Earnings Call Transcript - CMT Q2 2022

Operator, Operator

Good morning, everyone. Welcome to the Core Molding Technologies Second Quarter Fiscal 2022 Financial Results Conference Call. As a reminder, this conference call is being recorded. Now I will turn the call over to Sandy Martin, Three Part Advisors, to provide introductions and read the safe harbor statements. Please go ahead.

Sandy Martin, Three Part Advisors

Thank you, and good morning, everyone. We appreciate you joining us for the Core Molding Technologies conference call to review second quarter results for 2022. 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 the statements made in today's discussion that are not historical facts, 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 may also refer to non-GAAP measures, including adjusted EBITDA, free cash flow, return on capital employed, and adjusted gross margin. 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 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, President and CEO

Thank you, Sandy, and good morning, everyone. Before I get into the quarterly progress, I'd like to start by congratulating our Executive Vice President of Human Resources, Renee Anderson. Renee was selected as a 2022 HR Impact award honoree this year. If you remember, this award is presented to human resource professionals each year that exemplify excellence in leadership at their company as well as doing important work in the field of HR and communities where they live and work. Renee absolutely embodies excellence, integrity, and HR leadership at Core Molding. And she has positively impacted the customers and communities that we serve. Renee and the HR team are a critical component of our success and our overall business strategy. Having an open, engaging, and rewarding work environment is foundational to any business strategy. And we're fortunate that Renee is a part of our leadership team and she is an asset to the organization. I would like to start with some very recent good news. Last week, we came to an agreement with Volvo to extend our current supply agreement through 2027. With this extension, we were able to modify terms that provide the company with a recovery of raw material costs. This agreement also provides our valuable partner with uninterrupted service for more than five years. We're excited to continue our relationship with Volvo. Last quarter, John and I spoke to you about our IR strategy that we implemented earlier this year and described how we have prioritized a proactive investor outreach process. We are pleased with the reaction from the buy side and sell side on our journey to increase awareness of the Core Molding story. We continue to believe that our stock is underfollowed, and we are continually working to create transparency and awareness of our company. Now turning to our continued progress. I will open up by discussing our major initiatives and touch on some highlights in our 2022 second quarter results. Then I'll turn the call over to John to review Q2 in more detail. Lastly, I will come back to wrap up the call and discuss our continued efforts around the company's sustainability programs and provide some market outlook. Historically, Core Molding was synonymous with the heavy truck OEM industry. In 1996, we acquired Columbus Plastics, which was a division of Navistar International. So it was natural for legacy stakeholders to think of us as a truck company, citing that more than 90% of our revenue originates from the heavy-duty transportation industry. However, in 2015, we began transforming the business through strategic acquisitions that added thermoplastic presses and specialized material compositions. Then in 2019, we underwent a major company-wide operational turnaround project. Most recently, in 2020, we introduced two important teams, our technical solution sales team and our materials R&D to create engineering materials that support customers by solving challenges and creating new products. Instead of referring to ourselves as a composite company, we began building an innovative business around engineered materials. This deliberate sequence that includes our turnaround program, transformational and diversification plans, coupled with the launch of the technical solution sales and material R&D teams over the past several years, brings us to 2022. And today, our medium and heavy-duty truck business represents 39% of our product revenues, well below the 90% of truck business from just a few years back. We did not deliberately reduce our truck revenues. Instead, we strategically grew into other industries and businesses by partnering with customers and developing new specially formulated engineered products that are either a unique solution or a much improved conversion from traditional materials like concrete or metal. In many cases, we take multiple components and redesign them into a single molded piece that is lighter weight, stronger, corrosion-resistant, and requires less labor during assembly for the customer. We are skilled at providing the upfront work, including design, and development simulation, which enables customers to create unique products and solutions that by their basic design perform better and last longer. The outcome is an infinite market for product improvements, especially important now when costs are rising, and businesses as well as the public sector need better margins and simpler supply chains. This differentiation opens up new markets and creates new demand, which is what we are experiencing with the continued momentum in our business. Profitable growth and diversification will continue to be the cornerstone of our business model and long-term strategy. And in the first half of 2022, we have successfully added $16 million of net new wins. These net new wins will launch between 2022 and 2024 and are incremental to the $75 million of wins we achieved last year. This incremental business further diversifies the company's revenues by expanding into growing markets like last-mile delivery transportation, utilities, construction, agricultural, and power sports. A number of our current customer partners are seeing the strength of our model and are engaging us to partner with them on other products, thereby increasing our wallet share. Personal watercrafts and all-terrain vehicles are a great example of this. We have significant market share in the personal watercraft industry, but some of these companies also sell golf carts, all-terrain vehicles, or light utility vehicles. And we are partnering with those teams to look at other engineered material applications. We believe this larger category of utility and sport vehicles provides additional tailwinds related to our power sports category. This is just one example of our significant wallet share expansion possibilities. Coming off of back-to-back record revenue quarters, we are encouraged by business demand for 2022 and 2023. The demand environment allows us to be more selective about the new business that we accept. We will continue to look for ways to diversify revenues and produce high-value products, generating better margins. We are ramping up major programs with certain customers and have full production launch in Q3 of the Ford Bronco roof in our automotive category. Launches of major programs, along with serving production requirements of existing commitments, requires proven processes, adequate capacity, and a dedicated team in each of the plants. Bringing all these new products to life requires stable, reliable systems that are capable of handling changes in customer demand while delivering operational improvements. We are working daily on all of this. New business wins continue to be our primary growth driver. Our current opportunity pipeline continues to be robust at over $115 million. If you remember from last time, this was significantly higher, but the pipeline is lower than reported in the first quarter as we rationalized opportunities based on capacity constraints and eliminated lower value-add opportunities and projects that require capacity sooner than what we can deliver. We are now to a point that in order to continue our revenue expansion, we are increasing capacity with the installation of three new presses and automation in our existing facilities. We first want to maximize capacity within our existing six plants before adding another location. Turning now to a few of our financial highlights. On top of our highest quarterly sales reported for Core Molding last quarter, we topped the number for the second quarter with over $98 million in revenue. In Q2, we continued to focus on offsetting raw material and other manufacturing cost inflation and are always looking for ways to improve efficiencies in our plants. In the second quarter, we saw some inefficiencies driven by high customer demand and disruption in order fulfillment due to customer supply chain challenges. We are actively working with our customers to manage demand and improve our production efficiencies. Our material and labor supply pressures have stabilized but are still a challenge at times, so we are monitoring this carefully. The important takeaway is that the demand environment continues to be strong. With that, I will turn the call over to John to give further details on our overall financial results.

John Zimmer, EVP and CFO

Thank you, Dave, and good morning, everyone. In the second quarter of 2022, net sales reached $98.7 million, an increase of 23% compared to the previous year, while product sales rose by 18% year-over-year. The growth in revenue was primarily due to increased customer demand across almost all sectors, the launch of new programs, and recoveries in raw material costs. Gross profit for the second quarter was $13 million, representing 13.2% of sales, down from $13.7 million or 17.1% of sales in the same quarter last year. The decrease in gross margin percentage was mainly attributed to changes in product mix, along with the effects of raw material recovery, inflationary production costs, and high demand that led to plant inefficiencies that we are actively addressing. If we exclude raw material recoveries, the gross margin for the second quarter would have been 14.3%. We have recuperated most of the additional costs incurred due to raw material inflation. Additionally, we have reached a new long-term agreement with Volvo that enables us to start recovering raw material cost increases effective July this year. Although supply chain stability has returned, prices for certain resins, chemicals, and hardware components continue to rise. We will strive to pass on any fluctuations in raw material costs as needed going forward. We are closely monitoring shifts in customer demand, which could emerge in the latter half of 2022 or early 2023 if recessionary pressures rise. Selling, general, and administrative expenses for the quarter stood at $8.7 million, compared to $7.6 million in the same period last year. Despite the rise in SG&A costs primarily due to labor, insurance, and professional fees, SG&A as a percentage of sales improved to 8.8%, a gain of 60 basis points from the prior year. The company reported an operating income of $4.4 million for the second quarter. Net income for Q2 was $2.2 million or $0.26 per share, down from $4.1 million or $0.48 per share in the second quarter of 2021. Adjusted EBITDA for the quarter was $7.9 million or 8%, which remains strong despite being lower than the $9.7 million reported in the same quarter last year. Detailed reconciliations of GAAP to non-GAAP adjusted EBITDA can be found at the end of the press release. As discussed in our previous call, our strategic revenue diversification is progressing, with the product revenue composition for Q2 showing 39% from trucks, 23% from power sports, 16% from building products, 9% from industrials and utilities, and 13% from other segments. Now, regarding the results for the first half of the year, net sales totaled $189.3 million, a 24% increase from last year, with product sales also up 24% compared to the prior year. The sales growth was largely driven by customer demand across all sectors, alongside new program sales and raw material recoveries. Gross profit for the first half reached $27.6 million or 14.6% of sales, compared to $26.5 million or 17.3% in the same period last year. Similar to the second quarter, the drop in margin percentage was mainly due to product mix changes, zero margin raw material recoveries, and other inflationary production pressures and operational challenges. If raw material recoveries are excluded, the gross margin for the first half would have been 16%. SG&A expenses for the first half were $17.2 million, compared to $14.9 million in the previous year. Operating income for the first six months was $10.4 million. Net income for the first half amounted to $6.1 million or $0.71 per share, down from $7.5 million or $0.89 per share in the prior year. Adjusted EBITDA for the first half was $17.5 million or 9.2%, compared to $18.2 million in the previous year. Reconciliations of GAAP to non-GAAP adjusted EBITDA can also be found at the end of this press release. Turning to our financial position, cash flow, and balance sheet, cash from operating activities was $2.9 million for the first six months ending June 30, 2022, while capital expenditures for the same period totaled $8.6 million. The increase in working capital due to business growth has adversely affected cash flows from operations. Approximately $5.2 million of the capital expenditures were related to capacity increases or new program launches. During our last call, we discussed revising our capital spending for 2022 to about $20 million, including funds for completing the capacity expansion of our direct long fiber thermoplastic project in our Mexico plant. All equipment for the new press has been installed, and we expect it to be fully operational by Q3. As mentioned last quarter, adding more presses and automation will help us maximize our current capacity and enhance throughput, leading to immediate revenue generation while reducing our reliance on labor. As of June 30, 2022, we had $18.4 million in available liquidity mainly from our revolving credit facility. Our term debt stood at $23.2 million at the end of June, with a term debt to trailing twelve-month EBITDA ratio of less than 1x adjusted EBITDA at that time. Our working capital remains robust, with accounts receivable at $54 million and days sales outstanding at 49 days. Our return on capital employed, a pretax return measure, was 15.2% on an annualized basis for the first half of the year. We believe that our strong balance sheet and efficient liquidity set us up well for continued growth. After the quarter ended, on July 22, we refinanced our debt facility and secured a new $75 million credit agreement, divided equally between a revolving loan, term loan, and CapEx loan. Concurrently with this credit agreement, we entered into an interest rate swap agreement through 2027 on the $25 million term loan, with a fixed rate of 4.75%. Proceeds from the new term loan were used to pay off our higher-rate existing term debt. Though we successfully completed our business transformation from a few years ago, our work is ongoing. We continue to enhance operational efficiencies on the production floor at all our plants, and adding more presses in our existing facilities enables us to increase throughput and generate additional revenue. We remain focused on core strategic growth and profitability objectives for this year while looking forward to creating more shareholder value through sales growth, improved performance, and clear, consistent communication with investors and analysts. Now, I will turn it back to Dave for some final comments.

David Duvall, President and CEO

Thank you, John. We're happy to report record quarterly sales and continue to see strong demand for truck and power sports with growing demand in industrials, utilities, and packaging. We are focused on margin improvement, better efficiencies, and making the most of our added presses and automation. Although we cannot control product mix from quarter to quarter, we can control our productivity and operational efficiencies in each of our six plants. With a solid demand environment at core and record-setting sales, we must relentlessly drive productivity improvements, focus on eliminating all waste and increasing throughput. This is hard work, and we have the right team and processes to execute. Regarding sustainability in Core Molding, our long-term goal is to positively impact the world with smarter alternative materials that reduce the environmental impact. Related to this, we are purposefully working to convert waste into usable products and on deploying recycled materials as alternatives to prime materials. As I mentioned last quarter, we took seriously our responsibility for environmental sustainability that focuses on the efficient use of energy and raw materials as well as waste minimization. Our materials development team is continuously researching alternative materials that reduce environmental impact. Our sustainability efforts extend into our customers' businesses with the design of engineered materials and processes that convert existing materials and provide solutions for our customers that also benefit our communities. For example, in our packaging category, we have partnered in the design and now manufacturing unique containers for our customer to grow and harvest millions of crickets. And this is in a fully automated facility to serve as protein-rich food for countries that are underserved or as a base for animal food. This type of innovative sustainability solution is one example of how Core is making a difference in the world. The applications are truly limitless. We remain intensely focused on executing our short- and long-term plans. And we are well positioned to grow and generate profits and cash flows. We are winning in new industries, investing in our people, engineering capabilities, automation, and assets. We are relentlessly driving improvements in our business every day. Our investments in innovation and product conversion result in lighter weight, lower cost, and higher performance products for our customers. Utilizing our heat map hotspot process, we are discovering new applications and expanding wallet share, especially in the industrial and utility sectors. We are solving challenges for businesses and people that desire to what we call work where they want to live, which is driving more infrastructure demand. We are partnering with businesses that are solving new and evolving infrastructure challenges such as underground high-speed data lines that accelerated throughout the pandemic and continues today. We believe that a relentless execution of our strategy will pay off by leading to further stability and profitability for our company. We continue to see a bright future for Core Molding Technologies. And I'm very excited to continue to expand the business and deliver value for our shareholders and all stakeholders. With that, I would like to open the call to questions from analysts or investors. Operator?

Operator, Operator

The first question comes from Chip Moore with EF Hutton.

Chip Moore, Analyst

I want to ask about, I guess, first on just production and efficiencies. You called that out. It sounds like it's more customer-driven on supply chain and some of those issues. So maybe just if you could expand on that and what you're seeing there and what you can do to help mitigate some of those pressures?

David Duvall, President and CEO

Yes. So on the product mix and really product mix and operational inefficiencies, it obviously impacted our gross margin by about 340 basis points. We really see a ramp-up in the truck schedule. So on the roof products, roofs are significantly more complicated, some of the other products, and it drives a lot of mold changes and I guess, overall from the product mix. So we've implemented a lot of Kanban systems and really quick change of molds and dies to really compensate for the product mix side. Obviously also had to add certain labor into specific plants as to handle the increase in demand. So we do see a big increase in truck.

Chip Moore, Analyst

Got it. Okay. That's very helpful. And if we think about that, some of those efforts, if we think about Volvo obviously layering in starting Q3 on that new extension with price pass-through if you take that and just some of the ramping programs, is there a way to think about any read-through for margins in the back half? I would assume improving sequentially, but just curious how we should think about that.

John Zimmer, EVP and CFO

Yes. The Volvo contract starting July 1 will support us moving forward with our margins. Previously, we struggled to recover in this area, but we have been actively negotiating a new deal with them and appreciate their collaboration. We expect to see some margin improvements as a result. Additionally, as Dave mentioned, we are addressing some operational challenges, implementing Kanban processes, changing molds, and adapting to new labor as volumes increase at specific plants. We will focus on bringing in labor and managing training and retention. With these operational improvements and the Volvo contract, we hope to see our margins increase as we move into the latter half of the year.

Chip Moore, Analyst

Got it. Okay. That's helpful. One more question from me. Thinking bigger picture, you're reaching practical capacity and investing in new capacity. How do you view potential future growth while balancing any recession risks? Are you in a position to be more selective about the business you pursue? Is it more crucial to focus on maximizing what you currently have, or when might you consider expanding further on the growth side?

David Duvall, President and CEO

Yes. Right now, the focus is on optimizing our existing plants by utilizing our current capacity effectively. We have identified some areas that are close to reaching their capacity limits, which is why we've decided to remove certain opportunities from our pipeline and prioritize where we can add the most value. We're being more selective at this time. We still have a few locations in some of our plants where we can expand further, but this would either require building a new facility or acquiring another company in a similar industry.

Chip Moore, Analyst

Yes. Got it. Okay.

David Duvall, President and CEO

We still have some opportunities in our current plants when we start talking about the automation we're putting in place. Really the automation reduces your labor. It also reduces your exposure to the labor market. But more importantly, what it does is it provides a faster cycle time for your machines because you're not waiting for people to go in and out of a machine to unload or load the part. So you can run the machines faster with the automated load and unload.

Chip Moore, Analyst

Yes. Perfect. Okay. So kind of tackle some of that low-hanging fruit and if the demand grows and the wallet share grows and contemplate additional expansion when it mixes up. Okay.

Operator, Operator

The next question comes from an unidentified analyst.

Unidentified Analyst, Analyst

So kind of a follow-up question here. But as we think about your kind of aggregate book of business, what portion of that business needs to be, I guess, renegotiated or repriced to at least cover cost inflation? Have you got through the majority of those contracts? Or is there more to come? And what are your expectations as we move into the second half of this year?

John Zimmer, EVP and CFO

Yes, you're right, we have actually gotten through all the contracts, all the significant contracts at this point. There was kind of a 2-step process. The first step was to introduce a raw material adjusted clause in some of these contracts. And then after that is going on quarter by quarter and being able basically pass those costs through every quarter. And so we put mechanisms in place for most of those new contracts that we've renegotiated at this point. We do have ongoing a couple of other contracts that aren't due yet, but we've been able to get raw material recoveries from them. And so the contracts don't specifically provide for them, but both of the customers are providing us with raw material recoveries at this point.

Unidentified Analyst, Analyst

Okay. Great. And then I think you talked a little bit about it at the beginning of the call, but the $16 million in new business wins year-to-date, maybe remind us what types of new business is that from maybe a verticals perspective? And then that's down a little bit from last year, I guess, the pace of new wins. But how are we thinking about maybe the next 12 months in terms of what's in the pipeline for additional new wins?

David Duvall, President and CEO

Yes. So I'll just kind of go through as far as the current wins. About half of it is in what we would call utilities. And then the other half is split between what we would call last-mile delivery truck, so not heavy trucks, but your Amazon-type trucks and FedEx-type trucks. And then some of the remainder is in smaller programs on ConAg and power sports. And as we see the net new wins moving forward, I know our EVP of Sales and Marketing, we had set some targets. But when we start looking at the capacity and ability to launch, we're launching $75 million of wins last year. We got another $16 million in wins this year. We're adding really, in total, four new presses, one, the D-LFT press that John talked about in Matamoros, which is a 5,500-ton press. And then we're adding another DLT press in Winona and two more presses into our Cobourg facility. So getting those presses up and launch and the automation in place will take a lot of resources and time over the next about six months. So being able to add capacity, we're being a lot more selective on what we're adding and working on the current contracts and adding the automation. I would not expect to see $75 million again this year. I don't know that we would have the capacity to not only launch it but also to produce it.

Unidentified Analyst, Analyst

How should we consider start-up costs as you launch $75 million of new wins in the future?

John Zimmer, EVP and CFO

Yes. In the first quarter when we bring someone on board, there's a ramp-up stage where we are fine-tuning tools and increasing our throughput. Each quarter, we will incur some additional costs related to the ramp-up of new products. However, we’ve reached a level of expertise in this process, although there may still be some impact as we initiate it each quarter. In the long term, the introduction of a new program brings positive outcomes as we work to get it up to speed and increase margins to the levels we have targeted.

Operator, Operator

The next question comes from Jeff Geygan with Global Value Investment Corporation.

Jeffrey Geygan, Analyst

Appreciate the color and detail in your prepared comments earlier. Dave, with respect to your comment around infinite market opportunity, as you think about narrowing to a more manageable universe, what are the criteria that you consider most important when targeting new business?

David Duvall, President and CEO

We find it particularly appealing when we can provide something that is distinctly different from what our clients currently use, especially in sectors like industrial or utilities. Many of them might be using traditional concrete systems for drainage or stormwater management, and we can offer a product that enhances performance, possibly due to increased surface area or simpler installation. We can customize our products to meet their full specifications. For instance, when we discuss troughs, we can manufacture different sections specifically for their project needs. If they outline a project, we can efficiently configure our offerings like modular pieces, allowing us to create all necessary components and ship them directly for installation. This gives us a competitive edge with our innovative processes and materials compared to what they are currently utilizing.

Jeffrey Geygan, Analyst

What type of overlay do you have financially when contemplating these different opportunities?

John Zimmer, EVP and CFO

Yes. So Jeff, one of the things we examine for all our businesses is the margin and the return on capital employed in various situations. When we assess any new program, we set targets for the margins we want to achieve in terms of value added. We also take into account the normal capital that we use daily in the business, and we have a hurdle rate for that. If we need to purchase a special asset for any product, we might have a different hurdle rate, recognizing that the income would come from that specific asset linked to that target opportunity. We consistently consider the return on capital employed, aiming for at least a 16% return long-term, on a pretax basis. We establish earnings targets to reach that goal, which will subsequently drive the free cash flows necessary for continued business growth.

Jeffrey Geygan, Analyst

Yes. Great. Appreciate that additional color. And Dave, back to you strategically with the finite amount of capacity in the six facilities that you have, under what circumstance would you opt to add a seventh as opposed to rationalize further to improve profitability among your six facilities?

David Duvall, President and CEO

Yes. I mean, right now, I would absolutely say that we're looking at the rationalizing the new business coming in as well as optimizing what we have in our current locations. That will take some time. We have some launches that we have to get under our belt here and put the horses in place to make sure that those are successful, as John has said. What we would look, I think we're probably talking six months, nine months to be able to do that. And we have one or two locations left in our current facilities to add. But I think it's more about the automation and optimization and then really longer term, what we look at, whether we would add a new facility. But we would have to have that business really already secured before we would just add a facility and just decide that if we build it, they will come because we know that doesn't work.

John Zimmer, EVP and CFO

And Jeff, I think right now, we realize that we're in a little bit of an uncertain time in the economy. And so as we went through this year, last year, we put in $75 million of new wins. This year, we've been more rationalizing the business. I think it's more driven by let's see where the economy goes. And then as the economy does what it does, I think it will come out on the other side of ventures like it always does and also start growing again. And we would probably look at, hey, is this the time that you look at investing in new buildings and new facilities where you've got a good long-term growth path on the economy going ahead of you. Right now, we're just a little bit uncertain. If we could pick exactly where we think this thing is going, we would probably go one way or the other. But we're just going to be a little bit cautious right now and see where this economy goes over probably the next 12 months and then maybe kind of look at things a little bit different as we get on the other side of what's happening over the next 12 months.

Jeffrey Geygan, Analyst

We certainly understand the uncertainty. John, for the last question, it's really just a housekeeping issue. Your income tax expense year-over-year is notably higher. Can you explain the reason for that?

John Zimmer, EVP and CFO

Yes. Currently, as we are renegotiating our contracts and managing raw material recoveries based on the country of operation, we've been incurring losses in the United States over the past year. This is noted in our footnotes in the income tax section. While our general and administrative expenses are mainly in the U.S. due to our corporate offices being located here, we do allocate costs to our entities in Mexico and Canada, although there are restrictions on how much we can allocate. Consequently, the income earned in Mexico and Canada is being taxed and reflected in our profit and loss statement, whereas the losses in the United States cannot be recognized currently due to accounting regulations, forcing us to maintain a full valuation allowance. Thus, we face taxation on our profitable operations without reaping benefits from the unprofitable ones. To address this in the long term, we are reevaluating our business structure and considering alternatives, such as royalties, particularly since much of the value generated in Canada and Mexico originates from the U.S. We might restructure to increase income in the United States. We currently have a net operating loss of about $4 million that isn't recognized, which represents potential cash that we could access if we solve this issue. This situation may have a short-term impact on our profit and loss statement, but our goal is to return to profitability in the U.S. and achieve a more standard blended tax rate of around 25%.

Jeffrey Geygan, Analyst

Yes. I'll conclude just by congratulating both of you. I think your performance has been notable and delivering another constructive quarter. Good luck.

Operator, Operator

The next question comes from Justyn Putnam with Talanta Investment Group.

Justyn Putnam, Analyst

I just have one quick clarification question. In the press release, it said that your gross margin percentage pressures were primarily due to mix shift, production efficiencies, and inflation. I think earlier caller asked about that, and you mentioned a 340 basis point impact, and it was across those three items. Is that correct?

John Zimmer, EVP and CFO

Yes. I believe Dave was referencing all three items we have. The 10-Q being released today will provide more clarity on the specific numbers for these three components. Before accounting for raw material recoveries, you will see approximately 340 basis points from selling price and raw material costs, along with an unfavorable net change due to inefficiencies. The selling cost accounts for 160 basis points related to raw materials. Additionally, we gained roughly 110 basis points from fixed cost leverage. So yes, that 340 is distributed across all three categories.

Justyn Putnam, Analyst

And that...

John Zimmer, EVP and CFO

I'm sorry. Go ahead.

Justyn Putnam, Analyst

And that's comparing quarter-over-quarter, right? Second quarter '21.

John Zimmer, EVP and CFO

Compared to last year, specifically the second quarter.

Justyn Putnam, Analyst

Is there a way to quantify how much you think this implies that there is something unusual or a negative impact? Is that a correct interpretation of that number? Do you believe that this represents a negative impact for that quarter?

John Zimmer, EVP and CFO

Yes, I believe it had a negative impact for the quarter as well. When we examine the current ramp-up, especially with the product we're increasing production on, which is heavily truck-related, it requires significantly more labor. This leads to increased training costs and similar expenses. We are currently experiencing this, and if you’re looking at sequential or year-over-year comparisons, I think you will notice similar issues arising from the inefficiencies associated with the types of products we're manufacturing and the pace at which we must produce them. Additionally, we are facing ongoing disruptions from the customer supply chain. This is a situation I can't stress enough. We continue to have customers contacting us on Fridays saying they can't operate the following week, which forces us to scramble to adjust schedules, reallocate resources, and inform customers about our production capabilities. We are still navigating considerable disruptions, and we experienced a lot of this in the second quarter. Our aim is to work closely with our customers to achieve more stability compared to what we experienced in the first quarter or during the same period last year.

David Duvall, President and CEO

You start seeing a product mix change quite a bit with the truck ramp-up as well. Truck is saying they're booked for the next 18 months.

Justyn Putnam, Analyst

Yes, over the past few quarters, especially towards the end of 2021, you identified a particular factor that was affecting you. You referred to it as unrecouped raw material price increases. Has that largely been resolved, and is it no longer a significant issue compared to the other factors you just mentioned?

John Zimmer, EVP and CFO

Yes. In the fourth quarter, we were really pretty far behind on getting a lot of the customers. A lot of the customers at that time had never heard of what the price increase. We were battling them on price increases. We have really gotten to the point where we've got recoveries from all our customers. Starting in July, we got kind of that final contract done with Volvo. And so it's become much less of an issue. The bigger issue we probably have now, and that's what we've been breaking out that becomes something that as we go forward, it should normalize is that on the raw material recoveries, we're really not getting a profit on those, and so we pass that cost through. And it's actually having a little bit of a dilution to our gross margin percent, not the gross margin dollars because we're really selling materials at cost is what we're doing whenever we have to raise cost because of raw material or raise price because of raw materials.

Operator, Operator

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

David Duvall, President and CEO

No. Thank you for your continued interest in our company. We look forward to providing an update of our progress when we report the third quarter results in a few months. Thank you very much.

Operator, Operator

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