Q2 2021 Eastern Co Earnings Call
Stern company second quarter fiscal year 2021 earnings call all lines have been placed on a listen only mode and the floor will be opened for your questions and comments. Following the presentation. If you should require assistance throughout the conference. Please press star zero to reach a live operator at this time. It is my pleasure to turn the floor over to your host Chris Moulton head of <unk>.
But development, Sir the floor is yours.
Thank you good morning, and thank you for joining us today.
Speaking today will be eastern's, president and CEO, Gus Black and CF, Joe CFO John Sullivan.
After that we'll open the call up 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.
Without limitation statements regarding revenue gross margin operating expenses, other income and expense taxes and business outlook.
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.
For more information regarding these risks and uncertainties. Please refer to risk factors discussed in our Form 10-Q filed yesterday Thursday rather.
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.
Non-GAAP measures should be considered in addition 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 to those of you who have joined us on the phone and those participating via the web.
We released Eastern's second quarter 2021 results on our earnings press release, and our Form 10-Q last Thursday afternoon.
The second quarter capped off a historic 12 months.
Over this period, we have delivered record sales and record sales growth.
I want to emphasize how proud we are of the collective effort of the approximately 2000 people in each of our businesses.
We thank them for their resilience and dedication.
And their agility to cut through many of the challenges associated with executing during a global pandemic.
And the way they have stepped up as impressive taking care of our customers our people and our communities. They have a lot to be proud of.
We can summarize our quarter with three points strong sales and even stronger demand.
Margin pressure from raw materials and shipping costs.
And our commitment to continue to streamline our company and focus on our best core businesses.
First.
Sales from our continuing operations grew by more than 55% compared to the last year.
Following a solid start in the first quarter.
Strong sales were the result of the economic recovery across a broad range of commercial vehicle and industrial markets as.
As well as the impact of our product launches.
Including a new integrated cable arc that we produce for the incredibly popular <unk> buyback.
A new cover walking system for a retract tunnel covers.
As well as the ramp up of several new class eight truck mirror programs.
According to STR North America coffee net orders for June were up 13% month over month at 71% year over year with class eight orders now totaling 431000 units for the previous 12 months.
Cross all commercial vehicle markets demand continues to strengthen with strong GDP growth.
Capacity constraints across multiple shipping modes.
At near record truck freight rates.
<unk> record used equipment valuations.
As a result order rates for our Red Hawk in the second quarter.
And the ending backlog remains near record levels our.
Our backlog at the end of the quarter reached $89 million, that's an increase of 61% over the end of the second quarter last year.
We're excited about the full potential of these opportunities to support strong revenue growth in the back half and beyond.
We believe that the growth in ourselves could have been even more robust if not for delays.
OEM production delays related to electronic component shortages.
<unk> shipping delays to our own facilities.
The OEM delays of new passenger car vehicle launches yet. Despite these challenges we posted strong sales in the second quarter.
In the quarter, we also experienced a continuation and in many cases, an acceleration in the cost of key raw materials and freight rates.
Which pressured our margins.
Just to provide you with some perspective of the magnitude of these.
The rising costs over the last 12 months.
The price of hot rolled steel increased by 236% and the price for cold rolled steel grew by 174%.
These are examples of key raw materials that we use in many of our products.
Similarly spot shipping rates between several Asian and U S ports increased from approximately $5000 per container in may to more than $18000 per container in July.
Our businesses have been able to pass on some of these price increases to our customers, but we've had to absorb a share of some of these costs.
And there is frequently a lag in the realized price increases relative to the rapid escalation in cost.
As a result, we estimate that our margins in the second quarter were compressed by several hundred basis points.
That said, although the supply chain remains disrupted and many material prices are still volatile. We are cautiously optimistic that were beginning to see signs of moderation in the rate of price increases across many of our key raw materials.
And we're working with our customers and suppliers to ensure that we return to a more stable normalized margins in the coming quarter.
Finally, we continue the execution of our long term strategy to drive growth in our core businesses.
And therefore, we are now reporting our diversified products segment as discontinued operations.
As these legacy businesses no longer aligned with our strategy and as such we're exploring strategic alternatives for each of them.
We believe that this change in reporting signals, our commitment to focus 100% of our time and resources to ensure that each of our core businesses.
The resources that they require and people and capabilities in place to drive growth and profitability for years to come.
With that I'll turn the call over to John to go over the details of our financial results.
Thank you <unk> My remarks. This morning will focus on <unk> results for the second quarter of 2021.
As just noted we recognized that the companies within the diversified products segment no longer aligned with our strategy.
As such we are exploring strategic alternatives for each of them.
In light of this the diversified products segment meets the criteria to be held for sale and Furthermore, we determined that the assets held for sale qualify as a discontinued operation.
Therefore, the financial results of the diversified product segment are reflected in our consolidated financial statements.
Discontinued operations for all periods presented.
Additionally, current and non current assets and liabilities.
From the discontinued operations are reflected in the unaudited balance sheets for the periods presented.
The loss recognized in the write down of the diversified product segment to fair value in the second quarter was $8.1 million net of tax within anticipated cash flow over the next 12 months for approximately $25 million.
Should we successfully.
Divest each business the.
The majority of the cash would be allocated to debt reduction.
I will now focus on the second quarter of 2021 as compared to the second quarter of 2020 from continuing operations for.
For the second quarter of 2021, net sales increased 55% to $61.2 million compared to $39.5 million for the second quarter 2020.
Sales increased largely due to increased demand for truck accessories, automotive returnable packaging global tooling and distribution product.
Net sale of existing products increased 44% in the second quarter compared to the same period in 2020 price increases and new products increased net sales by 11% in the second quarter of 2021 compared to the same periods in 2020 new.
New products included various truck mirror assemblies for compression matches cable box in Europe teams.
Gross margin as a percent of sales in <unk>.
Was 23% in the second quarter.
Compared to 26% in the second quarter of 2020 the.
The decline in gross margin was due in large part.
Unprecedented increases in prices of many of the raw materials as well as freight rates.
For example price of hot rolled steel increased 236%.
Year over year from the second quarter of 2020 to the second quarter of 2021.
<unk> increased 174%.
Nickel increased 42% scrap iron increased 178% copper and zinc increased 81% and 49% respectively for the same periods.
Our freight costs increased $1.4 million or 148% and $2.1 million or <unk>, 97%.
For the three and six months ended July 31, 2021, as compared to the corresponding period in 2020.
Price increases to customers were only able to offset a portion of these increases.
Product development expenses increased $2 million or 19% in the second quarter compared to the same period in 2020.
As a percentage of sales product development expenses was approximately 8%.
Selling and administrative expenses increased $2.8 million or 43% in the second quarter compared to the same period in 2020, primarily due to increased commissions other selling expenses amortization expenses paid.
<unk> related expenses and incentive costs, which were.
Ended in the second quarter of 2020.
Net income for the second quarter was $2.8 million or <unk> 44 per diluted share compared to net income of $2.1 million or 33 cents per diluted share for the same period in 2020.
Now for a quick summary of our cash flow and balance sheet highlights.
Cash flow from operations was $2.2 million for the second quarter.
Lower when compared to the same period last year due to an increase in inventory and accounts receivable. This was primarily the result of significant increases in sales, partially offset by an increase in accounts payable.
Inventories of $48.8 million as of July three 2021.
It presents a increase of 13% as compared to $43.1 million at the end of fiscal year 2020.
And an increase of 12% as compared to $43.7 million at the end of the second quarter of 2020.
And certain of our businesses and the dissipation of increased prices and material shortages, we selectively.
Purchased from pre purchase key raw materials.
<unk> receivables were $35.1 million as of July three 2021, as compared to $31.8 million at 2020 fiscal year end and 28.
$4 million at the end of the second quarter of 2020.
As of July 3rd we had cash and cash equivalents of $18.5 million.
An untapped $20 million revolving line of credit.
Our net leverage ratio was two three times and our fixed charge ratio is two seven times, both of which are well within our bank covenants are for the quarter and one and a quarter respectively.
With that I'll now turn the call over to the operator for questions.
Thank you the floor is now open for questions for those of you who have joined by webcast. You can submit your questions through the webcast to all by clicking on the ask question button on the left side of your screen. If you would like to ask a question over the phone. Please press star one on your telephone keypad at this time.
You are using a speaker phone, we ask that while posing your question you pick up your handset to provide the best sound quality again, ladies and gentlemen, if you do have a question or comment to ask over the phone you May press star one on your telephone keypad at this time.
And thank you operator, we do have some questions in the Permian via the webcast. So let's start with those.
So let's go to the first question.
Can you explain the $10 million restructuring charge that we took this quarter.
Yes.
Every quarter, we continuously evaluate all of our reporting units for impairment.
And we do this by comparing the estimated fair value of each reporting unit with its carrying amount.
And if the carrying amount of the assets exceed the fair value then we have an impairment.
We have a write down.
And this last quarter, we determined that the discontinued operations do not fit our long term strategy. So we.
And we wanted to focus on our core business and as a result, we are.
We reevaluated the fair value of these legacy businesses.
And we recorded an impairment as part of this we recognize the goodwill write off of approximately $5.9 million.
Into the discontinued operations when we classified the disposal group as held for sale.
Okay.
Second question when will you have completed the sale of a discontinued operations.
Well, we're reporting these as discontinued operations now means that we're confident that we will be able to complete these within the next 12 months.
We expect that the net cash proceeds of these sales is.
Somewhere in the area of $25 million and we.
I intend to use these proceeds primarily to reduce our outstanding debt.
Which will help us continue to strengthen our balance sheet.
And sets us up to support the growth of our core businesses.
And we have a third question how much EBITDA did the discontinued operations contribute in the first half and second quarter of 2021.
Well actually we haven't reported those numbers and.
We did report the net income from the discontinued operations of our latest 10-Q.
Also if you reviewed our 10-Q for 2020 for six months.
We reported adjusted EBITDA and in our 10-K for 2020 note 12 in reported.
Our segment reports, which identified the diversified products segment.
With those you can kind of compute what the EBITDA would have been contributed from the discontinued operations.
But it would not have been material relative to the total EBITDA from the company.
Okay.
We have a fourth question what is the impact of raw material prices on your earnings.
Well.
I guess, we mentioned raw material prices as shipping costs have increased at unprecedented rates.
And although we pass.
Pass on these costs to our customers. There is often a lagging in the past I would say the impact of the language barely noticeable because we were able to raise prices more in line with higher costs.
But because of the rapid <unk>.
Sustained and would you say the sheer scale of the cost increases we have not yet been able to fully recover these in the past quarter.
As a result, we estimate that our gross margins fell by several hundred basis points.
Our ability to recover will improve as we worked with our customers has the rate of price increases slows down in the coming quarters.
Okay.
Question number five how is the integration of big three precision drilling.
So we acquired big three precision in August of 2019, and we're very pleased with the acquisition, it's one of our core businesses.
We've taken a number of steps to help drive growth in.
In January we brought on a new leader for the business and we've hired and promoted several other senior leaders in inside the business.
On the transport packaging side of the business, we believe that with this team we are well positioned to.
To capitalize on the increase in the number of new vehicle launches that are scheduled for the next four to five years, including the launch of many electric vehicles.
So bofa estimates that in 2000.
'twenty one.
There'll be roughly 34, new vehicle launches.
They also estimate that the average for 2022 to 2025.60, new vehicles per year.
And the other thing this team will be able to do for US. This has helped us diversify our customer base going after some new markets and also integrate new bolt on acquisitions that will help us expand our product offering offering and geographic market coverage.
On the tooling side of Big three precision we had an exceptional 2020 driven in part by the demand for our hygiene packaging.
And 2021 is just the strong through through the first six months.
You may sell recall that we added hailing based in Ontario, Canada to this business.
It was last July.
Ah hailing expanded our offering.
At three precision to include two step blow mold tooling and its been a very strong addition to overall to the organization.
On the commercial side of Enlink is fully integrated and really we couldnt be more pleased with this addition.
Now while I'm on the topic of integration.
Ill note that we.
We're also working on the combination of our F. A heart and Illinois lock businesses and this is progressing extremely well.
Through this combination at Bahar.
Not only benefits from the consolidation of synergies.
We're currently working on streamlining their manufacturing footprint.
But more importantly, it could drive the adoption of electromechanical and digital products into many of our markets.
In the past few years, Illinois lock has invested in many of these capabilities, including the acquisition of load and lock, which we completed in 2000.
2018.
With the combination now of Eberhard and Illinois lock, we can bring these products to these capabilities.
To many of our best bodybuilding service body and truck accessories customers.
So we believe that by 2025 more than.
A third of total Eberhard sales will come from electromechanical and digital products.
Okay. It looks like we have one more question.
How does the sale of discontinued operations impacted though.
Become becoming $100 million EBITDA company.
Part away.
I guess John mentioned most of our EBITDA comes from our <unk>.
Continuing operations, so or the core business itself from a purely mathematical perspective, I would say the impact is minimal.
But more importantly.
But.
But this will allow us to do is allocate all of our capital to our highest return businesses and as a result.
We should see faster topline and bottomline growth from these businesses.
And we're going to have more capital for accretive bolt on acquisitions.
Okay.
I'm not seeing any further questions via the webcast. So operator, please open the line for questions.
As a reminder, ladies and gentlemen, if you would like to ask a question over the phone you May press star one on your telephone keypad at this time again Thats star one if you'd like to queue up for a question over the phone.
There appear to be no questions over the phone.
Okay. Thank you with that I will turn the call over to Gus for closing remarks.
Okay.
Thank you.
There are many signs for continued optimism as we enter into the back half of the year. Despite some of the supply chain difficulties and the raw material price volatility.
Our backlog is strong and we're making progress on pricing and we're confident that our focus on our core businesses big three precision at Bahar and fell back will translate into material sales earnings and cash flow growth throughout the remainder of the remainder of 2021 and beyond.
Thank you.
Thanks, Scott I'll now turn the call back to the operator.
Thank you ladies and gentlemen, this does conclude today's teleconference. We thank you again for your participation you may disconnect. Your lines at this time and have a great day.
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