Q2 2022 Eastern Co Earnings Call
Good day ladies and gentlemen and welcome to the second quarter fiscal year 2022 earnings call.
At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Nicholas Vallejos, Vice President of Finance, Treasurer, and Secretary. Sir, the floor is yours.
Thank you.
Good morning and thank you everyone for joining us. Speaking today will be Eastern's President and CEO Gus Flack and our CFO Peter O'Hara.
After that, we will open the call for questions.
Please note that some of the information you 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, and financial performance.
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.
We undertake no obligation to revise or update any forward-looking statements to reflect events or circumstances that occur after the call.
For more information regarding these risks and uncertainties, please refer to risk factors discussed in our Form 10-K for the fiscal year filed with the SEC on March 5, 2022, and any other filings with the SEC.
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 an isolation from GAAP results.
A reconciliation of each of the non-GAAP measures discussed during today's call.
The most directly comparable gap measure can be found in the earnings press release available on our website at www.drsusan.org.
www.easterncompany.com under the investor information tab.
With that, I'll turn the call over to Gus for opening remarks.
Thanks, Nick, and good morning to those who have joined us on the phone and those participating via the web.
We released Eastern second quarter numbers on our Form 10Q yesterday afternoon. And before Peter reviews the detailed results with you, I'd like to take a few minutes to reflect on the quarter.
This was another strong quarter for Eastern with solid revenue growth.
Net sales from continuing operations grew to 69.5 million in the second quarter of 2022. That's an increase of 14% over the second quarter of 2021.
And it's another quarterly sales record this year over Eastern 164-year history.
Customer orders were strong and importantly our backlog at the end of the second quarter was 82.8 million, stable from where it stood at the end of the second quarter of last year as well as the beginning of 2022.
Strong backlog positions as 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 Big3 Precision Team remains well positioned for the anticipated growth in returnable packaging over the remainder of this year and beyond as the pace of new vehicle launches accelerates.
Sales from our returnable transport packaging products grew nearly 47% in the quarter compared to the prior year.
At the same time?
Sales of our recently launched Truck Mirror programs continue to gain momentum as truck builds for these programs ramp up.
According to FDR Transportation Intelligence, demand for new Class A trucks is expected to remain robust into 2023.
Now, while raw material cost increases began to moderate for certain key commodities in the second quarter, of courage began to rise again in theesse always electroSBG
we continue to operate at a much higher material cost structure than in prior years.
We also still experience ongoing labor shortages and supply chain constraints. As such,
We remain focused on the need for price adjustments across all of our businesses, most of which took effect towards the latter half of the second quarter and in the beginning of the third quarter of 2022.
We expect to see the ongoing benefits of these actions.
and will start to take more full impact in the third quarter.
We have clearly sustained a momentum from last year with strong sales, a healthy pipeline, and growing end markets.
These results reflect solid execution by our teams.
and we're well positioned to finish 2022 in record territory.
That said, we're not ignoring the macroeconomic warning signs that are out there.
global inflationary pressures and the reaction of the central banks across the world may trigger a natural cyclical contraction.
global inflationary pressures and the reaction of the central banks across the world may trigger a natural cyclical contraction and we will be prepared. For example... There is no direct fault.
We're focusing our efforts on inventory reduction opportunities. Inventory as you know increased in part for a couple of reasons including protracted supply chains from China and a desire to protect sales during a pandemic and aftershocks with greater safety stocks.
and general inflationary cost increases that are also capitalized when a product remains on hand.
All that said, we're looking for every opportunity to reduce inventory. And have two focus teams that are Velvac and Everhart operation, the largest consumers of our inventory due to the structure of our business.
to review each of their overall supply chains for opportunities.
at the same time.
We're establishing very specific plans at each of our businesses for operating cost reductions should we see certain factors change in a market.
At this time, our order intake and backlog across most of our businesses do not suggest the need to deploy these plans on a company-wide basis.
but we're going to remain vigilant and ready for such a scenario.
Finally, I think it's important to stress that our balance sheet remains solid.
Our liquidity continues to improve, demonstrated by a very strong current ratio of 3.0 times for the second quarter of 2022.
We were also able to deploy capital in order to repurchase over 29,000 shares of common stock in a quarter.
Moreover, we believe that we are prepared for a rising interest rate environment.
with over 50% of our term debt locked in at fixed interest rates through an interest rate swap agreement.
With that, I'll hand it over to Peter to take you through the detailed commentary on the second quarter results.
Thank you guys and good morning to everyone who is on the call today. My remarks this morning will focus on Eastern's results for the second quarter of 2022.
For the quarter, net sales increased 14% to $69.5 million from $61.2 million a year earlier.
Sales increased primarily due to the increased demand for truck accessories and automotive returnable transport packaging products as well as from distributors.
Our returnable transport package sales have continued to benefit from an increase in upcoming new automotive launches including several electric vehicle launches.
The effective volume on existing products increased net sales by 9.3% year over year, while price increases in new products contributed an additional 4.2%.
Price increases primarily reflected our efforts to recover increases in raw materials and freight costs.
Gross margin as a percent of sales was 23% in the second quarter of 2022, roughly in line with the prior year.
As Gus outlined, we have worked with many of our major customers to agree upon new pricing that took effect toward the latter half of the second quarter and the beginning of the third quarter of 2022.
We expect those increases will continue to have a more fuller effect in the third quarter and beyond.
Product development costs increased 100,000 or 12% in the second quarter, excuse me, decreased 100,000 or 12% in the second quarter of 2022 compared to the second quarter of 2021. museum.
As a percent of that sales product development cost for 1.4% for the quarter compared to 1.8% in the second quarter of 2021.
Selling general and administrative expenses increased 800,000 or 8% year over year, primarily as a result of increased commissions and other selling costs, payroll related expenses and travel costs. At Turn Kat weldingilestine.com someone who is bipedal to Canadian Worizard, is they're converted to Harry Potter. Libed
The increase in selling expenses reflects both the impact from increased sales as well as strategic investments we have made in our sales capabilities.
Net income from continual operations for the second quarter of 2022 was $3.7 million or $0.59 per diluted share compared to net income of $2.8 million or $0.44 per diluted share in the prior year. Net income from continual operations for the second quarter of 2022 was $3.7 million or $0.44 per diluted share in the prior year.
As reflected in the supplemental financial information of our press release, we did not have any adjustments for events outside of our ongoing operations during either the second quarter or for that matter the second quarter of the prior year.
Adjust the EBITDA from continuing operations for the second quarter with $7.2 million compared to $5.8 million in the second quarter of 2021. EBITDA represents a 24% increase in EBITDA year over year.
In terms of operating cash flow, the company generated approximately $1.1 million of cash from continuing operations during the second quarter of 2022 compared to generating approximately $3 million in the second quarter of the prior year.
In the second quarter of 2022, cash flow was impacted by an increase in working capital, principally resulting from the settlement of payables associated with the build of inventory during the first quarter of 2022.
The effect of COVID-19 pandemic and the related recent shutdowns in China continue to adversely impact our supply chain.
And as a result, the inventories increased in the first quarter and largely remained at those levels for the second quarter as well.
As of July 2nd, 2022, we held cash and cash equivalents of approximately $7.2 million. With that, I'll now turn the call over to Nick.
Thanks, Peter.
Operator, I'd like to open the line for questions.
I do see that we have some questions on the webcast and we'll address those questions first.
And then we'll turn the questions over to the operator for the ones on the phone.
What is your view on the likelihood and impact of an economic downturn?
So, we're monitoring demand and our backlog very closely, and not just demand by our customers, but also the demand in many of the end markets, so demand by their customers.
And while it remains strong right now, and our backlog is very solid.
As I mentioned earlier, we have begun to prepare plans so that we can respond very quickly if we see any softening in any of our end markets.
Thank you, Gus.
The next question is what is the direct impact of increasing interest rates on the Eastern Company?
We're fortunate that over half of the $78 million of financial debt that we have on the balance sheet currently was swapped from floating to fixed.
at origination. And that means that the impact from the increase in interest rates and our monthly interest payments is now muted.
Thank you, Peter.
For the next question, when do you expect to sell Argo?
As you'll recall, we report Argo as discontinued operations while we continue to evaluate options to maximize its value.
Now with the current dynamics in the market for printed circuit board assembly, Argyre is a really good asset and the business reported strong sales and earnings in the first half of 2022.
So as we explore these options, we are committed to make sure that we maximize the value of ARGO for our shareholders.
Thank you, Gus.
The next question.
is what are your near-term plans for M&A activity?
We remain committed to complete multiple accrete default on acquisitions.
However, in the current environment, and more specifically with the risk of an economic downturn, we believe that we may be great through future acquisition opportunities.
And so...
We continue to actively look at potential near-term transactions while we continue to look at near-term transactions, I should say. We're also primarily focused on using those excess funds to strengthen our balance sheet by reducing our debt.
Thank you, Peter.
The next question we have is year over year price increases have been 2.5%, which is well below inflation. The next question we have is year over year price increases have been 2.5%, which is well
Does the company have plans to increase prices further to restore margins?
Thank you. So the 2.5% price increase reflects the entirety of all price increases over the entirety of all our sales. Now the price increases, we only take price increases on recurring sales. So these are products that we sold last year and are selling again this year. A big part of our volume is new products and you won't see any price increases on that because those are priced.
or repriced each time we sell them, or they are the launch of new programs that came in since the prior year. So that 2.5% is the entirety of the price increase, but over a much larger sales volume.
If I may add to that as well, the price increases principally happen in the back half of the second quarter. And so the 2.5% is a measurement of just really kind of the entire quarter, but the increase is occurring only in the second half of that, the latter half of that.
Thank you, Gus and Peter.
For the next question, can you speak to expected margin cadence for Q3 and Q4 given price and actions?
So generally, we continue, we expect margins to continue to expand into Q3 and into Q4. And we see no reason why we could not bring our gross margins back to the margins that we held in 2019. There's nothing structural about our business that would prevent us to do that.
I'm not going to forecast where we will be by Q4, but I do believe that we will get there.
Thank you, Gus.
We have no more questions online. Operator, do we have any questions?
Ladies and gentlemen, the phone lines are now open for questions. If you have any questions or comments, please press star 1 on your phone at this time.
We ask that while posing your question you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions.
Your first question for today is coming from David Cohen. Please announce your affiliation then pose your question.
Hi, Minerva Advisors. Morning guys.
My question relates to the working capital accounts for obvious reasons.
They grew meaningfully during the first half, I think about 14 or 15 million of incremental working capital. I'm wondering what sort of expectations you'd like to provide about the trend in the second half and when might we be able to start to release.
some funds from the working capital. Thanks.
Thank you.
Thank you, David.
So, as Gus outlined in his discussion, we're very focused on looking for opportunities to reduce inventory at the company and that's gonna be the major consumer of working capital overall. At this time, I don't think we're gonna be able to give you guidance as to exactly the amount and the timing of when it'll come down, but I can tell you it's a project focused internally within the company.
Thank you, Peter.
Operator, do we have another question online?
There are no questions in queue at this time.
Okay, thank you. We see no other questions on the webcast either. So with that, I'll turn the call over to Gus for closing remarks.
Thank you, Nick, and thanks everyone for joining us this morning.
We are pleased with the continued acceleration and demand for our products and services across all of our businesses.
The strength of our backlog provides a great deal of comfort and confidence that they will sustain growth across our businesses in the coming quarters.
Supply chain and inflation related pressures aside, we're optimistic about the remainder of this year and our longer term future. Over the last year, our team has become increasingly effective at managing supply chain pressures and volatile raw material costs and has driven better throughput.
Our team is committed, resilient.
prepared for the challenges ahead and we are well positioned to capture the opportunities in front of us.
We share a great deal of optimism and urgency to show you what we are truly capable of delivering.
Thanks Gus. With that, I'll hand the call back to the operator.
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.
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This time were able gu to exact the in the time come down project ly with in the company. eightthank Peter operated to other no questionions in at this time. Thank other ions C. So with that the call over cloing. marthank you to thank every one for join moring. We ased the continue to seleration in demand for our products and services across all of our businesses. The streng backlog prov the Al conferen conferenidence will ST TH across our businesses in the coming quars. The ply chain in inflation related. The pressures optimm the remain of thisyear and our long ter future. Over the last year are team be coming increasing fected manageaging supply cha pressuions and all material cost and the D better our team committed re il ion and prepared for allenges a and we are well position to cappt opportunity fron we deal optim and re CY to show you what we Tru able theliingthank with that. The call back to the oper. Thank you, Ladies and gentlement. cluded to conference call. 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Conference center Please hold and operator will be with two momentarly welcome to the issue. Direct conference center, the conference after the comp case. Yes, that for 9, five for seven 9, very much name. companyy pyes, ress RAC are I I, H and I that are. Thank, Thank you very much. Ty to the cour now. Ok, conference center Please hold and operator will be with two momentarly welcome to the issue direct conference center, the conferen. After the comp case. That for 9, five for seven 9, very much name. companyy pyes, ressing RAC are I I, H and I that are. Thank you very much. Pretty to the cour now. Thank day. Ladies and gentlemen, welcome to the second quarter fifiscal year 20 20, two earning call. At this time all part EST have been plac list only no and the floorable be openbeen for questions in comment after the presentation. It is now my pleasure to turn the loor over to year host n a host prespresentident, finance treasure and se ary the Flo. yoursthank you morning. Thank twent. speaing to today will be e tern President, and C e fl and our C there. After that will open the call questionsple. No that some of the information you will year during hour discussions today will consist the forward looking statements about the company future financial performance in business prospect inincluding with without mentation, ments regarding revenue girross margion, operating sentenes, other income in expen actses in business out look. These fourward looking statements are subject to risks, certainties that could cause actual resul or T to versing idently for most projected in these forward looking statements. We under take no ation to REV or up the any forward looking statements for reflect of events or circumstances that cur after the callmore information regarding these Ks and certainties. weple refer to risk factors. Discuss our Form for the fiscal year F with the's se C, our Mar two thousand and 20, two and any the other filings with the se C addition. During these call we will discuss non-GAAP financial measures that we believe our useful sub? ple measures of eas, ERS or performancethese on GA measures should be concent in addition to and that as the substantuteto or solation from GAAP results record con? il of each of the non AP measures discussed during to the call the most. The directly parable gap measure to found in the earnings press rease available on our website that East tern companyy call under the inves information with that turn the call over for over marks. Thanks n and good morning to those in on thephone and those participating by the web. We re the second quarter bers on our 4: 10. yesterday afternoon the four ter revieused to detailed results with'd like to take a few minut to reflect on the quarter. This was another strong quarter for, with solid revenue grow that Sal from continue operation CRE to sixty nine point five million in the second arter of two thousand 20 two's an increase 14% over the second quarter of two thousand and 20 and it's another courarter sales record this year over e hundred and sixtyy four or history order for strong and importantly are backlog at the. The second quarter was eighty 2, twentyeight million stable from our did at the end of the second quarter last year as well as the beginningof two thousand and 20: two the strong backlog posions as well for the coming quarters. Sales pro under cours affected execution by each of our businesses. The benefit from favorable the MAN trens across our court markets, for example, are big three preition team remain well position 40 particicipated growth in returnable packaging over the remain of this year and beyond. As the case of new launches excelerrates. Sales from our turnable transanfer packaging product CRE nearly 40, 7% the quarter compared to prior yearat the same time, sales of our recently launch struck programs continue the game moment struck ill for programs ran couraring to after our transansportation in intelions. The mand for new Class trck is expected to re remain rebus into thousand and 20: 3, while material cost increases began to moderate for MO ities in the second quarter. We continue to operate at a much high material co structure that in prior years. We also still experience on going abor ortages and supply change constraints. Such we remain focus on the need for price justments across all of our businesses, most of which to effect towards the lot half the quarter and in the beginning of the D? quter of two thousand and 20: two we expect the see the on going befits of these actions and start to take more full impact in the third quarter. We have clearly ST men from last year, strong sales health, pipe line and growing and marketsthe results reflect sawid execution by our teams and were we position to finish two thousand twent two in record territory. That said, we're not ignoring the AC conomic couring signs that are out there: global inflation, ary pressures and the reaction of the centr bank across world G and natural cyclical contraction, and we will be prep. For example, werere focus ourefforts on inventory reuction opportunities. Inventory, you know, increased in part for ouple reasons, including protracted supply changeation from China and the to protect sales uring a pandemic and after shocks with CRE safety stocks and general inflationary cost increases that are also capitalizized when the product remains on hand. All that said, werere looking for every opportunity to reduce inventory and two focus teams that our well back our operation. The largest consumers of our inventory, due to the structure of our business, to revie each of their over all supply change for opportunities. At the same time're abaging very specific planans our businesses for operating coross productions should we see certain fact change in market at this time our order take and backlog across of our inesses do not ggest the need to deploy plants on a companyy by bases. We're going remain vigulent and ready for such in areafinally, I thinkit' important to stress that our balance remain solid. Are liquidity continuees to improve, demonstrtrated by very strong courrent ratione three times for the second quar of two thousand and 20: two we were also able to deploy capital order to purches over twoy nine shares of common talk. The quarter for over. We believe that prepared for rising interest rate vironment 50% of our ter that locked in sixx interest rates through an interest rates agreement with all had over to Peter to take through to detailed comment ary on the second quarter. rel gu morning one's on the call today, Mars morning. Cus on theseers results for the second quar of two thousand and 20. for the courarder sales increase 14 per to sixty nine million dollars from sixty one point two million ear sales increase. Im ly used in the increase MAN for trc ores on the returnable pri aging.
Center Please hold and operat will be with two momentarly welcome to the issu direct conference center. The conference after the compferen case yes that for nine five for seven nine much name company caseyes ressing RAC are I H and I that are Thank Thank you very much pretty to the call. Now ok Thank conference center. Please hold and operat will be with two momentarly welcome to the issue. Direct conference center. The conference after the compferen P case that for nine five for seven nine much company pyes ressing RAC are I H and I that are a Thank you very much pretty to the call now ok Thank day. Ladies and gentlemen welcome to the second quarter fiscal year 20 20 two earning call. At this time all part EST been have been plac list only MO and the floorable be openbeen for questions and comment. After the presentation. It is now my pleasure to turn loor over to year host nic. A host President finance treasure and secre ary the Flo yoursthank. You morning of B 20 speaing to today will be e tern prespresentident and C e fl and our C there after that will open the call for questionsple know that some of the information you will year during hour discussions. Today will consist the forward looking statements about the companyies future financial performmance in business prospect including without mentation ments regarding revenue margions operating sentenes other income in expen actses in business outlook. These forward looking statements are subject two Ks in UN certainties that could cause actual resul or T to versing idently from those projected in these forward looking statements. We under take no obligation to REV or up the and forward. Looking statements reflect of events or circumstances that cur after the callmore information regarding these Ks and uncertainties we refer to risk factors discuss that our Form for the fiscal year F with the se C our Mar two thousand and 20 two and any the other ilings with the se C ition. During call we will discus non deap financial measures that we believe our useful su ple measures of for performance. These on AP measures should be concent in addition to and that the substitute or solation from AP results record. conilation of each of the non-GAAP measures CUs during to today call the most thedirectly parable AP measure to found in the earnings. Press rease ailable on our B that East tern company DOT call under the inves information that with that call over for opening marksthanks n and good morning to those two in onthephone and those participating by the we we re second quarter numbers on our 10 yesterday afternoon. The four ter revieused to detailed results with you D like to take a few minut to reflect on the quarter. This was another strong quarter for e with solidof revenue grow that Sal from continue operation CRE to sixty nine point five million in the second quarter of two thousand. twenty's an increase 14% over the second quar of two thousand and 20 and it's another courarterly sales record this year over e hundred and sixtyy four or history order for strong and importantly are backlog. At the the second quar was eighty two twentyeight million stable from our did at the end of the second quarter of last year as well as the beginning of two thousand and 20 two strong backlog posions as well for the coming quarters. Sales pro under cours affected execution by each of our businesses. The benefit from favorable the MAN TS across ourcourt markets. For example are three preition team remain well position 40 particicipated growth in returnable packaging over the remainder of this year and beyond as the case of new launches celerrates sales from our able transanfer packaging product nearly 40 7%. The arter compared to the prior year. At. The same time sales of our recently launch truck programs continue the game moment struck ill for programs. Ram up couraring to after our transansportation in intelions. The MAN for new Class trcks is expected. Ing remain rebus into thousand and 20 threeout while material cost increases began to moderate for commo ities in the second quarter we continue to operate at a much highire material coross structure and in prior yearss we also ststill experi on going labor ortages and supply change constraints. Such we remain focus on the need for price justments across allof our businesses. Most of which to effect tors lot the quarter and in thebeginning of the D quter of two thousand and 20 two We expect the see the on going benefits of these actions and start to take more full impact. In the third quarter. We have clearly ST men from last year strong sales health ipeline and growing and markets. The results reflect saw execution by our team and were we position to finish. twoy twent two in record territory that said we're not ignoring the AC reconomic couring signs that are out there GLO inflation ary pressures and the reaction of the centr bank across of world trig and natural clitical contraction and we will be preppar for example werere focus our forts on inventory reuction opportunities inventory. You know increased in cour for couple reasons including protracted supply change from China and the to protect sales during a pandemic and after shocks with CRE safety stocks and generally inflationary coross increases that are also capitalizized that the product remains on hand. All that said werere looking for every opportunity to reduce inventory and two focus team that our LL back our our operation. The largest consumers of our inventory due to the structure of our business to revieyou each of their over all supply change for opportunities at the same time're abishing very specific planans of our businesses for operating coross. Productions should we see certain fact change in market. At this time. Our order in take and backlog across of our businesses do not ggest the need to deplo plants on the company by bases 'regoing remain vigilent and ready for such in areafinally. I think it's important to stress that our balance remain solid are liquidity continuees to improve demonstrtrated by very strong courrent ratione three times for the second quter of two thousand and 20 two we were also able to deploy capital order to re purches over twoy nine shares of common talk. The quarter for over we believe the prepared for a rising interest rate in vironment. We 50% of ter that locked in sixx interest rates an interest rates o agreement with all had over to Peter to take through to detailed commentary. On the second quarter results Thank gu morning one who's on the call remars morning focus on theseers results for the second quarter of two thousand and 20 for the courarder. Sales increased 14 per to sixfety nine million dollars from sixfety one point twomillion. The earli ales increase prim ly's in the increase MAN tracting ies on the returnable packaging product as well as from the.