Q3 2024 Core Molding Technologies Inc Earnings Call
Good morning everyone. Welcome to the core molding technologies, third quarter fiscal 24 financials, conference call. All participants will be in listen only move. She's in the assistant to be a central conference specialist, I present to start T-Fall by zero.
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I will now turn the color to Sandy Martin to three-quarter dividers. Please go ahead.
Sandy Martin: Thank you, Operator and Good Morning, everyone. We appreciate you joining us for the core Milding Technologies Conference Call to Review 3rd Quarter Results for 2024. Joining me on the call today are the company's president and CEO Dave Duvall and EPP 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. Please be advised that any time-sensitive information may no longer be accurate as of the date of any replay or transcript reading.
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. Actual results may differ materially from those expressed or implied.
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.
Sandy Martin: Core Molding Technologies assumes no obligation to publicly update or revise any forward-looking statements.
Management will refer to non-GAAP measures including adjusted EPS, adjusted EBITDA, debt-to-trailing 12-month EBITDA ratio, free cash flow, and return on capital employed. Reconciliations to the nearest GAAP measures can be found at the end of our earnings release.
Sandy Martin: Finally, this release has been submitted to the SEC on Form 8K. Now, I would like to turn the call over to the company's President and CEO, Dave Duvall.
Dave Duvall: Thank you, Sandy, and thank you all for joining to review our 2024 third quarter results.
Dave Duvall: Before John and I summarize our third quarter results, I want to share some exciting updates on our Invest for Growth strategies.
First, we announce on October 28th that Alex Vance joined the company as our new Chief Commercial Officer. We understand that strong, capable leadership is fundamental to the successful execution of any strategy.
Dave Duvall: and appointing Alex to this newly created role is an important step in our sales and marketing transformation of accelerating quarters revenue growth. Alex brings an impressive track record of over 25 years executing successful industrial sales and marketing programs.
He is the ideal person to lead the charge based on his commercial sales expertise and long-tenured roles at building relationships, driving revenue programs, and aligning market strategies with a customer-centric approach.
Dave Duvall: I want to quickly provide an update from last quarter on our participation in trade shows, customer lunch and learn events, and sales engagement opportunities as we continue to make progress pursuing new end markets.
Dave Duvall: We exhibited in our first Mexican composite trade show at Polyplast in Monterrey, Mexico, which I think is a demonstration of our strength of our Mexican team.
We also attended the Battery Show in Detroit.
which is North America's largest and most comprehensive battery event. This event showcases emerging markets and technologies in the automotive, medical, aerospace, commercial, and industrial applications.
Turning to a summary of the third quarter's financial results, we continue to face macroeconomic headwinds in some of the industries we serve, but we continue to maintain our profitability.
Dave Duvall: Our third quarter sales were $73 million, and we generated $7.5 million in adjusted EBITDA, or 10.3% of sales, which contributed to a year-to-date free cash flow of over $23 million.
Dave Duvall: Our net income was $3.2 million, or $0.36 per diluted share.
Dave Duvall: We continue to drive profitability and our entire organization is preparing for the next chapter of growth. We are investing cash in organic and inorganic growth as well as technical capabilities in manufacturing infrastructure.
High return investments are possible based on our disciplined business execution over the last 24 months, which strengthened our balance sheet and generated higher cash flows on fewer sales dollars with more consistency and stability.
Speaker Change: Now, I want to turn the call over to John to cover the financials in more detail.
John Zimmer: Thank you, Dave, and good morning everyone. Our product sales and total net sales were down 11.9% and 15.8% respectively for the third quarter compared to a year ago. Truck sales declines were as expected due to lower demand and the start of the Volvo transition we have discussed on prior calls.
The truck market is currently in a normal cyclical downturn, but is expected to transition to a cyclical upturn in the second half of 2025 and all of 2026 due to upcoming environmental regulation changes in 2027.
John Zimmer: As previously discussed, the Volvo transition has started and is impacting the second half of 2024.
John Zimmer: The majority of the transition will occur next year, which will negatively impact sales in 2025. We are currently quoting several new opportunities with Volvo, with one program we are currently bidding on launching as soon as early 2026.
In other markets, power sports and building products continue to be impacted by macroeconomic pressures and post-COVID resets, while industrial and utilities are being negatively impacted by customers' insourcing of certain products we were producing in 2023 as overflow molders.
John Zimmer: We are seeing some leveling off in the non-truck markets and believe that next year we will begin to see some rebound in these markets.
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Speaker Change: Our third quarter gross margin was $12.3 million, or 16.9% of sales, compared to 17.6% in the year-ago quarter. Gross margins on a year-to-date basis were 18.1%, which is within our long-term full year target range of 17% to 19%.
Dave Duvall: As we have previously discussed, the majority of our cost of sales is variable, and our ability to maintain our gross margins within our long-term range is based on how efficient we are in reducing the variable costs in times of lower revenues.
Dave Duvall: Our operational team has been out in front of the revenue slowdown and has done a great job reducing the variable costs in the past two quarters.
Dave Duvall: As a result of their efforts and our ability to reduce raw material pricing and achieve better customer pricing, we have been able to partially offset the 150 basis points of lost fixed cost leverage in the third quarter.
Dave Duvall: SG&A expenses were $8.7 million compared to $9.4 million in the prior year, primarily due to lower bonuses, labor and benefit costs, offset by severance costs of $228,000 and $612,000 of unfavorable foreign currency translation.
Dave Duvall: As we disclosed in our earnings release, we completed a fixed cost in SG&A reduction in force during the third quarter that is expected to generate annual savings of approximately $2.6 million moving forward.
Dave Duvall: This rebaselining of course fixed costs at our headquarters and plants were partially driven by the decrease in Volvo business, but also to better position our cost structure going forward when revenues begin to rebound.
Dave Duvall: Operating income for the quarter was $3.6 million, or 4.9% of sales, compared to 6.8% of sales in the year-ago period.
Dave Duvall: Net interest income was $144,000 in the third quarter, which included $440,000 of interest income on cash balances.
Dave Duvall: This was an improvement from $187,000 of net interest expense in the prior year of quarter.
Dave Duvall: The quarter's effective tax rate was 18.7%, comprising the weighted tax costs from the three tax jurisdictions where we operate.
Dave Duvall: Our net income was $3.2 million or diluted EPS of $0.36 compared to $4.4 million or diluted EPS of $0.49 in the comparable year period.
Dave Duvall: Our third quarter adjusted EBITDA was $7.4 million, or 10.3% of sales, compared to $9.8 million, or 11.3% of sales in the prior year's quarter.
Dave Duvall: Please see our earnings release for GAAP to non-GAAP reconciliation tables.
Dave Duvall: Starting to the company's financial position, we ended the quarter with $42.3 million of cash and cash equivalents. Strong cash flows resulted from our ability to convert earnings to cash.
Dave Duvall: The company's cash provided by operating activities increased by $9.2 million this quarter to $30.2 million for the first nine months of 2024, and year-to-date capital expenditures were $7 million.
Dave Duvall: This resulted in strong 2024 free cash flows of $23.1 million through the third quarter of the year. We expect full-year capital expenditures to be approximately $11-13 million.
Dave Duvall: As of September 30, 2024, total outstanding liquidity was $92.3 million, which included $42.3 million of cash plus $50 million available under the revolver and capital credit lines.
Dave Duvall: The company's term debt was $22 million at the end of the quarter, and our debt-to-trailing 12-month EBITDA ratio continues to be less than one time.
Dave Duvall: We have optimized our working capital efficiencies, which netted 67.6 million dollars on September 30th.
Dave Duvall: Our Return on Capital Employed, a pre-tax return metric, was 10.8% on a trailing 12-month basis. Excluding the accumulated cash available for future investment, our Return on Capital Employed was 14.4%, which aligns with our long-term targets of 14-16%.
Dave Duvall: Our capital allocation strategy remains consistent with prior guidance and includes investments in organic growth and infrastructure, share buybacks, acquisitions, and debt repayment. We continue to be disciplined and will not rush into an acquisition that is not a strategic fit or doesn't fit our financial hurdles.
Dave Duvall: We also understand that both organic and inorganic growth for coral molding will provide long-term growth, enterprise value expansion, and strong cash flow generation.
Dave Duvall: Under our previously announced share buyback plan, we purchased approximately 112,000 shares in the third quarter at an average price of $17.62 per share.
Dave Duvall: We expect full year 2024 sales to be down approximately 17% compared to 2023 which is slightly lower than our previous projections of a full year net sales decrease of approximately 15%.
Dave Duvall: The adjustment is primarily due to customer demand schedules changing during the less predictable upcoming holiday season.
Dave Duvall: For the full year, we continued to forecast gross margins in the 17-19% range.
Dave Duvall: As we have previously discussed on earlier calls this year, Volvo's existing truck model transition began this quarter and will continue to pressure sales through 2025, with most significant impact expected in 2025.
Dave Duvall: We are encouraged by CORE's bid on new Volvo programs and continue to work hard to earn future programs at Volvo and with other customers.
Dave Duvall: With that, I'd like to turn the call back over to Dave. Thank you, John. We're developing new relationships and new industries, yet our surest way to meaningful growth is through working with our large customers to expand our product and process offerings.
Dave Duvall: A key part of our strategy is to grow WalletShare and continually develop the resources to solve customer problems with a high-value core molding solution.
Dave Duvall: We want to continue to be first in the customer's mind to industrialize their designs. We also want to take full advantage of our large portfolio processes and support customers with cost-saving opportunities.
Dave Duvall: Cross-selling of thermoplastic and thermosets allows us to offer customers a unique and, in many cases, lower-cost overall solution as a higher-value alternative. This is another cornerstone of our sales and marketing initiatives.
Dave Duvall: We know that strengthening our sales and marketing resources and continually improving our customer-focused systems, such as solutions and applications engineering, are the next and final step of our business transformation.
Dave Duvall: As we've stated, our must-win battle is the development and integration of our front-end business processes to leverage the execution improvements we have made throughout all internal areas of our business.
Dave Duvall: This is what we've discussed since the beginning of our business transformation four years ago. I thought it would go faster, but we did have some unprecedented times over the last four years with COVID, significant rate, interest rate increases, supply chain shortage, rapid inflation, to name a few. Not an excuse, just a fact.
Dave Duvall: So, I would like to take a few minutes to outline the business strategy we've been implementing from the beginning in 2019 to today. I hope this will put some more color around what we have achieved and where we're going with the company.
Dave Duvall: In 2019, when we started this transformation, CORE lost $11.5 million in EBIT on $284 million in revenue. When I look at today, year to date, Q3 2024, we generated $15.8 million in EBIT on $240 million in revenue.
Dave Duvall: We improved our basic business performance by $27 million on $40 million less revenue.
Dave Duvall: I say this because, as we've consistently discussed, our focus up to this year has been internally focused on creating a strong team and business model that can execute and serve current customers better than the competition.
Dave Duvall: A strong team operating with strong execution systems should always be a prerequisite for driving growth.
Dave Duvall: We communicated this externally through our must-win battles of operational turnaround first and then the product line portfolio rationalization.
Dave Duvall: that we did after that. Our next step is investor growth to now leverage the execution engine that we have created.
Dave Duvall: Growing a profitable business that can serve the customer needs better than our competition and is a highly trusted supply partner to blue chip companies is and always has been our strategy.
Speaker Change: CORE produces complex, large, and ultra-large specific-use composite parts.
Dave Duvall: We are able to offer our customers unique manufactured solutions supported by our expertise and wide portfolio processes.
Dave Duvall: This creates a business model with a revenue stream that is characterized by long-term programs, large complex single source solutions, and directly tied to the success of our large customers and their markets.
Dave Duvall: That the three steps in priority order of our five year investor growth strategy is directly linked to optimizing that business model.
Dave Duvall: Number one, Salesforce development. We are investing in our sales function to be closer to our customers and improve our knowledge of the markets. We are focused on growing wallet share with our large customers and our wide portfolio processes.
Dave Duvall: We are advancing our technology functions, really further enhancing our expertise to solve customer problems. And three, acquisitions and diversifications, expanding sales channels, complementary technology and resources, and footprint expansion.
Dave Duvall: In 2022 and 2023, we experience a surge in demand partly fueled by the COVID bump, where limited travel led consumers to invest more in products across our key markets, power, sports, truck, industrial.
Dave Duvall: I'm incredibly proud of how our team rose to the occasion during this period, quickly ramping up production and seizing overflow business that others couldn't manage. It was a remarkable demonstration of our capacity and capability.
Dave Duvall: We do believe that the markets we serve are stabilizing to a more normal cyclicality and demand level.
Dave Duvall: So far this year, we've secured over $45 million in new business, and our pipeline is thriving with over $270 million in active opportunities.
Dave Duvall: Currently, more than $100 million is in the final pipeline stage of negotiation.
Dave Duvall: This reflects, we believe this reflects the cautious optimism among customers as they prepare for significant investments.
Dave Duvall: We're confident that we're nearing the bottom of the market dip, and there are promising signs as customers begin to accelerate program launches. Our competitive edge is more visible now than ever with some large competitors facing challenges, further expanding our opportunity pipeline.
Dave Duvall: Our initial growth efforts and investments are already yielding wins, not only with existing customers, but also in exciting new markets.
Dave Duvall: We're breaking into areas like EV bus battery trays, hospital bed frames in the medical industry and large turf care protection plates for construction, just to name a few.
Dave Duvall: We're thrilled about the possibilities in these emerging verticals and look forward to introducing even more products in the coming months.
Dave Duvall: We also anticipate a peak in the truck market by 2026, with early signs emerging as soon as mid-2025.
Dave Duvall: The power sports industrial segment remains robust and we see substantial opportunities with current customers to expand our offerings in both thermoplastic and thermoset solutions.
Dave Duvall: As part of our Invest for Growth strategy, we're actively rebalancing assets and optimizing costs for long-term success. Our technical advancements and infrastructure investments in core sheet molding compound infrastructure have already cut annual costs by over $1 million.
Dave Duvall: This is a testament to the effectiveness of our improvements.
Dave Duvall: This SMC initiative has allowed us to produce a more consistent, higher quality product with a longer shelf life, leading to an additional $500,000 in savings across the organization.
Dave Duvall: Importantly, this advance enables us to enhance our SMC formulations for external customers, opening doors to new revenue streams in material sales.
Dave Duvall: I believe we've proven that we're a team that follows through and executes, especially in challenging times.
Dave Duvall: and our track record speaks for itself.
Dave Duvall: simply stated.
Dave Duvall: We first invested in making CORE a better place to work and grow your career, significantly improving our employee retention and stabilizing the business. Our employee turnover is now less than 9% annualized.
Dave Duvall: We then completed a company-wide operational turnaround with major investments in capital and people to drive our ability to better meet customer demand and quality expectations.
Dave Duvall: Success is demonstrated by being awarded the BRP Gold Award and the PACCAR 10 PPM Award. We then rationalize our entire product line portfolio to capture a fair market value for the solutions we provide.
Dave Duvall: The next step for a must-win battle is our Invest for Growth strategy. I'm confident that our Invest for Growth initiatives will be equally as successful and allow us to fully leverage the exceptional capabilities we've built at Core Molding.
Dave Duvall: This is where the true excitement begins. This is why we've done it all.
Dave Duvall: So, our momentum is growing with a strong pipeline of new opportunities in the truck market, including quotes for the major programs like Volvo.
Dave Duvall: Increased customer engagement and our presence at trade shows are creating valuable connections across new industries. Our approach to transformational change has been pivotal in getting us to where we are today and it's inspiring for everyone at Core Molding to witness the impact of our efforts.
Dave Duvall: Our next step in this journey is investor growth, and we're fully committed to making this phase as successful as the last.
Dave Duvall: I am grateful for the hardworking, collaborative team at CORE and want to thank the entire team for embracing this significant change throughout our transformation.
Dave Duvall: and the successful execution of our must-win battle initiatives each year.
Dave Duvall: I want to also thank our customers, shareholders, and the board for their continued support.
Dave Duvall: Finally, we plan to participate in the upcoming Southwest Ideas Conference in Dallas later this month. With that, I'd like to open the line for questions. Operator?
Dave Duvall: Thank you for watching!
Speaker Change: We will now begin the question and answer session.
Speaker Change: To ask a question, you may press star then on your telephone keypad. If you're using speakerphone, please pick up your handset before pressing the keys.
Speaker Change: To withdraw a question, please press star then 2. At this time, we'll pause momentarily to assemble our roster.
Speaker Change: Our first question will come from Chip Moore with Roth MKM.
Dave Duvall: You may now go ahead.
Chip Moore: Hey David, John, morning. Thanks for taking the question. Hey, I wanted to ask about that, I think you said 100 million plus in your pipeline that's moving further along, maybe just expand on that sort of
Dave Duvall: where that business lies in terms of mix and you know I assume your expected win rate there would be higher but any thoughts?
Dave Duvall: Yeah, for sure, and really when we look at it, and we go through it relative to the team here
Dave Duvall: And the pipeline is somewhat inverted, so you're seeing it move through the different phases, and we're seeing it at the last phase. And a lot of what we hear from customers is they're waiting on when they're going to launch a program, when they're going to spend a program, so it's a little bit bottlenecked in that.
Dave Duvall: FASE, they are large programs, a lot of the work that we see in there is in different industries. So we have a lot of programs that are in what we call the construction or ag area as well as truck and power sports.
Dave Duvall: but we are seeing customers maybe slow down a little bit on launching these programs and usually for a customer it's pretty large tooling programs that they have to spend and approve when they launch the program and source us with the program so that's usually what we see right now.
Dave Duvall: whereas a year and a half ago it was rushed as fast as you could do it and get it out there.
Speaker Change: Gotcha, yeah, and I imagine having some more certainty on the political environment doesn't hurt as well. Yeah, I'm sure that's got something to do with it as well.
Speaker Change: Yeah, we'll stay tuned I guess any any thoughts on volumes next year just given that Volvo program transition and Some of the newer programs you have set to ramp any way to help Frame that or too early
Speaker Change: No, again, I think...
Dave Duvall: Yeah, we kind of...
Dave Duvall: Talk through the Volvo piece the Volvo will transition out next year And so that will negatively impact our sales as we've been saying right now We're kind of early in the process of looking at next year We kind of we our customer gives us forecast But we tracked what they're saying to the outside world probably more than we do inside what they're telling us and
Dave Duvall: You know, most of our customers, BRP, Polaris, Genrac, UFP, all those guys have been pretty silent on next year at this point.
Dave Duvall: So, I think there's a lot of our customers trying to figure out, you know, again, not just the political environment, but how fast interest rates are coming down, those types of things. And so, probably a little bit early for next year at this point.
Dave Duvall: Volvo is the one piece we know that's happening. You know the truck market, ACT does say is a little bit softer next year is where they're at and then a real strong rebound in 26 and so I think the truck market will see some softness everything else we're kind of in a wait-and-see mode at this point.
Speaker Change: For more information visit www.FEMA.gov
Speaker Change: That's helpful. That's helpful. And Dave, I think you called out a win and I guess it was in
Speaker Change: setting structures in health care? Any, it seems like a new market, maybe not, but but we've been trying for that one. I think we went back though and it's been eight years.
Speaker Change: talk to that customer. Right now we are, it's on a hospital bed so the support structure for the hospital bed
Speaker Change: which, you know, that's our first program to win. Right now the customer's delighted with...
Speaker Change: The timing and everything that we met, so I think that can be another growing diversification channel for us.
Chip Moore: Great, great. And maybe a last one for me, just on the cost side, you talked about some actions you've taken, you know, when do we see that benefit fully rolled through, John? And are we done with sort of the one-time cost of that all in this quarter? Thanks.
Speaker Change: You know in the fourth quarter, but most of the benefits you should we should be starting to see the benefits as early as this quarter It was primarily labor cost and so we'll see the benefit coming through this quarter and moving forward And pretty much a full impact in this quarter in the fourth quarter
Speaker Change: Thank you for watching!
Speaker Change: Got it. Okay. Awesome. Appreciate it. Thanks.
Speaker Change: Yep. Thanks, Chuck.
Speaker Change: Again, if you have a question, please press star then 1. Our next question will come from Bill Desilin of Peayton Capital. You may now go ahead.
Bill Desilin: Thank you. I'd like to start with the hospital bed. Would you please kind of walk us through exactly what it is, kind of help us visualize what it is you're actually doing on the bed, and then secondarily how that
Bill Desilin: process worked over the last eight years to to win that business and what the hurdles were for your customer and for you to ultimately decide this was the right way for them to make the bid.
Speaker Change: Yeah, we originally had contact with this customer. It was probably initial contact about eight years ago through our sales agent group We started working with them on an opportunity they had here. I would say about a year and a half ago
Speaker Change: What we're producing and what we designed with them is they're changing from a sheet metal part and the part that is underneath the bed that holds the structure of the person.
Speaker Change: is what we're making, is that platform underneath the entire bed holding the structure to people so the bed would sit on top of that.
Speaker Change: Really, it's going through the validation, the development, changing the material. We were able to use a higher value, lower cost option for the customer and design features in that molded in features that you couldn't do with steel.
Speaker Change: So I would say the actual development from initial concept to today, where we're actually tooling, going into production, is probably about a year.
Speaker Change: Thank you for watching. Please subscribe to my channel. See you in the next video.
Speaker Change: and not to oversimplify this but the underneath a person sounds very similar to the underneath of a of a golf cart or of a watercraft.
Speaker Change: I agree, I completely agree that the concept and structure that we did on the bed was very similar to the concept and structure that we had looked at on the golf cart application.
Speaker Change: that we were originally quoting. We still have other golf cart opportunities and you also see that on ATVU-TV as well. We won the skid plates.
Speaker Change: on all the ATV, UTVs, so the new regulation coming next year to where you can't, when you're riding, you can't have something protrude through the bottom of the vehicle and impale the driver or passenger. That's a new regulation, so that's a big part of the wins as well.
Speaker Change: Thank you for watching!
Speaker Change: Same process, same structure as well.
Speaker Change: Great, thank you. And then shifting to Volvo for a moment, would you please update us on their process of moving that business versus their original plan of moving that business?
Speaker Change: Yeah, it would depend on what original plan, so this was originally two years ago that they were looking at
Speaker Change: transitioning. So right now they are in the middle of the transition to the new program. It ramps down, there's different models, so what they're doing is commonizing their Volvo and Mac programs.
Speaker Change: so right now they are separate so as they phase in phase out it depends on whether it's a Volvo or Mac volume so what they're doing you'll start phasing out at the end of this year and through next year and into the beginning of the following year
Speaker Change: Thank you for watching!
Speaker Change: It's quite a quite a long phase out time frame because there's so many part numbers going to a common part number.
Speaker Change: And is it your sense that that process is moving?
Speaker Change: slower faster in line with what they were thinking I'll say earlier this year
Speaker Change: I would say everything always moves slower than people plan.
Speaker Change: Great, thank you.
Speaker Change: It appears there are no further questions.
Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.
Speaker Change: Thank you. Bye.
Speaker Change: Oh, Hi.
Speaker Change: Sorry.
Speaker Change: Thank you for your continued interest in our company. We look forward to providing an update on our progress when we report the fourth quarter results in March. Have a great day. Thank you.
Speaker Change: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Speaker Change: Thank you. Bye-bye.