Q1 2022 Eastern Co Earnings Call

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Good day, ladies and gentlemen, and welcome to the Eastern company first quarter fiscal year 2022 earnings call.

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

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

Good morning, and thank you for joining us today speaking today will be eastern's, president and CEO , Gus Black and our CFO Peter O'hara 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 were trends to differ significantly from those projected these forward looking statements.

More information regarding these risks and uncertainties. Please refer to risk factors discussed in our recently filed Form 10-K.

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 are pretty desperate opening remarks.

Thanks, Chris.

Good morning to those who have joined us on the phone and those participating via the web.

We released Eastern's first quarter numbers on our Form 10-Q yesterday afternoon.

Before Peter reviews, the detailed results with you.

I would like to take a few minutes to reflect on the quarter.

This was another strong quarter for eastern.

Solid revenue growth.

Net sales from continuing operations.

Grew to 69 million in the first quarter of 2022.

That's an increase of 12% over the first quarter of 2021.

And.

It's another quarterly sales record in eastern Eastern's 164 year history.

Orders from our customers was strong.

And importantly, our backlog at the end of the first quarter reached $86 million.

That's a year over year increase of 23%.

And an increase of 4% since it started the year.

A strong backlog positions us well for the coming quarters.

Sales growth underscores effective execution by each of our businesses to benefit from favorable demand trends across our core markets for example, our.

Our big three precision team built new sales and project management capabilities to capitalize on the increase of new automotive launches, including several electric vehicle watches.

As a result.

Sales of our returnable transport packaging products grew approximately 16% in the quarter compared to the prior year.

We project that demand for returnable transport packaging, both strengthened further through the remainder of this year and beyond.

Pace of new vehicle launches accelerates.

At the same time.

Sales of our recently launched truck mirror programs gained momentum.

As truck builds for these new programs ramped up.

And sales in this market are expected to remain robust.

According to <unk> research class eight truck builds will reach 220000 in 2022, that's an increase of 12% over 2021.

Act research projects that 265000, new class eight trucks will be built in 2023.

We sustained our momentum from last year through the first quarter and into the second quarter with strong sales, a healthy pipeline and growing end markets and solid execution by our teams.

Our business portfolio is aligned with significant demand trends and we're expanding our capabilities to benefit from these trends.

Our balance sheet also reflects our growth.

To ensure we can fulfill customer demand across a broad range of product offerings.

We temporarily dedicated additional capital to improve our inventory on hand, which did impact our free cash flow generation during the quarter.

By temporarily increasing our inventory levels, we can best guarantee D availability of all necessary input materials that we need to meet our customer demands and score some impressive competitive wins.

In addition in the quarter, we experienced a resurgence.

In raw material costs for certain key commodities.

We also continue to see labor shortages of supply chain constraints.

And while material cost inflation impacted gross margin in the first quarter.

We are working to mitigate the impact primarily through successive rounds of needed price adjustments across each of our businesses.

Our most recent routes have gotten it to have gone into effect in may and will continue through June and.

And we expect to see significant benefits from these actions in the coming months.

Now as you May know John Sullivan is retiring after a 46 year career at Easter and Peter are Hara has joined us.

So I'm going to turn the call over to Peter to go over the details of our financial results.

Thank you very much Scott and thank you to everyone who is on the call today.

Citing time to join the Eastern company and I look forward to building relationships with our customers shareholders and analysts.

My remarks. This morning will focus on eastern's results for the first quarter of 2022.

For the quarter net sales increased 12% to 69 million from $61 8 million a year earlier.

Sales increased primarily due to increased demand for truck accessories, and automotive returnable transport packaging products as well as from distributors, our returnable transport packaging sales benefited from an increase in upcoming new automotive product launches, including several electric vehicle launches.

The effect of volume on existing products increased net sales by 4% year over year, while price increases and new products contributed an additional eight percentage points.

New products included various truck mirror accessories, rotary latches D rings and mirror cabs.

Price increases primarily reflected our efforts to recover increases in raw material and freight cost.

Gross margin as a percent of sales was 21% in the first quarter of 2022 compared to 25% from the prior year.

Klein of gross margins in the quarter reflected the ongoing impact of rapid increases in raw materials commodity prices.

We're currently in the process of making the latest round of price increases to mitigate this impact on future earnings.

Product development cost increased two tenths of $1 million or 18% in the first quarter of 2022 compared to the first quarter of 2021.

As a percent of net sales product development costs were one 7% for the quarter compared to one 6% in the first quarter 'twenty one.

The cost increase was primarily due to one time reimbursements in the prior year that did not repeat in the current period from truck Oems for engineering and product samples relating to new mirror programs.

Selling and administrative expenses increased nine tenths of a million dollars or 10% year over year, primarily as a result of increased commissions and other selling costs payroll related expenses and travel costs.

The increase in selling expenses reflected both the impact from increased sales as well as strategic investments, we have made into our sales capabilities.

Net income from continuing operations for the first quarter of 2022 was $2 7 million or 43 cents per diluted share compared to net income of $5 7 million or <unk> 90 per diluted share in the prior year.

Notably adjusted for onetime items earnings per diluted share from continue operations for the first quarter were <unk> 46, compared to <unk> 69 in the prior year.

Adjusted EBITDA for the first quarter was $6 1 million compared to $7 9 million.

In the first quarter of 2021.

In terms of operating cash flow the company consumed approximately $3 $6 million of cash from continue operations. During the first quarter 'twenty, two compared to generating approximately $1 3 million in the prior year.

Cash flow during the quarter was impacted by an increase in working capital.

The effect of COVID-19, pandemic and the related to recent shutdowns in China continue to impact our supply chain and so as a result, both inventories and accounts payable have increased due to increased shipping time port congestion and selective pre buying of raw materials to ensure availability and to mitigate the impact of likely future inflate.

Larry price increases.

As of April <unk>, 2022, we held cash and cash equivalents of approximately $5 $1 million.

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

Thanks, Peter operator, we'd like to open the line for questions.

Ladies and gentlemen to floor is now open for questions. If you have any questions or comments. Please press star one on your phone.

We ask that while posing your question. Please pick up your handset assisting on the speakerphone, sorry optimum sound policy. Please hold while we poll for questions.

And we do have several questions that have come in via the webcast. We will tackle then burst.

The first question is what is our view on the likelihood and impact of an economic downturn on eastern.

So we are monitoring demand very closely and.

And not just demand for our products by our customers, but also the drivers of demand for our customers' products.

And while demand remains strong right now and our backlog is very solid.

We have begun to prepare some plans for what we might do to respond quickly if we see any softening in our end markets and we take some confidence in the way that we were able to respond dirty onset of COVID-19 pandemic.

Okay. We have another question what is the direct impact of increasing interest rates on the company sure I'll take that one.

We're fortunate enough that most of our floating rate term debt is covered by an interest rate swap, which simply means that impact of increases in interest rates on our monthly interest payments will be relatively muted.

Okay. We do have another question actually two questions on the same topic here when do we expect to.

I think when do we expect to sell Argo since our own the remaining non core business.

While we continue to evaluate options for Argo.

With the current dynamics in the market for printed Circuit Board Assembly Argos, a really good asset and the business reported very strong sales and earnings in the first quarter.

So we're committed to maximizing the value of Argo for our shareholders. As we proceed down this path.

And we have I think one other question to this management disclosed the percent of revenue that comes from big three.

What we have told.

Our investors is that within our continuing operations each of our three core businesses is roughly the same size, they're not exactly the same size, but.

Directionally the same.

Alright, let me.

Okay.

Have a question from Ross.

Please ask your question.

Great. Thanks, and thanks for taking my question and welcome Peter I had.

A question just about gross margin.

Material costs, clearly have increased quite a bit over the last year looking year over year, but looking sequentially. It seems like at least in some key commodities like steel prices have been more stable or maybe even down sequentially I guess, depending how you look at it.

And I know you guys have taken a series of price actions in the past or at least that's my impression, but we didn't see a whole lot of improvement in gross margins sequentially. So just comparing to Q4 can you just talk at all about why maybe these price increases you haven't you've already implemented like you referenced to 8% impact from price increases from a year ago why is that not had more of an impact and restore.

Margins relative to that sequential quarter relative to Q4.

Yes, I'd be happy to.

To address that so the price increases that we took last year.

Helped us with some of the raw material and a lot of the.

Increase in shipping rates that we experienced throughout the year.

These recent the latest pricing price increases or cost increases to us.

We're primarily in.

I think some of the cost for Zika, we use quite a bit of zinc and aluminum.

And.

When we pass through pass through those price increases.

Have more of a delayed impact based on the nature of the customers that we serve.

With those kinds of products so.

As those commodity prices continue to increase and we started to prepare risks our customers for those price increases.

But the impact there is more delayed than it has been in in some other parts of our business and as a result, we are still <unk>.

<unk> up there is nothing structural in our business that would cause us to believe that our margins would stay where they are today.

But it is taking us some time to get back on track here.

Fair enough that's really helpful guys.

I guess to that point to the delay, which I totally understand why there is that delay when you look at that very large backlog that you have does that imply also that within that backlog. There is still a fair amount to work off in terms of maybe where you quoted prices that don't reflect the current time.

The current raw material costs.

Actually no that's not the case if that.

The price increases that were working on right now our ongoing programs.

And.

The price increases wood wood as soon as they take effect.

Also be effective for anything thats in the backlog that has not yet shipped.

Got it okay, great I appreciate it thank you.

At one five times.

Alright.

I'm sorry, we did have one other question on the <unk>.

Webcast, but I believe that we had addressed that on the previous question, but if you do want more in <unk>.

Sites, please let us know email us or call us and he can provide you with one.

It doesn't appear as though we have any more questions on the webcast.

Operator, do we have any on the line.

There are currently no more questions on the line.

Sure.

If anybody has any questions. Please press star one on your phone at this time.

Okay.

Okay.

No more questions in the Q2, you have any closing comments you'd like to finish with.

Yes, so I'll turn the call over to gas for closing remarks.

Thanks, and thanks to everyone for joining us this morning.

We're pleased by the continued acceleration in demand for our products and services across all of our businesses.

The strength in the growth of our backlog during the first quarter provides us with a great deal of comfort and confidence that we'll be able to sustained growth across our businesses in the coming quarters.

Supply chain and inflation related pressures aside we are optimistic about the remainder of this year and our long term future.

Over the last year, our teams have become increasingly effective at managing the supply chain pressures volatile raw material costs, and we've driven dramatically better throughput.

Our team is committed resilient and prepared for the challenges ahead, and we are well positioned to capture the opportunities in front of us.

We all share a great deal of optimism and urgency to show you, what we're truly capable of delivering.

Thank you.

Thanks, Gus with that I'll turn the call back to the operator.

Ladies and gentlemen, this does conclude.

Today's conference call.

At this time.

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Participate.