Core Molding Technologies Inc. Q1 2023 Earnings Call
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Paul.
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Now I will turn the call over to Sandy Martin <unk>.
Three part advisors. Please go ahead.
Thank you and good morning, everyone. We appreciate you joining us for the core molding technologies conference call to review first quarter results for 2023.
Joining me on the call today are core moldings, President and CEO , Dave Duvall, and the company's EVP and CFO John Zimmer.
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 core M T Dot 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, if any replay or transcript reading.
I would also like to remind you that statements made in today's discussion that are not historical facts, including statements of expectations or future events or future financial performance are forward looking statements and are not made pursuant and are made pursuant to the safe Harbor provisions of the private Securities Litigation reform.
Warm act of 1995.
Forward looking statements by their nature are uncertain and outside of 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 and return on capital employed reconciliation.
As 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 our website at core M. T. Dot com a copy of the release has also been included in an 8-K submitted to the SEC.
And now I would like to turn the call over to Dave to ball games.
Thank you Sandy good morning, and welcome to our first quarter earnings call.
First want to thank the core molding team for our outstanding financial results. It is the direct result of our hard working team of skilled people driving our business and a shared direction with a passion to improve every day.
It is exciting to see our business transformation progressing, especially when you can feel the momentum, but the change increasing as.
As we stated in March one of our key strategic goals for 2023 is profitability improvement the direct measurement of this is reflected in our gross margin I'm excited to communicate that our gross margin for the quarter was 17, 8% that's the highest in over five years.
This is a sequential improvement of 440 basis points from the fourth quarter and an increase of 180 basis points from Q1 of the prior year.
This was driven by our continued focus on operational execution, and our challenge plants material cost recoveries and technical solution sales as we expand into newer markets.
As we stated in March our must win battle for 'twenty to 'twenty three is to fully embed our operational excellence processes and all of our operations with a focus on our lower performing locations.
We are strategically focused on improving operational performance and specifically improving the productivity and profitability at all of our operations to optimize our current capacity.
This is always never ending but we know that we have some short term opportunities to capture that will both improve our margins and open more capacity within our sheet molding compound business.
In Q1, we have increased our plant overall productivity by more than 8%.
This was good progress and I appreciate how focused our operational teams and plants are on supporting each other and driving our must win battle for 'twenty to 'twenty three.
We also know there is still much more opportunity for us to capture before the end of the year.
Now turning more specifically to the quarter.
The team has worked extremely hard and focused on our four strategic goals for the year of revenue growth technical solution sales.
<unk> ability improvements in free cash flow generation.
The first quarter results reflect our progress on these goals with strong gross margin and operating income improvements compared to last year on solid sales growth.
We continue to see strength in our largest market medium and heavy duty truck with increased demand during the first quarter. The first quarter truck demand increase also includes business with a new truck customer, which was launched in the second half of 2022.
In the first quarter revenue mix shifted.
Leading to 50% of our sales coming from medium and heavy duty trucks.
With the new truck business contributing to this growth.
We also saw an increase in demand in the power sports market in Q1.
While building products has been pressured since the beginning of the year.
The solid sales growth in our first quarter 2023, compared to 2022 of nine 8% demonstrates the benefits from the company's strategic diversification strategy into new end markets.
We also made significant margin improvement progress by delivering higher gross margins of 17, 8%, which reflects ongoing achievements from our transformation process.
We continue to win and launch programs in the industrial and utilities categories, specifically, a number of projects related to storm water solutions blush covers and hang around bulk products along with other industrial and utility projects that we expect to be in full production. This year.
We are excited about these launches because they represent differentiator growing end markets, where we provide high value engineered solutions.
All of these projects drive margin enhancements and create a value differentiator with our customers as we improve product performance lower cost and reduce manufacturing complexities for our customers.
We are also excited about publishing our inaugural sustainability report, which was posted on our website on March 21st we do see more customer requests to support them when their sustainability path by either using recycled material or developing a recyclable solution.
Usually by converting traditional materials to a recyclable products.
Specifically, we have converted their most of their products or solutions, which are not recyclable, two thermoplastics, which are recyclable.
This is aligned to our strategy of providing a technical solution that utilizes our wide portfolio of processes.
Implementing our sustainability strategy has taken almost a year and I am proud of how far we progressed in this area. It is a journey and I'm looking forward to how we will integrate our sustainability goals outlined in our 30 by 30 targets into our business strategy.
And I firmly believe this will enhance our customer and employee value proposition.
We also expect to receive our ego boarder certification in July which further supports the value proposition of several industrial and utility customers.
It makes us a more holistic and disciplined organization that is visibly aware of our responsibility to our employees communities and the environment.
With that I would like to now I'll turn it over to John to cover the financials in more detail.
Thank you, Dave and good morning, everyone.
As Dave mentioned sales growth and margin improvements, primarily driven by a combination of volume and strategic pricing actions drove higher free cash flows when compared to last year's first quarter.
First quarter 2023, net sales totaled $99 $5 million up nine 8% versus a year ago and product sales increased nine 4% versus the prior year period.
Revenue increases were largely driven by higher customer dam, coupled with higher pricing to offset inflationary costs as well as new program launches.
Gross.
For the first quarter was $17 $7 million or 17, 8% of sales compared to $14 5 million or 16% of sales in the prior year quarter.
During the quarter, we saw that the combination of higher volumes and strategic pricing to enhance our overall margins, especially given the more stable labor environment and supply chain.
We have also seen a weakening of the U S dollar, which had a negative impact on gross margins in the first quarter of 2023 of approximately a 100 basis points.
Actively hedge a portion of our exposure to the Mexican peso and the Canadian dollar, but were still impacted by the change in the dollar.
Selling general and administrative expenses for the quarter were $9 $7 million compared to $8 5 million in the prior year period.
Increases were primarily due to year over year wage increases primarily due to inflation and certain strategic conditions to improve operations.
In the first quarter the company reported operating income of $8 $1 million up 30 point.
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Net income was $7 $8 million or <unk> 66 per share on a diluted basis versus the same period prior year diluted EPS of <unk> 46 cents, an increase of 43%.
Adjusted EBITDA for the quarter was $12 2 million or 12, 3% of sales compared to $9 5 million of adjusted EBITDA in the 2022 first quarter or 10, 5% of sales.
We are pleased with our progress on adjusted EBITDA, returning to margins of 12, 3% for the first quarter of 'twenty to 'twenty three but we recognize we still have more opportunities for improvement.
You can find the GAAP to non-GAAP reconciliation tables at the end of our press release for the first quarter results.
Turning now to the company's financial position cash flow and balance sheet.
The company's cash provided by operating activities totaled $4 6 million for the three months ended March 31, 2023, and capital expenditures for the year were $2 1 million, resulting in a positive free cash flow of $2 $5 million.
Due to seasonality first quarter.
Historically results in a reduction in free cash flows as working capital grows in line with first quarter sales growth compared to fourth quarter of the prior year. This year, we experienced an increase in working capital, resulting from sales growth and we also generated free cash flows based on ongoing improvements we are making in the business, we expect to generate free cash.
Cash flows for the remainder of the year as working capital requirement changes from seasonality are not forecasted to be significant.
With cash flows generated from operations. This year, we plan to utilize approximately $13 million for capital spending in 2023.
At March 31, 2023, the company had available liquidity of $54 $5 million, which includes a combination of cash and cash equivalents and availability on revolver and capital credit lines.
The company also had term debt of $23 9 million at the end of March and our debt to trailing 12 month EBITDA ratio remains less than one times adjusted EBITDA at the end of the first quarter.
As I mentioned, a few moments ago, our working capital investments were well managed and netted to $38 million as of March 31, we ended the year with accounts receivable of $52 $5 million with a DSO of 48 days.
Inventories were well controlled and remain less than one times accounts payable at the end of March.
Our return on capital employed a pretax return metric improved to 22% on annualized basis, driven by a disciplined use of capital.
We plan to strategically manage our capital deployment in a prudent manner and believe that a combination of good liquidity and strong balance sheet provides flexibility to focus on our four growth.
Our four strategic growth initiatives, which are revenue growth technical solution sales profitability improvements in free cash flow generation.
As Dave discussed our strategic business transformation efforts progressed, and we continue to work on operational efficiencies at all our plants and higher margin technical solution sales to improve margins and reduce the impact of product mix shifts in our business.
Our must win Battle for 2023 includes integrated major productivity and quality improvements as well as scrap reductions labor productivity and a reduction of overhead spending.
We're also focused on operational improvements with our new product launches, which usually take up to a year from launch to work out all the operational efficiencies our operational performance and efficiency goals. Her target further gross margin enhancements as well as increased capacity.
Throughput in return on capital.
We are dedicated to core strategic growth and profitability goals with programs to drive long term value creation.
With that I would like to turn it back to Dave for some final comments, Dave. Thank you John .
John and I stated earlier, our must win battle for 2023 is to fully embed our operational excellence processes into our operations with the largest opportunity is coming from our SMT or sheet molding compound plants.
We have communicated our strategic execution goals throughout the organization, which has placed a high level of focus and energy into driving speed and quality of event into our must win battle mission improve.
Improving our S. M seat plants is a strategic priority what that will directly increase productivity reduce cost and expand our large asset capacity by about 20%.
Which we believe will create a stronger foundation for success as we prepare for future growth investments.
As we continue to grow the business, we plan on adding capacity and are currently investigating how best to add capacity either through acquisition facility expansion or Greenfield site.
The prerequisite to executing and expansion is the successful completion of our 2023 must win battle, which creates both machine capacity and technical expertise availability to enable a flawless execution of our major growth objectives.
Basically it justified piece of proper planning prevent poor performance.
We are measuring what we want to improve and have achieved over 8% improvement in productivity in Q1 alone.
And although this journey is never complete we are making significant progress in 2023.
We are also adding additional automation to support further production efficiencies reduce cost and increase capacity.
Yeah.
Our 2023 outlook includes includes carefully monitoring customer forecasts and adjusting assets and labor utilization accordingly.
We planned for and value revenue diversification by industry, which serves to reduce our concentration risks and all of our end markets. We are driving to further increase gross margins to generate incremental cash flow.
Our outlook. This year continues to be optimistic and we are forecasting.
Casting to be flat to slightly up on our product sales for the year.
Our technical solutions sales strategy positions us well to take advantage of opportunities in various industries that requires new solutions, including opportunities, resulting from government funded infrastructure and sustainability projects.
We have seen an impact on our building products industry demand from macroeconomic efforts to slow inflation, but demand from our customers and other industries remains unchanged.
We will continue to carefully watch for demand impacts from interest rate increases and other macroeconomic headwinds, but believe our continued industry diversification progress will lessen the impact of any industry specific downturn on our business.
We again want to thank analysts investors for their time and attention on this call and we want to welcome your questions on today's call or in a follow up call.
What's that.
To open up the line for questions operator.
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At this time, we will pause momentarily to assemble our roster.
The first question comes from Chip Moore with E F Hutton.
Please go ahead.
Hey, thanks.
Good morning, David and John and congrats to the whole team on a great quarter of execution.
Wanted to start with margins.
You sound.
I'm fairly optimistic on the margin front, obviously, a great quarter just.
Maybe you can.
Remind us some sort of seasonality mix and sort of ramp of new programs at any any factors to take into account.
Margins were near term.
Yeah.
Morning Chip.
Yeah, so margins first quarter or 17, 8%, obviously, we're pretty happy with those we are seeing the benefits of a lot of the must win battles that we talk about.
Historically seasonality Q1, Q2, we're always going to have the best margins, just because of the product mix, but when.
When you look at even versus last year.
And up from 16% I think first quarter, which kind of indicates normal product mix you can see some of the benefits that we're seeing from our operational improvement. So you know going forward, we would expect those operational improvements to kind of show up in every quarter.
And but have normal seasonality with that where the back half of the year margins do usually are just a little bit weaker than the first half just because of the product mix, but yeah. There's a lot of the operational improvements that we've seen are sustainable ongoing operational improvements that we would expect to be there for the rest of the year.
Got it that's great to hear and then if I could ask another around sort of future capacity expansion, which you referenced does potential efforts MACRA.
Macro not notwithstanding.
Obviously, we're all watching that but curious around maybe bidding pipeline, what youre seeing out there and.
And how that's progressing.
And how that may impact some of those efforts.
Yes chip this is Dave so.
We're looking at that right now as far as developing our pipeline we've outlined our strategy.
Working looking at different individuals or companies investment banks on how we want to.
Proceed with that but it's definitely in our interest to <unk>.
Expand our business and being able to organically added capacity, what's the rate that you can purchase machines is probably slower than what we want or is possible for us so and we've really within all of our locations. We build all the spots are mostly all the spots that we have so our next step is either brick and mortar acquisition or not.
What we want to do is were probably looking more towards the acquisition side, just because of the speed and ability to implement.
Understood Yeah.
And obviously the balance sheet.
Good position I guess, maybe a last one for me on.
Market wise, you referenced sort of.
<unk> seen some impacts on the on the let us and things like that I guess I'm.
Curious other markets.
You're hearing anything right, particularly power sports.
With the higher interest rate environment. Thanks.
Yeah, we had thought and just like you a especially at the beginning of the year that we were going to see a significant decline, but we have not.
Right now, we still see orders strong.
We are anticipating that at near the end of this year in the second half that that would start having effect, but right now we see strong volumes.
Yeah got it.
Got it.
If we stay really close to our customers and to tell you. The truth, we were talking to them all the time and Theyre pretty bullish still yes, we've had some small adjustments so far.
Personal watercraft, but nothing major and a television really haven't seen any major adjustments at this point so.
And we are staying close to the customer to get their data as fast as we can.
Perfect Yeah.
I've got a follow up and say based on your.
Product sales outlook. It sounds like you have pretty good visibility that oh.
On that for the year.
Yeah, I think we do.
Most of our customers give us forecast out extended period of time I think they are all of them, saying bodes us, although they're they're they're watching the economy, but they can see it in their distribution channels their inventory levels.
Things like that so they are probably a little bit more visibility, but again I think they're all rational also but right now.
It seems like when people have jobs, and they're going to still spend money and so right now I think <unk> got it.
Customers are still spending money at least.
Great to hear I'm, sorry, maybe one last one if I could sort.
Sort of in the utilities infrastructure World.
Are you seeing that.
In the technical solutions side are you seeing that sort of early opportunities start to grow and would that be a potential.
You know source of acquisition.
Opportunity. Thanks.
No absolutely when we start looking at whether we want to grow processors or sales channels. That's what we're looking at we definitely see industrial utilities infrastructure is a significant area for growth for us.
Perfect. Okay, I'll hop back in thanks, very much guys.
Thanks Chip.
Again, if you have a question press Star then one.
This concludes our question and answer session I would like to turn the conference back over to David <unk> for any closing remarks.
Thank you. Thank you for your continued interest in our company and we look forward to providing an update of our progress when we report second quarter results in a few months and if we have a conference call is already scheduled later this week and next week. So thank you very much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
Yes.
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