Q2 2024 Core Molding Technologies Inc Earnings Call
Operator: Good morning, everyone. Welcome to the Core Molding Technologies Second Quarter Fiscal 2024 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star, then zero, on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press the star, then one, on your telephone keypad. To withdraw your question, please press star, then two. Please note this event is being recorded. Now, I will turn the call over to Sandy Martin, your three-part advisor. Please go ahead.
Speaker Change: Good morning, everyone. Welcome to the Core Molding Technologies second quarter.
Speaker Change: Fiscal 2024 Financial Results Conference Call
Speaker Change: All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions.
Speaker Change: To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press star then 2. Please note this event is being recorded. Now, I will turn the call over to Sandy Martin, 3-Part Advisors.
Sandra Martin: Thank you and good morning, everyone. We appreciate you joining us for the Core Molding Technologies conference call to review the second quarter results for 2024. Joining me on the call today are the company's President and CEO Dave Duvall and EVP and CFO John Zimmer. This call is being webcast and can be accessed through coremt.com via an audio link on the Investor Relations Events and Presentations page. Today's conference call, including the Q&A session, will be recorded.
Speaker Change: Please go ahead.
Sandy Martin: Thank you and good morning, everyone. We appreciate you joining us for the Core Molding Technologies conference call to review second quarter results for 2024. Joining me on the call today are the company's president and CEO , Dave Duvall, and EVP and CFO , John Zimmer.
Speaker Change: This call is being webcast and can be accessed through coremt.com via an audio link on the Investor Relations Events and Presentations page.
Sandra Martin: 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 in today's discussion that are not historical facts, including statements or expectations about 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. By their nature, forward-looking statements are uncertain and outside of the company's control. However, actual results may differ materially from those expressed or implied.
Speaker Change: Today's conference 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.
Speaker Change: I would also like to remind you that the statements made in today's discussion that are not historical facts
Speaker Change: including statements or expectations or 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.
Speaker Change: By their nature, forward-looking statements are uncertain and outside of the company's control. Actual results may differ materially from those expressed or implied.
Sandra Martin: Please refer to today's earnings press release for our disclosures regarding 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. Instead, management will refer to non-gap measures, including adjusted EPS, adjusted EBITDA, debt to trailing 12-months EBITDA ratio, free cash flow, and return on capital employed. Reconciliations to the nearest gap measures can be found at the end of our earnings release. Finally, this release has been submitted to the SEC on a Form 8K. Now, I would like to turn the call over to the company's president and CEO, Dave Duvall.
Speaker Change: Please refer to today's earnings press release 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.
Speaker Change: Core Molding Technologies assumes no obligation to publicly update or revise any forward-looking statements.
Speaker Change: Management will refer to non- GAAP measures including adjusted EPS.
Speaker Change: Adjusted EBITDA, Debt to Trailing 12 Months EBITDA Ratio,
Speaker Change: Free Cash Flow and Return on Capital Employed. Reconciliations to the nearest GAAP measures can be found at the end of our earnings release.
Speaker Change: Finally, this release has been submitted to the SEC on a Form 8K. Now I would like to turn the call over to the company's president and CEO , Dave Duvall.
David Duvall: Thank you, Sandy, and thank you all for joining to review our 2024 second quarter results. I want to start today with some important achievements by the Core Molding team in the first half of 2024. We were recognized this year with the 2023 PACCAR 10 PPM Quality Award. This is in addition to the 2023 BRP Gold Supplier Award we discussed last quarter. PACCAR awards this to suppliers that achieve and sustain exceptional quality.
Dave Duvall: Thank you, Sandy, and thank you all for joining to review our 2024 second quarter results.
Dave Duvall: I want to start today with some important achievements by the Core Molding team in the first half of 2024.
Speaker Change: We were recognized this year with the 2023 PACCAR 10 PPM Quality Award. This is in addition to the 2023 BRP Gold Supplier Award we discussed last quarter.
Speaker Change: PACCAR awards this to suppliers that achieve and sustain exceptional quality. We are pleased with this exemplary quality performance achievement of less than 10 defects for every million final assembly shipped.
David Duvall: We are pleased with this exemplary quality performance achievement of less than 10 defects for every million final assembly ships. In addition to high quality standards, we maintain strong customer partnerships through excellence in customer service and continuous improvement processes. Gross margin for the 2024 second quarter was 20%. Anticipating the current demand environment, we proactively rebalanced our cost structure to minimize lower fixed cost leverage.
Speaker Change: This demonstrates our commitment and understanding of what our large OEM customers require in a supplier partner.
Speaker Change: In addition to high quality standards, we maintain strong customer partnerships through excellence in customer service and continuous improvement processes.
Speaker Change: It is part of who Core Molding is as an organization. We have made significant improvements on our operational performance and continue to invest in our operational systems, both in growing skills and improving processes.
Speaker Change: Our first two priorities were on creating a winning culture,
Speaker Change: This multi-year transformation plan also involved in an aggressive revenue diversification program which strategically shift us from being solely a truck supplier to a much more diverse business.
Speaker Change: In 2024, we are focused on strategically investing in accelerated growth to specifically leverage the business we have created.
Speaker Change: Today, we reported the second quarter with $88.7 million in sales, down 9.2% compared to the second quarter of 2023, primarily due to end market headwinds that we will discuss in detail.
Speaker Change: Anticipating the current demand environment, we proactively rebalanced our cost structure to minimize lower fixed cost leverage.
Speaker Change: We also generated $11.6 million in adjusted EBITDA, or 13% of sales, which improved over the first quarter's EBITDA margin of 11.2%.
Speaker Change: Thank you, Dave, and good morning, everyone. As Dave mentioned, our total net sales for the first quarter were $88.7 million, down 9.2% compared to a year ago. And sequentially, our net sales improved by 13.6%.
Speaker Change: Normal seasonality produced growth compared to the first quarter sales.
Speaker Change: In addition, other industries including building products and industrial and utilities continued to produce softer sails than a year ago.
Speaker Change: The second quarter gross margin was $17.7 million, or 20% of sales, compared to 21% in the year-ago quarter.
Speaker Change: Before last year's operational improvements, volume and mixed shift fluctuations create more volatility in gross margins.
Speaker Change: Today, we have better margin stability from improved product line profitability and operational efficiencies across all of our plants.
Speaker Change: Net interest income was $38,000 in the second quarter, an improvement from $293,000 of net interest expense in the prior year quarter.
Speaker Change: The quarterly interim effective tax rate was 16.3%, comprising the weighted tax costs from the three tax jurisdictions where we operate.
Speaker Change: Our net income totaled $6.4 million or diluted EPS of $0.73 per share compared to $7.9 million or diluted EPS of $0.91 per share in the comparable year period.
Speaker Change: You can refer to our gap-to-non-gap reconciliation tables at the end of our press release.
Speaker Change: For the first six months, capital expenditures were $4.8 million and free cash flows were $16.1 million, an improvement from $14.4 million in the prior year.
Speaker Change: We expect 2020 for capital expenditures to be approximately 13 million dollars for the full year.
Speaker Change: As of June 30, 2024, total outstanding liquidity was $87.8 million, which includes cash and $50 million available under the Revolver and Capital Credit lines.
David Duvall: The company's term debt was $22.4 million at the end of the quarter, and our debt-to-trillion-12-month EBITDA ratio was less than one-tenth. Our working capital continues to be well-managed and netted $66.7 million on June 30, 2024. Our return on capital employed, a pre-tax return metric, was 12.1% on a trailing 12-month basis. Excluding accumulated cash available for future investment, our return on capital employed was 15.6%, which aligns with our long-term targets of 14-16%.
Speaker Change: The company's term debt was $22.4 million at the end of the quarter, and our debt-to-trillion-12-month EBITDA ratio was less than one time.
Speaker Change: Our working capital continues to be well-managed and netted $66.7 million on June 30, 2024. Our return on capital employed, a pre-tax return metric, was 12.1% on a trailing 12-month basis.
Speaker Change: Excluding the accumulated cash available for future investment, our return on capital employed was 15.6 percent, which aligns with our long-term targets of 14 to 16 percent.
Speaker Change: Capital allocation strategy remains consistent with prior guidance and includes investments in organic growth, share buybacks, acquisitions, and net debt repayments.
Speaker Change: Under our previously announced share buyback plan, we repurchase approximately 24,000 shares in the quarter at an average price of $16.41 per share.
Speaker Change: Earlier this year, we announced that we expected full year 2024 net sales to be down 10 to 15 percent compared to 2023 and gross margins of 17 to 19 percent.
Speaker Change: Due to the ongoing in-customer demand softness and normal seasonality, full-year net sales and margins will likely come in at the lower end of those ranges.
Speaker Change: To be clear, we expect full-year sales to be down approximately 15% from fiscal year 2023, and second-half margins to be lower than first-half margins.
Speaker Change: Resulting in a full year of margins closer to the bottom of our margin range.
Speaker Change: The sales outlook includes a cyclical demand slowdown in truck, stable customer inventories, as well as consumer demand to continue in a more normal seasonal pattern.
Speaker Change: We are carefully watching for Fed changes to interest rates, which could begin to improve end markets more closely tied to the consumer.
Speaker Change: As a reminder, Volvo's transition from its existing business truck model to a new one will begin to impact us in the second half of 2024 and continue through 2026.
Speaker Change: We are bidding on new programs with Volvo and are a trusted vendor.
Speaker Change: Despite truck customers operating in a reduced demand period, our business is well-positioned to serve all of our blue-chip customers with sole-source manufacturing essentials to our customers' long-term growth plans once the economy begins to rebound.
Speaker Change: As Dave will discuss in a moment, we have signed $42 million of new business in a diverse set of end markets this year due to our Invest for Growth 2024 must-win battle.
Speaker Change: With that, I would like to turn it back to Dave.
Dave Duvall: Thank you, John . Our vision at Core Molding is to be the most reliable, innovative, and responsive partner in engineered material manufacturing solutions.
Dave Duvall: We help to bring our vision to life by striving to create what we refer to as the Red Thread, linking our vision to our strategies that tie to our action plans and to our team members' goals.
Dave Duvall: This transparency and clarity are critical to enabling a winning culture and establishing culture as a competitive advantage at core.
Dave Duvall: We have created an organization that is ready for growth, and we have the assets to support growth. As John mentioned, we are excited to report that we have been awarded $42 million of business through the first six months of the year.
John: Over half of this business is new, and the remaining is replacement.
John: Because of the technical requirements and validation required, with most of our solutions, our quote-to-cash cycle is 12 to 18 months, and therefore the benefits of these wins will be realized starting in 2025 and 2026.
David Duvall: We are now focused on strengthening and transforming our sales and marketing organization to leverage the business execution improvements made in the first phase of the transformation. Simply stated, first improve the ability to execute, then increase the volume.
Speaker Change: We are now focused on strengthening and transforming our sales and marketing organization to leverage the business execution improvements made in the first phase of the transformation. Simply stated, first improve the ability to execute, then increase the volume.
David Duvall: We have worked to streamline our quote-to-cash process to improve our speed and quality of events, enabling Core to better support customer needs. We are driving and enabling ownership for industry verticals by adding four key account managers with ownership for growth in their industry verticals. We are implementing a deeper market and application analysis process, and we will be adding executive leadership to support the transformation. We fully expect this major initiative to be successfully executed, similar to our transformation of all other areas in Core Molding. It is exciting for the team and me to see the improvements in processes, investments in people, and clear direction to drive growth in all processes.
Speaker Change: We are driving to make this validation process easier and faster for the customer.
Speaker Change: Our current sales opportunity pipeline is over 250 million dollars, and we are purposely driving to win more of this identified business.
Speaker Change: Although we are pleased with this year's new business progress thus far, we know that our revenue initiative requires aggressive goals and multiple work streams.
Speaker Change: Our investor growth initiative has several strategic components I want to discuss today.
Speaker Change: We first focused on creating flow in all quoting, costing, and customer-facing processes, improving the execution process.
Speaker Change: We are driving and enabling ownership for industry verticals by adding four key account managers with ownership for growth in their industry vertical.
Speaker Change: We are implementing a deeper market and application analysis process, and we will be adding executive leadership to support the transformation.
Speaker Change: We are currently conducting an external search for a Chief Commercial Officer to lead and drive the sales and marketing transformation.
Speaker Change: We fully expect this major initiative be successfully executed, similar to our transformation of all other areas in Core Molding.
Speaker Change: The final transformational area is sales and marketing, because as we stated, we had to improve the operational execution ability before driving significant growth in the business.
Speaker Change: We expect to announce the appointment by the end of the year.
Speaker Change: Growing sales and marketing resources within with the right skills to establish market industry ownership is essential.
Speaker Change: These changes will enable industry ownership and accelerate market growth by industry or vertical.
Speaker Change: Our market analysis utilizing heat map and hotspot process will enable us to focus our efforts on the highest potential opportunities for our products and processes.
Speaker Change: We will continue to drive our aggressive lead generation campaign with robust lead generation initiatives through our sales agents, account leaders, customer lunch and learn events, trade show displays, and engaging in trade industry associations.
Speaker Change: A key part of our strategy is to grow WalletShare with existing large customers, and by streamlining and strengthening our front-end processes, we want to be first in the customer's mind to industrialize their designs.
Speaker Change: We are working with large customers to expand our product offerings to take advantage of our large portfolio processes.
Speaker Change: and supporting customers with cost-saving opportunities.
Speaker Change: Cross-selling of thermoplastics and thermosets allows us to offer customers a unique and likely lower cost or higher value alternative.
Speaker Change: We are seeing early results of our initial sales and marketing transformation as shown by the 42 million in wins year-to-date.
Speaker Change: It is exciting for the team, and me, to see the improvements in processes, investments in people, and clear direction to drive growth in all processes.
Speaker Change: with the confidence that we can execute an aggressive growth plan and make happy customers.
Speaker Change: Notwithstanding a traditional long sales cycle, we continue to pursue opportunities for near-term revenue.
Speaker Change: supporting customers with mold transfers from challenged suppliers and or supporting technical manufacturing challenges.
Speaker Change: We continue our vetting process for potential acquisitions that meet our strategic growth criteria for sales channel growth and footprint expansion.
Speaker Change: John and I believe in being disciplined and prudent and will not rush into an acquisition that is not a strategic fit or does not fit our financial thresholds.
Speaker Change: I appreciate the hard work and dedication of our team and want to thank them for enabling the significant changes we have implemented.
Speaker Change: For our investor relations efforts, we plan to participate in the upcoming Midwest Ideas Conference in Chicago later this month, and in September , we are planning a non-deal roadshow with three-part advisors.
Speaker Change: With that, I would like to open the line for questions. Operator?
Speaker Change: We will now begin the question and answer session.
Speaker Change: To ask a question, you may press star then 1.
Speaker Change: on your telephone keypad.
Operator: At this time, we will pause momentarily to assemble our roster.
Speaker Change: Maybe expand on, it sounds like you're seeing some early returns already, but how to think about, I guess, you know, OPEX implications and then maybe potential lag on return on those investments. I know I have a follow-up there.
John Zimmer: Yeah, it's definitely a challenge that we've thought about as far as seeing where we are with the overall market, seeing all the markets decrease a bit, and then where we need to grow.
John Zimmer: I mean, we have we've seen that we have the ability to execute, and we've seen that we can bring in the sales. You know, if there was one thing that we need to drive, it would really be increasing sales. And, you know, we're at a point now where we can easily put the sales into our capacity that we gain from the operational improvements, and the magic wand is really doing all that we can do right now to gain and leverage what we've done on the operational side and the business side.
Speaker Change: So, growing the sales. Now, we do have a lag of, say, 12 to 18 months. We're trying to look at business that we can get earlier than that. Maybe it's a mold transfer, or working with a troubled supplier competitor, working with our customers.
Speaker Change: But, you know, in the end, it's the investments we need now to grow the business over the next 10-12 months.
Speaker Change: Yeah, no, that's, that's helpful. And I guess the follow up is sort of on, you know, as you add these resources, how to think about greenfield opportunity versus
Speaker Change: growing wallet share. And then on the wallet share piece, I think, you know, you've talked in the past about those opportunities, whether it's, you know, inside the truck or maybe some adjacent power sports products, just an update there on, on, uh, action and growing that wallet, wallet share.
Speaker Change: No, we are seeing growth in the wallet share. I mean, a lot of our wins are with existing customers on new programs, so we see that.
Speaker Change: I always think that we can do more when I look at a Class A truck. I think there's a lot of work that we can do on the inside about converting.
Speaker Change: Some of the plywood bunks and cabinets and things like that into thermoplastic, something that would fit that need better.
Speaker Change: We are talking with customers about that. So we are seeing a lot of opportunities with existing customers and growing WalletShare. I think there's a lot of other opportunities out there as we expand the portfolio with those customers.
Speaker Change: So, those are the, I would say,
Speaker Change: I don't know if I'd say easier, but those are the more attainable sales because we already have those relationships and we're already
Speaker Change: Deeper in those customers so we know about those opportunities earlier, and that's that really is a big part of Growing the wallet share is having that interaction and knowing what's coming down the line and being there being first in our mind with being Able to have a solution for that
Dave Duvall: That's helpful, Dave. And maybe on the financial side, you know, I think understandable, right, coming in at the lower end with everybody seen out there. Any more color on, you know, between the Volvo transition and seasonality?
Speaker Change: Think about that progression in the back half, and I guess, you know, volumes as well as margins.
John Zimmer: Yeah, I think you've got several moving pieces. I think we said that, and we're still comfortable, that Volvo's impact is probably around $10 million in revenue impact this year, and the majority of it really hits next year. The seasonality piece, we have seen most of our customers come back to seasonality, but I would also say that we do have a book of business where our customers are being impacted by a slower overall demand that I think is the result of the Fed and what the Fed has done.
Speaker Change: Yeah, I think you got several moving pieces. You know, I think we said that, and we're still comfortable, that Volvo's impact is probably around $10 million of revenue impact this year, and the majority of it really hits next year.
John Zimmer: Long term, I think, if the Fed starts to loosen up interest rates, I think all our customers are very bullish that they're going to grow again. And again, the nice part about our business is that we talk about this a lot, and we're the sole source for their tools, and so if they grow, we grow with them. But the back half of this year, I think our guidance really, we've seen a little bit of additional, it's still softer than what we had expected early in the year, but again, still all customers, we retained all customers, and we look to grow with them as they return to their growth going into next year and those types of things. And so, yeah.
Speaker Change: that I think is the result of the Fed and what the Fed has done. Long term, I think, if the Fed starts to loosen up interest rates, I think all our customers are very bullish that they're gonna grow again.
Speaker Change: But the back half of this year, I think our guidance really, we've seen a little bit of additional, it's still softer than what we had expected early in the year, but again, still all customers, we retained all customers, and we looked to grow with them as they.
Speaker Change: The M&A side, what are you seeing? I think, right, you've talked in the past about, you know, geographic, southwest, but any other color on what you're seeing on sort of the tuck-in opportunity?
Speaker Change: Yeah, you know, we said last quarter we did hire an outside banker that really focuses on buy side. We've identified targets. The challenge we have is there's not as many players in the market today that want to be bought.
Speaker Change: But, you know, that's not holding us back. We have outreach programs using the bankers to go through and...
Speaker Change: You know, kind of working with those, you know, potential targets and...
Speaker Change: getting them to understand the benefit of joining CORE and having us together. But we're actively doing it, just in a market that right now is probably a little bit slow on the M&A side, where people are really looking to sell their businesses. But it doesn't mean we won't stop trying to find that right acquisition that makes sense for us.
Speaker Change: Yeah, we're always looking, we're evaluating, we know exactly what we want to get or how we want to add that.
Speaker Change: That's excellent. Okay, thanks. I'll pop back in queue. Thank you very much. Appreciate it.
Chip: Thanks, Chip.
Speaker Change: Again, if you have a question, please press star then 1.
Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to Dave Duvall for any closing remarks.
Dave Duvall: Thank you for your continued interest in our company. We look forward to providing an update on our progress when we report the third quarter results in November . Have a great day. Thank you.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.