Q3 2021 Eastern Co Earnings Call

Good morning, welcome to the third quarter fiscal year, 2021 earnings call.

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

It is now my pleasure to turn the floor over to your host Chris Moulton head of corporate development, Sir the floor is yours.

Good morning, and thank you everyone for joining us 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 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 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.

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. These 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 industrial opening remarks.

Thanks, Chris.

And good morning to those of you who have joined US on the phone and also those participating via the web.

We released Eastern's third quarter of 2021 results on our earnings press release, and Form 10-Q, which we filed yesterday.

Our third quarter results reflect strengthening financial performance across each of our three core businesses.

Proud of the tremendous commitment and agility and creativity from everyone at eastern given the extra effort required to achieve these outstanding results, while operating in an unusually complex supply chain environment.

Eastern is clearly the stronger and more focused company today as a result of the changes that we've made to our portfolio over the last year.

Does that include the consolidation of heart an ILC.

Which materially reduces our fixed cost and provides a solid platform for growth and innovation.

As well as the addition of hailing a strategic bolt on business to big three precision that expands our offering to core customers.

And of course, the divestitures of Canadian commercial vehicles, Sesame Mexicana and most recently Greenville industries.

In the third quarter, our performance was driven by continued strong sales and clear improvement in gross margins.

Sales from continuing operations were up 15% compared to the third quarter of 2020 and 4% over the second quarter of this year.

Although demand was strong our sales were impacted by the supply chain issues with staff in some of our customers production levels.

Big three precision our returnable transfer packaging business was a significant contributor to sales growth in the third quarter, primarily as a result of the wrap up of planned new vehicle and truck model launches in 2022 and 2023.

Including a wide range of electric vehicles.

According to IHS market market Research organization automotive Oems will launch 55, new vehicle models in 2022, and <unk> 63, new vehicle models in 2023.

That compares to just 42, new vehicle models in 2020, and 34, new vehicle models in 2021 with numerous new product launches were postponed as a result of the Covid pandemic and subsequent supply chain constraints.

In the third quarter sales at our heart and <unk> businesses also continued to strengthen due to robust demand across a broad range of commercial vehicle and industrial markets as well as our new product launches.

In the third quarter, we ramped up our shipments of a new class eight year program and we expect demand for this program to remain strong.

Referring to FTR.

Class eight truck deliveries will reach 72, I'm, sorry, 274000 units this year before jumping to 335000 next year and 360000 in 2023.

That was already tremendous pent up demand for trucks coming out of the economic restart.

With the current supply chain environment.

More pent up demand.

And we believe that this is going to keep OEM build rates elevated into 2023 and maybe into 2024.

The industry will clearly be in catch up mode for a while which we expect will benefit sales at both of our hard and all that.

We also expect that new products will benefit Eberhard last week <unk> launched several new electromechanical products at the annual Sema show in Las Vegas.

Leading our new electronic rotary latch that less customers electrified access security with a power efficient design using both Bluetooth and wired activation, we now offer a comprehensive portfolio of electromechanical products for a broad range of applications.

Our ability to bring more innovative products to market is the direct result of the combination of everhart any of them are locked into one industry leader.

In the third quarter, our margins improved as a result of many of the actions that we took to mitigate the impact of cost increases and these actions are starting to take effect.

Pacifically third quarter gross margins improved by 100 basis points over the second quarter as we successfully passed on increases in the cost of raw materials and shipping to our customers.

Encouragingly during the quarter, we began to see a slowdown in the rate of price increases of <unk> steel and certain resins and in fact, we've seen some declines.

While we believe that these trends bode well for continued margin recovery, some raw material costs and shipping rates remained at historically high levels.

We're also pleased with the divestiture of Fremont.

Part of our ongoing work to streamline our portfolio of businesses.

The Greenville team was part of eastern for over 20 years, and we are grateful for their contributions during his time and all the hard work that they put in this year to get this transaction done.

We wish to Greenville team much success as they continue to run their business under new ownership.

As you might recall in August this year.

We announced our intent to divest our non core businesses and.

We began reporting these businesses as discontinued operations.

We're very pleased to complete this transaction within three months of our announcements.

With the sale of Canadian commercial vehicles, Sesame mix economies, we completed last year. This transaction further strengthens our focus on our three core businesses, helping us to build scale and accelerate growth and strengthen operating margins.

As we mentioned in our press release, we plan to allocate the majority of the proceeds from the sale to debt reduction and share repurchases.

We're putting a new <unk> plan in place under which we'll be able to repurchase shares in accordance with the share repurchase program adopted in 2018.

With those comments I'll turn it over to John to go over the details of our financial results.

Thank you <unk> My remarks. This morning will focus on Houston results for third quarter 2021.

For the third quarter of 2021, net sales increased 15% to $63 9 million compared to $55 7 million for the third quarter of 2020.

Sales increased largely due to demand for truck accessories automotive returnable packaging.

More cooling and distribution products.

Net sales of existing products increased 4% in the third quarter compared to the same period in 2020.

Price increases and new products increased net sales by 10% in the third quarter 2021 compared to the same period in 2020.

New products include various truck mirror assemblies road, relapses hearings and mirror cans.

Gross margin as a percent of sales was 24% in the third quarter compared to 24% in the third quarter of 2020.

Product development expenses increased.

$4 million or <unk>, 73% in the third quarter compared to the same period in 2020.

As a percentage of net sales product development expenses was one 5%.

Selling and administrative expenses increased $9 million or 11% and the <unk>.

Third quarter compared to the same period in 2020 <unk>.

Primarily due to increased commissions other selling cost amortization expense payroll related expenses and incentive costs, which were suspended in 2020.

Net income from continuing operations for the third quarter was $3 8 million or <unk> 61 per diluted share compared to net income of $3 2 million or <unk> 51 per diluted share for the same period in 2020.

Adjusted for onetime expenses related to the move of certain operations from Illinois to Mexico.

<unk> per share were 64 per diluted share.

<unk> two.

57.

For the same period in 2020.

Adjusted EBITDA from continuing operations for the third quarter was $7 1 million compared to $6 8 million for the same period in 2020.

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

To address the various supply chain challenges, which added weeks tour and transit materials and volatile raw material prices.

We strategically managed our working capital, including intentionally building up certain inventory item levels to avoid future shortages.

In addition, we experienced a very large increase in our accounts receivable due to the rapid acceleration in our sales.

Of these impacted our operating cash flow during the third quarter in light of this cash decreased $8 2 million in the third quarter.

We expect cash flow to improve in the coming quarters as we manage down our working capital.

As of October 2021, our cash balance was $10 million.

And with an untapped $20 million revolving line of credit we have sufficient liquidity to meet our cash requirements.

Our net leverage ratio and our fixed charge coverage ratios were two five times, both of which comfortably comply with the bank covenants of four in a quarter in one and a quarter respectively.

I'll turn the call over to Chris for questions. Thanks, John Operator, I'd like to open the line for questions.

Certainly ladies and gentlemen, the floor is now open for questions.

Have any questions or comments. Please press star one on your phone now.

We ask that will posing your question. Please pickup your handset is listening on speaker phone to provide a film film quality.

Once again, if you have any questions or comments. Please press star one on your phone now please hold while we poll for questions.

And I'm not seeing any questions via the webcast.

We have no questions from the phone lines at this time.

Okay, so with that I'll turn to Gus for closing remarks, thanks, Chris.

We remain optimistic.

Optimistic that the economic recovery.

You can see within our business is sustainable.

And we're confident that our performance will continue to improve in the coming quarters as demand remained strong and the impact of the supply chain challenges on us and our customers debate.

Moreover, we believe that the resilience of each of our core businesses will not allow not only 11 prevail, but thrive as they continue to win significant new business in <unk>.

Currently our backlog at the end of the third quarter reached $83 million and Thats, an increase of $25 million or <unk>, 44% over the backlog at the end of the third quarter of 2020.

On a separate note for those of you who may be attending were considering attending the Sidoti Microcap virtual Investor Conference on December 8th or ninth.

I'll be presenting and conducting one on one will.

We'd be glad to speak with you there and as always we welcome any opportunity to speak with you or answer any questions that you may have.

Thanks, Gus I would that I will hand, the call back to the operator.

Thank you ladies and gentlemen. This concludes today's event you may disconnect at this time and have a wonderful day. Thank you for your participation.