Q3 2022 Core Molding Technologies Inc Earnings Call

November 8, 2022

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Operator: Good morning, everyone, and welcome to the Core Molding Technologies Q3 fiscal 2022 financial results conference call. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there'll be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note that this event is being recorded today. Now I will turn the call over to Steven Hooser, Three Part Advisors. Please go ahead, sir.

Operator: Good morning, everyone, and welcome to the Core Molding Technologies Q3 fiscal 2022 Financial Results Conference Call. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there'll be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note that this event is being recorded today. Now I will turn the call over to Steven Hooser, Three Part Advisors. Please go ahead, sir.

Good morning, everyone and welcome to the core molding technologies third quarter fiscal 2022 financial results Conference call.

Should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please.

Please note that this event is being recorded today.

Steven Hooser: Thank you and good morning, everyone. We appreciate you joining us for the Core Molding Technologies conference call to review Q3 results for 2022. Joining me on the call today are Core Molding's President and CEO, Dave Duvall, and the company's Executive Vice President and Chief Financial Officer, John Zimmer. Before we begin, I would like to remind you that this call is also being webcast and can be accessed through the audio link on the Events and Presentations page of the investor relations section at coremt.com. Today's call, including the Q&A session, will be recorded. Please be advised that any time-sensitive information may no longer be accurate as of the date of any replay or transcript reading.

Steven Hooser: Thank you and good morning, everyone. We appreciate you joining us for the C`ore Molding Technologies conference call to review Q3 results for 2022. Joining me on the call today are Core Molding's President and CEO, Dave Duvall, and the company's Executive Vice President and Chief Financial Officer, John Zimmer. Before we begin, I would like to remind you that this call is also being webcast and can be accessed through the audio link on the Events and Presentations page of the investor relations section at coremt.com. Today's call, including the Q&A session, will be recorded. Please be advised that any time-sensitive information may no longer be accurate as of the date of any replay or transcript reading.

Now I'll turn the call over to Steven Hooser, three part advisors. Please go ahead Sir.

Thank you and good morning, everyone. We appreciate you joining us for the core molding technologies Conference call to review third quarter results for 2022, joining me on the call today are coal car moldings, President and CEO , Dave <unk>, and the company's executive Vice President and Chief Financial Officer, John Zimmer.

Before we begin I would like to remind you that this call is also being webcast and can be accessed through the audio link on them, then and presentations page of the Investor Relations section at core M T Dot com.

Please be advised that any time sensitive information may no longer be accurate as of the date of any replay or transcript reading I would also like to remind you that the statements made during.

Steven Hooser: I would also like to remind you that the statements made during today's discussion that are not historical facts, including statements or expectations of future events or future financial performance, are forward-looking statements and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements, by their nature, are uncertain and outside the company's control. Actual results may differ materially from those expressed or implied. Please refer to the earnings press release that was issued today for our disclosures on forward-looking statements. These factors and other risks and uncertainties are described in detail in the company's filings with the Securities and Exchange Commission. Core Molding Technologies assumes no obligation to publicly update or revise any forward-looking statements. Management will refer to non-GAAP measures, including adjusted EBITDA, free cash flow, return on capital employed, and adjusted net income, and earnings per share.

Today's discussion that are not historical facts, including statements or expectations of future events or future financial performance are forward looking statements and are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.

Forward looking statements by their nature are uncertain and outside the company's control.

Actual results may differ materially from those expressed or implied.

Please refer to the earnings press release that was issued today or our disclosures on forward looking statements. These factors and other risks and uncertainties are described in detail in the company's filings with the Securities and Exchange Commission Court.

Core molding technology assumes no obligation to publicly update or revise any forward looking statements management will refer to non-GAAP measures, including adjusted EBITDA free cash flow return on capital employed and adjusted net income and earnings per share reconciliations to the nearest GAAP measures can be found at the end of our earnings release.

Steven Hooser: Reconciliations to the nearest GAAP measures can be found at the end of our earnings release. Finally, the earnings press release we issued earlier today is posted on the investor relations section of the website at coremt.com as well. A copy of the release has also been included in the 8-K submitted with the SEC. With that, I'd now like to turn the call over to Dave Duvall. Dave?

Finally, the earnings press release, we issued earlier today is posted on the Investor Relations section of the website at core M. P dot com as well.

A company a copy of the release has also been included in the 8-K submitted with the S E C.

Dave Duvall: Thank you, Steven, and good morning, everyone. Want to start today with a summary of some recent good news. A few weeks ago, we executed a new agreement with Universal Forest Products to extend our relationship for another five years. We supply decorative lattice products that UFP provides to commercial and residential customers throughout major big box home improvement retailers throughout the US. With this long-term relationship and others like it, we look forward to continuing to be a valuable partner for building products, industrial, utilities, packaging, transport, powersports, as well as critical infrastructure businesses throughout North America. Although we remain cautious in our outlook, like most companies in this environment, demand remains solid, and in certain end markets, demand is strong. Fortunately, we are a key and trusted supplier in a number of growing companies and industries.

And with that I'd now like to turn the call over date, they double H.

Thank you Steven and good morning, everyone.

I want to start today with a summary of some recent good news a few weeks ago, we executed a new agreement with United Forest products to extend our relationship for another five years.

We supply decorative latest products that <unk> provides to commercial and residential customers throughout major big box home improvement retailers throughout the U S.

With this long term relationship and others like it we look forward to continuing to be a valuable partner for building products industrial utilities packaging transport power sports as well as critical infrastructure businesses throughout North America.

Although we remain cautious in our outlook like most companies in this environment demand remained solid and in certain end markets demand is strong.

Dave Duvall: As businesses plan for their 2023 production, they are locking in agreements with us. We have done a significant amount of work to develop supply agreements that are mutually beneficial with our partners, and our new agreements will allow for price escalations when input costs increase. We remain an essential manufacturer in vital end markets, and as macroeconomic headwinds hit, US businesses want security and confidence in their supply chain, especially after navigating the recent supply chain disruptions and sea freight challenges we've experienced. Turning to our performance for the first nine months of the year, net new wins this year grew to $24 million, and our opportunity pipeline remains robust at $110 million. As a reminder, our aggregate pipeline represents all active new business opportunities.

Fortunately, we are a key and trusted supplier in a number of growing companies and industries and as business businesses plan for their 2023 production, they're locking in agreements with US we have done a significant amount of work to develop supply agreements that are mutually beneficial with our partners and our new agreements.

[noise] allow for price escalation when input costs increase.

We remain in a central manufacturer and vital end markets and as macroeconomic headwinds head U S businesses want security and confidence in their supply chain.

Especially after navigating in the recent supply chain disruptions in sea freight challenges we've experienced.

Turning to our performance for the first nine months of the year net new wins this year grew to $24 million and our opportunity pipeline remains robust at $110 million.

Dave Duvall: This year, we are pleased with the wins we are capturing, which I believe further demonstrate our ability to select and manage projects that best utilize our assets and our ability to capture higher margins. Results for Q3 were strong, but product mix was the primary influence on margins in the quarter. We are pleased to report record-high sales this quarter, growing net sales by over 25% to nearly $102 million. Despite the strong revenue performance, normal seasonality revenue diversification tipped back towards medium or heavy-duty truck, which moved from 39% in Q2 to 49% in Q3 of this year. John will cover this in more detail in a few moments, but from a high level, this is the primary reason our sequential gross profit margin was essentially flat between Q2 and Q3 of this year.

As a reminder, our aggregate pipeline represents all active new business opportunities.

This year, we are pleased with the wins, we're capturing which I believe further demonstrate our ability to select and manage projects that best utilize our assets and our ability to capture higher margins.

Results for the third quarter were strong but product mix was the primary influence on margins in the quarter. We are pleased to report record high sales this quarter growing net sales by over 25% to nearly $102 million.

Despite the strong revenue performance normal seasonality revenue diversification tip back towards medium or heavy duty truck, which moved from 39% in the second quarter to 49% in the third quarter of this year.

John will cover this in more detail in a few moments.

A high level. This is the primary reason our sequential gross profit margin was essentially flat between Q2 and Q3 of this year.

Dave Duvall: I also want to point out some meaningful progress in product launches during Q3. Product launches and product sales represent net new wins communicated in 2021 and 2022 that are in production and currently being launched. We reported strong Q3 increases in product sales up 36.5%. A few examples of product launches include the Last Mile Truck project, which is now in full production. In addition, we launched a number of new powersport projects. Finally, in the industrial and utilities categories, we had a major launch that is now in full production, as well as a number of projects related to stormwater solutions, flush cover products, and other industrial utility projects that are expected to be in production by Q1 of 2023.

I also want to point out some meaningful progress in product launches during the third quarter product launches a product sales represent net new wins communicated in 2021 and 2022 that are in production and currently being launched.

We reported strong third quarter increases in product sales up 36, 5% fewer.

A few example of product launches include the last mile truck project, which is now in full production and in addition, we launched a number of new power sport projects.

Finally in the industrial and utilities categories.

We had a major launch that is now in full production as well as a number of projects related to storm water solutions flash cover products. Another industrial utility projects that are expected to be in production by Q1 of 2023.

Dave Duvall: We're excited about each of these customer launches because they are in large end markets where we have provided engineering solutions with the help of our technical solution team. Each of these projects are important because they align to our strategy of continued diversification and providing an engineered solution, which directly drives our margin enhancement initiatives. With that, I would now like to turn it over to John to cover the financials in more detail.

We're excited about each of these customer launches because they're in large end markets, where we have provided engineering solutions with the help of our technical solution team. Each of these projects are important because they align to our strategy of continued diversification and.

Providing an engineered solution.

Which directly drives our margin enhancement initiatives.

John Zimmer: Thank you, Dave, and good morning, everyone. Q3 2022 net sales totaled $101.6 million, up 25.4% versus a year ago. Product sales increased 36.5% versus the prior year period. Revenue increases were largely driven by higher customer demand in our transportation and power sports industry, new program launches, as well as raw material recoveries. Gross profit for the third quarter was $13.3 million or 13.1% of sales, compared to $6.4 million or 7.9% of sales in the prior year quarter. Recall last fall in 2021 that we experienced a period of rapid inflation in the US, so our margins reflected that impact to our business.

John Zimmer: Thank you, Dave, and good morning, everyone. Q3 2022 net sales totaled $101.6 million, up 25.4% versus a year ago. Product sales increased 36.5% versus the prior year period. Revenue increases were largely driven by higher customer demand in our transportation and power sports industry, new program launches, as well as raw material recoveries. Gross profit for the Q3 was $13.3 million or 13.1% of sales, compared to $6.4 million or 7.9% of sales in the prior year quarter. Recall last fall in 2021 that we experienced a period of rapid inflation in the US, so our margins reflected that impact to our business.

With that I would now like to turn it over to John to cover the financials in more detail.

Thank you, Dave and good morning, everyone.

Third quarter 2022, net sales totaled $101 $6 million up 25, 4% versus a year ago and product sales increased 36, 5% versus the prior year period.

Revenue increases were largely driven by higher customer demand in our transportation and power sports industry, New program launches as well as raw material recoveries.

Gross profit for the third quarter was $13 $3 million or 13, 1% of sales compared to $6 4 million or seven 9% of sales in the prior year quarter.

Recall last fall in 2021 that we experienced a period of rapid inflation in the U S. So our margins reflected that impact to our business.

John Zimmer: We quickly reacted last year and started to work with our customers to recover raw material price increases. As expected, efforts to pass through raw material inflation have been challenging, with significant ongoing negotiations. The results of our efforts, though, can be seen in improved gross margin. The net impact of changes in selling price and ongoing raw material inflation result in an increase in reported gross margin of 790 basis points in Q3 2022 compared to the same period in 2021. The gross margin in Q3 was primarily impacted by product mix shifts, coupled with production inefficiencies. As Dave previously discussed, sequential gross margin for Q2 to Q3 2022 was basically flat, which was due primarily to product mix.

We quickly reacted last year and started to work with our customers to recover raw material price increases as expected efforts to pass through raw material inflation have been challenging with significant ongoing negotiations.

The results of our efforts, though it can be seen in an improved gross margin.

The net impact of changes in selling price and ongoing raw material inflation, resulting in increase in reported gross margin of 790 basis points in the third quarter of 2022 compared to the same period in 2021.

The gross margin in the third quarter was primarily impacted by product mix shifts coupled with production inefficiencies.

As Dave previously discussed so rental gross margin for the quarter to quarter. Three of 2022 was basically flat, which was due primarily to product mix.

John Zimmer: The medium and heavy duty truck market was approximately 49% of product sales in Q3 of 2022, compared to approximately 39% in Q2. This shift in revenue mix was driven by normal seasonality, along with a heavy push by our truck customers for increased demand. Raw material inflation has somewhat leveled out in Q3, and we have seen some decreases in revenues and prices. We will continue to work with customers to pass through changes in raw material costs going forward. As Dave mentioned, we are carefully watching for customer demand changes, which we could see in Q4 of 2022 or early 2023 if recessionary pressures increase, but nothing meaningful yet.

The medium and heavy duty truck market was approximately 49% of product sales in the third quarter of 2022 compared to approximately 39% in the second quarter.

This shift in revenue mix was driven by normal seasonality along with a heavy push by our truck customers for increased demand.

Raw material inflation has somewhat leveled out in the third quarter and we've seen some decreases in resin prices. We will continue to work with customers to pass through changes in raw material costs going forward.

As Dave mentioned, we are carefully watching for customer demand changes, which we could see it in the last quarter of 2022 or early 2023.

John Zimmer: Selling, general and administrative expenses for the quarter were $8.7 million, compared to $8.8 million in the prior year period. Prior year SG&A included $1.8 million of closing costs from shuttering the Cincinnati plant. Excluding last year's plant closing costs, SG&A costs as a percent of net sales remained approximately flat compared to 2021. In Q3, the company reported operating income of $4.6 million. Q3 net income aggregated $1.3 million or 16 cents per share, which included a one-time $1.6 million or approximately 19 cents per share loss on extinguishing of debt resulting from our debt refinancing that was completed in July.

Recessionary pressures increase but nothing meaningful meaningful yet.

Selling general and administrative expenses for the quarter were $8 7 million compared to $8 $8 million in the prior year period.

Higher year SG&A included $1 $8 million.

Closing costs from shuttering, the Cincinnati plant excuse me, excluding last year's plant closing costs SG&A costs as a percent of net sales remained approximately flat compared to 2021.

In the third quarter, the company reported operating income of $4 $6 million.

Q3, net income aggregated $1 3 million or <unk> 16 per share, which included a one time $1 $6 million or approximately <unk> 19 per share loss on extinguishment of debt, resulting from our debt refinancing that was completed in July .

John Zimmer: The loss resulted from non-cash write-off of previous debt issuance costs of approximately $1.2 million and an early extinguishment fee of approximately $350,000 to repay approximately $12 million of 8.25% fixed interest debt. The 2021 Q3 net loss was $3.3 million or $0.41 loss per share. Adjusted EBITDA for the Q3 of 2022 was $8.4 million or 8.3% of sales. You can find the GAAP to non-GAAP reconciliation tables at the end of our press release for both Q3 and year-to-date numbers discussed today. Now turning to results for the first nine months of 2022. Net sales totaled $290.9 million, up 24% versus a year ago.

So the loss resulted from noncash write off of previous debt issuance costs of approximately $1 $2 million and early extinguishment fee of approximately $350000 to repay approximately 12.

Million up $8, two 5% fixed.

Fixed interest debt.

The 2021 third quarter net loss was $3 3 million or <unk> 41.

Loss per share adjusted.

EBITDA for the third quarter of 2022 was $8 $4 million or eight 3% of sales.

You can find the GAAP to non-GAAP reconciliation tables at the end of our press release for both third quarter and year to date numbers discussed today.

Now turning to results for the first nine months of 2022.

John Zimmer: Product sales increased 28% versus the prior year period. Sales increases were largely driven by strong customer demand and new program sales, demonstrating success of our strategic revenue diversity objectives and raw material recoveries. Gross profit for the first nine months was $40.9 million or 14.1% of sales, compared to $32.9 million or 14% of sales in the first nine months of fiscal 2021. Gross margins were impacted by favorable net selling prices in excess of raw material cost increases, offset by unfavorable product mix and production inefficiencies. The company has experienced operational inefficiencies and program launch startup costs in two of our plants, which we are working on reducing.

Net sales totaled $299 million up 24% versus a year ago and product sales increased 28% versus the prior year period.

Sales increases were largely driven by strong customer demand and new program sales demonstrated success of our strategic revenue diversity objectives and raw material recoveries.

Gross profit for the first nine months was $49 million or 14, 1% of sales compared to $32 $9 million or 14% of sales in the first nine months of fiscal 2021.

Gross margins were impacted by favorable net selling prices in excess of raw material cost increases offset by unfavorable product mix and production inefficiencies.

The company has experienced operational inefficiencies in program launch startup costs in two of our plants, which we are working on reducing.

John Zimmer: SG&A costs for the first nine months were $25.9 million, compared to $23.7 million or $21.7 million, excluding plant closure costs in the prior year period. Year-to-date operating income was $15 million. Below the operating income line, we recorded the write-off of debt issuance cost of $1.6 million. Net income for the first nine months aggregated $7.4 million or $0.87 per share, compared to net income of $4.2 million or $0.50 per share in the prior year. Year-to-date adjusted EBITDA was $25.9 million or 8.9%, compared to $18.7 million for the prior year. Turning now to the company's financial position, cash flow, and balance sheet.

SG&A costs for the first nine months were $25 9 million compared to $23 $7 million or $21 seven $1.

$7 million, excluding plant closure costs in the prior year period.

Year to date operating income was $15 million.

Below the operating income line, we recorded the write off of debt issuance cost of $1 $6 million.

Net income for the first nine months aggregated $7 $4 million or <unk> 87 per share compared to net income of $4 $2 million or <unk> 50 per share in the prior year.

Year to date, adjusted EBITDA was $25 $9 million or eight 9% compared to $18 $7 million for the prior year.

John Zimmer: The company's cash provided by operating activities totaled $8.5 million for the first nine months ended September 30, 2022, and capital expenditures for the same period were $12.3 million. The increase in working capital, specifically accounts receivable, is related to increased sales this year. Approximately $7.5 million of the year-to-date capital expenditures relate to capacity increases and/or the launch of new programs. We estimate that our capital spending in 2022 will now be approximately $18 million, and two of our new presses and robotics came online and are operational. Adding presses and automation this year allows us to maximize our current footprint, add capacity, and drive higher throughputs and efficiencies, which have incrementally increased our revenue and reduced our reliance on labor.

Yes.

Turning now to the company's financial position cash flow and balance sheet.

The company's cat company's cash provided by operating activities totaled $8 $5 million for the first nine months ended September 32022, and capital expenditures for the same period were $12 $3 million.

The increase in working capital specifically accounts receivable is related to increased sales. This year approximately $7 $5 million of the year to date capital expenditures relate to capacity increases and or the launch of new programs.

We estimate that our capital spending in 2022 will now be approximately $18 million.

And two of our new two of our new presses and robotics came online and are operational.

Adding presses in automation this year allows us to maximize our current footprint add capacity and drive higher throughput and efficiencies, which have incrementally increased our revenue and reduced our reliance on labor.

John Zimmer: At 30 September 2022, the company had available liquidity of $46.5 million, consisting primarily of $20.9 million under our revolving credit facility and $25 million of available liquidity under our cap line of credit. The company has term debt of $24.5 million at the end of September, and our term debt to trailing twelve months EBITDA ratio was less than 1x adjusted EBITDA at quarter end. The company's working capital remains strong, and we ended the September quarter with accounts receivable at $54 million in days sales outstanding, or DSO, at 48 days. Our return on capital employed, which is a pre-tax return metric, was 14.6% on an annualized basis.

At September 32022, the company had available liquidity of $46 $5 million, consisting primarily of $20 9 million under our revolving credit facility and $25 million of available liquidity under our cap line of credit.

The company is term debt of $24 $5 million at the end of September and our term debt to trailing 12 months EBITDA ratio was less than one times adjusted EBITDA at quarter end.

The company's working capital remains strong and we ended the September quarter with accounts receivable at $54 million and days sales outstanding or DSO at 48 days.

Our return on capital employed which has a pretax return metric was 14, 6% on an annualized basis.

John Zimmer: We continue to believe that our strong balance sheet, coupled with sufficient liquidity, provides the company with the flexibility to continue to grow. Recall that in July, the company successfully refinanced its debt facility and entered into a new aggregate $75 million credit agreement for its revolving loan, term loan, and CapEx loan commitment. We also swapped daily floating SOFR for a fixed 2.95% interest rate on the term loan as part of a swap agreement. With the credit agreement margin of 180 basis points, our term loan's effective interest rate at 30 September 2022 was 4.75%. Concurrent with the new credit agreement, we repaid all of our existing credit facility, which charged higher interest rates than the new facility.

We continue to believe that our strong balance sheet, coupled with sufficient liquidity provides the company with the flexibility to continue to grow.

Recalling that recall that in July the company successfully refinanced this debt facility and entered into a new aggregate $75 million credit agreement for its revolving term loan and Capex loan commitment.

We also swapped a daily floating sofa for a fixed 295% interest rate on the term loan as part of a swap agreement.

With the credit agreement margin of 180 basis points, our term loan debt increased interest rate at September 32022 was 475%.

Concurrent with the new credit agreement, we repaid all of our existing credit facility, which charged higher interest rates than the new facility.

John Zimmer: These activities improve our liquidity position, strengthens our balance sheet, and lowers our weighted average cost of debt and debt service cost. Although our strategic business transformation continues, we see changes quarter to quarter related to product mix shifts that impact revenue diversification targets, as well as production efficiencies that impact gross margin. We remain laser-focused on all of our controllables related to input costs and productivity, and our technical sales teams are continuing to make progress on designing engineered solution and conversions that enhance gross margins. Improving operational efficiencies on the production floor of our plants with the addition of more presses in certain facilities allows us to immediately ramp throughput and sales. Of our six manufacturing facilities, we are working to improve one plant more than the others for two reasons. One, from a product mix standpoint, this facility handles more volume in the heavy-duty truck.

These activities improve our liquidity position strengthens our balance sheet and lowers our weighted average cost of debt and debt service cost.

Although our strategic business transformation continues we see changes quarter to quarter related to product mix shifts that impact revenue diversification targets as well as production efficiencies that impact gross margin.

We remain laser focused on all of our controllable related to input costs and productivity in our technical sales teams are continuing to make progress on designing engineered solution and conversions that enhanced gross margins.

Improving operational efficiencies on the production floor of our plants with the addition of more presses in certain facilities allows us to immediately ramp through throughput and sales.

Of our six manufacturing facilities, we are working to improve one plant more than the others for two reasons one from a product mix standpoint. This facility handles more volume in the heavy duty truck.

John Zimmer: Two, the plant is less efficient based on facility infrastructure that we can improve, which we are working on. We remain firmly dedicated to Core's strategic growth and profitability goals with programs to drive long-term value creation in 2022 and beyond. Although we are encouraged by strength in customer demand currently, we are closely monitoring volumes and forecasts, and we remain conservative with regard to cash and our capital allocation decisions for investments in capital expenditures, acquisitions, people, and all other costs and expense. With that, I would like to turn it back to Dave for some final comments. Dave?

And to the plant is less efficient based on facility infrastructure that we can improve which we're working on.

We remain firmly dedicated to core strategic growth and profitability goals with programs to drive long term value creation in 2022 and beyond.

Although we are encouraged by strength in customer demand. Currently we are closely monitoring volumes than forecast and we remain conservative with regard to cash and our capital allocation decisions for investments in capital expenditures acquisitions people and all other cost and expense.

Dave Duvall: Thank you, John. We continue to see strong orders for truck and powersports, with growing demand for industrials, utilities, packaging, and infrastructure solutions. As we think about capacity, not all work is created equal. We are focused and disciplined in our commitment to be purposeful in the utilization of our assets. Like all businesses right now, we are focused on profitability and asset utilization while watching for signs of changing order forecasts. For Core, we will continue to diversify revenue by end markets to reduce the risk of concentration in a single customer or end market. This reduces the risk of one industry from significantly affecting our business and helps us stabilize our gross margin performance when the market does change. Our team continues evaluating internal factors to improve the efficiencies of our manufacturing processes so that we maintain a culture and discipline of continuous improvement within our organization.

With that I would like to turn it back to Dave for some final comments Dave. Thank.

Thank you John .

We continue to see strong orders for truck and power sports with growing demand for industrials utilities packaging and infrastructure solutions as.

As we think about capacity not all work is created equal and we are focused and disciplined in our commitment to be purposeful and the utilization of our assets like all businesses right. Now we are focused on profitability and asset utilization.

While watching for signs of changing order forecasts for core we will continue to diversify revenue by end markets to reduce the risk of concentration in a single customer or end market.

This reduces the risk of one industry pumped significantly affecting our business and helps to stabilize our gross margin performance when the market does change.

Our team continues evaluating internal factors to improve the efficiencies of our manufacturing processes. So that we maintain our culture and discipline of continuous improvement within our organization.

Dave Duvall: We are investing more in automation and the speed at which we can process materials. We're also making steady progress on our sustainability efforts. We will publish our first sustainability report in Q1 of 2023, which will highlight some of the areas we are advancing. Every day, we make choices in our lives that affect the environment, the climate, and other species. If we can make decisions each day that help make a better future, we believe that these incremental changes will create a powerful flywheel effect for our families and our communities. Last quarter, I shared that in our packaging category, we were partnered with the design and manufacture of containers for a customer to grow millions of crickets that can serve as protein-rich food for countries that are underserved, or as a base for animal food.

We are investing more in automation and the speed at which we can process materials.

We're also making steady progress on our sustainability efforts, we will publish our first sustainability report in Q1 of 2023.

Which will highlight some of the areas we are advancing.

Everyday we make choices in our lives that affect the environment the climate in other species.

Can make decisions each day to help make a better future. We believe that these incremental changes will create a powerful flywheel effect for our families and our communities.

Last quarter I shared that in our packaging category, we were partnered with a designer and manufacturer of containers for a customer to grow millions of crickets that can serve as protein rich food for countries that are underserved or is the base for animal food.

Dave Duvall: I am happy to report that this Last Mile Truck is in full production, and we are meeting the customer's ramp-up volumes today. We're also focused on energy savings projects utilizing state-funded energy and thermal audits to scope projects that improve the power factor in our plants, which will reduce the electricity consumption in our larger locations. I do want to reiterate that John, what John said about cash and our capital allocation strategy. As we prepare budgets and look at our three-year strategic plan, we are carefully evaluating how best to use cash for long-term value creation. Although we are pleased with our record sales and optimistic about the growth potential for some of our newer end markets, we plan to remain cautious and disciplined with our capital allocation strategy.

I'm happy to report that this automated cricket farm is in full production.

And we are meeting the customers' ramp up volumes today.

We're also focused on energy savings projects utilizing state funded energy and thermal audits scope projects that improve the power factor on our plants, which will reduce the electricity consumption in our larger locations.

I do want to reiterate what John .

John said about cash and our capital allocation strategy.

As we prepare budgets and look at our three year strategic plan, we are carefully evaluating how best to use cash for long term value creation.

And although we are pleased with our record sales and optimistic about the growth potential for some of our newer end markets. We plan to remain cautious and disciplined with our capital allocation strategy.

Dave Duvall: This means that we will continue to monitor cash, value creation, and our return profile, especially as the macro environment change. Before we open for questions, I want to thank our entire Core Molding team for their hard work and dedication through another challenging and successful year. Simply stated, I'm a proud member of a great team. I believe most businesses would say the last couple years have been challenging as we navigated through COVID, rapid inflation, and more recently, the weaknesses in the overall global supply chain. It has been challenging to produce strong results, and I want to commend our team for staying focused and alert while continuing to execute and move the business forward. We are fortunate at Core to have strong cooperative teams that put excellence and diligence at the center.

This means that we will continue to monitor our cash value creation, and our return profile, especially as the macro environment change.

Before we open for questions I want to thank our entire core molding team for their hard work and dedication through another challenging and successful year.

Simply stated I'm, a proud member of a great team.

I believe most businesses would say the last couple of years have been challenging as we navigated through COVID-19 rapid inflation and more recent recently the weaknesses in the overall global supply chain.

It has been challenging produced strong results and I want to commend our team for staying focused and alert, while continuing to execute and move the business forward.

We are fortunate of course to have strong co-operative teams that put excellence in diligence at the center.

Dave Duvall: John and I want to continue to also thank analysts and investors for their support, and we welcome your questions either on the earnings call today or in a follow-up call to answer all your questions. With that, I'd like to open up the line for questions. Operator?

John and I want to continue to also thank analysts and investors for their support and we welcome your questions either on the earnings call today or in a follow up call to answer all your questions.

Operator: We will now begin the question-and-answer session. To ask a question, you may press star, then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause just momentarily to assemble our roster. Our first question here will come from Chip Moore with EF Hutton. Please go ahead.

I'd like to open up the line for questions operator.

We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.

If youre using a speakerphone please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Okay.

Chip Moore: Hey, good morning Dave and John. Thanks for taking the question.

And our first question here will come from Chip Moore with E. F. Hutton. Please go ahead.

Dave Duvall: Hey now, Chip.

John Zimmer: Good morning.

Chip Moore: Good. I wanted to ask about gross margins. You know, you talked about mix shift and some of the production inefficiencies. Can you maybe help us, you know, understand that impact a little better? It sounds like, you know, in addition to seasonality, there was maybe a little bit more demand on the trucking side. Just remind us how that seasonality should work. Also just any raw material cost recovery impacts that to take into account on margins as well.

Hey, good morning, Dave John Thanks for taking the question.

I Gotcha alright.

Yeah, I wanted to ask about gross margins.

You talked about mix shift.

Some of the production inefficiencies.

Can you maybe help us understand.

Understand that effectively better and then it sounds like.

In addition to seasonality that was maybe a little bit more demand on the trucking side could you just remind us how that Keith.

Seasonality should work.

Dave Duvall: Yeah, we have a normal seasonality to where we would see the Q3, Q4, where we have a majority of our sales into maybe, margins that aren't as high on some of our products. Really mainly mix driven. You'll see that in our history as well. Q1 and Q2 will always be our higher margin relative to the business. I think when we look at Q3 in particular, it's about 270 basis points for Q3, the majority of that being product mix, as you saw in percent of sales. Some of that we do have some operational inefficiencies. We have some large launches in one of our plants.

And then also just any raw material cost recovery in Texas to take into account on margins as well.

Yeah, we have a normal seasonality to where we would see the Q3 Q4, where we have the majority of our sales into maybe.

Margins that arent as high on some of our products.

So really mainly mixed revenue, you'll see that in our history as well.

Q1, Q2 will always be our higher margin relative to the business I think when we look at Q3 in particular, it's about 270 basis points for Q3, the majority of that being product mix as you saw on a percent of sales.

Dave Duvall: In the other plant, when John talked about some of the infrastructure, it's really looking at some of the large facilities in that plant, like the electrical systems, the steam systems, and the press systems.

Some of that we do have some operational inefficiencies we have some large launches in one of our plants and then the other plant when we when John talked about some of the infrastructure. It's really looking at some of the large facilities in our plants like the electrical systems of steam systems.

John Zimmer: Yeah. Chip, I'll address your question on the raw materials. You'll notice that what's happening in raw materials, we're kind of actually at that point year-over-year, where we're starting to get some comps, some comparability from quarter to quarter. I know last year, Q3, we just started getting some comps. You know, we're still getting significant recovery. We actually have recovery mechanisms in place for the most part, all of our business, you know, either formally or informally, and we're recovering. What we're starting to see now, though, is that, you know, I've got ups and downs. Certain raw materials are starting to go down in price. As part of the raw material recovery, we actually have some revenue decreases to certain customers as that happens.

In the press systems.

Yeah.

Chip I'll I'll address your on raw materials, you'll notice that whats happening in raw materials.

At that point year over year, where were starting to get some comps some comparability from quarter to quarter I know last year third quarter, we just start getting something caps.

We're still getting significant recovery, we actually have recovery mechanisms in place for the most part all of our business.

Either formally or informally and where recovery what we're starting to see now though is that I've got ups and downs certain raw materials are starting to go down in price and so as part of the raw material recovery, we actually have some revenue decreases to certain customers as that happens at the same time, we have revenue increases for other raw materials. The other thing.

John Zimmer: At the same time, we have, you know, revenue increases for other raw materials. The other thing that we're seeing, at least right now, is the raw materials are starting to stabilize, as of right now. You know, we saw some pretty big increases early in the year, but, you know, most of our raw materials have now come to a little bit more of a stable and hopefully maybe even start to decrease a little bit. Some of the steel prices and stuff like that we pay on hardware, should hopefully reset, you know, early next year, as, you know, steel prices kind of zoomed up earlier this year and now have come back to earth. We'll start maybe seeing some of that.

We're seeing at least right now as the raw materials are starting to stabilize as of right now.

We saw some pretty big increases early in the year, but.

Most of our raw materials have now come to a little bit more of a stable and hopefully maybe even start to decrease a little bit some of the steel prices and stuff like that that we pay on hardware should hopefully reset early next year.

John Zimmer: I really think, you know, where our revenues are gonna be in gross margins, we're gonna see less effect of raw material recoveries, being a factor in the gross margin numbers because I think they're just stabilizing a little bit at this point.

Steel prices zoomed up earlier, this year and I'll come back to Earth. So we'll start maybe seeing some of that and so.

I really think we're our revenues are going to be in gross margins, we're going to see less effect of raw material recoveries.

Dave Duvall: I think the challenge, I think as we talked before, is that the acceleration of the increase and the decrease was really a challenge, especially on the upside of that.

A factor in the gross margin numbers, because I think theyre, just stabilizing a little bit at this point.

I think the challenge I think as we've talked before is that the acceleration of the increase in or decrease was really a challenge, especially on the upside of that.

Chip Moore: Got it. That's helpful, guys. Then I wanted to ask, you know, you added some more net new business in the quarter. You know, can you talk about sort of where that lies? Is that, you know, continuing to diversify into new areas? Then also on CapEx, I think, right, you have maybe one more press coming in this year. Just remind us on where that stands and some of the automation and what we should expect.

Got it that's helpful guys.

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And then I wanted to ask you added some more.

New business in the quarter.

Can you talk about.

Sort of where that line is that continuing to diversify.

Into new areas and then also on.

Capex I think one more press.

Coming into this year, so just to remind us.

Dave Duvall: On the net new wins, a little over 50% of that, we would say that's in industrial and utilities. The rest of part of that would be in heavy truck.

On where that stands in some of the automation in.

And what we should expect.

On the net new wins, a little over 50% of that we would say that's an industrial and utilities.

The rest of part of that would be in heavy.

John Zimmer: Heavy truck, marine has a little bit also for the year. Would you say for the $24 million for the year, you know, about $4 million of it is transportation truck, so what, 15%. The rest is, you know, mixed between last mile delivery, little con-ag, little power sports, utilities, those types of things. We continue to see the diversification, you know, with the net new wins being a little bit less, you know, truck. You know, and again, I think one of the things that we are key on is that there's still good truck business out there. We're gonna win some good new truck business, that makes sense that, and we'll always go for the stuff that makes sense there.

So what 15% the rest is a mix between last mile delivery.

Little Con AG willpower sports utilities, those types of things and so we continue to see diversification with a net new wins being a little bit less truck.

John Zimmer: You know, it's just some of the other stuff we're probably highly focused on because just the margins are a little bit better on those.

Chip Moore: Got it. Perfect. Makes sense. Maybe just one more from me. Just bigger picture, you know, kind of talked about the macro and being a little cautious, you know, appropriately cautious and monitoring things. I guess at this point, you know, where would you typically get more visibility from customers at this point in the year? Just given where you know you're bumping up against capacity constraints, you know, when would you potentially consider adding capacity or just given the potential macro slowdown, that's where you're gonna be more cautious near term? Thanks, guys.

When would you potentially consider adding capacity or just given the potential macro slowdown that that's where you're going to be more cautious.

John Zimmer: Yeah.

Dave Duvall: Yeah. I think when we look at next year, obviously, same as everyone else, we anticipate some type of a decline in the revenue. Right now, we're not really seeing that. We see still continued increase and strong demand in the truck. We would expect to see it first in probably personal watercraft, ATV, more of the discretionary spends. We would expect to start seeing that maybe by the end of the year, beginning of Q1. We're gonna be cautious about moving forward relative to investing in new capacity. I think with the four machines that we've installed this year, we have enough capacity at least until we grow, till we see more growth going into the end of next year.

Yeah, I think when we look at next year. We obviously are same as everyone else. We anticipate a some type of a decline in the revenue right now we're not really seeing that we see still continued increase and strong demand in the trough, we would expect to see a person probably personal watercraft adv more of the distress.

But we're going to be cautious about moving forward relative to investing in new capacity I think it was a four machines that we've installed this year.

Chip Moore: Got it. Great. All right. Thanks very much.

Dave Duvall: Yeah. I think the big thing, too, is we're being a lot more selective on the growth, where we decide to grow and where, what we're deciding to grow in. Year before, we had $75 million net new wins, and we probably could have hit $75 million in net new wins again this year. Being able to install that capacity, launch it, and have it all at the same level of value is probably, we're focused more on the value of the new business.

Chip Moore: Yeah. Risk profile sounds like you feel very good. All right. Thanks.

Dave Duvall: You bet.

Yes, yes, and risk profile it sounds like you feel very good alright, thanks Jack.

Operator: Our next question will come from Mike Hughes with SGF Capital. Please go ahead.

Mike Hughes: Yeah, thanks for taking my questions. Just on the program inefficiencies and launch costs, can you put a finer point on that if possible and, you know, quantify the hit to gross margins in the quarter from those issues?

Yes, thanks for taking my questions just on the program inefficiencies and launch costs can you put a finer point on that if possible.

John Zimmer: Yeah. It's really tough because what will happen is, you know, during a launch, you got kind of, you know, inefficiencies that happen throughout the plant. We've always tried to grab it and say, "Hey, we know." You know, you can measure some scrap and those things, but, you know, it causes a significant. On launch, we'll usually create inefficiencies throughout all types of jobs. You know, all of a sudden everybody's focused on, you know, a bonder that's not bonding right, and so you're not, you know, working as much on just your normal day-to-day stuff. It really has a way to disrupt the whole facility. The nice thing about those usually can kind of get cleaned up in about a six-month period.

Quantify the hit to gross margins in the quarter from from those issues.

Inefficiencies that happen throughout the plant. So we've always tried to grab it and say hey, we know you can measure some scrap and those things, but it causes a U.

A significant.

On launch will usually create inefficiencies throughout all types of jobs you know all of a sudden everybody is focused on a bond or that's not bonding right and so you're not working as much on just your normal day to day stuff and so it really has a way to disrupt the whole facility. The nice thing about those is usually can kind of get cleaned up in about a six month period, what we say is with them.

John Zimmer: What we say is with a major launch, you got that six-month period where you're really, you know, working through bonder issues or scrap issues or where do you place the charge pattern, all those things that you get worked out eventually, and you get your normalization back into the plant. We would hope to see that the impact from that launch, you know, would be really kind of in Q1 next year, would start to disappear, the impact of it. You know, on the other facility that we talk about, you know, again, we don't really break out the individual piece. We do believe that, you know, the inefficiencies out there, I think you'll see in the 10-Q we had inefficiencies and mix of, you know, versus last year of another 270 basis points.

John Zimmer: You know, I think we really believe if we can get that plant, once we get that plant, you know, kind of reworked and working well, that, you know, I'm not gonna give a number out there, but it definitely will show up in the margin. It won't be something so small that it would be a point or something or, you know, at ten basis points. You know, it's gonna be something that would show up on the margins as we keep working through that. We would expect as we fix that we would see our, you know, margins start to head, you know, back up towards the mid-teens to high teens as we get through that and we launch other products.

Versus last year of another 270 basis points.

I think we really believe if we can get that plant once we get that plant kind of rework reworked and are working well.

Yes.

10 basis points again, it's going to be something that will show up on the margins as we keep working through that and so we would expect as we fix that that we would see our margins start to head back up towards the mid teens.

Dave Duvall: Yeah. I think one of the challenges you get into, as you know, on any launch is customer has challenges. They'll stop production, start production back up. Some of the supply base that maybe the customer put in place has challenges. You know, it's working through all that. It's not just, say, a plant operational necessarily.

High teens as we get through that and we've launched other products I think one of the challenges you get into as you know on any launch its customer has challenges they'll stop production and start production back up some of the supply base that maybe the customer put in place those challenges so.

Mike Hughes: Okay. John, just to follow up on your comments. Once this, it sounds like it's concentrated in this one plant. Once that plant's running more efficiently, you can recover 200 to 300 basis points of gross margin just from that alone. Is that correct?

Okay. So John just to follow up on your comments so what once this it sounds like it's concentrated in this one plant once that plant's running more efficiently.

John Zimmer: Yeah. I mean, what we would be saying is, I think, you know, we're at 13 today. I mean, our goal is that we get back to that 15% to 20%. I think, you know, with the one facility that we get the stabilization on the launch and then the other one where we get through, work through the issues we're having there, again, that would be our goal to be back in that 15% to, you know, 18% range. You got mix that will come in every quarter and those types of things, but, you know, that would be the range that we would definitely be head, trying to head back towards.

On the.

The issues, we're having there again that would be our goal to be back in that 15 to 18 range and so.

Mike Hughes: Okay. That launch, is it with a Class 8 existing customer?

John Zimmer: Yeah, well, it's a Class 8 customer, yes.

Mike Hughes: Okay. You had a really strong tooling number in the quarter. In some respects, I guess, that could be a forward-looking indicator unless you're transferring business to an existing customer. How much of the tooling numbers related to new business?

A class eight customer yes.

Okay.

In some respects I guess that could be a forward looking indicator unless you're transferring business from an existing customer so how much of the tooling numbers related to new business.

John Zimmer: You know, during the quarter, I know we had a couple of big ones. One is actually for a business that actually is launched during this quarter also, it was definitely brand new. A good piece of that was for that piece that was launched during the quarter. Actually, when I say that, both the two biggest ones were for a business that was launched. One was that Class 8 truck that we were talking about, which is new program. The other one was, you know, some stuff that is non-Class 8, but it was a new program also. Both of the majority of the stuff was definitely for future revenues or new revenues.

And when I say that both of them both of the two biggest ones were for a business that was launched one was that class a truck that we're talking about which is new program and the other one was some stuff that is non class eight but it was a new program also so both of those do recognize.

Mike Hughes: Okay. I think year-to-date, $24 million in net new business wins, and last year was $75 million. That's just shy of $100 million in net new business wins. How much of that has launched already?

Just just shy of $100 million and net new business wins, how much of that is has.

John Zimmer: in Q3, about $10 million of that, just in Q3 alone. Yeah, that's actually the revenues in Q3 from the launches. What will happen during these launches is, when I go down my sheet here, you know, majority of those programs have launched in some form. You know, what will happen is they will take multiple quarters to get up to speed, ramp up to speed, in those. What we can tell is what we're tracking is that in Q3, we had about $10 million of new revenues just for that quarter, from programs that were out of that 75 and the 24.

Mike Hughes: Okay. If I annualize the 10 million, it's $40 million. That would leave an additional $59 million to launch, correct? What's the timeframe on that?

It's $40 million.

John Zimmer: It would either be launch or ramp. Like I said, some of these are launched but not ramped. You know, again, what we would expect is that they would start ramping through the periods next year, additionally. Now again, these were $75 million, and 24 of net new wins when they were won. I'll be cautious on that number like I am on the rest of my business. I don't know what's going on with the Fed and what they're trying to do to slow down business. I think it will impact all our business eventually from what they said.

So these are the launch or ramp like I said some of these are launched but not ramp.

Additionally, now again these were $75 million and 24 of net new wins when they were one.

I'll be cautious on that number like I am on the rest of my business I don't know what's going on with.

John Zimmer: You know, I think you would definitely have the ramp, and then there are several programs like I'm just going across my sheet here, 4, 5, 6, 7 of them that haven't even launched yet. They'll launch later this year. Actually, some will launch throughout next year, as we have. I think my latest one is actually one launches in Q1 of 2025. I mean, that's how far some of these programs can get out there just because, you know, major OEMs will award those programs, you know, that far ahead.

So.

I think you would definitely have the ramp and then there are several programs like I'm just going across my sheet here 4567 of them that haven't even launched yet so that will launch later this year or actually some will launch throughout next year.

Mike Hughes: Okay. I'm just thinking about your core business. If it were to decline 10% next year on the current runway, that's about $40 million. There's a potential that the launches or ramps could offset that, right?

John Zimmer: Yeah. Yes. Yeah.

Mike Hughes: Okay. What's the margin look like on these launches and ramps that are ahead of you? Putting aside, you discussed the issue with the one big program that's having a little, some issues.

John Zimmer: Yeah. I mean, that's always our goal is to, you know, improving our margins as we move forward, whether that's with an engineered solution or in a different industry or being able to do a conversion from some traditional material. Absolutely. The main goal is to move further into the customer's design cycle and further integrated in a higher value solution.

Yeah, I mean, that's always our goal is to improving our margins as we move forward, whether that's with a engineered solution or in a different industry or being able to do a conversion from some traditional material.

Mike Hughes: Okay. Just two more quick questions for you. You were at a conference over the summer, and I think you mentioned one large customer you hadn't received the price recovery yet. Have you received the price recovery on the raw materials from all your major customers at this point?

John Zimmer: Yes, we have.

Mike Hughes: Okay. Last question, just on the raws. Polypropylene, the October pricing looks about down 20% from the average from Q3, and polyethylene down about 6% from the Q3 average. As raws fall, isn't there a little bit of lag where you'll benefit, just like you're hurt as they go up?

Yes, we are.

Okay and then last question just on the raws.

The October pricing looks down about 20% from the average from the third quarter and polyethylene down about 6% third quarter average.

John Zimmer: Yeah. It. Unfortunately, all material adjustment clauses aren't created equal. We are living through that, where we have some that move as fast as monthly, some move quarterly, some move every six months. Yeah, we would expect a little bit of a lag, but I mean, I will tell you, some do move as fast as monthly, that we will change prices monthly. Overall, that's what we would expect, is that you get some lag benefit as those prices do fall.

Yes, yes.

So, yes, we would expect a little bit of a lag, but I mean I will tell you some do moves fastest monthly.

We'll change prices monthly, but overall, that's what we would expect is that you get some lag benefit as those prices do fall.

Mike Hughes: Okay. Just one follow-up on that. Fiberglass, I had read that there's gonna be another price increase early next year. Does that impact you, or you have that locked in at this point?

John Zimmer: We are locked on our major fiberglass other than they have an actual kind of adjuster clause that would move every six months, and that one's driven more by energy, couple other raw materials that go into it. I can't remember exactly. For the majority of it is really locked, but you know, you can see probably moves of 3, 4, 5 cents per pound just based on that adjuster clause. That's locked. I will tell you that we're not fully locked, and we're seeing that you know, there might be some opportunities in glass otherwise, it's actually maybe a little bit lower priced that we you know, might be able to get take advantage of that.

Kind of a just a clause that would move every six months and that one is driven more by energy a couple of other raw materials that go into it I can't remember exactly.

John Zimmer: Some of the stuff coming out of China, thanks to shipping rates coming down, those types of things, have actually gotten a little bit more beneficial. I will tell you that, you know, we still have the majority of our glass comes from North America. We just think that's the better supply chain right now, the more stable supply chain right now. We can get a little bit of benefit from buying some from China.

That we might be able to get take advantage of that some of the stuff coming out of China.

In North America, we just think that's the better supply chain right now the more stable supply chain right now, but we can get a little bit of benefit from buying some some from China.

Dave Duvall: Okay. Thank you very much. Appreciate it.

John Zimmer: Yep.

Operator: As a reminder, if you have a question, please press star then one to join the queue. Our next question here will come from JP Geygan with Global Value Investment Corporation. Please go ahead.

As a reminder, if you have a question. Please press star then one to join the queue.

Our next question here will come from J P Gagan with global value Investment Corporation. Please go ahead.

JP Geygan: Hey, good morning, gentlemen, and congratulations on the nice quarter. It's obvious to us that your efforts to transform the business are bearing fruit.

Hey, good morning, gentlemen, and congratulations on the nice quarter.

John Zimmer: Thanks, JP.

Dave Duvall: Thanks, JP.

JP Geygan: I have a couple more strategic questions this morning. Number one, you've been clear that you're adding new verticals to the business, which should help dampen some of the cyclicality we've historically seen with the Class 8 truck market. How should we be thinking about end customer demand in these verticals as we're starting to see signs of an economic slowdown?

This to us that your efforts to transform the business are bearing fruit.

Thanks, JP and thanks JP.

And a couple more strategic questions. This morning number one you've been clear that you are adding new verticals to the business, which should help to dampen some of the cyclicality that historically seen with the class eight truck market.

John Zimmer: Yeah. I think when we start looking at infrastructure and utilities, especially, we're continuing to see an increased demand, and there's a lot of excitement around the infrastructure bill and how that's being divvied up. You know, things like fiber optics and communications have actually been translated just into the state's budget so that the states can then perform what they need to start launching projects. Some of the other ones on, you know, maybe some of the stormwater drains relative to buildings, we might see some, I guess, leveling off of that. Right now, what we see, anything to do with fiber optics and communications, data transmission, and then general infrastructure, we're seeing an increase.

Well I think when we start looking at infrastructure and utilities, especially as we're continuing to see an increased demand and theres a lot of excitement around the infrastructure Bill and how thats being divvied up.

Things like fiber optics and communications have actually been translated just into the state's budget. So that the states and then perform what they need to start launching projects.

Some of the other ones on maybe some of the storm water drains relative to buildings we.

JP Geygan: Great. All right. You've alluded to discussions that you've had with customers about raw material price escalations and more, maybe more generally about negotiating more fair and balanced terms and conditions. Can you provide some more color on how these talks have progressed, and how we should really think about T's and C's in the new contracts that you're announcing, such as the contract with UFP?

And then general infrastructure, we're seeing an increase.

Great Alright.

You've alluded to discussions that you've had with customers about raw material price escalation.

Fair and balanced terms and conditions can you provide some more color on how this has progressed and how we should really think about Ts and CS and the new contracts that you are announcing such as the contract with you Pete.

John Zimmer: Yeah. You know, and again, I'll use the statement again, not all customers are created equal either. You know, we do go through the T's and C's with different customers. We really understand our different customers. There's just different levels of customer partnership, some of the T's and C's will be different for others. You know, what we are looking at is that, you know, we will, you know, have a raw material adjuster clause, some type of adjuster clause in every contract going forward. You know, some will be pretty easy negotiations, some will still be pretty tough negotiations. You know, a person like UFP, again, in the thermoplastics area with an index, it's a pretty straightforward conversation, and it happened very quickly.

Yeah.

And again.

I'll use the state and again not all customers are created equal either.

And so we do go through the Ts and CS with different customers, we really understand our different customers, there's just different levels of.

Customer partnership and so some of the Ts and CS will be different for others.

What we are looking at is that we will.

Have a raw material adjuster clause some type of adjustment clause and every contract going forward.

Some will be pretty easy negotiations, some will still be pretty tough negotiations.

First of all like UFP.

John Zimmer: You know, I think that, you know, we'll continue to see that primarily in the thermoplastic areas. The thermoset guys will continue to have an RMA clause, but maybe a little bit, probably more negotiation. As we hit each of those negotiations, I know, I think we've talked, you know, we got a couple more negotiations coming up where we are getting raw materials, but we got new contracts coming up that we're gonna work through those with the customer, and then, you know, try to make sure that we get probably a little bit more balanced contracts on some of those than maybe historically we were able to get.

Again in the thermoplastics area with the index, it's a pretty straightforward conversation and it happened very quickly.

And so I think that will.

We'll continue to see that primarily in the thermal plastic areas. The thermostat guys. We'll start we'll continue to have an RMA clause, but maybe a little bit probably more negotiation and so as we hit each of those negotiations and I know you have I think we've talked we've got several couple more negotiations coming up where we are getting raw materials, but we got new contracts coming up that work.

And to work through those with the customer and then try to make sure that we get probably a little bit more balanced contracts on some of those that maybe historically, we were able to get.

Dave Duvall: Yeah. I think it's a business model and a culture change for some customers. They base their entire business model on set pricing and then being able to increase their pricing onto the end customer.

JP Geygan: All right. Thanks for the additional color. Finally, as you begin to offer more solutions-oriented or highly engineered products or solutions, how should we expect project level economics to develop over the life of a project, and particularly as it relates to project ramp-up costs or timing?

Finally, as you begin to offer more solutions oriented or.

John Zimmer: Yeah, I mean, it definitely extends the timing if you're early in the design phase. It doesn't necessarily extend when we look at the quote to cash, when we look at the net new wins, because once they've decided to launch it's already. You know, you're looking at the tooling at that point. We definitely have more time and more resources involved being earlier in the design and development cycle. We're doing a lot more validation to federal requirements for loading, and relative to the material and the product in itself.

It's timing.

Doesn't necessarily extend when we look at the quote to cash when we look at the net new wins because once they decided to launch it it's already youre looking at the tooling at that point, but we definitely have more time and more resources involved being earlier in the design and development cycle, we're doing a lot more validation to federal requirement.

For loading.

JP Geygan: I would assume, maybe you can confirm that sort of early engagement really makes these contracts a bit more sticky.

Uh huh.

JP Geygan: I would assume, maybe you can confirm that sort of early engagement really makes these contracts a bit more sticky.

Relative to the material and the product itself.

And I would assume but maybe maybe you can confirm that that sort of early engagement really makes these contracts a bit more sticky.

John Zimmer: Absolutely. I mean, if you're the only one that can provide that solution, I think some of our programs are very, very clear on that. I mean, we're able to use two different processes to optimize a solution when we're the only supplier in the world that has those two processes to offer that solution.

Absolutely I mean, if you're the only one that can provide that solution I think some of our programs are very very clear on that I mean, we're able to use two different processes to optimize the solution. When we're the only supplier in the world that has those two processes to offer that solution.

JP Geygan: Great. Thank you for taking my questions.

Dave Duvall: Thanks, JP.

John Zimmer: Thanks, JP.

Great. Thanks for taking my questions.

Operator: This concludes our question and answer session. I'd like to turn the conference back over to Dave Duvall for any closing remarks.

This concludes our question and answer session I would like to turn the conference back over to Dave <unk> for any closing remarks.

Dave Duvall: All right. Thank you for your continued interest in our company, and we look forward to providing an update of our progress when we report Q4 results in a few months. Thank you.

Alright. Thank you for your continued interest in our company and we look forward to providing an update of our progress when we report fourth quarter results in a few months. Thank you.

Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

Q3 2022 Core Molding Technologies Inc Earnings Call

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