The Eastern Company Q1 2023 Earnings Call

Greetings and welcome to the Eastern company's first quarter fiscal year 2023 earnings call.

At this time all participants are in a listen only mode.

Question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

Please note this conference is being recorded.

Although now turn the conference over to your host Mr. Ernie Hawkins, Sir you may begin.

Good morning, and thank you everyone for joining us this morning for a review of Eastern's results for the first quarter of 2023.

With me on the call are Eastern's, President and CEO , Mark Fernandez and CFO Nicholas Places.

We issued an earnings press release yesterday after the market closed if anyone has not yet seen the release I invite you to visit the investors section of the company's website Www Dot Eastern company Dot Com, where you will find the release under financial news.

Please note that some of the information you will hear today.

During today's call will consist of forward looking statements about the company's future financial performance and business prospects.

<unk> without limitation statements regarding revenue gross margin operating expenses other income and expenses taxes and business outlook.

These forward looking statements are subject to risks and uncertainties that could cause actual results or trends to differ significantly from those projected in these forward looking statements.

We undertake no obligation to review or update any forward looking statements to reflect events or circumstances that occur after the call.

For more information regarding these risks and uncertainties. Please refer to risk factors discussed in our SEC filings, including Form 10-K filed with the SEC on March 14th 2023 for the fiscal year 2022, and Form 10-Q filed with the SEC on May nine 2010.

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In addition, during today's call we will discuss non-GAAP financial measures that we believe are useful as supplemental measures of eastern's performance.

These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from GAAP results.

Reconciliation of each of the non-GAAP measures discussed during today's call to the most directly comparable GAAP measure can be found in the earnings press release.

With that I'll turn the call over to Mark.

Thank you Ernie and good morning to those who have joined us by phone or participating via the web it's a pleasure to speak with all of you today.

I'm going to begin the call today with some high level observations about our first quarter performance, then I'll turn the call over to Nick Who'll take you through the detailed review of our financial results.

After that I'll come back and share with you.

Many of the initiatives, we have underway to improve our operational performance and enhance our return to our shareholders and the goals of this management team intends to achieve in 2023.

When I accepted the appointment as he eastern CEO four months ago, I saw a company capable with capable people in three promising businesses.

Each which faced a very challenging market environment.

As you know, we can supply chain disruptions and increases in freight and material costs were the order of the day in 2022.

As a result of the severe headwinds our businesses did not perform to their full potential and our 2022 financial results suffered.

Clearly we needed to immediately change the way we are running our business.

And.

During the quarter, we undertook a thorough review of our businesses products and began to implement an action plan consisting of several operational initiatives.

We've said call it volatile.

Quantitative goals for these initiatives and are tracking performance to completion.

Pleased to report that we began to see initial benefits of these operational improvement initiatives. During the first quarter inventory declined 11% from the end of the fourth quarter, particularly at <unk> and working capital as a percentage of sales declined to 22, 1% from 26, 1% for the fourth quarter.

As we flushed out a portion of our lower margin orders from our backlog.

Supply chain bottlenecks are easing and raw material and freight costs are moderating.

Backlog at quarter end was $72 million compared with $85 8 million.

On April one of 2022 went backlog was artificially inflated because of supply chain constraints that delayed shipments.

We continue to seek pricing improvements and all that which you are resulting in addition.

Of higher margin orders to our backlog at big three backlog levels remained within favorable levels assuring our optimized order turnaround and order fulfillment.

On the demand side, we continued to transition from old.

Two new programs within our commercial vehicle and automotive customers and remain well positioned to capitalize on industry trends of electrification digitization and automation.

And they'll back demand remains strong and we're receiving orders for new products introduced last year.

To serve several new truck mirror program and orders on existing programs as commercial vehicle customers get closer to producing that playing capacity.

Evercore, it's electromechanical business is gaining momentum as one sizable orders.

Three precision products is generating increased quote activity and winning awards for returnable transport packaging solutions designed for new automotive model launches primarily in the electric vehicle space.

With that I'll now turn the call over to Nick.

Thank you Martin and good morning, everyone.

Net sales from continuing operations increased 5% to $72 5 million from $69 million in the first quarter of 2022.

Reflecting increased shipments of truck accessories, and automotive returnable transport packaging products returnable transport packaging sales benefited from new automotive product launches, including several electric vehicle launches.

Sales of existing products increased three 3%.

Price increases in sales of new products contributed one 7% and sales growth for the first quarter when compared to the first quarter of last year.

New products included various truck mirror assemblies rotary latches electronic latches unlocks D raise and mirror camps.

Gross margin as a percentage of sales was 21% unchanged from the first quarter of 2022, reflecting improved price cost alignment and the easing of some raw material and freight costs.

Product development expenses were $1 4 million up $22 million, reflecting increased investment in new products that everhart and dull back as a percentage of net sales product development expenses were one 9% compared to one 7% for the first quarter of 2022.

Selling and administrative expenses were $11 9 million compared to $9 9 million for the first quarter of 2022, an increase of $2 million.

One $8 million of the $2 million year over year variance relates to one time severance expenses associated with the elimination of the CLO position and the departure of our previous CEO .

The remaining <unk> 2 million increase reflects higher sales and investments in sales capabilities.

Other expense of <unk> 6 million for the first quarter of 2023 includes <unk> 4 million, reflecting the final working capital adjustment related to the sale of the greenwald's business.

Net income from continuing operations was <unk> 6 million or <unk> 10 per share compared to $2 7 million or <unk> 43 cents per share for the first quarter of 2022.

Adjusting for the severance expenses and working capital adjustments net of tax which totaled $1 6 million or <unk> 26 cents per share adjusted net income from continuing operations was 36 cents per share.

Adjusted EBITDA from continuing operations was $5 5 million compared to $6 1 million for the first quarter of 2022.

Net cash provided by operating activities swung $10 4 million to $6 9 million compared to net cash used in operating activities of $3 6 million for the first quarter of last year the.

The improvement reflects reduction in cash used to support working capital, primarily a $7 2 million decrease in inventory.

By comparison in the first quarter of 2022 cash was used to ensure availability of inventory to meet customer demands in light of supply chain constraints.

As a result inventory turnover improved four times compared to three two times for the first quarter of last year.

Operating cash flow was used primarily to fund capital expenditures of $1 2 million repay $4 9 million of long term debt and paid dividends of <unk> 7 million.

At quarter end, our net leverage ratio was 2.05 down from $2 76 at the end of the first quarter of last year and 2.27 at the end of fiscal 2022.

Cash increased $2 9 million to $13 1 million at quarter end.

That completes my financial review I'll now turn the call back to Mark.

Thank you Nick.

Our team strategy falls into four categories.

Disciplined operations that deliver consistent results.

Strong commercial business focus.

Effective capital allocation and utilization and value adding acquisition.

Our priority. This year is to ensure that all facets of eastern operations, our pricing strategy cost structure working capital management meet profitability and return on invested capital thresholds that each business contributes to the building.

He is to contribute to building overall share shareholder value.

As you've heard during the first quarter, we improved working capital significantly to a record low of 22, 1% of sales. We're now sharpening our focus on profitability.

With operations optimized we will be in good shape to move forward with the fourth category of bolstering growth through acquisitions.

As I mentioned in my opening remarks, our action plan and initiatives. We're implementing this year are expected to have a quick impact on the Companys financial performance.

Can be apparent in our results in the second half of the year.

I'll start with a review of the first category disciplined operations that deliver consistent results.

With more efficient operations will be much better positioned to deal with market challenges and in addition to take advantage of growth opportunities.

Whereas we're scrubbing the cost side of the business, making sure that the cost of goods sold and operating expenses meet internal profitability targets.

Let me give you a couple of examples of initiatives were implemented.

We're addressing supply chain inefficiencies, reducing lead times from our Asian suppliers, and leveraging near short Nearshoring capabilities.

We're also leveraging our Mexico operations to overcome labor shortfalls in the U S and taking steps to reduce manufacturing costs.

Finally, we've implemented a hiring freeze throughout our businesses and we're cutting non essential expenses looking for ways to realize cost synergies across our three businesses.

The second leg of our Corp.

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Here, we're instilling discipline that our working capital management process to improve utilization and enhance return on invested capital.

Allocating capital expenditures for projects that will generate the highest return on investment as part of our inventory reduction effort, we've calculated aspirational targets return rates.

And it's a great Vince Lombardi, one said protection is not attainable, but if we chase protection, we can catch excellence.

The third category is a strong commercial business focus in this area, we're focusing on improving return on invested capital through pricing actions and margin discipline.

During the first quarter, we completed an evaluation of the margin of each product as part of our overall portfolio optimization exercise and determined that we are missing opportunities to enhance margins through pricing and that we needed to change our approach.

An example, we're engaging in conversations with our customers about contract terms shifting the conversation to real time pricing model in order to ensure recovery costs driven by macroeconomic pressures.

Going forward based on based on new business must meet predetermined return on invested capital and return on sales targets.

We're also leveraging business growth opportunities from automotive sector in Mexico, and the uplift opportunity led by the Australian off road and commercial vehicle markets.

We're pursuing activities to reduce lead times by 50% and remote business.

Finally.

Our strategy contemplates value added acquisitions as.

As we work to bring easters debt to EBITDA ratio down we will continually be on the lookout for companies that fall into two.

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Those that can be absorbed in one of our existing divisions to complement operations.

And second those that will be added to the eastern level and operated separately.

The way, we will make sure that they augment income EBITDA return on capital employed return on invested capital before we pursue them.

In summary, I want you to take away from my remarks today is that we are laser focused on execution and creating value for our stakeholders.

While we have many initiatives in process, we're not yet at a stage, where we're prepared to share with you.

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What I can share with you. However, as it is in my view what define successful automotive.

OEM supplier.

Which is our ambition for eastern.

Based on my 30, plus years in commercial vehicle space I learned that.

Successful OEM suppliers proactively respond to changes in cyclical demand while returning.

10% to 12% return on sales and working capital to sales ratios of less than 22%.

In addition to focusing on execution I want to bring cohesion and commonality to our organization. We can do that by sharing best practices and ideas across businesses in locations crafting set of common methods and optimizing processes in the pursuit of perfection.

As a leader I believe working together in a collaborative manner, reaching out to our employees for input and then making decisions expeditiously and executing on those decisions.

That's what employees to make changes in their business practices and I. Appreciate that this can be unsettling to an organization having.

Having said that I am seeing employers adopt these new business practices openly and I sincerely want to thank them for accepting the challenge in working together to optimize eastern operations.

Finally, as you know improvement business is not a race with the finish line. It's an ongoing continual process no industry is static and cutter customer needs are always changing.

Unlike the baseball game bound by the rules of today, where a nine inning game is successful business has an infinite game.

We're not only play today's game like today's rules, but we're looking forward to anticipate how the rules may change tomorrow.

We continue to engage.

Because we like to play the game and the better we get at play in the game the better our results will be in the long term.

With that I'd like to open up the floor for questions.

Thank you okay.

Go ahead.

Sorry, sorry.

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One moment, please why we pull for questions.

Okay, we do have we.

We do have.

A few questions submitted via the web.

We will go over those down first question.

Why did operating income adjusted for one time expenses declined quarter over quarter.

I'll take that in the first quarter, we took a challenge of reducing working capital and lower our working capital ratios.

This action had additional effects primarily around capitalized free.

The reduction of inventory within recovering logistics market caused us to recognize this value as an operating operational loss of income.

The low term logistics market is stabilizing and we will minimize the effect going forward.

Yeah.

Okay second question.

How much improvement in gross margin do you think is possible in 2023.

Well I can't I can't give you an exact answer but through our strategy, we intend to return to historical margin performance to eastern.

And last question from the web how should I measure success for eastern in 2023 and longer term.

So I.

I look at the.

The loan to the longer term in 2023 in this way consistent and stable results quarter by quarter as our first objective solidifying EBITDA and return on invested capital.

In the future will be driven by EBITDA growth with solid underlying metrics.

Mhm services.

Okay operator.

Do you have any other questions on the line yeah.

Yes, Sir we have a question from Ross Davison with financing capital. Sir you May go ahead.

And Mark Thanks for taking my question.

Quick follow up on something you just said.

You said there is I think he said capitalized freight costs that were more sort of onetime in nature as you clean things up in.

They're in SG&A that where they are.

No. They are in cost of goods sold and what happens is.

When the when the freight rates coming from Asia, particularly the container costs were over $10000 per container, where we normally see about $3000 per container. The freight gets capitalized at the higher at the higher level. Therefore, when we when we reduce inventory we have to reduce at the higher level, which hits our income.

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Okay.

Sorry.

Clarifying.

And then the other question I wanted to ask was just around the growth rates, So Q1 growth rate and revenue specifically decelerated.

As a percentage compared to Q4 or just all of last year.

And it wasn't just price it looks like volume decelerated too.

Going on there.

I sort of provide some color around kind of what we need to slow down your you're obviously, you're still seeing growth. There curious if there's sort of underlying dynamics, especially since it sounds like things are still pretty robust in terms of demand and waiting for across the business.

Yeah last year, we were fighting the headwinds.

Heavily into commercial vehicles were fighting the headwinds of commercial vehicle companies tried to produce but they were unable to supply chain.

History now those constraints are somewhat freed up.

But the incremental is the organic growth is not 10% we're looking at.

Potential growth in revenues of 3% to 4% throughout this year.

Yes, okay that makes sense.

Thanks, so much I appreciate it.

Thank you. We currently have no further questions in queue. So I'll hand back to Mr. Hernandez for any closing comments.

Thanks, again for joining us today to sum up today's discussion I am confident that our determined focus on disciplined operations.

Capital utilization focused commercial business and value, adding acquisitions will bring positive changes and improved results in 2023 and put us on a path for sustained growth our markets have many favorable trends, we can leverage and we look forward to sharing our progress with you after the second quarter.

Yeah.

Thank you.

This concludes today's conference and you may disconnect your lines at this time and we thank you for your participation.