Q4 2021 Eastern Co Earnings Call
Good day, ladies and gentlemen, and welcome to the Eastern company fourth quarter fiscal year 2021 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.
If you have any questions or comments, you can submit them through the webcast by typing them into the ask a question box.
If you wish to ask a question via telephone. Please press star one on your phone at any time to join the queue. If you wish to leave the Q Press Star two we do ask that if you were listening on a speakerphone. Please pick up your handset for optimum sound quality. 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 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 and expense taxes and business outlook. These forward looking statements are subject to risks and uncertainties that could cause actual results works.
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-K 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 Gus for opening remarks.
Thanks, Chris and good morning to those of you who have joined over the phone and those participating via the web.
We released eastern's fourth quarter and full year of 2021 numbers on our Form 10-K yesterday afternoon.
Before John Sullivan reviews, the detailed results with you I'd like to take a few minutes to reflect on the year.
Let me start by saying that 2021 was truly a transformative year for eastern.
We're very proud of how we executed our plan to create long term shareholder value in a dynamic environment.
We focus on doing everything we could to keep our teams safe and our supply chain moving.
<unk> got production to address the strong demand for our products and helping our communities recover.
At the same time, our focus on performance and innovation remains unwavering.
I want to once again, thank our high performing teams around the world for their continued commitment to eastern.
I am truly grateful for their efforts every day.
To ensure our success going forward.
In 2021, we successfully executed several strategic moves to strengthen and transform our business portfolio into a faster growing and more profitable franchise.
We announced our intention to divest three non core businesses and reported them as discontinued operations on our Form 10-Q for the second quarter of 2021.
We subsequently divested both Fraser and Jones and rebuild industries.
Number of last year.
Which follows the sale of Canadian commercial vehicles, and Sesame in Mexico in 2024.
For a total of four divestitures in two years.
These divestitures allowed us to reduce our outstanding debt by $17 3 million and repurchase approximately 15000 shares in 2021.
Last year, we also completed the integration of our everhart and build on our lock businesses.
We combine these two organizations to build scale.
Improve innovation.
And capture operating synergies.
As part of the integration, we closed our manufacturing and warehousing facilities until Sunbelt, Canada and in Wheeling, Illinois, and we moved operations to our current location in strong sell Ohio and rigorous in Mexico.
In 2022, we plan to further consolidate manufacturing into Reynosa, Mexico, including moving some production from Asia.
We believe that our expansion into Mexico will build shorter supply chains, more robust supply chain and improve logistics to better serve our core customers.
Yes.
Further.
In 2021, we capitalized on the extraordinarily robust demand.
Rebound in customer demand fueled by macro trends, including the surge in outdoor recreational activity and commercial transportation, which in turn fueled demand for truck accessories and distribution products.
We also experienced a meaningful pickup in demand from our transport packaging customers.
In automotive and commercial vehicle model launches accelerated.
Last year, I remember describing 2020.
Unprecedented turmoil.
Yes, the environment in 2021 proved equally dynamic.
As I mentioned before on these calls we saw unparalleled growth in raw material costs to give you. An example, the price of hot rolled steel increased from $500 per ton in August of 2020 right at the time, we were pricing some of our 2021 sales.
To a peak.
90, <unk> hundred $45 per ton in August of 2021.
As we are buying some of this deal.
It produced on those sales.
And we buy more than 5000 tonnes of hot rolled steel per year.
And we were able to pass on most of the increases for the most of the increases in raw materials and shipping costs as you can see in our gross margin of 23% for the year.
But many of our price increases lagged the growth in material costs and in some instances, we were not able to raise prices.
As a result, the impact on our earnings was material.
Now raw material costs are more stable now than they were last year and even with the war Ukrainian.
For example, hot rolled steel is approximately $14 50 per ton today, which is close to where it was a year ago.
It's important to add that we navigated a rapidly evolving operating environment and prioritize meeting the strong demand from our customers by increasing our safety stocks and adding new suppliers.
As a result of those decisions free cash flow was temporarily impacted as we strategically built inventory required to serve our customers and navigate the stretch global supply chains and support the current backlog, which is up 28% at the end of 2021 over the end of 2020.
As you can see we had a truly transformative year.
I'll share some thoughts on 2022 at the end of the call, but for now I'll turn the call over to John to go over the details of the financial results. Thank.
Thank you guys.
For the fourth quarter 2021, net sales increased 18% to $59 6 million from $56 million in the fourth quarter of 2020 same.
Sales increased primarily due to higher demand for truck accessories distribution products in automotive returnable packaging as well as improved pricing.
Sales volume of existing products increased 6% and price and new products contributed 12% in the quarter new products included various truck mirrors latches and accessories.
For the full year 2021, net sales increased 25%.
$246 5 million from $197 6 million in 2020.
Gross margin as a percent of net sales for the fourth quarter of 2021 was 20% compared to 23% in the prior year fourth quarter.
The decrease reflects the combination of higher material and freight costs.
Gross margin for the year as a percentage of sales was 23% in 2021 compared to 24% in 2020.
Product development expenses in the fourth quarter of 2021 of $1 million was up 192% when compared to the fourth quarter of 2020 as a percentage of net sales product development expenses was one seven.
<unk> compared to <unk>, 7% in the fourth quarter of 2020, the increase is primarily related to our investment in new products at Eberhard in Vale day.
Selling and administrative expenses in the fourth quarter growth 2021 increased 8% compared to the fourth quarter of 2020. The increase was primarily the result of increased payroll and payroll related expenses increased travel and other expenses as business returned to more normal operations in 2021.
Net income for the fourth quarter of 2021 increase 24% to $3 9 million or <unk> 62 per diluted share from $3 2 million or <unk> 50 per diluted share in 2020, and the fourth quarter of 2020 net income was negatively impacted.
Alrighty noncash goodwill impairment charge of <unk> 7 million net of tax and nonrecurring restructuring factory relocation and transaction cost of <unk> 9 million net of tax.
For the full year 2021, net income increased by 40% to $16 2 million.
Or two.
$2 58 per diluted share from $11 million or $1 76 per diluted share in 2020.
Adjusted EBITDA from continuing operations for the fourth quarter was approximately $5 7 million.
<unk> to approximately $7 3 million for the fourth quarter of 2020.
Adjusted EBITDA from continuing operations for the full year of 2021 increased approximately 8% to $26 7 million from $24 7 million in 2020.
Now for a quick summary on the cash flow and the balance sheet highlights.
On a full year basis net cash used for operating activities was $7 8 million in 2021 compared to $14 6 million net cash provided by operating activities in 2020, and 2021, we contributed $2 3 million.
To our defined benefit retirement plans.
During 2021 cash used to support additional working capital requirements was $22 9 million, which was primarily due to management's focus on ensuring availability of inventory to meet customer demands during the current supply chain constraints.
By way of comparison in 2020 cash used to support additional working capital was $5 6 million.
Total capital expenditures for 2021 was $3 7 million.
We expect capital expenditures in fiscal year 2022 to be approximately $5 3 billion.
In 2021, the company made total debt payments of $17 3 million of which $11 million was on an accelerated principal payment.
As of January one 2022, we had cash and cash equivalents of $6 2 million.
Our debt leverage ratio stood at $2 46, and our fixed coverage ratio at two <unk> two both of which are well within our bank covenants for the quarter and one in the quarter respectively.
With that I'll turn the call over to Chris for <unk>.
Sure.
Thanks, John operator like to open the line for questions.
Certainly ladies and gentlemen, once again, if you have any questions or comments you may type them into the ask a question box via the webcast or press star one on your phone at this time, please hold a moment, while we poll for questions.
Okay. We do have some questions that have come in via the webcast. So we can begin with them.
We have one question bear with me I'm going to read out.
Regarding the big three returnable packaging business.
Obviously, a big year for that segment as Oems get their supply chain is ready for the introduction of new vehicle models.
Do you expect that the recent growth in this segment will continue through 'twenty, two and 'twenty three as these models are introduced.
Or rather do Oems essentially preorder big Three's products, such that growth one <unk>.
Such that the growth one would expect to take place as a result of new model introduction. During 2022 2023 already took place this year.
I think we can answer that question yes.
Yes, so the <unk>.
Yes.
Quarter somewhere in the 18 to.
To 24 months prior to product launch is when they start working with us on the design of returnable transport packaging.
For tier ones, that's probably a little bit later.
So that's all driven by new product launches and based on the latest data that we have which gets aggregated by bank of America.
The forecast for a new vehicle launches remains strong through 2025, So bank of America estimate to approximately 55, new product launches in.
2022.
And that remains at 60 or above through through 2025 that compares to an average of 35 to 40 launches over the last.
Three years, so we're expecting demand to remain strong for us.
For the foreseeable future.
We have another question can you comment on your current level of working capital and where we see it headed in coming quarters.
Sure.
So obviously, our working capital is above our historical level.
There's really three main factors that are driving as I mentioned.
Our investments in safety stocks.
I think I mentioned, a long time that product fits in transit and.
And the third reason our working capital is above where we would expect it to be is that we do have a higher level of past due is we're not able to complete all.
<unk>.
While we are waiting on certain components finished dose to finish those projects all of which is driving our working capital now.
Now we can see this declining but it's going to take a few quarters to do this.
It won't it doesn't happen right away.
But we don't have any concern about inventory spoilage based on the quality of what we've got.
Now of course as that happens, we will generate cash which will further drive down our net leverage ratio.
Then we have another question around gross margins and we're currently at.
At about 20% in the quarter do we think that we can get back to you are at the previous highs that we experienced back in 2019.
I'm not sure.
John do you have any.
Well actually yes, I think we will see that go forward.
Increase and improve as we can get our prices normalize with the material costs discussed earlier.
Earlier.
Many of the materials is rising so fast that we couldnt keep up with the pricing and we had to negotiate a lot of price recoveries with our customers, which took time, so we lagged as the <unk>.
Price of materials starts coming down and our prices are holding we should see a marked improvement in the gross margin.
And then we have another question on SG&A.
It's notably below other quarters in the year do we feel this is an appropriate run rate going forward.
I think it's appropriate.
It really is.
Where we actually should be running for I know that we do monitor us selling administrative expenses and we do put a lot of controls on them.
I know also as business starts improving we will be bringing on some additional people and additional sales staff, which increased a bit but it should be relative to sales.
Okay. It appears as though we have no further webcast questions. Operator, do we have anyone on the line that we'd like to ask a question.
Yes, our first question from the line today is coming from miles Jennings private Investor. Your line is live you may begin.
Good morning, and thanks for that good report.
Hi, I just had a few questions.
And.
I suspect that maybe you answered one of them at least.
I see that your pension fund has about 219000 shares of eastern common stock.
Six 8% of your plan assets.
And about three 5% of your shares outstanding.
I just wondered have you considered buying back those shares from our plan.
It seems as though.
Employees has had sort of a double jeopardy by owning shares of stock as well as having the funds available for various expenses and everything.
I'm sure that cash in that pension plan, it's easier to handle them.
The volatility of shares.
Well actually we do have we do look at that every quarter. When we have our board meeting and we do review our pension investments. However, we feel that we've been acquiring the shares.
Fairly low price relative to where we know the market was going to go and we expect it to actually be a benefit into the overall funding.
We are capped so we cannot include into the pension plan any more than 10% cost so that would be the limitation factor, but at this point in time, we don't see a reason to try to divest that out of there.
Thanks.
Hi.
This is along the lines of what you're planning to do this year as far as further.
Consolidation of facilities and businesses.
Which I commend you for.
I see that at year end.
You own.
376000 square feet of industrial space at year end.
I just looked at Globe Street Dot Com, which is a.
Service for value in commercial real estate industrial real estate.
And they say that the average price based.
Based on the largest dataset is about.
About $145 a square foot.
That's just the value of about $54 million versus your carrying value of $17 million.
And that excess works out to just about $6 per share I.
I just wondered.
Do you have plans to.
Reduce your.
Here.
Square footage facilities.
I saw in the 10-K that you saw building willing lock Wheeling, Illinois.
Which was tied to.
A lot of company, but it seems like a very heavy.
Heavy facilities.
Resorts that youre carrying.
So there is to just kind of two parts to your question one has to do with the optimization of our manufacturing footprint.
And do we believe that we've got more square footage that we need to support our current.
Our production levels.
And the second part of your question is.
I think if I understand it correctly is more to do with the way we should only release.
The.
The manufacturing sector that we currently own.
I would say both we are continuously evaluating.
And each year, when we put our plans together we look at.
What kind of.
Manufacturing capacity, we need.
I know that today with the goals that we have.
We are in fact looking at some ways to add I would say on the margin some.
Some space so we can support our production levels.
But we're not.
We're not expecting a wholesale change in terms of our overall square footage.
At the same time.
When we.
I'll look for any acquisitions our ability to.
Our ability to optimize that.
Footprint with an acquisition is what I think if we look at very closely because there is potentially quite a bit of benefit to be gained from that.
Yes.
Christian we have looked and continue to look I would say certainly at least once a month and offers that come in for sale leasebacks and we evaluate those.
Based on the.
The impact that it has two to each shareholders.
And I.
I would say until now that cap rates have been at a level, where we don't think it benefits us if we compare the cap rates with.
Yes.
General rates.
Debt out there we don't think the offers that we've gotten so far benefit.
Benefits that could change.
The market for commercial real estate.
Its pretty dynamic that if that changes and certainly we would.
We would come to a different conclusion.
Excellent.
And just one further thing.
I saw that.
You disclosed that you sold the business of Greenwald for $8 million I think.
President John too.
Noted some gain on the sale of equipment sales.
Just wondering can.
Can you give us the total net proceeds on the sale of these two businesses.
$16 million.
$15 million.
<unk>.
16.
Oh, good thank you and Thats that is retaining the.
Building of Greenwald for Gist.
Investment reps I assume.
That is correct. Thank you very much and.
Our acquisitions have been working out very nicely.
It sounds like you're in the right spot in the economy. Thanks again.
Thank you.
Operator, do we have any other questions on the line.
We have no further questions in the queue at this time.
Okay. Thank you with that I will turn the call to Gus for closing remarks.
Thank you.
Thank you for those questions.
As I reflect on 2022 I believe that there are many reasons to be optimistic about the year with strong demand in our core markets.
Recovering supply chains.
And a higher level of confidence that raw material price volatility will subside.
While the war in Ukraine as I mentioned is once again driving up some of the cost of raw materials.
We're not seeing the kind of increases that we saw in 2021.
In 2022, we should also begin to see the impacted of the increase in new vehicle launches the synergies from our consolidation of MRV, Illinois lock.
As well as the accelerated growth from the launch of six new truck Mirror program in 2021.
As noted earlier big three precision our returnable transport packaging business has seen a material pickup in demand for its products and services throughout 2021.
A lot of which was reflected in the year end backlog.
And we expect demand to continue to strengthen in 2022 due to return of new model launches.
Excited about many of the launches that we're working on with our OEM and tier one customers.
These include the upcoming toward Mustang.
<unk> Grand Cherokee.
At $2 50, and $3 50 Super duty passenger trucks.
We're also working with our customers on numerous near term electric vehicle model launches, including among others. The Ford F 150 lightning passenger truck.
Sadie's, EQM SUV and GM EQM SUV.
At the same time, we've made significant headway in the heavy duty truck industry and are excited to report that we are now a primary packaging supplier to one of the leading heavy duty truck Oems.
And we are building business with the others as well.
Success in this market is in part based on our ability to leverage <unk> and Bell box strong relationships with these various commercial vehicle Oems.
But beyond 2022, we believe that our focus on our three core businesses Big three precision Tampa heart and fell back we.
We will deliver innovation led organic growth.
Capitalizing on several industry trends, including electrification digitization and automation.
At the Heart for example, recently launched a full line of electromechanical solutions capitalizing on the electrification and digitization across many of our core markets, including commercial transportation and retail.
And we anticipate that our innovative products will translate into significant sales earnings and cash flow growth in 2022 and beyond.
We're very active in our pursuit of bolt on acquisitions for 2022, 2023 and beyond that.
We're looking at businesses that expand our access to markets build our capabilities and offer synergies for each of our core businesses.
As a result, we remain confident in our goal to become a $100 million EBIT a company through a combination of organic growth.
And bolt on acquisitions.
Last but not least as you might have seen in our press release, we're excited that Peter O'hara will join our senior leadership team as CFO . Most recently was vice president of finance at Navistar.
Peter will replace John Sullivan, who is retiring on may 15th of this year.
John has had an incredible 46 year career at eastern and we are deeply grateful for his leadership and commitment.
With that I'll turn the call back to Chris Thank you and with that I'll turn the call back to the operator.
Thank you.
Ladies and gentlemen, this does conclude todays event you may disconnect at this time and have a wonderful day.
Thank you for your participation.