Q3 2022 Eastern Co Earnings Call
Good morning, ladies and gentlemen, and welcome to the Eastern company's third quarter fiscal year 2022 earnings call.
At this time, all participants have been placed on a listen only mode and we will open the floor for your questions and comments after the presentation.
It is not my pleasure to turn the floor over to your host Nicholas blouse.
The floor is yours.
Good morning, and thank you everyone for joining us speaking today will be eastern's, president and CEO Gus Black.
Our CFO Peter O'hara.
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 include.
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.
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 the risk factors discussed in our Form 10-K for the fiscal year filed with the SEC on March 17th 2022, and our other filings with the SEC.
In addition, during today's call we will discuss non-GAAP financial measures that we believe are useful as subtle 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.
A reconciliation of each of the non-GAAP measures discussed during today's call.
Two.
Most directly comparable GAAP measure can be found in the earnings press release available on our web site at Www Eastern company Dot com under the Investor information tab with that I will turn the call over to Gus for opening remarks.
Thanks, Nick and good.
Good morning to those who have joined us on the phone and those participating via the web.
We released eastern's third quarter numbers, and our Form 10-Q yesterday afternoon.
Before Peter reviews, the detailed results with you I'd like to take a few moments to reflect on the quarter.
This was another strong quarter for eastern with solid revenue growth.
Net sales from continuing operations grew to $71 6 million in the third quarter of 2022.
That's an increase of 12% over the third quarter of 2021.
And it's another quarterly sales record this year over a 164 year history.
Customer orders were strong and importantly, our backlog at the end of the third quarter was $85 7 million.
That's up 3% from where it stood at the end of the third quarter of last year as well as the beginning of 2022.
A strong backlog positions us well for the coming quarters.
Sales growth underscores the effective execution by each of our businesses to benefit from favorable demand trends across our core markets.
For example are.
Our big three position 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.
IHS Markit.
S&P Global research firm <unk>.
Predicts that there will be a 130 electric vehicle models by 2026 at according to Bank of America GM alone will be releasing 17, new models between 2023 and 2026.
Sales of our returnable transport packaging products through.
<unk> grew nearly 24% in the quarter compared to the prior year.
At the same time.
Sales of our truck mirror programs that launched early this year continue to gain momentum.
<unk> builds for these programs ramp up.
According to FTR transportation intelligence demand for new class eight trucks is expected to remain robust well into 2023.
Okay.
While raw material cost increases began to moderate for certain key commodities in the third quarter. We continued to operate at a much higher material cost structure than in previous years.
We also still experienced labor shortages and supply chain constraints.
So if our costs continue to increase we're taking further pricing actions.
I am pleased that an asset subsequent to the ended the third quarter, we divested our interest in <unk>, which is the final step in our work to streamline our portfolio of businesses.
With this transaction we have now completed the sale of all non core businesses.
And we will be able to focus our efforts exclusively on our three largest businesses characterized within the financial statements as continuing operations.
Moreover.
In the 2022 third quarter, we divested our corporate headquarters building located in <unk>, Connecticut and later this month, we will be relocating to office space in Shelton, Connecticut.
That will be both to substantially reduce our operating and carrying costs and also before the capital repairs that are otherwise needed for the 120 year old facility and the AGA Tuck a true win in my book.
Finally, our balance sheet remains solid with.
With a very strong current ratio of two nine times for the third quarter of 2022.
It is noteworthy to mention that we repaid $3 million of debt within the third quarter and.
And subsequent to quarter end in the month of October 2022.
We repaid another $5 million from the proceeds of the sale of Argo.
We're able to deploy capital to repurchase over 10000 shares of common stock in the quarter.
And we believe we are prepared for a rising interest rate environment with nearly 55% of our term debt now locked in at a fixed interest rate of three 9%.
Through an interest rate swap agreement.
We've clearly sustained our momentum from last quarter with strong sales and healthy pipeline and growing end markets.
Solid execution by our teams and our focus on our core businesses.
We believe we are well positioned to finish 2022 and record territory.
As I outlined last quarter, we're closely monitoring the macroeconomic boarding sites that are out there.
Global inflationary pressure and the reaction of central banks across the World May trigger a naturals cyclical contraction, which could depress demand in many of our north American markets and we will be prepared.
For example, we focus our efforts on inventory production opportunities.
Inventory issue no increased in part.
Due to the protracted supply chain from Asia, our desire to protect our sales during the pandemic with greater safety stocks and generally inflationary cost increases that are capitalized while the product remains on hand.
We're also establishing very specific plants at each of our businesses for operated cost reductions should we see certain factors change in the 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 will be vigilant and ready for such a scenario.
Peter will now take us through a more detailed commentary on our second quarter results.
Thank you Augusta and good morning to everyone who's on the call today. My remarks. This morning will focus on eastern's results for the third quarter of 2022.
For the quarter net sales from continuing operations increased 12% to $71 6 million from $63 9 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 have continued to benefit 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 5% year over year, while price increases and new products contributed an additional 7%.
Price increases primarily reflected our efforts to recover increases in raw materials and freight costs.
Gross margin as a percentage of sales was 23% in the third quarter of 2022, reflecting an improvement from the 22% weighted average across the first nine months of 2022.
In the third quarter of 2022 gross margins were still 1% lower than the prior year, primarily due to unfavorable sales mix. Nevertheless, we remain focused on our effort to seek margin improvement opportunities.
Eastern structural costs comprised of product development expense and selling general and administrative expenses increased seven tenths of a million dollars or 7% year over year, primarily as a result of increased new product development commissions and other selling costs payroll related expenses and travel costs.
The increase in selling expenses reflects both the impact from increased sales as well as strategic investments we've made in our sales capabilities.
Net income from continuing operations for the third quarter of 2022 was $4 5 million or <unk> 72 per diluted share compared to net income of $3 8 million or <unk> 61 per diluted share in the prior year period.
As reflected in the supplemental financial information contained in our earnings press release adjusted EBITDA from continuing operations for the third quarter was $7 7 million compared to $7 1 million in the third quarter of 2021.
Adjusted EBITDA margins remained a healthy 11% in both periods.
In the quarter, we saw only a modest decline in inventory in part due to a relatively long supply chain originating from Asia that requires time to take full effect as well as the receipt of a large influx of inventory in Q3 principally.
Principally from Shanghai, resulting from the shipping delays in Q2 due to the COVID-19 shutdown last spring in China.
As we enter year end, we will continue to balance our focus on inventory reduction with ensuring we maintain sufficient product to meet our substantial sales backlog.
In terms of operating cash flow the company generated approximately $2 2 million in cash from continue operations. During the third quarter of 2022 compared to a use of cash of approximately seven 6 million in the third quarter of the prior year.
In the third quarter of 2022 cash flow was primarily impacted by a sequential Europe quarter over quarter increase in accounts receivable, which is principally timing related.
As of October one 2022, we held cash and cash equivalents of approximately $5 3 million.
And with that I'll now turn the call over to Nick for questions.
Thanks, Peter operator, I'd like to open the question. The open the line for questions I see that we have some questions from test and we'll address those questions first and then turn to the questions on the line.
Certainly what are the near term plans for M&A.
I can take that one.
I would tell you that we remain committed to pursuing multiple accretive bolt on acquisitions and we have the balance sheet borrowing capacity should those opportunities arise. However in the current market.
More specifically with the risk of an economic downturn, we have to carefully evaluate the downside risk of any transaction and so while we continue to look for these potential near term acquisitions right now, we're very focused on reducing our debt on the balance sheet.
Thank you Peter.
For the next question can you comment on the impact of an economic downturn.
So as I mentioned, we are monitoring demand closely not just demand by our customers, but also demand by their customers primarily customers of commercial transportation.
As well as any changes in vehicle launch schedules.
Right now demand remains strong and industry forecast for many of our markets remain strong.
And our backlog is very solid so for example, the three <unk>.
Primary industry forecast for 2023 class eight vehicle production up at three two projected increase in vehicle production from 2022 to 2023, while the third forecast or predict just a very modest contraction.
At the same time, all our coffee customers projected increase in the number of trucks that they plan to build between 2022 and 2023.
Similarly, IHS fill for Nyx very strong new vehicle launches in 2023 from Ed as well as 2024.
Despite these very encouraging signs we know that conditions can change on us very quickly. So we have begun to prepare plan. So that we can respond.
That are ready to respond very quickly if we see any softening in demand.
In demand from our markets.
Thank you Gus.
Okay.
To what extent did the AVR hard labor issues and rising wages impacts gross margins in the quarter.
We can start those off Sir.
So what I would say there is we had a mild increase in our overall labor costs. However, we've remained focused on taking price increases.
So theres really been a minimal impact overall on our gross margins. However are yes.
Yes that I would add to that.
We.
We are continuing to find ways to improve labor productivity.
Have a heart and.
It's really paying great dividends for us.
Thank you Gus and Peter.
We I'm not seeing any questions via the webcast operator were there any questions on the phone.
Joan.
Certainly and ladies and gentlemen, if you have any questions or comments for the phone. Please press star one on your phone at this time.
Your first question is coming from Ross Davidson from <unk> capital Your line is live.
Russ Davidson your line is live.
Apologies.
Morning, guys. Thanks for taking the question.
Hoping you could just elaborate a little bit on gross margin as you head here and I know you said in the past.
Then.
Working to recover.
Through price increases any offset to the.
Quite a bit higher raw materials looking at the gross margin you're up just a little bit from Q2 about 10 basis points on a percent of sales basis.
But as you said the price increases went into effect at the end of continuing beginning of Q3. So I was hoping you could just elaborate a little bit on where are you in your view of sort of a journey back to potential the potential gross margin for the business and.
Sort of what's your outlook from here in terms of your ability to continue to see that go up.
I'll start that off Russell.
I'll hand, it over to guest compounds as well so what I can tell you is we had.
If you do the actual computation youll see the gross margins for Q3, 'twenty, two we're slightly above 23%.
In Q3 2021, they were slightly below 23%.
We've rounded our numbers when we describe it as a 1% Dominion Asian year over year.
Although it's more around seven tenths or so.
We've done some calculations of our own sales mix here and what I would say is out of that seven tenths around.
Around five tenths of it relates to unfavorable sales mix in the company overall.
And so you know.
While we've been able to recover on.
With price increases were also finding basically we need to also focus on <unk>.
Selling the higher margin products and moving more higher margin products.
In relation to how we performed in the prior year.
That makes a lot of time and thanks for explaining that if you go back further in history and yet EBITDA.
The 70 basis points about a full percentage totally.
You used to run.
You said the business showed capability of running 27, 28% gross margin obviously.
Product mix changes lots of stuff has changed since then but is that a is that a long term goal to get back there still or do you think that just given where the business is today and given how raw materials have increased so much just things have changed.
The actual terminal gross margin I think a little bit lower in your view.
So we've been working on our long term plans and we do not see any structural reason why we should not be able to make our way back.
To those historical gross margins now I cant say thats part of our.
Fourth quarter plan.
But certainly over time.
See no reason why we shouldnt be able to command that kind of a gross margin.
Fair enough that's helpful to hear and then just a quick question. Peter if you could just elaborate on the on the Dsos, increasing you said of the timing related that just flipping helping slipping from one quarter to the other or something else you just told us more about that.
Yes.
It is ultimately a slippage from one quarter to another and within one of our operations.
They had some rebuilding may have it perform.
And they now need to collect on those that refilling.
Got it great.
You guys I appreciate all the color.
Thank you.
Thank you once again, ladies and gentlemen, if you have any questions or comments. Please press Star then one on your phone at this time.
Please hold while we poll for questions.
There are no further questions in the queue.
So with that I'll turn the call over to Gus for closing remarks.
Thank you.
Yes.
And thanks, everyone for joining us this morning.
We're pleased to see the continued acceleration in demand for our products and services across all of our businesses.
And the strength of our backlog provides us with a great deal of comfort and confidence that we can sustain growth across our businesses in the future.
Supply chain and inflation related pressure side, we are optimistic about the remainder of the year and our long term future.
Over the last year, our team has been increasingly effective at managing supply pressure and volatile raw material costs and has driven 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.
With a great sense of optimism and urgency, which we all share. So that we can show you what we're truly capable of delivering.
Thanks, Gus with that I'll hand, the call back to the operator.
Certainly thank you ladies and gentlemen. This concludes today's event you may disconnect at this time and have a wonderful day. Thank.
Thank you for your participation.