Q3 2023 The Eastern Co Earnings Call
Greetings and welcome to the eastern company's third quarter fiscal year 2023 earnings call. At this time all participants are in a listen only mode. A 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 I will now turn the conference over to your host Ernie Hawkins corporate controller at the Eastern Company you may begin.
Good morning, and thank you everyone for joining us this morning for a review of Eastern's results for the third quarter of 2023.
With me on the call are Eastern's, President and CEO, Mark Hernandez, and Eastern CFO Nicholas lighthouse.
We issued an earnings press release yesterday after the market close.
If anyone has not yet seen the release. Please 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'll hear during today's call will consist of forward looking statements about the company's future financial performance and business prospects, including without limitation statements regarding revenue gross margin operating expenses other income and expenses taxes and.
Business outlook. Please.
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 FCC on March 14th 2023 for the fiscal year 2022, and Form 10-Q filed with the SEC on November seven.
In 2023.
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.
A 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 introduction I'll turn the call over to Mark.
Thank you Ernie and good morning to those who have joined us by phone and those participating via the web.
As is our practice I'm going to begin today's call with some high level observations about our performance and market conditions during the past quarter.
I'll, then turn the call over to Nick who will provide more detailed review of the quarter quarter's financial results.
After that I'll come back and update you on the progress we've made with various additional activities to transform eastern's operations and enhance shareholder value.
All of these build on four basic pillars I've described to you in earlier calls disciplined operations effective capital allocation and utilization a strong commercial business focus and value, adding acquisitions today I'm pleased to announce the second our second consecutive quarter of improved financial.
Performance with improvements in working capital margin and earnings per share from continuing operations, we've been moving quickly with the implementation of our operational improvement plan and cost reduction efforts.
And as we expected these results became increasingly evident as the year progressed.
All of these all of the changes we've been making are based on our ground up review of eastern businesses products and markets that we undertook shortly after I became CEO in late January.
I'm delighted that our improvement initiatives are making so much progress and just as important I remain confident that our teams hard work will become more and more apparent in coming quarters.
Let's take a quick look at some key developments for.
For the nine months ending September 32023 cash flow from operations increased by almost $20 million compared to the same period in 2022 as Nick will discuss in more detail our balance sheet continues to strengthen due to operational improvements, enabling us to pay down another $5 million in debt during quarter, three and <unk>.
<unk> us well for the future actions to create bigger better and more profitable company.
On a sequential basis, our gross margins continue to rise, reaching 25% in this year's third quarter from 22% in the second quarter of 2023, and helping us achieve earnings per share of 49 cents.
From continuing operations, our unwavering commitment to disciplined operations and commercial business focus drove this result over the past nine months, we systematically worked on resetting our commercial relationships to those that are mutually beneficial.
We completed this initiative in the third quarter and now have fully transitioned to our new commercial structure for our legacy products. We believe establishing a sound foundation for earnings growth earnings and growth in the future.
As I mentioned in our Q2 call we expected some headwinds from macroeconomic factors in the third quarter and also saw a pause in orders related to new product launches in the automotive industry in.
In addition, the global supply chain finally returned to pre pandemic state our customers reduced the number of excess orders. They have previously placed as a precautionary measure nonetheless, our backlog increased 4% year over year as of quarter end.
In addition, more recently with the fears of deep recession put to rest the automotive market has strengthened along with eastern order flow and we expect 2023 to end on a solid note with a club for our company.
With that backdrop, I'll turn the call over to Nick.
Thank you Mark and good morning, everyone.
I'll provide a quick review of the quarter's financial results.
Net sales from continuing operations declined 8% to $65 6 million from 71 6 million in the third quarter of 2022.
Primarily due to lower demand for truck accessories, and returnable transport packaging products.
Price increases in sales of new products contributed 6%.
New products included various truck mirror assemblies, rotary latches drams and mirror camps.
Price increases primarily reflect our program to recover increases in raw material and freight costs.
Gross margin as a percentage of sales was 25% in the third quarter compared to 23% in last year's period and up from 22% in the second quarter of 2023.
The quarter over quarter increase reflected improved price cost alignment, particularly with respect to increases in raw material costs.
As a percentage of net sales product development expenses were two 2% compared to one 4% for the third quarter of 2022.
Selling general and administrative expenses were $9 7 million compared to $10 1 million for the third quarter of 2022, a decrease of <unk> 4 million or 4%, primarily due to lower legal and professional selling costs and payroll related expenses.
Other income decreased $1 3 million to negative <unk> 1 million in the third quarter of 2023 compared to the corresponding period in 2022.
This decrease primarily reflected unfavorable pension cost of 300000 in this year's third quarter, while in the prior year period. The company had a favorable pension cost adjustment of 400000 and a gain on the sale of our corporate office building for 600000.
Net income from continuing operations for the third quarter of 2023 was $3 1 million or <unk> 49 per diluted share compared to $4 5 million.
Or 72 cents per diluted share for the comparable period in 2022.
Adjusted EBITDA from continuing operations.
non-GAAP measure for the third quarter of 2023 was $7 million compared to 7.7 million in the third quarter of 2022.
During the first nine months of 2023, we increased our cash flow from operations by $19 6 million when compared to the same period in 2022.
The improvement reflects a reduction in cash used to support working capital primarily a 4 million dollar decrease in inventory.
By comparison last year cash was used to ensure the availability of inventory to meet customer demand in light of the supply chain constraints.
With this cash flow, we paid down more than $5 million of debt during the third quarter and year to date more than $15 million.
A record level of debt paid out for Easter.
At the end of the third quarter, our senior net leverage ratio was 185 to one down from $1 95 at the end of the second quarter.
In addition, we invested $4 7 million in capital expenditures and paid dividends of $2 1 million in the first nine months of 2023.
For the third quarter cash flow from operating activities was $5 7 million compared to $2 2 million for last year's third quarter. As a result inventory turnover improved to $3 five compared to 3.2 for last year's period.
That completes my financial review I'll now turn the call back to Mark.
Thanks, Nick there are a few more points I'd like to bring to everyone up to date on our business.
First as I've mentioned on earlier calls this year to become more efficient and optimize performance. We've been taking a close look at every aspect of our operations of our three divisions, where needed. We have also been making tough decisions and taking action steps. For example, we recently brought in new managers to lead big three precision products.
Division, the New Division President and its new general manager have the right mix of experience and driving manufacturing performance and efficiencies to strengthen big three's existing business and take full advantage of opportunities in Khartoum, returnable packaging and blow mold tools.
Second the integration of short flex manufacturer of tractor trailer electric table.
Fixing cables and assemblies.
We proceeded smoothly has proceeded smoothly since we acquired the assets in the company last June as a reminder, we acquired these assets to vertically integrate our trailer whose business and expand <unk> production capabilities. We are now positioned to achieve cost efficiencies by producing additional products.
Yes.
Although by itself the short flex acquisition was not big enough to move the needle. It's a good indicator of our future strategy and approach.
One additional point of information before we open the floor to questions as I mentioned in our Q2 call. We have started to expand on our investor relations activities.
Next week, we will participating in the Sidoti conference, which is focused specifically on smaller microcap companies and institutions that invest in the in their securities.
We'll issue an advisory announcement soon about the conference. So you can look for the details on our.
IR website in just a day or two.
I hope you're listening to our webcast at the conference on Wednesday November 15th.
We will also hold broached virtual one on one meetings with buy side. So we can inform them of our new business strategy and improved financial results Eastern is generating.
Now let's proceed to questions. Operator can you. Please give the instructions to the investors who have joined US via the conference call on how to enter your questions.
Certainly at this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star case. Once again, please press star one on your phone at this time if.
If he would like to ask a question. Please hold while we poll for questions.
Thank you, we'll now address the questions via the web first and then return to the telephone questions.
First question.
From the web your debt Paydown has certainly been strong this year do you expect that to continue going forward.
Approximately at what rate.
So.
Yeah I'll take the first part of this and then Nick you can answer.
What we anticipate as is.
Working on continuous flow operations, so that meaning that our performance is consistent quarter over quarter that should yield our ability to continue to pay down debt.
You are our disciplined operations is focused on just that so that we don't have a variation in quarter over quarter performance.
Going forward, so we anticipate that the the.
The debt pay down will continue.
Hum.
At this rate or higher based on our you know how we're performing going forward like do you have anything to add.
Thank you summed it up well mark.
Next question.
Mark mentioned, four pillars on which eastern strategy and deployment of our base. Please.
Please remind us what those principles and the most important elements are.
So the four pillars, alright, I mentioned earlier in this call is disciplined operations, making sure that we do everything every day to run our businesses looking at every dollar of capturing every dollar and selling all our products in a timely fashion next pillar one pillar two is capital utilization allocation looking at how we spend our capital within our businesses in China.
Reduce it to become more efficient company and secondly is it we're investing our capital Capex and projects that have high rates of return and return value to eastern.
Our third pillar is.
Strong commercial business focus this is where we're working with our customers and the relationships we have with customers like I said earlier. So that's mutually beneficial we don't we don't want to take advantage of anybody but we also don't want people to take advantage of that so we'll get we're going to price appropriately and we're going to be.
Being good stewards of our business going forward and then lastly, if we do the first three correctly and we have been.
Is it is a value.
You add in acquisitions, we will move forward on value added acquisitions in 2024 things that that makes sense for us that are that can allow us to vertically further vertically integrate our our businesses and reduce our cost structures.
With the hopes of growing the business not the hopes with the intention of growing the business. So that we can further add on a larger acquisition in the future.
Okay.
Thanks, Mark do you expect further growth in gross margin in Q4 and beyond.
I said the.
Pricing initiative and the customer resetting is was completed in the third quarter. However, the impact of all of that work hasn't fully been implemented this year and thats purely on legacy products that are going to flow through in the next quarter and into the beginning of next year.
I just want to keep in.
In mind that our new products to the stuff that were quoting today has a different standard by which we're quoting and the businesses that we are the <unk>.
Business that we generate from those from those new programs are at a significant increase of our offer are gross margins going forward.
Okay.
How much of the improvement in gross margin came from a normalizing supply chain environment and lower raw material prices.
The pricing actions that we've been taking as a result of the new program.
I would I would you know to.
To put a number on I would say, 90% came from the resetting of our commercial relationships and 10% where it was fixing the cost the logistics cost and dealing with raw material going forward. So.
We've transitioned to ourselves and we're in a much better position going forward should not get not stumble on.
Macroeconomic conditions with our customers going forward.
Okay.
Yes.
Alright. Thank you Ernie operator are there any questions on the conference call.
We did have one question come in once again, you can press star one if you wish to enter the queue. Today. Please press star one if you have a question and our question that we have in Q is coming from Ross Davidson from Balaton company roster.
Ross Your line is life.
Hey, Mark Thanks for taking the question.
Just kind of continuing on the theme of gross margin.
Maybe just more high level is there anything about this quarter's gross margin CAGR, which which was great to see and clearly shows that your strategy. Having the fact is there anything about is that we shouldnt terminator, our or had that sort of a one time benefit like any catch up or anything like that that would make there.
This level of gross margin unsustainable notwithstanding part of other changes that might be happening.
Well Ross, we when we when we undertook this you know we kind of went through the the pricing side and the commercial.
Reset of the of our relationships.
That is a onetime foundational.
Pillar that we've built up but we're going to build on that going forward with the new programs that we do launch. So I don't think it's a onetime thing one thing that helped us with the gross margins that probably is the one time is the resetting of our supply chain.
Clearing out the precautionary orders that were that were bottlenecking, our inventory levels and.
Reducing our ability to our operations ability to return.
Earnings to our company, so well, we'll move forward with that that's a one time thing, but it was small in comparison to the other commercial aspects that we're doing and then the future growth of new programs and how were pricing and how we're positioning ourselves going forward, we will add other values now on the cost side, you know, we're going through all our costs because material.
Expenditures are the single largest.
Item that we expense and so we're going through.
A rapid analysis of what our cost side is and see if we can do more do better with the one eastern strategy for all our direct material procurement and our indirect material expenses.
Got it okay.
Okay. So it sounds like you know the rate I mean, clearly a rate change can't stay the same forever I get that but like the level you're at it there's nothing unusual about it.
There's no reason to believe it can't be sustainable.
Eric Perche our summary.
Well, we're always trying to move forward I mean, I have an internal objective of 30, 30% gross margin will we ever get there I don't know, we're gonna try, though and you know with with the pursuit of that that aspirational target Yeah, We hope to not backsliding always moved forward with our gross margin.
Actions.
Got it got it. Thank you and then just on the backlog.
You talked about the increase year over year, it seemed like a bit even bigger increase sequentially about $14 million can you remind me is that if someone had a seasonal effect or is that showing up in some sort of you know a little bit of a rebound happening in sales potentially.
Yeah, the way I look at it Ross is that it's it's a rebounds, we did the the middle of the year was we saw quite a bit of softening or delayed and orders coming in and now now with the program launches. They haven't changed the end dates of these program launches they basically snow plowed a lot of the demand and that's what we're seeing with the building of our backlog because they are releasing orders to us.
Because they haven't changed their launch dates.
We see that as a positive going forward into <unk> into 'twenty four.
Got it okay, well, that's encouraging I mean, you mentioned that it's just one more thing I mean, you mentioned the fears of a deep recession put to rest and sort of I.
Being an encouraging sign going towards the end of the year here.
I mean.
Truck trailer truck manufacturing it does seem like it held up really well auto motor vehicles things a little bit more challenging anything else you can say about sort of the current environment in terms of what youre seeing with your customers.
Yeah. So.
C T who does the truck market analysis is it is predicting some softening of the class eight market. However, that's more than made up for with medium duty segment. So we think the commercial vehicle space will still be strong going in or at least equal to what it was this year. The commercial vehicle space, there's been limited by suppliers, particularly on frame rails as they were.
Through that bottleneck of supply we have indications that that all the Oems want to want to produce more than 24 than they did in 'twenty three on the automotive side, Yes, you know the turmoil of the last few months in the automotive industry has caused.
The automotive companies to take a pause on how they how they move forward with their program launches, but they like I said, they havent changed their days and.
The forecast for 2024 for program launches is substantially higher than it was in 2023, we look at those as positive indicators going forward for 2023 and the automotive sector.
Okay. That's great. That's really helpful. I appreciate all the color.
Yeah.
Yeah.
There were no other questions from the lines at this time I would now like to hand, the call back to Martin <unk> for closing remarks.
Okay. Thanks, operator.
Thanks, again for joining us today, you've heard our strategy and focus on bringing positive changes and improvements.
Results in 2023, establishing a sound foundation for the future going forward, we remain committed to drive earnings cash flow paying down debt and when appropriate pursuing M&A opportunities to accelerate our objectives. We look forward to sharing more evidence of our progress with you in after the fourth quarter. If you would like more information.
In the meantime, please reach out to us thank you.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.
Okay.