Eastern Company (EML) 2021 Q3 法說會逐字稿

Good morning. Welcome to the Third Quarter Fiscal Year 2021 Earnings Call. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Chris Moulton, Head of Corporate Development. Sir, the floor is yours.

Good morning, and thank you, everyone, for joining us. Speaking today will be Eastern's President and CEO, Gus Vlak; and our CFO, John Sullivan. After that, we'll open the call for questions.

Please note that some of the information you'll hear during our discussion today 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 expense, 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. For more information regarding these risks and uncertainties, please refer to risk factors discussed in our Form 10-Q filed yesterday.

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.

With that, I'll turn the call over to Gus for opening remarks.

Thanks, Chris. And good morning to those of you who have joined us on the phone and also those participating via the web. We released Eastern's third quarter 2021 results on our earnings press release and Form 10-Q, which we filed yesterday.

Our third quarter results reflect strengthening financial performance across each of our 3 core businesses, and we're proud of the tremendous commitment, agility and creativity from everyone at Eastern, given the extra effort required to achieve these outstanding results while operating in an unusually complex supply chain environment.

Eastern is clearly the stronger and more focused company today, as a result of the changes that we've made to our portfolio over the last year, changes that include the consolidation of Eberhard and ILC, which materially reduces our fixed costs and provides a sound platform for growth and innovation as well as the addition of Paylink, a strategic bolt-on business to Big 3 Precision that expands our offering to core customers; and of course, the divestitures of Canadian Commercial Vehicles, Sesamee Mexicana and most recently, Greenwald Industries.

In the third quarter, our performance was driven by continued strong sales and clear improvement in gross margins. Sales from continuing operations were up 15% compared to the third quarter of 2020 and 4% over the second quarter of this year. Although demand was strong, our sales were impacted by the supply chain issues, which dampened some of our customers' production levels.

Big 3 Precision, our returnable transfer packaging business, was a significant contributor to sales growth in the third quarter, primarily as a result of the ramp-up of planned new vehicle and truck model launches in 2022 and 2023, including a wide range of electric vehicles.

According to IHS Markit Research Organization, automotive OEMs will launch 55 new vehicle models in 2022 and 63 new vehicle models in 2023. That compares to just 42 new vehicle models in 2020 and 34 new vehicle models in 2021 when numerous new product launches were postponed as a result of the COVID pandemic and the subsequent supply chain constraints.

In the third quarter, sales at our Eberhard and Velvac businesses also continue to strengthen due to robust demand across a broad range of commercial vehicle and industrial markets as well as our new product launches. In the third quarter, we ramped up our shipments of a new Class 8 mirror program, and we expect demand for this program to remain strong.

According to FTR, U.S. Class 8 truck deliveries will reach -- sorry, 274,000 units this year before jumping to 335,000 next year and 360,000 in 2023. There was already tremendous pent-up demand for trucks coming out of the economic restart. But with the current supply chain environment, there's even more pent-up demand, and we believe that this is going to keep OEM build rates elevated into 2023 and maybe into 2024. The industry will clearly be in catch-up mode for a while, which we expect will benefit sales at both Eberhard and Velvac.

We also expect that new products will benefit Eberhard. Last week, Eberhard launched several new electromechanical products at the Annual SEMA Show in Las Vegas, including our new electronic rotary latch that lets customers electrify access security with a power-efficient design using both Bluetooth and wired activation. We now offer a comprehensive portfolio of electromechanical products for a broad range of applications. Our ability to bring more innovative products to the market is the direct result of the combination of Eberhard and Velvac into 1 industry leader.

In the third quarter, our margins improved as a result of many of the actions that we took to mitigate the impact of cost increases, and these actions are starting to take effect. Specifically, third quarter gross margins improved by 100 basis points over the second quarter as we successfully passed off increases in the cost of raw materials and shipping to our customers.

Encouragingly, during the quarter, we began to see a slowdown in the rate of price increases of hot-rolled steel and certain resins. And in fact, we've seen some declines. And while we believe that these trends bode well for continued margin recovery, some raw material costs and shipping rates will remain at historically high levels.

We're also pleased with the divestiture of Greenwald part of our ongoing work to streamline our portfolio of businesses. The Greenwald team was part of Eastern for over 20 years, and we're grateful for their contributions during this time and all the hard work that they put in this year to get this transaction done. We wish the Greenwald team much success as they continue to run their business under new ownership.

As you might recall, in August this year, we announced our intent to divest our noncore businesses. And we began reporting these businesses as discontinued operations. We are very pleased to complete this transaction within 3 months of our announcement. And with the sale of Canadian Commercial Vehicles, Sesamee Mexicana, which we completed last year, this transaction further strengthens our focus on our 3 core businesses, helping us to build scale, accelerate growth and strengthen operating margins.

As we mentioned in our press release, we plan to allocate the majority of the proceeds from the sale to debt reduction and share repurchases. We're putting a new 10b5-2 plan in place under which we'll be able to repurchase shares in accordance with the share repurchase program adopted in 2018.

With those comments, I'll turn it over to John to go over the details of our financial results.

Thank you, Gus. My remarks this morning will focus on Eastern's results for the third quarter 2021. For the third quarter of 2021, net sales increased 15% to $63.9 million compared to $55.7 million for the third quarter of 2020. Sales increased largely due to demand for truck accessories, automotive returnable packaging, local tooling and distribution products.

Net sales of existing products increased 4% in the third quarter compared to the same period in 2020. Price increases and new products increased net sales by 10% in the third quarter of 2021 compared to the same period in 2020. New products include various truck mirror assemblies, road relatches, [T rings] and mirror cams.

Gross margin as a percent of sales was 24% in the third quarter compared to 24% in the third quarter of 2020. Product development expenses increased $0.4 million or 73% in the third quarter compared to the same period in 2020. As a percentage of net sales, product development expenses was 1.5%.

Selling and administrative expenses increased $0.9 million or 11% in the third quarter compared to the same period in 2020, primarily due to increased commissions, other selling costs, amortization expense, payroll-related expenses and incentive costs, which were suspended in 2020.

Net income from continuing operations for the third quarter was $3.8 million or $0.61 per diluted share compared to net income of $3.2 million or $0.51 per diluted share for the same period in 2020. Adjusted for onetime expenses related to the move of certain operations from Illinois to Mexico, earnings per share were $0.64 per diluted share compared to $0.57 for the same period in 2020. Adjusted EBITDA from continuing operations for the third quarter was $7.1 million compared to $6.8 million for the same period in 2020.

Now for a quick summary of our cash flow and some balance sheet highlights. To address the various supply chain challenges, which added weeks to our in-transit materials and volatile raw material prices, we've strategically managed our working capital, including intentionally building up certain inventory item levels to avoid future shortages.

In addition, we experienced a very large increase in our accounts receivable due to the rapid acceleration in our sales, both of these impacted our operating cash flow during the third quarter. In light of this, cash decreased $8.2 million in the third quarter. We expect cash flow to improve in the coming quarters as we manage down our working capital.

As of October 2, 2021, our cash balance was $10 million. And with an untapped $20 million revolving line of credit, we have sufficient liquidity to meet our cash requirements. Our net leverage ratio and our fixed charge coverage ratios were 2.5x, both of which comfortably comply with the bank covenants of 4.25 and 1.25, respectively.

With that, I'll turn the call over to Chris for questions.

Thanks, John. Operator, I'd like to open the line for questions.

(Operator Instructions)

And I'm not seeing any questions via the webcast.

We have no questions from the phone lines at this time.

Okay. So with that, I'll turn to Gus for closing remarks.

Thanks, Chris. We remain optimistic of the economic recovery, which we've been seeing within our business is sustainable. And we're confident that our performance will continue to improve in the coming quarters as demand remains strong and the impact of the supply chain challenges on us and our customers abate.

Moreover, we believe that the resilience of each of our core businesses will not only allow them to prevail, but thrive as they continue to win significant new business. Importantly, our backlog at the end of the third quarter reached $83 million, and that's an increase of $25 million or 44% over the backlog at the end of the third quarter in 2020.

On a separate note, for those of you who may be attending or considering attending the Sidoti Micro Cap Virtual Investor Conference on December 8 and 9, we will be presenting and conducting one-on-ones. We'd be glad to speak with you there. And as always, we welcome any opportunity to speak with you or answer any questions that you may have.

Thanks, Gus. With that, I'll hand the call back to the operator.

Thank you, ladies and gentlemen. This concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.