Earnings Call Transcript - CMT Q1 2023

Operator, Operator

Good morning, everyone. Welcome to the Core Molding Technologies' First Quarter Fiscal 2023 Financial Results Conference Call. Please note this event is being recorded. Now I will turn the call over to Sandy Martin, Three Part Advisors. Please go ahead. Thank you, and good morning, everyone. We appreciate you joining us for the Core Molding Technologies' conference call to review first quarter results for 2023. Joining me on the call today are Core Molding's President and CEO, Dave Duvall; and the company's EVP and CFO, John Zimmer. This call is also being webcast and can be accessed through the audio link on the Events and Presentations page of the Investor Relations section at coremt.com. Today's 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. I would also like to remind you that statements made in today's discussion that are not historical fact, 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. Forward-looking statements, by their nature, are uncertain and outside of the company's control. Actual results may differ materially from those expressed or implied. Please refer to the earnings press release that was issued today 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. Core Molding Technologies assumes no obligation to publicly update or revise any forward-looking statements. Management will refer to non-GAAP measures, including adjusted EBITDA, free cash flow, and return on capital employed. Reconciliations to the nearest GAAP measures can be found at the end of our earnings release. Finally, the earnings press release we issued earlier today is posted on the Investor Relations section of our website at coremt.com. A copy of the release has also been included in an 8-K submitted to the SEC. And now I would like to turn the call over to Dave Duvall. Dave?

David Duvall, CEO

Thank you, Sandy. Good morning, and welcome to our first quarter earnings call. I want to begin by expressing my gratitude to the Core Molding team for delivering outstanding financial results. This success is a testament to our dedicated team of skilled individuals who are working together with a shared commitment to continuous improvement. It's encouraging to see our business transformation moving forward, particularly as the momentum of change builds. As mentioned in March, one of our key strategic objectives for 2023 is to enhance profitability, which is directly measured by our gross margin. I am pleased to report that our gross margin for this quarter reached 17.8%, the highest in over five years. This represents a sequential improvement of 440 basis points from the fourth quarter and an increase of 180 basis points from the first quarter of the previous year. This growth is attributed to our relentless focus on operational execution in our challenged plants, recovery of material costs, and technical solution sales as we expand into new markets. As we stated in March, our critical goal for 2023 is to fully integrate our operational excellence processes across all operations, particularly in our lower-performing locations. We are strategically concentrating on enhancing operational performance, specifically boosting productivity and profitability at all locations to optimize our current capacity. This is an ongoing effort, but we recognize some immediate opportunities to improve our margins and increase capacity within our sheet molding compound business. In the first quarter, we improved our overall plant productivity by more than 8%. This marks significant progress, and I appreciate the dedication of our operational teams and plants in collaborating to achieve our goals for 2023. We are also aware that there is still plenty of opportunity for us to capture before the year's end. Now, looking more closely at the quarter, the team has worked diligently, focusing on our four strategic goals for the year: revenue growth, technical solution sales, profitability enhancements, and free cash flow generation. The results from the first quarter reflect our advancement in these areas, with solid improvements in gross margin and operating income compared to last year amid promising sales growth. We continue to see strong demand in our largest market, medium and heavy-duty trucks, with heightened demand in the first quarter. This increase also includes business from a new truck customer that started in the latter half of 2022. In the first quarter, the revenue mix shifted, leading to 50% of our sales coming from medium- and heavy-duty trucks, aided by this new truck business. We also observed an uptick in demand in the powersports market in the first quarter, although our building products sector has faced pressures since the start of the year. A sales growth of 9.8% from the first quarter of 2023 compared to the previous year underscores the advantages of our strategic diversification into new end markets. We achieved significant margin enhancement, realizing gross margins of 17.8%, reflecting our ongoing transformation achievements. We continue to secure and launch programs in the industrial and utilities sectors, particularly projects related to stormwater solutions, flush covers, and in-ground bulk products, among others, which we anticipate entering full production this year. We are enthusiastic about these launches as they represent differentiated growing end markets where we deliver high-value engineered solutions. These projects promote margin improvements and create value for our customers by enhancing product performance, reducing costs, and minimizing manufacturing complexities. Additionally, we are excited to have published our inaugural sustainability report on our website on March 21. We have seen an increase in customer requests for support on their sustainability journeys, whether through the use of recycled materials or the development of recyclable solutions, often by transitioning from traditional materials to recyclable products. Specifically, we have converted non-recyclable thermoset products into recyclable thermoplastics. This aligns with our strategy of providing technical solutions that leverage our diverse portfolio of processes. Implementing our sustainability strategy has been a nearly year-long effort, and I am proud of the progress we've made. This journey is ongoing, and I look forward to integrating our sustainability goals outlined in our 30x30 targets into our business strategy, which I believe will enhance our value proposition for both customers and employees. We anticipate receiving our EcoVadis certification in July, further solidifying our value with several industrial and utility customers. This makes us a more cohesive and disciplined organization that recognizes its responsibilities to our employees, communities, and the environment. Now, I would like to turn it over to John for a detailed look at the financials.

John Zimmer, CFO

Thank you, Dave, and good morning, everyone. As Dave mentioned, sales growth and margin improvements, primarily driven by a combination of volume and strategic pricing actions, drove higher free cash flows when compared to last year's first quarter. First quarter 2023 net sales totaled $99.5 million, up 9.8% versus a year ago, and product sales increased 9.4% versus the prior year period. Revenue increases were largely driven by higher customer demand coupled with higher pricing to offset inflationary costs as well as new program launches. Gross profit for the first quarter was $17.7 million or 17.8% of sales compared to $14.5 million or 16% of sales in the prior year quarter. During the quarter, we saw that the combination of higher volumes and strategic pricing enhanced our overall margins, especially given the more stable labor environment and supply chains. We have also seen a weakening of the U.S. dollar, which had a negative impact on gross margins in the first quarter of 2023 of approximately 100 basis points. We actively hedge a portion of our exposure to the Mexican peso and the Canadian dollar, but we're still impacted by the change in the dollar. Selling, general and administrative expenses for the quarter were $9.7 million compared to $8.5 million in the prior year period. Increases were primarily due to year-over-year wage increases, primarily due to inflation and certain strategic conditions to improve operations. In the first quarter, the company reported operating income of $8.1 million, up 34.3% over the same period of the prior year. Net income was $7.8 million or $0.66 per share on a diluted basis versus the same period prior year diluted EPS of $0.46, an increase of 43%. Adjusted EBITDA for the quarter was $12.2 million or 12.3% of sales compared to $9.5 million of adjusted EBITDA in the 2022 first quarter or 10.5% of sales. We are pleased with our progress on adjusted EBITDA returning to margins of 12.3% for the first quarter of 2023, but we recognize we still have more opportunities for improvements. You can find the GAAP to non-GAAP reconciliation tables at the end of our press release for the first quarter results. Turning now to the company's financial position, cash flow, and balance sheet. The company's cash provided by operating activities totaled $4.6 million for the 3 months ended March 31, 2023, and capital expenditures for the year were $2.1 million, resulting in a positive free cash flow of $2.5 million. Due to seasonality, first quarter historically results in a reduction in free cash flows as working capital grows in line with first quarter sales growth compared to the fourth quarter of the prior year. This year, we experienced an increase in working capital resulting from sales growth, and we also generate free cash flows based on ongoing improvements we are making in the business. We expect to generate free cash flows for the remainder of the year as working capital requirement changes from seasonality are not forecasted to be significant. With cash flows generated from operations this year, we plan to utilize approximately $13 million for capital spending in 2023. At March 31, 2023, the company had available liquidity of $54.5 million, which includes a combination of cash and cash equivalents and availability on revolvers and capital credit lines. The company also had term debt of $23.9 million at the end of March, and our debt-to-trailing 12-month EBITDA ratio remains less than 1x adjusted EBITDA at the end of the first quarter. As I mentioned a few moments ago, our working capital investments were well managed and netted to $38 million as of March 31. We ended the year with accounts receivable of $52.5 million with a DSO of 48 days. Inventories were well controlled and remain less than 1x accounts payable at the end of March. Our return on capital employed, a pretax return metric, improved to 22% on an annualized basis, driven by a disciplined use of capital. We plan to strategically manage our capital deployment in a prudent manner and believe that a combination of good liquidity and a strong balance sheet provides flexibility to focus on our four growth initiatives, which are revenue growth, technical solution sales, profitability improvements, and free cash flow generation. As Dave discussed, our strategic business transformation efforts progressed and we continue to work on operational efficiencies at all our plants and higher-margin technical solution sales to improve margins and reduce the impact of product mix shifts in our business. Our must-win battle for 2023 includes integrating major productivity and quality improvements as well as scrap reduction, labor productivity, and the reduction of overhead spending. We also focus on operational improvements with our new product launches, which usually take up to a year from launch to work out all the operational efficiencies. Our operational performance and efficiency goals target further gross margin enhancements as well as increased capacity, throughput, and return on capital. We are dedicated to Core's strategic growth and profitability goals with programs to drive long-term value creation.

David Duvall, CEO

Thank you, John. As both John and I stated earlier, our must-win battle for 2023 is to fully embed our operational excellence processes into our operations with the largest opportunities coming from our SMC, or sheet molding compound, plants. We have communicated our strategic execution goals throughout the organization, which has placed a high level of focus and energy into driving speed and quality of event into our must-win battle mission. Improving our SMC plants is a strategic priority that will directly increase productivity, reduce costs and expand our large asset capacity by about 20%, which we believe will create a stronger foundation for success as we prepare for future growth investments. As we continue to grow the business, we plan on adding capacity and are currently investigating how best to add capacity, either through acquisition, facility expansion or greenfield site. The prerequisite to executing an expansion is the successful completion of our 2023 must-win battle, which creates both machine capacity and technical expertise availability to enable a flawless execution of our major growth objectives. Basically, it's just the five Ps of proper planning prevent poor performance. We are measuring what we want to improve and have achieved over 8% improvement in productivity in Q1 alone. And although this journey is never complete, we are making significant progress in 2023. We are also adding additional automation to support further production efficiencies, reduce costs, and increase capacity. Our 2023 outlook includes carefully monitoring customer forecasts and adjusting assets and labor utilization accordingly. We plan for and value revenue diversification by industry, which serves to reduce our concentration risks in all of our end markets. We are driving to further increase gross margins to generate incremental cash flow. Our outlook this year continues to be optimistic and we are forecasting to be flat to slightly up on our product sales for the year. Our technical solution sales strategy positions us well to take advantage of opportunities in various industries that require new solutions, including opportunities resulting from government-funded infrastructure and sustainability projects. We have seen an impact on our building products industry demand from macroeconomic efforts to slow inflation, but demand from our customers and other industries remains unchanged. We will continue to carefully watch for demand impacts from interest rate increases and other macroeconomic headwinds, but believe our continued industry diversification progress will lessen the impact of any industry-specific downturn on our business. We again want to thank analysts and investors for their time and attention on this call, and we want to welcome your questions on today's call or in a follow-up call. With that, I would like to open up the line for questions.

Operator, Operator

The first question comes from Chip Moore with EF Hutton.

Chip Moore, Analyst

Congrats to the whole team on a great quarter of execution. Wanted to start with margins. You sound fairly optimistic on the margin front. Obviously, a great quarter. Just maybe you can remind us of sort of seasonality mix and sort of ramp of new programs and any factors to take into account on margins for the near term?

John Zimmer, CFO

Yes, Chip, regarding margins in the first quarter, we reached 17.8%, and we're quite pleased with that. We're seeing benefits from many of the crucial initiatives we've discussed. Typically, Q1 and Q2 have the best margins due to the product mix. Compared to last year, we’ve improved from 16% in the first quarter, which reflects a standard product mix and shows the advantages from our operational enhancements. We anticipate that these operational improvements will continue to appear in every quarter, although we will still experience the usual seasonality, where margins in the second half of the year tend to be slightly weaker due to product mix. However, the operational improvements we've implemented are sustainable and should remain in place for the rest of the year.

Chip Moore, Analyst

Got it. That's great to hear. And then if I could ask another around sort of future capacity expansion, which you referenced, those potential efforts, macro notwithstanding, obviously, we're all watching that. But curious around maybe bidding pipeline, what you're seeing out there and how that's progressed and how that may impact some of those efforts?

David Duvall, CEO

Yes, Chip, this is Dave. We are currently exploring our options for developing the pipeline. We have outlined a strategy and are considering various individuals, companies, and investment banks on how to move forward. Expanding the business is important to us, but the rate at which we can acquire machines may be slower than desired. We have nearly filled all available positions at our locations, so our next step may involve acquiring existing brick-and-mortar locations. We are inclined towards acquisition due to the speed and ease of implementation.

Chip Moore, Analyst

Understood. Yes. And obviously, the balance sheet is in good position. I guess maybe a last one for me. On end market-wise, you referenced sort of seeing some impacts on the lattice and things like that. I guess curious other markets, if you're hearing anything, right, particularly powersports with a higher interest rate environment?

David Duvall, CEO

Yes, we had thought, just like you, especially at the beginning of the year, that we were going to see a significant decline, but we have not. Right now, we still see orders strong. We are anticipating that near the end of this year, in the second half that, that would start having effect. But right now, we see strong volumes.

John Zimmer, CFO

If we stay really close to our customers and to tell you the truth, we have been talking to them all the time, and they're pretty bullish still. We've had some small adjustments so far in personal watercraft, but nothing major. In ATV, we really haven't seen any major adjustments at this point. So we're staying close to the customer to get their data as fast as we can.

Chip Moore, Analyst

Perfect. Yes, and I was going to follow up and say based on your product sales outlook, it sounds like you have pretty good visibility then on that for the year?

John Zimmer, CFO

Yes, I think we do. Again, most of our customers give us forecast out extended period of time. I think they're all in the same boat as us, though, they're watching the economy, but they can see in their distribution channels, their inventory levels, things like that. So they have probably a little bit more visibility. But again, I think they're all rational also. But right now, it seems like when people have jobs, they're going to still spend money. And so right now, I think customers are still spending money at least.

Chip Moore, Analyst

It's great to hear. Sorry, maybe one last question if I could. In the utilities and infrastructure sector, are you seeing early opportunities starting to grow? And could that potentially lead to acquisition opportunities?

David Duvall, CEO

No, absolutely. When we start looking at whether we want to grow processes or sales channels, that's what we're looking at. We definitely see industrial, utilities, infrastructure as a significant area for growth for us.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Dave Duvall for any closing remarks.

David Duvall, CEO

Thank you for your continued interest in our company, and we look forward to providing an update of our progress when we report second quarter results in a few months, and if we have conference calls already scheduled later this week and next week. So thank you very much.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.