larger sales force selling the entire portfolio of F. A heart and Illinois lock products. For example, many of our standard Illinois products are now available at Bahar its largest distributor.

In addition, we're able to leverage the technology and engineering capabilities to bring more and more innovative products to our customers.

We're able to scale, Illinois, <unk> investments and Blue Ox, a Bluetooth enabled control module across a much broader market.

And finally, we're consolidating our manufacturing footprint. For example, we are already ceased production and Taiwan and we're closing our facility in Tulsa and work this quarter.

This combined business will operate under the <unk> brand.

And on track to complete the combination by the end of the second quarter.

Our third action to strengthen our portfolio with the divestiture of our two composite panel businesses Canadian commercial vehicle company and.

Sesame, Mexico on them as part of our effort to streamline our company.

As a result of these changes.

We are now more focused more innovative and more competitive.

We also now report our businesses in two segments engineered solutions and diversified products.

The engineered solutions segment, which is the largest segment accounted for roughly 82% of 2020 sales includes big three precision.

The newly combined Eberhard and all that and the diversified product segment includes global industries, Argo Oems and Fraser and Jones.

We also upgraded our leadership team with several new appointments, Jim Boykie BK Eastern <unk> Chief operating officer.

Flemming became the new managing director of the combined and my heart and.

And January of this year nickel and TV became the president of Big three precision.

And you can start just joined us from for a top 10 global automotive supplier revenue technologies for sustainable mobility.

We're very excited to have him on board.

And to allow us to capitalize on the numerous opportunities and big three precision.

Now briefly turning to some financial highlights for the fourth quarter and fiscal year.

Net sales for the fourth quarter and full year, 2020 were $64 million and $244 million respectively.

During the second half of the year, we experienced and increasingly sharp recovery and demand and the fourth quarter demand came close to pre pandemic levels across many of our markets.

However growth and demand by many of our customers was offset by the divestitures of our composite panel businesses.

Ladies and new automotive launches and lower sales for mining customers.

And the year, we incurred some onetime charges to the P&L relating to the improvements and our portfolio.

More than 70% of these charges are non cash.

As a result, our reported earnings for the fourth quarter were 23 per diluted share adjusted for onetime mostly non cash charges earnings per diluted share for the fourth quarter for 74.

And for the full year 2020 adjusted earnings for $1 95.

Adjusted earnings of <unk> 74 per diluted share and fourth quarter represented an increase of 38% over adjusted earnings in the third quarter and more.

And at three times, the adjusted earnings per share and the second quarter of 2020.

This growth and adjusted earnings is due to the rebounding demand and many of our markets.

The recent acquisitions.

And as well as the positive impact of our work to streamline the company and focus on our core businesses.

And importantly, we generated $21 million and cash from operations and 2020.

Despite the economic downturn.

This is double what we used to generate as recent as three or four years ago.

Moreover, our free cash flow in 2020 was $18 million, that's a record and eastern is more than a 160 year history.

We define free cash flow as cash from operations minus the investments and capital expenditures.

Our strong cash flow allows us to strengthen our balance sheet and invest in our future growth.

With that I'll turn the call over to John to go over the details of our financial results.

Thank you Gus.

I'll focus on eastern <unk> results for the fourth quarter of 2020 as compared to the fourth quarter of 2019 are.

For a full year results are available in todays 10-K filing and summarized in our earnings release.

For the fourth quarter of 2020, net sales decreased 12% to $60 4 million from $68 7 million a year earlier on.

As Gus mentioned, we're now reporting across two segments and.

Engineered solutions and diversified products.

Sales decreased and the engineering solutions segment.

8% to $50 6 million and in the fourth quarter from $54 7 million and the fourth quarter of 2019 due to lower demand for truck accessories distribution products and automotive returnable packaging as a result of delays and new automotive launches.

Partially offset by the impact of new program launches and stronger sales of blow mold tooling and related services.

Sales and the diversified segment decreased 30% to $9 $9 million and the fourth quarter compared to $14 million and the fourth quarter of 2019 as a result of the sale of Canadian commercial vehicle in June of 2020, which reported sales and the fourth quarter of 2019, but not in the fourth.

Quarter of 2020, and lower demand for mining products, and industrial castings commercial laundry products and printed circuit boards.

Sales of new products contributed 4% for sales growth and the fourth quarter of <unk>.

Compared to 5% of <unk>.

Sales growth from new products and the fourth quarter of 2019, new.

New products.

And the quarter included various new mirrors compression latch cable arc and mirror teams.

Gross margin as a percentage of net sales for the fourth quarter was 22% compared to 26% and the fourth quarter of 2019. The decrease reflects the combination of and escalation in raw material costs and the decline and facility utilization due to lower.

Sales during the quarter.

Product development expenses, and the fourth quarter were <unk> 7 million down 11% compared to the fourth quarter of 2019.

As a percentage of net sales product development expenses were one 2% compared to one 1% and the fourth quarter of 2019.

Selling and administrative expenses and the fourth quarter decreased 26% compared to the fourth quarter 2019.

The decline was primarily the result of reductions in payroll and payroll related expenses reduced travel expenses and other expense reduction initiatives and loaded for COVID-19.

Net income and the fourth quarter decreased 72% per $1 4 million or <unk> 23 per diluted share from 5 million for 79.

Per diluted share in 2019.

Adjusting for onetime expenses earnings per share would have been 74 per diluted share.

And the fourth quarter net income was negatively impacted by a noncash goodwill impairment charge of <unk> 7 million net of tax.

And we announced the closure of EVAR and hardware and Ontario, Canada.

In addition, there were non recurring restructuring expenses.

And we relocation expenses.

And transaction expenses and the amount of $1 9 million. This tax for the majority of which related to the severance pay and incurred through the closure of Edvard hard.

And a loss on disposition on assessing and Mexican and Canadian commercial vehicle Corporation or <unk>.

On a $1 6 million net of tax.

EBITDA for the fourth quarter was $3 7 million and our adjusted EBITDA accounting for one time expenses would have been $8 million.

Now for a quick summary of cash flow and balance sheet highlights.

Net cash provided by operating activities was 20 <unk>.

<unk> 7.002 million 20, compared to 23.002 million 19 cash.

Cash generated by reductions in working capital of 2 million was offset by $2 7 million pension contributions.

Cash used for investing.

<unk> was $9 1 million.

And was used to acquire Henrik move for $7 2 million and investing $3 1 million and capital expenditures.

The company received $3 $2 million related to the divestiture of our composite channel.

<unk> during the year offset by notes received and the amount of $2 2 million.

We're planning for capital expenditures and fiscal 2021 to be approximately $5 million.

We used $13 2 million and financing activities, primarily debt repayments totaling $10 million of which 5 million was and accelerated principal payment and $2 8 million and dividend payments to our shareholders.

As of January 2021, we had cash and cash equivalents of $16 1 million on net leverage ratio was three times and our fixed coverage.

Ratio was two one times, both of which are well within our bank covenants are for the quarter and one in the quarter respectively.

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

Thank you John operator, I'd like to open the commodity for questions.

Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time.

We ask that while posing your question you. Please pickup your handset if listening on speaker phone to provide optimum sound quality. Please.

Please hold while we poll for questions.

There are no questions from the phone lines at this time, okay, and I'm not seeing any questions via the webcast so with that I'll turn the call over.

Gus for closing remarks.

Thanks, Chris and.

Thanks, everyone for joining us this morning.

We are very encouraged by the acceleration and demand for our products and services across many of our businesses and to strengthen our backlog at the end of the year and heading into 2021.

Indicate sustained growth for our businesses.

Off to a strong start in 2021.

The value of our backlog of orders was $85 million at the end of fiscal 2020 and that compares to $71 million at the end of fiscal 2019.

I would like to highlight that this is the company's highest ever level of backlog and the growth and backlog reflects the rebounding demand for truck accessories and have a heart the launch of numeric programs for class eight trucks and strong demand for our services and our global tooling business, including the acquisition of <unk>.

At this time there are many signs for optimism going into 2021, despite lingering uncertainty and demand.

Recovering supply chains and raw material volatility.

Much of this uncertainty and disruption stems from the.

And the growth and demand and the impact of last year's measures to control the spread of COVID-19, still reverberating across global supply chains.

We expect transportation challenges and higher raw materials to linger through sometime in the second quarter of this year.

That said, we believe that our focus on our three core businesses big three precision Applecart and fell back will translate into material sales earnings and cash flow growth and 2021 and beyond.

The markets that these core businesses are serving.

We are experiencing transformational changes as a result of digitization and automation and more.

And our position in these markets and our capabilities are unique setting us up for success.

Together, we believe these three core businesses will enable us to achieve our goal.

Becoming a $100 million EBIT a company.

Thanks, and thanks Scott.

With that I'll hand, the call back to the operator.

Okay.

Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.

Okay.

Okay.